Gold & Precious Metals

On July 13, gold was still around $1,340 per ounce. Since last Monday, gold has suffered a big drop, falling as low as $1,293 in a few days. Many blame the decline on hawkish comments from the Fed’s Janet Yellen, who recently suggested the Fed could raise interest rates. “Higher interest rates would encourage investors to switch to assets that, unlike gold, pay interest,” said the news service Reuters1.

Following Thursday’s news from the Ukraine, gold has rebounded from its low, but remains under $1,320 as of July 18. Rick Rule, Chairman of Sprott US Holdings Inc., recently said gold could fall back another 10% as a normal event in this market. I asked him whether this week’s step down had altered his views on gold for 2014 (Update: Gold still below $1,300 per ounce as of 6:00am July 30th).

Does the recent drop in the gold price affect your outlook for gold in 2014?

“No, not at all, Henry. You will recall that in our last interview, I suggested that gold and gold equities would grind higher after reaching a bottom, I believe, in July of last year. That is precisely what’s happening. We’re seeing higher highs and higher lows, but every new high requires a subsequent consolidation. You’ll be up 10 or 12%, then off 8 or 9%. The ‘backing and filling’ that we are seeing right now is completely consistent with the behavior that we would expect to see coming out of a bear market bottom into a gradual recovery.

“I think this market is in good shape. It’s healthy. These ‘j-curve’ advances are followed by appropriate declines on the backside. I am very encouraged by the market action that we are seeing in both gold, and the gold equities.”

What do you make of Fed Chairman Janet Yellen’s recent comments regarding raising interest rates? Are higher interest rates plausible?

“What Janet Yellen said was that the recovery was tepid at best – if we have a recovery at all. The political narrative dictates that low interest rates are needed in order to help the economy.

“My own belief is that interest rates will remain low in the next 18 months or 2 years, but for a different set of reasons. There isn’t much private demand for loans, even at this low interest rate. But there is an implicit transfer of wealth from savers, who benefit from higher interest rates, to spenders. It’s the spenders who are more numerous, which means that the government will look out for the spenders at the expense of the savers.

“Secondly, the extraordinary levels of Federal, State, and local debts would be difficult to service at higher interest rates. As a result, I think that the Fed will continue to do whatever it can in order to keep interest rates constrained for as long as possible. As long as the demand for debt from the private sector remains low – in other words, until the economy recovers — I believe you will see artificially low interest rates.”

Recent reports show that big companies, like IBM, are probably issuing debt for the sole purpose of buying back their own shares. What do you make of this behavior? Is this the beginning of the end for low interest rates?

“Actually, I don’t think so, because they don’t need to borrow this money for their basic business. The biggest corporations in the United States have good balance sheets and are generating fairly substantial free cash flow. There is nowhere for them to re-deploy the money in their own businesses, because the economy is expanding slowly.

“At these interest rates – particularly if these companies can lock in these interest rates for long periods of time – debt is a cheaper form of capital than equity. In a slowly growing economy, the only way that these companies can increase earnings per share is to reduce the number of shares.

“What they are doing – buying back their own stock with borrowed money – is a normal response to the Fed’s low interest rates. Right now, debt is much cheaper than equity in the long term.

“Of course, there is a downside. Companies like IBM are weakening their balance sheets, which were real fortresses against potential problems in the economy. When everyone does this, you are replacing more and more equity with debt. You are making the economy as a whole much more vulnerable going forward. That will become a concern for these companies in 18 months or two years from now.”

If it is good for big companies, why not for everyone else? Do you think average investors should also try to benefit from these record low interest rates?

“In fact, I do. For an investor who has a stable financial situation, a 30-year fixed-rate mortgage for a house where they intend to live will probably begin to feel like free money once we are 3, 5, or maybe 10 years down the line. If you have the ability to borrow long-term capital at today’s rates, and are able to service the debt – in other words, don’t abuse it – this is probably a once-in-a-lifetime opportunity. After real inflation, the costs of this capital over the long term will likely be negative. That’s very attractive!”

What do continued low interest rates mean for gold going forward?

“Ultimately, it’s probably pretty good for gold. Right now, you are seeing gold being crowded out, because the returns from other assets such as stocks look more attractive.

“But the way I look at this nearly ‘free’ capital is ultimately good for gold. It weakens the medium of exchange, the US dollar, in which gold is denominated.”

What do you think is the most important message to attendees of the conferencein Vancouver, just a few days away now?

“The most important thing to do for attendees is to really take the time to interrogate the exhibitors. We are in the early stages of a resource sector recovery, and the most dramatic parts of a recovery take place in the micro-cap stocks. If you want an in-depth discussion of what to ask, take a moment to revisit the material on our website on how to conduct these interrogations with company. You can use these techniques when talking with the exhibitors at the Sprott conference. There is going to be a lot of money to be made at that conference.”

Update: The Sprott Vancouver Natural Resource Symposium is now over. If you’re interested, you can get the audio recordings at a reduced price of $149 until August 1sthere.

1 http://www.reuters.com/article/2014/07/16/markets-precious-idUSL4N0PR2A420140716

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This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested.

Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and nowadays also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment.  Because of significant volatility,  large dealer spreads and very limited market liquidity, typically you will  not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally  associated with  domestic markets, such as political,  currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.

Fed Delivers Warning To Investors

Posted by Chris Ciovacco - Ciovacco Capital Management

on Wednesday, 30 July 2014 12:34

34672 aThe Federal Reserve is an interesting study in public relations. The Fed has twelve districts that release statements and publish studies. The Federal Reserve Board is comprised of seven members who often make public statements about monetary policy. The chair of the Federal Reserve Board also testifies and conducts Q&A sessions with the media. Often, statements coming from the various sources within the Fed seem to be highly contradictory and confusing, something that serves a purpose in the realm of monetary policy.

Fed Cares About Inflation Expectations

Experienced investors know central bankers care about their legacy, as most professionals do. While casual investors may believe all the Fed cares about is higher stock prices, the Fed is genuinely concerned about allowing inflation to get ahead of them. If inflation expectations begin to pick up, it can change habits, which ultimately can lead to real world inflation.

Fisher’s Shot Across The Bow

On Sunday night, The Wall Street Journal published an opinion piece by Richard Fisher, president of the Federal Reserve Bank of Dallas. The text serves as a warning to complacent investors that the Fed cannot keep interest rates near zero indefinitely. The op-ed opens with a single sentence paragraph:

“I have grown increasingly concerned about the risks posed by current monetary policy.”

That is a pretty strong opening statement meant to get the attention of investors and businesses impacted by interest rates.

Making The Same Mistakes?

If you were investing during the dot-com bubble, you remember the Fed failed to tighten margin requirements, which allowed speculation to run rampant. The Fed is often criticized for “keeping rates too low for too long” between 2003 and 2005. For example, the Federal Funds Rate was at 2.25% in January 2005. In the July 27, 2014 Wall Street Journal (WSJ) opinion piece, Fisher states:

“I believe we are at risk of doing what the Fed has too often done: overstaying our welcome by staying too loose, too long.”

34672 bIncentives To Take On Risk

Fisher noted that Janet Yellen was also aware of the potential risks of maintaining the Fed’s current stance. From Fisher’s WSJ piece:

“In her recent lecture at the International Monetary Fund, Fed Chair Janet Yellen said, ‘I am also mindful of the potential for low interest rates to heighten the incentives of financial market participants to reach for yield and take on risk, and of the limits of macroprudential measures to address these and other financial stability concerns.’ She added that ‘[a]ccordingly, there may be times when an adjustment in monetary policy may be appropriate to ameliorate emerging risks to financial stability.’ I believe that time is fast approaching.”

Investment Implications – Good To Be Aware Of

Should we sprint for the equity exits after reading Fisher’s comments? No. However, it is good to be aware of the Fed’s willingness to raise rates sooner than many market participants believe. The risk is not related exclusively to a rate increase. It is the timing of the rate increase that could catch some investors off guard.

How do we use all this? Fed policy is one of many inputs impacting the battle between bullish economic conviction and bearish economic conviction. As noted on July 28, the market will guide us if we are willing to listen. Not much has changed this week. Therefore, the 80% confident 20% concerned analysis in this week’s video still applies. Therefore, we continue to hold a mix of stocks (SPY), leading sectors (XLK), and a relatively small stake in bonds (TLT).

34672 c

The possible market-spooking outcome this week or in the weeks ahead is if the Fed signals an interest rate hike may be coming sooner rather than later. Again, it is not the act of raising rates that matters, but the timing.

 

About Chris Ciovacco

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC.

Remarkable Value in Junior Miners & Oil Stocks – Frank Holmes Interview

Posted by Frank Holmes via Cambridge House

on Wednesday, 30 July 2014 12:16

This is both a transcript and the video of an interview at  the Sprott Symposium with Frank Holmes, CEO and Chief Investment Strategist at US Global Investors. Scan to the bottom of this transcript for the entire interview in video. Money Talks Editor 

FrankLatinAmericaHelicopterVC: Now Frank, you’re a big fan of following global indicators. What are you seeing right now?

FH: One of the most important indicators when looking at resources as a whole, is what they call the Purchasing Manufacturer’s Index – the PMI – and the PMI is a forecasting tool, it’s what is anticipated 6 months out – and each month it is updated. It’s highly correlated to the demand for commodities. When you look back – it’s industrial production- it’s where money is being spent. So with that, PMI’s have turned positive. They were positive, they faltered with Japan, in April, in May, now they’ve turned positive for the world. That’s very powerful for underlying a belly of demand for resources.

VC: And why is that?

FH: Because the Purchasing Manufacturer’s Index is basically a high paying jobs that manufacture various goods and products and services. And that means there is global economic trade. 

VC: So you are seeing the PMI’s rising, and recovering, globally. Are we seeing a global recovery?

FH: Yes we are, and it’s important – what we like to look at is the one month- for the global PMI, versus three months. So when the averages – the trend is your friend – when the one month is above the three months, usually, the mathematical models say copper is up, oil is up, it’s all apart of that global economic activity.

VC: So what does this all relate to gold?

FH: Well with gold, it comes to the love trade. Because what is so important, what took gold to $1900, half of that whole move, is the rising & GDP per capita of emerging countries. And they have a cultural affinity to give gold for weddings, graduations, etc.

VC: So we just kicked off the seasonal, love trade in gold.

FH:Yes.

VC: And that continues from now until Christmas ?

FH: It’s Chinese New Year. So it starts with Ramadan, then we have Indian wedding season, and then we’ll go into the season of lights in India, then we will have another wedding season, then we’ll have Christmas, then we’ll have Chinese New Year. Until February.

VC: And how are you seeing it play out this year compared to other years?

FH: Well last year there was a big import duty imposed in India, to try to get everything to slow down gold and all it did is make it go illegal – and smuggling took place. They’ve laxed those and we just witnessed last week, a 65% increase on a year over year basis of gold imports going into India.

VC: I mean a lot of people have been watching and waiting, for this new Prime Minister coming into office in India, and people have been waiting for him to reverse this 10% gold import duty. So did we see a change, is that what you’re saying, last week? Has any announcement been made?

FH: Well, there are some – making it easier for the banks to facilitate the movement of gold and distribute gold. So that is in place – the exact 5%, 10%, 20% – that is not put in place – but the ability just to move gold.

VC: Now you’ve said that this year platinum and palladium are your favorites. Are they still your favorites?

FH: They are – because you if you have rising PMI’s – That’s highly correlated to car sales. And now we are seeing China with car sales, and now they are imposing North American standards for platinum and palladium to be in cars, so there is a pent up demand taking place there. And in North America, with the higher energy process, and the cheapest prices in history to borrow money – you can borrow money inexpensively to buy a brand new car – and it helps offset the higher energy prices because the new cars have much better mileage – 30% more than what a car ten years ago would deliver.

VC: Right and with this incredible urbanization happening in China, for example, a lot of people are buying their cars for the first time.

FH: They are.

VC: And more than in the US actually– the numbers are higher in China than the US with annual car sales?

FH:  Correct. And as fast as they build highways, they start packing them with cars.

VC: Now what is going on in South Africa with the strikes there?

FH:  What we have seen in the past, since 2011, when there are blocks in the supply of any commodity then we get a big rise in them. So the problems in South Africa are causing a supply situation, a constraint, for platinum and palladium. SO the two big issues with platinum and palladium are Russia, Putin, is a big supplier of the world’s palladium, and South Africa is for platinum. I think the global economic activity will remain, and that will both see platinum and palladium trade higher.

VC: And is that why palladium recently hit a 13 year high?

FH: We did. Every time there are problems in Russia, it can be a supply restriction for palladium.

VC: Now you’ve said that people should hold about 10% of their portfolio in gold? Can you elaborate?

FH: Well, looking back on studies, it is just prudent to have insurance – I like to call it portfolio insurance. It’s like car insurance- you don’t go and have an accident so you can collect. So you want to always have gold in your portfolio, and having 10% seems to be just a prudent process. So last year the stock market was vibrant, up spectacularly well, so you would have taken profits because gold was down and bought gold at a discount, and year to date, gold has had a wonderful run. So this idea of having 10% helps balance your overall portfolio against currency volatility, and also participates in the huge consumer demand that is taking place in the Middle East, India and Asia.

VC: Right. Now are you buying gold right now, gold stocks? Are you excited about the sector? You have said in your sector rotation model the peak of the last bull market in metals was December 2010 – and it is very unusual for any sector to be in for more than 2 or 3 years – and we are now in our 4th year? 

FH: Three years – so it’s only 3 times in thirty years that you have had gold stocks fall 3 years in a row. And what took place in 2011, that peak, was GDP globally. We look at GDP as the world’s – flying at 50,000 feet, watching it rotate and spin, we will see that real global GDP peaked at 5.4% and fell to 3%. So if it has fallen almost 50%, guess what happens to the metals stocks – and even energy stocks – they are off dramatically. So you are seeing great value in this space. 

VC: So you are seeing a lot of value right now in maybe some of the companies that are here at the Sprott Symposium or that you are looking at right now? 

FH: Yes. And it not just gold stocks, or base metals stocks, copper stocks which we love, it’s also oil – I mean it is remarkable that oil stocks are priced  at where they were when oil was $12 a barrel. It’s hard to fathom that. And junior oil stocks – they were trading at $120,000 per barrel of oil production, they fell down to $20,000, now they are back to $30,000 on takeovers that are worth $50-60,000 – so I think there’s many wonderful small cap energy companies – in Colombia in particular, they’re just going to get bought out because we are seeing these roll-ups -and when the M&A activity takes place, there are 100% lifts in these stock prices.

VC: What are some of the other drivers behind that? We’ve looked at some of the drivers behind gold – gold purchases coming from India and China- what are some of the drivers for the oil sector?

FH: Just global GDP – the correlation is so high with PMI- Purchasing Manufacturer’s Index – when it’s rising, oil demand picks up- – and they are just not finding enough production to come on-stream. In particular, in North America we have been blessed with fracking as an innovative process – but they do not have this in Russia – or Eastern Europe. And Russia has done everything to prevent – one of the biggest funders for anti-fracking comes from Putin’s regime – comes from Gasprom. And they’ve been sponsoring movies – same thing with Qatar, they’ve been sponsoring this disinformation about fracking – because it impacts their sales.

VC: Well yes and Gasprom has all of Europe dependent on it – they have a monopoly.

FH: But let’s say America – Canada has cheap gas prices and makes oil sands more attractive – also chemical companies because to make chemicals you need gas as an input, and then you have refineries – so the input of natural gas being so inexpensive relative to Europe is helping boom – and so last year we saw refineries up 70%- the year before up 60% – so there are these wonderful pockets of opportunity.

VC: So that is where you are seeing a lot of opportunity right now– excellent. Well thank you so much for joining us again Frank, it was great having you here.

FH: It was great being here, and hopefully everyone is buying some of that nice gold jewelry for that love trade.

VC:  Fantastic.  

-End-

qwe

 

 

Gold vs. Currencies, Commodities, Equities & Bonds

Posted by Jordan Roy-Byrne - The Daily Gold

on Tuesday, 29 July 2014 20:52

At turning points and for Gold in particular, relative performance is quite important. When people buy Gold they are effectively passing on another investment or market. Hence, it is always important to check how Gold is performing against other markets. In the chart below from top to bottom we plot Gold against foreign currencies, commodities, equities and bonds. What is this chart telling you about Gold’s relative performance?

july26rpog

Gold looks fine against foreign currencies, good against commodities but has yet to breakout against equities or bonds. We’ve noted that 0.75 is the important point for Gold/S&P 500. Gold appears close to breaking out against bonds. It could happen suddenly but the price action says its farther away. The action in gold and gold stocks relative to the stock market is something I will carefully watch this week. I think this is more important than the US$. As I showed you last week, correlation analysis shows no negative correlation, recently, between the US$ and Gold. I think at the present time the strength of the equity and bond market is more of a headwind for a sustained recovery in precious metals than a falling US$. Take a look at what happened during Gold’s bottoms in 2001, 2005 and 2008. The US$ went up with Gold. The two can go up together.  

Overall, the short term trend is difficult to call. I believe the miners are still in consolidation or corrective mode but Friday’s recovery puts that in doubt just a bit. I reduced long exposure a bit this week by trimming the weakest position and those which could have material downside. I also hedged a bit. If the stocks breakout then I can make a few trades and be fully long. If the sector continues to consolidate or correct then I will keep an eye on the relative strength of my positions. To repeat what I said last week:

We want to sell non-performers and reduce overweighted stocks which are not performing strong enough. The stocks that hold up best during this correction, if it materializes, should be the leaders during the next breakout. Meanwhile, stocks that are underperforming and acting poorly figure to lag in the future.

Thanks for reading. I wish you all great health and prosperity in 2014 and beyond. 

-Jordan

….also from Jordan:

More Weakness Ahead for the Miners published July 25th

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In addition to our technical expertise, we publish company reports and update them every quarter or so. Companies are starting to report Q2 production but financials won’t be out for several more weeks. In the company reports we look at the company’s valuation, margins, production potential and various metals prices in order to come up with a viable price target or range. Combine that with the company’s chart and one can get an idea of the potential. Upon signup, you will be sent many reports. One is a 55-page file with reports on 12 producers.  

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In my opinion there is no other service which provides the volume of technical research that we do combined with a focus on company fundamentals. I appreciate my subscribers because their support allows me this labor of love. Click below to learn more about our service and watch the video for details.

 

Disclaimer: Sponsor Companies are paid sponsor companies of TheDailyGold.com website and this free newsletter. Do not construe sponsorship with a recommendation. The author of this newsletter is not a registered investment advisor. This newsletter is intended for informational and educational purposes only and should not be considered personalized and individualized investment advice. Investment in the precious metals sector contains significant risks. You should consult with an investment advisor and due your own due diligence before making any investment decisions. This email may contain certain forward looking statements which are subject to risks, uncertainties and a multitude of factors that can cause results and outcomes to differ materially from those discussed herein. 

Marc Faber Responds To CNBC Mockery, Asks “How Has CNBC’s Portfolio Done Since 1999?”

Posted by Marc Faber via ZeroHedge

on Tuesday, 29 July 2014 20:18

25523-thumbHaving provided his clarifying perspective on why the markets are extremely fragile and due for a 20-30% correction, Marc Faber was assaulted by CNBC’s Scott Wapner reading off a litany of recent calls that have not worked out as planned. His response was notable: “I started to work in 1970, and over that career, somehow, somewhere, I must have made some right calls; otherwise I wouldn’t be in business.”

What CNBC then edited out of the transcript was Faber pointing out his 22% annualized return in his publicly-viewable funds since then and asking – sounding somewhat frustrated at the anchor’s mockery (and background snickers) – “I wonder what the CNBC portfolio would look like since 1999?” The response: silence.

*Note: Continute reading for Marc’s view of the Fed, the health of the market, money-printing, the remarkable performance of the Phillipines, Indonesia, India, Thailand Vietnam, and his recommendations. All in two short 2 minute video’s and transcript that also reveal CNBC’s mockery of someone who isn’t wildly bullish – All HERE – Money Talks Editor

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