This Week on Wall Street and the Gold Bug Bites Again
This week was all about the economics and earnings. Economic reports released this week included the consumer confidence report, the existing home sales report, the new home sales report, weekly jobless claims and preliminary first quarter GDP. All of which showed that our economy is running on all cylinders. As far as earnings have gone, they’ve been fantastic. Roughly 70% of companies who’ve reported have either met or beat earnings.
Before we get to our “Pick of the Week”, we’re going to go off on a quick tangent.
Gasoline prices have risen to heights not seen since Katrina. Oil companies have reported record profits. Midterm elections are right around the corner. It’s time for us to be abused!
With Congressional seats on the line, politicians are jockeying for position, coming up with any buzz words or sound bites that will win them votes. Unfortunately for the investing world (which is just about everyone these days), we’re in the line of fire and nothing will stop them from filling us with the proverbial lead… not even basic economic theory.
Politicians looking to grab a seat, keep a seat, or move up in the ranks, have blamed the rise in oil prices on the “greed of Big Oil.” After all, Exxon Mobil reported net income for the last three month period at $8.4 billion! With that much income, could the politicians are right?
Pennsylvania Governor Ed Rendell, sent a letter to the President, asking him to work with Congress to pass a windfall oil profits tax with the proceeds going back to consumers and businesses that are being hurt by the jump in energy costs. The Governor, along with many pandering politicians, feels that with oil companies making so much money, they owe someone something. If oil prices are rising, their must be collusion, corruption or monopolization occurring here… most likely perpetrated by Big Oil. It couldn’t possibly be the forces of global economics at work.
What Congress fails to realize is there are many places on God’s green earth where people actually trade oil and oil futures. At these exchanges (which are mythical to politicians), prices are agreed upon by a buyer and a seller. These prices are fixed by using supply/demand models, geopolitical news and rumors…they’re not set by the CEO of ConocoPhillips… but by you, me and millions of other investors who are willing to put their hard earned dollars on the line. If a windfall profits tax occurs, watch as your oil investments shrink, and fuel prices continue to rise.
If we’re going to blame any institution for expensive fuel, blame the government. Perhaps Governor Rendell should propose the withdrawal of state and local gasoline taxes. Perhaps the federal government should cancel their excise taxes. They wouldn’t want to do that though… cut into their own revenues, doubtful. Someone else should pay.
Remember, politicians are lawyers… professional buck passers and blamers. They apparently know little of this thing we call economics, supply and demand and market forces. All they know is fear… and how to use it to gain political hand. The only solution to driving gas prices down is to increase supply--or diminish demand, which is not looking likely. The best recourse for consumers is to call their state and federal representatives and demand a withdrawal of fuel taxes.
A Quick Look At Oil
Last week we discussed how to trade crude now that its surpassed all time highs. The following is an excerpt:
“How do we trade crude now? We’re not sure. The best thing to do now (safest) is to wait for another pattern to develop. Crude has never traded at these levels so we have no overhead resistance and support is tricky here as well since the run is based mostly on geopolitical news, and not on supply and demand. At these levels, it may be a wiser move to sell your contracts and wait for more developments.”
Well, we’ve finally got a pattern to work with. The below chart shows that a support zone has been created, although it is somewhat weak, and a resistance zone has formed which is very strong at $75.35.
So the plan now is to buy crude up to $75. However, looking at the crude chart you’ll see that bottom support line (a trending line) is showing stronger support around $67.50. If crude does fall through that weak support line (midline near $70), sell down to $67.50, then return to the long side back up to $70.
With the Iranian situation becoming ever closer to a flat out confrontation, we may see crude jump past $75 to near $80. But we do have some factors working against this now.
China announced this week that it raised its interest rates to help curb investment and cool down their economy. If this rate increase (from 5.58% to 5.85%) does manage to cool off their growth, crude consumption may drop a bit and prices could fall back to near $60 per barrel. It will take at least a full quarter before we know what the effect on this rate hike has made in China, so the current plan is to continue bullish on crude.
All that glitters is Golden Peaks (GL.V) on the Toronto Venture Exchange
This international exploration and resource company is focused on the discovery and development of gold deposits in Argentina, where it holds over 385,000 acres and has five projects with significant potential. This includes a recent discovery at Golden Peaks’ La Fortuna prospect in Patagonia, as well as a joint venture in La Rioja with Peruvian-based Minera Hochschild SA, one of South America's oldest and most established mining groups. The company’s senior management also boasts former executives from majors Cameco Corporation
and Homestake Mining. Our decision to work with Golden Peaks is based on what we view as a very rare opportunity to participate with a highly credible mining group just as they appear to be making a massive multi-million ounce gold discovery.
While we must caution these are early days, and that considerable work remains to be done, the initial results have been exceptional. Golden Peaks’ Fortuna gold discovery, though 150 miles south, is in the same geological setting as the giant Navidad and Esquel gold and silver deposits. The Fortuna prospect contains five extensively mineralized gold zones with multiple high grade gold outcrops. Drill testing of these dozens of exceptionally rich gold outcrops has just started and the results have been immediate. The first shallow seven hole “reconnaissance” program resulted in a discovery at the T-11 where an initial approximately 240,000 ounces is expected to be blocked out. It remains open to depth and strike.
The Company subsequently drill-tested a poorly exposed mineralized structure in an area called the Amphitheater, roughly one kilometer to the northwest of the T-ll. It was here that they made a second gold discovery. The Amphitheater consists of a mineralized zone on the side of a hill two square kilometers in size. Golden Peaks has already found 10 high grade gold outcrops within this zone. The Amphitheatre also lies at the intersection of two multi-kilometer long gold zones. One of these contains an old gold mine, with the potential that the Ampitheatre is at the source of a giant epithermal gold system. The Company is methodically drill-testing the area's gold outcrops and the latest results are the second and third outcrops to be drilled. (The first was the T-11.) Drilling at the second outcrop intersected a world-class 65 meters grading 5.72 grams gold per ton (214 feet of 0.2 oz/ton gold). This zone, of just under two meters, averaged over 6 oz/ton of gold and 4.5 oz/ton silver. A second hole tested a nearby two meter wide high-grade gold outcrop and intercepted it roughly 30 meters below with an average grade of 3.65 grams per ton over 2.4 meters. Considering the limited amount of drilling thus far, this is an exceptional start and indicates that their property's many high-grade gold outcrops should lead to a significant gold resource. The Company has yet to establish the actual source of all these high grade gold outcrops and drilled zones. Clearly, judging from the extensive mineralization, a major geologic event and source is responsible and its discovery could translate into a huge gold resource. In the meantime, if they can keep drilling off intersections similar to those just reported, it will not take long to establish a million ounce or so gold resource.
Following the initial T-11 gold discovery, Golden Peaks worked with London-based Ocean Equities to privately place $8.7 million of its shares to some of Europe's most respected financial institutions, including Rab Capital PLC, which manages one of the world's top performing resource funds. We are further reassured by the fact that Golden Peaks' management also participated in the financing. Combined with the recent exercise of warrants, Golden Peaks currently has $20 million cash, which is more than enough to fund their planned exploration and development of the Fortuna Project.
Shortly after this financing, the highly respected Zurich-based research group Equity Research (www.equityresearch.li) initiated coverage. The group is known mostly for its analysis of major market trends, and in-depth analysis of resource frontiers from Africa's Congo to Caracas in South America. Its coverage is mostly on large-cap companies. Only very occasionally does it recommend small-caps such as Golden Peaks. It has initiated coverage at the onset of some of the last two decade's largest energy and gold developments. Included with this letter is the latest Equity Research quarterly report. An article regarding Golden Peak's discovery is on page 19.
While we are encouraged that a Swiss-based research group thinks Golden Peaks has made a major gold discovery, we also are very impressed by the caliber of the Company's management. This includes Golden Peaks President and CEO Kieran Downes a Ph.D., Geologist and former Senior Exploration Manager for Cameco. Likewise, Director Gillyeard Leathley was the driving force behind the development of some of America's premier mines including the Jolu, Eskay Creek, Santa Fe and Ruby Hill mines. Finally, Chairman Scott Emerson assisted in the financing of the Jolu project in association with Ingot Management, a private venture capital firm. He has been with Golden Peaks since its founding in 1993.
Conclusion:
With gold and gold stocks hitting new highs on a daily basis we firmly believe that every portfolio should have some exposure to gold as a hedge on inflation and a prudent investment. As we mentioned in our piece earlier this month, just check the index before you buy. The indexes will give you a decent indication of the general market conditions. For the year IAU, a Gold Index is up 60% and GL.V is up over 200%. While there has been a very significant run-up as of late on Golden Peaks we believe the best is yet to come. For disclaimer purposes we have purchased 5,000 shares of Golden Peaks and will continue to add at these levels.