12 Nov 2011

Turd Ferguson: The Inexorable March Higher For Precious Metals

Turd Ferguson is a funny guy. But there's one thing this irreverent, acerbically goofball forecaster is stone-cold serious about: the need to build personal exposure to the precious metals.

For him, it's a straightforward mathematical certainty that the global economy must collapse under the weight of the excessive (and exponentially compounding) credit amassed over the past several decades. The debt is simply too large to be serviced.

As a growing number of analysts (including Chris) are predicting, Turd sees the replacement of the world's current monetary regimes as the endgame to this story. And he believes we are watching that endgame unfold in real-time now.

In this interview with Chris, Turd discusses his reasons why gold and silver offer the best prospect for preserving wealth through the coming devaluation of world currencies, despite his strong conviction that the markets for these metals are heavily price-manipulated.

In fact, it's precisely due to this manipulation that Turd is able to predict short-term price movements in gold and silver as confidently as he does:

Believe me, if you looked at my trading account and looked at my success in trading corn, or soybeans, or crude, or something like that: I make choices just as badly as the average guy. The reason why I am successful in forecasting gold and silver is because they are manipulated.

Because once you understand that the bullion banks, particularly JPMorgan in silver, are in there trying to stack the deck in their favor, then you use some simple technical analysis. And you begin to see where they're going to act, where they're going to place some sell orders to try to start cascading waterfall selling by tripping stocks. It's not real hard. I mean, its pretty basic stuff. But once you admit to yourself that if this does take place, it makes forecasting where price is going pretty easy...

We see this quite often where the prices of gold and silver – they decline rather sharply after hours, after COMEX trading hours, on the Globex because volume is so thin there. A little bit of money thrown at the market – any new paper shorts can have a rather dramatic impact...

And that is where the manipulation has a lasting impact. And you can't get that money back... And it takes a whole bunch of new buy orders, a whole bunch of new speculative longs and commercial longs to come in and bid it back up to where it was before that raid. And so, they're always going to be in there. Again, I guess the ultimate question is at who's behest are they doing this? But, nonetheless, they're in there controlling price, managing the assent, if you will, to create this illusion that there's still confidence in the dollar, that all is well. And that it's okay to go buy a new car.

Turd sees the precious metals as a true barometer of the dollar's devaluation as the Fed pursues its policy of negative real interest rates - which is challenging for the average consumer to see when the dollar may strengthen on a relative basis versus other fiat currencies, and the government-published CPI is artificially low. In his opinion, the government is well aware of the signaling function of the PMs, and therefore feels it needs to manage their ascent in as drawn-out and orderly a process in order to prevent the frogs in the pot (i.e. citizenry) from noticing the water is getting a lot hotter.

The important mission here, in Turd's mind, is to realize the economic reality we are used to as "normal" is over, and to take protection action. And once you have, try to help those around you wake up to that fact - a major challenge, as most of them don't want to realize this, and the entrenched status quo powers are aggressively marketing that 'return to normalcy' is just around the corner:

The last thing I would add to that, Chris, and one that's challenging, and I'm sure you've seen this too in working with your subscribers is where we are headed is unlike anywhere where we've been, at least in recent memory. I mean, there may be some octogenarians out there that remember what it was like before the Great Depression and during the Great Depression and before World War II. But it's a world like that where we're headed to.

All I've ever known, all my friends and family, even my parents really have ever known is this hegemonic United States that was the world power, and provided the world's reserve currency. And we could print as much as we wanted to, and then export the inflation to all the other poor staff that had to – took our dollar. And so we bought their cheap stuff. And those days are over, and it's a really hard concept.

If you haven't had personal experience with something else, it's a really hard concept to get your arms around. That the United States isn't going to be this huge economic and military superpower. Just because it always has been doesn't mean that it always will be. And as we talked about, the numbers and the fundamentals suggest that it's not always going to be.

And so you got to kind of prepare yourself that tomorrow's not going to be like today, that we're in a new paradigm. And try to intellectually figure out, okay, how do I survive and prosper in this new world knowing that it's coming? And that's what we try to do. I know that's what you try to do. And it's our job, Chris, to try and help as many as we can.


11 Nov 2011

Germany & France in talks to break up Eurozone

Debt crisis sets markets in turmoil amid reports of talks about the break up of the eurozone. Photograph: Jeff Spielman/Getty Images

Fears that Europe's sovereign debt crisis was spiralling out of control have intensified as political chaos in Athens and Rome, and looming recession, created panic on world markets.

Reports emerging from Brussels said that Germany and France had begun preliminary talks on a break-up of the eurozone, amid fears thatItaly would be too big to rescue.

Despite Silvio Berlusconi's announcement that he would step down as prime minister once austerity measures were pushed through parliament, a collapse of investor confidence in the eurozone's third-biggest economy sent interest rates in Italy to the levels that triggered bailouts in Portugal, Greece and Ireland.

Italian bond yields surged through the critical 7% mark, at one point hitting 7.5%, amid concern that the deteriorating situation had moved the crisis into a dangerous new phase.

In Athens talks to appoint a prime minister to succeed George Papandreou were in deadlock, and will resume on Thursday morning. The Italian president, Giorgio Napolitano, sought to reassure the markets by promising that Berlusconi would be leaving office soon.

Angela Merkel, the German chancellor, said the situation had become "unpleasant", and called for eurozone members to accelerate plans for closer political integration. "It is time for a breakthrough to a new Europe," she said. "Because the world is changing so much, we must be prepared to answer the challenges. That will mean more Europe, not less Europe."

The president of the European commission, José Manuel Barroso, issued a new call for the EU to "unite or face irrelevance" in the face of the mounting economic crisis in Italy. "We are witnessing fundamental changes to the economic and geopolitical order that have convinced me that Europe needs to advance now together or risk fragmentation. Europe must either transform itself or it will decline. We are in a defining moment where we either unite or face irrelevance," he said.

Senior policymakers in Paris, Berlin and Brussels are reported to have discussed the possibility of one or more countries leaving the eurozone, while the remaining core pushes on toward deeper economic integration, including on tax and fiscal policy. "France and Germany have had intense consultations on this issue over the last months, at all levels," a senior EU official in Brussels told Reuters, speaking on condition of anonymity because of the sensitivity of the discussions.

Financial regulators across Europe were last night carefully monitoring the health of their heavily exposed banks, amid concern that the turmoil could lead to a debt default, or even the break-up of the euro.

George Osborne, just three weeks away from delivering his autumn statement on the health of the economy, believes Europe's problems are blighting the UK's growth prospects, but he will use the sell-off of Italian bonds to insist there is no alternative to his austerity plans.

Nick Clegg, the deputy prime minister, spent Wednesday in Brussels urging the council president, Herman Van Rompuy, and a clutch of EU commissioners to focus on growth, and not further treaty changes, warning that if Europe does not become more competitive it will end up in a spiral of perpetual decline. Both he and David Cameron are urging EU integrationists to recognise that EU Treaty changes in the next few months would be a massive distraction and no cure for the underlying economic crisis. He pointed out that they would require referendums in at least four countries.

The latest chapter in the ongoing sovereign debt crisis came as Bank of England policymakers gathered for their monthly two-day interest rate-setting meeting. The monetary policy committee announced £75bn-worth of quantitative easing last month in an effort to prevent a recession.

City analysts believe the renewed turmoil in the eurozone is pointing to a deep recession in Europe. "It's unavoidable that there will be an outright contraction in the fourth quarter of this year, and a 60%-70% chance of another decline in the first quarter of next year," said Nick Parsons, head of strategy at National Australia Bank.

Shares fell heavily on both sides of the Atlantic. The Italian stock market lost 4% of its value. The FTSE100 index of leading shares closed 106.96 points down, at 5460.38. The Dow Jones closed 389 points down at 11,780.94.

Christine Lagarde, head of the IMF, told a financial forum in Beijing that Europe's debt crisis risked plunging the global economy into a Japan-style "lost decade" of weak growth and deflation.

"Our sense is that if we do not act boldly and if we do not act together, the economy around the world runs the risk of a downward spiral of uncertainty, financial instability and potential collapse of global demand … we could run the risk of what some commentators are already calling the lost decade."

Simon Derrick, currency strategist at BNY Mellon, said: "We're at the point of asking the question, if I put my money into Italy, am I going to get it back? The fact is, there isn't a safety net." He added that the mood in the City was reminiscent of Black Wednesday, in September 1992, when the UK crashed out of the European Exchange Rate Mechanism.

The surge in Italian bond yields was eventually capped by the European Central Bank, which intervened in the markets to buy limited quantities of Italian debt. But analysts say the ECB will eventually have to step up its action, and act as a lender of last resort to bring interest rates down to pre-crisis levels. Sony Kapoor, director of Brussels-based think-tank Re-Define, said: "We may be fairly close to the point where an existential threat to the eurozone, and hence the ECB, is on the horizon. This could easily spiral out of control."

The ECB is seen as the only institution with the firepower to rescue Italy, because the EU lacks the resources to bail out such a large economy. Ben May, of Capital Economics, said Italy would need a €650bn bailout to keep it out of financial markets for the next three years or so. "The European Financial Stability Facility will not be able to provide a bailout of this size," he said.

Officials in Brussels insisted on Wednesday there would be no rescue package for Rome, saying, "financial assistance is not on the cards". A key test will come on Thursday morning when Italy has to raise €5bn from investors on the bond market.

Economic and monetary affairs commissioner Olli Rehn ratcheted up the political pressure on Italy with a strongly-worded letter to finance minister Giulio Tremonti. In it, Rehn demanded concrete written details of how Italy will implement each of the 39 separate reform measures it has promised to undertake.

In Rome the head of state, Giorgio Napolitano, insisted that Berlusconi would be leaving office soon, and that his departure would not be the prelude to a lengthy period of political instability.

His intervention came after hurried consultations with the speakers of both houses of parliament to ensure the speediest possible approval for a package of economic reform and austerity measures agreed with the European institutions. On Tuesday evening, after losing his majority in the chamber of deputies, Berlusconi told Napolitano he would resign.

But, to prevent the economic measures being blocked by the fall of his government, he said he would only go once the package had been approved.

As concern grew that he might delay the passage of the legislation, which has become a litmus test of Italy's credibility in the markets, Berlusconi said he would insist on holding new elections and one of his ministers speculated that could be next February.

After the yield on Italy's benchmark bonds soared above 7%, taking interest rates to a level beyond which previous euro zone debt crisis victims have sought a bail-out, the president issued a statement to say the new economic measures would be "approved in the space of a few days" and that there was "no uncertainty over the prime minister's decision to resign".

Napolitano, who cannot begin consultations with party leaders until Berlusconi leaves office, said that either a new government would be formed "to take every necessary decision" or an election would be held "within the shortest time".

That would still mean a vote was not held until January. But a source close to the president stressed to the Guardian that "early elections are not a foregone conclusion."

Bernanke Knows He’s Powerless This Time Around

During Round 1 of the Crisis, the US tried to combat the collapse of the private banking sector (especially the TBTFs) by shifting debt onto the public’s balance sheet and printing money to buy Treasuries so we could maintain a massive deficit (north of $1 trillion).
Put another way, the powers that be attempted to solve a MASSIVE debt implosion by issuing more debt. Aside from the fact this is outright insane, the problem with this is that we’re at a point of debt saturation in the system.
Kyle Bass of Hayman Advisors notes that from 1917 to 1952 each new Dollar of US debt brought on roughly $4 worth of GDP. From 2000-2010, you got seven cents of GDP growth for every $1 in new debt issued.
Put another way, each new $1 in debt issued today is producing less and less returns. By some estimates we’ve even reached the point at which new debt issuance is actually a net drag on the economy as interest payments eat into growth.
Ben Bernanke knows this, and has started to hint at it in his recent speeches and Q&A sessions with the public. Indeed, if you read between the lines of his statements starting in May, it’s clear that he has realized he cannot solve the US’s debt problems and that QE has failed.
Q. Since both housing and unemployment have not recovered sufficiently, why are you not instantly embarking on QE3? — Michael A. Kamperman, Waco, Tex.
Mr. Bernanke: “Going forward, we’ll have to continue to make judgments about whether additional steps are warranted, but as we do so, we have to keep in mind that we do have a dual mandate, that we do have to worry about both the rate of growth but also the inflation rate…
The trade-offs are getting — are getting less attractive at this point. Inflation has gotten higher. Inflation expectations are a bit higher. It’s not clear that we can get substantial improvements in payrolls without some additional inflation risk. And in my view, if we’re going to have success in creating a long-run, sustainable recovery with lots of job growth, we’ve got to keep inflation under control. So we’ve got to look at both of those — both parts of the mandate as we — as we choose policy”
Pessimistic Bernanke Fed Admits QE Has Failed In FOMC Statement
In its latest FOMC statement, the Bernanke Fed has admitted the economy continues to remain depressed, essentially admitting that both programs of long-term asset purchases, or quantitative easing, have failed to prop up output after what has been the worst recession since the Great Depression.
“Monetary policy can do a lot, but monetary policy is not a panacea.” — Ben Bernanke 9/29/11
U.S. “close to faltering,” Fed ready to act: Bernanke
Asked whether another round of bond purchases, known as quantitative easing, was in store, Bernanke was noncommittal.
“We never take anything off the table because we don’t know where the economy is going to go. We have no immediate plans to do anything like that,” he said.

Federal Reserve Chairman Ben Bernanke said on Tuesday that central banks may need to resort to monetary policy to combat asset bubbles, although regulation should be a first line of defense.

Look at the progression there. As far back as May 2011, Bernanke admitted the benefits of QE were less attractive. Now he’s not only admitting that asset bubbles exist (something Greenspan never admitted) but that Central Banks may even need to “burst” them!?!?
In plain terms, the Fed will NOT be launching another round of QE or major policy changes until the next round of the Great Crisis hits in full force. And by that time it will be pointless anyway as once the defaults begin, the leverage in the global banking system will implode rapidly.
It is no longer a matter of “if” for defaults, it’s a matter of “when.” And we are going to be seeing defaults in the individual, corporate, banking, and sovereign space. This is going to be the Great Debt Reset: the time when the market calls out the global debt bubble and we enter a period of severe economic contraction accompanied by soaring interest rates.
The worst-case scenario is that everything comes to a head in the next six months. Remember, the slow motion train wreck that is Greece has been playing out since the end of 2009. The market is already pricing in a Greek default. And Germany has even alluded to the fact that it’s preparing for a Greek default that will feature at least a 60% haircut. Heck, France has even announced plans to nationalize 2-3 banks “just in case.”
What happened in 2008 was literally just the warm up. The REAL DEAL is coming in the next 14 months. And it’s going to involve corporate, financial, and sovereign defaults.
This is coming. It’s no longer a matter of if but when. And those investors who position themselves for it in advance will make a killing.


10 Nov 2011

A Financial Nightmare For Italy: The Yield Curve For Italian Bonds Is Turning Upside Down

What we are all watching unfold right now is a complete and total financial nightmare for Italy.  Italian bond yields are soaring to incredibly dangerous levels, and now the yield curve for Italian bonds is turning upside down.  So what does that mean?  Normally, government debt securities that have a longer maturity pay a higher interest rate.  There is typically more risk when you hold a bond for an extended period of time, so investors normally demand a higher return for holding debt over longer time periods.  But when investors feel as though a major economic downturn or a substantial financial crisis is coming, the yield on short-term bonds will often rise above the yield for long-term bonds.  This happened to Greece, to Ireland and to Portugal and all three of them ended up needing bailouts.  Now it is happening to Italy and Spain may follow shortly, but the EU cannot afford to bail out either of them.  An inverted yield curve is a major red flag.  Unfortunately, there does not seem to be much hope that there is going to be a solution to this European debt crisis any time soon.
We are witnessing a crisis of confidence in the European financial system.  All over Europe bond yields went soaring today.  When I finished my article aboutthe financial crisis in Italy on Tuesday night, the yield on 10 year Italian bonds was at 6.7 percent.  I awoke today to learn that it had risen to 7.2 percent.
But even more importantly, the yield on 5 year Italian bonds is now sitting at about 7.5 percent, and the yield on 2 year Italian bonds is about 7.2 percent.
The yield curve for Italian bonds is in the process of turning upside down.
If you want to see a frightening chart, just look at this chart that shows what has happened to 2 year Italian bonds recently.
Do phrases like "heading straight up" and "going through the roof" come to mind?
This comes despite rampant Italian bond buying by the European Central Bank.  CNBC is reporting that the European Central Bank was aggressively buying up 2 year Italian bonds and 10 year Italian bonds on Wednesday.
So what does it say when even open market manipulation by the European Central Bank is not working?
Of course some in the financial community are saying that the European Central Bank is not going far enough.  Some prominent financial professionals are even calling on the European Central Bank to buy up a trillion euros worth of European bonds in order to soothe the markets.
Part of the reason why Italian bond yields rose so much on Wednesday was that London clearing house LCH Clearnet raised margin requirements on Italian government bonds.
But that doesn't explain why bond yields all over Europe were soaring.
The reality is that bond yields for Spain, Belgium, Austria and France also skyrocketed on Wednesday.
This is a crisis that is rapidly engulfing all of Europe.
But at this point, bond yields in Europe are still way too low.  European leadersshattered confidence when they announced that they were going to ask private Greek bondholders to take a 50% haircut.  So now rational investors have got to be asking themselves why they would want to hold any sovereign European debt at all.
There is no way in the world that any rational investor should invest in European bonds at these levels.
Are you kidding me?
If there is a very good chance that private bondholders will be forced to take huge haircuts on these bonds at some point in the future then they should be demanding much, much higher returns than this.
But if bond yields continue to go up in Europe, we are going to quickly come to a moment of very great crisis.
The following is what Rod Smyth of Riverfront Investment Group recently told his clients about the situation that is unfolding in Italy....
"In our view, 7% is a 'tipping point' for any large debt-laden country and is the level at which Greece, Portugal and Ireland were forced to accept assistance"
Other analysts are speaking of a "point of no return".  For example, check out what a report that was just released by Barclays Capital had to say....
"At this point, Italy may be beyond the point of no return. While reform may be necessary, we doubt that Italian economic reforms alone will be sufficient to rehabilitate the Italian credit and eliminate the possibility of a debilitating confidence crisis that could overwhelm the positive effects of a reform agenda, however well conceived and implemented."
But unlike Greece, Ireland and Portugal, the EU simply cannot afford to bail out Italy.
Italy's national debt is approximately 2.7 times larger than the national debts of Greece, Ireland and Portugal put together.
Plus, as I noted earlier, Spain is heading down the exact same road as Italy.
Europe has simply piled up way, way too much debt and now they are going to pay the price.
Global financial markets are very nervous right now.  You can almost smell the panic in the air.  As a CNBC article posted on Wednesday noted, one prominent think tank actually believes that there is a 65 percent chance that we will see a "banking crisis" by the end of November....
"There is a 65 percent chance of a banking crisis between November 23-26 following a Greek default and a run on the Italian banking system, according to analysts at Exclusive Analysis, a research firm that focuses on global risks."
Personally, I believe that particular think tank is being way too pessimistic, but this just shows how much fear is out there right now.
It seems more likely to me that the European debt crisis will really unravel once we get into 2012.  And when it does, it just won't be a few countries that feel the pain.
For example, when Italy goes down many of their neighbors will be in a massive amount of trouble as well.  As you can see from this chart, France has massive exposure to Italian debt.
Just like we saw a few years ago, a financial crisis can be very much like a game of dominoes.  Once the financial dominoes start tumbling, it will be hard to predict where the damage will end.
Some believe that what is coming is going to be even worse than the financial nightmare of a few years ago.  For example, the following is what renowned investor Jim Rogers recently told CNBC....
"In 2002 it was bad, in 2008 it was worse and 2012 or 2013 is going to be worse still – be careful"
Rogers says that the reason the next crisis is going to be so bad is because debt levels are so much higher than they were back then....
"Last time, America quadrupled its debt. The system is much more extended now, and America cannot quadruple its debt again. Greece cannot double its debt again. The next time around is going to be much worse"
So what is the "endgame" for this crisis?
German Chancellor Angela Merkel is saying that fundamental changes are needed....
"It is time for a breakthrough to a new Europe"
So what kind of a "breakthrough" is she talking about?  Well, Merkel says that the ultimate solution to this crisis is going to require even tighter integrationfor Europe....
"That will mean more Europe, not less Europe"
As I have written about previously, the political and financial elite of Europe are not going to give up on the EU because of a few bumps in the road.  In fact, at some point they are likely to propose a "United States of Europe" as the ultimate solution to this crisis.
But being more like the United States is not necessarily a solution to anything.
The U.S. is 15 trillion dollars in debt and extreme poverty is spreading like wildfire in this nation.
No, the real problem is government debt and the central banks of the western world which act as perpetual debt machines.
By not objecting to central banks and demanding change, those of us living in the western world have allowed ourselves to become enslaved to gigantic mountains of debt.  Unless something dramatically changes, our children and our grandchildren will suffer under the weight of this debt for as long as they live.
Don't we owe future generations something better than this?

9 Nov 2011

Gold breaks through $US1800

GOLD futures settled below $US1800 this morning, after rushing above that level for the first time in six weeks on worries about Italy. 
The third-largest economy in the European currency bloc waded into troubled waters after Prime Minister Silvio Berlusconi failed to secure a parliamentary majority in a budget vote. While parliament approved the budget bill, Mr Berlusconi announced plans to resign his post shortly after gold floor trading closed in New York.

"Italy coming under greater scrutiny is helping provide support to the (gold) market and subsequently the market was able to get through some of that psychological resistance up near $US1800," said Stephen Platt, analyst with Archer Financial Services.

The most actively traded contract, for December delivery, settled up $US8.10, or 0.5 per cent, at $US1799.20 a troy ounce on the Comex division of the New York Mercantile Exchange.

November-delivery gold settled up $US8.10, or 0.5 per cent, at $US1798.40 a troy ounce though no contracts changed hands.

Gold rallied to a fresh six-week high at $US1804.40 in the wake of Italy's vote as investors clamoured to shield their wealth by purchasing safe-haven assets such as gold, which is seen as a store of value.

"I think it's the gradual realisation that if Europe comes out of this with a deal intact and it gets settled in the short term, we're still looking at a long period of money printing on both sides of the Atlantic, and that's going to be bullish for gold," said Michael Gross, commodity analyst with OptionSellers.com.

Italy has been under international pressure to implement labour reforms and reduce its government borrowing amid the escalating European debt crisis. The euro bloc's third-largest economy has seen its cost of borrowing hit a euro-era record in recent days, as investors worried not enough is being done to bolster the economy.

"Italian debt approached the 7 per cent mark this morning with about the same speed that Prime Minister Berlusconi's government was coming apart at the seams," said Jon Nadler, senior metals analyst with Kitco Metals, in a note to clients.

Gold's recent upswing has coincided with significant increases in the holdings of physical gold-backed exchange traded funds, a sign that retail investors are again favouring the precious metal. The world's largest gold ETF, SPDR Gold Trust (GLD), saw its gold holdings increase by 389,147.2 troy ounces, or 1 per cent, to 40.37 million ounces, over the past week.

"Investors again flock towards the safe-haven asset types in a bid to preserve wealth levels," said James Moore, metals analyst at FastMarkets.com, in a note to clients.


Should I Buy Physical Gold or Gold Shares?

The Times, They are a Changin’

Since 1985 to 2007 the developed world has seen the sophisticated development of equity and fixed interest rate markets that has ensured that investments are aimed at a positive, growth future for the economies on the west side of the globe. All the skills and beliefs in markets have been consistent with that expectation. When the credit crunch came, the belief was that the powers that be would rectify matters and we would be back to the same rosy future once the hurdles had been surmounted. But here we are, ending 2011 and that rosy future has given way to an uncertain one where the very structures on which the rosy future had been built have stated to buckle and falter. Despite this, the adjustment by institutions has been slow to recognize these changes and the process of making markets face this new reality has been as slow as politicians have been to adjust their handling of matters. It’s far more than denial; it is a refusal to change. The change needed is so fundamental that the careers and very way of life of financial manager would be at risk. Hence the poor efforts we see in changing the financial world. This is taking the path we walk in the financial world to a precipitous, almost cathartic point at an unquantifiable date ahead of us when we see pressures exerted to change that way we live our lives.
Rather like a drought in a hot summer when the grass and bush dry out, the risks of fire are growing by the day. The drier the undergrowth the less the spark needed to start a most destructive fire. It is in this environment that we find ourselves now. It is affecting every single financial market in this global economy and requires every single portfolio and investment manager to recognize the scene and adjust investment values accordingly. Those who do this first will reap the largest rewards. Those who do not will find themselves way behind the crowd. This is particularly pertinent in the precious metal worlds. It brings us to the point in our series on ‘changing ones portfolio to adjust to these days’ to the question of, “Do I hold gold bullion itself or gold shares. As with all such questions the answer is not simple and straightforward.
The Rosy Past
In the last 25 years gold mining shares have followed the way of most equities focusing on capital growth and through that, rewarding shareholders. In the last couple of years we have seen this change favor those companies that pay across dividends to their shareholders reflecting their profits as the gold price rose. This immediately points to a change that is now today’s reality, that mining shares must reward shareholders with dividends. This implies that while a mining share is still an equity [but with a great product] carrying all the corporate risks that attend equities and suffering the rising costs that come with rising profits [the mining industry is susceptible to this in particular] each one must be carefully looked at before we can give a simple answer to the question in the title of this essay.
In the earlier parts of this series we defined what to look for in the precious metal equity. We highlighted the criteria that apply to getting the best out of these shares, so we will take a mining share that met these criteria as the basis for our comparison. Any other share that does not meet these criteria will clearly not perform as well, so will underperform both gold bullion and the shares that do meet our criteria. So let’s look at the information we have on the performance of gold bullion and gold shares. The chart below gives a direct comparison of a fund, the XAU index and gold bullion itself in the last five years. Bear in mind that the performance of the gold fund and the XAU index does not add the cash flow that comes from gold shares. However, when we add this back and the subsequent accruing of income on income the performance is enhanced. For the fund, we do have to extract their fees which lower the total return to that extent.  Further to that, if we consider only the shares that meet our criteria, then their performance will far exceed both the gold fund and the XAU index.

Both Have a Place but Perform Differently
This tells us that there is a place for both bullion and selected gold shares in our portfolio. The right share will give an outstanding performance that can outrun gold bullion any day, but that performance comes from it reaching different milestones in time and its own growth.
At what point does a gold share see the spurt in its share price.
1.       When an un-mined deposit turns from a gold resource to a gold reserve by “official” recognition [by a NI 43-101 confirmation] doubts about the size of the deposit are removed as are the unforeseen difficulties in mining that deposit. At this point the larger gold mining companies [really mining finance houses owning several mines] may show a real interest in taking share in the deposit.
2.      Once a feasibility study is complete showing just how feasible the subsequent mining operation will be and the difficulties that may face the mine and its costs, then the company is in a position to raise the finance to begin. This may come from the markets, the forwards sale of identified gold in the ground or from a mining company buying shares in the operation and bringing it to production.
3.      It can take several year to turn the deposit into a producing mine. Management must be selected, the operation must be financed, (i.e. loans, equity) and the corporate shape defined. This will give the operation an identifiable price which the market will discount through its pricing of the shares in the mine or adjustment of the shares of the company that bought it (subject to the expected impact it will have on the overall balance sheet of the owning company).
4.      When the gold or silver price jumps, gold shares will follow to some extent but will, overall, wait until the average gold price for the period in question, has risen. After all, it is from the cash in the bank that the company will pay dividends or not. Until then the gold or silver price may go either way.
The prices of gold and silver themselves are not affected by any of the above factors. Their prices in the last six years have been driven by two distinctly different forces.
On the one hand, gold and silver have reflected the fall of currencies. As confidence in currencies has waned, so the price of precious metals has risen. This is really a bear market in currencies and not so much a bull market in precious metals. On the other hand the demand base for precious metals has broadened and deepened across the world. As you can see in the accompanying table the developed world now only accounts for a total of less than 20% of total jewelry, coin and bar demand, whereas the emerging world from Turkey eastwards accounts for somewhere around 80% and the flow of demand remains unabated. 

Goodbye $1700 Gold

In lieu of the period of unbridled peace and prosperity that was supposed to be ushered once the European summit ended, we have more chaos, more uncertainty, and record blow ups in all Euro-sovereign paper. Which means only one thing: the long-awaited moment of coordinated and endless central planner printing is getting ever closer. And once again, gold has figured this out albeit with a slight delay, having left the $1700 handle behind. Once the general public notices the most recent break out in the yellow metal expect yet another manic phase higher, coupled with the now traditional margin hike buffoonery (or wait, maybe this time the CME will lower margins to, gasp, make sure there is no liquidity stress).



7 Nov 2011

Greek PM 'Set To Resign' Amid Euro Crisis

Greece's prime minister George Papandreou will resign today, Pasok party sources have told Sky News.

A possible replacement for Mr Papandreou is currently being discussed, the sources have also indicated.

The development comes after the country's opposition leader insisted the PM must go to save the economy.

Antonis Samaras said he was willing to help in the formation of a coalition government - but not until Mr Papandreou had stepped down.

Despite winning a confidence vote in parliament, Mr Papandreou has struggled to form a temporary coalition government to back the controversial EU bailout package.

The prime minister had gone into talks with president Karolos Papoulias on how to construct an administration to negotiate the deal to write down Greek debt and release billions in emergency aid.

But sources within Pasok - the socialist party that Mr Papandreou heads - have told Sky News there are only two possible scenarios.

The first involves Mr Papandreou stepping down and being replaced by a compromise candidate who is acceptable to both the left and right of the political spectrum.

The second scenario would see Mr Papandreou stepping down and being replaced by someone within Pasok itself - potentially Evangelos Venizelos, the current finance minister, who has been part of the bailout negotiations.

An emergency cabinet meeting will be held this afternoon, when these issues will be discussed.

The country is under pressure from the eurozone's power brokers to implement the bailout package agreed in Brussels on October 27.

If the bailout stalls in the Greek parliament, that would hamper the release of money Greece needs to pay salaries, pensions and international creditors.

After the prime minister won a confidence vote in the early hours of Saturday morning, European finance ministers, who meet next week, will want to see progress in Athens.

However the opposition New Democracy party is angry Mr Papandreou decided to tough out his tenure, rather than call snap elections.

Its (Euronext: ALITS.NX - news) leader, Mr Samaras, said the prime minister was "dangerous" for Greece.

But he and other opposition leaders have already said they would work to implement the bailout deal, so the pressure to join a consensus government is immense.

Greece's shadow finance minister Notis Mitatarakis told Sky News he believes the leader of the country's new interim government did not have to be a politician.

"We need elections because we need a stable government to be able to negotiate the new loan agreement," he said.

"However, we realise the need for an interim government in order to conclude the loan agreement [and] the restructuring of the Greek debt.

"That would need a person that is mutually accepted, not necessarily a politician - rather, not a politician - to run an interim government and then go to elections."

The wrangling comes after almost a week of market anxiety over whether the near-bankrupt country will actually embrace the bailout deal.

Mr Papandreou has already abandoned a proposal to hold a referendum on the package, which would result in years of financial austerity for Greece.

On Friday world leaders drew a blank in their efforts to resolve the wider eurozone crisis, as a G20 summit ended with no agreement on crucial measures to shore up ailing economies.

The Group of 20 leading economies failed to thrash out a detailed plan to stabilise the single currency or to boost the International Monetary Fund's ability to respond to emergencies.

Prime Minister David Cameron warned squabbling eurozone leaders "the world can't wait" for them to finalise plans to bailout Greece, recapitalise banks and erect a one trillion euro (£870bn) "firewall" to protect the single currency.

He acknowledged that the ongoing uncertainty in the eurozone was having a "chilling" effect on the British economy.

6 Nov 2011

The Coming Dollar Collapse. The Largest Event In Human History

Iran Cornerstone of WW3

Tensions are once again mounting against Iran ahead of a crucial report by the UN nuclear watchdog, IAEA, due next week. Meanwhile, Israel has tested a new ballistic missile. ­Some reports go even further and suggest the idea of a military strike on the Islamic Republic is being pushed by Israeli Prime Minister Benjamin Netanyahu. And British media say that with Iran remaining resilient against international sanctions, the attack could come as soon as next November. Various media cite the UK Ministry of Defense and Whitehall as their sources.