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June, 2009
Wealth
Creation and Personal Security
.even Survival: Gathering Gold, Avoiding Fiat
Once again back to basics: 'gold is the only true and honest
standard'. This is becoming increasingly obvious as the actions of
shedding the US dollar has moved from the quiet and discreet to a raucous
and total abandonment.
Gathering Gold.
Last year it was described as fear driven when the purchase
of bullion by ordinary folks first hit the news feeds. I remember the
early movement to hard gold being decried by one esteemed writer as
"a knee-jerk reaction by unsophisticated investors". This
year his tune has changed."it is the wise investor who is not
fooled by the arrogant comedy of corruption and posturing, fully
realizing that gold has turned into the de facto currency of the
civilized world." Before I move on, full marks
to the legions of small investors who led the way; who were not fooled by
superbly choreographed charismatic leaders trying to sell a false bill of
goods by delivering leg-shivering speeches, flawlessly read off a
teleprompter.
This year it is the big players making their presence felt, as evidenced
by last week's announcement that "Hedge-fund firms Paulson &
Company and Lone Pine Capital made big bets on gold during the first
quarter, becoming Number One and Number Two shareholders, respectively,
in the SPDR Gold Trust (GLD) exchange-traded fund, according to
regulatory filings."
Paulson & Co. - run by John Paulson, who had already been beefing up
his exposure to gold companies - bought 31.5 million shares of the ETF
during the first quarter, according to its mandatory end-of-first-quarter
holdings report with the Securities and Exchange Commission. That stake
would be worth more than $2.8 billion.
Seems their timing is spot on, as market sentiment has definitely turned
bullish on gold. Global demand has jumped 38% year-over-year in the first
quarter as sharply higher buying in gold investment products more that
offset depressed jewellery consumption and industrial usage. The
'identifiable investment in gold' numbers, including both ETF's and
bullion coins - rose to 595.0 tonnes for the first quarter, more than TRIPLE
the 171.3 tonnes of a year ago.
Obviously, investing in gold continues to be the order of the day,
spurred on by the ongoing financial crisis as well as a complete distrust
of Washington's prevailing answer to everything - print more money. As
far back as November, 2008 it appears that I was not the only one calling
for a return to gold and promoting the fact that we were in a historic
secular gold market. During that month, Steven Rog? of Rog? Partners
fund, bought gold through an ETF for the first time. Rog? feels that inflation
could rise to 8% a year in three to five years, as the government
spends hundreds of billions of dollars of borrowed money to jump-start
the economy.
8% inflation would (imo) be a complete gift, as I have heard nothing out
of Washington to indicate they are ever going to stop printing new money
any time soon. As a matter of fact, on Saturday, May 23rd
President Obama went on record to make two vitally important and illuminating
comments. First off, and I quote: "We're out of money..". But
more to the point, and something that must have chilled the blood of
anyone holding US debt was Obama's response to a question posed by C-SPAN host Steve Scully regarding universal health
care: The President's response: "One answer is to keep the health
care system that we've got now. Along that trajectory, we will see health
care cost as an overall share of our federal spending grow and grow and
grow until essentially it consumes everything.."
A telling response - as it sounds that Washington, regardless of the fact
that the US is out of money, will attempt to push through a universal
health care program. Expect the debt load to increase yet another
$1.5 trillion! A mere 8% inflation? We wish!
Again, none of this is lost on the global investor. Motivated and
clear-headed investors are scooping up gold coins as fast as the world's
mints can product them. Here is a sober stat, and clearly shows the
American public is not being swayed by rhetoric: From September
2008 to January 2009, the US Mint sold over 800,000 American Eagle gold
coins. That amount was TRIPLE that of the same period in
the previous year. Now, in 2009 the US Mint is rationing some types of
coins as it simply cannot keep up with exploding demand.
But surprise, surprise! According to the mint, it is not the professional
investor causing them grief, it is the folks. The regular ma-and-pa
investors are besieging the mint in their quest to purchase gold and
silver coins. It's your neighbour, your barber, the babe who works in the
coffee bar. They want hard gold and silver and are not interested in
substitutes. As a result of overwhelming demand, the US Mint sells so
many gold coins it keeps running out of blanks. Sunshine Minting out of
Coeur d'Alene, Idaho, a company that produces blanks for the Mint has
more than doubled its gold production capacity. Sunshine has hired on 15
new workers to try and cope with the extra gold work. Tom Power, the
company president says that even with the extra workers, "we are
way, way behind on trying to keep up with physical demand."
This unprecedented demand toward acquiring legitimate money (gold and silver)
has resulted in both wholesalers and retail customers being forced to
wait longer for delivery of their coins. One example is US Coins out of
Houston where customers have to wait two weeks for delivery, compared to
less than a week last summer. And that is just in the US. Many mints
around the world have expanded production capacity (Royal Canadian Mint,
quadrupled in size, Rand Refinery in South Africa, doubling production
from 10,000 coins to 20,000 coins), and are still unable to satisfy
demand.
Avoid Fiat.and the Treasuries
The Federal Reserve looks like it is printing money based on the results
of a daily coin toss. Heads, we print.tails, we print. Under the guise of
trying to spend its way out of a recession Washington has given the nod
to printing TRILLIONS of dollars; huge stimulus packages, dodgy and
possibly unconstitutional auto industry rescues, and creative new lending
programs - not to mention forging ahead with what will turn out to be a
hugely expensive universal health care plan.
It is clear that the global appetite for this debt has diminished. There
simply is not enough demand to absorb all of these new dollars and
Treasury bills. And as the above chart indicates, the decline in
the dollar is turning into a collapse. Now if you consider the
demand for bullion reflects an erosion of trust in the dollar (and all
other fiat currencies), then what does it say to those very investors who
have moved to bullion - and they watch in amazement as Washington goes
into overdrive to print even more fiat?
One of my new more technically minded readers has been keeping me updated
on his take on the US Treasuries. We share a lot of common ground,
including promoting the theory that the US is losing control of its
ability to manipulate the economy. Evidence: The Federal Reserve
buys over $300 billion 30-year bonds so they can keep a lid on the top
end of the yield curve - but fail to do so, as those rates have
since gone up, and after this week's auction have gone up again!
So it is no wonder there are some skittish investors out there convinced
(rightfully so) that the bottom will fall out of the US dollar and the
Treasuries. It probably did not help when Standard and Poor's ratings
agency warned the AAA sovereign rating of Britain is under review. As
Britain is emulating the US by spending billions and billions of pounds
to bring about an economic recovery, it only makes sense that US rating
is not immune to review. Adding fuel that fire, I watched Bill Gross of
Pimco on Bloomberg TV comment that the US may very well lose its
AAA credit rating. Not sure if I can apply this adage to fund managers,
but when it comes to politicians I have come to realise that 'if they are
talking about it, they're going to do it.' Just a quick head's up.
Although for some balance, I would suspect that Moody's may be thinking
twice about doing their job - based on a lightly covered story back in
April, 2009. "Barney Frank Declares War on Moody's". It
seems that Frank is able to read the signs better than most. Evidence:
Frank's displeasure with the possibility that Moody's will
downgrade America's municipalities (muni-bonds) as the "action will
raise interest rates on cities and towns making it more expensive to
borrow funds for infrastructure developments." Well said, Mr. Frank.
But then he goes on to threaten Moody's be suggesting
to hold a hearing to explore "the unfair treatment of full faith and
credit general obligation bonds." His first statement is accurate.
His second statement is pure fudge.
Full Circle: Gold is the Only True and Honest Standard
For months I have been beating the drum for gold. For me that is a pretty
narrow focus, as technically I am NOT a gold bug. What I do
have is a healthy appetite for all commodities. But the fact remains that
in this 'new economy', gold is the single most important commodity. Gold
represents safety, and comfort. Gold and the honest value it
represents is reality in a world of spin and nonsense,
where economists and politicians expect me to support them in untried
sciences and want me to turn away from oil and coal in favour of a theory
that a large fan might generate enough energy to power a city.
A comment on
the production and supply side of gold - today an announcement out of
South Africa alerted me that South Africa's gold output fell by another
10% compared to the disappointing fourth quarter results of last year. On
a year-on-year basis, the rate of decline stands at 5%. Ominous indeed as
for those paying attention to South Africa's gold production numbers, the
last quarter of 2008 was supposed to be a one-off in terms of
lower than expected production because of power issues. What is really at
the heart of the problem is dramatically dwindling grades in the now third
ranked producer behind China and the United States.
So when you consider that the world's top producer (China) has gone on
record that not one ounce of their annual production will make it into
western markets and the number three producer is in steady decline, there
will be a gold production shortage - unless of course, countries like
Canada, Australia and the US can pick up the slack.
The Business of Gold, from October to June.
A little history: It was directly after the October Crash when I
initially looked to bullion as the only safe haven worthy of the name.
As hordes of investors stampeded into US dollars, I opted for
gold. While doing so I correctly identified that gold would turn
into a bull market of historic proportions. During the winter
months I began writing about the 'business of gold' - a strategy that
included purchasing both
bullion and shares in woefully underpriced junior gold companies. My
reasoning was that precious metals and the companies that produce them
could represent a low-risk haven of safety.
As you can see by the six month chart, gold has been cooperating -
steadily moving up, yet offering a few good opportunities for investors
to nip in and buy bullion on the dips.
At the same time, my early due diligence efforts (November,
2008) were also proving profitable, evidenced by the
appreciation of select company share prices. (Nova Gold $0.60 currently priced at
$5.13, and Moto Gold Mines $0.75 to a current price $4.50 and Atac
Resources $0.07 currently trading at $0.36).
Adding
in a layer of safety when investing in the penny markets...
To those investors who previously put their
money only on big board companies, using 'safety' and 'penny
markets' in the same sentence might be considered as audacious,
remember: AIG at $1.69 and GM at $0.75 are now penny stocks.
When it comes to seeking out promising junior gold (and silver)
companies, I am once again returning to basic fundamentals: a strong and
experienced management team, a property of merit that contains a resource
or compelling assay results, a prudent amount of dollars in the bank and
is operating in North America. When it comes to top rated CRA (country
risk assessment) countries there are exceptions to the rule (Australia,
Chile and Ghana) being three that spring instantly to mind), but due to
an increasingly unsettled world and ever-changing country conditions, my
immediate focus will be in my own back yard - Canada and the USA.
As we are talking about the business of gold, it is important to remember
that the US is the third largest producer of gold in the world. For its
part, Canada is known historically as one of the most productive
countries on the planet when it comes to the discovery of economic
mineral deposits.
As we are talking about the business of gold, it is important to remember
that the US is the third largest producer of gold in the world. For its
part, Canada is known historically as one of the most productive
countries on the planet when it comes to the discovery of economic
mineral deposits.
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The United States and Canada are generally considered the
benchmark for low country risk.
Country Risk Categories
Although by no means unanimous, many
analysts agree upon six main points when preparing a country risk
assessment:
Economic Risk: Any noteworthy change in the economic structure, growth rate or
direction that produces a material change in the expected return of
your foreign investment.
Currency Risk: How your foreign investment will be affected by changes in the
exchange rates. An example would be if the countries currency has to be
converted into a different currency to complete an investment. Changes
in the value of the currency relative to the European currency or the
American dollar could affect the total loss or gain on the investment. (Also
referred to as Exchange Rate Risk)
Transfer Risk: The risk associated with the possibility of a currency not
being able to be
sent out of the foreign country - usually due to central bank or
political restrictions.
Sovereign Risk: The risk that a foreign central bank will amend it s foreign
exchange
regulations - either significantly reducing or completely abolishing
the value of foreign exchange contracts.
Macro Risk: A type of political risk in which political actions in a
foreign country can
negatively affect foreign operations. Macro risk can come about from
events that may - or may not - be in the central government's control.
Geo-political Risk: The risk an investment's return could suffer as the direct
result of political instability, or a change in political direction.
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Mining for gold in the US has taken place since the discovery of gold in
North Carolina in 1799. US gold production greatly increased during the
1980's, due to higher gold prices and the use of heap leaching to recover
gold from disseminated low-grade deposits in Nevada and other areas. I am
confident that - the trend line notwithstanding, a continued increase in
the price of gold will inspire additional exploration, resulting in an
increase in production.
The Canadian Shield - Underexplored and Untapped
A little known fact when it comes to Canada - almost all of the precious
metal mines in Canada are gold mines.
Canada's gold mines are found predominately on the Canadian Shield, and the
Cordillera in British Columbia. The most important provinces in gold
production are Ontario, Quebec, Manitoba and British Columbia.
Canadian Shield
Worth noting: Canada is the 2nd largest country in the world
with 6.7% of the world's land area. One more factoid, and yes - this is
all to do about gold! The Canadian Shield represents about half of
the land area of Canada. So, in theory we have barely scratched the
surface when it comes to exploring and producing gold in Canada. After catching all the slow rabbits and for a
myriad of reasons (political, land ownership issues, remote and thereby
expensive access to properties, low gold prices, weather, etc.) many
Canadian miners found it advantageous to try their hand in foreign
countries. But now many of the once mining- friendly countries with
temperate climates, generous mining laws, etc. now offer increased risks.
Whether it is waiting for a property to be nationalized in Venezuela or
getting out of the way of escalating drug warfare in Mexico, it is all
leading up to many investors shunning companies with properties in
troubled countries.
I think it is obvious to the majority of investors - red flags are
popping up around the globe. We have moved from a period of relative
stability to one where the country risk factor can no longer be ignored.
That being said, I do offer a
caveat: I will consider investing in a junior gold company that is not
under the safety of the North American umbrella, but does offer an
irresistible and compelling narrative. Two key factors would have
to be in place - a respect for mining companies working within the
country's borders and a respect for the law by the citizens of the
country.
Canada Continues its World-Leading
Performance
According to the most recent survey by the Fraser
Institute, interest in mining in North America continues to
increase. Three Canadian provinces were in the top twenty North American
jurisdictions: Quebec leading the way for three years in a row. I do not
think it a coincidence that almost the entire province of Quebec is in
the Canadian Shield.
Rated number seven is a surging
Ontario. Evidence would have it that some of the new discoveries have
come as a result of the Ontario Government's $19 million program,
"Operation Treasure Hunt", commenced in April, 1999. Information
on publications describing the Operation Treasure Hunt and other recent
Ontario Geological Survey projects is available through the Ministry of
Northern Development and Mines Website at http://www.mndm.gov.on..ca/MNDM/MINES/default_e.asp
Continuing to Focus on the Business of
Gold.and Profiting
I intend to stay with my November investment strategy of buying bullion
on the dips while I continue to unearth artificially low priced junior
gold companies. In my opinion, this has WIN written all
over it. If you have been reading previous reports, you know the supply and production
are in crisis - and many feel that this situation will not improve any
time soon. "Industry-wide cuts in exploration spending and activity,
as miners try to put a lid on costs, could send commodity prices soaring
when economic activity rebounds," Ernst & Young said in a recent
report, adding, "In many cases, the juniors are suspending
exploration altogether, or as much as they dare without compromising
mineral rights."
Over the months I have supplied some compelling
information on the rush to gold versus the decline in the America dollar.
I feel it is only common sense when on one hand, government prints vast
amounts of money out of thin air - while on the other hand, we have an
increasing demand for the traditional historic measure of wealth (gold)
that is becoming scarcer by the day. I will continue to report, you will
continue to decide: gold versus dollar.
A final thought worth sharing has to do with an
investment strategy book that focuses strictly on gold. (The Ultimate Gold Stock Trader). I
read it, appreciated the information found within its
pages....then promptly forgot it on a shelf along with other such books.
The other day I decided to go back to Reginald Ogden's book and after
re-reading it, have decided that "The Ultimate Gold Stock Trader"
is one of those 'must read' books. Although written some years ago, most
of the common sense information continues to hold great
value.
Larry Myles
Larry Myles Reports
http://www.larrymylesreports.com
604-408-7600
TF: 1-877-405-7600
info@larrymylesreports.com
"So you think that money is the root of all
evil. Have you ever asked what is the root of all money?"
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