By: Jordan Roy-Byrne, CMT

Even despite the tremendous recovery in precious metals shares, I still find value across the entire spectrum. The various indices (HUI, XAU & XGD.to) as well as my proprietary junior index (shown below) all rallied back to or near the 2008 high. Since that point, Gold is about 10% higher. It is more than 10% higher when priced in foreign currencies. Meanwhile, Oil, (which is 25% the cost of mining) is down about 30% (from March 2008). I bet most other cost inputs have declined in price.

Assuming other things are held constant, the sector indices should be trading materially higher than their 2008 and 2010 highs. The average gold producer is set to produce excellent cash flow and margins. Simply put, Gold is higher and costs are lower.

Interestingly, the best value is now at the very bottom of the food chain. Some people call these the crap juniors or the garbage juniors. I refer to them as the lower tier juniors. While the seniors and quality juniors have essentially recovered their losses from the crash, the lower tier juniors have barely recovered. Most of these stocks could rise five-fold and still be well below their 2007 or 2008 high.

That being said, these stocks are a huge risk. Most of these companies will never produce an ounce of anything, nor will most define a resource that has a good chance of ever coming out of the ground.

Why am I writing about them?

At this juncture, 95% of the risk has been priced out of these stocks. They fell more than 95% and have barely recovered. Yet, in the same time frame, Gold rose $500 and to a new high. Moreover, gold producers should be seeing record margins in 2010 and 2011 and that would put them in a better position to acquire large and small juniors.

As it is, these stocks (the ones with real prospects) are already significantly undervalued. If these companies can execute and Gold rises to $2000/oz, their share prices could rise ten fold.

Here is an example of one particular company. The stock is in the latter stages of a bottoming formation. The only problem I have with the company is that its fully diluted share count is about 70% more than its current shares, which is typical of lower tier juniors. Nonetheless it has a seasoned management team. The company is a small producer with a plan to increase production and define their resources.

In our premium service we have started to focus a bit of attention on these lower tier juniors, in search of value and quality. We believe that the bulk of one’s gold stock portfolio should be in the quality junior producers. However, now is the time to take a look further down the food chain. These types of stocks have yet to move. Odds are they probably will when Gold makes its next move.

Jordan Roy-Byrne, CMT

http://www.thedailygold.com/newsletter

Trendsman@Trendsman.com

By: Adam Hamilton, Zeal Intelligence LLC

The US Mint’s popular American Eagle gold and silver coins remain in high demand by US investors. Working to overcome production bottlenecks, the Mint radically stepped up operations last year to the highest levels by far of this entire secular gold bull. The Mint’s Eagle sales data offers interesting insights into physical precious-metals demand.

Back in the early 1980s, foreign gold coins like the famous South African Krugerrand were soaring in popularity. The US Congress didn’t want the United States to be left out of the prestigious national gold-coin realm, so it crafted the Gold Bullion Coin Act of 1985 which President Ronald Reagan promptly signed into law. It mandated that the US Mint produce a family of 22-karat gold bullion coins containing one, one-half, one-quarter, and one-tenth of a troy ounce of pure gold.

The gold bullion for these coins had to come from the United States, first from gold mined in America within the past year and if this source isn’t sufficient then from official US gold reserves. Most importantly, this law required the US Mint to “mint and issue the gold coins … in quantities sufficient to meet public demand”. The Mint got to work and sold its first Eagles right on schedule in October 1986.

For the next 22 years without interruption, the Mint dutifully sold Eagles and generally achieved its mandate. Per the GBCA the Mint couldn’t sell its first coins until October 1986, but it spent the first three quarters of that year minting these new coins so it had huge stockpiles to sell right out of the gates. And of course gold languished in a long secular bear in the 1980s and 1990s, so naturally investment demand wasn’t very robust.

But in the 2000s as today’s secular gold bull started powering higher, investment demand for gold Eagles grew. In the early years the Mint didn’t have any real problems meeting demand. Between its fresh supplies and existing Eagle coins that investors sold back into the market, Eagles were easy to buy. This was even true leading up to the dreaded Y2k changeover, when gold-coin demand soared on wild fears.

But abruptly in August 2008, the US Mint stealthily announced it was temporarily suspending gold Eagle sales. This ignited a firestorm amongst conspiracy theorists, and even spilled into the mainstream when the Wall Street Journal ran a story on page C1 called “The Eagle Has Been Grounded”. Many commentators sensationally spun this Eagle shortage into a broader physical-gold shortage, but it was truly just an Eagle shortage.

In the year and a half since that troubling Eagle suspension, the Mint has faced a fabrication bottleneck. While gold in the form of large 400-ounce bars that central banks and ETFs use is common and always readily available, the Mint’s suppliers couldn’t produce enough planchets (blanks) for one-ounce Eagle production. These are the flat disks of 22-karat gold that are ultimately stamped into the beautiful coins we all love.

The Eagle shortages have been very frustrating for American investors. Having laid up my own gold Eagle hoard way back between 1999 and 2001, I didn’t experience these shortages firsthand. But I sure talked with a lot of investors in the last couple years who were very discouraged and upset by the Eagle shortages and resulting high premiums. They made new physical-gold investment a big hassle at times.

I have continuously recommended one-ounce gold-bullion coins to our subscribers since May 2001 as the foundation for every long-term investment portfolio, so I’ve been a vocal critic of the Mint. It wasn’t following the law and providing “quantities sufficient to meet public demand”, which was inexcusable. In last year’s essay on this same subject I discussed these problems in more depth. It looked like the Mint was just sandbagging, not trying hard enough to produce the required Eagles.

So as I started gathering the US Mint’s Eagle sales data for this essay, I expected more of the same. But amazingly, the Mint finally seems to be getting its supply chain sorted out! Based on 2009 Eagle sales, the oft-lamented fabrication bottleneck finally appears to be opening back up. After that rude awakening of having to illegally suspend Eagle sales in August 2008, the Mint has started taking this gold bull seriously.

These charts show the US Mint’s monthly sales of gold Eagles and then silver Eagles over the last decade, encompassing the powerful secular gold bull. This data is superimposed over the daily gold and silver prices for reference. In addition, the annual averages of monthly Eagle sales are noted for each calendar year. Since its summer 2008 troubles, the Mint has really started getting its act together.

Back in the early years of this gold bull, the Mint’s gold Eagle sales were modest yet rising. In 2000 for example, the Mint only sold 165k ounces of gold through its Eagle program. Monthly sales averaged less than 14k ounces. In 2001 surrounding gold’s multi-decade secular-bear lows, sales improved to 325k ounces. Yet at 2001’s pathetic average gold price of $272, this only represented $88m worth of gold Eagles. Only a tiny fraction of hardcore contrarians wanted to invest in gold after such a long and deep bear.

But as gold gradually started climbing after today’s secular bull was born near $257 in April 2001, gold Eagle demand naturally picked up. While this data merely shows Mint sales, not underlying demand, over time they are probably a decent approximation of demand. Investors would go to coin dealers looking for Eagles, so the coin dealers would order Eagles from their distributors, of which an elite group of 10 wholesalers were authorized to order directly from the Mint. So the Mint’s production supply probably roughly matched end-investor physical-coin demand growth.

Provocatively Eagle sales fell off in 2005, 2006, and 2007. This lull is really odd, and I still haven’t found a great explanation for it. If gold had been flat over this span, it would make sense for new-investor enthusiasm to wane. But in 2006 gold soared to new bull highs yet the Eagle sales still fell sharply. That year, gold rallied 23.1% yet freshly-minted gold Eagle sales plunged 41.9% to 261k ounces.

One possibility is the birth of the wildly-popular GLD gold ETF diverted some small-investor gold demand from traditional gold coins to this tracking vehicle. GLD was born in November 2004, so its early years which saw huge GLD demand growth indeed coincided with dwindling Eagle sales. But on the other hand, this model breaks down in 2008 and 2009. Although GLD demand and its gold bullion held in trust for stock investors soared, so did traditional bullion-coin demand simultaneously. There is no sustained GLD/Eagle correlation.

While physical gold coins held in your own immediate physical possession are infinitely safer than any paper-gold vehicle like an ETF, in all but end-of-the-world scenarios both coins and ETFs have functionally-identical impacts on investment portfolios. They each mirror gold’s price moves and lead to nearly equal gains or losses. In normal times when markets were functioning well, many investors apparently preferred to get their gold-price exposure through paper-gold vehicles like GLD.

But starting in the summer of 2008, general faith in paper markets was seriously rocked. The bond panic, followed by a once-in-a-century stock panic, scared investors half to death. There were fears of the entire markets seizing up, of a new depression. It is provocative that physical-gold-coin demand started soaring to bull records just as the financial markets started to implode. Incidentally, GLD’s holdings were also growing through the panics, so it wasn’t a shift out of the ETF into Eagles. Other investors wanted physical.

While Eagle demand as indicated by Mint sales started picking up in mid-2007 as gold rallied to new bull highs, it didn’t surge dramatically until the summer of 2008 when mortgage behemoths Fannie and Freddie were on the verge of bankruptcy. In the first half of 2008, monthly gold Eagle sales averaged 33k ounces, which was in line with bull precedent to that point. But in the second half as the panics erupted, the monthly-average gold Eagle sales skyrocketed to 111k ounces! As these bull-record levels show, a paper crisis led investors to rediscover the unique merits of physical coins.

In the Mint’s defense regarding its August 2008 suspension, the Eagle demand spike driven by the panics was far beyond anything yet witnessed in this gold bull. It was essentially impossible to forecast, like once-in-a-century stock panics. Yet in hindsight, the Mint adapted more quickly than its critics like me have given it credit for. It produced 50k ounces of gold Eagles in July 2008, 86k in August, 113k in September, 122k in October, 117k in November, and 176k in December. As you can see in this chart, these levels were way beyond bull-to-date norms.

And then in 2009, the Mint sustained this radically-higher panic-driven output. Last year its monthly gold Eagle sales averaged 119k ounces, a level well above even the previous extremes prior to late 2008. 2009’s 1425k ounces of gold Eagles represented a staggering 65.6% year-over-year growth rate. At last year’s $974 average gold price, this equates to $1388m worth of Eagles (16x 2001’s levels)! December 2009’s 232k ounces hit a new monthly bull record as well.

I came into this week fully expecting to be disappointed again by the US Mint’s performance, but actually 2009 was very impressive. I never thought I’d write this, but kudos to the US Mint! The Mint indeed took the fabrication bottleneck encountered in summer 2008 seriously and ramped up its suppliers’ blank production. I don’t know if today’s gold Eagle production is high enough to meet demand yet, but the trend has certainly turned in the right direction.

Even more important for gold investors are the implications of the sustained high freshly-minted gold Eagle sales over the last 19 months or so. The Mint couldn’t sell such high numbers of gold Eagles unless wholesalers were buying them. And wholesalers wouldn’t take the risk of holding huge inventories in this volatile gold market, so they must be seeing serious demand from coin dealers. And coin dealers are only buying because retail investors’ appetite for physical-gold investment is growing.

Even before gold broke decisively above $1000 last autumn, gold Eagle demand remained very strong near panic levels. This was despite consolidating gold prices, the ugly hit US-dollar gold took in the stock panic, and the competition from paper gold-tracking vehicles like GLD. And it is not hedge funds buying one-ounce Eagles, their premiums and transaction costs are simply too high for bulk purchases. It is individual retail investors. Physical-gold investment demand is strong, a very bullish omen for gold. Read More…

By: Gordon Gekko

Evidence seems to be mounting that we are headed towards some sort of implosion in the paper Gold market, and perhaps the currency/bond markets in general. Let’s take a look:

Jacksonville, FL based EverBank – a bank with approximately $8 billion in assets and 1800 employees according to the company website – recently sent this notice to customers (courtesy of Warren Bevan):

“Non-FDIC Insured Metals Select Changes” -
Section 6.3.7. General Terms: We have added language clarifying our right to close your account. We may close your Metals Select Account at anytime upon reasonable notice to you. If we believe that it is necessary to close your account immediately in order to limit losses by you or us [GG: We really don’t give a s**t about you; it’s us that we care about], we may close your account prior to providing notice to you. Notice from us to one of you is notice to all of you [GG: the nerve of these people!]. If we close your account, we reserve the right to convert your Precious Metals to U.S. dollars and tender the balance to you by mail [GG: I am willing to bet my entire Gold stash that when you receive these "converted" dollars, they will be nowhere near the market price of physical. What did you think that whole "limit losses" thing meant?] .

If you have a “Non FDIC Insured Metals Select” account with these people, you can pretty much say goodbye to any chances of ever seeing your metal. This is a clear sign that the (already tight) availability of physical metal at the manipulated Comex futures paper price is in danger of vanishing altogether. Think about it. What is the scenario in which they avoid catastrophic losses while at the same time sending you the US dollar value of the metal? When the official or Comex price has fully decoupled from the physical price. Expect to see more such notices from banks offering Metals “Investments”.

Citibank recently issued this notice to its checking account (remember the type of account where you thought you could withdraw your money whenever you wanted? Well, not anymore) customers (via Market Ticker):

Withdrawal Notice:

We reserve the right to require seven (7) days advance notice before permitting a withdrawal from all checking, savings and money market accounts. We currently do not exercise this right and have not exercised it in the past.

Hi Mish

I work in the construction business and something has been creeping to the forefront of my attention for the past few weeks and now it seems to be moving full steam ahead.

Banks are forcing developers/builders (especially smaller ones) to give up their properties (unsold homes and lots).

Banks say the reason is that the properties in question are no longer performing assets. I am sure there are some loans out there that are not performing and the owners are going under. I am equally sure that there are plenty of developers that are still selling homes - just not at the pace originally planned on the pro formas.

Having inside information on one of these scenarios that happened today, I cannot help but wonder what is really going on? The bank told a small developer/builder I work for that they were taking back his ongoing subdivision.

He is selling houses and updated pro formas would indicate that the current sales pace would exhaust all remaining lots within 33 months. Yet the bank stated they would only give him until April 15 to find alternative financing. The bank is also willing to let him buy the subdivision at a 33% discount to what is currently owed.

If he is unable to obtain this backing, the bank will let him walk away without penalty or consequence so they can write it off.

I have been on the phone trying to put some of these pieces together. It seems there are many banks doing the same thing. However, there is apparently no interest [or ability - Mish] from anyone wanting to pick up land/lots at 30% - 50% discounts to today’s prices.

Another interesting point is that the banks all state that they must have these situations written off or taken care of by the end of Q2.

Looks to me like DaBoyz are calling in the loans while the currency still has some value. Does the government plan some type of overt currency devaluation or expect the dollar to collapse on the currency markets of its own sorry weight? The cracks are already appearing in the Bond market. Foreigners are increasingly fleeing the Treasury auctions. The only thing keeping them going is manufactured “deflation” fears from time-to-time. A recent 30 year auction (10th February, 2010 to be precise) practically failed. This is what Mr. Denninger had to say about it:

Bad. Actually, let’s go worse than bad and call it what it is - by any definition this is just one step off from “Failed.”

The more-worrying factor here is that we’ve got this “mystery” direct buyers out here again taking nearly 25% of the offered amount (who is bidding for that undisclosed?) and another 11% taken down by The Fed for the SOMA account.

Yet even with this Treasury had to pay up to get it to go and the bid-to-cover was anemic at best.

Given the Primary Dealer system we have in this country, any BTC under 2.0 is an effective fail. To get an auction that behaves in this sort of fashion, complete with mystery direct bidders and heavy SOMA (Fed) participation, yet Treasury has to pay up in the form of a significantly higher coupon is not a good sign at all.

And this is what happened on 23rd February, 2010 for a 4-week $37 billion Treasury Bill auction (Per Graham Summers):

There are times in life when one witnesses something so outside the scope of normal experience, that at first you don’t see it.

Captain Cook’s diaries tell us that upon first seeing his ships offshore in Australia, the aborigines expressed “neither surprise nor concern.” Cook notes that it was not until he and his men approached the shore in smaller, more familiar vessels that the villagers reacted, arming themselves as “the sight of men in small boats was comprehensible to them: it meant invasion.”

Well, I had a similar experience during yesterday’s bond auction.

Roughly, 27% of the auction took place at the highest rate. This means nearly one third of the demand from competitive bidders (those who care about yield) came at the HIGHEST yield that was accepted. In plain terms, this alone tells you that investors want higher yields from Treasuries since nearly a full third of the debt issuance took place at the highest REQUIRED yield.

Of the competitive bids (meaning those bids coming from folks who care about yield), roughly 70% went to Primary Dealers (investors who HAVE to buy the debt and who usually turn around and try to sell it afterwards). To put this number into perspective here is the percentage of competitive purchases made by Primary Dealers in the last four 4-week Treasury issuances:

…yesterday’s auction featured MORE buys from Primary Dealers than almost any of those occurring in 2010. Remember, Primary Dealers HAVE to buy Treasuries. So to see them buying a high percentage of Treasuries at debt auctions means that few investors who can pick and choose what to buy are actually looking to buy US debt.
Of the remaining competitive buys (about $8.86 billion), only 32% came from Direct Bidders or those who bought debt directly from the Treasury: orders that can easily be tracked. The other 68% ($5.9 billion) came from Indirect Bidders: folks who we cannot track.

Even more bizarre, only $5.9 billion in Indirect Bidder competitive buys were ACTUALLY OFFERED. So we had a 100% acceptance rate for Indirect Bidder competitive buys. Read More…

On March 11, I spoke at the annual Austrian Scholars Conference, sponsored by the Ludwig von Mises Institute. It was gratifying to see so many attendees that they could not fit into one room.

The Mises Institute is a high-tech outfit. They set up a video camera, and the speech appeared on monitors in other rooms. It will also go on-line within a few days. This will be free. Anyone in the world with Web access can see it from now on. This is a great model for communication and education.

My topic was “Keynes and His Influence.” My goal is to recruit half a dozen bright young scholars to begin a joint project in refuting Keynes’ General Theory of Employment, Interest, and Money (1936) line by line. I have set up a department on my Website to this end.

I tried to make four main points in my speech.

1. Keynes’ influence has been indirect (mediated).
2. His legacy will soon be uniquely vulnerable.
3. Only the Austrians called the 2008 recession.
4. It is time for a comprehensive refutation of Keynes

THE MOST INFLUENTIAL MODERN ECONOMIST

There is no question that John Maynard Keynes was the most influential economist in the 20th century. Yet his influence has been different from what economists and the intelligentsia have believed.

In a filmed interview of Keynes’ main rival in 1935, but not in 1965, F. A. Hayek, an Austrian School economist, made an important point. Keynes was influential in 1946, the year of his death, but his influence was not yet overwhelming. That came later. Hayek did not say how much later. It came within five years. You can see the video here.

The key to Keynes’ influence was the 1948 textbook written by Paul Samuelson, Economics. It became the most widely assigned college textbook in economics. It had no major competition for at least three decades, and its competitors were also Keynesian in outlook.

Samuelson promoted Keynes’ ideas, but he used a very different format. He did not quote Keynes at length. He presented what has since been called the neo-Keynesian synthesis. He applied Keynes’ fundamental principle of deficit spending in the Great Depression to the overall economy in a post-depression world. He really did try to make general the General Theory, which the book had not been.

The General Theory was highly specific. It was a program designed to counteract falling spending and a falling money supply in an era in which there was no government insurance for failed banks or their depositors. It was a program to offset widespread hoarding of currency. From the day that the FDIC was created in 1934, American banks stopped failing, and the money supply started to rise. Keynes wrote his book after this transition in the United States. The book was a theoretical defense of policies that had already been adopted in the United States and Western Europe, and which World War II would escalate: deficit spending, mass inflation, and a vast expansion of the government’s share of the economy. This is not how the Keynesians have told the story. It is how the story ought to be told. I am trying to recruit economists and historians who will commit several years of research to telling it.

Keynes’ “General Theory” has long been an unread book that sits on the shelves of economics graduate students and professors. No one actually has read it except specialists in the history of economic thought. The book is close to unreadable. Compared to his earlier books and essays, it is uniquely unreadable. We do not see its formulas quoted as proof of contemporary policies or recommended policies. The literature cited in economists’ footnotes is what we can legitimately call Keynesian, but this literature is an extension of Keynes’ work, not Keynes’ actual work.

Whether Keynes would approve of what is recommended in his name is moot. Hayek spoke to Keynes a few weeks before he died. According to Hayek, Keynes was not happy with developments being offered in his name.

Keynes had always been an opponent of inflation. His earlier works repeatedly warned against the threat of inflation. Yet, by 1945, inflation was a way of life in the West.

We should compare The General Theory to Charles Darwin’s Origin of Species. Darwinists rarely quote Darwin to support their latest papers. They cite him as the originator of the idea of evolution through natural selection. Attacks on Darwin’s actual exposition are shrugged off by his followers as irrelevant. We find an entire school of Darwinists who preach an idea that is opposed to what Darwin taught: the “punctuated evolutionism.” Darwin believed in tiny changes over long periods of time. They believe in huge changes in brief periods of time. Still, they call themselves Darwinists. Why? Because they believe in his Big Idea: purposeless, random causation prior to man.

The same is true of Keynes’ General Theory. It was Keynes’ primary idea that dominates the thinking of economists: government budget deficits as the means of overcoming economic slumps. As to simple formulas and concepts in the book, modern economists rarely cite them in professional journals. If one or more specifics of the book are refuted, his supporters shrug it off. Keynes’ influence relates to the one big idea, just as Darwin’s influence does.

The specifics in the book are forgotten today, such as his statement that the government could plant bottles full of money, bury them, and let workers dig them up for a living. He also said that building the equivalent of Egypt’s pyramids would help restore prosperity. He really believed this. His disciples do not refer to these passages. When pressured by critics, they dismiss them as merely rhetorical. They were rhetorical, but not merely rhetorical. Read More…