Lihir Gold Limited (ASX:LGL) is a gold mining, development and exploration company, focused on the Lihir gold mine and processing facilities located in Papua New Guinea.

Yesterday we saw that Sino Gold Mining (ASX:SGX) was likely to take advantage of the strong Gold price rebound. Today we have a look at a similar stock, also strongly correlated with Bullion prices. The analysis is therefore almost the same as the 2 stocks (SGX and LGL) have the same price action.

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Two charts illustrate this: the first one is the LGL price development in parallel with gold prices (Gold in red line), while the second one is the LGL/SGX comparison (SGX in blue line). There again the positive correlation of LGL with both Gold and SGX is flagrant.

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As indicated yesterday, many indicators argue for a strong rebound of the Bullion, in the current context of financial crisis and uncertain business climate. Gold price soared yesterday, the biggest gain ever posted in one day, as the credit market turmoil convinces investors to pull their money out from equities and to put it back in safe-haven assets. Yesterday SGX jumped by 22.54% and LGL bounced 15.89%.

As same causes create same consequences, a further momentum is expected for LGL.

Several signals argue also for a positive development.

The stock actually lost 61% of its value between the historical high posted in last March, at $4.39 (well the real historical high had been posted in October 2007 at $4.45), and the recent low posted last week (at $1.6950). The stock has been obviously oversold and, as it has already bounced back impressively, a large retracement is more than likely.

The MACD just triggered a bullish signal yesterday, as it crossed above its signal line. So did the Relative Strength Index, which has quit the oversold area and has been soaring for a week now. The On Balance volume indicator (OBV) provides a running total of volume and shows whether this volume is flowing in or out of a given stock. Here the OBV has also clearly bottomed and has turned upward: money is flowing back into the stock. Once again, if both price and volume move on the upside, it’s a good sign that a bullish momentum is building up, and that a positive trend may be possible.

A significant retracement of the recent decline is likely. Yesterday the price closed at $2.48, well above the 23.6% Fibonacci ratio. The next objectives are therefore $2.7 then $3.1 (the 38.2% and 50% retracement ratios).

And now over to Bill Bonner in Ouzilly, France:

After the biggest spending and borrowing binge in history, Americans need time and money. They need to pay their debts. They need to build savings for their retirements. They need time and money to recover from their mistakes.

What kind of mistakes?

Well, down near the bottom of the ladder, people bought houses they couldn’t really afford to own in places they couldn’t afford to live. And cars they couldn’t afford to run. Those mistakes need to be undone. Which is why there are so many foreclosed houses on the market…and why house prices generally are falling.

S&P/Case-Shiller reports that house prices took their biggest hit ever in the second quarter of this year. They were down 15.4% from the year before.

Further up on the ladder, the rich are now embarrassed by their own housing mistakes. New Yorker magazine reports that it is the ’season of white elephants’ in Greenwich, Connecticut. Speculators began huge mansions - in the “Georgian Stockbroker” style, for example, complete with indoor swimming pools, wine cellars, movie theatres, dozens of bathrooms, even ice-skating rinks - and now find the buyers have disappeared. Want to buy a $28 million spec house? Go to Greenwich.

At the investment level there were plenty of mistakes too. Subprime mortgage lending dominated the headlines for the last 12 months, but the same reckless spirit found its way into transactions all over the economy. Private equity, IPOs, student loans, shopping malls, fast-food joints - while the going was good, everyone wanted to go along.

And now, they all need time and money to pay for their errors.

The baby boomers say they are postponing retirement. Some are going back to the office.

A county in Alabama says it will have to declare bankruptcy.

The FDIC says its “problem list” of banks lengthened by 30% during the second quarter.

Bank earnings fell to their second lowest level in 19 years, says Bloomberg.

In London, tens of thousands of jobs have already been lost in the financial sector, says the Financial Times. IPOs, where the City (equivalent to Wall Street in New York) made much of its money, have “fallen off a cliff.”

We have lived through the biggest credit expansion ever. Ahead is perhaps the biggest credit contraction ever. Why? Because it takes time and money to correct mistakes. The bigger the mistakes; the longer and more expensive the correction.

When money and credit flow, they tend to raise prices. You get inflation - first of asset prices…later, of consumer prices. When money stops flowing, prices come down. As George Soros puts it, the willingness to lend is directly related to the value of the collateral. Both tend to rise and fall together.

Currently, lenders are wary and the value of the collateral is falling. Everyone knows house prices are going down. But U.S. stock prices are going down too. Adjusted for consumer price inflation, they’ve been going down since the end of 1999. That is, a $50 stock is still worth about $50…but the 50 bucks ain’t what it used to be. It buys only 1/5th as much oil, for example.

This trend, towards lower asset prices, is likely to last a long time. To protect ourselves, we began buying gold in 2000. So far…so good.

*** “Gold hasn’t done too well lately, maybe it’s time to get out…”

The thought comes up from time to time, most recently from a visitor from Maryland.

“If the world economy is slowing down, commodities aren’t the place to be,” he went on. “Gold either. People buy gold to protect themselves from inflation. But inflation isn’t going to increase in a recession. You’d be better off in cash until this thing turns around.”

Our guest voiced what is probably the dominant opinion of the summer - that a worldwide slowdown means price increases will slow down too. Without the hot breath of the inflation hounds chasing it, gold will go back to sleep and the Fed can continue to rescue speculators from their mistakes.

That’s why the U.S. 10-year Treasury note yields all of 3.78%. Yes, investors know they will lose money if inflation remains above 4%. But that risk - they believe - is worth taking for the safety of the dollar and the full faith and credit of the U.S. Federal Government. Besides, inflation is almost sure to go down.

This view may turn out to be right. But when we think of moving to cash we pose the question: what cash? And there’s the problem. The planet’s alpha cash is the dollar. And while the dollar may have some limited upside in a punk market (it’s already gone up about 7% against the euro), the potential downside is enormous.

What if the bond market is wrong about inflation? What if the increase in producer prices - now running at nearly 10% - works its way into consumer prices? What if demand from the developing world doesn’t slack off as expected? What if there is war? What if the U.S. economy worsens…and the feds need to cut rates and offer further $100 billion bailouts? What if Asian, Arab and Russian creditors lose faith in the dollar and switch to euros?

Any of these things could be catastrophic for holders of U.S. Treasury bonds. At 3.78% yields - it hardly seems worth the risk. Shorter-term Treasury bills barely pay anything at all.

So what cash do you hold? We choose gold because it is cash that no central bank manages. No one prints. No government backs. And no one ever threw away a gold coin. Gold will always hold an intrinsic value - so we’ll keep holding gold.

At War with the Odds …

No one can argue against the successful investing strategies of Peter Lynch of Fidelity Funds. His compounded rate of return is one of the best Wall Street has seen and it extended over a decade. In Peter Lynch’s book on his investment strategy, he emphasizes that traders should learn the elements of the game of Poker to increase their understanding of investing. Since tournament poker is one of my hobbies, I thought we might check out what Peter Lynch was saying about this popular game of skill.

Poker, unlike nearly all casino games, requires skill to consistently win. The casino does not take a percentage in tournament poker, each player is trying to beat the other players in the hand and win the pot. Poker, like trading, is based on probability. Participants in the event must always be cognizant of the risk versus reward of each trade or hand. There is an old saying in Poker that goes something like this, “If you sit down at a poker table and don’t recognize who the sucker is, then you are the sucker.” The same is true of all neophyte traders who want to beat the Wall Street boys but have no knowledge or experience as they enter the world’s toughest business.

The key word in the title of this article is “Finding”.  “What is the best market to trade in ?” This seems like a very reasonable question and people become frustrated when the answer is “It depends”.

Imagine if you will, that the time had come to replace your car and that you had the opportunity to ask Michael Schumacher for his opinion as to the best car you could get. What might his possible answers be?

• A Ferrari
• Something with maximum power to weight ratio
• Anything red with superb traction in corners

Or he might say “It depends. What do you want it for, how much do you want to spend, what trade-off can you accept between performance and running costs, do you want spare parts and servicing available promptly, anywhere?

Back to trading again, there are specific characteristics of different markets be they stocks, currencies, index futures or commodity futures that can work better or worse with different trading plans but unfortunately there is not a brochure that neatly tabulates the features for comparison.

Finally, there is the unfortunate fact that the markets are greatly affected by human emotion and mass psychology so they can be capricious and change their character for no obvious reason. For example on the 11th July Oil touched 147 USD and yet on the 5th August reached as low as 120 USD, an 18% decline in 16 trading days. Does it seem likely that the world’s energy demand fundamentals have changed this quickly? No of course not, but as traders we don’t particularly care so long as we know how to capture some of that short but highly profitable move.

Closely related to our first question, is “How do I get more consistent results from my ABC Trading Plan as taught in the Smarter Starter Pack?” Often, this is a question arising from having expectations which exceed our current level of study and experience. Would we give our children the keys to a car, point out the steering wheel, the “go” pedal, the “stop” pedal, and tell them to read the RTA book of road signs and expect them to drive safely in the city and the country, in day and night, in sun fog or snow and to watch out for drivers who break the rules?

It is common sense that we would not do this, but every week people excitedly rush into their first trade having not completed the reading, watching or practicing aspects of their education, having not spent enough time understanding the powerful software tools they own, and having not tested their plan on their chosen market.

Yet the excitement and desire to be successful dulls our perception of danger. We have all been there but as independent, self-directed traders and investors we owe it to ourselves to note W.D. Gann’s words in “Speculation, A Profitable Profession” – “Remember that the harder you work, the more knowledge you will get, and the more profits you will make.”

Rather than being a “One Size Fits All” proposition, the “ABC Trading Plan” is in fact a framework of trading plan options that can be shaped to specific goals. It is essential that we each make it our own so in future articles I will further explore some of those choices.

Are You an Investor, a Speculator or a Gambler?

What exactly is an Investor, a Speculator or a Gambler in the context of the Stock Exchange Market or for that matter, any markets?

The Public as well as the Media have often loosely and interchangeably used these three terms. Comparisons are often made between their activities, but the terms are never explicitly defined.

You might ask if there is a need to be distinct on these terms. Well, there is definitely such a need simply because, if you want to profit from the market consistently, it is crucial to first, know who you are and how you are going to participate in the market. In fact, the mindset and methods employed by an investor, speculator or gambler differs extensively and greatly affect the profitability of participating in the market. How perilous it is to venture into the markets blindly!

The Public often called themselves Investors, perhaps, influenced by the Media. But how many of them are really Investors or even Speculators. Think about it, many of the self- acclaim Investors are actually habitual Gamblers, betting on the market on the slightest rumours, insider news, company news or fluctuations, hoping to get rich quick by chance. This is not a debate on whether gambling is good or bad, but if you’re going to gamble; don’t you think you have a better chance at the Casino, which is there for this purpose?

So, what are the differences between an Investor, Speculator and Gambler? In order to differentiate between them, we should start by defining them. If you’re sufficiently motivated, I encourage you to try to define the terms ’speculating’, ‘gambling’ and ‘investing’ before you continue reading this article… you may surprise yourself.

Consider the following.

Investor

An investor is an individual whose primary concerns in the purchase of a security are regular dividend income, safety of the original investment, and if possible, capital appreciation.

A person whose principal concern in the purchase of a security is the minimizing of risk, compared to the speculator who is prepared to accept calculated risk in the hope of making better-than-average profits, or the “gambler” who is prepared to take even greater risks.

In 1934, Graham and David Dodd addressed the issue and offered a definition of “investment” in their classic text book Security Analysis

“An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return.
Operations not meeting these requirements are speculative.”
- Graham and Dodd’s Security Analysis (original 1934 edition)

Speculator

Speculation is the buying, holding, and selling of stocks, commodities, futures, currencies, collectibles, real estate, or any valuable thing to profit from fluctuations in its price as opposed to buying it for use or for income - dividends, rent etc.

A speculator is one who is prepared to accept calculated risks in the marketplace for attractive potential returns.

Speculation: The activity of forecasting the psychology of the market.
Speculative motive: The object of securing profit from knowing better than the market what the future will bring forth.
John Maynard Keynes in The General Theory of Employment, Interest, and Money

Gambler

Gambling (or betting) is any behaviour involving the risk of money or valuables on the outcome of a game, contest, or other event in which the outcome of that activity is partially or totally dependent upon chance or on one’s ability to do something.

“A gamble is the assumption of risk for no purpose but enjoyment of the risk itself, whereas speculation is undertaken in spite of the risk involved because one perceives a favorable risk-return trade-off. To turn a gamble into a speculative prospect requires an adequate risk premium for compensation to risk-averse investors for the risks that they bear.”
- Investments by Zvi Bodie, Alex Kane, and Alan J. Marcus

Regardless of how you define the terms, it is likely to be a worthwhile activity to estimate your expected returns on both an absolute basis as well as relative to an appropriate benchmark. And if you find yourself enjoying the activity of investing or if you find yourself addicted to the speed and excitement of the trading game, perhaps you should seriously consider whether you’ve crossed the line between investing and speculation, or worse yet, maybe you are really gambling with your money.

July 18 2008 - Australasian Investment Review – (AIR)

It has been a week for mining and resource company reports as oil led other commodity prices lower for a second day, and major mining groups reported solid quarterly or full year production figures (and half year in the case of Rio Tinto and Woodside). Oil is now down $US16 a barrel after another fall Thursday night in northern hemisphere markets. Its now around $US129 a barrel. Gold and most metals fell, but copper rose a touch in a surprise. Slowing growth in China and more poor news about the US economy were the main factors. In Brazil a big share offering by the giant Vale mining group (also known as CVRD) fell short of expectations as the slump in metal and oil prices this week took their toll. We will get a major test of sentiment when BHP Billiton reveals its 4th quarter and full year production figures on next Wednesday, July 24. BHP fell more than 4%, or $1.74 to $37.55 yesterday. Rio fell $3.44 to $118 at the close. The BHP 3.4 for one offer is now worth $127.60 per each Rio share. The bid remains under water. Strategists at Merrill Lynch and Morgan Stanley said investors should sell commodities stocks because demand may decline for raw materials such as copper, nickel and corn. Minara Resources, Australia’s second-largest nickel producer, fell as much as 6% to $2.03 and Oxiana fell 10 cents, or 4% to $2.05. The uncertainty in metal prices this week and the instability in credit markets had probably trimmed around $US3 billion from what Brazilian mining giant, Vale (CVRD) was expecting from a share sale that was being watched around the world. When the timing was confirmed a week ago, Value was expecting to get around $US15 billion at the top of the range in the offering. The issue was first announced in June. But market reports yesterday said around $US11.5 billion had raised from the issue, before a possible supplemental offering, or over-allotment of shares. Including the so-called green-shoe option of preferred shares, Vale is raising 19.4 billion reais, but the offering only raised 18.4 billion reais. Value shares have fallen 16% since the offering’s first announcement in June, so the market isn’t confident the company will spend the money wisely. But as we have seen in Australia, the prices of all leading miners have weakened in the past month as metal prices have come off.  Even BHP Billiton and Rio Tinto have seen their shares prices retreat, despite big ore price settlements, strong coal prices, and the as yet unresolved takeover offer from BHP. Vale sold 256.9 million common shares for 46.28 reais each and 164.4 million preferred shares, excluding the over-allotment option, for 39.9 reais each, according to a filing yesterday reported by Bloomberg and the FT. The share offering was the largest ever by a Brazilian company, but the shortfall in the expected amount raised will come as a disappointment to many.  Vale still has cash rolling in from its higher priced iron ore sales (although BHP Billiton and Rio Tinto have done better in the Chinese and other Asian markets. Vale won price increases of around 71% and will now receive less in Asia because of the discount being applied to its remoteness from the region. Australian producers have successfully argued for a premium in their pricing because of their proximity and cheaper shipping charges. The share sale had started speculation Vale is preparing to launch another takeover after walking away from a $US90 billion deal with Xstrata. With metal prices lower (but coal prices higher), Xstrata might be a bit cheaper in coming months.   Newcrest Mining fell 3%, or $1.10, to $32.20 despite gold trading around a three month high of $US963 and the Papua New Guinea joint venture with South Africa’s Harmony Gold being confirmedNewcrest and Harmony said yesterday that the PNG Government had given its approval for a gold joint venture between Harmony and Newcrest. The approval paves the way for the two companies to pursue the development of their joint venture interests in the country. These include the Hidden Valley gold mine, which is expected to commence production mid-2009, and the highly prospective Wafi Golpu copper and gold deposit. Newcrest will bring its technical skills to the joint venture in exploration, project delivery and large scale mining. Harmony chief executive Graham Briggs said in a statement the ministerial approval allows for the conclusion of all conditions precedent to the joint venture, including regulatory and statutory approvals. ”Not only does the joint venture augur well for both companies, but it will also provide broader employment opportunities and corporate social investment for Papua New Guinea.” In April, the two companies announced that they had signed an agreement which will allow Newcrest to earn a 50% interest in Harmony’s Papua New Guinea (PNG) gold assets. The joint venture includes: The Hidden Valley mining operation, a gold and silver project, expected to produce over 250,000 ounces of gold and 3.6 Moz of silver p.a. over a 14 year mine life, peaking at over 300,000 ounces of gold p.a. in 2011. Production is scheduled to commence around mid 2009; and the highly-prospective Wafi-Golpu gold/copper deposit and its surrounding exploration tenements. Located approximately 65kms southwest of Lae in Morobe province, Papua New Guinea, Wafi-Golpu is a highly prospective region with two advanced staged exploration projects – the Wafi gold project and the Golpu porphyry copper/gold project. Wafi-Golpu comprises two separate mineralised systems in a highly prospective region with potential to develop into a major mineralised province. Wafi-Golpu is currently estimated to contain 9.5Moz of gold and 1.76Mt of copper in resources. Also included is more than 3,400 square kilometres of Harmony’s exploration tenements in Morobe province, 300 km north-east of Port Moresby. The April statement said the PNG assets have a significant resource inventory, with a JORC-compliant resource base of approximately 31 million ounces of contained gold equivalent. Current resources total 15.2Moz gold, 90Moz silver, 1,761kt copper and 22kt molybdenum.

The cost will be paid in two stages: (i) an initial US$180 million payment to acquire a 30.01% interest by 30 June 2008, together with a reimbursement to Harmony of US$45 million in project expenditure (”Stage 1 Completion”), and (ii) a farm-in commitment for the remaining 19.99% of approximately US$300 million, to fund project expenditure up to the commencement of mining operations at Hidden Valley. Newcrest will fund the deal from internal cash flows.

Harmony and Newcrest said they will jointly operate the PNG assets from the date of Stage 1 Completion with voting rights in the operator to be in proportion to each joint venturer’s interest. As a 30.01% interest holder, during the earn-in period, Newcrest’s approval will be required for major decisions in the joint venture.

Shares in Kagara Ltd hit a 52 week low yesterday of $3.20 (down 7.5%) as lower metal prices caused investors to offload shares, despite producing more copper and less zinc in the three months to June.

That followed 19 cent or 5% fall on Wednesday off the back of weakening zinc and copper prices on world markets.

The company’s shares are down well over 46% so far this year, compared to the 23% fall in the overall market.

Kagara said the lift in copper production to record levels was due to increased production from its two treatment plants in Queensland..

Copper production increased to 9,000 tonnes in the quarter, from 6,227 in the same quarter of 2007. Zinc output fell 9.6% to 8,568 tonnes.

Kagara started building its new Mungana plant in the quarter. That’s in north Queensland . It will double the company’s zinc production and boost copper output.

Total full-year output was 40,940 tonnes of zinc and 26,329 tonnes of copper.

The company said operating costs for copper output fell during the quarter, with copper sales achieved at $US3.12 a pound compared with costs of $US1.37 a pound. Zinc sales were made at 97 US cents a pound, compared with costs of 58 US cents a pound.

Zinc prices are down 24% this year, copper prices are up.

“The June quarter production capped a very successful year for Kagara with copper and zinc production coming in on target at 26,329 tonnes of copper and 40,940 tonnes of zinc for the financial year.”

The company said quarterly copper production from both Thalanga and Mt. Garnet copper treatment facilities were at record levels of 5,261 tonnes and 2,755 tonnes respectively at very high recovery rates.

“Copper production overall was 52 percent higher than the previous quarter and 31 percent higher in the June half compared with the December half year. 

“Copper price received for the half year was lower than the previous half however margins increased as a result of lower unit costs due to higher production.

“Plant construction at Mungana commenced during the quarter and this will more than double our zinc production and further increase our copper production when it comes on line in April of 2009.

“The base metal ore body at Mungana is now being accessed with underground development and this high grade development ore will be processed through the Mt. Garnet polymetallic plant until the Mungana processing facility is available.

“Several gold intersections including 69.00 metres at 2.44 grams per tonne gold from underground grade control drilling at Mungana and 63.45 metres at 3.14 grams per tonne gold at Red Dome have enhanced the probability of a large scale underground gold mining operation as the next growth phase at Mungana.

“During the quarter, initial inferred and indicated resources of 3.44 million tonnes grading 5.1% zinc and 1.0% copper for the Victoria deposit and 5.712 million tonnes at 1.08% nickel including 263,000 tonnes at 6.4% nickel for the Lounge Lizard nickel deposit were announced. Both deposits will grow larger as drilling continues.

“At Admiral Bay, an inferred resource is expected to be finalised in August. It is becoming increasingly likely that an exploration shaft will be commissioned in advance of full scale development.

“Initial discussions with engineering consultants regarding the advancement of the project have begun.

“Cash on hand as at 30 June 2008 was A15.8 million and receivables were $55.3 million>” the company said.

Iluka (ILU) said production fell across all of its mineral sands products in the June quarter because of the interruption of gas supplies in Western Australia.

Around 30% of the state’s gas supplies were cut following an explosion on the Varanus Island facility in early June but Iluka says it was able to restore most of its WA production this month.

It said yesterday that any adverse financial impact from the interruption should be mitigated by its moves to sell stocks, save money from lower production and reclaim lost profits and sales from insurance.

Total mineral sands production in the June quarter was fell 20% to 592,089 tonnes from 741,765 in the same quarter of 2007.

Sales revenue was $259.5 million, up 21.8% in the same period last year.

Zircon production fell 32.7% to 94,702 tonnes in the June quarter and rutile was down 1.6% to 51,886 tonnes.

Synthetic rutile declined 27.7% to 99,488, and saleable ilmenite fell 17.1% to 177,740 tonnes.

Iluka said that because of commercial considerations related to pricing negotiations, it was no longer disclosing sales volumes as it moves to complete pricing arrangements for uncontracted zircon volumes in the second half of this year.

“On the basis of continuing strong demand, especially in developing economies, and tight supply conditions, Iluka expects to achieve appreciable second half price increases,” it said.

The company said it is experiencing strong demand across its product range, especially from China.

In the first half of 2008, Iluka sold over 100,000 tonnes of zircon into China, a 75% increase on the same period in 2007.

“This sales growth has been underpinned by the decision to warehouse zircon inventory in China to capitalise on new sales opportunities, including that associated with the decline in supply from Indonesia.”