Silver’s peak occurred an hour or so later. The boyz weren’t going to allow a runaway gold price after the Fed’s interest rate decision. To give you an idea of how hard they’ve been sitting on the gold market, consider this…in the last 36 hours (as of midnight last night)…the US dollar was down almost four full cents, the US Fed Funds rate was cut by a third…and gold was only up $30-40. Check your own charts if you doubt me. The gold price should have been up several multiples of that. Trading was heavier in silver than in gold…and in actual fact, if you remove the effect of switches…gold trading was extremely quiet.

However, the precious metals stocks have been on fire for the last couple of days…and I’d like to think that the smart money and the insiders know that gold and silver prices are going much higher. The Commitment of Traders report for both precious metals (and every other commodity for that matter) hasn’t been this bullish in at least five years…and the one due out tomorrow will be even more so. If there ever was a time for a moon shot…this is it…as the set up is perfect for it. But like I said, we still have to get past JPMorgan, HSBC USA…and a US election.

Open interest changes for Tuesday were a surprise. The gold o.i. seemed semi-normal…down 588 contracts to 313,709…but it was the o.i. in silver that was the eye-opener. Instead of dropping a bunch…o.i. was up 1,818 contracts instead. I wonder what combination of long liquidation/buying, short covering and spreads gave rise to that number? It’s impossible to tell. I only hope that this information is in tomorrow’s COT. It should be, because the cut-off for the report was Tuesday at the close of regular trading on the Comex…and the bottom occurred in early Tuesday morning trading in London.

I got an e-mail from Ted Butler yesterday which is worth sharing. It has to do with backwardation in the silver price. We’re not there yet, but the events of the last several days indicate that we seem to be heading in that direction. Here’s the e-mail, where I’m paraphrasing a bit…”Based on the settlement prices just posted (yesterday afternoon at the close of regular business on the Comex…around 1:30 Eastern time), the silver spreads have tightened noticeably over the last few days. Last week the Dec/Mar silver spread was about 4.5 cents. On Monday it was 3.8 cents, and is now down to 1.4 cents today (now yesterday). There is some tightening on gold spreads, but not as pronounced as silver.” In a subsequent telephone conversation, Ted mentioned that it’s the bad guys (JPM/HSBC) that control the spreads…and this narrowing will not go unnoticed by traders who follow these sorts of things. Ted explained to me that backwardation is synonymous with a shortage of good delivery silver…i.e. 1,000 ounce bars. IF we end up in backwardation (which is what this recent data suggests is about to happen), then nobody will be able to deny that there is a shortage. I’ll keep you posted.

In other gold news, I see in a Reuters story that Newmont Mining has reported that “The company’s average production cost per ounce of gold rose to $480, from $374, a year earlier…while its average costs per pound of copper rose to $1.98, from 64 cents, in the year earlier quarter.” Those are substantial increases! Yesterday, both the GLD and SLV were unchanged.

In other news, a story in the NY Times said that lenders are significantly curtailing both their credit card offers and lofty credit lines. The paper adds that the retrenchment is even impacting credit-worthy consumers. Of interest, the article notes that after writing off an estimated $21 billion in bad credit card loans in the first half of the year, analysts believe the industry is likely to lose at least another $55B over the next 18 months. On Monday, GM and Chrysler wanted to borrow $5 billion so they could afford to merge. Yesterday they upped the ante to $15 billion! In a headline out of The Times in London “West goes cap in hand to the East for credit crunch help”. And lastly, a headline from a Yahoo U.K. reads “Russia military offers Cuba air defence aid”. How many of you are old enough to remember the Cuban Missile Crisis? Just asking.

Two stories today. The first is from Hugo Salinas Price…one of the richest men in Mexico. I mentioned him last week when I was talking about the silver Libertad production being slashed by the Bank of Mexico. This directly affects him, as his large chain of stores in Mexico each has a branch of Banco Azteca in it…and he makes sure that they all sell the Libertad…and they do. His stores are the biggest Libertad distributors in all of Mexico. The story is an absolute ‘MUST READ‘ and is headlined “Banco Azteca: New policy on purchase and sale of silver ‘Libertad’ coins.” The link is here.

My second offering is a photo essay of runaway hyperinflation…which may be coming to us one of these days. This will give you some idea of what to expect. It’s all in pictures…with very few lines of text…a Gee-Dubya type of executive summary if there ever was one. The link is here.

click to enlarge

A liberal is someone who feels a great debt to his fellow man, which debt he proposes to pay off with your money. – G. Gordon Liddy

Yesterday’s Dow performance was underwhelming…as it literally fell of a cliff in the last half hour of trading. Even I was surprised. However, as I put the finishing touches on this in the small hours of Thursday morning, I see that the Nikkei was up a bunch…and now the S&P futures are spun higher…so the PPT is obviously going to give it the old college try again today in preparation for end of the month mark-ups. We’ll see what next week…and the new month…brings. I’m not optimistic.

Source: And Then There’s This…Thursday, October 30th, 2008

For the tale of the tape, the TSX Exchange lost 0.58%, while the TSX Gold Index gave back 1.6% and the TSX Venture Exchange, Canada’s largest junior exploration bourse, fell 0.44% with the declining issuers swamping the advancers by a 562 to 466 margin on volume of nearly 218 million shares traded.

Silver Wheaton stepped up to the plate and has agreed to buy 50% of the life of mine silver at Aurcana’s 80% owned La Negra mine in Mexico. The price tag is an upfront cash payment of $25 million. Aurcana ended the day up C$0.06 at C$0.64.

It was a good session for shareholders of X-Terra Resources as the junior applied for shale licenses in Quebec. The junior received a letter from the Ministry of Natural Resources to confirm the application permits for over 120,000 hectares. X-Terra ended the day up C$0.73 at C$2.21.

Shares of Buchans River added C$0.04 to close at C$0.225 after the company announced a drill intercept of 6.64% zinc, 3.01% lead, 0.65% copper, 15.06 grams silver and 0.11 grams gold per tonne on the Lundberg zone in Newfoundland.

Radius Gold has inked a deal with Kappes, Cassiday & Associates to develop the high-grade Tambor gold deposit in Guatemala. The agreement envisions an initial 150 tonne per day operation from both underground and surface pits. Kappes can earn a 51% interest in the project by spending $6.5 million over four years or by putting the project into production. Radius ended the day up C$0.05 at C$0.32.

Newmont Mining put itself on the brink of bidding for Gabriel Resources after buying an additional 1.5% equity stake in the company on the open market. That gives Newmont 19.9%, just a tad less than the 20% threshold that would trigger a mandatory offer. Gabriel ended the day down C$0.04 at C$2.86.

Gold took one on the chin as it made a run at the $900 per ounce mark but failed to break through. We will see what Wednesday trading has in store.
Source: Resource Stock Roundup Wednesday, June 4, 2008

From the air, the north end of the Carlin Trend looks like a suburban housing development – of gold mines. Most of the mines dotting this region are simply huge holes in the ground (called open-pit mines) but several of the richest mines follow the ore bodies nearly a half-mile underground.

The Leeville Mining Complex, owned by mining giant Newmont Mining, contains one such underground mine. It’s part of a huge cluster of mines located on the north end of the Carlin Trend.

The mine I visited, West Leeville, should produce about 400,000 ounces per year for six to eight years… and provide a revenue stream of about $100 million to $150 million at today’s gold prices. While Newmont technically owns this stream of gold, another company gets a steady paycheck from that production…

You see, if Nevada were a sovereign nation, it would be the world’s third-largest gold producer. The state produced 6.3 million ounces last year, 78% of U.S. gold production, and 12% of the world’s production. The heart of Nevada gold production is the Carlin Trend, which has produced more than 50 million ounces since the 1960s.

While Nevada’s mining riches are no secret to many investors, few have heard of the gold royalty business. Investing in gold royalty streams gives you a safe and diversified way to participate in the bull market in gold… without risking it all on one big strike or worrying about rising production costs.

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You see, building a large gold mine is usually a messy, expensive business.

First, you have to pay geologists to scour the Earth in search of prospective ore bodies – but that’s only after paying governments the proper permitting and licensing fees.

Let’s say you find a large body of ore after punching hundreds (and often thousands) of exploratory drill holes. Now you have to spend millions on mine infrastructure. This includes roads, mine shafts, electricity, and a smelter. In Newmont’s case with the West Leeville mine, it took six years and hundreds of millions of dollars to get it up and running.

One way a producer offsets that cost is by selling a small royalty for the life of the mine. In general, a royalty is simply the right to receive a portion of a mineral resource. It could be oil, gold, copper, or any other commodity.

The mining company gets a lump-sum payment up front, and the royalty investor gets a paycheck for the life of the mine. A royalty company may make hundreds of small investments to spread its risk and even out future payments. The royalty company then distributes a small portion of its paychecks to shareholders through dividends and invests the rest in new projects.

Investing in royalty companies is like taking the shotgun approach to mining. You get many small chances to participate in exploration, so you have the potential of a big discovery. In addition, you have minimal risk and you get a paycheck for the risk you do take.

I believe gold’s bull market will last a long, long time… and the more gold rises, the more money these royalty companies will make. If you don’t own any gold stocks, and you’re not sure how to get started, gold royalty companies are a fantastic option for the conservative investor.

Good investing,

Matt

P.S. I think royalty companies are the ideal gold investments to put in your retirement account and forget about for years. If you’d like to learn more about them and my favorite picks in the sector, click here.

Source: A Shotgun Approach to Gold Investing

Right now some metals are poised to reach new all-time highs because of production deficits (aka lack of supply), while other metals still remain hostage to an onslaught of new supplies – so their prices are dropping.

Silver falls in that “too much supply” camp. More than any other precious metal this year, silver’s prices will be put to the test. We’re all waiting to see if silver’s price can hold up under the growing bombardment of new production.

Over the last five years, silver prices have surged more than 250% to just under US$17 an ounce at the moment. On May 20th, my Commodity Trend Alert (CTA) service, turned “neutral” on silver, after my CTA subscribers earned big profits on several existing open silver positions since 2003.

But the tides have turned. And now rising supplies are forecasting a sizable silver correction.

Meanwhile, gold is still soaring. Gold production peaked in 2001 and continues to decline this year, which is VERY bullish for gold prices. But that’s certainly not the case for silver and to a lesser extent, palladium.

Could Silver Break Away from Gold?

Gold and silver generally track each other in a bull or bear market. When gold goes up, silver goes up and vice versa. But in this case, a divergence might be possible, if only temporarily.

In the base metals arena, a similar price divergence has already happened after seven years of generally spectacular gains for the complex. These include namely copper, lead, tin, nickel, iron-ore (steel), aluminum and zinc. Over the last 18 months, nickel and zinc prices have crashed while tin, lead and copper prices have posted gains. It’s not impossible for metals to break away from the primary uptrend if supplies begin to saturate individual fundamentals.

Over the last 12 months, gold prices have risen 37% while silver has gained 31%. Both metals continue to track each other on a total return basis.

But thus far in 2008, gold prices have risen just 8% while silver has rallied 15%. The fundamentals, however, don’t support silver’s higher returns this year.

Will Investor Demand Support Silver?

Gold is rapidly approaching its first year of net supply deficit while silver is increasingly becoming a net surplus commodity. And according to textbook economics, rising supplies eventually dilute a rising price trend and drag prices back down.

Considering the demand for both silver jewelry and silver industrial supplies is waning, the bulk of global demand for silver will have to come from investors going forward. This will come mainly from exchange traded funds like SLV or the iShares Silver Trust in the United States and other silver ETFs traded in London and Zurich.

I have serious doubts investor demand will continue to support silver at these levels without suffering a major correction first.

The iShares Silver Trust has already seen a massive increase of silver accumulation since 2006 – over 180 million ounces. Silver supply has surged since 2001, according to GFMS, a precious metals consultancy firm, rising to 670.6 million ounces. Unless investor demand consumes this rising supply – and more is projected in 2008, then prices will decline. That’s because industrial demand has probably peaked.

Last year, industrial demand for silver increased 7.2% to a record 455.3 million ounces, according to the 2008 World Silver Survey. That offset the long-term decline in demand for traditional usage, mainly in photography, jewelry and silverware.

But another survey by Barclays Capital points to alarm bells for the silver market. The survey shows new supplies just hit the market this year. Barclays believes mine production will grow by 6.5% in 2008 and faster than last year’s increase of 3.6%. That could create possibly the largest surplus of silver in over 20 years.

A disappointing initial public offering (IPO) in London is another bearish signal for silver bulls.

Mexican silver company, Fresnillo PLC, went public in London earlier this month and declined 7.5% on its debut – that’s a bad sign. Despite stronger silver prices this year, the IPO was not received well in the markets.

Gold and Platinum: Precious Metal Kings

Though I’m not predicting a long-term silver decline, I think it’s time to reduce your exposure during current price strength. The big picture for sister metals, gold and platinum, however, remains incredibly bullish because supplies continue to tighten.

Some investors, their hopes dashed that $1,000 would be quickly and decisively overrun, are seeing disaster in this correction and dropping their gold as they run for cover.

So… do we at Casey Research think we’re now seeing a reversal in gold’s fortunes?

In a word, no.

I’m not going to go into meticulous detail here, but I do want to share some thoughts with you that may be of some use… if for nothing more than playing them back to me in sarcastic e-mails several months down the road if we’re proven wrong.

A few key things to ponder as the battle for $900 gold rages…

1. The current correction is not yet exceptional. Since the current bull market began in earnest in 2001, there have been nine corrections in excess of 8%.

During the three worst pullbacks, gold fell 15.98%, 18.27%, and 27.7%, respectively. And the average of all nine corrections is 13.6%, so the latest, which touched 15% at its worst (so far), is only fractionally worse than average.

Put another way, for the current pullback to match the sharpest correction to date, a drop of 27.7%, gold would have to fall to about $730. Could it happen, again? Sure, why not?

And if it does, rest assured that analysts will line up to say the back of the gold bull has been broken… just as they did when gold moved down by that percentage in May 2006, falling from $725 to $567. But if you had listened to the naysayers back then and bailed out at the bottom of that correction, you would have missed a rebound of close to 100%.

I mention this to stress that the fits and starts we are currently experiencing are nothing unusual. Quite the opposite, they’re the norm for any sustained bull market. In the sustained gold bull market of the 1970s, a similar pattern occurred.

The bottom line is that if you are going to invest in the resource sector, you need to take a long view. And I would stress once again, you have to be invested with money you can afford to lose a substantial portion of and not be overly concerned. Otherwise you’ll invariably become shell-shocked during periods of volatility and be prone to breaking ranks and selling at the worst possible time.

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2. The big gold companies are delivering. One of the largest mining companies in the world, Newmont Mining, just released its first-quarter 2008 financials, the first of the big gold producers to do so.

As we have been forecasting, the company had record sales of $1.94 billion, realized a record price of $933 per ounce sold, and saw its cash operating margin soar by 119% from the same period last year. Further, net income was up 444% from the first quarter last year. And the company’s cash operating margin rose to a record $537 million in the first quarter this year over the prior record $419 million earned in the previous quarter.

Over the next couple of weeks, we’ll see a string of similar results from the other major producers, offering a stark contrast to the billions upon billions in losses being suffered by the banks, investment houses, housing industry, airlines, etc.

So, what happened to Newmont’s shares on releasing its financials? They fell, albeit modestly, victim to this week’s softening gold price and a dumb remark by the minister of mines of Ghana – where Newmont has significant projects – about the need for mining reform in that country.

The key point is that the increase in the profitability of the gold miners, a prerequisite for the entire gold share complex to get moving, is now materializing.

3. Oil is stubbornly holding on over $100, and food prices are on the rise everywhere. This is simply the most visible evidence of the inflation now gripping the world.

We’ve said for years that there is a very tight correlation between rising oil prices and rising gold prices. While oil prices may moderate at some point – because, again, no market goes straight up or down – the trend is clearly for sustained high prices. This is additional support for gold in our view.

So… given gold’s correction, you might go right ahead and sell your gold. I’m hanging on to mine. And if I’m hanging on to my gold, I’m hanging on to my gold stocks, because that’s where the real juice will be.

When I look at the alternatives and the amount of risk I have to take to get even a 10% return right now, I am comfortable biding my time, continuing to buy gold and gold share bargains with the expectation that the 100%, 200%, and 500% gains down the road will catch me up in a hurry.

Good investing,

David Galland

Now let’s say, all of a sudden, folks are willing to pay you $6 per hot dog. They’ll buy as many dogs at $6 as you can make. Your profit-generating ability has soared, from $0.50 to $4.50. Now… do you think your business would be worth more to an outside buyer? I think it would… but that’s not how folks see the gold mining industry right now.

America’s largest gold producer, Newmont Mining (NEM), announced its first-quarter earnings last week. The company’s revenue was 60% higher than the quarter one year ago. It sold its gold for an average $933 per ounce during the quarter, up 40% from the same time in 2007. Newmont cut its cost per ounce a bit, but of course, the real kicker was the gold price. People are paying a lot more for Newmont’s hot dogs.

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Do you know what happened to Newmont’s share price? It fell. I could hear Rodney Dangerfield speaking to me from the grave… Newmont got no respect, not even from investors who should know better.

This lack of respect is pervasive across the entire gold industry right now… and it’s giving investors a fantastic opportunity to get into these stocks.

Gold prices have doubled from $427 in April 2005 to about $879 today. Yet the share prices of major gold producers haven’t done much at all. Newmont Mining’s shares appreciated a meager 6% over that same period.

Typically, shares of gold producers give you “leverage” to the price of gold… meaning that if gold doubles in price, gold stocks often quadruple in price. It all comes down to the “leverage effect”…

If Gold Company A can mine gold for $250 an ounce and sell that gold for $300 an ounce, it makes a profit of $50 an ounce. However, if the gold price jumps 50% to $450 an ounce, Gold Company A’s profit per ounce increases from $50 to $200… a gain of 300%.

Now let’s say the price of gold really gets rocking, increasing 100% to $600 an ounce. Gold Company A’s profits increase dramatically… They jump sevenfold from $50 per ounce to $350 an ounce! Of course, Gold Company A’s stock price would explode higher in response to the increased profits.

However, it hasn’t quite worked out that way in the past few years. Due to the soaring costs of fuel, equipment, and upgrading facilities, the costs to mine gold have risen nearly as much as the gold itself!

On May 1, 2006, the AMEX Gold Bugs index (HUI), which tracks the big gold mining companies, closed at 380. Yesterday it closed at 389. The index basically moved sideways… during a period in which gold gained about 32%. As David Galland pointed out in this essay, the gold industry has been busy “digesting” the higher costs it pays to pull gold out of the ground.

But I think the news from Newmont is the latest sign that gold miners are now really starting to rake in the cash… Newmont’s quarterly profit rose 444% over the first quarter of 2007. The elevated gold price is finally kicking in. And the situation is the same with other big miners, including Barrick and Goldcorp… But like Newmont, these stocks are sitting dormant right now.

That’s why I have so many “buy” recommendations in my S&A Prospector portfolio right now. With just a few exceptions, I think gold equities are incredibly cheap. For a relatively conservative portfolio, you should own producers, like Newmont. But for opportunities to make 1,000% quickly, I love prospect generators.

If you don’t have exposure to gold stocks yet, now is the time to get some. I believe gold’s bull market will last a long, long time… and will continue to massively increase the cash flow to those who mine it.

Good investing,

Matt

P.S. As I mentioned… the tiny class of mining companies called “prospect generators” are a huge opportunity right now to make at least 1,000% gains from the bull market in gold. Click here to learn the best way to invest in them.

For the tale of the tape, the TSX Exchange fell 0.74%, while the TSX Gold Index plunged another 4.1% and the TSX Venture Exchange, Canada’s largest junior exploration bourse, ended the session down 1.50% with declining issues once again swamping the advancers this time by a 632 to 402 margin on stable volume of 189 million shares traded.

Nevoro has offered to buy Sheffield Resources in an all-share transaction that would see Sheffield shareholders get 0.8 of a Nevoro share for each Sheffield share held. Sheffield, which holds the Moonlight copper project in California, added C$0.09 to close at C$0.335.

Newmont Mining posted a first quarter profit of $370 million, or $0.81 a share, a five-fold increase from the $68 million, or $0.15 a share tabled in the same period a year ago. Despite the jump the falling bullion price had the World’s third largest gold producer by volume end the day down $0.85 at $43 in New York.

Potash Corp of Saskatchewan continued to ride the fertilizer train as the world’s largest crop-nutrient maker by market value posted a record first quarter profit of $566 million or $1.74 per share up from the $198 million or $0.62 per share tallied in the year ago period. After a stellar run up so far this year, Potash ended the day at C$193.90, down C$10.22.

In a case of total bewilderment, shares of Goldsource Mines soared C$0.405 to close at C$0.78 on nearly 1.2 million shares traded. The company recently completed six drill holes of a permitted 22-hole program on its mineral claim blocks in central and eastern Saskatchewan. No kimberlites were encountered and the only results of interest were a coal seam. More news pending?

The latest pullback in commodity prices from recent highs is having a rather dramatic impact on resource equities. To many this pullback will make a good entry point for the next leg up, while others think that the resource bull is now over. Based on the overall trend and current price point, I suspect the former to be closer to the truth. We will see what Friday trading has in store.

As the chief of Newmont’s investment bank, Schulich knew this was a major problem for his company.

You see, oil prices are a big part of the cost of mining. Huge trucks and machines mostly burn diesel fuel. Even the tires are made of oil. As a gold miner, Newmont would see its earnings suffer from continued oil price hikes.
Faced with the potentially crippling rises in mining costs, Schulich hit on an elegant solution: The perfect hedge against rising oil prices was to own a stake in an oil company.

So Schulich purchased for Newmont 6 million shares of Canadian Oil Sands Trust – a producer with vast reserves of low-quality bitumen. Schulich figured as oil prices rose, oil-sands assets would go from marginal to very profitable. As a result, the shares of bitumen producers, like Canadian Oil Sands Trust, would rise faster than those of companies producing prized (and pricey) light, sweet crude.

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Schulich’s goal was simple: “I bought this thing to make four times my money in three years.”

(Incidentally, Schulich had a little skin in the game, too… He personally bought 3 million shares, separate from Newmont’s position.)

Since then, the price of oil has doubled again, rising from about $53 a barrel to more than $107. And Canadian Oil Sands shares behaved exactly as Schulich predicted. While Canadian Oil Sands Trust’s share price has “only” risen 171% since then, the shares split 5:1… That’s a 384% total gain, counting dividends, in a little more than three years.

Here’s why the Canadian Oil Sands investment was critical to Newmont. While the price of oil doubled, Newmont’s mining costs rose along with it. The company spent $697 to mine an ounce of gold in 2007, up from $412 in 2004.

Newmont sold its gold last year at $700 an ounce, barely more than breakeven with its mining costs.

Meanwhile, Schulich’s investment paid dividends in 2007 worth $8 per ounce of gold Newmont produced. While that doesn’t look like much, it turned out to be the difference between producing gold at a profit or at a loss.

That’s how bad costs have become lately. And oil isn’t the only expense miners have to worry about… Fertilizer, believe it or not, has become a problem recently. Miners use a ton of nitrogen explosives to blast out the mines, but fertilizer costs have gone through the roof with the grain boom.

Steel and concrete, same thing. Two of the industry’s biggest projects have seen construction costs escalate 30%-40%. But, as I said, the real issue is diesel…

Miners have to feed a fleet of trucks… everything from the water truck that keeps the dust down at the bottom of the mine to the huge three-story-tall ore haulers.

So investors have to remember that just because a company is producing gold, it doesn’t necessarily mean it will make money.

These companies are exposed to the same high prices that we face at the pump… and the grocery store. Seymour Schulich helped keep Newmont afloat, but he wasn’t quite able to overcome cost inflation.

While costs remain sky-high, I gold investors can consider skipping right to bullion or the Gold ETF (GLD) as opposed to buying big mining stocks.

Good investing,

Matt Badiali

P.S. Small discovery stocks don’t have the same exposure to rising costs as the big mining companies. Exploration at its most basic is a couple of geologists and a compass. However, when the discovery is made, the share price responds. Click here to read more about it.