Rick Rule - What To Expect From Gold, Silver & Mining Shares

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/7/29_Rick_Rule_-_What_To_Expect_From_Gold%2C_Silver_%26_Mining_Shares.html

James Turk - The Single Most Important Chart For All Of 2013

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2013/3/4_James_Turk_-_The_Single_Most_Important_Chart_For_All_Of_2013.html

SAC Capital Partners Bets A Quarter Billion On Gold, Silver, & Mining Shares

http://bullmarketthinking.com/sac-capital-partners-bets-a-quarter-billion-on-gold-silver-mining-shares/

Mining Maven Says Share Slump To Spur Merger Boom

http://www.bloomberg.com/news/2012-05-28/mining-maven-says-share-slump-to-spur-merger-boom.html?cmpid=yhoo

Newmont CEO - China Doing Everything It Can to Get Gold

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/5/29_Newmont_CEO_-_China_Doing_Everything_It_Can_to_Get_Gold.html

What Investors Need to Know About Gold & the Mining Shares

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/5/16_What_Investors_Need_to_Know_About_Gold_%26_the_Mining_Shares.html

“Clearly, Eric, we’ve seen a big decline in the value of gold equities.  Yesterday I was reading a piece by Don Coxe, a well known strategist.  In his note he did a calculation on how much gold one can buy with $1,000 in the gold ETF versus what can be purchased with some mining companies. 

Based on the prices a few days ago, so it’s more extreme now, but with $1,000 you can buy .62 ounces of gold in the ETF.  If you buy $1,000 of Goldcorp shares, you get 4 ounces of gold.  With El Dorado, an intermediate company, you get more than 5 ounces of gold.  With a smaller producer like Perseus Mining, you get nearly 7 ounces of gold. 

So, you can get up to 7 ounces of gold for $1,000, or .62 ounces through the ETF.  Clearly he wasn’t making a recommendation on these stocks, he was just bringing to attention the tremendous value in the gold equities as a group."

Exclusive post: precious metals mining shares are breaking out

As predicted, the previously underperforming mining stocks are outperforming the actual metals spot prices in gold and silver.  One possible reason for their underperformance was hedge funds were correctly playing the long gold trade as euro and US debt problems were emerging.  As a hedge, they were shorting the mining stocks.

But the fundamentals of mining shares are extremely bullish, with low price/earnings ratios.  Despite falling input costs (energy, water, labor costs), output prices in the form of gold and silver production have risen.  It's a perfect storm for margin expansion and share price appreciation.

Since gold-related assets are under-appreciated and under-owned by institutional managers, there is still room to run.  Most are waking up to the fact that major gold producers are raising their dividends, which means large pension and mutual fund managers can now add them to their portfolios.  These fund managers are victimized by groupthink, so when they see their gold bug peers outperforming themselves, they inevitably will jump on the bandwagon--at much higher prices.

A bubble is only a bubble when prices outrace fundamentals.  The fundamentals for gold mining companies couldn't be better right now.  Some shares are priced lower than when gold was $800/oz.  Today, gold is at $1800.  You do the math--see previous blogs on operational leverage.

Other catalysts include major producers runing out of easily recoverable deposits.  They will look to acquire mid-tier and junior mining companies to replace their depleting reserves (remember:  a mine is a constantly depleting asset).  They will apply premiums for any acquisitions.  While shares of major miners will appreciate, their acquisition targets will soar going forward.  I believe major gold mining share prices will appreciate the most initially, but as investors get savvier, they'll turn to solid junior miners, which will propel their shares to the stratosphere.

Of course, most mining companies are intrinsically worthless as they own no recoverable deposits, but for the juniors and exploration companies that do prove up reserves, their shares will soar many-fold.  The mining industry is fraught with risk so that's why deep research is essential.

Own the physical bullion for insurance against currency debasement and to protect purchasing power, while eliminating counterparty risk.  Good luck everyone.

See disclaimers in the side bar.

Disclosure:  long precious metals and mining equities.

Embry - Mining Shares Will Be Like Internet Stocks in the ’90’s

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/7/13_Embry_-_Mining_Shares_Will_Be_Like_Internet_Stocks_in_the_90s.html

Spot prices decoupling from mining equities

While physical spot prices for gold and silver continue to surge, some of the mining shares are stagnant, which prompted me to take partial profits in SLW yesterday <click here> .  One possible reason is that the big money hedge funds are long the metals, but short the mining shares as a hedge.  These shorts put a cap on the prices of mining equities.

It may work for a while, but with any arbitrage, if the market wakes up to the reality of higher profits for mining companies going forward, the shorts will be carried out in a body bag.  In other words, this separation between the physical and equities markets is only temporary, and mining equities may not only catch up to the spot markets, but slingshot past the physical markets in the event of a huge short squeeze.

Paramount Gold Discovers High Grade Strike Extension of Main Palmarejo Mine Vein at San Miguel

Shares of PZG spiked over 40% last Friday on news of a high-grade strike extension in their Palmarejo mine.

http://finance.yahoo.com/news/Paramount-Gold-Discovers-High-iw-1958336846.html?x=0&.v=1

See disclaimers in the side bar.

Disclosure:  long shares of PZG.

US gold coin sales surge

As I've often posited: better early than late. No crystal ball predictions here, as we may be entering a temporary overbought situation, but treat precious metals as insurance against a financial crisis, not a money-making venture. And given the past and current debt problems domestically and offshore, the odds of a crisis have increased substantially. Good luck to all.

http://www.reuters.com/article/idUSN0762739220100507

See disclaimers on side bar.

Disclosure: long physical precious metals, long precious metals mining shares.

Precious metals as an asset class

Relative to other asset classes, the gold and silver sectors are minuscule. If and when precious metals and resource mining companies become popular, the rush into these tiny sectors will drive up prices, as supply won't be able to keep up with demand.

http://dailyreckoning.com/how-to-invest-in-gold-mania/

Disclosure: long gold and silver mining shares.

What's happening and what could happen

Bad and worse, I'm afraid. The first article (see yesterday's reference to the Independent in the Bloomberg blotter) reiterates sovereign government funds diversifying away from the weakening dollar, which is causing inflation domestically.

http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar-1798175.html

Expect denials from all sides, the it's becoming increasingly apparent the USDollar is doomed long-term.

And here is a dour prediction from a normally conservative Swiss banker. It's convincing, but let's hope he's dead wrong.

http://www.mmnews.de/index.php/200910043905/Gold-Silber/Gold-vs.-Paper-Money.html

Answers to your questions

Some of you have asked some key questions, so I will answer them to the best of my knowledge. This is not financial advice, but strategies I have either deployed or considered for my own portfolio:

1) Buy gold bullion, either in 10 or 100 ounce bars. This will have the lowest premium, but then you need to take delivery, store it and secure it. There will be a serial number attached to each bar. Check to make sure the dealers are reputable, or you can take delivery on the COMEX futures exchange.

2) Buy gold coins (stick to South African Krugerrands, Canadian Maple Leafs, U.S. Eagles). Since coins are smaller, these are more transferable than bullion, but you pay a higher premium above delivery price. Wait until the premiums are in the single digits, as demand has exceeded supply. If you're lucky, you can buy them from the U.S. mint (they are allocated due to high demand) or through a reputable dealer.

3) For potential extra returns, I have also purchased rare gold and silver coins. The St. Gaudens $20 double eagles (about 100 years old) are valued by numismatic collectors due to their beauty and liquidity. Morgan Silver dollars are also liquid (coined in the late 1800's). Obviously, coins in better condition are rare and command a higher premium. Visit a reputable coin dealer with reliable grading services.

4) Buy the gold exchange traded fund (ETF), which tracks the price of gold, and trades like a stock. I cannot give specific recommendations so Google it.

5) Buy individual gold mining shares. These companies usually give you greater leverage than the actual price of gold. They offer greater reward, but also greater risk. However, not all gold mining companies are created equal, as some are mature, leading producers, while some are junior companies with even higher potential for appreciation. They may be less liquid to trade and inherently riskier. Either way, you must perform due diligence as the company's prospects are not just dependent on the price of gold, but also other factors like geopolitical risk, environmentalist risk, production risk, labor risk, earnings risk, etc. just like other sector equities.

6) Buy a gold mining share ETF, which is a basket of various gold mining share companies. Again, it tracks the shares of these companies and trades like a stock.

When purchasing items (4), (5), and (6) above, you must put in mental trailing stop-loss thresholds. While equities and ETF's offer liquidity and convenience, they also are more volatile. To limit losses, you should keep a mental trailing stop, but do NOT indicate this stop loss to your broker. Because these stocks are volatile, unscrupulous market manipulators can drive the price down artificially to your threshold, stopping you out of the trade, guaranteeing your loss, perhaps 20% or 25%, or whatever you choose. Since these shares are volatile, do not keep your stop-loss too tight, as you will be stopped out too often. Volatility invites higher reward and risk, so you have to widen your stop-loss limits.

If you are risk-adverse, stick to bullion and coins.

And the reason why you want to have a trailing-stop is because as gold and/or gold share prices rise, you want to lock in profits along the way. For instance, I rode ABX from $19 up to $38/share. However, if it drops to $29, I am stopped out of the trade, as I put in a sell order (25% below the $38 level). I've locked in a $10/share profit. However, if it continues to rise to $50, I'm still in the trade, increasing my profits.

Remember: when placing buy or sell orders, use limit orders, not market orders.

7) You can do all of the above with silver as well. In fact, silver may have more upside as the gold/silver ratio is at the higher end of its historical range.

In summary, don't view gold as a vehicle to get rich quick. History has shown that in times of financial crisis, that certainly can happen, but think of using gold or gold mining shares as a diversification away from financial and paper assets (stocks, bonds, currencies, real estate). Gold has historically held its purchasing power for thousands of years, so treat it as a hedge against inflation, as well as a hedge against uncertainty in markets.

Good luck to us all.

Deflation or Inflation?

I've posed this question before, but if you own gold, the answer is it doesn't matter.

According to Porter Stansberry:

"This is really shaping up as the Great Depression Part II, with Obama's nearly $900 billion bailout package as the first episode of the New New Deal. Protectionism was one of the highly destructive ideas that helped keep the U.S. economy down during the 1930s. The bailout includes "Buy American" language, requiring bailout money to be spent on U.S. goods, something U.S. trading partners like China, India, Russia, and other signers of trade treaties with the U.S. aren't crazy about.


I bet you some day soon we get something very much like the New Deal's Committee on Continuity of Business and Employment, which put out a report in 1931 stating: "A freedom of action which might have been justified in the relatively simple life of the last century cannot be tolerated today... We have left the period of extreme individualism and are living in a period in which national economy must be recognized as a controlling factor."


Where do you invest if the Great Depression II is in our future? Believe it or not, gold stocks. Homestake Mining shares rose sixfold from October 1929 to December 1935, during which time the Dow Jones Industrials Average lost 64% of its value. A huge run up in Homestake's share price came after FDR stole everyone's gold. It's foolish to think you can impair gold's value by making it illegal. Prohibition usually increases the price of the outlawed commodity."

Gold--due for a pause--or ready to explode again?

I questioned whether gold was due for a pause a couple days ago, as the price of gold kept spiking up, breaking resistance levels. Well, the price shot up again overnight in Asia, BUT the mining shares didn't move much this morning. So I hedged this morning, not selling my positions, instead buying a couple puts, which will profit should ABX correct. Think of it as a cheap form of insurance in case gold pauses--without having to trigger a taxable event from profit-taking.

The price of the mining shares usually lead the actual price of the underlying commodity. In other words, it's gone up too fast and is looking heavy. There's that Physics training kicking in again...:-)

Having said that, I'm still bullish on gold medium- and long-term, as the fundamentals are unimpaired, to borrow a quote from Jim Rogers. But gold mining shares do look a bit tired at these levels. More conservative investors may want to take some profits off the table--a 100% profit in two months is nothing to sneeze at.

A sobering, but still bullish case for gold from Morningstar

From Vahid Fathi of morningstar.com:

I never thought I'd see the day that gold markets went into backwardation (spot prices higher than futures prices). However, the seemingly unthinkable has indeed happened. Of course, I'm not suggesting that backwardation will be a permanent feature of the market, as the misalignment of interest rates that theoretically caused gold backwardation is most likely not a permanent feature, either. Nonetheless, the question remains: Where do we go from here? This writer speculates that gold could very well turn out to be in a win-win situation, whether there is deflation or inflation. How is this possible? Adam Smith told us that gold is a barbaric relic, although it is more commonly known as the metal of kings. I remind you all that the world is still full of barbarians.

The above-ground stocks of gold, presumably available for disinvestment at any time, are some 60-fold of annual production of about 2,500 metric tons. This is why gold has never been in backwardation. Unlike any other commodity, all gold that has been mined throughout the ages is still out there somewhere. At an estimated 150,000 metric tons, this above-ground stock of gold--with most obvious portions in private hands or tucked away in central bank vaults--dwarfs annual production. Unlike industrial commodities such as copper, aluminum, or zinc, where prices can go into backwardation at the slightest hint of a temporary supply disruption from major producers, contango pricing has always been the norm for gold, where futures prices exceed the spot price.

Earlier this month, however, for the first time in history gold prices went into backwardation. Put differently, physical demand was to be met only by higher prices; those that held gold appear to be more reluctant to part with their hoard today than they may be in the future. Naturally, one wonders why it is that gold is now dearer in the face of what could turn out to be a potentially painful deflationary environment ahead.

Historically, it is understood that the role of gold is more of a hedge against inflation. Accordingly, the usual cadres of gold bugs have been telling us that gold strength reflects the enormous sums of money that are being printed and spent to bail out failing financial institutions and to shore up the flow of credit to prevent the economy from falling ever more deeply into recession. The inflationary implication of printing so much new fiat money is clear-cut to gold bugs; after all, Milton Friedman taught us that inflation is always and everywhere a monetary phenomenon. Most gold bugs equipped with charts showing money supply going through the roof see this as the precursor to runaway inflation ahead.

The flaw with that rationale, however, is that while it is true that money supply has increased significantly and inflation is a monetary phenomenon, it is the velocity of money that matters. And velocity has decelerated dramatically--a natural outcome of deleveraging. That's why I speculate that the deployment of monetary tools, including reducing the cost of credit through the Fed window to prevent deflation, is akin to pushing on a string. As long as the velocity of money is decelerating, one should expect that nominal economic growth will remain at best anemic worldwide, even if the cost of credit gravitates toward zero (and for all practical purposes is there already).

However, should the Fed decide to monetize debt, then inflation would become a threat. For now though, given the subdued velocity of money, swapping financial institutions' illiquid assets for liquid Treasuries to stimulate credit flow can hardly be viewed as inflationary, and it's not even having much success yet as financial institutions appear to be hoarding liquidity.

The last era of any significant period of deflation was in the 1930s. Although gold was fixed for a long time at $20.67 per ounce, in 1934 a massive devaluation of the U.S. dollar saw its fixed price jump to $35 per ounce. During this period of entrenched deflation, and in spite of the fixed price of the metal, gold proxies saw a dramatic rise in price. The NYSE-listed shares of Homestake Mining Company rose from about $4 to $500 from 1929 to 1935; the company operated for some 120 years until its flagship Homestake mine in Lead, S.D., ran out of economic reserves a few years ago and the company ceased to exist.

From my perspective, we dare not expect such returns from gold producers' shares, but I remain confident that our revised target price of $1,250 per ounce (our previous target of $1,000 was met) has a reasonable probability of panning out. That would likely result in handsome returns for gold producers' shares. The likes of Newmont Mining (NYSE:NEM - News), Barrick (NYSE:ABX - News), Anglogold Ashanti (NYSE:AU - News), Gold Fields (NYSE:GFI - News), and Agnico Eagle (NYSE:AEM - News) would benefit in such an environment.

That said, we could very well experience some deflationary forces first, before inflation (or more precisely, reflation) changes the course. Surely, a fast cure for deflation may simply be another major devaluation of the dollar, however unthinkable this may seem. Perhaps the following excerpt from Fed Chairman Ben Bernanke suffices as support for my take on gold prices:

"Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934. The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation."

Caveat emptor: This win-win proposition for gold is not for the faint of heart and is only speculation on my part. There is no reason to believe that the randomness of events will favor any one particular scenario. Only time will tell.

Gold, gold, and more gold...

I used the recent pullback in gold to purchase more Barrick Gold mining shares, albeit it at a higher entry point than my previous purchase of $19/share for ABX. I'm in at about $26/share, which is still cheaper than the $30 it touched earlier.

I also found a way to reduce future purchases to $18.90 by writing April 2009 ABX 22.50 puts, collecting $360 per contract. If ABX touches $22.50/share before the April expiration--and I get exercised, I'll pick up the shares, and since I get to keep the premiums whether I am exercised or not, my effective purchase price would be $18.90.

I also purchased rare gold coins at an auction, including the beautiful $20 St. Gaudens double eagle. I expect them to soar once inflation kicks in from the trillions of dollars of additional money flows.

I'm usually far from a gold bug--I am agnostic as far as investments go, but the inflationary scenario is too coompelling for me not to act. As long as the Fed and Treasury aim to bail out industry after industry, as long as banks and companies continue to collapse, and as long as the government continues to print money in unprecedented amounts, gold will have nowhere to go but up. There usually is a lag period before inflation accelerates, but the inflationary pressures are already starting to build. With short-term interest rates under 1%, it's only a matter of time before people figure out it's wiser to hold gold than devalued paper currency.