Oct 31

Tea Leaves & $2000 Gold

Gold Price Comments Off on Tea Leaves & $2000 Gold
Yes, some people are still forecasting $2000 gold by year’s end…

BOB and BARB Moriarty launched 321gold.com over 10 years ago, adding 321energy.com the better to cover oil, natural gas, gasoline, coal, solar, wind and nuclear energy as well as precious metals.
Previously a US Marine fighter pilot, and holding 14 international aviation records, Bob Moriarty here tells The Gold Report why he’s 100% certain that a market crash is looming… 
The Gold Report: Bob, in our last interview in February, we had currency devaluation in Argentina and Venezuela, interest rate hikes in Turkey and South America, and a cotton and federal bond-buying program. Just eight months later in October, we’ve got Ebola, ISIS and Russia annexing Crimea plus a rising US Dollar Index. We’ve also got pullbacks in gold, silver and pretty much all commodity prices. With all this news, what, in your view, should people really be focusing in on?
Bob Moriarty: There is a flock of black swans overhead, any one of which could be catastrophic. The fundamental problems with the world’s debt crisis and banking crisis have never been solved. The fundamental issues with the Euro have never been solved. The world is a lot closer to the edge of the cliff today than it was back in February.
About ISIS, I think I was six years old when my parents pointed out a hornet’s nest. They said, “Whatever you do, don’t swat the hornets’ nest.” Of course, being six years old, I took stick and went up there and swatted the hornets’ nest, which really pissed off the hornets. I learned my lesson.
We swatted the hornets’ nest when we invaded Iraq and Afghanistan. What we did is we empowered every religious fruitcake in the world. We said, “Okay, here’s your gun, go shoot somebody. We’ll plant flowers.” We are reaping what we sowed. What we need to do is leave them to their own devices and let them figure out what they want to do. It’s our presence in the Middle East that is creating a problem.
TGR: Will stepping back allow the Middle East to heal itself, or will there be continued civil wars that threaten the world?
Bob Moriarty: We are the catalyst in the Middle East. We have been the catalyst under the theory that we are the world’s policemen and that we’re better and smarter than everybody else and rich enough to afford to fight war after war. None of those beliefs are true. The idea that America is exceptional is hogwash. We’re not smarter. We’re not better. We’re certainly not effective policemen.
The Congress of the United States has been bought and paid for by special interest groups: part of it is Wall Street, part of it is the banks and part of it is Israel. We’re just trying to do things that we can’t do. What the US needs to do is mind its own business.
TGR: You’ve commented recently that you’re expecting a stock market crash soon. Can you elaborate on that?
Bob Moriarty: We have two giant elephants in the room fighting it out. One is the inflation elephant and one is the deflation elephant. The deflation elephant is the $710 trillion worth of derivatives, which is $100,000 per man, woman and child on earth. Those derivatives have to blow up and crash. That’s going to be deflationary.
At the same time, we’ve got the world awash in debt, more debt than we’ve ever had in history, and it’s been inflationary in terms of energy and the stock market. When the stock and bond markets implode, as we know they’re going to, we’re going to see some really scary things. We’ll go to quantitative easing infinity, and we’re going to see the price of gold go through the roof. It’s going to go to the moon when everything else crashes.
TGR: How are you looking at the crash – short term, before the end of this year? How imminent are we?
Bob Moriarty: Soon. But I’m in the market. Not in the general market, but I’m in resources. There’s a triangle of value created by a guy named John Exter: Exter’s Pyramid. It’s an inverted pyramid. At the top there are derivatives, and then there are miscellaneous assets going down: securitized debt and stocks, broad currency and physical notes. At the very bottom – the single most valuable asset at the end of time – is gold. When the derivatives, bonds, currencies and stock markets crash, the last man standing is going to be gold.
TGR: So the last man standing is the actual commodity, not the stocks?
Bob Moriarty: Not necessarily. The stocks represent fractional ownership of a real commodity. There are some really wonderful companies out there with wonderful assets that are selling for peanuts.
TGR: In one of your recent articles, “Black Swans and Brown Snakes“, you were tracking the US Dollar Index as it climbed 12 weeks in a row, and you discussed the influence of the Yen, the Euro, the British Pound. Can you explain the US Dollar Index and the impact it has on silver and gold?
Bob Moriarty: First of all, when people talk about the US Dollar Index, they think it has something to do with the Dollar and it does not. It is made up of the Euro, the Yen, the Mexican Peso, the British Pound and some other currencies. When the Euro goes down, the Dollar Index goes up. When the Yen goes down, the Dollar Index goes up. The Dollar, as measured by the Dollar Index, got way too expensive. It was up 12 weeks in a row. On Oct. 3, it was up 1.33% in one day, and that’s a blow-off top. It’s very obvious in hindsight. I took a look at the charts for silver and gold – if you took a mirror to the Dollar Index, you saw the charts for silver and gold inversely. When people talk about gold going down and silver going down, that’s not true. The Euro went down. The Yen went down. The Pound went down and the value of gold and silver didn’t change. It only changed in reference to the US Dollar. In every currency except the Dollar, gold and silver haven’t changed in value at all since July.
The US Dollar Index got irrationally exuberant, and it’s due for a crash. When it crashes, it’s going to take the stock market with it and perhaps the bond market. If you see QE increase, head for your bunker.
TGR: Should I conclude that gold and silver will escalate?
Bob Moriarty: Yes. There was an enormous flow of money from China, Japan, England, Europe in general into the stock and bond markets. What happened from July was the equivalent of the water flowing out before a tsunami hits. It’s not the water coming in that signals a tsunami, it’s the water going out. Nobody paid attention because everybody was looking at it in terms of silver or gold or platinum or oil, and they were not looking at the big picture. You’ve got to look at the big picture. A financial crash is coming. I’m not going to beat around the bush. I’m not saying there’s a 99% chance. There’s a 100% chance.
TGR: Why does it have to crash? Why can’t it just correct?
Bob Moriarty: Because the world’s financial system is in such disequilibrium that it can’t gradually go down. It has to crash. The term for it in physics is called entropy. When you spin a top, at first it is very smooth and regular. As it slows down, it becomes more and more unstable and eventually it simply crashes. The financial system is doing the same thing. It’s becoming more and more unstable every day.
TGR: You spoke at the Cambridge House International 2014 Silver Summit Oct. 23-24. Bo Polny also spoke. He predicts that gold will be the greatest trade in history. He’s calling for $2000 per ounce gold before the end of this year. We’re moving into the third seven-year cycle of a 21-year bull cycle. Do you agree with him?
Bob Moriarty: I’ve seen several interviews with Bo. The only problem with his cycles theory is you can’t logically or factually see his argument. Now if you look at my comments about silver, gold and the stock market, factually we know the US Dollar Index went up 12 weeks in a row. That’s not an opinion; that’s a fact. I’m using both facts and logic to make a point.
When a person walks in and says, okay, my tea leaves say that gold is going to be $2000 by the end of the year, you are forced to either believe or disbelieve him based on voodoo. I don’t predict price; I don’t know anybody who can. If Bo actually can, he’s going to be very popular and very rich.
TGR: Many people have predicted a significant crash for a number of years. How do you even begin to time this thing? A lot of people who have been speculating on this have lost money.
Bob Moriarty: That’s a really good point. People have been betting against the Yen for years. That’s been one of the most expensive things you can bet against. Likewise, people have been betting on gold and silver and they’ve lost a lot of money. I haven’t made the money that I wish I’d made over the last three years, but I’ve taken a fairly conservative approach and I don’t think I’m in bad shape.
TGR: Describe your conservative approach.
Bob Moriarty: The way to make money in any market is to buy when things are cheap and sell when they’re dear. It’s as simple as that. Markets go up and markets go down. There is no magic to anything.
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Oct 30

Peak Oil? How About Peak Oil Storage?

Gold Price Comments Off on Peak Oil? How About Peak Oil Storage?
Here’s how cheap US energy promises an ‘epic’ turnaround in the US economy…

MATT BADIALI is editor of the S&A Resource Report, a monthly investment advisory focusing on natural resources from Stansberry & Associates.
A regular contributor to Growth Stock Wire, Badiali has experience as a hydrologist, geologist and consultant to the oil industry, and holds a master’s degree in geology from Florida Atlantic University.
Here he tells The Gold Report‘s sister title The Mining Report that cheap oil prices and the economic prosperity they bring can make politicians and investors look smarter than they are. Hence Badiali’s forecast that Hillary Clinton…if elected in 2016…could go become one of America’s most popular presidents. Yes, really.
The Mining Report: You have said that Hillary Clinton could go down in history as one of the best presidents ever. Why?
Matt Badiali: Before we get your readership in an uproar, let me clarify that the oddsmakers say that Hillary Clinton is probably going to take the White House in the next election. Even Berkshire Hathaway CEO Warren Buffet said she is a slam dunk. I’m not personally a huge fan of Hillary Clinton, but I believe whoever the next president is will ride a wave of economic benefits that will cast a rosy glow on the administration.
Her husband benefitted from the same lucky timing. In the 1980s, people had money and felt secure. It wasn’t because of anything Bill Clinton did. He just happened to step onto the train as the economy started humming. Hillary is going to do the same thing. In this case, an abundance of affordable energy will fuel that glow. The fact is things are about to get really good in the United States.
TMR: Are you saying shale oil and gas production can overcome all the other problems in the country?
Matt Badiali: Cheap natural gas is already impacting the economy. In 2008, we were paying $14 per thousand cubic feet. Then, in March 2012, the price bottomed below $2 because we had found so much of it. We quit drilling the shale that only produces dry gas because it wasn’t economic. You can’t really export natural gas without spending billions to reverse the natural gas importing infrastructure that was put in place before the resource became a domestic boom. The result is that natural gas is so cheap that European and Asian manufacturing companies are moving here. Cheap energy trumps cheap labor any day.
The same thing is happening in tight crude oil. We are producing more oil today than we have in decades. We are filling up every tank, reservoir and teacup because we need more pipelines. And it is just getting started. Companies are ramping up production and hiring lots of people. By 2016, the US will have manufacturing, jobs and a healthy export trade. It will be an economic resurgence of epic proportions.
TMR: The economist and The Prize author Daniel Yergin forecasted US oil production of 14 million barrels a day by 2035. What are the implications for that both in terms of infrastructure and price?
Matt Badiali: Let’s start with the infrastructure. The US produces over 8.5 million barrels a day right now; a jump to 14 would be a 65% increase. That would require an additional 5.5 million barrels a day.
To put this in perspective, the growth of oil production from 2005 to today is faster than at any other time in American history, including the oil boom of the 1920s and 1930s. And we’re adding it in bizarre places like North Dakota, places that have never produced large volumes of oil in the past.
North Dakota now produces over 1.1 million barrels a day, but doesn’t have the pipeline capacity to move the oil to the refineries and the people who use it. There also aren’t enough places to store it. The bottlenecks are knocking as much as $10 per barrel off the price to producers and resulting in lots of oil tankers on trains.
And it isn’t just happening in North Dakota. Oil and gas production in Colorado, Ohio, Pennsylvania and even parts of Texas is overwhelming our existing infrastructure. That is why major pipeline and transportation companies have exploded in value. They already have some infrastructure in place and they have the ability to invest in new pipelines.
The problem we are facing in refining is that a few decades ago we thought we were running out of the good stuff, the light sweet crude oil. So refiners invested $100 billion to retool for the heavier, sour crudes from Canada, Venezuela and Mexico. That leaves little capacity for the new sources of high-quality oil being discovered in our backyard. That limited capacity results in lower prices for what should be premium grades.
One solution would be to lift the restriction on crude oil exports that dates back to the 1970s, when we were feeling protectionist. It is illegal for us to export crude oil. And because all the new oil is light sweet crude, the refiners can only use so much. That means the crude oil is piling up.
Peak oil is no longer a problem, but peak storage is. If we could ship the excess overseas, producers would get a fair price for the quality of their products. That would lead them to invest in more discovery. However, if they continue to get less money for their products, investment will slow. 
TMR: Is everything on sale, as Rick Rule likes to say?
Matt Badiali: Everything is on sale. But the great thing about oil is it is not like metals. It is cyclical, but it’s critical. If you want your boats to cross oceans, your airplanes to fly, your cars to drive and your military to move, you have to have oil. You don’t have to buy a new ship today, which would take metals. But if you want that sucker to go from point A to point B, you have to have oil. That’s really important. There have been five cycles in oil prices in the last few years.
Oil prices rise and then fall. That’s what we call a cycle. Each cycle impacts both the oil price and the stock prices of oil companies. These cycles are like clockwork. Their periods vary, but it’s been an annual event since 2009. Shale, especially if we can export it, could change all of that.
The rest of the world’s economy stinks. Russia and Europe are flirting with recession. China is a black box, but it is not as robust as we thought it was. Extra supply in the US combined with less demand than expected is leading to temporary low oil prices. But strategically and economically, oil is too important for the price to get too low for too long.
I was recently at a conference in Washington DC where International Energy Agency Executive Director Maria van der Hoeven predicted that without significant investment in the oil fields in the Middle East, we can expect a $15 per barrel increase in the price of oil globally by 2025.
I don’t foresee a lot of people investing in those places right now. A shooting war is not the best place to be invested. I was in Iraq last year and met the Kurds, and they’re wonderful people. This is just a nightmare for them. And for the rest of the world it means a $15 increase in oil.
For investors, the prospect of oil back at $100 per barrel is not the end of the world. With oil prices down 20% from recent highs and the best companies down over 30% in value, it is a buying opportunity. It means the entire oil sector has just gone on sale, including the companies building the infrastructure.
As oil prices climb back to $100, companies will continue to invest in producing more oil. And that will turn Hillary Clinton’s eight-year presidency into an economic wonderland.
TMR: The last time you and I chatted, you explained that different shales have different geology with different implications for cracking it, drilling it and transporting it. Are there parts of the country where it’s cheaper to produce and companies will get higher prices?
Matt Badiali: The producers in the Bakken are paying about twice as much to ship their oil by rail as the ones in the Permian or in Texas are paying to put it in a pipeline. The Eagle Ford is still my favorite quality shale and it is close to existing pipelines and export infrastructure, if that becomes a viable option. There are farmers being transformed into millionaires in Ohio as we speak, thanks to the Utica Shale.
TMR: What about the sands providers? Is that another way to play the service companies?
Matt Badiali: Absolutely. The single most important factor in cracking the shale code is sand. If the pages of a book are the thin layers of rocks in the shale, pumping water is how the producers pop the rock layers apart and sand is the placeholder that props them open despite the enormous pressure from above. Today, for every vertical hole, drillers create long horizontals and divide them into 30+ sections with as much as 1,500 pounds of sand per section. A single pad in the Eagle Ford could anchor four vertical holes with four horizontal legs requiring the equivalent of 200 train car loads of sand.
Investors need to distinguish between companies that provide highly refined sand for oil services and companies that bag sand for school playgrounds. Fracking sand is filtered and graded for consistency to ensure the most oil is recovered. Investors have to be careful about the type of company they are buying.
TMR: Coal still fuels a big chunk of the electricity in the US Can a commodity be politically incorrect and a good investment?
Matt Badiali: Coal has a serious headwind, and it’s not just that it’s politically incorrect. It competes with natural gas as an electrical fuel so you would expect the two commodities would trade for roughly the same price for the amount of electricity they can generate, but they don’t. The Environmental Protection Agency is enacting emission standards that are effectively closing down coal-fired power plants. And because it is baseload power, you can’t easily shut it off and turn it back on; it has to be maintained. That means it doesn’t augment variable power like solar, as well as natural gas, which can be turned on and off like a jet engine turbine. So coal has two strikes against it. It is dirty and it isn’t flexible.
Some coal companies could survive this transition, however. Metallurgical coal (met coal) companies, which produce a clean coal for making steel, have better prospects than steam coal. Along with steam coal, met coal prices are at a six-year low. 
Generally, I want to own coal that can be exported to India or China, where they really need it. Japan has replaced a lot of its nuclear power with coal and Germany restarted all the coal-fired power plants it had closed because of carbon emissions goals. We are already seeing deindustrialization there due to high energy prices. Cheap energy sources, including coal, will be embraced. I just don’t know when.
TMR: Thank you for your time, Matt.
Matt Badiali: Thank you.
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Oct 23

US Oil & Global Gold

Gold Price Comments Off on US Oil & Global Gold
US oil stocks have soared as shale pushes crude prices down. But gold…?

The UNITED STATES is doing better than it has in years, writes Frank Holmes on his Frank Talk blog at US Global Investors.
Jobs growth is up, unemployment is down, our manufacturing sector carries the rest of the world on its shoulders like a wounded soldier and the World Economic Forum named the US the third-most competitive nation, our highest ranking since before the recession.
As heretical as it sounds, there’s a downside to America’s success, and that’s a stronger Dollar. Although our currency has softened recently, it has put pressure on two commodities that we consider our lifeblood at US Global Investors: gold and oil.
It’s worth noting that we’ve been here before. In October 2011, a similar correction occurred in energy, commodities and resources stocks based on European and Chinese growth fears. 
But international economic stimulus measures helped raise market confidence, and many of the companies we now own within these sectors benefited. Between October 2011 and January 2012, Anadarko Petroleum rose 58%; Canadian Natural Resources, 20%; Devon Energy, 15%; Cimarex Energy, 15%; Peyto Exploration & Development, 15%; and Suncor Energy, 10%.
Granted, we face new challenges this year that have caused market jitters – Ebola and ISIS, just to name a couple. But we’re confident that once the Dollar begins to revert back to the mean, a rally in energy and resources stocks might soon follow. Brian Hicks, portfolio manager of our Global Resources Fund (PSPFX), notes that he’s been nibbling on cheap stocks ahead of a potential rally, one that, he hopes, mimics what we saw in late 2011 and early 2012.
A repeat of last year’s abnormally frigid winter, though unpleasant, might help heat up some of the sectors and companies that have underperformed lately.
On the left side of the chart below, you can see 45 years’ worth of data that show fairly subdued fluctuations in gold prices in relation to the Dollar. On the right side, by contrast, you can see that the strong Dollar pushed bullion prices down 6% in September, historically gold’s strongest month. This move is unusual also because gold has had a monthly standard deviation of ±5.5% based on the last 10 years’ worth of data.
Here’s another way of looking at it. On October 3, bullion fell below $1200 to prices we haven’t seen since 2010, but they quickly rebounded to the $1240 range as the Dollar index receded from its peak the same day.
There’s no need to worry just yet. This isn’t 2013, when the metal gave back 28%. And despite the correction, would it surprise you to learn that gold has actually outperformed several of the major stock indices this year?
As for gold stocks, there’s no denying the facts: With few exceptions, they’ve been taken to the woodshed. September was demonstrably cruel. Based on the last five years’ worth of data, the NYSE Arca Gold BUGS Index has had a monthly standard deviation of ±9.4, but last month it plunged 20%. We haven’t seen such a one-month dip since April 2013. This volatility exemplifies why we always advocate for no more than a 10% combined allocation to gold and gold stocks in investor portfolios.
Oil’s slump is a little more complicated to explain.
Since the end of World War II, black gold has been priced in US greenbacks. This means that when our currency fluctuates as dramatically as it has recently, it affects every other nation’s consumption of crude. Oil, then, has become much more expensive lately for the slowing European and Asian markets. Weaker purchasing power equals less overseas oil demand equals even lower prices.
What some people are calling the American energy renaissance has also led to lower oil prices. Spurred by more efficient extraction techniques such as fracking, the US has been producing over 8.5 million barrels a day, the highest domestic production level since 1986. 
We’re awash in the stuff, with supply outpacing demand. Whereas the rest of the world has flat-lined in terms of oil production, the US has zoomed to 30-year highs.
In a way, American shale oil has become a victim of its own success.
At the end of next month, members of the Organization of the Petroleum Exporting Countries (OPEC) are scheduled to meet in Vienna. As Brian speculated during our most recent webcast, it would be surprising if we didn’t see another production cut. With Brent oil for November delivery at $83 a barrel – a four-year low – many oil-rich countries, including Iran, Iraq and Venezuela and Saudi Arabia, will have a hard time balancing their books. Venezuela, in fact, has been clamoring for an emergency meeting ahead of November to make a plea for production cuts. 
Although not an OPEC member, Russia, once the world’s largest producer of crude, is being squeezed by plunging oil prices on the left, international sanctions on the right. This might prompt President Vladimir Putin to scale back the country’s presence in Ukraine and delay a multibillion-Dollar revamp of its armed forces. When the upgrade was approved in 2011, GDP growth was expected to hold at 6%. But now as a result of the sanctions and dropping oil prices, Russia faces a dismally flat 0.5%.
The current all-in sustaining cost to produce one ounce of gold is hovering between $1000 and $1200. With the price of bullion where it is, many miners can barely break even. Production has been down 10% because it’s become costlier to excavate. As I recently told Kitco News’ Daniela Cambone, we will probably start seeing supply shrinkage in North and South America and Africa.
The same could happen to oil production. Extraction of shale oil here in the US costs companies between $50 and $100 a barrel, with producers able to break even at around $80 to $85. If prices slide even further, drillers might be forced to trim their capital budgets or even shelve new projects.
Michael Levi of the Council on Foreign Relations told NPR’s Audie Cornish that a decrease in drilling could hurt certain commodities:
“[I]f prices fall far enough for long enough, you’ll see a pullback in drilling. And shale drilling uses a lot of manufactured goods – 20% of what people spend on a well is steel, 10% is cement, so less drilling means less manufacturing in those sectors.”
At the same time, Levi places oil prices in a long-term context, reminding listeners that we’ve become accustomed to unusually high prices for the last three years.
“People were starting to believe that this was permanent, and they were wrong,” he said. “So the big news is that volatility is back.”
On this note, be sure to visit our interactive and perennially popular Periodic Table of Commodities, which you can modify to view gold and oil’s performance going back ten years.
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Sep 23

Gold Reserve Awarded $740 Million by World Bank for Brisas Project

Gold Price Comments Off on Gold Reserve Awarded $740 Million by World Bank for Brisas Project

Gold Reserve (TSX:GRZ) has been awarded $740.3 million by the World Bank’s International Center for the Settlement of Investment Disputes after Venezuela expropriated the company’s Brisas project in 2009. The award represents $713 million for the fair market value of the project, $22.3 million for interest on the award and $5 million for reimbursement of legal and technical costs.

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Aug 21

Central Banks Buying Gold "Firmly" in 2014

Gold Price Comments Off on Central Banks Buying Gold "Firmly" in 2014
Countries “not aligned” with US views likely to track Russia, buy gold…

GOLD BUYING by central banks has continued ahead of recent averages in 2014, according to several analysts’ notes.
“Central banks remained firmly on the buy-side of the gold market” in the first half of the year, writes Macquarie Bank analyst Matthew Turner in London.
Based on official gold bullion reserves as reported to the International Monetary Fund, Turner notes that his net figure of 113 tonnes for central bank gold-buying in H1 does not account for a 14-tonne drop in Ecuador’s holdings – withdrawn as part of a Dollars for gold swap with US investment bank Goldman Sachs, and set to be unwound with the gold bars returned in two years’ time.
“The Ecuador-Goldman Sachs deal,” agrees another London-based analyst, “simply reiterates that gold is a highly liquid asset that can readily be converted into cash.” A similar deal with the same bank was last year begun but dropped by the socialist government of Venezuela, which under the late Hugo Chavez withdrew its gold bullion reserves from London’s international trading center in what commentators called an attempt to “guard against” US seizure or interference with the Latin American state’s assets overseas.
According to IMF data, Moscow’s gold buying in 2014 rose from 5 tonnes in the first 3 months of 2014 to 55 tonnes between April and June, when the Ukraine crisis intensified after Russia’s annexation of Crimea in March. “Given Russia’s FX reserves have fallen,” says Turner, that “might reflect a preference for gold over government bonds in the current political environment.”
Also noting the increase in Russia’s gold reserves, “We would expect a range of countries who are not aligned with the USA to see ever greater attraction in holding gold as a reserve asset,” writes Mitsui analyst David Jollie, pointing to “indications” in reporting data which suggest Moscow may have reduced its holdings of US Treasury debt. 
Even though the US Dollar remains the No.1 central-bank reserve currency, “Any country that might come into political disagreement with the USA might have some fears that it might not be able to use its Dollar reserves,” says Jollie. “And such a country might also have little desire to fund the US Government’s budget deficit too by owning US Treasuries.”
The largest foreign holder of US Treasury bonds, China has not updated the world on its bullion reserves since 2009, when it revised its reported holdings 75% higher to 1,054 tonnes. Beijing is widely suspected of buying gold since then, with unreported central bank purchases explaining a gap between China’s private-sector demand and visible supply.
“China’s nearly $4 trillion in [foreign currency] reserves,” wrote British MP Kwasi Kwarteng – author of new book War and Gold: A Five-Hundred-Year History of Empires, Adventures and Debt – last month in the New York Times, “give it plenty of ammunition to claim leadership in the creation of a new monetary order.”
Kwarteng suggests Beijing may be buying gold to prepare for a bullion-backed Yuan – “not in the immediate future…[but] in, say, 20 years.”
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Mar 12

25,000 PDAC Attendees Can’t Be Wrong

Gold Price Comments Off on 25,000 PDAC Attendees Can’t Be Wrong
But they can give wildly different views of what’s coming in junior gold stocks…

PDAC blessing for junior gold? The annual conference of the Prospectors and Developers Association of Canada (PDAC) usually sees a “PDAC curse” drop stock prices straight after the event.
But rather than inviting irony in 2014, this year’s PDAC conference…which saw 25,000 people come through its doors…found both investors and mining bosses “muted” and “realistic”, according to one analyst, about near-term outlook for gold and other precious metals.
Here The Gold Report asks five US-based mining analysts and investors for their thoughts…
The Gold Report: What was the mood at the Prospectors and Developers Association of Canada annual meeting? Did any companies stand out to you?
Brent Cook (Exploration Insights): There was an overall lack of “buzz” and news releases. Although many companies seemed to time news for the event, not many had market moving news. It seemed most companies were keeping their heads down.
Chris Berry (House Mountain Partners): Most were realistic. It is clear that the days of having the wind at the back of the mining industry based on China’s increasing appetite for a host of commodities, is over – or at least paused. Companies across all market capitalizations have written down the value of assets, sold properties at a discount, and instituted strict cost discipline going forward. 
Jordan Roy-Byrne (TheDailyGold): What stood out to me was the muted bullish sentiment or cautious optimism from the industry. 
Adrian Day (Adrian Day Asset Management): While crowds were thinner, the mood was a little more optimistic, though realistic. Many companies were looking for projects, joint ventures and other deals.
Eric Coffin (Hard Rock Advisory): I saw no evidence of conditions that would lead to a “PDAC curse.” Traffic was understandably lighter, but generally optimistic. Traders were pleasantly surprised by the lift in gold prices the first few weeks of March, but not overly aggressive. Many of them are worried about a post-PDAC pullback but I think that pullback is unlikely unless metal prices suddenly tanked. 
The tsunami of press releases that normally comes out as companies save their news for this event was not there and the ones that did release didn’t get really big reactions for the most part. 
The market bottomed last summer, as I said at the time, but there were no catalysts to move it much higher. There are more reasons now, with a stronger gold market and seller exhaustion. I think physical demand and renewed ETF buying should be enough for gold to reach my current $1400 per ounce target and I may raise that. We will see 30%+ increases in the TSX Venture Index this year.
TGR: Were conference attendees worried about the impact of geopolitics on mining portfolios?
Chris Berry: The crises in Ukraine and Venezuela bring this question to the fore. Additionally, issues like slowing growth in China, inflationary pressures in emerging markets and resource nationalism appear set to provide investment opportunities, but also wipe out unsuspecting or careless resource investors.
TGR: What is a realistic portfolio today? 
Chris Berry: I still see excess capacity across the industry, with the number of companies exploring for various metals/minerals, in particular. The paradox is that there are some tremendously undervalued opportunities out there, but with so many investors snakebitten from losses in recent years and a distinct lack of M&A activity on the part of the majors, these companies could stay undervalued for a while. I am still optimistic over the medium to long term because of underlying commodity demand. Population dynamics and the ubiquity of technology dictate that many more individuals in the future are poised to live more commodity-intensive lifestyles. 
That said, I am a long-term optimist about commodities and emerging market growth and think that as long as investors are selective and have a disciplined strategy and approach, they can take advantage of opportunities. 
A key takeaway from PDAC this year was that all commodities are not created equal. Uranium is clearly the belle of the ball right now. Differentiation and diversification among metals and across the value chain are keys to success going forward, if you’re investing at this stage of the cycle. It is increasingly clear that large projects are being reevaluated in favor of smaller projects better able to fit into current and future demand forecasts. This is a good development.
It was also abundantly clear that money is pooling and consolidating assets across a host of metals in the precious and base categories. Private equity money has moved into the mining sector and is intent on consolidating properties, recapitalizing companies and potentially spinning them out. Again, this is a longer-term positive sign for the industry as a whole, but differs from one metal to the next. 
You can’t rely on Elon Musk or Russian President Vladimir Putin to boost metals prices sustainably. This may sound silly, but it’s true. Share prices of U.S. and Canada-based lithium exploration and development plays exploded through the roof. Similarly, Putin’s movement of Russian troops into Ukraine sent gold and silver much higher. These isolated events tell us nothing about true supply and demand dynamics of commodities, and everything about speculation and the fear and greed paradigm in financial markets. 
Only organic growth, technological breakthroughs and sound fiscal and monetary policies will provide the basis for increasing and sustainable demand. The travails in the mining markets today are setting the stage for the next move higher, but I continue to believe that a mixed global growth picture and excess capacity have delayed this move into the future. Patience and selectivity are still the most prudent ways forward and can be rewarding in the interim, as we’ve seen with select uranium plays.
TGR: Crowdsourcing was presented as one solution to the financing challenges junior gold miners face today. Do you think that is realistic? 
Adrian Day: I believe it is already too easy for exploration companies to raise money and crowdsourcing would likely mean that more ill-informed investors put more money into marginal projects, which would not be good for the industry. But I also don’t want more regulation and more restrictions; people need to do their own homework.
Eric Coffin: I am not sure crowdsourcing will work with regulators. It has become more difficult for investors to get involved rather than easier. I do hope they succeed because the retail investor is critical to the space.
I have heard about a lot of private equity investment out there waiting for the right deal and it is getting more realistic about the level of development it is willing to look at. I was, frankly, surprised by the number of European fund managers at PDAC this year. That is definitely a sign. 
Chris Berry: I’m really not sure about crowdfunding because I don’t think it will make a surmountable difference to the fate of many of the companies. If a company is able to raise $250,000 through crowdfunding, what difference does that make when the company needs $250M (a thousand times as much) to get into production? Maybe it pays some bills and salaries, but doesn’t “move the needle” forward. I just don’t see crowdfunding as a realistic way forward, but I do applaud the realization that a new paradigm for company financing is necessary.
TGR: What did you hope that attendees took away from your presentation at the conference?
Adrian Day: I tried to put the current rally in perspective by looking at the main factors that caused gold to decline last year and whether they had changed. I hope attendees took away the message that despite the strong rally since mid-December, and notwithstanding the strong possibility of a pullback soon, this rally has only just begun. In my view, gold has bottomed, and it would be a mistake to sell it too soon. 
Jordan Roy-Byrne: I discussed some of my rules for proper portfolio management such as 1) sell anything that goes down 20% after you bought, 2) focus on a limited number of stocks so you can become an expert on all, and 3) overweight your favorite companies in your portfolio. 
Brent Cook: My talk focused on the geological, financing and political reasons economic metal discoveries are so rare. This leads into what I think will be a very important tipping point when the mining companies realize there are not enough new deposits to replace current production.
Eric Coffin: My talk, “You Can Come Out Now”, pretty much summed up my feelings about the state of the junior mining market now. This is not a “rising tide lifts all boats” market and I don’t expect it to be for some time. But well-managed companies with good targets that know how to finance will have a good year.
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Feb 26

Gold Bug, Gold Bull

Gold Price Comments Off on Gold Bug, Gold Bull
If you can pronounce cyclicality, you can invest in it…

NATURAL-resource-based industries are very capital intensive, and hence extremely cyclical, writes Rick Rule, chairman and founder, Sprott Global Resource Investments Ltd., in an article first published by Doug Casey’s research group.
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!
Why cyclicality?
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 $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. Because 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.
Meantime, poor people are 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 wealthier.
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”.
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.
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Feb 14

A Blindford, a Dart, and a Winning Gold Miner Stock

Gold Price Comments Off on A Blindford, a Dart, and a Winning Gold Miner Stock
Really it’s that simple after the December sell-off, says Bob Moriarty…

BOB and BARB Moriarty brought 321gold.com to the internet more than 10 years ago, later adding 321energy.com to cover oil, natural gas, gasoline, coal, solar, wind and nuclear energy.
Both sites feature articles, editorial opinions, pricing figures and updates on current events affecting both sectors. And according to Bob Moriarty – previously a Marine F-4B and O-1 pilot with more than 820 missions in Vietnam and holding 14 international aviation records – “fact that everyone hated gold in December is a good reason for rational people to love it now.”
Indeed, as he tells The Gold Report here, many good gold mining stocks now sell for “peanuts”. All you need to pick a winner is a blindfold and a dart…
The Gold Report: Bob, in the last few weeks, Argentina and Venezuela have devalued their currencies and the central banks in Turkey and South Africa hiked interest rates. The US Federal Reserve cut its monthly bond buying by another $10 billion. What do you make of all this happening in such a short timeframe?
Bob Moriarty: In a way, I will take credit for having predicted it. The world is bankrupt, and not one government is talking about reducing expenses. They talk about austerity, but austerity means living within one’s means. Governments refuse to do that.
The Fed has three options: It can continue to taper, maintain the status quo or increase its bond buying. I think there’s a good chance it will take that third option. We need a big crash first.
TGR: What message does that send to the general market?
Bob Moriarty: It says we’ve run out of bullets, head for your bunker.
TGR: That can’t be the message the Fed wants to send.
Bob Moriarty: The message it intends to send is one thing; the message it actually sends is something else.
Events in 2008 were only the opening act. The financial instability and the pressures in the markets are far worse today than they were in 2008. We had the chance to fix things back then, but Ben Bernanke, Alan Greenspan and Tim Geithner panicked and made the situation far worse.
TGR: You sent me an article by James Gruber titled, “Welcome to Phase Three of the Global Financial Crisis“. In it, he writes, “The system broke down in 2008 and again in Europe in 2011 and now in the emerging markets in 2013 and 2014. The market reaction to the latest events has been abrupt and violent, particularly in the currency world. In my experience, markets generally cope well when there is one crisis but when there are multiple spot fires like last week, most markets don’t cope well.” Is there more to come?
Bob Moriarty: Of course things will keep getting worse until somebody understands that the real issue is debt. There are $694 trillion in derivatives. That is financial debt that can never be paid off. The world has been a giant casino for the last 20 years, and it’s all coming to a head.
TGR: How does devaluing their currencies help Argentina and Venezuela?
Bob Moriarty: It doesn’t. Every government in the world is spending money it doesn’t have. The only solution is to stop spending money. Everyone refuses to do that because governments gain power by spending money. They will spend money until they’ve bankrupted all of their citizens.
TGR: In Greece and in Spain, the European Union has implemented mandatory austerity programs to pay off their bonds. Shouldn’t Greece and Spain be seeing economic improvement now that they’ve implemented those severe austerity programs?
Bob Moriarty: There is no economic improvement. It’s all smoke and mirrors. It’s similar to climbing to the top of a 50-storey building and jumping off. Once you’ve jumped, it doesn’t matter what you do on the drop down. You’re going to hit the ground. They need to crash so they can rebuild on a solid foundation.
Calling it austerity is using semantics to play with the citizenry. If one honest politician stood up and said, “We’re spending more money than we have. We need to stop,” that would put us on the way to curing the problem. But the politicians keep pretending there are other solutions.
President Obama’s charade in the State of the Union message was interesting. He was a Constitutional law professor before going into politics, yet in his speech he said the president of the US can unilaterally change the minimum wage. Did he ever read the Constitution?
TGR: Apparently, he does have the ability to change it, but only in upcoming, new federal contracts.
Bob Moriarty: There are three separate branches in the American political system: the executive, the legislative and the judicial. The president of the US does not make laws; he enforces them. His ability to do something is not the same thing as it being legal. All federal financial bills have to start in Congress. The president of the US simply cannot change the minimum wage. It’s not part of his job.
TGR: Wages earned by low-wage workers aren’t increasing at the same rate as inflation. As a result, the minimum wage today doesn’t give the same amount of purchasing power as it did when it was first implemented. Should the minimum wage be hitched to inflation or should it just be abolished?
Bob Moriarty: If you make the minimum wage $10.10/hour, people who are gainfully employed at $8.50 have lost their jobs. All minimum wage laws do is eliminate jobs.
If minimum wage laws worked and helped people, we should pay everybody $100/hour. But as soon as you say $100/hour, everybody says, nobody can afford that, which is true. There are people who cannot afford $10.10/hour. There are workers not worth $10/hour.
In the EU, seven countries do not have minimum wage laws, 20 do. In the seven countries without minimum wage laws, the unemployment rate is just over 8%. In the 20 countries with minimum wage laws, the rate is over 11%. Minimum wage laws, no matter how well intentioned, cost an economy jobs.
The economic stability of any country is based on the number of people in its middle class. There are rich and poor people in every society. That is as true as it is meaningless. The key to economic and political stability is the size of the middle class.
The policies of George Bush, which have been compounded by Barack Obama, have destroyed the middle class.
TGR: How have they done that?
Bob Moriarty: First, people can’t save money. If you save money at 0.25%, you’re insane; inflation robs you of your real wealth. Second, taxes have increased. There are something like 48 separate taxes in Obamacare that have nothing to do with healthcare.
The Affordable Care Act, Obamacare, is the nail in the coffin of the middle class. It is a giant payoff to the insurance companies. The insurance companies are protected under law. They are allowed to collude and do things no other industry can. As a result, the US has one of the least effective healthcare systems in the world and the most expensive. We need to burn the healthcare system down and start all over again. The insurance companies have the American public’s throats in a death grip and they’re killing us.
TGR: Following on the general topic of insurance, you’ve talked about using precious metals as an insurance policy in a crisis. Do you mean the metal, the equities or a combination of both?
Bob Moriarty: I see the physical metal as an insurance policy. Once investors have that policy in place, the equities are what they do with their investments. There are some wonderful companies selling for peanuts now that will do well no matter what happens – inflation or deflation.
TGR: How much of a portfolio needs to be in precious metals to have a good underlying insurance policy?
Bob Moriarty: That depends on the person and the amount of money available. Everybody has a different level.
If my total worldly assets were $1000, I would put all of it into silver or gold coins. If I had $100,000, I’d probably put half of it into silver and gold. If I had $1 million, the percentage would be 5-10%.
I was recommending metals even when gold was $268 per ounce and silver was $4 per ounce. All investments go up and down, and investors have to be prepared for that, but that doesn’t change the fact that metals are the best insurance policy.
TGR: I have my insurance policy; I have my gold and silver coins. Where should I look for gold mining and precious metals stocks
Bob Moriarty: You need two things: a blindfold and a dart.
TGR: But you just said there were some really special companies selling for peanuts.
Bob Moriarty: Yes, but the way to pick them is with a blindfold and a dart. 
TGR: Are some opportunities better than others, or do you believe the entire sector will improve? After all, some analysts say that part of the sector needs to go bankrupt.
Bob Moriarty: I can name five or six people who said, in the last three weeks, that we’re at a bottom and it’s safe to buy.
My questions to them are:
  • What were they saying in April 2011 when silver was at a very clear top?
  • What were they saying in June 2013 when it was clear to some of us that the metals were at a bottom?
Bottoming processes last a long time. Silver and gold were at a bottom from the middle of 2000 until the end of 2011. Any one date in that 18-month period was a bottom.
I have a bunch of stocks that are up 50% since 1st December 2013. I think it’s clear that we’ve had a major bottom. This is an incredible opportunity, and the longer people whine about how gold could go lower, the better it is. It’s called climbing the wall of worry.
TGR: You also are excited about copper. Why is that?
Bob Moriarty: A lot of people think the copper price will go down with the rest of the base metals. I disagree. I’ve seen some incredible copper projects in the last six months – very high-grade projects that are reasonably priced to go into production. There are 10 or 20 companies that had projects of low-grade that were going to cost a lot of money. At least 6 to 10 are in the Middle Cauca belt in Colombia, which has enormous resources that, unfortunately, will always be uneconomic.
TGR: Copper is the canary in the coal mine. If we’re going to have a deflationary environment and economies are contracting, it would seem more logical for the price of copper to go down. What makes these particular copper projects good investments?
Bob Moriarty: If copper goes down, they’ll be more valuable. Because these are all high-grade projects, a lower copper price is good for them, because a lower price will drive the marginal producers out of business. The ideal situation is a company that will make money no matter what the cost of copper is.
TGR: Bob, thanks for your time and your insights.
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Jan 20

Central Banks, Gold & the Currency Market, Part II

Gold Price Comments Off on Central Banks, Gold & the Currency Market, Part II
Yes, governments plainly manipulate markets all the time. They also hold gold…

The LATEST TARGET of governmental investigation and criminalization are foreign exchange traders at the big banks, writes Miguel Perez-Santalla at Bullionvault in the second part of this essay on central banks, currencies and gold.
No matter that manipulating underlying rates or direction in the foreign exchange markets is close to impossible. What it is currently being alleged is the idea that the FX market “fixing price” is being manipulated.
These rates are set by market trading during a one-minute window, across three different trading platforms, averaged out by an independent company at which time the news agency Reuters publishes the data.
To make it clear, during that one-minute period actual transactions occur between trading parties. The prices of these transactions are transparent because they are posted on the market trading systems, which make it public knowledge as they occur. All the actual prices at which transactions were negotiated are then tabulated into an average price and posted. The posted price is a reference price that is used by many to settle outstanding orders that were left for the fixing.
Whatever the outcome of this latest attack, central banks – who are taking a lead role in investigating the banks – plainly hold the power to manipulate (or control) markets without anyone saying they shouldn’t. Setting interest rates and buying bonds while releasing more money into the economy, their actions are instead called “easing”. On the other hand, government and the central bank can of course use their policing power to bully the markets by restrictive policies or regulations. Witness the “short selling bans” imposed during the worst of the financial crisis in 2008, apparently to protect banking stocks from hedge funds, but attempting instead to prevent the market from clearing at a freely-decided price. Similar blocks were applied across the Eurozone during their 2010-2012 credit crisis too, with traders banned from profiting if weaker government bonds fell.
Venezuela, while under the tutelage of the late, unlamented Hugo Chavez, was driven into the worst economic environment in its history following such policies. Exchange controls and other blocks on what citizens could do with their money led the economy to stall and then shrink.
Further attacking his own country’s economic growth by seizing foreign-owned assets, and so blocking that flow of free trade and capital which leads to prosperity, the Chavez government began to fear reprisals by foreign governments. So they moved their national gold reserves from the vaults in the Bank of England in London, heart of the world’s bullion market, back to Venezuela. That cut them off from the international market entirely. Chavez’s government fixed the currency rate, which with restrictions on the trade and flow of money as a consequence created a parallel (or black) market. Untrusted and closed to the world’s free markets, Venezuela lost its access to international credit, damaging its economy yet further.
If Venezuela were to get back into the business of allowing prosperity to flourish under the guidance of hard working business, then sending some of their gold back into a major Western bullion market would be a good first step. Indeed, recent reports from Caracas say that is what the government will do, raising cash from Goldman Sachs through a “gold swap”.
This is a great example of why central banks hold gold, and why most hold a portion of their reserves outside their own borders, ready for use in a major center. Gold, the one commodity that has never seen a complete decline in demand, is a vital form of guarantee between countries, enabling those with tenuous economies and collapsing markets to revive credit and trade.
The USA holds the largest gold reserves in the world and maintains 8,133 tonnes of gold currently priced at $42.22 per ounce. Germany holds the second largest reserves with 3,387 tonnes of gold. Incidentally it is no surprise that these holdings have enabled these countries to be the most powerful economies in the world. It is clear that gold has not lost its allure to the rest of the world’s central banks either.
Though the price does not determine central bank activity in buying or selling gold, it is no doubt that “Gordon Brown has had many sleepless nights,” as George Milling Stanley put it in a recent interview with Bullionvault’s New York Markets Live. Brown decided to sell half of the UK’s national gold stocks at an average price of $275 per ounce. Even after falling more than 35% from its 2011 peak, the price today is over four times that level.
George Milling Stanley also told us that the growing emerging market economies will continue to buy gold for their national reserves as well, to grow their overall strength in the global forum. For instance China. The world’s second-largest economy may have increased its reserves to 2,710 tonnes, up from 600 tonnes a decade ago, according to Kenneth Hoffman, a senior analyst at Bloomberg Industries. If correct, that would make China’s national gold bullion reserves the third largest behind the US and Germany.
For comparison, the average gold holding of the top 100 central banks is 15% of reserves. Yet many of the largest Asian central banks, including China, hold less than 5% in gold, based on data on the World Gold Council’s website. This lack of equilibrium is why they will continue to work on building these holdings on their balance sheet into the future.
As central banks and governments work to protect themselves from unknown currency or economic crisis, by holding gold as part of their crucial reserves does it not make it abundantly clear that we should too as private individuals?
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Jan 16

Gold Prices Bottoming, "Long-Term Buy": CPM’s Christian

Gold Price Comments Off on Gold Prices Bottoming, "Long-Term Buy": CPM’s Christian
Gold and silver “have paid their dues”. Whereas stocks are very high, and bonds are suicidal…

JEFFREY CHRISTIAN is managing director of precious metals and commodity research consultancy, the CPM Group in New York.
Here he talks to Hard Assets Investor about his 2014 outlook for gold and silver prices, plus central-bank demand
Hard Assets Investor: Last year was rough and rocky for the precious metals, for all the metals groups in fact. What do you see this year, in 2014?
Jeffrey Christian: Well, in 2013, we were telling people to be short. So we were kind of happy campers last year. And what we’re telling people now is we think 2014 is going to be the year where we see the prices bottom out. Not necessarily run away to the upside. But we expect that, by the end of the year, gold prices and silver and platinum and palladium will all be higher than they are now, and that gold equities also will be a lot stronger.
HAI: So is the bottom fundamentally, in this mid-$1100-1200 price range in gold?
Jeffrey Christian: We think the bottom is probably around $1180, which is what we saw in late June, and then we saw it again in December. And we think it’ll be tested again.
There are clearly a lot of people out there who think it’s going to break with a spike down to $1100 or maybe even $1000. But we’ve had two tests. And every time you see the price down that low, there’s a lot of demand that’s coming in. So I wouldn’t be surprised to see gold prices hold at $1180 now.
HAI: Looking at the charts, that $850 print in gold in 1980 lasted as the all-time high all the way to 2007. Isn’t there a chance it would go back down there again, and that $850 acts as the new support?
Jeffrey Christian: Technically, you could say that could be a support level. But I think there’s a lot more fundamental support, much higher, in terms of investors who don’t look at price charts, but look at the overall economy. And I think you’re seeing is a lot of people are still interested in gold.
If you look at the numbers, last year investors bought nearly 30 million ounces of gold. Now that was off from about 40 million ounces of gold in 2011 and 2012. So about 25% reduction in the amount of gold that investors were buying on a net basis. But that’s 30 million ounces of gold investment. That’s an enormous amount of gold for investors to buy. And a lot of those guys were buying expressly because the price fell from $1680 at the beginning down to $1180, $1200, $1280.
HAI: What category of investors? Would that be individual investors? Institutions, more or less, have pulled back.
Jeffrey Christian: Well, on the investor side, we divide it up into different areas. And there are some institutions and some individuals who have bailed. But there are also some institutions that either had gotten out, taken their profits, in some cases went short, and now they’re going long again. And there are a lot of family offices and individuals who were buying gold.
So I don’t think it divides down institution versus individual. What it divides down is that there are shorter-term opportunistic investors and momentum traders who were buying in 2007 to 2011. And they were selling in 2011 to 2013. They’re out of the market now. They did their buying, they did their selling. They’re gone.
And you have other investors, institutions as well as individuals, who are longer-term investors, who look at the market, and they say, from a long-term perspective, none of the problems that caused 2008 have been fixed. Some of them are worse. There’s 100 percent chance that we’ll have another economic crisis. It’s just a matter of timing. So, from a longer-term perspective, I want to buy.
Within that group, you find two different groups. One is, I’m not a genius, I’m just going to buy gold. And the other group is more opportunistic. And they’ve been waiting to see how low the price of gold goes. So you’ve seen a lot of investors who want to buy gold on a long-term basis, but they’re waiting to see the gold price stop falling and start rising.
HAI: What about central banks?
Jeffrey Christian: Central banks, by and large, fall into that same category. There’s been a handful of central banks that have been large significant buyers of gold since 2008-2009. They pulled back sharply – China, Russia, Kazakhstan, Venezuela, the Philippines, a couple other countries. And they’ve pulled back in 2013 from buying, as the price fell. They haven’t lost an interest in adding gold to their reserves. What they’re doing is they’re waiting to see how low the gold price falls before they start buying again.
HAI: But won’t central banks wait until the price gets back to $1900 per ounce? They make great contrarian indicators.
Jeffrey Christian: The Chinese central bank, all of the gold they bought, they bought below $1000. So they’re still, what, $300 to the good, $200 to the good.
HAI: We can say for sure that market sentiment and psychology has definitely flipped around from wild bullishness and optimism. There’s clearly been just a chill on the outlook. And that’s the time you want to buy, right?
Jeffrey Christian: I’m very proud of the fact that in January 2012 we issued a sell recommendation at $1800 gold. And the consensus was, universally, that it was going over $2000 to $2400 or $3000. I’m very proud of the fact that we got that right. And now, we’re saying we think that the low is in. This is a good place for long-term investors to buy. And universally, on the Street, people are talking about $1000 gold.
I have absolutely no problem running contrary to them. Because those guys, they come up with their research by drawing a line on the chart. Prices are falling; therefore, I’m bearish. Prices are rising; therefore, I’m bullish. They don’t look at the fundamentals. They have no clue what’s going on in the mining sector, what’s going on in fabrication demand, let alone investment demand of central banks.
HAI: Let’s talk about silver, which also got hit pretty hard last year. Same sort of scenario there – a bottoming process?
Jeffrey Christian: Bottoming process, but we’re probably more bearish on silver. We think there’s a lot of metal hanging over that market. And investors may be a little bit harder to come back into silver. So we think that the silver price has reached its bottom or is close to its bottom. But we don’t necessarily see it rising for the bulk of 2014. Maybe ’15 or ’16 before we start seeing that price rise.
HAI: So long-term, investors still should have a positive outlook, both metals?
Jeffrey Christian: I think so. You don’t want to put all your money into gold and silver. But if you look at it, the stock market is very high and very top-heavy. The bond market is suicidal to be long. And gold and silver, they’ve paid their dues. The prices are way off from their 2011 peaks. They probably represent good long-term buys for a portion of your portfolio.
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