Curried Wealth Building
Finding an Edge

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August 28, 2011
Issue 162  -  The New Normal
 
 
As time passes and the unfolding collapse of our empire comes about, the past week's volatility will become almost quaint.  I see this "new normal" affecting each and every one of us.  As long as you don't have much margin, there is nothing to fear and all of the angst that you feel during these times is intentional.  The ultimate goal is to scare you away from the safest of all asset classes.
 
To do this they initiate large drops in the metals at speeds that make your head spin and stomach drop.  This is a signal to buy and that is the hardest of all skills to attain as an investor.  Buy when there is blood in the streets.  That should be your game plan.  Much like a diet, easy to plan, hard to do.  The key to all investing is finding the large trend, jumping on early and then just riding it out.  Buying on dips with new funds to build your position is the best course of action after that.
 
 
Gold took a giant hit this week falling $100 in three days.  This was easy to cause:
 

Gold tumbles as CME raises margin calls for second time

Gold fell sharply again on Thursday as investors reacted to the Chicago Mercantile Exchange's decision to raise margins requirements on gold futures contracts for the second time in a month.

 
1:07PM BST 25 Aug 2011
 
The spot price of the precious metal fell $44 - or 2.5pc - to $1,714 an ounce as investors continued to cash out. Yesterday the price dropped 3.8pc and has now fallen around $200 in twenty-four hours.

Recent worries about the global economy and the possibility of a double dip recession in the US and eurozone, saw gold spike to an all-time high of $1,911 on Tuesday as investors dumped equities to buy safe haven assets.

David Thurtell, an analyst at Citigroup, told Reuters: "A lot of hot money has entered the complex and the rally was done too much in too short a time.

"The last 24 hours there was definitely profit-taking. With the margin hike, if speculators don't have the money to pull out as extra margin they'll just cut their positions. That contributed to the liquidation."

The CME group, the world's leading derivatives marketplace, increased margin requirements on its gold futures contract by 27pc, following similar moves by the Shanghai Gold Exchange and Hong Kong Mercantile Exchange earlier this month.
 
Also helping the sell-off was data suggesting that the US economy was facing a slowdown instead of a recession.

His comments came as the miner reported a better-than-expected return to net profit of $108.2m in the first half, compared with a $55.4m loss last year

 
Much like they did with silver, when the price of gold got too hot, one tool in the manipulation chest is the margin raises.  "Hot money," hedge funds and the like, are HEAVILY leveraged.  They like to ride on the edge of their bubble to maximize their gains on the upside.  Of course if things move against them they will either sell quickly, which causes the price to drop even faster.  If they wait too long they get a margin call.  To meet this call they usually sell assets.  If they are margined on gold contracts, they will sell some to raise funds.  This drives the price down.  This causes more margin calls.  This is completely a short term effective process as the price (as you've seen) rebounds back up.  Sometimes this takes longer but it has happened the same way for over 10 straight years.  I think that's a pattern you can put some faith behind. 
 
The powers that be have also used silver, because it's the "poor man's gold" to try and affect the gold market.  Here is a perfect example of that from a couple of weeks ago:
 
 
As you can see, and this was the one day performance of the listed commodities, silver was down over 4% while, almost every other commodity was higher.  There is no explanation for this other than manipulation as there were no outside news factors that would have caused this discrepancy.  Look at that chart and confirm in your mind that there IS manipulation.  The sooner you accept that, the sooner you can stop having nightmares anytime the metals fall. Manipulations ALWAYS end badly and this will be no different.  Make sure you have invested accordingly.
 
Mexus Gold
 
I wanted to write a little bit about Mexus as there was significant activity.  First a press release:
 

Mexus Gold US Cable and Mining Updates

 

CARSON CITY, Nev., Aug 22, 2011 (GlobeNewswire via COMTEX) -- Mexus Gold US (otcqb:MXSG) is a company engaged in the evaluation, acquisition, exploration and development of mining properties and conducts salvage operations for the recovery of precious metals.

Cable Update

Mexus automated cable pulling equipment is working as planned and is pulling cable approximately 150 miles north of Ketchikan, Alaska. The cable recovery equipment will remain in operation through November 2011. The Mexus cable surveying boat is working 200 miles north of the pulling operation gathering information and locating additional cable along with mapping. Ken Setters and native diver Henry Larsen will remain in Alaska with the survey equipment gathering additional information for the future of Mexus Submarine Cable Pulling operations.

Mexico Mining Operations Update

Mexus has drilled and completed its deep 8" diameter water well and has tested its new piping system in Caborca, Sonora State Mexico. The last of Mexus gold recovery equipment has cleared Mexican customs and is being set up at this time and should be in production as soon as September 1, 2011.

Mexus has completed necessary work and has mined a small quantity of silver ore at the 8 Brothers mine site. At this time, Mexus is awaiting a blasting permit for the 8 Brothers project. Elias Badilla, Mexus person in charge of the 8 Brothers mine site states that although difficult to obtain, the blasting permit will save Mexus time and money for years to come. Elias ensures Mexus that the permit will be issued soon.

President Paul Thompson states that Mexus Gold US is moving forward with its Gold/Silver mining projects and believes that when Mexus completes its building of a sound foundation, the future of Mexus will be assured.

About Mexus Gold US (otcqb:MXSG) is a company engaged in the mining industry for the purpose of producing precious metals, including gold, silver and copper, from its projects located in the state of Sonora, Mexico and in the states of Nevada and Alaska. Mexus Gold US is dedicated to protecting the environment, providing employment and education opportunities for the communities where they operate. For further information or to see the full report, visit www.mexusgoldus.com .

 
Mexus is making progress on all three of their main efforts, the cable pulling operation and their two Mexico mines.  I have been able to watch the tug and barge pulling cable and there is confirmation with new pictures published on their web site.  They can be seen here. (click on Alaska 2011)  Although they aren't pulling as quickly as originally planned, things are moving.  I don't think that they will be able to pull 10 miles a day anytime soon, but that isn't necessary for them to make a nice profit.  In fact, they don't have to pull more than a mile or two a day to make a good living.  As they work out more of the kinks, I expect them to pull more and more cable per day.  Mexus also released two videos which show the two different aspects of the cable pulling operation.  First the magnetometer which is used to locate the cable for pulling:
 
 
Then here's a video of the pulling/cutting operation:
 
 
I'm very impressed with the modification they made to the cutter.  This will enable them to continue moving while pulling.    Paul Thomas, the president, is one smart nut.  As long as he's around, this company should have a bright future.  Mexus is still an excellent buy at anything under 30 cents for money you can afford to lose.  The risk/reward is in your favor here.  If this stock ever does catch on, you will be startled at how fast it rises.  Waiting sucks, but there is no other way in these peewee companies.  It just comes with the territory.
 
 
Gold Resources
 
GORO received another blow from the shorts as a completely bogus article was published by Streetsweeper.com basically reiterating the same bologna as the previous Barron's article.  This was picked up on CNBC by Herb Greenberg which added to the selling pressure.  GORO responded with a strong announcement:
 

Gold Resource boosts dividend, revises to monthly dividend policy

Thu 3:35 pm by Olivia D'Orazio and Deborah Sterescu
 

Gold Resource Corp (AMEX:GORO) announced Thursday it increased its August dividend and instituted a monthly dividend policy to replace its special dividend policy.

The gold miner increased its August dividend by one cent to $0.05 per share. The dividend is payable on September 23, to shareholders on record as of September 12.

The company also announced it has instituted a regular monthly dividend policy to replace its special dividend policy.

This August payment represents the fourteenth dividend since the company entered commercial production at its El Aguila project in Mexico in July 2010. Since then, Gold Resource has returned approximately $0.48 per share, or $24.6 million in total, to shareholders in the form of special dividends.

"With record production, record revenue and record dividends paid in the second quarter, the increased August dividend to five cents per share per month, coupled with the fact that it has now been instituted, speaks to the positive outlook we have for the continued success and current production trajectory of the Aguila project," said president Jason Reid.

"Monthly production is increasing, ore grades and increasing and we continue making good strikes on the underground mine development.

"Our dividends reward the owners of the company, its long term shareholders."

Despite some challenges at its El Aguila project due to a freak storm in April, the company reported record second quarter results, beating its first ever profit recorded in the first quarter.

Gold Resource also 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%.

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 El Aguila mine.

Production is set to only increase, as the company has now begun processing ore from its high grade La Arista deposit, with lower cash costs and greater output levels expected in the future.

 
Not only did they raise the dividend to a nickel, which is $.60 a year, they made it a regular dividend.  Previously it was a special dividend.  A special dividend is considered a unique, nonrecurring event.  Even though GORO was giving the dividend every month, they weren't being given credit on the various financial web sites.  Now that it is a regular dividend it will start showing up on most of the quote sites.  This raises the attention level as some investors only invest in dividend paying companies.  Sooner or later as the dividend keeps rising, our yield will be too high and buying will come in.  Unfortunately, gold took a huge dive on the day of the announcement and the shorts had their way once again.  On Friday, after the close, GORO provided an update of Q3 progress:
 

Gold Resource on target for 60,000-ounce or higher full year production

Mon 9:53 am by Olivia D'Orazio
 

In an update to shareholders, Mexico-focused Gold Resource Corp (AMEX:GORO) said it remains on track to achieve its full year production guidance of between 60,000 and 70,000 ounces of gold equivalent.

Production at its El Aguila project has produced more precious metal in the first two months of the third quarter than the total prior quarter, the company said. Ore grades, mill throughput, and recoveries have improved mineral production.

The El Aguila property is located approximately 120 kilometres southeast of the capital city of Oaxaca, Mexico, and has yielded several strong metal samples, including 36.0 grams per tonne (g/t) gold, and 3,100 g/t silver.

The project entered commercial production at the start of July in 2010, and has been responsible for the company's steady pay out of $24.6 million to shareholders to date, through monthly dividends.

"Our team is doing an excellent job and we are very proud of their continued mill optimizations, mine development and overall accomplishments," said president Jason Reid.

"Presuming mill optimization and throughput levels continue during September, we could potentially see substantial production growth in the third quarter.

"As we have stated before, our production growth is primarily a function of mine development, increasing the number of working stoped and the buildup of underground ore stockpiles."

Indeed, the company's growth has been well-noted. In July, Gold Resource announced it had reported record profits of $2.0 million, despite flooding at its underground La Arista deposit on account of a freak storm in April.

It generated $11.3 million in revenues from sales of metals concentrate during the quarter, and made a gross profit of $8.8 million directly from El Aguila. The project produced 7,479 ounces of gold equivalent at a cash cost of just $87 per ounce in the three month period.

Standardized drilling is currently being carried out at the La Arista vein system, as is exploration for the development of the high grade deposit.

Gold Resource, whose stock on the AMEX closed on Friday at $22.00 per share, said it has yet to determine the completion date for a mineral resource estimate at La Arista, but is targeting release of the report by year-end.

 
There were a couple of great things in this release.  First, they confirmed they are on target for the 60-70,000 ounces this year, and second, that they had already produced more ounces in the first 57 days of Q3 then all of Q2.  They produced 13,457 ounces in Q2.  Let's say they are at 13,700 in 57 days, if they can stay operational for the full 90 days, that would mean a minimum of 21,600 equivalent ounces.  This equates to a yearly rate of 86,400 a year.  If their progress were to continue at even half the pace, they will produce 27,800 ounces in Q4.  This is a 111,200 a year rate.  Even at a $200 an ounce mining production cost, this will yield, at current prices $1600 an ounce, which is $177,920,000 in gross mine profit.  Taking away 1/3 for smelter costs and royalties leaves $117,427,200.  A third of this for dividends yields .72 a share.  That means we should see $.06 a share dividend by November.  This is worst case scenario in my opinion and I wouldn't be surprised to see 7 or 8 cents a share by the end of the year.  if this stock is paying a dollar a year, there is no way it will be trading at $22.
 
The shorts are going to have their hands full with a monthly rising dividend.  They must pay this dividend and paying monthly instead of quarterly leaves less time to play around.  Essentially with a quarterly dividend a short has over 2 months where they don't have to worry about paying this.  GORO has now made it much more difficult.  I fully expect GORO to be over $30 by the end of the year.  The stock has basically been between $20 and $30 for almost a year.  That is a powerful base which should prove a catalyst to much higher prices.  This is because most new buyers have now bought in this range and won't be in a great hurry to sell at $30.  I see a new range of $40-50 in the next 6 months. 
 
Market Overview
 
I see the market heading higher in the short term but not for long.  There is a six year cycle ending next month which may mark the top.  The news has just been lousy over the last couple weeks and I expect the markets to start down during the fall.  I thought about playing it for a month but it's just not worth it.  Remember the first and second rules of investing.  Rule 1:  Don't lose money.  Rule 2:  Don't forget rule #1.  If you are taking a "chance" it is probably not a good idea.  If you must, risk no more than 20% of your portfolio as the next crash could be brutal.
 
Positions
 
GORO  (closed $21.97, down $3.02, average price paid $6) 
 
Mexus Gold  (closed $.155, up $.015, average price paid, $.22)   
Alexco Resource Corporation -  AXU  (closed $7.75, up .42, recommended at $7.90)  
 
Stocks    (Current status, out, sold on March 18) 
 
Physical Gold  (Closed $1829, down $11,  average price paid $395)
 
Physical Silver  (Closed $41.50,  down $.50,  average price paid $5.31)
 
I'll close this week with video of the "Wedge" in Newport Beach, CA.  Here, if the waves come in from the correct direction, waves are formed that are truly scary.  Even so, some nuts will go out and ride them out.  I say they're crazy.  Have a great week!