Sprott Shifts From Gold Bullion To Gold Stocks, Explains Why
From Eric Sprott and David Baker
Gold Stocks: Ready, Set,…
Last week, the HUI Gold Index marked a new all-time high as it surpassed 600. Recent gold equity investors were undoubtedly happy with this move, but for longer-term holders, the recent strength is actually somewhat disappointing. If you review the chart below, you’ll notice that while the gold price has almost doubled since early 2008, the HUI Index has appreciated by a mere 22% over the same period (see Chart A). If the HUI was justified at 500 in early ’08, it should surely be justified at 1,000 today, given the appreciation of the gold price over that time. So why have the equities lagged?
Chart A
Source: Bloomberg
First and foremost: the sell-side’s abysmal gold price estimates. Table 1 shows the average gold price that analysts are using to value gold equities today. While the futures market is comfortably forecasting a continuation of today’s levels, the majority of sell-side analysts refuse to update their gold price estimates to reflect its recent strength. A rising gold price is normally a bad sign for the broader equity markets, and generally indicates a bearish trend. As bears ourselves, we’re completely fine with this, and invest accordingly. But the sell-side has difficulty pairing bearishness with new underwriting opportunities. It doesn’t mean you have to believe their price forecasts however.
The second reason is gold’s volatility. The amount of paper gold and silver contracts that trade on the futures and equities exchanges still dwarf the amount of actual physical trading that takes place. Paper markets continue to set price discovery – thereby allowing for dramatic volatility with little or no influence from actual physical fundamentals. In the LBMA market, for example, market participants traded an average 19.6 million ounces of gold PER DAY in July 2011.1,2 Keep in mind that the total gold mine production in 2010, globally, was approximately 86.5 million ounces. Global gold mine production is not expected to increase significantly year-over-year, so the LBMA is essentially trading a year’s worth of production in less than a week. And this is just ONE market. When you add the COMEX futures and gold ETFs, the paper trading volume becomes absurdly high. When price discovery is dictated by levered paper contracts with no physical backing, it’s extremely easy and relatively inexpensive to jostle the spot price around. The result for gold has been many days of extreme downside volatility, despite a strong and consistent overall upward trend. Investors don’t like volatility – and the constant whipsawing has probably kept many of them away from the gold equity sector as a result.
Thirdly – investors still remember how badly gold equities got crushed in 2008. There was a reason they sold off so aggressively however – they were the most profitable positions investors owned going into the ‘08 crisis. Gold equities had enjoyed a strong bull trend going back to 2001, with the HUI Index appreciating by 980% from its November 2000 low through to August 2008. Investor behaviour is fairly consistent – when panic hits, you sell your winning positions first.
Something has changed recently, however. A new divergence has arisen in the precious metals equity market – a subtle, but plainly evident shift in recent daily performance. On Wednesday, August 10th, for example, the Dow dropped 4% while gold stocks rallied 3%, for a delta of 7% on the day. That is significant outperformance, and not what we have come to expect on an equity market down day. Gold stocks, as represented by the HUI Index, also seem to be breaking away from their traditional correlation with the spot gold price. On August 29th, spot gold dropped 2.16%, while the stocks fell by only 0.81%. On September 7th, gold fell by 3.09%, while gold stocks rose by 0.33%. These small differences indicate a new trend forming. While gold’s daily volatility is expected to continue, we may be entering a new phase where the stocks react less harshly on gold down days, and outperform gold on days of strength.
The gold equities’ recent divergence has played itself out even more prominently against the financials, with the HUI Index outperforming financials by a stunning 49% since the beginning of July (see Chart B). As we wrote in "The Real Banking Crisis" two months ago, there appears to be a run on European banks, and financial stocks are reflecting that. IMF Managing Director, Christine Lagarde, recently confirmed as much in her Jackson Hole speech, where she warned about the banks’ need for urgent recapitalization: "They must be strong enough to withstand the risks of sovereigns and weak growth. This is key to cutting the chains of contagion. If it is not addressed, we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis."3 Investors aren’t waiting around to see if they’ll pull it off, and as the chart below suggests, at least some of them have reinvested their former bank equity capital into the precious metals sector.
Chart B
Source: Bloomberg
As a side note, Chart C symbolizes the great wealth redistribution that has taken place since 2000. Those investors who have owned precious metals equities have prospered, while those who have invested exclusively in the broader equity market or financials have little to show for it. We clearly see this trend continuing, and even accelerating, in the coming years.
In many of the funds we manage at Sprott, we’ve transitioned out of gold bullion and into gold equities to better participate in the continuation of the trend indicated above. As long-time investors in this space, we can assure you that the production growth rates will be significantly higher in the junior stocks. They continue to trade at discounted valuations, and we believe they offer the best opportunity to build exposure. Margin expansion is the key metric for this industry, and the market is now acknowledging the miners’ improvement in margin capture – which has occurred despite the increase in capital and operating costs (see Chart D). We meet with a large number of gold mining management teams on a weekly basis, and based on those meetings, it appears that the average cost of producing an ounce of gold today, all in, is now around $800. At $1,200 gold, these companies can capture roughly $400 in EBITDA. At $1800 gold, however, they’re now capturing $1,000 per ounce in EBITDA - representing an increase of 150% in profit margin. That is significantly far above what any other equity sector has been able to generate over the past year.
Amazingly – despite this new reality for gold producers, we are still finding opportunities in select gold and silver mining companies that can be purchased today at 2-3 times their 2-year-out forecasted cash flow. These multiples are based on the current gold and silver spot price, and if these companies hit their production targets, and gold and silver continue their appreciation – we may discover that these stocks were trading at less than 1 times 2-year-out cash flow today. Having been in the business for many years, we can tell you that investing in a stock at 1 times 2-year-out cash flow tends to be a winning proposition – let alone in an industry that literally mines the world’s reserve currency out of the ground.
Chart C
Source: Bloomberg
Chart D
Source: BMO Capital Markets
In our view, gold stocks represent a bona fide growth sector in an otherwise dreadful equity market. All other equity sectors are weakening due to sovereign uncertainty and the reemergence of soundly weak economic data. The recent disconnect between gold equities and bullion isn’t new either. We’ve seen it before over the past decade, and the returns generated after previous divergences have averaged around 26% (see Table 2). Given the recent performance correlations, the HUI’s breakout above 600 and spot gold now firmly above $1600, we expect this rebound in gold equities to be prolonged and much more significant in percentage terms.
Equity investors shouldn’t let $1800 gold dissuade them from participating in precious metals equities. The world is still dramatically underexposed to gold, and we firmly believe it should represent a higher percentage of investors’ total portfolios today. The fact remains that both gold and silver continue to trade well below their inflation-adjusted highs in nominal terms, and the market is now beginning to acknowledge the profit potential that precious metals equities offer at today’s bullion prices. We believe the equities will offer more upside than the bullion over time. Many of the smaller names are well priced and have momentum behind them. The prospects for gold stocks look extremely bright.
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Gold bitchez!
"let alone in an industry that literally mines the world’s reserve currency out of the ground."
aahhh yes, Sprott and Embry are so dead on with words...love it.
One look at the GDX to bullion ratio and you can see that gold stocks have lagged in a major way. But I wouldn't throw in the towel on bullion - gold miners need funding and get killed when credit markets seize up.
http://seekingalpha.com/article/292652-time-for-gold-miners-to-outperform
only gold is money.
gold stocks are not money.
if you're looking for potentially large fiat-denominated gains (and also potentially large losses) look to the stocks.
if you want hard money look to the physical.
http://azizonomics.com/2011/09/10/can-bernanke-print-gold/
Agreed Spiral, no one is suggesting that gold stocks are money, they are not. They have traded at a historical 30% upside to gold price and as such are a good vehicle for speculating on gold market. I personally feel that this is a good place to look for return after you have established a base in physical. Mining stocks are risky and should perform well, why would you want to be in this market for a 10% return? The key is to take profits when they are there and convert it into physical or use it to buy other mining stocks. Risky, yes, rewarding, absolutely. Recommend to everyone? Absolutely not.
I myself am sitting on a few junior miners. (Kaminak, bitchez)
But nobody should ever sell an ounce of physical to get into them.
They are also much quicker and easier to buy and sell than physical. The physical has the insurance aspect but the stocks are a better investment vehicle. Gold prices could freeze where they are and mining stocks still skyrocket based on margins.
The Bernank and the Dem's muslim are destroying fiat.
If you do not hold it, you do not own it.
My shiny bars would never do this to me:
http://www.theglobeandmail.com/globe-investor/silvercorp-ceo-vows-fight-...
IF I had any money in Sprott, I would liquidate it and buy physical right now.
Are the mining shares going up because they are a good spec investment or because of the intense PR campaign that has been waged in the recent past?
Sounds like a pump and dump coming. A gold mine is still a liar standing next to a hole in the ground.
If you don't have physical you don't have the best form of money.
`Intense`? `Recent`? How so? Usual suspects saying the usual things as far as the eye can see, as far as I can tell; and been making fiatscos all the while too, I might add...
"A gold mine is still a liar standing next to a hole in the ground."
Remind me again, in what century was that sentiment expressed? `Cuz today it ain`t that hard to figure out whether or not a mine is actually producing or not, `cous`. SC was an excellent chronicler of his time, and much of his wisdom still rings true to this day, no doubt, but it's obvious that he was never very skilled at speculatin`, ol`hoss.
"If you don't have physical you don't have the best form of money."
Yeeeaaah, I don`t see you getting much of an argument from many on ZH about that, but where I see a big disconnect here is in the acquisition of said real money... I mean, do you actually get paid in bullion? Or do you run a creekside panning operation in Africa? Because if you don`t you`re getting fiatscos first like the rest of us and then converting them into real money.
Now I can think of a number of ways of building ounces;this article just goes over one of them, and you`ve been up and down this thread ripping on it.
So what exactly is your agenda SW?
PS Not to rub salt in an open wound or anything, but have you had a look at today`s tape? It makes this post look positively prescient.
My strategy has been buying gold bullion by taking profits from selling gold stocks. You're saying fuck me? I say you're a whore of paper.
Gump, you're a fucking genius!!! I've done the same with silver. Bought 1000 ounces with paper profits realized by selling half of my positions when they doubled. That is a sweet trade, get bullion and keep exposure to company upside. You probably shouldn't tell people about this, they may realize that this is a good idea.
I have been doing the same thing. 1/2 my stash has been realized due to paper gains. I was lucky enough to sell at $48 silver and convert into gold. Just don't get to greedy. You will still need to get your hands on the phyz. Keep an eye on the margin's for the phyz. I presume they will start to grow at the dealers. Plan accordingly and prepare to loose some fiat in the machine when the SHTF.
The open secret is that you're STILL able to buy physical using paper. To my little pea-sized brain, that's a wonderful bargain while gold is still as cheap as dirt.
Long Balls, you have big cajones to sell silver at $48. Excellent call, very well done.
I would never claim to be that smart dude. I was lucky enough to catch the CME margin hike article on this site Friday afternoon. My local coin dealer is open on Saturday's. So I made the trip first thing in the a.m. I knew is was coming down hard since it's such a small market and the rise was parabolic. I owe my realized profits in silver and since gold to ZH. Ever since that moment I come here daily.
seems to be what a lot of folks on this blog do:
http://marketwatching.freeforums.org/gold-f3.html
I don't have the savvy or the liquidity to trade - but I do put a set amount into physical, religiously and monthly (have been since 07 - initially Gold, and now silver)
Marc Faber calls the monthly buying physical strategy "becoming your own central bank". Lately I have been buying "the other precious metals, brass and lead".
I think you are ahead of 90% of most people in that you understand the risk, the limitations you have on capital and the amount of time needed to stay on top of speculative positions. Bravo to you to be diligent in building a physical position, it will serve you well in the coming storm.
there maybe some logic to this, reader
MAYBE THEY DONT WANT TO GET RAIDED LIKE,
lrag
ejypt
NORFED
ft. knox
libya
etc.
He is NOT saying to sell your phyzz. He saying sell GLD lol, and buy miners lol, fuck the morgue!
My condolences in advance to Sprott.
Junk me all you like. :)
You really think governments will allow companies that dig money outta the ground the profits ( after it has become recognized as money)?
Yeah. right.
ps. I really shouldn't use the term money. Gold isn't money it's wealth.
Sprott is simply interested in positioning himself as the new bank when comex explodes. He's trying to be london gold pool part III.
ps. I really shouldn't use the term money. Gold isn't money it's wealth
*************
I didn't junk you but I also never marked you up-
Gold is money-it is a currency the senior currency and that's all it's ever been-
http://bit.ly/o0t0vp
Agree, MF, the government cannot realistically confiscate citizen gold, but they sure as hell can confiscate gold below ground. It will suck to be a miner/miner investor when that day arrives.
Let's not forget that they carry risks of nationalization also and hedging which may not be visible.
Just bought Silvercorp SVM at friggin' 6.08/share this morning due to the coordinated short attack they are experiencing. What a gift! They will be producing 10mOz of silver in the next 1-2 years. Their closest comparison is First Majestic, trading at $20/share. This stock is going to double or triple when miners catch up to bullion.
SVM's mines are in China. Have you thought that all the way through?
Yes, China not nearly as risky as Peru, Bolivia or Venezuela, I must say. Can't have all your eggs in one basket, Silvercorp is just part of the portfolio. None of the mining stocks are buy and hold forever, you have got to take profits or you will get burned.
I dunno. The Chines strike me as fairly honest and transparent operators, no?
I mean it's not like they would lie or anything.
Like I stated earlier, it's a calculated risk. By the way, SilverCorp is a Canadian mining company, they are not nationalized. Don't think I would touch a Chinese mining company. China doesn't have the technology or the expertise to explore and develop new projects. They need the junior miners like SilverCorp to come in and do it for them. Costs are much lower in China, SVM built their mine for less than $15 million, 3-4 times less than it costs in the West. Fortuna Silver just built a mine in Mexico for $50 million. Mining stocks have been described as burning matches, if you hold on to them to long, well you can figure it out.
who cares where the company is located...If the mine is in China then your SOL if they decide they want it. Same as everywhere else of course but China is, well, China.
Buckaroo Banzai .
Yep, and last report was they were not ALLOWING in Gold or Silver exports.
Have a bud tried to get me into it, and almost did.He made reall good % for a while, then he lost 90% of his profits overnight.
Buying any kind of commod shares in any Chinese controlled country, is akin to suicide.
I too have been buying SVM in quantity. At least "quantity" for me -- lol!
It's a calculated risk, but at this price it is easy to see a 100-200% return. Selling at $15-$18 would be tremendous and reachable IMO. Good luck to you.
I agree, when it crosses the $15 mark, half of my new position is going into something like the dreaded COP or XOM.
- and likewise, good luck!
Oh yeah...
http://www.reuters.com/article/2011/09/15/silvercorp-buyback-idUSS1E78E0BZ20110915?feedType=RSS&feedName=marketsNews&rpc=43
Sold all of ours at $8.40 and am staying away. Looks like it could be another TRE.
while I tend to agree with this post in theory...the reality is a different story all together.
this analysis is good. the problem is that analysis and fundamentals and facts simply do not matter any longer. all stocks move as one now a days. I'm not saying this is a good thing...I'm just saying it is what it is.
perhaps it's worth keeping an eye on some gold stocks...but investing on "fundamentals" in this market is a dangerous thing because fundamentals require facts and as we all know...the facts simply do not matter any longer.
alien-IQ, Wrote: "..but investing on "fundamentals" in this market is a dangerous thing because fundamentals require facts and as we all know...the facts simply do not matter any longer...."
I couldnt agree with you more. +100
"...all stocks move as one now a days. I'm not saying this is a good thing...I'm just saying it is what it is."
Erm, I'm not endorsing any strategy one way or the other, but I think you may have overlooked the following paragraph:
"Something has changed recently, however. A new divergence has arisen in the precious metals equity market – a subtle, but plainly evident shift in recent daily performance. On Wednesday, August 10th, for example, the Dow dropped 4% while gold stocks rallied 3%, for a delta of 7% on the day. That is significant outperformance, and not what we have come to expect on an equity market down day. Gold stocks, as represented by the HUI Index, also seem to be breaking away from their traditional correlation with the spot gold price. On August 29th, spot gold dropped 2.16%, while the stocks fell by only 0.81%. On September 7th, gold fell by 3.09%, while gold stocks rose by 0.33%. These small differences indicate a new trend forming. While gold’s daily volatility is expected to continue, we may be entering a new phase where the stocks react less harshly on gold down days, and outperform gold on days of strength."
You say 'anomaly', Mr.Sprott says 'tell'.
Anyway, I expect Kidd Dynamite will be on this thread any minute now 'expertly debunking' the whole article, promoting the verity of SLV and GLD physical holdings, and pointing out how unwarranted in his mind PSLV's premium is. While you have his attention I suggest you repeatedly ask him how his whole 'short PSLV/long SLV' play is working out...
Disclosure: None of the above Funds has ever been on my books. (No reason)
I've noticed this divergence as well. When gold and silver are getting slammed, you don't see the same level of drop in the miners and at times actuially see up moves. I suspect you're seeing a divergence in markets. The paper metals markets no longer reflect the physical market - the manipulation is clear and transparent - predictable drops before COMEX monthly close, drops before bad economic news. Gold gpoing DOWN after the CHF uis linked to hte Euro?!?!?! That mekse NO sense - unless you view it as a deliberate effort to make gold look bad - tho head off any 'flight to safety' (to the one last refuge) after the Swiss killed thier currency.
There is (IMO - and that of many others) a concereted effort to portray gold and silver as irrelevant and not worthy of 'investment' - this despite central bank buying and a continual upward price trend (or should I say downward paper money trend?). Gold is predictably slammed in off hours with massive selling after major up days and before major news breaking. If it looks like manipulation and smells like manipulation..... because no SANE seller is going to dump a huge position under circumstances that guarantee the WORST price. But as a deliberate effort to drop prices and trigger stops - these raids are very effective. But the raids are less and less effective lately with bounce backs being quicker.
You DO see concerted manipulation in mining stocks as well - part of an overall effort to downplay gold - but this does not seem to be as widespread. You do see large volumes at end of day on GDX, SLW and others to drop the price at close - seems like some don;t want any upward trend line looking too regular. Premiums on physical have been going up - with momentary panic in physical markets duriong the recent silver and gold run ups. AS mere coincidence that Gold had one heck of an uptick on a Monday when NY and London were closed AND when the budget crisis was peaking. 'Market intervention' efforts by govt had been suspended - no cash available.
Individual holders of gold/silver - bullion, ETF's and mining stocks is still miniscule compared to years past when gold stocks were a small but consistent part of any holdings. Despite all the 'BUY GOLD' ads on radio and TV pandering to the inexperienced and fearful (with way too high premiums) the masses are still more likely to be selling.
I suspect that smart money is moving into miners - indeed it seems like the Chinese and others are doing all they can to convert paper holdings into TANGIBLE assets. China is trading paper $US for African farmland, long term energy contracts all over the world and Australian and South American mining companies. If those miners produce gold and silver - all the better. Anyone notice the CDE deal where China is buying gold ore concentrate from China?
The disparity in price between physical and the miners has caught the attention of a number of analysts lately - this has been getting more and more coverage. Common sense would say ther HAS to be a breakout at some point given the continual upward trend in these metals.
I have the same trade on as Sprott - it's been disclosed in all of my blog posts about the subject. He sold PHYS to buy miners - I bought GDX and shorted GLD.
Also disclosed was that I took off my short PSLV vs long SLV trade in relatively short order, as the borrow costs were too high. However, if you're long PSLV, you will absolutely outperform over the next year by switching to SLV and saving yourself the 20% premium - bet on it. Quote me. Of course, shorting PSLV and buying SLV (which is a very expensive trade to carry) is not the same trade as selling your PSLV to buy SLV (which, yes, is a slam dunk trade)... I can explain it to you more if you really want to learn - leave a comment on any one of my PSLV posts for a free lesson. ps - Sprott is doing this same trade too! Swapping out of PSLV and into bullion at spot (minus the 20% premium)
pps - almost forgot: I'm long OCT GLD calls too
Goin... There has been an enormous sales campaign recently aimed at 'buy gold stocks, they are dirt cheap'...
Simply because something is cheap does not mean it's a good value.
The games that small companies can legally play with stocks would make your hair stand up...especially if YOUR money is invested in them.
Get in the water with these sharks and you will get eaten alive... Sprott isn't a multi billionaire because he spends his time helping the small investor.
"Simply because something is cheap does not mean it's a good value."
Once again, I'm not advocating anything one way or the other. But,
You're taking the word 'cheap' completely out of context. Sprott is not comparing a shovel sold at Malwart to one you'd get at Lee Valley and saying the Malwart spade is the better deal solely because it cost less, he's suggesting that if you're smart you might be able to pick up a high quality Lee Valley shovel at a Malwart price. Big difference there.
"The games that small companies can legally play with stocks would make your hair stand up...especially if YOUR money is invested in them."
Right. Due diligence, do the due dude; I doubt as many posting here were 'born yesterday' as you seem to think. Oh and 'small' could be 'med', 'large' or even 'ginormous' in that sentence. Indeud, if you've been following the PM mining sector over just the last few years you should have noticed that `bigger isn`t necessarily better`.
"Sprott isn't a multi billionaire because he spends his time helping the small investor."
Bollocks! Are you seriously trying to tell me that anyone, even the small, who invested in PM`s or their proxies over the past decade hasn't benefited from Sprott's actions and advice? How much physical metal has he taken off the market in the last ten years? I`m not saying he`s been acting out of a sense of altruism, but it`s not like his success has been based on making bad calls that hurt small investors either.
Is this a 'sour grapes' thing? I mean it's hardly Mr.Sprott`s fault if you haven't tagged along for the ride of your life.
imo this is the problem with relying solely on "fundamentals" it is too difficult (for me at least) to identify/quantify the relevant facts and establish causality between these facts and share price...this is why i find it more useful to be aware of the fundamental backdrop, including the state of the broader equity market, and observe the price action (in the miners in this case)
i do not want to own equities in the current environment but it's hard to ignore the action of NEM for example, bumping up against what i consider key levels despite the terrible tape...for example, 9/2,9/8,9/9 NEM performed relatively well in some really bad ES action
haven't bought anything yet but still watching
caerus... Start up gold miners are tiny. Their stock prices can be moved easily by the wealthy investors.
IOWs the small mining company can have their 'tape painted' easily. Once a bunch of fools are lured in the big operators that got huge stock options to fund the start up can dump their stock and the price plunges.
Better think a long time on this one...
Bingo! The analysis is good, yet the game has changed. The casino has made the use of marked cards, loaded dice, crooked roulette wheels, and rigged slot machines a standard practice rather than a hushed exception. It's openly flaunted because the sheriff and his boys are bought and paid for with their cut of the take.
There are occasional winners in order to keep the tables full of suckers. Naturally the payouts consist of the casino's chips; this is fine as long as there are people willing to accept the chips for tangible goods and services.
I could see it making sense as a short- to medium-term investment strategy for the purpose of making some quick fiat clownbux to retire a debt. The investment would need to be limited to maximum acceptable total loss, as profit could only be realized by bailing out well enough in advance of the system falling apart.
Made some $ in Redback but they got bought out. Still have a few juniors under-performing I decided long ago I'm going to ride it out over the long term.
This comes as a pleasant surprise...
Hello, confiscation and taxation of your paper gold equities. I prefer the physical stuff.
if (when?) the jack boot thugs decide to kick down your door and start the confiscation...it won't matter if you've got physical, paper or unicorn gold. the only thing that's gonna keep them from taking your shit is a good dose of M.A.D. backed by a nuclear weapon. the shotgun and 20 boxes of shells ain't gonna cut the mustard.
Ever actually fired a shotgun?
My thoughts exactly. Political risk in gold stocks is going to be huge, IMO. I don't expect governments to try to confiscate gold coins or bullion this time around... but I DO expect one (or several) of the following:
-- gold mining companies will be heavily (HEAVILY) taxed
-- gold shares will be heavily (HEAVILY) taxed
-- gold mines will be seized outright (a la Venezuela)
Don't think that gold mines can't be seized here in the US of A? Well, what do you think happened to General Motors? The same thing, more or less.
Not in Canada, safe jurisdiction, great companies (especially amongst the Abitibi Greenstone Belt in Ontario/Quebec. The Cadillac trend has pumped out more gold than you can count and Canada relies upon gold mining so, buy mid tier producers in Ontario and Quebec (well researched) and get set to hear Ka Ching
The reality is that the government can tax or confiscate whatever they want. Remember the pictures of the police in California raiding the dairy farm that sold unpasteurized milk? Overwhelming force and guns drawn - WTF? - are the cows gonna shoot back?
The question you should ask is WHY mining companies will be taxed and countries demand higher royalties on the production? Because it is profitable. If the company is profitable, stock will go higher, you will make money. It's OK if you don't want to do it, physical gold and silver will do just fine and there is no counterparty risk. BTW, our gold can be confiscated and capital gains tax is 28%, looks like the US Gov't has already been here too.
It will only be profitable though, until they are windfall taxed/royalteed to death. With the entire world expecting to live off of each other, jealousy will ensure this outcome.
The idea that the Canadian gov. (et al.) will remain "mining friendly" in the face of the rioting crowds demanding more handouts, well, that's yesterday's thinking. Once enough stuff breaks down, those attitudes will change over night.
I think there are a couple of things to keep in mind on the subject of govt confiscation.
1. After the collapse of the global financial system based on paper fiat, in particular the COMEX & LBMA and the accompanying explosion in the value of bullion, I suspect the governmental & financial institutions that helped create the mess will be discredited & replaced by new political & financial institutions that won't be permitted to engage in fractional reserve bullion banking, etc. but instead will be much more bullion (i.e., honest money) friendly
2. Gold will become national currency (or at least back the paper/electronic) - so governments will want to encourage gold mining simply to increase domestic wealth vis a viz other countries (as Sprott says, gold miners will literally mine the world's reserve currency out of the ground). Taxing them to death or confiscating them would turn them into inefficient, bureaucratic arms of the government, which would be counterproductive & vehemently opposed by voters who would have a very different view of gold & see domestic gold deposits as a national treasure to be used for the benefit of everyone.
It is possible that dictatorial governments may try to confiscate, but I suspect the transformation of the global financial system after collapse of the current one will change a lot of perceptions about gold among those who consider it nothing more than a barbarous relic to the point where they may not take confiscation lying down...
Two very good points, P&S. I would add that almost all the new discoveries are done by junior miners who are then bought by the big boys. If a country did confiscate all the mines, they would get the reserves of the working mines, but no explorer in their right mind would come and invest millions to prove up a new resource and have the government take it away. What would happen is that the proven reserves would go to the government but they would not be replaced and the mining industry would quickly dry up. Countries like Peru and Mexico where a significant percentage of the countries GDP is tied to mining may initially benefit from nationalization but it would deteriorate into riots as the working mines reach the end of their lifecycle and are not replaced. Tens of thousands of workers would be out of a job and have hungry families. It would be an interesting case study to see what countries would realize how important a healthy mining industry is to their nation and act to protect it. My opinion is that countries would impose higher royalties (taxes) rather than overt nationalization, in fact many analysts are factoring this into their future projections. Mining industry CEOs obviously don't like it, but being awash with cash does make them a fat target for increasing government revenue and they will pay it.
Yah, um, except GM wasn't profitable and was not "confinscated", it was bailed the fk out.
Do you guys all feed off eachothers bullshit without doing any thinking? When is the next asshat going to say "PM's, bitchez!".... so i can bitchslap them?
I'd like to see China or some other sov. wealth fund come in with a hostile take over of one of these miners to really light a fire under this sector... any chance of something like that happening ?
Bolivia could nationalize its silver mines along with several Latin American countries. South Africa could start taxing exports of platinum. Anything could happen...
Wow, I had to go this far down the thread to find the word nationalization. I don't understand why people like Sprott (and my favorite 'which-dictator-is-mining-friendly' analyst, Doug Casey) fail to consider this when it is obvious gov's around the world will seize these assets in order to secure funding for bread and circuses.
Let's see, administration X is staring at inevitable bankruptcy, paper currency is collapsing, yet there are national assets just sitting there for the taking. But no, somehow I'm supposed to believe that miners not named Barrick or Anglogold will be allowed to profit during this time?
Riiiiiiiiiiiiggggggghhhhhhht!
They will be beaten about the head with the Socialism stick until they too, succumb.
Guys, with all the unknown geopolitical factors compounding with all the uncertain sunrising crossover credit-market contagion dilemmas, you know the average investor must be diversified: that means GDX and GDXJ.
I worry more about the wolves taking in fleets of fleece in the home-job Vancouver market, now being ghosted by BOM sponsorship and indexing operations.
Do stocks still get watered so their current holding investors get soaked? Excuse me, the term now is "diluted", an upgrade from when they were formerly "raided". Didn't ABX have a huge forward overhead load due to gold "leases"? There are at least as many ways to devalue gold shares as there are for any other paper currency.
The strategy of rolling profits from paper into physical is older than Gresham's Law. Coin traders, dealers and collectors trading in bullion and coins have always kept "upgraded" profits stored in more valuable, numismatic quality rare coins. Paper is for trading.
I really miss Giant YellowKnife, my old favorite Canadian gold stock.
The gold boom won't go to bubble phase until the "colored gemstones as a store of wealth strategy" starts getting pitched to "gold investors". Watch for it, it's part of the food chain with sheep, wolves, then ravens and buzzards.
Trust is conditional on a government's honor in dealings with its citizens, judicially and monetarily. Not much love coming from citizens on this thread for them.
Any big acquisition would be a game changer and perhaps could sound the gun for nationalization of mines. Not just in the U.S.
What’s the top 3 potential companies?
Names anyone??
three juniors with big potential are pretium reources, hellix ventures and abbington resources
Agnico eagle (AEM) is the blue chip of blue chips. often said to be the best mining company in the world.
Agnico eagle (AEM) is the blue chip of blue chips. often said to be the best mining company in the world.
Ever heard of Aurillian, saw it go from .40C to $40 in a week, after talk of nationalization back to .40C
GDX flirting with 64ish for third time (dec '10, april '11, sep '11) not surprisingly, similar behavior exhibited by shares of GDX components...i'm wary of an across the board sell-off as i am still looking for an es break but watching closely
Best of luck, Herr Sprott. Physical for me and mine.
He is here to help thee and thine.
At the risk of telling Eric how to suck a egg , this isn't 2008.
Good luck with the paper circle jerk , I understand he has to justify a fee but KISS
'Buy gold stocks' is yet another way of saying 'don't buy physical gold'.
No sir, 'buy gold stocks' is just another way to accumulate paper that is exchangeable for physical gold...
Not everyone is in a position to operate a placer mine, you know.
"When did the cogs of fate begin to turn?" ... in the other direction! Back to paper now???
Figure your shares are gonna appreciate while the world crashes and burns? Rather doubtful any Nation ain't gonna nationalize the gold mines if they confiscate gold?
Again, the headlines are shouting at us. Sprott probably cannot get delivery in quantity worthwhile or is encountering heavy overhead and shepherding costs to get a deal done... The investors who buy his shares probably won't mind. They are chasing return on their money, still not concerned with return OF their money...
Anybody buying a PM that don't take delivery of physical is just buying another Promise To Pay.
Not like this isn't an alarm bell either... If you live within driving distance of your gold mine investment, then maybe in times like these you can have some confidence; otherwise, if want invest gold, buy physical. Wonder how many are going to have that I could've had a V-8 bang forehead type moment in the weeks ahead?
I want a gold stock that pays its dividends in physical gold. Are there any?
GORO
Better yet, a private equity firm needs to go around nationally and gobble up all the local coin stores, and then go public.
I know they have done this with funeral homes and pawn shops.
MM:
GORO is a super buy right now. Shorts have been trying to smash the stock recently with bogus press. The market is 5.3 million short on a very limited public float. Many brokers are unable to offer more shares to short and shorts have failed several times to drive the price much lower.
Production is growing rapidly, they are paying over a 2% dividend right now, and that is expected to grow rapidly as well. The management are major holders of the stock. It has very high instituional investor ownership that is also growing. It is possible the short attack may have been an attempt at more institutional accumulation. Even the "retail" investors in the stock hold their shares very tightly! The "weak" hands have already sold. High price earlier this year was over $31
GORO is planning to offer dividend in kind (gold or silver coins). I strongly urge you to carefully check out this company and project its earnings into 2012, 2013 --- this stock could be over 100 in 2 years and is currently at about $21.5. Learn about the high esteem shareholders have for the management team. You better hurry though, a short squeeze could develop at any time as many sharesholders have been making their shares unavailable for lending recently in the last few days, and the shorts seem to be out of shares they can borrow.
http://www.goldresourcecorp.com/
There is also an excellent private board with many knowlegeable posters at Yahoo groups:
http://finance.dir.groups.yahoo.com/group/goldresourcecorp
(disclosure, I have a very small stake: 300 shares).
Forgot to mention, GORO has one of the lowest cost per ounce in the industry. It has rich mineralization of silver, copper lead AND zince in the the arista gold veins. This year they are running about $120/oz cost so far when applying the base metal credits as cost offset. Projected cost per ounce in 2012: 0$/ounce, yes you read that right, ZERO! There is so much base metal in the deposits that they should be able to get down to 0$/ounce next year. They are one of the lowest cost structures in the industry, they have no debt, and the mine geology is some of the best for mining purposes. Just do your DD and I think you will like what you find. This stock is still largely unknown but you best hurry. Amex: GORO
GORO will likely prove a swindle. The shorts have done their homework. Stop pumping.
Even though I posted the 10k filing as a negative, I think its unfair to say the shorts "know" something. There are several high quality miners out there with huge short interests: Hecla Mining for example. Zero debt, huge cash flow and a large proven deposit. As with every company. Do your own due diligence and read the filings. There is always the risk that the filings are inaccurate or fraudulent, but that is the speculative nature of paper investments.
Bear in mind that I cannot provide any form of financial advice and that my opinion does not constitue financial advice in any way.
Sorry, I used to be a GORO fan. Not any more. The shorts have done their due dilligence on the company, providing detailed analysis of the 10K reports.
I'm personally dismayed, because a hint of falsehood in the reporting of a gold mining company anywhere is bound to reflect badly on the whole industry. But any company that claims they are a gold miner with zero costs when they're actually a silver miner are to be scrutinized very closely.
The shorts may be correct for the wrong reasons, because GORO has outperformed gold considerably and is bound to have a correction, solely based on the overvalued share price. I presume this is as a result of the mania in silver prices and not related to gold.
http://seekingalpha.com/article/289368-will-goro-ever-find-that-magic-pot-of-gold
Google Search On GORO story:
http://ow.ly/6uTKY
This is what I meant by bogus press. Yes the shorts are very nervous right now, find out why. AS above stated do your own due dillegence. When big money wants in, some of them often want to cheat the little guys, and you get nasty stuff like the above disinfo. (Welcome to wallstreet, where the press is the "tool" of the super rich).
AS I stated above, institutional investor's holdings are increasing, and there are good reasons for that. The largest institutionals have had their own geologists on site. They are satified to remain in the stock. That should tell you something. I have evaluated the bad "press" and I have remained in as well (with my entire gold miner stock investment - modest as it is). But again do your own DD, I also am not claiming to be a financial adviser and so I can't give you investment advise either, you should base your decision on your own reseaserch, consultation with your advisers, and sec fililings.
I think the reason GORO had outperformed before the short attack was because of sharholder's trust in management - due to past personal experience, size of resource that is projected at 8 years and could easily double with only 1 percent of properties explored, the stated and proven track record being very stock holder friendly and of paying 1/3 of gross as dividends, and very importantly such low cost means you command the appropriate premium. But at the price it now is at, where the shorts have knocked it down about 33%, a great value (in my opinion).
FS, the cost structure is not misrepresentation. Just their gold deposit alone is economicly viable given their scale of operation and justifies the name. They just hapen to have a very large amount of silver, copper, lead and zince as well. You want to gripe about that? One of their deposits up north is mostly gold based on dollar value (El Ray) and they will be going into production shortly on that, trucking it down to the main mill and using the presently idle agitated leach circuit for additional boost to production. So you want them to pretend they don't have any gold rich deposits?Look at their drill results, and look at the grams/ton, the Gold designation of the company is clearly justifiable. (See http://www.goldresourcecorp.com/project-er.php). I am sorry you fell for the short attack con job if you sold at the wrong time. Who's fault would that be? Why not look more carefully, figure out if you made a mistake, and act acordingly given the lower price today?
Were you a stock holder and did you buy high and sell low? If so you have only yourself to blame and I hope you learned a valuable lesson about Wall Street. It cost me quite a bit to learn a similar lesson. I am still kicking myself for net getting my orders filled for a thousand shares of GORO at about $11 (failed by a few pennies) about 14 months ago mostly due to crappy execution by my broker (Etrade) on a then BB stock and ended up being taken to the cleaners shorting the wrong company just before the FED detonated their QE bomb, instead of going back to GORO and bidding a little more a few days later. I learned something from that too about foolish stubbornness wanting to dicker over pennies and ETRADE trying to screw me on the spreads on a BB stock! I decided to wait till AMEX listing went through for GORO (big mistake).