Tommy
11 years ago
Why Is Anti-Goldbug Dennis Gartman Getting into Gold?
http://www.theaureport.com/pub/na/15533?utm_source=delivra&utm_medium=email&utm_campaign=Gold+final+streetwise-reports+08%2F21%2F2013+14%3A28%3A10
Dennis Gartman Dennis Gartman, the editor and publisher of The Gartman Letter, has made no secret of his disdain for gold. But he believes a good trader is agnostic of everything. So, when technical charts indicated it was time to buy, he did. In this interview with The Gold Report, Gartman talks about how he has been playing gold off of other currencies to turn a profit and discusses whether he is ready to get into gold equities yet.
Companies Mentioned: AngloGold Ashanti Ltd. : Barrick Gold Corp. : Newmont Mining Corp.
The Gold Report: Dennis, in late July, you told CNBC that you're a "buyer of gold" after being what amounted to the grand marshal for the gold bear parade. Why did you change sides?
Dennis Gartman: Simply because the gold bear parade had gotten a bit overcrowded. It was actually quite astonishing to me. Everybody was overtly and manifestly bearish of gold. If I've learned anything in 40 years, it's that when things get terribly one-sided, it's probably time to go to the other side. Gold had reached some technical levels that I found interesting, but more important, it had reached a level of psychological bearishness that pushed me off the sidelines, off from being bearish of gold, to being bullish.
TGR: Have you taken some ribbing from your colleagues as a result of that position?
DG: I found it amusing that I was taken to the woodshed because gold went down another $15/ounce from where I bought it.
TGR: While you are buying gold, you told CNBC that you're not a true believer. What's holding you back?
DG: The true believers in gold—the goldbugs, the folks who think that the world is coming to an end, that gold is the be all and end all, that money should be backed by gold—I'm not of their religion. Good traders are agnostic of everything. They look at numbers simply as something dancing across the page, as cleanly and as unaffectedly as they can, buying the things that look cheap and are starting to go higher, selling the things that are high and are starting to move lower and not caring a wit about what it is that they are trading. Most people who trade gold are true believers. They believe that gold is the be all and end all. I could care less.
TGR: In another interview, you said that you're bullish on gold in yen terms versus gold in U.S.-dollar terms. Could you please flesh out the difference?
DG: First of all, let's understand that gold is nothing but another currency. Yen is a currency. The dollar is a currency. The euro is a currency. That's all it is.
Having grown up as a currency trader, I was always taught to trade one currency against another. One is long of Canadian dollars, short of yen. One is long of euro, short of British pound sterling. One is long of gold, short of yen.
I'm long of gold, short of yen for the very simple reason that the Bank of Japan, under the new regime of Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda, has made it abundantly clear that it will do everything within its power to expand the bank's balance sheet over the next year and to weaken the currency over time.
It's been a far better trade over the last two years than being long of gold in U.S.-dollar terms. Gold in yen is down 1% over the last two years. Gold in U.S.-dollar terms is down 28%. I think down 1% is better than down 28% almost any time.
TGR: Has gold in U.S.-dollar terms bottomed?
DG: Gold in dollar terms likely has not bottomed. Gold in dollar terms has been a bear market since the autumn of 2011. Each low has been lower. Each high has been lower. Until that trend changes, it's a bear market.
Prices have been moving from the upper left to the lower right. I haven't learned many things in 40 years of doing this, but if something has been moving for two and a half years from the upper left to the lower right, the odds are next month it will have moved even lower to the right. No, gold has not seen its low in dollar terms.
TGR: What has caused that two-year decline?
DG: Too many goldbugs. Too many people hoping that there will be a continuation. Although they take Federal Reserve Chairman Ben Bernanke to task for what he does, they hope he will continue because they hope that the expansion of monetary aggregates gives rise to higher inflation. They have been abundantly wrong about that—it has not. It may eventually, but it hasn't thus far. Because it hasn't created the inflation that the goldbugs wanted, they continue to buy gold. They find themselves in an uncomfortable and losing position, day by day and hour by hour.
TGR: Is stagflation or rapid inflation more likely?
DG: Stagflation—no question. It's been happening for the past several years and will continue. Why? Wages are under pressure and will continue to be under pressure. People won't like this answer, but in a world where 1.3 billion Chinese, 1.2 billion Indians, 240 million Indonesians and 28 million Malaysians are being brought into the modern world; where Africans are being brought into the modern world; and where transportation and communications are better than we've ever seen, if you think that a high school education in North America or Europe is going to give you the same living standard and the same wage rates that your parents got, you're naïve. Wage rates in Asia are going to continue to put downward pressure upon wage rates in Europe and the U.S.
When wage rates are under pressure, and they are under pressure, where can inflation be derived from? The true believers have always thought that an overexpansion of the monetary aggregates has to give rise to inflation. Thus far, they've been proven wrong.
TGR: You have bought the S&P 500 and the Nikkei in recent weeks. Why did you make those moves?
DG: For the same reason I made the move to buy gold. Everybody had been so overtly bearish. Let's be honest, I got very lucky. I sold half of it last Friday, going into the nonfarm payrolls number, and I sold the other half of it two days ago. Now I am once again agnostic of stocks.
I'm still bullish in the long run. This bull market still has years to run, but sometimes it's better to just stand on the sidelines. As I like to say, in a bull market, there are only three positions that you should ever consider having: wildly bullish, pleasantly bullish or neutral. I was wildly bullish. I'm neutral for a while.
TGR: If you're bullish on gold, what about gold equities?
DG: If you'd asked me that question a year ago, I would have said that they're a losing proposition. If you wished to bet on gold, why would you buy gold equities that expose you to management ignorance and the vagaries of natural disasters? For the past two years, gold equities have lost day after day after day. It has been a horrifyingly bad trade. It has made no sense.
But today, gold equities have been beaten up so badly relative to gold that they've discounted natural disasters. They've discounted management ignorance. They've discounted all of the ill that could befall an industry.
If you're going to be a buyer of gold miners, buy the real gold miners. Buy Barrick Gold Corp. (ABX:TSX; ABX:NYSE). Buy Newmont Mining Corp. (NEM:NYSE). Buy AngloGold Ashanti Ltd. (AU:NYSE; ANG:JSE; AGG:ASX; AGD:LSE). Buy the companies that have been around for a while.
It's the first time in some two and a half years that gold equities may actually begin to rally when gold rallies—and may even begin to rally when gold goes sideways.
TGR: But wouldn't some of those smaller companies rally along with the gold price?
DG: The answer is maybe. But that's roulette. Nine times out of ten, even when gold rallies, you're going to lose money. You may get lucky, but mostly you're going to lose money.
TGR: Do you see another round of consolidation coming to the gold equities?
DG: There is always consolidation in gold equities. There has been for hundreds of years. There will be hundreds of years into the future. That will never change.
TGR: Are you bullish on any other precious metals like silver, platinum, palladium or even rhodium?
DG: I know nothing about them. Those are for people smarter, more naïve or more courageous than me. I don't trade silver because I don't trade things that can move 3% in a day. I don't understand that kind of irrationality. I leave that to others.
TGR: That's happened to gold in the last few months, too. It certainly moved a few percent a couple of times in April.
DG: That was also very disconcerting. I don't like that. It also moved a couple percent after the nonfarm payrolls number; it moved 1.5% lower and 1.5% higher. That's illogical. It makes me tend to go to the sidelines.
TGR: You started out in commodities in the cotton business. How does your experience with cotton inform your view of gold?
DG: My experience in agriculture, not just cotton, taught me a good deal about psychology. Learning how psychology dashes about is extremely important in agriculture and absolutely attributable to any other commodity, equity and even the bond market.
The cotton market taught me to watch how the term structure of the futures functions. I learned not to sell any market that's gone to backwardation where the front months are above the backs. That tells you a lot about what informed money is doing.
It also taught me a lot about technical analysis. It taught me that I need to understand the fundamentals of what I am trading, and then I need to understand what the chart is telling me. Investors need to understand whether they are going to be bullish or bearish fundamentally, and then they better see what the chart is telling them.
Everything I learned in cotton is absolutely applicable to what goes on in almost any other market.
TGR: What is the gold chart telling you right now?
DG: That it's a bear market in dollar terms and that it's a neutral market in yen terms. If you're going to be long of gold, you're better off owning it in yen. That's what the charts are telling me.
TGR: At the New Orleans Investment Conference in November, you're going to be on the speakers docket with the likes of Dr. Ron Paul, Marc Faber and Charles Krauthammer. What role will you play in that group?
DG: I will be the court jester. My duty is to laugh with Marc Faber, who is one of the truly funniest people in the world despite his Swiss accent and his Swiss background. He's hysterical, but we usually end up arguing. We're on the opposite side of ideas. I probably will not be a proponent of what Ron Paul argues because I know that he'll be arguing against the Federal Reserve, and I'll argue that the Fed, under Bernanke, saved the world from crumbling in 2008 and no one gives it credit for that. My role with Dr. Krauthammer will be to bow in awe of the guy's majestic wisdom because he is truly a brilliant gentleman.
TGR: What's the key message that you're telling subscribers of The Gartman Letter right now? What sort of wisdom are you imparting to them?
DG: My message is the same one that I've imparted for the last 35 years. Buy things that are going up. Sell things short that are going down. Run from losses as quickly as you can. Admit when you're wrong. Try to understand why something is fundamentally going higher. Make sure that the chart agrees with what you're saying.
TGR: What's the trade right now?
DG: The world is a far better place than the goldbugs would ever admit. The world is moving forward and advancing on a shocking basis economically. There will be people who will tell you that things are getting bad. I will tell you they've never been better. They might not be perfect here in the U.S., but the rest of the world is scrambling to jump into the 21st century. Those who forget that, those who miss that, are going to miss great opportunities. It's a bull market in equities in global terms. You better understand that.
TGR: Thanks for talking with me today.
DG: My pleasure.
Tommy
11 years ago
Finding Bargains Down Under with Rick Rule
http://www.theaureport.com/pub/na/15493?utm_source=delivra&utm_medium=email&utm_campaign=Gold+final+streetwise-reports+08%2F05%2F2013+14%3A19%3A01
Rick Rule Down markets are notoriously rife with good deals, and nowhere is this truer than down under in Australia. In this interview with The Gold Report, Rick Rule, founder of Sprott Global Resource Investments, explains how he takes advantage of Australia's small, volatile market and investors' ethnocentrism to find high-quality companies whose shares are, in his opinion, going for a steal.
Companies Mentioned: Birimian Gold Ltd. : Hot Chili Ltd. : Hummingbird Resources Plc : Papillon Resources Inc. : Peel Mining Ltd. : Perseus Mining Ltd.
The Gold Report: You recently said that this is your fourth cycle in a commodity sector in your 40-year career. Where are we in this current cycle, and how do you determine that?
Rick Rule: The bottom is usually marked by a two- or three-week period of capitulation selling followed by a standoff, where both the buyers and the sellers are exhausted. We haven't seen that yet. We've had two or three different periods with a couple of days of capitulation selling but not a two-week period as we saw in 2000.
I wouldn't be surprised if the downturn was four years, which suggests we have a year and a half to two years before we clean out the excesses. The junior sector is substantially overpopulated with companies, managers and agents. There needs to be a major cleansing over the next 18 months.
TGR: Will it be more cleansing or more mergers and acquisitions?
RR: Cleansing. Most of the walking dead juniors, the zombies, are a bunch of liabilities disguised as public companies. Their assets are liabilities; their financials are liabilities; mostly their managements are liabilities. It's wonderful. Every 5 or 10 years you have this major reset in the junior sector. Although it's extremely unpleasant to go through, it's very healthy.
A lot of money can be made in deep and cataclysmic market downturns, not just on the rebounds. People do egregiously stupid things out of panic at the bottom. They engage in capitulation selling with no regard to value. In that situation, you don't need to buy in anticipation of news, because good news comes out and there's no market reaction to it. You can wait for the news to get out, analyze and digest it and then buy it. That's as much fun as you can have in this business.
TGR: Is this basically buy and hold? Find the good values now and ride through this down market?
RR: That has always been my technique. For me a market is just a facility to buy and sell assets. Juniors rise in value when they answer a series of unanswered questions; that takes time. I never go into a speculation with a planned timeframe of fewer than 18 months. I'm 60 years old now—the idea that I have to hold a stock for 18 months doesn't give me apoplexy. I'm on my 31st cycle like that.
When I interview a junior I ask, "What are you going to do with the money you're asking me for? Tell me how this $3 million is going to make the company worth twice as much." About 70% of the time the junior doesn't have an answer. That makes my life really easy. I just get up and leave.
TGR: That's a pretty quick litmus test.
RR: It's as though somebody is going to drive from Los Angeles to San Francisco and starts driving east. Those juniors don't have a plan. They don't have a map. They plan to pay down payables and then slam a few holes in the ground, and if there's good fishing nearby, they'll take advantage of that.
TGR: You've been focusing on Australia, which you've said is cheaper than North America and has better quality.
RR: It's true in both cases. This is a wonderful topic because I can get the Australians and the North Americans mad at me at the same time. Compared to the North American market, Australia's is very small and much more volatile. When outside money floods into it, the valuations explode and the market goes higher faster. When outside money pours out, the market contracts ridiculously.
The Australian equities market becomes very ethnocentric in a bad market. Australians focus within Australia and tend to sell non-Australian things more than Australian things. We like to go into Australia in bad markets and find the companies that have done a good job overseas but have been sold because of this ethnocentricity. We try to put equity into existing Australian companies and be supportive shareholders.
The Australian exploration community is extremely competent overseas, particularly in Africa. They're used to Archean terrain and harsh climate conditions.
TGR: Can you highlight some of the companies you're investing in that have projects in Africa?
RR: We're following 70 or 80 exploration plays in Africa. Most are too low grade to ultimately attract our attention, but seven or eight deposits will almost certainly become mines.
With the number of companies active in West Africa, there's going to be a fairly active consolidation. In several situations, we think we're going to get what we laughingly refer to as a "double bump": the property will prove itself up, and then the company that has the property will be acquired, and then the newly acquired property will provide a growth profile to the acquirer. You get a bump for being acquired and a bump for the earnings visibility of the people who acquired it.
This theme worked well for us in the early 1990s and coming out of the 1998–2002 market. Our hope is that West African consolidation over the next five years will give us several double, triple or quadruple bumps.
TGR: Australia-based companies in the Sprott portfolio that are doing business in West Africa include Papillon Resources Inc. (PIR:ASX), Birimian Gold Ltd. (BGS:ASX) and Perseus Mining Ltd. (PRU:TSX; PRU:ASX). Are those the types of double bumps you're looking for?
RR: There's a range of discussions there. Papillion is a first-rate deposit. It's done a superb exploration job, and its deposit has size and grade. It could get over the 5 million ounce (5 Moz) market; it certainly has 3 Moz–plus potential. It could make a lot of money for its ultimate acquirer.
Birimian and Hummingbird Resources Plc (HUM:AIM) are attractive in their own right. They're not as large as Papillion, but the potential profitability of their deposits stands out. Perseus has had operational failings that have caused people to reflexively sell them out of disgust. They're just too cheap—the market is valuing their exploration and development assets at zero, and we don't think they're worth zero. A year and a half ago I would have said that Perseus would be a consolidator, but now I expect it will be consolidated because it's selling for 80% less than it did 18 or 19 months ago.
"Compared to the North American market, Australia's is very small and much more volatile. When outside money floods into it, the valuations explode and the market goes higher faster."
West Africa is superior exploration terrain. The amount of money being spent there and the quality of the people exploring there could yield the best exploration results of any region on the globe. It has a lot to give up, and we think it will give it up this cycle. Three or four players will come to dominate the sector. That theme has worked for us in Mexico, in Peru and in Nevada. We are confident it will work for us in West Africa.
TGR: Because Australia is such a small and volatile market, is it challenging for companies listed there to raise money? Do they start cross listing?
RR: They don't necessarily need to cross list. Really good projects will finance themselves. We recently participated in a small financing of about $12 million for Hot Chili Ltd. (HCH:ASX), an unfortunately named copper explorer in Australia that's mining in Chile. To raise that money, it talked to the top five people on its shareholders register. It didn't have to go to the brokers or the institutions.
If Papillion needed to raise more money, I expect it wouldn't have to engage the Australian broker/dealer community. It could engage the top 10 names on its shareholder register.
TGR: I noticed that all the major mining areas in Australia are in New South Wales or Western Australia. Is it critical that those locations are part of your investment strategy for Australia?
RR: We like the whole continent—the Gawler Craton and South Australia. We like New South Wales and Queensland, the eastern goldfields, a lot. We still like the iron oxide copper-gold exploration opportunities in Australia. We like the Archean terrain in eastern Australia and the western Australia goldfields. The Australian continent has an unusually generous mineral endowment.
Our existing participation is limited to the areas where people deliver good drill holes and the Australian valuations are insufficient. In other words, it's limited to where we see bargains. We like what Peel Mining Ltd. (PEX:ASX) has been achieving up at Cobar. Cobar is familiar territory for us, which is an advantage.
TGR: Do you think Australia-based companies will get a bump up if Kevin Rudd comes back as prime minister and alleviates the mining tax?
RR: The mining industry has had a good 10 years in Australia and has unfortunately bragged about its good fortune so much that Australians think there's more money to steal from miners. Similarly, wages are sticky. People competed aggressively for workers in Australia, and workers' wages did extraordinarily well, tripling in many instances. It will take two to three years for those expectations to diminish—expectations on the part of the issuers, suppliers, workers, managements and government-sponsored entitlement beneficiaries.
TGR: There is a perception that Australia's growth is linked to China's due to the proximity of the two. If China's growth is slowing, does that mean Australian mining could potentially slow?
RR: The perception that Australian growth is tied to Chinese growth isn't really a perception—it's reality. China has several problems, such as its weakness in the economies to which it exports, the misallocation of capital internally and the opacity of the lending and capital allocation system. China will have a rough 18 to 36 months working through the capital misallocation. The other part of me says that 5% or 6% growth from a huge base like that means a recovery is inevitable.
"Bear markets cause bull markets; these are wonderful times if you're an investor as opposed to a momentum player."
Looking at the incredible success of the Chinese diaspora globally, you see that as people become freer, they become richer. I think the process is underway and inescapable in China. You don't put the toothpaste back in the tube. It's just the way it works.
TGR: Australia has been getting a lot of press for rare earths, particularly heavy rare earths. Could it complement or overtake the Chinese production of rare earths?
RR: It has the ability to complement Chinese production. If the Chinese were to raise the rare earth prices, production would increase in South Africa, Congo, Australia and any place with Archean rocks and pegmatites. The Australians are leaders in Archean geology.
TGR: Australia is becoming a hotbed for oil and gas exploration. Are you looking at that sector?
RR: We certainly like Australian geology and Australian geologists, but we haven't found the opportunity in conventional energy in Australia that we have found in mining there.
TGR: You are heading down to do a variety of presentations in the coming months. What message do you hope your audience takes away?
RR: I don't know that I have an awful lot to say to conference attendees other than bear markets cause bull markets and that these are wonderful times if you're an investor as opposed to a momentum player.
My message to the financial services industry and to the issuers in Australia is that while capital markets may be shut, Sprott is not. We are able to mobilize our own capital, and we have clients and partners with the same capabilities and outlook that we have.
TGR: Can a regular investor who is not accredited take advantage of this extreme opportunity for financing, as Sprott is doing through private placements and private equity, by buying into Sprott funds?
RR: That depends on the domicile of the investor and his or her personal circumstances. Of course, we would solicit discussions that would lead to people participating with us or owning us. Our U.S. brokerage operation offers resource investment services to investors with portfolios of all sizes.
TGR: So if investors are interested, what should they do?
RR: The easiest way is to go to our website, http://www.sprottglobal.com. I encourage readers to click on the Sprott's Thoughts tab and take advantage of the free subscription. That's a free daily publication that draws information analysis and paradigm from 26 of Sprott's thought leaders. The best way to get to know us is to listen to us on a daily basis for free.
TGR: Rick, I appreciate your time.
Rick Rule, founder and chairman of Sprott Global Resource Investments Ltd., began his career in the securities business in 1974. He is a leading American retail broker specializing in mining, energy, water utilities, forest products and agriculture. His company has built a national reputation on taking advantage of global opportunities in the oil and gas, mining, alternative energy, agriculture, forestry and water industries.
Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.
DISCLOSURE:
1) Karen Roche conducted this interview for The Gold Report and provides services to The Gold Report as an employee. She or her family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: None. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Rick Rule: I or my family own shares of the following companies mentioned in this interview: Papillon Resources Inc., Peel Mining Ltd., Hot Chili Ltd., Perseus Mining Ltd., Hummingbird Resources Plc and Birimian Gold Ltd. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
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Tommy
11 years ago
$CEF - COMEX Gold Inventories Plummet: Shorts May Be Forced To Cover Fast
http://seekingalpha.com/article/1560912-comex-gold-inventories-plummet-shorts-may-be-forced-to-cover-fast?source=email_rt_article_readmore
Disclosure: I am long SGOL, AGI, PSLV, GOLD, GG, SIVR. (More...)
We have covered the rapidly declining COMEX gold inventories in previous articles, and the story seems to be getting old, but COMEX gold continues to drop with registered gold inventories hitting their lowest levels ever. Additionally, total COMEX gold has now dropped under 7 million total ounces or by almost 40% since the beginning of the year (we started 2013 with around 11 million total ounces).
This is something that should be very relevant to investors who own physical gold and the gold ETFs (GLD, PHYS, and CEF) because any abnormal inventory declines may signify extraordinary events behind the scenes that would ultimately affect the gold price.
(click to enlarge)
As you can see on the chart above, both registered and eligible gold stocks have been declining significantly since the beginning of 2013, and they continue to decline at rapid levels. We will take a closer look at these numbers but let us first explain the COMEX a little more for investors who are unfamiliar with it.
Introduction to COMEX Warehousing
COMEX is an exchange that offers metal warehousing and storage options for its clients. The list of their silver warehouses can be found here and their gold warehouses can be found here. In the case of silver and gold, the metal is stored at these official warehouses on behalf of banks and their clients and can be used to settle futures contracts, transferred between clients, or withdrawn from the warehouse. This offers large holders of precious metals a convenient way to store their metal with minimal storage fees - very convenient indeed if you hold large amounts of gold or silver and you don't want to store them in your basement.
Silver and gold stored in these warehouses can fall into two categories: Eligible and Registered.
Eligible metals are those that conform to the exchange's requirements of size (1000 ounce bars for silver and 100 ounce bars for gold), purity, and refined by an exchange approved refiner. Eligible metals are stored at COMEX warehouses on behalf of banks or private parties, but are not available for delivery for a futures contract.
Registered metals are similar to eligible metals except that these metals are also available for delivery to settle a futures contract. COMEX issues a daily report on gold, silver, copper, platinum, and palladium stocks, which lists all the metal that is currently stored in COMEX warehouses and how much eligible and registered metal is present.
This information allows investors insight into how much metal is currently backing COMEX futures contracts, what large gold and silver owners are doing with their metals, and how many clients are requesting delivery of their metals. There is a lot more to glean from this information but for the purpose of this article we will focus on the gold drawdown.
Gold Continues to Leave the COMEX
Before we look at the numbers we have to give a plug to the folks at troyozgold who provided important data that helped to contribute to this article. Their site is free to use and provides investors with terrific information about COMEX inventories, ETF inventories, and a lot of other data about everything related to the gold and silver markets - investors should check it out.
Let us now take a deeper look at the gold draw-downs being seen in the COMEX warehouses.
(click to enlarge)
As you can see in the chart above, we have been seeing consistent declines in gold inventories for the last six months and last week continued this decline. In the reporting week ending on 7/19, gold stocks dropped by 120,723 ounces for the week which left COMEX inventories at a new yearly low of only 6.99 million ounces - the lowest it has been since the beginning of 2006.
But what may be more important to investors is that registered gold stocks have dropped to their lowest levels since data has been published - pre-2002 levels.
(click to enlarge)
Keep in mind that registered gold is the only gold available for delivery at the COMEX - eligible gold is stored but is not available for delivery. This means that COMEX participants are demanding more gold for delivery, even as other COMEX gold holders are preventing their gold from being eligible to fulfill delivery on settled gold contracts.
As we have mentioned before, we do not know why gold is leaving the COMEX - but we do know it is still leaving in ever increasing quantities. The steep and sustained nature of this decline suggests that it is not a haphazard event - multiple players are withdrawing their gold in large amounts and there must be a significant reason why they are doing it.
Debunking the Negative Gold Sentiment Explanation
Some may suggest that gold stock declines are due to negative investor sentiment about gold. The argument is that investors are no longer interested in gold so there is no need to own or keep it at the COMEX - they can just sell it on the market and move their investment dollars elsewhere.
The first problem with this argument is that the declines started way before the gold price started to drop. Why wouldn't we have seen the start of this decline in 2011 after the $1900 gold high? Why not in 2012 when the gold price dropped 20% from its highs? This type of gold stock decline has not been witnessed in prior periods with similar price drops, so it doesn't seem to have much weight behind it.
The second problem with this argument is that we are just not seeing the same decline in COMEX silver. We know that investors that buy physical gold and store it at the COMEX are the same investors that buy physical silver and store it at the COMEX - so why not see the same declines in COMEX silver especially since it is more costly to store silver than gold? If the above argument were correct, we would expect investors to be removing their COMEX silver too, which is not what we are seeing.
This suggests that there is something specific regarding gold that is causing such large inventory declines. Our belief is that the reason for this large decline in gold stocks is because it is being used to satisfy gold demand outside the United States. Foreigners demand both gold and silver, but their gold demand is much greater than their silver demand and thus we see the significant decline in gold stocks that is not matched by a similar decline in silver stocks.
What does this Mean for Gold Investors
This is extremely bullish for investors in physical gold and the gold ETFs (GLD, CEF, and PHYS). As COMEX gold stocks drop, there is less gold to satisfy outstanding contracts which may cause a major problem in the future if these stocks are not replenished or the number of outstanding contracts does not decline. While we don't expect a COMEX default (though we cannot rule it out), we do expect the price to rise significantly if stocks continue to decline - rather than a default we see a large price rise to replenish COMEX inventories.
Additionally, we know that demand for physical gold across the world has been very strong - if this gold is being used to meet demand outside the United States then we may not have much longer before COMEX gold cannot be used to fulfill this demand. This is very bullish because if whoever is using COMEX gold to meet their physical demand no longer has it as an option, demand will have to come from elsewhere - which will push up the price.
Finally, we know that many hedge funds and retail investors have heavily shorted gold, anticipating prices below $1000. Unfortunately for them, we believe that the physical market is very tight and this physical market stress is about to push the paper price of gold much higher and cause many of these shorts to scramble and cover. The physical market may be much slower to affect price with the large volumes of paper gold being traded, but when it does catch up to the price the result is often violent moves.
As a gold investor, it is difficult to think of a better situation to own physical gold than when gold inventories are dropping to unprecedented levels and large short positions exist amongst investors who really have little knowledge of the gold market. For those investors seeking much higher returns, we suggest considering gold miners such as Randgold (GOLD), Goldcorp (GG), and Alamos Gold (AGI), though for the more conservative investors gold seems like a very good value at these prices.
Tommy
11 years ago
$CEF - Central Fund Of Canada: Down With A Discount
http://seekingalpha.com/article/1526652-central-fund-of-canada-down-with-a-discount?source=email_macro_view&ifp=0
Central Fund of Canada (CEF) has been providing a reliable stock market vehicle to invest in precious metals since 1961. CEF is a closed-end fund investing in gold and silver and is an alternative to GLD and SLV. As a closed-end fund, it can trade at a premium or discount. Please see chart below for the time series of how it is traded relative to NAV. It is easily seen that CEF has, for the last 8 years or so traded at a premium to its NAV. Now, in this precious metals sell-off, it has begun trading at a discount. It is currently trading at a 6.5% discount, which is close to the largest discount since June 2005. The question is whether this is an opportunity to buy gold and silver at a discount to their market prices or whether the discount widens further.
(click to enlarge)
(source Bloomberg)
First, let's look at the mechanics. The Fund makes it easy to calculate the NAV. The Fund's site provides all of the relevant information. Currently, the Fund holds ~1.7M oz of gold and ~77M oz of silver, plus ~$40M cash. Simply use the exact values from the site and multiply by current spot prices for gold and silver and then the cash to calculate total NAV for the Fund. Divide by the number shares, which is also given on that page. This is all straightforward. Be sure that you are using the spot price of the metals, not GLD, SLV or futures prices. Keep in mind that for gold, spot has recently traded slightly above the active futures price, which is unusual, particularly when the futures curve is in contango.
If one does some additional research, including reading the annual report [pdf], there is some key additional information to be aware of. First, management of the Fund will periodically sell additional shares. Check the notes on pages 11-12 regarding Capital Stock. On three occasions, in 2009, 2010, and 2011, additional shares were issued. On April 6, 2011 the Fund issued shares and that drove the premium down to zero and below (see graph above). The premium re-appeared but at a lower average level than where it had been since 2005. Offerings in 2009, and 2010, do not appear to have impacted the premium for Fund shares. One final important tidbit worth mentioning is also in the Capital Stock note: since October 1989, class A stockholders (the shares) can redeem their shares for 80% of the NAV of the fiscal quarter.
Down with a Discount
Now we can verify current market prices of CEF and its NAV and we see that we can get this basket of precious metals at a 6.5% discount to current spot prices. It is clearly an attractive proposition to purchase the metals cheaper than what the market is currently offering. CEF is a closed-end fund (I won't abbreviate it as CEF to avoid confusion with the Fund), and there is no creation/redemption mechanism for keeping the market value of CEF in line with its NAV. The only mechanisms available are investor rationality, the 80% redemption mentioned above and the ability of CEF management to issue more shares. Statistically, CEF has traded at a premium for the past 8 years or so and it seems reasonable that trading at a premium is "normal." At first glance, scooping up CEF at a discount seems like a no-brainer.
However, for all of that time, gold and silver have been in a bull market. During a bull market, it makes sense if investors were perhaps too aggressive in their purchases of gold- and silver-related assets. So it is worthwhile to look at CEF performance prior to 2001 when gold was at the bottom of its last bear market. Here is a graph going back to April 1986 (source: Bloomberg):
(click to enlarge)
Now the picture looks very different. One can see the premium seems to be correlated to the trend of gold. To get a better handle on this, I will create a series to proxy the "trend of gold" as the weekly close of spot gold divided by its 52 prior weeks' moving average less 1. This will give a percentage "premium" of the weekly close to the moving average. The idea being that it will parallel the percentage premium of the weekly closing price for CEF. The following graph shows the two time series (source Bloomberg).
(click to enlarge)
And here is a scatter graph with regression line. In both, there are some outliers, but the basic story that the premium of CEF is closely correlated to gold's trend is accurate; 77% of the sample can be found in either the top right or bottom left quadrants, meaning that direction matches, even if magnitude is less predictable.
(click to enlarge)
The Opportunity
There are two ways to take advantage of this. Choose CEF to get long precious metals as an alternative to buying gold and silver in some other way or to create an arb type position if one is neutral on metal. The key to this trade is that you need the discount to diminish. There is no yield or other advantage accruing to the holder (CEF does pay a small .01 annual dividend but it is small enough to effectively ignore). Currently, gold is 22% below its trend as I defined it above. For the indicator to go positive would require gold to bounce to $1600/oz; $1600/oz does not look likely in the short term.
I believe that 6.5% discount is a good entry point. It still comes with risk. At the extreme, CEF is willing to compensate investors with 80% of the NAV via a redemption process that is untried (as far as I know). There has yet to be sufficient discount to motivate investors to exchange. That makes a hard-ish floor of 20% discount and that seems unlikely, but not impossible. On the other hand, the market could print 10%+ discounts in another sweep down of precious metals and overall risk-off trading. My personal view is that gold is due for a bounce and quarter end could be the catalyst.
To construct an arb trade, one would need to buy an amount of CEF and offset it with an appropriate short in gold and silver. Based on the numbers from CEF, it holds 45.42 ounces of silver for every ounce of gold. Each share of CEF has .00666 oz of gold (1.7M oz / 254M shares - check data for exact figures). Table 1 shows equivalent positions. Note that equivalent positions means combined gold and silver positions vs. CEF position. This is because CEF holds both gold and silver. An example trade would be long 1450 CEF, short 450 SLV and short 100 GLD. There will be tracking error as the positions do not match exactly, but they are small relative to the discount.
Table 1: Equivalent Ratios
Per Ounce Per GC Future Per 100 GLD
Gold/GLD 1 oz 100 oz 100 shares GLD (9.6643 oz)
Silver/SLV 45.42 oz 4,542 oz 454 shares SLV (439 oz)
CEF 150 shares 15,013 shares 1450 shares
There are some advantages and disadvantages to using GLD and SLV (or other ETFs). The first advantage is that being short GLD and SLV accrues the expense ratio in your favor. That is, if gold is unchanged, the value of GLD declines over time to represent the loss of metal as the administrator removes some of the metal to pay for fees. In addition, the expense ratios for both GLD and SLV are higher than that of CEF, which is typically 0.31% (see the annual report for further details). Another advantage is smaller resolution; that is, one can trade smaller positions with more accuracy. For instance, trading the 100 oz future would require a mis-match of the 5,000 oz silver (SI) contract against a desired position of 4,542 oz. And, of course, any futures position held for some time would potentially require rolling contracts. The main disadvantage is that metals ETFs are taxed at a higher rate than futures. Check this article for a recent story about this. There is no way to address each individual's tax situation; this article addresses my market outlook and the mechanics of the trade. Please make a note of margin implications for putting on an arb structure as margin will increase on the short leg if gold rises and might cause an issue for an inappropriately funded account. Any potential trade is something an individual decides for themselves.
Conclusion
A look at the history of CEF premiums shows that its pricing is correlated to the trend of gold. That makes sense and it can be viewed as a bit of a sentiment indicator on gold direction. Gold and silver have sold off in a manner indicating liquidation. It is now just before quarter end and it seems reasonable that the timing might mark a turning point as institutions finish adjusting their balance sheets for the reporting period. Purchasing CEF at a discount to the market price of its assets is clearly an attractive proposition. Nevertheless, it pays to go into a trade with one's eyes open. It is reasonable that the discount could expand toward 10% or more if sentiment worsens. On the other hand, if one is bullish on precious metals, and precious metals do rise, the discount will likely disappear adding an additional 6.5% return to one's investments. The arb looks attractive to begin stepping into. My feeling is that it is not time to take a particularly large position, but it does seem likely that positions will get re-set or initiated after quarter end that will act to add liquidity to areas that have been stressed in this recent yield sell-off.
Additional disclosure: Short GLD, SLV for arb.
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