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XMFSinchiruna (26.53)

5 Imminent Catalysts for Gold Stocks, Part I



February 08, 2011 – Comments (12) | RELATED TICKERS: GLD , JPM , AUQ.DL

Please stay tuned for Part II by bookmarking my automatically updated author's feed.

In the meantime, here is my discussion of the first two of those five catalysts I've indentified as the most likely to bolster the near-term upside for gold mining stocks. Presented in no particular order, the first two relate to the anticipated strength of forthcoming earnings results, and the uninterrupted long-term upward trend in global gold investment demand (as opposed to far less consequential dynamics within the fast-money momentum traders).

Extra credit for anyone who can identify the remaining three catalysts. Even if they're not the same catalysts I've chosen, I bet they'd spawn some interesting conversation. Please understand, I won't be able to reveal my selections until Part II is released. :)

Thanks as always for reading, reccing (the article at the link if you please), and for sharing your Foolish thoughts on the topics discussed. Thank you, leohaas, for your kind comment beneath the article.


Like an epic stage production, this multi-year bull market for gold and silver is supported by an enormous cast of characters that each contribute meaningfully to the final masterpiece.

By "cast of characters," I refer to the extensive set of fundamental drivers and catalysts that come together -- in highly dynamic combinations -- to propel this long-term upward trend through successive periods of breathtaking market outperformance. They're far too numerous to discuss at once, so perhaps the best we can do is to hone our focus on the actors that are most illuminated under the spotlight at any given point in time.


Royal Gold's average realized gold price of $1,367 per ounce provides a yardstick for the sector's fourth-quarter revenue expectations, which can be applied to estimated operating costs for your favorite miners to yield a sneak peek at hurriedly expanding operating margins. For lower-cost producers like Eldorado Gold (NYSE: EGO) and my top pick, Gammon Gold (NYSE: GRS), operating margins will have surged to $950 or more for each ounce of gold produced in the fourth quarter, representing roughly two-thirds of operating revenue.


These momentary, manic maneuverings by momentum traders, however, reveal nothing about the longer-term upward trend in worldwide investment demand for gold. Amid the sudden liquidation in New York, traders in London and Hong Kong were reportedly "stunned" by the scale of buying activity from China in January. London's Financial Times quoted one banker observing: "The demand is unbelievable. The size of the orders is enormous." The Shanghai Gold Exchange reported that Chinese gold imports during the first 10 months of 2010 surged to more than five times the corresponding level from 2009! China is on the brink of overtaking India as the world's largest importer of gold, and convenient new investment programs like the Industrial and Commercial Bank of China's Gold Accumulation Plan open the vault doors to massive potential influx of retail demand for physical gold. With gold savings options going for as little as $1.53 per day, the GAP program presents a sea of change in gold's accessibility for the masses.



12 Comments – Post Your Own

#1) On February 08, 2011 at 5:44 PM, DavidSobel (< 20) wrote:

Here is one Gold and Silver have a history of trading at a 10 to 1 ratio.  That said Gold might pull back a little so Silver can catch up now that the SEC is breathing down the necks of the board of trade for price fixing silver.  Since the story came out Silver is up $10 an ounce.  With Gold at $1450 Silver has a big run to get to $145.  On the other hand Gold can pull back a bit so silver has less of a run to catch up and the board of trade can look good to the feds.  It is a win win as Silver still makes its run and then Gold looks more attractive and maybe just maybe the historical ratio can be maintained.

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#2) On February 08, 2011 at 6:01 PM, DavidSobel (< 20) wrote:

Why does gold dip, you say?  To make the dollar attractive again to the world market.  With India making mega buys of gold and China needing more and more gold this run up in the price of gold is a house of cards.  They are dumping dollars for gold (suprise suprise) because who wants to own the debt of a country that prints more money.  So if we drive the price of gold down they will own our debt in gold as its value is deflated.  They will want dollars again we hope otherwise it is hyper inflation for the US down the road!

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#3) On February 08, 2011 at 6:36 PM, XMFSinchiruna (26.53) wrote:


The long-term historical ratio is actually more like 16:1.


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#4) On February 08, 2011 at 6:51 PM, Jbay76 (< 20) wrote:

OK Chris,

Here are my speculatios on #3-5...

#3- Quantitative Easing, 1, 2 and those to come

#4 Demand for gold, and all PM's at this piont has out-stripped supply

#5 On the heels of #4, if you can't ge the real thing,get shares inthe companies that get the real thing. 

So, thanks agin for your analysis onthis sector.  It is truly a diamond within TMF!



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#5) On February 08, 2011 at 7:19 PM, rd80 (94.67) wrote:

You mentioned it in the article, but JPM's decision to accept gold as collateral is very interesting.

The WSJ article on it mentions that JPM is just one more step in a trend that's already growing around the world.

It's one more argument, and a strong one, that gold is considered a currency.

Fellow Fool Valyooo's blog entry deserves a shout out as well.

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#6) On February 08, 2011 at 7:22 PM, rd80 (94.67) wrote:

Falling bond prices signals more inflation on the horizon is a good candidate for one of the remaining three reasons.

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#7) On February 08, 2011 at 8:36 PM, rfaramir (28.68) wrote:

I've never bought on margin, so I've never lost collateral in a margin call, so could anyone tell me how it is done?

Say you've put up 100 shares of IBM as collateral for your loan so you can purchase some risky stock you have a hunch about. The hunch proves wrong, losing say 40% of value, so the brokerage makes a margin call. You have no more cash handy, so you say "Take my IBM shares". The problem is, they've lost 10% in the meantime. (It was a general downturn, but your stock took it on the chin, IBM just shaved.) Does the brokerage take ownership of your IBM shares and also says you owe them the other 10%? Or do they just call it a day, or something else?

I'm just certain that this is another way for JPM to get their mitts on more gold (as lost collateral), so they can fractional-reserve lend it out to multiple people at once like they do cash. And short it. 

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#8) On February 09, 2011 at 1:44 PM, Starfirenv (< 20) wrote:

  Strongman-Greetings from "Isla Bonita", Bz. I am really surprised at the mere 7 comments.
  I would bet that the "collateral" will be held in unallocated accts with a similar provision as was used here-
 Not sure about imminent (looks like a good bet though), but the following potentialites come to mind:
1.  Implosion of the ponzi/paper PM derivitive game.
2.  Delivery default
3.  The continued acceleration in the race to debase global fiat currency.
4.  Inflation-vanilla or hyper
5.  Bursting of the "Confidence Bubble"
6.  Loss of "reserve currency" status
7.  Etc, etc.
  I agree with the overlap concept- but it all comes down to supply/demand which can change fast for a variey of reasons and/or a combination of.
  A couple short reads which, "knowing you", have probably read, but may add to someone's understanding.
  On the leveraged short to which you referred:
  On paper vs physical and to scope of the derivitives mkt:
+1 here, +1 at the source, thanks again for your efforts. Best

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#9) On February 10, 2011 at 6:48 PM, magnetpal (< 20) wrote:


 Do follow potash plays? Have you come across encanto potash? Seeing great runs by potash plays lately, the market waits for their resource release which is rumored to be a great one.Thought your thoughts on this might be helpful.

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#10) On February 10, 2011 at 7:36 PM, silverminer (30.04) wrote:


I would to be able to say I follow the potash market. With everything else I follow, however, I simply lack the time.

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#11) On February 11, 2011 at 4:37 PM, DavidSobel (< 20) wrote:

It is all so sick and it is a house of cards waiting for the right wind.  My guy said to buy wheat futures before Russia had all the bad weather and contracts went to $10.50 a bush. and then Russia does not live up to the contract ( suprise suprise )  I still did ok but I say let them eat sand and learn the meaning of the word contract.  I can not wait for all the U.S. beef and hogs that were in feed lots with $10.00 wheat to price out in our local meat markets.  I think I am going to buy a boat load of Mcd's and Wendy's and Sonic.  The price of that beef is going to get passed on to every : ( unhappy meal for a long long time.  Their profits should move and the street should like the numbers.

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#12) On February 13, 2011 at 10:34 PM, skypilot2005 (< 20) wrote:


 I did some D. D. on  encanto this weekend.  Looks good.  I am going to buy some tomorrow.  Placed a limit order this evening.  Thanks, for the heads up.


Sky Pilot

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