Monday, February 10, 2014

Go Figure! Since "Tapering" Started In December, Gold Has Been Best Asset To Own

The only theory I can think of to explain this is that the smart money in the market is anticipating that the Fed will have to soon reverse itself and pump even more money into the banking system.

Although I was wrong that gold would fly when QE3 started - primarily due to the the Fed's price containment of gold (see today's earlier post) - I did say late last year that if the Fed did start to taper I would not be surprised to see gold start to chew threw the market obstacles being thrown at it by the Fed/bullion banks and move higher in anticipation of an eventual reversal of the taper.  Janet Yellen is just person for that task given her stance on interest rates and "deflation fighting."

source:  Zerohedge, with a few of my edits to clarify

A good friend/colleague called today wondering why the mining stocks were going nuts the past few days.  Again, given that mining stocks are leveraged to the price of gold, market theory explains that stocks move ahead of the growth in their underlying source of profit - gold/silver in this case.  I also averred that there's a massive short interest in mining stocks by hedge funds and that they are aggressively covering ahead of a possible upward explosion in the miners.

In fact, in the fund I manage, we had several holdings where were up double digits, with some of them outperforming the triple-leveraged mining stock ETFs:  AAU +14.5%, Wildcat Silver up 17.9%, Exeter Resources (XRA) up 13%  and ATAC Resources up 13.8%.   Some of our holdings have more than doubled since early December.

I have suggested to a few colleagues that properly selected junior miners could end up returning 20-30x your investment at these levels.   We've seen that occur in the past and now the big mining companies like Newmont and Goldcorp are starving to replace their reserves.    A couple of the ones mentioned above have monster reserves and will eventually be swallowed up by the bigs.

There's no rush like a gold rush...


  1. Dave, what do you think of the Peak Gold theory? Big gold discovery is very rare these days.

    1. I don't think it's a theory - I think it's a fact

    2. You bet it's a fact!! EVERY year the average grade mined goes down. In the last 10 years almost no 1million+ ounce deposits have been found, and over the last 2 years mines have high graded to keep the bills paid resulting in a lot of low grade resources being lost forever. Even as prices climbed to all-time records in 2011 and there was ample money available to go looking for more gold, no new major deposits were found and production did not ramp up. That kind of says it all.
      For a long-term play I like Agnico-Eagle (AEM) because of this. They have spent the last 3 years buying into deposits and developing their already existing deposits. I think they have more resource ounces in the ground that are not in existing mines than any company in the world. All of their deposits are in safe, mining-friendly districts, too. I worked on their Meliadine West deposit before they bought it, both logging core and being a senior underground geologist on an underground bulk sample. From what I saw they will eventually mine 10million ounces out of the area at a grade of close to 10g/t with the deposit starting right at surface. The day the place opens they will be making money hand over fist, especially when gold goes back up. 32 consecutive years of paying a dividend and a presently seriously undervalued stock. I could be wrong but I think it's a buy.
      Justin from Canada

    3. Justin, what you described (high grading, lower grade stuff) is just in North America or around the globe?

    4. That's globally. It's been an issue for a few years.

    5. Justin, I agree with you that AEM is superior large cap play. But the serious money is going to be made in the quality juniors. In my view, the risk/return matrix is very very heavily skewed toward to juniors - i.e. the potential returns are so great relative to the large caps, that the risk of owning them vs large caps is more than offset by the possible returns.

      In fact, I would argue that companies like Barrick and NEM are higher risk than the high quality juniors because they've got fundamental operational issues that they might have trouble overcoming. Not to say that a high price of gold won't bail them out, but compared to owning a good junior, ABX and NEM are higher risk, in my view. I know that sounds crazy but I'll elaborate on that idea in a future post.

      AEM is probably the only large cap I'd consider owning right now. I've shifted our "large cap" money in the fund into an emerging producer with a lot of exploration potential still to go. The rest of our fund is in very solid juniors.

  2. Dave, I'm surprised you didn't list Golden Minerals as you would be up closer to 60% since mid-December.

  3. China's gold consumption surges

    BEIJING, Feb. 11 (Xinhua) -- China's gold consumption surpassed the 1,000-tonne mark last year as domestic demand for jewelry and bars surged despite the lackluster global market.

    Consumption soared 41.36 percent year on year to 1,176.4 tonnes in 2013, nearly triple the amount of its total domestic gold production, data released by China Gold Association (CGA) showed on Monday.

    The figure is likely to mean that China will take the place of India as the world's largest gold consumer, under the backdrop that shrinking gold prices and concerns that the Federal Reserve might withdraw its quantitative easing stimulus had dampened market sentiments last year.

    The marked increase was mainly attributed to the country's surging demand for gold jewelry and bars, which increased 42.52 percent and 56.57 percent year on year to 716.5 tonnes and 375.73 tonnes respectively.

    In the second quarter of 2013, the international gold price dropped to around 1,400 U.S. dollars per ounce from the 1,600-U.S. dollar level, prompting Chinese consumers to go on a shopping spree.

  4. Dave, I would reason like this for the time being, less liquidity in the system, less paper assets to short physical asset. I’m sure banks interventions no longer a secrecy to anyone.
    During the next wave of QE it’s going to be even harder to sell economic recovery and gold once again might be viewed as a store of value.

    1. Yep. Who cares what the broad public thinks. By the time they wake up they won't be able to afford and ounce of gold because China will have hoovered everything available below $5k per oz.

      Once the mad rush for gold starts, who is going to sell it? Coin dealers will be wiped out.

  5. In past 2 weeks I put in $20,000 various solid junior miners, I have a very good feeling in this and glad I'm not the only person who feels this way :)

  6. Another Big Effort for GATA

    One of these was a well-dressed German fellow who looked to be in his early 40′s. He came up to Bill Murphy during the first break and asked why GATA had not gotten all of their information out to the regulators and the media? He said, “The manipulation is so obvious, why don’t you go whistleblower?” Bill explained that GATA has tirelessly given uncovered information out for years, 16 years now and no one wants to hear it. Murphy went right down the line, he told of his CNBC appearance that was cut short and him never being allowed to appear since then … He explained that he and Chris Powell have given the CFTC piles of information, they’ve given multiple “smoking guns” to the press…yet nothing but silence.

    Bill even explained that over the years, some reporters have even told him that the word “GATA” (Gold Antitrust Action Committee) could never be printed. In fact, about the only press over the years has been foreign press. He told of the 2001 Durban, South Africa trip and the press coverage, the fact that even Russia has carried news of and spoken of GATA…but only silence and suppression of the truth here in the U.S. and Britain.

    The German guy wouldn’t give up though (because he’s a stubborn German, I should know as I am the same), he approached Bill 2 more times and couldn’t understand why GATA hasn’t been able to do what their primary mission is, namely exposing the truth about the suppression of gold’s price as part of keeping the markets “tame” (rigged). GATA’s mission has been merely about “free markets” or I should say the LACK of free markets. All they want is a free gold price and for that to reflect the “temperature” of markets much like a thermometer.

    As I said, the German was stubborn and approached Murphy one last time after the conference…and only then did things start to roll. It turns out that this guy was quite successful, he retired 6 years ago (presumably in his 30′s) after selling his “headhunting” business. This is significant because he has ties and acquaintances in the German media…it was GAME ON! You could see Murphy’s face light up like a Christmas tree! Could this be possible? A German who truly understands what has been happening AND a connection to the German media…at a time when Germany has been defaulted on and it appears that their gold is gone?

    The 3 of us spent a couple of hours brainstorming as to how to approach this and of course nothing was set in stone but much as an artist sketches an outline…it was drawn up last night. Bill is going to pull the “entire file” with every piece to the puzzle and every smoking gun that GATA has uncovered over the years. This “file” will be shown to several journalists in Germany AND also to Bafin. Bafin if you will recall is the financial regulatory agency that is cracking down on LIBOR, bank fraud and also “gold manipulation.” Bafin’s President Elke Koenig made the comments last month that “if there is gold manipulation it would be far worse than LIBOR.”


  7. David Stockman - This Financial Collapse Will Be Catastrophic

    Eric King: “The Fed and the massive trading room where they are managing these markets, are they going to eventually get overrun and it’s going to be a horror show even in that trading room, where there’s nothing left they can do, no levers to pull as everything comes unwound?”

    Stockman: “That trading room is a weapon of financial mass destruction. That’s the point that people need to understand. The people running the Fed today have no clue of the danger that they are creating through this massive market intervention and manipulation....
    Eric King: “David, where do you think this is leading? You are warning about this massive trading room and the fact that these people are totally out of control. They (the people at the Fed) don’t agree with you. They don’t agree that it’s going to lead to destruction.”

    Stockman: “No, because obviously they are having a grand time. They are at the switchboard. They have anointed themselves, that is the Open Market Committee, the Fed and the senior staff around them, the ‘Monetary Politburo’ of the United States. Read Yellen’s testimony and listen to the gravity of her tone. She thinks she’s running everything -- that she has been given this heavy burden and responsibility for 317 million American citizens. Give me a break.

    This is institutional imperialism of staggering proportions.

  8. Fire Sale Risk Climbs With Equity-Backed Repo Rise, Fitch Says

    Increased use of equities collateral in the U.S. market for borrowing and lending securities may heighten regulators focus on the risks of rapid asset sales disrupting financial markets, according to Fitch Ratings.

    Repurchase agreements, known as repos, backed by equities rose 40 percent during the year ended Jan. 10, according to Federal Reserve data. Rising equity-collateral usage combined with a slide in repos backed by government securities pushed equities share to 9.6 percent of the $1.55 trillion tri-party repo market in January, up from 5.7 percent a year earlier, Fitch said in a report published yesterday.

    Fed policy makers and researchers have discussed during the past year that the repo market still requires changes to reduce risks related to fire-sales triggered by a dealer default or lenders’ perceptions that it may default. Since the 2008 financial crisis that caused a near global credit freeze and disruptions in repo funding, global policy maker have sought to increase bank capital and mitigate side-effects of bank defaults to prevent the need for government bailouts.

    “One reason for the equity-backed repo increase is because of the higher yield available on them, that is, from the lenders perspective,” Robert Grossman, managing director of macro credit research at Fitch in New York said in a telephone interview yesterday. “All other things being equal, in a distressed market the nongovernment collateral can have more liquidity issues. One of the policy issues on the horizon is fire-sale risk.”

  9. And the realtors are in cahoots with the investors. Seen it happen again and again; house is listed (REO or similar) offer full price, one offered 10% over list price w/ 10% down and NO inspections / contingencies and full cash offer (w proof of funds attached to the offer)... not accepted. Houses go to investors. Investors pay the realtors a large "commission" and they do not even pass on the offer to the bank. One I know confronted the owner of a realty office, said they knew what they were doing... the guy just laughed. Took it to the state level... $2000 fine. He asked at what level they take the license away, the answer was never. So they can just pay a 2k fine IF caught, and in the mean time keep making 10-20k on each deal for "loosing" offers...

    And the poor old little guy keeps bending over and thinking he should trust those kind other folks with his money. When is Joe Q. Public gonna ever wake up and get educated? He gets raped on every financial transaction and still blindly lines up to get took again.

    Frustrated at the level of blind ignorance and willful idiocy out there...

  10. It was good for Moriarty to come out so far beyond his usual empty sneers and to attempt some argument that can be rebutted.

    "People with deep pockets have the ability to manipulate the markets," Moriarty said. "It's perfectly legal."
    Actually, in the United States and other developed countries it's not perfectly legal. While the definition of market manipulation is not always clear, in the United States anti-trust law, securities law, and commodity trading law all seek to forbid market manipulation, as do the regulations of the Federal Trade Commission, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. Prohibited mechanisms of market manipulation include concentration of market share, trading on insider information, and dissemination of false information:

    Yes, as Moriarty said, market manipulation happens every day. But it happens every day not because it is legal but rather because the rules against it are seldom vigorously enforced.

  11. Dave,

    Do you mind sharing what those quality juniors are?


    1. It takes a lot of work, research, management phone calls and a formula I've devised over the past 13 years. I'm designing a new website that will include this blog and I'll offer my research work for a small cost per report. Stay tuned.