If Gold’s Going Up… Why Are Gold Stocks Falling?

If gold is going up...why are gold stocks falling?

In theory, a gold stock is worth the value of its future cashflow. So a stronger gold price should lift gold stocks. That’s pretty much the pattern we have seen in the past.

So in times of new highs in the gold price every few months, why are gold stocks falling?

Gold price goes up – Gold stock index drags lower


Gold stocks normally amplify the gains from gold. If gold goes up 10%, then a good gold stock should go up 20%. So traders look for this ‘leverage’ to the gold price in gold stocks.

That was until ETFs became such a big force on the market.

Now traders can invest directly in gold ETFs with borrowed money to get the same effect. It saves having to do all that annoying research into a gold company.

So with all that money heading for the ETFs – instead of the stocks – the gold price and gold stocks are diverging.

It looks like some of them are even short selling the gold stocks to reduce their risk. This suppresses the price of the gold stocks even more.

But the ETFs can only push this trade so far.

For one thing, wherever the price goes, gold stocks are still worth the price of their future cash flows. And as the gold price rises further, so does the stock’s value. Gold stocks at current prices are incredible value.

And good value will lead to good buying.

If we start to get bargain hunters taking this opportunity up, then at some point the traders will start having to close their short positions. This increases the price, and soon the traders could start a stampede as they all try to get out. This could lead to a big spike in the price, blowing up months’ worth of profits in minutes.

This will happen at some point, and gold stocks will go ballistic as they get back to where they should be.

Closing this trade would also mean selling the gold ETF. It’s amazing to think that the largest gold ETF in the world now holds more gold than most central banks.

Or so they say...

Apparently, the US Commodity Futures Trading Commission, with the Gold Anti-Trust Action Committee, reckon there is now one hundred times more gold in ETFs in the world…than physically exists above ground.

ETFs are convenient. They are the cheapest way to buy and sell precious metals and they have their role in the market. They let you buy and sell metal via Etrade or Commsec quicker than you can say ‘Goldfinger’.

At the other end of the spectrum, buying physical gold or silver metal is more expensive – because dealers charge a premium. You then have the cost of delivery, storage and insurance. Dealers also take their cut when you sell.

So why bother with bullion? For one reason – to avoid ‘counterparty risk’.

This is the risk of trusting another party with your investment. When you buy an ETF, the metal you buy is generally not held by the ETF provider, but by a large global bank like HSBC or Morgan Stanley.

Thankfully buying gold and silver yourself is easy in Australia. I took a look at how to do that in this month’s Diggers and Drillers, so readers had a full list of ways to buy and store gold themselves. This included a few ways to get bullion that you may not have thought of. But you might be able to turn up with a bit of research.

With precious metals stocks looking very cheap, and set to catch up with the gold and silver price before long, I have been busy recommending gold and silver explorers for the last few months. This month, as well as looking at buying bullion, I recommended a precious metals stock that could make a 600% return in the next few years. Not everything is overbought. There are still some value picks out there if you’re prepared to look. I’ve got another newsletter brewing, and have my eye on the next tip already.

You can make good money on good precious metals stocks. But I don’t think there’s any replacement for actual physical gold and silver ownership.

Gold Australia: AUSTRALIAN GOLD SOVEREIGN 2011 PERTH MINT PROOF ISSUE

Gold Australia: AUSTRALIAN GOLD SOVEREIGN 2011 PERTH MINT PROOF ISSUE

LUCKY WAVING CAT Series - Perth Mint Fractional Gold 1/5 1/10 1/25

LUCKY WAVING CAT SERIES

•99.99% Pure Gold
•Coloured Reverse Design
•Issued as Legal Tender
•Presentation Packaging
•Limited Mintage
•Numbered Certificate of Authenticity

The popular Maneki Neko, or Lucky Waving Cat, is believed to bring good luck to homes and businesses. The Perth Mint now brings all the fortune of this famed figurine to you in a stunning three-coin set, comprising two 1/25oz gold coins and one 1/10oz gold coin.

99.99% PURE GOLD

Each coin is struck by The Perth Mint from either 1/25oz or 1/10oz of 99.99% pure gold in proof quality.

COLOURED REVERSE DESIGNS

One of the 1/25oz coins in the set portrays a Lucky Waving Cat with purple markings – a colour believed to attract wealth. The cat has its left paw raised, which is said to attract customers, friendship and love and is holding a red heart.

The other 1/25oz coin features the same design but portrays a Lucky Waving Cat with green markings – a colour said to attract health and camaraderie.

The 1/10oz coin in this set depicts a Lucky Waving Cat with yellow and black markings – colours said to attract prosperity and success. The cat has a raised right paw and is holding a traditional Japanese token – believed to attract wealth and good luck.

The monetary denomination is also shown on each reverse design.

LEGAL TENDER

Issued as legal tender under the authority of the Government of Tuvalu, each coin bears the Raphael Maklouf effigy of Her Majesty Queen Elizabeth II, and the inscriptions QUEEN ELIZABETH II and TUVALU on its obverse.

LIMITED MINTAGE

No more than 2,000 sets will be released.

NUMBERED CERTIFICATE OF AUTHENTICITY

A numbered Certificate of Authenticity accompanies each coin.

PRESENTATION PACKAGING
Each set is housed in an attractive presentation display case featuring a granite-effect base and glossy timber lid. The case comes in a colourful illustrated shipper.

Silver Investment News by GaleForceSales: New Carbon and Mining Taxes to drive up Commodity Prices

Silver Investment News by GaleForceSales: New Carbon and Mining Taxes to drive up Commodity Prices

Australia's Central Bank Decision To Sell Gold Reserves Cost the Country $5 Billion

Just over ten years ago, Australia’s central bank the RBA sold off most of the countries gold reserves under the belief that the price of gold would continue to remain flat, and that as an asset, it would no longer play any role in the future financial system, or any crises that may result.

Based on the current market price of $1,400 an ounce for gold, the decision to sell 167 tonnes of the precious metal by the central bank has cost Australia approximately $5 billion.

A paper written by the central bank which recommended selling off the gold reserves conceded that that asset whilst the assets served as “insurance against a breakdown in the international financial system”, it was not necessary to hold.

In recommending the decision the paper went on to add that Australia did not need to be overly concerned about selling off its existing gold stock because it has vast reserves of the precious metal, though according to Geoscience Australia, the country has reserves that will last no more than 30 years.

In 1997 the Reserve Bank of Australia sold 167 tonnes of gold over a six month period, reducing the nation’s gold reserves to just 80 tonnes. Over that period the value of its gold holdings declined to $1.1 billion from $3.6 billion.

The sale of gold by the Australian central bank had a significant impact on world gold prices, sending them tumbling to an 11 year low, returning just $2.4bn for the gold that was sold via a single broker engaged without a tender. The same amount of gold would be worth about $7.4bn today.

The central bank’s justification for reducing its gold reserves so drastically was that gold represented a poor investment, and Australia had successfully integrated itself into global financial markets, and that it need not worry about access to those markets during a financial crisis.

Since the sale of the gold reserves the global financial systems has experienced severe stress on a number of different occasions, starting with the implosion of the technology bubble at the start of the millennium followed by the September 11th terrorist attacks, and more recently the global financial crisis in 2008.

The price of the precious metal over that time frame has risen spectacularly and the asset has begun to play an increasingly important role in the global financial system since the financial crisis.

The central bank argued that continuing development of financial system meant that circumstances which would require Australia to call upon our gold holdings for economic reasons looked increasingly remote.

“Central banks traditionally hold gold because of its ability to be used in the event of a crisis in the international financial system; it is the only reserve asset that is not a claim on some other government, international institution or bank. However, over the past two or three decades, the world has experienced a number of economic ‘crises’, but gold played no part in coping with them,” the paper said.

Why Buy Gold Stocks? Australia Gold

For profit and wealth protection. Gold mining companies have done extremely well over the past ten years and in particular since the 2008 credit crisis, commonly known as the Global Financial Crisis (GFC). Many investors have made well above average returns investing in gold mining companies and gold itself during this time. The opportunity has not passed because the underlying reasons that have caused this bull market have not been fixed.

But isn't gold just a useless pretty rock? Obviously not as Central Banks, wealthy investors and corporations have been buying gold right up to this date. Gold has proven to be an essential Central Bank asset as protection against currency fluctuations and to provide confidence in the banking system.

Since 1981 houses in Australia are up at least1700% (17 times) and yet gold is only up 47% since 1980 at the writing of this piece (13th September 2010) even though gold was at a record high in early 1980. Gold reached its low of US$252.45 in August 1999 making a second low at US254.35 during February 2001. I was there in 2001 investing in gold stocks and trying to highlight the opportunity to everybody around me. I eventually started work on GoldOz in early 2006 in frustration that few if any would listen.

I was also there in the second half of 2003 buying silver and again nobody would listen to me. It was under US$5 at the time. So how well have Australian gold stocks performed since then? Australia's largest gold company, Newcrest Mining Ltd, sold as low as A$3.00 in April 2001 and has reached A$40.50 in March 2008. That is a 1250% profit.

Oz Minerals Ltd, Bolnisi Gold Ltd, Kingsgate Consolidated and many other Australian gold stocks have done even better from low to high. Educated investors have made staggering profits in the last decade. Do you want to protect your wealth and/or make excellent investment gains over the duration of this gold bull market?

Did you watch the dot-com bubble? Most of the gains happened in the latter stages. Did you watch the last gold bull that ran from 1971 to 1980? Remember, gold was fixed at US$35 an ounce until 1971 and the Federal Reserve Chairman Paul Volcker was able to push interest rates to 21.5% to deal with inflation at that time. This measure is unavailable to Ben Bernanke who now faces the largest global debt bubble in recorded history.

The 70's Bull Run was abbreviated because of the gold fix (to 1971). The problems back then had been brewing for several years before 1971 and therefore if gold had not been fixed it would have been moving upwards strongly years earlier. Financial asset bull markets commonly run for about 20 years and then reverse for a similar amount of time. These counter cycles are when gold really shines. Financial analysis tells us this gold bull will run for the next 5 to 10 years taking this rallyout to a similar time frame. Will the gold stocks do as well or better in the last half of this (secular - long term) rally?

Gold stocks ran up the hardest producing unbelievable gains from the second half of the seventies. Many stocks rallied from under 50c to hundreds of dollars per share. Gold ran as hard as it did in the seventies due to a lack of faith, a lack of confidence in the financial markets of the time. This is just what we face now.

Ask yourself, do you think that debt creation can really cure a debt crisis? Clearly this is ridiculous - such measures can only buy time and makes the problem worse. This is exactly like giving $100,000 credit limit American Express card to a family that has maxed out their other credit cards, have a massive mortgage and expensive car payments that they cannot manage. It buys them time and makes their debt and eventual default even worse.

Of course, whole nations cannot go bankrupt but they can and do default and need restructuring. The turmoil this creates is on a much greater scale. Fortunately in the past this has been a rare occurrence however, unfortunately, now several countries face such a risk at the same time. All the fuss about Greece, Spain, Portugal, Ireland and Italy is only the beginning of this process. Japanese government debt is twice as bad as Greece and similar to some states of the USA.

Stimulus money has to come from somewhere – it has to be paid back. Government borrowing more money they don’t have to stimulate a sick economy creates more debt. This crisis will not go away quickly. The worst is yet to come. The best is yet to unfold for investors who buy gold, silver and the companies that mine them. The future Bolnisi Gold companies are now some of the juniors, developers and emerging producers.

Do you want in? Do you really trust governments and politicians? Will they bail you out or will they bail out themselves and the banks? Who will bail you out if they don’t? I will tell you – only you can protect yourself. As long as this debt crisis lasts gold will be bid, gold will rise. Selecting gold stocks that will produce the stellar gains seen in the second half of the 70’s gold boom is an art – luck will not suffice. The answer is to get information – the best you can get.

Get educated; we hope you can prosper during the difficult times ahead. Now you have to look at timing and that comes down to top down analysis or world events in financial markets.

Good trading / investing.

Source: Neil Charnock

Junior gold miners provide M&A allure - Australia Gold News

Investors seeking exposure to gold should back Australia's junior gold miners, which will be takeover targets for larger producers pushing to expand, analysts say.

The forecast wave of consolidation in the small end of the sector will likely see more Australian miners tie-up with offshore producers of the precious metal, Martin Place Securities research analyst Warren Kreyzig says.

"There is definitely a trend," Mr Kreyzig told AAP.

"Gold production is diversifying.

"It used to be South Africa, Australia and United States that were the big producers, and if you look now, it is more evenly spread among many countries.

"That trend is certainly taking Australian companies offshore.

"Australian companies in the future will have a lot more offshore operations than they do now."

Just this week, Perth's Avoca Resources Ltd unveiled a plan to merge with Turkey-focused, Colorado-headquartered Anatolia Minerals Development Ltd, while a bidding war between Canadian miners for Sydney-based Andean Resources Ltd was short lived.

Goldcorp Inc took pole position to take over Andean on Tuesday, when fellow Vancouver-based company Eldorado Gold Corporation pulled out.

Mr Kreyzig said Argentina-focused Andean was a perfect example of a prime takeover target for larger international gold miners, with its long-life, high quality ore bodies.

The larger miners were seeking projects with a mine life of about 30 years and were not interested in those expected to last less than 10 years, which described many of Australia's small gold mines, he said.

"It's not really in any of the larger players' interest to acquire any of those (smaller) projects unless they're thinking of amalgamating a few different operations perhaps into one," Mr Kreyzig said.

For junior gold miners, however, the acquisition of modest assets could be worthwhile as it had the added bonus of making a company harder to take over.

"For Avoca, their whole friendly merger is basically protection against a hostile takeover in the future," Mr Kreyzig said.

Citi's research division this week said Thailand-focused Kingsgate Consolidated Ltd was a potential takeover target, while Medusa Mining Ltd was set to hit the big league by 2015 with production of 400,000 ounces per annum (ozpa) from its operations in the Philippines.

But Mr Kreyzig was less convinced.

"Kingsgate will have to float their operations in Thailand onto the Thai stock exchange at some point in the not too distant future, so that's certainly a disincentive for any takeover," he said.

"And Medusa ... had very high grades initially, but they will tend to lower over time and that's the nature of the ore body."

Citi said several 100,000 to 200,000 ozpa Australian gold juniors would "scramble to build size and relevance" to fill the gap left by Lihir, a one million ozpa producer, following its $10.5 billion takeover by Newcrest Mining Ltd.

The transaction increased Newcrest's dominance of the Australian gold sector with the addition of Lihir's long-life assets.

Citi said Newcrest was 10 times larger than Australia's next biggest producer, Pacific Rim-focused OceanaGold Corporation, which produced about 280,000 ozpa against almost three million ozpa from an enlarged Newcrest.

"With the emergence of the small cap sector and the consolidation at the big end of town, there is a massive void in the mid-cap gold space in Australia.

"We see the need for a company to replicate LGL (Lihir) and believe that many of the Australian gold juniors have their eyes on the space.

"With the quality of their resource bases, none of the companies are likely to get there through organic growth in the next few years (Medusa possibly excluded).

"Thus we believe that M&A (merger and acquisition) activity is likely to continue in the Australian gold space."

Most analysts say there is strong outlook for the gold price, which is currently hovering around the $US1,250 per ounce mark, down slightly from the all-time high of $US1,265 in late June.

Surging investment demand would continue to be driven by concern about currencies, with the US considering quantitative easing, while global supply would stay tight as existing mine production declined and was replaced by fewer discoveries, Mr Kreyzig said.

However, gold sector consultants Surbiton Associates recently painted a buoyant picture for Australian gold output in the September quarter, when several operations are slated to pour first gold.

At the big end of town, Newmont Mining Corporation's massive Boddington mine in Western Australia continues to ramp up, while AngloGold Ashanti Ltd is expected to complete a feasibility study on its 410,000 ozpa Tropicana project, also in WA, in the December quarter.

See SMH Article