We'll be using this thread to discuss precious metals and their investments.

Analysts Bullish On Gold for the Week

By Chris Poindexter

5/28/2012

Precious metals analysts are, as a group, feeling bullish on gold prices next week with a significant majority expecting prices in the $1,600 an ounce range next week.

Last week gold closed strong but still down for the week at $1,572.20 an ounce and silver finished the week at $28.49, down less than a percent on the week. The silver/gold ratio ended the week down a point to 55.

The trading optimism for next week, which doesn’t start up again until Tuesday because of the holiday, stems from the feeling that the Fed is going to announce some kind of stimulus plan.

Keep in mind that stimulus may not be limited to the Federal Reserve. The European Central Bank will almost certainly undertake some program to pump cash into a struggling Euro-zone over the strident and persistent objections of Germany.

Where it could all go wrong is if the Fed snuffs at another round of stimulus leaving Operation Twist to expire in June with no imminent replacement. That would certainly spur an even greater rush to the dollar.

I’m going to side with the analysts betting the Fed will be moved to another round of stimulus. The Fed can’t stand by and watch the dollar get stronger and stronger in the face of current employment numbers. If Bernanke doesn’t stay competitive in the global race to the bottom in paper currency, then we can expect layoff notices to dominate the headlines. That’s just not going to happen in an election year.

This price trend will reverse at some point; there are just too many bullish indicators for gold out there for the downtrend to continue indefinitely. Besides, the mid-$1,500 an ounce price range is not a bad entry point no matter what happens down the road. As always, keep some cash in reserve if prices do drift sideways or down in the near term.

Look for sales of bullion-priced 1 ounce bars. While there are fractional bullion products out there, the markup is higher because the cost of production is still the same.

With the silver/gold ratio still high, I might split some of my regular buy with silver. While silver is going to be influenced more by the global manufacturing picture, it has managed to track pretty closely with gold through the current volatility.

I still maintain that we’re going to look back on these days as a golden buying opportunity for precious metals.

The Golden Constant

by David Galland
Casey Research

May 28, 2012

Glancing at the news most days, it's hard not to feel like Bill Murphy's character in Groundhog Day. In the event you are unfamiliar with the movie, in it Murphy's character becomes trapped in the same day… day after day.

In the current circular condition, we have the powers-that-be assuring us that the next high-level meeting will finally produce a permanent fix to the broken economy, essentially solving the sovereign debt crisis. Then, in no more than a few days, or at most a couple of weeks, the fix is revealed to be flawed and the crisis again sparks into flames. Followed shortly thereafter by yet another high-level meeting – and the cycle begins anew.

While the characters may change – one week it is Greece, the next it is Spain, the next it is France, the next it is the US, the next it is Greece again, etc., etc. ad nauseam – the detached observer who steps back to a distance sufficient to view the larger picture can only come to the conclusion that we are now well outside of the bounds of the normal business cycle.

As we here at Casey Research have written on this topic at great length, I don't intend to dwell on this topic today, but I did want to loop back in just long enough to comment on the recent price action in commodities, especially gold, in the face of the continuing crisis.

Today, a glance at the screen reveals that gold is trading for $1,565. For comparative purposes, as revelers warmed up their vocal chords to sing in the New Year on the last trading day of 2011, gold exchanged hands at $1,531. And exactly one year ago to the day, gold traded at $1,526 for a one-year gain of a modest 2.6%.

A year ago, the S&P 500 traded at 1,325, while today it trades at 1,318, a small loss. Yet, have you noticed we don't hear much about the imminent collapse of the US stock market, as we do about gold? This perma-bear sentiment about gold on the part of what some people lump together under the label "Wall Street" is especially apparent in the gold stocks.

Using the GDX ETF as a proxy for the sector, we see that the shares of the more substantial gold producers are off by an unpleasant 24% over the last year. More on the topic of gold shares momentarily, but first let's round things out by also looking at the price action of a couple of other core components of the global economy.

For instance, a year ago, a barrel of WTI crude sold for a tick over $100. A couple of weeks ago, it was still selling for $102, though it has slid a bit to $91 today. Even so, that is still considerably higher than where it traded as recently as New Year's 2008, when it was just $38 per barrel. Since that low, the price of oil has made a steady advance and for the last year and a half has traded right around $100/bbl.

Then there is the matter of base metals. Copper, for example, traded at $8,980 per tonne a year ago, and is today at $8,289, a loss of almost 11%. Likewise, the iron ore price is off by 15% over the last year, and zinc is off by 13%. Even the minor monetary metal with industrial applications, silver, is off 8.39%.

With that "baseline" in place, I would like to now turn to the current outlook for gold, and touch on some of the other commodities as well.

• Gold. In the context of its secular bull market, and given that absolutely nothing has gotten better about the sovereign debt crisis – only worse – gold's correction is nothing to be concerned about.

  I know the technical types will point to levels such as $1,540 as important resistance points – and there's no question that if gold was to break decisively below that level, and especially below $1,500 – that a lot of autopilot trades would kick in and put further pressure on gold.

  Yet, when you view the market through the lens of hard realities, which is to say, by focusing on the intractable mess the sovereigns have gotten the world into… in Europe, in Japan, in China and here in the US… then viewing gold at these levels as anything other than an opportunity is a mistake.

   

• Gold Stocks. As far as the gold stocks are concerned, I consider today's levels to be extraordinarily compelling for anyone looking to build up a portfolio, or to average down an existing portfolio.

  I say this for a number of reasons, starting with the contrarian perspective that this may now be the most unloved sector of the stock market. No one wants anything to do with gold stocks, and hasn't for some time now. As a consequence, the sellers will soon dry up, leaving almost nothing but buyers to push the sector back to the upside.

  This contrarian perspective is important because in today's world literally thousands of competent equities analysts plop down at the desk each trading day with the sole purpose of searching for prospective investments. Many of these analysts are backed by huge firms with billions of dollars at risk in the markets, and so are armed with high-powered computational tools of the sort that was unimaginable even a few years ago. All of these analysts, armed with all their computational power, habitually scan a universe that totals about 4,000 publicly traded companies. Realistically, however, even a thin analytical screen will weed out all but perhaps 400 of those companies as being potentially suitable for investment.

  Thus, you have thousands of high-priced and well-armed securities analysts crunching pretty much the same data on a very small universe of possible investments. Given this reality, is it any surprise that securities are so tightly correlated? Which is to say, is it any surprise that these securities all trade right in line with the valuations that the analytical screens ultimately derive that they should? Which means there are really only two possible circumstances under which any of these stocks move up, or move down, by any significant degree:

   

1. Broad market movements. The saturated levels of analysis mean that, within a fairly tight range, all the stocks now move more or less together. Thus, with few exceptions, a big upswing or downswing in the broader market will send almost all stocks up or down together. To help make the point, I randomly pulled a chart of IBM and compared it against SPY (the S&P 500 tracking ETF) for the last year. Note the lockstep price movements:

1. OK, IBM is a big company, so it will have a lower beta than many companies, but the point remains that saturated coverage of the stocks greatly reduces the odds of any one issue breaking free from the larger herd, unless there is…
   
2. A surprise. All of these analysts, and all of their computerized analysis, help form a certain future price expectation for each security based on past financial metrics (earnings growth, return on equity, and so forth). Other than the broad market movement just referenced, or moves in line with a sub-sector of the larger market (e.g., if oil falls, oil-sector stocks will move up or down in sync), for a company to deviate in any substantial way from analyst expectations, by definition requires a "surprise" to occur.

   Of course, such a surprise can be positive, but because these companies are so closely watched, it is more likely to be negative. In the former category, a positive surprise might come in the form of an unexpectedly strong new product launch á la the iPad. In the latter, less happy category of surprise, it can be the blow-out of a big well in the Gulf of Mexico… or any one of a million other unanticipated vagaries of fate.

    

As investors, recognizing these fundamental realities is important because it points to where above-average market opportunities are most likely to be found (or not). And that brings us back to the whole idea of being a contrarian. As I mentioned, "Wall Street" has never much liked the precious metals, and by extension the gold stocks. Given the length of the gold bull market – which, in our view, reflects systematic risk in all the fiat currencies, but which Wall Street views as an indication of a fatiguing trend confirmed by the underperformance of the gold stocks – traditional portfolio managers are unhesitant in giving the boot to the few gold shares that somehow made it into their portfolios against their better judgment.

If our thinking is not clouded by our own bias, then it would behoove us as good contrarians to buy these shares from the eager sellers at such unexpectedly favorable prices. So, is our own bias leading us to believe in gold and gold stocks when virtually the entire army of analysts won't even consider them? Some inputs:

• Gold prices remain near historic highs – and that has a significant impact on the bottom line of the gold producers. Barrick Gold Corp. (ABX), for example, currently boasts a profit margin of over 30%, better than twice that of IBM and almost ten times that of Walmart. While ABX sells for just 1.6 times its book value, IBM sells for 10X.
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• Interest rates remain at historic lows, producing a negative real return for bond holders. Unless and until investors are able to capture a positive yield – a potential stake through the heart of gold – there is no lost-opportunity cost for holding gold. And bonds are increasingly at risk of loss should interest rates be pressured upwards, as they inevitably will be.
• 
  
• Sovereign money printing continues – because it must. In today's iteration of Groundhog Day, the Europeans are once again meeting in an attempt to fix the unfixable, but the growing consensus – because there is no other realistic option left to them – is that they will have to accelerate, not decelerate the money printing. Ditto here in the US, where a fiscal cliff is fast approaching due to the trifecta of the expiring Bush tax cuts, mandated cuts in government spending from the last debt-ceiling debacle and the new debacle soon to begin as the latest debt ceiling is approached. The problems in important economies such as China and Japan are as bad, and maybe even worse.
•  
• Debt at all levels remains high. With historic levels of debt, rising interest rates are a no-fly zone for governments, because should these rates go up even a little bit, the impact on the economy and on the ability of these governments to meet their obligations would be dramatic and devastating. This fundamental reality ensures a continuation of policies aimed at keeping real yields in negative territory, meaning that the monetization/currency debasement in the world's largest economies will continue apace.

  To get a sense of just how bad things are and how soon the wheels might come off, sending gold and gold stocks to the moon as governments throw all restraint in money printing to the wind to save themselves and their overindebted economies – here's a telling excerpt and a chart from a recent article by Standard & Poor's titled, The Credit Overhang: Is a $46 Trillion Perfect Storm Brewing?

   

Our study of corporate and bank balance sheets indicates that the bank loan and debt capital markets will need to finance an estimated $43 trillion to $46 trillion wall of corporate borrowings between 2012 and 2016 in the U.S., the eurozone, the U.K., China, and Japan (including both rated and unrated debt, and excluding securitized loans). This amount comprises outstanding debt of $30 trillion that will require refinancing (of which Standard & Poor's rates about $4 trillion), plus $13 trillion to $16 trillion in incremental commercial debt financing over the next five years that we estimate companies will need to spur growth (see table 1).

(Click on image to enlarge)

You can read the full article here. While the authors of the S&P report try to find some glimmer of hope that roughly $45 trillion in debt will be able to be sold off over the next four years – even their base case casts doubt on the availability of the "new money" shown in the chart above. Note that this is the funding they indicate is required to fund growth. Which is to say that should the money not be found, the outlook is for low to no growth for the foreseeable future.

It is also worth noting that the analysis assumes that something akin to the status quo will persist – which is very unlikely given the pressure building up behind the thin dykes keeping the world's largest economy's intact. The landing of even a small black swan at this point could trigger a devastating cascade.

We have said it before, and we'll say it again: there is no way out of this mess. At least not without acute pain to a wide swath of the citizenry in the world's most developed nations. While this pain will certainly be felt by sovereign bond holders (and already has been felt by those who owned Greek issues), it will quickly spread across the board to banks, businesses and pensioners – in time wiping out the lifetime savings of anyone who is "all in" on fiat currency units.

In this environment, gold isn't just a good idea – it's a life saver. And gold stocks are not just a good contrarian opportunity, they are one of the few intelligent speculations available in an uncertain investment landscape. By speculation, I mean that, at these prices, they offer an understandable and reasonable risk/reward ratio. Put another way, every investment – even cash – has risk these days. With gold stocks, you at least have the opportunity to earn a serious upside for taking the risk… and the risk is much reduced by the correction over the last year or so.

Now, that said, there are some important caveats for gold stock buyers.

• With access to capital likely to dry up, any gold-related company you own must be well cashed up. In the case of the producers, this means a lot of cash in the bank, strong positive cash flow and a manageable level of debt.

• In the case of the junior explorers, the companies we like the most have to have all the cash they need to clear the next couple of major hurdles in their march towards proving value. That's because a company can have a great asset but still get crushed if it is forced to raise cash these days… and the situation will only get more pronounced when credit markets once again tighten as the global debt crisis deepens.

   

• Beware of political risk. Despite the critical importance of the extractive industries to the modern economy, the industry is universally hated by politicians and regular folks everywhere. If your company – production or exploration – has significant assets in unstable or politically meddlesome jurisdictions, tread carefully. And it's important to recognize that few jurisdictions are more politically risky than the US. This doesn't mean you need to avoid all US-centric resource stocks – but rather that you need a geopolitically diversified portfolio that you keep a close eye on at all times.
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• Know your companies. Some large gold miners are also large base-metals miners. And at this juncture in time, personally I'm avoiding base-metals companies like a bad cold. While most base-metals companies have already been beaten down – and hard – over the last year and a half, the fundamentals remain poor. Specifically, they not only have the risk of rising production costs and political meddling, but unlike gold – where the driving fundamental is its monetary role in a world awash with fiat currency units – the base-metals miners depend on economic growth to sustain demand for their products. In a world slipping back into recession – or perhaps, in the case of Japan and China, tripping off a cliff – betting on a recovery in growth is not a bet I'd want to make just now.

Having gone on longer than anticipated, I will now edge for the exit on this topic by pointing out that while it is hard to accurately predict the timing of major developments in any one economy, let alone the global economy, there are a number of tangible clues we can follow to the conclusion that the next year will be a seminal one in terms of this crisis.

For starters, there is the next round of Greek elections on June 17, the result of which is likely to be the anointment of one Alexis Tsipras as the head of state. An unrepentant uber-leftist whose primary campaign plank is to tell the rest of the EU to put their austerity where the sun doesn't shine, the election of Tsipras would almost certainly trigger a run on the Greek banks, followed by a cut-off of further EU funding and Greece's exit from the EU. And once that rock starts to slide down the hill, it is very likely that Spain and Portugal will follow… after that, who knows? As I don't need to point out (but will anyway), June 17 is right around the corner, so you might want to tighten your seat belt.

A bit further out, but not very, here in the US we can look forward to the aforementioned fiscal cliff. Or, more accurately, the political theatrics around the three colliding co-factors in that cliff (the approach once more of the debt ceiling, the expiring tax cuts and mandated government spending cuts). While the outcome of the theatrics has yet to be determined, it's a safe bet that the government will extend in order to pretend while continuing to spend – and by doing so, signal in no uncertain terms that the dollar will follow all of the sovereign currency units in a competitive rush down the drain.

Bottom line: Be very cautious about industrial commodities as a whole, at least until we see signs of inflation showing up in earnest, but don't miss this opportunity to use the recent correction to fill out that corner of your portfolio dedicated to gold and gold stocks.

(Silver? Personally, I own some silver investments and believe it will do just fine over time – but I see no big rush to build a bigger position today as the metal's industrial applications are likely to be a drag on its price for the next little while.)

May 28, 2012

David Galland is the managing editor of Casey Research.

Yesterday in Gold and Silver - Ed Steer- Casey Research

Good point six. The HFT and machines dive into or out of sectors together because they all use the same alogrithms to determine what to do in any specific set of circumstances. It's awful hard to try and front run the computers. If you're buying P.M. stocks just try to buy when gold is down and the sector is on sale and then just hold on. Trading is much harder than it used to be.

Don Coxe: Gold and Natural Resources are Incredibly Cheap, With Gold in the Ground at a Discount

http://www.financialsense.com/financial-sense-newshour/guest-expert/2012/05/29/donald-coxe/gold-and-natural-resources-are-incredibly-cheap

Jesse's Cafe Americain

May 29, 2012

29 May 2012

 

 

Gold Daily and Silver Weekly Charts - Gold Chart Shows About 10,000 Contracts Dumped in Quiet Market

 

 

I felt this bear raid coming on the tape, from the action I was seeing. I cannot express it better than that.

So I had sold my silver bullion trading position and trimmed back gold, adding a hedge in the first hour of trade.

The hit came around mid-day after the European close as you can see on the 5 minute June futures chart.

One does not drop 11,000 contracts in a ten minute period in what might be called a reasonable trade.


Will the CFTC investigate, asking the seller why perchance they did this? No, and that in itself speaks volumes.

But the solution is not to try and trade these scandalously under-regulated markets, but instead to hold long term investment positions, preferably as far away from Wall Street as is possible.

I had suggested last week that calls that the 'bottom was in' might be premature. It is in the established playbook to hit the futures hard at least once after an options expiration which we had last week.

The shorts are trapped, especially in silver, and they have powerful friends in the government and the media. There are some very worried people out there. Big things may be coming.

The flock of black swans facing gold

Deliberations on World Markets Author, Ian McAvity, believes that the world faces a number of major challenges that could see gold go significantly higher this year.

Author: Geoff Candy
Tuesday , 29 May 2012
 

GRONINGEN (Mineweb) -

While the commodity spectrum as a whole peaked out around 14 months ago the sheer number of potential black swan events on the horizon could see gold breach $2,500 before year-end.

This is the view of Deliberations on World Markets Author, Ian McAvity, who maintains " the Continuous Commodity Index peaked in early 2011 and [commodities] have been declining and will continue declining - that's in a sense what the stock markets have been reflecting."

But, he says, gold is increasingly trading like a currency at the moment, a behaviour that is amplified by the fact that the speculative money has now largely been chased out of the gold market.

Speaking on Mineweb.com's Metals Weekly Podcast, McAvity added, the whole point of the various levels of the gold standards that have been tried over history is largely an attempt to discipline against the irresponsible printing of paper.

"What you've seen over the last couple of years is a lot of the newly wealthy emerging countries quietly accumulating gold... I think a lot of people are converting paper - not just euros but also US dollars into tangibles and doing it quietly. Nobody advertises what they're buying until after they've bought it."

As a result of this and a multitude of other factors, McAvity, believes that gold is unlikely to trade much below $1500 but, he says, "I still think that we're going to have events - various black swans unfolding over the course of the year that will have the gold price up to $2500 sometime by year end."

Indeed, McAvity says black swans are travelling in flocks at the moment so it is difficult to predict which might be the catalyst for a sharp move higher but, there are a number of significant ones over which he is keeping a sharp eye.

The first of these is the potential for the blow-up of a European bank.

"In a sense you've got a global bear market under way that in many respects I regard as being the second half of the events that started in 2007-2009 and I don't think that the global banking system today is any better than it was back then," he says.

But. he says, that the attitude of many of the US banks is that what is happening now is very much a European problem.

"If a European bank blows up, that problem will cross the Atlantic in a Nano-second because the Federal Reserve was bailing out some of the European banks in 2008-2009 and they'll be doing it again. So we're still pretty much in the same mess and it comes down to one very simple question - how can you borrow your way out of a debt problem... and that's what they've been trying to do."

The second significant one is linked to currencies, of which McAvity says, the dollar is "the best looking horse in the glue factory."

"I think we're getting to a point where if the euro breaks 1.20 that probably will become the crisis level that could spark a major exodus out of the various euro currencies. Switzerland has already made it clear that they've got a line in the sand, but I think if the euro was to break 1.20 in the dollar, then you might see a greater level of panic coming out."

And, as McAvity points out, a strong dollar doesn't have to mean a weak gold price.

"If a trillion dollar's worth of euros was fleeing because the euro was about to blow up, perhaps 800bn, maybe 850bn of it would flow to the dollar, maybe 150bn of it would flow to gold and the relative volatility of gold is such that that 150bn going to gold might actually end up driving the gold price up in dollar terms too."

The third black swan event that McAvity is concerned about is the build up of Israeli pressure over the past year on who's going to go in and take out some of the Iranian nuclear facilities.

"I was very concerned when I saw Israel call up six battalions of reserves about three or four weeks ago and it hasn't been in the headlines much because they're negotiating in Baghdad about not throwing Iran out of the system if they allow inspectors and that sort of thing.

"But when you look back at the history of violence in the Middle East, particularly Arab-Israeli wars and various uprisings, they all seem to have occurred between May and July. So in a sense it's almost a seasonal risk that has me extremely nervous about something going on in the Middle East that right now nobody seems to be focused on."

A week ago or so I went thru the charts of a lot of PM stocks and many were at new 3 yr. lows, even though gold was 50% higher.  So I took a shot with Aurizon (AZK) and Brigus Gold Corp (BRD) both under $1 and producing with good prospects.

Well, it would be a lot easier for a stock like that to triple than for Newmont or Barrick to go up 50%.