The 12 Gold Bugs of Christmas

Louis James, Chief Metals & Mining Investment Strategist

Dear Reader,

Due to the way our publication schedule and the holidays work out, this holiday edition of Metals & Mining Monday will be our last Casey Daily Dispatch column until after the New Year. We hope you've found value in our articles this year, both for entertainment and for profit, and look forward to delivering more of the same to you next year.

Whatever your beliefs may be, we wish you a very happy holiday season and peace and prosperity going forward. The peace might be hard to come by in these turbulent times, but we'll do our best to help you with the prosperity part.

Sincerely,

Louis James
Senior Metals Investment Strategist
Casey Research

Rock & Stock Stats
Last
One Month Ago
One Year Ago
Gold 1,696.83 1,726.34 1,573.67
Silver 32.52 32.66 28.88
Copper 3.64 3.46 3.27
Oil 85.89 86.32 94.95
Gold Producers (GDX) 46.48 47.22 52.38
Gold Junior Stocks (GDXJ) 21.30 22.08 25.24
Silver Stocks (SIL) 23.15 22.46 20.45
TSX (Toronto Stock Exchange) 12,289.17 11,929.79 11,543.05
TSX Venture 1,174.01 1,258.69 1,405.93


The 12 Gold Bugs of Christmas

By Jeff Clark, Senior Precious Metals Analyst

While the price of gold has languished in a trading range much of the year, leaving some investors scratching their heads, many have been buying – and in some cases, really loading up.

It's a tad puzzling that gold hasn't broken into new highs, despite enough catalysts to move a herd of stubborn mules. But that's the hand we're dealt right now. We can't get up from the table until the game reaches its conclusion. Besides, I think the stall in prices is giving us one last window to buy before prices break permanently into higher levels for this cycle.

At least that's how a number of prominent investors and institutions are viewing the price action right now. Here's a sampling of this year's "gold bugs" and what they've been doing about precious metals recently.

Jim Rogers, billionaire and cofounder of the Soros Quantum Fund, publicly stated last month that he plans to "sell federal debt and purchase more gold and silver."

George Soros increased his investment in GLD by a whopping 49% last quarter, to 1.32 million shares. His stake is now worth over $221 million. Many investors don't realize that he also placed call options on GDX worth $9 million. The most logical explanation is that he thinks gold equities are undervalued and that there's big money to be made in them within a year.

Marc Faber mocks those claiming gold is in a bubble. "It's nowhere close to that stage," he says. And even though he's already sitting on a huge gain, he won't take any profits. Why? "I keep a picture of Mr. Bernanke in my toilet, and every time I think about selling my gold, I look at it and I know better!"

Brent Johnson, a San Francisco hedge-fund manager, believed in gold so much that he started his own gold fund, Santiago Capital, earlier this year. His latest video points out that there have been "278 global easing moves in the last 14 months." How does someone not own gold in that kind of environment?

Don Coxe, a highly respected global commodities strategist, stated at the Denver Gold Forum that "now is the best climate I have ever seen for an increase in gold prices." He told fund managers, mining analysts, and mining executives to prepare for significantly higher gold prices and thus higher gold-mining-stock valuations. "The opportunities ahead are the best I've seen." He thinks a new gold rush is ahead for gold stocks, and that a "lustrous" rally will occur within a year.

Jeffrey Gundlach, cofounder of DoubleLine Capital, predicts that deeply indebted countries and companies will default sometime after 2013. Central banks may forestall these defaults by pumping even more money into the economy – but at the risk of higher inflation in coming years. He recommends buying hard assets including gold, and also "gold-mining firms because we consider them to be bargains."

Rob McEwen, CEO of McEwen Mining and founder of Goldcorp, is buying precious metals because he believes gold will someday hit $5,000 and silver $200.

Savneet Singh, a former investment analyst at Morgan Stanley, was frustrated with the options available to acquire physical gold in an allocated, whole-bar format outside the banking system. He started Gold Bullion International, the platform service used by the Hard Assets Alliance, a service that virtually does away with the need to buy GLD.

This is only a handful of individual investors who have made recent news with their bullion buying. But institutions, governments, and others are participating, too…

Central Banks

  • The South Korean central bank added 14 tonnes (approximately 450,000 troy ounces) of gold in November, and now holds six times more than back in June of 2011. "Gold is a physical, safe asset, and allows us to deal with changes in the international financial environment more effectively," bank officials said.
  • Brazil bought 18.9 tonnes (607,650 ounces) in September and October alone. It will likely buy more, since gold still accounts for only 0.8% of its reserves.
  • Paraguay bought 7.5 tonnes (241,130 ounces) in July.
  • Turkey imported 4.2 tonnes (135,000 ounces) of gold in November. It has bought 117.2 tonnes (3.7 million ounces) so far this year, almost double last year's purchases.
  • Central banks around the world bought a total of 351.8 tonnes of gold (11.3 million ounces) in the first nine months of 2012, up 2% from a year ago.
  • Even Argentina added 7 tonnes last year (225,000 ounces), and Colombia 2.3 tonnes (almost 74,000 ounces).

These data suggest in and of themselves that dips in the gold price are likely being bought – and will continue to be bought – by central banks. They're not exactly short-term traders. Remember, central banks were net sellers as recently as 2009, so this reversal will likely play out for years.

India. I tire of the reports that proclaim something like, "Indian buying dropped this month!" Let's be clear about India and gold: Imports have more than doubled in three years (through 2011), and investment demand has climbed almost fivefold. And all this occurred while prices were rising and from a nation that already has a strong cultural predisposition towards the metal. Further, silver demand is taking off: sales have jumped 24% this year over last.

There is some government interference, but no slump in demand in India. This trend will continue and may even strengthen when inflation begins making front-page headlines.

Germany. A precious-metals group recently reported that Germans are increasingly buying gold because of fears about economic uncertainty, and that a third of citizens are now considering gold as part of their investments. "There has been a significant increase in demand in recent months because of worry about actions taken by the European Central Bank and US Federal Reserve, as the two central banks seek to counter the euro zone crisis and slow US economic growth."

Commercial Banks

  • Morgan Stanley's preferred metal exposure for 2013 is gold, though the company expects silver to outperform it. The bank stated that it believes "nothing has changed with gold's fundamental thesis: QE 3 (and 4...) and similar commitments from the ECB and BoJ; low nominal and negative real interest rates; ongoing geopolitical risk in the Middle East; and mine supply issues."
  • ScotiaMocatta stated that it will "not be surprised to see prices reach $2,200/oz." Why? "One of the main reasons we are still bullish is because of the mess the Western world is in. Europe has a debt problem that is proving all but impossible to solve, and all efforts to date have revolved around throwing more money at the problem to avoid the monetary system from breaking down… that should be reason enough to be bullish."
  • Deutsche Bank released a new report essentially declaring that gold is money. "We see gold as an officially recognized form of money for one primary reason: it is widely held by most of the world's larger central banks as a component of reserves. We would go further, however, and argue that gold could be characterized as 'good' money, as opposed to 'bad' money which would be represented by many of today's fiat currencies."
  • Bank of America Merrill Lynch says gold will hit at least $2,000 by the end of 2013.
  • JP Morgan now accepts physical gold as collateral.
  • Another source of demand from banks could be the change in Basel III regulations. If you haven't read about it, gold could get promoted to Tier 1 status, meaning it would be considered a "zero-percent risk weighted item."

    Eric Sprott recently wrote, "If the Basel Committee decides to grant gold a favourable liquidity profile under its proposed Basel III framework, it will open the door for gold to compete with cash and government bonds on bank balance sheets – and provide banks with an asset that actually has the chance to appreciate. Given that US Treasury bonds pay little to no yield today, if offered the choice between the 'liquidity trifecta' of cash, government bonds or gold to meet Basel III liquidity requirements, why wouldn't a bank choose gold?"

    We'll be watching the news on this topic.

None of these parties think the gold bull market is over, nor the price too high. They recognize the implications of a world floating on fiat currencies, and that government "solutions" to debt and deficit spending will significantly – perhaps catastrophically – dilute the value of currencies, the fallout of which has yet to materialize. As for me, I think that the longer the malaise continues, the more likely the breakout is to be both sudden and dramatic.

We can all speculate about when the next leg up for gold will kick in, but the point for now is to take advantage of the weakness, like many of these gold bugs. When the price breaks out of its trading range, are you sure you won't wish you'd bought a little more?

I say give you and your loved ones a lasting Christmas gift and call your favorite bullion dealer.

Happy Holidays from your Casey Research Metals Team!


Gold and Silver HEADLINES

Sudan's Central Bank Places Moratorium on Gold-Ore Exports (AllAfrica)

In an attempt to bring the country's gold sector under tighter control and increase profits, Sudan introduced a moratorium on gold-ore exports. This is not an all-in isolation from the foreign market: gold miners will be allowed to export after refining ore in the specially designated, state-controlled gold refinery.

The step is meant to prevent local producers from smuggling gold ore to Dubai, among other places. The new refinery will pay a higher price, which should serve to remove some of the incentive to escape official export channels.

The country also aims to close a budget deficit caused by the loss of about 75% of its oil production due to last year's secession of South Sudan.

The measure is understandable, but will hardly serve the country's investment clients well. In our view, privately owned refineries and an open market for gold-ore processing would do the job just as well, if not better.

Ivory Coast Parliament Approves New Tax on Gold Profits (Reuters)

The world's top cocoa-producing country introduced a new tax on gold profits last Thursday. The country wants its growing mining sector to contribute more to post-war reconstruction efforts and – unsurprisingly – raising taxes looked like the best option.

The new tax will apply to profits above production costs of US$615/oz., the rate fluctuating with the price of gold.

Randgold is a gold producer with operations in Ivory Coast. CEO Mark Bristow characterized the tax as punitive:

"We are saying that not only it is detrimental to the country's investment stand, it also defies reality: in the world where mining costs rise constantly, gold price appreciation is the only positive factor that helps miners deliver good profit margins and have an incentive to develop projects that were deemed unprofitable when gold was cheaper. To come up with arbitrary estimates of what the appropriate cost of production is, introduce new taxes and hope that the country's mining sector will respond by booming growth is just not right."

(BIG GOLD subscribers can see our view of the political outlook for Randgold and our Buy advice on the portfolio page of the current issue.)


This Week in International Speculator and BIG GOLD – Key Updates for Subscribers

International Speculator

BIG GOLD

  • The current issue outlines our candidates for the 2013 Stock of the Year. Start your new year off right by buying the best undervalued gold and silver producers from inexpensive BIG GOLD. Now is the time to buy while prices are down!
Dec 17, 2012