Archive for June, 2011

Will Gold Equity Investors Strike Gold?

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By Frank Holmes

CEO and Chief Investment Officer

U.S. Global Investors

Gold prices passed the $1,500 per ounce mark for the first time ever in mid-April of this year and have set up shop around $1,525-$1,550 an ounce aside from a couple of short pullbacks in early May. So far in 2011, it’s been relatively status quo for those investors who’ve embraced gold as a way to protect themselves from currency debasement, excessive money printing and inflation as prices have increased 7.67 percent. BofA-Merrill Lynch (BofA-ML) analysts are forecasting gold prices could fall to $1,400 an ounce during seasonal weakness in July before rebounding as high as $1,650 an ounce by early fall.

While the party continues for gold bullion prices, stocks of gold companies have been a no-show. The NYSE Arca Gold Bugs Index (HUI) has fallen more than 13 percent year-to-date and the Philadelphia Gold & Silver Index (XAU) has toppled more than 16 percent. Companies such as High River Gold Mines, Jaguar Mining and NovaGold Resources are off more than 45 percent from 2007-2008 highs.

This underperformance has been exacerbated in recent weeks making it a hot topic of discussion among investors, analysts and portfolio managers. This chart shows gold equities of all market capitalization sizes were holding up quite well until late April. That’s when global sentiment toward equities, not just gold shares, began to waver and prices dropped off a cliff.

For the purposes of this chart, CIBC qualifies seniors as companies with market capitalizations above $10 billion, intermediates as those between $10 billion and $2 billion, and juniors as those below $2 billion. Non-producing companies are excluded.

Now, short-term aberrations in markets are common, and this isn’t the first time gold bullion and gold equity prices have diverged. Gold equities underperformed gold bullion in 2000 and 2008 during times of extreme market negativity and uncertainty. These previous instances have been merely temporary setbacks and markets generally reverted back to their long-term trends. According to J.P. Morgan research, gold equities have climbed an astounding 1,400 percent off of their 2000 lows while the S&P 500 Index has seen an 11 percent decline.

Here’s the same chart from above but it has been extended out to the beginning of 2009. You can see that with the exception of the seniors, gold equities have far outpaced gold bullion performance by more than 2-to-1.

Gold stocks have historically outperformed the gold price by roughly a 3-to-1 ratio. This means that a 5 percent rise in the price of gold generally translated into a 15 percent rise in the miners. Recently, this leverage has eroded to about a 1-to-1 ratio, or lower at times, according to BofA-ML.

Leverage, of course, can work in both directions, and the beta-to-bullion ratio for many gold stocks is stronger during downward price movements and weaker during the upward ones. This means that the gold stocks are being punished for any downside volatility in gold prices, without being rewarded for any increases.

This has been unilateral across different market cap sizes. This chart shows the average beta-to-bullion response for upward movements in the gold price has been declining since 2009. Senior gold stocks have seen the largest decline with their average beta dropping nearly 60 percent.

One likely reason for the loss in upward leverage has been the maturation of the gold investing market. In the past, investors looking to gain gold exposure without the headaches of taking physical possession of gold bullion turned to gold equities. Today, the proliferation of bullion-backed ETFs and the birth of small, gold bar buying programs in Asia have unlocked additional options.

I had lunch with CIBC’s Barry Cooper, gold-company wizard and one of the industry’s best analysts, last week. He sees this recent phenomenon as “a market-sentiment driven event that will pass as fundamental financial drivers kick in to support share prices and drive them higher.” However, the trend could continue as long as the cost of mining operations continues to inflate. Cooper modeled a case study that showed equities can produce an inferior return relative to bullion when the price of an ounce and the cost to produce it rise in tandem despite the opportunity for companies to use higher prices to expand production or increase reserves.

According to Cooper, “the average global cost per ton has been rising at a rate that is slower than the gold prices increase; however, it has also been accompanied by a declining grade profile for most operations.” The average grade of a gold deposit has declined 21 percent since 2005 but higher bullion prices have made it economically viable for gold companies to pursue higher cost projects and keep lower cost, high grade operations off line in case gold prices pull back.

Further, Cooper says this means that “the market seems to have penalized companies for the rising costs associated with lengthening the life of a mine operation…the market does not seem to be paying for the optionality offered by increasing reserves when they come with increased costs.”

The strongest periods of underperformance seem to correspond with times when cost inflation was high. Cooper concluded that “investors seeking gold exposure also want safety in terms of cost containment, and when part of the reason for buying stocks falters, the choice is abandoned for alternative investments.”

BofA-ML estimates that the average all-in cost for the industry was up 19 percent from the previous year to $1,081 an ounce during the first quarter of 2011. The increase is largely due to rising fuel prices, higher labor costs, increased regulatory expenses and declining ore grades.

While it’s true that these rising costs are putting a strain on miners’ profitability, it’s important to keep it in context. While cash costs have increased 19 percent, profit margins—the true gauge of a company’s value—have expanded 25 percent on average, more than offsetting the cost increases.

In fact, financials for the majority of gold companies have been improving for years. According to Cooper, many gold companies “have been generating positive [cash flow] and growing earnings on a per-share basis.” Although it hasn’t showed up in share price performance, senior gold miners have seen the strongest gains with average per share earnings increasing roughly 67 percent since 2009.

Corporate cash flows for gold producing companies have also increased significantly. The average senior gold miner now has more than twice the amount of cash flow; mid-sized intermediate gold companies’ cash flow has more than tripled.

This year’s carnage has created a substantial opportunity to buy healthy, gold mining companies at historically low prices compared to gold bullion. Cooper says that “the net result is that gold companies can now be purchased for about their intrinsic value for the spot price of bullion.”

Historically, one could purchase about 4.4. units of the XAU for the price of an ounce of gold. That ratio fell to less than 3 units per ounce in the mid-1990s when gold prices bottomed but has averaged 5.2 units during the current bull market.

You can see from the chart that today’s level is 46 percent above the historical norm at 7.6 units to one ounce of gold. By this measure, one can purchase shares of gold mining companies at their second-cheapest level in nearly 30 years. The extreme was in 2008 during the depths of the financial crisis; many share values quadrupled off of those levels.

One way gold companies can lure investors is by sharing their profits through dividends. This would provide a cash incentive to hold shares of the company and allow investors to participate in rising earnings. We like the idea of investors getting “paid to wait” or reinvesting those dividends and purchasing additional shares at potentially lower prices.

Newmont Mining, a company whose share price is about 15 percent off of its highs, recently initiated a dividend program and has a current yield of 1.55 percent. Companies such as Buenaventura (1.82 percent), Yamana Gold (1.59 percent), Gold Fields (1.39 percent) and Barrick Gold (1.11 percent) also offer attractive yields.

This week’s events in Greece should remind everyone that global markets are still recovering from 2008’s trauma. The system is not nearly as strained as it was then but we are by no means out of the woods in terms of global economic stability. This should continue to provide a catalyst for strong gold prices.

With gold companies currently undervalued and offering strong cash flows and attractive yields, we think gold equities will be rewarded by the market and rise with strong gold prices. BMO Financial analyst Don Coxe echoes our sentiment: “gold and gold stocks offer a protection that is going to become more valuable in the period of months ahead. It’s possible that the long-awaited period, when gold stocks outperform bullion, is coming soon.”

Ralph Aldis, co-manager of the U.S. Global Investors World Precious Minerals Fund (UNWPX) and Gold & Precious Metals Fund (USERX) contributed to this commentary.

Want to receive commentary from Frank and analysis from the rest of the U.S. Global Investors team delivered to your inbox every Friday? Sign up to receive our weekly Investor Alert at

U.S. Global Investors, Inc. is an investment management firm specializing in gold, natural resources, emerging markets and global infrastructure opportunities around the world. The company, headquartered in San Antonio, Texas, manages 13 no-load mutual funds in the U.S. Global Investors fund family, as well as funds for international clients.

Holdings in the World Precious Minerals Fund and Gold & Precious Metals Fund as of March 31, 2011:

High River Gold Mines: 0.00%

NovaGold Resources: 0.00%

Jaguar Mining: 0.00%

Newmont Mining: Gold & Precious Metals Fund 0.75%

Buenaventura: 0.00%

Barrick Gold: Gold & Precious Metals Fund 7.17%, World Precious Minerals Fund 2.82%

Yamana Gold: Gold & Precious Metals Fund 3.76%, World Precious Minerals Fund 2.93%

Gold Fields: Gold & Precious Metals Fund 0.64%

The NYSE Arca Gold BUGS (Basket of Unhedged Gold Stocks) Index (HUI) is a modified equal dollar weighted index of companies involved in gold mining. The HUI Index was designed to provide significant exposure to near term movements in gold prices by including companies that do not hedge their gold production beyond 1.5 years. The Philadelphia Stock Exchange Gold and Silver Index (XAU) is a capitalization-weighted index that includes the leading companies involved in the mining of gold and silver. Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

  • Published On Jun. 25, 2011
  • Black Swans From New Normal

    By: Jim Willie CB,

    – Posted Wednesday, 22 June 2011 | Share this article | Source:

    Mohammed El-Erian is given credit for the phrase ‘The New Normal’ to mean an altered state of perceived instability within the normalcy realm, as in crisis being called normal, like endless crisis. As buddy Jim Mess in Europe says, just like trying to redefine what debt default is, it sounds like high octane prevarication. El-Erian is considered one of the good guys. He managed to slip away from Harvard University without much smear, where he served on the management team of the giant multi-$billion endowment fund. If truth be told, Harvard hatched the Enron monster from its Business School as a project, funded by Citigroup, where JPMorgan created all the off-shore companies to hide their dealings. Building #7 in Lower Manhattan contained the records until it fell from structural sympathy. Harvard successfully made money all the way on the Enron runup, but also successfully shorted Enron all the way down. So El-Erian is hardly squeaky clean. He does give a good interview though, does not deal much in varnished truths, and is an avid NYMets baseball fan. At PIMCO, he worked on the team to direct the biggest bond fund in the world to turn its back on the entire USTreasury Bond complex. In fact, their Total Return Fund, its flagship bond fund, is net short on USTreasurys as a group. That means they own a raft of Credit Default Swaps for USGovt debt default and an assortment of other vehicles like the TNX and TYX that track the 10-year and 30-year bond yield. They recognize an asset bubble when they see one, and even invest in Gold.

    The other person relevant to the article title is Nassim Taleb, who coined the term Black Swan. Generally it refers to the extreme oddity that passes through view, shows up on the radar, the extreme warning signal being dire, but is largely ignored by the masses, regarded as the exception or outlier event. THE BLACK SWAN HAS BECOME THE NATIONAL BIRD!! When a few black swans appear, the alert analysts pay heed and express their warnings. When an armada of black swans appear, the message is clear. A systemic failure is in progress, and the important foundations are crumbling. In 2009 and 2010, it was clear that numerous black swans were sighted and identified. In 2011, something highly unusual and extraordinary has occurred. The black swans can be organized into groups. They are numerous within each important economic and financial camp. The Armada of Black Swans, well organized into regiments, has become dominant enough to be considered the New Normal. During the global financial crisis (which has earned a widely used GFC acronym), tragically the state of crisis has become an engrained latticework on the reality mosaic. A quick review at a high level should cause alarm, except for the gradual pathogenesis that dictates the pace of systemic failure in progress. If the list below were presented as a Wall Street Journal forecast in 2006, the author would have been subjected to laughter, derision, and mockery. Yet here and now, the organized groups of black swans are visible everywhere one looks. Worse, they are carrying nuclear slingshots, and defecate highly toxic green blobs into the liquidity streams that we have grown so dependent upon.


    Quantitative Easing will continue for obvious reasons. Many were outlined in the last two articles. The QE2 will continue seamlessly, extending beyond the June 30th deadline. It will change in complexion slightly to become QE3, with some added twists like to include some municipal bonds. Later the entire financial initiatives will morph into a Global QE, since all major central banks will face the same plight. They will all purchase USTreasury Bonds or face extinction, in order to support their own balance sheets. The credibility of the US Federal Reserve has undergone major damage. In the next year, it will be totally destroyed. The factor ignored by many analysts is that the USFed balance sheet has expanded recklessly, and insolvency is its unavoidable condition. If the US housing market does not revive, then the US banks will go deeper into insolvency, carrying perhaps two million homes on their books at some point in the future. The resulting effect on the USFed balance sheet is permanent ruin.

    The USTreasury Bond default might possibly come, as warned by a great reliable inside source in 2008, from the USFed resignation as central bank for the USGovt. They are not subject to bank regulations, to reserves ratios, to collateral requirements on loans, or to anything for that matter. They managed the secret handouts of $12 trillion under the cover of TARP Fund dispensation. They rescued foreign banks even though that is not under their charter. They orchestrate the narcotics money laundering effectively, certainly not in their charter either. The USFed does have owners, and they cannot be pleased. The turnaround in the housing market never occurred. Its prospects look worse with each passing month. If the USGovt or the Elite operating as handlers for the captive USGovt decide to convert private property into collectivized syndicate ownership, and use their Fannie Mae device as agent for the process, then perhaps the USFed might serve as a facilitator to the vast Collectivism project. The United States Government might someday own the majority of homes in the nation, maybe even commercial buildings and shopping malls too. The disenfranchised can always go camping, as in the Favored Environmental Managerie Amorphous camps.


    Consider the following black swan specimens, each of which is astounding, each alarming, each serving as one more added element to the ruined situation. The swan organization is admittedly rough, but the regiments are put in sensible order. Any small handful of these signals would qualify as forewarning a profound crisis. Not anymore, since crisis is the new normal. Not anymore, since black swans adorn the entire landscape. A healthy white swan gradually suffers from toxic exposure, quickly to turn black from a putrefaction process. Apologies for overlooking at least a dozen other important other black swans, as time and space did not permit the exhaustive catalogue process. Emphasis was given to the United States ponds and its migratory bird population.


    • USGovt debt ceiling standoff, with actual violations
    • Over 75% of USTreasurys auctioned bought by the USFed in debt monetization
    • Turnaround from primary bond dealers to POMO repurchase by the USFed is 3 weeks
    • Foreign banks form 12 of 21 primary bond dealers
    • PIMCO owns no USTreasury Bonds, even short
    • Global boycott of USTBond by creditors, some net sellers
    • Foreign creditors owns the majority of USGovt debt
    • A fixture of $1.5 trillion annual USGovt deficits
    • Greenspan and David Stockman warn of USGovt debt catastrophe
    • USMint officers admit Fort Knox has been shut down for 30 years, as in zero gold


    • QE permanence, otherwise called QE to Infinity, worked into standard policy
    • Bank of England urges more bond buying
    • Cost of money 0% for two full years, implication being destroyed capital
    • Chairman regards monetary hyper-inflation as being zero cost
    • Ron Paul pushes for a USFed audit, an end run to pay down USGovt debt
    • USFed owns more USTBonds than any other creditor
    • Competing Currency War has Euro weakness mean USDollar as all circle the toilet


    • USGovt could shut all operations but still be have a budget deficit
    • USGovt could confiscate all income but still have a budget deficit
    • USGovt must cover AIG payouts on Greek Govt debt default from CDSwaps
    • US Postal Service stops all payments into their pension system
    • New York Fed refuses to disclose the destination of $6.6 billion stolen from Iraqi Reconstruction Fund
    • Federal Worker Pension Funds and G-Funds confiscated (called borrowed)
    • USMint runs out of gold & silver metal to make coins
    • Endless war accepted as sacred, whose costs are crippling
    • Council on Foreign Relations enables a foreign nation to control US foreign policy
    • Breaches to USGovt communications via WikiLeaks


    • GATA Gold Rush 2011 in London Savoy Hotel on August 4th will feature the COMEX whisteblower Andrew Maguire
    • Silver futures contracts settled almost exclusively in cash, often with 25% vig bonus
    • Gold & silver futures contracts often settled with GLD & SLV shares
    • Umpteen margin increases for gold & silver futures contracts, but reductions in USTBond futures contract margin requirements
    • Brent versus West Texas crude oil price has a $20 spread
    • Every time Bernanke assures US financial markets, gold & silver rise in price
    • Elimination of Over The Counter gold & silver contracts due in mid-July


    • Chronically insolvent USFed and EuroCB, balance sheets ruined
    • FASB accounting rules permit banks to grade their own test exams
    • Stress Test for banks had almost no stress, a sham
    • Dependence by Wall Street banks on naked shorting USTBonds and narco funds, the former called Failures to Deliver, the latter recognized by the United Nations
    • Shadow housing inventory held by banks over one million homes
    • Wall Street firms in court on the defensive, JPMorgan foreclosed soldiers
    • Wall Street firms banned in Europe on bond securitization and issuance
    • Strategic mortgage defaults by homeowners on the fast rise
    • Gold holdings by tyrant Arab rulers targeted by New York & London banks
    • War over Libya grabbed $90 billion in Qaddafi money by New York & London
    • PIGS sovereign debt default in Europe to have impact ripples that reach US banks
    • Standard & Poors reminds the players what constitutes a debt default
    • No liquidation of big US or London or European banks since Lehman Brothers
    • Much of dimwitted US population believes the propaganda that Gold is a bubble


    • USEconomic indexes fall off the cliff, see Philly Fed, Empire State, ISMs
    • Rampant systemic insolvency in banks, homes, federal government
    • US housing resumes its powerful bear market
    • US land title system in the disintegration process, see MERS on mortgage titles
    • Unemployment at 20% across the Western world, economic misery index hit 30%
    • USGovt economic stimulus never contains stimulus
    • Main non-military innovation in the United States is bond fraud
    • Shrinking US trucker industry from $4 gasoline and diesel
    • China begins to export price inflation to the United States
    • Killing state worker union pensions as part of the state budget shortfalls
    • Gulf of Mexico off limits for oil drilling
    • 1 in 7 Americans is on Food Stamps, whose debit cards are good JPMorgan business
    • media blackout on the Fort Calhoun near nuclear plant meltdown in Nebraska


    • Food price inflation is staggering but denied
    • Floods across Midwest & Plains states to interrupt with planting & harvest
    • Australian floods have interfered with coal industry and agriculture
    • Fukushima and Northwest US infant mortality, with vulnerable milk next
    • Big volcanoes like in Chile and Iceland disrupt weather and air travel


    • German bankers at war with Euro Central Bank
    • Germans abandon the EuroCB, leaving it to Goldman Sachs, see Draghi
    • Spanish banking system has yet to write down squat on housing credit assets
    • Portugal, Italy, and Spain sure to follow Greece into a debt default
    • Belgium has had no government for a full year
    • Ireland prints more money per capita than the USFed
    • US & NATO to part ways


    • G-8 Meeting is pushed aside, as the Anglos deal with broad insolvency
    • G-20 Meeting takes center stage in a power play, led by China and the BRICs
    • China buys discounted PIGS sovereign debt, to redeem later in central bank gold
    • Chinese FX reserves exceed $3 trillion held in sovereign wealth funds
    • China owns most world major ports, as part of a strangulation process
    • China conducts the great Idaho experiment, toward re-industrialization of America


    • Swiss faces hundreds of $million lawsuits, for refusal to deliver Allocated gold
    • Saudi Arabia cuts new deal for Persian Gulf security protection, see Petro-Dollar
    • Citigroup has high hidden exposure to Greek Govt debt default
    • Chinese vengeance over reneged USGovt gold & silver lease, as part of the Most Favored Nation granted status, has motivated its extreme pursuit of precious metals
    • Containers hold $300 to $500 billion in EuroNotes at Greek port warehouses
    • Internet strides light years ahead of USGovt regulatory hounds at syndicate offices
    • Chemtrails, storm steering, lingering droughts, fallout falling, haarps a playing Read More…

  • Published On Jun. 25, 2011

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