Japan and China start new (bidding) war (for gold)

Reuters / Tyrone Siu

Citizens of America’s two biggest creditors China and Japan are now fighting each other to buy Gold and Silver. But could they be doing something more intelligent with their time and money?

Mrs. Wang, China’s mythical housewife is buying Gold hand over fist, so is Japan’s mythical housewife Mrs. Watanabe. Unlike during past downturns in the price of Gold, the peasants (anyone not a partner at Goldman Sachs or JP Morgan) are reacting with long queues at the local bullion dealer with fistfuls of fiat, fractional bank reserve notes to swap for the currency of kings: Gold.

Apparently, the emerging world ‘gets it.’ There will never be an exit from the Quantitative Easing by any of the world’s central banks. (The ECB has just reduced rates to ½% to match the UK). The Fed in America is sticking to their ultra-low rates and Japan led the parade decades ago with their Kamikaze ZIRP (Zero Interest Rate Policy) monetary madness.

In private conversations, the world’s central bankers let slip that their plan is to keep interest rates close to zero for 10, 15 years or longer – however long it takes to increase the global population enough to create enough ‘violence growth’ to start retiring some of the $100 trillion in debt on these bank’s books.

In other words, there is no exit. There can be no exit. There will only be more money printing and all fiat currencies around the world will continue to be debased until the sheer size of the global population is so great growth occurs as overpopulated areas start fighting each other for air, water, and food. This is the banker’s plan: everybody fighting everybody with the survivors needing credit (inflation) and the losers dying (deflation).

Citizens of America’s biggest creditors; China and Japan, aren’t waiting around, they are doing the equivalent to picking up their pitchforks and torches and buying gold in record amounts. On the NYSE $16 bn. in ‘paper gold’ was sold via the exchange traded fund GLD while Chinese housewifes (and other members of their households) bought that amount and then some. The wealth that is Gold is being transferred from West to East. Paper gold is being swapped for physical.

And what about the China and Japan saber rattling the disputed Senkaku islands? I implore both the Chinese and the Japanese to see past this silly island dispute and instead focus your combined, massive buying power to take enough physical gold and silver off the market to put the Western paper bugs and market manipulators out of business. Your skirmish over islands is a rear-guard action that will amount to nothing. Instead, fight the real enemy: the US dollar and the bankers who – by virtue of the Dollar as world reserve currency – get your people to finance America’s wars in the Mid-East and Africa.

This is the time to do some deep soul searching and realize the enemy is not each other China and Japan, but the common enemy, the US dollar.

Source: http://rt.com/op-edge/japan-china-war-gold-827/

Gold – Another Post-Crash Update

A Possible Bullish E-Wave Interpretation

When looking at the chart of gold in dollars, it is obvious that a number of bearish interpretations and chart targets can be derived from it. We were thinking about how to go about an Elliott Wave count of the chart, and one possibility that suggests itself is that ‘wave 1 down’ was a rare leading diagonal, and that after a wave 2 correction, we are now somewhere in wave 3 down.

However, because leading diagonals are so rare, we have to consider whether a bullish interpretation of the chart is also possible, especially in view of the panic volume at the lows and the extremes in bearish sentiment that were recorded (more on those further below).

Here is what we have come up with. Please note, we do not claim that this is a ‘correct’ interpretation – we merely note that it is a possibility that would conform with Elliott Wave rules.

Gold’s Elliott wave count, the bullish possibility- click to enlarge.

One caveat is that wave ‘C’ may not be finished. There could be further subdivisions (and hence additional declines) without necessarily invalidating the concept as such. Apart from sentiment, one further consideration that lends support to the above interpretation is the fact that the entire movement since the 2011 high does look corrective in nature. We can detect a plethora of three-wave moves, but no big 5 wave moves except those in the proposed wave C.

Sentiment and the CoT Report

It seems almost superfluous to mention it, but sentiment on gold has become even more bearish than it already was prior to the recent crash. Luckily this is something that can be quantified, and we show a few of the most recent relevant data points below.

A new low in Hulbert’s HGNSI (gold newsletter sentiment indicator – at minus 37.5. This means that on average, gold timers now recommend a 37.5% net short position in gold. Given the fact that a number of newsletter writers are perma-bulls, this is quite an astonishingly high percentage- click to enlarge.

Gold, public opinion – this indicator merges several prominent sentiment surveys into a single number. A new multi-year low in the bullish consensus has been recorded- click to enlarge.

Now let us briefly discuss the commitments of traders report. Several observers have argued that the fact that the net position of large speculators has actually remained long and has in fact become slightly more ‘net long’ than it was prior to the plunge, is bearish. For example, well-known internet gold pundit Clive Maund writes: “…despite the massive drop in price, the COT structure is little changed. This is viewed as strongly bearish”.

This interpretation is erroneous. The group that is most knowledgeable about gold‘s future direction are in fact the big speculators. It would have been very bearish if they had added to their gross short positions. The fact that they have covered a good portion of their shorts is bullish, not bearish. It means they perceive less downside risk than before, and we would note that Mr. Maund previously regarded their growing gross short position as bullish; it wasn’t, and we mentioned at the time in these pages that we felt it was a major fly in the bullish ointment. We noted that obviously, a growing speculative short position could add fuel to any developing rally. However, we then added this caveat, which proved to be prophetic in hindsight:


“However, we hasten to add that one should definitely not assume that just because these short positions have risen, a market rally is necessarily imminent. In fact, it would be a very bad sign if money managers became so bearish as to flip over to a net short position.

It is short term bullish when gross and net long positions are reduced in a correction in an uptrend, but it is far less bullish when the decline in the net long position owes mostly to an increase in shorts.

Let us not forget: the big speculators are the group that tends to be right about gold’s major underlying trend. Their growing skepticism is not an unalloyed positive sign as many other writers currently maintain. Quite to the contrary, it is a reason for concern. Bulls would want to see this gross short position reduced as quickly as possible.”

In so many words, those who believe that the commercial hedgers are the ‘smart money’ in gold simply have it wrong. This is not meant to detract from the otherwise often very good quality of Mr. Maund’s technical observations. We only have a beef with his interpretation of the COT report as well as his misconception about what the ‘bullish percent’ chart of the GDM or the HUI actually depicts (this chart does not show us the degree of ‘bullish sentiment’, but the percentage of gold stocks that are on a Point & Figure buy signal).

There has been another positive development in the CoT report, and that was the ongoing liquidation of long positions by small traders. Historically, this is a group of traders that contributes to a positive outlook if its net long position is as small as possible.

Commitments of traders in gold futures: big speculators have covered some of their shorts, small speculators have liquidated longs. This is bullish, not bearish- click to enlarge.

What bulls would want to see from here on out is a further reduction in big trader shorts, ideally to a level of between 30 to 40,000 contracts gross or less.

Gold and the Rand

The South African Rand has weakened further as gold and platinum were clobbered, with the result that the gold price in Rand terms remains within its  trading range of the past few years. As we write these words, Harmony Gold (HMY) is up by nearly 13% on the day, trading at a still very low $5.20 per share. The huge gap between HMY and the Rand gold price can be seen below:

Gold in Rand and the share price of HMY (green line) – eventually, this gap should close – click to enlarge.

As a matter of fact, Harmony has managed to keep cost increases in check last quarter due to the weakening Rand. The same can probably be expected from other South Africa based mining operations as well – a gradual improvement in the escalation of costs. We think that the current prices of these shares represent an extraordinary opportunity, but obviously everyone will have to do his own due diligence on that point.

There are numerous risk factors, not the least of which is the marginal nature of South African deep level mining operations. They would not be able to cope with a large decline in the gold price. On the other hand, this means also that they sport extraordinary leverage to a rising gold price – it would not be incorrect to refer to them as cheap call options on gold.

Source: http://www.acting-man.com/?p=22854

Portfolio Manager Greg Orrell: ‘My Belief in Gold Has Not Wavered’

After the extreme volatility of gold in the last few weeks, OCM Gold Fund Manager Greg Orrell is more convinced than ever of the necessity of owning gold assets. In this interview with The Gold Report, Orrell lays out the rationale for buying these cheap gold stocks around the world, including California of all places.

The Gold Report: How has your bullish view on the gold sector evolved as a series of crises has jolted both the international stock market and the price of gold?

Greg Orrell: First off, my belief in gold as a monetary asset has not wavered. Japan basically admitted that it is bankrupt with its intention to aggressively debase its currency. Normally such actions would invoke, and may still, a race to the bottom as each country engages in economic warfare to deal with its debt issues. At this juncture the fear of global deflation among the G7 crowd remains its worst nightmare, especially as additional stimulus by the Federal Reserve is showing diminishing returns. With high debt levels in both the private and public sectors around the world, stimulating economic growth is proving elusive. These alarming events are setting the stage for the next leg up in the dollar gold price, in my opinion. The fiscal and monetary crisis is ongoing and underscores the necessity of owning gold assets.

Though agonizing, the past 18 months have been nothing more than a consolidation for gold from the September 2011 highs of $1,900/ounce ($1,900/oz). The recent decline in gold prices below $1,500/oz is not the end of the bull market in gold, despite the barrage of negative commentary by those wanting to dance on gold’s grave. The destruction of currencies is in full bloom, but it is not a straight line. The problem for many gold investors is that they can see the endgame. Gold prices rise in a straight line at the end of a monetary system, but we are not there yet. It takes some patience to hold the course while the establishment fights tooth and nail to keep the dollar system from failing.

TGR: The years 2009 and 2010 were better for gold stocks. Can you talk about how things changed after that and how investors can best respond to the precipitous drop in market value?

GO: A number of factors go into the poor performance of the gold shares over the past couple of years besides the gold price. We have seen investor rotation out of defensive posturing and then the gold miners ended up being their own worst enemy. Gold share investors became concerned, and rightfully so, with rising operating and capital costs, poor capital allocation and growing resource nationalization. This in turn made bullion exchange-traded fund (ETF) products more attractive and prompted a trend of shorting the miners versus long gold positions.

Let’s look at the world’s largest producer, Barrick Gold Corp. (ABX:TSX; ABX:NYSE). It incurred cost overruns at the Pascua-Lama project in Latin America. And it overpaid for a copper asset in Africa after spinning off its African gold assets a couple of years earlier. Each of these instances led to contraction of cash flow and net asset value multiples for the whole sector, and set a theme for the industry. At this point, the pendulum has swung too far, with the shares basically discounting everything that could go wrong and more. Therefore, if an investor is not in the gold sector, now is an opportune time to take advantage of the significant decline in share values as there are signs of positive change taking place within the sector.

TGR: Can you provide any insight as to why longer-term investors, and also new gold investors, should buy into the current gold market?

GO: The rationale for owning gold assets remains simple: global deterioration of sovereign credit and a growing need to debase currencies in order to meet future obligations, whether it’s here in the U.S., Europe or Japan. The policy of socializing risk with monetary and fiscal policy has destroyed the balance sheets of the Western world. We are in a phase of experimental central banking, which I believe is going to end badly due to the dislocations of capital it has caused through prolonged periods of negative rates.

In the event economic growth were to take hold, an unleashing of built up reserves in the system would set off inflation with a corresponding rise in rates. Just imagine the effect of a change in the direction of interest rates and the collateral damage that will create in the bond markets and the interest rate derivative markets after all of these years of managing a zero interest rate policy. The cost of funding the U.S. deficit will rise exponentially. More quantitative easing begets more quantitative easing. Investors need to have some type of asset to balance their portfolios. Policymakers who got us into this mess are unlikely to navigate us out of it. History tells us that only gold is a good place to be.

TGR: Is now a good time to be looking at the gold miners, including the juniors?

GO: Absolutely. With current sentiment negative on the miners, it is an incredible opportunity to buy gold shares and recapture lost value. A major problem for the mining industry is that its business model is flawed. Gold investors are not strictly interested in taking money from one hole in the ground and putting it in another. Investors want participation in cash flow through dividends and earnings leverage to higher gold prices along with the potential for increased shareholder value through discovery . Not paying dividends was great for management, geologists, engineers and everyone but the investor who was locked out of the cash flow.

Now falling share prices have put the onus on management to compete with the ETFs for investor dollars. A number of CEOs are being shown the door. Marginal projects are being shelved. Dividends are increasing. Management is beginning to understand that the needs of shareholders must be prioritized. Granted, the decline has been painful, but in my 30 years in the business, this is exactly what needed to happen.

TGR: Has the balance in your portfolio between bullion, large caps, mid caps, small caps, ETFs, royalties and cash changed over the last five years?

GO: Because production is cheap, we are weighting toward the large- and mid-cap producers. They are poised to recapture value as sentiment turns around in that space. The smaller, macro-cap exploration and development companies are bombed out, and a number of companies are trading where market cap per resource ounce is down to $10 or lower. Those companies are interesting as long as they have a balance sheet and they’re not diluting their shares to keep the lights on. Royalty companies have outperformed along with bullion over the last five years because of all the negative factors that I mentioned previously. But I’m not adding to the royalty companies right now because the operating companies offer better value.

TGR: You’re not adding to bullion?

GO: Not at this time. We’re keeping bullion around 5–6%. The miners, in my opinion, offer tremendous value at this point with gold reserves in the ground.

TGR: Who are some of the companies you think are attractive in the middle and small spaces?

GO: Endeavour Mining Corp. (EDV:TSX; EVR:ASX) is interesting right here. The share price has been washed out because it is a higher-cost producer, around $900/oz. Its market cap is down to under $400 million ($400M) with 300,000 oz (300 Koz) of annual production in West Africa, but is slated to grow to 450 Koz over the next couple of years. That’s a 50% increase. Endeavour is driving expansion mostly from internally generated cash flow.

Esperanza Resources Corp. (EPZ:TSX.V) is cashed up with over $70M and with experienced management is developing a couple of attractive heap-leach projects in Mexico. One project can put up 35 Koz/year and another one can do 110 Koz/year. Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ) is a major shareholder. Esperanza could be an early day Alamos Gold Inc. (AGI:TSX).

Avala Resources Ltd. (AVZ:TSX.V), 50% owned by Dundee Precious Metals Inc. (DPM:TSX), is trading down at dirt prices. The company has an entire Carlin-style belt tied up in Serbia where it has outlined close to 3 million ounces (3 Moz) so far. The company’s market cap is $12–15M, with $9M in the bank; it’s not a bad option—the market will appreciate the optionality value on the company’s assets at some point.

TGR: Are you a fan of the royalty model?

GO: I am a fan of royalty companies. The revenue comes right off the top so royalty holders have no exposure to increases in costs and typically have exposure to increases in reserves. Royalty companies often acquire the royalties from the original property owners. Another form of royalty is the creation of a gold or silver stream: the royalty firm helps to finance the project and receives gold or silver in return. We have seen a pick up of companies selling either net smelter royalties or streaming deals on projects as a way to finance in a marketplace where equity capital has become expensive.

Source: http://www.theaureport.com/pub/na/15186