Gold & Precious Metals

Sprott’s Kosowan Asks: Are You Swayed or Afraid?

Source: Special to The Gold Report from the Cambridge House World Resource Investment Conference   (6/5/13)

Many investors are wondering if the words “gold” and “opportunity” can coexist in the same sentence. Michael Kosowan of Sprott Global Resource Investments answers with a resounding “yes.” He believes in the Pareto Principle—80% of the gain is derived from 20% of the stocks—and that contrarians will be rewarded in this “wonderfully miserable market.” To find that 20%, Kosowan outlines the criteria he uses when sizing up a junior mining company.

Watching gold prices these days has been an “exercise for the eyeballs,” similar to watching a rubber ball bounce around a concrete room. At times the price moves unnaturally, in fits and starts, according to broad economic policy statements in the marketplace and seemingly harmless comments right out of the Fed chairman’s office. How do we uncover opportunity amidst so much volatility in the marketplace?

Excellent gold stock opportunities are still available in this wonderfully miserable market. Gold stocks represent excellent opportunities to create wealth.

Most readers will fall into three categories: those who want to know how gold stocks and the word opportunity can coexist in the same sentence; those who have been swayed or afraid to invest in gold and are wondering what to do with their current portfolio; and those who recognize that they can be a contrarian or a victim in these markets and believe that there may be a turn in the market that can lead to wealth.

The history of this sector shows that there have been critical times to invest to produce life-changing wealth. Not surprisingly, this has typically coincided with times when public sentiment has been at all-time lows. At times like these the media tends to highlight the risk while ignoring the returns.

Today’s market is similar to a replay of a movie that we’ve all seen before. The low sentiment toward gold and gold stocks was also very prevalent in 1999, when I, Michael Kosowan, moved from the mining engineering side of the business to become a stock broker. At that time, like today, you were able to buy reality at a discount. The 1999 market gave rise to such success stories as Southwestern Resources Corp., International Uranium Corp. and AngloGold, all increasing tenfold or more.

Going back to the gold market in the 1970s, the price of gold moved up from $35/ounce ($35/oz) in 1970 to $200/oz by 1975. In the midst of that bull-run on gold, the price suffered a 50% retracement and moved back to $100/oz by August 1976—this was a cyclical retracement in a secular bull market. It was painful, but not debilitating to the bull market thesis.

During this tumultuous time the media had its own part to play. In August 1976, Time magazine proclaimed that “gold lately has had about as much luster as a rusty tin can.” Expectations were set very high on the initial run-up and the interim weakness was enough for the analysts of the time to discredit the entire gold thesis. Those swayed by the media were shaken out of that market and then missed the subsequent move from $100/oz in 1976 to $800/oz four years later. Time magazine was a very expensive subscription that year, to say the least. The investors who were swayed by the media missed astounding returns on gold as it moved through its bullish cycle.

So what do opportunities for gold look like now and how do I find them? A mine is a depleting asset; every day that goes by while it is in production reduces the size of the business.

The recent landslide at the Kennecott Utah Copper Bingham Canyon mine, located not too far from Salt Lake City, Utah, highlights this issue. This is the second biggest copper mine in the U.S. and one of the oldest—it started production in 1906. This mine as 107 years old and has been producing 200,000 tons of copper, 300,000 ounces gold, 3 million ounces (3 Moz) silver and 13,000 tons of molybdenum per year—truly massive!

Although it is very impressive to be pumping out this kind of tonnage at its age, Bingham Canyon is telling us legacy assets are becoming strained and long of tooth. They are dwindling, which spells supply disruptions, and therein lies the opportunity.

The costs associated with keeping mines in production are increasing and supply disruptions to such important assets are becoming more common place. The estimate for Bingham is that it may very well be off-line for the next two years.

Our dwindling legacy mines are in urgent need of being replaced by new discoveries. So, where are they?

This chart depicts the 3+ Moz discoveries over the last 21 years.

6-5gr

The chart dramatically shows that this industry has seen an acute lack of significant discoveries in the recent past. Meanwhile, the industry is chugging through more than 80 Moz gold, 680 Moz silver, 15 million tonnes of copper and 90 million pounds of uranium annually. These depleted reserves need replenishment. And, in today’s challenging economic environment, the quality needs to be higher.

Discoveries made in the mid- to late 1990s are largely due to the increased financing activity that took place 10 years earlier. Funding comes 10 years ahead of discovery activity. The poor discovery rate of today is relative to the poor market conditions and lack of funding we suffered in early 2000s.

Since that time, funding has ramped up, notably between 2005 and 2007. If this cycle holds true—let’s call it the circadian rhythm of mining—then we may be directly in front of a renewed exploration and discovery cycle.

Here is a checklist for success with four factors:

The first factor is balance sheets. They can be intimidating for some investors, but they don’t need to be. Investors should look for whether the company has sufficient cash to cover its projected expenses for the next two years. Two years is important because finance continues to be tough in this market. If the capital raise is significant it will spell out heavy dilution and water down future positive price moves—if there are any. Small financings at these levels could be a warning of desperation as the company fights to cover incidental costs while adding no benefit to the exploration venture. These small raises could be going toward covering working capital deficits and salaries—basically keeping the lights on. Be wary of both large and small financings.

You don’t want a junior miner that has debt or high property payments in the near term. A company’s cash balance needs to be sufficient to take it to its next technical milestone. Companies add value by answering unanswered questions. How far will the company get to answering that critical question regarding its exploration program before needing to raise capital yet again?

The second factor is management. When it comes to junior mining stocks, management is key—and that can’t be stressed enough. Good management can make a lesser property viable. Make sure the people running the junior miner have a ton of experience, ideally directly related to the same commodity involved in the project at hand. 

In an ideal world, management and/or the company’s geologists will have made significant discoveries in the past, bringing some of those deposits to production. Experienced management will also know how to navigate legal, political and financial issues and, especially important in many North American jurisdictions, the permitting process. Also, look for companies where the key people have plenty of “skin in the game,” ensuring their shares and stock options align their interests with those of shareholders.

The third factor is low capital costs. Capital cost is simply the total cost to put the mine into production. This is commonly found in the feasibility studies for the project.

The current challenging financial scene has made it difficult to access capital. This has been a barrier for the big, high-tonnage deposits. Recent high profile projects that have gone way over budget have poisoned the well of large-scale finance. While it was not that long ago that companies were being rewarded for big projects, this is not the case today and financiers are being far more selective.

The final factor is high margins. High grade equals high margin. And in this market, that’s crucial. The Holy Grail for many of the juniors is to be acquired by a senior. They must show that they have the high grade to offer or the takeover won’t happen. From my perspective the seniors have developed an inward-looking focus. They are attempting to develop low-grade ounces in a rising cost environment. Their older mines are getting deeper and more costly. This is known in the industry as “extend and pretend.” Production expansion is coming at a much higher price; at some point this will prove a losing battle. Going forward, high-return deposits will be key. The seniors have not spent money on exploration, leaving them with only one place to turn. . .the juniors.

These criteria form the “must haves” when choosing gold shares that will yield the best returns. Now more than ever they are crucial to the success of your investment. These criteria represent the tip of the iceberg. This is really just the beginning of your homework assignment in making your stock selection. Understand that the performance of this sector is really dependent on only a handful of stocks. The outstanding returns of the few derive benefit to the many.

The Pareto Principle is firmly at work here—80% of the gain is derived from 20% of the stocks. Finding that 20% is key.

There is real opportunity in this market to buy the all-stars of this industry at a discount. This is truly a wonderful set of circumstances for speculators—names like Ross Beaty, Bob Quartermain, Lukas Lundin, Robert Friedland—proven veterans of the mining sector who are now able to get their hands on some of the best projects they’ve ever seen.

Take advantage of this wonderfully miserable market we find ourselves in and find those fantastic opportunities that are out there.

This article was adapted from the talk Michael Kosowan gave at Cambridge House’s World Resource Investment Conference in Vancouver on May 27, 2013.

 

Michael Kosowan is an investment executive at Sprott Global Resource Investments Ltd. Prior to working for Global Resources, Kosowan was a project engineer at Placer Dome (now Barrick Gold) and the exploration manager for Atapa Minerals in Indonesia. Originally from Canada, Kosowan holds a master’s degree in mining engineering and is a licensed professional engineer. He is also a registered representative, having completed the Series 7, Series 24 and Series 63 in the U.S. and the Canadian Securities Commission course. He also holds a diploma in regulatory law. Kosowan will be speaking at the Agora Financial Tale of Two Americas Symposium in July.

DISCLOSURE: 
1) Michael Kosowan: I was not paid by Streetwise Reports for this article. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the article for accuracy as of the date of the interview and am responsible for the content of the article. 
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What is precious metals leasing, and why is it done…

LEASING is an integral part of the precious metals market, writes Miguel Perez-Santalla at BullionVault.

Why is it necessary? For a diverse number of reasons, the first is the need for industry to borrow instead of buying outright the metal. This enables them to avoid owning the metal at a fixed price if they have not yet contracted to sell their product.

Other companies want to borrow rather than buying gold or silver, to keep their cash consumption down. Leasing gives their business greater flexibility in money management. Still others choose to borrow to free up cash. Finally, there are those in a bridge lease, commonly used in the oil refining and pharmaceutical fields.

These companies already own all the precious metal that is needed, inside their pipeline. And as that platinum, palladium, gold or silver does its job, of cleaning out impurities from their end product (petroleum, drugs or other chemicals) it simply needs to be extracted from the waste byproduct and re-introduced to the process. But leasing gives the producer a little headroom while this goes on. They don’t need to own any more metal than they use, because it always comes back to them.

On the flip side there are financial, trading and metal refining companies who own gold, silver or platinum-group metals, or have metal on account, which they need to put to work. The metal which they have on account is held as a debt to their customers, rather than being physically allocated to the client. That is what enables them to turn their liability into an asset by putting it to good use, leasing gold out to earn them money.

The reason you want to know about precious metals leasing is to understand what this function represents, how it actually affects the market place, and its relationship to the price. This little exposé will in no way be exhaustive about all the different uses and functions of leasing. But it will serve as a primer for understanding a market product and service that seems to be a mystery for many commentators.

First, the pricing: Just as with anything you might pay to borrow, longer-term leases typically cost more – per annum – than short-term arrangements. See this table of indicative lease rates for instance.

Screen shot 2013-06-05 at 11.31.20 AM

Another very important point you should remember is that the ability to borrow gold or silver through leasing is not a simple process. In fact, most businesses involved have very stringent credit practices, and depending on the entity may entail quite lengthy processes and documentation at the front end before you can effectively become a user of this type of service. So moving forward, let’s assume for practical purposes that all parties to a transaction have met the highest credit standards.

We must also remember that the movement of valuables and precious metals is time consuming and expensive. Because of this, the marketplace created the ability to swap metals from one location – or from one period of time – with someone else that has it in another. Now, this is not something that is done for free. There is a charge which is determined by supply and demand for the specific location. Of course this is the kind of thing that can only be done if the two parties share the same interest. It is incumbent on anyone in the precious metals industry to establish trade relationships in the major markets that enable them to participate.

What does a swap have to do with leasing? If you are asking then I still have your interest! The reason is that location swap transactions happen to be a major part of the ability of institutions to lease or lend their metal to another party is because it increases the size of the available market. 

So how does someone end up in the gold leasing business? For most, it’s because they have active business in the metal from the get go. In this case we can say a bank involved in precious metals, a trading company or precious metals refining business would have natural flow of business that would enable them to be in a position where they could offer leasing. In the first example we will call this primary entity Company A.

Company A has customers who hold metals on deposit.  They’re not charged anything for this service, on the condition that Company A can use it in the meantime. Those clients have given their asset and accepted Company A’s good credit that they will deliver it back when needed. It is in reality no different that when you leave your money with a banking institution. The only difference is that the gold does not multiply through the banking system as money does. Because the sum total of physical metal does not change.

Let us make believe you are Company A and you have 10,000 ounces of gold deposited by your customers. Of those, you are able to lend out 8,000 ounces easily. But now you have an excess. So you calculate the earnings if you sell the gold outright in the market, and deposit or lend the cash to another borrower. To make sure you can give your clients the metal they’re owed, you also need to hedge yourself by buying gold back at a later date against a forward or gold futures contract (often referred to lately as paper gold) to avoid price risk.

In the current market environment, this could be profitable. Because the near term price is higher than the forward or future price (the market is in what’s called backwardation). You would pocket the premium for selling immediate gold, and buy the future delivery cheaper. Over that time period, you also lend the cash raised from the sale as well. It is a bonanza!

But it does not happen like this most of the time, and besides – Company A has multiple transactions and commitments in gold. So the picture I projected, though nice, is not always that simple

Let’s make believe the market is in full contango. This is the typical state of the gold and other precious metals markets. It means that the future or forward price is higher than the near term. So if you were Company A, then the spread would cost you money to hedge your position, and it would cost you more than you would earn, too.

What to do? You contact other people in the market place – outside your own circle of gold borrowing clients – and it happens that you can lend it to another party that has need for the gold in New York. He will pay you a premium, because he doesn’t have any there and needs to deliver to a manufacturer.  But instead of just outright borrowing, he wants to give you gold in London – the most liquid physical gold market in the world – at the end of the term, which may be for 3 months. This sounds good. You can earn the premium for New York because he needs it there, and you have no price exposure. That is the simplest route from the point of view for company A.

Now let’s look at the different reasons to lease gold. Let’s take a jeweler. A jeweler needs to produce 10,000 gold rings for Macy’s (or whoever). But he does not want to buy the gold and take the price risk. Because the jewelry outlet does not want to price it until the goods are ready, especially if they expect the gold price to be lower.

The jeweler then borrows the gold from Company A and pays a percentage just like any loan for the term they are borrowing the metal based on the price of the day they borrow the gold. At the end of this lease they would then buy the gold from Company A at the same time they sell the metal to Macy’s.

Another possibility is the gold miner who needs to pay his employees and expenses. This company expects to have one thousand gold ounces from their recent production. The metal however will take 30 days to be available from the refiner, ready to sell in the market. So the miner leases the gold for one month from Company A, selling the gold for cash and paying its bills. They then deliver the refined gold to Company A at the end of that term.

There is also a manufacturer that uses precious metals as part of a catalyst. They already own what they need. But because the process to reclaim the metal from the catalyst is time consuming, and because they need a fresh catalyst immediately when they remove the old one, they need to lease some metal for that time period.

In leasing there are many other models and it can be used for other purposes, much like in the stock market. To sell short is one such use. It means to sell what you don’t have because you expect you will buy it back cheaper at a later date. But in the precious metals market, however, you don’t need to do that with physical metal if you have access to the futures market. Speculation using physical bullion – borrowed and then sold directly into the marketplace in the hope of buying back later at lower prices – just doesn’t make any commercial sense when the futures (aka paper gold) market enables you to do it much faster, without the need for long and involved credit checks like we saw earlier.

There you have the basics of precious metals and gold leasing. Just like anything in the world, what should always be simple is complicated by some to create some advantage in most cases. If you understand the basics you can work make your way through any other related concepts.

So what kind of effect can the leasing market have on pricing? It really all depends on liquidity. Unlike currency – where the Fed can come in and inject more money into the system – this is not possible in a truly finite market like precious metals. But thanks to the available supply above-ground, some precious metals markets are more susceptible to a liquidity crunch than others. For the next example I will use a true to life market occurrence.

In November 2006, I remember like it was yesterday, I walked into my office on a Monday morning and platinum was up $200. It had jumped from the $1200 level to over $1400 dollars. This was more than a 16% move from one day to the next. The chatter and market reports back then were that a bank trader was short a large amount of platinum, and was being forced to deliver on his short position on that Monday by other players who had got wind of his problems, and took the opportunity to profit from it. 

Because his short position was so large, and because the platinum market is so small, his covering drove the price up.  This happened because typically in the platinum market, much of the metal is out on leases. It would take some time to get all the metal back to make the delivery.

In this circumstance there were industrial users who knew their leases were coming due at that specific time period too. Because of this large short covering in platinum, the price shot up not just on the commodity but on the platinum lease rate as well. That day in fact, the industrial customer that was expecting to pay 3% to 4% for a 1-year lease was being offered at between 100% to 120% per annum! The consumer had no choice but either to return the platinum they’d leased, buy it outright, or accept the new rate.

In this instance, the best way to manage the situation was to lease day by day. As it worked out, the market calmed down and three days later the lease rates were essentially back to normal. But if the industrial consumer had decided to buy it at that elevated price level, he would have suffered a major – and unnecessary – rise to his costs. By the end of that week, the platinum price had also retreated. 

Take note: the platinum market is far less liquid than gold or silver, meaning that there is less supply and demand. So its wild gyrations would not be probable in gold or silver markets. However, there is still a possibility of a similar circumstance. It’s just less likely that moves of that size would occur, because they are very much larger markets. And in the end it is not the lease rates that affect the market price, but immediate physical demand and price which affect the lease rates.

Leasing is a tool just like any other. It has its proper function, just like a knife for cooking, a rifle for hunting, or a gun for self-defense. That does not mean they are not misused, and often intentionally. But this does not negate their purpose and need in the market.

Some decry that the ability to lease metals enables the multiplication of the metal. However this is not true. It may multiply the commitments, but physical leasing is unlike money – which is multiplied by the ability of financial institutions to hold only a minimal part of the reserve as cash on hand.

With the precious metals market, in contrast, the commitments are for physical metal and delivery is always necessary at some point. Hence it is not a stroke of a pen, but the blood, sweat and tears of miners, refiners and logistics companies that produces or brings gold back into the market.

Yes, leasing might invite poor judgment on the part of a lender, or borrower. But the contrast that to the lack of metals industry failure with the repeated and increasingly common failure of financial and banking entities. Having to deliver rare, physical metals keeps errant trading to a minimum in a way which Fed-guaranteed bail outs of banking and financial brokerages does not.

Miguel Perez-Santalla

BullionVault

Miguel Perez-Santalla is vice president of business development for BullionVault, the physical gold and silver exchange founded a decade ago and now the world’s #1 provider of physical bullion ownership online. A fierce advocate for retail investors, and a regular speaker at industry and media events, Miguel has over 30 years’ experience in the precious metals business, previously working at the United States’ top coin dealerships, as well as international refining group Heraeus.

(c) BullionVault 2013

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

 

One of the many scary things about writing an investment book is the six months that elapse between the typing of the last word and the book’s appearance in stores. That’s enough time for your predictions to be proven wrong or – nearly as bad – for your predictions to come true and make the book’s advice obsolete.

The temporal jury is still out on Nick Barisheff’s $10,000 Gold. Either it will be this generation’s Dow 36,000, a signpost marking a secular top, or a prescient and gutsy call for faith in gold’s fundamentals at a time when many are giving up on precious metals.

The latter is more probable, for reasons that Barisheff, CEO of Canadian gold dealer Bullion Management Group, spells out early on. To hit just a few of the high points: the developed world is grossly over-indebted and is holding a 1930s-style depression at bay with insanely-low interest rates and unprecedented amounts of newly-created currency. In response, the developing world, led by China, India and Russia, is buying up every bit of gold they can get their hands on, with an eye to the inevitable changing of the currency guard when the dollar, euro and yen are depreciated to nothing and the yuan and ruble rise to take their place. This dynamic, says Barisheff, will send gold soaring – though of course it will actually be gold sitting still and the dollar plunging.

As a gold dealer, Barisheff is at his best when clarifying the differences between paper gold like ETFs and unallocated storage and the real thing like coins and allocated accounts. This paper-versus-physical distinction has become front-page news recently, and is a crucial piece of information for new gold investors. The time will come when millions of people who think they own gold find out that they really don’t. This book’s readers will avoid that fate.

In Barisheff’s analysis, the US is in the final stage before hyperinflation, with debt beginning to overwhelm the system while crucial needs like infrastructure are starved to pay for entitlements, overseas military adventures and interest. Here’s how he describes what comes next:

Stage 5 is hyperinflation, the worst economic phase of the fiat cycle, when currency becomes essentially worthless. Hyperinflation has occurred fifty-six times since 1795. During the Weimar hyperinflation, which we will discuss in more detail below, only gold was accepted as reparation payment. Of course, it is probable that a significant structural change will occur, likely involving the formal recognition of gold as money, in order to avoid hyperinflation on a global scale.

Where would gold have to be set to account for all the paper currency now circulating? That’s right, $10,000.

A final note about this book’s production values: The publisher, John Wiley & Sons Canada, has done a great job with the cover art, the graphs and the indexes, while Barisheff’s presentation is clear and logical. This is a polished production from beginning to end, which makes it an easy read. Everyone associated with it should be proud of what they’ve produced.

Is It Time to Start Freaking Out About the Gold Supply?

You hear a lot about central banks and gold reserves these days.

Back in February, Germany decided to start repatriating some of its U.S.- and Paris-held gold. And in March, Switzerland announced plans to vote to do the same, as well as to stop selling its gold reserves.

Moves like these aren’t necessarily out-of-the-ordinary. After all, if you’re a gold buyer, it’s generally not a good idea to buy and hold it sight unseen.

But many can’t help but wonder whether Germany, Switzerland and potentially other countries doubt perhaps not the purity of the gold bars held in their name, but rather their existence.

While we expect their gold is ready for the taking, it does make you wonder why, in Germany’s case, it will take seven years for the wealth transfer to be complete.

Whatever the reasoning for the timeline, it’s a lesson to us all that the companies storing and selling your bullion should be able to produce your gold upon request.

But let’s suppose the bullion isn’t where it’s supposed to be … and the governments have to go and buy gold on the open market. Will there be enough available?

Well, there’s plenty in the ground. So that may depend on whether several miners can go forward with their plans to get it out. And unfortunately for some big gold projects, miners are finding themselves between a (gold) rock and a hard place …

Last week, Atna Resources (ATNAF) announced that low gold prices have “temporarily downsized” the ramp-up of underground mining operations at its Pinson Mine near Winnemucca, Nevada. Atna’s stock was punished mercilessly.

Pinson was expected to yield 50,000 to 57,000 gold ounces this year. Atna had hoped to increase that production to as much as 200,000 gold ounces annually.

Nope. Not gonna happen. At least, not at these prices.

But the Pinson Mine is small potatoes, right?

On Monday, Mexico’s Minera Frisco (MFRVF), owned by billionaire Carlos Slim, said that production at its gold and silver mine El Coronel was suspended due to “illegal” worker action.

El Coronel produced 42,211 ounces of gold and 4,234 ounces of silver in the first quarter of 2013, and was planning on ramping up production.

A production ramp-up? Nope, not gonna happen now.

But that’s still small potatoes, right?

On Friday, Roque Benavides, chief executive of mining company Buenaventura, talked to Reuters about Conga, the monster, $4.8 billion Peruvian gold project that is being developed by Newmont Mining (NEM). Buenaventura is junior partner on the project.

Protests flared up at Conga again last week. And these aren’t placard-holding hippies singing “Kumbaya.” People have died in clashes with security forces at the Conga project.

The project was suspended in November 2011 at the request of Peru’s central government, after increased protests in Cajamarca by anti-mining activists. Benavides says that those protests, if they continue, could mean the end of the project.

Conga could have an average annual output of 580,000 to 680,000 ounces of gold and 155 million to 235 million pounds of copper during its first five years.

Now THAT’S big potatoes.

On Monday, an Indonesian government official announced that Grasberg, an Indonesian copper mine owned by Freeport-McMoRan Copper and Gold (FCX), will not be able to resume output for three months until a probe into a deadly tunnel collapse is completed.

Grasberg is known as a copper mine — the third-largest in the world, in fact — but it’s also the BIGGEST gold-producing mine in the world, averaging more than 1 million ounces of gold production each year for the past three years.

That’s HUGE potatoes!

Should We Start to Worry
About Gold Supply Now?

The word on the street is that it’s getting tougher and tougher to buy physical gold.

Maybe that’s why people in Singapore were paying a premium of $7 per ounce for physical gold last week — a new record. And if you want to buy physical gold in Singapore in June — too bad! Orders put in now won’t be filled until July.

 

  • Maybe that’s why the Indian government just raised the import tariff on gold — AGAIN — on Sunday, in desperate bid to clamp down on consumer demand for the yellow metal. And this is happening during an economic slowdown! What’s going to happen when India’s economy starts firing on all cylinders again?
  • Maybe that’s why sales of physical gold are hitting “astronomical” levels in Dubai. Expat Indians are rushing to buy gold in Dubai and ship it home, perhaps in a bid to get around India’s onerous new gold-import restrictions. Dubai merchants report that their sales have shot up by 400% after the recent price plunge.
  • Maybe that’s also why sales of American Eagle gold bullion coins by the U.S. Mint — despite dropping in May from April — are still on track to set a new annual sales record.

 

The buyers are there. The suppliers are getting thinned out. The question of the day may soon become: “Got physical gold?”

What’s your answer going to be?

Got Gold (Miners)?

Miners look good too, of course — at least, the good ones do. That’s why I recommended two new gold miners to my Junior Resource Millionaire subscribers on Friday. Are those positions up? Yup! Are they likely to go higher? Hey, nothing’s certain in this world, but I think the odds favor this trade.

And let’s look at the Market Vectors Gold Miners ETF (GDX), a basket of leading gold miners.

060513-img-01

Despite recent bad news from Newmont and Barrick Gold (ABX), which is having its own troubles with a multibillion-dollar project, the gold miners seem to be breaking out. Maybe it’s because the gold they do own is suddenly looking a lot more valuable.

The real test will come at the 50-day moving average. Good luck to all.

If you’re doing this on your own, do your own due diligence.

All the best,
Sean

P.S.Tony Sagami has discovered a peculiar indicator that has an incredible 85% accuracy in determining whether a stock will rise or fall. That means for every 10 trades, better than eight of them can make money.

But Tony found a way to juice up his returns. Just in the last 12 months, you could have had the opportunity to make gains better than 600%… five different times!

He’s revealing the details about his secret ABR Indicator in a new breakthrough presentation. However, as with all other proprietary trading strategies, it’s important to keep it under-wraps. So, he’s not planning to leave this new video online for long.

While you still can, I urge you to //www.gliq.com/cgi-bin/click?weiss_uwd+SEAN-TAC2013-link+UWD1351+vgbb@shaw.ca+g446+5619124“>click this link here and watch it immediately.

Gold’s Pivotal Role – The Yuan Sees Freer Convertibility this Year! (part 2)

In a continuation of the article on the rising convertibility of the Chinese Yuan towards the end of this year we look further into the path both the Chinese Yuan will follow and the changes that will follow in the global monetary system.

We feel it is inevitable that –in line with the World Gold Council sponsored OMFIF report on the subject—from which we will quote freely, that gold will move to a pivotal role in the monetary system over time. 

There is a tendency among analysts and academics to believe that academic theory will override the final changes that the monetary system will bring about. The reality of the matter is that theory will be made to bend to suit governments and their interests and then an amalgam of the interests of the most forceful nations trying to dictate such changes. This may not reflect academic wisdom but the opinion of the most powerful nation’s interests.

With this in mind it is good to look at these interests and see whether there can be an accord that will work in the global monetary system. A look at some features of the system that currently holds sway helps us to see the pressure points that lie ahead.

I.M.F. & World Bank

The first stumbling block is the I.M.F. itself. This is dominated by the U.S. voting power of 16.83% whereas 85% of votes are needed to pass a resolution there. It’s unlikely that China will accept a continuation of the U.S. control of issues that may deeply affect the Chinese. A removal of the U.S.’ overriding power must be on the cards. If that is not to happen, then what we’re seeing already among the emerging nations (the BRIC nations) led by China, where they have proposed  institutions that could take on the I.M.F. and World Bank roles as an alternative to these western controlled institutions, will move to completion. After all, it is unlikely that the U.S. would willingly relinquish the power it has, let alone in favour of China.

While China has openly expressed an interest in widening the definition of the S.D.R. the invention of the I.M.F. it is unlikely that the U.S. will be happy to see it linked to gold and with the Yuan becoming an important component of it. So far, China’s reaction has been to walk its own road and not to bow to the dictates of the U.S.

What China Wants

To emphasize that point we must be clear that China will claim as much power and control over the monetary system that its coming position in the economic tables of the world describes. Furthermore, China will want to have a similar degree of financial power as has been exercised by the U.S. for generations.

These interests are described in financial terms as China will want to improve the return on Chinese savings. Emulating the ‘exorbitant privilege’ of the dollar, under which China can absorb capital inflows from abroad at a relatively low interest rate and reinvest these as productive foreign assets earning a much higher return, has become an aim espoused by many Chinese economists and academics.

The Chinese authorities distinguish between means and ends. The overall aim is not just attaining reserve currency status. Rather, it is optimizing China’s economic power, resilience and prosperity. The internationalization of the currency is a means to that end, and the chosen routes are through increasing the use of the currency in trade and investment between China and the rest of the world, and the opening up of a carefully-controlled offshore Yuan market to facilitate that aim.

China & Gold

If central banks take a more active interest in gold, they’re likely to be imitated by private sector investors, de facto diminishing the amount of extra gold available as reserves. This set of considerations makes it unlikely that gold could re-emerge as a significant threat to fiat currencies, in the sense that it could replace them in a systemic way. The relative scarcity of gold means, that it could only ever replace a fiat currency on a fractional basis; however, even such a system is unlikely. That worked during the Gold and Gold Exchange Standards mainly because politicians and markets had faith in them. When that faith broke down in 1914, the early 1930s and early 1970s, the system could no longer be maintained. Precisely because of that experience and of the constant temptation for politicians to manipulate a standard to their short-term advantage, we will probably never see the return of a fractional Gold Standard.

The flexibility, for better or worse, of fiat currencies makes it unlikely that all politicians –including China’s— will accept abandoning them. The future monetary system will have to be pragmatic, bowing to the most influential of national politicians so that the current monetary system will be made to continue albeit with such changes that allow China and its currency to dovetail into the system that we already have.

This means a continuation of the increase in distrust of politicians, founded on suspicion that they, or central bankers, are debasing the currency. Naturally this will increase the attraction of gold as a hedge against all currencies. While politicians will continue to bow on this subject to the central banks allowing them to be independent of government, national interests will override international ones. It’s because of this set of strains that gold could become so important in the monetary system, in terms of individual national credibility that it becomes in the national interest to harness the entire gold stock within the borders of a nation.

Certainly if China decides that it is to its advantage to build a substantial store of gold, then it will ensure it can be used to lessen liquidity constraints, internationally and mollify currency crises that emanate from them.

We believe that it may well insist that other nations use their gold in the same way.

The only way this can be done effectively, is as we and OMFIF mentioned in the first part of this article: use gold as a form of ‘value anchor’ indexing currencies to gold. We see this as being somewhat brutal on some nations making them look at the realities of their currency’s value, but also reinforcing the monetary system as a whole.

 The Coming Convertibility of the Yuan

Progress in the Yuan’s international use has been concentrated on trade invoicing and settlement. In the first half of 2012, the Yuan’s share of China’s overall cross border receipts and payments stood at around 11%, up from around 7% in 2011, and only 2% in 2010 (Chart 9). Yuan flows into China for foreign direct and portfolio investment increased threefold compared with a year earlier. The authorities have built up a Yuan clearing agreement between Hong Kong and the mainland to reflect the growing pace of economic integration and de facto Yuan convertibility between these two areas. This has accompanied a sharp increase in volumes of Yuan held and traded in Hong Kong, although the amounts levelled off during the latter part of 2012.

1

Key Swap Agreements

The People’s Bank of China has signed Yuan swap agreements with  foreign central banks, including Japan, South Korea, Hong Kong, Singapore, Iceland, Argentina and Australia, to provide Chinese currency liquidity to local markets abroad (Table 4). Between 10 and 15 central banks own mainly small volumes of Yuan reserves through agreements with the People’s Bank. Most of the reserve-holding is concentrated on Asia. According to the People’s Bank of China holdings also extend to Africa, Latin America, Europe and Middle East. Notable non-Asian central banks to hold Yuan reserves include the Central Bank of Nigeria (where the governor announced in 2011 that 10% of reserves would be eventually held in Yuan) and the Austrian National Bank (the first European central bank to invest in the Chinese currency). Other leading European central banks have made clear that they will not contemplate Yuan ownership until the currency is fully convertible.

2

The Chinese authorities may be prepared to make use of a number of opportunities to expand international use of the Yuan in a way that goes beyond invoicing and settlement for trade and investment. One idea put forward by Chinese economists with close links to the authorities is that China should encourage both its own borrowing entities as well as indebted western nations to issue bonds in Yuan specifically destined to be held in foreign countries official reserves. (If that were the case, China would have to proceed to full Yuan convertibility.)

Hold your gold in such a way that governments and banks can’t seize it!

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This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment.  Gold Forecaster – Global Watch / Julian D. W. Phillips / Peter Spina, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold Forecaster – Global Watch / Julian D. W. Phillips / Peter Spina make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster – Global Watch / Julian D. W. Phillips / Peter Spina only and are subject to change without notice. Gold Forecaster – Global Watch / Julian D. W. Phillips / Peter Spina assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.

— Posted Tuesday, 4 June 2013