After correcting from above $1900 to below $1550, gold prices have undergone the necessary consolidation and now look poised to challenge the old highs.
Euphoria hit the financial markets as the news was announced of a one trillion euro bailout package. The large European banks jumped by as much as 20% in a single day increasing their market caps by billions. This burst of excitement followed through to the United States where the DOW leaped forward as the banking sector lead the way to higher ground.
During the first financial crisis whereby the like of Lehman Brothers failed we heard the war cry ‘Too Big To Fail’ trotted out by our political masters.
Gold prices push higher as once again the ineptitude of our political masters fails to deliver. German Chancellor Angela Merkel and French President Nicolas Sarkozy had scheduled yet another problem solving high level meeting, out of which their followers expected a stroke of economic genius.
The demand for silver remains very strong despite the regulators delivering an almost knock out blow when they changed the rules half a dozen times effectively inflicting margin calls on those who use margin.
One of main determinants of gold prices in the medium to long term is US real interest rates. US real rates are the rate of interest that can be earned on US Government bonds, minus the expected rate of inflation. One can monitor US real rates by watching the yields on Treasury Inflation Protected Securities (TIPS) and we watch them closely since they exhibit a negative relationship with gold.
We made our first purchase of First Majestic Silver Corporation (FR:TSX || AG:NYSE) on 9th Feb 2011 at $13.13 and decided to hold despite a rapid rise in the order of 92% gained within two months of purchase. As we can see from the chart the stock price has eased along with the correction in silver prices.
A question that we constantly wrestle with is, are gold producers correlated to gold prices as gold is their underlying asset, or are they correlated with the stock market? Is there safety in gold producers should the stock market in general experience a pull back? If so, why are the gold producers lagging behind the steady progress being made by gold prices at the moment?
Randgold Resources Limited (GOLD) is an African focused gold play engaged in gold mining, exploration and related activities in Africa with the company listing on both the London Stock Exchange and NASDAQ. Major discoveries to date include the 7.5 million ounce Morila deposit in southern Mali, the 7 million ounce Yalea deposit and the 5 million ounce Gounkoto deposit, both in western Mali, the 4 million ounce Tongon deposit in the Côte d’Ivoire and the 3 million ounce Massawa deposit in eastern Senegal.
Two of our favourite silver producers led the charge today, Endeavour Silver Corporation (EXK) up 9.25% and First Majestic Silver Corporation (AG) up 7.49% as silver prices bounced $1.53/oz in today's trading session.
Silver prices have gained 4.37% in today’s trading session and look to have found some support at the $34.00/oz level, which could form the platform for a re-test of the $40.00/oz level.
The debt problems now weighing on the Euro have inflicted a devaluation of around 6% this month with no recovery in sight for the PIIGS, Portugal, Ireland, Italy, Greece and Spain. The harder the ECB tries to badger and cajole the PIIGS into accepting a serious dose of austerity, the more the people, who will have to carry this burden, revolt.
