INTRODUCTION - Global Speculator...Volume 2, Issue 1, 5 February 2007 Contents INTRODUCTION I want...

Volume 2, Issue 1, 5 February 2007

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Content
www.globalspeculator.com.au
INTRODUCTION I want to start by welcoming everybody to the first issue of the new improved Global Speculator. Members who have subscribed to the earlier issues of the newsletter in 2006 will notice essentially one major change and that is the removal of the Model Portfolio section. My intention when starting this newsletter was to educate people on speculating in precious metals companies. By offering a model portfolio I have since learned that this is limited in its educational benefit, as people use this more as a stock picking service. There are already many newsletters and stock promoters out there that will provide you with numerous companies to buy and sell. You will also note many of these publications include disclaimers stating: You should do your own analysis and homework on these companies prior to deciding on whether to buy and sell them. It is the focus of this newsletter, the articles and the website to better educate people on how to do exactly that, so that more independent decision making can be made by the individual. I apologize for any inconvenience or disappointment the closing of the model portfolios may cause. Of the companies reviewed using our approach in 2006, I am pleased to report the average return (using closing prices at the 31/01/07 for the open positions) is 52% a trade. These results have been achieved during a period where the precious metals market has remained essentially flat. The results in summary are as follows:

Introduction XAU Gold Ratio The North American Silver Index (NASI) The TSX Gold Index The Australian Producers Index The Australian Theoretical Price of Gold Update Closing Comments Disclaimer
Contact Details Australian Universal Resources (ASX:URL): 100% (Closed trade) Leviathan Resources (ASX:LVR): -31% (Stopped out but has since been taken over) Canadian Sabina Silver: (TSX-V: SBB): 56% (Open trade) Pan American Silver (TSX:PAA): 92% (Open trade) Minefinders (TSX:MFL): 45% (Open trade) The monthly newsletter will continue to assess the various precious metals markets predominantly in North America and Australia, whilst also following the Inflation Adjusted Theoretical price of Gold in terms of Australian dollars. I will also take this opportunity to introduce you to our new website where you will find the following:
Email: [email protected] Internet Address:


Volume 1, Issue 4, 5 June 2006© The Global Speculator 1



• Charts (Including all of the charts in this newsletter plus many more updated on a regular basis).

• A run down of Our Approach to speculating in precious metals companies.

• A Useful Links section including many of the resources we have found of benefit over the years.

• A Company Research section currently under construction which will give you access to a quarterly report detailing the 100 or so companies on our international database for a very reasonable fee.

XAU




XAU GOLD RATIO

Key Dates XAU/Gold XAU XAU

Performance Gold Price

Gold Performance

Net Position

19/11/2001 0.18 49.46 272.90

28/05/2002 0.27 88.65 79.24% 325.50 19.27% 59.96%

26/07/2002 0.18 55.73 -37.13% 303.30 -6.82% -30.31%

08/12/2003 0.28 112.21 101.35% 406.60 34.06% 67.29%

13/05/2005 0.19 78.99 -29.61% 420.70 3.47% -33.07%

31/01/2006 0.27 154.19 95.20% 570.70 35.65% 59.55%

Current (31/01/07) 0.21 139.02 -9.84% 651.90 14.23% -24.07%

I think the recent underperformance of the Gold shares versus the Gold price is signaling one last pull back in the Gold sector, which I am expecting to be the last call before we embark on the next significant rally.

OUTLOOK There are three potential short term scenarios as I see it over the coming weeks and months: Scenario 1: The Gold price continues to rally and we get an unusual situation where the Gold price leads the Gold shares and the XAU breaks the intermediate term resistance trend line at about the 140 -145 mark to embark on a new significant rally. Given the past I see this scenario as unlikely. Scenario 2: The Gold price continues to run into resistance at around the US$650 – US$660 mark and embarks on another pullback which will initially see the precious metals shares sell off sharply, but then steady very quickly to a point where they will outperform the Gold price (Value for money will start to prevail). This will signal the beginning of a new significant rally. I have two downside targets for the XAU including the 125-127 mark and in a worse case scenario 115. If this consolidation pattern follows in a similar vein to the previous ones (2002/03 and 2004/05), I would be leaning towards this scenario 2 outlook. Scenario 3: The precious metals market gets caught up in a broad commodity sell off and/or a correction in the stock market, resulting in the XAU falling all the way down to the long term support line at around 95. I see this scenario as unlikely at the present time. Intermediate Term Outlook: Over the intermediate term my next target for the XAU is around 230 towards the latter half of 2007 and early 2008 depending on how long it takes this consolidation to run its course.




NORTH AMERICAN SILVER INDEX (NASI)

A look at the Silver market reveals an interesting difference to that of the Gold market. The following chart is an index of 6 established North American Silver companies. We like to use this chart in a similar way to the XAU index as a barometer for the silver sector. If we look at the index performance against the Silver price (Top section) we can see that the silver shares on a whole have been outperforming the physical metal since about June last year and continues to do so. This is potentially very bullish for both the Silver price and the Silver shares going forward. Over the last three years or so we can see that the Silver index of shares largely underperformed the Silver price (See the downward sloping trend line). A break of this trend line could see a very strong period for the Silver miners in the coming year, potentially similar to the explosive period of 2003/04.




A look at the earnings of some of the larger players including Pan American Silver and Silver Wheaton show strong growth which I expect will continue during 2007 and over the coming years. In 2003/04 the Silver producers were largely unprofitable and the rally that occurred was based solely on expectations and speculative hype surrounding the Silver price. The following two to three years has seen the Silver price catch up whilst the index has consolidated. In my opinion, we are now bracing for another significant rally in the index. This time around there is not just earnings, but substantial earnings growth to fuel and justify a significant rally for the Silver sector over the coming year.

OUTLOOK The three scenarios I see as a possibility are as follows: Scenario 1: A break of the resistance trend line at around the 7,500 mark in conjunction with the XAU breaking its resistance at the 140 – 145 mark which will signal the beginning of the next major rally in precious metals stocks. Scenario 2: If the XAU experiences short term weakness as the underperformance of the metal shares versus the Gold price is suggesting, we may see this index pull back to the support at 6,500 and continue to consolidate before a successful break out in the coming weeks or months. This is the scenario I am presently leaning towards. Scenario 3: If the Gold and Silver price get caught up in the sharp fall of the other commodity prices and/or a sharp sell off in the Stock market, we could see a worse case scenario of a breakdown of the present consolidation pattern and a move of the index back to the long term support line at around 4,200. Whilst always a possibility, I don’t support this scenario. Intermediate Term Outlook: Over the intermediate term my next target for the NASI is around the 11,000 mark towards the latter half of 2007 or early 2008, again depending on when the present consolidation ends.




THE TSX GOLD INDEX TSX Gold Index

Of the major precious metals indices that we follow, this is the one that has me somewhat perplexed. A look at the relative strength index comparative with the Canadian Gold price has the index looking historically expensive. Unlike the other indices that are pointing towards reasonable value, this chart is showing that the Canadian Gold mining companies are moderately priced. A look at many of the shares that make up the index will indicate that they are trading near or close to their 52 week highs. The fact that several of these companies have held up and outperformed whilst the Gold market in general has been flat is bullish in its implications. I think the dynamics of the TSX Gold index are changing with the inclusion of more growth and development style companies versus established producers. As these companies develop their respective projects and the stocks are re-rated accordingly, we should start to see the Relative Strength Comparative channel




take on more of an upward sloping trend. I have drawn in a potential path it “may” start to take. If this is the case, the previous Accumulate and Profit Taking sections may have to be revised to reflect the changes.

OUTLOOK The three potential scenarios as I see it are as follows: Scenario 1: The interim resistance line at around 340 is broken signaling an end to the recent consolidation and the beginning of the next stage higher. Scenario 2: If the XAU experiences short term weakness as the underperformance of the metal shares versus the Gold price is suggesting, we may see the TSX Gold index pull back to the support at 290 and a continuance of the consolidation before a successful breakout in the coming weeks. As with the previous assessments, this is the scenario I am leaning towards. Scenario 3: If the Gold and Silver prices get caught up in a sharp fall with the other commodity prices or a sharp sell off in the Stock market, we could see a worse case scenario of a breakdown of the present consolidation pattern and a move of the index back to the long term support line at around 190. Intermediate Term Outlook: Over the intermediate term my next target for the TSX Gold index is around the 500 mark towards the latter half of 2007 or early 2008, again depending on when the present consolidation ends.




AUSTRALIAN PRODUCERS INDEX (API)

The API, like the XAU, has spent the best part of the last 9 months consolidating. The above chart shows a Reverse Head and Shoulder Pattern (Bullish implications) forming with a neckline at about 4,300. A look at the middle section of the chart shows the Australian producers outperforming the Australian Gold price since September 2006. This has bullish implications for both the Australian Gold price and the producing Gold mining companies going forward.




OUTLOOK The three potential scenarios as I see it are as follows: Scenario 1: The neckline of the Reverse Head and Shoulder formation is broken at 4,300 signaling an end to the recent consolidation and the beginning of the next stage higher. Scenario 2: If the XAU experiences short term weakness, as the underperformance of the metal shares versus the Gold price is suggesting, we may see this impact on the Australian market with a pullback to the support at 3,600 and a continuance of the consolidation before a successful breakout in the coming weeks. As with the previous three assessments, this is the scenario I am leaning towards. Scenario 3: If the Gold and Silver prices get caught up in a sharp fall with the other commodity prices or a sharp sell off in the Stock market, we could see a worse case scenario of a breakdown of the present consolidation pattern and a move of the index back to the long term support line at around 2,600. Intermediate Term Outlook: Over the intermediate term my next target for the API is around the 6,500 mark towards the latter half of 2007 or early 2008, again depending on when the present consolidation ends.

AUSTRALIAN THEORETICAL PRICE OF GOLD UPDATE

Date

10 Year BB Interest

Rates Official CPI

M3 Aggregate

Money Supply

Rate of Australian

M3 Change

Gold Production Av Annual

Increase (1.73%)

Australian Theoretical Gold Price

Actual Australian Gold Price

Actual as a % of

Theoretical

Jul-06 5.84 749.8 0.3480% 0.14% 2,422.82 834.00 34.42%

Aug-06 5.67 759.9 1.3470% 0.14% 2,451.97 810.00 33.03%

Sep-06 5.51 3.90 768.5 1.1317% 0.14% 2,476.18 807.00 32.59%

Oct-06 5.66 777.7 1.1971% 0.14% 2,502.26 781.00 31.21%

Nov-06 5.59 784.4 0.8615% 0.14% 2,520.21 809.90 32.14%

Dec-06 5.89 3.30 802.6 2.3202% 0.14% 2,575.05 804.50 31.24%

The 6 months to the end of December has seen the money supply measured by M3 advance 7.2% or at an annualized rate of 14.4%. About one third of this increase occurred in December 06. This has resulted in the Theoretical price of Gold in Australian dollars advancing AUD$152.23, whilst the Actual price of Gold in Aussie dollars has declined from AUD$834 to AUD$804.50. The core inflation figure that came out for December 06 declined to 3.30% from 3.90% due predominantly to a fall in world oil prices. The Gold price in Australian dollars as at the 31/12/06 was just 31.24% of the Theoretical price. As I type this, the Australian Gold price is surging again to about AUD$842 an ounce. A look at the chart below shows a bullish breakout of a consolidation triangle recently.




AUSTRALIAN GOLD BULLION (ASX:GOLD – 1/10 OF AN OUNCE)




CLOSING COMMENTS Patience remains the order of the day during these times. The vital signs of this precious metals bull market remain incredibly strong in my opinion and this should translate into better times ahead in the not too distant future. For the time being there is a lot of positive sentiment among analysts and this, coupled with the fact that Gold shares continue to underperform the metal, indicates there may be some more pain to endure in the immediate future. In a recent Reuters survey only 2 out of 42 analysts predicted the Gold price would average less than 2006’s average of US$604.42. The consensus was US$656.78 an oz. As a contrarian, I can’t help but feel a little nervous when I see mainstream analysts bullish on the outlook for Gold. I read this in a 4 page special section dedicated to Gold in one of Australia’s leading newspapers. It was no doubt inspired by the recent price surge we have experienced.

Troy Schwensen

DISCLAIMER This publication has been prepared from a wide variety of sources which the editor to the best of his knowledge and belief considers accurate. The editor does not warrant the accuracy of the information and forecasts contained in this publication. This information is provided for educational purposes and nothing written should be construed as a solicitation to buy and sell securities.


INTRODUCTION - Global Speculator...Volume 2, Issue 1, 5 February 2007 Contents INTRODUCTION I want...

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