Gold often receives criticism from investors such as Warren Buffett for not producing a yield. This claim often falls on deaf ears because proven gold miners such as Newmont Mining Corp. and AngloGold Ashanti both pay a dividend north of 2 percent. However, the downside to these dividends is that they are paid in a fiat currency, somewhat defeating the intentions of gold investors. A new dividend program seeks to change this process by giving investors the choice to receive dividends in the form of physical bullion, instead of paper or electronic dollars.
Earlier this week, Gold Bullion International announced a new service called The GBI Physical Dividend Program. The program allows publicly-traded companies to pay dividends to shareholders in the form of physical precious metals. The first company to participate in the program is Gold Resource Corp., which has 100 percent interest in six high-grade gold and silver properties in Mexico’s southern state of Oaxaca. The Colorado based company is scheduled to launch its gold and silver dividend program in April. On Monday, GBI’s chief executive officer, Savneet Singh, said, “There is an increasing demand by both institutional and retail investors to own physical precious metals. The program we announced today makes this a seamless and simple process for listed companies and their shareholders.”
Gold Resource Corp.’s default dividend payment will be cash, but shareholders will have the ability to convert it into Double Eagle one ounce fine gold or silver rounds, made by the miner. The company’s supply of Double Eagles will be held at GBI. “A convenient and easy way of delivering precious metals dividends to shareholders has been a long-term goal of our company,” explained Jason Reid, President of Gold Resource Corp. Shareholders that convert cash dividends into physical metal may store their bullion within GBI’s insured and audited storage facilities (for a fee), take direct delivery of their precious metals or direct the metals to be shipped to a vault of their choice. If shareholders do not accumulate enough dividends to convert into gold or silver rounds, they can roll their cash balance into the next month until enough is accrued for conversion.
The dividend conversion price will be set at the London PM Fix on the company’s record date of dividend distribution. Shareholders are required to direct their individual bullion account for desired gold and silver allocation by midnight EST the day before the record date. Shareholders interested in converting their cash dividend into precious metals will also be required to hold their shares directly with Gold Resource Corp.’s transfer agent, Computershare. Meaning, investors may have to move shares from their brokerage accountto Computershare by the Direct Registration System. Once the move is complete, shareholders will be able to open a Gold Resource Corp. on-line individual bullion account with GBI so they can manage their dividends. The process requires a little time and effort, but after the MF Global disaster, investors should be more than willing to move their shares away from brokers.
The new dividend program paves the way for more miners to follow suit. As the longevity of fiat currencies come under increasing pressure, more shareholders will recognize the benefits of gold and silver. Singh added that the new program can be “replicated by other publicly-traded companies and provides investors a choice in how they receive their dividends. The process we provide is safe, easy and secure, fully insured and audited quarterly.”
and the Volatility term structure, its steepest EVER…
Short-term volatility (risk) is the lowest relative to medium-term risk EVER - is this the biggest ever levered bet on FOMC calmness into European election event risk? Or more technically is this late forced unwinds of legacy long vol/steepeners into the Greece March 20th event risk (which seemed like a decent trade looking for a risk-flare). Given the steepness of the rest of the curve, it certainly feels very technical (flow) driven.
The underperformance of gold stocks was a hot topic at PDAC and continues to dominate discussion in industry circles. As to why the sector is underperforming, we hear numerous reasons. The conspiracy crowd will claim manipulation or hedge fund shorting. More well-reasoned thoughts include the struggle of large miners to adequately replace reserves and grow production and the continued issuance of shares. We believe one key reason is that the bull market is in the wall of worry phase and in this phase valuations compress as investors are nervous of among other things, another major correction. The HUI is trading at 15x trailing earnings and only 13x 2012 earnings. If the market returned to the historical average valuation of 28x earnings, then share prices would double (and that assumes present earnings). Yet, does the HUI or XAU even adequately represent the mining stock universe anymore?
The HUI is the go-to index for the sector but it is failing to represent precious metals equities as a whole. The HUI is currently trading at the same level as in November 2009. That means it has made no net progress in 27 months! In the same time period, Gold is up 42%. GDXJ, the junior ETF is up only marginally. The CDNX is up only 15%. I don’t know about you but I can think of numerous companies that have performed fantastically in the same period.
One problem is that these indices are being polluted by dramatic underperformance by certain companies which is not a reflection of gold stock fundamentals. Newmont Mining, which is a percentage of numerous indices, is at the same price as it was in 1996. Kinross Gold, Agnico-Eagle and IAM Gold have fallen 40% or more in just the past six months. This performance has little to due with negative sector fundamentals, yet it has a negative effect on the index and can greatly distort a correct analysis of the gold stocks.
Being sick and tired of the HUI, XAU, GDX, and basically any of these indices, we decided to create our own. This equal weighted index includes 10 of the largest, best performing gold companies. It is up about 40% in that 27 month period. The index closed Friday at 80 and we see a confluence of support at 68, which is also the 38% retracement from the 2008 low to 2011 high.
We’ve relied on our own proprietary silver stock index for a while. SIL, the silver stock ETF, is not too bad but it is exposed to Hecla, Pan American, Silver Standard and Couer D’Alene. These are four companies which have dramatically underperformed Silver in the past four years. Our index (shown below) contains 10 silver producers which are focused on growth.
The underperformance of the mining stocks occurred in the 1970s and is occurring again. As we’ve argued countless times, there is no historical record of the large mining stocks outperforming. Mining is an extremely difficult business and even more so the larger the firm. It is the law of numbers. It is difficult to grow from a large starting point. Smartly, large gold miners are starting to increase dividends. They aren’t attracting growth investors so they decided to seek out value investors. This is a smart move.
Nevertheless, as you can see from our indices, there are many companies that are actually outperforming. The market of precious metals equities is not limited to the HUI or XAU. There are hundreds and hundreds of other companies out there. Moreover, it is very important to note that the large miners did not go parabolic in the late 1970s. The Barrons Gold Mining Index performed well but actually performed better in the 1960s. The reason is because the last third of a bull market sees increasing speculation. It was the juniors and small cap miners which received the speculative interest. At somepoint the market will diverge and the smaller miners will outperform the large caps. This is why we are focused on the smaller companies which show value and excellent growth potential.
Data from EPFR Global, which provides fund flows and asset allocation data to financial institutions around the world, shows that investors placed more than $200 million into commodities in the week ending March 7. However, investors placed $404 million into gold and precious metals funds. Bloomberg explains, “Investors in gold-backed exchange-traded products added to holdings for a seventh consecutive week, taking the total to a record 2,408.4 metric tons valued at $132.7 billion.” Even though nations such as China are trying to tame inflation and stimulus expectations, investors continue to seek wealth preservation in gold and silver as nations continue to engage in currency wars.
Last week, Brazil’s central bank cut interest rates for the fifth consecutive time by reducing the benchmark Selic 75 basis points to 9.75 percent. The prior rate cuts had been by 50 basis points. Brazil President Dilma Rousseff said, “The reduction of interest rates by the Central Bank isn’t just to heat up the Brazilian economy. I compliment the central bank because the broader intention is to align the internal rate with the international rate.” She goes on to criticize the low rates and easy money seen in developed economies and says there’s a “huge bubble on the way.”
Although the European Central Bank did not cut rates last week, investors are focused on the bank’s exploding balance sheet. Due to the European banks craving capital, the ECB pumped one trillion euros into the banks via cheap three-year loans, known as the long-term refinancing operation. Now, the can has been kicked once again down the long and bumpy road of unsustainable debt. The ECB’s balance sheet now exceeds three trillion euros and equals one-third of euro zone GDP. Meanwhile, the Federal Reserve’s balance sheet represents about 20 percent of the GDP in the United States.
On Tuesday, the Federal Reserve’s policy-making committee will meet, but the outcome is unlikely to produce more stimulus measures. Fed Chairman Ben Bernanke is more likely to discuss the current Operation Twist program and positive signs in the labor market. Thus, gold and silver may be see more weakness in the short-term. Currently, both metals are near key support levels. However, with countries around the world competing to devalue currencies against each other, the longer-term picture in gold and silver remains bullish.
Far be it for Gold Stock Trades to indulge in hubris, nevertheless with all humility we not only saw this risk on rally forming in early October but reiterated on many occasions “be not dismayed by recent declines.” “Commodities are not in a bubble.” “Patience and Fortitude.”
Recent action exemplifies the importance of not being trigger happy when it involves the commodity arena especially precious metals, uranium and rare earths. Volatility can daunt even the most resolute of investors.
Gold Stock Trades is once again vindicated in sticking with the ebbs and flows of the resource arena which often contrive to misdirect, confuse and obfuscate the impatient investor. The eventual payouts are worth the swings as we look forward to halcyon profits.
What does this all mean for our patient subscribers? When many respected gray beards were calling the end of what they thought was a bubble in precious metals (GDX), uranium (URA) and rare earths (REMX), our obvious conclusion was that even experienced so called experts were calling it wrong. There are morals to be drawn here.
Adhere to the long term cyclical upswing in natural resources specifically in gold (GLD), silver (SLV), copper (JJC), uranium and rare earths. Breakouts occurring in 2012 are filling gaps to the upside which were created in 2011.
Do not be dismayed of major corrections in the long range move upward of our chosen sectors. Downside gaps are in the process of being filled and are bullish moves. Do not be turned off by whipsaws often engineered by the speculators.
We are in the time interval of the first quarter, which is often a period of favorable seasonality. Hopefully, may this force be with us. There is a turbulent atmosphere pervading the world, wherein hard assets may be regarded as appropriate safe havens as banks are buying treasuries at a record pace.
Observe the convolutions of the Eurozone nations as they attempt to upright the various ships of state. On the other hand we have just seen where Caterpillar is backlogged in its orders of mining machinery. In fact, Caterpillar in their quarterly report has stated that the demand for their machines represent a bullish and growing activity in commodity production. Note the concurrent breakout in rare earths and uranium despite any diversion caused by the European travails.
In conclusion, 2012 breakouts in gold, silver, rare earths and uranium is a welcome confirmation to our analysis and bullish for precious metals. General equities have hit some resistance after making a powerful move since our October 4th buy signal.
We are witnessing a rotation from treasuries into equities and the precious metals and natural resources arena as investors are realizing that the outcome of Europe’s 1 trillion dollar LTRO program may be hyper-inflationary. The S&P 500 is hitting resistance after a powerful upmove and we may see a rotation into undervalued commodities such as uranium and rare earths. The uranium miners have been rallying as Rio Tinto entered the Athabasca Basin. The heavy rare earth miners are starting their breakout moves as well as Molycorp (MCP) announces the $1.3 billion dollar acquisition of Neo Materials. To stay up to the minute with current developments and to understand the deeper implications click here…
Patience and fortitude is not only required in any precious metal investment, but it is also needed in the Miranda Gold (MAD:TSXV or MRDDF:OTCQX) situation which may be just one drill hole discovery away from a substantial, exponential payout to investors. In 2011, they saw the most exploration work done in its history. The 2012 exploration program is going to be even more aggressive with many of the partners returning for second and third rounds of drilling. The drill is the truth tool and we are closely following to see if this is the year that a major discovery will be found. To see Miranda’s recent letter to shareholderclick here…
This interview may contain forward looking statements. We seek safe harbor.
Disclosure: Jeb Handwerger is a shareholder of Miranda Gold.
The a weekly gold ETF had dropped under Under Its Ctr., Bollinger band but closed back over its with a hammer on Friday.
Silver had dropped back down to its 38.2% Fibonacci level after rallying to the 61.8% during the prior week.
The silver ETF has bounced back up to the 38.2% retrace level on this 60 min. chart. So short term can be traded in these $.50 increments between the Fibonacci levels
SLV Had moved up on Friday $.37, but not enough for our mechanical trading system to shift to a buy.
Copper had a long a red candle on Tuesday but we covered most of that by the close though it remains under resistance. As shown.
Palladium also recovered but on lower volume than the previous weeks.
Do you own enough gold and silver for what lies ahead?
If 10% of your total investable assets (i.e., excluding equity in your primary residence) aren’t held in various forms of gold and silver, we at Casey Research think your portfolio is at risk.
After speaking at the Cambridge House conference last month and talking with many attendees, I came away convinced that most investors fall into one of two categories: those that hold an abundance of gold and silver (which tends to be physical forms only), and those with little or none. While both groups need to diversify, I’m a little more concerned about the second group. Here’s why.
Regardless of what you think will happen over the remainder of this decade, one thing seems virtually certain: the value of paper money will be affected, perhaps dramatically. Even if the economy slips into deflation, the deflation wouldn’t last long. A panicked Fed would print to the max and set off a wild rise in prices. This is why we’re convinced currency dilution will not only continue but accelerate.
Let’s take a look at what’s happened so far with the value of our currency vs. gold, after accounting for the loss in purchasing power.
Both the US and Canadian dollar, after adjusting for their respective CPIs, have lost about a quarter of their purchasing power just since 2000. Concurrently, gold has increased dramatically in buying power, far outpacing the effects of inflation.
This is the core reason why I’m convinced we should hold our savings in gold and silver instead of dollars. Let’s take a brief look at how gold and gold stocks might perform if the economy takes a turn for the worse…
What If We Enter a Recession or Depression?
Mayan prophecies aside, many of our panelists last month, including most of the senior Casey staff, believe economic, monetary, and fiscal pressures could come to a head this year. The massive build-up of global debt, continued reckless deficit spending, and the lack of sound political leadership to reverse either trend point to a potentially ugly tipping point. What happens to our investments if we enter another recession or – gulp – a depression?
Here’s an updated snapshot of the gold price during each recession since 1955.
Clearly, one should not assume that gold will perform poorly during a recession. Even in the crash of 2008, gold still ended the year with a 5% gain. And with the amount of currency dilution we’ve undergone since that time, it seems more likely gold will rise in any economic contraction than fall. Indeed, if the response of government to a recession is more money printing, precious metals will be a critical asset to have in your possession.
Even if the gold price ends up flat or down this year,the CPI won’t. Gold’s enduring purchasing power is why we hold the metal.
How about gold stocks?
In spite of the debilitating 1970s that suffered from stagflation, price controls, three recessions, and the Vietnam war, gold producers rose over 600% while the S&P was basically flat. And that includes a roughly 65% fire-sale correction, much like we saw in 2008. To be clear, gold and silver stocks won’t be immune to selloffs if a recession or worse temporarily clobbers our industry. But in the end, we’re convinced they will prevail.
Don’t lose patience with, or confidence in, your gold holdings. What happens to the price over any short period of time is only one chapter in the book of this bull market, and we think you’ll be happy by the time that last chapter is written.
With Gold’s failure at $1800, it should be obvious that the market is in a protracted consolidation. This is actually similar to 2006-2007 and it is something we wrote about in a missive in early January. At the time, Gold had bottomed and had the luxury of very strong support nearby. We believed Gold would be range bound, but because it was emerging from support, it would have an upward bias. With Gold’s failure at $1800, now we can say range-bound with a downward bias.
Before we get to today, I wanted to look at the 2006-2007 consolidation once again. Note that Gold had a nice rally from point C to point D. After a more than 50 retracement, Gold rallied from point E to point F. The lows were clearly in but the consolidation continued for several more months.
A similar pattern to 2006-2007 continues to unfold. If the pattern continues then Gold should bottom at point E, which is slightly above the 300-day moving average. The same happened in early 2007.
Judging from the price action and moving averages, Gold should have very strong support at $1600-$1650.
After a rip roaring two year period in which Gold advanced from about $950 to $1900, the metal is in consolidation and digestion mode. After strong advances a market needs time to attract new buyers and new demand. Profits are taken and resistance emerges. This is why and how a consolidation develops. Then the market moves back and forth between supply and demand. Gold has been consolidating for six months. That is hardly enough to digest a 24 month move. At a minimum, we’d expect three more months of consolidation and perhaps five.
Fear not gold investor. You should appreciate these consolidations. They will make you a better investor. You will learn how to buy lows and not get excited near highs. Buying lows is exactly what you should focus on. Gold has strong support at $1600-$1650 and that is an area to accumulate. Make a short list of your favorite companies and evaluate potential high reward/risk target prices. Now is the time to focus on your favorites and get ready to buy. Not when the market is surging to new highs.
Gasoline consumption in the United States has been dropping for years. In the last decade, vehicle fuel efficiency has improved by 20%, and the combination of that shift and a weak economy of late has pushed gasoline demand to its lowest level in a decade.
At the same time, US oil production is at its highest level in a decade. Deepwater wells in the Gulf of Mexico and horizontal fracs in the Bakken shale have turned America’s domestic oil production scene around. After 20 years of declining production, US crude output rates started to climb in 2008 and have increased every year since.
With production up and demand down, the basics of supply and demand indicate that oil prices should be falling. Americans should be paying less at the pump.
Instead, the average US price at the pump reached US$3.80 per gallon on March 5, after 27 consecutive days of gains. That’s 26.7¢ above the old record for March 5, set last year. The price of gasoline has climbed 32¢ or 9.3% since February 1; analysts expect prices to continue rising, reaching a national average of something like US$4.25 per gallon.
What gives? Is it all about Iran? Are speculators manipulating the market? Do any politicians have good ideas on how to “fix” the high cost of gasoline? And is there relief on the horizon?
What gives is a combination of forces. Rising tensions in the Middle East are part of the problem, but so are deficiencies in North America’s oil infrastructure that are causing price discrepancies across the nation. Some of the refineries being forced to pay premium prices for oil are shutting down, and that limits gasoline supplies in parts of the country. Speculation is also a factor, as it is an ingrained part of the market, but it is not the driving force behind America’s fuel-price problems.
If you’re wondering, there aren’t any politicians with novel, sound ideas on how to reduce fuel prices. Newt Gingrich’s promise to bring prices below $2.50 a gallon is as attainable as Michelle Bachmann’s plucked-out-of-the-air promise of $2 gasoline.
Thankfully though, there is some relief on the horizon. First, we’ll tackle the issues. Then we’ll outline some developments that should ease the pain.
A Two-Part Problem
Two main forces are driving fuel prices upward in the United States: high global oil prices and the state of the US oil transportation and refining industry.
High oil prices are the more obvious part of the problem and are certainly the part that attracts the most attention. Tensions in the Middle East have been elevated since Tunisia’s revolution kick-started the Arab Spring in January 2011. Subsequent revolutions in Egypt and Libya as well as the oftentimes violent suppression of dissent in Bahrain, Jordan, and now Syria have kept questions about the stability of supplies from the oil-important Middle East front and center all year.
Now, of course, it’s Iran that is keeping oil traders up at night. Between oil embargoes against the country and threats from Iran to block the Strait of Hormuz (a maritime passageway vital to the oil industry), the growing rift between Iran and the Western world is threatening supplies from the world’s fourth-largest producer. That’s a surefire way to push oil prices skyward.
The result: Brent North Sea (the pricing benchmark for crude oil traded in Europe) climbed above US$100 per barrel a year ago and hasn’t looked back. Since last February Brent crude has traded above US$110 per barrel more often than not, and has regularly topped US$120 per barrel.
The Middle East’s ongoing tensions also lifted crude prices in North America: After sitting comfortably near US$80 per barrel for most of 2010, the price for West Texas Intermediate (WTI) rose above US$100 several times during 2011 and averaged close to US$90. Yes, it moved much less than did Brent; moreover, not all crude oils in North America had similar boosts. To understand that situation, we have to delve into America’s oil transportation and refining system.
The US is divided into five oil districts, which were originally designed to ensure energy security during World War II. Things have certainly evolved since then, but the districts remain less connected than you might think. Crude oil cannot necessarily flow from one side of the country to the other or from one producing region to another refining area. The system’s disconnectedness means that refiners in different regions are forced to pay whatever the price may be for the crude oil they can access – and those prices differ significantly.
East-Coast refiners have traditionally relied on imported oil from Europe and West Africa, which means they pay Brent pricing for most of their crude. As such, Brent’s surging price has dealt a blow to East-Coast refiners, hitting several so hard that they are shutting down. No fewer than four refineries serving the East Coast are going or have gone offline since 2010, eliminating almost half of the gasoline previously supplied to the US Northeast. Knowing that, high gasoline prices in the Northeast start to make a bit more sense: Refiners’ costs have been sky high, and refinery shutdowns have eliminated a huge chunk of supply.
Similarly, refiners on the West Coast receive some supply from Alaska but depend on internationally priced crude for the bulk of their input. Their need to pay Brent pricing explains why gas prices in California are regularly among the highest in the nation.
At the other end of the spectrum are refiners in the Midwest. The oil hub at Cushing, Oklahoma, is being increasingly inundated with crude oil as production ramps up in North Dakota’s Bakken formation and in Canada’s oil sands. Crude from both of those rapidly-expanding oil regions flows primarily to Cushing, where refineries process as much as they can. Those refiners are able to buy at WTI pricing, which has held a roughly 20% discount to Brent crude for the last year. That helps keep gasoline prices in the Midwest a little lower.
However, Midwest refineries are generally designed to process light, sweet oil, which means they can handle output from the Bakken but are not up to processing heavy oil from the sands. Oil-sands crude needs to go to the Gulf Coast, where an army of sophisticated refineries are thirsty for heavy oil. All that is lacking is a pipeline to connect supply with demand, but at the moment there is no such pipe; thus, the supply glut at Cushing has discounted heavy oil significantly. Western Canada Select, the benchmark crude oil coming out of Canada’s oil sands, closed at US$74.73 per barrel on March 5, a 30% discount to WTI and a 40% discount to Brent.
There is cheap oil available in the United States. You just have to be able to transport the crude from Cushing to your personal refinery to take advantage of it.
One final element is making matters worse: Refineries are currently starting to shift to producing spring-summer gasoline blends, which are lighter and therefore usually cost about 10¢ more per gallon than fall-winter blends. And this year, the quick refinery shutdowns needed to enact the seasonal shift are creating slight supply gaps because some of the “swing” refineries that usually help bridge the gap are no longer operating. For example, the Hovensa refinery in the US Virgin Islands – a joint venture between Hess Corp. (NYSE.HES) and Petroleos de Venezuela – used to produce extra volume during the seasonal transition, but it was closed down a few weeks ago after losing $1.3 billion over the last three years.
Lights on the Horizon
Both sides of the problem – high oil prices and insufficiencies in America’s oil infrastructure – will develop over the next 12 months. On the infrastructure side, we can be pretty certain that the developments will be positive. One pipeline that for years has carried oil north from the Gulf to Cushing is being reversed, which will start to ease the heavy-oil glut within weeks. TransCanada recently announced that it is seeking expedited approval to start construction of the southern leg of its Keystone XL pipeline, which will also connect Cushing to the Gulf Coast. Since there is nothing controversial about the southern portion of the project it should be approved quickly, in which case TransCanada hopes to have the pipeline built and operational by the middle of next year.
These pipelines will enable America’s army of Gulf Coast oil refineries to purchase North American crude oil. When that happens, Western Canada Select will not maintain its current 40% discount to Brent, but it will almost certainly remain cheaper than its European counterpart, creating cost savings for US refiners that they will pass on to consumers.
As for high oil prices in general, the biggest question there is Iran. If Iran blockades the Strait of Hormuz, oil prices will shoot up. If Israel or the US sends in air strikes against Iran’s nuclear facilities, the same thing will happen. The average price of gas in the United States would likely top US$5 per gallon. However, if war can be avoided, the price of oil should start to recede as fears abate; if oil sanctions against Iran stay in place, Saudi Arabia should be able to step up production enough to replace the lost volumes. Under this scenario the price of a barrel of Brent oil could fall below $100.
The level of warmongering from all sides seems to change on a daily basis, so we are not prepared to make any predictions about whether an attack on Iran is imminent. However, there are ways savvy energy investors can profit from this uncertain situation as well as other shifting trends. Get our free 2012 Energy Forecast to get started today.
In early February we wrote, “Don’t be unsettled by short term pullbacks or day to day volatility. One should use pullbacks as buying opportunities on this long term upward trend in gold and silver.”
It is characteristic in gold and silver to witness short term volatile pullbacks at the beginning of major moves to shakeout the short term speculators looking for overnight riches and who lack patience and fortitude.
The recent selloff is just one of the many shakeouts that somehow manages to occur when precious metals are about to take off. For weeks we have stated that we were on the verge of a breakout at $35 in silver, $4 copper and $1800 gold. Coincidence??? We think not.
Listen to my recent interview with Gregg Greenberg from thestreet.com discussing the recent pullback in precious metals and why we believe that gold and silver will rebound.
