Golden Relief Rally Ahead of FED Tapering Decision
To taper or not to taper...?
That is the question the financial world wants answered. With the two most manipulated stats in the Western Financial System as targets; employment and inflation. Tapering will start when the powers that be want tapering to start. Basically on someone else's whim. But if you are looking at the clues, like the fact we are even talking about tapering. It seems like those in the know have decided that enough is enough. What I find must amazing is the abrupt turnaround in policy in less than a year. From QE to infinity and beyond to talk of tapering QE, in less thatn a year. Trying to predict anything that the govt has control over is as easy as reading people's minds. It is like trying to predict where the little white ball on the roulette wheel is going to land... only the house knows when. They are the only ones who control the magnet underneath the roulette wheel which tells where the little white ball is supposed to land.
It's house rules and all the house wants us to know is that tapering is indeed imminent. Nice for us regular folks to finally know about tapering so we can sell our gold $300 cheaper than the inside sellers front running the FED this February. Who thinks Bernanke, Yellen and Summers all sold their gold in February? Just joking, Bernanke doesn't own any gold, but it really does make your mind wonder and wander about the dramatic sell off this February in the paper market. Real FED policy gets churned out months in advance of the FED meetings. The meetings are only a stage to jawbone the market where the powers that be at the FED feel they want it on a given day.
Sometimes you get lucky... but only when the house wants you to. In any event, tapering looks like it is a reality and will most likely be ushered in with a new Federal Reserve Chair. September should bring us a little more clarity on this issue. Next week's FED meeting is a non starter... you might as well keep your vacations plans... all eyes are to September.
Which leads us to the other burning question..... "who is replacing the 'fired' Ben Bernanke?"
Most would predict Janet Yellen, while she is the obvious choice and has been there with Bernanke through out the Quantitative Easing Policies and should be able to smooth the transition to a more normalized system. The 'hated' Larry Summers has been appearing in headlines as Obama's man recently. Having 'his guy' as Chair at the FED may be too good of an opportunity to pass up. It would certainly make the Obama administration a much more powerful administration having much greater influence in monetary policy. While Yellen is the logical choice, Obama knows and likes Summers while he does not know Yellen. This could hold a lot of weight as these two positions have to be on the same page or that may be how Obama justifies it. Who knows?
OR
Tapering as Soon As September
We might not get tapering in September, but at this point in time, tapering is pretty much set in stone. Anyone holding on to thoughts that the US would continue to print money through QE style asset purchases is going to be sorely mistaken.
So much for the Buzz Lightyear Theme... "QE to Infinity and Beyond."
Currently, the only nation who is engaged in currency debasement are the Japanese and that is not enough to make me want to line my pockets with gold. Certainly not yet at this price which is still well above the $500/oz price when I first starting writing about the precious metal back in 2005/2006.
That being said.....
Gold has made an important seasonal bottom
It was a little bit later in June this year, in fact POG took to the very last trading day of June to make a bottom. July saw a modest $130 rebound in the price to $1330 and has now broken the accelerated downtrend it started in February of this year. Many quality gold producers (whose true cost of production is well under $700 per ounce and not the $1000 to $1200 that gold producers are apparently trying to convince the market) are still at fire sale prices and most have technically put in a double bottom.
If this truly is the bottom for POG, (and I am not convinced it is)... the gold producers are still at FIRE SALE PRICES and should continue to rally while POG has some strength. Even if the POG isn't at a bottom and does drop to $1,000 and under... there certainly is more conviction with the Gold Stocks. There are some really good names out their whose costs are well under $1,000 that I would certainly take a shot at going into September's FED meeting. Although I would have sold all gold assets before the next FED meeting.
Why is GOLD ultimately going lower?
It is a debt issue.
Ultimately, gold soared as the US debt spiraled out of control and ultimately, as the US deals with their deficit/debt issue or doesn't deal with it... will drive the price of gold. Simple. End of story. Nothing else drives gold more than out of control US govt spending. Yes there are other variables that play into this trade at certain times like the risk trade or a declining USD or inflation; but the number one thing that drives the long term out look of gold is 'out of control US spending.'
Bernanke is printing massive amounts of money. He is injecting an unprecedented $85 Billion per month into the system. To the layman you would think that this unprecedented expansion of the balance sheet through monetary expansion would send the USD spiraling down to its death like in Zimbabwe. But there is a huge difference. The biggest being that QE has not affected the money supply. All of the QE money hit the banks' balance sheets and stayed there. Propping up America's sickest financial institutions and pumping up the biggest US Banks balance sheets to be meet Basil requirements. None of that money ever really went into the system. None. In fact one of the reason's Ben Bernanke stated for end QE in the 'tapering' meeting was that the banks are now "Basil Compliant".
You can't have out of control inflation from record money printing if none of the money ever hits the streets. It just cant happen. Everyone had pictures of Helicopter Ben throwing money from a helicopter into the streets when Ben first came to the FED.... In reality it worked quite a bit different. The common man did not benefit from QE except that there is a still bank on his block to who keeps sticking its hand in his pocket. Ben basically stood at a giant podium telling the world he is throwing all this money out but in reality the cash feel into the front row of small gathering which was dominated by the biggest US banks. Print all the money you want Ben.... because as long as the choke point at the banks remains in place. There is no impending inflation. Hell, if the money doesn't even get into the system and is just sitting the the US banks. There is very little argument the USD should be devalued because there is still the same amount of demand (if not more) for the same US dollars.
So what does this all have to do with gold going lower? A lot. No inflation. No monetary debasement.
And the fact that the biggest thing diving gold and the REAL REASON behind QE, 'out of control US spending' is disappearing faster than the ice cap on Greenland. And in spite of things getting worse for the majority in America, the economy continues to be a resilient 'corporate economy' being the best of breed among the global economy. American companies continue to lead all global developed and developing companies. And one of the big reasons they aren't on the pickle the rest of the world is because they QE'd their way to Basil compliant and QE'D their deficit during this time. In fact it really smoothed out the downturns as European Banks struggled to meet Basil complaint the old fashioned way. Talk about a competitive advantage.
Ben Bernanke no longer needs to finance the US deficit. The US banks are Basil compliant. The Sequester has come and gone and was relatively painless seeing the US deficit go from $1.1 trillion to the current $817 Billion in 6 months. A massive reduction in the deficit in just half a year. In fact I am projecting that by the time the Obama administration has left office, the US will be very close to eliminating the deficit entirely and may even by in a surplus. The Obama administration has stated they want to reduce the deficit another $800 Billion by the end of his term which will potentially put the US in a surplus if the US economy continues to grow.
Don't think they can cut another $800 Billion...? US spending amounts to $3.5 Trillion... The US GOVT only has to reduce its budget by 23% to achieve this goal. I have full confidence any country can tighten the belts 23%. I have always said that the US debficit problem isn't a revenue problem. It is spending problem and I have full confidence given the current trajectory that this is achievable.
US Deficit Same Size as QE... Coincidence?
If you hadn't noticed, the size of QE was the size of the US deficit because no one wanted to buy US treasuries while their spending was out of control. The only other alternative for the US was Greece like interest rates if QE wasn't enacted upon. The USA could have easily gone through a couple of Greece style crisis during the last 5 years and seen rates go to 6 or 7% just like Italy. But when you are at the center of the financial system, you can print money to solve all your problems and get away with murder. No one else can do what the US did, except maybe Japan.
Ben Bernanke is now leaving the Fed because QE is now no longer needed. The US can still enjoy low interest rates because they have their spending under control and gaining back confidence of the international financial community. They can now grow their GDP into their debt and slowly roll it over while slowly letting rates raise over the next decade. So some of you out there think they have to continue to buy bonds to keep rates low... I don't buy it... why?
Because they have....
- Restored confidence to the system
- Fixed their banks
- Maintained the integrity of the US dollar
- Are leading a global economic recovery while most countries still struggle
If only everyone could just print money to save their banks. But alas... only the Banker at the game of monopoly can do this.
But in the game of monopoly... if you did do this... other players would quickly call you out as a cheater. When did the world get turned so upside down that cheaters can cheat openly and the biggest cheaters of all end up winning the most? Doesn't seem fair unless you are American.
So the US have their spending under control, the no longer need QE to prop up the financial system AND their economy is the best of the bunch in a global economy. So you tell me?
BUY GOLD????
I can remember Peter Grandich's favorite line being... "everyone knows the USD is dead but the USA."... that was when gold was at $500 an ounce. The USD is no longer dead and gold is at $1300 per ounce. Doesn't really seem like a great investing environment for gold to me. Not a long term one... The only thing propping up the price of gold is supply and demand and now that demand is waning, the price of gold becomes much more a reflection of the price of supply which is why the World Gold Council has colluded with the worlds biggest gold miners like Anglo Gold Ashanti and Barrick to artificially inflate their expenses in this new category loosely called "All-in Attributable Costs".
Right now these giant gold companies are writing off billions and putting it right into their cost of goods sold which defies pretty much every accounting principle I was taught in school. Certainly the timing and matching principles are being violated. These giant gold companies have made billion dollar mistakes and hav somehow justified those mistakes as regular expenses. They misforecasted the market, overpaid for assets, put billions into projects that may never mine and none of these miners bothered hedging when gold hit $1900 an ounce. In fact now only a few miners are actually thinking... "(hmmmm maybe hedging might be a good thing)"
These executives have made billion dollar mistakes in any industry would be written off as an extra line item, but in the gold industry , apparently because CEO's are 'special' they get special treatment and this a regular cost of doing business.
Well maybe if you have gone FULL RETARD.
And Barrick is now warning that the Pascua Lama charge may hit $5.5B. With the new rules defined by the World Gold Council... this is just a regular cost of doing business and an easy way to show these huge non cash impairments that dramatically increase the cost of gold. Don't be fooled. If a gold miner's cash cost is $600 and their all-in cost is $1000... they will keep mining gold until POG hits $600 and not $1,000. The gold industry is in collusion to artificially inflate the gold price so they can hedge into the retail market and pyshcology put in a floor for gold above $1,000. Why? Because they know they same thing I know. POG is only going one way over the next 3 to 4 years and maybe even longer... and that way is down.
Going Back to the gold Standard.... NOT!!!
Does anyone still believe the Gold Bug myth that we are going to the Gold Standard? Just because gold was on the rise or is on the rise does not mean any one country would adopt the gold standard or any individual for that fact. Gold is a financial asset that helps you have keep a diverse portfolio and helps protect against increased monetary inflation. You would have to have a complete meltdown for gold to get much higher than double the industry average cost of production as the law of supply and demand always dictates prices must come back into equilibrium... and anyone who follows the gold market knows that gold prices have been out of whack in relation to almost every currency for the last 10 years and only now are things starting to correct to a more nomralized range of prices. Which seems to me is most likely some where between $700 to $1000 once gold finishes selling off. Anyone trying to convince you of that indusry costs are $1,200 has an agenda. They are not looking out for your best interest!
Anyone trying to convince you we are going back to the godl standard has clearly not thought things through and doesn't understand what the original Bretton-Woods agreement was about and tried to solve. There just wasn't enough gold to expand the monetary system as the same rate as the population expanded. There was no nefarious reason at all... simple put... gold was an old relic and had worn out its usefulness in the monetary system. Think about it. Gold is finite. There is only so much of it above ground and only so much of it you can mine. The Earth's population is continually expanding and has more than quadrupled in the last 100 years. There is no way the financial system could have grown to match the population curve with every note being linked to gold. It just couldn't happen. Everyone would be chasing after continually less dollars each subsequent generation which would eventually lead to war between impoverished nations.
The system does work as intended when it is not abused. And to put another nail in the coffin of gold... the only other reason to own gold is to have it as an alternative currency to protect yourself against goverment likethe recent Cypriot bank deposit scandal. Bitcoin in the span of 4 years has overtaken gold as the alternative currency of choice. Who wants to pay $5 premium on every silver dollar? How can you spend a silver dollar? You can't. The biggest reason gold and silver are failing is that they do not work as alternative currencies. Their value is not legal tender. You just can't spend it. You can spend bitcoins. You can easily transfer bitcoins into cash with a small transaction fee... the same can't be said for precious metals.
Gold and silver... no matter how you cut it... just does not meet the definition of money.
Gold Bugs are like a broken clock. They are right twice a day because its always two o'clock twice a day. They have again completely missed out on what has happend and now that we are at the end of the gold/debasement cycle.... they still think gold is going higher because they don't truly understand the godl market.
Take a step back brother... a rational thinker looks at the drastically shrinking US deficit and goes...
"UH-OH. QE is not going to last too much longer."
And then they ask... How can this be good for Gold? Bottom line... is its not.
And then they ask... How can this be good for Gold? Bottom line... is its not.
Three gold stocks to TRADE the recovery
In my opinion high grade is the name of the game and it is essential for low cost mining in a period of rising fuel and labor prices which low grade operations are much more exposed to moving 10 times the rock of a high grade mining operation. Barrick's Pascua Lama, Kinross's Tsiast and GoldCorp's Penasquito are all low grade billion dollar boondoggles. Going after mines with grade is a way to protect yourself from further SP declines and companies like San Gold Resources SGR going from $5 to the current $0.10. Although SGR may not be the best example as they are a company that does have grade.... just not enough of it.
A great way to play this trade is to buy the best of the gold stocks for a 4 to 6 week rally to the point where they originally broke down in mid April. Technically they may not get all the way back to that point, but the SP's in all the gold stocks will try and 'fill the gap' back up.
I have 3 speculative gold trades for the next 4 to 6 weeks. If you are long POG or gold stocks after that... you are playing under House rules... remember that. Sometimes the market seem to change on a whim.
Lake Shore Gold LSG.TO
Share Price... $0.35 Breakdown Point... $0.55
Shares Out... 416.6M
Market Cap... $145M
Gold Production Guidance for 2013...
- 120,000 to 135,000 ounces
- ~4.5 g/t average grade
- $700 to $825 cash cost per ounce
- 2,800 to 3,000 tpd throughput capacity
I rank LSG ahead of KGI just because of its current price and may represent a better short term trading opportunity. LSG has the advantage of a bulk situation underground while KGI is mining narrower veins.
Kirkland Lake Gold KGI.TO
Share Price... $3.59 Breakdown Point... $5.70
Shares Out... 70.2M
Market Cap... $251M
Gold Production Guidance for 2013...
- 150,000 to 180,000 ounces
- 1.800 to 2,200 tpd throughput capacity
- ~10 g/t average grade
- $800 to $900 cash cost per ounce
Detour Lake Gold DGC.TO
Share Price... $11.49
Shares Out... 138M
Market Cap... $1.56B
Gold Production Guidance...
- 260,000 to 320,000 ounces
- 55,000 tpd throughput capacity
- ~0.75 g/t average grade
- $800 to $1000 cash costs
Christopher Skidmore
Beat the Market Stock Picks
