Big Picture View

Here is a summary of our big picture view of the markets. Note that our short-term views may differ from our big picture view.

In nominal dollar terms, the BULL market in US Treasury Bonds that began in the early 1980s ended in 2012. In real (gold) terms, bonds commenced a secular BEAR market in 2001 that will continue until 2018-2020. (Last update: 20 January 2014)

The stock market, as represented by the S&P500 Index, commenced a secular BEAR market during the first quarter of 2000, where "secular bear market" is defined as a long-term downward trend in valuations (P/E ratios, etc.) and gold-denominated prices. This secular trend will bottom sometime between 2014 and 2020. (Last update: 22 October 2007)

A secular BEAR market in the Dollar began during the final quarter of 2000 and ended in July of 2008. This secular bear market will be followed by a multi-year period of range trading. (Last update: 09 February 2009)

Gold commenced a secular bull market relative to all fiat currencies, the CRB Index, bonds and most stock market indices during 1999-2001. This secular trend will peak sometime between 2014 and 2020. (Last update: 22 October 2007)

Commodities, as represented by the Continuous Commodity Index (CCI), commenced a secular BULL market in 2001 in nominal dollar terms. The first major upward leg in this bull market ended during the first half of 2008, but a long-term peak won't occur until 2014-2020. In real (gold) terms, commodities commenced a secular BEAR market in 2001 that will continue until 2014-2020. (Last update: 09 February 2009)

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Outlook Summary

Economics Myths

Our original intention was to explain where we agreed and disagreed with the article by Cullen Roche at "Pragmatic Capitalism" (is there any other kind of capitalism?) titled "The Biggest Myths in Economics". Instead, while we are still going to refer extensively to the Roche article we will do so within the context of our own list of economics myths. We would have preferred to have kept our list to ten items, but it was a challenge just to restrict it to eleven. Unfortunately, our list is by no means comprehensive.

Myth #1: Banks "lend reserves"

This is the second myth in the Roche article. He is 100% correct when he states:

"...banks don't make lending decisions based on the quantity of reserves they hold. Banks lend to creditworthy customers who have demand for loans. If there's no demand for loans it really doesn't matter whether the bank wants to make loans. Not that it could "lend out" its reserve anyhow. Reserves are held in the interbank system. The only place reserves go is to other banks. In other words, reserves don't leave the banking system so the entire concept of the money multiplier and banks "lending reserves" is misleading."

Any analyst who takes a cursory look at historical US bank lending and reserves data will see that there has been no relationship between bank lending and bank reserves for at least the past few decades. We live in hope that the economics textbooks will eventually be updated to reflect this reality, although compared to some of the other errors in the typical economics textbook, this one is minor.

Myth #2: The Fed's QE boosts bank reserves, but doesn't boost the money supply

We've dealt with this myth at length in previous commentaries. Anyone who believes that the Fed's QE adds to bank reserves but not the money supply does not understand the mechanics of the asset monetisation process. It's a fact that for every dollar of assets purchased by the Fed as part of its QE, one dollar is added to bank reserves at the Fed and one dollar is added to demand deposits within the economy (the demand deposits of the securities dealers that sell the assets to the Fed).

A related myth is that the Fed is powerless to expand the money supply if the commercial banks aren't expanding their loan books. It is certainly the case that prior to 2008 almost all new money was loaned into existence by commercial banks, but this wasn't because the Fed didn't have the ability to directly expand the money supply. From the Fed's perspective, there was simply no reason to use its direct money-creation ability prior to September of 2008.

In order to maintain the false belief that US monetary inflation requires commercial bank credit expansion an analyst must not only be unaware of QE mechanics, he must also ignore the readily available monetary and credit data. As evidence we point out that from the end of August-2008 through to the end of January-2014 the US money supply (the sum of physical currency in circulation plus bank demand deposits plus bank savings deposits) increased by about $4.4T and commercial bank credit increased by about $1.1T, leaving about $3.3T of new money that cannot be explained by commercial bank expansion. Not coincidentally, over the same period the Fed monetised about $3.3T of securities via its various QE programs.

Myth #3: The US government is running out of money and must pay back the national debt

This is the third myth in the Roche article. The reality is that no government will ever run short of money as long as its spending and debt are denominated in a currency it can create, either directly or indirectly (via a central bank). The lack of any normal financial limit on the extent of government spending and borrowing is a very bad thing.

Myth #4: The federal debt is a bill that each citizen is liable for

This is similar to the fourth myth in the Roche article, although the Roche explanation contains statements that are either misleading or wrong. Before we take issue with one of these statements, we note that a popular scare tactic is to divide the total government debt by the population to come up with a figure that supposedly represents a liability of every man, woman and child in the country. For example, according to http://www.usdebtclock.org/ the US Federal debt amounts to about $55,000 per citizen or $150,000 per taxpayer. For most people this is a lot of money, but it doesn't make sense to look at the government debt in this way. Rightly or wrongly, the government's debt will never be paid back. It will grow indefinitely, or at least until it gets defaulted on. There are negative indirect consequences of a large government debt, but it is wrong to think of this debt as something that will have to be repaid by current citizens or future citizens.

The Roche statement that we take issue with is: "...the government doesn't necessarily reduce our children's living standards by issuing debt. In fact, the national debt is also a big chunk of the private sector's savings so these assets are, in a big way, a private sector benefit."

The government doesn't create wealth and therefore cannot possibly create real savings. To put it another way, real savings cannot be created out of thin air by the issuing of government debt. What happens when the government issues debt is that savings are diverted from the private sector to the government. In any single instance the government will not necessarily use the savings less efficiently than they would have been used by the private sector, but logic and a veritable mountain of history tells us that, on average, government spending is less productive than private-sector spending. In fact, government spending is often COUNTER-productive.

Myth #5: QE is not inflationary

Our fifth myth is the opposite of Cullen Roche's fifth myth. According to Roche, it's a myth that QE is inflationary. His argument:

"Quantitative Easing (QE) ... involves the Fed expanding its balance sheet in order to alter the composition of the private sector's balance sheet. This means the Fed is creating new money and buying private sector assets like MBS or T-bonds. When the Fed buys these assets it is technically "printing" new money, but it is also effectively "unprinting" the T-bond or MBS from the private sector. When people call QE "money printing" they imply that there is magically more money in the private sector which will chase more goods which will lead to higher inflation. But since QE doesn't change the private sector's net worth (because it's a simple swap) the operation is actually a lot more like changing a savings account into a checking account. This isn't "money printing" in the sense that some imply."

There is a lot wrong with this argument. For starters, in one sentence he says "when people call QE "money printing" they imply that there is magically more money in the private sector", and yet in the preceding sentence he states that the Fed adds new money to the economy when it purchases assets. So, there is no need for anyone to imply that there is "magically more money" as a result of QE, because, as Mr. Roche himself admits, the supply of money really does increase as a result of QE. (As an aside, recall that in the previous myth Mr. Roche implied that the government could magically increase the private sector's savings by going further into debt.)

The instant after the Fed monetises some of the private sector's assets there will be more money, the same quantity of goods and less assets in the economy. Until the laws of supply and demand are repealed this will definitely have an inflationary effect, because there will now be more money 'chasing' the same quantity of goods and a smaller quantity of assets. However, the details of the effect will be impossible to predict, because the details will depend on how the new money is used. We can be confident that the initial effect of the new money will be to elevate the prices of the sorts of assets that were bought by the Fed, but what happens after that will depend on what the first receivers of the new money (the sellers of assets to the Fed) do, and then on what the second receivers of the new money do, and so on. It's a high-probability bet that the new money will eventually work its way through the economy and lead to the sort of "price inflation" that the average economist worries about, but this could be many years down the track. This type of "price inflation" problem hasn't emerged yet and probably won't emerge this year, but the price-related effects of the Fed's QE should be blatantly obvious to any rational observer. One of the most obvious is that despite being 6 years into a so-called "great de-leveraging", the S&P500 recently traded 17% above its 2007 peak.

Myth #6: Hyperinflation can be caused by factors unrelated to money

This is almost the opposite of Roche's sixth myth. He argues that hyperinflation is not caused by "money printing", but is, instead, caused by events such as the collapse of production, the loss of a war, and regime change or collapse.

While the events mentioned by Cullen Roche tend to precede hyperinflation, they only do so when they prompt a huge increase in the money supply. To put it another way, if these events do not lead to a huge increase in the money supply then they will not be followed by hyperinflation.

The fact is that hyperinflation requires both a large increase in the supply of money and a large decline in the desire to hold money. Over the past several years there has been a large increase in the US money supply, although certainly not large enough to cause hyperinflation, along with an increase in the desire to hold money that has partially offset the supply increase.

Myth #7: Increased government spending and borrowing drives up interest rates

This is almost the same as Roche's seventh myth. An increase in government spending and borrowing makes the economy less efficient and causes long-term economic progress to be slower than it would have been, but it doesn't necessarily drive up the yields on government bonds. This is especially so during periods when deep-pocketed price-insensitive bond buyers such as the Fed and other central banks are very active in the market.

Myth #8: The Fed provides a net benefit to the US economy

It never ceases to amaze us that people who understand that it would make no sense to have central planners setting the price of eggs believe that it is a good idea to have central planners setting the price of credit.

The real reason for the Fed's creation is of secondary importance. No conspiracy theory is required, because the fact is that even if the Fed were established with the best of intentions and even if it were managed by knowledgeable people with the best of intentions, it would be a bad idea. This is because the Fed falsifies the price signals that guide business and other investing decisions.

Myth #9: Different economic theories are needed in different circumstances

The myth that different times call for different economic theories, for example, that the valid theories of normal times must be discarded and replaced with other theories during economic depressions, has been popularised by Paul Krugman. However, he has only gone down this track because he is in the business of promoting an illogical theory.

A good economic theory will work, that is, it will explain why things happened the way they did and provide generally correct guidance about the likely future direct and indirect effects of current actions, under all circumstances. It will work for an individual on a desert island, it will work in a rural village and it will work in a bustling metropolis. It will work during periods of strong economic growth and it will work during depressions.

Myth #10: The economy is driven by changes in aggregate demand

This and the next myth are related and are the most destructive myths in our list. The notion that the economy is driven by changes in aggregate demand, with recessions/depressions caused by mysterious declines in aggregate demand and periods of strong growth caused by equally mysterious increases in aggregate demand, is the basis of the Keynesian religion and the justification for countless counter-productive monetary and fiscal policies.

Changes in aggregate demand are effects, not causes, of economic growth. More specifically, an increase in consumption is at the end of a three-step sequence that has as its first two steps an increase in saving/investment and an increase in production. For an increase in consumption to be sustainable it MUST be funded by an increase in production. By the same token, an artificial boost in consumption (demand) caused by monetary and/or fiscal stimulus will be both unsustainable and wasteful. It is like eating the seed corn -- it helps satisfy hunger in the short-term, but ultimately results in less food.

A related point is that there has never been "insufficient aggregate demand" and there never will be "insufficient aggregate demand", at least not until everyone has everything they want. In the real world, the ability to demand/consume is limited only by the ability to produce the right things. Consequently, what is typically diagnosed as "insufficient aggregate demand" is actually insufficient production, or, to put it more accurately, a production-consumption mismatch resulting from the economy becoming geared-up to produce too many of some things and not enough of others.

Myth #11: Consumer spending is about 70% of the US economy

Consumer spending involves taking something out of the economy, so it is mathematically impossible for consumer spending to be more than 50% of the economy. Consumer spending does account for about 70% of US GDP, but that's only because the GDP calculation omits about half the economy (GDP leaves out all intermediate stages of production). Due to the fact that the GDP calculation includes 100% of consumer spending and only about half the total economy, 35% would be a more accurate estimate of US consumer spending as a percentage of the total US economy.

Industrial Metals Update

The Stock Market

The US Market

The NASDAQ100 Index (NDX) has broken above its January high, the S&P500 Index (SPX) has moved up to within 1% of its January high, and several other important US stock indices remain comfortably below their January highs. The NDX's new high is therefore unconfirmed at this time.

If the SPX (see chart below) makes a new high this week it will add to the similarity between the current situation and June-August of 2007, provided that the new high is marginal and quickly followed by a downward reversal.



A clue as to what's in store for the US stock market will be the SPX's February close. A February close below the January close (1783) would be a short-term and an intermediate-term bearish omen.

The Emerging Markets

As a group, the emerging markets clearly offer better value than the US market. However, due to obvious inflation problems in many "emerging" economies and the performances of the related stock markets, emerging market equities, as represented on the following daily chart by EEM, have greater short-term downside potential than US equities.

EEM has rebounded to just below its breakdown level, which now roughly coincides with its 50-day and 200-day moving averages. This is about as far as the rebound should go IF it is a routine counter-trend move.



EEM's rebound to its breakdown level has prompted us to add EEV, a leveraged bet against the emerging markets, to the TSI List as a short-term trading position. We think that EEV has short-term upside potential in the 20%-40% range.

This trade will be exited at a loss if EEM achieves consecutive daily closes above $40.20.

This week's important US economic events

Gold and the Dollar

Gold and Silver

Gold rallying in response to strong physical demand?

Whenever the gold price moves higher the standard response of most gold-bullish newsletter writers and bloggers is to state something along the lines of: "Gold is rallying in response to strong physical demand." According to these analysts, strong physical demand is almost always the cause of a price rise, whereas the selling of 'paper gold' is almost always the cause of a price decline. This type of analysis is complete nonsense.

The demand for physical gold is always equal to the supply of physical gold, with price being the variable that keeps the two in balance. Consequently, if the price of gold has risen over a period then we know that during this period there was an attempt by demand to increase relative to supply and that the price had to rise to restore balance. This applies to physical gold and so-called 'paper gold'. Other than by referring to the price, there will never be any way of knowing whether there was an attempt by demand to rise relative to supply or an attempt by supply to rise relative to demand.

Based on price action, we know with 100% certainty that there was an attempt over the past several weeks for gold demand to increase relative to gold supply in both the physical market and the paper market. We also know that during 2013 there was an attempt by supply to increase relative to demand in both the physical market and the paper market.

Claiming that the price is rising due to increasing demand relative to supply is, at best, a statement of the bleeding obvious. However, many gold-market commentators are delusional in that they not only believe it is possible to determine the supply-demand situation without referring to price (by, for example, measuring the flows of gold from one part of the market to another), they also believe that it is possible for demand to increase relative to supply in parallel with a FALLING price.

Current Market Situation

The evidence of a major trend reversal continues to pile up. For example, last week the US$ gold price broke decisively above its 150-day MA (the red line on the first of the following charts) and the US$ silver price blasted through resistance at $20.50 (refer to the second of the following charts).

The next significant resistance for gold lies at $1350. We expect that this resistance will be overcome within the first half of this year, but not within the next few weeks. Furthermore, if gold moves up to test this resistance in the near future the short-term downside risk will then be as high as the remaining short-term upside potential. Our short-term gold outlook will therefore shift from "bullish" to "neutral" if gold moves up to the $1340s within the next two weeks.

Silver is likely to trade at least as high as $23 and could trade as high as $24-$25 within the next three months. Silver also has the potential to trade as high as $30 (but not significantly higher than that) before year-end.

Gold's recent performance relative to the US$ is interesting, but its recent performance relative to some other commodities is even more interesting. Of particular note:

a) The gold/GYX ratio (gold relative to industrial metals) has just broken above the top of a downward-sloping channel that began to form in October of 2012. This is a bearish omen for the broad stock market.



b) The platinum/gold ratio has broken out to the downside, suggesting that platinum peaked relative to gold early this year. We won't be surprised if the early-2014 peak in the platinum/gold ratio is tested later this year in similar fashion to this ratio's August-2012 test of its late-2011 bottom, but our guess at this early stage is that an important trend reversal is in the works.



The recent breakouts in the gold/GYX and platinum/gold ratios reflect a decline in economic confidence.

Gold Stocks

There is now considerable price-related evidence that the HUI (and the other gold-stock indices and ETFs) made a major bottom at the end of last year. For example, the current rally has differentiated itself from last year's short-term counter-trend rebounds by decisively breaking above the 150-day moving average. However, the obvious evidence of a major reversal has not created a short-term buying opportunity (the short-term buying opportunity occurred at lower prices). In fact, it has probably set the stage for a multi-week consolidation.

The next piece of the puzzle will come in the form of a weekly close above the price channel drawn on the following weekly HUI chart. When it happens, such an event will differentiate the current rally from the intermediate-term counter-trend rebound that occurred in 2012. Note, though, that we won't be confident in the position of the channel lines drawn on this chart until after the next significant weekly decline or reversal. The reason is that the next significant weekly decline/reversal should help define the channel top, which at the moment could lie anywhere between 245 and 265.



The HUI, the XAU and GDXJ are now 'overbought' on a short-term basis, as are many individual senior and junior gold-mining stocks. This certainly doesn't preclude additional gains over the days ahead, but our guess is that even if the HUI were to quickly gain another 5% it would subsequently trade below its current price before resuming its upward trend.

Also worth mentioning is that the gold sector is now vulnerable to substantial weakness in the broad stock market. Over the bulk of the past two years the HUI and the SPX have trended in opposite directions. This inverse relationship will likely continue on an intermediate-term basis, but the two indices are now short-term 'overbought' together.

Further to the above, our short-term HUI outlook has shifted from "bullish" to "neutral".

With a lot more evidence of a major reversal now in hand, in this week's Interim Update we plan to take another look at how the gold sector fared following major upward reversals in 1970, 1976 and 2000.

Currency Market Update

The currency market is ignoring bad news emanating from Europe. This is a sign that the short-term path of least resistance is turning up for the euro and down for the Dollar Index.

As illustrated below, the Dollar Index successfully tested resistance at around 81.5 during the week before last and broke below short-term trend-line support last week. This is bearish price action, but we suspect that additional near-term downside will be limited by support at 79.5. Also, the Dollar Index could be supported over the next few weeks by a general 'flight to safety' prompted by a declining stock market.

Updates on Stock Selections

Notes: 1) 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. 2) The Small Stock Watch List is located at http://www.speculative-investor.com/new/smallstockwatch.html

Company news/developments for the week ended Friday 14th February 2014:

[Note: AISC = All-In Sustaining Cost, FS = Feasibility Study, IRR = Internal Rate of Return, MD&A = Management Discussion and Analysis, M&I = Measured and Indicated, NAV = Net Asset Value, NPV(X%) = Net Present Value using a discount rate of X%, P&P = Proven and Probable, PEA = Preliminary Economic Assessment, PFS = Pre-Feasibility Study]

  *Asanko Gold (AKG) issued a press release that indicated a change in development plan for the company's Esaase and Obotan gold projects in Ghana.

The previous development plan was explained as follows in the 17th December press release that announced the merger with PMI Gold:

"Asanko intends to proceed with the development of the fully financed Esaase gold project, with permits expected imminently. The definitive feasibility study is nearing completion and is expected to be released in early 2014 with the work on it thus far broadly confirming the conclusions of the May, 2013, prefeasibility study. The DFS envisages the commencement of construction in the first quarter of 2014 and steady-state production of 200,000 ounces of gold per year by the end of 2015.

Preliminary work has been carried out to investigate the various options that are available for a more integrated development of the Obotan and Esaase gold projects. Based on the initial findings, the best approach is to first develop Esaase and then commence the development of Obotan."

So, the previous plan was to first develop Esaase and then develop Obotan.

The new plan announced last week is to develop an open-pit mining operation that a) encompasses the Esaase and Obotan pits, and b) is constructed in two phases, with the first phase involving the construction of processing facilities and a mine at Obotan. It is envisaged that the first phase will begin construction during the second or third quarters of this year and will result in a production rate of 200K ounces/year in 2016. The second phase involves increasing the production rate via the construction of a mine at Esaase and will commence after the first phase is finished. As we understand it, the plan is for the Esaase ore to be transported 20-30kms to the processing facilities at Obotan.

The development plan will apparently be finalised following the completion of economic analyses in the second quarter of this year.

Although the change advised by AKG last week seems logical, sudden changes in plans always make us suspicious. We always wonder: What aren't they telling us?

In this case, perhaps what they aren't telling us is that it makes no sense to start construction of the Esaase mine in the near future (as per the previous plan) because the studies completed to date indicate that the Esaase mine would not be economically viable at the current gold price. The Obotan mine, however, would be economic at the current gold price, assuming that the figures included in the FS published in late-2012 are still applicable. For this reason we were surprised by the plan outlined in the December-2013 press release (the one that involved developing Esaase first).

  *Golden Star Resources (GSS) reported its reserve and resource estimates as at 31st December 2013.

Due to a lower gold price assumption, many gold producers have reported or will be reporting lower reserves. The reason is that some of the in-ground resources that would be economic to extract and could therefore be classified as "reserves" at the gold price that most producers would have assumed in their calculations at the end of 2012, are not economic near the current gold price. To put it another way: the gold is still there, but in order to be classified as a "reserve" there must be a reasonable expectation that it could be profitably extracted.

In GSS's case the effects of the lower gold price assumption ($1300/oz at the end of 2013 versus $1450/oz at the end of 2012) and mining depletion were partially offset by reserves added through exploration success at the Wassa project. The net effect was an 8% reduction in P&P reserves -- from 4.31M ounces to 3.95M ounces. This is obviously not good, but it certainly isn't unexpected and doesn't significantly reduce GSS's speculative merit.

  *Ramelius Resources (RMS.AX) advised that its Mt Magnet processing plant was back to operating at 100% capacity. It had been operating at approximately 85% capacity due to the failure of the ball-mill motor last November and the temporary use of a smaller motor.

On a short-term basis, RMS is more interesting now than it has been for many months. This is due to the return to 100% capacity at the Mt Magnet mine, the upside breakout in the gold price, and the potential for a catch-up move.

  *Sabina Gold and Silver (SBB.TO) advised that it has received notice from the relevant government agency that the Back River draft environmental impact statement (DEIS) conforms to the environmental assessment guidelines and that the technical review process has begun.

Environmental permitting for a project like Back River is a long and arduous process. The technical review will extend into the second half of this year and will be followed by technical meetings. The results of the review and the meetings will then be used in the preparation of the final environmental impact statement (FEIS).

SBB also advised that an updated Back River resource estimate should be available before the end of this month. This will be the next news of significance for SBB.

List of candidates for new buying

From within the ranks of TSI stock selections, the best candidates for new buying at this time are:

1) LYD.TO in the low-C$1 area (last Friday's closing price: C$1.17). LYD's latest equity financing is scheduled to close on Tuesday 18th Feb, thus removing a source of downward pressure on the stock.

2) SBB.TO at around C$0.90 (last Friday's closing price: A$0.95).

Profit-taking ideas

All of the gold-silver stocks in the TSI Stocks List remain very under-valued and are likely to trade at much higher prices later this year, but good money-management practice involves taking some money out of the market following quick and large percentage gains (and putting some money back into the market following meaningful pullbacks). How much is sold and which stocks are sold by an individual should largely be determined by that individual's current exposure and financial situation, so all we can do is provide ideas as to where it could make sense to reduce exposure to particular stocks. Here are some ideas:

1) Endeavour Mining (EDV) has intermediate-term resistance at C$0.85-$1.00, after which there is no chart-related resistance until the C$1.80s. Depending on current exposure, it could make sense to do a small amount of selling within the lower resistance range.



2) Golden Star Resources (GSS) has a wide range of intermediate-term resistance at US$0.80-$1.00. It could be appropriate to 'take some money off the table' within this range.



3) Premier Gold (PG) broke upward from a 2-year price channel last week, which prompted a quick rise to resistance at C$2.50. There is also resistance at C$3.00, C$3.50 and then C$4.00. It would be reasonable to make a partial exit in the C$3.00-$3.50 range, or perhaps just below this range, if the stock surges to this price region within the next couple of weeks.



4) Rio Alto (RIO.TO / RIOM) has resistance at C$3.00. With gold now above $1300 fair value for this stock is north of C$5, but depending on current exposure it could make sense to 'take some money off the table' near C$3.00 if an opportunity to do so arises within the next couple of weeks.



5) Sprott Inc. (SII.TO) has major resistance at C$4.00. Some selling would be appropriate if this resistance is approached over the weeks immediately ahead.



Note: Just as it is a mistake to buy too much too soon during a decline, it is a mistake to sell too much too soon during a rally. Of course, it is only with the benefit of hindsight that you know for sure what constitutes "too much" and "too soon", but the way to deal with the uncertainty is to gradually scale in and scale out.

We think that the gold sector is now 6-7 weeks into a cyclical bull market that will last 3-5 years, so we don't perceive any urgency to sell anything gold-related or silver-related at this time. However, it is a lot easier to 'ride' a bull market if you do some selling into the periodic surges and some buying into the periodic purges.

We did a bit of selling within the gold sector late last week and will do a bit more selling if the surge continues over the days ahead.

Updates on short-term TSI trading positions

For TSI record purposes, we will do the following:

1) Immediately exit the short-term trading position in AKG using Friday's closing price of US$2.24 for record purposes. This decision is solely based on the stock's quick rise to its 200-day MA. The result is a profit of 34.1%.

2) Exit the short-term trading position in EDV.TO if the stock trades at C$0.93. The current price is C$0.81.

3) Exit the short-term trading position in EVN.AX if the stock trades at A$0.96. The current price is A$0.83.

4) Exit the short-term trading position in GFI if the stock trades at US$4.60 ($4.60 is a few percent below the 200-day MA). The current price is US$4.09.

5) Exit the short-term trading position in RIO.TO if the stock trades at C$2.90. The current price is C$2.72.

6) Add a short-term trading position in Orezone Gold (ORE.TO) at Friday's closing price of C$0.65. Here's a synopsis of the ORE story, including our reasons for thinking it makes a good short-term speculation:

ORE owns the Bombore project, an exploration-stage gold project in Burkina Faso with 4.6M ounces of M&I resources at an average grade of 1.01-g/t. The total resource is really two deposits -- a near-surface 1.3M-ounce deposit suitable for heap-leach (HL) mining and a larger/deeper sulphide deposit that would have to be mined via a different method (perhaps carbon in leach (CIL)). The sulphide deposit has option value, but is probably not economic at the current gold price. However, a recently completed PEA indicates that the HL-amenable deposit could, for a capital cost of about $180M, be developed into a profitable 120K-oz/yr mine at a gold price of $1250/oz. Specifically, the PEA estimated that at $1250/oz the HL mine would have an IRR and NPV(5%) of 23.9% and US$159M, resp. These are better-than-average economics.

ORE has 96M shares outstanding, so at its current price of C$0.65 its market cap is about C$62M. It also has about $10M of cash, so its current enterprise value is about $52M. The enterprise value is a long way below the estimated NPV of the proposed HL mine, but ORE's valuation is in line with the valuations of many other exploration-stage gold miners. Under-valuation is more the norm than the exception at this time.

ORE's valuation is attractive, but not unusually so. What draws us to this stock is the combination of attractive valuation and constructive price action. With reference to the following chart, it looks like ORE completed an 8-month basing pattern when it recently broke above C$0.60.

There is a risk that the stock will pull back as far as the low-C$0.50s before resuming its advance, but the optimum place to take a trading position would be in the low-C$0.60s (at or just above the breakout level). The chart pattern suggests short-term upside potential to C$1.00-$1.20.

Chart Sources

Charts appearing in today's commentary are courtesy of:

http://stockcharts.com/index.html