LBMA Now Staring At Another Gordon Brown Abyss

Today whistleblower Andrew Maguire warned King World News that the LBMA is now staring dangerously into the abyss once again.  Maguire, who recently appeared in the CBC production “The Secret World of Gold,” described this stunning situation as “very similar to the abyss that Gordon Brown stared into when the Bank of England was forced to bailout Goldman Sachs 13 years ago.”  Below is part one of a series of extraordinary written interviews that will be released today with Maguire on King World News.

Maguire:  “The mainstream media has this myopic focus on the over 600 tons of GLD redemptions, while in reality we are witnessing massive bullion demand far in excess of these relatively small ETF redemptions.  This bullion demand is actually putting enormous pressure upon immediately deliverable LBMA bullion stocks.

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What is notable, Eric, is that since the ABN AMRO bank default became public, it forced that defensive attack by the Fed and the Bank for International Settlements….

“I know we talked (on KWN) about it right as it happened, and it forced that defensive attack.  It was a desperate attempt to bail out an imminent collapse of the largest bullion houses in London.  And despite an over $400 rigged decline in the gold price, Eric, here we are back full circle, with the bullion bank inventories again under stress.


About That Supposed Correlation Of The U.S. Dollar And Gold…

One of the most widely accepted truisms in what passes for our financial media is that the dollar and gold are correlated: when the dollar weakens, gold rises, and when gold rises, the dollar declines.
Nice, except this vaunted correlation isn’t remotely visible in the charts. Let’s have a look. Here is the 5-year chart of the DXY Dollar Index, the most widely quoted measure of the U.S. Dollar:
And here is a 5-year chart of GLD, a proxy for gold:
I’ve marked the charts up seeking the sort of correlation that is accepted with near-religious faith and come up with near-random fluctuations. Let’s start with the basics of correlation:
1. Do the peaks and troughs align? No, they don’t. If gold and the DXY were correlated, we’d expect gold to bottom when the dollar peaked and the dollar to hit its lows at gold‘s peak. Instead, we find gold was rising when the dollar hit its last peak in mid-2010.
At gold‘s peak, the DXY was around its previous lows hit in 2008 and 2009. At the dollar’s previous low in 2008 at 72, GLD was around 100; at the dollar’s next low in late 2009 at 74, GLD was around 110. At the low in 2010 at 73, GLD was 150.
Conclusion: the peaks and troughs do not align–not even close.
2. Do the trends up and down align inversely? In other words, when gold is rising, is the dollar declining, and vice versa? Nope. The supposedly inversely correlated DXY and GLD have risen in tandem for several significant stretches of time.
We can play mind-games and claim the correlation inverted during these periods, but what would we base this claim on? Why did the correlation invert during these periods?
3. Were major uplegs/downlegs matched by similar percentage moves in the other index?If there was any sort of real correlation, we would expect to see a 30% rise or fall in one align with a similar-sized inverse move in the other.
For example, gold dropped by 30% since October 2012, yet the DXY rose a mere 5% in that period, crossing a price line it has crossed 9 times before.
When the DXY rocketed up 20% from late 2009 to mid-2010, we’d expect gold to plummet by 20% in the same timeframe. Instead, gold rose in tandem with the dollar.
4. If one has climbed by 70% since late 2008, the other should decline by roughly 70%.Instead, the dollar is back where it was in late 2008 at 84, a price level it has crossed 10 times since late 2008.
Gold has risen 70% from its late-2008 level. How are these dramatically different price movements correlated?
Conclusion: there is no correlation between gold and the U.S. dollar index. Not even close.The two move independently; any apparent correlation is semi-random signal noise. They are not on a simplistic see-saw.

Finally, A Reason To Buy Gold Miners

A strange thing occurred at 2:00 PM Eastern Time on Thursday. While the price of the SPDR Gold Shares ETF (GLD) continued its free-fall, curiously the price of the Gold Miners ETF (GDX) jumped on high volume, adding 2.5% for the day.

My first reaction was that the abnormal divergence between the spot cost of the metal from the price of miners’ shares must be due to some kind of quarter-end portfolio rebalancing. Upon further review of the day’s news, I think the miners’ revival may be the result of another impetus, which may continue to contribute support to miner stocks.

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As the market opened, it appeared that gold was due for a “dead cat bounce” from drastic losses earlier in the week, and the Miners rebounded with the metal. However, by 1:00 PM, GLD had given back the gains and the miners were pulling back as would be expected. Near 2:00 PM a story was circulating on the newswire that the World Gold Council had issued new guidelines for analyzing gold mining companies. The WGC distributed “a Guidance Note on ‘all-in sustaining costs’ and ‘all-in costs’ metrics, which gold mining companies can use to report their costs as part of their overall reporting disclosure. The World Gold Council has worked closely with its member companies to develop these non-GAAP measures which are intended to provide further transparency into the costs associated with producing gold.”

In order to understand the significance of this news, we should revisit the Mark Twain assessment of the industry: a gold mine is a hole in the ground with a liar standing next to it. Too many investors have been burned by gold miners’ claims, and distrust keeps many others away from legitimate mine operators.

In order to prevent deceptive representation of a miner’s potential for profitability, the US Geological Survey, SEC and Canadian authorities have created strict reporting requirements. Categorization of a mine’s resources must meet certain requirements, and a more complete explanation of this may be reviewed in our SA article, Beware The Trap Door Under Miner’s Silver Reserves. Despite all the attempts at clarification, most investors have little faculty for understanding exactly what miners mean when they tout, “our production costs are below $400.” It is frustrating and difficult to understand why a miner cannot earn more profits with the spot price three or four times the production cost.

The problem is that the “operating cost” or “production cost” only factors in a small portion of the miners’ expenses, excluding things like corporate G&A, amortization, reclamation, some exploration and capital expenses, etc. A better measure is the WGC’s “sustaining cost,” which is the actual cost to sustain the operation, including all the above and other costs. The sustaining cost for most miners exceeds $1000 per ounce, including all the costs incurred by the company.

We think this news proved positive for miners’ stocks for the following reasons:

  • The guidelines define an acceptable alternate to GAAP accounting that is consistent in the industry.
  • They more realistically allow the comparison between the spot price and the company costs, and its relationship to profits.
  • They bring to the investing public the realization that the spot price of gold cannot fall to triple digits without drastically affecting supply.
  • They enable legitimately efficient companies to differentiate themselves from miners that promote their prospects with partial information.

The definition of “all-in costs” and “sustaining costs” can be found in the WGC guidance memo.

Although the “sustaining costs” have not been published for most miners, we added a calculation from the Alamos Gold investor presentation in the following table we sent to clients recently:

AGI $ 812 1.7% 1.9 No Debt/Buybck
EGO $ 928 2.2% 2.1 China/Political
AUY $ 945 2.7% 2.1 Debt/Political
ABX $ 1,120 4.3% 2.2 High Debt
CAGDF $ 1,126 4.5% 4.0 Asia/Political
NEM $ 1,129 4.7% 2.6 Debt/Divvy Inc.
GG $ 1,168 2.4% 2.2 Moderate Debt
AEM $ 1,245 3.3% 2.6 High Debt
IAG $ 1,257 5.7% 2.7 Debt/Low Rating
FCX UNKNOWN 4.4% 2.2 Diversified

It is clear why Alamos Gold chose to highlight this metric in its presentation. In addition to low sustaining costs, we prefer mining companies to have some dividend yield, a moderate debt level and low political risk. As a comparison, the table also includes the current YAHOO analyst consensus number (lower is better).

Alamos Gold is the clear winner in the cost category, and the debt free balance sheet offers strong support for growing dividends even if the spot price drops. The dividend is lowest among these ten, but the company recently announced a share buyback program. In the recent earnings report, the company explained its intent to continue exploration and development of its properties, and these are initiatives that can readily be cut back if the gold drop becomes worse.

Yamana Gold is also attractive in this comparison with very low costs. Debt is also moderate, but some important properties are in politically-unpredictable Argentina. AUY has sold off more severely than most, so it may benefit from a bounce.

We also think that Newmont Mining and Goldcorp, Inc. should be on the watch list for bottom fishers.


We had considered $1246 per ounce as the support level for gold, although that appears too optimistic. That is the level in September 2010 when the price of gold exploded up, creating a gap-like phenomenon that had to be backfilled. It also is a point where some miners must evaluate how to sustain their operations, possibly to shut-in mines or slow production. This eventually will support the price of gold, although the immediate bearishness requires caution. However, if investors understand that the price of gold cannot continue indefinitely below its production price, miners like Alamos, Yamana and Goldcorp may justify a long-term investment. With the new reporting options from the World Gold Council, these stocks will be able to differentiate themselves from the crowd going forward.