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Posts Tagged ‘How to Buy Gold and Silver’

BY JIM WILLIE
10/26/2011
Financial Sense

The feverish positive sentiment has left the Gold & Silver market in the last two months. Raised margin requirements during falling prices alongside naked short ambushes in the COMEX, coupled with permitted asset damage from debt monetization conducted more in secrecy will always help to dampen enthusiasm. But with the billboard message on the European subway walls and boulevards and news magazines stating the obvious, that the European debt crisis has no solution, that Germany has no more checks to write in funding the bailouts, that Greece is set to default, that leaders in political spheres are opposed by bank leaders where the final decisions are made, the GOLD & SILVER PRICES ARE SET TO ZOOM. Only the dummies sold in the last round of ambushes and interrupted recoveries. The precious metals have suddenly awakened. The old defended range for the two metals was easily overrun as a splash of reality hit the market faces. A mad scramble is likely from here onto the end of year, as people realize that hyper-inflation is the solution on any massive bailout with clearer gigantic needs, and as people realize that a broad string of bank failures will drive gigantic flows into safer places since sovereign bonds will go from sacred to toxic. The powerful decline in September, down $200 in gold and down $10 in silver suddenly have presented a ripe easy recovery without resistance. A powerful reversal is near and coming. Many investors will rush back in, paying higher prices than where they unwisely sold. Many investors will rush in, seeing banks and government bonds as ugly options.

FRAUD LACED IN THE SYSTEM

Before delving into the easy 15% upside opportunity in gold and easy 25% upside opportunity in silver, a topic begs to be covered. The topic is fraud. While discussion and analysis of fraud in US high finance can fill volumes, an entire set of encyclopedias, from just the last generation, direct attention to the fraud of investment funds and fraudulent bank accounting. My desire is to cite specifics on how investors have been duped into not participating in major moves up in commodity prices, like crude oil and precious metals gold & silver. My desire is to cite specifics on how the big banks avoid reporting 75% cuts in profits by fabricating the most absurd of accounting profits that even financial newscasters dispute as valid. The various funds to participate in the black gold and yellow gold asset plays have been congames. The defense by the big US banks against utter and complete insolvency have been congames. The public must avoid the ETFund investments. The public must avoid the perception that the big US banks are anything but dead.

PINPOINT FAILURE OF U.S. CAPITALISM

A opening argument against fraud and misrepresentation goes far beyond the Wall Street practice of pandering toxic bonds with AAA ratings. It goes far beyond promoting a fund that actually is critical in shorting oil and gold, rather than investing in them as investors intend. It goes far beyond deceiving about a price inflation between 7% and 11% since year 2005. It goes far beyond hiding an economic recession that started in 2007 and never ended. It goes far beyond news coverage of foreign wars like in Libya, when $90 billion in Qaddafi parked funds have been frozen, probably never to be released by Western banks. It goes far beyond $50 billion gone missing from the Iraq Reconstruction Fund with direct $2.3 billion payment handed to a fellow who received the highest medal of honor to a private citizen. The biggest problems that plague the United States Economy, its financial system, and its capitalist structure relate to ineffective usage of brainpower, co-opted assets & capital, and enormous investment in the corrupted system.

Clearly the United States has untapped resources, deep riches, broadly spread. The nation has significant land, including agriculture, timber, and water resources. The nation has significant untouched oil & gas deposits, and natural energy in wind, sun, and geothermal pockets. The nation has significant knowledge and technology, some of which has never been used that could dramatically reduce a wide range of expenses. The nation has 300 million people who have a great deal of their time and energy ready for productive usage. The nation has enormous untapped resources. However, the investment and capital devoted to support the fraudulent system is staggering. Just look for instance at the CNBC and Bloomberg financial news center facilities. They are not devoted to industry that produces jobs directed at value added enterprise. Just look at the entire Wall Street and hedge fund and asset management sector. It is not directed at value added enterprise, but rather to shuffling of securities certificates. A Chinese economist remarked a year or more ago that of the $14 trillion US Gross Domestic Product, perhaps half was not legitimate since merely related to transfers of debt securities and other debt paper products. What a great point! The USEconomy might be exaggerated by double in legitimate size, a fact underscored by the industrial base that has been moved to Asia since 1980, first with the Pacific Rim and finally with the Chinese buildup. Just look at the vast network of consumption centers, like Wal-Mart and Target and Best Buy, the retail chains that do not invest in value added enterprise. Recall that 70% of the USEconomy is devoted to consumption, as some sort of sick religious exercise that all too often has resulted in home equity converted to things bought. America has spent its capital tragically and now finds its many sectors insolvent. The conclusion is that a large part of American capital is devoted to the syndicate and beholden to the advertisers. Resources do not mean much when the capital and brainpower is co-opted and dedicated to fraudulent enterprise and even to self-destruction.

Let’s consider some specifics. Larry Ellison of Oracle, Steve Jobs of Apple, and Bill Gates of Microsoft never finished college. They were productive, as Gates is given a pass for innovation in monopoly development and marketing theft to build a stodgy empire that has stagnated in the last decade happily. When young minds attend college, they emerge hungry to make a mark, to put a stake in the ground, to create an organization, to build wealth and to make a legacy. All too often, the best & brightest are hired by the bad guys. An entire generation of brilliant young minds has been largely co-opted. Microsoft took genius minds, as the Jackass knew of several who applied there. They produced co-opted software technology, source code theft during partnership ventures, little or no innovation unless one considers bundling to smother Netscape and Norton. Also Goldman Sachs took genius minds, as the Jackass knew none, but a couple wannabees. They produced insider trading in finance technology, derivative devices that enabled concealed debt, exchange traded funds that enable control of a market, and so much more. A Forbes Magazine editor once sat next to Gates on an airline flight. During the conversation, Gates admitted that his chief rival in hiring the best minds that America had to offer came from Goldman Sachs. So the best graduates pursue permitted monopoly and fraudulent finance. Also the Defense Contractors took genius minds, as the Jackass knows of one in particular. They specialize in weapon systems and the attendant equipment. The trickle down benefits are an illusion, as the end product is a structure in smithereens. Benefits trickle down in seven to ten stages. Destruction trickles down in two or three stages, with Senate kickbacks and cost overruns the chief icing.

The biggest problems in the US are

• diverted intellect toward fraud, theft, and monopoly enterprise
• war and destruction, in pursuit of dominance over rubble landscape
• absent industry after 30 years of off-shoring factories to Asia
• really dumb kids, whose perspective is both shallow and limited.

When the Jackass was in Digital Equipment Corp from 1980 to 1993, many of us shook our heads when Intel, then many others, including DEC, opened manufacturing plants in the Pacific Rim. Ours were Taiwan, Hong Kong, and Singapore. One of my little accomplishments was to streamline online testing of factory output in quality control procedures. We had one major success with clients on their manufacturing sites that produced monitors and memory among others. The initial strategy on the national movement to off-shore was “just manufacturing” but many of us kept shaking our heads, thinking “no way, next comes Research & Development.” Within only two years, the DEC site in Taiwan had a leading R&D center that ultimately developed a world class computer monitor, a smart monitor with loads of options. Patents were filed, and the business segments upstream were set to flourish. Capital was attracted to Asia by the boatload. The United States has huge resources. But as we have see in the last two decades, they have been tapped, and they will be tapped, but by foreign nations and foreign firms. For a disgusting sign of the times, look to the California high speed rail project. The California Legislature eventually had to install new laws to limit the contract funds and contract jobs going to China. Most stimulus aid foreign jobs. Even stimulus toward the infrastructure in a key project aided China more than the US. Sadly, most new jobs in the USEconomy are devoted to health care and retail. So we are becoming a nation of hospital orderlies and cash register clerks, whose products tend to be bedpans and checkout lines. No need for college on those fronts.

FUND GROWTH DESPITE INEFFECTIVENESS

Exchange Traded Funds are generally a profound fraud laced with deception and extremely slippery prospectus language. Many lazy investors are being duped. The flagship GLD fund is the worst perpetrator in my view. Many analysts and industry experts have offered details on all manner of problems, irregularities, and anomalies, like unstable bar lists, like shorted shares by management, like bullion metal inventory shipped to the COMEX, like vault fees without stored metal. Turn to the flagship crude oil fund. The popular crude oil ETFund has lost over half its value relative to tracking the commodity price. Funds might be regularly abused by managers to short the commodity and keep the price down, an old game with an easy fingerprints. Such practice would fly in the face of investors, who sometimes feel betrayed, when they discover what is happening under their desks. The investors think they are investing in gold or crude oil in a fund, but those in charge of management and fiduciary responsibility are working hard toward the opposite objective. Investors are duped into shorting the same assets they invested in, indirectly. The total volume of Exchange Traded Funds is fast approaching $2 trillion, but not well invested. The invested funds all too often support the system that wishes to keep down the commodity prices, so that paper financial products are encouraged. The GLD fund managed by HSBC receives the most attention on widespread illicit activity, from fraudulent drainage of its gold inventory toward the COMEX to meet delivery demands through massive shorting. The fund has never been subjected to the scrutiny of a full audit by an independent agency.

EXCHANGE TRADED FUNDS DO NOT TRACK

Another big fraud is the crude oil investment tracker. The United States Oil Fund (USO) was introduced as a vehicle for investors to track the crude oil price. When it began, the ETF had a 1:1 price relationship with the New York crude oil from the futures exchange, a close match. Its expense ratio was a mere 0.45% in overhead. What a huge change since inception! The active month crude oil contract trades between $85 and $95, but the USO fund has been bobbing around recently in a lowly ratio to crude oil below 40%, with a plunge below 30% in October. The penalty for investing in the oil ETF has come to 60% to the dopey lazy investor. The investors did not invest in crude oil at all. They benefited not at all from any rise in crude oil over the last three years. 

Analysts defend the fund, claiming that rollover from current nearby contracts has eaten up value, along with administrative costs. That seems a lie. The successive monthly contracts do ramp down, but by the month’s end, the difference should be very small. In all likelihood, just like GLD but to the extreme, the USO fund is being brutally abused to short the crude oil price on the West Texas contract. Recall that the WTIC oil price has consistently been $15 to $25 below the North Sea Brent oil price for months. Blame is placed for the gross differential on surplus storage at the Cushing Oklahoma facilities, but that too seems a lie. Look instead for a fishy finger on extreme Wall Street activity with futures contract shorts, perhaps even backed by the official Strategic Petroleum Reserve storage supply on oil slick cover. Notice in the ratio of USO/WTIC, the quantum decline in early 2009 corresponded to the extreme drop from $135 to $40 per barrel. Conclude that the USO fund might have been instrumental in generating some extreme profits on the downside when they drove down the crude oil price. Even more leverage is deployed with futures options.

One can see the other smaller quantum declines circled on the graph. Even they are outsized, since 6% is not the cost to roll into the current nearby month. The spread from successive months is typically only 30 to 60 cents, well under 1%. See for yourself from the INO website on the CL crude oil futures contract (CLICK HERE). However, between those sudden drops one can notice a steady ramp in decline. That is where the fraud and abuse lies, since they should be flat horizontal, acting like a true tracking fund. There is no tracking. Funds are in high likelihood removed regularly in illicit shorting programs, to sell the crude oil contract with investor funds. Just speculating, but this is an old game.

A final comment on the lavish expense ratios. For the SPDR Gold Shares (GLD) it is 0.40%, which does not seem like much. However, the size of the fund is about $55 billion, making 0.40% a hefty $220 million. That is a big fee to charge for mismanagement. At best it is badinvestment decisions, but at worst it is fraud such as from shorting the shares, the money drawn out to sell into the gold market. The metal inventory from short programs would go straight to the COMEX, as some intrepid reporters have revealed from insider sources. Conclude that investors are violated coming and going. Only total idiots and morons invest in such funds, of course along with lazy folks, cheered on by intellectual clowns like Adam Hamilton of Zeal Intelligence, who seems never to have identified a fraud in his entire career.

BIG BANK FRAUDULENT ACCOUNTING

Let me introduce you to my little friend, said the infamous Scarface. The little friend for the giant US banks is the Debt Value Adjustment, which fabricates profits from bond decay. The success is in placating really stupid investors, who rush in, only to see the bank stock fall by the afternoon sesssion. The accounting fraud committed by JPMorgan is typical. Instead of taking a loss on their own declining corporate bonds, or doing nothing, they posted a queer profit in a Debt Value Adjustment of $1.9 billion, equal to 29 cents per share. The JPM bond yield spread has widened by 200 basis points versus the USTreasury Bond. The bank colossus paid out $1 billion in legal expenses for bond investor lawsuits. They raided $96 million from Loan Loss Reserves, which will be needed later, like in bond fraud investor settlements. They cut 1100 in bank staff. They posted a $700 million decline in investment banking profit. Their biggest line item of profit was the fiction of a $1.9 billion profit from their decaying corporate bonds. It is not a profit & loss event at all. If they default on the corporate bond, imagine the accounting profit could be maximized. Only in American bank accounting!! Blessed as good by the FASB and USCongress!! JPMorgan is a wreck, as their businesses are tanking. Their tight grip on the Silver market could be loosened in time. 

Profits announced by the big US banks are phony. A laundry list of tainted supposed profits came in the last two weeks for the entire crew of giant insolvent us banks. The Debt Value Adjustment (DVA) deception is the main common thread of deception. Citigroup posted $1.9 billion in Debt Value Adjustments, the same amount JPMorgan posted for DVA in a parade. This item is so corrupt as to be indefensible by any rational person. They take the fallen value of their own corporate debt, cite how they could buy it back at a lower cost, and book the difference as profit. But the debt is not bought back, only pretended. Similar games are played with bond spreads widening, but keep the argument simple. Imagine a corporate bond rising in principal, but not as fast as USTBonds, booked as a profit since the spread has worsened. So if the corporate bond fails altogether and goes to zero, the DVA would maximize the profit for the dead firm. In my book, dead firms do not buy back their debt. As a statistical analyst, the Jackass always prefers to carry an argument or method to the extreme to reveal its legitimacy or flaw.

Bank of America also posted a $1.7 billion DVA profit, but the winner was Morgan Stanley, which has the highest risk of death. They posted a hefty $3.4 billion fictional profit from a non-event adjustment to their corporate debt, the same Debt Value Adjustment. Without such tainted profits, the big US banks would have shown their dead decaying matter more clearly. Worse, during a time when mortgage assets and lawsuits are all the rage, they raided their Loan Loss Reserves, more phony profits. Bank of America even listed litigation losses while raiding LLReserves in the amount of $1.6 billion. Citigroup snatched back $1.4 billion in LLR, while Wells Fargo snatched back $0.8 billion in LLR. The big US bank quarterly reports were worse than dreadful, as they were corrupted and phony, the rot visible. Amazingly, the Bloomberg financial news identified the practice as questionable but legal, calling them poor quality profits!! Poor quality indeed. They are too kind. In March they called outgoing Egyptian leader (emperor) Mubarek a prolific saver, for having accumulated $60 billion. Maybe they will call the pilfered Libyan funds sticky, when not returned. 

DERIVATIVES DUMPED ON DEPOSITORS WITH USFED BLESSING

Bank of America dumped its derivative book, possibly preparing for a restructure. The dumping ground is likely a pitstop en route to the USGovt toxic vats. The USFed applauds while the FDIC complains. Raids of assets preceded the Lehman Brothers failure, alert students of history note. This event might be no different. Bank of America engaged in devious accounting. Not only did they call their own corporate bond decay a phony profit, butthe firm shifted much of its mountain of derivatives held on its balance sheet as of June 30th. They moved it to their retail bank. Just last week, Moodys downgraded the bank holding company from A2 to Baa1. The retail bank was downgraded more gently to A2 from Aa3. The collateral backstopping will next be done fully and effectively by the bank’s $1.041 trillion in deposits. A bank run has been rumored at the big lumbering insolvent bank. Its website was down for several consecutive days, inhibiting usage of funds. Furthermore, the insurance agency to the depository base is very angry, namely the Federal Deposit Insurance Corp. The FDIC is another dead entity, devoid of funds, posing as a Wall Street harlot, this time betrayed by its brethren. The USFed favored the shift on the books, so as to give relief to the bank holding company (in their words). Conclude that depositors are forced to backstop its $53 trillion derivative book, as clients continue to depart. Savings accounts and certificate holders might be wiped out on a liquidation.

Bank of America already had the threat of failure looming due to deep insolvency from mortgage and litigation losses. Until now, the operations like the retail banks would not be affected and could be spun out to a new entity, even sold. Shareholders would be wiped out and holding company creditors like the bondholders would take losses. The derivative shift changed everything. Bank analyst Chris Whalen calls it either criminal incompetence or abject corruption by the USFed. Dumping derivatives into the depository business segment goes in diametric opposition to Dodd Frank resolutions. So much for Financial Regulatory Reform if not enforced. The US Federal Reserve and Federal Deposit Insurance Corp are in deep disagreement over the transfers. The USFed favors moving the derivatives to benefit the bank holding company, while the FDIC objects since it must pay off depositors in the event of a bank failure made more likely. The FDIC will attempt to reject this brazen move. The corrupted USFed will argue not to disrupt the financial markets further. Witness the justification for a Dodd Frank resolution and ruling.

The 2005 bankruptcy law was revised to permit derivatives counter-parties to be given the first in line position. They grab assets first in a little known feature of the bankruptcy reform that favored the banks. This truly devious bold move amounts to a direct transfer from Merrill Lynch derivatives risk to the USGovt via the FDIC. It means depositors will be made whole only after derivatives counter-parties have seized collateral. Depositors are lined up for a legalized raid, better yet a theft. Recall back in September 2008, that Lehman Brothers failed over a weekend after JPMorgan grabbed its collateral in a basic daylight raid. Expect another TARP type of bank bailout, as the Wall Street firms jockey to slide their derivative exposure under carefully crafted shells. The bad news for them is that they have over $200 trillion left, even after this ugly maneuver to shift the Merrill Lynch exposure.

GOLD & SILVER READY TO REBOUND

The Gold market is on the verge of a powerful move. The reversal base has been created. The $1620 level was tested successfully a few times. The uptrend has been defended and should continue in a powerful surge upward. The Chinese have been buying with both hands on the physical market, as the London traders report. They took full advantage of the horrendous display of market interference, as the gold contract margins were hiked in repeated fashion during the price declines. It was engineered. The nasty ambush appears over. A bullish divergence is clear, as the daily stochastix showed positive signals while the price was forming a flat bottom near the $1600 level. A powerful reversal is in progress, one that echoes the reversal in the Euro currency from 132 up to 140. Gold had fallen on the back of the Euro decline. Now the Gold price is rising from lack of resolution witnessed and confirmed in Europe. The gap to fill should be swift, easy, and loud. The gap from $1670 to $1770 is a full hundred points. As it is filled, the naysayers on Gold will have to defend why they advised clients to abandon the only true safe haven in the financial universe, Gold, along with its little brother Silver.

The growing economic recession will reveal many dead objects in the flotsam & jetsam, much like a tide going out to sea. That is a primary function of recessions, to clear the deck of bad debt and start anew, to plow the soil and permit nutrients to work again. Gold will shine. Gold is not loaded with the fraudulent traps and snares built by Wall Street from the devious risky paper realm. Gold has no fraud from counter-party risk. Gold is legitimate money. The United States will be forced back to the Gold Standard, but it will be the currency used over a landscape that features rubble, ruin, and discontent. Be sure that every measure will be taken to save the current system, to debase the major currencies in every way possible, at the greatest allowable volume. The USDollar and other majors will be wrecked in the process, and Gold will be lifted in value in corresponding opposite fashion. The Western leaders have no desire to reform, to yield power, and to install a viable sound monetary system. Banks should become utilities, not casinos and helms of market control. A grand disruption cometh!

The Europeans provided the trigger on Tuesday for the big $50 move up in the Gold price, and the $1.50 move up in the Silver price. Their bankers, politicians, and commissioners are in deep discord. No solution exists. Big bond losses are coming. Big banks that are already insolvent will topple. The Greek Govt debt will default. They are trying to make the default orderly. The gang in crisis resolution talks could not be more in discord. The Germans want out of the obligation of being the savings account of last resort to use. The Germans are actually working toward a new alliance with Russia and China, with Persian Gulf support. They look East as they see the West in shambles. If the Euro banks benefit from a big bailout from a $2 trillion filled fund, at minimum, then the monetary debasement will be great for Gold. Tremendous leverage would be the only means of supplying that volume of funding. The Europeans dislike the Geithner concept of heavy leverage usage. If the Euro banks do not fail to secure funding, and cannot recapitalize, a string of bank failures will rock the continent. The contagion will slam London and New York like a tsunami. The crisis would intensify to a new dangerous level that brings talk finally of systemic failure from banking system collapse, which will be great for Gold. Those who jumped or were pushed off the Gold locomotive in September are the real losers. If they relied upon the leverage inherent to the rigged futures contract game, shame on them. Let them climb aboard on the legitimate rail cars that feature physical Gold bullion benches, not the paper fake asset.

Finally, attention has grown on the gathering storm of Italy. Their debt is being downgraded steadily, just like Spain. The Italian prime minister seems like a clown in a suit, calling the crisis a fiction written by the press. They reject austerity measures, as their debt runs out of control. The nation of Italy must fund over EUR 200 billion of debt before the end of 2012, from rollover. Their bond yield has surpassed the 6.0% level known to serve as the alarm bell. Then tack on fresh debt. The Greek domino could easily push over the Italian domino, which lies next to the fragile Spanish domino. The European Monetary Union will break. Germany announced the return of the Deustche Mark, the date unclear for re-launch. It will be priced for conversion at one Euro to 1.95 DMarks, the same as the 1999 exchange rate when the ill-fated Euro was born. Regard this vehicle as a transitional currency to a new gold-backed currency, the USDollar Killer, the ticket to the Third World. Details are in the October Gold & Currency Hat Trick Letter report. These are exciting times, but dangerous times, full of risk, but full of opportunities.

Read the entire article HERE.

by Dave Brown, Gold Senior Reporter
Thu, Oct 20, 2011
Gold Investing News

Even as spot market gold prices have traded at historical highs over the past few months, central banks are increasing positions and demonstrating support for the precious metal.

Earlier this week, the World Gold Council released an update on its official gold holdings indicating the Bank of Thailand reported an increase for its gold reserves of 9.3 tonnes in August following the net purchases of 28 tonnes during the first half of the year. These purchases combine to represent 4.2 percent of the total foreign reserves and an increase of gold holdings to 136.9 tonnes. This might seem of interest for gold investors as the Bank of Thailand may continue to add to the position during short term fluctuations in gold prices to the downside, given the still relatively modest percentage of foreign reserves in gold that it has. In terms of a monetary policy, Thailand has maintained its interest rate level for the first time this year, terminating the longest consecutive period of increases since 2006. A weakening global economy and the worst floods in five decades are seen as impediments for growth in the South East Asian nation.

Regional peer, Vietnam has recently re-authorized gold trading on foreign accounts in order to narrow the difference between domestic and international gold prices following a recent increase in demand for gold in Vietnam. The State Bank of Vietnam changed its policy following a careful collaboration with its domestic gold jewellery industry and commercial banks.

South American demand

The central bank of Bolivia reported an increase of 7.0 tonnes in gold reserves bringing its total to 42.3 tonnes of gold. The country is holding approximately 21.3 percent of its foreign reserves in gold with its last reported gold acquisition dating to last December when it also reported a 7.0 tonne increase. Bolivia has recently been in the news as a result of strong environmental protests and declining political support for the leader Evo Morales. Mr. Morales’ socialist agenda appears committed to reducing the country’s poverty; however, requisite infrastructural progress, mining activity and gas development which are critical for economic growth are generating protest movements. Although the administration’s second term in office is due to end in early 2015, some observers are uncertain that stability in the South American nation will be maintained until a new election.

Russia adding gold to its reserves

Russia has also increased its gold position to 841.1 tonnes, adding 8.0 tonnes of gold to its reserves during the summer months of July and August. Russia has been consistently adding to its gold reserves for 52 consecutive months.

Gold dispositions

The central bank of the Philippines recorded a decrease in gold reserves of 10.3 tonnes, bringing its total to 147.8 tonnes of gold. Recently the central bank of the Philippines decided to protect growth by maintaining the benchmark interest rate at 4.5 percent, keeping with the monetary policy demonstrated by South Korea and Indonesia.

Sri Lanka has reduced its gold reserves to 8.1 tonnes as the result of selling 9.3 tonnes of gold. The country has followed other Asian examples in maintaining a cautious monetary policy; however, Mr. Anoop Singh, Director of Asia Pacific Department from the IMF indicates in a press briefing last month, “Sri Lanka has introduced new fiscal reforms to broaden the tax base, to remove exemptions, to bring these in line with international standards, and I think we can be quite confident the government and the central bank remain confident to carry forward these reforms.” Facing such uncertainty in the global economic context, the country is also modestly holding 4.6 percent of its foreign reserves in gold.

Read the entire article HERE.

BY STEVE ST. ANGELO
10/10/2011
Financial Sense

 

 

The world is about to peak in global silver production. This will not occur due to a lack of silver to mine, but rather as a result of the peaking of world energy resources, declining ore grades, and a falling Energy Returned On Invested – EROI.  The information below will describe a future world that very few have forecasted and even less are prepared.  This is an update to my previous article Peak Silver and Mining by a Falling EROI.  In my first article I stated that global silver production may peak in 2009 if we were to enter a worldwide depression.  We did not have the global depression as massive central bank printing and bailouts have thus far postponed the inevitable.

The world has entered a plateau of global oil production over the past 5-6 years.  A higher oil price has not brought on more supply to offset depletion rates from existing fields.  From the graphs above we see a correlation between global silver supply and oil production, especially in the latter part of the 20th century.  Up until the late 1800’s and early 1900’s the majority of energy used in mining silver came from human and animal labor.  It is truly amazing just how much silver was produced in the United States at this time without the use of oil and modern mining practices (information provided later in the article).  This all changed as global oil production as well as the technique of open-pit mining increased.

 

The 3 Big Energy Game Changers for Silver Mining

 

There are a number of some very large open-pit mining projects supplying silver that are forecasted to go into production within the next several years as well as others by the end of the decade.  It is astounding to see these 25-45 year extended forecasts by these mining companies without any consideration of what the energy environment will be like in 2015-2020 or later.  It seems like everyone in the sector assumes there will be ample supplies of energy at commercially viable prices.

 

This is where the trouble begins.  There are three negative energy game changers that will impact the mining industry going forward.  They are: (1) the Peaking of global oil production, (2) the Land Export Model and (3) the falling EROI – Energy Returned On Invested.  Of the three, I believe the falling EROI will be the most devastating.  Before explaining why this is the case, let’s take a look at each.

 

Peak Global Oil Production

 

According to JODI’s global oil production figures represented HERE in a post on theOilDrum.com, it looks like the global peak of convention crude/condensate and natural gas liquids took place in 2006:

 

 

Global oil production has increased steadily since the early 1980’s and has now been in a bumpy plateau for the past 5-6 years even with much higher oil prices.  It is true that there are more projects and oil fields slated to come online in the next several years, but much of the increase will be offset by depletion in existing fields.  To add insult to injury, the majority of oil that is exported throughout the world is being supplied by countries that are also increasing their own domestic oil consumption.  This is a double-edged sword for dependent oil importing nations— which leads us to the Export Land Model.

 

Export Land Model

 

The Export Land Model developed by geologist Jeffery Brown and others shows how oil- exporting countries suffer higher declines of exports due to increased domestic consumption.  As the nation increases its own oil consumption for their expanding economy, this causes exports to fall even greater than declines in oil production alone.  This becomes apparent when we look at what is taking place in Saudi Arabia.

 

 

In 1980, Saudi Arabia produced approximately the same amount of oil it is presently. However the kingdom is exporting 2+ mbd (million barrels a day) less oil.   The right side graph above reveals that as domestic consumption has increased (black line), exports have declined.  By 2020, Saudi Arabia’s domestic consumption is forecasted to reach 5.9 mbd of oil equivalent, including natural gas, which will decrease the country’s exports even further (Jadwa Investment’s “Saudi Arabia’s coming oil and Fiscal Challenge”).

 

If we add up all the other exporting oil countries and consider what the future percentage loss from this model might be, the drop in oil exports will be significant indeed.  Here we can see that the peaking of global oil production, plus the declining oil exports described above by the Export Land Model, puts a serious dent in the ability for future growth in the world economies.  If the world economies are unable to grow, neither will the supply of base metals and silver.

 

These two energy constraints are in themselves bad enough news for the global economy and the mining industry.  Unfortunately the third is by far the most devastating.  The falling EROI measures what amount of that oil will be available for market.  It is also described as the net energy that remains after production costs are considered.

 

The Falling EROI: Energy Returned on Invested

 

In my opinion, the EROI —Energy Returned On Invested— is by far the most important aspect confronting our economy, society and world at large.  Ironically, the EROI of oil and natural gas has been falling ever since man drilled his first well.

 

 

According to work done by Cutler Cleveland of Boston University, the EROI of U.S. oil andgas was 100/1 in 1930. It fell to 30/1 by 1970, and hit 11/1 by 2000.  Oil was so abundant during the 30’s in the States that it only took the cost of 1 barrel of oil to produce 100 barrels for market.  By 2000, it has declined nearly tenfold.

 

The graph on the right side shows the falling Global oil and gas EROI (by Gagnon, Hall & Brinker) to be 18/1 in 2006.  They plot with a solid black line that a possible 1:1 EROI projection may be by the mid 2030 decade.  As this EROI ratio continues to decline, it puts a huge stress on the world economies by increased energy costs while providing less net energy for the market.

 

There has been so much misinformation put out by different organizations as to the amount of oil and natural gas reserves that it is has totally confused the investing community and the public.  Whenever I get into a debate about peak oil or oil reserves there is always someone who brings up the notion that the United States is sitting on trillions of barrels of shale oil.  This is  the subject of a whole other article, but to get to the point, shale oil as a savior of the inevitable United States (or World) Energy Crisis is a pipe dream.  Here are the three biggest lies propagated in the U.S. energy industry:

 

1. 1950’s – Nuclear energy…..too cheap to meter.
2. 2000’s – Shale Oil trillion+ barrels of U.S. reserves
3. 2000’s – Shale Gas 100 years worth of U.S. supply

 

To explain why there is a great deal of hype in shale oil and gas, take a look at the graph below.

 

 

Shale oil is much more expensive to extract than light sweet crude in Saudi Arabia.  Many say that increased technology will bring more oil to the market, but it does so at a lower EROI.  The lower the EROI, the less net energy is available for market.  With less net energy, there is less growth.

 

Furthermore the depletion rates of a typical shale well in the North Dakota Bakken Field are 75-80% by the second year.  Shale gas depletion is even worse, with fields reported from the Texas Barnett Field declining 60% in the first year.  The notion that the U.S. will be able to increase oil production significantly with shale oil turns out to be a red herring when you figure that these severe depletion rates make it impossible to do so.

 

Another nail in the coffin for shale oil is its low EROI.  The figures on the right side of the graph above show the different EROI ratios for conventional and nonconventional energy sources.  The only thing worse on the EROI scale than shale oil (5:1) is tar sands (2-4:1).  Why are these EROI ratios so important and ultimately devastating to the world economy and silver mining?  The next graph provides the answer.

 

 

As we can see from the left side of the global oil peak, everything is rosy; high EROI ratios with a majority of net energy already consumed by the world economies.  Once we slide over to the other side, the picture gets downright scary.  Even though there is a great deal of oil on the downward side of the peak, the majority of it gets consumed in the production of the energy itself.  Once it costs more to produce a barrel than you get in return, the game is over.

 

Unfortunately, there is more to it than that.  There is a minimum EROI that a modern society needs to sustain itself.  All the EROI ratios listed above are figured from the point the oil & gas comes out of the well.  We have to remember the oil & gas has to be transported and refined and the interstate-highway system and infrastructure has to been maintained.  All of these are costs that are subtracted out of that EROI ratio.  This is explained in detail by Charles Hall & David Murphy HERE.  The bare minimum a modern society needs is an EROI of 3:1….but if you want the luxuries of art, entertainment, medicine, education or etc; the ratio has to be higher still.

 

The graph above is one possible forecast of net energy.  The creator of the graph has produced another showing a more gradual slope of net energy.  I have had several conversations and email exchanges with other geologists and engineers who believe the graph presented above is a more realistic representation than the second.  I agree.

 

Peak Oil is Here Whether You Believe it or Not

 

Before we get into the silver part of the article, there is one more topic on energy that needs to be discussed.  There is continued debate about the Abiotic Theory of Oil as well as the blocking of oil drilling in certain areas of the United States by environmentalists.  The Abiotic Oil Theory states that oil fields are continuously being refilled, so there will be no peak oil.  Even though this might be true in some small cases as it pertains to methane, the amount is infinitesimal.

 

 

The list of countries presently past peak is long.  If we consider a good portion of these countries are in areas of the world that do not have much in the way of regulations or environmentalists, peak oil still took place.  It is true that there is still some oil in the U.S. being kept from the market by environmentalists and the government, but in the end….it doesn’t change the overall picture all that much.

 

Lastly, for those of you who believe the information above is controlled by the Illuminati, Bilderbergs or whomever and there is still plenty of oil in wells capped all over the country, there is nothing that can be written or said to change your mind.  As illustrated by the data, peak oil is here whether you believe it or not.

 

As the world is currently peaking in oil production, the United States passed its peak forty years ago in 1971.   The same can be said for overall silver production.  The U.S. extracted the majority of its high grade silver by the middle of the 20th century.  Today, the U.S. has to resort to mining a great deal more total ore to produce the same or less silver than it did years ago.   This process is occurring throughout the world.  In my first article (link provided at the top of this article) most of the information on ore grades came from Gavin Mudd and his work on the Australian mining industry as well as data on declining global gold ore grades.   To continue to understand this ongoing process, I choose to focus on the United States as the USGS – U.S. Geological Survey – has kept some very detailed records of historical mining activity in the States.

 

CASE STUDY: United States Past Silver Production and Falling Ore Grades

 

In the early days, miners and investors sought out the best quality and highest ore grades they could find.  The higher the ore grade, the higher the profit.  Today, there is a great deal of excitement when mining companies release drill results with higher ore grades than expected.  Yet, these same ore grades would have been embarrassing to the prospector and investor just 100 years ago.  How the passage of time makes us forget what life was like just a short while ago…

 

The majority of the top eight silver ore-producing states in the country peaked in annual silver production before the 1940’s.  Only Idaho and Nevada had higher peaks after 1950.

 

 

Colorado had the highest annual silver production of all 50 states with 25.8 million ounces produced in 1893, almost 120 years ago.  New Mexico peaked in 1885, Montana in 1892, California in 1921, Utah in 1925, and Arizona in 1937.  Even though Idaho had its true peak in 1966 at 19.8 million ounces, it surpassed its previous record by only 200,000 ounces, which occurred in 1937.  Nevada peaked late in the game due to two factors:  1) it has recently become the largest gold producer in the country currently, providing nearly 75% of nation’s gold.  (with gold mining comes by-product silver), and  2) due to the McCoy/Cove Mine, which single-handedly mined 11 of the 27.4 million ounces Nevada produced at its all time peak in 1997.

 

Not only did the McCoy/Cove Mine help Nevada to become the second-highest silver producer in U.S. history, it also accounted for 35% of all silver extracted from the state between 1987 and 2003.

 

 

The record silver production in Nevada as well as the McCoy/Cove mine are now gone.  In its last recorded year of production, the McCoy/Cove Mine produced 596 oz of silver in 2006.  That’s correct, a mere 596 oz (that year it was still producing some gold).  According to theMajor Mines of Nevada 2010 publication just released, Nevada only produced 7.3 million ounces of silver in 2010…a 70% decline in just 13 years from its peak.

 

From the late 1800’s to 1950’s the same eight states listed above produced the lion’s share of silver in the country.  Very few people who are asked will know which state was the largest producer at this time.  Most when asked will say Idaho, Utah or Colorado.  I was quite surprised to find out that Montana outperformed them all by producing 775 million ounces by 1950.

 

 

Montana produced the most silver in the country at this time due to the richness of copper in the state, where silver was a by-product.  According to the MONTANA MINING NEWS MINING JOURNAL dated 8/30/1930:

 

Anaconda Copper Mining Company is confining work at the Flathead Mine, near Kalispell, Montana, to development, because of the present metal prices, according to a reported statement by Jack Dugan, superintendent. Thirty men are employed in extracting 40 tons daily, of ore, said to average 50 ounces of silver, per ton.

 

This is an example of the kind of high grade ores they were pulling out of Montana back in 1930.  Impressive as it was, this was not the average.  To give you an idea of the difference of 75 years, Montana produced 9.3 million ounces of silver in 1935 at an average ore grade of 3.45 oz/ton.  In 2010 there were only two mines producing silver as a by-product of copper.  The larger producer is the only publicly traded company in Montana and it produced a little more than 1 million ounces of silver at an average ore grade of 0.87 oz/ton or a 75% decline.

 

The USGS provides Mineral Yearbooks for the states back until 1932.  One can imagine what the ore grades must have been in 1892 when Montana produced its most silver in one year at 19 million ounces.

 

Idaho:  the Largest Silver Producer in the Country’s History

 

The one state that sticks out like a sore thumb in the graph above is Idaho.  It is the only state that has produced over a billion ounces silver by 1990 with the majority of it after 1950.  Even with this significant production, Idaho wasn’t able to escape the negative aspects of falling ore grades.

 

In the late 1800’s and early 1900’s a larger percentage of silver came from a grade called “Dry and Siliceous Ore”.  During this time, between 40-50% of silver produced in the country came from this type of ore.  To give you an example in 1922, 46.8% of silver in the U.S. came from dry and siliceous ore.   The percentage dropped over the next decade— falling some years into the teens (especially during the 1930’s depression).  By 1935, it climbed back to 40%.

 

This is the sort of ore that primary silver mines are made of as it contains the most silver per ton.  Idaho had some of the richest dry and siliceous ore grades in the country.  The graph below represents how much this sort of ore grade has declined since the 1940’s.

 

 

The reason why this graph only shows data up until 1980 for Idaho and 1989 for the U.S. is due to the fact that information was withheld from the USGS due to proprietary reasons by the mining companies.  Furthermore, this is also true for individual state reporting of detailed silver statistics after 1990.  In the early days the states provided the USGS with so much information on gold and silver that many of the gold-silver reports were over 200-300 pages.  Today the Silver Yearbooks barely fill 15 pages.

 

To bridge the gap to the present day, we can look at what has taken place in the largest publicly traded mining company in the state.  Hecla’s Lucky Friday Mine in Idaho produced 3.3 million ounces in 2010 at an average ore grade of 10.25 oz per ton.  The chart below compares the difference from the same mine in 1965.

 

 

Here we can see that Hecla has only produced a little more than 100,000 ounces of silver than it did in 1965 but has to process almost double the amount of total ore.  This insidious decline of silver ore grades over the years seems subtle to the mining industry that is focused on quarterly results, but becomes an increasingly difficult problem now that the world suffers from peak oil and a falling EROI.

 

The United States:  Produced 25% of all Global Silver 1900-1950

 

When the U.S. was the Saudi Arabia of the world in oil production at the early and middle part of the 20th century, it was also the second-largest silver producer in the world behind Mexico.   Of the 10.5 billion ounces of silver produced by the world from 1900-1950, the United States accounted for 2.7 billion (or 26%) of the total amount.

 

 

This historical graph is relevant due to the fact that in next 60 years from 1951-2010 the U.S. only produced 2.58 billion ounces of silver… with significantly falling ore grades shown below.

 

 

The chart above represents total ore from mining gold, silver, copper, lead and zinc.  The majority of silver comes from base metal mining in which zinc/lead provides the highest percentage compared to copper and gold.  In 75 years, the total ore grade of silver has fallen nearly 92% while actual production has remained basically flat.  This is due to the fact that all base metal ore grades in the U.S. are falling as well.

 

For example, copper has shown a huge decrease in ore grade since the early 1900’s.  In 1906 the average ore grade for copper was 2.5%.  By 1935 the average copper ore grade had fallen to 1.89% and in 2009 the United States produced copper at 0.43% a ton.  This is a decline of 77%.

 

The Falling EROI and Declining Ore Grades

 

On top of declining ore grades and adding insult to injury, is the falling EROI of energy.   When the U.S. and the world were tapping into high quality concentrated ore grades in the early years, they did so with the majority of human and animal labor.  This kind of labor was not only very efficient but it also utilizing a higher EROI.  The open-pit mining practices employed today are in fact quite the opposite….extracting metal at a much lower EROI.

 

For example, people today have this misguided opinion that modern farming is very efficient.  They see one farmer on a huge tractor working hundreds or thousands of acres of agricultural land.  They do not factor in all the energy it costs to plant, fertilize, harvest and process the crop.  This does not include all the energy and technology it takes to develop hybrid seeds, the manufacturing of the tractor and equipment as well as many other aspects that go into modern farming.  In reality, the pre-industrial farmer with horse and plow was extremely more efficient that his modern counterpart.

 

FOOD EROI’s

 

Hunter Gatherer = 10/1
Pre-Industrial farmer = 10/1
Modern high-tech farmer = 1/10

 

The pre-industrial farmer with horse and plow was able to produce 10 calories (of food) for market for every 1 calorie of energy (food) consumed by the operation.  Today, the modern farmer needs to consume 10 calories of energy to provide only 1 calorie of food for market.  If we consider this ratio, the modern farmer is 98.8% less efficient than the simple farmer with horse and plow.

 

The only reason why modern farming practices have been successful at this horrible rate of efficiency is due to the high EROI of energy over the past 100 years.  Now that the EROI is falling considerably, it is putting severe pressure on the agricultural industry.  This will also be true for the mining industry.

 

Base metals are extracted by either open-pit or underground mining.  Of the two, open-pit mines account for the larger percentage of metal produced in the world. (Surface Mining Methods and Equipment)  The technique of open-pit mining utilizes huge excavators and large haul trucks to move the ore from the mine.  There is a great deal of energy consumed in the development, manufacturing, maintenance and operation of these huge earth moving machines in the mining industry.

 

It is difficult to estimate an EROI ratio for open pit mining as the end product is metal and not energy.  That being said, a simple rule of thumb can be assumed if we take the negative EROI of modern farming as an example.  The larger and more complex the machine used in industry, the more inefficient its production as it pertains to the EROI.

 

Now that we understand the past and present EROI ratios in the agricultural sector, we can see why the early miners and prospectors were much more efficient in producing silver than the huge open-pit mining operations of today when we consider all the energy involved.  As the world’s energy sources start to decline in the future and the falling EROI destroys an ever increasing portion of the net energy available for market, the number of open-pit mines will decline as well.  As this process takes place, the peak in global mining will occur due the fact that human or animal labor cannot equal the extraction rate of diesel powered earth-moving machines.  What is taking place in the mining industry today is the WORST OF BOTH WORLDS… declining ore grades on top of a falling EROI of energy.

 

The Coming Global Depression:  Another Nail in the Coffin for Peak Silver

 

The world hasn’t suffered an economic depression for almost 80 years.  The Kondratieff-Wave analysts who study business cycles say we are now overdue for a depression.  Even though this is true, they are correct for the wrong reasons.  Business cycles have occurred because humans were able to constantly grow and expand their economies.  It was due to the 10/1 EROI of the pre-industrial farmers that enabled the rest of the economy to grow and flourish.  After several generations of booms, we had the busts.

 

As we moved into the modern-industrial economy cheap energy with a high EROI allowed the world economies to grow exponentially—allowing these business cycles to continue.  Today we are at the top Boom part of the cycle.  The big Bust and depression have been postponed due to the ability of central banks to print money and financial institutions to invent hundreds of trillions of dollars worth of derivatives to hedge overly inflated assets.  When the global depression finally arrives, we will never return to anything like we enjoyed before.  This bust will be the depression that ends all global depressions.

 

If we consider what took place during the last depression, base metal & silver mining activity fell off a cliff.  The interesting thing to note in the next two graphs below as global silver production declined, gold production actually increased.

 

 

 

Global silver production declined 38% from 1929 to 1932, whereas gold production actually increased 24% in these three years.  It took eight years before the world was able to increase silver production over its 1929 figure.  Gold on the other hand, increased its global production a staggering 80% during the same time.

 

This time will truly be different.  The world will not be able to increase its gold production anywhere near the percentage it did in the 1930’s.  There is a good chance that actual global gold production will decline as the supply chains break down disrupting the highly technical method of refining and processing gold.  Another reason may be due to its dependence on copper production as part of its supply.  When economies collapse, so does the demand for base metals such as copper, zinc and lead.  This is the reason why silver production suffers greater during a depression than gold.

 

 

Here we see just how much difference there is in the base metal mining percentage between gold and silver.  Zinc & Lead account for the larger portion of the base metal percentage of silver mining, whereas copper production provided 15% of all the gold produced in the world in 2010….or 75% of the base metal pie.

 

When the world’s central banks are unable to continue to prop up the global economies with money printing, economic growth will drop considerably.  China is starting to show signs of an economy heading into a brick wall.  Base metal production will decline significantly in the following years cutting back the production of silver as well.  If history is a good reference, the future global supply of silver can decline between 20-40%.

 

A Brief look at World Silver Production

 

Over the past decade global silver production has increased on average between 2-3% per year.  In 2010, according to the World Silver Survey, global silver production reached 735 million ounces of silver.   In the first half of 2011 some of the top silver-producing countries have increased their production while others have seen declines.   The top producing silver mine in the world, BHP Billiton’s Cannington, has seen its production decrease from 18.9 million oz in the first half of 2010 to only 15.5 million ounces in the first half of 2011 (an 18% decline).  Cannington — like all mines— suffers from falling ore grades.

 

 

In 2000, Canningtion mined 1.6 million tons of ore and produced 30 million ounces of silver at an average ore grade of 636 g/t.  By 2011, it mined 3.1 million tons of ore (or 92% more) just to produce an additional 5 million ounces than it did eleven years ago.  What is occurring at Cannington is typical of mines throughout the world.

 

If we take a look at global silver supply, only a handful of countries have increased their production significantly over the past several decades.  Out of all the countries listed in the graph below since 1985, China has had the largest percentage increase.  China increased its estimated production from only 2.5 million ounces in 1985 to 99 million oz (or +3,850%) by 2010.  The other countries that have increased their production in order of highest percentage are, Bolivia from 3.6 mil oz to 41 mil oz (+1,039%), Argentina from 2.1 mil oz to 20.6 mil oz (+880%), Chile from 16.6 mil oz to 41 mil oz (+147%), Peru from 58.2 mil oz to 116.1 mil oz (+100%), and finally Mexico from 73.2 mil oz to 128 mil oz (+75%), in the same time period.  Even though Mexico is the number one silver producer in the world, it had the lowest percentage increase of all six countries.  These countries account for 61% of all global silver supply.

 

 

Australia was not included in the graph for two reasons.  First, even though its production has increased 71% since 1985, its future growth is not forecasted to improve as much as the nations listed above.  Secondly, because of Australia’s western form of capitalistic government, it is least likely to deal with issues of political instability, threats of nationalization or protectionist policies such as those in South America, Mexico and China.

 

Argentina, Bolivia, Chile and Peru— which are located in South America— may suffer from the same type of policies that have plagued the resource industry in Venezuela.  Not only are Venezuela’s oil fields nationalized, in August of this year, President Hugo Chavez has also ordered the same for the gold mining industry.

 

In Mexico, billionaire Hugo Salinas Price has gained significant support in the country to reintroduce the Silver Libertad as legal tender to compete with the Peso for the Mexican people.  If this policy were to pass, a large percentage of Mexico’s silver production would be consumed by its own people to protect them from continued inflation.  Furthermore, the country suffers from a great deal of upheaval and violence from the drug wars which could lead to political instability possibly threatening the mining industry.

 

Lastly, over the past several years the world has felt the ramifications of China’s cutback of rare earth mineral exports.  China currently produces between 95-97% of the 17 rare earth minerals in the world.  Not only have prices of rare earth minerals increased substantially due to this monopolistic policy, it is also forcing foreign companies to move their facilities that manufacture end-user products in China.  These companies are also being requested by China to transfer valuable technology to other domestic companies so they can benefit from the knowledge.

 

This may also occur in exports of Chinese silver.   As global tensions increase due the continued disintegration of the world fiat currency system, China may decide to put a total ban on silver exports.  Even though Chinese exports have declined substantially (from 3,000 metric tons in 2005 to only 1,575 metric tons in 2009), there is a good possibility that they may turn off the silver spigot completely.

 

The countries listed above are enjoying the best records of increased silver production, but at the same time are some of the worst candidates for dependable future global supply.

 

Final Remarks and Conclusion

 

The world produced a record amount of silver in 2010.  Many analysts are forecasting a continued increase in global production for the next decade.  There are several factors that show why this will not be possible.

 

As the world peaks in global oil production and the net energy available for market continues to shrink due to the falling EROI (Energy Returned On Invested), of oil and natural gas, global economic growth will come to a screeching halt.  The falling EROI of energy is a one way street to the bottom.  Unconventional energy sources such as shale oil, shale gas and tar sands will not be able to stop this decline.

 

As global economic growth disintegrates so will the demand for base metals – which 70% of silver is a by-product.  On top of that, silver ore grades are relentlessly falling in mines throughout the world which takes an increasing amount of energy just to keep production flat.  If the mining industry tries to incorporate more human and animal labor to offset declining oil based energy in the future, it will do so only at much lower rates of production than today.  This is due to the fact that human or animal labor cannot match the extraction rate of diesel powered excavators or huge dump trucks when it comes to mining silver.

 

Then there is the negative effect of a global depression on the production of silver.  Presently the world has entered into tremendous chaos and economic turmoil.  Conditions are ripe for a complete disintegration of the financial markets, thus pushing the world over the edge into a new dark age of hyperinflationary depression.  In this sort of atmosphere, countries may resort to the nationalization of mines as well as other protectionist’s policies.

 

When the nails of the peak silver coffin are added up, the death of increasing future supply is close at hand.  The CEO’s and analysts in the mining industry are for the most part oblivious to these factors that will destroy their ability to make viable forecasts of future projects.  It amazes me to see professionals plan a huge open-pit mine with a 25-45 year economic plan without any consideration of what the energy environment will be like at that time.  For some strange reason, there is this false assumption that “If we build it, the energy will come.”

 

If the world enters a depression within the next year or two, this will certainly guarantee the global peak of silver production.  Why?  It won’t matter if the global economy recovers in the next decade, because the peaking of oil and the falling EROI of energy will have destroyed enough net energy to kill any attempt to bring global silver production back to the level it was before.

 

Lastly, anyone who is good at connecting the dots will realize the ramifications of this article go way beyond just the peaking of silver.  The falling EROI of energy will not only be a destroyer of precious net energy, but will also help bring down the largest empire in the world.  This will be the subject of a future article.

Read the entire article HERE.
 

 

 

 

 

 

 

 

 

 

 

 

By Jeff Clark
October 5, 2011
BIG GOLD

It may not feel like it after a 12% correction in the past 30 days, but Mike Maloney – founder of GoldSilver.com – is convinced that we’re in a gold bull market that will be life changing for those who participate. I interviewed him for our current edition of BIG GOLD and am sharing some of what we talked about here. You may be shocked at what you read, because he’s devoted a larger allocation to gold and silver than we have. See why he’s convinced a bubble is ahead for precious metals, how high prices will go, and why he stores some gold overseas.

Jeff Clark: For those who don’t know you, why is Mike Maloney such a big believer in gold and silver?

Mike Maloney: Around 1999, my mother needed help with the estate my father had left her. My sister and I interviewed a dozen financial planners and picked the one that had the most glowing recommendations and gave him control of the assets. He lost about 50% of them in the next year and a half. What I’ve found is most financial planners get it wrong. They’re always chasing yesterday’s news. To be fair, there was a market crash, but with 50% of her assets gone by 2001, I ripped everything away from him, moved it to cash, and started studying the economy like crazy.

I discovered that the people concerned about budget deficits and trade imbalances at that time were in the precious metals sector, the hard money advocates. All the rest of the economists and newsletter writers didn’t really care. Concerns about international trade imbalances and how they were going to come back to bite us one day were coming from the hard money analysts. They also wrote about monetary history, something I just fell in love with. The fact that things just repeat over and over again is amazing.

I have hard data from 1918 to today, and anecdotal evidence before 1918, that shows that throughout history a society has a certain amount of real money – gold and silver. Then they either come out with debased coinage, or paper representations of gold and silver and expand the currency supply, which eventually cause prices to rise. People then realize there was something wrong with the currency and they rush back toward gold and silver to protect their purchasing power… and in doing so, they bid up the value of the gold and silver in the country until it matches the value of the circulating medium.

It appears to me this process has been going on since 407 BC, with the first great inflation in Athens. I have charts in my book, Guide to Investing in Gold and Silver, starting in the year 1918, showing the value of the gold held at the United States Treasury compared to the value of all of the base money or paper currency, and it was a 1:1 ratio.

Jeff: So history shows that the value of gold eventually equals the value of all paper money in circulation?

Mike: Yes. Back then, the US dollar was a claim check on real money – gold. Base money was the number of US Treasury gold notes in circulation. Before World War I, base money equaled the value of the gold held at the US Treasury. Then we established the Federal Reserve and did a bunch of deficit spending for WWI, expanding the currency supply, so now there wasn’t enough gold to cover all the dollars they printed. In 1934 the price of gold was changed to $35 per ounce and the values of base money and gold at the Treasury were once again in equilibrium.

Then we expanded the currency supply to pay for WWII, Korea, and Vietnam, and in the ‘70s the price of gold rose until its value at the Treasury exceeded base money. But, for a short time in 1980, the value of gold at the Treasury not only exceeded the base money, it surpassed base money plus outstanding credit card balances. This is important because credit cards are replacing cash in circulation, so you must include it if you want to estimate a price target.

Jeff: So how high do gold and silver go?

Mike: When I finished the book, it required a $6,000 gold price to cover base money plus outstanding revolving credit. I’m not saying that that’s going to happen, but if history were to repeat, that would be the price.

However, since the book was written, Bernanke created a whole bunch of base money to bail out the banks, and now it takes a $15,000 to $20,000 gold price. One caveat is that $1.6 trillion of excess currency is sitting on banks’ balance sheets. It has yet to enter circulation, and if it never does, then this price target changes. My point is that prices are a moving target. Putting a dollar figure on them is an exercise in stupidity, I think, because the dollar is always changing. You can’t use it as a measuring stick.

My target for gold is that it should be equivalent to 1/40 of a single-family, medium-priced home, or two shares of the Dow. So gold will probably buy you about 12 times more stocks and 3 times more real estate in the future than it does now. So those are my prices.

And silver will leverage you to that. There is more gold on the exchanges and with the dealers that investors can buy than there is silver. Their current prices do not reflect this. Gold is way too cheap compared to dollars, and silver is too cheap compared to gold.

Jeff: Sounds like it’s not too late to buy gold and silver.

Mike: No. What investors need to be aware of is that we are on the last legs of our currency system. History shows that the world sees a brand-new monetary system every 30-40 years – and ours is 40 years old. Right now all currencies on the planet are backed by debt. All of the previous transitions were baby steps from something (gold) to nothing (debt). In order to give confidence back to the currencies, we’ll have to go from nothing (debt) to something (most likely gold again) in one big, huge, gigantic leap. This will cause an economic convulsion the likes of which the world has never seen.

The end of this precious metals bull market will be marked by panic buying. Gold and silver will be going into an astronomical bubble one day, probably the biggest bubble in financial history. That is why I think gold and silver are still fundamentally undervalued.

Jeff: Investors reading this might be a little skeptical that a bullion dealer is telling them to buy gold and silver. Do you mind sharing what percentage of your assets is held in gold and silver?

Mike: My personal portfolio is 100% in gold and silver. I have no other investments. I am completely committed to this because I absolutely believe it. I spent 2-1/2 years writing what is now a bestselling book on gold, and I opened a precious metals dealership. There isn’t anything I do, no action I take, that isn’t somehow connected to gold and silver.

Jeff: What separates GoldSilver.com from other bullion dealers?

Mike: Everybody at GoldSilver.com invests in gold and silver. They have all been invested in precious metals since I started the company in 2005. Everyone is absolutely committed and very knowledgeable. So we are all on the same side of the boat as Casey Research. If you become a gold and silver client, you’ll know we’re invested just like you are. We’re walking the walk and talking the talk.

We also have a team of researchers who are constantly analyzing where we are in this bull market. It’s in our best interest to try to find the top of this bull market and sell when the time is right. I believe we can multiply your winnings by letting you know what we’re doing when it comes time to sell. The way I’ve set up my company is that if you don’t win, I don’t win.

Another thing you should know is that I am not a gold or silver bug. I couldn’t care less about these metals. They are just in their cycle right now and will be the best performing asset for the coming years – period – just based on history.

There are these brief moments in history where the safe-haven asset also becomes the asset class with the single greatest potential gains in absolute purchasing power. We’re in one of these cycles right now; as the currency supply gets ramped up and people realize there is something wrong with it, they’ll rush back toward gold and silver and bid the price up until it matches the value of the currency supply.

Jeff: You’re increasing the number of storage facilities outside the US; why should a US citizen consider storing bullion outside the country?

Mike: Some investors are concerned about “confiscation,” which is technically incorrect. The US government never confiscated gold; they “nationalized” it. In 1933, they bought it from US citizens at full face so that the Treasury could hold it as an asset for the entire nation. That’s the very definition of nationalization.

Jeff: Are you saying you don’t think gold could be confiscated?

Mike: It’s possible, but I don’t believe it would happen in the United States. More than half of our currency resides outside the border. We’re the only country in that situation. If Obama passed an executive order today once again nationalizing gold, I believe that banks and brokerage houses around the world would suspect something was wrong with the dollar, and they would immediately dump their dollars and buy gold and silver. That would cause the dollar to fall to zero and send gold and silver to infinity in a matter of weeks. I would hope there is someone in the government smart enough to know this. If so, then it makes nationalization very unlikely.

Jeff: Good point.

Mike: But I do believe that it is good to have some geographical diversity. I think we’re going to see governments trying to limit our financial freedom even more than we’ve seen since 9/11. They’ll do this by instituting such draconian capital controls that today’s IRS will seem magnanimous by comparison. I want to be able to travel freely and have access to my funds no matter what happens. Therefore, I keep some of my gold in offshore storage accounts in several countries.

Jeff: But why go to the hassle and bother with the reporting requirements?

Mike: Because if you’ve got ownership outside the country, you may be able to retain it, even in a nationalization. The point is, we don’t know the future. All we can do is look at what’s happening, try to figure out what governments are going to do, and then protect ourselves with a little bit of diversity. And of all the assets you could own offshore, I believe none are safer than physical gold or silver.

Jeff: Do you think foreign storage puts a target on my back with government officials?

Mike: Well, they want to make sure you’re declaring any capital gain. And I do think that precious metals investors will see some sort of windfall profit tax when the government tries to punish those nasty gold speculators that caused the dollar to crash. They will always point the finger anywhere but where it belongs – which is squarely at the government and the Federal Reserve. People are just trying to protect themselves from government stupidity and the Fed by buying gold and silver.

I think the reason they require the reporting is to make it difficult for people to cheat on their taxes. I don’t think it’s going to make you any more of a target than anybody else if you report everything. If you play within the rules, you’re not a target. I myself walk the straight and narrow. I make sure I comply with everything the IRS and the Treasury require.

Jeff: What about the small investor? Do you have any advice for the person who has limited funds?

Mike: Yes. It only takes $40 to become a silver investor. Regardless of what your income level is, you’re going to come out much better in the end. And once you take the leap and become an investor, your mindset changes and you find yourself starting to plan. A lot of people are not really planning on the future that much – but once you buy an ounce of silver and become educated, you give yourself a tremendous advantage over the rest of the population.

So just buy small quantities of silver. It has such leverage to it. And silver will probably go into some sort of super-spike that you will want to catch, which means you probably need some sort of guidance. That’s where subscribing to newsletters such as yours is very, very important for anybody who’s going to get into this.

Jeff: Thanks for your time, Mike. And we appreciate the discount you’re offering our readers.

Mike: You’re very welcome.

Read the entire article HERE.

by Robert Lenzner, Forbes Staff
9/27/2011 @ 6:34PM
FORBES

Get ready for the Pan Asian Gold Exchange, scheduled to open in June, 2012 in Kunming City, Yunman Province– the gateway to all of Southeast Asia. This is serious, as the Pan Asian Gold Exchange is a part of China’s five year plan– which means it is part of China’s strategy for dominance in global financial markets and the global economy.

Pan Asian will allow Chinese to speculate in gold futures contracts or buy physical  gold through an account with a bank or broker. All 320 million customers of the giant  Agricultural Bank of China  will. simply be able to use their Renminbi, the Chinese currency, from their bank accounts to  trade gold. Sounds bloody dangerous doesn’t it.

It means the spot market in gold could be headed for China– and away from London’s Metals Exchange or the Comex in New York. I’d like to know who is going to oversee and regulate all this action.  For example, when the Comex raises margin requirements to dampen speculative fervor– will  China bew governed by that? I doubt it very much.

In June you’ll be able to buy spot gold or futures contracts in China. It also means that the Chinese currency- not dollars– will for the first time become the ruling currency used in one of the major speculative commodities of our age. All eyes will be on the influence of the gold trade in China  rather than New York, London, Switzerland or South Africa.

Another reason for registering the reality of gold as a trading vehicle, an investment for households, central banks, hedge funds, endowments. Another bullish force behind the powering of gold prices higher.

No wonder George Soros has bought back some or all of the gold position he sold around $1600 an ounce.

Read the entire article HERE.

By Mike Getlin
September 29, 2011 1:18 PM EDT
International Business Times

We gold bulls have been licking our wounds over the last few weeks. This summer’s intense upward price movement set the stage for major volatility on the precious metals markets, and long term gold investors are stuck riding out the storm, at least for the moment. Yesterday however, something was brought to my attention by someone out on our trading floor. One of his clients who bought a diversified investment grade coin position early in the month was actually dead even on his overall position. While gold had tumbled by over $300 per ounce, his coins had stayed right where they were showing him no loss whatsoever. Needless to say, this needs a bit of explaining.

Let’s take a look at gold’s correction versus the price movement in a variety of $20 Liberty certified coins. Gold closed at $1895 on September 6th. Over the course of the next 20 calendar days, it shed $297 to close at $1598 on September 26th. That is an overall correction of 18.58% in 14 trading days. The certified $20 Liberty coins fared much better. See the chart below for the comparison.

Click Image for Larger View

The major difference between raw gold bullion and certified coins is the premium (which is often significant) that the coins carry over the spot price of gold. For example, the $20 Liberty in Mint State 66 condition is a coin that sells for well above $15,000. Most investors look at that and wonder why in the world anyone would buy a one ounce coin for over 15 grand! Yet this month, the one who did would be laughing all the way to the bank while the rest of us dream longingly of weeks gone by and $1900 per ounce.

Now this is not to say we should all rush out and dump all our bullion in favor of certified coins. That said, there is clearly an advantage to be gained by owning some of these products that help insulate investors from these volatile markets. The real question is what causes certified coin premiums to change, and what place do these products have in a healthy and diversified gold portfolio.

The debate over whether to buy bullion or certified coins (also referred to as numismatics) has been raging for decades and will probably continue to produce spirited cocktail hour conversation for a long time to come. Some people swear by investment grade numismatics, while others think only a fool would buy anything other than bullion. So who’s right? Both of course. As with most arguments like this, there is a lot of truth to both sides, and each strategy has significant advantages and disadvantages.

On the bullion side, the main argument against certified coins is that they are too expensive. Why pay $3000 per ounce or more for a gold coin when you could buy a Gold Eagle or a bar for $1800? The premium, as well as the dealer’s bid/ask spread is much higher on certified coins as they are more difficult to source and procure. The other argument against them is they tend to move more slowly than bullion coins. For investors who need instant liquidity, or are trying to pop in and out of the markets with some frequency, certified coins present some major drawbacks.

In contrast, numismatists (people who study coins) never forget one simple fact: value comes from scarcity. If you purchase a gold bar this year and sell it in 2015, there will have been millions upon millions more produced and sold between now and then. If you purchase a certified $20 Liberty, you can sleep well at night knowing that never again will a single $20 Liberty coin be produced. It’s hardly even a question of supply and demand, because there really is no supply. Thus when you look at the $20 Liberty MS66 in the graph above, you see it actually increase in value during gold’s worst month in 20 + years. The premiums on certified coins can move quite independently from the gold market and often times increase when gold goes down. This provides strong buoyancy during gold market corrections; something a lot of gold buyers would have loved over the last few weeks.

All in all, there is no real “right” answer as to whether investors are better off with bullion or certified coins. As such, we’re strong believers in owning both. Ideally, a healthy gold portfolio would have both bullion and certified coins. The bullion will move more quickly, provide more gold per dollar invested, and can be bought and sold at lower margins. The certified coins may have higher long term profit potential, benefit from strong demand and scarcity, and can provide stability in a gold market that is likely to become increasingly volatile in the coming years. As with most arguments, the best answer probably borrows a bit from both sides. As with most investments, the best strategy is probably a diversified one.

Read the entire article HERE.

by Mac Slavo
September 9th, 2011
SHTFplan.com

This week we returned from a trip to the Eurozone where we met with a host of different people across many countries and several industries. All of the indicators we’re seeing – construction starts, bank lending, personal borrowing habits, economic growth, and even the (lack of) items in grocery store carts – suggest that Europe is on the brink, though as is generally the case, the average European has no clue what’s coming their way.

The most alarming situation we identified is one relating to the purchase of gold coins and bullion – specifically in the country of Austria – but one that will likely make its way across the EU if it hasn’t already. Unlike the United States, where gold and silver can be purchased through traditional methods like visiting a local dealer directly, or even placing an order on the internet, it is much more difficult to find a gold/silver dealer outside of Germany or Switzerland. As a result, those individuals interested in acquiring gold are left with purchasing directly from local bank branches.

Had you visited an Austrian bank three months ago, you would have had absolutely no problem purchasing a large quantity of gold/silver from the bank. You’d simply call the bank about 24 – 48 hours in advance, let them know you’re coming and how much you needed, and you’d personally pick up your order within a couple days.

” A new trend in Austrian (and perhaps the rest of Europe’s) banking policies suggests that certain interested parties are attempting to control the sale and personal acquisition of gold/silver as safe haven assets. What we experienced first hand should be a wake up call for not just Europeans, but Americans as well.

The policy change was quiet, has not been reported by any media outlets that we’re aware of, and no mention of the new policies is made on the web sites of Austria’s largest banking institutions (though it is clear they vehemently comply with U.S. anti-money laundering measures and the Patriot Act)

According to the bank representatives and manager we spoke with, Austrian banks have now been ordered to restrict the sale of gold and silver bullion purchases and are limiting personal acquisitions of precious metals to 15,000€ (approximately $20,700 USD) at a time, or 11 ounces of gold at today’s prices.

Upon further discussion we learned that these policies were implemented over the course of the last 30 days, and they are now standard operating procedure. The reason given was the banks had come under pressure from EU, Austrian and U.S. officials, with this particular manager specifically citing U.S. money laundering initiatives and the EU’s Third EU Money Laundering Directive which was implemented across the zone in December of 2007.

The idea that these restrictions have been put in place as anti-money laundering measures is laughable. As we all know, if a drug cartel or other criminal organization wanted to launder money, they wouldn’t do it in person purchasing bullion coins at a local banking branch. They’d simply pick up the phone and contact a too-big-too-fail bank (video), as we’ve seen with the billions of dollars recently laundered through U.S. banks. You may remember there was very little reporting on this issue from mainstream media and it has been ignored by U.S. prosecutors.

As Austria is one of the more developed nations in the Euro Zone, there is a strong likelihood that they are not the sole country implementing these new policies – and that this has been, or soon will be, implemented across the entirety of EU nations.

To the average European and American this may not mean much. But if you’ve been paying attention to the events unfolding over the last several years, it’s becoming clear that the economies of the EU and US are under threat of a significant and potentially permanent financial collapse. This morning, IMF managing director Christine Lagarde was quoted as saying that the situation is so dire, “policymakers should stand ready, as needed, to take more action to support the recovery, including through unconventional measures.”

The new gold and silver purchasing limits would certainly qualify as unconventional, along with other recent proposed measures by EU officials and business leaders. One such proposal from Italian business leaders calls for all cash transactions over 300 Euro (About $400 USD) to be banned, and to be permitted only in electronic format.

The global trend across industrialized nations for the last twenty years has been to move towards a cashless society, but one that still utilizes centrally planned currencies. While central banks, large institutional funds and wealthy private investors across the world continue to buy up gold, governments seem to be moving quickly to restrict the ability of average people to do the same – and they are rapidly implementing policies to either restrict or track these types of transactions.

Many cities around the country, such as Houston, TX, have passed identification requirements that force sellers of precious metals to present a valid form of ID at the time of sale. Like Europe, the U.S. is expeditiously implementing direct methods of tracking these transactions, as well as indirect methods that target those who may be engaging in suspicious activities, namely using cash, as per FBI and Homeland Security bulletins issued last month.

The noose is tightening. Governments, large financial institutions and political chess players know exactly where real value exists. And it’s certainly not in the currencies that are being printed with reckless abandon.

Read the entire article HERE.

by Brian Sylvester
The Gold Report
August 26, 2011

Chen Lin stumbled into investing. While working on a doctorate at Princeton, he turned $5,411 in his wife’s retirement account into $1.5 million. In his newsletter, What is Chen Buying? What is Chen Selling?, Lin shares the fruits of his analytical aptitude. In this exclusive interview with The Gold Report, Lin reveals his latest finds in undervalued gold miners, and why he has high hopes for silver, too.

The Gold Report: With gold trading around $1,800+/ounce (oz.), famous precious metals investor Eric Sprott announced that he is selling 2 million units, or $30 million (M), of the Sprott Physical Gold Trust. Sprott then said he would take that cash and put it into silver, which he called “the investment of the next decade.” What do you think of his long-term silver strategy?

Chen Lin: Silver and gold are both precious metals, but they move at different times. Right now, the gold:silver ratio is a little bit over 40. Obviously, Sprott is more bullish on silver versus gold. I take a pretty even point of view. I like gold. I like silver. I know that historically the gold:silver ratio is much lower than it is right now. I checked Chinese history and it’s about 10:1. Even China has much less gold than the rest of the world and is richer in silver. We could have a much lower ratio, which means silver would outperform gold going forward, but personally I’m betting evenly on gold and silver.

TGR: Another interesting development is that Venezuelan President Hugo Chavez has announced that he will nationalize all of the remaining non-state-owned gold mining operations in the country. Is this announcement likely to affect the share prices of small-cap companies operating in other countries with leftist leaders, like Bolivia or Peru?

CL: I think it’s possible. What Chavez is doing will probably destroy the country’s gold mining industry because it needs the juniors to lay the groundwork so the majors can dig out the gold. If Chavez nationalizes, it will probably lower the gold production. I think one day he will regret that. It will increase concerns about the political risk in countries that have those close ties to Chavez.

TGR: Recently, we saw the Dow Jones Industrial Average drop a little over 400 points in a day. What’s your outlook for gold? Are we going to see $2,000/oz. gold before the end of 2011?

CL: It’s very possible. I personally do not want to see the parabolic move of gold. I hope gold doesn’t rise as fast as silver did in the second half of last year. But in the back of my mind, I think gold could do that. There is a dramatic difference between this year and 2008, however. In 2008, gold initially went down along with the stock market. This year gold went up as the market went down, which means investors believe gold is the place to put money. I read a report that some banks in China have low gold inventories because individual investors are buying gold like crazy. It’s very possible gold goes to $2,000/oz., but I hope it goes slower. I invest in gold. I have gold exchange-traded funds, gold futures, silver ETFs and silver futures on my recommendation list. But I hope they go up gradually.

TGR: Do you fear a correction?

CL: I hope we have some correction. I expect that the margin will increase another six times before gold has a real correction. That probably will push into early next year. Usually the gold season is strong from September into Chinese New Year. A severe correction could come in February.

TGR: You’ve said that you are seeing a decoupling of gold stocks versus stocks in the broader market. Can you explain that?

CL: Now, when the market takes a huge dive, gold goes up. Quite a few stocks, including Yamana Gold Inc. (TSX:YRI; NYSE:AUY; LSE:YAU) and Franco-Nevada Corp. (TSX:FNV) actually went up into the green. Many others, such as Pretium Resources Inc. (TSX:PVG), are up as well. Majors will start to stabilize and move up despite the stock market going down. As things stabilize, the juniors will likely catch up. As gold moves up, gold stocks are likely to outperform gold for the rest of the year.

TGR: Your investment success is somewhat legendary. You took about $5,000 in 2002 and turned it into about $1.56M by the end of 2010. Even as your portfolio regressed this year, it’s only by 10%. What’s changed in 2011 that is making it more difficult to find small-cap companies poised for big gains?

CL: This year has been difficult. The resource stocks got hit as investors took profits and ran. Fortunately, I have a pretty diverse portfolio. I have stocks, ETFs and futures. It is a very difficult year for small-cap companies, but I see some great opportunities. I’m ready to buy because investors are selling gold stocks indiscriminately. This is the time to buy. There are some great opportunities for investors that have a relatively long-term vision.

TGR: So then, what is Chen buying?

CL: Pretium, which I mentioned earlier, is run by Bob Quartermain, the founder of Silver Standard Resources Inc. (TSX:SSO; NASDAQ:SSRI). Management is really key at gold and silver companies. There are tons of companies that just go nowhere. The management raises money to pay themselves. With great management, like Bob Quartermain, there is a proven track record. He doesn’t just grant options to management. He buys them. He bought shares on the market like every other shareholder. He has a couple of projects that are becoming very promising in British Columbia, which I am visiting next week.

TGR: Is that the Snowfield Project?

CL: Yes. Pretium is in low-grade Snowfield and high-grade Brucejack. I think the Snowfield Project will likely do a deal with Seabridge Gold Inc. (TSX:SEA; NYSE.A:SA). Quartermain is more focused on the high-grade area with about 15 kilograms/ton of gold. Some people don’t believe it. They say it must be silver. It’s gold. That is what he is focused on. He is looking to do a very high-grade underground operation, which was permitted before. He just needs to reapply for a permit and get into production.

TGR: The company has a positive preliminary economic assessment, but it really hasn’t produced a dramatic rise in the stock price.

CL: That was based on previous results. In the new drilling tests, the company intersected a lot more gold. That will help them when people realize the valuation of the deposit. Another catalyst would be the deal with Seabridge and a major investing in the lower-grade area. The feasibility study is not very high, but the company used a conservative gold price. Eventually, people will catch up with it.

TGR: What are some other names on Chen’s radar screen?

CL: Barkerville Gold Mines Ltd. (TSX.V:BGM) has been on my list for a pretty long time. I like the company. I met the management. The stock has already gone up pretty significantly since my recommendation. However, it recently has been in consolidation, which could be an entry point. The company keeps making progress. It keeps producing gold, which means it can generate a lot of cash flow at the current gold price. That will fund its next move versus going into the market begging for money.

TGR: Barkerville is planning to mine about 50 thousand ounces (Koz.) from the QR Mine this year. Is it on target?

CL: I will be following that very closely. As long as the company is producing gold, it should be doing fairly well. As long as it can produce, even if it’s not 100% as planned, the higher gold price will compensate. If the company can make its target, that will be a great bonus.

TGR: Has Barkerville forward-sold any of its gold or is it fully exposed to the gold price?

CL: No, it is fully exposed to the gold price. You don’t want to invest in any company that has hedges in place. Then it would be selling gold at maybe $1,000/oz. when it could be getting $1,800/oz. or more.

TGR: Barkerville has about 937 Koz. outlined in all categories. That is still a pretty small operation. Do you believe that as the company produces gold and takes some of that money to further exploration, it will continue to discover more resources?

CL: The company is getting good drilling results. I’m sure when it updates its new resource, it will be much higher. Once the company starts to get into a good financial situation, it will do more exploration. Gold is prolific in that area—there is a lot to find.

TGR: What else is Chen buying?

CL: There is a very small company called Majescor Resources Inc. (TSX.V:MJX) that just announced fantastic drilling results. The stock is actually up about 89% right now. It’s a very tiny company with about a $20M market cap. It’s drilling next to Newmont Mining Corp.’s (NYSE:NEM) latest project in Haiti. Newmont’s chief executive said it is one of his most important projects. It’s had fantastic drilling results of 77 grams over 10 meters (m). It’s very shallow at about 100m deep. Plus, it has many other intersections with very high-grade gold and copper. For this market cap, it looks very promising.

TGR: It’s trading between $0.25 and $0.30. Is that a good entry point?

CL: I think the current price still looks very good.

TGR: How high could it go and still be a good entry point?

CL: There are heavy insider purchases at $0.20. I think anything between $0.20 and $0.30 is a great buy.

TGR: Majescor is effectively almost like an exploration arm for Newmont at this point. Does Newmont have a position in it?

CL: No, but Majescor has a mining license while Newmont is still applying for a mining license. That makes them a very good target for Newmont.

Haiti is on the same island as the Dominican Republic, which hosts one of the largest gold mines in the world. Since the earthquake, the U.N. is trying to help the country create jobs. One of the key areas it is looking at is mining. Haiti could be opening up and this could be a hot new mining area in the world.

TGR: What’s another name, Chen?

CL: I just visited Prophecy Platinum Corp. (TSX.V:NKL; OTCPink:PNIKD; Fkft:P94P). It’s in the Yukon, very close to the Alaska border and only about 10 miles from the Alaskan highway. It just announced a NI 43-101 for about 12 million ounces (Moz.) of platinum, gold and palladium. The key for the company is to have very high grades. Right now, it has consolidated a little bit as the company is probably going to raise money. Sprott just announced it bought about 10% in the open market. I would assume Sprott would probably participate in one of many raisings. Then we can potentially consolidate the stock and it could go higher.

TGR: It also has a producing coal mine in Mongolia, correct?

CL: That’s actually its parent company, Prophecy Resource Corp. (TSX.V:PCY). Prophecy Resource owns 45% of Prophecy Platinum, which is a spin-off. Prophecy Resource is also a very interesting story because Prophecy Platinum’s price almost covers the entire market cap. You’ve got a producing coal mine almost for free.

TGR: It just discovered a substantial coal seam in Mongolia about 20 kilometers away from its existing coal mine, which actually hasn’t had any effect on the stock to date. It certainly could be a promising find in the future.

CL: Exactly. There are bargains almost everywhere. Investors are just selling by emotions. There are a lot of opportunities and Prophecy is a perfect example. It owns 45% of Prophecy Platinum. You can calculate the market cap. It doesn’t make sense, but the market still treats it like this. I bet the market probably won’t treat it this way for too much longer.

Another is Romios Gold Resources Inc. (TSX.V:RG; NASDAQ:RMIOF; Fkft:D4R), which I am going to visit next week as well. It is drilling the Trek Property in northwestern British Columbia, right next to NovaGold Resources Inc. (TSX:NG; NYSE.A:NG) Galore Creek Project. It’s actually drilling on top of the company’s proposed mill site, so drilling results are pending. This stock could have a very explosive movement because its market cap is very small at about $70M.

NovaGold and Teck Resources Ltd. (NYSE:TCK; TSX:TCK.A, TSX:TCK.B) need to build a $1B tunnel to get ore from the other side of the mountain. But if the pair can find ore on the Romios side of the mountain, right on top of the mill, they could save $1B and take the company over. If there are good drill results, Romios will be an easy takeover target for NovaGold and Teck.

TGR: Romios recently found some massive sulfide mineralization at the Trek Property, which is known to host large gold and copper deposits. Can you tell us about those results?

CL: It has a lot more results coming. The assay is pending, but it looks very promising. If it has a grade similar to Tech and NovaGold’s Galore Creek, this is a very easy takeover target.

I want to mention another stock that is under the radar, Helio Resource Corp. (TSX.V:HRC), which is drilling in Africa and already has 1 Moz. of gold. Its market cap is very tiny, but it has some very important, pending results coming in the next few weeks. It is drilling to a mere 200m for open-pit gold. If it can upgrade its resource to a few Moz., that could make the company very cheap versus its market cap. It could see some major movement in the second half of the year.

TGR: That is the SMP Gold Project in Tanzania that has multiple zones of gold mineralization at shallow depths. Could that be a target for a company like African Barrick Gold plc (LSE:ABG)?

CL: It’s possible. Helio is an exploration company run by geologists. Its goal is to find a deposit and then sell it to the majors. If we use $100/oz. in its existing gold inventory that is already worth $100M and it is looking at a much higher stock price. It could expand dramatically with its recent drilling results. The company is well funded with $8M in the bank. It doesn’t have to raise money for a long time.

TGR: Helio is trading at just below $0.30 right now. At what point would you not get into Helio?

CL: I think it is dependent on its drill results and those are unknown. When the stock moves, it can move very fast. With its existing resource, around $0.30 is pretty good. But I don’t know what the drill results look like, so that will decide what the new valuation will be.

TGR: On the other side of the ledger, what are you divesting yourself of right now?

CL: I have been gradually selling some gold and silver ETFs. They have appreciated a lot, so I use them as buying power on the dip on the miners. Instead of following Sprott by selling gold and buying silver, I’m reducing a little bit to use that as capital to buy undervalued small-cap gold and silver miners.

TGR: You have had success in pulp, paper and oil and gas. What other sectors do you believe are poised for growth?

CL: I like the pulp sector, including the company Mercer International Inc. (NASDAQ:MERC). There are a lot of very undervalued energy stocks, as long as oil finds a floor somewhere in the $60–$70/barrel range. China does not have enough strategic oil reserves. If oil really dips, China would probably use the opportunity to build up more oil reserves. India has no strategic oil reserve. The pressure is on both countries to stock up if oil dips. In 2008, the worldwide oil demand only dipped like 1–2%. As long as investors stay with low-cost producers with good balance sheets, they will ride out the storm.

TGR: Any parting thoughts for us?

CL: I think this market correction will create a lot of opportunity for us. The market is putting a lot of pressure on the European leaders to get their acts together. There is a lot of pressure on Federal Reserve Chairman Ben Bernanke to do another round of quantitative easing. I hope the outcome will have some stabilizing effect on the market. In the meantime, when investors are selling everything, that’s a very good buying opportunity.

TGR: Excellent. Thanks, Chen.

Chen Lin writes the popular stock newsletter What Is Chen Buying? What Is Chen Selling?, published and distributed by Taylor Hard Money Advisors, Inc., publisher of J. Taylor’s Gold, Energy & Tech Stocks newsletter and Roger Wiegand’s Trader Tracks. Using his wife’s Roth IRA account, Lin invested $5,411 in December 2002, and by December 31, 2010, it was worth $1,188,993—with no cash added. You can see his portfolio chart here.

A doctoral candidate in aeronautical engineering at Princeton, Chen found his investment strategies were so profitable that he put his Ph.D. on the back burner. Chen worked in the Internet and computer area where he founded a few start-up companies. After the tech bubble burst of 2000, Chen was able to move his technology portfolio into the resource sector with considerable success. Chen employs a value-oriented approach and often demonstrates excellent market timing due to his exceptional technical analysis. To subscribe to Lin’s What Is Chen Buying? What Is Chen Selling? newsletter, click here or call Claudio Bassi at (718) 457-1426.

Read the entire article HERE.

by Michael Maloney
Wealth Cycles
August 3, 2011

A recent white paper released by the World Gold Council confirms to a large extent what we at WealthCycles.com have been saying all along—that in just about any imaginable economic scenario, gold stands to outperform all other assets.

The report, The Impact of Inflation and Deflation on the Case for Gold, prepared for the Council by Oxford Economics, differs from our own analysis primarily in degree—we don’t think it puts nearly enough emphasis on the “perfect storm” of global economic and monetary factors brewing on the not-so-distant horizon—conditions we believe are converging to produce the greatest wealth transfer in history.

The study examines gold and its past performance under certain conditions such as high oil prices, positive or negative real interest rates, the strength of the dollar, inflation or deflation. Based on the historic analysis of gold’s performance, the study creates formulas with which to forecast gold’s future performance. As WealthCycles.com did in its own article, The Road Ahead, the study then postulates how gold will do under four potential future scenarios. The only scenario under which, according to the study, gold does not shine is its “Baseline scenario”:
Steady economic recovery in major economies supported by strong emerging market growth
Easing of financial stress and repair of banking

Read the entire article HERE.

By Pham-Duy Nguyen and Maria Kolesnikova
Jul 27, 2011 7:36 AM PT
Bloomberg

Gold futures rose to a record $1,631.20 an ounce as the impasse on the U.S. debt ceiling boosted demand for the precious metal as a haven.

The cost of insuring U.S. debt rose to a 17-month high, and the dollar fell to a record against the Swiss franc as congressional leaders offered competing budget plans. Moody’s Investors Service, Standard & Poor’s and Fitch Ratings have said they will cut the U.S.’s top-level credit rating should a failure to raise the debt ceiling lead to a default.

“Government securities, the traditional area of safety, are now at risk, so that’s why you’re seeing gold grind higher,” Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago, said in a telephone interview. “The level of U.S. government borrowing has caused the erosion of the dollar and adds more fuel to the metal’s rally.”

Gold futures for December delivery rose $8.90, or 0.5 percent, to $1,628 at 10:33 a.m. on the Comex in New York. In July, the price has climbed 8.3 percent, heading for the biggest gain since November 2009.

Holdings of gold in exchange-traded products rose 0.3 percent to a record 2,128.229 metric tons yesterday, data compiled by Bloomberg show.

Silver futures for September delivery rose 57.7 cents, or 1.4 percent, to $41.275 an ounce on the Comex.

Platinum futures for October delivery gained $8.80, or 0.5 percent, to $1,816 an ounce on the New York Mercantile Exchange. Palladium futures for September delivery climbed $8.35, or 1 percent, to $844.45 an ounce.

 

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