Monday Morning, August 20th
New IceMD Recording:
Alcohol Consumption and Risk of Stroke;
There's a new article in the Investor's Health section — "Scientists cure diabetes in mice."
Read the article here: http://icecoldstocks.com/investors_health/diabetes2.html
"Teaching Brokers Sales"
Thee is a Free training program on Tuesday Night at 5 PM California time. There is no charge for the 45 minute course. Inidividuals are invited also, although it is geared towards brokers. Just write the Ice Man at iceman081@hotmail.com with your email address and phone number and you will be invited onto the free conference call.
"Technical Analysis"
We appreciate all those that participated in our last training program call. We are having another training program next Saturday at 7 AM by Steve Nelson. He is extremely knowledgable on MACD, Stochastics and On-balance Volume. We invite you to write the Ice Man at iceman081@hotmail.com to participate in either call.
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Kudos for Last week's Call:
Ice Man,
Outstanding call. I cannot express it in words any better.
As an individual investor (who has been actively learning the trade for the past 12 months), your call and your net service has highlighted everything I read and listened to ( including IBD, Gorilla, Stocktiger, Cramer, Fast Money, Yahoo Trader groups, Telechart Trader groups...). Today Icecold Stocks is a main part of my daily and hourly routine.
On today's call I learned 3 things - particularly on the pyschological strategies side:
- have a game plan
- prey on the weak
- buy day 1 up (on close) during bear market - do not buy 2nd day momentum - day 3 will probably be last up day
Appreciate the update on NNRF and GRSR.
I will particpate on next week's call. If possible please repeat the indexes and stocks on your main page (this will help me short term and prepare for boot camp).
Secondly, a conference call focused on psychological strategies would be a good follow up to today's call (maybe recapping a week's activity once the second pullback of this bear market trend correction occurs).
It is still early to say but you probably have changed my life. And I plan on sharing this wealth.
Thank-you for your services.
Patrick
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Hello Ice Man and Steve,
This was an excellent session....thank you very much. You and Steve really compliment each other.
You have so much energy.....I wasn't able to get all the seven sectors and the respective stocks in each that you mentioned. I would like to get these in a permanent watch list to monitor as I'm sure all listeners will want to do. Thanks very much, again YOU are TERRIFIC.
God Bless
Best Regards,
Jim
SITE NEWS
Hidden Treasure News:
Dow Stock News
The New York Times writes that Hewlett-Packard (HPQ) has introduced a feature that allows PCs to print documents on almost any printer.
The New York Times writes that business and political interest in Europe are waiting for a September ruling on the EU's huge antitrust suit against Microsoft (MSFT).
Ice Man Stocks
Regular Trades the Ice Man may consider:
PLXS - 24
RDN - 20.20
MTH - 20
Depressed stocks the Ice Man may buy:
BG - 80.15 Gap
ATK - 95 Gap
AKAM
ASA
CPA - 37.85 Gap
Dollar Man Ideas:
CBF - 5.90
FMT - 3.85
CTDC - 4
KOG - Possible Bottom
ANSW - 7
NFI - 9.30
Media Commentators
Cramer's Comments:
Bullish: GS, LEH, SHLD, BSC, DSL, WM, CTX, SLB, HAL, NYX
Ice Cold Commentators
Break Man Video Summary:
Break out buy (or short sell) watch list for short term gains August 20 includes: FNM, TRCA, TJX, WFT, KIM, TSFG, PNY, RSTI, TNL, ODSY.
Several candidates for break out or short sell plays for at least short term gains by buying the break out (or selling the break down) on good volume and closing at least some on the first day.
Swing Man Market Recap:
The Swing Man will be teaching a Free Educational Seminar Saturday at 7 am California Time.
Week in Review: Extremely Volatile Week With Opportunities for both Bulls and Bears...Fed Steps In...
A pretty wild week for our markets which is very atypical for August. The market was down quite heavily through mid day Thursday with the Dow down about 800 points at one point but rallied back hard late week thanks to a Fed cut in the Discount Rate. For the week most indices were down approximately 1-2%. One thing seems certain to us. The Federal Reserve seems like it will try to do everything within its power to keep Countrywide (Ticker-CFC) afloat given the impact on the financial system/economy if that company were to go under. Whether or not its the right thing to do continues to be under constant debate in the financial media.
Mid day Thursday many of our key metrics such as the 21 Day P/C and Intraday readings were literally at all time historical levels, the VIX fired up to 37.5 and with a tag of our highlighted 1375 SP 500 support we finally reversed late session on some historical volume on the NYSE. It was a week to remember in terms of the Volatility with many opportunities on both sides of the ledger. The question now remains where do we go from here....lets move onto the charts.
Taking a look at the Nasdaq and NDX charts we broke through our 1 Year Rising Support Lines and it would be normal now for those to provide resistance on backtests. Its worth noting that the volume on Friday while solid for August historically was relatively light given the action over the past 3 weeks and in light of the Fed news. Important resistance for the Nasdaq next week comes into play at the 2525-2550 area where both Trendline and 20 MA resistance comes into play. On the NDX it has significant resistance at the 1920-1940 level where a confluence of Trendline and 20/50 MA resistance should provide a major test. While "V" bottoms do occasionally occur they are relatively rare. Its much more common to get another retest of some type before setting a major low. It would take a move through the above key pivots and our 60 Minute downtrendlines to suggest a major bottom is behind us. The SP 500 found some resistance at 1450 Friday and we expect the 1450-65 level to provide some resistance for that index. As can be seen in our 4th chart below we tested and tagged our 5 year Rising Support Line in the 1375 area which provided us with a nice late week bounce. Moving onto the Dow we are looking for resistance in the 13,200-300 area where both Neckline and 20 MA resistance comes into play.
Moving onto Sectors, the Financials and Techs got the biggest boost late week due to short covering. Shorts had piled into those groups and many players were forced to cover their positions late week on the Fed news. Most Commodities performed poorly during the week. The Dollar rallied and thus Silver broke down during the week. Gold was under pressure much of the week as well. Oil did rally some late on the news of the development of Hurricane Dean in the Caribbean which as of this writing was a potent Category 4 storm. The Transports held its key 4750 Weekly long term support line by the close of the week.
On the Sentiment Front our 21 Day P/C hit 1.22 an all time high reading. The Commercials remain net long the market and our Investor Intelligence Data indicated that Bulls/Bears has narrowed to 43/32.
Big picture we continue to believe that we're in a corrective move within a primary bullish trend. At Thursday's lows the P/E on the SP 500 was 15. For the near term continue to remain nimble.
CNBC Fast Money Review
1. FED SALVAGES THE WEEK
The headline: Dow Dramatically Cuts Loss For Week With 230 Point Jump After Fed Cuts Discount Rate
Karen Finerman: Investors should not try and fight The Fed.
Macke: Agrees and says consequently, investors should not short financials.
Adami: On a valuation basis stocks are not rich. He thinks the market is moving higher.
2. THE WEEK: FINANCIALS
The headline: JPM, WFC Lead Bank Recovery; BSC Gains 7% For Week, 1 Month After Market-Roiling Hedge Fund Losses
Money Center Banks Last Week
C +3.8%, BAC +6.5%, JPM +6.2%
Brokers Last Week
GS -3.0%, MER +2.6%, LEH -1.6%, BSC +7.3%
Adami: Likes GS and thinks it could trade with 100-handle very soon. He also likes BAC and USB.
Najarian: Warns the to keep an eye on volatility – he thinks there´s still nervousness in the market.
3. THE WEEK: COMMODITY STOCKS
The headline: FCX Sheds 11%, While AA Tumbles 4%
Commodities Stocks Last Week
AA -4.0%, NU -5.2%, NEM -4.8%, FCX -11%
Adami: Traders were selling first and asking questions later in this sector. They were selling names they should have held.
Karen Finerman: There´s fear the economy is slowing and the commodity names are very sensitive to that kind of news. The activity could be a referendum on the overall economy.
Najarian: The XLB was murdered and options volume suggests to him that traders are looking for more downside.
4. Pops & Drops
DNDN popped 17% after hours. Najarian, the pop was due to positive results from their breast cancer drug, which is in Phase 1 trails.
BAC popped 6%. Adami says it´s a good buy.
WFC popped 8%. Karen Finerman likes the stock.
DE popped 6%. Najarian likes DE for global growth.
RIMM popped 7%. Najarian thinks it could go higher after the split.
TR popped 10%. Macke says quality never goes out of style.
TMA, Najarian thinks this stock is going higher.
AAPL, Macke says walk away.
WMT dropped 6%. Macke thinks WMT is in trouble until they make a major change.
MON dropped 8%. Adami thinks it will be a $100 stock in ´08.
CSCO dropped 4%. Najarian recommends owning CSCO.
5. THE WEEK: ENERGY REBOUNDS
The headline: CVX, Oil Rebound Friday To Erase Losses For Week
Adami: Stocks such as XOM are overplayed. Thinks XOM is a value at $80. (It´s worth noting that on Friday Aug. 17th XOM closed at $84.14). Gasoline jumped .10 cents and he thinks that will help the refiners.
6. OPTIONS ACTION
The headline: Najarian Seeing Unusual Options Activity In WEN
Najarian: Options volume suggests to him that Nelson Peltz might pay $41 a share for WEN. WEN closed at $31.79 on Friday.
7. The Final Trade: Your First Move For Monday
Macke: WFMI is a buy, a court ruled in favor of their plans to acquire OATS.
Karen Finerman: Likes TRN for growth in the railroads.
Adami: Prefers DE for the agriculture story.
Najarian: Recommends C as a big money center bank.
News and Events Digest
Breaking News
Nasdaq said it is reviewing options for its 31% stake in the London Stock Exchange, a move that could signal its intention to make an increased bid for Nordic stock-exchange operator OMX. - WSJ
Oil slipped on Monday after forecasts showed Hurricane Dean was unlikely to plough through production and refining centers in the U.S. Gulf of Mexico. - CNBC
KKR Financial (KFN) said it's agreed to sell 16 million shares to institutional investors at $14.40 each -- its closing price on Friday -- to raise $230 million, and will offer $270 million worth fo shares to existing holders, also at $14.40 each. Each existing holder will be able to buy 0.19430 rights for each share they own. Kohlberg Kravis Roberts will buy up to $100 million of the shares if they aren't sold. KKR Financial is an affiliate of Kohlberg Kravis Roberts. - MarketWatch
CDC Corporation (CHINA) announced today that it plans to file with the Securities and Exchange Commission a registration statement for an initial public offering of up to (U.S.) $225 million aggregate principal amount of Class A Common Shares of CDC Software, its business unit that develops enterprise software.
Luminent Mortgage Capital Inc. (LUM) said it signed a definitive agreement with Arco Capital Corp. whereby Arco will buy $65 million of Luminent's mortgage-backed securities. The San Francisco mortgage investment company said Arco will get warrants to buy a 51% economic stake and a 49% voting stake in the company at an exercise price of 18 cents a share. Luminent also said it will replace four members of its board, who have been asked to submit their resignations. The agrement also provides Luminent with access to up to $60 million in added capital through repurchase agreements or secured credit arrangements. The company said that, going forward, it plans to act as a "multi-channel manager for asset-backed securities." Luminent will not ask shareholders to approve the deal. - MarketWatch
Reported by Annette Kreuger, Industrial Info Resources (Sugar Land, Texas) -- The rumors started multiplying on industry insider websites earlier this year, all hinting that Big Bio Amgen (AMGN) was preparing to initiate massive layoffs and would scrap a number of major capital projects. The early signs were there, including putting its highly vaunted $1 billion Cork, Ireland project on ice, or in the company's words "...rescoping..." But they ceased being rumors as the questions moved from the bloggers to Amgen's announcement that in response to the twin dragons of poor sales and health alarms surrounding its anemia drugs, Aranesp and EPOGEN, it would shed 12-14% of its employees and cancel nearly $2 billion worth of capital projects. It is a page out of Big Pharma's playbook that the biggest biotech company in the world did not expect or desire to read.
A vaccine designed to treat breast cancer appeared to be safe in women with advanced disease and showed signs of actually slowing down tumors, U.S. researchers reported on Friday.
Dendreon Corporation, maker of the Provenge prostate cancer vaccine, calls the new vaccine Neuvenge. It targets a type of breast cancer called her2/neu-positive breast cancer, which affects between 20 percent and 30 percent of breast cancer patients.
Media Summary:
According to Reuters, the spotlight in an investigation of Dell's (DELL) accounting practices will fall on whether company founder and CEO Michael Dell had any role in the restatement of numbers.
Reuters writes that the Whole Foods (WFMI) merger with Wild Oats (OATS) could pave the way for other mergers that are pending.
The Wall Street Journal writes that Countrywide (CFC) has begun to lay off employees involved in originating loans.
The Wall Street Journal writes that crude prices should stay high this year as a strong supply will an abundant supply begins to drop.
The New York Times writes that a slowdown in advertising growth at AOL may hurt the chances for turning around the Time Warner (TWX) unit.
According to the FT, AOL says its slow ad growth is a "hiccup".
Barron's writes that Sony (SNE) PS3 could face more sales problems due to poor sales of Electronic Arts (ERTS) new Madden NFL .08 for the game platform.
M&A Activity:
Financial giant HSBC said Monday it is in talks to buy the controlling stake in Korea Exchange Bank currently held by U.S. private equity group Lone Star Funds. - AP
IPO Central:
No IPOs Scheduled for the week of 8/20/2007
Stock Split Announcement:
FMC Corporation (FMC) announced that its board of directors approved a 2 for 1 stock split.
Economic Data:
10:00 Leading Indicators
Upgrades and Downgrades by Sector:
Advertising
CCO Clear Channel Outdoor Bear Stearns Upgraed from Peer Perform to Outperform
LAMR Lamar Advertising Stifel Nicolaus Upgraed from Hold to Buy $62
LAMR Lamar Advertising Bear Stearns Upgraed from Peer Perform to Outperform
Beauty Products
FACE Physicians Formula Citigroup Upgraed from Hold to Buy
Computer Hardware
DELL Dell WR Hambrecht Initiated at Buy $34
NICE Nice Systems CE Unterberg Towbin Coverage Dropped
Computer Services
IFOX Infocrossing CE Unterberg Towbin Coverage Dropped
Computer Software
DBTK Double-Take Software CIBC Wrld Mkts Price Target Raised Sector Outperform $17 to $20
ALDN Aladdin Knowledge Systems CE Unterberg Towbin Coverage Dropped
CHRD Chordiant Sftwr CE Unterberg Towbin Coverage Dropped
CNQR Concur Tech CE Unterberg Towbin Coverage Dropped
NSTC Ness Tech CE Unterberg Towbin Coverage Dropped
RTLX Retalix CE Unterberg Towbin Coverage Dropped
TMWD Tumbleweed Comms CE Unterberg Towbin Coverage Dropped
VRNT Verint Systems CE Unterberg Towbin Coverage Dropped
WBSN Websense CE Unterberg Towbin Coverage Dropped
CTSH CTSH - upgraded to Buy at Smith Barney
Construction
USG USG Corp Matrix Research Downgraded from Buy to Sell
Gaming Operations
MPEL Melco PBL Entertainment Citigroup Upgraed from Hold to Buy
Gold and Silver Mining
GFI Gold Fields Matrix Research Upgraed from Sell to Buy
Healthcare Facilities
BKD Brookdale Senior Living Stifel Nicolaus Downgraded from Buy to Hold
Healthcare Services
OPTN Option Care Susquehanna Financial Coverage Dropped
Industrial Equipment
FLS Flowserve RBC Capital Mkts Upgraed from Sector Perform to Outperform
Insurance
AGP Amerigroup Jefferies & Co Upgraed from Hold to Buy $31 to $34
Manufacturing
NNBR NN Inc BB&T Capital Mkts Upgraed from Hold to Buy
Mfg - Shoes
CROX VMC - initiated with a Neutral at Cowen CROX - rieterated Outperform at Piper TASR - set for impressive multi
year growth says Jefferies
Mining - Steel & Iron
GNA Gerdau AmeriSteel Soleil Downgraded from Buy to Hold
Oil and Gas
UCLP Universal Compression Ptnrs Wachovia Upgraed from Mkt Perform to Outperform
KEGS Key Energy Services RBC Capital Mkts Cut Price Target Sector Perform $20 to $19
BHP Citigroup would buy BHP and RTP
TUWLF TUWLF - upgraded to Buy at UBS
Publishing
MHP McGraw-Hill JP Morgan Downgraded from Overweight to Neutral
Regional Banks
SBCF Seacoast Banking Stifel Nicolaus Downgraded from Hold to Sell
PFB PFF Bancorp Friedman Billings Cut Price Target Mkt Perform $21 to $18
Restaurants
DRI Darden Restaurants CIBC Wrld Mkts Upgraed from Sector Perform to Sector Outperform $50
Retail Trade
DLTR Dollar Tree Wachovia Upgraed from Mkt Perform to Outperform
OATS Wild Oats Mkts Bear Stearns Downgraded from Outperform to Peer Perform
Semiconductors
OVTI OmniVision Needham & Co Upgraed from Hold to Buy
TSM Taiwan Semi UBS Upgraed from Neutral to Buy
MU MU - upgraded to Neutral at Goldman Sachs
NVLS NVLS - - upgraded to Neutral at Goldman Sachs
Solar Energy
FSLR First Solar Deutsche Securities Upgraed from Hold to Buy $100
Telecommunications
INPC InPhonic Kaufman Bros Cut Price Target Buy $12 to $6
RIMM RIMM - price target raised to $295 at Goldman Sachs
Transportation
JBHT JB Hunt Trans Wachovia Upgraed from Mkt Perform to Outperform
Utilities
CNP CenterPoint Citigroup Upgraded from Hold to Buy
EQT Equitable Res Deutsche Securities Initiated at Buy $63
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Ideas from Other Sites:
HealthSonix Targets $2.6 Billion Market for Topical Analgesics ZingiberRx
HealthSonix, Inc. (HSXI) (FRANKFURT: H7S) today announced that it has launched new packaging for its ZingiberRx pain relieving cream. The move follows 3 months of feedback from consumers, particularly the over 50 market, who prefer the easier-to-use tube rather than the jars.
"According to Pain Therapeutics-Drugs, Markets and Companies, October 2005, the worldwide market for pain is estimated at U.S. $50.0 billion for 2005 and is expected to increase to U.S. $75.0 billion by 2010," said Dieter D. Doederlein, Vice President of Corporate Development for HealthSonix.
"And according to the Nicholas Hall DB6 database, the global market for OTC sales of topical analgesics is estimated at U.S. $2.6 billion. With a market this size, it was imperative that we address all consumer concerns and this packaging change reflects our commitment and ability to respond quickly to changing trends."
Customers can order ZingiberRx by calling HealthSonix, Inc. on a toll free line at 1-877-622-2121, or by ordering on line at MyArthritisStore.com. HealthSonix is also launching regional sampling programs to increase awareness and encourage trial use of ZingiberRx, particularly among the elderly suffering with arthritis and people active in sports and fitness organizations.
HealthSonix, Inc. (HSXI) (FRANKFURT: H7S) is a publicly traded medical technology company. The Company's core products are based on proprietary, patent pending medical technologies that use sound pressure waves to stimulate soft tissue, muscles and sensory and mechanoreceptors in the human body to relieve pain. All treatments and products are safe, non-invasive, and have no known side effects.
More information regarding HealthSonix, Inc. and its products and services can be found on the World Wide Web at: www.HealthSonix.com or by calling the company at 1-877-622-2121.
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They Need NNRF to Help !!
Barnwell radioactive waste could be worse than feared
The Associated Press
SNELLING, S.C. --
Higher-than-expected levels of a radioactive material are tainting the groundwater at a Barnwell County nuclear waste dump that's been considered safe by regulators, according to a published report.
Tritium levels in the groundwater beneath the landfill are above the Environmental Protection Agency's standard for safe drinking water, The (Columbia) State reported in Sunday's newspapers.
Exposure to tritium can increase a person's chances of cancer, regulators say.
Leaks of radioactivity have been found before at the Barnwell County site. But the recently released records give new details about the extent, showing the average levels of contamination in monitoring wells and the location of the wells.
Company officials said that Chem-Nuclear complies with federal standards for water pollution.
No one lives directly in the path of the radioactive pollution from the landfill, and area drinking wells are not tainted by the material, according to the South Carolina Department of Health and Environmental Control.
Still, the agency said it will take a closer look at chemical levels in the wells. Chem-Nuclear will test wells for anyone concerned about tritium in their drinking water, said Vice President Jim Latham.
The company has acknowledged a leak, traced to the late 1970s, when the company says its disposal practices were not as advanced as today.
"Our door has always been open to anybody who may be interested or who has questions about what we do," Latham said.
In an attempt to reduce tritium levels, the company has begun sealing closed landfill trenches to prevent rainwater from getting into the burial pits.
The company is also using a synthetic liner above some of the trenches to repel rainwater that could trickle through the nuclear garbage and into groundwater.
Walter Grubbs, 35, a factory worker who grew up south of the landfill, wants to know why state regulators never told him about the tritium - and whether radioactive waste threatens his family's well.
"It concerns me if I'm drinking this stuff and it's doing harm to me somewhere down the road," Grubbs said. "You'd think the government would be keeping on top of all that. That's what they get paid to do."
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PEAK GOLD!
A Primer on True Hedging, Part One
Maximize life, not profits!
In a previous article Gold Vanishing Into Private Hoards I have examined the future of gold from the demand side. Now in Peak Gold! I examine it from the supply side.
For the title I am grateful to Tom Szabo. He said in his comments dated August 3, 2007: "the unanswered question is: are we approaching 'Peak Gold'? We often hear the term 'Peak Oil', but there are probably some pretty good arguments against being able to predict when the 'peak' date will arrive. Certainly no oil company has put out a prediction of peak production, much less one predicting that oil output will drop by 10 to 15% within a decade."
In this new series of articles I wish to provide a definitive answer to Tom Szabo's question: yes, we are approaching 'Peak Gold' if we have not already passed it. The last twenty-five years in the history of gold mining has been a gross aberration during which gold was mined as if it were a base metal, namely, at the top grade of ore reserves (that is, most recklessly). This is in the sharpest contrast with how gold has been mined traditionally as dictated by the economics of gold mining, namely, at the marginal grade of ore reserves (that is, most conservatively). The world is witnessing a sea change: gold, having been mined qua a base metal, is once more being mined qua a monetary metal.
By marginal grade of ore is meant that grade which can still yield a profit (i.e., is payable), however, any lower grade is already submarginal (i.e., is non-payable). Clearly, marginal grade varies inversely with price: it goes higher as the price goes down, and vice versa. Gold mining used to be the very opposite of base metal mining which must, of necessity, maximize profits, just like any other enterprise. Not many people realize that gold mining is the only exception to this rule. The goal of the gold miner is not to maximize profits. Far from it. His goal is to maximize the life of the gold property. There are several reasons for this, the outstanding one being that gold is the monetary metal par excellence. Whenever private enterprise rather than the government or its central bank controls its creation, new money is not railroaded (should we say air-dropped by helicopter?) into circulation. Money creation is then guided by economic rather than political considerations.
Worst grade first, top grade last
Historically, the propensity of governments is to debase the currency rather than maintaining its value. The longer gold stays underground locked up in the gold-bearing ore, the longer it stays outside of the government's reach. We must remember that gold in the ground can still be an efficient store of value. The aberration of the last twenty-five years of mining gold at break-neck speed, and selling it forward, in some case as much as fifteen years of mine production, is ending. All mines will realize that premature exhaustion of their gold property is suicidal. They will have to learn again the wisdom of gold miners of old: worst grade first, best grade last. Ben Franklin's dictum that "experience runs an expensive school, but fools will learn in no other" applies here as well and, therefore, the learning process may take some time. Be that as it may, the smartest gold miner has probably shifted back to mining at the marginal grade already. He reasons as follows: "If I can only keep my mine operational long enough, dollar debasement will catch up with my submarginal grades and will make them go through a metamorphosis. My submarginal grades of ore will become payable. My expiring gold mine will be rejuvenated and given a new lease on life, thanks to the misguided monetary policies of spendthrift governments. Ergo I had better work my mine as conservatively as possible and lengthen its working life by all available means". This line of thinking is well summarized by the adage: "in and out of ground gold teaches man husbandry".
Barrick bringing good tidings for gold bugs
The present negative roller coaster ride for monetary metals is leading to an increase in absolute terms of the price, which appears unstoppable. (Negative, because an ordinary roller coaster ride ends at the lowest, not the highest, level.) The latest confirmation has come from a most unexpected source. Barrick, the gold miner held in contempt by most gold bugs (for its presumed activities in trying to cap the gold price, nay, to club it down) is now saying that the price of gold will rise during the next five to seven years because supplies from the mines will drop more than anyone in the market can anticipate. This is an extraordinary statement coming, as it is, from a gold producer with a millstone-size and weight of a hedge book around its neck.
As Dorothy Kosich reports on Mineweb in her article Barrick Opines on Gold Supply and Price (Aug. 3, 2007), during a conference call Barrick delved into its future prospects including gold prices. President and CEO Greg Wilkins, and Executive Vice President and CFO Jamie Sokalsky revealed that Barrick has been "digging in very deeply on the supply side of the business" working with a research firm to uncover evidence and trends increasing Barrick's optimism for the future gold price. Mark the word optimism. Perhaps it should read pessimism. Barrick's hedgebook is so hopelessly under water that the company cannot afford to buy it back, as did Newmont making it the largest 'unhedged' gold mine, while the going is still good. The future gold price spells disaster for Barrick that cuts the pitiable figure of a moose standing on the train track fixated on the headlights of the fast approaching train.
"Timeo Danaos et dona ferentes"
Barrick is still studying the research reports, but Sokalsky already told analysts that "our initial analysis shows the buy side (sic) is likely to drop a lot quicker and more than most in the market are anticipating." While he insisted that "it is still too early to talk about any specific numbers", Barrick's research has uncovered much that "should be a lot more positive for the gold price". Sokalsky has divulged that a 10 to 15% drop should occur in overall mine supply of gold within the next five to seven years. That's a volte-face if there ever was one. Ten years ago gold was fetching $300 an ounce and Sokalsky boasted that if horribile dictu the gold price went to $600, Barrick would still be O.K. It could not get a margin call on its gold leases for fifteen years. It need not sell into its hedge book at a loss. It could always sell its output in the open market at a profit. 'Barrick would make every cent of that increase'.
Every cent? The gold price presently is well over $600, and the same Sokalsky is talking about much higher gold prices for the next five to seven years. He must have Santa Claus for bullion banker who carries Barrick's short position most cheerfully, regardless of staggering losses. (Since then we have been told that there is no Santa Claus, not in the gold mining business anyway. The bullion banks have barred Barrick from speculating in the bond market with the proceeds from the sale of leased gold. Moreover, they took away Barrick's freedom to sell its output in the open market without putting a prescribed amount of gold into the hedge book. In effect, Barrick's gold production is in escrow. In all but name the company is foreclosed on its gold leases. The 15-year moratorium on margin calls is a myth that has been exploded by the market.)
Tom Szabo seems to be a bit skeptical about Barrick being the first to report the bad news (bad, that is, from the point of view of those who have endeavored to cap the price of gold during the last decade of the last century. Who knows, maybe the research shows an even bigger than 15% decline in output, but Barrick has opted to tamper with the data in order to show a smaller anticipated decline in gold production than justified by the research, as part of its undending quest to keep the lid on the gold price. Tom Szabo adds that, joking aside, these projections are incredibly bullish for the long-term gold price. What Barrick implies, in effect, is that despite billions of dollars thrown at exploration during the past 2 or 3 years, there are not enough new projects even in the early discovery stage (much less in the late development stage) to maintain the current level of output, as production at the existing sites will start to decline in the next few years.
I myself am also skeptical. "Timeo Danaos et dona ferentes" (Virgil, Aeneid, ii.49): I fear the Greeks especially when they bear gifts. President Wilkins is on record that, while reducing its hedge book some, Barrick will retain its hedge plan as an "essential risk-management tool" and a means of "stabilizing revenues". It gives Barrick "needed flexibility" and, Barrick's creditors, necessary collateral. I think Wilkins should have come clean during the conference call. The talk about 'risk-management' and 'stabilizing revenues' is for the birds. Wilkins should repudiate the hedge plan in no uncertain terms and put the whole unpleasant affair behind him for once and all. Barrick and its creditors need the so-called hedge plan as they need pain in the neck. Unless. unless. there are yet more skeletons in Barrick's cupboard.
Logic would dictate that Barrick lift its short hedges first, and release the research report afterwards. Doing it in the wrong order could cost a pretty penny. Barrick brings the dictum of Cicero to mind: Mendaci neque quum vera dicit, creditur (a liar is not to be believed even when he speaks the truth).
Ruthless exploitation
During the past twenty-five years gold was mined following the worst traditions of ruthless exploitation of a resource. Barrick served both as brain-trust and ring-leader, by mining gold at the top grade of ore defying the tradition and economics of gold mining, and by promoting a thoroughly mendacious, false, and self-defeating forward sales program under the banner of 'hedging'. At one point during the past fifteen years Barrick had to close down operations at no fewer than ten of its gold producing sites as a result of exploitation, because ore reserves became submarginal in the wake of the falling gold price. For years, Barrick has been selling gold forward with wild abandon at ridiculously low prices, in effect blocking its own escape route to short covering should the need arise. It is hard to imagine a gold mine managed more incompetently from a global point of view. Of course, Barrick's highly touted 'hedges' are no hedges at all. In so far as they mature over one year, and their volume exceeds one year's mine output, they are naked forward sales misrepresented as hedges. The whole scheme has been a mindless and extravagant exploitation of a world resource.
In all likelihood it has also been a 'gold laundering' scheme. I have coined this expression to describe clandestine transfer of shareholder equity, either to management (a.k.a. embezzlement), or to an unnamed third party (a.k.a. defalcation). We do not know whether Barrick is guilty of embezzlement, defalcation, or both, and perhaps never will.
Forewarned but not forearmed
We need not keep guessing. I submit that Barrick has been put on notice that its so-called hedge plan would invite charges of unfaithful stewardship as soon as the bear market in gold is over. I warned Sokalsky in person ten years ago at Barrick's headquarters. The meeting took place at the suggestion of Chairman Peter Munk with whom I exchanged letters on the matter. Sokalsky and I discussed Barrick's hedge plan for an hour and a half. I can testify that he understood my point very well. At the end of our meeting I presented to him a 50-page document entitled Gold Mining and Hedging: Will Hedging Kill the Goose To Lay the Golden Egg? which treated this issue exhaustively. He promised to read it and to pass his comments on to me within a month. I have never heard from him again.
In my document the process whereby a rising gold price inevitably makes world gold output shrink (in terms of tonnes) is very clearly demonstrated. To explain this, first I have to discuss another remarkable difference between the ways gold and base metals are traditionally mined. This is the deliberate variation of the rate at which mill capacity is being utilized. The base metal miner is under constraint to mine at the top grade of ore. But he is free to vary the rate of mill capacity utilization in response to changing market conditions. Accordingly, he will increase it if he has to increase output, and vice versa. Not so the gold miner, who is under constraint to run his mill full time, as close to capacity as practicable. But he is free to vary the grade of ore at the mill in response to changing market conditions. Whenever the price of gold rises he decreases, and it falls he increases the grade. He does this because the marginal grade of ore varies inversely with the gold price. If he is to run his mine economically, the gold miner is compelled to go after the marginal grade of ore and leave the better grades alone. He knows that premature exhaustion of his gold mine means dissipating shareholder equity and wasting capital resources. The prematurely exhausted gold mine would have a lot of valuable ore-reserves left behind that would become payable later when the dollar is sufficiently debased. But then it would be too late. Once the gold mine is closed down, it could be prohibitively expensive to re-open it.
Mechanism of Peak Gold
For example, whenever the gold price rises, the marginal grade of ore falls as heretofore submarginal grades become payable. Since gold mines run their mills close to capacity, output shrinks every time the gold price has reached a new high plateau, provided that they are managed economically. Uneconomically managed gold mines get exhausted prematurely and fall by the wayside, as they well deserve.
Peak Gold can be confidently predicted since the increasing gold price (an inevitable consequence of deliberate dollar debasement) causes a world-wide shift in the marginal grade of every gold mine. The marginal grade of ore drops. Since the combined milling capacity of the world's gold mines is a given quantity, and it can only be increased slowly, after a great capital outlay which management may well be reluctant to make (as it would eat into profits and shorten the life of the gold property to boot), the upshot is that the gold content of mill output is falling. World production of gold shrinks (in terms of tonnes) with the rise in the price of gold.
But what about opening new gold mines? As Tom Szabo has hinted, the artificially induced bear market in monetary metals between 1981 and 2001 has resulted in a great reduction in prospecting, exploration of known sites, and development of mines at proven sites. We must realize, however, that the whole episode of explosive increase in world gold production from 1914 through the end of the century was a great anomaly. Even though it was engineered by governments on the warpath, the feat cannot be repeated. The inflationary escapades of governments, either acting in solo or in concert will of course continue. The governments can stay on the warpath and can expand their pet welfare projects as long as they want. In vain: the nexus between the welfare-warfare state's inflationary design and the value of gold, or the tectonics of marginal gold ore underground, has decisively been broken. Governments have expended their ephemeral power to work the miracle of multiplying cash gold through multiplying paper gold. Ditto, no longer can they pretend that gold locked up in ore deposits below surface is a valid substitute for cash gold. From now on it is "cash gold on the barrel". Falsecarding in the gold business has been exposed and discredited.
The great increase in world gold output during the twentieth century was a non-repeatable event, largely due to the inflationary propensities of governments under the gold standard artificially suppressing, as they did, the value of gold. This has caused a world-wide shift in the marginal grade of ore in every gold mine. The marginal grade was boosted and, with it, the world's gold output. That is the background that has created Peak Gold in the first place: a reckless exploitation of a world resource whose production would have increased much more evenly in the absence of inflationary escapades.
But this is history. The present reality is that uneconomic increases in production and naked forward selling are over for good. On the supply side, limited and diminishing injections of newly mined gold shall replace unlimited and ever increasing dumping of paper gold. When you need gold, you demand cash gold, the supply of which from the mines is going to decrease from now on. It is satisfying to see Barrick acknowledge this first.
Hedging proper
In the next part of this series Peak Gold! I shall explain, as I have explained to Jamie Sokalsky ten years ago, the principles of proper hedging. I suggested to him that Barrick should announce a bilateral hedge plan to succeed its notorious unilateral plan. The latter involves short hedges (forward sales) to the exclusion of long hedges (forward purchases). The former involves both.
Just as its forward sales are balanced by Barrick's need to market future production, forward purchases, had they been entered, could have balanced Barrick's future need to acquire new gold properties in anticipation of the exhaustion of its ageing sites. Had Barrick listened to my advice, Peak Gold would not have been to its chagrin. Not only would profits on the long hedges have outstripped losses on the short ones; they would have covered the hefty increases in the price that Barrick has now to pay for new gold properties. Barrick could have scaled Peak Gold with the flying colors, and without a penny loss on its short hedges. What is more, it could have plenty of money left on its long hedges to pay for the acquisition of fresh gold properties in preparation for a bright future bringing higher gold prices in its wake. Barrick would have been ready for the new bull market and could contemplate its own future with genuine optimism.