Where’s the Beef for Gold Equities?

Sunday, April 15th, 2012

Where’s the Beef for Gold Equities?

By Frank Holmes, CEO and Chief Invest­ment Offi­cer, U.S. Global Investors

Gold bulls have plenty of room to graze in the stock­yard these days as the invest­ing herd migrated to other assets dur­ing the market’s steep climb in 2012. For the fourth time in the past year, gold bears out­num­bered the bulls in Bloomberg’s weekly Gold Bull/Bear Sen­ti­ment Sur­vey. In fact, the bears had the bulls out­num­bered by almost 2-to-1.

Today’s grow­ing sloth of gold bears is a “buy” sig­nal for con­trar­ian investors like us at U.S. Global. Research from the gold team at Canac­cord Genu­ity found that gold ral­lied about 10 per­cent on aver­age dur­ing the month fol­low­ing each of these sen­ti­ment “cross-overs.” This his­tor­i­cal increase means that gold could poten­tially rally to the “high $1,700’s per ounce,” which Canac­cord believes “would breathe some new life into the gold equities.”

After a year of neglect from investors who favored bul­lion, gold equi­ties need resus­ci­ta­tion. Going back to April of last year, gold stocks have been under­val­ued com­pared to bul­lion. I dis­cussed this dis­con­nect back in June 2011 (Will Gold Equity Investors Strike Gold?) and again in August (Val­u­a­tion Gap Makes Gold Min­ers Attrac­tive, but All Min­ers Aren’t Cre­ated Equal).

This trend has been accel­er­at­ing recently: At the end of March, the spread between the NYSE Arca Gold Min­ers Index and gold bul­lion was at the same extreme level it was dur­ing the 2008 credit cri­sis despite a much rosier global eco­nomic out­look. Going back the full decade of gold’s bull run, this is quite a rare event.

It hasn’t been a com­plete drought for gold equity investors though, as there have been occa­sional spurts of relief over the past year. From the begin­ning of 2011 through the mid­dle of the year, the S&P/TSX Global Gold Index declined by 14 per­cent. The index then quickly reversed course upward dur­ing the market’s volatile period last fall. Now, the index has been declin­ing for four months now, drop­ping 28 per­cent, while gold bul­lion has only fallen 9 per­cent over that same time period, says Canaccord.

Believe it or not, the four-month sell­off is a bull­ish sign for gold stocks. If you expand your time hori­zon, you’ll see each dip has been a turn­ing point for gold stocks. Canac­cord says that, “sec­tor weak­ness (less than one year) in the gold equi­ties over the last six years has typ­i­cally ended with “V” shaped cor­rec­tions to the upside.” Gold investors must be quick to “buy on the dips” since these sharp V-shaped cor­rec­tions have been frequent.

The Stam­pede to Buy Under­val­ued Gold Miners

If you plan on shop­ping for bar­gains in the gold miner depart­ment, you’re going to have to fight a crowd. Numer­ous global investors have been pound­ing the table for gold stocks, includ­ing Dr. Marc Faber who said “gold shares have become extremely over­sold and could rebound in the next few days” in his April mar­ket com­men­tary and Global Port­fo­lio Strate­gist Don Coxe, who reit­er­ated that gold equi­ties are under­val­ued com­pared to the pre­cious metal on his weekly con­fer­ence call today.
Another big buyer has been the min­ers them­selves. Merg­ers and acqui­si­tions in the min­ing sec­tor have been at an all-time high over the past two years. Large gold min­ers such as Bar­rick, Gold­corp and Kin­ross have been tak­ing advan­tage of these cheap val­u­a­tions by snatch­ing up small min­ers with proven deposits.

And they’ve been will­ing to pay a pre­mium too. Accord­ing to Des­jardins Cap­i­tal Mar­kets, over 2010 and 2011, a total of 26 merg­ers and acqui­si­tions have taken place to the tune of more than $30 bil­lion. In this time period, the buy­out or pur­chas­ing pre­mium has aver­aged more than 40 percent.

Des­jardins says the M&A trend in the gold sec­tor should con­tinue, given “grow­ing cash hoards and a lack of new dis­cov­er­ies” of the pre­cious metal. As one exam­ple of this ongo­ing world­wide trend, Bloomberg News reported today that, “Chi­nese gold pro­duc­ers are vying for domes­tic and over­seas min­ing resources,” with two com­pa­nies com­pet­ing for two dif­fer­ent gold min­ing com­pa­nies located in the east­ern province of Shandong.

Big min­ers have his­tor­i­cally pur­chased the known assets of their rivals as a way to increase reserves rather than deal with the heartache and headache of drilling core sam­ples and fill­ing out per­mit appli­ca­tions. Large-scale gold pro­duc­tion is a com­plex and costly process involv­ing dig­ging, trans­port­ing, crush­ing and chem­i­cally treat­ing mas­sive quan­ti­ties of rock to get at small amounts of gold. In fact, a com­mer­cially viable deposit could con­tain just a tiny frac­tion of an ounce of gold for every ton of mined rock. If you’re curi­ous about this phe­nom­e­non and want to learn more, check out my book The Gold­watcher: Demys­ti­fy­ing Gold Invest­ing where I go into greater detail.

With the sig­nals there for a bounce and stocks under­val­ued, what’s stop­ping investors from buy­ing gold equi­ties? One rea­son could be mar­gin pres­sure. Ris­ing energy costs, reduced sup­ply and cur­rency swings can quickly erase a gold company’s mar­gin. It takes a great deal of diesel fuel to run the shov­els and dump trucks that haul ore to the mill for pro­cess­ing and ris­ing energy costs can affect the prof­itabil­ity of a mine sub­stan­tially. These vari­ables are the project’s cash costs, or how much cap­i­tal must be spent to pull an ounce of gold out of the ground.

From the first quar­ter of 2008 through the third quar­ter of 2011, the global aver­age cash cost has been ris­ing for min­ers at a rate of about 8 per­cent year-over-year. Des­jardins says costs will “likely remain under pres­sure, espe­cially on the energy and labor fronts.”

How­ever, as Des­jardins points out, at the level that gold is at now, “most pro­duc­ers will be gen­er­at­ing sig­nif­i­cant cash flow and earn­ings,” using this cash to fund takeovers, build out devel­op­ment pipelines and pay higher div­i­dends.
Another bar­rier for investors could be per­ceived volatil­ity. On Bloomberg Radio, I explained to host Kath­leen Hays how gold’s 12-month rolling volatil­ity is very dif­fer­ent from the way it’s per­ceived. While the nor­mal volatil­ity for the S&P 500 Index is up or down 19 per­cent over a 12-month period, it’s only 13 per­cent for gold bullion.

My friend and CIBC ana­lyst, Barry Cooper heard my Bloomberg inter­view and emailed me the chart below show­ing how the TSX Global Gold Index ETF/Gold Price Ratio has his­tor­i­cally been neg­a­tively cor­re­lated with gold’s volatil­ity. Two times over the past four years, when gold price volatil­ity was falling, it was gen­er­ally asso­ci­ated with ris­ing val­u­a­tions of the TSX Global Gold Index ETF. Today it’s a dif­fer­ent story: Gold’s volatil­ity and value are both going down. Accord­ing to Barry, “either we are in a totally new régime for gold shares or some­thing has to give.”

The cold shoul­der from investors has also given way to a promis­ing trend in the gold space—growing div­i­dend pay­outs. We believe this is one can’t-miss trend. We’ve been pay­ing close atten­tion to this as it has devel­oped over the past few years, because through monthly or quar­terly div­i­dends, investors can receive income while they wait for share prices to appre­ci­ate. To cap­ture the income poten­tial, we’ve adjusted the port­fo­lios of USERX and UNWPX to hold some of these dividend-payers. Many of these hold­ings pay a monthly div­i­dend that is higher than the two-year gov­ern­ment note, have rich bal­ance sheets and receive roy­al­ties from all over the world on their gold mines.

We encour­age investors to think con­trar­ian: Eat up all you can while the pas­ture is wide open, because as the chart above shows, when gold equi­ties reverse, it hap­pens quickly.

Tags: Bullion Gold, Chief Investment Officer, Contrarian Investors, Credit Crisis, Equity Investors, Extreme Level, Frank Holmes, Global Economic Outlook, Global Gold, Gold Bullion, Gold Bulls, Gold Equities, Gold Equity, Gold Index, Gold Miners, gold stocks, Gold Team, Nyse Arca, Strike Gold, U S Global Investors, Volatile Period
Posted in Markets | Comments Off

Jim Grant On Gold-Backed Bonds And 'The Hope Leeches'

Wednesday, February 15th, 2012

James Grant, of Grant's Inter­est Rate Observer makes some thought-provoking state­ments in his must-listen Bloomberg Radio inter­view with Tom Keene today. While not­ing America's excep­tion­al­ism (h/t Clint East­wood?), he per­haps doesn't mean all Amer­i­cans as he takes the Fed and Trea­sury to task over their actions in recent years (and in fact for decades). His long-held view that rates should be higher and fol­low gen­er­a­tional cycles raises con­cerns for him that gov­ern­ment inter­ven­tion is in fact 'pro­long­ing the symp­toms' of the reces­sion. In con­sid­er­ing Tom Keene's well-thought-out ques­tion of why the US does not take advan­tage of low rates and issue excep­tion­ally long-dated bonds, Grant agrees with the odd premise that they do not but then goes on to what would be sounder policy.

"Why not issue bonds backed by gold bul­lion? Gold is a bet­ter money and is grounded in some­thing besides the power of the peo­ple that print the dol­lar bills." The inter­view goes on to dis­cuss pop­u­la­tion growth as a more potent 'fix' for hous­ing in the US than QE, that the US is a prefer­able invest­ment envi­ron­ment (given val­u­a­tions) than Ger­many or Japan, the dras­tic drop in NYSE vol­umes, and the "leech­ing out of excite­ment, hope, and expec­ta­tion of improve­ment (par­tic­u­larly for the young)." His com­pare and con­trast of the 1920–21 depres­sion to the cur­rent Great Reces­sion (which seems not to end), focused on the fis­cal and mon­e­tary actions, is an eye opener that its just pos­si­ble the present-day ortho­doxy is wrong. Urg­ing that we main­tain our sense of shock at the size of our 'peace­time' deficits, Grant wor­ries that we are in a sec­u­lar stagnation.

Click below to lis­ten to the interview...

Jim Grant On Bloomberg Radio by user5452365

Tags: Bullion Gold, Compare And Contrast, Dollar Bills, Drastic Drop, Exceptionalism, Eye Opener, Generational Cycles, Gold Bullion, Government Intervention, Interest Rate Observer, Investment Environment, Issue Bonds, James Grant, Jim Grant, Leeches, Nyse, Peacetime, Population Growth, Radio Interview, Tom Keene
Posted in Markets | Comments Off

“Please move into gold,” urges Richard Russell

Thursday, January 12th, 2012

Since its pre­cip­i­tous decline of more than $350 from August to Decem­ber last year, gold bul­lion has regained almost $100 of its loss. The yel­low metal two days ago man­aged to climb above its 200-day mov­ing aver­age in what appears to be an upside break from a mini inverse head-and-shoulders pattern.

Source: StockCharts.com

I remain bull­ish on the fun­da­men­tal out­look for gold for, among oth­ers, the fol­low­ing reasons:

• Stress in sov­er­eign debt markets.
• A likely reces­sion in Europe (and com­men­su­rate quan­ti­ta­tive eas­ing in what­ever form).
• L0w real inter­est rates.
• Cen­tral bank buying.
• The least bull­ish posi­tion­ing of investors in gold since 2008. (Also see yesterday’s post “Gold bounces off most over­sold level since ’08 – buy­ing time?“)

Hav­ing said this, I believe gold has more con­sol­i­da­tion ahead before resum­ing its bull mar­ket. Pull-backs dur­ing this period should be used for adding to positions.

I often get asked what Richard Rus­sell, 87-year old writer of the Dow The­ory Let­ters, nowa­days says about the out­look for gold. In short, he sees a world “eco­nomic train wreck” ahead, and views gold as the “last man stand­ing”. A few of his com­ments are below.

“For a decade I have been urg­ing my sub­scribers to move into gold – either phys­i­cal bul­lion or oth­er­wise. Now I am at it again PLEASE MOVE INTO GOLD. Those who think gold has lapsed into a bear mar­ket sim­ply do not know what they are talk­ing about. Gold has sim­ply been cor­rect­ing in an on-going bull market.

“This is a time when almost every cen­tral bank in the world is grind­ing out paper cur­rency, grind­ing it out by the car-load. This is a time when peo­ple are search­ing for safety. Peo­ple are fright­ened and con­fused. Where is the land of safety?

“There is only one safe asset on the planet: that safe asset is gold. Unin­formed peo­ple believe gold is just a com­mod­ity. Wrong, gold is absolute money. Gold alone is the world’s only com­pletely safe cur­rency. Gold has no counter-party against it, and no cen­tral bank has ever found a way to cre­ate gold.

“Almost every nation on earth has indulged in the same kind of fis­cal mad­ness. To cover the insane spend­ing, nations have had to cre­ate an almost end­less amount of fiat cur­rency. This avalanche of “money” has steadily reduced the buy­ing power of almost every cur­rency. The result is that it takes increas­ingly more paper cur­rency to buy one ounce of real money – gold.

“Gold may now be end­ing its lat­est cor­rec­tion. If I am cor­rect in this, gold is in a buy­ing zone.”

The long-timer has spoken!

Source: Dow The­ory Let­ters , Jan­u­ary 11, 2012.

Tags: Bear Market, Buying Time, Car Load, Commodity Gold, Cou, Debt Markets, Dow Theory Letters, Gold Bullion, Head And Shoulders, Head And Shoulders Pattern, Last Man Standing, Money Gold, Moving Average, Paper Currency, Pattern Source, Precipitous Decline, Recession, Richard Russell, Sovereign Debt, Train Wreck
Posted in Markets | Comments Off

Gold Market Radar (January 1, 2012)

Sunday, January 1st, 2012

Gold Mar­ket Radar (Jan­u­ary 1, 2012)

For the week, spot gold closed at $1,563.70 down $42.65 per ounce, or 2.7 per­cent.  Gold stocks, as mea­sured by the NYSE Arca Golds BUGS Index, fell 2.4 per­cent. The U.S. Trade-Weighted Dol­lar Index rose 0.4 per­cent for the week.

Strengths

• With the end of tax loss sell­ing on Decem­ber 23 for Cana­di­ans, the pres­sure to lock in losses for the year was abated and there were some sig­nif­i­cant rebounds over the last five trad­ing days of the year.  Gran Colom­bia Gold surged 16 per­cent while both Romarco Min­er­als and San Gold gained 6 percent.
• Although we have been see­ing some profit-taking towards year-end, gold has advanced 10 per­cent, head­ing for the eleventh straight annual gain. Gold returns are largely uncor­re­lated with the mar­ket and this has boosted its demand as an alter­na­tive invest­ment for port­fo­lio diver­si­fi­ca­tion amid slump­ing equi­ties.  Gold’s high for the year was a record $1,923.70, reached on Sep­tem­ber 6.
• Hold­ings in exchange-traded prod­ucts backed by phys­i­cal bul­lion are increas­ing for the first time in three weeks, ris­ing 0.3 per­cent this week after falling in the pre­vi­ous two weeks 1.5 per­cent.  Buy­ers are com­ing back as the mar­ket looks over­sold at cur­rent levels.

Weak­nesses

• The United States Mint reported this week that sales of the U.S. gold and sil­ver bul­lion coins slowed in the fourth quar­ter as pre­cious metal prices fell from their highs, sig­nal­ing that investor inter­est in phys­i­cal metal pur­chases may be waning.
• Gen­er­ally, news flow in the gold space was neg­a­tive for the week.  Sea­son­ally slow jew­elry demand in India (the world’s largest gold buy­ing nation) and a ban from the People’s Bank of China (PBOC) on all non-official gold trad­ing exchanges in the world’s num­ber two gold con­sum­ing com­pany, all con­tributed to weaker sen­ti­ment.  The Bom­bay Bul­lion Asso­ci­a­tion said on Tues­day that December’s imports of gold bul­lion to India will likely stand 50 per­cent below Decem­ber 2010 lev­els.  The PBOC ordered the clo­sure of all gold trad­ing plat­forms and ser­vices out­side the Shang­hai Gold Exchange and Shang­hai Futures Exchange.
• Due to surg­ing gold prices in rupee terms, to lift sales, Indian jew­el­ers have reduced the gold con­tent to make up for the loss.  A steep jump in the price of gold in the first half of the year impacted demand for gold, while the volatil­ity over the remain­ing months ensured that gold traders and jew­elry retail­ers destocked.  Jew­el­ers in some cases were replac­ing the weight of gold with dia­monds to keep investors’ interest.

Oppor­tu­ni­ties

• The Head of Research at China’s Cen­tral Bank was quoted say­ing that the coun­try should buy gold as the only safe place for risk-averse investors when other assets are los­ing value.  Zhang Jian­hua, the head of the research depart­ment at PBOC, wrote in the Finan­cial News that, “the Chi­nese gov­ern­ment needs to fur­ther opti­mize China’s for­eign exchange asset port­fo­lio and to seek rel­a­tively low entry points to buy gold assets.”
• We would expect there to be renewed inter­est in pick­ing up many of the beaten down gold stocks with the start of the New Year as the sell off was exac­er­bated by tax loss sell­ing in both the U.S. and Canada in the fourth quar­ter.  Sea­son­ally, the Jan­u­ary Effect is in play and gold prices typ­i­cally see sea­sonal strength up until the April/May window.
• Secu­ri­ties and Exchange Com­mis­sion data shows John Paul­son, Paul Touradji and Eric Mindich, all hedge fund man­agers, sold bul­lion this year.  While there have been reports of high pro­file investors cut­ting their gold expo­sure it can­not be con­ceded that this con­clu­sively ends the run in gold bul­lion.  Cer­tainly some of the bul­lion sell­ing reflected investor redemp­tion requests, and fund man­ager pref­er­ence to sell bul­lion instead of stocks, which on a rel­a­tive basis have under­per­formed.  Tur­moil in Europe has also been a fac­tor in push­ing the euro lower to the ben­e­fit of the dol­lar and detri­ment of gold.  Keep the eco­nomic fun­da­men­tals in mind as the debt and unem­ploy­ment prob­lems are far from being solved and the politi­cians will be more likely to stim­u­late growth and print money to extin­guish debt as they seek to get reelected in 2012.

Threats

• Zim­babwe announced that it is con­sid­er­ing set­ting up a ban on raw plat­inum exports, in an effort to force min­ers to set up refiner­ies in the coun­try.  Zim­babwe has the second-largest known plat­inum reserves in the world.
• Peru’s gov­ern­ment may declare a state of emer­gency in the north­ern Andes should protests resume against Newmont’s Minas Conga gold project val­ued at $4.8billion.  It has been spec­u­lated that those protest­ing against the project have planned a march in the high­land region for Jan­u­ary 2–3.  The gov­ern­ment has said it will take legal action against the protest leader, Gre­go­rio San­tos, for bar­ring all indus­trial activ­ity in the area around Newmont’s project.
• Begin­ning Jan­u­ary 20, 2012, work­ers of Freeport McMoRan’s Gras­berg mine, who have been on strike since Sep­tem­ber 15, will grad­u­ally return to work.  More than 8,000 work­ers went on strike demand­ing higher wages, and the union has agreed to a 37 per­cent pay rise over the next two years. Cop­per prices may see some slack­ness in the near term.

Tags: Alternative Investment, Bank Of China, Days Of The Year, Dollar Index, Gold And Silver, Gold Bullion, Gold Market, gold stocks, Gran Colombia, Investor Interest, Market Radar, Nyse Arca, Pboc, Portfolio Diversification, Precious Metal Prices, Romarco Minerals, Silver Bullion Coins, Spot Gold, U S Gold, United States Mint
Posted in Markets | Comments Off

Gold Market Radar (December 19, 2011)

Sunday, December 18th, 2011

Gold Mar­ket Radar (Decem­ber 19, 2011)

For the week, spot gold closed at $1,598.95 down $112.65 per ounce, or 6.58 per­cent.  Gold stocks, as mea­sured by the NYSE Arca Golds BUGS Index, fell 9.06 per­cent. The U.S. Trade-Weighted Dol­lar Index jumped 2.07 per­cent for the week.

Strengths

• Despite tough gold mar­kets, we con­tinue to see strength from Asia, with the lat­est gov­ern­ment sta­tis­tics show­ing that Chi­nese gold imports were up 50 per­cent in Octo­ber from Sep­tem­ber.  The most com­mon route for Chi­nese imports is one through Hong Kong, which hit a new record and was 40 times higher than imports via this route a year ago. This is the fourth month of record imports into China. Chi­nese New Year, begin­ning Jan­u­ary 23, presents a strong plat­form for fur­ther Chi­nese gold import records.
• Peru’s newest Prime Min­is­ter Oscar Valdes decided late Thurs­day to lift the “state of emer­gency” insti­tuted late last week in response to protests that had turned vio­lent against the New­mont and Bue­naven­tura Minas’ Conga project. Nego­ti­a­tions will be reopened Mon­day.  Both Bue­naven­tura and Rio Alto Min­ing, with largely only Peru­vian based assets, rose 4.5 and 2.9 per­cent, respectively.
• Despite the pull back in gold bul­lion, gold exchange-traded prod­ucts have expe­ri­enced fairly small out­flows so far, and do not antic­i­pate much to change.  With the amount of gold held equal­ing the hold­ings of the French cen­tral bank, the amount of gold is up nearly 20 per­cent for the year. The recent price cor­rec­tion touched almost a 17 per­cent drop from the highs set in Sep­tem­ber 2011 and by the end of the week gold seemed to have found a floor.

Weak­nesses

• Gold was likely a source of liq­uid­ity to meet redemp­tions for hedge funds that antic­i­pate large redemp­tions due to poor equity mar­ket per­for­mance and suf­fered some­what from Euro­pean banks, such as France’s Credit Agri­cole deci­sion to scale back its com­mod­ity trad­ing and finance busi­ness in a move to cut risk. As pro­pri­etary trad­ing for the banks was ended by new reg­u­la­tions, many of the trad­ing desks have been scut­tled in Europe.
• With gold tak­ing a hit this week, the reins were also pulled in on gold stocks. Senior gold stocks declined roughly 9 per­cent but junior gold pro­duc­ers decreased, on aver­age, about 6 per­cent, per­haps reflect­ing cheaper val­u­a­tions. Gold explo­ration and devel­op­ment com­pa­nies fared the worst, with a fall of about 11 percent.
• The deci­sion to rule Rio Tinto as the win­ner in the arbi­tra­tion with Ivan­hoe Mines left Ivanhoe’s shares down almost 22 per­cent this past Tues­day.  Rio Tinto is no longer sub­ject to a stand­still agree­ment with the com­pany which there­fore means that Rio is pro­tected against hav­ing its 49 per­cent hold­ings diluted should Ivan­hoe issue addi­tional shares. When ques­tioned whether or not Rio would con­tinue tak­ing Ivan­hoe out com­pletely, Rio stated that it, “may seek oppor­tu­ni­ties to increase its share­hold­ing in Ivan­hoe to a major­ity posi­tion but cur­rently has no inten­tion of mak­ing a full takeover bid for Ivanhoe’s shares.”

Oppor­tu­ni­ties

• Due to the Royal Cana­dian Mint’s (RCM) over­whelm­ing suc­cess of its new Cana­dian Gold Reserves’ Exchange Traded Receipts (ETRs), the RCM is now con­sid­er­ing mar­ket­ing sil­ver ETRs. With each ETR rep­re­sent­ing actual own­er­ship in the phys­i­cal pre­cious metal, investors helped to raise C$600 mil­lion in three weeks for the gold ETR ini­tial pub­lic offer­ing, killing ini­tial expec­ta­tions of rais­ing C$250 mil­lion. So far, U.S. cus­tomers are the largest buy­ers of the gold ETR.
• Merger and acqui­si­tion activ­ity remains hot in the gold space with the lat­est bid com­ing from Luxor Cap­i­tal Group, a major hedge fund, for Croc­o­dile Gold.  Luxor said it would buy up to 215.5 mil­lion Croc­o­dile Gold shares for C$0.56 a share, rep­re­sent­ing a 60 per­cent pre­mium over the pre­vi­ous day’s close.  Cur­rently, Luxor owns 10 per­cent.  Croc­o­dile Gold shares were up almost 39 per­cent the day of this announcement.
• India report­edly has been con­sid­er­ing free­ing gold doré imports, which up until this point, has only been under­taken by India’s cen­tral bank. India’s com­merce min­istry is cur­rently debat­ing a pro­posal which would ulti­mately bring down jew­elry prices. The country’s Finance Bill 2011 had stip­u­lated that doré, with up to 80 per­cent gold con­tent, could be imported through des­ig­nated agen­cies, under strict con­di­tions and a com­plex tax struc­ture; free­ing the import restric­tions would encour­age more to come into the coun­try. The Cen­tre for Mon­i­tor­ing Indian Econ­omy has fore­casted that the country’s con­sump­tion of the pre­cious metal will surge 50 per­cent to 1,200 tons a year by 2020.

Threats

• Oxford Pol­icy Man­age­ment reported in a new research doc­u­ment that Botswana, the Demo­c­ra­tic Repub­lic of Congo and Zam­bia are cur­rently most vul­ner­a­ble to “resource curse.” The study looked at nearly 100 “mineral-dependent” coun­tries and explained “the para­dox­i­cal sit­u­a­tion in which resource-rich coun­tries suf­fer from stag­nant growth or even eco­nomic con­trac­tion, as well as insti­tu­tional prob­lems such as cor­rup­tion and weak pub­lic ser­vice deliv­ery.” Other coun­tries in this cat­e­gory included Bolivia, Burk­ina Faso, Ghana, Guyana and Mau­ri­ta­nia, where many com­pa­nies are cur­rently mining.
• The FTSE Inter­na­tional announced this week that it had increased the free-float require­ment for U.K. incor­po­rated com­pa­nies seek­ing inclu­sion in the bench­mark U.K. equity indices to 25 per­cent from 15 per­cent, sub­ject to take effect Jan­u­ary 2012.  Although this announce­ment is poten­tially pos­i­tive from a liq­uid­ity and cor­po­rate stand­point, it does poten­tially threaten the stocks until com­pli­ance is met.  Eurasian Nat­ural Resources, Fres­nillo and ENRC are a few com­pa­nies that may have trou­ble meet­ing this new requirement.
• Absa Capital’s lat­est quar­terly eco­nomic out­look reported that min­ing and man­u­fac­tur­ing would remain a drag on South Africa’s growth for 2012. Gina Schoe­man, a lead­ing South African econ­o­mist, pointed out that the two sec­tors had been a mate­r­ial drag on the country’s growth per­for­mance dur­ing the sec­ond and third quar­ters of 2011. Growth domes­tic prod­uct was neg­a­tively affected in the third quar­ter by a 17.4 per­cent quarter-over-quarter con­trac­tion in min­ing, while an 8.8 per­cent con­trac­tion in man­u­fac­tur­ing in the sec­ond quar­ter affected the second-quarter GDP number.

Tags: Bullion Gold, China Chinese, Chinese Gold, Chinese New Year, Commodity Trading, Dollar Index, European Banks, Gold Bullion, Gold Exchange, Gold Imports, Gold Market, Gold Markets, gold stocks, Import Records, Market Radar, Nyse Arca, Oscar Valdes, Proprietary Trading, Record Imports, Spot Gold
Posted in Markets | Comments Off

Gold Shares Would Soon Play Catch Up

Monday, December 12th, 2011

In a recent research note, BCA Research argues that it is too soon to give up on gold shares – a sec­tor that has under­per­formed gold bul­lion and liq­uid­ity plays over the past few years.

The report says: “Gold miner prof­its track gold prices and this has not changed in the past few years, although the track­ing is far from per­fect. What has changed is the tra­di­tional 2:1 rela­tion­ship between changes in gold shares and under­ly­ing prices. Global gold shares are flat year-on-year in dol­lar terms, yet the dol­lar price of gold is up 22%. This is despite the fact that gold com­pany hedge books are leaner than they have been in years.

“One pos­si­ble expla­na­tion is that commodity-sensitive cur­ren­cies have been strong in recent years. This places a wedge between rev­enues and costs for many gold pro­duc­ers. Put another way, gold in C$, A$ and SA rand terms has been weaker than in U.S. dol­lar terms. How­ever, that has not been the case in recent months as the com­mod­ity cur­ren­cies have dropped in the face of investor risk aversion.

“A more likely expla­na­tion relates to the ETF phe­nom­e­non. Gold com­pany mul­ti­ple com­pres­sion accel­er­ated as ETF hold­ings hit suc­ces­sive new highs in 2010 and 2011.

“While the diver­gence is unsus­tain­able, it is dif­fi­cult to tell when it will end. Even if gold shares are in a bear mar­ket ver­sus gold prices, they are stretched rel­a­tive to the down­trend in place since 2006. Per­haps global refla­tion and a softer dol­lar will spur a “broad­en­ing” of inter­est in lag­ging liq­uid­ity plays, such as gold shares.”

I am in agree­ment with BCA’s rec­om­men­da­tion that one should con­tinue to hold strate­gic posi­tions in both gold and gold shares.

Source: BCA – Daily Insights Ser­vice, Decem­ber 8, 2011.

Tags: Bear Market, Commodity, December 8, Divergence, Dollar Price, Dollar Terms, Gold Bullion, Gold Company, Gold Miner, Gold Prices, Gold Producers, Gold Shares, Investor Risk, liquidity, New Highs, Phenomenon, Price Of Gold, Rand Terms, Reflation, Risk Aversion
Posted in Markets | Comments Off

You Can’t Print More Gold

Sunday, December 11th, 2011

You Can’t Print More Gold

By Frank Holmes, CEO and Chief Invest­ment Offi­cer, U.S. Global Investors

What do you get when you mix neg­a­tive real inter­est rates with stim­u­la­tive money sup­ply efforts by global cen­tral banks?
An excep­tion­ally potent for­mula for higher gold prices that could send gold to the unimag­in­able level of $10,000 an ounce. Neg­a­tive real inter­est rates and strong money sup­ply growth are two key fac­tors of what I refer to as the Fear Trade.

Neg­a­tive real inter­est rates occur when the infla­tion­ary rate, or CPI, is greater than the cur­rent inter­est rate. A quick account of the G-7 and E-7 coun­tries shows that the major­ity have neg­a­tive real inter­est rates.

Across the devel­oped G-7 coun­tries, British cit­i­zens are the worst off with real inter­est rates in the U.K. sit­ting at neg­a­tive 4.5 per­cent. U.S investors aren’t doing much bet­ter with rates at neg­a­tive 3.25 per­cent and the Fed has all but guar­an­teed rates will remain there. Only Japan has a pos­i­tive real inter­est rate among the G-7 and that rate is barely above zero.

Con­versely, the most pop­u­lous nations mak­ing up the E-7 have mostly pos­i­tive real inter­est rates. How­ever, the grouping’s grand­est eco­nomic pow­er­houses, China and India, have neg­a­tive real inter­est rates sit­ting around neg­a­tive 2 percent.

Sim­ply put, investors in those coun­tries who have parked their sav­ings in cash and low-yielding invest­ments, such as Trea­sury bills and money mar­ket accounts in the U.S., are actu­ally los­ing money due to inflation.

That can be tough for any investor, but when you’re the cen­tral bank of a coun­try with mil­lions of dol­lars in reserves, it can be cat­a­strophic. This is why cen­tral banks around the globe have sought pro­tec­tion by diver­si­fy­ing their foreign-exchange reserves into gold bul­lion this year.

VTB Capital’s Andrey Kryuchenkov told The Wall Street Jour­nal this week that, “Cen­tral banks are diver­si­fy­ing, and it has inten­si­fied to a rate that nobody had expected.” Lat­est esti­mates pre­dict global cen­tral banks will pur­chase between 475–500 tons of gold in 2011.

This amount of cap­i­tal flow­ing into gold has the poten­tial to push prices up a level in 2012. John Mendel­son from ISI Group sees gold prices reach­ing $2,200 an ounce dur­ing the first six months of 2012.

While real inter­est rates look to remain in the red for the fore­see­able future, many of these same coun­tries are print­ing record amounts of “green” with accom­moda­tive mon­e­tary policies.

U.S. Global’s direc­tor of research John Der­rick says cen­tral banks around the world have focused their atten­tion on stim­u­lat­ing growth. Begin­ning with Brazil’s inter­est rate cut in late August through the Euro­pean Cen­tral Banks (ECB) cut this week, there have been 40 eas­ing moves by global cen­tral banks, accord­ing to ISI Group.

John says this also means we will likely see more quan­ti­ta­tive eas­ing in 2012. The Bank of Eng­land has already started its quan­ti­ta­tive eas­ing, and many experts believe the ECB and the Fed­eral Reserve will fol­low in its footsteps.

Bloomberg reports that global money sup­ply (M2) is “set to increase the most on record in 2011.” The chart below shows the year-over-year change of global money sup­ply has been grad­u­ally mov­ing higher and higher since mid-2010.

The rea­son global cen­tral banks have shifted the print­ing presses into over­drive is sim­ple: they need the money. My long-time friend Frank Gius­tra reminded us of this new real­ity in an op-ed piece for the Van­cou­ver Sun last week. Frank writes:

“The bot­tom line is that the money needed to bail out Europe and to fund America’s spi­ral­ing debt and future unfunded oblig­a­tions is in the ten of tril­lions. IT DOES NOT EXIST. It has to be cre­ated by print­ing money in mas­sive quan­ti­ties, and despite all the rhetoric you will hear against such poli­cies, in the end it’s the path of least resis­tance. Print­ing money is an invis­i­ble tax on sav­ings, much eas­ier to ini­ti­ate, than, say, rais­ing taxes or cut­ting back on ser­vices and entitlements.”

As cen­tral banks print money and increase sup­ply, cur­ren­cies become deval­ued. Whereas in the recent past, one cur­rency may be reduced in value com­pared with other cur­ren­cies, this time there is global com­pet­i­tive deval­u­a­tion as excess liq­uid­ity is put into the sys­tem. His­tor­i­cally, this excess liq­uid­ity has made its way to riskier assets, i.e. stocks and commodities.

Gold is gen­er­ally a bene­fac­tor of this flight to riskier assets as many investors see it as a store of value. This chart illus­trates the inter­con­nec­tiv­ity of gold and global money sup­ply growth.

How­ever, this image doesn’t tell the whole story. While the price of gold has fol­lowed the same upward path as money sup­ply over the past 14 years, it hasn’t been able to keep pace with M2 growth, says the Bloomberg Pre­cious Metal Min­ing Team.

In fact, if the global money sup­ply were backed by gold, gold prices would be much higher, accord­ing to Bloomberg. The yel­low line below shows how gold would be greater than $5,000 per troy ounce if just half of global money sup­ply were backed by gold. If all of the money sup­ply in the world were to be backed by gold, the price of one troy ounce would need to rise above $10,000.

It’s unlikely, of course, that this will hap­pen, but it serves as a use­ful illus­tra­tion for the dis­ap­pear­ing value of the world’s fiat currencies.

Frank reminded read­ers that we have been down this path before. Frank says, “When great nations mature and over-extend them­selves, they revert to the paths of least resis­tance: bor­row and/or print money. They all did it and they all failed; this time will be no different.”

The ben­e­fi­ciary of this type of event has his­tor­i­cally been gold.

Tags: Andrey, British Citizens, Central Banks, Chief Investment Officer, CPI, Current Interest Rate, Economic Powerhouses, Foreign Exchange Reserves, Frank Holmes, Gold Bullion, Gold Prices, Money Market Accounts, Money Supply Growth, Ounce, Populous Nations, Potent Formula, Real Interest Rate, Treasury Bills, U S Global Investors, Wall Street Journal
Posted in Markets | Comments Off

Gold Bullion Demand Trends – Bullish!

Friday, November 18th, 2011

The World Gold Coun­cil has just pub­lished the lat­est issue of “Gold Demand Trends” (Third quar­ter 2011). This is a rather bull­ish report, high­light­ing a surge in cen­tral bank pur­chases – more than dou­bling from the sec­ond quar­ter and increas­ing by 556% from a year ago!

The report said: “Activ­ity among cen­tral banks con­tin­ued to ful­fil our expec­ta­tions of fur­ther pur­chases in Q3. In fact, net buy­ing accel­er­ated notably dur­ing the quar­ter – total­ing 148.4 met­ric tons – as the issues sur­round­ing the cred­it­wor­thi­ness of west­ern gov­ern­ments’ debt seeped into the offi­cial sec­tor. A num­ber of banks con­tin­ued their well-publicised pro­grams of buy­ing, while a slew of new entrants emerged wish­ing to bol­ster their gold hold­ings in order to diver­sify their reserves. We see this trend con­tin­u­ing into 2012.”

This reports is very pos­i­tive for the gold price and should limit the down­side risk of corrections.

Click here to down­load the full report.

[pdf http://worldgoldcouncil.newsweaver.co.uk/images/5861/10802/1883495/WOR6562%20GDT%20Q3%202011.pdf 500 670]

Source: World Gold Coun­cil, Novem­ber 17, 2011.

Copy­right © Invest­ment Postcards

Tags: Bank Purchases, Bullish Report, Central Banks, Creditworthiness, Downside Risk, Gold Bullion, Gold Demand Trends, Gold Holdings, Gold Price, Images, Metric Tons, Postcards, Q3, Report Pdf, Second Quarter, Slew, Source World, Western Governments, World Gold Council, Worldgoldcouncil
Posted in Markets | Comments Off

Gold Market Cheat Sheet (October 24, 2011)

Saturday, October 22nd, 2011

Muam­mar Gaddafi's golden gun

Gold Mar­ket Cheat Sheet (Octo­ber 24, 2011)

For the week, spot gold closed at $1,642.38, down $38.35 per ounce, or 2.28 per­cent. Gold stocks, as mea­sured by the NYSE Arca Gold Min­ers Index, fell 6.88 per­cent lower. The U.S. Trade-Weighted Dol­lar Index slid 0.49 per­cent for the week.

Strengths

• The per­for­mance of the gold funds was in line with bench­marks and peers for the week, despite a jit­tery mar­ket. A hand­ful of com­pa­nies made pos­i­tive gains. Among them is Detour Gold, up 4.4 per­cent, which is being dri­ven by hedge funds going long Detour Gold and short­ing Osisko Min­ing, down 9.4 per­cent. Rubi­con Min­er­als was also up 4.0 per­cent on takeover spec­u­la­tion for the week.
• Fur­ther to the orig­i­nal agree­ment of C$92 mil­lion as a cash-share takeover of Grayd Resources, the takeover offer was sweet­ened to C$183 mil­lion cash instead. Since the announce­ment of the takeover on Sep­tem­ber 19, Agnico-Eagle shares have plunged more than 30 per­cent; it can be under­stood why Grayd would ask for more cash than shares.
• The Euro­pean sov­er­eign debt cri­sis is still dom­i­nat­ing sen­ti­ment. Ulti­mately the money-printing solu­tion should be pos­i­tive for gold and the com­pa­nies that con­trol large resource bases of high grade reserves. The Russ­ian Cen­tral Bank noted they will con­tinue acquir­ing “huge vol­umes of gold.”.

Weak­nesses

• Bul­lion con­tin­ued the recent trend, and out­per­formed equi­ties for the week by 2.28 per­cent. The ongo­ing trend of weak­ness in junior min­ing com­pa­nies rel­a­tive to the seniors con­tin­ues. The Mar­ket Vec­tors Junior Gold Mine ETF fin­ished down 7.67 per­cent for the week, while the Mar­ket Vec­tors Gold Min­ers ETF closed down 6.87 percent.
• The plunge in Agnico-Eagle’s share price this week is reflec­tive of how ner­vous investors are in the cur­rent eco­nomic envi­ron­ment. The write off of Goldex, Agnico-Eagle’s low­est grade oper­at­ing mine, is a clas­sic case of the street assign­ing too much value to low qual­ity assets. The write down to the bal­ance sheet is about $170 mil­lion but the mar­ket trimmed the val­u­a­tion by $2.7 bil­lion. Low grade assets have a much lower prob­a­bil­ity of deliv­er­ing a dol­lar of profit to the bot­tom line.
• Only two min­ing com­pa­nies have yet to meet con­sen­sus and guid­ance on gold pro­duc­tion on their earn­ings this quar­ter. With no excep­tion to the trend, New­crest Mining’s gold pro­duc­tion for Sep­tem­ber fell 16 per­cent to 587,286 ounces, being heav­ily affected by heavy rain and main­te­nance shut­downs at its mine in Papua New Guinea. Polit­i­cal insta­bil­ity, roy­alty con­cerns, strikes and weather influ­ences have all been affect­ing the indus­try as a whole for the third quarter.

Oppor­tu­ni­ties

• The EU Sum­mit meet­ing will take place this week­end. There are some expec­ta­tions that a bank recap­i­tal­iza­tion could be worked out and this would take a lot of uncer­tainty out of the mar­ket. China, which Europe’s largest, trad­ing part­ner, could see some ben­e­fits out of this. With Chi­nese con­sumers being the des­ti­na­tion of about 60 per­cent of all com­mer­cial gold sold today, some sta­bil­ity would be a wel­come relief.
• India’s fes­ti­val, Diwali, takes place next week. With the fes­ti­val around the cor­ner, a slight dip in gold prices has pre­sented a great buy­ing oppor­tu­nity for the metal. Traders are spec­u­lat­ing that gold jew­elry buy­ing and smaller denom­i­na­tion coins will surge dur­ing the Indian fes­ti­val of lights, with sales already pick­ing up significantly.

Threats

• In response to weak min­ing sec­tor growth and crit­i­cism over the industry’s con­tri­bu­tion to eco­nomic growth, Tan­za­nia is said to raise gold roy­al­ties by year end as the coun­try con­tin­ues restruc­tur­ing the sec­tor, the Min­er­als and Energy Min­is­ter William Ngeleja said on Wednes­day. Despite Tanzania’s annual gold exports tripling to $1.5 bil­lion in the past five years as the price of gold has risen, the gov­ern­ment rev­enues have remained stag­nant around $100 mil­lion a year.
• With talk of higher taxes, it is no won­der that Tanzania’s min­ing sec­tor growth slowed to 5.8 per­cent for the sec­ond quar­ter this year in con­trast with the 20.5 per­cent growth of the sec­ond quar­ter last year. Down from 28.3 per­cent in the first quar­ter of 2010, the sec­tor only expanded to an annual of 2.1 per­cent in the first quar­ter of this year. Ongo­ing uncer­tainty over gov­ern­ment poli­cies, a pro­longed power cri­sis and lim­i­ta­tions within infra­struc­ture were all con­tribut­ing fac­tors to this decline.
• Nego­ti­a­tions sur­round­ing min­ing export and for­eign invest­ments bans for Eritrea were sched­uled to begin Tues­day among UN Secu­rity Coun­cil mem­bers. The new draft res­o­lu­tions, which stated in part that “all states shall pro­hibit invest­ment by their nation­als, per­sons sub­ject to their juris­dic­tions and firms incor­po­rated in their ter­ri­tory or sub­ject to their juris­dic­tion in the extrac­tive indus­tries and min­ing sec­tors in Eritrea,” also calls on all states to pro­hibit the import of gold and other raw mate­ri­als from the coun­try, Reuters reported. Eritrea has been under con­sid­er­able scrutiny from the inter­na­tional com­mu­nity for its reported affil­i­a­tion with Soma­lia and fund­ing armed ter­ror­ist groups, linked to al-Qaeda.

Tags: Agnico Eagle, Debt Crisis, Dollar Index, Gold, Gold Bullion, Gold Funds, Gold Market, gold stocks, Golden Gun, India, Infrastructure, Junior Gold, Market Vectors Gold Miners, Money Printing, Muammar Gaddafi, Nyse Arca, Printing Solution, Quality Assets, Rubicon Minerals, Russian Central Bank, Share Takeover, Sovereign Debt, Spot Gold, Takeover Speculation, Vectors Gold Miners
Posted in ETFs, Gold, India, Infrastructure, Markets | Comments Off

Which Gold Miners Have the Most Upside? (Holmes)

Friday, October 21st, 2011

Since hit­ting $1,900 an ounce through the begin­ning of Octo­ber, gold has declined nearly 11 per­cent. Over the same time­frame, the NYSE Arca Gold Min­ers Index lost almost 13 per­cent. That’s a closer per­for­mance cor­re­la­tion than the roughly 3-to-1 gold equi­ties to bul­lion ratio we’ve his­tor­i­cally seen and could mean the min­ers are finally clos­ing the gap.

How­ever, TD Secu­ri­ties Equity Research points out this inter­est­ing fact: Over a period of 18 months prior to hit­ting $1,900, gold rose 79 per­cent but TD’s bas­ket of gold equi­ties only increased 57 per­cent. The firm says this per­for­mance gap “ranks as the worst rel­a­tive per­for­mance of gold equi­ties to gold since 2001.” Dur­ing the July through Sep­tem­ber period of 2008, TD Secu­ri­ties’ uni­verse of gold equi­ties declined 46 per­cent, while gold bul­lion only lost 24 per­cent. In Octo­ber through Novem­ber of 2008, the same gold equi­ties lost 37 per­cent; while gold decreased 22 percent.

What’s behind today’s record disparity?

Part of it may be due to the under­per­for­mance of the explor­ers and devel­op­ers, which, TD says, “have been hit the hard­est.” The chart below shows gold min­ers by cap­i­tal­iza­tion and their returns since April 2011. Explor­ers and devel­op­ers have declined the most, los­ing 21 per­cent, small– and mid-cap pro­duc­ers have declined 6 per­cent and large pro­duc­ers lost 5 percent.

Because of the dra­matic price decline in these early-stage com­pa­nies, investors have the oppor­tu­nity to pur­chase explor­ers & devel­op­ers (E&D), often referred to as juniors, at about half of the company’s net asset value (NAV). In sim­plest terms, the NAV means assets minus lia­bil­i­ties. In fact, you can see from the chart that the cur­rent price-to-NAV level for E&D equi­ties is sit­ting near record low levels…levels not seen since the finan­cial cri­sis of 2008.

TD found that in seven of the past 10 ral­lies, gold equi­ties beat gold—averaging a beta of 1.4 times. Look­ing over the next year or so, we believe the smaller gold min­ers are espe­cially poised to out­per­form this time. As TD says, “on a rebound, we expect the best per­form­ing equi­ties to be among the ranks of the explor­ers and developers.”

Source: US Global Investors

Tags: Asset Value, Assets Minus Liabilities, Chart Below Shows, Closing The Gap, Disparity, Early Stage Companies, Equity Research, Explorers, Gap, Gold, Gold Bullion, Gold Equities, Gold Miners, Interesting Fact, Mid Cap, Nyse Arca, Nyse Index, October Gold, Performance Gap, Price Decline, Relative Performance
Posted in Gold, Markets | Comments Off

Anxiety Recedes, as Long Term Investors Show Their Hands

Thursday, October 20th, 2011

Finan­cial mar­ket volatil­ity has receded sig­nif­i­cantly over the past two weeks. The CBOE S&P 500 Volatil­ity Index (VIX) dropped from 45.5 at the end of Sep­tem­ber to 28.2 two days ago, before again edg­ing up a notch.

Source: StockCharts.com

The drop brought the VIX back to less than one stan­dard devi­a­tion from its aver­age since 1986. While still high, it sig­nals that anx­i­ety lev­els have moved away from cri­sis levels.

Sources: CBOE, Plexus Asset Management.

But what led to the eas­ing of volatil­i­ties? In pre­vi­ous arti­cles I indi­cated that the most impor­tant fac­tor that had led to the eas­ing of cri­sis lev­els in the past was when prices fell to lev­els that attracted renewed buy­ing from long-term investors. This is exactly what hap­pened this time round. The Shiller PE10 ratio dropped to 18.67 on Mon­day, 3 Octo­ber, the low­est since August 2009. The earn­ings yield over ten years, or what I call Shiller EY10 (inverse of PE10), there­fore rose to 5.36%.

Sources: CBOE, Robert Shiller; Plexus Asset Management.

The value per unit of volatil­ity there­fore bounced off the aver­age of the major turn­ing points in the past.

Sources: CBOE, Robert Shiller; Plexus Asset Management.

The S&P 500 bounced strongly and ended last week 11.4% up from its lows on 3 October.

Sources: CBOE, I-Net Bridge; Plexus Asset Management.

Global investors are becom­ing less risk averse. Emerging-market bond yield spreads are head­ing south again.

Sources: CBOE, I-Net Bridge; Plexus Asset Management.

The yield on the 10-year gov­ern­ment bond note has turned and is ris­ing again.

Sources: CBOE, I-Net Bridge; Plexus Asset Management.

The sell-off in gold bul­lion is over for now.

Sources: CBOE, I-Net Bridge; Plexus Asset Management.

The sell-off in emerging-market and commodity-dependent cur­ren­cies has receded.

Sources: CBOE, I-Net Bridge; Plexus Asset Management.

Sources: CBOE, I-Net Bridge; Plexus Asset Management.

Global investors have again found value in emerging-market equi­ties, using South Africa as an exam­ple in the chart below..

Sources: Robert Shiller, Dis­mal Sci­en­tist; Plexus Asset Management.

Does that mean that the firestorm is over? I think the global finan­cial sys­tem is not out of the woods yet as the Euro­pean Union is still fac­ing head­winds. Be that as it may, what is of par­tic­u­lar note is that global long-term investors have shown their hand by buy­ing the mar­ket again. The dire posi­tion of some Euro­pean banks also indi­cates they have prob­a­bly shut most of their risk posi­tions and taken their pain – I think the sell-off in gold bul­lion is an indi­ca­tion of this. The global value at risk through deriv­a­tives has there­fore prob­a­bly dimin­ished substantially.

Also, the eas­ing of anx­i­ety in finan­cial mar­ket will help U.S. con­sumer con­fi­dence in com­ing months.

Sources: CBOE, Dis­mal Sci­en­tist; Plexus Asset Management.

As I said in a num­ber of posts last week (see “Stock mar­kets: In long-term indi­ca­tors we trust” and “Global stock mar­ket mov­ing aver­ages – a mixed pic­ture“), I would not be sur­prised to see a fur­ther recov­ery in global stock mar­kets over the next few weeks, with those mar­kets most deeply over­sold rel­a­tive to their 200-day mov­ing aver­ages offer­ing the strongest recov­ery poten­tial. How­ever, to add con­vic­tion to the rally most of the global indices (as well as the major­ity of indi­vid­ual stocks) need to bet­ter their 200-day lines, and do so on bet­ter vol­umes seen thus far. Until this hap­pens, fol­low a cau­tious approach.

Tags: 3 October, Amp, Anxiety Levels, Bond Yield, Cboe, Commodity, Crisis Levels, Earnings Yield, Emerging Market, Global Investors, Gold Bullion, Government Bond, Lows, Management Sources, Market Volatility, Plexus Asset Management, Robert Shiller, Standard Deviation, Stocks, Term Investors, Volatility Index Vix
Posted in Gold, Markets | Comments Off

Put Gold Miners on Your Radar Screen

Monday, October 17th, 2011

Ever since I started my invest­ment career as a min­ing ana­lyst in 1984, I have taken a keen inter­est in gold stocks. The behav­ior of the min­ers in recent times war­rants spe­cial attention.

I always keep a close eye on the rel­a­tive strength of the min­ers ver­sus the metal as stocks often lead bul­lion. The chart below was con­structed by divid­ing the Mar­ketVec­tors Gold Min­ers ETF (GDX) by the SPDR Gold Trust (GLD). A ris­ing trend­line indi­cates out­per­for­mance by gold stocks against bul­lion, whereas a declin­ing line shows the metal hav­ing the upper hand. After a period of out­per­for­mance until the begin­ning of 2011, the min­ers have been drift­ing lower until find­ing a pos­si­ble bot­tom (in rel­a­tive terms) over the past few weeks. Based purely on this chart, more evi­dence is required that the curve of min­ing stocks has in fact turned upwards.

Source: StockCharts.com

In addi­tion to the nascent out­per­for­mance by gold stocks, the Gold Min­ers Bull­ish Per­cent Index (BPGDM) shows only 23% of the 32 stocks in the Gold Min­ers Index are now in point and fig­ure uptrends. The sen­ti­ment indi­ca­tor is used like all bull­ish per­cent indices: read­ings over 70 are over­bought while drops below 30 are oversold.

Impor­tantly, the last two times an over­sold con­di­tion existed were at the end of 2008 and dur­ing the first quar­ter of 2010. The late 2008 upturn sig­naled a major rally in gold shares. While the BPGDM has just turned up, the “all clear” for the group will only be sig­naled when more than half of its stocks are in new uptrends (i.e. above 50). How­ever, given the very low level of the indi­ca­tor, and buy sig­nals being given by short-term indi­ca­tors such as MACD and ROC, it would not be sur­pris­ing if bet­ter tid­ings for gold and sil­ver shares lie ahead.

Source: StockCharts.com

The fact that most gold mines are sit­u­ated in devel­op­ing coun­tries con­tributed sig­nif­i­cantly to their under­per­for­mance as the cur­ren­cies of these coun­tries tend to come under pres­sure dur­ing cri­sis times as investors shy away from high-risk assets.

Source: Plexus Asset Man­age­ment (based on data from I-Net Bridge).

Fur­ther­more, the gold stocks are included in the main stock indices of the respec­tive emerg­ing mar­kets and are there­fore vul­ner­a­ble when for­eign investors hedge their expo­sure to the devel­op­ing countries.

Source: Plexus Asset Man­age­ment (based on data from I-Net Bridge).

Although the gold min­ers (GDX and its younger brother GDXJ) have more work to do before con­firm­ing the stocks are back in sec­ondary uptrends, I doubt one could go too far wrong by start­ing to nib­ble on this neglected sector.

Tags: Buy Signals, Crisis Times, Gdx, Gold, Gold And Silver, Gold Bullion, Gold Miners, Gold Mines, Gold Shares, gold stocks, Investment Career, Keen Interest, Macd, Mining Analyst, Radar Screen, Relative Strength, Relative Terms, Term Indicators, Tidings, Trendline, Upturn
Posted in ETFs, Gold, Markets | Comments Off

Gold Market Cheat Sheet (October 11, 2011)

Monday, October 10th, 2011

Gold Mar­ket Cheat Sheet (Octo­ber 11, 2011)

For the week, spot gold closed at $1,637.85, up $13.88 per ounce, or 0.85 per­cent. Gold stocks, as mea­sured by the NYSE Arca Gold BUGS Index, drifted 0.29 per­cent lower. The U.S. Trade-Weighted Dol­lar Index rose 0.25 per­cent for the week.

Strengths

• Accord­ing to Mineweb, the U.S. Mint recorded its sec­ond best sales month ever for Sil­ver Eagle bul­lion coins, with sales of 4,460,500 coins in Sep­tem­ber. All-time record sales of 6,422,000 coins were recorded in Jan­u­ary 2011.  Expec­ta­tions are that trade in the coins will shat­ter records again this year.
• This week, Qatar Hold­ings, which con­trols the wealth of the Mid­dle East state's royal fam­ily, con­firmed a $1 bil­lion invest­ment in Euro­pean Gold­fields, a London-listed miner cur­rently devel­op­ing the largest gold-mining project in Greece. Qatar Hold­ings noted that it will allo­cate $10 bil­lion to invest­ments in gold min­ing com­pa­nies, which have largely under­per­formed gold bullion.
• The Indian fes­ti­val and wed­ding sea­son was kicked off by Navra­tri, which runs from Sep­tem­ber 28 through Octo­ber 6. The Bom­bay Bul­lion Asso­ci­a­tion noted that Navra­tri is tra­di­tion­ally an aus­pi­cious time for start­ing new ven­tures and given the propen­sity of Indi­ans to buy gold, bul­lion demand is expected to jump 70 per­cent this year, to cross 150 met­ric tons. Last year, traders esti­mate demand dur­ing the fes­ti­val sea­son was around 90 tons. This well-timed price slump has Indian gold traders expect­ing a bumper fes­ti­val season.

Weak­nesses

• The CME Group raised plat­inum and cop­per trad­ing mar­gins again this week by 29 per­cent and 15 per­cent, respec­tively, to curb spec­u­la­tion in the futures market.
• Reuters high­lighted that gold min­ing com­pa­nies reported their first con­sec­u­tive quar­terly net hedg­ing in 10 years dur­ing the sec­ond quar­ter, pri­mar­ily dri­ven by new hedges by small pro­duc­ers.  It is expected that the global hedge book will have its first annual net addi­tion since 1999. Hedg­ing helps pro­duc­ers lock in prices for future out­put, but can con­se­quently back­fire if spot metal prices rise above the hedged price.
• A nor­mal cor­rec­tion in bul­lion aver­ages about 15 per­cent and this was approx­i­mately the mag­ni­tude of the sell­off dur­ing the last three weeks of Sep­tem­ber. The worst price cor­rec­tions over the last decade occurred dur­ing the Global Finan­cial Cri­sis of 2008, when gold cor­rected 24 per­cent from July to September.

Oppor­tu­ni­ties

• More and more, gold is being viewed as money. On Thurs­day, LCH.Clearnet, an Anglo-French clear­ing house, became the lat­est clearer to allow gold as col­lat­eral. This move fol­lowed the CME Group increas­ing the amount of gold accepted at its U.S.-based clear­ing house Mon­day from $200 mil­lion to $500 mil­lion. Investors are increas­ingly view­ing gold as a “safe” asset, but only recently has it been con­sid­ered as col­lat­eral by clear­ing houses. The CME Group noted this would allow mar­ket par­tic­i­pants to bet­ter man­age their risk and to take advan­tage of lower gold lease rates.
• Cen­tral banks are expected to buy at least 336 tons of gold this year. Influ­ence from emerg­ing mar­ket coun­tries such as Rus­sia, Thai­land and Bolivia all increas­ing their hold­ings con­tributed to the pos­i­tive fig­ures. Cen­tral banks’ gold pur­chases have helped drive gold higher, boost­ing mar­ket sen­ti­ment and absorb­ing sup­ply. In the past decade, cen­tral banks were net sell­ers of gold, pro­vid­ing 400 to 500 tons of sup­ply to the mar­ket each year, pur­chas­ing gov­ern­ment debt with the proceeds.
• Gold­man Sachs ana­lysts still main­tain a pos­i­tive out­look for gold. “As we expect gold prices will con­tinue to be dri­ven in large mea­sure by the evo­lu­tion of U.S. real inter­est rates, and with our U.S. eco­nomic out­look point­ing for con­tin­ued low lev­els of U.S. real rates in 2012, we con­tinue to rec­om­mend long trad­ing posi­tions in gold and reit­er­ate our 12-month price tar­get of $1,860 per ounce," the Gold­man Sachs ana­lysts said.

Threats

• It was con­firmed this week that the major­ity of Zimbabwe’s min­ing com­pa­nies had sub­mit­ted plans to trans­fer 51 per­cent of own­er­ship to locals. This law, which is heav­ily con­tested, is pri­mar­ily directed at min­ing firms and banks oper­at­ing in a resource-rich state that has become a social dis­as­ter via government-directed eco­nomic solutions.
• The Union Cab­i­net of India has passed a new min­ing bill stip­u­lat­ing that coal min­ers are to share a max­i­mum of 26 per­cent of their prof­its with locally dis­placed and affected com­mu­ni­ties, and for other min­ers to pay out roy­al­ties. This min­ing bill could reduce min­ing income by $2 bil­lion, rais­ing the costs of metal and min­ing com­pa­nies in the coun­try. Stock mar­kets in India did not react pos­i­tively to this, tak­ing a hit after the announcement.
• The Occupy Wall Street protest is gain­ing momen­tum and Con­gress is tin­ker­ing with chang­ing Pres­i­dent Obama’s jobs bill to be funded with a 5 per­cent sur­charge on mil­lion­aires. Con­sid­er­ing that mar­ket par­tic­i­pants tend to dis­count infor­ma­tion, with the top 5 per­cent of the income earn­ers account­ing for 37 per­cent of the aggre­gate spend­ing today, up from 25 per­cent two decades ago, the law of unin­tended con­se­quences may dic­tate a change in spend­ing habits.

Tags: Auspicious Time, Bullion Coins, Dollar Index, European Goldfields, Futures Market, Gold, Gold Bugs, Gold Bullion, Gold Market, Gold Mining Companies, gold stocks, Gold Traders, India, Mining Project, Navratri, New Hedges, New Ventures, Nyse Arca, Outlook, Silver Eagle, Spot Gold, U S Mint, Wedding Season
Posted in Gold, India, Markets, Outlook | Comments Off

Gold Market Cheat Sheet (September 26, 2011)

Saturday, September 24th, 2011

Gold Mar­ket Cheat Sheet (Sep­tem­ber 26, 2011)

For the week, spot gold closed at $1,656.80, down $188.08 per ounce, or 8.56 per­cent. Gold stocks, as mea­sured by the NYSE Arca Gold BUGS Index, fell 11.74 per­cent. The U.S. Trade-Weighted Dol­lar Index surged 2.19 per­cent for the week.

Strengths

• The week started on a strong note, as the World Pre­cious Min­er­als Fund ben­e­fited from its expo­sure to the announce­ment that Agnico-Eagle entered into a defin­i­tive agree­ment to acquire Grayd Resources for C$275M in cash; a 41 per­cent pre­mium to its prior close. Our fund is the sec­ond largest share­holder of Grayd Resources.
• While the senior-tiered min­ing com­pa­nies have sug­gested there is no need to pur­chase assets from the junior explo­ration and devel­op­ment com­pa­nies, our view is that there def­i­nitely are some trans­ac­tions that would make sense.
• While gold fell 8.56 per­cent this week, and is nearly 13 per­cent off its recent highs, this type of cor­rec­tion is nor­mal and to be expected. Since the start of the quar­ter, gold bul­lion had ral­lied more than 25 per­cent in the quar­ter due to investor con­cerns over the world wide debt cri­sis. Tech­ni­cally, if gold falls back to about $1,600 it would just be in line with its upward trend line estab­lished over the last five years. A cor­rec­tion to $1,550 would roughly be the next sup­port level.

Weak­nesses

• Friday’s five per­cent plunge in the spot gold price and 13 per­cent drop in sil­ver appar­ently reflected the after-market close announce­ment by the CME that it would raise mar­gin require­ments for gold and sil­ver futures by 21 per­cent and 15 per­cent, respectively.
• After the Fed noted on Wednes­day, "There are sig­nif­i­cant down­side risks to the eco­nomic out­look, includ­ing strains in global finan­cial mar­kets," investors were in liq­ui­da­tion mode for all assets classes, includ­ing com­modi­ties, and sought safety in U.S. dol­lars and U.S. Treasuries.
• Brought on by more fears of a fur­ther eco­nomic slow­down, HSBC com­mented that in nor­mal cir­cum­stances this would be pos­i­tive for gold. Instead, the equity declines have been so steep that investors have raised cash by liq­ui­dat­ing bul­lion as risk man­agers called for profit-taking on gold, one of few assets classes to deliver sig­nif­i­cantly pos­i­tive returns this year.

Oppor­tu­ni­ties

• One of the main talk­ing points at the Den­ver Gold Forum, held this week in Col­orado Springs, was the per­cep­tion of how under­val­ued gold min­ing equi­ties are rel­a­tive to the price of gold. Tim Wood, the exec­u­tive direc­tor at the Den­ver Gold Group, made note that the mul­ti­ples of equity val­u­a­tions have not kept pace with bul­lion. There was much dis­cus­sion at the con­fer­ence of whether the val­u­a­tion lev­els are an indi­ca­tion that the mar­ket is expect­ing some sort of a pull­back or whether there is some­thing else going on. He noted that gold is “act­ing like a money now and that's what we need to take into con­sid­er­a­tion. We are already see­ing that in many instances orga­ni­za­tions, insti­tu­tions are start­ing to accept gold as col­lat­eral. Now that hasn't hap­pened for a very long time. So you can actu­ally put down phys­i­cal bul­lion as col­lat­eral and we can see gold's increase in price is really a reflec­tion, not just of the tur­moil that we are see­ing around the world but it is tak­ing on a very real mon­e­tary role because you've got this race to the bot­tom amongst all the currencies.”
• Miningweekly.com high­lighted that Nouriel Roubini, a world­wide respected econ­o­mist, announced to a South African audi­ence that com­mod­ity mar­kets were not yet fully pric­ing in the ris­ing risk that a num­ber of advanced indus­trial coun­tries, includ­ing the U.S., could face a double-dip reces­sion. He was call­ing for a two-thirds prob­a­bil­ity to the like­li­hood that some Euro­pean economies and the U.S. would report eco­nomic con­trac­tions in the com­ing months and quar­ters. Con­se­quently, com­mod­ity prices would expe­ri­ence renewed pres­sures. Gold, specif­i­cally, as a pre­cious metal would likely “buck the trend” as investors seek safety against a pos­si­ble new finan­cial crisis.
• Ongo­ing global con­cerns over the sov­er­eign debt cri­sis have led influ­en­tial fig­ures to pre­dict higher prices for gold. Thom­son Reuters and Eric Sprott have called for a push toward gold prices of $2,000 per ounce and $2,500 per ounce, respec­tively, should the debt woes con­tinue. “If gov­ern­ments keep print­ing more money, the price can go any­where. It could go to $10,000/oz, it could go to $20,000/oz,” Sprott opined.

Threats

• Short sell­ers are under threat this week as Sil­ver­corp Met­als filed a law­suit in New York against a stock manip­u­la­tion scheme. Plain­tiffs named in the law­suit could be hard pressed to make their case when sub­ject to cross exam­i­na­tion and the prospect of finan­cial ruin.
• Finan­cial Times pub­lished an arti­cle say­ing that reg­u­la­tors world­wide are now focus­ing on ETFs. The neces­sity of increased reg­u­la­tion recently came to light over the UBS rogue trader, who man­aged to accu­mu­late $2.3 bil­lion in losses for the com­pany. Increased inter­na­tional super­vi­sion and lim­its are being con­sid­ered to elim­i­nate sys­temic risk con­nected with ETFs.
• In a highly pub­li­cized story, Don­ald Trump recently accepted bul­lion as a means of pay­ment for property.

Tags: Agnico Eagle, Commodities, Debt Crisis, Dollar Index, Downside Risks, Economic Slowdown, Global Financial Markets, Gold, Gold And Silver, Gold Bugs, Gold Bullion, Gold Market, gold stocks, Investor Concerns, Junior Exploration, Margin Requirements, Nyse Arca, Outlook, Precious Minerals, Silver Futures, Spot Gold Price, That Would Make Sense, Trend Line
Posted in Commodities, ETFs, Gold, Markets, Outlook | Comments Off

Gold Market Cheat Sheet (September 12, 2011)

Sunday, September 11th, 2011

Gold Mar­ket Cheat Sheet (Sep­tem­ber 12, 2011)

For the week, spot gold closed at $1,855.70, down $27.18 per ounce, or 1.44 per­cent, how­ever the gold stocks tacked on gains. The U.S. Trade-Weighted Dol­lar Index jumped 3.29 per­cent for the week.

Strengths

• The gold min­ing equi­ties, as mea­sured by the NYSE Arca Gold Min­ers Index, ended the week with a gain of 1.42 per­cent, despite the weak­ness in gold prices.
• This rise is sig­nif­i­cant in that for most of the trail­ing year gold bul­lion has been beat­ing the per­for­mance of the gold stocks.
• As we have recently high­lighted, pre­cious metal investors appear to now rec­og­nize that the min­ing company’s val­u­a­tions have lagged the price per­for­mance of bul­lion and are rotat­ing money out of bul­lion into shares of gold and sil­ver producers.

Weak­nesses

• Over­all the eco­nomic data being reported as of late paints a somber picture.
• Not only was gold bul­lion down this week, but sil­ver, plat­inum, pal­la­dium, and cop­per all decreased.
• The imme­di­ate ben­e­fi­ciary of the mar­ket tur­moil was the U.S. dol­lar which ral­lied sig­nif­i­cantly despite the recent down­grade of our credit rating.

Oppor­tu­ni­ties

• The Swiss gov­ern­ment pol­icy change to peg their cur­rency value to the euro is a game changer which should ben­e­fit gold and pre­cious met­als investors.
• No longer will the Swiss franc be a haven for a wor­ried investor as the franc’s future has been anchored to the mask of a sink­ing ship.
• Another spike in COMEX futures mar­gin require­ments may prompt an abrupt sell off in bul­lion. Pre­cious metal stocks seem to be the clear ben­e­fi­ciary for investors who want a con­tin­ued expo­sure to gold.

Threats

• A recent study by the Fed­eral Reserve Bank of San Fran­cisco titled “Boomer Retire­ment: Head­winds for the U.S. Equity Mar­kets?” out­lines a less pos­i­tive view on equity returns in the broader market.
• Essen­tially, the study notes his­tor­i­cal data which sug­gest a strong link between age dis­tri­b­u­tion and stock mar­ket per­for­mance. A key demo­graphic trend is the aging baby boom gen­er­a­tion that will likely shift from buy­ing equi­ties to sell­ing equi­ties to fund their retirement.
• The Fed noted that their sta­tis­ti­cal mod­els on this rela­tion­ship sug­gest this shift in asset allo­ca­tion could hold down equity val­u­a­tions of the gen­eral mar­ket for the next two decades.

Tags: Currency Value, Federal Reserve Bank, Federal Reserve Bank Of San Francisco, Futures Margin, Gold, Gold Bullion, Gold Market, Gold Miners, Gold Mining, Gold Prices, gold stocks, Government Policy Change, Market Turmoil, Nyse Arca, Precious Metal Investors, Precious Metal Stocks, precious metals, Silver Platinum, Spot Gold, Stock Market Performance, Swiss Franc
Posted in Gold, Markets | Comments Off

Gold Miners will Rally with Rationality

Saturday, September 3rd, 2011

This Week: iShares CDN S&P/TSX Global Gold ( Ticker: XGD )

Last week, on a visit to Chicago’s Art Insti­tute, I was reminded of the time­less allure of gold. Ancient Egypt­ian arti­facts; Aztec bur­ial masks, medieval Euro­pean gob­lets; in each the recur­ring ele­ment was gold. Around the world, through­out human his­tory, peo­ple have val­ued this untar­nished metal.

When gold futures hit an all time high of $1,913 an ounce last Tues­day, it seemed our mod­ern civ­i­liza­tion was no dif­fer­ent from the ancients in its love affair. Yet I can­not accept this. The ratio­nal side of my brain does the math and is baf­fled by its incred­i­bly fast ascent.

There was a time when gold truly was the only store of wealth. Indian (and many other) brides would receive golden ban­gles to carry them through the lean times. But my Indian-born wife, though her name means “golden”, brought some­thing more valu­able: an edu­ca­tion worth much more than any dowry. Could it be other Indian grooms – all those smart IIT engi­neers – are doing the same math as me?

There is some logic to gold’s recent rise. As the United States and Europe boost money sup­ply in their efforts to keep their economies afloat, their cur­ren­cies have fallen rel­a­tive to gold. Exchange-traded funds hold­ing gold bul­lion allow investors cheap, easy access to the metal; As a result they are hoard­ing about 2,200 tonnes of gold, more than most cen­tral banks.

But at some point, those hold­ing gold – both the bride sell­ing one of her ban­gles and the port­fo­lio man­ager tak­ing profit on her 5% allo­ca­tion – will do the same math: what a lit­tle expen­sive gold can buy – a new flat-screen TV or rel­a­tively cheap gold pro­ducer stocks – offers bet­ter value than the gold itself.

Speak­ing of gold pro­duc­ers, while the SPDR Gold ETF (GLD-NY) is up 30% this year to date, iShares S&P/TSX Global Gold pro­duc­ers ETF (XGD-T) is up only 7%. This dis­par­ity not caused by cur­rency moves. The loonie is at roughly the same value ver­sus the U.S. dol­lar as it was at the start of the year.

The spread between min­ers and gold has rarely been as wide as it is now. Rel­a­tive to the price per share of a cou­ple of large pro­duc­ers of mainly gold – Bar­rick (ABX-T) and Gold­corp (G-T) – one ounce of gold at about $1750 is worth about 35 shares of either miner.

The last time this ratio was so high was in March 2009 when equity mar­kets were caught in the final throes of a sav­age bear mar­ket. Before that, the ratio was high in Octo­ber 2008, when Lehman col­lapsed and every dooms­day­ers rushed to buy gold.

Both times, after widen­ing to extreme lev­els, the spread nar­rowed quickly, with gold drop­ping and min­ers’ share prices ris­ing. We saw the begin­ning of this squeeze last week. After hit­ting at over 35 times early last week, gold prices fell sharply by Thurs­day, bring­ing the ratio down to about 33.9.

At archerETF, we expect this trend to con­tinue until the spread returns to a more sta­ble level in the mid-20’s. Apart from a fall in gold prices, we expect to see some strength in min­ers’ share prices. Min­ers have been sell­ing their prod­uct at record prof­its for most of this year, as their finan­cials will even­tu­ally reveal.

We may also see min­ers’ tak­ing some action to boost their share prices, whether it be through increas­ing their div­i­dends or buy­ing back shares. Gold­corp, New­mont and Yamana have all raised their div­i­dends sub­stan­tially this year.

To invest in global gold pro­duc­ers, XGD is a good choice. Since I wrote about XGD last Decem­ber, it has added more inter­na­tional firms to the mix. It used to hold 53 gold min­ers with about 70% of its allo­ca­tion within Canada, another 15% in South Africa and the bal­ance in the United States. XGD now holds 64 com­pa­nies, with a much more diver­si­fied mix. Cana­dian firms still rep­re­sent 57%, then the United States with 16% and South Africa with 11%. But now, Brazil, other African nations, Mex­ico (those Aztecs!), and Turkey are also included.

Dis­clo­sure: We may hold posi­tions in any and all secu­ri­ties men­tioned in this report.

The archerETF Global Tac­ti­cal Portfolio

archerETF offers Global Tac­ti­cal Port­fo­lio Management.

Our out­look is Global: we invest across coun­tries, sec­tors, com­modi­ties and other asset classes to improve returns. Our man­age­ment is Tac­ti­cal: we strive to select the right oppor­tu­ni­ties at the right times in response to chang­ing mar­ket con­di­tions to man­age and min­i­mize port­fo­lio risk.

Please call us at TF 1–866-469‑7990 for more information.

Tags: Ancient Egyptian Artifacts, Born Wife, Brazil, Canadian, Canadian Market, Central Banks, Cheap Gold, Commodities, Dowry, Education Worth, Exchange Traded Funds, Flat Screen Tv, Goblets, Gold, Gold Bullion, Gold Etf, Gold Exchange Traded Funds, Gold Futures, Gold Miners, Gold Producer, Gold Producers, India, Indian Grooms, Lean Times, Loonie, Outlook, Producer Stocks
Posted in Brazil, Canadian Market, Commodities, ETFs, Gold, India, Markets, Outlook | Comments Off

Oceans 2011: Venezuelan Gold

Monday, August 29th, 2011

Now might be a good time for Daniel Ocean to start assem­bling his gang of 11. Venezue­lan Pres­i­dent Hugo Chavez announced last week that he was order­ing the country’s ample gold reserves back to Cara­cas for safe keep­ing. Not a bad idea given the global geopo­lit­i­cal envi­ron­ment, but with some 211 tons of 400-ounce gold bars to be moved from bank vaults in Lon­don, Pres­i­dent Chavez has a logis­ti­cal night­mare on his hands.

How do you trans­port vast quan­ti­ties of gold nearly 4,000 miles from one con­ti­nent to another?

Reuters blog­ger Felix Salmon had an inter­est­ing piece this week break­ing down the major options.

The most direct route would be to fly the gold home, but there are a cou­ple of prob­lems with that option. It would take roughly 40 dif­fer­ent ship­ments to trans­port 211 tons of gold, the Finan­cial Times says. Inter­cept­ing just one ship­ment would net a rob­ber $300 mil­lion, Salmon says, and if not suc­cess­ful, you would have 39 more chances. It’s unlikely there’s an insur­ance com­pany out there that would take on the responsibility.

Another option is to ship by boat using the Venezue­lan Navy. The obvi­ous risk here is piracy. Europe-to-South Amer­ica ship­ping routes have a long his­tory of piracy. Throw in the Bermuda Tri­an­gle, hur­ri­canes and the incred­i­bly slow pace—you’d have a month’s worth of $12 bil­lion hand-wringing in Caracas.

The most inven­tive idea Salmon puts forth is to exchange it upon deliv­ery. Gold stored in the Bank of Eng­land gen­er­ally receives a 2 per­cent pre­mium for its safety and pres­tige. Chavez could trade his Bank of Eng­land bars with another coun­try upon the safe deliv­ery of their own gold bul­lion in Cara­cas. This would cost Venezuela at least the 2 per­cent pre­mium, but save the headache of trans­port­ing so much gold.

Even if the gold reaches Cara­cas safely, the chal­lenge of securely stor­ing it is immense. Salmon calls gold “the per­fect heist: anony­mous, untrace­able, hugely valu­able.” The trans­fer is so risky; this would be the world’s largest trans­fer of gold since 1936. There’s no offi­cial word on where Chavez will store Venezuela’s gold, but he said last week that “if there isn’t enough room to store the gold in the cen­tral bank vaults, I can lend you the base­ment of the Miraflo­res pres­i­den­tial palace.”

For the record, the U.S. houses its 8,100 tons of gold reserves in Cen­tral Ken­tucky at Fort Knox. The bul­lion vault lies in the cen­ter of a 110,000 acre base that’s also home to more than 10,000 troops and the mech­a­nized tank divi­sion of the U.S. army—a secu­rity sys­tem even Ocean’s 11 couldn’t crack.

We’ll have to wait and see how this story devel­ops, but it’s cer­tain oth­ers on both sides of the law are watch­ing closely as well.

All opin­ions expressed and data pro­vided are sub­ject to change with­out notice. Some of these opin­ions may not be appro­pri­ate to every investor. By click­ing the links above, you will be directed to third-party web­sites. U.S. Global Investors does not endorse all infor­ma­tion sup­plied by these web­sites and is not respon­si­ble for its/their content.

Tags: Bank Of England, Bank Vaults, Bermuda Triangle, Financial Times, Geopolitical Environment, Gold, Gold Bars, Gold Bullion, Gold Reserves, History Of Piracy, Hugo Chavez, Logistical Nightmare, Perfect Heist, President Chavez, President Hugo Chavez, Safe Delivery, Shipping Routes, Slow Pace, Venezuelan Navy, Venezuelan President Hugo, Venezuelan President Hugo Chavez
Posted in Gold, Markets | Comments Off

Valuation Gap Makes Gold Miners Attractive But All Miners Aren’t Created Equal

Saturday, August 27th, 2011

Val­u­a­tion Gap Makes Gold Min­ers Attrac­tive But All Min­ers Aren’t Cre­ated Equal

By Frank Holmes, CEO and Chief Invest­ment Offi­cer, U.S. Global Investors

Gold­watch­ers were reminded gold’s volatil­ity works in both direc­tions this week, with prices falling more than $100 an ounce in just one day. We fore­casted the sell­off last week, explain­ing a 10 per­cent cor­rec­tion would be a non-event. Once again the CME Group hiked the exchange’s mar­gin require­ments for gold invest­ment to shake out over­lever­aged spec­u­la­tion. This is a pos­i­tive for long-term investors.

One mar­ket trend that seems to be attract­ing more and more atten­tion is the large per­for­mance gap between gold bul­lion and gold stocks. The price of gold bul­lion has increased roughly 28 per­cent in 2011, while the S&P/TSX Gold Index was down 1 per­cent as of Mon­day. This shouldn’t come as news for sub­scribers to these weekly alerts; we first dis­cussed this oppor­tu­nity back on June 17: Will Gold Equity Investors Strike Gold?

A report this week from BMO Cap­i­tal Mar­kets offered one rea­son behind the per­for­mance gap, “The rate of change in the gold price has been high over the past decade, per­haps too high for investors to gain con­fi­dence in that price as sus­tain­able for an equity invest­ment deci­sion.” BMO says it was hard to imag­ine gold prices could sus­tain a $1,000 an ounce lev­els five years ago, but “now it’s hard to see the gold price falling to that level.”

Using the implied value of a defined group of global gold stocks, it cal­cu­lated the inter­nal rate of return to mea­sure how gold stocks have under­per­formed com­pared to the yel­low metal. Over a period of nearly 20 years, BMO’s group of global gold stocks has never been this inex­pen­sive. Only twice—during the Tech bub­ble in 2000 and the finan­cial cri­sis of 2008—has the inter­nal rate of return com­pared so closely with the price of gold bullion.

RBC Cap­i­tal Mar­kets also sees poten­tial in unpop­u­lar, under­val­ued gold equi­ties and urged read­ers to take “a fresh look” at gold com­pa­nies in a report this week. RBC says gold com­pa­nies cur­rently have mar­gins that are at record highs and it believes mar­gins could be approx­i­mately $1,200 an ounce for the next 12 to 24 months. This is sub­stan­tially higher than the 10-year aver­age of $320 an ounce. Com­par­a­tively, many cur­rent projects were eco­nom­i­cally sound at $700-$1,000 per ounce gold prices, cre­at­ing $300–500 an ounce margins.

Right now, BMO cal­cu­lates the total cost to pro­duce an ounce of gold at roughly $900 an ounce, while the com­pany can turn around and sell that ounce for upwards of $1,400. This puts mar­gins near 40 per­cent, roughly twice what they were in 2007 and four times higher than in 2000.

Increased profit mar­gins put more money in gold com­pany cof­fers and this is reflected in the unprece­dented amount of free cash flow (FCF), RBC says. The firm says the indus­try has reached an inflec­tion point with a “sub­stan­tial wave of free cash flow” com­ing over the next 1 to 2 years.

You can see this incred­i­ble increase in Tier 1 pro­duc­ers, such as Bar­rick, Gold­corp, Kin­ross and New­mont Min­ing. Look­ing at their trail­ing 12 months of free cash flow over 10 years, FCF never rose above $2 bil­lion. How­ever, fol­low­ing the trend in gold prices, FCF among these Tier 1 com­pa­nies stair-stepped up to $4 billion.

Look­ing for­ward over the next few years, RBC esti­mates that if the price of gold remains at $1,850, FCF should stair-step even fur­ther, reach­ing nearly $12,000 by the end of Decem­ber 2013. BMO esti­mates the global gold com­pa­nies will accu­mu­late net cash of $120 bil­lion by 2015 if gold prices remain elevated.

Ris­ing FCF is espe­cially rel­e­vant to share­hold­ers, as it allows the gold com­pany to use that money to invest in projects that should enhance share­holder value. This could include pur­su­ing new projects, mak­ing acqui­si­tions, reduc­ing debt or pay­ing div­i­dends. Many gold com­pa­nies are opt­ing for the lat­ter and increas­ing div­i­dends but these increases haven’t kept up with the pace of ris­ing earn­ings. The aver­age pay­out ratio was roughly 20 per­cent in 2008 but cur­rently sits around 10 per­cent in 2011.

BMO says, “A div­i­dend pol­icy linked to the finan­cial per­for­mance of the com­pany offers investors addi­tional lever­age to the gold price. The pro­vi­sion of a mean­ing­ful and sus­tained div­i­dend has the poten­tial to broaden investor appeal and to instill fis­cal respon­si­bil­ity for man­age­ment.” I’ve often echoed sim­i­lar sentiments.

BMO says gold stocks are cur­rently trad­ing at his­tor­i­cally cheap lev­els, which the com­pany sees as an oppor­tu­nity investors can take advan­tage of. RBC attempts to quan­tify that oppor­tu­nity by say­ing “if gold prices remain ele­vated and/or investors accept a higher long-term gold price, we could see 25–50 per­cent upside in equities.”

How to Pick Gold Min­ers
With gold min­ers, in gen­eral, so attrac­tively val­ued rel­a­tive to the gold bul­lion price, the ques­tion becomes: Which stocks are the most com­pelling and have the best lever­age to robust pre­cious met­als prices?

First, an investor could begin the process through elim­i­na­tion. FINRA high­lighted some of the key warn­ing signs when ana­lyz­ing gold stocks, such as claims of being a “buy­out tar­get,” or spec­u­la­tive claims about reserve growth, and grandiose pre­dic­tions of expo­nen­tial growth, to name a few. FINRA says investors should be wary of “free lunch” pro­grams that claim prof­its in gold are “easy,” and we agree.

Research from geol­o­gist Robert Sibthorpe shows that only one in 2,000 (0.05 per­cent) com­pa­nies would ever find 1 mil­lion ounces of gold, and that only a third of those would be able to turn that find into pro­duc­tion. In addi­tion, research from Barry Cooper at CIBC shows that these dis­cov­er­ies are becom­ing even more dif­fi­cult. There were 51 gold/copper por­phyry dis­cov­er­ies of +3 mil­lion ounces dur­ing the 1990s, but only 24 of such dis­cov­er­ies occurred dur­ing the 2000s.

In order to find the dia­monds in the rough, I use what I call “The Five M’s” for min­ing stocks. I dis­cussed this process thor­oughly in The Gold­watcher: Demys­ti­fy­ing Gold Invest­ing, an investor’s guide­book to gold invest­ing I co-authored with John Katz a cou­ple of years ago.

The Five M’s are: Mar­ket cap, Man­age­ment, Money, Min­er­als and Mine life cycle.

1) Mar­ket Cap
Mar­ket cap is sim­ply the num­ber of shares out­stand­ing mul­ti­plied by the stock price. The gold sec­tor is bro­ken down into three sec­tors by mar­ket cap: Seniors (mar­ket caps >$10 bil­lion), inter­me­di­ates (between $2 and $10 bil­lion) and juniors (<$2 billion).

If a gold com­pany has 10 mil­lion shares out­stand­ing at $1 per share, the com­pany is val­ued at $10 mil­lion. The ques­tion any investor should ask is, “Is this com­pany really worth $10 mil­lion?” If the mar­ket pays $25 per ounce of gold in the ground, the com­pany should be val­ued at $25 mil­lion (1 mil­lion ounces in reserves X $25 an ounce). If the company’s mar­ket cap is only $10 mil­lion, it may look under­val­ued. Accord­ingly, if the company’s mar­ket cap is $50 mil­lion, it may appear to be overvalued.

For larger gold com­pa­nies, an investor can mea­sure a company’s mar­ket cap against its pro­duc­tion level, reserve assets, geo­graphic loca­tion and/or other met­rics to estab­lish rel­a­tive val­u­a­tion. For junior min­ing companies—an area of focus for our World Pre­cious Min­er­als Fund (UNWPX)—we look for bal­ance sheets with ample cash for explo­ration and devel­op­ment of prospec­tive reserves, but we resist pay­ing more than two times cash per share.

2) Man­age­ment
Essen­tially, man­age­ment of min­ing com­pa­nies must have both explicit and tacit knowl­edge to be suc­cess­ful. Explicit knowl­edge is aca­d­e­mic. How many PhDs or mas­ters in geology/engineering does com­pany man­age­ment have?

Tacit knowl­edge is more per­sonal in nature and much more dif­fi­cult to obtain. It is acquired over time through first-hand obser­va­tion, expe­ri­ence and prac­tice. How many years have they worked in the indus­try? Has man­age­ment ever suc­cess­fully com­pleted a project with sim­i­lar geopolitical/environmental constraints?

Suc­cess in the min­ing sec­tor, espe­cially the juniors, relies on the abil­ity to raise cap­i­tal and com­mu­ni­cate with investors. Often the heads of junior com­pa­nies are geol­o­gists or engi­neers who have no rela­tion­ships in the bro­ker­age busi­ness. This lack of rela­tion­ships impedes their abil­ity to gen­er­ate mar­ket sup­port. His­tor­i­cally, com­pa­nies with the high­est num­ber of retail share­hold­ers have the high­est price-to-book ratios and carry higher val­u­a­tions than peers.

Some of the most suc­cess­ful com­pany builders in the gold-mining indus­try are what I call the “finan­cial engi­neers” – peo­ple who have the rela­tion­ships and under­stand the cap­i­tal mar­kets and who know how to hire the best geo­log­i­cal and engi­neer­ing teams. We tend to have more con­fi­dence invest­ing in them.

3) Money
Min­ing is an expen­sive busi­ness. Often, com­pa­nies burn through sub­stan­tial amounts of cap­i­tal before gen­er­at­ing their first $1 in cash flow. A gold explo­ration com­pany has to deliver reserves per share to have a chance at another round of financ­ing. It has to con­vince the cap­i­tal mar­kets that it is an attrac­tive invest­ment on a per-share basis.

We call this the “burn rate”—how long will the company’s cur­rent cash lev­els last before it has to return for addi­tional financ­ing. If a junior explo­ration com­pany has $15 mil­lion in cash reserves and is spend­ing $3 mil­lion a month, it has five months to deliver enough reserves per share to con­vince cap­i­tal mar­kets it is worth the risk.

This cal­cu­la­tion can be done quickly. Explo­ration reserves are gen­er­ally val­ued at one-third the reserve val­ues of a pro­duc­ing mine—if pro­duc­ing reserves are val­ued at $150 an ounce, explo­ration reserves would be $50 per ounce.

The gold-equities mar­ket is gen­er­ally effi­cient at judg­ing reserves per share, so if the explo­ration com­pany doesn’t come up with the results nec­es­sary to get an evaluation—find gold for less than $50 an ounce—investors quickly lose con­fi­dence. There is an old rule when it comes to explo­ration com­pa­nies: don’t pay more than two times cash per share if there are no proven assets in the ground.

4) Min­er­als
Com­pared to the rest of the min­ing sec­tor, gold com­pa­nies have the high­est indus­try val­u­a­tions based on price to earn­ings, price to cash flow, price to enter­prise value and price to reserves per share.

Com­pa­nies oper­at­ing mines that pro­duce gold as well as indus­trial met­als tend to have lower val­u­a­tion mul­ti­ples. For exam­ple, the cur­rent price-to-earnings ratio for Freeport-McMoRan (FCX), is 8x-times for­ward earn­ings. This is con­sid­er­ably lower than Yamana (20x), Gold­corp (21x) and Agnico-Eagle (36x). Investors can use the low rel­a­tive val­u­a­tions of copper/gold pro­duc­ers to increase their mar­gin of safety in antic­i­pa­tion of an upward move in gold prices.

5) Mine Life­cy­cle
There are many delays and dis­ap­point­ments dur­ing the devel­op­ment and oper­a­tion of a gold mine. Input costs can rise out of con­trol (such as what hap­pened in 2008 when oil hit $140 per bar­rel), labor work­ers can strike, and political/environmental pol­icy shifts such as higher taxes or stricter envi­ron­men­tal reg­u­la­tions can shrink margins.

Dur­ing the explo­ration and devel­op­ment phase, the price of a gold stock often fol­lows a course that ends up look­ing like a double-humped camel (see graphic). First there’s eupho­ria over explo­ration results that are bet­ter than expected. The stock price rises as investors race to buy shares. Then real­ity sets in – this gold dis­cov­ery is still years away from being an actual pro­duc­ing mine. At this point, there’s a huge cor­rec­tion in the stock price.

Assum­ing the com­pany con­tin­ues down the path to devel­op­ment, its share price drifts side­ways until around six months before the first ounce of gold is expected to be pro­duced. At this point, the stock begins a strong new leg up when a more sophis­ti­cated set of share­hold­ers come into the mar­ket. Even­tu­ally the price drops off and then lev­els as the spec­u­la­tive money moves on to the next hot oppor­tu­nity and the com­pany tran­si­tions from explorer to producer.

U.S. Global’s Exper­tise
Clearly, the task of pick­ing which gold min­ers to invest in isn’t easy. We actively travel to min­ing projects in places such as Colom­bia, Panama and West Africa to “kick the tires” and ask tough ques­tions of man­age­ment. This is the value that our invest­ment team at U.S. Global Investors pro­vides for our share­hold­ers and how we seek to gen­er­ate alpha.

Tags: BMO Capital Markets, Chief Investment Officer, Equity Investors, Frank Holmes, Gold, Gold Bullion, Gold Equity, Gold Index, Gold Investment, Gold Miners, Gold Price, Gold Prices, gold stocks, Internal Rate Of Return, Margin Requirements, Performance Gap, Price Of Gold, Rbc Capital Markets, Strike Gold, Term Investors, U S Global Investors
Posted in Gold, Markets | Comments Off

The Neverending Story of a "Gold Bubble"

Tuesday, August 23rd, 2011

Gold con­tin­ued to make head­lines last week, reach­ing nearly $1,900 an ounce on Fri­day before rest­ing around the $1,850 level. Gold’s 15 per­cent rise to new nom­i­nal highs over the past month has rekin­dled “gold bub­ble” talk from many pun­dits. Long-term gold bulls have been forced to lis­ten to these naysay­ers since gold reached $500 an ounce. If you would have joined their group­think then, you would’ve missed gold’s roughly 270 per­cent rise since.

That said, gold is due for a cor­rec­tion. It would be a non-event to see a 10 per­cent drop in gold. This would actu­ally be a healthy devel­op­ment for mar­kets by shak­ing out the short-term spec­u­la­tors while the long-term story remains on solid ground.

Forty years ago this week, Pres­i­dent Richard Nixon “closed the gold win­dow,” end­ing the gold-backed global mon­e­tary sys­tem estab­lished at the Bret­ton Woods Con­fer­ence in 1944 and kick­ing off a decade of stagfla­tion for the U.S. economy.

At the time, $1 would buy 1/35th an ounce of gold. Today, $1 will net you about 1/1,178th an ounce of gold. Put dif­fer­ently, “One U.S. dol­lar now buys only 2 cents worth of the gold it could buy in 1971,” says Gold Stock Ana­lyst. This means that con­sumers have lost roughly 98 per­cent of their pur­chas­ing power com­pared to gold over the past 40 years.

The U.S. dol­lar isn’t the only asset gold has out­per­formed dur­ing recent decades. The yel­low metal has also seen peri­ods of rel­a­tive strength against the S&P 500. This chart from Gold Stock Ana­lyst pits the per­for­mance of gold bul­lion against the S&P 500 since 1971—you can see that gold imme­di­ately ral­lied fol­low­ing Nixon’s announce­ment before peak­ing at $850 an ounce in 1980. At that price, one ounce of gold was 7.6 times greater than the S&P 500, accord­ing to Gold Stock Ana­lyst. Gold’s rel­a­tive per­for­mance then declined for the next 20 years, with the S&P 500 tak­ing the lead in 1992 and peak­ing at 5.3 times the value of gold in 1999. Cur­rently, gold’s value is roughly 1.6 times greater than the S&P 500.

What drove gold’s rel­a­tive under­per­for­mance from 1980 to 1999? It was a shift in gov­ern­ment poli­cies, which have his­tor­i­cally been pre­cur­sors to change—a key tenet of our invest­ment process here at U.S. Global Investors.

Gold Stock Ana­lyst points out that Fed­eral Reserve Chair­man Paul Vol­cker began steer­ing the U.S. econ­omy toward pos­i­tive real inter­est rates in 1980 and Volcker’s goal was met in 1992—the same year the S&P 500 over­took gold.

In order for gold’s rel­a­tive value to return to 1979–1980 peak lev­els of 7.6 times the S&P 500, Gold Stock Analyst’s John Doody says gold prices would have to hit the $10,000 mark. Obvi­ously that sce­nario is unlikely, but it does put all this “gold bub­ble” non­sense into perspective.

One point to pop the “gold bub­ble” talk is that neg­a­tive real inter­est rates are poised to stick around for a while. We’ve pre­vi­ously dis­cussed that neg­a­tive real inter­est rates—one of the main dri­vers of the Fear Trade—have his­tor­i­cally been a mir­a­cle elixir for higher gold prices. The magic num­ber for real inter­est rates is 2 per­cent. That’s when you can earn more than 2 per­cent on a U.S. Trea­sury bill after dis­count­ing for infla­tion. Our research has shown that com­modi­ties tend to per­form well when rates fall below 2 percent.

Take gold and sil­ver, for exam­ple, which have his­tor­i­cally appre­ci­ated when the real inter­est rate dips below 2 per­cent. Addi­tion­ally, the lower real inter­est rates drop, the stronger the returns tend to be for gold. On the other hand, once real inter­est rates rise above the 2 per­cent mark, you start to see neg­a­tive year-over-year returns for both gold and silver.

Tags: Bretton Woods Conference, Commodities, Global Monetary System, Gold, Gold Bullion, Gold Bulls, Gold Stock Analyst, Groupthink, India, Level Gold, Naysayers, Neverending Story, Ounce Of Gold, President Richard Nixon, Pundits, Purchasing Power, Relative Performance, Relative Strength, Richard Nixon, Speculators, stagflation, Taking The Lead, Value Of Gold
Posted in Commodities, Gold, India, Markets | Comments Off

Happy 40th Anniversary to the Modern Fiat Monetary System

Monday, August 15th, 2011

From Gold­Core

Today Is The 40th Anniver­sary Of Nixon End­ing Gold Stan­dard And Cre­at­ing Mod­ern Fiat Mon­e­tary System

Gold has fallen today in all major cur­ren­cies except the Swiss franc which has fallen sharply again on con­tin­ued talk of SNB inter­ven­tion. Gold is trad­ing at USD 1,742.70, EUR 1,220.10, GBP 1,068.70, CHF 1,375.60 per ounce and 133,820 JPY/oz.  Gold’s Lon­don AM fix this morn­ing was USD 1,738.00/oz, EUR 1,214.11/oz, GBP 1,065.88/oz.

Gold in Swiss Francs reached 1,393.24 an ounce this morn­ing – the high­est price so far in 2011. Gold in Swiss francs has climbed 7.7% so far in August, 3.7% in 2011 and 8.2% in the past 12 months as gold reasserts itself as the true safe haven.

On this day, August 15th, 40 years ago, Pres­i­dent Nixon announced the end of the Gold Stan­dard and the end of the Bret­ton Woods inter­na­tional mon­e­tary sys­tem (see video of Nixon’s dra­matic announce­ment here).

This was one of the most impor­tant deci­sions in mod­ern finan­cial, eco­nomic and mon­e­tary his­tory and is a sem­i­nal moment in the cre­ation of the global debt cri­sis con­fronting the U.S., Europe and the world today.

Cross Cur­rency Rates

Nixon ush­ered in an era of float­ing fiat cur­ren­cies not backed by gold but rather deriv­ing value through gov­ern­ment “fiat” or diktat.

While Nixon jus­ti­fied the move was that the U.S. , then as today, was liv­ing way beyond its means with the Viet­nam war and grow­ing mil­i­tary indus­trial com­plex lead­ing to large bud­get deficits and inflation.

Gov­ern­ments inter­na­tion­ally includ­ing the French and their Pres­i­dent Charles de Gaulle were con­cerned about the debase­ment of the dol­lar and began to exchange their dol­lar reserves for gold bul­lion bars.

Sub­se­quent to Nixon’s deci­sion 40 years ago, the U.S. dol­lar has fallen from 1/35th of an ounce of gold to 1/1750th of an ounce of gold today.

Gold in Nom­i­nal USD – 1971 to Today (Weekly)

This is not the fault of “spec­u­la­tors”, rather it is the fault of prof­li­gate gov­ern­ments and cen­tral bankers debas­ing the U.S. dol­lar since 1971 (except for Fed­eral Reserve Chair­man Paul Volcker).

Today, U.S. dol­lars and all paper and dig­i­tal money is declared by gov­ern­ments to be legal ten­der, despite the fact that it has no intrin­sic value and is not backed by gold reserves.

His­tor­i­cally, cur­ren­cies were based on pre­cious met­als such as gold or sil­ver, but fiat money is based on faith and on the per­for­mance of politi­cians, bankers and cen­tral bankers.

Because today’s fiat money is not linked to phys­i­cal reserves of gold and sil­ver, it is becom­ing worth less with each pass­ing month and risks becom­ing worth­less should hyper­in­fla­tion take hold.

If peo­ple lose faith in a nation's paper cur­rency, the money will no longer hold value.

Through­out his­tory most fiat cur­ren­cies have not sur­vived more than a few decades and have suc­cumbed to hyperinflation.

The fiat cur­rency or paper and dig­i­tal based inter­na­tional mon­e­tary sys­tem has sur­vived 40 years but is in ter­mi­nal decline with many astute com­men­ta­tors now ques­tion­ing whether it will sur­vive the global debt crisis.

Gold’s role as a store of value and impor­tant mon­e­tary asset is being increas­ingly appre­ci­ated. Indeed, there are increas­ing calls for gold to again play a role in the global mon­e­tary system.

The Pres­i­dent of the World Bank, Robert Zoel­lick, wrote in the Finan­cial Times (‘The G20 must look beyond Bret­ton Woods II’ — Novem­ber, 2010) that a new mon­e­tary sys­tem involv­ing a bas­ket of cur­ren­cies “should also con­sider employ­ing gold as an inter­na­tional ref­er­ence point of mar­ket expec­ta­tions about infla­tion, defla­tion and future cur­rency values”.

He also said that “although text­books may view gold as the old money, mar­kets are using gold as an alter­na­tive mon­e­tary asset today.”

This was an impor­tant state­ment regard­ing gold espe­cially as it came from the Pres­i­dent of the World Bank, the head of one of the most pow­er­ful finan­cial and mon­e­tary orga­ni­za­tions in the world.

Jack Farchy wrote in the Finan­cial Times today, “the return of gold as a promi­nent finan­cial asset is with­out doubt the most impor­tant devel­op­ment in the bul­lion mar­ket today.”

It is also a very impor­tant devel­op­ment for cur­rency mar­kets and for the global finan­cial and mon­e­tary system.

Ex Eco­nom­ics Edi­tor of The Tele­graph, Edmund Con­way wrote over the week­end how “we've had the finan­cial cri­sis that usu­ally marks the begin­ning of the end of estab­lished mon­e­tary sys­tems. And now we are see­ing the debasement.”

He wrote that the ris­ing gold price “reflects many fac­tors  . . .   but chief among them is a dimin­ish­ing faith in the abil­ity of fiat cur­ren­cies to main­tain their value.”

“These bouts of debase­ment typ­i­cally end in dis­as­ter, as faith is lost in the cur­rency, infla­tion shoots through the roof and the econ­omy col­lapses, after which politi­cians intro­duce a new, more cred­i­ble system.”

Con­way warned that the “next stage of the cri­sis rep­re­sents a cri­sis of con­fi­dence in the very sys­tem which, founded as it is on trust rather than mea­sur­able yard­sticks, has no reli­able, inbuilt way of right­ing itself.”

We have for many months now been warn­ing of the real risk of an inter­na­tional mon­e­tary cri­sis and this risk looks more likely by the day.

While hyper­in­fla­tion remains a worst case sce­nario, stagfla­tion and a vir­u­lent bout of infla­tion looks almost cer­tain in the com­ing months.

For the lat­est news and com­men­tary on gold and finan­cial mar­kets fol­low us on Twit­ter.

SILVER
Sil­ver is trad­ing at $39.14/oz, €27.35/oz and £23.99/oz.

PLATINUM GROUP METALS
Plat­inum is trad­ing at $1,789.00/oz, pal­la­dium at $754/oz and rhodium at $1,775/oz.

NEWS
(Finan­cial Times)
Cen­tral banks pol­ish gold’s shine — Sys­tem of fiat money is 40 years old today

(Mar­ket­Watch)
Gold edges higher amid weaker dollar

(Reuters)
Spot gold falls 1 per­cent in third ses­sion of losses

(Bloomberg)
Gold Declines for Third Straight Day as Equity Rebound Trims Haven Demand

COMMENTARY
(The Tele­graph)
Aban­don­ing the gold stan­dard was a sem­i­nal moment, and one we're now all pay­ing for

(Mar­ket­Watch)
Com­men­tary: What are all those gold-bashers say­ing now?

(Lon­don Bul­lion Mar­ket Asso­ci­a­tion)
Brian Lucey: What do Aca­d­e­mics Think They Know About Gold?

(Zero­Hedge)
At 50x Lever­age And 2% Tier 1 Cap­i­tal, Is Soc­Gen Truly A Paragon Of Bal­ance Sheet Invincibility?

(Got Gold Report)
Gene Arens­berg: Comex swap deal­ers cover gold shorts like a big dog

Tags: 40th Anniversary, Bretton Woods, Budget Deficits, Currency Rates, Debasement, Dramatic Announcement, Fiat Currencies, Global Debt Crisis, Gold Bullion, Gold Standard, Important Decisions, International Monetary System, Military Industrial Complex, Monetary History, Ounce Of Gold, President Charles, President Nixon, Seminal Moment, Swiss Franc, System Gold
Posted in Markets | Comments Off