Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
I have received several emails this week asking my thoughts on the current price action in precious metals. Some subscribers are asking how low gold and silver might go in the short term and my honest response is “I have no idea.” Anyone that claims they can predict the short-term price movements in a market as manipulated as this one is blowing hot air. The banks can utilize leveraged paper contracts to take gold down to $1,200 and silver to $20 if they want to, in the short term.
However, they absolutely can not keep prices this low for very long, as free market forces will bring things back into equilibrium. In fact, recent take down attempts have been met rather quickly with buying from strong hands, much of it likely coming from China. While I still believe that the manipulators can create rather substantial take downs that scare weak hands out of their positions in the short term, they are becoming less effective and more impotent each day. This has been obvious in the charting, where buyers are stepping up to take advantage of these paper-driven artificial sell offs. I view this manipulation of paper prices as insignificant. Whether gold falls to $1,200 or only drops to $1,600 and bounces, I have no doubt it will continue to preserve wealth and continue to increase the purchasing power of those holding it over time.
I believe it is important not to give into emotions during corrections such as these. If you have been staring at your computer screen and stressing the price action this week, you are doing yourself a great disservice. I would suggest that your focus should be mustering the strength to stick with your convictions, ignore the noise and keep your eye on the longer-term picture. I see nothing wrong with hedging via put options or inverse ETFs, but I’ve found it easier and more effective to simply hold onto core positions and buy the dips.
I am convinced that gold and silver will eclipse their previous inflation-adjusted highs before this bull market is over. This means that gold will climb above $2,400 and silver above $150 at an absolute minimum. If we use more realistic inflation numbers such as those calculated by John Williams of Shadow Stats, the true inflation-adjusted highs are more than triple the prices listed above. Whether gold climbs to $8,890 and silver to $517 remains to be seen, but I believe we are likely to see the lower price targets listed above within the next 12 to 18 months.
If you agree with this assessment of the situation, then there is no reason to be concerned when silver falls by 5% or 10% in a week. When silver is trading anywhere from $150 to $517 per ounce, will it matter much if you bought at $30 or $35? Will the temporary decline that we are currently experiencing have any meaning at all?
When fear creeps in and you begin to doubt your investment beliefs, remember these numbers. Then go out for a long walk, read a book, play with your children or do something other obsessing over short-term price fluctuations in precious metals. It will most often drive you mad, mess with your emotions and cause you to make bad investment decisions.
Analysts are claiming that the recent weakness in precious metals is due to the strengthening of the economy and stock market, causing investors to move away from safe haven assets and into equities. There is also the assumption that the sovereign debt issue in Greece has been resolved in a neat and orderly way, so that the threat has been removed.
Nothing could be further from the truth, in my opinion. While the media is reporting only $3 billion at risk, the true impact of the Greek default is probably going to be measured in the hundreds of billions, if not trillions, and cause much more harm than is currently believed. The CDS settlement next week and future bond auctions will shed more light on the extent of the damage. And while there may be some deflationary impact from the bond haircut, the proposed solution to the debt problem is once again more debt.
And let’s not forget that the ECB just pumped over $1 Trillion into Eurozone banks to keep them from crashing the entire system. This was an unprecedented move from the ECB that will prove to be incredibly inflationary and bullish for precious metals. The ECB balance sheet is now at a record $3.9 Trillion, which is now more than a third bigger than the U.S. Federal Reserve’s $2.9 trillion and eclipses the 2.3 trillion-euro gross domestic product of Germany, the world’s fourth largest economy. Even if they manage the Greek default in such a way as to hold together the Ponzi Scheme of a financial/monetary system a while longer, they will soon be facing Portugal, Italy and Spain. I doubt these countries will be nearly as easy to manage.
Then, just when you thought there was light at the end of the tunnel, here comes Japan, the UK and the United States with their own monstrous debt problems that will surely blow up the system, if the smaller countries don’t do it first.
I hate to be so drab, really I do. But I refuse to drink the Kool-Aid. By the very nature of the monetary system, all people and nations will become increasingly indebted until the bankers soak up every last penny of wealth and then demand our slave labor to pay off the imaginary debt they have created out of thin air. The situation can not change course and get better suddenly, unless we agree to eliminate all debt, eliminate the FED and fractional reserve banking and begin utilizing some form of interest-free money. What are the chances of that happening?
So, the only resolution comes from cascading defaults or all-out hyperinflation. While things have been unfolding relatively slowly up to this point, I think most people will be shocked at how quickly the pace accelerates and how close we are to some type of tipping point. In either scenario, I want to be holding precious metals that are outside of the banking system and in my possession.
I also believe it is wise to consider other preparations to ride out the storm, such as food and water storage, gardening seeds, methods of self defense, etc. After kicking the can down the road for so long, if and when the system finally crashes, we are likely to go through a rather ugly transition period marked by bank runs, hyperinflation, civil unrest, food supply chain disruptions and other difficult challenges. You don’t have to become a hard core Doomsday Prepper, but taking a few common sense steps is entirely rational at this juncture. Specific details on how to prepare, with links for the top ten items to acquire, can be found in the Premium Member PDF guides.
It will keep you sane to ignore Bernanke and the mainstream media shills that continue to spew their nonsense. The debt situation in Greece is not resolved, QE is not over, gold is nowhere near a top and our economic problems are much greater than anyone wants to admit. While soaring stock prices are giving many investors the illusion of prosperity, there are plenty of less obvious signs that things are beginning to fall apart. One such event was recently pointed out by Bix Weir (http://www.roadtoroota.com), regarding the resignation and whistleblowing of Goldman Sachs executive Greg Smith:
What is VERY important about this article is the person who is quitting – Greg Smith.
“Greg Smith is resigning today as a Goldman Sachs executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa.”
Holy Cow Batman! It’s the HEAD of European Derivatives for one of the biggest CDS players in the world, Goldman Sachs! He’s running for the hills just days before the settlement of the largest CDS payout in the history of the industry! Lay this fact on top of the retirement of the CEO of the CME and the removal of the CME as a European Derivative Clearing Organization and you have one toxic brew.
I’ve been doing some research into the settlement process of CDS’s for the Friday Road Trip and from what I can surmise they call it the “Big Bang Protocol” for a reason! What a Cluster #!@*! When the DTCC came out and said this was only a $3.2B issue they totally left out all the Greek CDS’s that are not purchased to cover any specific bond investments…which is most of the Greek CDS market!
Another major catalyst is the developing trend of nations around the globe wanting their gold back from the United States. Germany and Switzerland are both looking to follow in the footsteps of Venezuela and repatriate their gold from the NY FED. What happens if the FED has already sold or lent out this gold, or simply refuses to give it back? Gold? What gold?
In getting back to the original topic of the current correction in precious metals, it is a non-event in my opinion. It still amazes me how fast investors lose confidence in gold during the slightest correction. The bears come out of the woodwork to proclaim that the bull market is over and everyone seems to panic, just like they did at $600 gold, $800 gold, $1,000 gold and so on. This is not to say that gold and silver can’t drop further from here, but the upside potential is magnitudes greater than the downside risk.
The chart above suggest that the upside potential for silver over the next several months is around $70, a gain of over 100% from current levels. Conversely, the downside risk (blue line, absent a crisis) is around $28 or (-14%). A drop to the red line which corresponds to the 2008 crisis bottom, would be around $23 (-29%) but only expected if another severe crisis unfolds. Given it is an election year for Obama, I believe the administration will do everything possible to avert or delay another crash until after November. Either way, with upside potential of 100% and downside risk in the 14% to 29% range, it is unclear why so many silver investors are panicking.
The bottom line is that the fundamental reasons to own gold and silver have not changed, but have only continued to strengthen in recent weeks. If gold and silver continue to fall to even lower artificially-suppressed prices next week, I will use this opportunity to buy aggressively, both physical metals and undervalued mining shares. The Gold Stock Bull portfolio has a relatively high percentage of cash waiting to be deployed and any drop below $1,600 gold and $30 silver will be seen as just such an opportunity.
I include this as the last paragraph in every newsletter, but it is worth repeating at this time:
“Remember to think like a contrarian, buy the dips, sell the rallies and never allow the paper shorts to shake you from your positions at temporarily suppressed prices. Gold and silver are nowhere near the end of this bull market and could easily top $5,000 and $250, respectively, before all is said and done. Corrections are a healthy part of any bull market, allowing the bull to rest its legs and providing a base from which the next upleg will spring.”
Despite the negative tone of this email, I want to express that I am optimistic about the future. I believe that the coming financial collapse is necessary to cleanse the system and start over with something magnitudes better. I hope we can implement a system that has long-term sustainability, respect for the environment and a greater focus on cooperation, community and compassion. If you are interested in some potential solutions, I recommend this recent article and assessment of our current situation by author Daniel Pinchbeck: http://www.realitysandwich.com/answer_henry_baum
I believe the leading two films/movements for new solutions are the ones listed below. Of course, I don’t agree with everything within these films, but they both break down the flaws of our financial system in very clear and concise ways. I think there are some really brilliant solutions proposed and I urge you to open your mind, suspend any bias and see what you think.
Thrive: What on Earth Will it Take?
Zeitgeist: Moving Forward
If you would like to receive our monthly contrarian newsletter, view the Gold Stock Bull portfolio, receive email alerts when we trade and gain access to a number of detailed guides to surviving financial crisis, click here to become a premium member.
