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XMFSinchiruna (26.55)

What the Market's Mayhem Means for Gold and Silver



August 05, 2011 – Comments (34)

During the afternoon hours Thursday I took part in a live chat session on The Motley Fool's home page, and it became clear folks out there had a lot of questions about gold and silver in relation to the deep market selloff. The following article represents my effort to paint as broad a picture as possible of the outlooks for gold and silver on both the near-term and longer-term horizons. It's never easy to touch upon everything you want to say within the space alotted -- and in this case I could have written a tome -- but all the same i hope the result is helpful to a broad swath of Foolish investors looking to make sense of gold and silver.

Thank you in advance for reading, reccing, and responding with your thoughts, and please don't forget that every rec, tweet, like, e-mailed link, etc helps an article like this one to reach a wider audience. :)


"That latter point is critical to understanding the resiliently bullish outlook for gold and silver. One might say it's the primary puzzle piece around which all others are arranged. You see, the still-deepening structural imbalance within the world's leading reserve currency (the U.S. dollar), together with the acute debt distress across the Atlantic blazing a similar trail for the euro, simultaneously herald the unavoidable devaluation of those two major currencies. Also, these conditions are, in turn, effectively forcing nations around the globe to engage in deliberate, competitive devaluation of their own currencies to defend their respective economic growth potential."

"In the final analysis, the broader story for gold and silver is all about the resurgence of alternative, time-tested monetary instruments to step in as viable safe havens to an increasingly sour-tasting array of competing paper currencies and sovereign bonds. Because public debts continue to expand around the world, and paper currencies continue to devalue en masse, I believe the long-term upward trajectory for gold and silver remains etched in -- well -- metal."

34 Comments – Post Your Own

#1) On August 05, 2011 at 5:32 PM, XMFSinchiruna (26.55) wrote:

Here's the same article over at AOL.

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#2) On August 05, 2011 at 8:17 PM, mjmac89 (< 20) wrote:


I doubled down on my CDE today heading into their earnings on Monday, and I plan on picking up some HL for Tuesday if CDE impresses. I remember a few weeks ago you wrote this article about how big silver profits should be this quarter:

Do you still feel this way? Are you buying silver heading into earnings? 

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#3) On August 05, 2011 at 8:51 PM, totallyoblivious (< 20) wrote:

I'm not quite as convinced of the long term bullish case for gold that you are, but I have to thank you for the article you wrote on AUY that led me to do my own DD and take a position in the company.  It  still stands out as being remarkably undervalued, and looks in prime position to be a cash flow machine over the next few years as new mines start producing even if gold were to inexplicably fall back to $1000/oz.  Any further increases in gold prices are just icing on the cake.

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#4) On August 05, 2011 at 10:27 PM, XMFSinchiruna (26.55) wrote:


I do still think silver profits will be huge, and they have been impressive already. But I;m not counting on rational appreciation of the shares in this near-term environment.

I'm nibbling at a few silver shares here, but still not buying big. I place too much value presently on the cash I have on hand until I witness signs of resurgent strength.

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#5) On August 05, 2011 at 10:34 PM, XMFSinchiruna (26.55) wrote:


the real icing on the cake will come when Agua Rica starts producing, and the market realizes how completely they misread the significance of that transaction.

You see, this transaction provides for a potentially super-charged kicker for Yamana in the form of a deferred revenue stream from Agua Rica's gold production. In addition to its retained 12.5% ownership share of the project's net proceeds, Yamana would receive bonus revenue from 65% of payable gold production, subject to adjustments for prevailing gold prices, and terminating after that revenue stream reaches 2.3 million ounces.

At $1,400 gold, used here solely as a current reference, this deferred revenue stream would carry a notional value of $2.1 billion, for a total notional transaction value of $2.4 billion for the 87.5% stake to be sold. For the relevant portion of Agua Rica's 8.6 million GEOs in reserves (converting silver at a 50:1 ratio), XSTRATA and Goldcorp would collectively be paying $318 using that theoretical spot price of $1,400 gold. Practically speaking, of course, it is very problematic to predict a long-term average spot price for gold over the lengthy portion of the targeted 26.5-year mine life that will be required to reach the 2.3 million ounces of gold payable to Yamana.

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#6) On August 06, 2011 at 12:20 AM, Valyooo (34.94) wrote:

I want to pick up some actual bullion....looking at long term chart, gold looks to be at resistance...looks like a 9% fall before I I reading this right?

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#7) On August 06, 2011 at 1:32 AM, Frankydontfailme (29.41) wrote:

Yeah Valyoo. Except for the downgrade.. hence the problem with technicals

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#8) On August 06, 2011 at 1:56 AM, Valyooo (34.94) wrote:

I don't see why the downgrade should effect this downgrade a wake up call for anyone?  Did anyone think the credit quality of America was flawless before 9:00 on friday?

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#9) On August 06, 2011 at 6:51 AM, Frankydontfailme (29.41) wrote:

I have no idea how markets are going to react to the downgrade. I can't imagine that treasuries won't be sold off. With the market fragile as it is, I can't imagine not seeing a big sell-off of the S & P with gold and silver extremely volatile (ending up none could know). Cash and gold will be king is my guess.

Tuesday.... enter Bernanke. Gold to 1,675 at least. Sinch's article (as, usual) is spot on. Nonetheless if you want to add gold you need to add at least some right away, whatever the price. It's simply too risky to assume a dip. And simply too likely to go parabolic without warning.

This is all happening so fast (at least in my head).... what to do about mining shares (hold I guess?) 

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#10) On August 06, 2011 at 9:52 AM, MoneyWorksforMe (< 20) wrote:

 "I don't see why the downgrade should effect this downgrade a wake up call for anyone?  Did anyone think the credit quality of America was flawless before 9:00 on friday?"

According to the yields on treasuries--they are priced as though America's  credit quality is flawless. The downgrade will increase the amount of interest investors demand for their capital...

I agree with franky. Linear trends are not safe ways to extrapolate future prices in this environment. Positive catalysts for precious metals are increasing over time, and I think that is capable of supporting much higher prices and establishing a trend line with a greater positive slope.

I would love a correction in spot gold prices, as it would be a "screaming buy", but I think upside potential is still greater than downside potential in the near-term.

The S&P downgrade and Bernanke speaking on the 9th are also two short term positive catalysts...

Some money will be leaving treasuries on the downgrade, in search of another safe haven, and some of it will wind up in precious metals.

I think Bernanke will really have to ratchet up his rhetoric on the 9th if he is to stem the recent spike in investors fears...The environment has once again become ripe for talking about additional stimulus as I believe we are once again in the midst of a deflationary scare, which is very reminiscent to what we experienced prior to the announcement of QEII...Commodities, such as oil are also well off their highs...

My call for next week is dollar down, precious metals up. 

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#11) On August 06, 2011 at 11:03 AM, XMFSinchiruna (26.55) wrote:

Franky... I agree it's very tough to predict the precise market reaction to the credit downgrade. All it really takes, though, is one sovereign holder deciding to execute a major downsizing of Treasury exposure to send bond markets and the USD reeling. If we end up with a situation where both the USD and Euro are falling simultaneously against the other major currencies, obviously gold and silver have nowhere to go but up ... way up.

If Bernanke were to announce a policy intervention Tuesday, which I rather doubt unless the downgrade impact proves acutely severe, then $1,675 is far too low a target to have in mind. Even just another strong hint at QE3 being under consideration could launch gold into the $1,700s. Remember Sinclair's guidance that "Gold between $1,600 and $1,764 is deciding its new and elevated role in international finance."

So obviously, the timing of S&P's downgrade of U.S. debt increases the likelihood that gold shakes off the near-term technical damage and proceeds -- with high volatility as Franky suggested -- higher. And yes, as Franky rightly points out, that is always the drawback of employing technical indicators as guidance when fresh fundamental developments can cross the wires at any instant.

I may become a bit more aggressive about redeploying cash into mining shares next week than I had planned. Please understand, Fools, that can make it very hard for me to write the kind of article I had planned to write regarding top picks for silver. I routinely sacrifice my ability to transact in a given stock for a few days at a time in order to bring timely analysis to the community, but during major dislocations like this one I have to give some thought to executing my investment strategy. Silver stocks have been the hardest hit, and therefore present the greatest opportunity for redeployment of cash. The names are nothing new ... the silver stocks that interest me are the same ones we've been discussing here for years ... though I might begin picking up a little bit of the one Mexican operator that so many people have begun paying attention to in recent months. :)

Next week I will likely prowl through the sector like a panther in search of attractive entry prices, and believe my odds of success are better than if I were playing Keno up in the Yukon. I may flock to China for silver, and the Destor-Porcupine fault for gold. I won't take a Mulligan on the mountain I want access to in BC, and I may ask Jean-Claude Trichet which junior gold producer he likes in Canada's heartland. It is of paramount importance -- primero importancia -- that we select well, as this may ultimately prove our last best chance to dig for prosperity.

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#12) On August 06, 2011 at 1:55 PM, mjmac89 (< 20) wrote:

I think that last paragraph just gave me a weekend's worth of detective work to sort through those clues :)

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#13) On August 06, 2011 at 3:12 PM, SN3165 (< 20) wrote:

I think the real debate here is whether money is best invested in the physcial or the mining shares. Gold has held up strong, but the stocks obviously have not. Patience is key and hopefully strong earnings will lift some of the shares up.

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#14) On August 06, 2011 at 5:34 PM, Frankydontfailme (29.41) wrote:

I agree that patience is key SN. I'm hoping the miners don't sell off too hard but am not optimistic. I'm not selling under any circumstance though.... maybe even buying.

If physical silver takes a hit I will buy for sure.


I agree with you Sinch on 1,675 being too low if the Bernank eases. I was taking a page out of your book with conservative estimates (I think we all know 2,000 an ounce gold is an absurd underestimate.... wink once).

 What I'm not sure about, is where gold goes if he doesn't initiate QE3 but focuses on continued low interest rates and the possibility for further easing in the future. Since I think this scenario is likely, I guess arodun 1675 but volatile. Meh, who knows.

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#15) On August 06, 2011 at 8:27 PM, givmeabreak (28.49) wrote:

Yeah, but what does the world look like with gold over 2k per ounce?

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#16) On August 06, 2011 at 11:35 PM, SN3165 (< 20) wrote:

What does the world look like at 1650?

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#17) On August 07, 2011 at 10:31 AM, Raambo20 (< 20) wrote:

The action over the past few months and more recently has made me a little bit worried. I have a large position in mining shares it seems as thought the shares are moving  in tandem with the market, opposed to the metal prices which directly influence their earnings. 

For example AUY recently reported stellar earnings, and good news about a new mine being ahead on the track to production. AUY sold off with the rest of the market the next day anyway. It seems like all equities, are being sold in favor of safety. I can only hope that over time the market realizes the earnings that some of these companeis have already started earning, and assigns a proper value for the shares.

 If QE III happens I agree that gold will go to 2,000 an ounce fairly rapidly. Assuming this QE has a similar effect to the last two ones, the equity markets might rally, and thus pull the  mining shares with them. Other than that I am not selling, but im skeptical the shares will move much in the near term even with gold going higher. 

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#18) On August 07, 2011 at 10:36 AM, XMFSinchiruna (26.55) wrote:


Think of the most attractively priced miners as offering access to bullion at massive discounts beneath spot. $1,650 will either buy you one ounce of gold in the hand, or 5-10 ounces of gold in the ground.

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#19) On August 07, 2011 at 11:24 AM, skypilot2005 (< 20) wrote:

Yukon-Nevada Gold Corp. Plans to Enter Into A Prepaid Forward Gold Purchase Agreement  


UPDATE 2-Yukon-Nevada plans $120 mln prepaid gold buy deal with Deutsche Bank

Deutsche Bank -- which owns more than 10 percent of Yukon-Nevada -- will lend the money to Queenstake.

About $26 million of the loan proceeds will be used to repay the senior secured notes issued to noteholders led by Sprott Asset Management LP in August 2010. Sprott owns 14.47 percent of Yukon-Nevada and is the second-largest shareholder of the company, according to Thomson Reuters data.

The company, which has a market value of about C$423 million, will not pay any interest to Deutsche Bank during the term of the facility.

Sky Pilot

Official Web Link Assistant to Sinch

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#20) On August 07, 2011 at 11:27 AM, skypilot2005 (< 20) wrote:

August 3, 2011 Tyhee Starts Drill Program at Yellowknife Gold Project

Sky Pilot

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#21) On August 07, 2011 at 11:29 PM, fndr489 (31.70) wrote:


I quickly glanced over this before reading it in more depth so someone may have asked you this already but I wanted to ask you before I forgot the question.

If we should return to the gold standard, what are your thoughts that the government would nationalize the miners ''in the interests of national security'' since the dollar would now be pegged to gold?  I agree that some exposure to gold via miners is a good idea but I got to thinking what the government would do now that private firms are digging up ''their money.''

And I also wanted to say thanks for all your hard work.  This will definitely keep me busy at work when the boss ain't lookin'!


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#22) On August 08, 2011 at 6:45 AM, outoffocus (23.91) wrote:

Gold over $1700 as we speak...

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#23) On August 08, 2011 at 7:54 AM, XMFSinchiruna (26.55) wrote:


Gold is a global asset, and targeting gold miners operating outside the U.S. is as simple as pie.

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#24) On August 08, 2011 at 8:02 AM, fndr489 (31.70) wrote:

Thanks Sinch.

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#25) On August 08, 2011 at 10:33 AM, silverminer (29.94) wrote:

Personally, I'm buying a lot of coal today.

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#26) On August 08, 2011 at 3:12 PM, jesusfreakinco (28.32) wrote:


When are the miners going to wake up and defend their stock price - dividends and/or buybacks are LONG overdue.  Do they all think they need to save money for acquisitions?


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#27) On August 08, 2011 at 5:34 PM, silverminer (29.94) wrote:


We have small dividends from many of the leading low-cost producers. But we also have rising capital costs, rising acquisition costs, increasing scarcity of large-scale new deposits, etc. I'm not waiting for the miners to defend their share prices ... I'm waiting for the market to wake up and take note of the valuation disconnect.

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#28) On August 08, 2011 at 7:01 PM, jesusfreakinco (28.32) wrote:


Thanks.  It seems to me that the management of these stocks SHOULD be defending their stock price by one or more of these methods.  Isn't management supposed to act in the best interest of the shareholders?  Yes.. that was a rhetorical question...


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#29) On August 09, 2011 at 9:45 AM, silverminer (29.94) wrote:

JFC, I think they are acting in the best interest of shareholders. I do not think oversized dividends or stock buybacks represent the best use of cash at this juncture. They need cheap production growth, whether through acquisitions, aggressive capital expansions, and/or aggressive exploration.

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#30) On August 09, 2011 at 10:27 AM, jesusfreakinco (28.32) wrote:


I guess it depends on what miners you are talking about.  I just remember Santa saying that he thought that shares would continue to be shorted (pair trade short miners, long metal) until dividends get large enough to discourage shorting.  

I guess you are saying that the price of gold and silver and the free cash flow they are generating is needed for expansion of operations and acquisitions rather than for dividends.  My point is that not all miners are sharks that should be saving money for acqusitions.  Some will be acquired, but your point would be that even those that will be acquired are probably better off putting funds into exploration and expansion of operations so they are more attractive to suitors.  

I guess I just expected divvys to start increasing given the significant underlying metal price appreciation and the sustainability of these prices - silver have been over $30/oz for a long time and gold has held over $1200/oz for a long time...

Thanks for your input.  

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#31) On August 09, 2011 at 3:42 PM, silverminer (29.94) wrote:


My point was not about becoming more attractive to suitors, but rather for securing production growth to offset the impacts of rising operating and construction capital costs.

The big internationals are also keenly aware that nations around the globe will be unable to resist tax hikes on gold and silver miners. Retaining cash on the sidelines in such an environment makes good sense. And in more general terms, retaining cash on the sidelines during times that are as uncertain as these from a macroeconomic standpoint has merits.

II think the dividends we currently have from the majors and low-cost intermediates are of an appropriate scale, and those that are not offering dividends for the most part do need to retain that capital.

Larger dividends will come above $2,000. I am satisfied the currrent prevailing yields as the beginning stages of a long-term trend toward growing yields.

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#32) On August 09, 2011 at 4:23 PM, jesusfreakinco (28.32) wrote:

Larger dividends will come above $2,000. I am satisfied the currrent prevailing yields as the beginning stages of a long-term trend toward growing yields.

That gives me hope!  Nice rally on Gold today.  Looks like the printing presses are back on!

I took the lead in DZZ today.  Feels good to be a leader in anything gold and silver related.  My trades in/out via MF have paid off.  Am close to the lead in ZSL as well and more importantly making some spending $ in real life.  However, looks like scary times ahead for our country.  According to Santa, 1764 is a scary threshoold to cross and we crossed it today even though we didn't close above it.  Just a matter of time before we have a daily and weekly close above that number then it looks like we may be going parabolic.

The EE is doing a good job capping silver, but they appear to be losing control of the gold market.  Go figure...


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#33) On August 09, 2011 at 4:38 PM, Raambo20 (< 20) wrote:


 Why do you think Silver is being held back, when equity markets rally silver takes a hit, and when gold was making new highs silver wasn't moving much. When do you think investors will look to silver as as much of a safe haven as gold? Or will they ever? It seems as though its trading like copper and other industrial metals at the moment,  even though industrial demand makes less than a quarter of total demand (I think). 

 Thanks for Your Insight 

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#34) On August 09, 2011 at 4:41 PM, jesusfreakinco (28.32) wrote:


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