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pencilvanian
1000+ Penny Miser Member
USA
2209 Posts |
 Posted - 05/18/2007 : 16:29:36
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Gold and silver slump - what's a precious metals investor to do?
After rising over $3 and $0.10 in Asian trading, gold and silver began getting thumped anew on Thursday at the London open which led to prices taking another sharp turn lower at the NY open.
The market has started trading on technicals rather than any fundamental news, with sell side pressure and shorts currently in control of the market.
So what's an investor to do?
First and foremost,
recognize that a precious metals investment isn't a day trade.
We hammer on this issue to the point of exhaustion because people (present company included) get frustrated, upset, emotional and so on when the prices don't react the way we believe they should over a short time frame.
Step back and look at the larger picture.
Precious metals are a medium to long term investment that is meant to be a meaningful diversification method against paper assets. But no one wants to invest in something that doesn't earn some return on capital. It's not like someone investing in a car that loses 40% of it's value when you peel off the lot hoping that if you wait 25 years it'll have a vintage appeal. The last five years, gold has shown an average annualized return of 19% each year, proving itself to be not only a diversification hedge, but an asset earning a return on investment at the same time. Not too shabby. Prices are up about 4% this year (or 9% if you mark the clock at Jan. 5th instead of Jan. 2nd).
What's next?
It's always tough to go out into the market with a prediction. We were wrong about the $700 level in weeks. Not because the fundamentals don't support that type of move - the fundamental picture for the market is more bullish today for increasing prices than it was just two years ago at $400 per ounce, but the market isn't trading on fundamental news at present. If it were,
news like South African production being down 9% in a quarter compared to the year earlier period would send prices higher; instead the market continued trending downward.
Investment demand has cooled off in the last quarter according to the World Gold Council, but overall demand was still 4% higher. So at a time like this when fundamentals aren't in control of the market and the little golden bull is having his cart loaded up with a lot of paper to carry forward, investors need to take a step back and look at some larger market trends...
Mine Supply
We are believers that mine supply possibly peaked in 2001, at least until we see materially higher prices closer to 4-digits. Will supply increase off of these current levels? Maybe, sure. But we're still more than 7 million ounces short in annual production from equaling 2001 production levels. South African Mine spokespeople and Chief Executives of South African companies have publicly stated this past week that these trends aren't reversing. At this same time, the mega-mines like Grasberg, Yanacocha, and Goldstrike (all outside of South Africa) have gone from annual production figures of over 8 million ounces a year in 2004 between them to 5 million ounces of production annually. There are a few mega-mines waiting in the wings to come in and fill the role of a Goldstrike or Grasberg, but until those mines go online, nothing can be counted on as a given in the mining industry.
Labor
We're heading into another potentially bitter round of wage talks between the South African mining companies and the labor unions. Much like 2004 when a strike took down their production numbers considerably, those in the industry have expectations at present that the new round of talks could have a similar affect. There are also rumblings that Newmont's Yanacocha mine in Peru could be heading offline as the South African talks begin. Also, the world's largest platinum miner, AngloPlat, is having similar issues with their labor force, threatening to cause another round of strikes within the platinum producer ranks.
And this is just the crew digging the material out of the ground.
A much larger concern is appearing on the horizon in mining offices around the globe with the current set of geologist, engineers and the like approaching a retirement age without any new blood entering the ranks to assume their place.
Dehedging
Dehedging was expected to slow down considerably in 2007 after having added nearly 13 million ounces of unexpected demand to the market in 2006. In reality, the exact opposite has taken place in the market with a spate of announcements in the first and second quarter about close outs and book reductions having added nearly 4.2 million ounces of demand to the market and pushing up overall expectations of hedge book close outs in 2007 to 11 million total ounces from estimates of 6-8 million ounces previously.
While there is no longer an 80 million ounce reduction that can take place in the market (thankfully!), there are still 38 million ounces sitting on books waiting to be dehedged. We believe this number will be cut down to 15 million ounces over the coming 2-3 years. Producers will always keep a nominal amount of project hedges on the book to be prudent, but millions of ounces hedged in the $300s while spot is kicking around $660 is neither prudent nor price protection. Investors have finally been able to press this view upon mining company executives.
Official Sector activity
Despite a strong reversal in selling trends for the calendar year of 2006-2007 in the last two months, it looks like ECB captive banks are still going to be short in terms of overall sales for a second year in a row. In the eight years of the CBGA agreements so far, that was the first time banks had failed to sell their full quota. 2007 looks like it will be the second. The last year has also seen central banks making 31 tonnes of purchases in the market. A fairly insignificant amount to be sure, but nearly 1 million ounces of purchases, is still nearly 1 million ounces of purchases.
According to the IMF, changes set to be implemented into the marketplace in 2008, investors will also begin getting a much larger appreciation for the lease and swap operations that take place inside of central banks. This market, which is estimated to be larger than mine supply, central bank sales, investment demand and scrap activity, will no longer be left to guesswork and estimates. Is the gold really in vaults in London or has it been leased out to fabricators and turned into trinkets in India and 18 carat necklaces in WalMart in Iowa? No one knows.
Current estimates target that there is currently 10% to 30% of central bank gold loaned or swapped into the marketplace. (estimates from GFMS, Virtual Metals and James Turk). When this information is no longer just estimates, but hard audited data, there will be an added transparency to the marketplace that has never previously been experienced. When the markets really know how much physical is in vaults versus IOU slips, that's when things will start to get interesting.
The trends above are the ones that precious metals investors need to grasp and understand, not the day trading noise out in the market. Take a position,
have a long term outlook
and understand the fundamental factors that influence the market, not the technicals that are currently controlling the price. 
I should have chosen "Cut-n-Paste" as a forum name, since that is what I do, mostly.
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pencilvanian
1000+ Penny Miser Member
USA
2209 Posts |
Posted - 05/25/2007 : 20:01:32
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Golden View Part 2,
or
Why do we always get the reasons for a gold price drop
After gold prices drop and not before? 
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Housing and Gold: Baaa! Baaa!
by Adrian Ash
BUY LOW, SELL HIGH - it sounds simple enough. Yet the strategy eludes most people.
Drowning in newsprint, they like to buy what's hot instead - like Tech Stocks in late 1999, oil futures in summer 2005, subprime mortgage-backed bonds in 2006, tulip bulbs in Amsterdam, 1624.
Average behavior won't beat the average, of course. Only extraordinary actions can deliver extraordinary profits. But still the crowd flocks together, buying what's hot and selling what's not.
Herding together feels so much safer -
even through the very doors of the slaughterhouse!
"Gold rose 600% in the 1970s and then went down nearly every month for two years," remarked Jim Rogers in an interview with Financial News earlier this week.
"Most people gave up - but then gold went up another 850%."
Fast forward three decades,
and the market's giving up on gold yet again.
Punters in StreetTracks GLD have shed 6% of their holdings from this time last month - the first ever drawdown since it launched in 2005.
Gold futures traders cut their net long positions by 16% last week alone.
"That's what happens in bull markets," shrugs Rogers, author of Adventure Capitalist and co-founder of the Quantum Fund that gained 4,200% during the inflationary '70s.
Rogers now foresees a "sizable near-term correction" in gold, adds the New York Sun, after speculators built up a massive leveraged position, far outweighing the shorts held by commercial gold traders and refineries.
Why this huge overhang?
Short-term hot money craves volatility, and that's just what it gets in gold.
The metal has become twice as volatile as US stocks over the last year, says the GFMS consultancy. And taking gold's temperature, the overhang of speculative longs built up in April recorded a fever.
Gold now needs the hot money to get squeezed out and move on - and it's being wrung dry in the futures market right now.
"The Dollar gold price would seem to have decisively broken down," said John Dizard in the Financial Times early this week, "with a trend that appears sustainable for the next several months, probably at least to the end of this year."
Dizard, a long-time gold bull, says the multi-year uptrend will return soon enough, however.
"Within a year, the gold bear market will have run its course," he goes on. "Mr Bernanke's expertise in depression avoidance will be called on. He and his counterparts in Europe, Japan and China will be called on to keep the global Ponzi scheme going, because the real economies cannot stand a bust in the financial economies."
This Ponzi scheme played us all for a sucker - long-term gold bulls included! Just one more Reflation Trade for hedge funds to buy, the metal got confused for a tradable asset to be swapped for ever-more leverage geared up on ever-more cheap credit.
But Ben Bernanke and his friends at the Fed won't cut US interest rates to defend gold, of course; nor is that what Dizard is saying.
They'll cut interest rates to defend real estate and securities prices instead, fearing a real economic depression caused by collapsing asset valuations. And luckily for anyone yet to buy gold, US housing just feigned a recovery.
This news has helped boost the Dollar and push gold lower. "Home buyers took advantage of the biggest decline in median [home] prices since 1970," reports Bloomberg.
"Baaa! Baaa!" bleat the new homebuyers, wagging their tails behind them.
"People are coming to grips with the idea that not only are there not going to be Fed rate cuts any time soon, but if the 10-year Treasury yield goes much higher, then people are going to start talking about the Fed lifting rates again," said Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis, this week.
...(People or sheeple?)
He was speaking after data showed the number of new US home sales leaping at its fastest pace in 14 years last month. All told, the number of people buying new US homes rose 16% in April from March.
But what the Dollar bounce missed on Thursday -
and what the housing lambs love -
is that average sale prices for new homes in April fell by 11% from March.
That's the fastest rate of collapse on record.
In other words, the only way US builders can shift unsold homes now is to discount -
and discount massively.
Existing homes, by comparison, just won't sell -
because the discounting has yet to begin.
The median price of an existing home, said the National Association of Realtors on Friday, was cut by less than 1% in April from March.
So the volume of sales fell sharply instead, down 2.6% from a month earlier.
Coming on the back of March's 8% drop in turnover, the slowdown outstripped Wall Street forecasts by a factor of nearly nine.
Looking ahead, we'll see "a significant increase in defaults and foreclosures," warned David Wyss, chief economist at Standard & Poors, during the Mortgage Bankers Association's expo in New York this week.
Both S&P and Moodys - the world's leading credit rating agencies - now predict a drop in US house prices of 8% for 2007 and 2008 as a whole.
But last month's 11% drop in new-home prices says that could prove an under-estimate.
The grinding shutdown in existing-home turnover says prices have to fall much further and faster.
How long before the Fed steps in with a little "depression avoidance"? Timing the Fed's reaction won't be easy.
Mocked for his printing-press speech and Depression obsession, Bernanke's more likely to wait than jump early.
But the bull market in gold - driven by low to negative real rates of interest on the Dollar - may shoot higher on expectations alone. "In anticipation of that rapid reversal in policy," says John Dizard, "gold will take off as it hasn't for a generation."
Last time around, as Jim Rogers points out, picking the bottom would have returned six times your money by the subsequent top.
Even buying the top of the setback would have given you 270% gains over the following five years - beating inflation, stocks, bonds and cash as real US interest rates sank back below zero.
With gold and silver in one's portfolio, the future looks shiny & bright.
I should have chosen "Cut-n-Paste" as a forum name, since that is what I do, mostly. |
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pencilvanian
1000+ Penny Miser Member
USA
2209 Posts |
Posted - 05/30/2007 : 21:29:37
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Still another golden view,
Same concept (gold undervalued) and another reason for the decline in price.
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Gold From Different Perspectives
European central banks continue to dump gold. A new report by Don Doyle and Neal Ryan of the Blanchard Economic Research Unit observes: "ECB banks have not sold this much gold in such a short time period in the life of the 2nd Central Bank Gold Agreement. In the last ten weeks, ECB banks have sold over 120 tonnes of gold into the market ($1.9 billion in euros or $2.55 billion in dollars). In the previous six months, ECB captive banks sold only 112 tonnes into the market." Their full report is at this link:
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Clearly, central banks are lining up to keep gold from climbing higher, and to keep it below the critical $700 level. Central banks, however, are only buying time. They are fighting a tidal wave of money fleeing from fiat currency into the safety and security of gold, which is the only money not dependent on some government's or a central bank's promise. This observation brings up an important point.
Because central banks can through their monetary policy control the buying power of their domestic currency, it is easy to accept the notion that they can control the value of all money, including gold. This notion, however, is incorrect because gold and national currencies are fundamentally different.
Central bank balance sheets show that national currencies are their liability, while gold they own is an asset. One does not have to be a chartered accountant to appreciate this difference. Central banks can control the value of their liabilities (i.e., their national currency) in various ways. But they cannot determine the value of gold, anymore than they can determine the value of a Picasso painting or any other tangible asset. Only the market can determine the usefulness of a tangible asset, and therefore its value.
Central banks can influence the market process, and right now by dumping their reserves, they are trying to convince the market that gold's value is questionable. But the following charts show that the central banks aren't fooling anyone. Gold is in a bull market, and in order to better appreciate the magnitude of the bull market that central banks are fighting, it is useful to look at gold in terms of different currencies.
Gold is not just rising in terms of US dollars. Gold is rising against all of the world's major currencies. There hasn't been anything like this since the great 1960-1970's bull market in gold, or to phrase that period another way, the great 1960-1970's bear market in fiat currencies.
...(Images don't always come up when I post them, sorry.)
Importantly, though gold has retreated somewhat as a result of recent central bank selling, the above charts show the impact from this central bank dishoarding has been minimal. As large as central bank intervention has been, gold prices have hardly flinched. They remain within the pennant formations formed over the past year that are consolidating the tremendous gains gold achieved from August 2005 through to May 2006.
This current bout of central bank selling will eventually pass. When it does, we'll look back at it as we now look back on British chancellor Gordon Brown's decision in 1999 to sell one-half of that country's gold reserves, and describe this selling as Mr. Brown's decision is now being described - a colossal blunder.
So I continue to expect that gold will soon exceed US$700, and for that matter, it will also exceed C$800, £350, EUR510, SFr 840, ¥83,000, A$850 and R30,000.
I should have chosen "Cut-n-Paste" as a forum name, since that is what I do, mostly. |
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Golden view
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