More Drill Results On The Way
I spoke to investor relations and more drill results are expected
soon. They could be out next week.Also I picked this up
from speculativestocks.com
The following was an update we sent to our members on August 28 of last year
when Golddropped to $271.
{Gold today appears to be in free-fall. It defies logic but we are past
logic here so we will stay strictly with the numbers.
If we use the swing rule we get a possible bottom of $260. To get this,
take the low of $330.00 in 1993 subtracted from the high of $420 in 1996 to
give $90.00.
Subtract this $90.00 from the $330.00 low in 93 and you get $260.00 (
approximately. )
The next method would be to look at either the fibonacci 62% or 38%
retracement levels from the last high of $420 and at 38% there is a
price of $260.00 and with a 62% retracement there is a price of $160.00.
( Using a base of zero )
So two methods come up with a $260.00 bottom level for Gold. Lets look
at the current price of $273.00. This is approximately 5% off our
projected support level of $260.00. Will it hold there is the question.
Prechter seems to think it will go to $200 before recovering?
When you look at Gold in US$ it has certainly fallen, however when it is
looked at in light of all other currencies it hasn't fallen that far. In
fact it has risen tremendously.}
So what do we see now, eight months later? In essence nothing has changed. The
low should
still be $260.00. We know there is a very large 'put' at $265 for July. this
will coincide
with the auction of the Bank of England Gold. The 'put' and the amount being
sold are
approximately the same. 1 million ounces or 32 tons and the B of E is putting
out 34 tons. So
we have an extraordinary coincidence here.At these prices the ability of many of
the existing
gold mines to produce at a profit is extremely limited. As any student of
business knows, noprofit, no cash flow, no debt repayments, no company.
The other very interesting item we note from the daily precious metals report is
that
physical demand is very strong. Gold goes down in price yet everyone is buying
it? Yes thatwould make sense. Everyone loves a bargain.
There is no doubt that everyone ( and we mean everyone ) has determined Gold is
down for the
count and will never play any significant role in the financial markets again as
either a
store of wealth, or as a backing for any currency. If you believe it is now a
commodity, then
the price should drop to somewhere near the cost of production plus operating
costs andprofit.
According to the major low cost producers, that would be around $260 an ounce.
Except that
very few mines produce at that cost. In fact only possibly, Barrick, Euro Nevada
and Franco
Nevada, Homestake and Placer have mines that produce at a cost under $150/oz.
But that is
only some mines out of many.( Homestake for example has a number of mines that
produce from
the range of $260/oz down to $120/oz with the average around $210/oz) The South
African mines
are labor intensive at the moment and are also high cost producers. This means
they must
mechanize like the Western producers. They also have ( unfortunate but true ) an
enormous
potential problem with their miners and HIV infection rates and the attendant
social costs.
What about the physical demand? If in fact there is no value in this metal why
is there
strong physical demand? When reading reports from the Gold analysts in various
media, we
always see these words, ' The price was weak but there was strong physical
demand' Why would
anyone buy something that will keep on depreciating in $US dollars? Why wouldn't
they just
amass the US Dollar? With gold so cheap in historical terms, are they hedging
their bets.
The time to buy something for maximum profits is when no one else wants it. We
believe this
is occurring now. No one wants Gold. We do not know just how long it will stay
down here, but
to believe Gold will only be ' just another commodity ' somehow defies belief.
When we look at the senior gold producers, today they are trading at values
approximately 20%
over the prices last August when Gold hit the then low of $271. If Gold no
longer is a factor
as a store of wealth and is ' just a commodity ' why do these companies stock
prices not thenreflect such a belief?
The other factor we have commented on is the 'Leasing' game. Now we understand
that when you
lease something, you pay the person that owns it an amount called the 'lease
payment' andthey maintain the ownership of the property while you get to use it.
So what has been going on in the 'Precious Metals' leasing game? Well the
lessees have backed
a truck up to the lessors vaults, taken the ( Gold, Silver ) metal and driven
away after
giving the lessor a pittance ( around 1 - 2%/year ) to 'Borrow' this metal and
the promise to
give it back ( sometimes with a guarantor aiding them ). They have then gone
around the
corner and sold it to the next door user. Now if this was a car and you did that
the lessor
would have you in jail for theft by conversion or some similar charge as the
lease did notgive you any authority to dispose of the car, just to use it.
So how is this different in the precious metals game? Obviously the lessees have
theauthority to dispose of the metal, as long as they and the guarantor provide
enough assurancethe lessor will get it back when they ask for it.
Many of the lessees are mining companies that have the ability to provide the
restoration
through production. Now excuse us for being a little naive here but, if we
borrow something
and sell it, use the money for our own purposes, spend it or lose it, and then
have to pay
back what we borrowed with what we produce, without having the money to produce
it, isn't
there something wrong with this picture? Further, no one knows where this leased
gold thathas been sold has ended up.( If they do they aren't telling )
On the LME ( London Metals Exchange ) approximately 850 - 900 tons of gold is
traded every
day. These trades however are mostly only on paper. They take the form of swaps,
futures,
derivatives, options etc., anything but the actual purchase and sale of the
metal itself.
after all with only ( approximately ) 2,500 tons of mined gold a year coming
onto the market,
transactions on the LME totalling 200,000 tons occur. This is 80 times the mined
supply.
So it stands to reason then that the physical supply has nothing to do with the
price. This
is made up in the most part by speculators and they are always betting on
something going up
or down. In this case they have shorted this metal all the way down to the
lowest price since
the late 70's. To do this they have had to borrow it. Now we have the mining
companies
borrowing the metal to sell it with the promise to replace, we have the shorts
borrowing the
metal to force the price down to buy it back at a cheaper price to replace it,
we have the
Central Banks and Bullion Exchanges loaning the metal to these participants who
want to play
the game. We then have the same Central Banks and the IMF selling ( or wanting
to sell )
gold in an artifically depressed market to the same people borrowing and
shorting the metal
to get the price down even lower. So we have an artificially induced supply
shock to the
market that will continue as long as the Central Banks continue leasing gold.
How do they replace the approximately 8,000 tons of physical gold that is short
the market (
three years mined supply )? Why they get the Central Banks to sell off their
reserves to
replace the shorts. Of course no one is going to say this is happening. No, it
is all under
the guise of doublespeak. Words like moving a non performing asset, buying
interest bearing
securities etc, etc, etc. ( After all gold by itself cannot earn interest, it
just sits therelooking pretty.)
This is also occurring in the silver market to an even greater degree. In fact
in one of the
latest reports the demand for silver dropped last year from a projected
820,000,000 ounces to
801,000,000 ounces. A drop of 19,000,000 ounces. On this information the market
dropped. When
the supply to the market is only 650,000,000 ounces, there is still a shortfall
of150,000,000 ounces ( or 4,700 tons ) and this deficit in Silver has been
accumulating for
over ten years at between 4 to 6 thousand tons a year so of course on the news
there is a
decline in the deficit it only makes sense for something that is still in
deficit to drop inprice. ( Or does it ).
What if one of the participants determine they do not want to lease/borrow any
more. What
happens if someone stops the music? How many chairs are their to sit in and who
is going to
be left out? This is a dangerous game that gets worse every year and someone is
going to be
left holding the bag. The stage is being set for a massive rebound in the
artifically createdprice of a scarce product.
We end with the comment that while there are no easy answers as to when, or if,
the price
will rebound, the change of investor sentiment has always been a factor and when
investors
decide to take up gold as an undervalued asset,the stress on the upside will be
just as greatas the stress being shown now on the downside.
Joe |
