Why I Exited Most of My Gold Positions Today

What a busy day -- I've had no time to update the blog.  But I sold a bunch of my precious metals positions at the open today. Here's why ...

Even though the Fed announced no change in its quantitative easing policy yesterday, gold sold off hard. That's a bad reaction to good news -- bearish.

The pain continued when the Wall Street Journal's Jon Hilsenrath -- aka The Mouth of Bernanke -- published an article saying that "taken together, the Fed

The Mouth of Bernanke strikes fear in markets

isn't taking a December adjustment o the bond-buying program off the table."

That caused the jittery bots on Wall Street to put on a hawkish trade. They sold gold bonds and stocks.  The Dollar Index rallied.

Too bad the bots didn't bother to read Hilsenrath's next sentence: "But that comes with the strong caveat that it depends on whether the economy is living up to expectations."

Interestingly, many gold miners rallied at the end of the day yesterday. So I was on the fence.  But thinking about it overnight, I decided that discretion was the better part of valor.

So, I exited ...

• Silvercrest with a small loss (8.5%, but it was a half position, and cheap).
• Global X Silver Miners flat. I gained 3 cents a share on the trade -- not enough to cover costs.
• Market Vectors Junior Gold Miners at a 5.4% loss. Grr!
• Market Vectors Gold Miners at a 1% gain.
• B2Gold at a 2.5% gain on the combined position. I'd doubled up on that one. 

The only precious metals position I kept was Primero. Because I don't know which level of support GLD is going to test.

(Updated chart)

Maybe gold is going to head higher from its 20-day moving average (I can always buy more miners if it does). Or maybe it will go test support around 121.

I would look forward to that buying opportunity. 

I'll be more selective on miners operating in Mexico, because the Mexican Senate passed the new mining royalty law. As of January 2014, mining companies in Mexico will pay an additional 7.5% royalty on pre-tax profits and precious metals will pay 0.5% extra on top of that.

In any case, I strongly believe we saw the bottom in late June. 

That's when the selling by gold ETFS seemed to peak. Investors sold 750.2 tons through gold-backed exchange-traded products this year, erasing $60.1 billion from the value of the funds, according to Bloomberg data. Holdings reached 1,881.4 tons on Oct. 25, the lowest since April 2010.

In other news, the Chicago PMI blew out expectations, coming in much higher ...

Source

Here are the details. Two of the most impressive aspects of this month's Chicago PMI report were the big jumps in Production (+13.1) and New Orders (+15.4).

Will more news like that cause the Fed to hike rates?  I think the Fed is looking for more jobs. And the looming budget battle should cast a cloud over the economy. Once traders realize that, they'll come back to gold.

Elsewhere in the world, demand for gold is heating up.

• Demand for bullion in Dubai expanded eightfold in the last six to 10 years
• Gold premiums in India are at a record, and traders in that country still can't find supply, the government crushes legal imports. 
• Not surprisingly, the fastest growing industry in India is gold-smuggling.
• Central banks were quite bullish on gold at the LBMA Conference. The central banks of France and Germany said they had no plans to sell gold.

Important Heads Up on China Gold Prices

I'm lifting this straight from Kitco ...

Gold on Shanghai Gold Exchange Wednesday traded below the international price in London for the fourth time within the last seven days, says Commerzbank. The discount reportedly amounted to $2 per ounce at times, the bank says. “By contrast, April and May were still seeing premiums of up to $30 being paid,” Commerzbank continues.
The bank says the discount lately is likely due to fears that lending regulations in China could be tightened, which is already being reflected in rising interest rates.
“The seven-day lending rate climbed significantly again today to 5.55% and has thus achieved its highest level in nearly four months,” Commerzbank says. “Interest rates are still a long way off their July high, however. Nonetheless, gold holdings were presumably sold as a result in order to generate liquidity. If this trend were to continue for any length of time, this could also lead to weaker Chinese gold imports.”

XX Sean's note -- this bears watching.

Another important point -- you have to understand that I am buying gold miners right now because of what I perceive as extraordinary value. And evidently I'm not alone, considering what the GDX has done since it bottomed on October 15-16 ...

(Updated chart)

So gold miners have done well. I'm buying them for value. But there are many investors buying them for performance.

Why is that important?  Because the S&P 500 looked like it had run into overhead resistance, so many performance chasers rotated out of the S&P 500 and into what was working (gold miners). But this has to be taken in the context of the fact that the S&P 500 has been on an incredible bull run. And now there are some very smart people saying that bull run could continue, with the S&P 500 going up perhaps another 5% into the end of the year.

If that happens, where will the performance chaser go? Back into the S&P 500, that's where.  And money would likely rotate out of miners.

That's just something to keep in mind.

That said, there's nothing wrong with buying the S&P 500 if you think it's going to go up. Heck, since the S&P 500 broke out to the upside on October 17, I've been waiting for a decent pullback to buy it, but we haven't gotten one ... yet.

These are all things to keep in mind as we watch gold and miners this week.

Gold Price Rallies, Dollar Fades

Let's check in on my favorite chart comparing the US dollar (as tracked by the UUP) and gold (as tracked by the GLD) ...

(Updated chart)

We can see that gold continues to march higher. And it is marching higher on what should be good news for gold. That's very important.  For a while, gold was going down on good news, which is quite bearish.

• The good news for gold today includes that the year-over-year inflation rate fell to 1.2% in September from 1.5% in August. That gives the Fed room to keep on with QE infinity.
• Also, ADP reports that 130,000 private-sector U.S. jobs were added in October, shy of the 150,000 consensus forecast. Weaker jobs data indicates that the Fed will keep on with QE infinity.
• Finally, gold production went up in the US in July, and prices still went up. That's gold moving higher on what should be bearish news (more supply).  That's all pretty bullish.

But now is when I disappoint my gold bug friends by saying that the tests for gold aren't over this week.

There are two real tests left. The first will be the reaction to the Fed statement later today. And the second will be how gold ends the week.

More conservative investors may want to refrain from adding positions until after we see positive results from those tests.

Meanwhile, the US dollar remains near a two-year low against the Euro, and the US dollar index does not seem to be able to manage a significant bounce from the low it tested on the 24th and 25th.  However, it could just be faking us all out, so be prepared. 

One final note -- Miners working in Mexico including Primero Mining and Silvercrest Mines are rallying this morning despite the fact that Mexican lawmakers remain "firm" on a new 7.5% to 8% mining tax. Sure, it's easy for miners to rally on a day that gold goes higher, and we'll have to see how these miners (and any miners) end the day. Still, it's almost as if the bad news was priced in. And a rally on what should be bearish news is ... you guessed it ... bullish.

But we'll see. Good luck out there.

Exited Two Positions at the Open; Gold Update

Yesterday's action generated some sell signals for two of my positions. Per my system, I sold them today at the open.

• I exited the second half of Guggenheim Solar (TAN) at $36.81. That's a 22% gain on that half of the position, and an even bigger gain on the whole thing. What a great run for TAN!
• I also exited all of my PowerShares DB Agriculture (DBA) at $25.32, a 1.4% loss. It's a shame, but the breakdown became apparent yesterday.

What About Gold?

Gold gave back its gains yesterday, which is worrisome. It didn't generate any sell signals on my positions yet.  And of my six precious metals positions, only one is in the red. I'm watching to see if gold rallies after the Fed meeting this week. Many Fed watchers are now saying the Fed will start tapering is QE program on March 14. Sure, sure it will. You do know we're going to have another budget battle in Washington between now and then, don't you?

Certainly the sentiment in the mainstream media remains profoundly bearish on gold.For example, if you follow that link, you'll see that the Wall Street Journal reports that Thompson-Reuters GFMS says that "Central banks are on track to cut back their gold-buying by 34% in 2013." At first glance, that looks bad.  But GFMS really means that Central Banks are still forecasted to buy gold, just at a lower pace.

In fact, Central-bank purchases may total 350 tons in 2013, the World Gold Council predicts, after they added 534.6 tons last year, the most since 1964.

Now, doesn't that sound more honest than what the Wall Street Journal wrote? And anyway, these are predictions about what the Central Banks will do. The proof will be in the pudding.

It would be paranoid (probably) to think that the Wall Street Journal is deliberately misleading readers. Instead, I believe that the mainstream media has settled on a negative narrative for gold, and they report facts in a way that suits that narrative.

One significant bearish fact remains:  Holdings in exchange-traded products (ETPs) have contracted every month this year, sending assets down 29%, according to data compiled by Bloomberg. However, it is also true that the selling seems to have ebbed.  We will see what November brings.

The Ancient Empire of Oil

I’m a history buff, as anyone who reads my old columns could tell you (examples here and here). And I'm fascinated by the Nabataeans, aka “the Oilmen of the Dead Sea.” It’s a story of oil, war, greed, and even involves two of the world’s most famous lovers, Antony and Cleopatra. This story has everything!

The Nabataeans built a kingdom in the 4th to 3rd centuries BC that spanned from northwestern Saudi Arabia to Syria. Their trading routes went even farther, More than a thousand years before Columbus went looking for a passage to India, the Nabataeans sailed longer distances – all the way to Southern India. In its day, the Nabataean Empire was famous throughout the world, as far as China.

The Nabataeans’ capital was Petra, ("rock" in Greek), a city carved out of stone that you may remember from the movie “Indiana Jones and the Last Crusade.”

Oil, along with a lock on the lucrative spice trade, made the Nabataeans so wealthy, explains Dr. Zayn Bilkadi, that “they are the only people in history known to have imposed a punitive tax on whomever among them grew poorer instead of richer.”

Oil Wealth Breeds Jealousy

As in present times, oil wealth bred jealousy. The Greeks sent an army to drive the Nabataeans away from their oil patch. The general leading the Greeks was Hieronymus – the famous historian – and he described what he saw on the shore of the Dead Sea. Scores of tribesmen camped on the shore next to reed rafts, waiting for what they called the thawr – the word was Arabic for “bull” – to appear in the middle of the sea.

The “bulls,” Hieronymus discovered, were great iceberg-like mounds of tarry crude oil – bitumen – that floated up from the depths of the Dead Sea. These giant chunks of floating asphalt were found after storms, which dislodged the tar from the bottom of the Dead Sea.

When the thawr reared in the waters, the tribesmen leapt aboard their rafts and paddled furiously after it. They chopped pieces of the tar off with axes, loaded up their rafts, then headed back to shore.

Sprinkled with sand, the tarry mess would then be taken by camel-back to Alexandria Egypt (then the cultural and economic center of the world) for sale. It was used in the Egyptians’ sacred mummification rituals. Bitumen was substituted for the even more expensive myrrh (the ancient words for both are very similar). Since everyone who was anyone in Egypt had to be mummified, demand for the thawr-oil was very high.

Hieronymus and his troops were under orders to drive the Nabataeans away from the oil-strewn shores and secure the prize for the Macedonians. However, Hieronymus was a better historian than a general, and he had his ass handed to him. His army was attacked by 6,000 tribesmen and massacred in a hail of arrows, and Hieronymus himself was forced to flee for his life.

Over the centuries, the immense wealth of the Nabataeans attracted one would-be conqueror after another. For a while, they crushed their enemies, but when the armies attacking them became too large, they started buying off potential adversaries with silver. This only made their enemies eye them more greedily.

A Love Story for the Ages

And this brings us to the love story. The expanding Roman empire wasn’t satisfied with huge ransoms of silver. Roman leader Marc Antony finally annexed the Nabataeans’ kingdom.

However, Marc Antony became smitten with a drop-dead gorgeous Egyptian princess, Cleopatra. She wrapped him around her finger and he gave her the Nabataean thawr-oil monopoly as a gift in 36 BC. Cleopatra had no stomach for running a complex business, so she leased the operation back to Nabataean king Malik in for 200 silver talents a year (roughly $400,000 a year in today’s money). This is history’s first recorded lease-back operation.

That oil wealth allowed Cleopatra to build a fleet which helped Marc Antony temporarily defeat his rival for the Roman throne, Octavian.

But the Nabataeans chafed under the expensive terms of the leaseback and rebelled. Antony sent Judean king Herod to quash the rebellion, and Herod had his ass handed to him. Lacking funds, Antony was then beaten in battle by come-back kid Octavian. It was time for Antony and Cleopatra to get out of Dodge.

Cleopatra had some of her ships dragged overland to the Red Sea in preparation for an escape to India. Holding a grudge, the Nabataeans swooped down on the ships and burned them. Hopelessly trapped in Egypt, Cleopatra had her … ahem … asp handed to her, and she and Antony committed suicide.

It was a lose-lose situation for the Nabataeans as well. When Octavian became emperor, he ended the ancient Egyptian custom of mummification. It was the equivalent of modern-day Saudi Arabia’s customers switching to alternative fuels. The bottom fell out of the bitumen market, and the Nabataeans faded into history. So, along with everything else, the Nabateans had history's first recorded oil boom-bust.

In 747 A.D., what was left of the Nabataean civilization was destroyed in a major earthquake. Now, this empire that was once famous throughout the known world is only known to most Americans because its former capital was a backdrop for an Indiana Jones movie.

Something to think about in the age of American super-power. Sic Transit Gloria Mundi. 

7 Quick Links for Monday

I have a hell of a busy week ahead of me. I hope yours looks less stressful. Here's a sample of what I'm reading this morning ...

PRECIOUS METALS

Precious Metals Top-Performing Commodity Sector In October

“In our view, for as long as financial markets postpone the (anticipated) date at which the Fed starts to tapers its program of QE (quantitative easing), we expect precious metal returns will be well supported,” Deutsche Bank says

Russia Reduces Gold Holdings for First Time in a Year

Reserves in Russia declined about 0.37 metric ton to 1,015.1 tons, data on the IMF’s website showed. Kazakhstan’s holdings expanded 2.52 tons to 137.04 tons, the data showed. Expectations that tapering would start spurred losses in emerging-market stocks and some currencies in August.

XX Sean's note -- but now, tapering seems off the table.

ENERGY

Sinopec field could reignite China shale hopes

Stymied by the cost of drilling and complexity of tapping shale gas, China has struggled in its bid to revolutionize its energy supplies and unlock what may be the world's largest shale gas reserves.

Sinopec targets an annual production capacity to be built at the field of 5 billion cubic meters (bcm) by the end of 2015, the source said. That would dwarf company estimates reported by local media in July of around 2 bcm for the whole of Sinopec's shale output by 2015, and would be 100 times greater than China's estimated output last year of just over 50 million cubic meters from all test drilling at shale formations. 

XX Emphasis on "may" and "could". We'll see.

Oil’s $5 Trillion Permian Boom Threatened by $70 Crude

Energy producers on average need oil prices around $96 a barrel to break even on wells drilled in Permian layers known as the Cline Shale and the Northern Mississippian Lime, according to Mike Kelly, an analyst at Global Hunter Securities LLC. That compares to average break-even prices of around $78 a barrel in the Eagle Ford Shale a few hundred miles east of the Permian, and $84 in the Bakken of North Dakota. Some areas of the Permian need a price of just $70-$74, Kelly said.

XX The best cure for low prices is low prices

GLOBAL ECONOMY & POLITICS

Economist Tells Daniela Cambone that we are in QE Forever

XX Not much to add. He may be right.

China Signals ‘Unprecedented’ Policy Changes on Agenda at Plenum 

Premier Li Keqiang has pledged to cut the state’s role in the economy, change the financial and fiscal systems, and overhaul land and household registration rules to sustain growth. 

XX Why are the Chinese raising expectations like this?

Why There Won't Be a Big Budget Deal  

The 29 members of the conference committee won't do anything other than preen for the cameras. This first meeting will take place roughly 6 weeks before December 13. When is the last time Congress has done anything substantive on the budget that far in advance of a deadline?

XX Probably true

I Was Zombie Patient Zero

I took part in a storytelling festival last night at the Coastars Coffee Bar in Lake Worth, Florida.  The guidelines I received were that the story had to be "under 10 minutes long, true and not blue." Here's the tale I told ...


Let me tell you about the time I became zombie patient zero.

I was returning from Nevada. I’d been there to visit a mining project. I was at the airport early, so I ordered a large iced tea and breakfast sandwich from Burger King.

I know, I know, Burger King is crap. At 6 am, all airport food is crap.

I had finished the sandwich and was halfway through the iced tea when my stomach started to feel weird. So, I hobbled to the bathroom. I should mention that I’d fractured my kneecap a month earlier and I was still using a cane. And I REALLY needed the cane that morning after playing mountain goat on the mining project all the previous day.

Anyway, I went to the bathroom and had the runs. Then I went back again later for the same thing. Do you think that's gross? Gross hasn't started yet. If you're easily grossed out, now’s about the time you should stick your fingers in your ears and sing “la-la-la”. 

So, I popped two Immodium, drank a lot more water, and got on my plane. Turns out I was stuck in the middle seat next to an old feller who was hobbling SO BAD – using a custom cane that I was very jealous of -- that the flight attendants were circling around him even before the plane took off, trying to pump water and food into him to make him feel better.

As soon as the plane took off, and the seatbelt light went off, I went back to the bathroom. To get out of my seat, I did a rub-along-creep over the old guy that a table dancer would be proud of. I didn't have to go to the bathroom, I was just making sure. Nothing happened. Hey, maybe I was all worried for nothing.

I got some TUMS antacid out of my backpack (I travel VERY prepared), friction-danced my way past the old guy, and tried to sleep. I actually slept on and off, but my dreams were strange …

• There was a casino in first class that I wasn't allowed in.
• There was some byzantine plot at work worthy of Game of Thrones.
• Someone was trying to infest me with a brain parasite.

I'd wake up from each of these dreams in a sweat, saying "What the F___!"

I now knew I was feverish. That probably wasn't good. Meanwhile, the old guy wanted to talk, and I tried to keep up my end of the conversation. I ate more TUMS, because my burps were getting more acidic and more serious. And suddenly, I knew I was going to throw up.

"I need to get out." I told the old guy. "Right now."

The urgency in my voice spurred him into action. Did I mention he was old and hobbled?

He started to get up. VERY slowly. I could have been out past him in three seconds, but this took at least 20, 25 seconds. All the while, my stomach kept rising in my throat.

I finally got out of my seat and looked down toward the lavatories in the back of the plane. The aisle was packed with passengers and food carts.

I REALLY knew the puke was coming now. So I turned and bolted into first class, to the bathroom that we economy-class plebes had been told not to use. "I really gotta use this," I told the startled steward as I ran past.

Luckily, the first-class bathroom was unoccupied. I got inside, lifted the toilet lid, and an enormous wave of puke rushed up out of my throat like an alien trying to get out of my body. The hot bile swamped my teeth and the roof of my mouth and tongue like tsunami victims in Thailand.

I was positioned over the toilet. It didn't matter. My mouth is so damned big it's less of a funnel and more of a canal lock. There was puke everywhere!

And then I did it again! Worse, this time, puke splattered over my pants, down into my cuffs, onto my shoes. And now we get to the scary part. 

My stomach contents were an ichory soup of my morning's breakfast and last night's burger and sweet potato fries. It was awful! And it was pitch-black!

My vomit was black as the ace of spades, like I'd swallowed an octopus and it squirted ink in my stomach. 

The only time I'd heard of black puke was in zombie movies, just before people turned. In my fevered brain, I wondered: “Am I zombie patient zero? Dammit! I don’t have time to turn zombie.”

However, I immediately felt better. I cleaned the bathroom and my clothing frantically. The floor was coated in black bile soup so thick, the vibrations of the plane’s flight sent little ripples through it.

Again, maybe it was the fever, but I started wondering: “Am I turning zombie?  Do zombie victims feel better after they puke? Is that one of the signs?”

Finally, I realized it was the Immodium that made my stomach contents black. So maybe I wouldn’t be a zombie after all.

I finished cleaning up the room … and myself. I used up most of the paper towels.

When I left the bathroom, I couldn’t even look at the stewardess.

Funniest thing is, when I got into Atlanta, I called my wife in West Palm Beach. When I told her what happened, she said, “maybe you shouldn’t come home. Until you’re better. Just to be on the safe side.”

But I did go home. And I wasn’t bitey. But I did sleep for about 12 hours.

It just shows that a good laugh and a long sleep is the best cure for just about anything.

Why I Bought Junior Gold Miners This Morning -- & Banked Nice Gains

This morning, I took nice half-gains in the Guggenheim Solar ETF (TAN). 

Why? TAN is down while the market is up, always a warning sign.  I'm out on the first half of the trade with 28% gains -- not bad for a trade I entered in September. I've moved up my close-only stop a lot, too. 

Meanwhile, my India position seemed to have stalled. So, I exited all of my WisdomTree India Earnings (CPI) at a nickel-a-share loss, and HALF of my WisdomTree Dreyfus Emerging Currency (CEW) at a decent 5.75% gain. I moved up the stop on CEW, too.

Bottom line: Taking gains before the weekend makes me happy, and I have less to worry about. AND I'll have money to put to work next week, if I want to. I traded more than I wanted to this week, but the opportunities were there. We'll see what happens next week.

I also added a new position this morning. After yesterday's action in gold, I'd made up my mind to buy something in precious metals if we got a pullback. I was leaning more toward an ETF than a single stock, for reasons I'll get to.

First, some news and charts. Specifically, let's start with these charts from Mark O'Byrne at Goldcore.com. Mark writes ...

A deeper look into China's gold holdings warrants attention (see charts).
Its last reported gold holdings in April 2009 were 1,054 metric tons. After adjusting for net imports from Hong Kong and domestic output, the figure is closer to 5,086 metric tons. If one were to take away gold uses for jewelry, industrial, and other categories and only add implied bar demand to central bank holdings, the figure is likely closer to 2,710 metric tons according to Bloomberg Industries’ Andrew Cosgrove and Kenneth Hoffman.
In just 10 years, China’s gold holdings could catch up to the U.S., based on adjusted Chinese consumption for jewelry, industrial and other uses and using implied bar demand as the primary driver of incremental central bank additions. 

Some other interesting news ...

• Gold premiums in India, the world's biggest buyer of the metal, stayed at a record high of $120 per ounce. Thailand has now slapped a 15% import tax on gold and jewelry being shipped to India, as India's government cracks down on importation loopholes. I'm sure the gold smugglers applauded.
• Bloomberg reports that gold holdings in exchange-traded products fell 3 metric tons to 1,886.2 tons yesterday. So far this year, gold assets held by ETPs have dropped 28% reaching the lowest since April 2010 on Oct. 21. This reverses the build we saw on Tuesday. Gold holdings in exchange-traded products rose by 6.5 metric tons on Oct. 22, the most since October 2012, according to data compiled by Bloomberg. So, if fund demand for gold is bottoming, it's a bumpy bottom. 
• And The U.S. Mint sold 39,000 ounces of American Eagle coins so far this month, triple September’s total, data on its website show. Don't get too excited -- 39,000 ounces is only 1.21 metric tonnes. But this may be indicative of sentiment. In fact, we may be seeing a bottom in sentiment.

Now, let's look at one of the major drivers of the gold price -- the US dollar.  The US dollar index is heading down to test that support I talked about previously ...

(updated chart)

I put #3 on there because someone sent me a note trying to say that was a trend (and potential support). Good luck with that. Maybe you'll luck out.

Anyway, What happens when the US Dollar Index tests support #2 is anybody's guess, but the trend is your friend, and the trend is lower.

And as we know, the recent trend is lower dollar = higher gold + higher miners.

This brings me to my next pick. I was considering adding the Global X Gold Explorers (GLDX), because it popped hard yesterday.

But it worries me that a stock like Pretium (PVG) was one of the big gainers.

You can read Pretium's sad story HERE. Basically, the big deposit they were developing may not turn out to have nearly the gold they thought it did. In fact, a geologist hired to assay it said the Valley of the Kings deposit at the Brucejack Project has "no valid gold mineral resources."

But on Pretium's website, you can read that Valley of the Kings is "comprised of high-grade visible gold stringers within a lower grade gold quartz stockwork system. The Valley of the Kings hosts Probable mineral reserves of 6.6 million ounces of gold (15.1 million tonnes grading 13.6 grams per tonne gold)." 

To paraphrase the great Inigo Montoya, "I do not think the word 'Probable' means what you think it means."


  The scary thing -- for me -- is that Pretium's Brucejack Project was recognized earlier this year with a discovery award from the Prospectors and Developers Association of Canada.

That indicates to me that the single-stock risk -- in explorers anyway -- is higher than average right now, or at least, higher than I had realized.

So I can't see buying any single explorer at this time. The risk is just too great.

I say that, but did you see what happened yesterday? Pretium rallied hard! Sure, many stocks rallied -- miners, developers, explorers. But who's buying Pretium? ...

(Updated chart)

Maybe it was short-covering, maybe we're seeing the Greater Fool theory at work.

Obviously, if Pretium can get a bid, viable explorers should get bids. And sure enough, yesterday, everything went up. But then I ran this next chart, comparing the gains made by the GLDX in the last (June 26 to August 26) rally. I compared the GLDX's performance against junior miners (GDXJ), silver miners (SIL), big gold miners (GDX), silver (SLV) and gold (GLD) ...

(updated chart)

You can see that the explorers did not significantly outperform junior gold miners or silver miners in the last rally.

So why would I buy a basket of explorers when I can buy a basket of producing junior miners? It seems to me that's where a lot of the value is anyway.

Why not buy a single junior miner?  Well, that's what I already did with Silvercrest, Primero and B2Gold. And if my thesis is correct, and precious metals and miners are on the cusp of a big rally, then we're at one of those rare stages in the market where you don't need to be as picky as you might be other times.

So, I bought the GDXJ at $40.72, right after the open.  It wasn't the low of the day, but it seems like a good price. We'll see if I'm crying in my beer come Monday.

So far, buying the dips has turned out to be worthwhile. I'm not your investment adviser -- do your own due diligence, and do what is best for your own investments.

Good luck, good trades, and have a great weekend.

Oil Boom & Its Effect on the Trade Deficit

Here's a chart from Calculated Risk showing the US trade deficit, with and without petroleum.

Source

The trade gap increased 0.4% to $38.8 billion from a revised $38.6 billion in July that was smaller than previously reported.  The trade deficit was a bit bigger than expected because we're importing more junk from China and we didn't export as much petroleum products as expected.

In fact, Andrew Wilkinson, chief economist of Miller Tabak, calls US petroleum product exports "curiously slack" for the second month in a row. (sorry, link not available)

Here's Andrew's chart of petroleum exports and imports

What are we to make of this?  I'm not surprised to see crude oil imports remain soft, but the drop in petroleum product exports disturbs me. Are our exports being crowded out by cheaper exports from Russia and the Middle East? Or is it something else?

One thing is for sure. The US is producing more oil than it has for the past 24 years ...

Source

The Department of Energy reported yesterday that US oil production during the week ending October 18 averaged nearly 7.9 million barrels per day (bpd), the highest weekly output of crude oil in the US since March 1989, more than 24.5 years ago.

Mark Perry of the Carpe Diem blog says: "At the current pace of increases in domestic output, US oil production will likely exceed 8 million bpd next week, and is on track to surpass 9 million bpd by April 2014 and then surpass 10 million bpd by next fall."

Stay tuned.

Charts of the Day -- Junior Gold Explorer Valuations and GLDX

Gold is up as the dollar is down today, and that should help the new picks I added yesterday. Oil is still sliding down a slippery slope.

There is some optimism creeping back into the precious metals sector, but it's not in the junior gold explorers. Take a look at this chart from Stockhouse.com ...

Danny Deadlock at Stockhouse tracks a basket of 45 TSX and TSX Venture penny stocks (micro caps) with a minimum 1 million gold ounces (as per a 43-101 report).

Danny also gives these examples of some of the companies in that basket ...

1) Batero Gold Corp. (TSX: V.BAT, Stock Forum) in Colombia has 6 million ounces near 0.4 g/t with approx. $16 million in the bank. The gold is valued near $0.

2) Sunward Resources Ltd. (TSX: V.SWD, Stock Forum) in Colombia has 11 million ounces near 0.5 g/t with approx. $25 million in the bank. The gold is valued near $1/oz
.
3) Victoria Gold Corp. (TSX: V.VIT, Stock Forum) in the Yukon has 6 million ounces near 0.7 g/t with approx. $30 million in the bank. The gold is valued near $1.50
.
4) Volta Resources Inc. (TSX: T.VTR, Stock Forum) in Africa has 6 million ounces near 1.0 g/t with approx. $10 million in the bank. The gold is valued near $4/oz
.
5) Asanko Gold Inc. (TSX: T.AKG, Stock Forum) in Africa has 5 million ounces near 1 g/t with approx. $185 million in the bank. The gold is valued near $6/oz.

6) PMI Gold Corp. (TSX: T.PMV, Stock Forum) in Africa has 2.5 million ounces near 2.3 g/t with approx. $100 million in the bank. The gold is valued near $9/oz.

So is it a good time to buy explorers?  Danny thinks so.

Let's take a look at a chart of the Global X Gold Explorers ETF (GLDX), which has Volta Resources as its biggest (7.91%) asset. Its other top holdings including Gold Canyon Resources, Seabridge Gold, Torex Gold Resources, and Novagold Resources.

(Updated chart)

It sure looks like we're seeing a double bottom in the GLDX.  Referring to the previous chart of junior gold explorer valuations, you can see that when the valuations of that group went from $18 in June to $22 in September, the GLDX likewise followed with a rally of around 60%.

I have not gotten the bullish "buy" signals on the GLDX that I have on my other picks.  So this is for bottom-fishers and real speculators only. The speculation would be that gold is at least going to rally like it did earlier this year, and that will breathe some life into this beaten-down industry.

Be very careful. And good luck to us all.

Why I Grabbed Gains on Oil Companies & Bought More Gold & Silver Miners

I exited four of my energy positions today, and added two precious metals positions. Here's the skinny on why ...

Watch the Dollar

It sure looks like the US Dollar Index is going lower. It is probably getting hammered by delayed expectations of tapering of the Fed's quantitative easing program, though it may also be reflecting Chinese desire to shift away from dollar-denominated trades to trades in other currencies.

(Updated chart)

Support at 79 needs to hold. If not then we will likely see a test of 78.70, and then, well, it's toes-dangling-over-the-abyss time for the once-mighty greenback.

I think 79 will draw the dollar like a magnet, and after that, we'll see.

For a while, oil was the anti-dollar. In fact, for a while, oil was more the anti-dollar than gold.  But in the very short term, gold has gone back to being the anti-dollar, while oil is joining the dollar in its slide lower. In the last 10 trading days, the dollar is down 1.6%, while oil is down 5.7%.

Why is this? It seems to be simple supply and demand.  

• The Energy Information Administration reported Wednesday that crude stockpiles rose 5.2 million barrels for the week ended Oct. 18.
• This was higher than expectations of 3 million barrels. In fact, crude oil inventories have risen more than expected for five weeks in a row, for a total of 24.1 million barrels.
• The latest supply climb lifts total crude stockpiles to within 20 million barrels of the record highs the market saw earlier in the year.

So, since oil is under pressure, I decided to exit four of my energy positions that were getting whacked today. I sold Rex Energy Corp. (REXX) for a 0.5% gain, PetroChina (PTR) for a 0.3% loss, SPDR S&P Oil & Gas Equipment & Services (XES) for a 1% gain, and Devon Energy (DVN) for a 6.8% gain.

These aren't the big gains I had in mind when I added these positions, but with oil going lower, it seems the wiser choice. And I still have my three strongest energy positions -- EEP, PKD and TAN.

I can always add more energy positions when oil finds new support.

Gold Is The Anti-Dollar Again

Meanwhile, gold looks better and better. It's not giving back much of yesterday's gain.

(Updated chart)

So, I decided to add a gold miner and a silver miner ETF.

First, Primero Mining ...

(Updated chart)

My subscribers at Weiss had the opportunity to make money on Primero a few times. I still like the story. Primero is a miner working in Mexico. It has a market cap of $660 million.  It trades at a slight discount to book value, but probably not for long.  

Primero has been increasing production at its flagship San Dimas mine, which has more than 100 mineralized gold-silver veins. Production at San Dimas rose 9% in 2012, and should hit ~130,000 gold equivalent ounces this year. The company stated that it expects its full-year all-in sustaining costs to average $1,050-$1,150 per ounce. Continued expansion of the mine is projected to bring production up to ~165,000 ounces by 2014.

Primero also own 70% of another project, Cerro del Gallo, in Guanajuato State. Goldcorp owns the remaining 30%. I've been to mines in Guanajuato; that area has a rich mining tradition and the government is mining friendly. Cerro del Gallo should start production in 2015. 2016 will be its first full year of production, and its targeted production is 60,000 ounces a year for the first year.

Primero has a little over 600,000 ounces in reserves and a million and half ounces in resources. The company says it expects to convert 90% of those resources to reserves. The company is spending money on exploration, something that other companies are putting off these days.

The company has $32 million in debt, due by the end of 2015, and it looks payable. Also, Primero received a favorable tax ruling from the Mexican government: Now, Primero no longer has to pay taxes based on the spot price of silver that they sell to Silver Wheaton. Silver Wheaton buys silver produced at San Dimas at a price of $3.90 per ounce. In 2012, Silver Wheaton bought 5.9 million ounces of silver from San Dimas.

When it bought the mine, Primero assumed the obligation to sell Silver Wheaton the first 3.5 million ounces of payable silver produced per year plus 50% of any excess at $4.04 per ounce (plus 1% inflation) until August 5, 2014. 

After that, Primero will sell Silver Wheaton the first 6 million ounces of payable silver produced per year plus 50% of any excess at $4.20 (plus 1% inflation) per ounce.

If you don't like Primero's side of that arrangement, you can always buy Silver Wheaton instead (and I might).

I like Primero, and today's pullback seemed like a good opportunity to add it. 

My other pick was Global X Silver Miners ETF (SIL) ...

(Updated chart)

SIL gives me exposure to a basket of companies across the silver mining industry. It tested its downtrend yesterday and is pulling back today. I think the US dollar is going to fall, silver and gold will rise, and SIL and PPP will rise with them.

To be sure, my entire market thesis could be wrong. Or maybe just a part of it will be wrong.  But when I go shopping in precious metals, I'm buying great companies at big discounts.  It helps me sleep better at night.

These are not official recommendations. I am not your investment adviser. You should not buy something just because some guy on the Internet likes it.  Do what is best for your own investing purposes. And you have at least until tomorrow morning to do your due diligence on anything I mentioned here.

Why Stock Market Bulls Should Worry -- Chart

Heck, I'm a stock market bull, and this chart worries me.  Perhaps it should worry you ...

(Updated chart)

The S&P 500 has been channeling higher, and it's at the top of its channel.  Could we see a correction of 2 to 3 weeks? Sure.  But a correction -- if it comes -- could also be shorter and shallower for a whole bunch of reasons.

And there's also the potential that the S&P 500 could break out from here and head higher, simply because it seems most traders are betting on a pullback.

So, I worry, but I don't let it stop me from trading. I took three positions off today, and added two new ones. Look for a post on that in a bit.

Charts and Must-Reads on Gold, Oil & More

After rallying strongly yesterday, gold is down this morning. Is this the end of gold's brief rally?

Mother of mercy, is this the end of Rico?

I don't think so. The action in the Market Vectors Gold Miners ETF (GDX) seems balanced between bulls and bears, and this comes after quite a nice rally.  

(Updated chart)

The GDX still has a lot to prove. But we'll see. At this stage, I'd rather have bought last week -- which I did -- then be on the sidelines right now.  People with different risk profiles will view the situation differently.

I'm more concerned about the gap down in PTR, and REXX has dropped to support (?) at its 50-day moving average. And the SPDR S&P Oil & Gas Equipment & Services Index (XES) has gapped lower after gapping higher last week.

 (Updated chart)

Most of my energy positions remain in positive territory, and the money flow into the XES remains strong, but still, that chart action is worrisome. Weakness in crude oil is dragging down oil companies. [XX Note -- crude inventories rose more than expected for the fifth week in a row] I may take gains sooner rather than later.

On the other hand, natural gas looks like its downward momentum has stopped, and it may be ready for its next leg higher. So, let's leave it at "the energy market is in flux right now."

6 Good Reads for Wednesday

In the meantime, here is what I am reading ...

1. Art Cashin remembers the Crash of 1987: "The interaction with the futures saw prices melt away.  The Dow closed down 508 points.  One specialist, who made too good a market, ran out of funds and the firm was sold to Merrill Lynch that very night.  At watering hole after watering hole, traders and specialists reported again and again how strained their resources were.  Wall Street could not survive another day like this.  Luckily, innkeepers, like Harry let them put the drinks on a tab.

"What is often lost in the retelling is that the next day, Tuesday, was far more dangerous.  It was the day that the wheels almost did come off the locomotive."

Cashin added this important note:  “Keep An Eye On Gold – Our friend and colleague, Paul Richards, recalls that the last time we raised the debt ceiling, gold rallied 17% over the next 15 days.”

2. Excerpt from Eric Sprott's letter to the World Gold Council:

"For very different reasons, we are now at a similar pivotal point for gold. Over the past few years, we have seen incredible incremental demand from emerging markets. Indeed, so much so that the People’s Bank of China has announced that it is planning to increase the number of firms allowed to import and export gold and ease restrictions on individual buyers. In India, the government has been fighting a losing battle against gold imports by imposing import taxes and restrictions. Moreover, Non-Western Central Banks from around the world are replacing their U.S. dollar reserves by increasing their holdings of gold.

"But, demand statistics reported by the World Gold Council (WGC) consistently misrepresent reality, mostly with regard to demand from Asia.

... snip ...

Since ETFs have a finite size (about 1,900 tonnes left), these outflows cannot continue for much longer (see our article on the topic). All these observations point to a considerable imbalance between supply and demand (unless Western Central Banks decide to fill this void with what is left of their reserves).

3. Interestingly, money does grow on trees. Or at least, gold grows on trees. In Australia, mate!

4. Many are looking for Indian gold buying in November to boost gold prices. Considering that India's government continues its gold import restrictions, I don't see it. The biggest winners from the ban are gold smugglers, naturally.

5. ETFs are adding gold again. The SPDR Gold Trust (GLD), the world's largest exchange-traded gold fund added gold on Tuesday for the first time in a month, and by the largest volume in 8 weeks. It added 6.7 metric tonnes.

You know how important I think this is. The trust's assets remained near 56-months lows at 878 tonnes.

6. Quote for the day: "Anyone who averts his eyes from the hopeless lives many of our fellow citizens lead and tells himself and others that these men and women only have themselves to blame, is either a fool or a soulless bastard."