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XMFSinchiruna (27.82)

Cash + PM Stocks = Our Best Shot at a Safe Haven

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April 18, 2011 – Comments (35)

I have decided to gradually increase my own cash allocation from 10% to 20% as silver's as the recent run-up in prices makes it convenient to do so. Cash by itself is a seriously flawed safe haven, but when combined with the incredible profit outlook for gold and silver miners, I submit that the two combined create about the most favorable of any safe haven asset I can identify.

I hope you enjoy the discussion linked here.

http://www.fool.com/investing/general/2011/04/15/the-ultimate-safe-haven-assets.aspx

And please be sure to read my comments below the article as well.

 

35 Comments – Post Your Own

#1) On April 18, 2011 at 5:48 AM, XMFSinchiruna (27.82) wrote:

Of course, for mining stocks to fulfill their safe haven role, they must operate in safe jurisdictions ... which is why the developments in Bolivia and the political climate in Peru are included in the discussion as well. I still think Canada has the lowest risk profile around, and so I enjoy counteracting my own elevated degree of exposure to operations in Mexico with the fortified jurisdictional attractiveness of Canada.

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#2) On April 18, 2011 at 7:25 AM, XMFSinchiruna (27.82) wrote:

From Trader Dan Norcini:

Note the steep decline in the line that began in the summer of last year which lasted throughout the remainder of 2010. Only towards the end of last year did the juniors recover a bit of ground but the best they could do was to retrace a small portion of their losses against the large cap miners by moving higher but since January they have gone nowhere against the large caps.

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#3) On April 18, 2011 at 7:28 AM, XMFSinchiruna (27.82) wrote:

Sorry, the image comes out unclear ... best to go to Dan's post here, and click on the images individually to see them in larger format.

http://jsmineset.com/2011/04/17/gdx-majors-versus-gdxj-juniors-ratio-chart/print/

The images charting ratios of select silver stocks vs. the silver price is very compelling evidence of the enormous upside that continues to remain baked into the quality shares whose reserves have still not been properly accounted for in prevailing market valuations.

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#4) On April 18, 2011 at 8:36 AM, BillyTG (29.47) wrote:

Agreed. My cash position is the highest it has been in several years, as I prepare for some heavy volatility and a possible summer of discontent.  There are too many global issues that could result in serious PM weakness (and buying opportunity).  The Euro is about to take a fall again, versus the dollar. A strengthening dollar (temporarily), relative to other fiats, could drag down PMs (temporarily).  I see comments all the time expressing the "certainty" of QE3 or certainty that there will NOT be QE3. Even Fed presidents don't seem to know, yet amateurs are making huge gambles on that decision.  The implications of guessing wrong could hurt...better to keep some cash on the side to pick up PMs on big dips.

Thank you for the excellent PM coverage. 

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#5) On April 18, 2011 at 9:07 AM, MoneyWorksforMe (< 20) wrote:

S&P cuts outlook on US to negative. Stock futures plummet gold and silver jump...

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#6) On April 18, 2011 at 9:18 AM, reinman60 (< 20) wrote:

Chris,

 Dan Norcini's post is must reading in that it puts the underperformance of the silver mining stocks in perspective.

The hedge funds, as usual, are all in the same trade, in this case the ratio spread trade long physical (via ETFs) and short the miners.  The graphs provide an excellent illustration of how far this trade has been stretched, and how distorted valuations have become relative to historical norms.  There are huge short positions in these stocks and fundamentally they're very cheap.  This is a recipe for an upside explosion which could occur at any time.  As usual, when this trade is unwound, all the hedge fund lemmings will want out at the same time, and the results will be something to behold.

Aside from these technical factors, I also think that the relative underperformance of gold and silver mining shares reflect a high degree of scepticism and lack of belief in the powerful rally in the PMs. It's as if the market is saying "gold and silver should not be trading at these levels- gold should be $1000 and silver should be $30." Bubble indeed!  I interperet this as a very bullish sentiment indicator. This same scepticism, which has been in evidence every step of the way, will continue to propel us to new heights.

Also of note is this story:

http://www.bloomberg.com/news/2011-04-15/texas-university-endowment-holds-almost-1-billion-in-gold-bars.html

If a large college endowment take such a large position in gold, how long will it be before Harvard, Yale, TIAA-CREF, CALPERS, etc. do the same.  My guess is, not very.

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#7) On April 18, 2011 at 9:22 AM, MoneyWorksforMe (< 20) wrote:

BillyTG,

"My cash position is the highest it has been in several years, as I prepare for some heavy volatility and a possible summer of discontent''

You said this back in late March. Silver is up roughly $6/oz (+15%) and Gold is up $65/oz. (+5%) since your move. You will now need to see a sizable correction just to get back to square one... 

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#8) On April 18, 2011 at 9:39 AM, XMFSinchiruna (27.82) wrote:

MoneyWorksforMe

regarding comment #7, insurance can often feel like a severe opportunity cost ... that is, until a policy-invoking event occurs. Provided pm investors retain their long-term core exposure, it's hard to fault the idea of seeking substantial insurance given the number of palpable risks of a widespread selloff event. That event may never come, and that would be terrific news, but each investor must decide for him/herself their own comfort level for an appropriate alocation to pm equities and cash.

reinman,

I agree wholeheartedly with your comment #6.

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#9) On April 18, 2011 at 9:43 AM, XMFSinchiruna (27.82) wrote:

IAG is looking sweet here ... more later.

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#10) On April 18, 2011 at 9:50 AM, BillyTG (29.47) wrote:

MoneyWorksforMe,

You're right...I did say that, right here.  I also said "Today, I sold off about 80% of my SLW LEAPs that I purchased last year.  I made a small fortune, my biggest single trade ever.  Luckily the orders filled at my limit order price of $14."

Guess what those calls are selling for today...?  $11.25.  Do me a favor and tell me what kind of sizeable correction I need to see just to get back to $14...

I also said this: "I still hold other SLW calls, CDE calls, and plenty of silver/gold stock.  A significant portion of my portfolio is physical. When I say physical, I'm talking actual silver rounds and bars that I've handled and locked up.  I'll buy more physical with my cash position if I see some good dips."

Hell, the title of my blog was: 

Sold SLW Calls; Still PM Bullish; Positioning for Market Mayhem

The bottom line is that you're putting yourself at huge risk in being fully invested right now (or ever, really), in PMs, conventional equities, cash, etc. Selling off my time-sensitive OPTIONS to increase cash reserves and prepare for PM dips is hardly anything to criticize.

That pricing movement (SLW/miners vs spot price) actually underscores what Sinchi is talking about in this post. We are not seeing linear relationships between spot price and miners

Reading comprehension is important. Thanks for keeping me honest. I guess?

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#11) On April 18, 2011 at 9:51 AM, MoneyWorksforMe (< 20) wrote:

Miners past few days in general have not been responding well to surging spot metal prices...There does seem to be a lot of skepticism out there...

We may not need the metals market to correct to get another good buying opportunity...Spot prices up + miners down equals a great buying opportunity...

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#12) On April 18, 2011 at 9:56 AM, MoneyWorksforMe (< 20) wrote:

Why are miners and spot prices diverging?

What are your thoughts? 

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#13) On April 18, 2011 at 10:08 AM, BillyTG (29.47) wrote:

Reinman60, in Comment 6, has the most likely reason for the divergence. Zerohedge PM articles usually have some very insightful comments on this. Terd Ferguson, Trader Dan, and Harvey Organ are other sources that people heavily invested in PM should probably be following for info on issues like this.

Edited to put "Terd" since the actual spelling was caught by the profanity filter. Sorry TMF for being "inappropriate."

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#14) On April 18, 2011 at 10:50 AM, silverminer (31.54) wrote:

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#15) On April 18, 2011 at 11:13 AM, reinman60 (< 20) wrote:

@BillyTG:

These are all good blogs for getting a short term trading perspective on the PMs.  While most of us here are not traders, but rather investors (disclosure, I traded for a large bank for many years, not PMs but FX), I think that having some sense of what's going on short term can of value to an investor in the following way.

While I think we all feel (and rightly so, given a myriad of fundamentals) the the PMs are in a secular bull market that has a long way to go, this is an intermediate to long term view.  Short term, funny things can happen.  There's a lot of trading activity that can distort price relationships (look at the performance of SLW, or most of the silver miners for that matter, the last several days relative to silver), and can cause you to start doubting your judgement in establishing a position.  I call it "Do 'they' know something I don't know" syndrome.  If you understand what's going on in this arena, and realize that it's due to a particular trade being establish by hedge funds, you get a different perspective. 

Hedge fund traders have a firm commitment to the prevailing wind.  For them a week is an eternity.  They identify a trade (usually they all see the same thing at the same time) put it on, and push it to the limits, hoping to get out with a profit before it blows up in their faces.  Sometimes they win, sometimes they lose. The ratio spread trade I mentioned in comment #6 is the one they're in now, in pretty large size given the lid they've put on the mining stocks.  But realize that this is a short term phenomenon- any spread trade that gets put has to get taken off.  I don't know when they'll start covering their shorts in the miners, could be in a few days, or it could take weeks or months.  In the meantime its pretty frustrating, but realize that the large short postions in these stocks, coupled with very low valuations, is setting up an explosive situation.

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#16) On April 18, 2011 at 12:24 PM, tdonb (22.71) wrote:

My only problem with having a huge cash position right now is that there are so many PMs that look good already.

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#17) On April 18, 2011 at 12:33 PM, Valyooo (99.55) wrote:

http://finance.yahoo.com/echarts?s=SLV+Interactive#chart10:symbol=slv;range=1y;compare=slw+gpl+exk+ag;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

Who says miners are underperforming?  SLW, GPL, EXK, AG are all doing fine...I guess you just have to find the right miner

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#18) On April 18, 2011 at 12:37 PM, MoneyWorksforMe (< 20) wrote:

I'm thinking the silver and gold funds, namely PHYS and CEF (Low NAV, holders of physical metal) may serve as the best ways to risk off vs going to cash...Shorters are having success against levered gold and silver plays because the addition of yet another uncertainty (diverging share price) is pushing many investors risk tolerances over the edge.

I read and thoroughly considered reinman60's comments and do think there is a great deal of truth to them...I also realized that the strategy employed by hedgefund traders was very skillfully timed as SLW's CEO suddenly stepping down, and recent developments regarding potential nationalization of several mines in Bolivia added fuel to already high levels of preexisting uncertainty surrounding U.S. political decisions and the future of precious metal prices. Was this all a coincidence? Perhaps. Maybe they lucked out immensely, and would have employed this strategy regardless. What I do know is that all of those seemingly unrelated developments within one industry over a very short period of time definitely helped their risky and coordinated investment strategy. At some point the strategy breaks down, and I will be keenly watching when signs begin to materialize.

As an aside, I continue to hate the dollar. I don't think it makes it much higher from here, after today's very solid run. I think there exists a ceiling around 76 and it will need significant momentum to get through that level...

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#19) On April 18, 2011 at 1:08 PM, reinman60 (< 20) wrote:

@Valyooo:

You're right.  Longer term, these have been performing great.  The point I was trying to make, maybe not clearly or well enough, is that many of them have been lagged lately, and that this is just a short term phenomenon.  For example silver is up about 39% this year, and SLW is up only 6%.

@MoneyWorksforMe:

"Was all this just a coincidence?"

I doubt it.  There are no coincidences with these guys.  They have a lot of firepower, and are really skilled at exploiting any perceived weakness in a particular sector.  But, the gains from these kind of trades, as I've learned from having my head handed to me on several occasions, can evaporate and turn into losses quickly and viciously when you least expect it.  These guys live in a zero sum world, and reversion to the mean can be a real bummer.

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#20) On April 18, 2011 at 1:55 PM, Horiemon (< 20) wrote:

What about http://caps.fool.com/Blogs/bull-n-bear-on-aaa-rating/577404 ?

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#21) On April 18, 2011 at 2:17 PM, jesusfreakinco (28.85) wrote:

Nice day to do a little day trading with that spare cash... Miners are a bargain today when compared to drop (or rise...) in silver and gold.

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#22) On April 18, 2011 at 2:24 PM, silverminer (31.54) wrote:

On IAMGOLD:

The Mid-Cap Miner with $1 Billion to Invest

http://www.fool.com/investing/general/2011/04/18/the-mid-cap-miner-with-1-billion-to-invest.aspx

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#23) On April 18, 2011 at 2:25 PM, reinman60 (< 20) wrote:

About the S&P downgrade; some strange things happening in the market in response.

Dollar Index up almost 0.9% (scroll towrds bottom of page):

http://www.marketwatch.com/investing/currencies/tools

Equity markets off by about 1.5%, but the bond maket's behavior is  very surprising- 2s-10s actually rallying, and 30s only off  09 pips:

http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

Only thing I can think of is Bill Gross on the bid, who having gotten advance notice of this, sold his bonds, expecting a bill sell off so he could buy back cheaper.  When it didn't materialize, he decided  he'd better go ahead and bid now.

PMs, at least, strong as you might expect.

 

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#24) On April 18, 2011 at 2:31 PM, chk999 (99.97) wrote:

Sinchy, I completely agree with you the increased utility of cash right now. While it isn't that great in an inflationary environment, in the medium run it gives you a whole heap of flexibility.

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#25) On April 18, 2011 at 3:53 PM, MoneyWorksforMe (< 20) wrote:

Sinch,

Thanks for bringing IAG to our attention; I had no idea how poorly it had been performing recently (down ~15% while gold is up ~ 5%, particularly relative to gold... From a technical and valuation perspective, it looks very attractive. 

Very interesting article as well... ~$1bill of cash and cash equivalents...that's a great value at ~$20/share...

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#26) On April 18, 2011 at 5:15 PM, ajm101 (32.03) wrote:

TMFSinchura -

Any thoughts on Yukon-Nevada?  It's unusual in that it's a PM company that comes up periodically in value investing circles.  Since you've listed your holdings and you're well acquainted with the area, I am curious if you have a reason for avoiding it.

 

 

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#27) On April 18, 2011 at 5:48 PM, silverminer (31.54) wrote:

MoneyWorksforMe

Yes, and a small portion of that $1 billion is held in gold bullion. Bonus! It's a terrific company that I've owned since 2005, and intend to hold for the long haul.

ajm101

I own a tiny bit, left over from my Queenstake holding pre-acquisition. There is value there, as well as some promise in the exploration assets, and I hope they can continue to unlock their potential effectively. The roaster is a strategic asset, but it carries baggage with respect to public relations with respect to environmental impacts (even though the company has installed a scrubber that keeps mercury emissions to a minimum. It remains an elevated-risk gold play until either something more concrete and longer-term is arranged to make Jerritt Canyon profitable, or Ketza River progresses well, etc. With any significant achievement along the stated path toward the stated production goal of 400,000 ounces per year in 2-3 years, the stock should revalue nicely. It's a tricky play to call, but of course the potential for outsized gains is there ... and wouldn't that finally have me feeling better about my $1+ cost basis carried over from Queenstake?  :)

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#28) On April 18, 2011 at 7:38 PM, magnetpal (< 20) wrote:

Sinch, did you see the latest NR from aurcana? They rejected the 25m credit facility from Sprott and facing legal suits. Whats your opinion on this?

 That deal was one of my main concern (apart from so much dilution) not enter into aurcana since they lose much on that deal. Now they are not going with that deal, I think its good for aurcana. But I am not sure about the outcome of the law suit though.

 

 

 

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#29) On April 18, 2011 at 7:51 PM, silverminer (31.54) wrote:

Guys, you have no idea how slammed a typical day is for me. :) If at all possible, please include links when posing a question about a specific news item or development. I just went to Aurcana's website and didn't imm,ediately find the press release you're referring to, but also definitively do not have time to dig for it. Thanks to everyone for keeping that in mind.

I hope to have the next installment in the microcaps series ouyt sometime tomorrow.

 

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#30) On April 18, 2011 at 8:17 PM, magnetpal (< 20) wrote:

I am sorry Sinch:). I will do that here onwards.

http://www.reuters.com/article/2011/04/18/aurcana-idUSL3E7FI38120110418?feedType=RSS&feedName=basicMaterialsSector&rpc=43

Waiting to see the next jewel in the series:).

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#31) On April 18, 2011 at 8:57 PM, ajm101 (32.03) wrote:

Thanks Sinch, appreciate it. 

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#32) On April 19, 2011 at 5:43 AM, XMFSinchiruna (27.82) wrote:

magnetpal

Thanks for the link. :) That's a bold move by Aurcana, and in these instances when both parties claim they are in the right legally speaking, it can be very difficult for investors to speculate as to the outcome of litigation. If someone has the time or inclination to check past filings from late last year, which might include mention of the Sprott credit facility, it would seem key if language employed indicates there that the facility was non-binding.

I agree it's a positive move for Aurcana, provided the legal issue comes out in their favor. Otherwise, they've only made the expensive borrowing more expensive still.

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#33) On April 19, 2011 at 9:07 AM, reinman60 (< 20) wrote:

CAZA Gold Appoints Vice President of Exploration

 

http://www.cazagold.com/news/

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#34) On April 24, 2011 at 9:34 PM, skypilot2005 (< 20) wrote:

Sinch,

 

I the spirit of collective D. D., here’s a couple updates on Northern Abitibi.  The interest of MineralFields may be a positive development…..

SkyPilot

 

4/18/11

 

Web: http://www.naminco.ca

 

Northern Abitibi Increases and Closes Previously Announced Non-Brokered Financing

Northern Abitibi Mining Corp. (‘Northern Abitibi’) is pleased to announce that it has closed a non-brokered private placement of 3,380,000 units (“Common Units”) at a price of $0.12 per Common Unit and 4,471,230 flow-through units (“FT Units”) at a price of $0.13 per FT Unit for gross proceeds of $986,860.

MineralFields Group purchased $360,000 of this placement and Northern Abitibi is pleased to be entering into this relationship with MineralFields and look forward to working with MineralFields as we continue to explore and develop our Viking Property in Newfoundland.

Each Common Unit consists of one common share and one common share purchase warrant. Each common share purchase warrant entitles the holder to purchase one common share at a price of $0.20 per share until April 15, 2013. Each FT Unit consists of one common flow-through share and one-half of one common share purchase warrant. Each whole common share purchase warrant entitles the holder to purchase one common share at a price of $0.20 per share until April 15, 2013.

The Common Units and FT Units were offered on a non-brokered basis by way of private placement to accredited investors and all securities issued are subject to a hold period until August 16, 2011. A director subscribed for 192,308 FT Units.

A finder’s fee of $50,297 was paid and 426,224 brokers’ warrants were issued to eligible agents. Each brokers’ warrant will be exercisable at an exercise price of $0.12 into one common share until April 15, 2013.

 

MineralFields Group (a division of Pathway Asset Management), based in Toronto, Vancouver, Montreal and Calgary, is a mining fund with significant assets under administration that offers its tax-advantaged super flow-through limited partnerships to investors throughout Canada as well as hard-dollar resource limited partnerships to investors throughout the world. Pathway Asset Management also specializes in the manufacturing and distribution of structured products and mutual funds (including the Pathway Multi Series Fund Inc. corporate-class mutual fund series). Information about MineralFields Group is available at www.mineralfields.com. First Canadian Securities ® (a division of Limited Market Dealer Inc.) is active in leading resource financings (both flow-through and hard dollar PIPE financings) on competitive,

effective and service-friendly terms, and offers investment banking, mergers and acquisitions, and mining industry consulting, services to resource companies. MineralFields and Pathway have financed several hundred mining and oil and gas exploration companies to date through First Canadian Securities ®.

 

http://www.mineralfields.com/index.cfm

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#35) On April 24, 2011 at 9:40 PM, skypilot2005 (< 20) wrote:

4/21/11

 

NORTHERN ABITIBI RECEIVES 2011 EXPLORATION PERMITS AND SIGNS DRILL CONTRACT

Northern Abitibi Mining Corp. (“Northern Abitibi”) is pleased to announce it has received exploration permits and has signed a drill contract for its 2011 exploration program at the company’s wholly owned Viking gold property in Newfoundland.

The 2011 exploration program will include a property scale induced polarization – resistivity geophysical survey,  3500 to 4000 metres of diamond drilling, additional trenching, mapping, surface sampling and possibly metallurgical and bulk sampling studies. The goal of this program will be to maximize high grade resources along the Thor Trend and identify additional areas on the claim block where resources can be defined.

Infill and expansion drilling on the Thor Trend is expected to start mid-May with one drill rig. This drilling will focus on expanding the known high grade gold shoots. Northern Abitibi plans to add a second drill to the project in June subject to availability of drills and drill crews. This drill will be used to explore the Thor Trend at depth and test additional targets on the property.

The Viking Property - The Viking Property contains numerous high grade veins within larger bulk tonnage style zones of gold mineralization located within a 3 to 4 kilometre long gold-in-soil anomaly. Drilling highlights include high grade intercepts of 5.75 metres grading 33.7 g/t gold, 3.7 metres grading 50.1 g/t gold, 0.5 metres grading 218.8 g/t gold as well as lower grade intercepts including 27 metres grading 7.9 g/t gold, 23.0 metres grading 5.1 g/t gold, and 57.4 metres grading 2.8 g/t gold.

The Thor Trend contains an uncut Inferred Mineral Resource containing 131,511 ounces of gold. Northern Abitibi has a 100% property interest in the Viking project subject to a 2% to 4% sliding scale net smelter royalty held by Altius Resources. The Property is located in the mining

friendly jurisdiction of Newfoundland and Labrador, and has excellent access and local infrastructure, with a paved highway and power line located less than one kilometre from the project. A detailed description of the Viking project is available on our website (www.naminco.ca).

 

Options - Northern Abitibi has granted stock options under its Stock Option Plan to two consultants to purchase up to 75,000 common shares at an exercise price of $0.12 per share for a period of three years commencing on

April 20, 2011.

Technical Report - The Corporation expects to receive a technical report next week detailing the March 2011 resource estimate for Viking which will then be filed on Sedar (www.sedar.com).

Dr. Shane Ebert, P. Geo. is the Qualified Person responsible for the preparation of this news release.

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