Bargain Gold?

by Addison Wiggin

  • Gold at $1,370… a buying opportunity?

  • Strange days: Ireland insists it doesn’t need a bailout, Germany insists it take one anyway

  • California back in the bond market, at the worst possible time

  • Chris Mayer identifies two commodities still available at bargain prices

  • Sleeping with the enemy? Spitzer consort becomes commodities trader

We find ourselves in a peculiar position this morning. With gold cresting $1,370 the price to us presents a buying opportunity.

Of course, today’s price is just shy of the all-time high hit last week. And for sure, it could it go lower in the short term. But the long-term trend, we contend, remains bullish…

“Gold prices have jumped 13.4% since June 1,” says Vancouver favorite Frank Holmes from U.S. Global Investors. “Most of this appreciation came after the Federal Reserve announced its intention for a second round of quantitative easing.

“The Federal Reserve’s recent announcement was both larger ($600 billion) and longer (until June 2011) than many had anticipated. The long-term depreciation effect this plan will have on the dollar could be a catalyst for higher gold prices all the way into next summer.”

Much higher.

At the same time, the outlook for silver remains very bullish. After a healthy correction from $29.34 last Tuesday, spot silver sits at $26.28 this morning.

“The fundamental factors driving silver higher have not changed,” says our friend James Turk from GoldMoney. “There has been no damage to silver’s technical condition. For example, silver is above its 21-day moving average. More importantly, the price drop at the end of the week occurred with bullish sentiment taking a nose dive.

“These conditions bode well for silver’s short-term outlook, as does the following chart:

“My reading of the above chart,” James says “indicates that silver might yet reach $30 within my 18-day target, i.e., Nov. 23.” As recently as Oct. 28, James referenced a similar chart to forecast a spike to a $30 silver price in the ensuing 18 trading days.

Our Byron King has a few favorite ways to play silver, which he’d be happy to share with you here.

Gold and silver are holding their own even as the greenback is rising today. The dollar index is up nearly 0.5%, to 78.4. “Near term,” says Options Hotline editor Steve Sarnoff, “I’m watching to see if some surprising strength in the U.S. dollar puts a bit of pressure on stocks and commodities.”

Steve’s readers are celebrating the gains from his Novartis put option recommendation. On Oct. 17, he wrote: “Conservative traders may target a move toward $58 and below. Speculative traders may eye a multiplier move toward $55.80 and below.”

Friday, it moved below $55.80 — delivering readers a gain of 125% in less than three weeks. If you’d like to be in on Steve’s next play, you’re in luck: We’re making Options Hotline available at half the regular membership fee.

Stands to reason, the dollar strength today is a byproduct of euro weakness. Eurozone jitters are back in the headlines…

  • Greece’s 2009 budget deficit just came in officially at 15.4% of GDP

  • Portugal’s foreign minister is making noises about dropping out of the eurozone if his country can’t get its fiscal act together.

And then there’s Ireland, where up is down and down is up today…

Ireland insists it doesn’t need a bailout from the European Union, but today, the EU is all but insisting Ireland take one anyway.

Let’s review how Ireland got where it is today: The Irish government went on a spending binge starting in the 1990s. Housing prices tripled in just 10 years. When the bubble burst, the banks got in trouble and government revenue cratered.

“Even an austerity movement after that is not going to help them with a decline in economic activity,” we told Canada’s National Post in a piece about the failure of stimulus throughout the Western world. “The problems were already inherent in the prosperity.”

So here’s where we stand now: German Chancellor Angela Merkel — the leader who’s taken a stand for fiscal probity through all the euro-nonsense of the last year — is among those pushing hardest for Ireland to take a bailout.

From what we can piece together, her reasoning appears to be thus: She’s keen on a plan to fix the situation once and for all by sticking future sovereign debt losses on the people who bought that sovereign debt, rather than German taxpayers. (Makes sense so far.)

But as long as there’s uncertainty about Ireland, it’s harder for Merkel to convince other European leaders to buy in. So she wants the Irish to take a bailout… courtesy of German taxpayers (among others).

Our mind wanders to George W. Bush saying of the 2008 bank bailouts, "I've abandoned free-market principles to save the free-market system." European Union finance ministers meet tomorrow in Brussels. Stay tuned.

Elsewhere in a world where governments find themselves inextricably mired in debt, California plans to auction $14 billion in bonds starting today.

Heh, great timing…

  • Lame-duck Gov. Arnold Schwarzenegger just called a special session of the legislature to figure out how to cover a $25 billion shortfall over the next 18 months

  • Federal subsidies for Build America Bonds are about to run out.

No wonder the Pimco California Municipal Income Fund has turned in such a splendid performance over the last week…


Put all 50 state governments together and they’re running about $3 trillion in the red. This is why we think retirees are taking undue risk by putting their money in allegedly “safe” and “tax advantaged” municipal bonds.

There aren’t many tax advantages to an asset that’s backed by an entity at risk of default. It’s why we recently expanded our income investing team — to search high and low for alternative sources of income that can’t be sabotaged by profligate governments. You can see the latest fruits of their research here.

Stocks are slowly moving up this morning, making up at least a bit for last week’s losses. The Dow is close to 11,250. Traders are celebrating one data point, and ignoring another…

Retail sales rose 1.2% between September and October, according to the Census Bureau. Well, that’s the headline number anyway. If you back out car sales, the number was only 0.4%. And a good chunk of the remainder was higher sales of food and gasoline.

Remember, this report measures sales by dollars, not by unit volume… so whatever increase we had in retail sales can be traced pretty much to that inflation the Ben Bernanke keeps telling us we don’t have enough of.

Here’s a data point to which there’s absolutely no positive spin: The Empire State Manufacturing Survey has plunged into negative territory for the first time since the Great Recession theoretically ended in the summer of last year.

Factory owners in the New York region are gloomy on just about everything. Important subcategories of the index — like new orders and shipments — also fell into negative territory.

This could make the next ISM manufacturing survey — due on Dec. 1 — really interesting.

“In the world of commodities,” says our managing editor Chris Mayer, “there are still a few bargains.

“One of them is uranium. After doing nothing for most of the year, the price of uranium is up more than 30% since the summer. It's still cheap for the simple reason that even the new higher price is not enough to make investing in new mines attractive.

“That wouldn't matter so much if there weren't such strong demand for uranium coming from the build-out of new nuclear plants. China recently increased its nuclear power targets by over 60%, for instance.

“As it is, the uranium industry has trouble meeting current demand. Total mined uranium is about 110 million pounds, which meets only 64% of the demand from utilities, according to John Stephenson's Little Book of Commodity Investing. The gap so far has been made up with dwindling stockpiles of existing uranium supplies.

“And remember that the peak for uranium came in 2007, when it traded for $136 per pound. There aren't too many commodities these days trading for 60% off their highs.”

“One other bargain commodity,” Chris continues, “is U.S. natural gas, currently around $4. Natural gas is down 70% from its 2005 high and down 21% since December.

“North American producers need $6-7 nat gas to make money. This analysis is similar to what we did for uranium. Likewise, it seems the natural gas price must rise or production must fall. I think demand for natural gas will rise long term — with a strong pull coming from overseas.”

Chris has ways to play both natural gas and uranium in Capital & Crisis.

Talk about regulators sleeping with the regulated: It turns out the favorite prostitute of “Wall Street Sheriff” Eliot Spitzer is leaving the business to become a commodities trader.

So says documentary filmmaker Alex Gibney, whose latest release is “Client 9: The Rise and Fall of Eliot Spitzer.” While Spitzer consorted with many escorts during his time as attorney general and governor of New York, his favorite was one who has chosen to remain anonymous. In the film, she’s known as “Angelina.”

“What was interesting about Angelina,” says Gibney, “was she tells us a lot about Spitzer as a character and the escort trade.”

And now she’s trading commodities, her former identity known to only a limited circle. “She had a lot of very powerful clients,” Gibney continues, “and I guess they were able to teach her things about the way the market worked.”

Like straddles, we presume.

Oh dear, that’s sure to offend this reader…

“Family Guy,” writes a reader reacting to the clip we shared on Friday, “is utterly filthy and disgusting — an ‘untestament’ to the decadence destroying the U.S. from inside out.” He went on to share a lengthy quotation from the late Charlton Heston about the decay of culture.

We are more concerned with the decay of the currency — without a sound one, there’s not much of a culture left to defend.

Which brings us to another amusing video for your viewing pleasure, recommended to us by two Reserve members. Fair warning: If an occasional profanity offends you, for goodness sake, don’t click on this…

“One of the readers in Friday's 5 Min. Forecast,” writes another, “asked why Medicare doesn't pay for herbalists and natural cure.” Our reader then goes on to address the issue:

“It would do no good to have Medicare start to pay for these type of treatments because then the cost of them would shoot up just like the cost of everyday types of treatments has shot up since the government has started paying for medical care.

“The only solution is for the government to get completely out of health care payments. When the patient is paying cash for what he can afford, as it was previous to the ’60s, the costs will decrease so fast we won't know what happened. Part of our deficit problem would be solved.”

The 5: Great. Then answer this: How do you expect the insurance industry to continue to line its pockets with a proposal like that?


Addison Wiggin

The 5 Min. Forecast

P.S.: “You can kick the can a little further down the road,” we said of bailouts and stimulus in that National Post article, “but you destroy the currency in the process and you basically have to put the economy on life support.” You can read the whole thing here.


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