Oct 31

Gold Lower on Bearish Fed Signal

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In another down week for gold, Barrick decided enough is enough at Pascua Lama, and temporarily suspended construction at the troubled mega-project.

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Oct 31

Outlook for Gold ETFs

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How gold ETF investors responded to the crisis, and the price drop…
 

KEVIN FELDMAN is managing director in New York, investment worldwide, for the World Gold Council.
 
Prior to the WGC, he held positions at BlackRock, where he was head of iShares Marketing, as well as Barclays Global Investors, Vanguard and Charles Schwab & Co. His expertise includes global ETF and US mutual funds markets, in addition to marketing, product strategy and general management experience for the World Gold Council.
 
Here Kevin Feldman speaks to Hard Assets Investor‘s Sumit Roy…
 
HardAssetsInvestor: Are institutional investors still interested in gold? I ask because assets in ETFs like GLD are still declining to new multi-year lows, even this week.
 
Kevin Feldman: I think there were two very large macro risks that a lot of institutional investors perceived coming out of the financial crisis. The first was that quantitative easing would lead to inflationary effects. The second one came in 2011, with all the risks related to concerns about the Eurozone breakup.
 
Additionally, there had already been a fairly strong gold market leading into 2008/2009, which was much more anchored to fundamentals – things that we’ve been studying for years, such as the rising middle class across Asia and the huge demand for gold there.
 
That, combined with the two macro risks that people were trying to hedge against, really had a lot of capital flowing into gold in the period from 2009 to 2012.
 
What we saw this year was a more risk-on-oriented footing. Clearly, there has not been a lot of inflation in developed markets, and the Euro crisis is on the backburner.
 
What we’ve seen in terms of the flows this year from GLD and other ETFs is that most of the outflow activity has been very concentrated in that institutional space. And a lot of that more speculative money has now left. 
 
But that happened during the first six months of the year. If you look at the flow patterns over the last few months, they’ve been moving up and down, but the very large outflows have abated.
 
It’s really hard to time the market. Our view has always been, for most investors, it’s wise to just put it in their portfolio and leave it in for the duration.
 
HAI: Gold never reacted to the Washington stalemate we had just a few weeks ago. Why is that?
 
Kevin Feldman: With regard specifically to what was happening in Washington, you could say that across all of the markets, there was a view that some sort of agreement was going to be reached.
 
In that way, gold was behaving like all of the other asset classes. There wasn’t a huge flight to Treasurys either, and stocks didn’t sell off a whole lot. Markets correctly perceived an agreement was going to happen.
 
HAI: You touched on the fact that inflation never took off over the last few years. Why is that, even though we’re getting all this quantitative easing? A lot of people did buy gold in expectations of this inflation.
 
Kevin Feldman: Just to be clear, our view is that gold is very well proven as an inflation hedge. But coming immediately out of the financial crisis, where there was so much overcapacity in the system, the idea that somehow you could have inflation in that environment, there was no historical precedent for that.
 
If you go back to the 1930s, which is the closest analogy to the situation we were in – with zero percent interest rates, essentially a liquidity trap environment – there is no way to model out how you would have inflation with such high unemployment, such high productive capacity available. Now, over the long term, the longer the Fed keeps interest rates at zero (or negative yield on real rates), and the longer that we’re into QE, the risks of inflation rise. And the exit becomes increasingly challenging because you could end up with a situation where it’s very difficult to manage the end of these monetary policies if we really did get inflationary pressure.
 
Our long-term view is that there are still risks for inflation, even though in the short-term, just coming right out of the financial crisis, there was no way for inflation to materialize.
 
If you had bought gold in 2008 because you had that very specific view, and you thought it was going to happen in 12 to 18 months, you were disappointed.
 
HAI: What do you think about Asia? Obviously, the demand there is surging record levels or near record levels. Do you see that continuing? And do you see any potential for ETFs to make inroads there?
 
Kevin Feldman: Gold is quite available and heavily used for investment in Asia. In some Asian markets, where you have pressures for local currency devaluations, gold is a very logical store of value for people who are looking for liquid alternatives. It’s not a surprise to us that we see a very strong demand.
 
In terms of your question on ETFs, that really involves whether countries have the market structure that can really sustain an ETF model for investment. At this stage, it’s still very much in the developing arena. There are some gold ETFs in India. We recently noted the ones that launched locally in China this year. We have our own GLD that trades out of Hong Kong and Singapore and is active.
 
But it’s still very much a smaller and emerging industry compared to the physical bullion, bar and coin market, which is quite well developed.
 
HAI: Finally, I wanted to get your sense on the supply side of the market. Are cutbacks on the horizon?
 
Kevin Feldman: Our view is that the longer that gold prices stay within this range or lower, the more pressure that will develop, and that there will eventually be cuts to production. 
 
These are longer timeline types of decisions that are made by gold mining firms. But given all the restructuring that’s going on in the industry right now, and the pressure they’ve come under with this violent change to the price this year, if we do continue to have prices at this level, we would expect production to contract in future years.
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Oct 31

Debt Limit Facts

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This year’s debt limit row in Washington only delays the inevitable…
 

SOME THINGS are stated as fact which are nothing of the kind, writes John Phelan at the Cobden Centre.
 
Right up until the Congressional deal raising the debt ceiling news anchors were parroting that without it the United States governmentwould default. This is nonsense.
 
Over the next year the US government will take in around $3 trillion in taxes. The interest payments on its $16.9 trillion debt in that period are estimated at around $240 billion. As long as its income is greater than its debt repayments there is no reason whatsoever why the US government should default on those debt repayments.
 
It may choose to do so, deciding to anger China rather than domestic recipients of Federal money, but there is nothing automatic about it. But at some point the US government will default on somebody.
 
Since 2002 US government debt has risen from $6 trillion to nearly $17 trillion, a rise of 183%. Under George W. Bush it increased at $625 billion a year, and in 2008 Senator Obama was moved to declare “That’s irresponsible. It’s unpatriotic.” Under President Obama that debt has increased by $900 billion a year. It now stands at around 73% of GDP, or $131,368 for every man, woman, and child in America. Even with record low interest rates, by 2015 repayments on this debt will come to $50,000 a year for each American family [1].
 
And the situation is forecast to get worse. The Congressional Budget Office’s September 2013 Long-Term Budget Outlook warns that government spending is set to outstrip revenues in each of at least the next twenty-five years with the gap opening from 2% of GDP at its narrowest point in 2015 to 6.5% of GDP at its widest in 2038, “larger than in any year between 1947 and 2008”. As a result, after a slight improvement between 2014 and 2018, Federal government debt as a percentage of GDP is projected to rise from about 75% to around 100% in 2038.
 
The CBO identifies the drivers of this increased spending and debt as “increasing interest costs and growing spending for Social Security and the government’s major health care programs (Medicare, Medicaid, the Children’s Health Insurance Program, and subsidies to be provided through health insurance exchanges)”. Spending on the “major health care programs and Social Security”, the CBO writes, “would increase to a total of 14 percent of GDP by 2038, twice the 7 percent average of the past 40 years” and “The federal government’s net interest payments would grow to 5 percent of GDP, compared with an average of 2 percent over the past 40 years”.
 
The CBO’s conclusion is stark; “Unless substantial changes are made to the major health care programs and Social Security, those programs will absorb a much larger share of the economy’s total output in the future than they have in the past”. Sadly for the taxpayers of 2038 these are just the changes President Obama and Congressional Democrats steadfastly refuse to consider.
 
But a refusal to see reality doesn’t make that reality go away. These sorts of figures are unprecedented in peacetime and unsustainable and as the saying goes, ‘If something can’t continue it won’t’. The essential problem is that the US government, as with other western governments, has made spending commitments its tax base cannot support. And a promise that can’t be kept won’t be kept. Drastic change will come to Medicare, Medicaid, and Social Security, not because of ‘evil’ or ‘heartless’ Republicans, but because of math, because there isn’t the money to pay for them.
 
The desperately sad truth is that Uncle Sam won’t keep his current promise to pay pensions, pay for medical care for the poor or the elderly at a given level because he won’t be able to. This will amount to defaulting on elderly and sick Americans, the only question is whether it happens through some entitlement reform (whether the Democrats want it or not) or through meeting these commitments with devalued Dollars (over to you Janet Yellen). Either way, if ‘default’ means a repudiation of a promise of payment this will be America’s default. The US government has a choice about ‘default’ now, it won’t in the future.
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Oct 31

How to Pick Miner Stocks

Gold Price Comments Off on How to Pick Miner Stocks
Gold price forecasts are not the place to start…
 

IF THE past two years have taught us anything, it’s that trying to predict short-term moves in the gold price can be a road to ruin, writes Eric Angeli of Sprott Global Resource Investments, also now sharing his thoughts through Doug Casey’s free e-letter, Casey Daily Dispatch.
 
Parsing the umpteen countervailing forces that combine to set the price of gold is tough. And it’s even tougher when you consider that oftentimes, market-moving news, such as a central bank trade, isn’t reported until after the fact.
 
In my years spent evaluating natural resource companies as a broker and analyst, I’ve found that there are two ways to successfully invest in precious metals equities. Doing it right can bolster the strength of your portfolio, not to mention your own confidence in your holdings.
 
Method #1: Top-Down Approach
You may have heard this method referred to as “Directional Investing”. A directional investor decides that gold prices will increase in the long run. That’s the starting point of his thesis. He then proceeds to find the companies that will be successful if his prediction comes true. He looks for companies with leverage to the gold price.
 
If an investor can get the timing right, this can be a lucrative strategy. There is an obvious caveat, though: for this strategy to work, precious metals prices must rise.
 
In my role as a broker, I deal with both companies and investors all day long. I can tell you that most speculators involved with gold equities use this top-down approach.
 
That’s why the number one question I’ve heard over the last three months has been, “Why isn’t gold moving up?” To directional investors, the answer to this question is paramount.
This mindset leads to the herd mentality and, frankly, gives us our best bull markets. I prefer method #2.
 
Method #2: Fundamental Approach
Fundamental investors ignore prognostications about where gold prices might move next. We eliminate gold price movements as the crux of our investment decisions, which removes a lot of the guesswork from our portfolios. For a fundamental investor, gold prices are still a piece of the puzzle, but they are not the only driver.
 
Fundamental investors want to know which company has a promising deposit in a relatively safe jurisdiction? Which has a tight share structure? This “bottom-up” method, however, does require a lot more homework.
 
Fundamental investing is all about identifying the difference between a stock’s intrinsic value and the price at which it is trading at in the open market.
 
While I do believe in higher gold prices eventually – and inevitably – I know that short-term movements in the price of gold are beyond my control. I instead prefer to position my clients for success in the current environment. Instead of focusing on when the gold price will move – which we can never know – we focus on picking quality companies.
 
Why hasn’t the top-down approach been working? You might say: because the price of gold hasn’t gone up! That’s true, but there’s more to the story.
 
Until quite recently, gold has continued to rise, though not at the same clip we enjoyed after 2008. The problem is that miners’ operating costs rose faster than the price of gold. Investors didn’t expect that.
 
Nor did they factor in other cost increases. Sure, the value of a deposit rises every day the gold price rises. But did oil prices jump at the same time, making trucking the goods out more expensive? Did your laborers start demanding high wages? Did energy costs increase? Did the federal government demand a bigger slice of the pie?
 
Top-down investors can stop trying to figure out why they haven’t been correct over the last several years. They were correct on the gold price – but they ignored underlying cost factors.
 
This is where the Fundamental Approach shines. All of your investments should fulfill a few key checkpoints:
  • Look for companies where management owns a large percentage of the stock. A vested interest at a higher share price is even better.
  • Look for a tight capital structure. A bloated outstanding share count is a red flag. As is a history of management carelessly diluting away shareholder interest by issuing new stock.
  • Look for a thrifty management team. A good company should spend their capital on projects, not swanky new offices.
  • The company’s mine should remain profitable even if gold drops to $1,000 per ounce. It could happen.
  • Look for companies with enough cash to finance their current drill program, expansion plans, feasibility study, or construction phase. This year in particular, companies are having a very difficult time finding financing. Those who have adequate cash are diamonds in the rough.
  • Know which countries support mining. A tier-one asset under the control of a wildly corrupt government isn’t really a tier-one asset. You don’t want to get caught in the middle of a government dangling final permits above managements’ heads.
  • Know the geological potential of the exploration area. A four-million-ounce gold deposit is swell, but what if your company discovers not just one gold mine, but an entire new gold district? How will you factor in that upside?
Mining companies have a fiduciary responsibility to make their shareholders money, so they can’t help but paint a rosy picture for potential investors. That’s why you need to have a disciplined and impartial eye. Most companies are not worthy of your hard-earned capital. Having an advisor you trust, or access to technical expertise, is crucial. Ideally you should have both. The most educated investor always has the edge.
 
I’ll conclude with this: the markets have not been kind to the miners recently. But selling a stock just because it dropped in value is an emotional decision. Seeing red on your computer screen is painful, but it is not relevant. What is relevant is what you do with that capital going forward. Don’t let emotion cloud your judgment.
 
On the other hand, if you’re waiting for the gold price to move higher before you sell, then you’re a speculator masquerading as an investor, and you may as well buy a ticket to Vegas. 
 
My boss and mentor, Rick Rule, recently said, “Bear markets are the authors of bull markets.” When these markets do start moving, if you’re not positioned with the highest-quality tier-one companies, you could miss out on one of the biggest bull market moves of your investing life.
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Oct 30

Silver Use: Changes & Outlook

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Industrial use of silver is constantly changed as new technologies develop…
 

SILVER USE never stops adapting and growing, writes Miguel Perez-Santalla, vice-president for business development at online precious metals exchange BullionVault.
 
Just at the recent Silver Industrial Conference in Washington, DC for instance, I was given gloves lined with microfibers of silver to try. Putting them on, I tested them out for their aim – which is so you can use your smart phone outdoors in the cold winter of the North East Coast.
 
The silver gloves worked like a charm. So will silver’s use in a growing range of applications, I believe, after researching further what the expert speakers revealed in DC.
 
Make no mistake. Silver use is rising worldwide. It grew by one fifth over the 10 years to 2012. Investment played a big part in that. But aside from silver’s use as a store of value, it has been called the “indispensable metal” for good reason.
Silver’s physical properties lend it to many uses. Silver’s greatest value to industrial use comes in its conductive properties, as we’ll see in a moment. Yes, silver is a thing of beauty as well. So it finds great use in both jewelry and investment bars and coins, which together represented 28% of silver consumption in the year 2012. But for the sake of focus in this special report on silver use – and its outlook – we want to give careful attention to expert projections in certain parts of the industrial sector. Silver use may struggle to keep up its rapid growth of recent years, as new uses are not growing frantically across the board.
 
Take the photovoltaic industry. Here, silver helps convert sunlight into electricity. The solar industry came on like gangbusters in 2008, growing its silver use by 155% that year alone. Growth in the PV industry’s silver demand remained voracious up until 2010, when it started to wane. That was because governments both in the USA and Europe started to withdraw subsidies for the sales of solar cells. They had been supporting the market so that the photovoltaic energy industry could compete against the less costly fossil fuels currently in place.
 
The aim was to give the solar energy industry the boost it needed to get onto a level playing field, in terms of cost, with those existing fuels. Essentially, as time has passed, the photovoltaic industry is coming closer to that goal. But then, enter the year 2011. The silver price traded up to new three-decade highs. At the same time, there were fewer and fewer government subsidies for the PV industry. So due to those market changes, silver became expensive and difficult to manage as part of the solar cell manufacturing process. Its price had become too volatile to work with, forcing silver use in the photovoltaic industry to seek better efficiency, as well as seeking out other materials to replace it.
 
Now, in many cases of precious metals use in industry – such as auto catalysts, to reduce emissions from gasoline or diesel engines – you may in the past have heard talk about replacing the metals. In the case of auto catalysts, that would mean replacing one of the platinum group metals currently used. However, suitable replacements sharing the same physical properties as platinum, palladium or rhodium are hard to come by. So throughout the auto catalyst industry, engineers were able to thrift the total usage. But they were not capable of fully replacing those metals.
 
The same has been true of silver use by the photovoltaic industry, but with greater success. Current estimates indicate that PV silver usage, per watt of energy produced by solar cells, will decline by two-thirds by the year 2017. In contrast, the PV industry overall is on pace to grow between 60 to 80% in that same timeframe. So that will essentially keep us at the same level of silver consumption as now, in 2013.
 
Silver use by the solar energy industry worldwide roughly stands at 51.5 million ounces annually. At this level, the industry consensus is that photovoltaic no longer represents the bull consumer that silver producers once enjoyed.
A factor of the photovoltaic industry which is more bullish for silver prices is that solar panels are typically insured to last 20 years. That may sound counter-intuitive. Replacement needs are a long time coming. But an industry expert I spoke to recently from Ames Goldsmith, Randy Klein, noted to me that solar panels are expected to last possibly as long as 30 years, although working at a lower capacity. And what this means is that the silver used in those panels will not be returning to market anytime soon. Unlike the auto catalyst industry, the cycle of recovered metal from solar panels won’t see any active stream of silver coming into the market until around the year 2025.
 
Silver’s own use in catalysts is meantime expected to keep growing. Catalysts basically help speed up the rate of a chemical reaction, producing the desired end-product without actually being part of it. The primary use of silver in catalysts is to produce ethylene oxide, which then goes to make polyester and other materials, as well as detergents, agro-chemicals and pharmaceuticals. This is a growing market, where industry analysts expect 14% increase in annual production over the next 20 years. Currently China’s demand is growing at a faster pace.
 
For silver use as the EO catalyst, it is expected that this industry, which currently uses around 100 million ounces, will go as high as 138 moz by the year 2020. Note, however, that the silver used in this industry does not disappear. The silver catalyst, once used, is reclaimed again after a period of time in use. Per change, there is an approximate loss of about 2% of silver. And with each catalyst in this industry holding around 2 moz of silver, that would indicate a loss of 40,000 ounces per change out. But the truth is that even this metal isn’t lost to the market in the end, as it eventually does get reclaimed at a later stage by the refinery.
 
Big picture, as with solar panels, the lack of recovered silver reaching market and boosting supply is the key factor for price longer term. It is claimed that there are 100 million ounces of silver in catalyst form at any given time. As long as this industry continues to need silver to produce this reaction, and create ethylene oxide, then that silver will not return to the market. But if ever there is a scientific advancement where users can either thrift in the catalytic process or remove silver completely, then some or all of that silver may come back. This is always a threat to any commodity, but more so if the commodity is pricier compared to similar metals.
 
Don’t get spooked by PV or EO silver use. These two markets only represent 15% of total industrial demand. The other 85% of silver’s industrial use comes from electronics, brazing alloy, and other key sectors such as auto parts, medical devices, electroplating and more. And it’s here that silver’s demand profile is adapting and changing fastest, finding new uses as old technologies are replaced by innovation.
 
Silver’s many uses in the industrial sector require it to take many different forms. One of the most significant areas of business is called silver powders. This sector encompasses photovoltaic paste, used in the production of solar cells as we saw earlier. But the rest of the silver powders industry covers multilayer ceramic capacitors, low temperature coal-fired ceramics, polymer inks, pastes and adhesives. Many of these are found on electronic boards as capacitors, circuits, resistors, and in televisions such as plasma TVs, which at one time became an important consumer. 
 
Plasma TVs have lost out, however, to the more popular LCD television sets. Because of this, plasma – which at one time was a major use of silver powders – will no longer be a consumer. Panasonic, the last remaining manufacturer of plasma television sets, in fact this month announced the discontinuation of this product due to its unprofitability. But in its place has come the use of silver in the production of touchscreens such as those for computers and handheld devices.
 
Still, the loss of plasma TVs, plus technological advances in other sectors, means a decrease in the use of silver powders is being forecast. In 2013 the consumption for electronic powders is likely to measure about 102 million ounces, according to Prismark Partners LLC. That is set to drop by 12% over by 2017 to an estimated 90 moz.
 
Might thrifting worsen that drop in demand? Capacity in the production of electronic powder exceeds demand by three times, which keeps output costs remarkably stable, despite silver price volatility, at the currently reasonable level. So it is highly unlikely that any replacement of silver in the specific areas of electronic powder consumption will come to the forefront within the next 10 years. To eat into this use of silver, a competitor product would face significant research and tooling expense to enable them to produce a product of the same caliber. And in other silver powders, not electronic specific, Metalor Technologies indicated at the Washington conference that they expect growth in total annual consumption of these powders from 7.5 million ounces per year to more than 8 moz by the year 2015. This represents a reasonable growth of over 10% in a two-year period.
 
Silver also continues to be in demand in many areas of the chemical industry. Use as a heating element and a connector in parts used for process measurement and control devices is expected to continue to grow. One subset of this industry, the production of formaldehyde, has recently found that using silver in their process reduces their overall costs in their conversion of methane.
 
Silver use in automotive, appliances, and aerospace and battery technology industries also continues to grow. So do electroplating for decorating and industrial applications. New uses in oil refineries, water treatment plants and in the transportation of liquefied natural gas has increased the demand for silver as well. Silver’s conductive and change-resistant properties are set to continue finding new applications and uses.
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Oct 30

Why Invest in Gold?

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The World Gold Council releases a report today entitled “Why invest in gold? Gold’s role in long-term strategies”.

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Oct 30

Orefinders Releases Stockpile Resource for Mirado: 20,742 Tonnes Averaging 4.41 gpt Au

Gold Price Comments Off on Orefinders Releases Stockpile Resource for Mirado: 20,742 Tonnes Averaging 4.41 gpt Au

Orefinders Resources Inc. (TSXV:ORX) identified a mineral resource of 20,742 tonnes of stockpiled material with an average grade of 4.41 grams per tonne gold (gpt Au) in three separate stockpiles located on the Mirado property.

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Oct 30

Gold Prices Rise to $1,356.50 an Ounce Following Private-Sector Jobs Report

Gold Price Comments Off on Gold Prices Rise to $1,356.50 an Ounce Following Private-Sector Jobs Report

Gold prices increased Oct. 30 after weak private-sector employment data was released, giving investors hope the US Federal Reserve will continue its stimulus program.

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Oct 30

Are Cash Costs for Gold Producers Rising or Falling?

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Two reports released this week provide conflicting results on the issue, with one saying that capital costs to build mines have stabilized, and the other saying that the average cost to produce an ounce of gold has risen nearly 12 percent this year.

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Oct 29

New Gold Has Record Low-Cost Quarter

Gold Price Comments Off on New Gold Has Record Low-Cost Quarter

New Gold (TSX:NGD, NYSE:NGD), an intermediate gold producer with mines in Canada, the United States, Mexico, Chile and Australia, said on Tuesday that it achieved its lowest quarterly costs of gold production in the company’s history.

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