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XMFSinchiruna (27.35)

The Race Begins for the Miners of Gold

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October 03, 2011 – Comments (38)

Those of us invested in the space have anticipated the starting gun for some time now ... the one that starts the race to see gold mining shares finally give chase to the long-term gold price trajectory.

With the announcement over the weekend that Qatar's wealth fund will invest $10 billion in a "gold buying spree", I believe the starting gun has just been fired.

http://www.telegraph.co.uk/finance/personalfinance/investing/gold/8802793/Qatari-wealth-fund-plans-10bn-gold-buying-spree.html

More thoughts from me on this later in the day. For now I wanted to get your wheels churning on this significant development.

38 Comments – Post Your Own

#1) On October 03, 2011 at 8:35 AM, torpex77 (< 20) wrote:

Chris,

 

Any quick thoughts on Copper Fox?  Under a $1 would seem to be a very attractive price. But I thought that at under $2, too.

 

Thanks.  I've learned a lot from reading your posts (but still have quite a ways to go.)

 

Doug

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#2) On October 03, 2011 at 8:43 AM, XMFSinchiruna (27.35) wrote:

torpex, At <$1 it's back near the range of where I first brought it to the attention of the community with an all-out plea for Fools to have a look. IMO, it's an amazing second chance. (Long CPFXF)

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#3) On October 03, 2011 at 9:03 AM, jwebbzor (< 20) wrote:

Interesting how he said the Qatar fund will be focusing on gold miners in Africa and Russia because North American gold miners are valued too high.

I'd like to know what African Exchanges have the lowest valuated gold miners.

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#4) On October 03, 2011 at 9:22 AM, SN3165 (< 20) wrote:

I'd like to know what North American miners are overvalued! lol

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#5) On October 03, 2011 at 9:38 AM, XMFSinchiruna (27.35) wrote:

Yeah ... I am not as familiar with valuations for Russian projects, but I have done some homework on the African continent. I haven't observed a valuation disconnect beyond that which may be appropriate for given political jurisdictions, and certainly I would refute any characterization of North American gold equities as anything less than extraordinarily undervalued.

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#6) On October 03, 2011 at 10:03 AM, catoismymotor (51.71) wrote:

It would be nice to have my miners break out of the gate like a crazed race horse. It would make for a nice change of pace compared to recent weeks.

All the best,

Cato

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#7) On October 03, 2011 at 11:04 AM, reinman60 (< 20) wrote:

Abent on the boards for a while due health issue in family, which thankfully has resolved itself positively.

I think the move by Qatar is the first salvo in a trend that will only accelerate from here: sovereign wealth funds of surplus nations swapping out of dollars, and into physical assets. Gold miners will lead the way. Many of these countries are on record as wanting to increase their gold reserves. China already captures the entire output of the gold mining industry. You can't help but believe that they too would love to make similar aquisitions.

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#8) On October 03, 2011 at 2:26 PM, reinman60 (< 20) wrote:

Good article in FT regarding this.

http://t.co/sJtzDZz5

Not sure if behind paywall or not.

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#9) On October 03, 2011 at 3:21 PM, jwebbzor (< 20) wrote:

Anybody picking up BRD today? It fell back onto support around the 1.09 to 1.10 mark.

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#10) On October 03, 2011 at 3:49 PM, reinman60 (< 20) wrote:

@jwebbzor

Added some at 1.12

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#11) On October 03, 2011 at 4:20 PM, XMFSinchiruna (27.35) wrote:

pretty incredible how deep this disconnect between gold/silver and their respective mining equities continues to grow. Obviously, fundamentals are meaningless at this particular moment. Gold was up $28 today, and my portfolio was down pretty substantially.

What this sets up, it seems to me, is a looming time when that disconnect will switch sides, and we may see days/periods where down days for gold/silver correspond to a resilient relief rally for the miners/explorers. We're approaching a point where quite a few names are valued as if we had $1,000 gold, which incidentally is about the industrywide all-in cost of production. These sorts of market events are of course very difficult to read/predict, but even given my meemory of the 2008 correction it becomes difficult to envision the mining shares continuing much lower. Since rationality already has nothing to do with recent action, I could be completely wrong on that, but I can't help having a gut reaction that the pm mining equities make a stand here quite soon.

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#12) On October 03, 2011 at 4:29 PM, reinman60 (< 20) wrote:

Chris,

You're right rationality has nothing to do with this. I'm hearing lots of forced liquidations by hedge funds. These guys are highly leveraged, and right now, survival is the only thing on their minds. Value is meaningless right now.

In this evironment, anything could happen, but there are some incredible values out there.

Interesting piece by the CEO of Seabridge Gold

http://www.seabridgegold.net/readmore.php?newsid=346

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#13) On October 03, 2011 at 4:31 PM, 100ozRound (29.40) wrote:

We're close Sinch - we're very close...

my gut feeling too

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#14) On October 03, 2011 at 4:42 PM, Frankydontfailme (27.20) wrote:

Meh. Just wish I had some more cash.

It's amazing that gold AND silver are rallying even with the massively strong dollar. This means gold and silver are up compared to virtually everything. When the dollar starts to keel over (and it has to eventually, or the US economy/debt load is toast), gold and silver will launch, and I suspect the mining shares will go berserk.

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#15) On October 03, 2011 at 5:00 PM, jwebbzor (< 20) wrote:

I added small chunk of BRD at $1.11, really just nibbling at this point.

If the Euro continues its downtrend and it causes the dollar index to spike to 80 or 90, I think we will have better buying opportunities in gold, silver, miners, and commodities. Long term I'm bearish on the dollar, but in the short term I can't help but sit on a moderate amount of cash while I witness the end-game of the current global debt cycle.

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#16) On October 03, 2011 at 5:09 PM, SN3165 (< 20) wrote:

whats with the drop in Brigus?

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#17) On October 03, 2011 at 5:18 PM, XMFSinchiruna (27.35) wrote:

SN ... I see no difference between the recent action in Brigus and that of its peers. Nothing out of the ordinary on the 1-month chart.

http://finance.yahoo.com/echarts?s=BRD+Interactive#chart14:symbol=brd;range=1m;compare=pzg+cgr+azk+auq+rby+gss+aem;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

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#18) On October 03, 2011 at 5:36 PM, SN3165 (< 20) wrote:

Thats what I thought... seems a bit drastic. At $1.08 I can't believe my eyes..

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#19) On October 03, 2011 at 8:41 PM, memoandstitch (< 20) wrote:

Here's how the gold miners can continue to struggle while the price of gold goes up:

If the the cost of extracting gold is going up.

Check out FCX's news for example.  Their labor union is demanding a raise from $1 to $35 (that's 35 folds raise) for miners in Indonesia.  Eventually the company will see a drop in profit if their labor costs goes up at a faster rate than gold (and in this case, about 30x faster).

Gold price is not the only factor in gold miners' profitability.  What if there is not much gold left in the crust of the earth? 

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#20) On October 03, 2011 at 8:53 PM, XMFSinchiruna (27.35) wrote:

memo ... gold's price advance has more-than-adequately outpaced the increasing all-in cost structure. What's more, oil prices are the primary factor impacting mining costs, so recently weaker oil prices bode well for further margin expansion.

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#21) On October 03, 2011 at 11:03 PM, Speed03 (< 20) wrote:

http://www.telegraph.co.uk/finance/personalfinance/investing/gold/8802793/Qatari-wealth-fund-plans-10bn-gold-buying-spree.html

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#22) On October 04, 2011 at 3:26 AM, reflector (< 20) wrote:

 

you know, i just came across this report that billyTG posted, arguing that the price of oil is correlated to the price of gold, at around 16:1 (barrels vs ounces of course)

http://www.gleasonreport.com/documents/The%20Real%20Gold%20Standard.pdf

his central premise seems to be "when America went off the gold standard, we went on the oil standard." , as in, USD is not backed by gold reserves, but its place as reserve currency (i.e. petrodollars) is upheld by its use in petroleum exchange.

haven't heard of this author before but he raises some interesting ideas, worth some consideration.

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#23) On October 04, 2011 at 4:43 AM, BillyTG (29.15) wrote:

Reflector, here is some more reading about the oil-dollar-gold relationship. I came across this article a couple years ago and favorited it, because it seems to make sense. In short, the way I see it, the dollar IS backed by something: oil ("petrodollar"). Oil is then backed by the US military which ensures US control of the oil markets and forces global oil trade to be made using US dollars (some will argue that Iraq and Iran are/were US declared "enemies" not because of terrorism or other tiny threats, but because they dared to trade oil in other currencies. We destroyed Iraq, and Iran will be next).

So, it really is a simpleton's statement, IMO, to ever say "the dollar isn't backed by anything."  Alstry recently posted that energy will be used, at least in part, to back any future world currency. Well guess what? We already have an energy backed currency! Some questions to ask are how long can we afford (financially, and politically without setting off major war) that military, how long before other currencies start heavily trading oil?

Petrodollar Warfare

For a real mindbender, read Tom Gleason's Oct 2010 report on how the US will collapse in 3 phases, and how gold and oil, which he says will eventually decouple, are the plays recommended to conserve wealth. It is based heavily on peak oil, which is a little like global warming, where the public doesn't have all the information, and the government strategically withholds its own findings. So take that for what it's worth.

"I've called the first phase of this process The Big Markdown where asset prices drop in price. We're only part way through it. Phase two will usher in massive bond defaults and job losses. Phase three will include a currency collapse when the dollar is dropped as the world reserve currency. In phase one, asset prices fall. In phase two institutional promises to pay debts like pensions, annuities and bond insurance fail. In phase three the currency fails and systemic economic failure occurs and most probably amid very high inflation."

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#24) On October 04, 2011 at 10:03 AM, XMFSinchiruna (27.35) wrote:

BillyTG,

To say that the dollar's role as the dominant currency for oil trade (even if/when upheld through force or the threat of force) makes the currency "backed" by oil is a real conceptual stretch. In truth, the dollar remains backed by nothing more than the "full faith and credit of the United States". Some have said it's backed by the U.S. military, through actual, threatened, or implied use of force or forceful diplomacy. Even that statement obscures the true meaning of what it is to have a currency "backed" by something (i.e. a tangible asset). But unless you can trade in your dollars for oil, then the dollar is not "backed" by oil. So, while the dollar's current role on the world's financial stage is actively bolstered by its petrodollar role, and indeed the U.S. is keen to thwart any attempts to challenge that bourse ... that has nothing to do with "backing" of the currency itself.

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#25) On October 04, 2011 at 10:30 AM, BillyTG (29.15) wrote:

Sinch, I can't disagree with any of what you wrote, and this is more semantics than anything. I'm largely invested in PMs because I believe there will be fiat currency and political crises the world over, to include the dollar and the USA.  There is no formal "backing" of a dollar to oil or anything else tangible, so lets call it a complex relationship between oil and the dollar.

However I was trying to say that I also think it's inaccurate, and perhaps even dangerously unhelpful to PM investors, to ignore the dollar's relationship to oil and as the world's reserve currency.  Change those two features and the dollar as we know it stops.  As you seem to say in your last sentence, the US bolsters the (petro)dollar, forcefully if necessary, via oil. IMO, that needs to be recognized.  As the petrodollar falters as more countries begin oil trade deals in their own currencies (Russia-China, Iran-Russia), the dollar weakens.  I think that is bullish for gold.

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#26) On October 04, 2011 at 11:21 AM, XMFSinchiruna (27.35) wrote:

10 billion new reasons to buy gold miners

http://www.fool.com/investing/general/2011/10/04/10-billion-new-reasons-to-buy-gold-miners.aspx

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#27) On October 04, 2011 at 11:56 AM, reflector (< 20) wrote:

sorry, sinch, didn't mean to sidetrack the discussion, hope you can forgive me.

it's just an interesting idea i hadn't thought about, relationship between oil and gold.

getting back to subject at hand - yes i agree, $10B investment from qatar is huge.

but i wonder why they put it all in 1 company, European Goldfields?

why not diversify? makes me wonder if something else is going on.

@billyTG, thanks for the link, i'll have a look.

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#28) On October 04, 2011 at 12:46 PM, XMFSinchiruna (27.35) wrote:

reflector ... they didn't. They put $1B in European Goldfields. Roughly 10% of the targeted allocation. :)

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#29) On October 04, 2011 at 12:55 PM, TheDumbMoney (37.72) wrote:

Short term real interest rates troughed for the year on Friday, 8/12:

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldYear&year=2011

The year high for gold was the following Thursday, 8/18.

The trough in short term real interest rates retested its lows on or about 9/8 or 9/9.

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldYear&year=2011

Gold retested highs on 9/2 and 9/8.

The steep part of the recent correction in gold lasted from 9/20 to 9/26.  During that period, short term real interest rates increased sharply from -0.82 to -0.56.  That -0.56 was a level the highest level seen since 7/27/2011, at which time gold was within dollars of todays levels.

Also, companies are companies, and shares in silver and gold miners reflect claims to present and also long-term cash flows, going out 20-30 years, discounted to present value.  Accordingly, the shares of miners are properly valued based in part (along with their cost structures, etc.) on the estimated price of gold and silver over an "infinate," or at least 20 or 30 year period, if one follows the standard methodology of treating stocks as analogous to bonds.  The fact that gold and silver miners have severely lagged the major spurts of gold and silver metals (and 1-year futures), should therefore give one "cause for pause". 

If this thesis is incorrect, or even if the thesis is correct but the market has incorrectly priced the long-term forecast, then miners have a long way to rise. 

It is also possible short term real interest rates will decline further.  However, notably if the Fed maintains a fairly consistent policy (as it will until at least the next FOMC meeting), but deflationary pressures increase during that time, then by definition short term real interest rates should actually increase, hurting gold, as nominal short term rates will remain static while what little inflation their is in the economy seeps out and a deflationary scenario encroaches.

Best of fortune to all,

DTAF

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#30) On October 04, 2011 at 1:11 PM, TheDumbMoney (37.72) wrote:

Correction:  I think gold hit its high on 8/22, not 8/18.

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#31) On October 05, 2011 at 8:05 AM, reinman60 (< 20) wrote:

A little off topic as it concerns silver, but just came across this. Quite interesting..

 

http://www.scribd.com/doc/67350783/Silver-Gorillas-CFTC-Etc-1

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#32) On October 05, 2011 at 12:30 PM, truleuneek (< 20) wrote:

DTAF,

Thanks for the link.  I read your blogs about the theory, but didn't know where to get the real short term interest rates and the linked page shows those.  Wish I had seen it earlier.

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#33) On October 10, 2011 at 8:08 PM, Sturmudgeon (< 20) wrote:

Thanks so much, Sinch, and you others on this site... am trying to learn a bit here, and the posts are really interesting..

Sinch: you have posted comments on Alexandria in the past, that were favorable.. any changes there?

Thanks everyone.

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#34) On October 10, 2011 at 8:33 PM, Sturmudgeon (< 20) wrote:

barnhardt.biz has a blog indicating that the top five banks in the u.s.a. are holding something like 328 Trillion in 'crap' that is totally at risk because of no 'exchange' buffer between the debt and the buyer/seller, and that it is bound to collapse the "world economy soon... and that this will cause war(s) all over the globe...  scarier than anything else 'out there'

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#35) On October 10, 2011 at 9:13 PM, BillyTG (29.15) wrote:

Sturmudgeon, thanks for bringing up that blog. Your blogger was actually linking to this zerohedge article.

Her commentary, however, is frightening: "Here is a piece from ZeroHedge.com that hopefully will make you all understand, once and for all, that this ain't the 1930's, and that there is absolutely no way in hell that this Republic is going to make it to November 2012."

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#36) On October 11, 2011 at 1:33 PM, Sturmudgeon (< 20) wrote:

BillyTG:    sorry for the 'numbers' mixup... should have read 238 Trillion... guess at age 76, my mem is not as sharp some days. I apologize.

  A chum gave me the zerohedge site a short time back, and with dialup, I have been slow getting to some of those he gave me.  Thx. for the reminder.

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#37) On October 11, 2011 at 1:43 PM, Sturmudgeon (< 20) wrote:

Also, my wife and I live on between 5 & 6 hundred per month, so the "trillions" are unfathomable to us...

(no complaints tho')

lol.

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#38) On October 27, 2011 at 2:26 PM, TheDumbMoney (37.72) wrote:

Short term real yield has been going WAY LOWER starting a few days ago.....  Back to early September levels.

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