October 2, 2022

Strong Gold Demand and Dwindling Gold Deposits Make Gold a Compelling Investment

gold-bullionRobust gold demand and dwindling ore deposits represent an imbalance between supply and demand that almost guarantees higher long term gold prices.  As discussed in Peak Gold, almost all of the earth’s supply of gold reserves have already been mined.

At the end of 2012 it is estimated that all the gold ever mined in history totaled approximately 173,000 metric tonnes.  According to the Perth Mint, a study done by Natural Resource Holdings estimates that there are only about 56,674 metric tonnes of recoverable gold reserves left.  If this bleak assessment is correct, over 75% of the world’s total gold reserves have already been mined.

Further confirmation of the basic imbalance between supply and demand for gold can be seen in today’s release by the World Gold Council of gold demand trends for the first quarter of 2014.

  • Global jewellery demand rose 3% in the first quarter to 571 tonnes
  • Total investment demand fell slightly to 282 tonnes from 288 tonnes last year
  • The outflows from gold ETFs slowed dramatically to 0.2 tonnes compared to 177 tonnes in the first quarter of last year
  • Gold purchases by central banks was 122 tonnes in the first quarter, the 13th consecutive quarterly that central banks were net purchasers
  • Mine production increased by 6%

Although mine production increased slightly in the first quarter, new gold discoveries have plunged and the quality of ore reserves being mined is declining.  The Wall Street Journal reports that One argument for Big Gold: There ain’t much gold left.

The depletion of global gold mines, and the resulting increase in extraction costs, is one of the main forces pushing gold miners to combine as they look for efficiencies or to gain access to rivals’ high-grade deposits.

“There is every reason to do that deal, and the reasons not to do it weren’t geology, but man-made,” said Douglas B. Groh, a fund manager at Tocqueville Asset Management LP, which owns Newmont stock. “The nature of geology is such that gold does not occur in large volumes, but the capital exploiting it is robust.”

The gold industry ramped up exploration as prices increased by a factor of six from 2001 through 2012 to $1,750 a troy ounce. Prices since have tapered off to around $1,300 an ounce.

Discoveries also have tapered off. In 1995, 22 gold deposits with at least two million ounces of gold each were discovered, according to SNL Metals Economics Group. In 2010 there were six such discoveries, and in 2011 there was one. In 2012: nothing.

Even in Nevada, which mines around three-quarters of all U.S. gold, production has dropped a third since peaking in 1998. Around 40% of Newmont’s and Barrick’s production comes out of Nevada, with that possible economy of scale a big factor in their proposed merger.

“Deposits are simply harder to discover,” said John Muntean, an associate professor of mines and geology at the University of Nevada.

There also is simply less gold to unearth. All the gold ever mined could fit in a 60-foot cube. At around 0.005 parts per million, gold’s presence in the Earth’s crust is minute compared with that copper, at over 50 parts, or iron, at more than 50,000.

Miners are plowing through available gold reserves faster than they are other metals. Global gold production was equal to 5.1% of the 54,000 tons in available reserves last year, according to the U.S. Geological Survey, theoretically meaning it would take 19.5 years to exhaust supply. That compares with 38.5 years for copper and 28 years for iron ore.

On a long term basis, the supply and demand situation in the gold market strongly suggests much higher prices in the future.

Why Gold Stocks Are Not a Substitute for Gold

gold & barAn investor who was correctly bullish on gold in late 2004 had three basic investment options to capitalize on an increase in the price of gold:

  1. Invest in physical gold
  2. Invest in a proxy for physical gold such as the SPDR Gold Shares (GLD)
  3. Invest in gold mining companies

The investor who picked option three does not have a lot to be cheerful about even after gold’s historic increase in value since 2004.  Why did gold stocks do so poorly in spite of a 500% increase in the price of gold bullion?  Merk Investment takes a look at gold versus gold stocks and explains why Gold Stocks Ain’t Gold.

A frequent mistake made by investors
is to invest in gold mining companies
(both juniors and majors) as a substitute
for gold. There are a couple of reasons
why this may be a mistake. Firstly, gold
mining company’s stock price does not
precisely track the price of gold. That’s
because lots of other factors influence the
share price of a company: management,
cost pressures, mining diversification,
stage of the mining process, to name just
a few.

This problem is generally more
acute for juniors than majors, because
juniors often have yet to “strike gold,”
therefore the stock price often trades more
like an option. Moreover, many mining
companies don’t only mine gold, many
also mine silver, palladium, diamonds
etc.

This dynamic also holds for baskets
of mining companies – baskets of miners
have significantly underperformed the
price of gold over recent years.  Some investors believe gold mining stocks may provide more attractive
investment exposure to gold than gold
itself. The investment thesis is as follows:
gold mining companies are able to take
advantage of an increase in the price
of gold through enhanced operational
leverage; as the gold price goes up, mining companies’ margins widen, ultimately increasing the bottom line.

However, this theory is predicated on fixed costs staying
relatively constant. Unfortunately, recent
performance does not support this
investment idea. Indeed, gold mining
stocks, on aggregate, have significantly
underperformed the price of gold.

The reality is that mining is a highly energy-
intensive undertaking, and therefore
many of the costs are closely linked to
energy prices, such as oil, which has also
experienced significant increases in price.
As a result, many mining companies
have not produced the anticipated
high level of profits. Additionally,
governments may demand higher taxes
and employees higher wages from mining
companies should profitability increase,
further limiting the upside potential for
shareholders.

The results for each investment option are shown below for physical gold, the GLD and the Vanguard Precious Metal and Mining Fund (VGPMX) used as a stock proxy.  Note that despite the horrible long term performance, a nimble investor in the VGPMX could have reaped  considerable gains by selling in early 2008 and then getting back into gold stocks after the crash of 2008.

PHYSICAL GOLD

PHYSICAL GOLD

SPDR GOLD SHARES TRUST (GLD)

GLD

VANGUARD PRECIOUS METALS FUND (VGPMX)

VGPMX

Gold’s Bad Luck With the Number 13

red deerGold has been on a rampage since the early 2000’s with yearly gains for 12 years in a row. Nothing lasts forever and the number 13 is starting to look very unlucky for gold. Barring a major upset in the world financial system, it looks increasing likely that gold will decline in the 13th year of its long rally in the year 2013.

Bloomberg’s Julie Hyman and Michael Purves, chief global strategist at Weeden & Co. take an interesting look at the factors impacting gold prices on Bloomberg Television.

Mr. Purves notes that the “flash crash” of gold in April correlated to a stronger dollar in the first half.  The strong dollar in the first half of the year has reversed and we have seen a weaker dollar so far in the second half of the year with a rebound and stabilization in gold prices.

Further evidence of healthy consolidation in gold prices can be seen by gold’s refusal to break to new lows as was widely predicted by consensus analysts.  Mr. Purves expects that the current consolidation in gold prices is building a base for a future advance.  As to the impact of a more restrained Federal Reserve monetary policy, Mr. Purves expects any tapering to be “measured and conditional.”

A strategy recommended by Mr. Purves to take advantage of expected continued volatility in gold prices is the option strategy of selling a November 127 put on the GLD and buying the 133 call.

The consensus opinion for gold remains one of bearishness or guarded optimism – and everyone knows that when the crowd is leaning in one direction, don’t be surprised if the consensus turns out to be wrong.

Courtesy: kitco.com

Courtesy: kitco.com

Marc Faber’s Surprising Gold Forecast

remembranceIn an interview with Barron’s, Marc Faber, editor of The Gloom, Boom & Doom report gives his take on where the gold market is headed and why certain investments related to gold might be very risky.

Marc Faber, never at a loss for a good soundbite, says gold is “in a correction mode” but seemed at a loss to explain why gold has dropped by over $400 per ounce over the past two years.

Faber talks about the paradox of weak physical gold prices even as demand for physical gold remains robust.  Although gold has declined in price and commentary on the gold market is extremely bearish, Faber notes that countries such as China is buying 2,600 tons of gold per year “which exceeds annual production.”  The gold market is currently in a “bottoming out process” and gold will see higher prices in the future according to Faber.

Courtesy: kitco.com

Courtesy: kitco.com

Many of the senior gold mining stocks represent good values but in a surprising comment Faber warns investors that many exploration companies “won’t make it so buy companies with cash reserves.”  Current gold prices mean that “few projects will get done.”  Faber’s bearish commentary on the smaller exploration companies seems to imply that he does not foresee a rapid short term recovery in the price of gold.

With central banks printing money at a rate that would have been unimaginable five years ago and huge demand for physical gold in Asia, the price of gold may recover to new highs faster than Faber expects.

Selling Climax in Gold and Silver Stocks Is a Classic Buy Signal

chartThe bear case for gold and silver stocks is well known and investors have reacted by dumping mining stocks indiscriminately.  The staggering decline in gold and silver stocks over the past two years now exceeds the decline that occurred during the crash of 2008 when the financial system was at the brink of collapse.

The Philadelphia Gold and Silver Index (XAU) is an index comprised of sixteen major precious metal mining companies. During the crash of 2008 the XAU declined by 58.5%.  From the peak of 226.58 in December 2010 to the low of 90.15 in June 2013, the XAU has collapsed by 60.2%.

Courtesy Yahoo Finance

Courtesy Yahoo Finance

Has the sell off of the past two years been so extreme as to constitute a selling climax which usually signals a major reversal from the lows?  According to John J. Murphy, an acknowledged technical analyst, a selling climax is “usually a dramatic turnaround at the bottom of a down move where all the discouraged longs have finally been forced out of the market on heavy volume.  The subsequent absence of selling pressure creates a vacuum over the market, which prices quickly rally to fill.”

It is too early to tell if prices have reached a capitulation bottom but investors who haven’t sold out positions in the precious metal miners after a 60% decline are probably thinking more about buying than selling.  Another factor that impedes future selling is the fact that investors are now getting paid to wait for a turnaround in the mining industry.

Historically, precious metal miners have never paid out large dividends but this metric has changed.  The stock price declines in  senior gold and silver producers have been so severe that the dividend yields on some gold mutual funds now approaches 4%.

The $2.4  billion Vanguard Precious Metals and Mining fund (VGPMX) currently yields 3.76% and holds a well diversified portfolio of seasoned mining companies.  The Vanguard fund holds investments in both domestic and foreign companies involved in activities related to gold, silver, platinum, diamonds, and rare minerals.

The chart on VGPMX looks like a reason for precious metal investors to commit suicide but if a selling climax has occurred, the losses of the past two years may be quickly recouped.  In addition, the chart of the Vanguard fund has made a triple bottom over the past six months.

VGPMX

Courtesy: Yahoo Finance

Another classic sign of a bottom in precious metal stocks was discussed by Mebane Faber who has drawn an analogy to the bottom of stock prices in early 2009 to the current chart of the Market Vectors Gold Miners (GDX).  In 2009 the S&P 500 kept hitting new lows even as the RSI and the MACD were making higher lows which is a classic bull signal.  A similar situation exists today with the GDX.

Courtesy: mebanefaber.com

Courtesy: mebanefaber.com

 

 

Physical Gold Inventories Plunge As Gold Market Crashes – How Can That Happen?

worldKyle Bass recently summed up the thoughts of many gold investors when he said “the largest central banks in the world, they have all moved to unlimited printing ideology.  Monetary policy happens to be the only game in town.  I am perplexed as to why gold is as low as it is.  I don’t have a great answer for you other than you should maintain a position.”

Gold investors can easily be forgiven for being perplexed, especially when considering that gold prices are plunging at a time when stocks of physical gold are being rapidly depleted at the COMEX warehouses.  Is this just one of life’s unsolvable mysteries or is the gold market being manipulated?  Bill Downey at Gold Trends lays out a solid case on how market manipulation caused last week’s gold collapse and why it makes more sense than ever to increase holdings in physical gold and silver.

 

There’s been a recent huge draw down of physical gold at the New York COMEX and at the JP Morgan Chase depository. Look at the physical market draw down on the charts below. It has taken a drastic plunge.HOUSTON — we have a problem.Physical inventory drawdown at JPM
Charts by Nick Laird of www.sharelynx.com

GoldInventoryJPMAPril2013
Physical Drawdown at COMEX
Charts by Nick Laird of www.sharelynx.com
GoldInventoryComexApr2013
You can imagine the dilemma this is causing for the market interests behind these inventories. If the inventory runs out and one cannot meet deliveries then it has to be bought on the open market. Not only that but it could cause a run up in prices that would hurt the shorts in the market.So what to do?There is only one way out of this for the market controllers would be to devise a plan that would collapse the market and trip up all the stops at the correction lows in gold of 1525 thereby setting off the stop loss orders under this important market low. And what if the plan included a way to stop the physical market from purchasing gold under 1525 while that correction was underway?

And how can that happen?

They have to hatch out a plan and carefully orchestrate it in a series of events that takes the gold market by surprise and force the players out of their positions.

Read on for today’s lesson in market manipulation and allow me to relay my speculation about what transpired last week.

A successful ambush usually involves surprise.

One of the main new weapons in the FEDS arsenal is TRANSPARENCY.

After a lifetime of silence the FED all of a sudden has come out of the closet and has decided that the best thing for the market is to be transparent and to that end they now have televised communication meetings with the general public so chairman Bernanke can explain the FED policy and answer any questions that the market has on its mind as well as the usual minutes that get released to the markets that review the policy decisions and discussion of prior meetings.

Why does the Fed need to explain what they are doing now?

Well it isn’t because everything is going just fine. Put it this way. They must figure when you have 50 million people on food stamps and the Dow Jones is going up a few hundred points a week and making all time highs and you have 16 trillion dollars in debt and interest rates are zero, its best to have a communiqué every month before someone asks you to explain what is going on. It’s called staying ahead of the curve if you will. If you tell them what’s going on it makes it look like you know what you’re doing. Otherwise all we have is the statistics and by themselves they tell you something is wrong, something is terribly wrong. So they have become transparent.

During the last communiqué the chairman made it abundantly clear that QE was here to stay until the unemployment rate reached acceptable levels. This communiqué whether by personal appearance or by releasing the FOMC minutes of the prior meeting is something the FED relies on so market participants can remain comfortable and abreast of Fed monetary policy.

Three strikes and you’re out

The FOMC minutes from the last meeting were due for release during last week. But a funny thing happened. They got released EARLIER than expected. It was all a big mistake and the FED let the SEC and the CFTC know right away that the error had occurred. And lo and behold even with all its transparency there happened to be some language we didn’t get updated on until the FOMC minutes were released. The notes say that several members have been discussing cutting back on the stimulus. That was strike one. It got the gold market thinking that stimulus cuts might be coming.

Strike one

Surprise number two

Then a bombshell was released from news sources. It was reported that Cyprus would have to sell 400 million Euro’s of gold as part of the bailout package of raising money for their failed banking system. Gold prices came down to 1550 on the news and the day passed by. Even though Cyprus bankers tell us the next day that they didn’t discuss selling any gold, market jitters seemed to remain and Friday was just around the corner. This was strike two.

Now we need a strike three and you’re out. Gold is a nervous market to begin with as a lot of people have already lost a lot of money in the last six months.
With Gold at 1550, all that is needed for the market to drop is to get one more push where all the stops are (just below the 2 year low of 1525).

The selling began in the Friday sessions overseas. By time we got to the New York COMEX gold open, the price was down to 1542. Now all the players are there and the volume and liquidity is there to create the final blow to the market.

And then the attack began. Wave after wave of selling until gold got to 1525. Then they break down the price below the two year low and all the stops that have been accumulating there start getting tripped up and the selling accelerates as it begins to feed on itself. The physical market for gold sees this as a gift and gets ready to make their move and buy up the gold.

Now comes the part that is pure genius or a total coincidental thing that just so happens to be a gift to those who are short the market and those who would be responsible to deliver gold should the inventory deplete.

ALL OF A SUDDEN THE LONDON PHYSICAL PLATFORM THAT BUYS AND SELLS PHYSICAL GOLD GETS LOCKED UP. THE SYSTEM FREEZES.

continue reading here.

 

Oversold Gold Stocks Set For Strong Rally

By: Vin Maru

In spite of the recent down turn in the price of gold and silver, we still remain bullish on precious metals and its equities. Regardless of its paper manipulated price (if you believe this is currently happening), history has shown us that gold is money (not fiat currencies) and it is no one else’s liabilities. When it comes to gold, as always we suggest owning the physical metals outright fully paid for and stored safely where only you have access to it. If you have a significant holding in the physical, it may be wise to diversify your gold internationally in order to minimize country and political risk by reading Getting Your Gold out of Dodge (GYGOOD). Gold seems to be gaining strong support under $1650 which should most likely hold, so now is a great time to be adding to physical holdings.

We could be at transition period in this bull market where the paper gold price dictatorship comes into question and the democratic free market physical price will start ruling the golden kingdom. The dictatorship by Western central planners over the gold price is ready to be challenged and we may come to a point in history where only votes based on actual physical holdings will be counted. There will be no hanging chads counted on this financial election ballet, its either you own the gold legally and outright, or you have paper promises for imaginary gold (similar to government bond and fiat money) where the question around ownership will arise. Trust us; you don’t want to be one holding paper receipts in questionable gold backed investments engineered by most western financial institutions. Ask yourself, can you trust the source of gold dictatorship to protect your financial assets, especially when it comes to your gold holdings?

HUI and the Gold Miners

When it comes to owning the gold miners, we actually believe we hit the bottom of the market this past summer and then most recently this December. Back in the summer we suggested adding to positions and selling into a September rally for trading positions and then look to add back position in the November/December time frame.

Looking at the HUI chart below, it seems this past December low finished off the correction that started in October. If this does turn out to be the lows, then I see some really positive signs in the charts. Since the beginning of December, the RSI, and MACD have been turning up after being in negative territory and they both look like they have room and momentum on their side to move higher. This means the HUI has a good chance at starting an intermediate uptrend which should last at least a month to two and go towards an initial target of 475 before taking a pause.

What is most encouraging is seeing HUI start to make a new trend upward from May 2012 in a series of higher highs and higher lows, this is a positive development especially if the December lows of 425 hold. What would be more encouraging would be to see the HUI start a new uptrend right now, go to 475 and then blow past it to test the resistance seen at 525 in September. If the gold miners do catch a strong bid and can get past the 525 hurdle that is in front of us, then we can be confident that we really do have a strong rally in the miners and that the uptrend will continue to make higher highs and higher lows moving forward. Eventually it may blow past the old highs of 625 which may come sometime towards the end of this year, but most likely in early 2014.

If you plan on trading these markets, pay attention to the above mentioned numbers on the HUI for places to lighten up on positions and then buy back in on any pull backs in a series of higher highs and higher lows. If we are right on this pattern and uptrend, then the next wave up should take out the September high of 525 and more likely run to 575 (hopefully by spring) before we see a significant correction going into the summer doldrums maybe back towards the 450-475 level. Then I suspect we could see a strong yearend rally that goes well into the early part of 2014 and at that time I expect the HUI to be back close to all time highs. This is what I see happening technically on the charts and hopefully the fundamentals will allow this to play out over the coming year and a half; of course this is based on normal market activity and no market manipulations. This is the strategy we have been planning for TDV Golden Trader subscriber and how to play this new uptrend that could be emerging over the next year.

If you enjoyed reading this article and are interested in protecting your wealth with precious metals, you can receive our free blog by visiting TDV Golden Trader. Also learn how you can purchase and protect your gold holdings by getting a copy of our special report Getting Your Gold out of Dodge or protecting the stock investments you currently own with Bullet Proof Shares.

Cheers,

Is The Gold Correction Over? A Technical Look At Gold, HUI And The U.S. Dollar

By Vin Maru

Gold Analysis

Looking at the gold chart below, we can see that gold has been correcting over the last two weeks. When applying some technical analysis to the gold chart, we can clearly see that there would have been overhead resistance at $1800 since most of the year gold has traded between $1550 and $1800. A few weeks ago, we also noticed a big build in the short position on the Comex’s Commitment of Traders report COT by the commercial and bullion banks. The effort to stop gold’s advance at a key resistance level was successful in part because of the huge increase in the short position at that level, which is why we knew to take some profits and that would be an ideal place for a correction to start.

Now that the correction has started and gold is giving back some of its gains from the summer, the question now remains: How much of a retracement will we see on the price of gold? While the shorts are currently in control of driving the price down, support will come from other central banks and buyers of physical gold.

With gold at $1701, it is currently (noon on Tuesday Oct. 24) sitting below the 50 dma at $1720 which is above the 200 dma at $1662. The first line of support for this coming week was at $1720 and if it holds above the 50 dma the correction in gold could be over. If we continue to see weakness in gold over the next week or two, we can expect the correction will continue later this month and going into elections. This is something I suspect could happen if the overall markets continue to remain week.

Looking at the chart we suspect that buying will come in at the new support price range at about $1650 (+ or – $20) if the 50 dma at $1720 doesn’t hold this coming week. One thing to note is that the 50 dma crossed above the 200 dma around the end of September, which is an over good sign. However it needs to remain above the 200 dma for this advance higher in gold to hold before it can go on to make new highs. We remain optimistic that gold will either bounce here at the 50 dma of $1720 or at a retest of the 200 dma of $1662, which would still be bullish over all. If you are looking to add to your physical gold holdings and diversifying them internationally, scaling in now and at the $1650 price range would be a good place to start adding to current or new positions. Keep in mind that the support at the 200 dma may not hold, which means the price of gold can retrace right back to longer term support at $1550 which has been in place all year. However, I give it a small probability that we will correct back to that price range as we are entering a seasonally strong part of the gold cycle in November and December.

While I hate making predictions on what the gold price will do short term, I suspect it could consolidate between $1650 – $1750 for the remainder of the year. While we are entering a stronger part of the gold season and the fundamentals are lined up to suggest higher prices, we have conflicting events such as a huge concentrated short position, the US elections, the US fiscal cliff and tax loss selling to deal with for the remainder of the year. With 2 strong opposing forces acting on one another, the price of the metal may consolidate around $1650 – $1750 for some time until either the bulls or bears clearly take this market in one direction or another. Until then, all we can do is sit around and wait for a clear break outside the trading range that has been established over the last year.

HUI Gold Miners Index Analysis

Just like gold, the HUI index is also correcting since September. Earlier last month, we thought index would trade to 520 before meeting resistance, which we can clearly see it has done and it is now in the process of correcting. It would not be unusual for the index to give back up to 50% of its recent gains from the summer lows. Back in July, it looks like a low of 385 was made on the index and a recent high of 525 was achieved back in September; this is a 140 point gain. So if the market was to give back 50% of this gain or 70 points, we can expect the HUI to retrace back to about 455, which would be the next best time to add to positions.

Currently the HUI is at 495 which is still above the 50 dma at 482 and the 200 dma at 465, which is a positive alignment if the index can hold these gains. One thing to pay attention to from the chart below is the price action on the HUI from April this past year to the end of August, a period called the summer doldrums. During this period support came around 385 and was tested 2 different times, while overhead resistance was at 450 which also was tested a couple of times. Back then 450 was overhead resistance which was finally broken with a strong move higher during September; we suspect this will now become the new support level while 520 will act as resistance.

While we still remain cautiously optimistic that a new uptrend has started longer term, the HUI will most likely correct back to the 460 range ( + or – 10 points) over the coming months and 520 will now act as overhead resistance as a new trading range will be set. In general, support around 465 (the 200 dma) is where we would look to initiate new positions in some of the senior producers and hold them going into the New Year. At some point, I do expect overhead resistance at 520 will be breached to the upside at which point the HUI index could run to 580 and higher, but that would mean gold would have to be on fire and trading above its overhead resistance at $1800 on a holding basis. Until then, the miners will probably trade in a range where the HUI fluctuates between 460 and 520 as long as gold stays above $1650.

US Dollar Analysis

While the US dollar is looking good at the moment and getting a nice little bounce higher lately, this could be very short lived. The up channel that has been in place from August 2011 to August 2012 has been clearly broken and now it has started a new down trend channel this past August.

All we are seeing is a current bounce from oversold levels on the RSI and MACD and it already seem to be stalling out. The US dollar could move slightly higher to test the 50dma of 80.38 or the top of the new down channel at 81, but the rally should stop there. One thing to note is that the 50 dma just crossed below the 200 dma in the last few days, that is not a good sign. Once this relief rally is over, the dollar should continue downward and possibly to the bottom end of this downward channel. This could mean a definitive move below recent support around 78 on the index, if this happens and support is broken, it could lead to a cascading move downwards towards 75 or possibly 73.75 as the next major support level. If the dollar does break down, gold and silver will shoot much higher.

The best hope for the US dollar is for it to sit in a channel between 78 and 81.50 which is where I think it could trade sideways for some time until we clear the elections and get some direction on fiscal policy from the Fed.  If the dollar goes sideways, G and S will also trade in a sideways channel. More than likely we will get some clear direction once the election are done.

 

If you enjoyed reading this article and are interested in protecting your wealth with precious metals, you can receive our free blog by visiting TDV Golden Trader.   Also learn how you can purchase and protect your gold holdings by getting a copy of our special report Getting Your Gold out of Dodge or protecting the stock investments you currently own with Bullet Proof Shares.

Gold Mining Industry Becomes Attractive To Capital Markets

By Vin Maru

Over the past summer we suggested that we would see more money become available to quality mining projects from banks sitting on tons of cash ready to loan out on credit worthy projects in their ever increasing need for higher yield. In our September 11th, 2012 blog post we stated that “Project funding will become available via bank loans on favourable projects; we can expect alot of money coming into the resource space and new projects will move towards production”.

Here is an exerpt from the TDV Golden Trader newsletter sent out to subscribers on July 23, 2012:

I suspect alot of that money will come into the commodities market and especially into the mining sector. There are many great projects which show great preliminary economic studies with today’s current prices of commodities. Banks can provide the funds necessary to help put projects into production by way of corporate bonds or loans with higher interest rates. Even with a 7-10 % rate, many of these projects are very economical, provide a positive IRR and have short payback period (3-5 years). Potential producers should really look at this option for funding their projects, the interest rates are reasonable and this would eliminate the need for further dilution.

It is also in the bankers’ best interest in making these loans to the various development projects for many reasons. First, they will be making a much higher positive yield over the next 3-5 years than most other fixed income investments. They can probably become first in line as a creditor guaranteeing their investment and using the company assets and reserves to help determine valuations as possible collateral. Also, their funds are probably safer at a cash flow positive producing mine versus buying bonds of a pig country that can only make interest payment by robbing Peter to pay Paul. In their need to make secure investments, banks can also guarantee their payments will not be interrupted by keeping a floor under the commodities prices. This floor price can be achieved by forcing the producer to hedge part of their production at current prices, thus guaranteeing a predictable minimum future cash flow.

Lately we have seen more debt offerings, issuance of debentures and credit being given to mining companies who can prove strong economics on new projects or expansion to current mining operations. Here are few examples from the last few months:

Stornoway Diamond Corp. (TSX:SWY) has entered into a mandate letter with seven financial institutions concerning debt financing for the company’s Renard diamond project in northern Quebec. The mandated lead arrangers are Bank of Montreal, Caterpillar Financial, Export Development Canada, Investissement Quebec, Nedbank Capital Limited (London Branch), Societe Generale (Canada Branch) and The Bank of Nova Scotia which will arrange senior loans of up to $475 million, the company says.

Lake Shore Gold Corp. (“Lake Shore Gold” or the “Company”) (TSX:LSG)(NYSE MKT:LSG)  announced today that the Company has completed the previously announced public offering (the “Offering”), on a “bought deal” basis, of C$90 million principal amount of 6.25% convertible senior unsecured debentures (the “Debentures”) maturing on September 30, 2017.

Kirkland Lake Gold Announces $50 Million Private Placement of Convertible Debentures – The Debentures will mature on June 30, 2017 (the “Maturity Date”), unless earlier redeemed, and will bear interest, accruing, calculated and payable semi-annually in arrears on June 30 and December 31 of each year, at a rate of 6.0%. 

While the quality juniors have been able to raise capital in the last year, most are still finding it difficult to raise funds. In the past, small producers and exploration companies relied on the capital markets to raise funds by way of private placement and issuing shares which have been highly dilutive and overall negative for investors in these companies. We have a feeling that many juniors will be able to raise capital in this market, but they will have to be creative in their approach to getting funding deals done without diluting shareholders.

Private Sector Enters the Gold Mining Industry

However, the nature and investing climate for the mining sector has changed recently. We are now seeing investment funding and credit becoming available to mining companies from the private sector. Cluff Gold (TSX:CFG) a West Africa focused gold mining company recently announced a strategic alliance with Samsung C&T Corporation where Samsung will provide an unhedged US$20M facility to Cluff Gold in a Memorandum of Understanding (MOU). The MOU also provides a framework for the potential long term funding of Cluff’s Baomahun project and other development opportunities.

In my opinion, Samsung, being a visionary in the electronics industry, has realized it needs to make strategic investments with its cash in order to protect purchasing power and secure availability of gold and silver to be used in its products. This is a game changer and as fiat paper currencies get destroyed by the central banks and governments, the smart money will continue to gravitate towards gold, the true store of wealth. This could be the start of a new trend where private sector corporations start paying attention to gold as currency and hedge against paper assets. I would expect this trend to continue as more private companies and fund manager will find a need to diversify out of paper money and into the currency of last resort: gold. While it may be difficult for these companies and institution to buy the physical metal on the open market, the smart money will go right to the source and get invested where profits can be maximised, which means going to the miners.

We are in next phase of this bull market in precious metals, and gold and silver will continue to move higher now that printing money to infinity has become official policy. It will be the miners who are still undervalued and have growth potential that will really benefit from this next round of QE and rising gold prices. Expect to hear more stories about investments coming to the mining sector and as this trend grows, so will the attention being paid to the minors. While the ETFs may be a good way to trade the price of metals rising, the leverage and exponential gains will be made with selecting the right mining company. The next leg of this bull market will benefit the miners and they could easily outperform the gold price over the next few years, this is where we see the real gains to be made.

I will be speaking at the Cambridge House Toronto Resource Investment Conference on September 27 and 28, 2012. You may register here to attend the show. I will be presenting a 30 minute workshop on Friday the 28th at 4:00 pm on “Trading Opportunities: Looking for Catalysts and Developing Strategies to Trade Precious Metals Shares”. On Thursday morning I will also be a panel speaker alongside Bill Murphy, Chris Powell, and Jay Taylor discussing gold’s diminishing supply and increasing demand.

If you enjoyed reading this article and are interested in protecting your wealth with precious metals, you can receive our free blog by visiting TDV Golden Trader.

Time To Buy The Summer Bottom In Gold

By Vin Maru

General Outlook for Gold and the Miners

It is our firm belief that the precious metals sector has bottomed out and the downside is very limited from here on out.  While there doesn’t seem to be an immediate rush back into the sector, now is a great time to be acquiring physical metals, but more importantly producers with growth profiles. That’s where we really see the value and upside potential.  Now would be a good time to start adding and scaling into any new positions you plan on taking.

If we would have to make a speculative/educated guess/evaluation, by looking at the charts and fundamentals for precious metals and the miners, we believe that the worst is over.  We are fairly certain that we have seen the bottom over this past summer and building a good position in the physical, ETFs, and select miners right now is looking very promising.

Support has pretty much held throughout the summer and it’s looking good going into the fall.  While we still may see one more down wave, it would be more of a fake breakdown below support just to scare the remaining weak hands.  If that happens, I would think backing up the truck is a good idea, and start getting aggressive in adding exposure to the sector.  Buying at support around $1570 is a good place to start adding to positions.  Over the next few weeks we expect gold to trade around $1600 (+ or – $30) in a sideways trading range.

The HUI is still lagging gold, but a solid base under 400 has been building and it looks like a good time to add at support around 390.  If you look at the chart below, it started a major correction back at the beginning of March (when we suggested selling) and made a bottom in the middle of May.  Since then the index has traded sideways between 390 and 460.  A particular item to note on the chart is a 3 fan formation that seems to be developing since March.  If the summer lows and support holds at 390, then a re-test of 420 and the 50 dma should come soon, this happens to be the top of 2nd fan line.  If it crosses above the 2nd fan line and holds above the 50 dma, it could trigger a move to 460 and overhead resistance, with a possible move to the 200 dma at 485.  This is something we will watch for and take one day at a time.

Juicing Profits with Covered Calls on the Senior Producers

If you are interested in options strategies for a flat market, you may want to consider writing calls against the shares you currently own or if you plan on take a position in the senior producers over the next few weeks.   This is great way to squeeze some extra money out of the market by writing covered calls while still maintaining a position in your favourite seniors.

If you own or are buying shares in major producers (which is a good idea as long as PM stay flat), make some extra money by selling call options slightly higher than market price (up to 20% higher is a good price) with a covered call option strategy.  This way you get to own the stock, collect dividends if the producer pays them and then collect the premiums by selling the calls.  If the stock breaks above the call strike price, you have the shares to deliver, and can still buy back your position at spot or wait for a slight pull back.

If you are unfamiliar with the covered call strategy, you can learn more about it by a simple google search or by visiting the Investopedia site discussing covered calls, below is a brief description from their site.

Definition of ‘Covered Call’

An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset in an attempt to generate increased income from the asset. This is often employed when an investor has a short-term neutral view on the asset and for this reason hold the asset long and simultaneously have a short position via the option to generate income from the option premium.

Summary of Strategy

Our subscribers have been provided some good ideas for buying several senior producers.  There are many small to mid size producers which we also like and a few great exploration plays that are also on our radar.  Over the next few weeks, we will provide some additional companies which also merit owning a position in.  While it may not be feasible to buy shares in all these companies, you should create a basket of producers and exploration companies in your own portfolio.  At the moment, all the producers have great value (even if you bought at today’s prices) and most will do very well in the next few years.  You could literally throw a dart and pick anyone of the majors and they will all raise in share price once gold starts rising.  Our goal is to help find the ones that have greater upside potential and organic growth.

If you are familiar with options trading, you should consider buying some call options in many of the majors.  If you are very knowledgeable about options, consider the covered call strategy we just suggested with several of the majors that don’t have a great growth profile in the next year.  With a covered call, you want the stock to sit sideways while you collect the premiums for selling the calls.  If you don’t understand covered calls, we suggest you stay away from them or ask before you initiate this strategy.

For the moment, we suggest slowly picking away at the junior and explorers as they are usually the last to rise in price in a normal cyclical move higher in precious metals.  Could this time be any different?  Absolutely, they have become so cheap that many are trading for cash value and very little value is given to proven reserves.  This could change at any time and this is something we will watch for when all boats start rising with the coming tide into gold and the miners.  We feel that tide is coming soon and you want to be positioned to ride the wave once it does arrive, and looking out on the horizon all we can say is: SURF’S UP.

If you enjoyed reading this article and are interested in protecting your wealth with precious metals, you can receive our free blog by visiting TDV Golden Trader.

Cheers,