ingoldwetrust.ch / by Koos Jansen / March 2, 2014 at 5:24 pm
The Shanghai Gold Exchange (SGE) is back on schedule publishing their trade reports on friday that cover the previous trading week. Last friday’s report covered the trading week February 17 – 21. For me the most important numbers is always the amount of physical gold withdrawn from the vaults as this equals Chinese wholesale demand. Withdrawals in week 8 (February 17 – 21) accounted for 49 tonnes, year to date there have been 369 tonnes withdrawn from the vaults.If we divide the later by the number of days of the corresponding period (52) we come up with an average demand of 7.09 tonnes per day – this includes weekends and the one week holiday at Lunar year when the SGE was closed.
I got a few request regarding demand compared to last year and daily moving averages. Great ideas which I have carried out (request are always welcome, we’re doing this together). Compared to last year demand is up 51 % over the same period. Of course we had the shocker in April 2013 when withdrawals exploded to 117 tonnes in week 17. I don’t expect any spikes that big this year so probably this year’s growth compared to 2013 in percentages will be decreasing when we’ll pass April. Nevertheless, the daily average of 2013 was (2197/365) 6.02 tonnes, while this year we’re up to 7.09 tonnes. China is on schedule to establish a new record, if the world can supply any more gold.
The London gold fix, the benchmark used by miners, jewelers and central banks to value the metal, may have been manipulated for a decade by the banks setting it, researchers say.
Unusual trading patterns around 3 p.m. in London, when the so-called afternoon fix is set on a private conference call between five of the biggest gold dealers, are a sign of collusive behavior and should be investigated, New York University’s Stern School of Business Professor Rosa Abrantes-Metz and Albert Metz, a managing director at Moody’s Investors Service, wrote in a draft research paper.
“The structure of the benchmark is certainly conducive to collusion and manipulation, and the empirical data are consistent with price artificiality,” they say in the report, which hasn’t yet been submitted for publication. “It is likely that co-operation between participants may be occurring.”
The paper is the first to raise the possibility that the five banks overseeing the century-old rate — Barclays Plc, Deutsche Bank AG (DBK), Bank of Nova Scotia (BNS), HSBC Holdings Plc (HSBA) and Societe Generale SA (GLE) — may have been actively working together to manipulate the benchmark. It also adds to pressure on the firms to overhaul the way the rate is calculated. Authorities around the world, already investigating the manipulation of benchmarks from interest rates to foreign exchange, are examining the $20 trillion gold market for signs of wrongdoing.
The remainder of the article does not add particularly interesting information.
We have no interest in analyzing the findings of the research. Readers interested in a critical analysis should read Ross Norman’s comments, managing director of bullion company SharpsPixley in London (read analysis).
We would like to point out how Bloomberg’s news is no news at all. In the past two years, we released several articles in which gold and silver price manipulation was discussed at length, based on facts and figures, without any bias. Obviously, there was no reference from the mainstream media to any of these findings on our site or on similar precious metals sites (think of GATA, Goldseek, and the likes).
First, on November 30th 2012, a year and a half ago, we released an interview with statistical researcher Dimitri Speck. We explained that his research showed evidence of central banks influencing systematically the price of gold as of August 1993. Mr. Speck’s conclusion comes from intraday price statistics, where he observed several anomalies. First, since 1993, the price has been falling systematically during the trading session of COMEX in NY. Another trading anomaly is that during the PM fix the price systematically tends to drop significantly. The following chart is the result of 16 years of recording intraday data. The sudden price drops are so sharp and systematic, that it can only point to intervention.
It was not only us who released this information. Dimitri Speck’s own website had existed for much longer and his work was released by GATA long before. The gold price manipulation during the London Fix was clearly much longer visible.
Bloomberg comes indeed very late with the “discovery” of gold price manipulation. Ironically, just two weeks ago, precious metals analyst Ted Butler explained here that Bear Stearns went bankrupt mainly because of excessive short positions on gold and silver in 2008. Butler wrote “What baffles me today is that no well-known journalist from outside the gold and silver world has yet picked up on what is an easy-to-document story of epic historical proportions. It’s the story of why Bear Stearns went under, and how the gold and silver price manipulation continued since the day JPMorgan took over Bear.”
Butler has provided evidence of gold and silver manipulation for several years. The key findings of Butler are based on COMEX gold and silver dominant positions by Bear Stearns and JP Morgan. Since the fall of Bear Stearns, JP Morgan has taken over those dominant positions in the futures markets, allowing them to set the direction of the price.
JPMorgan’s real crime resides in its ability to sell unlimited quantities of COMEX silver contracts short on the way up in price to the point of creating unprecedented levels of market share and concentration. In December 2009, JPMorgan held more than 40% of the entire short side of COMEX silver and close to that market share on other occasions. To my knowledge, there has never been a greater market share or corner in any major market in history. These unlimited short sales by JPMorgan inevitably satisfy technical buying interest and then that technical buying turns to selling at some point, with JPMorgan then working to induce the tech funds into selling. The buying back by JPMorgan is the illegal ringing of the cash register and closing out of the manipulative silver short positions sold at higher prices.
It is well-established that a market corner is against commodity law. In fact, this is the most important aspect to commodity law, because market corners are unquestioned proof of manipulation. CFTC data indicate that JPMorgan held short market corners in COMEX gold and silver at the start of the year and that this crooked bank holds a long market corner currently in COMEX gold. There can be no question that JPMorgan held and holds market corners in COMEX gold and silver based upon market share.
While the London Fix price manipulation was already known for years (for instance by research from Dimitri Speck documented on several sites including ours), it is the COMEX futures dominant positions of JP Morgan that is an even bigger act of price manipulation. As usual, the mainstream media are running behind the truth and are not able to report on the most relevant facts.
In his weekly market review, Frank Holmes of the USFunds.com nicely summarizes for gold investors this week’s strengths, weaknesses, opportunities and threats in the gold market. The price of the yellow metal went lower after two consecutive weeks of gains. Gold closed the week at $1,326.44, up $2.16 per ounce (0.16%). The NYSE Arca Gold Miners Index fell 2.62% on the week. This was the gold investors review of past week.
Gold Market Strengths
Gold is heading for a second month of gains, the longest such run since August. Bullion has gained more than 10% this year, rebounding from the biggest annual decline in more than three decades, even as the U.S. Federal Reserve announced a reduction in asset purchases at its past two meetings.
The rally in gold seems to be halting the 13-month outflow from the biggest ETF backed by the metal. Assets in the SPDR Gold Trust are poised for the first monthly inflow since December 2012.
Gold demand apparently remains very strong. China’s January Hong Kong gold imports soared 326 percent year-over-year. The Hong Kong region exported a net of 83.6 tonnes of gold to the Chinese mainland in January, down slightly from December exports of 91.9 tonnes. Exports from Hong Kong to China last year in January were very low at 19.6 tonnes. Macquarie notes that Russia was the biggest buyer of gold last year, purchasing 77 tonnes of the metal. Kazakhstan added 28 tonnes, Azerbaijan 20 tonnes, South Korea 20 tonnes, and Nepal 12 tonnes for a total estimated central bank addition of 185 tonnes.
Gold Market Weaknesses
Recently, Shanghai gold premiums have moved from a slight discount to flat, partially ameliorating concerns over China’s import appetite.
Gold Market Opportunities
With the stronger gold performance this year we are seeing some analysts revising their price predictions higher. For example, UBS analyst Edel Tully has revised her gold one-month average forecast price from $1,180 to $1,280, and her three-month gold price prediction stands now at $1,350 vs. $1,100. Also, RBCCM’s Toronto-based analytical team has revised its long-term gold and silver price assumptions to $1,400 and $23.50, respectively. The higher the price goes, the more likely commodity forecasters will start adjusting their price targets higher.
For those investors that have thought bitcoins might be a viable alternative to gold, they have something new to consider. Mt. Gox, once the world’s largest bitcoin exchange, filed for bankruptcy after the company lost 750,000 bitcoins belonging to users and 100,000 of its own. The company blamed weak computer systems for the theft of bitcoins, focusing attention on the digital currency’s risk. For digital currencies, security measures may leave a lot to be desired in comparison to the security one has of physical gold being locked in a bank vault.
Gold Market Threats
The world’s biggest macro hedge fund says Canada has a tough decade ahead of it, with Ray Dalio’s Bridgewater Associates saying in its well-read daily note that the country’s economy is just beginning a tough period of rebalancing. While this could be negative for the country as a whole, further currency weakness would likely be a positive for the gold miners which sell their production benchmarked to a U.S. dollar gold price.
Rosa Abrantes-Metz, a professor at Stern’s School of Business, and Albert Metz, a managing director at Moody’s Investors Service, conducted a study on gold fixing and found signs of collusive behavior that need to be investigated. The gold fixing study revealed unusual trading patterns around 3:00 pm in London, during the time when the five biggest gold dealers actively work together to manipulate the benchmark. This likely is a bigger problem for the banks involved in the price fix, but could lead to more transparent markets for customers.
In a stunning 24 hours, it now appears that Russia and the Ukraine are one formal announcement away from a state of war. From moments ago, as reported by Bloomberg:
UKRAINE ACTING PRESIDENT PUTS ALL FORCES ON FULL COMBAT ALERT
And this, as reported by the NYT, virtually assures the escalation to a hot war, as some provocation, somewhere will certainly take place: “a Ukrainian military official in Crimea said Ukrainian soldiers had been told to “open fire” if they came under attack by Russia troops or others.“
Ukraine protects all Ukrainians, acting President Oleksandr Turchynov says in Kiev briefing.
Ukraine Prime Minister Arseniy Yatsenyuk: “diverting funds for military”
Turchynov: untrue that Russians are under threat
Turchynov: no reason for Putin request
Turchynov calls for national unity
Yatsenyuk says to take all measures to ensure peace
Yatsenyuk: no reason for Russia to intervene in Ukraine
As we have repeated over and over again, gold should primarily act as an insurance policy which protects your purchasing power during a currency crisis. And despite the fact that most economic pundits want us to believe there is an economic recovery, the truth of the matter is that the recovery is very weak; the economy remains fragile. Apart from that, a global currency crisis is playing out and it will probably hit most of the currencies in the years ahead.
Recently, in the heat of the emerging market crisis, we wrote Gold Price Exploding In Emerging Markets. The charts in the article show the explosive price action in local currencies of the emerging markets that were hit hardest. That’s the insurance policy in action.
The Ukrainian hryvnia has fallen by 50.14% against gold in 2014 and by 28% in the last four days alone. Ukrainians who own gold have protected their savings – again showing gold’s safe haven properties.
Yesterday, gold hit a four-month high at $1,345.35 before falling almost 1%, possibly due to profit taking and technical selling.
Gold has risen more than 10% so far this year on uncertainty over the pace of the U.S. economic recovery, worries about growth in China and continuing robust global physical demand. Geopolitical tension between Russia and the western powers over Ukraine will likely support gold.
In other markets, Asian shares struggled to find a solid footing on Thursday as escalating tensions over the Ukraine led to weakness into equity markets and the risk of a renewed bout of risk off.
Ukraine is seeing bank runs, as central bank reserves shrink and some 7% of bank deposits were withdrawn in just 3 days. Bank run fears mean some financial institutions operating in Ukraine closed branches and imposed limits on cash withdrawals this week.
All jokes aside, if one tries to explain this to the majority of people, the result would be a conversation along these lines: “The gold price up? No, the currency down and gold is helping preserve the purchasing power which is the primary role of a currency. Oh, gold is a currency?”
This is an excerpt from this week’s premium update from the The Financial Tap, which is dedicated to helping people learn to grow into successful investors by providing cycle research on multiple markets delivered twice weekly. Now offering monthly & quarterly subscriptions with 30 day refund. Promo code ZEN saves 10%.
Gold reversed this morning after making fresh Daily Cycle highs before moving over $20 to the session lows. Most of the move can be attributed to the dollar’s fairly powerful rally as it confirmed a new DailyCycle of its own. But within the context of this powerful gold Daily Cycle, this remains (to date) just normal gyrations within a sustained uptrend. After all, we’ve seen 13 out of 15 winning sessions and a Cycle rally of $100 from the last Cycle Low. To think anything more of it at this point is to be “over analyzing” the daily chart.
But there is an element of concern now and a reason to be guarded. The Cycle has entered into the early stages for a Daily Cycle Top and therefore a move lower from this point could well signal that the Cycle has topped. But I reiterate, it is a little early for a 2nd Daily Cycle high and from a pricing standpoint, I would expect more upside. This is why I believe gold has more room left to rally higher.
But the dilemma is the dollar, it rallied hard today to confirm its 4th Daily Cycle. A few more days like today (out of the dollar) will likely pressure gold into an early DCL. I don’t expect too much from the dollar, but some “dead-cat bounce” strength here could put the brakes on this Cycle. Soon enough, the dollar will top (which should be very soon), and it should be a substantial move lower. That will provide gold with a significant push higher that is more likely to correspond with gold’s coming 3rd Daily Cycle, not the current 2nd DC.
Unfortunately because of its recent history, from an analysis standpoint we’re forced to question gold’s motives. We’re at the point in the Cycle where it could support moving in either direction. Today could well have marked a DC high with a shallow DCL to come. Or we could see still see our expected continuation higher (as drawn in the chart below) to test the $1,370-$1,400 area. Uncertainty and alternative scenarios in the trading world are just a common and normal development. The key is to be aware of the alternatives and to plan both your position sizing and reaction to each scenario accordingly.
For now, let’s continue to support the notion that a further move higher is coming. But at the same time, let’s acknowledge that a close below $1,322 would be Daily Swing High, a trend-line break, and a 10dma break. The next couple of days will be telling, because gold hitting that trifecta of events would certainly confirm a Daily Cycle headed towards the next Cycle Low.
The following video is an excerpt from “Upturn Millionaires—How to Play the Turning Tides in the Precious Metals Market.” In it, natural-resource legends Doug Casey and Rick Rule discuss the deeply undervalued junior mining sector and the rare opportunity for spectacular returns it offers investors right now.
“Mr. Bernanke, on the way out, don’t let the door hit ya, where the good Lord split ya!” That’s what I’ve imagined my former coworker Charley—a brilliant Alabamian who was proud to be called a redneck—might have said as the former Fed chairman stepped down.
In case you missed it, here’s Bernanke’s highlight reel:
The Federal Reserve jumped in and bailed out “too big to fail” banks that made bad business decisions.
The Fed continued to buy Treasury bonds in order to keep interest rates down.
The Fed openly acknowledged that their policies force seniors to put their life savings at risk.
Around 25% more baby boomers and Generation Xers will not have enough money because of Fed policies.
The Fed is creating a stock market bubble that will eventually burst.
Bankers are making record profits and paid out record bonuses for 2013.
Bernanke left behind a 100-year money supply that is continuing to double annually.
During his tenure, Bernanke essentially acted as the chairman of a corporation owned by banks and bankers. I’ve touched on the difference between the Fed’s published goals and how it actually behaves before. The party line: the Fed is a government agency acting in our best interest. Mr. Bernanke is just one of many chairmen who have continued to foster that illusion.
In Code Red, authors John Mauldin and Jonathan Tepper pull the curtain on Zero Interest Rate Policy (ZIRP) to reveal a merciless wizard. Basically, the Federal Reserve has deliberately driven interest rates so low that safe government bonds and government-backed CDs offer interest rates that do not keep up with inflation—which translates into true negative yield for investors. Historically, these fixed-income investments made up the majority of retirees’ investment portfolios.
In the words of the authors:
“When real rates are negative, cash is trash. Negative real rates act like a tax on savings. Inflation eats away at your money, and is, in effect, a tax by the (unelected!) central bankers on your hard-earned money. Leaving money in the bank when real rates are negative guarantees that you will lose purchasing power. Negative real rates force savers and investors to seek out riskier and riskier investments merely to tread water. It almost guarantees people don’t save and stop spending.
In fact, Bernanke openly acknowledges that his low-interest-rate policy is designed to get savers and investors to take more chances with riskier investments. The fact that this is precisely the wrong thing for retirees and savers seems to be lost in their pursuit of market and economic gains.”
On the other hand, if you are a banker you will love his legacy. Sheraz Mian broke down the Q2 2013 earnings reports of the S&P 500 companies in Zacks’ Earning Trends:
“Yes, the total earnings tally reached a new quarterly record in Q2 and the rest of the aggregate metrics like growth rates and beat ratios look respectable enough. But all of that was solely due to one sector only: Finance. … Finance results have been very strong, with total earnings for the companies that have reported results up to an impressive +30% on +8.5% higher revenues.”
Too big to fail banks were certainly succeeding on Bernanke’s watch. Mian continued:
“Earnings growth was particularly strong at the large national and regional banks, with total earnings at the Major Banks industry, which includes 15 banks like J.P. Morgan and Bank of America.”
While banks were making record profits, seniors and savers had been left to fend for themselves. What did Bernanke have to say about this? Well, in January 2011, he said:
“Policies have contributed to a stronger stock market just as they did in March 2009, when we did the last iteration of this. The S&P 500 is up 20%-plus and the Russell 2000, which is about small cap stocks, is up 30%-plus.”
He continued along that same vein in 2012:
“Large-Scale Asset Purchases (LSAP) also appear to have boosted stock prices, presumably both by lowering discount rates and by improving the economic outlook; it is probably not a coincidence that the sustained recovery in US equity prices began in March 2009, shortly after the FOMC’s decision to greatly expand securities purchases. This effect is potentially important because stock values affect both consumption and investment decisions.”
I guess that means Mr. Bernanke, through the asset purchases of the Federal Reserve, is now responsible for propping up the stock market. So now both the big banks and Wall Street are their primary concern?
Perhaps he thought he was doing us a favor by forcing us to risk our money in the market. That’s the kind of favor we sure don’t need.
Good for Bankers, Bad for Anyone Who Wants to Retire
In the summer of 2013, the Employee Benefit Research Institute published a survey about low-interest-rate policies and their impact on both baby boomers and Generation Xers who are following right behind. The bottom line:
“Overall, 25–27 percent of baby boomers and Gen Xers who would have had adequate retirement income under return assumptions based on historical averages (emphasis mine) are simulated to end up running short of money in retirement if today’s historically low-interest rates are assumed to be a permanent condition, assuming retirement income/wealth covers 100 percent of simulated retirement expense.”
Seniors and savers have yet to experience the long-term impact of Bernanke’s policies. Tim Price summed it up this way in an article from Sovereign Man:
“Why do we continue to keep the faith with gold (and silver)? We can encapsulate the argument in one statistic.
Last year, the US Federal Reserve enjoyed its 100th anniversary, having been founded in a blaze of secrecy in 1913. By 2007, the Fed’s balance sheet had grown to $800 billion.
Under its current QE programme (which may or may not get tapered according to the Fed’s current intentions), the Fed is printing $1 trillion a year.
To put it another way, the Fed is printing roughly 100 years’ worth of money every 12 months. (Now that’s inflation.)”
While Bernanke may have gotten out while the getting was still good, the effects of his policies on seniors and savers may be felt for years to come. Inflation is a huge—potentially catastrophic—tax on our savings.
Mr. Bernanke protected the banking system profits at the expense of several generations of hard-working people. If I am ever at an event where he is speaking and he sees me raise my hand, he’d be well advised to call on someone else…
But, it’s not all doom-and-gloom. There are ways to invest safely in order to produce returns well above inflation – and receive solid dividends – without exposing your nest egg to undue risk.
We, like you, strive for bulletproof income and we have found several opportunities out there to grow your nest egg while protecting it. And you can get access to these investments today, risk-free, by trying Miller’s Money Forever. With our 90-day trial you get access to the complete portfolio, our special reports dedicated to issues facing investors today, and all of our archives. In them you’ll find several interviews like this one with experts from all sectors.
So, try it today. You risk nothing and you will find stocks poised to make you the returns you want, with the protection you need.
By Rick Rule, Chairman and Founder, Sprott Global Resource Investments Ltd.
Natural-resource-based industries are very capital intensive, and hence extremely cyclical. It is not unreasonable to say that as a natural-resource investor, you are either contrarian or you will be a victim. These markets are risky and volatile!
Let’s talk about cyclicality first. Some of the cyclicality of these industries is a function of their being extraordinarily capital intensive. This lengthens the companies’ response times to market cycles. Strengthening copper prices, for example, do not immediately result in increased copper production in many market cycles, because the production cycle requires new deposits to be discovered, financed, and constructed—a process that can consume a decade.
Price declines—even declines below the industry’s total production costs—do not immediately cause massive production cuts. The “sunk capital” involved in discovery and construction of mining projects and attendant infrastructure (such as smelters, railways, and ports) causes the industry to produce down to, and sometimes below, their cash costs of production.
Producers often engage in a “last man standing” contest, to drive others to mothball productive assets, citing the high cost of shutdown and restart. They fail to mention their conflicts of interest as managers, whose compensation is linked to running operational mines.
Interest-rate cycles can raise or lower the cost and availability of capital, and the accompanying business cycles certainly influence demand. Given the “trapped” nature of the industry’s productive assets, local political and fiscal cycles can also influence outcomes in natural-resource investments.
Today, I believe that we are still in a resource “supercycle,” a long-term period of increasing commodity prices in both nominal and real terms. The market conditions of the past two years have made many observers doubt this assertion. But I believe the current cyclical decline is a normal and healthy part of the ongoing secular bull market.
Has this happened in the past?
The most striking analogy to the current situation occurred in the epic gold bull market in the 1970s. Many of you will recall that in that bull market, gold prices advanced from US$35 per ounce to $850 per ounce over the course of a decade. Fewer of you will recall that in the middle of that bull market, in 1975 and 1976, a cyclical decline saw the price of gold decline by 50%, from about $200 per ounce down to about $100 per ounce. It then rebounded over the next six years to $850 per ounce.
Investors who lacked the conviction to maintain their positions missed an 850% move over six short years. The current gold bull market, since its inception in 2000, has experienced eight declines of 10% or greater, and three declines—including the present one—of more than 20%.
This volatility need not threaten the investor who has the intellectual and financial resources to exploit it.
The natural-resources bull market lives…
The supercycle is a direct result of several factors. The most important of these is, ironically, the deep resource bear markets which lasted for almost two decades, commencing in 1982.
This period critically constrained investment in a capital-intensive industry where assets are depleted over time.
Productive capacity declined in every category; very little exploration took place; few new mines or oilfields replenished reserves; infrastructure and processing assets deteriorated. Critical human-resource capabilities suffered as well; as workers retired or got laid off, replacements were neither trained nor hired.
National oil companies (NOCs) exacerbated this decline in many nations by milking their oil and gas industries to subsidize domestic spending programs for political gain. This was done at the expense of sustaining capital investments. The worst examples are Mexico, Venezuela, Ecuador, Peru, Indonesia, and Iran. I believe 25% of world export crude capacity may be at risk from failure of NOCs to maintain and expand their productive assets.
Demands for social contributions in the form of taxes, royalties, carried equity interests, social or infrastructure contributions, and the like have increased. Voters are not concerned that producers need real returns to recover from two decades of underinvestment or to fund capital investments to offset depletion. Today this is actively constraining investment, and hence supply.
Poor people getting richer…
The supercycle is also driven by globalization and the social and political liberalization of emerging and frontier markets. As people become freer, they tend to become richer.
As poor countries become less poor, their purchases tend to be very commodity-centric, especially compared to Western consumers. For the 3.5 billion people at the bottom of the economic pyramid, the goods that provide the most utility are material goods and consumables, rather than the information services or “high value-added” goods.
A poor or very poor household is likely to increase its aggregate calorie consumption—both by eating more food and more energy-dense food like meat. They will likely consume more electrical power and motor fuel and upgrade their home from adobe or thatch to higher-quality building materials. As people’s incomes increase in developing and frontier markets, the goods they buy are commodity-intensive, which drives up demand per capita. And we are talking billions of “capitas.”
Rising incomes and savings among certain cultures in the Middle East, South Asia, and East Asia—places with a strong cultural affinity for bullion—have increased the demand for gold, silver, platinum, and palladium bullion. Bullion has been a store of value in these regions for generations, and rising incomes have generated physical bullion demand that has surprised many Western-centric analysts.
The third important driver in this cycle has been the depreciation of currencies and the impact that has had on nominal pricing for resources and precious metals.
Most developed economies have consumed and borrowed at worrying levels. The United States federal government has on-balance-sheet liabilities of over $16 trillion, and off-balance-sheet liabilities estimated at around $70 trillion.
These numbers do not include state and local government liabilities, nor the likely liabilities from underfunded private pensions. Not to mention increased costs associated with more comprehensive health care and an aging population!
Many analysts are even more concerned about the debts and liabilities of other developed economies—Europe and Japan. In both places, debt-to-GDP ratios are greater than in the US. Europe and Japan are financing themselves through a combination of artificially low interest rates and more borrowing and money printing. This drives down the value of their currencies, helping their exports.
But which nations’ leaders will stand firm and allow their export industries to wither as their domestic producers suffer from cheap competing foreign goods? If Japan’s Abe is successful at increasing his country’s exports at the expense of its competitors like Taiwan, Korea, or China, then his policies could lead to competitive devaluation. And how will the European community react, for that matter?
Loss of purchasing power in fiat currencies increases the nominal pricing of commodities and drives demand for bullion as a preferred savings vehicle.
The factors that have driven this resource supercycle have not changed. Demand is increasing. Supplies are constrained. Currencies are weakening. Thus I believe we remain in a secular bull market for natural resources and precious metals.
With that in mind, I would call the current market for bullion and resource equities a sale.
Where to invest?
Let’s talk about a type of company most of us follow: mineral exploration companies, or “juniors.” We often confuse the minerals exploration business with an asset-based business. I would argue that is a mistake.
Entities that explore for minerals are actually more similar to “the research and development” space of the mining industry. They are knowledge-based businesses.
When I was in university, I learned that one in 3,000 “mineralized anomalies” (exploration targets) ended up becoming a mine. I doubt those odds have improved much in 40 years. So investors take a 1-in-3,000 chance in order to receive a 10-to-1 return.
These are not good odds. But understanding the industry improves them substantially.
Exploration companies are similar to outsourcing companies. Major mining companies today conduct relatively little exploration. Their competitive advantage lies in scale, financial stability, and engineering and construction expertise. Similar to how big companies in other sectors outsource certain tasks to smaller, more specialized shops, the big miners let the juniors take on exploration risk and reward the successful ones via acquisitions.
Major companies are punished rather than rewarded for exploration activities in the short term. Majors therefore tend to focus on the acquisition of successful juniors as a growth strategy.
Today, the junior model is broken. Many public exploration companies spend a majority of their capital on general and administrative expenses, including fundraising. Overlay a hefty administrative load on an activity with a slim probability of success, and these challenges become even more severe.
One response from the exploration and financial community has been to put less emphasis on exploration success and focus instead on “market success.” In this model, rather than “turning rocks into money,” the process becomes “turning rocks into paper, and paper into money.”
One manifestation of that is the juniors’ habit of recycling exploration targets that have failed repeatedly in the past but can be counted on to yield decent confirmation holes, and the tendency to acquire hyper-marginal deposits and promote the value of resources underground without mentioning the cost of actually extracting them.
The industry has been quite successful, during bull markets, at causing “sophisticated” investors to focus on exciting but meaningless criteria.
Being successful in natural-resource investing requires you to make choices. If your broker convinces you to buy the sector as a whole, they will have lived up to their moniker—you will become “broker” and “broker.”
We have already said that exploration is a knowledge-based business. The truth is that a small number of people involved in the sector generate the overwhelming majority of the successes. This realization is key to improving our odds of success.
“Pareto’s law” is the social scientists’ term for the so-called “80-20 rule,” which holds that 80% of the work is accomplished by 20% of the participants.
A substantial body of evidence exists that it is roughly true across a variety of disciplines. In a large enough sample, this remains true within that top 20%—meaning 20% of the top 20%, or 4% of the population, contributes in excess of 60% of the utility.
The key as investors is to judge management teams by their past success. I believe this is usually much more relevant than their current exploration project.
It is important as well that their past successes are directly relevant to the task at hand. A mining entrepreneur might have past success operating a gold mine in French-speaking Quebec. Very impressive, except that this same promoter now proposes to explore for copper, in young volcanic rocks, in Peru!
In my experience, more than half of the management teams you interview will have no history of success that shows that they are apt at executing their current project.
Management must be able to identify the most important unanswered question that can make or break the project. They must be able to say how that question or thesis was identified, explain the process by which the question will be answered, the time required to answer the question, how much money it will take. They also need to know how to recognize when they have answered the question. Many of the management teams you interview will be unable to address this sequence of questions, and therefore will have a very difficult time adding value.
The resource sector is capital intensive and highly cyclical, and we expect that the current pullback is a cyclical decline from an overheated bull market. The fundamental reasons to own natural resource and precious metals have not changed. Warren Buffett says, “Be brave when others are afraid, be afraid when others are brave.” We are still “gold bugs.” And even “gold bulls.”
Rick Rule is the chairman and founder of Sprott Global Resource Investments Ltd., a full-service brokerage firm located in Carlsbad, CA. He has dedicated his entire adult life to different aspects of natural-resource investing and has a worldwide network of contacts in the natural-resource and finance worlds.
Watch Rick and an all-star cast of natural-resource and investment experts—including Frank Giustra, Doug Casey, John Mauldin, and Ross Beaty—in the must-see video “Upturn Millionaires,” and discover how to play the turning tides in junior mining stocks, for potentially life-changing gains. Click here to watch.
In his weekly market review, Frank Holmes of the USFunds.com nicely summarizes for gold investors this week’s strengths, weaknesses, opportunities and threats in the gold market. The price of the yellow metal went lower after two consecutive weeks of gains. Gold closed the week at $1,324.10, up $5.41 per ounce (0.41%). The NYSE Arca Gold Miners Index went 1.00% higher on the week. This was the gold investors review of past week.
We found out this week the extent that gold is sought in the East. For the first time since 1980, Switzerland released monthly gold trade data, providing a more transparent picture of physical gold flows. In January alone, the Swiss report showed an incredible 80 percent of gold shipments went to Asia. Switzerland plays a key role in the gold market because it is home to many big gold refiners, so its report confirms what we’ve been saying about gold’s move out of the West to the strong hands of the East.
So even though the gold price fell in 2013, the smart money tuned into this flow of physical gold that was moving into the East. Meanwhile, naysayers were distracted by the Fear Trade’s selling out of gold ETFs.
“Gold flooding onto the market as a result [of large-scale ETF selling] was used to feed the voracious appetite for physical metal among consumers in India, China and numerous Asian and Middle Eastern markets,” says the World Gold Council in its latest report. You can see in the chart that gold demand reached record levels in the jewelry, bar and coin areas of the market last year. In fact, there was a 21 percent increase in demand from consumers, which was in contrast to the outflows from gold ETFs, per the WGC.
Gold Market Strengths
Gold rose to a 15-week high as U.S. retail sales and housing starts slumped at the same time as Chinese manufacturing data fell to its lowest level in seven months. In addition, the political unrest in Ukraine and Thailand boosted gold’s haven premium. On a more positive note, gold demand in Japan jumped threefold in 2013 as investors sought refuge from Prime Minister Shinzo Abe’s campaign to stoke inflation. India’s gold demand remained buoyant in 2013, rising 13 percent from 2012 despite the government introducing several restrictions to curb imports. Lastly, JP Morgan raised its outlook on gold, saying prices are likely to hit $1,450 by the end of the year as fundamentals have turned bullish.
A recent report from the Swiss Customs Administration shows the European nation shipped more than 80 percent of its gold and silver bullion to Asia last month. The main destinations were Hong Kong, India and Singapore, while the main sources of gold imports were the U.K and the U.S. Despite the recent price recovery in gold, the demand from physical buyers in Asia continues to drive a wave of gold finding its way from weak hands into strong hands.
Gold Market Weaknesses
The two “most accurate” gold forecasters are holding on to their bearish forecasts for 2014 even after the metal posted its best start to a year since 1983, according to a Bloomberg report. The report cites analysts at Societe General and Westpac Banking as the best forecasters over the past two years; however, what the report fails to convey is the fact that these analysts are permanently bearish on gold, and the 15-month recent downtrend favored their forecasts. Now that the fundamentals have changed and the downtrend has been broken, it would be wise to appraise these forecasts.
Gold Market Opportunities
UBS boosted its forecast for gold in 2014 citing a change in investors’ attitude toward the yellow metal. According to the bank’s analysts, over the past year gold was either the favorite asset to short or was ignored completely. Recent developments suggest that this is no longer the case and momentum is turning, the analysts added. Moreover, BCA Research published data showing gold mining shares were down more than 40 percent over the past year. As shown in the chart below, each decline of more than 40 percent since 1980 has given way to at least a tradable rally.
Will the Sectors that Lagged in January Outperform the Rest of 2014?
India, which lost its crown to China last year as the top gold consumer, is likely to cut its import tax on gold before the end of February to 6 or 8 percent from the current 10 percent. The government initiative comes as pressure on the country’s current account deficit has scaled down, with recent data showing it has fallen by nearly 50 percent.
Gold Market Threats
Despite an apparent lack of inflationary pressure in the U.S., and ongoing disinflationary trends in the eurozone, the continuous commodities index, which tracks commodity baskets, has risen sharply. Many agricultural commodities have strengthened following poor conditions in several geographies, and energy prices have increased following colder than usual winter weather. These increases may appear transitory, but the index shows a very strong correlation with inflation readings and, as such, we could see month-over-month inflation readings turn positive over the next couple months.
The Province of Quebec is seeking to preserve head offices in the province, even if that means thwarting bids. On the back of the recent bid for Osisko Mining, Quebec will move to enact legislation that shields businesses from takeovers by allowing the province to purchase stakes in the ownership of homegrown companies. The measures are aimed at preserving head-office jobs that help generate the C$5 billion in economic activity.
Although the current strike in the platinum industry is broader than previous events, the metal price reaction has been relatively muted so far. The strike was preannounced, giving the industry time to prepare, but should the current stalemate continue, some tightness could start to develop.