Curried Wealth Building
Finding an Edge

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August 14, 2011
Issue 160  -  Gold and Silver, Top of the
Asset Pyramid
 
 
I'll start with a quote that describes the point we've reached:
 

"When you see that in order to produce, you need to obtain permission from men who produce nothing; when you see that money is flowing to those who deal not in goods, but in favors; when you see that men get rich more easily by graft than by work, and your laws no longer protect you against them, but protect them against you… you may know that your society is doomed." … Ayn Rand

 
As I've harped on for years, the system is broken. Money interests have taken over.  We've descended into a hole where black is white and the logical, illogical.  It is not fun for me to mention this, but it is a fact.  When systems break, the only viable asset is precious metals.  They are the life boats for the system.  I've had people ask me if it's time to sell gold since its "so high."  The reality is that we don't know what high is yet, in terms of fiat dollars for gold. 
 
I'll use an analogy.  Let's say you were going to ride a cruise ship.  Upon boarding you are informed that there are a limited number of life jackets.  To secure one for yourself you can pay $100 or take your chances should something go wrong.  Being prudent you buy four jackets for your family and go on your way to enjoy the vacation.  A couple days in, you hear rumors of a large storm that popped up and could hit the ship.  Life jackets promptly go to $200 and then $300 with some of the early buyers of jackets "taking profits."  They think that the odds are still slim of anything really wrong occurring.  The next day, the storm has significantly, and unexpectedly strengthened and is headed directly for the ship.  Life jackets shoot up to $500 and then $600.  You don't sell because that is why you bought the jackets in the first place.  The next day the storm has not only strengthened more, it has turned and looks certain to engulf the ship.  In fact, it looks like the ship will sink.  Life jackets have now crossed $1000 and are rising fast.  The ship is now sinking and people are offering outrageous amounts for life jackets including houses and cars.  The question is, on a sinking boat what price would you take for your life jacket?  
 
On a sinking ship, there is NO price that would get you to sell your life jacket.  Gold and silver are today's life jackets.  We are so far from a top in these metals that it's not even worth discussing.  Here is the biggest clue of all:
 

Divided Fed to keep interest rates low for two years

The surprise announcement helps fuel a dramatic turnaround in the stock market, which recoups some of its deep losses as faith in the economic recovery has faded.

August 10, 2011|By Don Lee and Tom Petruno, Los Angeles Times

Issuing a grim new assessment of the American economy, a divided Federal Reserve said it now expects to hold short-term interest rates near zero for at least two more years.

The central bank's surprise announcement on rates helped fuel a dramatic turnaround in the stock market, as some investors took comfort in the prospect of more help from the Fed.

The Dow Jones industrial average soared 429.92 points, or 4%, to 11,239.77 on Tuesday, recouping some of its deep losses over the last three weeks as faith in the economic recovery has faded.

"Yes, it's a dismal outlook," said Diane Swonk, chief economist at Mesirow Financial in Chicago. But in a market teeming with fatigue and confusion, she said, investors apparently read the Fed statement as somewhat hopeful.

"It's still growth, it didn't say double-dip [recession] and the Fed is going to fight it," Swonk said.

 
One of the biggest knocks on gold is that it "pays" nothing.  This is true, but if interest rates are going to be low for two more years, what are you losing by holding gold?  Nothing, and if it continues higher, you could make out big.  That is what is happening now.  More and more people are moving to gold.  It's even worse than that:
 
  • August 4, 2011, 11:16 AM ET
  • Bank of New York Charging to Hold Cash, Driving New Frenzy for T-Bills

    They say that nothing comes for free, and now that includes cash.

    Bank of New York, the world’s biggest custodian bank, announced it is charging a fee of 13 basis points for unusually large cash deposits.

    That has pushed money funds to move even more of their cash into already in-demand T-bills, short-term agency notes and Treasury repos.

    “By forcing cash out into the marketplace, demand for money-fund investments is only going to grow, forcing investors into a pool with already incredibly shallow options,” says a money fund manager. “Most importantly, if other banks follow suit, then yield levels as a whole will have no where to go but lower as investors look to remain invested.”

    Three-month T-bills recently yielded 0.008%, and short-term bills have been darting in and out of negative territory this morning.

     
    So banks are now starting to charge for holding cash.  This has been coming for awhile as there are numerous accounts with minimum balances that must be maintained or a fee is charged.  As the headline also says, this is driving people to treasuries.  Why?  Because they pay an interest rate.  This is also part of the Fed's plan to try and keep interest rates down.  This will be a boon to gold and silver.  Here is some further explanation from Dave in Denver (GATA)
     
     
    Just a quick comment on whether it's too late to buy into gold and silver or whether or not you should take some profits.  The reason to own gold gets stronger everyday.  Take yesterday for instance.  The Fed has guaranteed zero interest rates for 2 more years.  Real interest rates (nominal rates which are zero - less the inflation rate) will benegative for at least two years.  Gold ALWAYS ALWAYS ALWAYS goes higher when interest rates are negative.  Negative interest rates are like rocket fule for gold/silver.  So the Fed has now guaranateed higher gold for at least 2 years.  Wait until QE3 kick in....
     
     
    This is what is coming.  Higher gold.  Higher silver.  There is no other possible outcome unless Washington "finds religion" and starts down the path of fiscal purity.  (fat chance)  The powers that be are still extremely concerned that the public not buy too much gold.  A money manager from Oppenheimer funds was on CNBC and told the host he wanted to talk about gold and the host cut him off and changed subjects.  Of course CNBC is talking about gold because it's moving up so high, but it is mostly in guarded apprehensive terms.  Meanwhile the government is still printing money like crazy:  (zerohedge)
     

    US Default Scare Leads To Biggest Weekly Surge In Non-Seasonally Adjusted M2 In History

    Submitted by Tyler Durden on 08/12/2011 00:23 -0400



    About a month ago we penned a post to refute some misconceptions about a material spike in M2, which led such luminaries as Andy Lees and Art Cashin to get confused that this may be an indication that either the government was forcing money into the population with the end of QE2, or that this was actually a confirmation that QE was working. It was neither. As we explained it was a combination of the Treasury general account on the Fed's balance sheet soaring (from a balance sheet standpoint), and due to the repeal of Regulation Q (from an actual flow perspective), that led to the move. Sure enough, in the 3 weeks following, M2 dropped to very much unremarkable weekly change levels. Until the week of August 1, or the week in which the specter of a US bankruptcy came to life, and in which the market took its first notable leg down. In that week, the broadest publicly released monetary aggregated - the M2 - soared to an all time high $9.5 trillion, or a $159 billion weekly change. This make it the third largest weekly spike in history After the Lehman bankruptcy and September 11. Then again, this data includes the traditional seasonal fudge adjustments by the Fed. A look at the non-seasonally adjusted time series indicates that last week's spike in M2, primarily in demand and savings deposits at commercial banks, was the highest on record! Sure enough, the bulk of this cash ended up in America's largest depository institution, Bank of America. And yes, this was in the week prior to the massive market rout. Yet as the charts show, following every massive inflow of money into demand deposits and savings accounts, it goes right back out the next week. Which is why we wonder: is Bank of America, so flush with cash a week ago courtesy of the debt ceiling fiasco, suddenly cashless, as investors follow up with the kneejerk withdrawal of capital from the depositor bank due to worries of bank runs and other less quantifiable reasons? Does this explain why, in addition to the fact that the bank's sale of its China Construction Bank stake is not going well, BAC may soon be forced to enter the capital markets to raise equity capital, just as we have been predicting all along?
     
     
    What's very interesting here is that he included a non seasonally adjusted chart of M2 (this is without the "adjustments" that mask what is truly going on) and it looks like this:
     
     
     
    This is the weekly M2 changes back to 2000.  As you can see last week was the largest increase ever.  Add this to the now EXPECTED QE3 (remember a month ago most were saying it wasn't going to happen) and we have even more fuel for gold and silver:
     
    Goldman says QE3 likely after dovish Fed statement

    SINGAPORE | Wed Aug 10, 2011 4:15am EDT

    SINGAPORE (Reuters) - Goldman Sachs said on Wednesday a third round of quantitative easing from the Federal Reserve is likely after the U.S. Federal Reserve promised to keep rates at extraordinarily low levels for at least two more years.

    "We now see a greater-than-even chance that the FOMC will resume quantitative easing later this year or in early 2012. We have changed our call because today's statement suggests that the committee's reaction function to incoming economic news is more dovish than we had previously thought," Jan Hatzius, chief economist at the firm, said in a note.

    The explicit commitment to keep policy rates low through mid-2013 and a bias to easing policy further were more aggressive than expected and resulted in Goldman penciling in QE3 after the previous $600 billion bond-purchase program ended in June.

    Hatzius said he thought the fact that Fed Chairman Ben Bernanke went ahead with a promise to keep rates low within a specific time frame despite three dissents in the policy-setting committee was a sign the rest of the central bank believe renewed easing is important.

    (Reporting by Kevin Plumberg; Editing by Ramya Venugopal)

     
    So what might be an end game of this madness?  Jim Rickards, an analyst I like a lot, thinks that the United States might just confiscate the gold of other nations.  I don't believe that the U.S. has the RIGHTS to the 8,000 tons of gold that are claimed to be in their possession.  I believe it has been loaned out and leased to many different parties.  They, unfortunately for the others, still have the gold.  We could just say, owners keepers, losers weepers, and what could they do?  Attack us?  We still have the strongest military.  The other countries won't really be able to do much.  They could also confiscate gold in private storage vaults.  There is the old saying, "He who has the gold makes the rules."
     
    The end will see prices that are not being talked about today.  The final prices, barring a large intervention and currency reset, will be the stuff of legends:
     

    Pierre Lassonde - Coming Mania in Gold Will Dwarf that of ‘70s

    With gold over $1,600 and silver breaking back above $40, today King World News interviewed one of the greats in the gold world Pierre Lassonde.  When asked about the action in gold Lassonde stated, “The one thing about the gold market right now is I think it has confounded an awful lot of the skeptics.  Summers are a low period for gold price during the year and look at what you have, record high $1,600 gold in the last week and looking really good to attack the next level.” 

     
    Lassonde continues:

    “So the gold market is doing well, it’s lapping up what is going on in Europe with Greece, it’s lapping what’s going on in China with inflation, and of course I don’t even have to talk about the US at this point because you all know what’s going on over there.”

    When asked if strength in summer was an indication of a strong back half of the year for gold Lassonde replied, “More than likely.  Come September you’ve got the Indian wedding season that starts, you’ve got the whole Christmas season inventory build-up as well as in the financial market people getting back to their desks.  They look at what’s happening in the world and the September to December months are always, always the strong months for gold.  So it’s looking really good right now.”

    When asked if he felt mining shares were way undervalued Lassonde said, “It is (gold shares) way undervalued and this is one of the most interesting facets of the current market as far as I’m concerned.  The portfolio managers for whatever reason seem to have stuck their wallets up their rear ends and sat on their hands for the past three or four months.  

    When you look at the average valuation of gold stocks over the last ten, twenty years and where they are today, they are like one standard to two standard deviations below what they normally trade for.  Let alone in the current market they should be trading for, which is one standard deviation above the norm if not more....

    There is a real good opportunity for people (professionals) who decide that summer is over right now and get back in the shop and do something because the valuations are still very reasonable.”

    When asked about John Embry’s prediction for the HUI (Gold shares index) to double in the next six to twelve months Lassonde said, “Can his prediction for the index (HUI gold shares) double, I think he’s probably low, I think we are going to see more than that.  I’m totally convinced because the gold stocks are way undervalued, so I’m looking at a very strong performance of the equities vis a vis the bullion in the next 18 months.”

    When asked if the coming mania in gold will make the ’70’s run look like child’s play Lassonde responded, “Well it will because in 1980 the only players were the Americans, they were essentially the only players in the gold market, or the dominant players.

      Today the dominant players are China and India, 58% of all the gold sold this year will be sold in these two countries.  So they are by far the dominant players and as I’ve said the Chinese love gambling.  When we reach that phase (the mania) I told you and I will tell anyone who wants to listen, watch out because it will truly make your head spin.”
     
    So what did gold stocks do in the late 70's?  They skyrocketed.  Some stocks went up hundreds of times in value.  I see this being much more volatile than the dot.com bubble.  This outcome is almost sure to happen again as the whole world is now buyers and not just the U.S.  China has an OFFICIAL policy encouraging citizens to buy gold.  Buyers are going to significantly outnumber the quantity available at anywhere near these price levels.  Make sure you HAVE a life jacket.
      
    Positions
     
    GORO  (closed $26.22, up $1.37, average price paid $6) 
     
    This week saw the release of GORO's second quarter results:
     

    FOR IMMEDIATE RELEASE NEWS

    August 9, 2011 NYSE Amex: GORO

    GOLD RESOURCE CORPORATION REPORTS RECORD SECOND QUARTER

    RESULTS; SETS 2011 PRECIOUS METAL GOLD EQUIVALENT PRODUCTION

    TARGET OF 60,000 - 70,000 OUNCE RANGE

    COLORADO SPRINGS – August 9, 2011
    Gold Resource Corp (AMEX:GORO) reported Wednesday its second quarter results, beating its first ever profit recorded last quarter, despite some challenges at its El Aguila project in Oaxaca, Mexico.

    For the three months ending June 30, the relatively new Denver-based gold producer, which began commercial output from El Aguila in July of 2010, recorded net income of $4.9 million, or 9 cents per share, excluding losses from a storm at its operations in April.

    With these losses of $1.76 million, the company still generated a profit of $3.14 million, or 6 cents per share. This compares to a loss in the year-earlier period, and a profit of $2 million, or 4 cents per share, in the first quarter.

    The company said it managed to generate record revenue in the latest quarter of $20.7 million, versus $11.3 million in the previous three month period - an increase of 83%.

    All this was acheived despite the anomalous storm that negatively impacted April and May production at its high grade Arista mine, causing damage to the mine and some equipment due to flooding.

    In March, the company announced that it had begun the transition from processing lower grade, open pit ore, to processing underground ore from the high grade Arista deposit at El Aguila.

    Arista, the largest deposit discovered to date at the project, underwent cleanup and repairs that were completed in June, but mining was still delayed and mill throughput reduced, Gold Resource said, and the company had to endure higher costs in April and May.

    Nevertheless, the company produced 13,457 ounces of gold equivalent at a cash cost of $156 per ounce, generating a $17.2 million gross profit from the mine. Gold was sold at an average price of $1,576 per ounce and silver at $37 per ounce.

    Last quarter, the El Aguila project produced 7,479 ounces of gold equivalent at a cash cost of $87 per ounce, for a gross profit of $8.8 million.

    "We are very pleased with our results since they were achieved against the background of a freak storm, our own natural disaster,” said president Jason Reid.
     
    “The project paid for all our activities this quarter including operations, exploration, anomalous storm cleanup and repair which was an additional $2.5 million, General and Administrative, special dividends and added new cash to our treasury."

    Indeed, the company increased the cash in its bank by $4.2 million during the quarter, to $42.1 million. Since beginning production at El Aguila last July, the company has returned more than $22 million to shareholders in special dividends each  month.

    "This is in line with our objective to be both a growth stock and an income stock and not compromise one for the other,” added Reid. 

    “We are very proud of the fact that this management team and our people have demonstrated Gold Resource Corporation’s ability to achieve a high return on capital invested."

    Gold Resource continues to ramp up and improve operations at La Arista, with expected higher average grade ore, lower cash costs and greater output levels in the future.

    However, due to the storm impact at the Arista mine, the company revised its production target for the year to between 60,000 to 70,000 ounces of gold equivalent, down from 90,000 ounces in May. Still, the gold producer continues to stand by its long-term target of 200,000 ounces in 2013.
    GORO continues to shine as they are really starting to produce some significant metal. They held a Q2 conference call on Wednesday which I listened to and these are my highlights:
     
    1.  They are fully funded and won't need further financing.  This is excellent with such a low share count.
    2.  The production rate is increasing.  They were running at a 20,000 oz per quarter rate in June.  July was even better, and the 1st week of august better yet.  This bodes well for Q3 results.
    3.  Bill Reid, the CEO, spoke for quite a while about the shorts.  There are now over 5 million shares short.  The holders of these shorts are definitely in trouble if GORO's plan is successful.  They have tried several attacks on the stock price and so far have been unsuccessful.  Institutional ownership in the stock has increased dramatically in past quarter which will make it even harder to cover the shorts.  This increased ownership has actually helped the shorts get more shares as many institutions will lend their shares for a fee.  With the fee in GORO stock over 30% annualized, it isn't hard to see why these guys would take the fees.  The shorts will eventually have to get the shares back and this will drive the price higher.
    4.  Bill Reid was very animated compared to the last quarter's call and said exciting 3-4 times.  This is unusual for a CEO.
    5.  They expect to a get a formalized 43-101 resource report by the end of year.  This should help, as it allows more funds to buy the stock.
    6.  Reading through the report these guys should be able to significantly raise their dividend from the current 4 cents a month.
    7.  The company's new headquarters is zoned correctly, in direct contradiction to the shorts claims.
    8.  The ore is getting more rich as they proceed deeper.  This is expected and excellent news.
    9.  They hope to start feeding ore from their El Rey property by the end of the year.  This will allow them to start the floatation circuit of their mill which is currently not operating.  This could significantly increase their production if the ore is as rich as sampling indicates.
     
    Overall, a hugely successful quarter and makes me even more bullish.  All of the pieces are coming together to form a monster company.  If they can hit 200,000 ounces a year, I can easily see the dividend at $0.20 a quarter as a minimum!  That's eighty cents a year and a share price of $40-$80.   Still a strong buy on GORO up to $32. 
     

    Mexus Gold  (closed $.17, flat, average price paid, $.22) 

     
    This week saw the resumption of cable pulling in Alaska.  Thanks to Tim for information that the boat is in Hollis and has been pulling cable at least 3 days over the last week.  Here is a picture captured from a webcam in Ketchikan showing the Caleb and it's tug on the move.  (thanks to Jim)  If you look closely, you can see the green cable pulling machine on the rear of the barge.  In this price range they are giving away this stock.  Remember, this is a risky investment and you should be prepared to lose everything.  That being said, I think once the revenue starts flowing, prices in this range will be long gone. 
     
     
     
    Alexco Resource Corporation -  AXU  (closed $7.50, up .60, recommended at $7.90)  
     
    Stocks    (Current status, out, sold on March 18) 
     
    Wow, this is getting a little crazy here.  REALLY hard to know what is going on here as the high frequency trading bots and the Federal Reserve's computers basically run on autopilot.  Due to the surge in M2 last week, it looks like the market will move higher, but I'm not willing to move in with anything but a 10% position.
     
    Physical Gold  (Closed $1,746,  up $86,  average price paid $395)
     
    Physical Silver  (Closed $39.07,  down $0.23,  average price paid $5.31)
     
    I'll close this week with a video from America's Got Talent and a dance act that has a software engineer backstage interfacing with the costumes.  Have a great week!