Tuesday Aug 29, 2006

Joe Sixpack's golden touch

Taipan Group's Dynamic Market Alert

-- Joe Sixpack’s golden touch
-- Clowns & Harlots: Home for the Holidays

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Joe Sixpack’s golden touch

by J. Christoph Amberger

Gold’s spot price curve today mirrored yesterday’s vertical drop almost to the minute. Only that this morning, the precipice it fell off from was a tad lower. From a high of above $616 per ounce, it dipped below $607.

Depending on whose calculations you listen to, that’s still cheap. In fact, the math games involved in determining the “real value” of gold seem to be becoming the touchstone of a writer’s ingenuity. (You may remember, I devoted a few poignant passages on that in my book, Hot Trading Secrets.)

Here’s another one for my Aural Fixation Gallery:

Goldbug Neil Charnock wrote a week ago, on Aug. 22: “Due to globalization and cheap widgets / consumer goods, due to cheap labor offshore… and ‘adjusted’ inflation statistics the numbers are just plain distorted.  Money supply growth is a far better measure in my view so I do my own calculations using x4 as a more realistic variable.
Take 1980 numbers at the height of the last resources boom and x4 =  $3,200 (800x4) gold, $200 (50x4) silver etc.

“The other essential variable is demand and most would agree that the world was not facing modernization on the scale we are experiencing in Asia, China and India in 1980.

“The reverse must also be true that gold is currently selling at about $150 per ounce ($600 divided by 4) and silver at $3 ($12 divided by 4). This resources boom has the potential to run x 17 in silver to get back to $50 in 1980 dollars and to $200 in 2006 dollars.  We have several years to run yet assuming we do not get to these prices in the next few months and that is a very safe assumption.”

So, much like $70 is “The New $35” when it comes to oil, the new $600 is really the old $150. Which means that instead of losing 15 bucks on an ounce of gold since 9:30 a.m. yesterday, you’re really down $60? Or do I divide the $15 by 4 to make it feel better?

Quite frankly, I’m confused.

-- Luckily, these days there are alternatives to the old blowhard goldbugs with their numbers games. One of my favorite gold analysts is Marino G. Pieterse in the Netherlands.

On August 24, he wrote:

“While the World Gold Council did expect growing investment demand to remain the main driver for a further gold price increase in 2006, the price sensitivity of higher gold prices on demand has been greatly underestimated. Recently published figures by the World Gold Council show that implied net retail investment (bars & coins, other and ETF’s) declined from 298 tonnes in the first quarter of 2006 to 129 tonnes in the second quarter of 2006, including a significant drop in ETF’s demand from 109 tonnes to 39 tonnes.

“During the second quarter of 2006 jewelry demand, which is representing 60% of total demand, remained relatively stable with an increase of 9 tonnes to 541 tonnes compared to the first quarter, but declined 28 tonnes compared to the fourth quarter of 2005 and a robust 233 tonnes compared to the second quarter of 2005.

“These figures demonstrate that retail investment demand has even been more price sensitive to higher gold prices than jewellery demand. Because the latter being by far the main source of demand, might have accustomed to the current price level of around $620, I expect that a new buying momentum has been created. This could be underpinned by demand of ETF’s picking up again in the second half of the year to a targeted quarterly level of 100-120 tonnes.

“With jewelry demand having declined 408 tonnes to 1,073 tonnes and implied net investments having declined 76 tonnes in the first half year of 2006 compared to the first half of 2005, it should be evident that considering the strong gold price increase of 40% in the first five months of 2006, gold didn’t run its own course.”

The surprising aspect in these numbers: The Doom and Gloomers -- those who profess their undying belief that gold’s only fair valuation is its 1980 high adjusted for inflation AND money supply -- are showing more price sensitivity than Joe Blow who buys his wife a new pair of earrings for their anniversary... using credit card debt.

Could it be that the goldbugs’ belief in gold’s glorious future will last only as long as they have inventory to turn over?

-- And what about international gold investment as a “traditional” store of value in periods of crisis.

You may have missed today’s little note in the Khaleej Times from the Arab Emirates: “Middle East gold demand plunged in the second quarter of 2006 by 25 percent compared with the same period last year because of price volatility, the World Gold Council (WCG) said on Tuesday. Demand in Saudi Arabia fell by 32 percent and in the United Arab Emirates by 21 percent, the industry-backed body’s latest report sent to Reuters on Tuesday said.”

Does this make any sense to you? Arab countries that are awash in oil-generated cash and located in the most crisis-ridden region in the world, with the greatest sensitivity to declines in the dollar valuation against other currencies… They’re the textbook models of people who should be sewing doubloons in the hems of their robes.

And they stop buying gold because they think it’s too expensive?

Where does that leave us?

The answer seems obvious: If goldbugs, Arabs and ETF funds have stopped buying investment-grade gold and jewelry because they think it’s too expensive at $600-plus, and if the only stable demand currently is found in jewelry consumption, maybe we all need to bow to the American Consumer Joe and Jane Sixpack, whose profligate and much-condemned spending habits are not only keeping China churning out cheap consumer goods to fill their McMansions with crap, but also Russia and Saudi Arabia pumping oil to have Jane Sixpack ride her Ford Excursion to private school like a mahout on an elephant, and goldbugs from having to face the music that their stash is currently still just worth $150 in 1980 dollars -- and that after a cool double since 2002.

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Clowns & Harlots: Home for the Holidays

by Christopher Corbett

There is nothing I enjoy more than a good, old-fashioned, long American holiday weekend when the nation takes to the highways. The American Automobile Association predicts that during the coming Labor Day weekend, vast millions of my fellow countrymen will be on the roads, more each year, damn the price of fuel.  And that leaves only a few hundred thousand at home: shut-ins, the inmates of houses of correction, the clerks at Eddie’s food market and me.  The grim tally of deaths and injuries begins.  The constabulary braces.  And I take to my front porch, safe at home.
         
You can’t imagine the pleasure I get from listening to the traffic reports on holiday weekends.  The sweetest sound that ever was is “Detour Dave,” or whoever’s voice, with the roll call of highway horrors.  Bring it on.
         
Give me a 10-mile backup at the Chesapeake Bay Bridge.  Give me a 20-mile backup at the Delaware Memorial Bridge.  Do I hear a 40-mile backup at the Tappan Zee Bridge?  Who’ll make it 50?  That’s all I need to hear to know that, once again, I’ve done the right thing by staying home.  You can’t run out of gas up on the porch.  No flat tires, either.  You use very little $3-plus gas when your car is parked at home, too.  There are no tolls.  The wires are reporting that gas prices are dropping as the holiday approaches.  Fine and dandy.  Pal, I don’t care if they’re giving the stuff away.  I’m not going out.
        
I do not need further proof that the nation’s interstate highway system has unraveled.  I do not need proof that quite soon even if one wishes to travel by car it will not longer be possible.  I do not need proof that there are too many people and too many cars -- and no place to go.
         
I love the TV station helicopter shots of bumper-to-bumper cars, steaming and overheated.   I am a connoisseur of road rage stories.  I delight in reports of a 17-car pileup on the New Jersey Turnpike.  The gridlock nightmare on the Washington Beltway.  Hand-to-hand combat at the Vince Lombardi Rest Area.  The cars and vans and SUVs engorged with families, each a percolating Petri dish of domestic violence. Each husband a Homer Simpson, eyes bulbous and crazed, while the little woman attempts to navigate from the Rand McNally Road Atlas (“Goddamnit, you’re looking at Nebraska for chrissakes.”), the children ululating like Satan’s imps in the back seat, and always a big, miserable, smelly dog panting and slobbering on the window glass, crazed from confinement.  Got the picture?
         
One look at that scene and it’s heaven, I’m in heaven… You may sing along if you wish.
        
Usually I stroll up to Eddie’s market -- about three blocks -- to get a lemon ice and tell the clerks about the bad traffic backups at the Chesapeake Bay Bridge.  “Traffic’s backed up 75 miles in both directions at the Bay Bridge,” I’ll say, (though, technically, that’s really impossible).
         
“The National Guard is being called up,” I might add.  “Martial law’s been declared in Annapolis.” 

“And rebel forces have seized the Baltimore-Washington Parkway.”  I like to be the bearer of bad news (snowstorms are my specialty).  I also believe that one should not let the facts get in the way of a good travel horror story.
        
I think that it cheers the clerks up at Eddie’s, too.  After all, they’re working on a national holiday weekend, and they’ll feel a whole lot better if their friends and neighbors are sweltering by the roadside on the way to the beach, where unscrupulous freebooters are selling Dixie cups of cold water for $5 a shot, and guys who look like Hell’s Angels or extras from Mad Max movies are towing cars for vast sums of money.
        
I have lived in the middle-Atlantic states for more than 25 years and I have only driven to a beach resort on a holiday weekend once.  Once was enough.  Never again.  There is nothing in this life that would induce me to face the traffic to the Outer Banks of North Carolina, Ocean City or the Jersey Shore.  I would gladly face the gibbet or the headsman’s ax rather than the Washington Beltway on a holiday.  I have never gone anywhere on a holiday weekend that was a good experience.  Nothing could be finer than to be in Carolina, I hear you say… not with a broken water pump, pal.  Been there. 
       
So now, I celebrate the nation’s major holidays on my front porch, safe at home.  Come the holidays, I’m a homebody.  I don’t even go down to the harbor in Baltimore to see the fireworks.  I’ve seen fireworks.  I remember the Bicentennial.   Big deal.  You could not get me off my front porch if Jessica Simpson were opening for the pope.  What’s the point of Labor Day if it is not to luxuriate in idleness?  Does man not labor enough the remainder of the year?
         
Nothing sets my nerves on edge more than the words, three-day weekend.  No thanks.  Up on the porch I can take my ease and enjoy a little nap -- and dream of endless traffic backups, overheated radiators, flat tires and the misfortunes of others.  That’s all the E-Z pass that I need.

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Earnings Announcements

Bayer AG, China National Offshore Oil Corporation, Kirkland’s Inc, Retalix Ltd, Sanderson Farms, and Versant Corporation are releasing earnings.

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Unlock Dates for September 2006

9/4/06 – Alexza Pharmaceuticals is unlocking 5.5 million shares.
9/5/06 – Eagle Test Systems is unlocking 6.5 million shares.
9/11/06 – TransDigm Group Inc is unlocking 10.9 million shares.
9/20/06 – Clayton Holdings Inc is unlocking 7.5 million shares.
9/20/06 – Tim Hortons Inc is unlocking 29 million shares. 
9/27/06 – Himax Technologies is unlocking 52 million shares.

Keep an eye on Tim Hortons Inc. and Himax Technologies for significant sell-offs.  You may want to short shares or buy puts on these two positions.

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Upgrades and Downgrades

Avanex upgraded by BWS Financial from Sell to Hold
Crocs Inc upgraded by Wedbush Morgan from Hold to Buy.
Intel upgraded by Friedman Billings from Market Perform to Outperform.
Campbell Soup downgraded by Credit Suisse from Outperform to Neutral.
Hormel Foods downgraded by Credit Suisse from Outperform to Neutral.
Red Hat downgraded by Soleil from Hold to Sell.
U.S. Steel downgraded by Prudential from Neutral to Underweight.

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