Tuesday, December 18, 2012

The Gold/Silver Hit Is A Trap - This Too Shall Pass

Just because the future you expect and have prepared for hasn't yet materialized, don't think it won't. The very structure of the world's financial system has been fractured beyond repair, as have the foundations of the largest economies. The only thing holding it together is the fiat-currency system that was behind the fracturing in the first place and that is now being taken to an extreme and extraordinary level in an attempt to keep the whole shebang from literally collapsing.  - David Galland, Casey Research
Before I get started on my topic du jour, I wanted to link a stock investing article I wrote on Gold Resource Corporation (GORO) that was published on www.seekingalpha.com today:  LINK  I think GORO is a particularly attractive risk/return mining stock play right now and my write-up goes into detail on that view.

As for this latest take-down in the precious metals, it's more wash, rinse, repeat.  What makes this latest charade so transparent is the fact that the SPX has gone straight up for past two days and the dollar has tanked.  Sorry.  There's just no fundamental basis for this and it can't and won't last.

This action in gold and silver reminds me of the action in October 2008 when the sector was being mercilessly pounded with Comex paper.  Recall, that bottom in the metals preceded the banking system collapse and new era of QE and Government deficit "stimulus" spending.  I believe we're on the cusp of a lot more of that than the market is expecting and the big paper shorts in gold/silver are desperately trying to get the illegally large short positions covered before the market takes off again.

Think about the the Fiscal Cliff situation for a moment, outside of all of the rhetoric and media blow-hards.  They are going to come to an agreement sooner or later.  There's no way in hell that agreement possibly does not entail more deficit spending.  The Government spending deficit has already hit close $300 billion for the first two months of fiscal 2013:  LINK  That was as of the end of November, so the Government is well over $300 billion by now.

The economy, despite the b.s. being reported by homebuilders and the Government, is tanking - hard:

(click on chart to enlarge)

That chart shows the business "sentiment" of independent businesses in this country.  It's a literal cliff-dive in November and it's consistent with true unemployment, the real wage decline and real retail sales declines.  It is worth reading the accompanying commentary on Zerohedge:  LINK

My point here is that even if the Cliff agreement includes higher taxes, that won't raise more revenues to cover increases in deficit spending.  That means the Treasury is going to have to issue even more debt.  Who is going to buy that debt, given that the Fed has been buying close 100% of all new issuance over the last 18 months?  China and Japan are not going to make up the difference.  The debt ceiling is going to be raised significantly, if not entirely removed, and the Fed will have to print even more money in order to prevent the market from driving interest rates to the moon in order to attract new marginal buyers.

Bottom line:  Gold and silver are going a lot higher, as are the mining stocks.  Just like in late 2008.  In the context of big price corrections that we get in this sector, this one isn't close to being as severe as the one in 2008.   That one took silver down almost 60% from top to bottom.  This one so far has been 47% top to bottom for silver.  In the context of duration, this one so far isn't as long as the one in 2008, which lasted over 2 years before silver climbed over its 2008 peak.

BUT, the undisputed fact remains that, If you had bought silver at the top of the 2008 market ($21) and held til now ($32.20), you are still up 53% over 4 years.   That's worst case.  Unless the Fed and the Govt have decided to address the real deficit spending variables and will stop printing money and issuing debt, the smart money is buying the metals here and will be holding when the metals make another run at a new all-time high.

I'll leave off with an email inquiry to Jim Sinclair (www.jsmineset.com) from a worried reader:

Dear Jim:  How should I read the negative pressure over gold and gold stocks? What’s going to change this negative scenario?

Dear reader:  This is capitulation everywhere. This event has been a manufactured market move since $1800, with clearly planned and executed intervention. The gold price take downs during low volume periods internationally is a known price moving only tactic. I simply shut off the machine because all the regular causes for the gold price will make themselves effective with time. A manufactured market event will not change the trend. Even the most professional can be reduced to sheeple by their emotions.  I refuse emotions and emotional people in a market context. To save yourself from all this that has happened and will continue to happen requires commitment and courage. You have it or you do not. Admit who you are and act accordingly. Like every mistake made by Westerners, what you see today is simply driving gold into Asian control.


  1. Very much appreciate your perspective, Dave.

  2. Talk about taking it to an extreme....

    Gee Takes Jets as $1.9 Million Payday Roils Ohio Students

    The Ohio State University President E. Gordon Gee lives in a 9,630-square-foot Tudor Revival mansion that was renovated for him, featuring a great hall, pool, elevator and tennis court.

    Public University Pay Scale Draw Public Scrutiny

    Dec. 18 (Bloomberg) -- Salaries for the highest-paid public university employees from California to Virginia rose as state funding per student fell to the lowest level in a quarter century and the default rate on student loans hit a 15-year high. Record expenses for higher education are prompting lawmakers to scrutinize how the institutions spend their money.

    Gee made $1.9 million last year as the highest-paid public university president in the U.S. He also logged $1.7 million in expenses in fiscal 2011, including trips in private jets, country club dues and fundraising parties at his residence.

    “He’s overpaid,” said CJ Jones, 19, a junior public affairs major at Ohio State, whose tuition has risen 9.7 percent during her 2 1/2 years at the university, based in Columbus, the state capital. “You should want that job for a sense of Buckeye pride. Why do you have to suck so many resources from our budget? I know kids graduating from OSU with $90,000 in debt, and it’s a public university.”

    Gee was among 47 administrators, athletic officials and hospital faculty who earned more than $1 million in 2011, according to payroll records compiled by Bloomberg for about 216,000 employees at flagship universities in the 12 most populous states. Much of the compensation came from non-public sources. Gee’s expenses and home renovations weren’t funded with taxpayer dollars, and his performance justifies his compensation, said Gayle Saunders, a university spokeswoman.
    Pay ‘Mythology’

    “There’s a mythology promulgated by people in administration that you have to pay competitive salaries to attract the best people,” said Benjamin Ginsberg, political science professor at Baltimore-based Johns Hopkins University and author of a book detailing how universities are adding administrators even as state funding drops. “In point of fact, no one can show there is any relationship between what these people are paid and the quality of the work they do.”

    The public-university data show that top administrators, coaches and hospital physicians continue to enjoy compensation far above that of the best-paid state employees outside higher education, even as rising tuition squeezes the middle- and lower-class students the institutions are meant to serve. And as officials complain that declining funding from cash-strapped states is forcing them to raise student tuition and fees, university endowments continue to grow.


  3. An Open Letter to David Cameron

    Mr Bailey seems to have confirmed that, irrespective of their criminal actions, banks are not only “too big to fail”; they are also “too big to prosecute”. In an interview with the Telegraph, Mr Bailey said that prosecuting banks and by implication their executive and non-executive directors,

    “would be a very destabilising issue. It’s another version of too important to fail. Because of the confidence issue with banks, a major criminal indictment, which we haven’t seen and I’m not saying we are going to see… this is not an ordinary criminal indictment.”

    Mr Cameron, unless I am completely mistaken, Mr Bailey seems to be telling us that banks, and therefore bankers, are now officially considered to be above the law in this country and that, in the interests of confidence in the banking industry (which is already at rock bottom among the British public, and therefore can hardly sink any lower), they cannot be prosecuted.

    I am writing to ask you, as Prime Minister, for some clarification.

    Does your government endorse the notion that banks and bankers should be given a licence to commit criminal acts without any fear of prosecution? Is this now official government policy? Are the British public now being asked to accept that, despite incontrovertible evidence of multiple criminal acts by banks, including money-laundering, drug-money-laundering, Libor rigging, multiple frauds and assorted Ponzi schemes, bankers are considered to be immune from prosecution? And if so, can I ask on what grounds your government, or indeed the government of any democratic country, can justify such a policy?

    Since this article appeared, I have spoken to several well-informed people who are so outraged by this proposition that they cannot believe Mr Bailey made this statement — the ramifications are so immense and so terrifying to the democratic process.

    In his position as chief executive designate of the Prudential Regulation Authority, Mr Bailey has a duty to adhere to the FSA Principles, FSMA 2000 and, of course, the United Kingdom law. Yet it seems this legislation can be overturned without due process, without any regard to the consequences and without any regard to the fact that the regulator — if it fails in its duty to enforce FSMA or to report criminal acts to the relevant authorities — could become an accessory to the crimes it is failing to report.
    Read more at http://www.nakedcapitalism.com/2012/12/an-open-letter-to-david-cameron-the-prime-minister-of-the-united-kingdom-of-great-britain-and-northern-ireland-from-mrs-n-turner.html#flIHMXZ4jbTMi8Tx.99

  4. Happy days are gonna end badly^^^

    Dave I actually think people are selling a little gold and silver before the tax hikes kick in. I will laugh my ass off if the pricks make the hikes retroactive- which is something you can't put past these pricks.


  5. Thanks for these thoughts. But can I ask why large short covering would cause the price to drop? If the manipulators were trying to cover short positions, I'd think we'd see the price rise.

    1. Actually, just the opposite. The long side of the COT is the large spec hedge funds in which the trading is dominated by "black box" computer models. These programs use variations of the typical moving average/fibonacci/pivot ideas and base their stop-loss triggers on those concepts. The bullion banks take the short side of the trade, and thus when prices rise driven by the hedge funds getting long, the short side rises by an equal amount by the bullion banks.

      Then the bullion banks, who also are the primary shareholders of the CME/Comex, start to engineer a "COT liquidation" strategy where they bommb the market with big paper offerings, driving prices lower and triggering the stop-losses as set by the hedge funds. You can look at a chart and see where the stop losses are set but the bullion banks have access to that information, because they control the trade clearing systems at the Comex. The hedge fund selling is used by the shorts to cover their shorts. That's why o/i drops on price declines.

      This pattern has persisted for as long as I've been trading this market, which is over 11 years. Wash, rinse, repeat.

  6. The Gold/Silver Hit Is A Trap: What kind of trap? A bull trap or a bear trap?

    1. Bear trap. To continue my explanation above of why o/i drops when the price drops, what has been happening in the last couple of years is that the black box hedge funds start to get short the market as the price momentum to the downside picks up. It's how these momentum trading programs work. I bet this Friday we'll see in the disaggregated COT report that the commmercial short was significantly reduced, like has been the last two weeks, and I bet the "managed fund" sector of the "large specs" reduced their longs and increased their shorts.

      Let's see this Friday if I'm right. If I am right, we're at the end of this particular stop-loss COT liquidation cycle.

  7. Well nobody writes about how easy it is t. o move these markets down. Who actually determines direction . It's the banks of course. You all live under this illusion that there in fact is separate entity which is the bull. Embry and his cap about physical market, it is clear to me none of u have a clue about that. Registered comex ounces have been rising again. We r all steeple having been drawn into this cap.

  8. The mysterious new housing bubble:

    A tsunami of money coming into the housing market from deep pocket speculators, That's your recovery in a nutshell.

    Does Bernanke really care if minorities get fleeced for a second time in less than a decade?

    Don’t make me laugh. The Fed doesn’t give a rat’s ass who gets taken to the cleaners as long as his crooked Wall Street buddies get their pound of flesh.

    So, here’s how it’s going to go down: Bernanke’s going to twist arms at the Consumer Financial Protection Bureau (CFPB) to define a “qualified mortgage” in a way that allows the banks to dump their garbage loans on Uncle Sam without any risk to themselves. Once the new regulations are in place and the banks get the “safe harbor” provision they want; they’ll start issuing mortgages to anyone who’s strong enough to sit upright and put a “X” on the dotted line, which is how we got into this mess to begin with.


    1. yup....

      In 2008, Geithner was told about Libor manipulation

      The email from Hayley Boesky to Mr Geithner – with three senior colleagues, Meg McConnell, Matthew Raskin and William Dudley, copied in – are among unreported emails seen by the FT that show New York Fed officials linking the incentive for banks to misreport borrowing rates to the bank’s derivatives positions....

      “These individuals report to the head of [the] money markets desk, who often reports to the same person who oversees the derivatives book. They verify the posting with the boss to make sure it suits their derivatives position,” Ms Boesky wrote on May 23 2008....

      The New York Fed documents played down the possibility of a link between alleged rate manipulation to traders’ derivatives positions. Rather, in those documents New York Fed officials linked Libor misreporting to banks’ fears of appearing financially weak.


  9. Morgan Stanley Redeems Paulson Investments: Explanation For Recent Gold Liquidation?

    In key news that may well be the missing puzzle piece to explain some of the very odd market moves in the past week, we just learned courtesy of CNBC, that Morgan Stanley's Wealth platform unit has finally, after months and months of considerations, pulled the plug on the fund that for the second year in a row is one of the three worst performing in the weekly HSBC report and is now redeeming. That in itself is not unexpected. What however is notable is that MS withdrawing hundreds of millions in feeder capital may well explain why gold has seen such a dramatic dislocation in the past week. Recall that at Paulson & Co, gold is not simply an investment - the bulk of direct gold investments at the once legendary investor are in the form of (largely underperforming) gold mining stocks - but an actual investment class. In other words, instead of being denominated in USD, investors are actually denominated in (paper) gold, with a fixed conversion into GLD at inception. This means that upon liquidation of gold-denominated shares, any gold-denominated shares, he has no choice but to sell GLD, and by virtue of this being the most liquid paper instrument in the PM space, gold. Does the massive gold dislocation in the chart below now make more sense especially since Paulson was aware of MS' intentions days in advance and traded, or in this case liquidated, appropriately)?


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  11. I'm a little sceptical about GORO. Isn't its book value many times its equity? That's a dangerous indicator. Also, it pays more dividend than it earns in net income in the latest quarter. Is that sustainable?

    Its net income is only around $30 million/annum with a market cap of $800 million. Their growth is only to double production in about 2 years. That would bring their profit to maybe $80 million/annum in two years, that's a p/E ratio of 10. Today there are other precious metals companies that have a p/E ratio of 10 already.

    1. Valuing stocks using GAAP accounting is dangerous, especially with regard to "book value."

      The better metric is to take GORO's reported resource base and apply a multiple based on how much per/oz you think it should be worth given:

      1) comparable M&A transactions
      2) relative quality of the deposit

      Then apply an estimate to what you think might left to be discovered on just the producing property. You'll have to call management to get good estimates.

      Then take the rest of the of their properties where they've been drilling a turning out good assays and ascribe some value for that.

      "Book value" is almost always a phony number. Especially with current GAAP standards.

      As I said in my write-up: the shorts are either really right or really wrong. At this point I believe they are wrong.

    2. Thanks for your reply. The assets on the balance sheet should include the properties, which are about $15 million. Of course they can be expanded by drilling and performing feasibility studies, but that will cost money and maybe there could be a possibility that there isn't anything feasible to mine or maybe it would cost too much of CAPEX to develop. So to me that's a gamble. But I certainly believe that the company could be undervalued if their production would go back to what it was in 2011.

  12. Dave, I wouldn't be so certain about the deficit ballooning in FY13. Yes, the $300 billion so far looks that way, but there is one thing being forgotten. It's the acceleration in tax-gain harvesting going on right now to capture the lower (15%) capital gains tax rate before it goes up next year. That, combined with the up stock market in general, should result in outsized revenues for the Treasury in January - April 2013. We may actually see some SURPLUS prints in certain months, and I would go so far as to predict a sub-trillion dollar deficit in all of FY13. This could roil metals markets if it happens. Word to the wise.

    Disclaimer - I am long gold and miners, and think any sharp deficit reduction in FY13 will be offset by higher deficits in FY14.

    1. 2 things to consider:

      1) you are assuming that personal income increase next year. It's been declining and will continue to decline. you are also assuming in conjunction with this that the economy will stay flat or improve. No way.

      2) Even if we go over the Cliff, all that does is reduce the baseline spending increases. It does not reduce spending. Spending still increases.

      There is a slight possibility that tax revenues increase for the reason you point out, but the long term numbers show that in any given year, the tax revenues as a % of GDP are steady at 19.5%. If the economy stays flat or declines, tax revenues will be the same as 2012 and spending will increase...

  13. You made some excellent points in that post. I find this a really interesting subject.
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