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.
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."
I'm choosing today's energy winner for a few reasons, which I'll explain in a minute.
First, the pick o' the day. The SPDR S&P Oil & Gas Equipment & Services ETF (XES) ...
(Updated chart)
As you can see, the XES is breaking out of its recent range. You could buy it with a stop at either the recent bottom of the range ($41.50) Or below the 50-day moving average OR below the recent uptrend if you have a stomach for risk and big ol' brass ones.
Why I chose XES ...
1. Obviously, it's breaking out. My target is $62.
2. It's indicative of what's going on in the industry. Increasing oil demand is driving oilfield service activity.
Source
3. It's an example of how select energy stocks and funds can do well even when oil prices go lower
(Updated chart)
In the short term, oil prices look to get weaker. Sure, the bigger trend is up. If we get a test of support around $99, that's probably a great buying opportunity.
So why do energy stocks go up when oil goes down? While the price of oil is becoming more and more a reflection of global demand, there are still blockages getting oil out of Cushing, and prices could remain under pressure for a bit as American oil production continues to crank higher. Meanwhile, plenty of companies are VERY comfortable with oil in the $100+ range, and they want to pump more oil. So, the oilfield services companies are doing booming business.
Finally, oil services companies are being helped by the breakout in natural gas prices, which I talked about on Wednesday. We've seen follow-through as nat-gas moves to multi-month highs. This is sparking new interest in drilling for nat-gas and associated liquids.
I've seen multiple stories that the government shutdown is going to negatively impact the oil industry. So far, the action in oil industry stocks is calling those reports wrong. We'll see how it goes, though.
And remember, there are plenty of companies that do better when oil prices go lower. Airlines (Spirit, US Airways, Delta), for one. Travel companies (Allegiant Travel) for another. Companies that use oil as an input -- for example, agricultural chemical companies like American Vanguard.
Those are just some ideas. In any case, these three charts show that while oil prices may be headed lower, select oil industry stocks and funds should head higher.
I'm not your investment advisor. Do your own due diligence before buying anything. And a smart investor would have a stop in mind -- and a profit target -- before buying anything.
