New Delhi, Dec 6: Gold prices plunged by Rs 215 to close at Rs 12,360 per 10 gram in the bullion market here on poor demand amid weak signals from global markets.
Silver fell by Rs 150 to Rs 16,350 per kg.
Marketmen said reports that the precious metal tumbled in overseas market last evening pulled down its prices here.
Poor demand on ending of marriage season also impacted the sentiments, they added.
Gold in international markets fell after a report showed US employers eliminated jobs in November at the fastest pace in 34 years. A weak trend in crude oil prices was another dampening factor, they said.
In London, gold lost 14.79 dollars to 752.21 dollars an ounce after the US Labour Department said payrolls shrank by 533,000 workers last month.
Standard gold and ornaments plunged by Rs 215 each at Rs 12,360 and Rs 12,210 per 10 gram respectively. Sovereign, lost Rs 50 at Rs 10,400 per piece of eight gram.
Silver ready fell by Rs 150 to Rs 16,350 per kg and weekly-based delivery by Rs 160 to Rs 16,440 per kg. Silver coins, however, held steady at Rs 26,300 for buying and Rs 26,400 for selling of 100 coins.
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GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
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Saturday, December 6, 2008
Friday, December 5, 2008
Is It Time to Buy Gold?
Just a few months ago, the race was on for gold. In March, gold blew past $1,000 an ounce. Commentators were jumping over each other to make a more attention-getting prediction than anyone else was.
$1,500 an ounce…$2,000…$3,000 – they would say.
The gold bulls were getting very aggressive. Some even started adding a time element to their predictions (i.e. “gold will hit $1,500 an ounce within a year” – that really only happens when bullishness is at an extreme high). I’ve even saw a few - back of the envelope - calculations to justify $10,000 an ounce gold…or higher!
At the time, inflation was a top concern, Wall Street was turning to precious metals in a big way, and gold stocks were setting new highs for the decade.
It was euphoric. Even shares of Seabridge Gold (NYSE:SA) – which just owns a lot of property with gold in the ground – were being bid up every day. The company, which has no sales or revenue, was worth more than $1 billion.
With China’s inflation rate at 12%, Vietnam’s at 20%, Russia’s at 8%, and every other emerging economy facing rampant inflation, the future seemed very bright for gold and precious metals. Expectations of future riches in precious metals were growing stronger by the day. And many gold bugs were eagerly anticipating the big payday that some have been waiting on for 30 years. It was finally going to be “their time.”
Needless to say, it was a very exciting time to be a gold investor. Exciting investments, however, rarely turn out to be all that exciting in the end.
Here we are six months later. Gold price is down 20%, silver prices have been cut in half, and gold investors were met with the financial catastrophe they’ve been waiting for. Stock markets around the world went into freefall, banks failed, real estate values spiraled downward, consumers decided to start saving (all at the same time, practically)…a true financial crisis was at hand.
Gold, as a safe haven, would surely soar, right?
Well…it didn’t, and it probably won’t for a while. Here’s why:
Where, Oh Where, Has My Inflation Gone?
Gold has traditionally provided protection against inflation. I’m sure you’ve heard them all, including: gold is a store of value; gold has been a means of exchange for 3,000 years, etc. Gold has many attributes, which make it attractive.
Of course, detractors can make a decent case against gold. Warren Buffett probably summed the case against gold best when back in 1998 he said:
[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.
At the Prosperity Dispatch, we go as far to say gold is not an investment (it’s one of the most commonly misunderstood market myths). Gold is, however, an insurance policy against hyperinflation or economic catastrophe.
But with gold nearing $800 an ounce, is now the time to be buying gold?
Don’t Worry, Be Happy
The answer is yes and no. If you look at gold as an insurance policy and you don’t own any gold, then the answer is yes. However, if you already have gold, then the answer is a bit more complicated.
At its root, inflation is based on the amount of money supply. If there were more paper currencies floating around in the world chasing the same amount of stuff, then naturally things would get more expensive. That’s inflation. But right now, we’re in a period of deflation. Things are a lot cheaper than they were just a few months ago, and everything is getting a lot cheaper.
Just look at the prices for commodities. Zinc and nickel prices are off more than 75%. Copper, aluminum, and iron ore prices are down more than 50%. Fertilizer prices have practically fallen off a cliff. Oil, natural gas…you get the picture.
Deflation is not just in the markets though, you can see it all over in the real world. As we’ve been anticipating for a while, retailers are slashing the price on anything (You can view the original article on how bad the retail downturn will get here.), and they’re only going to keep slashing prices. From their perspective when cash flows are drying up and the bills are piling up, it’s far better to sell a sweater at a loss than have it unsold.
It’s not just prices at the mall though. Gasoline prices have fallen for 77 straight days. The automakers are sponsoring massive discounts (as big as 50% off in some places) just to get their bloated inventories trimmed down. Pretty soon you’ll see the impact of falling oil and energy prices in the form of lower electricity and heating bills.
If anyone who is concerned about inflation now, they simply shouldn’t be. As Jeremy Grantham noted a few weeks ago,
Don’t worry at all about inflation. We can all save up our worries there for a couple of years from now and then really worry!
Printing Presses on Hyperspeed
However, I know why many gold buyers are getting frustrated, as they are constantly barraged about how much new fiat currency is being created.
The Fed is printing dollars at an unprecedented rate, and if the economy doesn’t turn around in the next year or so, the U.S. central bank could be on the hook for trillions more. The only way it can pay for it is with more new dollars.
Therefore, it would make sense, on the surface, that inflation is imminent. Frankly, the risk of inflation down the road will be very real (remember, the Fed can reduce money supply as well). For now though, consumers are dealing with one of the greatest periods of paper wealth destruction of the past century.
Real estate prices have tumbled and still haven’t hit rock bottom. On top of that, the overall stock market has been cut in half. That means about $20 trillion in wealth has been eliminated.
Sure, that was all paper wealth and it was never real money that anyone could spend. But it sure had an impact on consumption. The average consumer who watched his house triple in value over the past few years certainly splurged on a few nice things. And the man whose portfolio just doubled certainly spent a few extra bucks on whatever he wanted when the market was setting new highs.
That’s why despite the trillions of new dollars being thrown into the economy, we’re still in a period of deflation. A lack of inflation will certainly put the brakes on any bull market in gold. That is, if we’re really still in a bull market for gold.
I’ve Never Seen a Bull Market Like This
This is what concerns me most right now about gold. There’s a good chance the bull market may be over. Gold is already down 25% from its March highs and a lot of investors are betting it’s just a correction. I’ve got to tell you, I’ve been through quite a few bull markets and I’ve never seen one like this.
A few months ago, gold shot up $70 an ounce in a day. It was gold’s biggest one-day move in history, but the rally was short-lived. Following the big move, gold prices dropped almost 30% before bottoming out just under $700 an ounce. After all those sharp ups and downs, no one was really surprised when gold would drop $40 in one day and then climb $30 the next, and vice versa.
This is what concerns me, because bull markets are usually much steadier. There’s some volatility, but ups and downs are usually pretty small.
The perfect example is the bull market in fertilizer stocks. For years, stocks like Potash Corp (POT) and Mosaic (MOS) would just steadily climb. Then over the summer, all of the fertilizer stocks doubled in price in about two months time. The bubble started to form and it looked like these stocks would go on forever.
Then in July, fertilizer stocks became precariously volatile. I was watching Mosaic closely (because I had a sizable short position on it), and remember it dropped 20%, rebounded quickly, dropped sharply, and rebounded again, all in a few weeks time. The bull market in fertilizer stock was showing it wasn’t bulletproof after all.
Whether gold goes up or down will depend on many factors. However, with gold at $770 an ounce and as volatile as ever, it’s definitely not a “sure thing” from here.
Investing and trading is in essence a game of risk and reward -.buy low/sell high. The risks of gold falling further are very real. Deflation is the top concern and the price of everything is falling, and gold is not immune.
To win big safely, you have to buy low. Buying low reduces your downside and increases your upside. It’s the only way to get the risk/reward potential in your favor (step one to making a successful investment).
With that in mind, when asked, “Should I be buying gold right now?” The answer, for most of us, is no. Gold, at $770 an ounce, is at a midpoint, and if you’re looking to buy gold, chances are you’ll be able to pick it up a good bit cheaper than you can today.
----------------------------------------------------------------------------------------------
GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
----------------------------------------------------------------------------------------------
$1,500 an ounce…$2,000…$3,000 – they would say.
The gold bulls were getting very aggressive. Some even started adding a time element to their predictions (i.e. “gold will hit $1,500 an ounce within a year” – that really only happens when bullishness is at an extreme high). I’ve even saw a few - back of the envelope - calculations to justify $10,000 an ounce gold…or higher!
At the time, inflation was a top concern, Wall Street was turning to precious metals in a big way, and gold stocks were setting new highs for the decade.
It was euphoric. Even shares of Seabridge Gold (NYSE:SA) – which just owns a lot of property with gold in the ground – were being bid up every day. The company, which has no sales or revenue, was worth more than $1 billion.
With China’s inflation rate at 12%, Vietnam’s at 20%, Russia’s at 8%, and every other emerging economy facing rampant inflation, the future seemed very bright for gold and precious metals. Expectations of future riches in precious metals were growing stronger by the day. And many gold bugs were eagerly anticipating the big payday that some have been waiting on for 30 years. It was finally going to be “their time.”
Needless to say, it was a very exciting time to be a gold investor. Exciting investments, however, rarely turn out to be all that exciting in the end.
Here we are six months later. Gold price is down 20%, silver prices have been cut in half, and gold investors were met with the financial catastrophe they’ve been waiting for. Stock markets around the world went into freefall, banks failed, real estate values spiraled downward, consumers decided to start saving (all at the same time, practically)…a true financial crisis was at hand.
Gold, as a safe haven, would surely soar, right?
Well…it didn’t, and it probably won’t for a while. Here’s why:
Where, Oh Where, Has My Inflation Gone?
Gold has traditionally provided protection against inflation. I’m sure you’ve heard them all, including: gold is a store of value; gold has been a means of exchange for 3,000 years, etc. Gold has many attributes, which make it attractive.
Of course, detractors can make a decent case against gold. Warren Buffett probably summed the case against gold best when back in 1998 he said:
[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.
At the Prosperity Dispatch, we go as far to say gold is not an investment (it’s one of the most commonly misunderstood market myths). Gold is, however, an insurance policy against hyperinflation or economic catastrophe.
But with gold nearing $800 an ounce, is now the time to be buying gold?
Don’t Worry, Be Happy
The answer is yes and no. If you look at gold as an insurance policy and you don’t own any gold, then the answer is yes. However, if you already have gold, then the answer is a bit more complicated.
At its root, inflation is based on the amount of money supply. If there were more paper currencies floating around in the world chasing the same amount of stuff, then naturally things would get more expensive. That’s inflation. But right now, we’re in a period of deflation. Things are a lot cheaper than they were just a few months ago, and everything is getting a lot cheaper.
Just look at the prices for commodities. Zinc and nickel prices are off more than 75%. Copper, aluminum, and iron ore prices are down more than 50%. Fertilizer prices have practically fallen off a cliff. Oil, natural gas…you get the picture.
Deflation is not just in the markets though, you can see it all over in the real world. As we’ve been anticipating for a while, retailers are slashing the price on anything (You can view the original article on how bad the retail downturn will get here.), and they’re only going to keep slashing prices. From their perspective when cash flows are drying up and the bills are piling up, it’s far better to sell a sweater at a loss than have it unsold.
It’s not just prices at the mall though. Gasoline prices have fallen for 77 straight days. The automakers are sponsoring massive discounts (as big as 50% off in some places) just to get their bloated inventories trimmed down. Pretty soon you’ll see the impact of falling oil and energy prices in the form of lower electricity and heating bills.
If anyone who is concerned about inflation now, they simply shouldn’t be. As Jeremy Grantham noted a few weeks ago,
Don’t worry at all about inflation. We can all save up our worries there for a couple of years from now and then really worry!
Printing Presses on Hyperspeed
However, I know why many gold buyers are getting frustrated, as they are constantly barraged about how much new fiat currency is being created.
The Fed is printing dollars at an unprecedented rate, and if the economy doesn’t turn around in the next year or so, the U.S. central bank could be on the hook for trillions more. The only way it can pay for it is with more new dollars.
Therefore, it would make sense, on the surface, that inflation is imminent. Frankly, the risk of inflation down the road will be very real (remember, the Fed can reduce money supply as well). For now though, consumers are dealing with one of the greatest periods of paper wealth destruction of the past century.
Real estate prices have tumbled and still haven’t hit rock bottom. On top of that, the overall stock market has been cut in half. That means about $20 trillion in wealth has been eliminated.
Sure, that was all paper wealth and it was never real money that anyone could spend. But it sure had an impact on consumption. The average consumer who watched his house triple in value over the past few years certainly splurged on a few nice things. And the man whose portfolio just doubled certainly spent a few extra bucks on whatever he wanted when the market was setting new highs.
That’s why despite the trillions of new dollars being thrown into the economy, we’re still in a period of deflation. A lack of inflation will certainly put the brakes on any bull market in gold. That is, if we’re really still in a bull market for gold.
I’ve Never Seen a Bull Market Like This
This is what concerns me most right now about gold. There’s a good chance the bull market may be over. Gold is already down 25% from its March highs and a lot of investors are betting it’s just a correction. I’ve got to tell you, I’ve been through quite a few bull markets and I’ve never seen one like this.
A few months ago, gold shot up $70 an ounce in a day. It was gold’s biggest one-day move in history, but the rally was short-lived. Following the big move, gold prices dropped almost 30% before bottoming out just under $700 an ounce. After all those sharp ups and downs, no one was really surprised when gold would drop $40 in one day and then climb $30 the next, and vice versa.
This is what concerns me, because bull markets are usually much steadier. There’s some volatility, but ups and downs are usually pretty small.
The perfect example is the bull market in fertilizer stocks. For years, stocks like Potash Corp (POT) and Mosaic (MOS) would just steadily climb. Then over the summer, all of the fertilizer stocks doubled in price in about two months time. The bubble started to form and it looked like these stocks would go on forever.
Then in July, fertilizer stocks became precariously volatile. I was watching Mosaic closely (because I had a sizable short position on it), and remember it dropped 20%, rebounded quickly, dropped sharply, and rebounded again, all in a few weeks time. The bull market in fertilizer stock was showing it wasn’t bulletproof after all.
Whether gold goes up or down will depend on many factors. However, with gold at $770 an ounce and as volatile as ever, it’s definitely not a “sure thing” from here.
Investing and trading is in essence a game of risk and reward -.buy low/sell high. The risks of gold falling further are very real. Deflation is the top concern and the price of everything is falling, and gold is not immune.
To win big safely, you have to buy low. Buying low reduces your downside and increases your upside. It’s the only way to get the risk/reward potential in your favor (step one to making a successful investment).
With that in mind, when asked, “Should I be buying gold right now?” The answer, for most of us, is no. Gold, at $770 an ounce, is at a midpoint, and if you’re looking to buy gold, chances are you’ll be able to pick it up a good bit cheaper than you can today.
----------------------------------------------------------------------------------------------
GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
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Scary Proposition for AngloGold Ashanti
AngloGold Ashanti (AU) is a South African Gold mining company that should frighten off sensible investors. The company is leveraged just too high with a precarious $1.3 billion of long term debt, and marginal cash holdings of only $400 million. AU's debt load is excessive when compared to its peers, such as Gold Corp's (GG) minimal debt of a mere $10 million. Its liquidity position is less than stellar, and in these volatile economic times, poor liquidity is akin to having one foot on a banana peel and the other on a wet floor.
The shares are overbought: Gold's recent 14% rise from last month's lows has given the shares a jolt. The stock has rallied more than 60%, despite the fact gold has already retraced about one half of its recent gains. The shares have simply gone up too much in too short of a time frame and are due for a heavy dose of profit taking. This ultimate selling pressure should correct the stock back down to a more reasonable $15 to $17 area.
Fundamentals are weak: The company's cost of production shot up dramatically on a sequential basis. It cost the gold producer approximately $434 to mine an ounce of gold in its second quarter, and by its third quarter, AU experienced a 12% increase, to a hefty $486 per ounce. The company is expected to produce 1.25 million ounces of gold in its fourth quarter versus 1.27 million ounces reported in its third quarter. The bottom line is: AU's costs are going up as its production goes down, not a good combination for enhancing profits.
Other produced minerals: The company also produces uranium, copper, sulphur and silver. These minerals are mainly utilized in manufacturing processes, and with a world wide recession in full force, most of these metals have all seen dramatic price collapses due to poor demand. This does not bode well for AU's bottom line.
Recommendation: Take advantage of this overbought situation by exploiting its downside potential. Open a short position with a $23 "buy stop" market order put in place to limit your downside risk. The shares should be covered in the $15-17 area for a juicy profit.
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GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
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The shares are overbought: Gold's recent 14% rise from last month's lows has given the shares a jolt. The stock has rallied more than 60%, despite the fact gold has already retraced about one half of its recent gains. The shares have simply gone up too much in too short of a time frame and are due for a heavy dose of profit taking. This ultimate selling pressure should correct the stock back down to a more reasonable $15 to $17 area.
Fundamentals are weak: The company's cost of production shot up dramatically on a sequential basis. It cost the gold producer approximately $434 to mine an ounce of gold in its second quarter, and by its third quarter, AU experienced a 12% increase, to a hefty $486 per ounce. The company is expected to produce 1.25 million ounces of gold in its fourth quarter versus 1.27 million ounces reported in its third quarter. The bottom line is: AU's costs are going up as its production goes down, not a good combination for enhancing profits.
Other produced minerals: The company also produces uranium, copper, sulphur and silver. These minerals are mainly utilized in manufacturing processes, and with a world wide recession in full force, most of these metals have all seen dramatic price collapses due to poor demand. This does not bode well for AU's bottom line.
Recommendation: Take advantage of this overbought situation by exploiting its downside potential. Open a short position with a $23 "buy stop" market order put in place to limit your downside risk. The shares should be covered in the $15-17 area for a juicy profit.
----------------------------------------------------------------------------------------------
GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
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Gold and Silver Prices Will Begin to Shine
Although it's not a great consolation, if you've seen your investment accounts implode and your net worth wilt like a rosebud in a desert sun, you can be comforted by the fact that you are not the only one.
Even the great Warren Buffett has seen his "mother lode", Berkshire Hathaway (BRK.A) decline from a 52-week high of $151,650 down to $74,100 a share. It has "recovered" to a recent price of $94,000, still 38% off its high.
Dorothy Kosich, covering the Northwest Mining Association conference on Wednesday in Reno, Nevada, filed the following report with comments from one of the top executives in that industry.
His words reflect the magnitude of the meltdown we have all experienced.
"Never has there been so much money lost in such a short period of time," Franco Nevada (Toronto: FNV.TO) President and CEO David Harquail told an audience at the Northwest Mining Association conference Wednesday.
Nevertheless, Harquail declared," We're expecting gold to go into the thousands" as a monetary expansion generates the "next gold bull market."
The former president of Newmont Capital, Harquail advised that when gold gets re-inflated, expect other commodities to follow.
In his luncheon address to the Northwest Mining Association conference in Reno, Harquail admitted witnessing shock and fear last month in London among the fund managers who had heavily invested in precious metals mining. At the time mining shares were down an average of 72%, major mining companies had been placed on Credit Watch, and mining M&A bids were collapsing.
Molybdenum alone had dropped from $31 to $11 in only two weeks.
Ironically, the earlier timing of when the global economic crisis hit the mining sector and other resource industries could eventually reap some benefit for mining, Harquail suggested. In the meantime, since mining companies could not borrow as heavily as other industries, it may also help the sector's recovery.
Harquail says major mining companies, junior companies and gold are looking better. But, mining exploration may pay the price for the industry's past six months of freefall. [Thursday, companies like Newmont Mining (NEM) and Yamana Gold (AUY) were experiencing a mainly positive day.]
Mining companies with sufficient cash reserves would now rather buy other companies rather than continue to explore or develop new mines. Some are taking advantage of their low share prices to use their cash to buy back their own shares.
And, Harquail noted, some miners are choosing to go private.
Harquail explained that companies without dollars are now operating in survival mode or are actually facing extinction. He referenced examples of as many as six smaller companies considering mergers into a single company.
As a result, Harquail is fearful "that a lot of companies will get out of the exploration business."
Meanwhile, he noted a number of mining and exploration companies won't be able to raise financing for another 18 months.
Nevertheless, Harquail sees a good long-term outlook for a mining industry which has grown accustomed to planning to weather mining's cycles.
Mining's improved stewardship practices have enhanced the reputation of the industry as an investment destination, he said.
Companies also have learned to be able to build cash and diversify. [keep an eye on bell-wether companies like Barrick Gold (ABX) and Goldcorp (GG), as well as Anglogold Ashanti (AU) to see how the most successful companies raise capital, pay off debt, build cash and diversify their operations].
Have you seen the one-year chart of the Market Vectors Goldminers ETF (GDX)? If you are a technical chartist it does appear to have put in a double bottom
However, Harquail is not happy with a U.S. system that has "let a form of casino capitalism" take the domestic mining industry hostage, especially through hedge fund investment. He also joked that the gold mining sector is "overdue for a 15-30 million ounces discovery."
This author isn't convinced that the gold and silver mining industry stock correction is finished yet. However, when we see royalty trusts and "middle men" like Royal Gold (RGLD) and Silver Wheaton (SLW) are trading at prices at the opposite ends of their respective 52-week ranges, one realizes that there is a great deal of confusion and uncertainty over the short term prospects.
I for one will be patient, and hope to pick up more shares of the "best-of-breed" companies whenever they test their recent lows. Without a crystal ball or compelling evidence, it seems foolish to bet too much on a short-term rally with all the current signs of temporary deflation (did you see oil tumble below $43 Thursday?).
It seems prudent to keep enough cash on the sidelines to buy the inevitable dips. Yet I haven't forgotten how far these stocks have fallen already, and that this is the season where gold and silver prices begin to shine.
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GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
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Gold Demand May Spoil the Party for New Double Eagle
For much of the year, the United States Mint has been touting the upcoming recreation of what it has called the “nation’s most beautiful coin.” Augustus Saint Gaudens’ design for the Ultra High Relief Gold Double Eagle will be recreated as a one ounce 24 karat gold coin available for sale to the public.
The Mint’s intention to recreate the coin was first announced this March, followed by an official unveiling in July, and a well publicized first striking in November. The US Mint intends to strike the coins throughout 2009 in quantities necessary to meet public demand. So far, coin collectors have responded enthusiastically to the upcoming offering. With the recent mainstream attention on gold, there will likely be interest from the broader public as well. Is the United States Mint prepared to handle the potentially significant demand for the new gold coin?
This year the US Mint, as well as most other world mints, have had continuous problems procuring sufficient gold blanks to meet the incredible demand for bullion coins. The US Mint in particular has been forced to suspend sales of some gold bullion offerings and continues to distribute coins though an allocation program since they are unable to meet the full demand.
Next year the US Mint will be at odds with itself as it struggles to meet growing demand for their regular bullion coins and new demand for a potentially hot collectible coin.
To estimate how much demand the new coin might generate, we can look at the US Mint’s 2006 release of the 24 karat American Buffalo Gold coin. Similar to next year’s offering, the coin design was taken from an old collector favorite, in this case the Buffalo Nickel. The coins were offered as one ounce bullion coins and one ounce collector proof coins. Sales of the coins began in late June 2006. In just over six months, the US Mint sold approximately 337,000 bullion coins and 252,000 proof coins for a total of 589,000 ounces worth of gold. Sales of the regular 2006 American Gold Eagle bullion coins totaled only 261,000 ounces.
Even if only the collectible versions of coins are considered, this represents a 50% increase in demand for gold coins. Since the US Mint has been unable to meet the full demand for regular gold bullion coins this year, the prospects that it can handle the additional demand for a popular collectible gold coin on top of already robust gold bullion coin demand seem remote.
Another aspect to consider is that the Ultra High Relief Gold Double Eagles are struck on specialized blanks. The coin will have a thickness of 4 millimeters, which is more than 50% thicker than most one ounce gold bullion coins. So far the US Mint has been procuring these specialized blanks from Gold Corp. (GG), a wholly owned subsidiary of the Western Australian Government, who operate the competing Perth Mint. Notably, the Perth Mint recently announced that it would be forced to cease taking orders for precious metals until January 2009 due to “unprecedented demand.” So, not only will the US Mint need to procure a large amount highly specialized blanks from an already tight market, it will need to procure them from a competitor struggling to meet its own demand.
Taken together, these factors do not bode well for a smooth release of this “recreated materpiece.” I envision a frustrating series back orders, delays, and eventual order limitations for the new coin. The US Mint intended the Ultra High Relief Gold Coin to be “a prestigous example of the highest level of artistic excellence in American coin design.” Instead it might just end up with another gold related headache.
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GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
------------------------------------------------------------------------------------------------------------------
The Mint’s intention to recreate the coin was first announced this March, followed by an official unveiling in July, and a well publicized first striking in November. The US Mint intends to strike the coins throughout 2009 in quantities necessary to meet public demand. So far, coin collectors have responded enthusiastically to the upcoming offering. With the recent mainstream attention on gold, there will likely be interest from the broader public as well. Is the United States Mint prepared to handle the potentially significant demand for the new gold coin?
This year the US Mint, as well as most other world mints, have had continuous problems procuring sufficient gold blanks to meet the incredible demand for bullion coins. The US Mint in particular has been forced to suspend sales of some gold bullion offerings and continues to distribute coins though an allocation program since they are unable to meet the full demand.
Next year the US Mint will be at odds with itself as it struggles to meet growing demand for their regular bullion coins and new demand for a potentially hot collectible coin.
To estimate how much demand the new coin might generate, we can look at the US Mint’s 2006 release of the 24 karat American Buffalo Gold coin. Similar to next year’s offering, the coin design was taken from an old collector favorite, in this case the Buffalo Nickel. The coins were offered as one ounce bullion coins and one ounce collector proof coins. Sales of the coins began in late June 2006. In just over six months, the US Mint sold approximately 337,000 bullion coins and 252,000 proof coins for a total of 589,000 ounces worth of gold. Sales of the regular 2006 American Gold Eagle bullion coins totaled only 261,000 ounces.
Even if only the collectible versions of coins are considered, this represents a 50% increase in demand for gold coins. Since the US Mint has been unable to meet the full demand for regular gold bullion coins this year, the prospects that it can handle the additional demand for a popular collectible gold coin on top of already robust gold bullion coin demand seem remote.
Another aspect to consider is that the Ultra High Relief Gold Double Eagles are struck on specialized blanks. The coin will have a thickness of 4 millimeters, which is more than 50% thicker than most one ounce gold bullion coins. So far the US Mint has been procuring these specialized blanks from Gold Corp. (GG), a wholly owned subsidiary of the Western Australian Government, who operate the competing Perth Mint. Notably, the Perth Mint recently announced that it would be forced to cease taking orders for precious metals until January 2009 due to “unprecedented demand.” So, not only will the US Mint need to procure a large amount highly specialized blanks from an already tight market, it will need to procure them from a competitor struggling to meet its own demand.
Taken together, these factors do not bode well for a smooth release of this “recreated materpiece.” I envision a frustrating series back orders, delays, and eventual order limitations for the new coin. The US Mint intended the Ultra High Relief Gold Coin to be “a prestigous example of the highest level of artistic excellence in American coin design.” Instead it might just end up with another gold related headache.
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Thursday, December 4, 2008
Peter Schiff on Gold, the Dollar and Asian Markets
Mike Norman, HardAssetsInvestor.com (Norman): Hello everybody, and welcome back for another installment of HardAssetsInvestor.com’s interview series. I’m Mike Norman, your host. Well, he’s back. Mr. Doom and Gloom is here … Peter Schiff, president of Euro Pacific Capital and author of the new book just out, “Bull Moves in Bear Markets.”
Peter Schiff, president of Euro Pacific Capital (Schiff): “The Little Book ...”
Norman: “The Little Book …”; it’s in The Little Book Series. Well look … the last time you were here, things were kind of going your way, but it looks like things have turned upside down.All kidding aside, I know your big thing over the last seven or eight years has been gold. We’re very supportive of gold on this show; we think that probably people should have some gold as part of their overall portfolio mix. But let’s just look at what happened.
Several weeks ago, the U.S. stock market had its worst week in history … even going back to the 1930s … worst week in history. I saw a breakdown of various assets – all assets really – stocks, bonds, gold, commodities, oil. Gold was at the bottom of the list. The top-performing asset, and something that you hate, was the U.S dollar.
So how do you explain that? If we are going through the worst economic and financial crisis in history – precisely what gold is supposed to protect against – why would it perform so bad?
Schiff: Well, I think it will perform very well; you got to give it a little bit more time.
Norman: More time or more decimation?
Schiff: No, what’s happening right now, Mike, is just de-leveraging, and so gold is going down for the same reason a lot of stocks are going down, a lot of commodities are going down. There’s a lot of leverage in this system, there’s a lot of margin calls, a lot of liquidation; a lot of people are having to sell whatever they own to pay off their debts.
Norman: But look at where the money is going … the money is going into U.S. sovereigns, Treasuries … it’s going into the U.S. dollar.
Schiff: For now.
Norman: Why for now?
Schiff: Right now there’s some perception of safety there, but it’s the opposite of the leveraging. If you’re selling your assets, you’re accumulating dollars; but ultimately right now, it’s like there’s been this gigantic nuclear explosion in the United States, and everybody is running toward the blast. Pretty soon they’re going to figure out they’re going in the wrong direction.
Norman: You always talk about gold as a currency, and we have seen currencies appreciate – the yen, for example, the dollar tremendously, for example, but gold has not held up.
Schiff: Well, if you actually look at gold versus other currencies, in the last couple of weeks gold has made new record highs in terms of the South African rand, the Canadian and Australian dollars … so gold was not doing as poorly as many of the currencies, and I think this is all short term.
I think you’re going to see a lot of money moving into gold, and if you look at how much gold has gone down from the peak, the peak was about a thousand … it’s off about 25%. Stocks are off 40%. Gold is still up during this year against the Dow. Norman: Let’s see the performance from this point forward; we’ll look back at this again and we’ll revisit this issue.
Let’s talk about something else, something that you have also … and I just mentioned it … the U.S. dollar. You were very, very negative. In the last month, we have seen unprecedented actions by the U.S. Fed in terms of expansion of the monetary basis; in other words, printing money … what you call printing money … and despite that, the dollar has remained incredibly strong.
How do you explain that according to your logic?
Schiff: Everything the government is doing is inherently negative for the dollar, and all of this…
Norman: It’s not playing out that way.
Schiff: It will; you’ve got to give it time.I remember when I was on television talking about the subprime and people were telling me it’s no big deal, and I said, just wait a while; give it time.
Look, everything that we’re doing – all the bailouts, all the stimulus packages – this is all being financed by inflation. It’s inherently terrible for the dollar.Norman: But you just said yourself that everything is deflating.Schiff: But right now, Mike, you’re getting this de-leveraging, and this is benefitting the dollar, so despite the horrific fundamentals for the dollar, it’s going up anyway.
But ultimately, when this phony rally runs out of steam, the dollar is going to collapse, and that’s when we’re going to have a much greater crisis because now you’re going to have a collapsing dollar, which is going to push long-term interest rates up, commodity prices up.
Norman: I still don’t understand why the dollar is going to collapse. So you’re saying that the Fed is just going to allow … or leave this enormous amount of liquidity in there, that at some point down the road, if we recover, they’re not going Scto take it out?
Schiff: Look, they have no control over it. The Fed is trying to artificially reflate our phony economy, right?
We had this economy that was based on Americans borrowing money and then spending it on products. We have this huge debt finance bubble which is collapsing, and it’s being supported by foreigners.
But when this artificial demand for Treasuries goes away, the Fed is going to try to print a lot of money and the dollar is going to get killed.Norman:I know you've been of this point of view that … just let everything go down, and somehow that's beneficial.
Schiff: It's called capitalismNorman: No, it's not called capitalism. Capitalism has a political structure over it; there are laws, there are regulations.
Schiff: It's all that regulation, all that interference that's the source of our problems. It's the government that interfered with the market; that's why we had a housing bubble, that's why we have this phony economy ― because politicians meddle in the market, and they tried to direct capital in politically favored ways. That's what causes these problems.
Norman: Some people say, basically, Wall Street was given the keys and the government walked away, that it was a totally unregulated environment, and the cutting of regulations to the bone is what precipitated the whole bubble.
Schiff: They gave Wall Street the keys. But the problem is Alan Greenspan, the Fed ― they supplied the alcohol, Wall Street got drunk. It's the government that is responsible, it's the government that supplied the alcohol. If we had sound money and if we didn't have Freddie and Fannie …
Norman: We're going to get to the gold standard in a second, but I have to disagree with you on this, and this is just a fact. The one thing the Fed has control over is the monetary base, and if you look at the last six years ― which, by the way, includes the period when Alan Greenspan was in there supposedly creating all this money ― the monetary base shrunk. In fact, it got down to almost zero growth. We have never seen that, with the exception being periods of recession, but they've [the Fed] been very, very tight.
Schiff: It was showing up in other places. Look at the asset bubbles that they blew up, look how low interest rates were. Maybe they should have been looking at M3 [money supply statistics], but I guess that was growing so much they stopped covering it.
Norman: All right. You say that we'd be better off on a gold standard. I've heard you say that, but yet the trade-off with a gold standard, while yes you can maintain stable prices, the cost is less money. Gold standards are inherently deflationary. How can you not…? Even extreme economists [don't] buy into this idea now.
Schiff: Look, we were on a gold standard until 1971, right? We didn't leave it until then. What gold does …
Norman: FDR made it illegal for Americans to own gold in 1933.
Schiff: But international trade … the dollar was redeemable in gold up until 1971 … so all the currencies were backed by the dollar, which was convertible into gold. What gold does is it puts discipline on central bankers and governments: they can't simply spend money that they don't have, they can't run deficits, so it keeps a limit on the size of government.
Norman: The total value of gold ever mined since the beginning of time is $4.3 trillion. The global economy is $60 trillion. Are you suggesting that we should cut the global economy by what, $56 trillion?
Schiff: Mike, prices adjust downward to reflect the supply of gold; that's fine, and we want prices to fall. As consumer prices fall, that's how standards of living grow. You want money to be scarce. The problem is now it's abundant; there's an infinite amount of it.
Norman: If scarce money creates a deflation, a depression, a collapse of business profits, a collapse in employment, how could you argue that that's a better system?
Schiff: No, Mike, it doesn't do all that; it keeps monetary discipline and it allows a free market to function better when you have sound money. It keeps a better supply of savings and debt, and it allows for economies to grow. Because real wealth is not a function of money creation, it's a function of savings and productivity and capital investment, but you get more of that when you have sound money.
Norman: Well, economics savings equal investment, it's an identity, so if you invest it reduces savings. You save in a forced way; there's that old thing called the paradox of thrift.
Schiff: It isn't a paradox, that's a Keynesian myth.
Norman: Well, he knew what he was talking about. OK, look, let's quickly talk about what's in your book, "Bull Moves in Bear Markets." It's certainly been a bear market; what are the bull moves?
Schiff: Well, they haven't materialized yet but they're going to. I think the bull moves are commodities; I think we're still in a bull market in commodities, particularly precious metals, but I think you buy in to this dip.
Norman: Now, I kind of agree with you, because we've had such a tremendous … and I'm a contrarian, so …
Schiff: I also like … a big part of my book is to play the Asian theme … to play the growth of the Asian consumer, the death of the American consumer.
Norman: Even with the dollar going up, doesn't that restore purchasing power to the U.S. now?
Schiff: For now, but it's going to go away. We're buying a lot of dividend-paying stocks around the world, particularly in Asia. A lot of the stocks are now trading at very low PEs, double-digit dividend yields.
Norman: There you have it. Sorry, Peter; ran out of time. There you have it, folks. We're going to have Peter back; he's always a great guest.
------------------------------------------------------------------------------------------------------------------
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------------------------------------------------------------------------------------------------------------------
Peter Schiff, president of Euro Pacific Capital (Schiff): “The Little Book ...”
Norman: “The Little Book …”; it’s in The Little Book Series. Well look … the last time you were here, things were kind of going your way, but it looks like things have turned upside down.All kidding aside, I know your big thing over the last seven or eight years has been gold. We’re very supportive of gold on this show; we think that probably people should have some gold as part of their overall portfolio mix. But let’s just look at what happened.
Several weeks ago, the U.S. stock market had its worst week in history … even going back to the 1930s … worst week in history. I saw a breakdown of various assets – all assets really – stocks, bonds, gold, commodities, oil. Gold was at the bottom of the list. The top-performing asset, and something that you hate, was the U.S dollar.
So how do you explain that? If we are going through the worst economic and financial crisis in history – precisely what gold is supposed to protect against – why would it perform so bad?
Schiff: Well, I think it will perform very well; you got to give it a little bit more time.
Norman: More time or more decimation?
Schiff: No, what’s happening right now, Mike, is just de-leveraging, and so gold is going down for the same reason a lot of stocks are going down, a lot of commodities are going down. There’s a lot of leverage in this system, there’s a lot of margin calls, a lot of liquidation; a lot of people are having to sell whatever they own to pay off their debts.
Norman: But look at where the money is going … the money is going into U.S. sovereigns, Treasuries … it’s going into the U.S. dollar.
Schiff: For now.
Norman: Why for now?
Schiff: Right now there’s some perception of safety there, but it’s the opposite of the leveraging. If you’re selling your assets, you’re accumulating dollars; but ultimately right now, it’s like there’s been this gigantic nuclear explosion in the United States, and everybody is running toward the blast. Pretty soon they’re going to figure out they’re going in the wrong direction.
Norman: You always talk about gold as a currency, and we have seen currencies appreciate – the yen, for example, the dollar tremendously, for example, but gold has not held up.
Schiff: Well, if you actually look at gold versus other currencies, in the last couple of weeks gold has made new record highs in terms of the South African rand, the Canadian and Australian dollars … so gold was not doing as poorly as many of the currencies, and I think this is all short term.
I think you’re going to see a lot of money moving into gold, and if you look at how much gold has gone down from the peak, the peak was about a thousand … it’s off about 25%. Stocks are off 40%. Gold is still up during this year against the Dow. Norman: Let’s see the performance from this point forward; we’ll look back at this again and we’ll revisit this issue.
Let’s talk about something else, something that you have also … and I just mentioned it … the U.S. dollar. You were very, very negative. In the last month, we have seen unprecedented actions by the U.S. Fed in terms of expansion of the monetary basis; in other words, printing money … what you call printing money … and despite that, the dollar has remained incredibly strong.
How do you explain that according to your logic?
Schiff: Everything the government is doing is inherently negative for the dollar, and all of this…
Norman: It’s not playing out that way.
Schiff: It will; you’ve got to give it time.I remember when I was on television talking about the subprime and people were telling me it’s no big deal, and I said, just wait a while; give it time.
Look, everything that we’re doing – all the bailouts, all the stimulus packages – this is all being financed by inflation. It’s inherently terrible for the dollar.Norman: But you just said yourself that everything is deflating.Schiff: But right now, Mike, you’re getting this de-leveraging, and this is benefitting the dollar, so despite the horrific fundamentals for the dollar, it’s going up anyway.
But ultimately, when this phony rally runs out of steam, the dollar is going to collapse, and that’s when we’re going to have a much greater crisis because now you’re going to have a collapsing dollar, which is going to push long-term interest rates up, commodity prices up.
Norman: I still don’t understand why the dollar is going to collapse. So you’re saying that the Fed is just going to allow … or leave this enormous amount of liquidity in there, that at some point down the road, if we recover, they’re not going Scto take it out?
Schiff: Look, they have no control over it. The Fed is trying to artificially reflate our phony economy, right?
We had this economy that was based on Americans borrowing money and then spending it on products. We have this huge debt finance bubble which is collapsing, and it’s being supported by foreigners.
But when this artificial demand for Treasuries goes away, the Fed is going to try to print a lot of money and the dollar is going to get killed.Norman:I know you've been of this point of view that … just let everything go down, and somehow that's beneficial.
Schiff: It's called capitalismNorman: No, it's not called capitalism. Capitalism has a political structure over it; there are laws, there are regulations.
Schiff: It's all that regulation, all that interference that's the source of our problems. It's the government that interfered with the market; that's why we had a housing bubble, that's why we have this phony economy ― because politicians meddle in the market, and they tried to direct capital in politically favored ways. That's what causes these problems.
Norman: Some people say, basically, Wall Street was given the keys and the government walked away, that it was a totally unregulated environment, and the cutting of regulations to the bone is what precipitated the whole bubble.
Schiff: They gave Wall Street the keys. But the problem is Alan Greenspan, the Fed ― they supplied the alcohol, Wall Street got drunk. It's the government that is responsible, it's the government that supplied the alcohol. If we had sound money and if we didn't have Freddie and Fannie …
Norman: We're going to get to the gold standard in a second, but I have to disagree with you on this, and this is just a fact. The one thing the Fed has control over is the monetary base, and if you look at the last six years ― which, by the way, includes the period when Alan Greenspan was in there supposedly creating all this money ― the monetary base shrunk. In fact, it got down to almost zero growth. We have never seen that, with the exception being periods of recession, but they've [the Fed] been very, very tight.
Schiff: It was showing up in other places. Look at the asset bubbles that they blew up, look how low interest rates were. Maybe they should have been looking at M3 [money supply statistics], but I guess that was growing so much they stopped covering it.
Norman: All right. You say that we'd be better off on a gold standard. I've heard you say that, but yet the trade-off with a gold standard, while yes you can maintain stable prices, the cost is less money. Gold standards are inherently deflationary. How can you not…? Even extreme economists [don't] buy into this idea now.
Schiff: Look, we were on a gold standard until 1971, right? We didn't leave it until then. What gold does …
Norman: FDR made it illegal for Americans to own gold in 1933.
Schiff: But international trade … the dollar was redeemable in gold up until 1971 … so all the currencies were backed by the dollar, which was convertible into gold. What gold does is it puts discipline on central bankers and governments: they can't simply spend money that they don't have, they can't run deficits, so it keeps a limit on the size of government.
Norman: The total value of gold ever mined since the beginning of time is $4.3 trillion. The global economy is $60 trillion. Are you suggesting that we should cut the global economy by what, $56 trillion?
Schiff: Mike, prices adjust downward to reflect the supply of gold; that's fine, and we want prices to fall. As consumer prices fall, that's how standards of living grow. You want money to be scarce. The problem is now it's abundant; there's an infinite amount of it.
Norman: If scarce money creates a deflation, a depression, a collapse of business profits, a collapse in employment, how could you argue that that's a better system?
Schiff: No, Mike, it doesn't do all that; it keeps monetary discipline and it allows a free market to function better when you have sound money. It keeps a better supply of savings and debt, and it allows for economies to grow. Because real wealth is not a function of money creation, it's a function of savings and productivity and capital investment, but you get more of that when you have sound money.
Norman: Well, economics savings equal investment, it's an identity, so if you invest it reduces savings. You save in a forced way; there's that old thing called the paradox of thrift.
Schiff: It isn't a paradox, that's a Keynesian myth.
Norman: Well, he knew what he was talking about. OK, look, let's quickly talk about what's in your book, "Bull Moves in Bear Markets." It's certainly been a bear market; what are the bull moves?
Schiff: Well, they haven't materialized yet but they're going to. I think the bull moves are commodities; I think we're still in a bull market in commodities, particularly precious metals, but I think you buy in to this dip.
Norman: Now, I kind of agree with you, because we've had such a tremendous … and I'm a contrarian, so …
Schiff: I also like … a big part of my book is to play the Asian theme … to play the growth of the Asian consumer, the death of the American consumer.
Norman: Even with the dollar going up, doesn't that restore purchasing power to the U.S. now?
Schiff: For now, but it's going to go away. We're buying a lot of dividend-paying stocks around the world, particularly in Asia. A lot of the stocks are now trading at very low PEs, double-digit dividend yields.
Norman: There you have it. Sorry, Peter; ran out of time. There you have it, folks. We're going to have Peter back; he's always a great guest.
------------------------------------------------------------------------------------------------------------------
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------------------------------------------------------------------------------------------------------------------
Gold Index Rallies for 65% Gain
Here’s a chart of an index of stocks which recently rallied more than 65%. Can you guess which one it is?
For the answer keep reading…
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For the answer keep reading…
Here is what I wrote, a few weeks ago, when I taunted the gold bugs, asking “Where is your golden idol now?”
Gold Bugs Index (HUI) has strong support at 175, which would mean the k-ratio to the low 0.20’s and once again, it could set up as a buying opportunity.
That turned out to be a pretty good call, all in all. To be honest though, I didn’t expect such a bombastic rally. Just that the relentless selling would be met with some meaningful support.
By the way, am I being too harsh on the gold bugs? You know, those who believe gold will go to a bajillion dollars and we’ll have to use it for legal tender in some post-apocalyptic “Mad Max” scenario. After all, if gold tops out and craters with the rest of commodities, in the face of one of the most ruthless bear markets and more importantly, in the face of perhaps the harshest global credit and financial crisis we’ve ever faced, when exactly will it rally?
Anyway, I’m sure that folks like Jim Sinclair will come up with some rationale and continue on with the same mindset. It is probably the fault of “manipulators” - just like the stock market is manipulated by the PPT (which by the way, is doing an amazingly atrocious job right now).
Interestingly enough, within the same time period physical gold rallied only 18%, going from a low of $700 per oz. to a high of $825. The previous counter rally in September was a respectable 40% but still a baby compared to this one. I guess my point is that gold and gold stocks are like everything else, supposed to be borrowed for a trade, not married for life. And a good gauge is the trusty k-ratio.
Here are the stocks that make up the Gold Bugs Index (HUI) which their individual weight:
- Barrick GoldABX 16.76%
- Goldcorp IncGG 16.10%
- Newmont MiningNEM 10.41%
- Harmony Gold Mining AdrHMY 6.78%
- Gold Fields Ltd AdrGFI 6.76%
- Kinross GoldKGC 6.43%
- Randgold Resources AdsGOLD 6.07%
- Eldorado Gold CorpEGO 5.52%
- IamgoldcorpIAG 5.41%
- Comp de Minas Buenaventura AdsBVN 4.75%
- Yamana GoldAUY 4.01%
- Agnico Eagle MinesAEM 3.73%
- Hecla MiningHL 2.59%
- Golden Star ResourcesGSS 2.38%
- Coeur d’alene MinesCDE 2.31%
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The Manipulation of Gold Prices
There is no other leveraged commodity market where short sellers increase their positions, materially, as the price rises, and increase them even more when prices are exploding, except gold and silver. The reason traders don’t normally do that is that it exposes short sellers to unlimited liability and risk. Yet, in both March and July 2008, and on countless occasions over the past 21 years, vast numbers of new gold and silver short positions were temporarily opened up, with the position holders seemingly unconcerned about the fact that precious metals had just risen exponentially, and that there was a very real potential they would bankrupt themselves with unlimited upside potential. Normal traders would not expose themselves to such unlimited risks.
I conclude, therefore, that over the last 21 years or so, “fake” precious metals supply in the form of promises of future delivery have habitually been increased when prices increase until increased “supply” managed to overwhelm increased demand, leading to a temporary price collapse. This is compounded by the fact that the futures prices on COMEX tend to dictate the “officially” report price for the precious metals elsewhere.
After the market is broken, shell-shocked leveraged long market participants have always been thrown out of their positions by margin calls, and/or have been happy to sell contracts back to the short sellers at much lower prices. This process has always allowed short sellers to cover short positions at a profit. If for some reason naked shorts needed to deliver, they could always count on various European central banks (and some say the Fed basement repository) to backstop them, releasing tons of physical gold into the market. It seemed that there were always another 34 tons or so of gold dumped at strategic times to bring down fast rising prices. Meanwhile, huge physical market demand in Asia and severe shortages buffered the downside. Because of the physical demand, prices steadily increased but, perhaps, at a much slower pace than would have been the case in the absence of market manipulation.
Rarely was there ever a serious short-squeeze. Rarely, that is, until Friday of last week when the deliveries demanded by non-leveraged long buyers reached record levels. In spite of an avalanche of complaints from gold and silver investors, the CFTC (Commodity Futures Trading Commission) has never bothered to audit even one vault to see if the short sellers really have the alleged gold and silver they claim to have. There is a legal requirement that, in every futures contract that promises to deliver a physical commodity, the short seller must be 90% covered by either a stockpile of the commodity or appropriate forward contracts with primary producers (such as miners). Inaction by CFTC, in the face of obvious market manipulation, implies a historical government endorsed price management.
Things, however, are changing fast. As previously stated, the first major mini-panic among COMEX gold short sellers happened last Friday. As of Wednesday morning, about 11,500 delivery demands for 100 ounce ingots were made at COMEX, which represents about 5% of the previous open interest. Another 2,000 contracts are still open, and a large percentage of those will probably demand delivery. These demands compare to the usual ½ to 1% of all contracts.
The U.S. economy is in shambles. Both commercial and investment banks are insolvent. European central banks no longer want to sell gold. China wants to buy 360 tons of it as soon as humanly possible, and as soon as it can be done without sending the price into the stratosphere. A close look at the Federal Reserve balance sheet tells us that Ben Bernanke eventually intends to devalue the U.S. dollar against gold. There has been a vast expansion of Fed credit, which has risen from $932 billion to $2.25 trillion in the last two and a half months. The Fed has bought nearly all toxic bank assets that were supposed to be purchased pursuant by the $700 billion Congressional bank bailout.
Official bailout funds have been used to buy equity interests in the various banks instead. By avoiding the use of monitored Congressional funds, the Fed has embarked on a secretive campaign to buy toxic assets. They have refused to give any accounting of their activities, even though they are using taxpayer money to do this. The Fed has refused, for example, to comply with a “freedom of information act” request from Bloomberg News. That refusal is now the subject of a major lawsuit.
The Federal Reserve has embarked on the biggest money printing surge in history, though the world economy has yet to feel its effect. To prevent newly printed dollars from causing immediate hyperinflation, these newly printed dollars have been temporarily sequestered into the banking industry’s reserves, rather than being released for general use. This was done in a number of creative ways.
First, the number of “reverse repurchase agreements” has been increased to $97 billion. A “repurchase agreement” is a non-recourse method by which the Fed increases the money supply by paying dollars for collateral. The collateral, in this case, are toxic defaulting mortgage bonds that banks want to be rid of. The cash enters the system and theoretically stimulates the economy because it supplies banks with money to make loans with.
A “reverse repurchase agreement” is the exact opposite. It is a method of reducing the money supply by selling bonds to the banks, and taking the cash back out of the system. In this case, the Fed gave banks cash for toxic defaulting mortgage bonds. Then, it took the same cash back by selling the banks new treasury bills just received from the U.S. Treasury. The Fed, in turn, bought these T-bills with the newly printed dollars. The banks, having gotten rid of toxic assets, were allowed to transfer private risk to the taxpayers. This process bolsters bank balance sheets by privatizing bank profits, and socializing bank losses.
At the same time, the U.S. Treasury has been very busy selling newly printed Treasury bills to anyone foolish enough to buy them. To a large extent, the fools reside overseas, but some reside inside this country, and the sale of these U.S. bonds has resulted in a substantial inflow of foreign reserves to the Treasury. Banks have also been offered favorable interest rates on both reserve and non-reserve deposits held at the Fed.
This was combined with what is probably a tacit agreement by which the banks were given the money and led to redeposit most newly printed cash back into the Fed, in a category known as “Reserve balances with Federal Reserve Banks”. This category has ballooned from $8 billion in September to $578 billion on November 28th.
On October 9, 2008, the Federal Reserve began paying interest on deposits at Federal Reserve Banks. The overnight rate happens to have dropped way below the “official” federal funds rate. Meanwhile, rates paid by the Fed on required deposits are only .1% less than the federal funds rate, and on voluntary deposits only .35% less than the federal funds rate. Accordingly, U.S. banks can engage in a dollar based one-nation carry trade, which further sequesters the newly printed dollars.
Banks are borrowing from the Fed, then taking the same money, redepositing it, and earning a spread on the interest rate differential. Banks can also deposit newly printed dollars into a category known as “Deposits with Federal Reserve Banks, other than reserve balances.” This category also earns interest in a similar way, and has risen from $12 billion to $554 billion in the same time period. The funds will eventually be used for direct lending from the Fed to open market borrowers, at huge levels of risk that even the free-wheeling cowboys who run things at America’s private banks are not willing to accept.
That being said, most money center banks in America are certainly NOT risk averse, even now. People who are bailed out of foolish decisions never become risk averse. They are, however, very insolvent, and, aside from the non-recourse provisions of Fed repurchase agreements, they would prefer, for bad publicity reasons, not to default on their obligations to the Fed. Aside from the newly printed dollars given to them by the Fed and the recent transfer of all risk to the taxpayers, they have no liquidity of their own with which to make new loans. That is why they aren’t making any. The Fed will eventually make the loans itself and take all the risk, while using the private banking system as merely a means for delivery.
Right now, however, the Fed wants to sequester the new dollars, until the U.S. Treasury has finished the major part of its funding activities. That will allow the Treasury to borrow money at very low rates. The Fed intends to feed money into the system, but at the minimum rate needed to prevent the DOW index from staying under 8,000 for any significant period of time. Right now, most measures are designed simply to stop U.S. banking laws from automatically requiring the closure of most big banks.
The extent of manipulations engaged in by this Federal Reserve is mind numbing. The total number of sequestered dollars has now reached well in excess of $1.2 trillion dollars. That means that Fed credit, so far, has been effectively increased only by about 10%, over the last 2.5 months, rather than 150% that appears on the surface of the Fed balance sheet. The rest is temporarily sequestered.
Back in July, the U.S. Treasury, through the ESF (Exchange Stabilization Fund), sold billions of euros and, I believe, established a dollar sequestering “derivative” by paying interest, perhaps in Euros, to foreign money center banks. This was designed to keep dollars out of circulation, overseas. It was the beginning of the dollar bull back on July 15th.
I had thought, at the time, with good reason, that the U.S. would run out of foreign exchange and would be forced to close down the operation within a few months. I underestimated Ben Bernanke.
Instead, the Fed managed to establish currency swap lines with various foreign nations, under the guise of supplying them with dollars. This need for dollars arose partly as a result of the actions of the Fed, in sequestering Eurodollars in July, and partly as a result of the multiple credit default events which triggered over $2.5 trillion worth of selling in the stock and commodities markets, as 50 to 1 leveraged players were forced to cover about $50 billion worth of credit default insurance obligations.
In truth, the Fed needs the foreign currency more than the foreign central banks need dollars. The Fed is using its new foreign currency resources, in part, to control the value of the dollar, and to insure that U.S. bailout bonds are sold for the highest possible prices at the lowest possible long term costs. Anyone who buys long term Treasury bills is going to lose a fortune of money in the long term.
The Fed has also taken a number of steps beyond those already discussed to restrict aspects of the normal money supply which most strongly affect exchange rates. For example, they only allowed “currency in circulation” to rise by $33 billion in aggregate, while at the same time increasing foreign reverse repurchase agreements to reduce foreign availability of dollars by $30 billion, and reducing the “other liabilities” category dollar availability by another $7 billion. Since it is likely that “other liabilities” involve foreign held dollars, this resulted in a net deficit of $4 billion on foreign exchange markets, as compared to September, 2008.
All these actions, taken together, have supported the dollar overseas, and led to a breakdown of the commodities markets. The adverse effect of a paradoxically rising dollar has been especially severe in dollar dependent commodity producing nations, such as Ukraine.
The net effect is that the U.S. dollar, in spite of terrible fundamentals, is now King of the Currencies once again, at least temporarily. The rising value of the dollar happens also to support naked short sellers of gold and silver, on COMEX, and these are old friends of the Federal Reserve. Supply and demand ultimately determine the price of gold but, in the shorter term, it is inversely tethered to the dollar. When the dollar is artificially high, gold prices will often plunge artificially low.
But, in short, the Fed currently has gained complete control over the value of the dollar. It can now adjust and micromange the dollar on a day-to-day basis. All it needs to do is open and close the “dollar spigot.” When they want the dollar to rise, the Fed can reduce the number of sequestered dollars. When they want it to fall, they simply ease up, releasing dollars into the financial markets. There is only one problem. Real investors are fleeing the stock market, and stock indexes are becoming more and more dependent upon government cash in order to avoid collapse.
People are liquidating holdings in mutual funds, and redeeming against hedge funds at a fantastic rate. This has created heavy downward pressure on stock prices. If the DOW falls below 8,000 for any significant amount of time, most big American insurance companies will be forced to recognize huge losses on their portfolios, and will become insolvent. Insolvent insurers, like insolvent banks, must be closed by their regulators as a matter of law. Obviously, mass insurer bankruptcies would be yet another major destabilizing slap in the face to an increasingly unstable economy.
The Fed now has only two ways to stop this. One is by brute force. It can buy securities directly, through its primary dealers, thereby supporting and pumping up stock prices. It has done a lot of that in the past few weeks, but this method is highly inefficient and costly. It is better to catalyze upward market movement rather than force it. Catalysis of markets involves opening up the money spigot a bit, allowing some of the sequestered funds to bleed back into the system. This allows the stock market to rise or stabilize naturally, as the equivalent of inflation is created mostly in the stock market without substantial bleed through. At the same time, however, opening the money spigot reduces the value of the dollar and causes gold prices to rise. Rising gold price adversely affects COMEX short sellers who are, as previously stated, old friends of the Federal Reserve.
Gold buying enthusiasm, everywhere but at the COMEX, is at record levels, whereas stock market investing appetite is low. For this reason, when the Fed tried to constrict the money supply on Monday, it caused more damage to the stock market than to the price of gold. Gold declined by over 5%, but the S&P 500 collapsed by over 9%. The next day, the Fed eased up on the money supply spigot, allowing the dollar to fall and the stock market to reflate. If the Fed repeats this performance over and over again, stock investor psychology will be seriously harmed. Withdrawals from mutual and hedge funds will accelerate. The stock market will sink at an uncontrollable rate, and the world will surge onward toward Great Depression II, much worse than the first. At some point, there will be nothing the Fed can do about it, no matter what manipulations it attempts. Hopefully Ben Bernanke is aware of the dangerous nature of the game he is playing.
The Federal Reserve must now make a tough choice. In the past, Federal Reserve Chairmen may have felt it necessary to support regular attacks on gold prices to dissuade conservative people from putting a majority of their capital into gold. Now, however, the world economy needs much higher gold prices in order to devalue paper money, not against other currencies in a "begger thy neighbor" policy, but against itself. This can jump start the system. If the Fed continued to support gold price suppression, that would collapse the stock market far deeper than they can afford, most insurers will end up bankrupt, and there will be no hope of avoiding Great Depression II.
I think Ben Bernanke is aware of this. Gold shorts will be abandoned, to avoid financial catastrophe. In commenting, I take a practical view, accepting what appears to be so, without passing judgment on the acts and omissions of the last 21 years.
Anyone who reads the written works of our Fed Chairman knows that Bernanke’s long term plan involves devaluing the dollar against gold. This is the exact opposite of most prior Fed Chairmen. He has overtly stated his intentions toward gold, many times, in various articles, speeches and treatises written before he became Fed Chairman. He often extols the virtues of former President Franklin Roosevelt’s gold revaluation/dollar devaluation, back in 1934, and credits it with saving the nation from the Great Depression. According to Bernanke, devaluation of the dollar against gold was so effective in stimulating economic activity that the stock market rose sharply in 1934, immediately thereafter. That is something that the Fed wants to see happen again.
It is only a matter of time before gold is allowed to rise to its natural level. Assuming that about half of the current increase in Fed credit is eventually neutralized, the monetized value of gold should be allowed to rise to between $7,500 and $9,000 per ounce as the world goes back to some type of gold standard. In the nearer term, gold will rise to about $2,000 per ounce, as the Fed abandons a hopeless campaign to support COMEX short sellers, in favor of saving the other, more productive, functions of the various banks and insurers.
Revaluation of gold, and a return to the gold standard, is the only way that hyperinflation can be avoided while large numbers of paper currency units are released into the economy. This is because most of the rise in prices can be filtered into gold. As the asset value of gold rises, it will soak up excess dollars, euros, pounds, etc., while the appearance of an increased number of currency units will stimulate investor psychology, and lending and economic output will increase, all over the world. Ben Bernanke and the other members of the FOMC Committee must know this, because it is basic economics.
Many venerable names in banking agree, although none have gone so far as to take their thoughts to the natural conclusion. Both JP Morgan Chase's and Citibank’s analysts, for example, are predicting a huge rise in the price of gold. That is interesting because GATA has come up with fairly compelling evidence that JP Morgan Chase (JPM) and HSBC (HBC) may have been big COMEX naked short sellers in the past.
Goldman Sachs (GS) is also a huge bullion bank, which allegedly is heavily involved in downward gold price manipulation. However, this month, both HSBC and GS took lots of deliveries of gold from COMEX. Given the size and bureaucracy at such firms, it is certainly possible for the majority of traders to be entirely honest, while others, at the same firm, may be totally corrupt.
More important, however, than dwelling on the accuracy of conspiracy theories is the fact that huge international banking firms normally do not take metal deliveries from futures markets. They normally buy on the London spot market. The fact that they are demanding delivery from COMEX means one of two things. Either the London bullion exchanges have run out of gold, or these firms are finding it cheaper to buy gold as a “future” than as a spot exchange.
Smart traders at big firms may be buying on COMEX to sell into the spot market, for a profit. This pricing condition is known as “backwardation”. Backwardation is always the first sign that a huge price rise is about to happen. In the absence of backwardation, there is no rational explanation as to why HSBC, Bank of Nova Scotia (BNS), Goldman Sachs, and others are forcing COMEX to make large deliveries.
The fact that this backwardation is hidden from the public eye is not surprising. In spite of the ostensible existence of a so-called “London fix”, 96% of all OTC transactions are secret and unreported. The transactions happen solely between two parties, and are done opaquely, in complete darkness. The current London fix may well be just as fake as the bank interest rate reports that comprised LIBOR proved to be, just a few months ago.
It won’t matter much if you purchase gold at $750, $800, $850, $900 per ounce, or even much higher. All of these prices will be looking extraordinarily cheap in a few months. The price of our pretty yellow metal is about to explode, and it is probably going to soar, eventually, to levels that not even most gold bugs imagine. COMEX gold shorts will be playing the price a bit longer, in an attempt shake out some remaining independent leveraged longs. Once that is finished, however, and it will be finished soon, the price will start to rise very quickly.
------------------------------------------------------------------------------------------------------------------
GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
------------------------------------------------------------------------------------------------------------------
I conclude, therefore, that over the last 21 years or so, “fake” precious metals supply in the form of promises of future delivery have habitually been increased when prices increase until increased “supply” managed to overwhelm increased demand, leading to a temporary price collapse. This is compounded by the fact that the futures prices on COMEX tend to dictate the “officially” report price for the precious metals elsewhere.
After the market is broken, shell-shocked leveraged long market participants have always been thrown out of their positions by margin calls, and/or have been happy to sell contracts back to the short sellers at much lower prices. This process has always allowed short sellers to cover short positions at a profit. If for some reason naked shorts needed to deliver, they could always count on various European central banks (and some say the Fed basement repository) to backstop them, releasing tons of physical gold into the market. It seemed that there were always another 34 tons or so of gold dumped at strategic times to bring down fast rising prices. Meanwhile, huge physical market demand in Asia and severe shortages buffered the downside. Because of the physical demand, prices steadily increased but, perhaps, at a much slower pace than would have been the case in the absence of market manipulation.
Rarely was there ever a serious short-squeeze. Rarely, that is, until Friday of last week when the deliveries demanded by non-leveraged long buyers reached record levels. In spite of an avalanche of complaints from gold and silver investors, the CFTC (Commodity Futures Trading Commission) has never bothered to audit even one vault to see if the short sellers really have the alleged gold and silver they claim to have. There is a legal requirement that, in every futures contract that promises to deliver a physical commodity, the short seller must be 90% covered by either a stockpile of the commodity or appropriate forward contracts with primary producers (such as miners). Inaction by CFTC, in the face of obvious market manipulation, implies a historical government endorsed price management.
Things, however, are changing fast. As previously stated, the first major mini-panic among COMEX gold short sellers happened last Friday. As of Wednesday morning, about 11,500 delivery demands for 100 ounce ingots were made at COMEX, which represents about 5% of the previous open interest. Another 2,000 contracts are still open, and a large percentage of those will probably demand delivery. These demands compare to the usual ½ to 1% of all contracts.
The U.S. economy is in shambles. Both commercial and investment banks are insolvent. European central banks no longer want to sell gold. China wants to buy 360 tons of it as soon as humanly possible, and as soon as it can be done without sending the price into the stratosphere. A close look at the Federal Reserve balance sheet tells us that Ben Bernanke eventually intends to devalue the U.S. dollar against gold. There has been a vast expansion of Fed credit, which has risen from $932 billion to $2.25 trillion in the last two and a half months. The Fed has bought nearly all toxic bank assets that were supposed to be purchased pursuant by the $700 billion Congressional bank bailout.
Official bailout funds have been used to buy equity interests in the various banks instead. By avoiding the use of monitored Congressional funds, the Fed has embarked on a secretive campaign to buy toxic assets. They have refused to give any accounting of their activities, even though they are using taxpayer money to do this. The Fed has refused, for example, to comply with a “freedom of information act” request from Bloomberg News. That refusal is now the subject of a major lawsuit.
The Federal Reserve has embarked on the biggest money printing surge in history, though the world economy has yet to feel its effect. To prevent newly printed dollars from causing immediate hyperinflation, these newly printed dollars have been temporarily sequestered into the banking industry’s reserves, rather than being released for general use. This was done in a number of creative ways.
First, the number of “reverse repurchase agreements” has been increased to $97 billion. A “repurchase agreement” is a non-recourse method by which the Fed increases the money supply by paying dollars for collateral. The collateral, in this case, are toxic defaulting mortgage bonds that banks want to be rid of. The cash enters the system and theoretically stimulates the economy because it supplies banks with money to make loans with.
A “reverse repurchase agreement” is the exact opposite. It is a method of reducing the money supply by selling bonds to the banks, and taking the cash back out of the system. In this case, the Fed gave banks cash for toxic defaulting mortgage bonds. Then, it took the same cash back by selling the banks new treasury bills just received from the U.S. Treasury. The Fed, in turn, bought these T-bills with the newly printed dollars. The banks, having gotten rid of toxic assets, were allowed to transfer private risk to the taxpayers. This process bolsters bank balance sheets by privatizing bank profits, and socializing bank losses.
At the same time, the U.S. Treasury has been very busy selling newly printed Treasury bills to anyone foolish enough to buy them. To a large extent, the fools reside overseas, but some reside inside this country, and the sale of these U.S. bonds has resulted in a substantial inflow of foreign reserves to the Treasury. Banks have also been offered favorable interest rates on both reserve and non-reserve deposits held at the Fed.
This was combined with what is probably a tacit agreement by which the banks were given the money and led to redeposit most newly printed cash back into the Fed, in a category known as “Reserve balances with Federal Reserve Banks”. This category has ballooned from $8 billion in September to $578 billion on November 28th.
On October 9, 2008, the Federal Reserve began paying interest on deposits at Federal Reserve Banks. The overnight rate happens to have dropped way below the “official” federal funds rate. Meanwhile, rates paid by the Fed on required deposits are only .1% less than the federal funds rate, and on voluntary deposits only .35% less than the federal funds rate. Accordingly, U.S. banks can engage in a dollar based one-nation carry trade, which further sequesters the newly printed dollars.
Banks are borrowing from the Fed, then taking the same money, redepositing it, and earning a spread on the interest rate differential. Banks can also deposit newly printed dollars into a category known as “Deposits with Federal Reserve Banks, other than reserve balances.” This category also earns interest in a similar way, and has risen from $12 billion to $554 billion in the same time period. The funds will eventually be used for direct lending from the Fed to open market borrowers, at huge levels of risk that even the free-wheeling cowboys who run things at America’s private banks are not willing to accept.
That being said, most money center banks in America are certainly NOT risk averse, even now. People who are bailed out of foolish decisions never become risk averse. They are, however, very insolvent, and, aside from the non-recourse provisions of Fed repurchase agreements, they would prefer, for bad publicity reasons, not to default on their obligations to the Fed. Aside from the newly printed dollars given to them by the Fed and the recent transfer of all risk to the taxpayers, they have no liquidity of their own with which to make new loans. That is why they aren’t making any. The Fed will eventually make the loans itself and take all the risk, while using the private banking system as merely a means for delivery.
Right now, however, the Fed wants to sequester the new dollars, until the U.S. Treasury has finished the major part of its funding activities. That will allow the Treasury to borrow money at very low rates. The Fed intends to feed money into the system, but at the minimum rate needed to prevent the DOW index from staying under 8,000 for any significant period of time. Right now, most measures are designed simply to stop U.S. banking laws from automatically requiring the closure of most big banks.
The extent of manipulations engaged in by this Federal Reserve is mind numbing. The total number of sequestered dollars has now reached well in excess of $1.2 trillion dollars. That means that Fed credit, so far, has been effectively increased only by about 10%, over the last 2.5 months, rather than 150% that appears on the surface of the Fed balance sheet. The rest is temporarily sequestered.
Back in July, the U.S. Treasury, through the ESF (Exchange Stabilization Fund), sold billions of euros and, I believe, established a dollar sequestering “derivative” by paying interest, perhaps in Euros, to foreign money center banks. This was designed to keep dollars out of circulation, overseas. It was the beginning of the dollar bull back on July 15th.
I had thought, at the time, with good reason, that the U.S. would run out of foreign exchange and would be forced to close down the operation within a few months. I underestimated Ben Bernanke.
Instead, the Fed managed to establish currency swap lines with various foreign nations, under the guise of supplying them with dollars. This need for dollars arose partly as a result of the actions of the Fed, in sequestering Eurodollars in July, and partly as a result of the multiple credit default events which triggered over $2.5 trillion worth of selling in the stock and commodities markets, as 50 to 1 leveraged players were forced to cover about $50 billion worth of credit default insurance obligations.
In truth, the Fed needs the foreign currency more than the foreign central banks need dollars. The Fed is using its new foreign currency resources, in part, to control the value of the dollar, and to insure that U.S. bailout bonds are sold for the highest possible prices at the lowest possible long term costs. Anyone who buys long term Treasury bills is going to lose a fortune of money in the long term.
The Fed has also taken a number of steps beyond those already discussed to restrict aspects of the normal money supply which most strongly affect exchange rates. For example, they only allowed “currency in circulation” to rise by $33 billion in aggregate, while at the same time increasing foreign reverse repurchase agreements to reduce foreign availability of dollars by $30 billion, and reducing the “other liabilities” category dollar availability by another $7 billion. Since it is likely that “other liabilities” involve foreign held dollars, this resulted in a net deficit of $4 billion on foreign exchange markets, as compared to September, 2008.
All these actions, taken together, have supported the dollar overseas, and led to a breakdown of the commodities markets. The adverse effect of a paradoxically rising dollar has been especially severe in dollar dependent commodity producing nations, such as Ukraine.
The net effect is that the U.S. dollar, in spite of terrible fundamentals, is now King of the Currencies once again, at least temporarily. The rising value of the dollar happens also to support naked short sellers of gold and silver, on COMEX, and these are old friends of the Federal Reserve. Supply and demand ultimately determine the price of gold but, in the shorter term, it is inversely tethered to the dollar. When the dollar is artificially high, gold prices will often plunge artificially low.
But, in short, the Fed currently has gained complete control over the value of the dollar. It can now adjust and micromange the dollar on a day-to-day basis. All it needs to do is open and close the “dollar spigot.” When they want the dollar to rise, the Fed can reduce the number of sequestered dollars. When they want it to fall, they simply ease up, releasing dollars into the financial markets. There is only one problem. Real investors are fleeing the stock market, and stock indexes are becoming more and more dependent upon government cash in order to avoid collapse.
People are liquidating holdings in mutual funds, and redeeming against hedge funds at a fantastic rate. This has created heavy downward pressure on stock prices. If the DOW falls below 8,000 for any significant amount of time, most big American insurance companies will be forced to recognize huge losses on their portfolios, and will become insolvent. Insolvent insurers, like insolvent banks, must be closed by their regulators as a matter of law. Obviously, mass insurer bankruptcies would be yet another major destabilizing slap in the face to an increasingly unstable economy.
The Fed now has only two ways to stop this. One is by brute force. It can buy securities directly, through its primary dealers, thereby supporting and pumping up stock prices. It has done a lot of that in the past few weeks, but this method is highly inefficient and costly. It is better to catalyze upward market movement rather than force it. Catalysis of markets involves opening up the money spigot a bit, allowing some of the sequestered funds to bleed back into the system. This allows the stock market to rise or stabilize naturally, as the equivalent of inflation is created mostly in the stock market without substantial bleed through. At the same time, however, opening the money spigot reduces the value of the dollar and causes gold prices to rise. Rising gold price adversely affects COMEX short sellers who are, as previously stated, old friends of the Federal Reserve.
Gold buying enthusiasm, everywhere but at the COMEX, is at record levels, whereas stock market investing appetite is low. For this reason, when the Fed tried to constrict the money supply on Monday, it caused more damage to the stock market than to the price of gold. Gold declined by over 5%, but the S&P 500 collapsed by over 9%. The next day, the Fed eased up on the money supply spigot, allowing the dollar to fall and the stock market to reflate. If the Fed repeats this performance over and over again, stock investor psychology will be seriously harmed. Withdrawals from mutual and hedge funds will accelerate. The stock market will sink at an uncontrollable rate, and the world will surge onward toward Great Depression II, much worse than the first. At some point, there will be nothing the Fed can do about it, no matter what manipulations it attempts. Hopefully Ben Bernanke is aware of the dangerous nature of the game he is playing.
The Federal Reserve must now make a tough choice. In the past, Federal Reserve Chairmen may have felt it necessary to support regular attacks on gold prices to dissuade conservative people from putting a majority of their capital into gold. Now, however, the world economy needs much higher gold prices in order to devalue paper money, not against other currencies in a "begger thy neighbor" policy, but against itself. This can jump start the system. If the Fed continued to support gold price suppression, that would collapse the stock market far deeper than they can afford, most insurers will end up bankrupt, and there will be no hope of avoiding Great Depression II.
I think Ben Bernanke is aware of this. Gold shorts will be abandoned, to avoid financial catastrophe. In commenting, I take a practical view, accepting what appears to be so, without passing judgment on the acts and omissions of the last 21 years.
Anyone who reads the written works of our Fed Chairman knows that Bernanke’s long term plan involves devaluing the dollar against gold. This is the exact opposite of most prior Fed Chairmen. He has overtly stated his intentions toward gold, many times, in various articles, speeches and treatises written before he became Fed Chairman. He often extols the virtues of former President Franklin Roosevelt’s gold revaluation/dollar devaluation, back in 1934, and credits it with saving the nation from the Great Depression. According to Bernanke, devaluation of the dollar against gold was so effective in stimulating economic activity that the stock market rose sharply in 1934, immediately thereafter. That is something that the Fed wants to see happen again.
It is only a matter of time before gold is allowed to rise to its natural level. Assuming that about half of the current increase in Fed credit is eventually neutralized, the monetized value of gold should be allowed to rise to between $7,500 and $9,000 per ounce as the world goes back to some type of gold standard. In the nearer term, gold will rise to about $2,000 per ounce, as the Fed abandons a hopeless campaign to support COMEX short sellers, in favor of saving the other, more productive, functions of the various banks and insurers.
Revaluation of gold, and a return to the gold standard, is the only way that hyperinflation can be avoided while large numbers of paper currency units are released into the economy. This is because most of the rise in prices can be filtered into gold. As the asset value of gold rises, it will soak up excess dollars, euros, pounds, etc., while the appearance of an increased number of currency units will stimulate investor psychology, and lending and economic output will increase, all over the world. Ben Bernanke and the other members of the FOMC Committee must know this, because it is basic economics.
Many venerable names in banking agree, although none have gone so far as to take their thoughts to the natural conclusion. Both JP Morgan Chase's and Citibank’s analysts, for example, are predicting a huge rise in the price of gold. That is interesting because GATA has come up with fairly compelling evidence that JP Morgan Chase (JPM) and HSBC (HBC) may have been big COMEX naked short sellers in the past.
Goldman Sachs (GS) is also a huge bullion bank, which allegedly is heavily involved in downward gold price manipulation. However, this month, both HSBC and GS took lots of deliveries of gold from COMEX. Given the size and bureaucracy at such firms, it is certainly possible for the majority of traders to be entirely honest, while others, at the same firm, may be totally corrupt.
More important, however, than dwelling on the accuracy of conspiracy theories is the fact that huge international banking firms normally do not take metal deliveries from futures markets. They normally buy on the London spot market. The fact that they are demanding delivery from COMEX means one of two things. Either the London bullion exchanges have run out of gold, or these firms are finding it cheaper to buy gold as a “future” than as a spot exchange.
Smart traders at big firms may be buying on COMEX to sell into the spot market, for a profit. This pricing condition is known as “backwardation”. Backwardation is always the first sign that a huge price rise is about to happen. In the absence of backwardation, there is no rational explanation as to why HSBC, Bank of Nova Scotia (BNS), Goldman Sachs, and others are forcing COMEX to make large deliveries.
The fact that this backwardation is hidden from the public eye is not surprising. In spite of the ostensible existence of a so-called “London fix”, 96% of all OTC transactions are secret and unreported. The transactions happen solely between two parties, and are done opaquely, in complete darkness. The current London fix may well be just as fake as the bank interest rate reports that comprised LIBOR proved to be, just a few months ago.
It won’t matter much if you purchase gold at $750, $800, $850, $900 per ounce, or even much higher. All of these prices will be looking extraordinarily cheap in a few months. The price of our pretty yellow metal is about to explode, and it is probably going to soar, eventually, to levels that not even most gold bugs imagine. COMEX gold shorts will be playing the price a bit longer, in an attempt shake out some remaining independent leveraged longs. Once that is finished, however, and it will be finished soon, the price will start to rise very quickly.
------------------------------------------------------------------------------------------------------------------
GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
------------------------------------------------------------------------------------------------------------------
Dow Will Equal Gold in 2009
If you have to pick one investment class that will shine in 2009, then choose gold, and probably silver. My prediction is that this will be the year when the Dow Jones to gold ratio goes to one.
That is to say the Dow Jones Index will plunge again, way beyond the 7,000 limit target I suggested long ago for 2008, and head to 4-5,000, while at the same time the price per ounce of the yellow metal will tip the $4-5,000 an ounce level, way above the $2,000 now predicted by Citigroup.
US economic implosion
Obviously only a terrible implosion of the US and global economy could produce such a massive shift in asset values. But I fear that is what is coming in 2009 and the moment to prepare for it is now before it is too late.
Just look at those US auto figures for November, down 37 per cent, and that is the figure across the board. The Japanese and Korean manufacturers also got their sales walloped, albeit Chrysler took the biggest hit of 47 per cent.
No manufacturer on earth has profit margins big enough to absorb that sort of a sales collapse. That it is the largest consumer goods section of the world’s largest economy just sets the whole US economy up for a collapse. The only historical parallel is 1930.
Now the Federal Reserve and US Treasury have been on to this case for some while, pumping money into the US economy - around $8 trillion on the last count, or more than half the annual GDP. That must have some countering effect to this collapse in the real economy.
Bailout trillions
Any observer can see that money produced and spent this fast is not being invested wisely. Trillions to support banks on the brink of collapse can surely only put off the evil day, while running up bigger debts that have to be repaid in devalued dollars - or defaulted on - later.
What we have in motion is a downward spiral of mounting debts and falling production in the US economy. You really have to be hopelessly blind not to see it when you think about it. And spirals continue down until they reach a bottom. We are not there yet.
If the US was a Third World country, the IMF would be called in to run the economy. Debts would go into default, uneconomic companies and projects would be allowed to fail, putting people out of work and interest rates would shoot up.
The US authorities have been acting as though they could spend their way out of this fate. It might work to some extent, but all logic suggests this will not be enough to prevent an economic implosion. For 2009 that looks far too close to the Third World model for comfort.
Buy precious metals
What are investors to do in such circumstances? Personally I would avoid US treasury bonds which look like the next asset bubble about to burst, and go for gold and silver which will be the next bubble to form as the world struggles to dig itself out of this very big hole.
Eventually the world will emerge from this crisis, just as it emerged from the Great Depression of the 30s, but we have not even seen the bottom yet, let alone begun the recovery phase.
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To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
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That is to say the Dow Jones Index will plunge again, way beyond the 7,000 limit target I suggested long ago for 2008, and head to 4-5,000, while at the same time the price per ounce of the yellow metal will tip the $4-5,000 an ounce level, way above the $2,000 now predicted by Citigroup.
US economic implosion
Obviously only a terrible implosion of the US and global economy could produce such a massive shift in asset values. But I fear that is what is coming in 2009 and the moment to prepare for it is now before it is too late.
Just look at those US auto figures for November, down 37 per cent, and that is the figure across the board. The Japanese and Korean manufacturers also got their sales walloped, albeit Chrysler took the biggest hit of 47 per cent.
No manufacturer on earth has profit margins big enough to absorb that sort of a sales collapse. That it is the largest consumer goods section of the world’s largest economy just sets the whole US economy up for a collapse. The only historical parallel is 1930.
Now the Federal Reserve and US Treasury have been on to this case for some while, pumping money into the US economy - around $8 trillion on the last count, or more than half the annual GDP. That must have some countering effect to this collapse in the real economy.
Bailout trillions
Any observer can see that money produced and spent this fast is not being invested wisely. Trillions to support banks on the brink of collapse can surely only put off the evil day, while running up bigger debts that have to be repaid in devalued dollars - or defaulted on - later.
What we have in motion is a downward spiral of mounting debts and falling production in the US economy. You really have to be hopelessly blind not to see it when you think about it. And spirals continue down until they reach a bottom. We are not there yet.
If the US was a Third World country, the IMF would be called in to run the economy. Debts would go into default, uneconomic companies and projects would be allowed to fail, putting people out of work and interest rates would shoot up.
The US authorities have been acting as though they could spend their way out of this fate. It might work to some extent, but all logic suggests this will not be enough to prevent an economic implosion. For 2009 that looks far too close to the Third World model for comfort.
Buy precious metals
What are investors to do in such circumstances? Personally I would avoid US treasury bonds which look like the next asset bubble about to burst, and go for gold and silver which will be the next bubble to form as the world struggles to dig itself out of this very big hole.
Eventually the world will emerge from this crisis, just as it emerged from the Great Depression of the 30s, but we have not even seen the bottom yet, let alone begun the recovery phase.
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GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
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Wednesday, December 3, 2008
Comparing Volatility of Gold to Its Price
It has been a turbulent year for both gold and gold stocks. After breaking the $1000 per ounce mark in mid-March and rising as high as $978 about four months later, the spot price of gold has fallen as low as $712. With the market volatility expected to continue for some time, investors continue to seek ways to play the discrepancy between bullion and related equities.
Analysts at RBC Capital Markets have looked at the beta, or volatility of gold stocks compared to the gold price, for Tier I and Tier II North American gold producers. For example, if a stock’s beta is 2.0 and the gold price moves 10%, the share price should theoretically move 20% in the same direction.
Stephen D. Walker and Michael Curran looked at two periods: the four-and-a-half months after gold’s July 15 interim high and the 12-month period that began on Nov. 30, 2007. They found that Kinross Gold Corp., Goldcorp Inc. (GG) and Barrick Gold Corp. (ABX) have similar betas for both periods – ranging from 1.95 to 2.11. Newmont Mining Corp.’s (NEM) betas were substantially lower, however, the analysts expected the opposite since it has higher-than-average cash costs.
“The explanation of a lower beta may be related to fewer surprises for investors, as management has delivered on its 2008 production and cost guidance,” they told clients, adding that Newmont has had no major M&A news or negative geopolitical developments in the past year.
The report also showed that Tier II producers tend to have a higher beta than their larger peers, which can be attributed to their greater risk and cost profiles. Eldorado Gold Corp. (EGO) stands out as a Tier II name with a high beta during both time periods.
So how can investors play the beta game? If they’re bullish on gold, RBC’s analysts suggest a focus on above-average beta-to-bullion names that have a high quality asset mix, such as the ones already mentioned. Another Tier II miner that fits this profile is Red Back Mining Inc. (RBIFF.PK).
Bullion bears should reduce their exposure to high beta names with low quality assets, as they should decline more quickly and severely if the gold price declines, the analysts said, highlighting Franco-Nevada Corp. [FNV.TO], Newmont and IAMGOLD Corp. (IAG) as stocks with a more defensive beta.
RBC expects a year-end rally for gold into 2009 and the Chinese New Year that begins on Jan. 26.
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GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
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Analysts at RBC Capital Markets have looked at the beta, or volatility of gold stocks compared to the gold price, for Tier I and Tier II North American gold producers. For example, if a stock’s beta is 2.0 and the gold price moves 10%, the share price should theoretically move 20% in the same direction.
Stephen D. Walker and Michael Curran looked at two periods: the four-and-a-half months after gold’s July 15 interim high and the 12-month period that began on Nov. 30, 2007. They found that Kinross Gold Corp., Goldcorp Inc. (GG) and Barrick Gold Corp. (ABX) have similar betas for both periods – ranging from 1.95 to 2.11. Newmont Mining Corp.’s (NEM) betas were substantially lower, however, the analysts expected the opposite since it has higher-than-average cash costs.
“The explanation of a lower beta may be related to fewer surprises for investors, as management has delivered on its 2008 production and cost guidance,” they told clients, adding that Newmont has had no major M&A news or negative geopolitical developments in the past year.
The report also showed that Tier II producers tend to have a higher beta than their larger peers, which can be attributed to their greater risk and cost profiles. Eldorado Gold Corp. (EGO) stands out as a Tier II name with a high beta during both time periods.
So how can investors play the beta game? If they’re bullish on gold, RBC’s analysts suggest a focus on above-average beta-to-bullion names that have a high quality asset mix, such as the ones already mentioned. Another Tier II miner that fits this profile is Red Back Mining Inc. (RBIFF.PK).
Bullion bears should reduce their exposure to high beta names with low quality assets, as they should decline more quickly and severely if the gold price declines, the analysts said, highlighting Franco-Nevada Corp. [FNV.TO], Newmont and IAMGOLD Corp. (IAG) as stocks with a more defensive beta.
RBC expects a year-end rally for gold into 2009 and the Chinese New Year that begins on Jan. 26.
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GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
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Analysts Are Bullish on Gold: Should You Be Worried?
Recently published commentary from analysts at Citigroup and JP Morgan both paint a bright picture for the future of gold. Citigroup specifically mentions the $2,000 level as attainable. JP Morgan recommends buying gold for the run into the holidays.
The Citigroup report runs down many factors that are well known to gold investors. Citi mentions the possibility that recent financial actions of world authorities will either result in massive inflation if the actions are successful; or further economic deterioration that leads to political instability and unrest if the actions are unsuccessful. Either scenario would have positive implications for gold. Citi also mentions the finite supply of gold in the world, and gold’s indisputable status as a monetary instrument. The full report can be found here (pdf link).
By mentioning the $2,000 price level, Citigroup has trumped Morgan Stanley’s lame recommendation that gold will reach $1,000 in three years and Merrill Lynch’s call for $1,500 gold. If you’re going to make a prediction on the price of gold, I guess you have to make it $500 higher than the last analyst.
JP Morgan’s analysts also mention a collection of well known factors pointing in gold’s favor. They see the strong dollar/weak gold link decoupling, the shrinking supply of gold discoveries, the declining pace of central bank gold sales, and the “seizure” of the gold coin and small bar market.
As a gold investor, should you be worried about analysts' latest love affair? Analysts have a less than stellar record for timely recommendations about emerging trends. In many cases, their most bullish predictions have come towards the end of a major move and merely represent an extrapolation of the recent past for reasons already well discounted. Is this time different?
In a word, yes.
Although gold has increased roughly 300% from the lows reached seven years ago, gold is still showing a loss for the year. If this was the typical pile-on of bullish analyst calls, it would more likely be taking place amidst a sharp, upward move.
Secondly, analysts are not jumping into a hot market, they are wading into a very confusing market. A continually evolving array of factors are at play which have baffled and frustrated even long time followers of gold. On one side, there are glaringly obvious reasons why gold should be moving higher. On the other side, there are plenty of credible reasons why gold is stuck in neutral.
When this current “tug of war” in the price of gold eventually resolves itself and gold starts to move higher, analysts will likely respond by ratcheting up their predictions in tandem with the rising price of gold. Even when this starts to happen, I still wouldn’t be worried.
Wait until you hear an analyst report come out with the boldest of the bold predictions yet, “Gold to Reach $10,000 Per Ounce.” The report will likely contain countless, well considered reasons that make $10,000 gold seem not only possible, but probable. Handy charts will extrapolate recent moves to harrowing peaks. Around the same time, any arguments against gold investing will seem downright silly and “man on the street” interviews will elicit sage advice on the merits of buying gold.
That’s when you should be worried about rosy analyst predictions on gold.
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GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
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The Citigroup report runs down many factors that are well known to gold investors. Citi mentions the possibility that recent financial actions of world authorities will either result in massive inflation if the actions are successful; or further economic deterioration that leads to political instability and unrest if the actions are unsuccessful. Either scenario would have positive implications for gold. Citi also mentions the finite supply of gold in the world, and gold’s indisputable status as a monetary instrument. The full report can be found here (pdf link).
By mentioning the $2,000 price level, Citigroup has trumped Morgan Stanley’s lame recommendation that gold will reach $1,000 in three years and Merrill Lynch’s call for $1,500 gold. If you’re going to make a prediction on the price of gold, I guess you have to make it $500 higher than the last analyst.
JP Morgan’s analysts also mention a collection of well known factors pointing in gold’s favor. They see the strong dollar/weak gold link decoupling, the shrinking supply of gold discoveries, the declining pace of central bank gold sales, and the “seizure” of the gold coin and small bar market.
As a gold investor, should you be worried about analysts' latest love affair? Analysts have a less than stellar record for timely recommendations about emerging trends. In many cases, their most bullish predictions have come towards the end of a major move and merely represent an extrapolation of the recent past for reasons already well discounted. Is this time different?
In a word, yes.
Although gold has increased roughly 300% from the lows reached seven years ago, gold is still showing a loss for the year. If this was the typical pile-on of bullish analyst calls, it would more likely be taking place amidst a sharp, upward move.
Secondly, analysts are not jumping into a hot market, they are wading into a very confusing market. A continually evolving array of factors are at play which have baffled and frustrated even long time followers of gold. On one side, there are glaringly obvious reasons why gold should be moving higher. On the other side, there are plenty of credible reasons why gold is stuck in neutral.
When this current “tug of war” in the price of gold eventually resolves itself and gold starts to move higher, analysts will likely respond by ratcheting up their predictions in tandem with the rising price of gold. Even when this starts to happen, I still wouldn’t be worried.
Wait until you hear an analyst report come out with the boldest of the bold predictions yet, “Gold to Reach $10,000 Per Ounce.” The report will likely contain countless, well considered reasons that make $10,000 gold seem not only possible, but probable. Handy charts will extrapolate recent moves to harrowing peaks. Around the same time, any arguments against gold investing will seem downright silly and “man on the street” interviews will elicit sage advice on the merits of buying gold.
That’s when you should be worried about rosy analyst predictions on gold.
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GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
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Misleading Gold Headline of the Day
It's natural to wonder about the real utility provided by editors and others in the publishing business who, for some reason, feel obligated to alter the headline supplied by the author of an article for one reason or another.
Apparently, they receive some kind of special training to write headlines that make for a more consistent overall look and feel in a publication, but, sometimes they just entirely miss the point. Such was the case in this story about gold at Commodity Online.
The headline apparently derived from this paragraph:
According to a research report from Kedia Commodities, gold is headed for an annual drop after seven straight yearly gains. Precious metal is being so far steady today in the markets as worries persist and expand due to the deepening of the global recession that is eroding to a further extent the appeal of commodities including the gold of course.
Yes, the English language looks to be a challenge as well for this publication that I believe originates in India.
As for the price of gold, any decline this year would be the biggest drop in seven eight years (apparently math poses its own set of difficulties), simply because gold has been about the only asset class to post gains in each of the previous seven.
Despite what the folks at Kedia Commodities might think, a negative result for gold this year is anything but assured. The yellow metal is down about six percent in 2008, $52 below where it began the year, and December is almost always a favorable month.
Wouldn't it be funny if, when all is said and done in 2008, gold is one of the handful of assets posting a gain for the year?
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GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
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Sean Rakhimov: Stock Market Will Recover; Economic Crisis Is Far from Over
As SilverStrategies.com editor Sean Rakhimov tells us in this exclusive interview with The Gold Report, the economic crisis may go on for a generation but the market is a separate animal that will stir back to life sooner. He expects physical gold and silver to lead the parade, with base metals lagging 12-18 months behind, followed by share price recovery for the majors and on down the line. When picking stocks to buy now, he says investors have to decide for themselves whether a company will survive the washout; it may be tough going from here to there, but sticking with survivors should prove beneficial in the long run.
The Gold Report: Let's start with your take on where are we today, what has happened, and where we’re going from here.
Sean Rakhimov: Basically we’re in a situation that we’ve long expected. We all anticipated a big financial crisis, all sorts of problems, an end-of-the-world type of scenario—not literally, but the world as we know it. And I think we’re there. This is the big one and it’s for real. Where we go from here is largely a function of what the powers-that-be will do. We have some idea of what they will do; they will do all the things that will make it worse. I go by the theory that they will always do the right thing, but only after they exhaust all other options.
TGR: When you say the big one, how much further are you expecting both the markets and the international financials to erode?
SR: The markets are a separate story. Don’t confuse what the markets will do with the general crisis or economic situation. Markets are a different animal; they can do all kinds of things that do not fit into your thinking or should not have happened given the economy or the political situation, or what-have-you. I want to be clear on that so that people don’t assume that if I say, “Oh, this is going to last a while, that automatically means the market is going to not recover for a long time.” The economic crisis, I think, is going to last for a generation. I foresee a twofold crisis here, or maybe three stages. The first one is what we're going through right now - a debt crisis.
At some point down the line we’re going to have a currency crisis, where the dollar will stop being the reserve currency of the world. I don’t know how long before that happens. It’s a matter of whoever runs first to the door, basically. I was just reading some articles. Iran is converting their foreign exchange reserves into gold. China is trying to do some of that. It only takes a few of these until there’s a domino effect and when that happens, things should play out quickly.
TGR: What do you mean “play out quickly”?
SR: This crisis, I think, has been a good example, where within three months we ended up in a completely different environment. If the dollar stops being the reserve currency of the world tomorrow, I expect things to happen quickly. It may take a decade until it gets started, but once it starts, I expect things to unravel quickly. The reason for that is we have maybe 20 to 30 major players in the world that can make a difference. I’m talking about countries and maybe some other entities such as sovereign funds. And I believe it’s going to be very difficult to bring everybody to the table and get them to agree on a plan that everybody would sign on to. Even if they did sign on, I think it’s going to be very difficult to make sure everybody sticks with it.
As soon as they break ranks, I think within six months the whole thing is going to break apart. Whatever accord they come up with, if it’s going to be Russia or China or somebody of that size, things are going to happen even quicker. If it’s going to be a smaller player like Iran or Venezuela, that may take a bit longer. The significance of it may be downplayed for a period of time. But ultimately I think most people understand the dire straits we’re in. At some point it’s going to be "everybody for themselves" and that’s when I think the current system is going to fall apart.
TGR: You’re suggesting the dollar will stop being the world currency and countries will make some attempt to come together to create the new world currency. Might that be gold or precious metals?
SR: I don’t think the adoption of gold or a derivative thereof as a reserve currency is going to come from governments, at least not voluntarily. Eventually, I think they will be forced to.
TGR: Wasn’t that the original part of the Bretton Woods agreement?
SR: Yes, it was, where the U.S. dollar was as good as gold and was convertible to gold, but we know how that ended.
TGR: You said this crisis could go on for a generation. That’s a long time.
SR: I foresee maybe several stages of this crisis unraveling and that’s why I say it’s going to take about a generation. As I said, the first one is the big debt crisis we have now. Maybe an extension of it will be some sort of a currency crisis. It’s not just a dollar that won’t be worth anything, but most other currencies as well. And then I believe what’s going to really, really change the environment and exacerbate the situation will be an oil crisis. I do expect oil to hit a new all-time high, say, by 2011. So within two to three years I would think that’s going to happen.
TGR: How low will we see oil go this time around?
SR: I don’t have a number on that because I don’t "buy these prices" on anything. These prices are largely a function of paper transactions, and yes, some transactions are taking place at these prices. Look at your Blackberry; a pound of copper is a brick that size. How much work, how much effort, how much energy goes into that and you can buy it for $1.50 or something in that range. Think to yourself, what else can you buy for $1.50? I was in Europe a few weeks ago. You can buy a bottle of water for €3, which is about $4. A cup of coffee costs that or more. I don’t know what you can get for $1.50 anymore; whereas you can get a piece of copper the size of your Blackberry for $1.61 today. The prices today are completely, absolutely bogus. Companies have to mine and sell their products at these prices. But if you recall our conversation in the last go-round, I said at some point I expect a complete reevaluation of most things, but commodities in particular (see here).
TGR: When you say commodities, are you doing base metals, precious metals?
SR: Everything. Everything that has an intrinsic value. Here’s the situation. Suppose three of us represent countries. One has oil, the other has wheat, and I have copper. If I want to buy your oil, I go back to my printer and print up as much money as I can and buy your oil. Well, the one with the wheat will do the same thing, print up as much money as possible and try to buy your oil. At some point people will stop accepting these currencies, whatever they are, because there’s no limit to them. Money is printed like leaflets. There’s no backing to it. When we get to the stage where there isn’t enough to go around—like you go to a gas station and you can’t get all the gas you need—the reevaluation will be forced on the market and will be forced on all the players. So, unless you have something else to offer, something of substance other than your paper money, I don’t think you’re going to get any of whatever it is you’re looking for.
So I do expect some time in the next decade that the oil market will fall apart. Whenever the deficit between production and consumption reaches a level where it’s going to start to have severe impact on availability and price, I think countries will go to direct contracts. That would be nothing new; such markets exist today, say, in uranium, where direct contracts are the main market and the futures market is basically an addendum. It’s more of a financial management tool for participants, rather than the market that determines anything significant.
TGR: At what level might the supply deficit trigger direct contract transactions in oil?
SR: Right now the supply and demand is about 85 million barrels a day supply against 87 million roughly in consumption. Suppose those numbers get to 90 and 95 (million barrels a day of consumption). At some point the shortage will become so severe that it’s going to wreak havoc in the marketplace. Those who have the oil will start to choose who they sell it to and in exchange for what. And I don’t think it’s going to be paper. That’s my longer term outlook.
TGR: What should investors be doing?
SR: It depends on the timeframe. If you’re talking about stocks, investors should take a hard look at their portfolios and ask themselves one question. Go through each stock and say, “Is this company going to be around on the other side of this financial crisis?” It may take six months; it may take three years for all I know. But if the company survives this current situation, I believe the benefits are going to be tremendous. Unfortunately, getting from here to there will be tough. It is already very, very difficult to get any kind of financing. And as we know, the mining (exploration) sector lives by it for the most part. A lot of these projects require large capital expenditure, either for exploration or development. Otherwise, they can’t do it.
TGR: Have you gone through your grid and come up with a list of companies that make the grade?
SR: I would be reluctant to discuss specific companies, particularly because investing is about the investor. If you want a simple version, stick with the major blue chips—but even then, survival is not a given. For instance, a company like Teck Cominco Ltd. (NYSE:TCK) is in a serious situation and the stock has plunged dramatically; it’s been one of the blue chips for the longest time and they’re a very conservative company.
TGR: Any other suggestions?
SR: If you need a guideline, the way I expect the market to play out going forward is for gold and silver to come back first. Base metals will probably lag behind by about a year to 18 months. When I say “come back,” I mean this downtrend in their price in the marketplace will reverse. Within two or three quarters after that, majors such as Newmont Mining Corp. (NYSE:NEM) and Barrick Gold Corp. (NYSE:ABX) will start making profits, good profits, large profits. Through that, I think their share price will come back and then they will turn around and buy juniors that survive this crisis on the cheap to justify those share prices. That’s the basic scenario I’m going by.
TGR: So you say first the bullion itself.
SR: First the bullion itself. You can never go wrong with that.
TGR: Despite the pullback we’ve encountered? Both gold and silver suffered during this asset devaluation.
SR: Well, yes and no. In retrospect in a perfect world it would have been wise to sell our gold and silver and their stocks and go into cash and try to buy them later on the cheap. In the real world, it doesn’t work like that. One thing to remember is gold and silver are the only markets that are driven by fear. We saw a good manifestation of that a couple of months ago, when gold shot up $90 in one day. We’ll see more days like that. In fact, it could be tomorrow for all I know, or the day after.
TGR: Do you see a specific catalyst for this?
SR: Not specific. It can be anything—war with Iran; some big banks going under; another country defaulting on its obligations. It can be a major investor like a sovereign wealth fund going to 50% gold or something. It can be absolutely anything. Now the trick here is gold and silver markets are not based on large amounts of buying. Let’s say tomorrow Warren Buffet says he’s going to buy $10 billion worth of gold. Immediately the supply is going to dry up. People who have gold will say, “Wait a minute, we’re not selling. The price is going up.” So the effect of a single event like that in the gold and silver space can reach far beyond what it would in any other market.
It is important to remember you don’t want to be in and out of assets of this type on a whim. Even if it takes a year, even if you have corrections like this, for my investment strategy I do not believe that gold and silver are amenable to buying and selling as are assets in other markets. Better to treat them like insurance, where you have it in good times and bad times. It won’t take a lot of buying to push these metals back up. And even though the metal prices have come down, if anything, demand for gold and silver has increased.
TGR: Evidenced by trying to find some coins.
SR: Absolutely and on any level. A week or two ago I was talking to a gentleman in London who runs a business that basically allows people to invest in gold. He told me that the gold he has in storage for his investors has reached some 11.5 tons in about 2.5 years. This is just one market participant out of who-knows-how-many and he deals mostly with retail investors. I believe the demand is there now and is only going to increase. Our current situation is going to add to that, not subtract from it.
Today’s metals prices are absolutely bogus, as is the price for oil. Yes, you can buy it at that price, but that is not what it’s worth. Right now oil is trading much, much cheaper than water, maybe one-third of the price of water. It should not be possible. I don’t believe in the rational market theory. I think the market is always wrong in the short term.
TGR: If people are looking at rolling money back into investments once the craziness stops, you say a logical sequence is to put some in bullion first and wait a little bit, buy some majors and wait a little bit, and then look at the juniors?
SR: That’s always been the theory. My views have not changed. If you asked me a year ago, I would have told you the exact same thing, so this is not trying to adjust my position based on current developments in the market. But in my opinion, that progression is how the market is going to move forward.
TGR: Doug Casey’s current philosophy is one-third cash, one-third bullion, one-third stocks. Would you agree, or are you saying to get it all in bullion for right now? Let’s say you have a high tolerance for speculation, risk taking. Where would you be?
SR: If you can get bullion at anything close to spot prices, you should buy as much as you plan to buy. I don’t endorse investors paying 50% premium, but I do believe in percentage terms the premiums will shrink at some point.
TGR: So would you buy Central Fund of Canada (AMEX:CEF)? Maybe half physical and half stock?
SR: Yes, I would, absolutely. And as far as stocks are concerned, it goes back to asking yourself that one question: “Is this company going to be around on the other side of this financial crisis?” If it is, by all means, buy some. I would recommend—as always, this is nothing new for me—dollar cost averaging. Whether you want to buy 1,000 shares or 10,000 shares, split it into five or six segments and buy one part every month or so.
The other thing is to reexamine your outlook or your investment horizon. You have to be prepared to not make any money for maybe about three years at least. I’m not saying that’s what’s going to happen, but you have to be prepared for that. Going in, you have to believe in this. I often use marriage as an example. You marry for the rest of your life, even if you end up getting divorced next year.
TGR: Things can change.
SR: Things can change. You can learn things you didn’t know. You may have other factors to deal with that don’t have to do with your position. But ultimately you have to believe in the company or the investment you’re making, and you have to give yourself at least three years to sit on it and maybe take some severe losses.
TGR: Speaking of severe losses, seeing billions evaporate this year has been a humbling experience.
SR: It is and it isn’t.
TGR: Tell us about the “isn’t.” We know about the “is.”
SR: The “isn’t” part is we all knew big problems would be coming down the line. And we knew why. Some of us discussed doomsday scenarios. I think where we went wrong is we did not prepare accordingly. A couple of months ago I wrote an article to that effect. It was called The Trouble with Forecasting. Basically the argument I was making is we knew that things would get bad, really bad. We should have believed our own predictions. There would have been no downside if we had been more conservative, more careful.
TGR: Can you give us any names based on various categories—senior producers, junior producers, exploration?
SR: I can flip that and tell you which companies I own. I own a good position in Pan American Silver Corp. (Nasdaq:PAAS). I own a position in Silver Wheaton Corp. (NYSE:SLW) and Hecla Mining (NYSE:HL). Those three I am comfortable will survive this crisis. One step down in terms of size and presence in the market, I own shares of First Majestic, IMPACT Silver and Minera Andes. Then if you go one step down below from that, companies with no production, I own shares of Esperanza and Silvercrest. I’ll leave it at that. Obviously, I own a lot of other different stocks, but I am trying to protect potential investors so I’m trying to be conservative here.
TGR: Tell us first about the one you mentioned last. What do you like about Silvercrest Mines Inc. [TSX.V:SVL]?
SR: The best thing about Silvercrest is management. And they do have a sizeable deposit, something on the order of 100 million ounces in Mexico. They have advanced studies, including, I believe, a feasibility study. They do need to build a mine. I don’t think it’s going to be an overly expensive mine and they don’t need too much lead time. They probably can be in production sometime in 2010, or maybe even sooner. But management is the key. I did buy that stock at well over $1. It’s probably half that today, maybe lower. But this is the type of company I believe will survive this crisis, come out on the other side and be one of the beneficiaries of whatever turnaround we see.
TGR: Esperanza Silver Corp. [TSX.V:EPZ]?
SR: Esperanza is a similar story. I like the management, very conservative. This is a pure exploration company. They do not plan to be in production, not that I know of. They have discovered two deposits: one in Peru and one in Mexico. I think the deposit in Mexico is about a million ounces of gold. In Peru, which should be roughly three quarters of a million ounces of gold, they have a JV with Silver Standard. That one is a higher grade. This is a grassroots exploration company, they like finding deposits. They found two in the recent past, so I expect more good things from them.
TGR: Minera Andes Inc. (MNEAF.OB)?
SR: Minera Andes is one of the companies that doesn’t have a high profile, but one of my favorites. It’s been my favorite for about five years now. Again, very good management, very low key. They focus on getting things done and not talking big, not too promotional. They have a mine in production that’s joint-ventured with Hochschild Mining [LSE:HOC] (which is a large silver producer) in Argentina. They have another project that they recently put out a resource calculation for—a copper project, which is a joint venture with Xstrata. Xstrata is a very large company, so this is another team that knows how to come up with good assets. I think they’ll also survive this crisis and will benefit from whatever upside in the future.
TGR: What about Minera Andes makes it one of your favorites?
SR: The management. Again, the management is very conservative, very low key, very non-promotional, very down to business. You just get a feeling for people; you see them so many times, talk to them, see how they go about their business and how they deliver. If they get where they plan to get and what they do to get there, it gives you a level of comfort. Minera Andes is one of those that has been through thick and thin and I think they’re definitely out of the woods in terms of whether they’re going to survive.
TGR: IMPACT Silver [TSX.V: IPT]. What’s the story there?
SR: I should mention that I am somewhat biased, in that I am a consultant to the company. But on the flip side, I like them for reasons other than that. It’s one of my largest silver holdings. They’re in production in Mexico, very conservative management. They have a good cash position, one of the lowest costs of production. It’s a small producer, at this time. They produce about a million ounces of silver equivalent. But management is seasoned, been around for quite some time and they know how to operate a mine. Their motto is: "a business has to make money, otherwise it’s a hobby". They bought an old mine in Mexico, and been profitable from day one. They’re still profitable, even in this environment, and I also believe they are going to be one of the ones that will come through this.
TGR: I’ve been hearing a lot about First Majestic (FRMSF.PK).
SR: First Majestic, I think, is one that has the highest chances of surviving this crash or this downturn, however you want to call it. I also think this is one that will get bigger, either through acquisitions or organic growth. I know the gentleman who started this company, Keith Neumeyer, very well, known him for years. Very ambitious and aggressive in executing his business plan. This company should produce on the order of about 5 million ounces of silver equivalent this year, maybe just under that. This has been accomplished in about four years. It’s no small task to get from zero to 5 million ounces in about four years. I also like First Majestic’s other principal, Ramon Davila, who is the most dynamic mining executive I’ve seen by far. He is the one who oversees the operations in Mexico, and is the one who built up Mexican operations for Pan American Silver in the past.
TGR: He’s got experience.
SR: Experience, knowledge and contacts; a very, very successful mining executive. First Majestic is going to be around for quite some time unless, of course, it’s going to be taken over by a major, which would be a compliment to get to a point where you are an attractive target to a major. For juniors that’s often of the ultimate goal. I’m not saying that’s the goal for First Majestic, but it’s like Rick Rule says, you build a company to keep and somebody else will want it. So I think First Majestic is going places.
TGR: And they’ve got the capital to weather the storm.
SR: I believe they have about $26 million in the bank. It’s a well established company in terms of production and operations. They have about 300 million ounces in resources. They’ve done their drilling, they’ve got four mines in production right now. They’re undertaking a major expansion at one of the projects in Northern Mexico. They’re basically going about their business according to plan. Maybe they’re making some minor adjustments to cut costs here and there, but ultimately this company is going to grow.
TGR: What’s going on with Hecla Mining Company (NYSE:HL)? Is it just silver and the industrial metal and, therefore, demand is off and prices are off?
SR: All of the above, but I think one of the reasons that is not well understood is that Hecla is one of the very few companies in this space that’s listed on the New York Stock Exchange. So it’s one of the more visible ones and I think they take it on the chin harder than the rest, particularly because of that listing. The way mainstream investors work is, “Everything is going down, so let’s short commodities. What do we have to play with?” And Hecla inevitably pops up on that list. I think that’s part of the reason it’s been beaten down so badly. Hecla is one of the best underground mine operators, so I think they will survive. The company’s been around for 100 years, so I’m sure they can weather this one—at least that’s the way I’m betting. If I’m wrong, then so be it.
This is why I am reluctant to discuss specific companies. If you’re investing in the mining sector, you have to be prepared to make mistakes and you will definitely make mistakes in many of them. The question is, of course, in the grand scheme of things, are you making progress or not, are you making money or not. So long as your portfolio is growing, you could do much, much worse than Hecla.
TGR: Wouldn’t you think the darling of the sector would hold up better?
SR: It works both ways. It would have been darling in good times and I think it will be again. At some point they will benefit from that New York Stock Exchange listing. But in bad times, they take it on the chin harder than the rest.
TGR: Another company that’s getting some conversation is Silver Recycling Company [TSX.V:TSR], which is a different play than mining. What do you know about them?
SR: Silver Recycling has been another favorite of mine. The businesses they currently control are profitable and they’re still doing okay. This has been one of the attractions when we first looked at it. Unfortunately, they’ve been one of the victims of the current credit environment. While they do have self-sustaining operations, they need to raise capital to make acquisitions. If they are successful in that task, and I have to believe they will be, it’s going to be a very, very pleasant surprise. It’s beaten down with the rest of the sector right now, but the business plan is sound. I am still optimistic about this company. In fact, I’m trying to help them get through this. By the way, chances are you can buy some silver from them because they’ve responded to the market demand and produce 100-ounce silver bars and silver rounds, which they sell to investors.
TGR: Right. At a premium to spot, right?
SR: Yes, at a premium to spot, I bought some myself, so I don’t think the premiums are outrageous at all or out of line with the market
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The Gold Report: Let's start with your take on where are we today, what has happened, and where we’re going from here.
Sean Rakhimov: Basically we’re in a situation that we’ve long expected. We all anticipated a big financial crisis, all sorts of problems, an end-of-the-world type of scenario—not literally, but the world as we know it. And I think we’re there. This is the big one and it’s for real. Where we go from here is largely a function of what the powers-that-be will do. We have some idea of what they will do; they will do all the things that will make it worse. I go by the theory that they will always do the right thing, but only after they exhaust all other options.
TGR: When you say the big one, how much further are you expecting both the markets and the international financials to erode?
SR: The markets are a separate story. Don’t confuse what the markets will do with the general crisis or economic situation. Markets are a different animal; they can do all kinds of things that do not fit into your thinking or should not have happened given the economy or the political situation, or what-have-you. I want to be clear on that so that people don’t assume that if I say, “Oh, this is going to last a while, that automatically means the market is going to not recover for a long time.” The economic crisis, I think, is going to last for a generation. I foresee a twofold crisis here, or maybe three stages. The first one is what we're going through right now - a debt crisis.
At some point down the line we’re going to have a currency crisis, where the dollar will stop being the reserve currency of the world. I don’t know how long before that happens. It’s a matter of whoever runs first to the door, basically. I was just reading some articles. Iran is converting their foreign exchange reserves into gold. China is trying to do some of that. It only takes a few of these until there’s a domino effect and when that happens, things should play out quickly.
TGR: What do you mean “play out quickly”?
SR: This crisis, I think, has been a good example, where within three months we ended up in a completely different environment. If the dollar stops being the reserve currency of the world tomorrow, I expect things to happen quickly. It may take a decade until it gets started, but once it starts, I expect things to unravel quickly. The reason for that is we have maybe 20 to 30 major players in the world that can make a difference. I’m talking about countries and maybe some other entities such as sovereign funds. And I believe it’s going to be very difficult to bring everybody to the table and get them to agree on a plan that everybody would sign on to. Even if they did sign on, I think it’s going to be very difficult to make sure everybody sticks with it.
As soon as they break ranks, I think within six months the whole thing is going to break apart. Whatever accord they come up with, if it’s going to be Russia or China or somebody of that size, things are going to happen even quicker. If it’s going to be a smaller player like Iran or Venezuela, that may take a bit longer. The significance of it may be downplayed for a period of time. But ultimately I think most people understand the dire straits we’re in. At some point it’s going to be "everybody for themselves" and that’s when I think the current system is going to fall apart.
TGR: You’re suggesting the dollar will stop being the world currency and countries will make some attempt to come together to create the new world currency. Might that be gold or precious metals?
SR: I don’t think the adoption of gold or a derivative thereof as a reserve currency is going to come from governments, at least not voluntarily. Eventually, I think they will be forced to.
TGR: Wasn’t that the original part of the Bretton Woods agreement?
SR: Yes, it was, where the U.S. dollar was as good as gold and was convertible to gold, but we know how that ended.
TGR: You said this crisis could go on for a generation. That’s a long time.
SR: I foresee maybe several stages of this crisis unraveling and that’s why I say it’s going to take about a generation. As I said, the first one is the big debt crisis we have now. Maybe an extension of it will be some sort of a currency crisis. It’s not just a dollar that won’t be worth anything, but most other currencies as well. And then I believe what’s going to really, really change the environment and exacerbate the situation will be an oil crisis. I do expect oil to hit a new all-time high, say, by 2011. So within two to three years I would think that’s going to happen.
TGR: How low will we see oil go this time around?
SR: I don’t have a number on that because I don’t "buy these prices" on anything. These prices are largely a function of paper transactions, and yes, some transactions are taking place at these prices. Look at your Blackberry; a pound of copper is a brick that size. How much work, how much effort, how much energy goes into that and you can buy it for $1.50 or something in that range. Think to yourself, what else can you buy for $1.50? I was in Europe a few weeks ago. You can buy a bottle of water for €3, which is about $4. A cup of coffee costs that or more. I don’t know what you can get for $1.50 anymore; whereas you can get a piece of copper the size of your Blackberry for $1.61 today. The prices today are completely, absolutely bogus. Companies have to mine and sell their products at these prices. But if you recall our conversation in the last go-round, I said at some point I expect a complete reevaluation of most things, but commodities in particular (see here).
TGR: When you say commodities, are you doing base metals, precious metals?
SR: Everything. Everything that has an intrinsic value. Here’s the situation. Suppose three of us represent countries. One has oil, the other has wheat, and I have copper. If I want to buy your oil, I go back to my printer and print up as much money as I can and buy your oil. Well, the one with the wheat will do the same thing, print up as much money as possible and try to buy your oil. At some point people will stop accepting these currencies, whatever they are, because there’s no limit to them. Money is printed like leaflets. There’s no backing to it. When we get to the stage where there isn’t enough to go around—like you go to a gas station and you can’t get all the gas you need—the reevaluation will be forced on the market and will be forced on all the players. So, unless you have something else to offer, something of substance other than your paper money, I don’t think you’re going to get any of whatever it is you’re looking for.
So I do expect some time in the next decade that the oil market will fall apart. Whenever the deficit between production and consumption reaches a level where it’s going to start to have severe impact on availability and price, I think countries will go to direct contracts. That would be nothing new; such markets exist today, say, in uranium, where direct contracts are the main market and the futures market is basically an addendum. It’s more of a financial management tool for participants, rather than the market that determines anything significant.
TGR: At what level might the supply deficit trigger direct contract transactions in oil?
SR: Right now the supply and demand is about 85 million barrels a day supply against 87 million roughly in consumption. Suppose those numbers get to 90 and 95 (million barrels a day of consumption). At some point the shortage will become so severe that it’s going to wreak havoc in the marketplace. Those who have the oil will start to choose who they sell it to and in exchange for what. And I don’t think it’s going to be paper. That’s my longer term outlook.
TGR: What should investors be doing?
SR: It depends on the timeframe. If you’re talking about stocks, investors should take a hard look at their portfolios and ask themselves one question. Go through each stock and say, “Is this company going to be around on the other side of this financial crisis?” It may take six months; it may take three years for all I know. But if the company survives this current situation, I believe the benefits are going to be tremendous. Unfortunately, getting from here to there will be tough. It is already very, very difficult to get any kind of financing. And as we know, the mining (exploration) sector lives by it for the most part. A lot of these projects require large capital expenditure, either for exploration or development. Otherwise, they can’t do it.
TGR: Have you gone through your grid and come up with a list of companies that make the grade?
SR: I would be reluctant to discuss specific companies, particularly because investing is about the investor. If you want a simple version, stick with the major blue chips—but even then, survival is not a given. For instance, a company like Teck Cominco Ltd. (NYSE:TCK) is in a serious situation and the stock has plunged dramatically; it’s been one of the blue chips for the longest time and they’re a very conservative company.
TGR: Any other suggestions?
SR: If you need a guideline, the way I expect the market to play out going forward is for gold and silver to come back first. Base metals will probably lag behind by about a year to 18 months. When I say “come back,” I mean this downtrend in their price in the marketplace will reverse. Within two or three quarters after that, majors such as Newmont Mining Corp. (NYSE:NEM) and Barrick Gold Corp. (NYSE:ABX) will start making profits, good profits, large profits. Through that, I think their share price will come back and then they will turn around and buy juniors that survive this crisis on the cheap to justify those share prices. That’s the basic scenario I’m going by.
TGR: So you say first the bullion itself.
SR: First the bullion itself. You can never go wrong with that.
TGR: Despite the pullback we’ve encountered? Both gold and silver suffered during this asset devaluation.
SR: Well, yes and no. In retrospect in a perfect world it would have been wise to sell our gold and silver and their stocks and go into cash and try to buy them later on the cheap. In the real world, it doesn’t work like that. One thing to remember is gold and silver are the only markets that are driven by fear. We saw a good manifestation of that a couple of months ago, when gold shot up $90 in one day. We’ll see more days like that. In fact, it could be tomorrow for all I know, or the day after.
TGR: Do you see a specific catalyst for this?
SR: Not specific. It can be anything—war with Iran; some big banks going under; another country defaulting on its obligations. It can be a major investor like a sovereign wealth fund going to 50% gold or something. It can be absolutely anything. Now the trick here is gold and silver markets are not based on large amounts of buying. Let’s say tomorrow Warren Buffet says he’s going to buy $10 billion worth of gold. Immediately the supply is going to dry up. People who have gold will say, “Wait a minute, we’re not selling. The price is going up.” So the effect of a single event like that in the gold and silver space can reach far beyond what it would in any other market.
It is important to remember you don’t want to be in and out of assets of this type on a whim. Even if it takes a year, even if you have corrections like this, for my investment strategy I do not believe that gold and silver are amenable to buying and selling as are assets in other markets. Better to treat them like insurance, where you have it in good times and bad times. It won’t take a lot of buying to push these metals back up. And even though the metal prices have come down, if anything, demand for gold and silver has increased.
TGR: Evidenced by trying to find some coins.
SR: Absolutely and on any level. A week or two ago I was talking to a gentleman in London who runs a business that basically allows people to invest in gold. He told me that the gold he has in storage for his investors has reached some 11.5 tons in about 2.5 years. This is just one market participant out of who-knows-how-many and he deals mostly with retail investors. I believe the demand is there now and is only going to increase. Our current situation is going to add to that, not subtract from it.
Today’s metals prices are absolutely bogus, as is the price for oil. Yes, you can buy it at that price, but that is not what it’s worth. Right now oil is trading much, much cheaper than water, maybe one-third of the price of water. It should not be possible. I don’t believe in the rational market theory. I think the market is always wrong in the short term.
TGR: If people are looking at rolling money back into investments once the craziness stops, you say a logical sequence is to put some in bullion first and wait a little bit, buy some majors and wait a little bit, and then look at the juniors?
SR: That’s always been the theory. My views have not changed. If you asked me a year ago, I would have told you the exact same thing, so this is not trying to adjust my position based on current developments in the market. But in my opinion, that progression is how the market is going to move forward.
TGR: Doug Casey’s current philosophy is one-third cash, one-third bullion, one-third stocks. Would you agree, or are you saying to get it all in bullion for right now? Let’s say you have a high tolerance for speculation, risk taking. Where would you be?
SR: If you can get bullion at anything close to spot prices, you should buy as much as you plan to buy. I don’t endorse investors paying 50% premium, but I do believe in percentage terms the premiums will shrink at some point.
TGR: So would you buy Central Fund of Canada (AMEX:CEF)? Maybe half physical and half stock?
SR: Yes, I would, absolutely. And as far as stocks are concerned, it goes back to asking yourself that one question: “Is this company going to be around on the other side of this financial crisis?” If it is, by all means, buy some. I would recommend—as always, this is nothing new for me—dollar cost averaging. Whether you want to buy 1,000 shares or 10,000 shares, split it into five or six segments and buy one part every month or so.
The other thing is to reexamine your outlook or your investment horizon. You have to be prepared to not make any money for maybe about three years at least. I’m not saying that’s what’s going to happen, but you have to be prepared for that. Going in, you have to believe in this. I often use marriage as an example. You marry for the rest of your life, even if you end up getting divorced next year.
TGR: Things can change.
SR: Things can change. You can learn things you didn’t know. You may have other factors to deal with that don’t have to do with your position. But ultimately you have to believe in the company or the investment you’re making, and you have to give yourself at least three years to sit on it and maybe take some severe losses.
TGR: Speaking of severe losses, seeing billions evaporate this year has been a humbling experience.
SR: It is and it isn’t.
TGR: Tell us about the “isn’t.” We know about the “is.”
SR: The “isn’t” part is we all knew big problems would be coming down the line. And we knew why. Some of us discussed doomsday scenarios. I think where we went wrong is we did not prepare accordingly. A couple of months ago I wrote an article to that effect. It was called The Trouble with Forecasting. Basically the argument I was making is we knew that things would get bad, really bad. We should have believed our own predictions. There would have been no downside if we had been more conservative, more careful.
TGR: Can you give us any names based on various categories—senior producers, junior producers, exploration?
SR: I can flip that and tell you which companies I own. I own a good position in Pan American Silver Corp. (Nasdaq:PAAS). I own a position in Silver Wheaton Corp. (NYSE:SLW) and Hecla Mining (NYSE:HL). Those three I am comfortable will survive this crisis. One step down in terms of size and presence in the market, I own shares of First Majestic, IMPACT Silver and Minera Andes. Then if you go one step down below from that, companies with no production, I own shares of Esperanza and Silvercrest. I’ll leave it at that. Obviously, I own a lot of other different stocks, but I am trying to protect potential investors so I’m trying to be conservative here.
TGR: Tell us first about the one you mentioned last. What do you like about Silvercrest Mines Inc. [TSX.V:SVL]?
SR: The best thing about Silvercrest is management. And they do have a sizeable deposit, something on the order of 100 million ounces in Mexico. They have advanced studies, including, I believe, a feasibility study. They do need to build a mine. I don’t think it’s going to be an overly expensive mine and they don’t need too much lead time. They probably can be in production sometime in 2010, or maybe even sooner. But management is the key. I did buy that stock at well over $1. It’s probably half that today, maybe lower. But this is the type of company I believe will survive this crisis, come out on the other side and be one of the beneficiaries of whatever turnaround we see.
TGR: Esperanza Silver Corp. [TSX.V:EPZ]?
SR: Esperanza is a similar story. I like the management, very conservative. This is a pure exploration company. They do not plan to be in production, not that I know of. They have discovered two deposits: one in Peru and one in Mexico. I think the deposit in Mexico is about a million ounces of gold. In Peru, which should be roughly three quarters of a million ounces of gold, they have a JV with Silver Standard. That one is a higher grade. This is a grassroots exploration company, they like finding deposits. They found two in the recent past, so I expect more good things from them.
TGR: Minera Andes Inc. (MNEAF.OB)?
SR: Minera Andes is one of the companies that doesn’t have a high profile, but one of my favorites. It’s been my favorite for about five years now. Again, very good management, very low key. They focus on getting things done and not talking big, not too promotional. They have a mine in production that’s joint-ventured with Hochschild Mining [LSE:HOC] (which is a large silver producer) in Argentina. They have another project that they recently put out a resource calculation for—a copper project, which is a joint venture with Xstrata. Xstrata is a very large company, so this is another team that knows how to come up with good assets. I think they’ll also survive this crisis and will benefit from whatever upside in the future.
TGR: What about Minera Andes makes it one of your favorites?
SR: The management. Again, the management is very conservative, very low key, very non-promotional, very down to business. You just get a feeling for people; you see them so many times, talk to them, see how they go about their business and how they deliver. If they get where they plan to get and what they do to get there, it gives you a level of comfort. Minera Andes is one of those that has been through thick and thin and I think they’re definitely out of the woods in terms of whether they’re going to survive.
TGR: IMPACT Silver [TSX.V: IPT]. What’s the story there?
SR: I should mention that I am somewhat biased, in that I am a consultant to the company. But on the flip side, I like them for reasons other than that. It’s one of my largest silver holdings. They’re in production in Mexico, very conservative management. They have a good cash position, one of the lowest costs of production. It’s a small producer, at this time. They produce about a million ounces of silver equivalent. But management is seasoned, been around for quite some time and they know how to operate a mine. Their motto is: "a business has to make money, otherwise it’s a hobby". They bought an old mine in Mexico, and been profitable from day one. They’re still profitable, even in this environment, and I also believe they are going to be one of the ones that will come through this.
TGR: I’ve been hearing a lot about First Majestic (FRMSF.PK).
SR: First Majestic, I think, is one that has the highest chances of surviving this crash or this downturn, however you want to call it. I also think this is one that will get bigger, either through acquisitions or organic growth. I know the gentleman who started this company, Keith Neumeyer, very well, known him for years. Very ambitious and aggressive in executing his business plan. This company should produce on the order of about 5 million ounces of silver equivalent this year, maybe just under that. This has been accomplished in about four years. It’s no small task to get from zero to 5 million ounces in about four years. I also like First Majestic’s other principal, Ramon Davila, who is the most dynamic mining executive I’ve seen by far. He is the one who oversees the operations in Mexico, and is the one who built up Mexican operations for Pan American Silver in the past.
TGR: He’s got experience.
SR: Experience, knowledge and contacts; a very, very successful mining executive. First Majestic is going to be around for quite some time unless, of course, it’s going to be taken over by a major, which would be a compliment to get to a point where you are an attractive target to a major. For juniors that’s often of the ultimate goal. I’m not saying that’s the goal for First Majestic, but it’s like Rick Rule says, you build a company to keep and somebody else will want it. So I think First Majestic is going places.
TGR: And they’ve got the capital to weather the storm.
SR: I believe they have about $26 million in the bank. It’s a well established company in terms of production and operations. They have about 300 million ounces in resources. They’ve done their drilling, they’ve got four mines in production right now. They’re undertaking a major expansion at one of the projects in Northern Mexico. They’re basically going about their business according to plan. Maybe they’re making some minor adjustments to cut costs here and there, but ultimately this company is going to grow.
TGR: What’s going on with Hecla Mining Company (NYSE:HL)? Is it just silver and the industrial metal and, therefore, demand is off and prices are off?
SR: All of the above, but I think one of the reasons that is not well understood is that Hecla is one of the very few companies in this space that’s listed on the New York Stock Exchange. So it’s one of the more visible ones and I think they take it on the chin harder than the rest, particularly because of that listing. The way mainstream investors work is, “Everything is going down, so let’s short commodities. What do we have to play with?” And Hecla inevitably pops up on that list. I think that’s part of the reason it’s been beaten down so badly. Hecla is one of the best underground mine operators, so I think they will survive. The company’s been around for 100 years, so I’m sure they can weather this one—at least that’s the way I’m betting. If I’m wrong, then so be it.
This is why I am reluctant to discuss specific companies. If you’re investing in the mining sector, you have to be prepared to make mistakes and you will definitely make mistakes in many of them. The question is, of course, in the grand scheme of things, are you making progress or not, are you making money or not. So long as your portfolio is growing, you could do much, much worse than Hecla.
TGR: Wouldn’t you think the darling of the sector would hold up better?
SR: It works both ways. It would have been darling in good times and I think it will be again. At some point they will benefit from that New York Stock Exchange listing. But in bad times, they take it on the chin harder than the rest.
TGR: Another company that’s getting some conversation is Silver Recycling Company [TSX.V:TSR], which is a different play than mining. What do you know about them?
SR: Silver Recycling has been another favorite of mine. The businesses they currently control are profitable and they’re still doing okay. This has been one of the attractions when we first looked at it. Unfortunately, they’ve been one of the victims of the current credit environment. While they do have self-sustaining operations, they need to raise capital to make acquisitions. If they are successful in that task, and I have to believe they will be, it’s going to be a very, very pleasant surprise. It’s beaten down with the rest of the sector right now, but the business plan is sound. I am still optimistic about this company. In fact, I’m trying to help them get through this. By the way, chances are you can buy some silver from them because they’ve responded to the market demand and produce 100-ounce silver bars and silver rounds, which they sell to investors.
TGR: Right. At a premium to spot, right?
SR: Yes, at a premium to spot, I bought some myself, so I don’t think the premiums are outrageous at all or out of line with the market
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