Gold & Precious Metals

Take Advantage ofl Metals and Mining Paradigm Shift – Exiting Easy And Economica

“Markets are reasonably efficient, most of the time, at setting prices. Where they are most likely to fail, though, is in correctly anticipating and pricing big, revolutionary, ‘paradigm’ shifts — whether a rise of disruptive technologies or revolutionary changes in geopolitics. We are living through one now.” – Crispin Odey

Ed Note: Be sure to read through to the conclusion at the bottom of this article:

Metals and Mining Paradigm Shift, Exiting Easy And Cheap

 

The massive growth of global prosperity over the last five centuries has been driven by easy and cheap access to critical materials:

  • Food
  • Fibre
  • Energy
  • Minerals

However since October 2001 the CRB BLS Spot Index has reached record levels.

commodities-25-1

The Spot Market Price Index is a measure of price movements of 22 basic commodities. The spot price is the price at which a commodity is selling for immediate delivery.

Commodity price rises could be caused by:

  • Raw materials shortages
  • Resource nationalism
  • Emerging market demand
  • Speculation
  • Intense weather pattern changes
  • War
  • Inflation
  • Hoarding
  • Low interest rates

Many people might assume that out of all the reasons given these three would be the main drivers:

  • War
  • Inflation
  • Emerging market demand

Inflation & War

Because central banks can increase the supply of money virtually at will, and do so, the value of all existing money decreases. The amount of goods and services remains the same, but now the amount of money chasing them has increased, this increased competition – more money (inflation) for the same amount of goods and services – causes prices to rise.

commodities-25-2

Governments and Central Banks want slowly rising prices. They pour money into the market to encourage growth so prices increase rather than decrease. Price decreases, or deflation (less money growth), slows economic activity – if people think prices are going to be lower next week they will not buy today, they will wait, this leads to a contraction in economic activity, something all governments fear.

Low interest rates play their part as well. When governments lower interest rates to stimulate borrowing businesses expand and consumers borrow to buy homes, cars and other goods. Demand for goods and services increase and so to do prices of commodities used in manufacturing.

Nations in Europe, and the U.S. will inflate (print more of) their currencies rather than cutting back spending or raising taxes. In a global race to worthless Asian economies will also have to print massive amounts of their currencies so they stay weaker then the US dollar. Asian exports have to be cheap for American consumers and American exports have to be more expensive then locally produced goods.

The buildup to war, and the actual running of a war is expensive. Governments will typically devalue their currencies by printing the money needed – very few people would ever consent to go to war if they were made to pay for it out of their pockets. How many Americans would consent to the trillions of dollars necessary for America’s endless wars and vast military complex if the money required came directly off their paycheques? Government control over the money supply makes the business of war easy to finance because the financial support of its citizens is not needed.

Actual war does not seem to be one of the main causes of the decade long commodities price increase, rather it’s the creation of the money necessary to go to war – government created inflation. In regards to recent wars, we haven’t had a global conflict, and the resultant massive global destruction and rebuilding, since World War II. Wars today are localized affairs and do not bring about the massive use of commodities for rebuilding as a global conflict would.

Throughout history periods of rising money supply growth has coincided with rising commodity prices, and falling money supply growth coincided with periods of falling commodity prices.

A key driver of higher commodity prices, global government sponsored inflation (and quite likely continuing war inflation) are locked in place for years to come.

Developing Country Demand

China’s plus nine percent annual growth, and other developing nations growth (averaging much less), are usually named as the biggest cause of price rises in the commodities markets. China has been growing at plus nine percent annually for well over two decades. Compounded that’s a lot of growth, add in other developing countries growth then realize a considerable period of this growth was spent in the commodity bear market. The growth story is suddenly an overnight sensation, inflations effects start to percolate, wars are started and speculators play.

A mismatch between demand and supply is not a new problem in commodity markets. It can and does take years to find and develop new resources and bring the commodities to market. If war and emerging country demand cause prices to rise – shortage caused price spikes – an increase in production (after a war or ramping up for developing country demand) would satisfy increased demand. But it hasn’t happened yet and it’s been over a decade since commodity prices have gone on their spectacular run.

So far inflation would seem to be the driver for commodity price increases, everything else seems temporary or if permanent, such as developing country demand, fixed with an increase in production.

But

There is a major paradigm shift taking place in the mining industry and it concerns the supply, not the demand side we hear so much about.

Supply

Supply shortages always lead to high enough metal prices for further increases in production, thus supply will eventually exceed demand and prices will drop…right? Well maybe, maybe not. Margins (not price) motivates investment and if the cost of metal production is increasing margins might not be sustainable.

Lets state the obvious:

  • For over the last ten years supply has struggled to keep pace with demand
  • Metal supply is finite and subject to compounding demand from developing nations
  • Metal production is highly cyclical, with intermittent peaks and troughs which are closely linked to economic cycles – declining production has historically been driven by falling demand and prices, not by scarcity
  • Rates of production and amounts of reserves continually change in response to movements in markets and technological advances
  • Most mineral resources will not be exhausted in the near future
  • If energy was cheap and unlimited then recoverable resources would be unlimited

But

  • Discovery and development is increasingly becoming more challenging and expensive
  • Average ore grades are in decline for most minerals, yet production has increased dramatically
  • Our most important metals are suffering from declining ore quality and rising extraction (ore is a different and inferior chemical or structural composition) costs
  • Our prosperity has always been based on the fact that producing resources yielded more resources than it cost. However the cost of *energy is climbing, the amount used is climbing but the returns from energy expended is declining. Eventually the quantity of resources used in the extraction process will be 100% of what is produced
  • Most older existing mines, the foundation of our supply, have increasing costs with production rates stagnating or even declining
  • The rate of discovery is not keeping pace with the rate of depletion, let alone being higher

*Energy can be thought of as a proxy for labor, materials, energy and externalities – environmental, community impact etc.

Copper and Gold as Proxies

The metal content of copper ore has been falling since the mid 1990s. A miner now has to dig up an extra 50 percent of ore to get the same amount of copper. As grade drops the amount of rock that must be moved and processed per tonne of produced copper rises dramatically – all the while using more energy that costs several times more than it use to. With the lower grades of ores now being mined energy becomes more and more of a factor when considering economics.

commodities-25-3

commodities-25-4

Conclusion
Complicated more expensive extraction of metals from increasingly harder to find, lower grade ore bodies in almost inaccessible and hostile parts of the world is going to affect our lifestyles.

What changes are we going to have to make as nature – the finite supply of materials and energy constraints – dictates lifestyles and aspirations?

“We took the nice, simple, easy stuff first from Australia, we took it from the U.S., we went to South America. Now we have to go to the more remote places.” Glencore CEO, Ivan Glasenberg in the Financial Times describing why his firm operates in the Congo and Zambia

We are experiencing a paradigm shift. If nothing else, right now at this point in history, we all have to realize that the mining industry is exiting “easy & cheap” and is starting the upward slope of chronic lower supply, permanently higher prices and higher risk.

We all have to agree that the planet’s booming population and rising standards of living are going to put unprecedented demands on supply.

This should be on everyone’s radar screen. Is it on yours?

If not, maybe it should be.

By Richard (Rick) Mills

www.aheadoftheherd.com

rick@aheadoftheherd.com

If you’re interested in learning more about specific lithium juniors and the junior resource market in general please come and visit us at www.aheadoftheherd.com. Membership is free, no credit card or personal information is asked for.

Copyright © 2012 Richard (Rick) Mills – All Rights Reserved

Legal Notice / Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.

© 2005-2012 http://www.MarketOracle.co.uk – The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Gold Stocks Nearing the End of the Wall of Worry Stage

“Gold stocks are following a typical bull market which evolves in three stages: the stealth phase, the wall of worry phase, then the bubble or public phase.” “Momentum has subdued for almost two years while the gold stocks have not had a rip roaring breakout to new highs since early 2006!” “We are essentially looking at a potential breakout from a multi-year base.”

feb24edgdx

….read more HERE

 

Precious Metals Monitor: Both Gold & Platinum to Break $1900, But One Has More Upside

We offer our latest analysis on the precious metals market.

After two weeks of consolidation, precious metals finally awoke from their slumber over the past few days. Gold, silver and palladium spiked to the top of their recent ranges, while platinum broke out to fresh multi-month highs.

A strike at the world’s largest platinum mine, Rustenburg in South Africa, has led to the loss of more than 80,000 troy ounces of the metal over the past month. The mine’s operator, Impala Platinum, said resumption of full production will take weeks, at least. 

Analysts warn that the situation could get uglier if labor unrest spreads to other companies.

South Africa’s total output was 4,775,000 troy ounces in 2011, which represented 75 percent of global output. 

Prices for platinum have surged in recent sessions, now trading at a five-month high. The metal is quickly closing in on parity with gold prices. 

platinumtechnicalchart20120222

After the recent breakout, prices have a clear path toward the multi-year high above $1900, leaving substantial upside from here.

While gold also has been performing well, the gold/platinum ratio has been quickly falling amid platinum’s outperformance. It was last trading near 1.02 after peaking above 1.15 late last year.

Over the past three decades, the ratio has been significantly below 1. Thus, continued platinum outperformance over gold would not be surprising as the ratio declines further.

goldplatinumratio20120222

Even so, the outlook for gold is bullish as well. The yellow metal moved up to the top of its recent range this past week and looks poised to move toward the next level of resistance at $1800


GOLD


…..read more on Gold, Silver, Palladium, US Dollar and view 25 charts HERE

A Prime Opportunity to Buy Gold Stocks is Imminent

Update: Mark Leibovit’s pre-opening Gold Comment for 02/22/12. GOLD – ACTION ALERT – BUY
Metals took off for the same reason stocks rallied. Platinum saw a new recovery high of 1646 along with Palladium which traded at 717. Silver touched 34.58, just four cents under its February 34.62 peak. Gold fell a tad short too touching 1761.50 versus its February 3 peak at 1764.20. The burden of proof is on the bulls here, but ‘seasonality’ for gold is beginning to run out. I would still like to see silver push back toward my projected 30-31 pullback zone. Afterwards, my target is first 37 on its way to 42-43. Gold targets to the mid 1800s and perhaps back to its record 1922 high, but I was thinking we should first see more of a pullback, perhaps into the 1600s. So far, this market has said it has other plans. Stay tuned.

A Prime Opportunity to Buy Gold Stocks is Imminent

The price action of the past six trading days made it clear that contrary to our previous thinking the XAU did not break out to the upside late last month. A definitive upside breakout and confirmation that the intermediate-term correction ended in late December will require a daily close above 205. (last nights close 198.20)

XAU 170212

By its nature, confirmation of an important low will usually be belated and will therefore usually not coincide with a good short-term buying opportunity. In general, buying should be done in response to pronounced weakness, not strength. For example, it made more sense to buy near the start of trading on Thursday 16th February, with the gold stock indices having just fallen for 9 days in a row and looking like they were about to extend the losing streak to 10 days, than to buy at the end of January with the XAU appearing to have just broken out to the upside.

It’s possible that the gold-stock indices bottomed on the morning of 16th February, but at this stage the price action is non-committal. If a short-term bottom had been put in place last Thursday it would have been normal for there to be some follow-through to the upside on Friday, so the fact that Friday was another down-day leaves open the possibility that the indices will make new multi-week lows this week.

If a break to new multi-week lows occurs this week it will create an opportunity for under-exposed speculators to do some buying. It won’t, in our opinion, signal that major additional weakness lies ahead. There is a realistic possibility that the HUI and the XAU will test their late-December lows before the end of this month, but very little chance that they will do worse than that before commencing their next tradable rallies.

 

The mission of The Speculative Investor (TSI) is to provide our subscribers with information that not only helps them understand and profit from changing financial market trends, but is also interesting and thought-provoking.

5 Powerful Reasons why there is still BIg Money to be Made in Gold

For those that view gold as a poor investment or hedge against currency devaluation need to consider the charts illustrated below. The first chart was produced by Thomas Gresham of Gresham’s Law. “When a government compulsorily overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation.”[1] It is commonly stated as: “Bad money drives out good”, but is more accurately stated: “Bad money drives out good if their exchange rate is set by law.”

The Long-Term Fundamental Case for Gold

“No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.”

~ United States Constitution, Excerpt from Article 1, Section 10 ~

A quick glance at most of the headlines over the weekend and the primary focus seemed to be either calling a near term top in domestic equity indices or a focus on the Greek debt situation. Why is anyone even paying attention to what is going on over there? Until the ISDA declares a default where the underlying Credit Default Swaps (CDS) are triggered, it is all just noise.

The ECB has broken the rule of law by placing itself as the senior creditor ahead of private creditors, the Greek government is trying to pass retroactive legislation to trap private sector creditors holding out of the PSI, and the leader of Greece was not even elected by the people of Greece – how much more manipulation and insanity do we need to monitor?

Similar to the price action since 2008, central banks around the world control everything from financial markets to the ascent of political leaders. These same political leaders help central bankers and planners control policy and decision making at the highest government levels in Europe and around the world. It would seem that the United States should change the motto from “We the People” to “We the Bankers.”

However, there is one particular asset class that even the central bankers have a hard time controlling. While they can impact short term price action through direct currency manipulation initiatives, in the longer-term gold is likely to move in only one direction – higher.

The price action on Tuesday reminded market participants that actions such as the Greek bailout come at a cost. Quantitative easing and/or printing money (depending on what one wishes to call the practice of producing fiat currency out of thin air) has a direct impact on the price of gold.

Many financial pundits argue that gold has no utility, but what they fail to recognize is that gold is the senior currency to all other fiat currencies. Silver is also a form of currency and is senior to all other fiat currencies as well. While one can draw the utility of gold into question, the idea that gold is the senior most currency to all other fiat currencies is not new.

The Constitution of the United States of America, which is over 200 years old, refers to gold and silver as forms of payment.  Looking back thousands of years the Romans used gold coins as a form of currency. The idea that gold and silver are currencies is certainly not a grandiose thought or a stretch of historical concept. Trying to depict gold as a worthless asset depends on your view and consideration of fiat currency.

There are those that would argue that the Federal Reserve of the United States is not actively manipulating economic conditions domestically or abroad. For those that view gold as a poor investment or hedge against currency devaluation need to consider the charts illustrated below. The chart below was produced by Thomas Gresham of Gresham’s Law.

Total Asset Growth of the Federal Reserve System – 1915 – 2012

Chart1

It is rather obvious by looking at this chart that the Federal Reserve has actively sought to enter domestic and foreign financial markets. The surge in balance sheet assets serves to prove how far the Federal Reserve Bank is willing to go to maintain markets which seemingly are only allowed to move higher over time.

This chart is bearish for nearly any form of paper backed assets. The above referenced chart is long-term bearish for the Dollar and Treasuries and long-term bullish for physical gold and silver. As the Federal Reserve continues to debase the U.S. Dollar in concert with other central banks’ monetary easing programs, gold and silver prices over time are destined to move higher in virtually every form of fiat currency.

During the same time frame that the Federal Reserve has seen its balance sheet grow exponentially, the rapid rise of M2 money supply is staggering. The long term chart of M2 is compared to gold futures in the charts presented below.

M2 Money Stock

Chart2

Gold Futures Monthly Chart

Chart3

It is rather obvious what has happened to the price of gold as the M2 money supply has grown. The idea that the Federal Reserve has not already destroyed a significant amount of the purchasing power of the Dollar can easily be refuted by the two charts shown above.

In the short-term, gold and silver could suffer from a pullback, but in the intermediate to longer term it is unlikely that we have seen the highs of this bull market for either metal. As long as central banks around the world continue to print money and expand their balance sheets gold and silver will remain in a long-term bull market. The daily chart of gold futures is presented below.

Gold Futures Daily Chart

Chart4

As can be seen above, it is not out of the question that we could see gold pullback to test one of the key moving averages in coming days/weeks. However, I expect the key support area to hold in the event of a sharp selloff. Ultimately, I expect to see a breakout over the resistance zone in the days/weeks ahead. However, I would not be surprised to see gold consolidate or work marginally lower from current prices before breaking out to the upside. Right now the primary threat in this fledgling gold rally is a short-term spike higher in the U.S. Dollar. The primary catalyst which could drive a flight to the Dollar involves the sovereign debt situation in Greece and the Eurozone as a whole.

While the short-term price action may be bearish, the intermediate to longer term time frames are quite bullish for metals as central banks will continue to race to debase their currencies. Quantitative easing in the U.S. and around the world will become pervasive and gold prices could potentially soar in value. The data from the Federal Reserve Bank itself suggests that they are indeed increasing the money supply. As time has passed, the money supply and gold have seemingly grown in lockstep with one another. Surely inquiring minds do not consider this mutual relationship between gold and the money supply to be purely coincidental.

As further evidence that the Federal Reserve continues to use quantitative easing to manipulate asset prices through direct entry into financial markets, a chart of the velocity of M2 clearly depicts that the velocity of money is declining. I am not an expert regarding macroeconomic data, but if the velocity of money is declining to 1960’s levels would it be a stretch to say that we may be going through a period of stagflation? The chart below illustrates the Velocity of M2 Money Stock courtesy of the St. Louis Federal Reserve Bank.

Velocity of M2 Money Stock

Chart5

For those unfamiliar with the term velocity of money, it is simply the rate of turnover in the overall money supply. The velocity of M2 is expressed as the number of times that a Dollar is used to purchase final goods or services which are included in the total gross domestic product.

Conclusion

The short term technical picture in gold is a bit suspect due to overhead resistance and recent U.S. Dollar strength. However, the longer term macro factors that impact the value of the U.S. Dollar and precious metals are all telling us the same thing.

As time wears on and central banks do even more to prop up the broader economy and failing financial institutions, it is without question in my mind that gold and silver will both benefit handsomely from these decisions being made by central bankers from around the world.

Ultimately, I am very bullish of gold and silver in the intermediate to longer-term, but in the immediate short-term frame gold could consolidate or pullback before breaking out to the upside.

By: Chris Vermeulen – Free Weekly ETF Reports & Analysis: www.GoldAndOilGuy.com
Co-Author: JW Jones – Free Weekly Options Reports & Analysis: www.Optionnacci.com

 

This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the OptionsTradingSignals.com website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.


 


Mining Juniors – Massive Gains – A MUST READ

Junior Detour Gold Corp up eightfold since late 2008, Ventana Gold Corp up nearly hundredfold before a takeover. 

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Detour Gold Corp chart above

 

Peter Grandich: On January 2, in my “2012 Outlook”  I posted this commentary on what I know and believe about the junior resources industry. I thought it was so important, it is now a permanent link (on Peter’s navigation bar) called MUST READ.

Here is another article I consider a “must read” about junior resource stocks by Martin Mittelstaedt

Junior miners: The big score – and the big risk 

Detour Gold Corp. has risen eightfold since late 2008, buoyed by exploration success at an Ontario property. Ventana Gold Corp. rallied nearly hundredfold on the strength of a Columbian mineral find, before it was snapped up in a takeover last year.

With these kinds of outsized gains, investors can be forgiven for wondering where they might find the next Detours or Ventanas, companies able to turn a small grubstake into some very serious money.

The trouble is, junior explorers, while offering dramatic gains, pose a bewildering problem: The extreme difficulty of stock selection. Small mining outfits are the most common type of security listed on Canada’s two equity markets. There are about 2,100 junior mining companies in the country, outnumbering bigger mining companies with actual producing mines by nearly 10 to one.

To help investors along, here are some stock-picking tips from the pros – mining analysts whose job is to steer their clients into the most promising of the juniors.

 

….read the tips HERE