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    - Interim Update 29th April 2009

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Fed Fallout

The Fed issued its latest monetary policy statement on Wednesday afternoon in the US. Interestingly, the gold, currency and bond markets had ended Tuesday's session almost exactly where they had ended the 17th March trading session (17th March was the day prior to the previous monetary policy announcement). The Fed's 18th March announcement prompted some wild market action (large jumps in gold and bond prices as well as a plunge in the US$), so many market participants were undoubtedly on tenterhooks as they awaited the central planning agency's next ruling.

With bonds, gold and the Dollar Index near short-term support levels, Wednesday's market reaction to the Fed news had the potential to be significant. It had the potential, in fact, to determine the general direction of prices over the ensuing few weeks. However, this time round the Fed announcement contained no surprises -- the 29th April Statement was very similar to the 18th March Statement, with the only noteworthy difference being a comment about the slowing rate of economic contraction -- and the market reaction didn't resolve anything. The US$ was down and gold was up, but neither moved by enough to effect a breakout. The most significant development was the breach of support by the June T-Bond futures contract (refer to the following daily chart for details), but even here the evidence is inconclusive because the 30-year T-Bond's breakdown was not confirmed by the more heavily traded 10-year T-Note.

 

"Global Warming" Notes

1. There are natural long-term temperature cycles, including 100-year and 1000-year cycles. For example, 800 years ago -- many centuries before humans began to burn fossil fuels in significant quantities -- the Earth's atmosphere was considerably warmer than the highest average global temperature of the past two decades, whereas in between then and now there were periods when temperatures were much lower than they are today. The fact is that global warming periodically occurs, as does global cooling. Polar bears have obviously been able to adapt to these temperature cycles.

2. There are shorter-term temperature cycles of around one decade in length that appear to be influenced to the greatest extent by sunspot activity. The sizeable decline in the average global temperature over the past two years, for example, has coincided with a large decline in sunspot activity (a large rise in the number of "spotless" days).

3. The sunspot-related temperature decline of the past two years has been "inconvenient" for the Global Warming Alarmists because it has resulted in the polar ice caps expanding to their average level of the past 30 years and the global temperature dropping back to 1980s levels, despite the greater amount of CO2 now in the atmosphere. But as discussed in item 5 below, the Alarmists have an ace up their collective sleeve.

4. Some time ago it was discovered that there has been a positive correlation over the millennia between temperature and the level of CO2 in the atmosphere. Al Gore used this correlation to dramatic effect in his much-heralded promotion of the Global Warming cause, but additional data collected since then shows that the CO2 level FOLLOWS the temperature change, not the other way round. In other words, the empirical data suggest that if there is a long-term cause-effect relationship between CO2 and temperature it works the opposite way to the way in which Gore and Co. claimed.

5. There is evidence that the world has embarked on a cooling cycle, but not to worry: the term "Global Warming" is in the process of being replaced by the more general term "Climate Change". Altering the terminology in this way is smart because the Earth's climate has been changing since the beginning of time and will continue to do so REGARDLESS of what mankind does or doesn't do. In other words, the climate alarmists are ensuring that they will have justification for imposing their collective will no matter what.

6. Some scientists extrapolated the most recent upward trend in temperature to yield cataclysmic forecasts. This was akin to someone in the Northern Hemisphere noticing, in August, that the temperature had been rising month after month since March and exclaiming: "If this keeps up we'll all be dead by December!"

7. The claim made by the current US President and other politicians that the science of Global Warming is beyond dispute is a lie. Many scientists dispute the idea that human-generated carbon emissions have a significant effect on global temperature, including the more-than 100 scientists who signed the petition at http://www.cato.org/special/climatechange/ClimateAd_ChicagoTrib_Rev.pdf and the 31,000 scientists who signed the petition mentioned in this Telegraph article.

8. Despite the US Environmental Protection Agency's assertion to the contrary, CO2 is NOT a pollutant.

The Stock Market

Current Market Situation

The daily chart of the S&P500 Index displayed below shows that the index's 200-day moving average is now approaching lateral resistance at 950. We continue to believe that the S&P500's 200-day moving average defines the market's maximum short-term upside potential.


The HYG/TLT ratio reflects the performance of high-yield bonds relative to the performance of Treasury Bonds. As evidenced by the following chart, this ratio has just moved to its highest level in more than 6 months. This indicates that credit spreads are continuing to narrow and that confidence is returning to the debt markets.

Unfortunately, the increasing optimism reflected by indicators such as credit spreads and consumer confidence surveys doesn't tell us anything about the future because sentiment was likely to become more optimistic during the first half of this year regardless of the longer-term outlook. For example, there was also a strong rebound in confidence during the first half of 1930.


Stock markets around the world were affected early this week by fear of a possible Swine Flu pandemic. From our perspective, the threat to the global economy posed by Swine Flu is so trivial compared to other risks and problems that we wouldn't bother to mention it except that it is being dramatised by the media, the World Health Organisation and many governments. It seems that every few years we 'need' a major health scare to take peoples' minds off what really matters and to demonstrate the good work that governments do to ensure our safety.

A dire economic forecast

We thought we were bearish on the US economy, but we are optimists compared to long-term economic trend forecaster Gerald Celente. Mr Celente shares some of his views in this interview: http://www.youtube.com/watch?v=Q2qDW34Fr64

Here's a quote that we liked:

"You can't print money based on nothing. It's not even Economics 101; it's economics for dummies. That's why gold prices are going up. You're going to look back in history and think: "my God, how could these people have been so stupid!""

Uranium Stocks

In the latest Weekly Update we discussed the strange divergence between the price of natural gas (the commodity) and the prices of natural gas equities. Specifically, we noted that natgas equities had been rallying while the natgas price had remained in a relentless decline that had taken it to 5-year lows, and that this divergent behaviour had pushed the XNG/natgas ratio (the AMEX Natural Gas Index relative to the natgas price) way above all previous extremes.

It's a similar story with regard to the relationship between the price of uranium and the prices of uranium equities in that uranium has been one of the strongest stock market sectors since last October even though the price of the underlying commodity remains near a multi-year low. That being said, the divergence between the price of uranium and the prices of uranium equities is easier to explain than the divergence between natural gas and natural gas equities. For one thing, there is no near-term supply glut weighing down the price of uranium. It is clear that speculation drove the uranium price way too high during 2006-2007, but the price now appears to be at a level where mine supply combined with the supply from other sources is barely adequate to satisfy current demand. For another thing, there are only a handful of listed companies in the world with significant current uranium production, so it takes only a small increase in the investment demand for uranium equities to create a strong sector-wide rally.

As is the case with natural gas equities, we think investors/traders should look for opportunities to scale back their exposure to uranium equities into strength over the next few weeks. There is significant additional short-term upside potential in the uranium sector, but as we get closer to mid-year the downside risk in all non-gold stocks will ramp up. However and as is also the case with natural gas equities, we think it will make sense to retain a core uranium position in line with the sector's longer-term bullish outlook.

Global Warming, discussed earlier in today's report, is one aspect of the aforementioned longer-term bullish outlook for uranium and uranium equities. Global Warming (the man-made variety) is most likely a giant hoax, but the political ship has set a course that it probably won't deviate from regardless of the facts. Additionally, whether or not mankind's burning of fossil fuels is an important cause of "climate change", all things being equal it would certainly be better to have less air pollution. And at this time it seems that the most economically feasible way to achieve a meaningful reduction in GLOBAL air pollution is to expand the use of nuclear power. The main reasons why this is so are outlined in a very good article by Peter Huber that John Mauldin re-produced in his latest "Outside the Box" letter.

Mr. Huber explains that most of the world's pollution is generated by the 5 billion poor people, which means that for a cleaner-energy solution to be truly viable it must also be cheap. He also explains that the expensive clean-energy solutions that are presently fashionable within the ranks of the 1.2 billion rich people not only don't have the ability to bring about a material reduction in global pollution, they will very likely cause pollution levels to INCREASE by making relatively dirty energy sources even cheaper for the most inefficient energy consumers. For example, the less coal that gets used in the US the lower the international coal price will become, leading to more coal being burned in countries such as China that use energy less efficiently than the US. Lastly, he points out that governments put their own economies at a major disadvantage when they force the use of expensive energy alternatives.

To end this discussion, here are excerpts from the above-linked article:

"The oil-coal economics come down to this. Per unit of energy delivered, coal costs about one-fifth as much as oil -- but contains one-third more carbon. High carbon taxes (or tradable permits, or any other economic equivalent) sharply narrow the price gap between oil and the one fuel that can displace it worldwide, here and now. The oil nasties will celebrate the green war on carbon as enthusiastically as the coal industry celebrated the green war on uranium 30 years ago.

The other 5 billion are too poor to deny these economic realities. For them, the price to beat is 3-cent coal-fired electricity. China and India won't trade 3-cent coal for 15-cent wind or 30-cent solar. As for us, if we embrace those economically frivolous alternatives on our own, we will certainly end up doing more harm than good.

By pouring money into anything-but-carbon fuels, we will lower demand for carbon, making it even cheaper for the rest of the world to buy and burn. The rest will use cheaper energy to accelerate their own economic growth. Jobs will go where energy is cheap, just as they go where labor is cheap. Manufacturing and heavy industry require a great deal of energy, and in a global economy, no competitor can survive while paying substantially more for an essential input. The carbon police acknowledge the problem and talk vaguely of using tariffs and such to address it. But carbon is far too deeply embedded in the global economy, and materials, goods, and services move and intermingle far too freely, for the customs agents to track."

..."So the suggestion that we can lift ourselves out of the economic doldrums by spending lavishly on exceptionally expensive new sources of energy is absurd. "Green jobs" means Americans paying other Americans to chase carbon while the rest of the world builds new power plants and factories. And the environmental consequences of outsourcing jobs, industries, and carbon to developing countries are beyond dispute. They use energy far less efficiently than we do, and they remain almost completely oblivious to environmental impacts, just as we were in our own first century of industrialization. A massive transfer of carbon, industry, and jobs from us to them will raise carbon emissions, not lower them."

Gold and the Dollar

Gold

In the latest Weekly Update we wrote: "...if June gold were to move below $890 on a daily closing basis it would negate last week's bullish price action. Short-term traders could therefore consider going 'long' near the current price (or, ideally, following a pullback over the coming 1-2 days) and placing a closing stop at around $890. That is, plan to exit short-term positions if June gold CLOSES below $890."

The gold market pulled back over the first two days of this week, but June gold held above $890 on a daily closing basis. The gold price then rose on Wednesday, but all of Wednesday's trading occurred within Tuesday's trading range. Wednesday was therefore an "inside day", and inside days rarely provide any useful information.

The upshot is that nothing of consequence happened in the gold market over the first three days of this week. June gold remains above $890 and below the top of the downward-sloping channel that has defined its progress since late February.


Gold Stocks

As was thought likely, the rapid advance of last Thursday-Friday was followed by a 1-2 day pullback. This pullback took the HUI down to the 290s, but didn't do any damage to the bullish technical picture.

The HUI would have to close below support defined by its mid-April low to completely negate the idea that a rally to the channel top or higher has begun. Traders who are long the gold sector via the gold mining ETF (GDX) should therefore exit if the HUI closes below this support.


Currency Market Update

The Dollar Index looks like it is on its way back to the low-80s, but we continue to believe that the dollar's downside risk is fairly small (no more than a few points) due to the problems of its main fiat currency counterparts. The situation during 2000-2003 was very different because at that time the US$ was over-valued relative to the euro and most other currencies. Now, with the US$ at a much lower level and with other currencies having depreciated at faster rates the case for a much lower foreign exchange value for the US$ is weak. The case for a much lower gold value for the US$ is, however, stronger than ever.

Update on Stock Selections

(Note: To review the complete list of current TSI stock selections, logon at http://www.speculative-investor.com/new/market_logon.asp and then click on "Stock Selections" in the menu. When at the Stock Selections page, click on a stock's symbol to bring-up an archive of our comments on the stock in question)

Precision Drilling Trust (NYSE: PDS, TSX: PD.UN). Shares: 276M issued, 291M fully diluted. Recent price: US$4.75, C$5.73

The details of PDS's rights offer have been announced. The Canada-based owners of PDS units as of 1st May will be given rights to buy one new unit at C$3.00 for every seven units they own (they will actually receive one right for each PDS unit they own, with seven rights plus C$3.00 being exchangeable for one new unit). Unit-holders will also be given the option to apply for units beyond their one-for-seven allotment, but additional units will only be available for sale if some unit-holders do not take up their entitlements. The rights offer will close on 3rd June 2009.

The rights will trade on the TSX under the symbol PD.RT.

Unit-holders based outside Canada will not receive rights to purchase additional units. Instead, the rights that they would otherwise be entitled to receive will be sold on the stock market by the "Subscription Agent" seven days prior to the cessation of rights trading. The proceeds of the sale will then be mailed to these unit-holders.

Given that the exercise price of the rights is a long way below the stock's current market price we suggest that Canadian unit-holders apply for as many of the new units as they can. For TSI record purposes we will assume that the rights are sold on the market and will accordingly adjust the entry prices of our PDS investment and trading positions.

    Northgate Minerals (AMEX: NXG, TSX: NGX). Shares: 256M issued, 263M fully diluted. Recent price: US$1.46

In the latest Weekly Update we said that the gold stocks with the best short-term risk/reward ratios are the juniors that offer significant current production, current cash flow, solid balance sheets, and reasonable stock market liquidity. Northgate Minerals (NXG) meets these criteria and has a very low valuation to boot. A chart of NXG was shown in the Weekly Update.

NXG is presently in the TSI Stocks List as a longer-term holding, but we have decided to also include a short-term trading position in the stock at Wednesday's closing price of US$1.46. Our initial closing stop will be US$1.18 (just below the April low), meaning that we will exit with a loss if the stock CLOSES at US$1.18 or lower. If/when the stock closes above US$1.55 we will switch to a 15% trailing stop, effective, again, on a daily closing basis.

    Andina Minerals (TSXV: ADM). Shares: 73M issued, 81M fully diluted. Recent price: C$1.34

One of the best times to 'nibble away' at a high potential, but relatively illiquid, exploration-stage gold stock is after the stock has spent a lengthy period drifting sideways or lower due to the absence of news. After a stock has done nothing for a while some small investors will lose interest and sell, which can create a good opportunity for other investors to build up positions at very low valuations.

Andina is a good current example of such a stock. As illustrated by the following chart, the ADM stock price peaked at around the same time as the gold price in late February. And, like gold, ADM has since been wandering lower within the confines of a channel.

Stocks such as ADM do not offer enough liquidity to make good short-term trading vehicles. They can, however, be suitable vehicles for patient investors looking for ways to accumulate gold-in-the-ground at ultra-low prices.


Chart Sources

Charts appearing in today's commentary are courtesy of:

http://stockcharts.com/index.html
http://www.futuresource.com/

 
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