Gold & Precious Metals

Bullish Record PM Shorting

Posted by Adam Hamilton - Zeal Intelligence

on Tuesday, 17 June 2014 14:29

The precious metals plunged last week, knifing through key support zones to unleash an explosion of bearish sentiment.This troubling heavy selling wasn’t news-driven, it emerged out of the blue.Who was dumping gold and why? Later data confirmed it was American futures speculators short selling gold and silver at record levels.Extreme shorting is very bullish, as these bets soon have to be covered.

The gold and silver price action has been exceedingly anomalous since early 2013.That’s when the Federal Reserve fomented a melt-up in the general stock markets, through both monetizing debt and jawboning implying it was backstopping stock prices.The levitating stock markets gradually sucked all life away from alternative investments including gold, which was crushed by epic selling of gold-ETF shares.

Western investors all but abandoned gold, leaving it solely at the mercy of American futures speculators.Their collective buying and selling always affects the gold price, but its impact is really amplified in this surreal world of withered investment demand.Since 2013’s extreme record gold-ETF selling petered out in early 2014, gold and silver prices have been utterly dominated by trading in the US futures markets.

Speculating in gold futures is a super-risky hyper-leveraged game.Last month the CME Group cut the margin requirements on gold and silver futures by 7.7% and 8.3%.Now traders only need to keep $6000 in their account to control a single 100-ounce gold contract, and $8250 for a 5000-ounce silver contract.And at $1250 gold and $19 silver, these contracts are worth a whopping $125,000 and $95,000 respectively.

Thus a speculator running minimum margin has maximum leverage of 20.8x in gold futures and 11.5x in silver futures.This is astoundingly high.In the stock markets, the Federal Reserve’s Regulation T has legally limited leverage to just 2.0xsince 1974.At 20.8x leverage, a relatively small 4.8% move in gold futures in the wrong direction from any speculator’s bet will wipe out 100% of the capital they risked!

So futures speculators simply can’t afford to be wrong for long, even if they aren’t running minimum margin.On Tuesday May 27th, they greatly expanded their bets that gold and silver prices would just keep drifting lower.So gold and silver plunged 2.1% and 1.9% that day, driving the final nail in the sentiment coffin for many precious-metals bulls.At the time, the source of this heavy selling wasn’t clear yet.

Futures speculators can sell PM futures, effectively adding supply and driving down prices, in two very different ways.They can liquidate longs, the worst kind of selling.Once traders sell their long gold and silver futures positions, they have no obligation to return.They can stay out for a long time, certainly not helping the precious metals’ prices.So paring longs can sometimes be a very bearish omen.

Futures speculators can also short sell PM futures, effectively borrowing the metals from someone else before dumping them.They hope to buy back the futures later at lower prices to repay their debts, pocketing the price drop as profit.But unlike long liquidations, short selling is very bullish because traders are under a legal contractual obligation to buy long contracts in the near future to cover their shorts.

Futures short selling is guaranteed near-future buying, as every single contract sold short has to be bought back which adds demand.This bullish covering occurs soonfor two reasons.First, given the extreme leverage inherent in gold and silver futures, speculators can’t risk being heavily short for too long.Second, futures contracts have built-in expiration dates.They have to be covered before those.

Thankfully the serious selling that crushed gold and silver last Tuesday was exclusively American speculators’ heavy futures short selling.We couldn’t know that until late last Friday afternoon, when the Commodity Futures Trading Commission released its weekly Commitments of Traders report on futures positions. Until 3:30pm Friday rolled around, I was worried last Tuesday was a long liquidation.

American stock traders, whose epic GLD-share selling was responsible for gold’s entire plunge last year, played no role in last Tuesday’s precious-metals breakdown.That day GLD’s gold-bullion holdings actually surged higher by 1.1% or 8.4 metric tons.That was their largest daily build in percentage terms since August 2011, and absolute tonnage terms since October 2012!Were stock traders buying gold?

I doubt it.The flagship GLD gold ETF’s mission is to track the gold price.So if stock traders weren’t selling GLD shares as fast as futures traders were dumping gold, GLD’s price would have decoupled to the upside.GLD’s custodians had to add new share supply to keep its price falling fast enough to keep pace with gold.So they issued new shares, and used the proceeds to buy more physical gold bullion.

Since GLD didn’t experience differential selling that breakdown day, American futures speculators had to be the culprit.And Friday’s CoT proved they were, on the short side.This first chart looks at the GLD price superimposed over speculators’ weekly total long and short positions in gold futures, taken from those CoT reports.When I saw this latest CoT data last Friday, my eyes nearly popped out of my skull.

Adam HamiltonBullish Record PM Shorting-2014-06-06-001.gif

…..more editorial & Silver chart HERE

 

Why Gold’s Base Price Should Be North Of $2,000

Posted by Steve St. Angelo - SRSrocco Report

on Tuesday, 17 June 2014 2:49

Even though present Geo-political events in Iraq have now pushed up the price of gold due to Brent Crude hitting a new high in 2014, the value of the yellow metal relative to oil is still way below its historical average.  Currently, the price of Brent Crude is trading at $113.35, while gold is at $1,275.  This is an embarrassing 11.2 to 1 ratio…. thanks to the manipulation by the Fed and member banks.

If we look at the table below, we can see the average Gold-Oil Ratios for the past 5+ decades.  When the U.S. Dollar was backed by gold, the average gold-oil ratio during the 1961-1970 period was 20 to 1.  Which means one ounce of gold could purchase 20 barrels of oil:

image002

Even though gold reached $850 in 1980, we can see that the gold-oil ratio for the 1970’s decade fell to 16 to 1.  The reason for the decline in the gold-oil ratio during the 1971-1980 period was due to the price of oil skyrocketing in response to the U.S. oil embargo as well as a peak in domestic oil production (1971).

Very few people today realize that the price of a barrel of oil remained at a constant $1.80 from 1962-1970…. volatility was zero as the U.S. enjoyed long-term contracts.  However, by 1976 the price of oil increased seven times to $12.80 (compared to $1.80), while gold was $124, only up 3.5 times (compared to $35) its value during the previous decade.

After Fed Chairman Volcker increased interest rates to double-digits, saving the the Dollar (1980), the price of gold declined from an average of $612 in 1980 to $350-$400 range in the 1981-1990 time period.  During the 1980’s decade the price of oil continued to decline from $36 in 1980 to a low of $14 in 1986.

Thus, the low price of oil pushed the gold-oil ratio to average 19 to 1 during the 1981-2000 period.

If we go by the price of Brent Crude which is currently trading at $113.35, we have the following values for gold:

1961-1970 (ratio 20/1) = $2,267

1971-1980 (ratio 16/1) = $1,814

1980-2000 (ratio 19/1) = $2,154

2000-2014 (ratio 12/1) = $1,360

Currently, the gold-oil ratio is 11.2 to 1, with the price of gold at $1,275.  This next chart shows clearly how the price of gold was manipulated lower in 2013 and 2014… pushing its gold-oil ratio well below the averages during the past four decades.

image004

We can see from this chart that the price of gold is rising in tandem with the price of oil.  In 2012, the average price of gold was $1,669 and oil $112 a barrel, at a gold-oil ratio of 15 to 1.  Many of the brain-dead analysts on Wall Street at the time stated that the price of gold was overvalued.

That’s an interesting statement when we realize that the average Gold-Oil ratio for 1961-2000 was 18 to 1.  So how can gold at an average price of $1,669 and a gold-oil ratio of 15 to 1 in 2012 be OVERVALUED??  Hell, even at the 2012, 15/1 gold-oil ratio, it was still 3 barrels short of its previous 4 decade average.

So, today… the price of gold is $1,275 and the gold-oil ratio is 11/1.  Which means an ounce of gold today buys seven less barrels of oil than it did from 1961-2000 average (18/1 ratio).

Does that seem fair when we factor in the ongoing Geo-political events taking place in the Middle East and Russia-Ukraine as well as the peaking of global oil production?  If we take the average gold-oil ratio for the previous four decades of 18/1 and multiply it by the current price of Brent Crude at $113.35, we end up with a price of gold at $2,040…. or $765 higher than the current spot price.

So, the BASE PRICE of gold should be over $2,000 an ounce.  I say base price because this just brings the value of gold back in line with its ratio to oil.  This DOES NOT INCLUDE the huge increase in monetary printing, debt and derivatives which have funneled a great deal of value away from the King Monetary Metal.

Once we include these factors, that base price of $2,000 should be higher by several orders of magnitude.  I like to use the gold-oil ratio because it gives the public-investor a BASE PRICE to go by.  We can plainly see that the price of gold should already be north of $2,000… if it wasn’t for the continued manipulation by the Fed and Central Banks

I’ve received emails from readers who believe the Gold-Oil ratio is falling because technology is becoming more efficient.  BOLLOCKS.  While this sounds nice at face value, the opposite is the case.

In 1970, the EROI – Energy Returned On Invested in the United States oil & gas industry was 30/1.  Which means, it took the energy of one barrel of oil to produce 30 barrels for the market.  Today, that EROI ratio is down to 10/1.  Moreover, the U.S domestic Shale oil industry with a 5/1 EROI makes the situation even worse — if not dire.

Lastly, all those who believe OIL SHALE in the western part of the U.S. with a supposed resource of over 1 trillion barrels is going to save us… think again. Oil shale with an EROI of 1.5-2/1 doesn’t pay the ENERGY BILLS… however, it’s a nice joke to share among oil geologists and engineers.

By the Fed and top banking institutions rigging the precious metals market to a low Gold-Oil ratio of 11/1, means that when the price revalues higher… IT WILL DO SO SHARPLY and painfully so for those on the wrong side of the trade or in worthless paper assets.

Please check back for updates at the SRSrocco Report and you can also follow us at Twitter:

In the carnage of the last three years, a lot of juniors have been left for dead with most commenters murmuring eulogies over the corpses. As a result, there are hundreds of still breathing companies selling literally for pennies that actually have a nice potential with a higher price for gold.

….read more HERE

Lackluster gold should find some of its sparkle in the second half of 2014, according to Joe Foster, fund manager at Van Eck Associates. The prospect of loosened import and tax restrictions in India is one potential catalyst, and stabilization in the exchange-traded funds is another positive. He shares with The Gold Report his perspective on the likely state of merger and acquisition activity in the gold equity space this year, and discusses companies positioned to ride the upswing.

COMPANIES MENTIONED: B2GOLD CORP. : CASTLE MOUNTAIN MINING CO. LTD. : CAYDEN RESOURCES INC. : CONTINENTAL GOLD LTD. : FRANCO-NEVADA CORP. : KLONDEX MINES LTD. : OSISKO MINING CORP. : PAPILLON RESOURCES INC. : ROXGOLD INC. : ROYAL GOLD INC. : SULLIDEN GOLD CORP. : TAHOE RESOURCES INC. : TOREX GOLD RESOURCES INC.

The Gold Report: Gold has been hovering between $1,250 and $1,300/ounce ($1,300/oz). How have supply-and-demand factors shifted since earlier in the year, when things seemed more bullish?

Joe Foster: At the beginning of the year, gold was being driven by risk concerns. Investors started worrying about risk when we saw problems in emerging markets like Thailand, Turkey and, eventually, Ukraine. The Chinese economy seemed to be slowing down.

It was less of a supply-demand story and more one of people looking at gold as a safe haven and a hedge against some of the risks in the world.

TGR: Is the world less risky now than it was three months ago?

JF: I don’t think so, but these things move in phases. Since then, the stock market is hitting new all-time highs, and people have become complacent again. The market is not that worried about risk right now.

TGR: You have talked about the impact of exchange-traded funds (ETFs) on the market. Do you see demand coming back for ETFs any time soon?

JF: I think the ETFs have stabilized. We saw inflows into the bullion ETFs early in 2014. We have seen some outflows the last couple of months. The best we can say is that ETFs have stabilized; the relentless selling pressure of last year is gone.

TGR: Has the rise of ETFs added volatility to the market that wasn’t there five years ago?

JF: I don’t think so. Gold has always been a relatively volatile market. The ETFs have added depth to the market, and they’ve brought people into the market who probably would not have been there otherwise.

TGR: A lot of people are saying that China, while still growing, is growing at a slower pace. Will that change in the near future?

JF: I’m not an expert on China, but I know a little about what drives gold demand in China. We have to look at two things. One is the wealth effect and the growing upper and middle classes in China. That creates demand for gold as an investment and as jewelry.

The second angle is gold as an investment asset. The Chinese don’t have very many places to put their money outside of real estate, stocks and gold. Even in a weak economy, gold is a safe investment.

TGR: If India relaxes its import restrictions, as rumored, what impact could that have on the gold price and, by extension, the mining equities? 

JF: If India should relax its gold taxation and its import restrictions, the impact could be big in H2/14. There is a lot of pent-up demand in India. That’s one of the catalysts we’re looking for as we move through H2/14.

TGR: Could that move gold up as much as 5% or 10%? If gold increased that much, how long would it take to move the gold mining stock prices up?

JF: One of the things missing over the past year was the seasonal pattern brought on by Indian demand. If we have a normal fall season in India, we would expect a stronger gold market moving into the fall and year-end.

I’m not sure about putting a number on that effect. With normal Indian demand, I could see the gold price at $1,300/oz, even $1,400/oz is not out of the question.

As far as gold stocks go, they’re strongly correlated with gold. Where gold goes, the stocks will follow. I’m convinced of that. If we see strength in the gold market going into year-end, that will be reflected in the stocks.

TGR: A lot more mines are economic at $1,400/oz than they are at $1,250/oz, aren’t they?

JF: Definitely. A lot of mines are struggling at current gold prices.

TGR: When we last talked, you were bullish on the prospects for the midtier and small-cap stocks. Is that still your sweet spot?

JF: We still like those companies. Even at current prices, we’re finding companies that can grow. This year, we’ve had some exciting mergers and acquisitions (M&A) activity that has panned out for us.

TGR: You’re talking about the Osisko Mining Corp. (OSK:TSX) deal?

JF: Osisko, yes, but we just had an announcement that Papillon Resources Inc. (PIR:ASX) is being taken out by B2Gold Corp. (BTG:NYSE; BTO:TSX; B2G:NSX) and Sulliden Gold Corp. (SUE:TSX; SDDDF:OTCQX; SUE:BVL). We hold all of those stocks.

TGR: Is this the start of a lot more M&A?

JF: It’s possible, but I don’t think this year will be any different than the last couple of years. In the current environment, a lot of companies are undervalued. Management doesn’t want to sell their companies if they’re at low valuations. I think this will be a below-average M&A year.

TGR: So far this year, how are the stocks in the Van Eck International Investors Gold Fund doing?

JF: The fund is up 11% year to date, though it doesn’t feel like it, because all the positive momentum from early in the year has dissipated. That said, to be up 11% when gold’s at $1,244/oz is an accomplishment. The stocks so far this year are outperforming gold. We’ve been looking for that for quite some time.

TGR: That’s very impressive. What have been the top performers?

JF: Osisko, because of the takeover opportunity, has been a great performer. Other M&A targets like Papillon have also done very well.

Also, the royalty companies— Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) and Franco-Nevada Corp. (FNV:TSX; FNV:NYSE)—have done well for us. In the junior stocks, Roxgold Inc. (ROG:TSX.V) has performed well.

TGR: When you’re looking at companies like Roxgold and Papillon, are you looking for geographic diversification or for individual companies that might have catalysts and good prospects?

JF: It’s a process that looks at quite a few things. First we look at company management and the location of the properties to determine if there is any geopolitical risk. If there is geopolitical risk, we want to know how the management will deal with it.

Once we get comfortable with where the properties are located, it’s all about the geology, the metallurgy and the engineering for the jurisdiction. It comes down to whether we think it can become a profitable mine in the future, or an attractive acquisition target for a larger company.

TGR: Do you want to talk about any of your Top 10 companies?

JF: Tahoe Resources Inc. (THO:TSX; TAHO:NYSE) is one; it’s another good performer. It has done a fantastic job starting its mine in Guatemala. It’s becoming one of the dominant midtier silver producers.

TGR: Have you held Tahoe for a long time? 

JF: We’ve held Tahoe pretty much since the company was created.

TGR: Are most of your holdings long term? How much do you change the portfolio every year?

JF: We have very low turnover. We do a lot of due diligence. Once a company gets into our portfolio, we tend to hold it. As long as the company is doing the right things and creating value, we become very long-term shareholders.

TGR: What smaller holdings do you have, perhaps companies that are just starting to get traction?

JF: I would put Klondex Mines Ltd. (KDX:TSX; KLNDF:OTCBB) in that category. It’s developing some high-grade, underground properties in Nevada that we’re excited about. It has a great management team.

TGR: When you visited the Klondex site, what excited you?

JF: It came down to the geology—very high-grade, near vertical veins—and it looked as if the mining isn’t that complicated for an underground mine. The continuity of the veins and the overall geology of the deposit are such that it could become a very profitable underground operation.

TGR: Do you have some recent additions to the portfolio?

JF: We added Cayden Resources Inc. (CYD:TSX.V; CDKNF:OTCQX) and Castle Mountain Mining Co. Ltd. (CMM:TSX.V) to the portfolio this year. Both are works in progress. Cayden is doing some drilling, which we hope will prove meaningful.

Castle Mountain is redeveloping a property in California. It is doing studies, still figuring out the best way to go about it.

Both companies are working through issues, whether they be metallurgical or strip ratios or finding more ounces. Whatever the issues, they’re robust properties that will enable them to create value as they develop.

TGR: Before you bring on a company, do you visit the site?

JF: Not always, but we do a lot of traveling. It just depends on the situation.

TGR: Are there any other companies you want to call out from the portfolio? 

JF: Others that we think could become acquisition targets include Continental Gold Ltd. (CNL:TSX; CGOOF:OTCQX). Its project in Colombia looks really promising, a multimillion-ounce deposit.

Torex Gold Resources Inc. (TXG:TSX) has a Mexican property under development. That will be a big mine, and the project may become an acquisition target. Even if it doesn’t, it will become a core cash-flow generator for Torex.

TGR: You have given our readers lots of good ideas to think about. With all that’s happened in H1/14, how are you adjusting your portfolio to prepare for H2/14?

JF: I think the market is in the process of finding a bottom. Gold will probably struggle through the summer, but I think $1,200/oz should prove to be a solid floor under the gold price.

While we’re in this bottoming process, we want to prepare the portfolio for the next upswing in the gold market. That’s what we’re doing now; using these times when gold has fallen out of favor to position ourselves in companies and get ready for the next upswing.

TGR: Makes sense, Joe. Thanks for your time and your insights.

Joseph M. Foster earned his Master of Business Administration at the University of Nevada-Reno and his master’s in geology at its Mackey School of Mines. He joined Van Eck Associates’ hard assets team in 1996. He currently serves as lead investment team member for its flagship fund, Van Eck International Investors Gold Fund, and investment team member of Van Eck Global Hard Assets Fund and Van Eck Worldwide Insurance Trust’s Worldwide Hard Assets Fund.

Read what other experts are saying about:

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DISCLOSURE:
1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an employee. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Tahoe Resources Inc., Klondex Mines Ltd., Cayden Resources Inc., Castle Mountain Mining Co. Ltd. and Continental Gold Ltd. Franco-Nevada Corp. is not affiliated with Streetwise Reports. Streetwise Reports does not accept stock in exchange for its services.
3) Joseph Foster: I own, or my family owns, shares of the following companies mentioned in this interview: None outside of participation in the fund. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. Van Eck funds hold shares of the following companies mentioned in this interview: Papillon Resources Inc., B2Gold Corp., Sulliden Gold Corp., Royal Gold Inc., Franco-Nevada Corp., Roxgold Inc., Tahoe Resources Inc., Klondex Mines Ltd., Cayden Resources Inc., Castle Mountain Mining Co. Ltd., Continental Gold Ltd. and Torex Gold Resources Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview. 
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

 

Gold & Silver Stocks Begin Next Leg Higher

Posted by Jordan Roy-Byrne - The Daily Gold

on Friday, 13 June 2014 8:21

Yes you read that correctly. The miners have begun another leg higher because the evidence strongly supports the view that they have formed a higher low. Only time will tell for sure but the evidence is quite strong. It seems that every analyst was calling for a July low. I felt strongly that the miners would make their next low after Gold broke below $1200. I was far more confident in the bullish case at the June 2013 and December 2013 bottoms. I was even skeptical after Tuesday’s upside explosion. However, the weight of the evidence today argues that the miners have made a higher low and are starting their next leg higher.

First let’s look at GDXJ which is showing leadership. I want to highlight three bullish points. First, the volume has been huge. Weekly volume will be a record. Daily volume was near records the day before GDXJ bottomed (May 27) and the day it bottomed (May 28). After Monday it appeared the miners could head lower. Tuesday GDXJ gapped up and closed at the high of the day on huge volume. Wednesday’s volume dipped only slightly while Thursday’s volume was an all time high! Strength was followed by strength. The second point is that Tuesday and Wednesday’s explosions came with the metals being up less than 1% in that entire period. The shares are showing excellent relative strength at a time when the metals are in a weak technical position. Third, note that GDXJ is set to close at a 12-week high. That is quite a bit of strength only two weeks after a low. The initial rebounds from the previous two lows were much weaker in size and intensity. GDXJ’s next resistance is $44. A weekly close above $44 marks a higher high.

june12edgdxj

Meanwhile, history argues that its very unlikely that the bear in the miners isn’t over. The current bear would be the third longest ever. The two longest bears were the longest because their price damage was mild until the tail end. It’s not impossible that the current bear could roll over to a final low. We thought that was possible until Wednesday. However, given the aforementioned strength in the sector, it seems highly unlikely.

june12goldbears-1024x647

The action in Silver and the silver stocks also leads me to believe that the near term risk reward strongly favors the upside. We’ve been waiting for Silver to break below $18 because we believe it would mark a clear end to its bear market. Silver recently closed at an 11-month low and the same week closed Friday at $18.82, which marked a new weekly low for the bear market. Silver has since failed to decline further. The metal has started to rally and it could spark a short squeeze. Gross short positions reached a new all time high in each of the past two weeks. Moreover, the chart below shows the positive divergence in the silver stocks. While Silver tested its June 2013 low, SIL and SILJ were trading well above their lows.

june12silver

The weight of the evidence argues that precious metals shares and likely Silver have seen their low and are headed higher. GDXJ and Silver peaked more than three years ago. GDXJ declined 81% while Silver’s bear market was nearly its worst excluding its 1980 collapse. The outright strength in the stocks cannot be disputed. It was not a one day event. The stocks led the metals down and are now in position to lead the metals higher. With that said, the only fly in the ointment for me is Gold which peaked last, is technically weak and still carries some speculative interest. I would not be surprised to see it break lower before the entire sector moves aggressively higher. Regardless, our view is the stocks have formed a higher low and that pullbacks should be bought. They don’t ring a bell at the start of a new bull market and by nature analysts and pundits won’t be in agreement when it starts.Consider a subscription to our premium service as we highlight the best junior companies and trade and invest a real money portfolio for subscribers benefit.

Good Luck!

Jordan Roy-Byrne, CMT

Jordan@TheDailyGold.com