The Problem with Mining

If you can believe the screaming headline, one of the gurus behind one of the gold newsletters is going all-in to gold, buying a million dollars of mining shares. If (1) gold is set to explode to the upside, and (2) mining shares are geared to the gold price, then he stands to get seriously rich(er).

 

As this book attests to, some people have a very cynical view of mining…  We would say there is a time for everything. For instance, when gold went  from $270 to $320 in 2001-2002, the HUI index went from 35 points to 150 points, in a show of rather noteworthy outperformance (something similar happened in 2016).  The “sweet spot” for gold mining shares is usually early in gold rallies, before input prices catch up (empirically, gold has a habit of leading price moves in the main mining inputs) [PT]

 

We are not mining experts, but we will address (2) by saying that mining shares only go up if the input costs don’t go up as much as the price of gold. And if the company keeps efficiency up, and costs down. And if local tax authorities don’t get greedy.

And if mine labor unions don’t get violent, environmental regulators don’t make expensive demands, etc. And if the company finds new ore bodies at the same rate it depletes them.

Here is a graph showing the price of the VanEck Vectors Gold Miners ETF (GDX) against the price of gold. We have plotted both price as a percentage of the start price to put them both on the same scale.

 

Gold vs. the GDX – click to enlarge.

 

You can see the problem. The price of gold from late May 2006 through present. In five years, the price of gold rose to 288% of its starting level. GDX was more than 100% behind, at only 170%. Note that the GDX is more than 40% down from its level in 2006. For comparison, the price of gold is just under double over the same period.

If this is gearing, then it looks like the gear box was bolted on backwards.

To bet big on gold mining shares now, your bet includes another conditional: (3) if the gearing has since been fixed…

Anyways, this is not really our wheelhouse. We focus our commentary on (1). Did something change in the market, that will drive the price much higher? Before that can happen, we would have to see something happen to put a bumper under that falling silver elevator.

 

Fundamental Developments

Below is the only true look at the supply and demand fundamental of the metals, but first, the price and ratio charts.

 

      Prices of gold and silver – click to enlarge.

 

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It began the week moving up, but then reversed and ended lower.

Last week, we said:

 

“If it breaks above 76, then the next resistance looks to be 80.”

 

It did not break 76. It closed Monday at 75.7, but ended the week below 75.

 

Gold-silver ratio – click to enlarge.

 

For each metal, we will look at a graph of the basis and co-basis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide brief commentary. The dollar will be represented in green, the basis in blue and co-basis in red.

 

Here is the gold graph.

 

Gold basis and co-basis and the dollar price

 

Note that the June contract has just a touch of backwardation, with the co-basis now at + 0.01%. Back in early 2013, we dubbed this new normal behavior, when each contract would go into backwardation before it expired, temporary backwardation. That is all this is, and not a very impressive specimen either.

Yes, it is true that the scarcity of gold has been rising for about a month (look at the red line, the co-basis). However, that corresponds to the rise in the price of the dollar (which is the inverse of what most people measure, the price of gold in dollars). On April 12, the dollar was 24.18 milligrams gold, corresponding to a price of gold at $1286. The co-basis — our measure of scarcity — was at -0.81%.

Since then, there has been a run up in the price of the dollar (which most people perceive as a run down in the price of gold), to 25.52mg gold (which people generally think of as a price of gold of $1,219).

When we see such a clear correlation between the price of the dollar and the co-basis, we know that the move is just speculators repositioning (in this case, obviously selling). The more the price of gold is down, the more speculators liquidate their futures, the scarcer the metal becomes.

Our calculated fundamental price closed the week up $3, to $1,254. While this may be welcome news for gold speculators after a few weeks when it fell, it’s hardly the stuff of making million-dollar bets.

Far be it from us to get in the way, when there’s serious money to be made. It’s a (more or less) free market. Where there’s an opportunity, people will take it. We refer, of course, to the newsletter hawkers and their explosive upside calls. We assume this is a lucrative business.

However, unlike the opportunity to sell newsletters to gold speculators who don’t know what most newsletters have been promising over the last 6 years, the opportunity to bet on a gold price increase looks rather less likely, at the moment.

Now let’s look at silver.

 

Silver basis and co-basis and the dollar price – click to enlarge.

 

Silver does not yet show any backwardation, though it’s close at -0.03%.

However, the sharp and sustained rise of the co-basis is notable—along with the sharp and sustained rise in the dollar. Measured in silver, the dollar has risen from 1.68 grams of silver to 1.92 grams earlier this week. That’s a big run up (i.e. run down in the price of silver as popularly perceived).

We have been talking about an ongoing flush in the silver speculators. The price fell through Wednesday, then rallied sharply on Thursday and Friday. Perhaps that elevator has found a rubber bumper?

Significantly, our calculated fundamental price rose a buck this week. From around $15 last week, it’s now $16.

We will end on an amusing note. Last week, we said:

 

We saw a technical analysis trader write a note this weekend. He said he plans to short silver on Monday. When the technicals and then fundamentals align, that can make for an interesting week.

 

Assuming he shorted it early on Monday morning, he might have top-ticked it at $16.40. On Tuesday, he could have closed at $16.05, for a gain of 2.1%. There has to be an easier way to earn a few bucks (and we never recommend naked-shorting gold or silver).

Keith will be speaking at the Metal Writers Conference in Vancouver, at the end of the month. And at the Mining Investment Europe event in Frankfurt in mid-June.

 

© 2017 Monetary Metals#

 

Image caption by PT

 

Dr. Keith Weiner is the president of the Gold Standard Institute USA, and CEO of Monetary Metals. Keith is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. Keith is a sought after speaker and regularly writes on economics. He is an Objectivist, and has his PhD from the New Austrian School of Economics. He lives with his wife near Phoenix, Arizona.

 

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Can Germany Be Made Great Again?
      When Germany Was Great! Ever since the start of the deliberately conceived “migrant crisis,” orchestrated by NWO elites, the news out of Germany has been, to say the least, horrific. Right before the eyes of the world, a country is being demographically destroyed through a coercive plan of mass migration.  The intended consequences of this – financial strain, widespread crime and property destruction, the breakdown of German culture – will continue to worsen if things are not...
  • Yanking the Bank of Japan’s Chain
      Mathematical Certainties Based on the simple reflection that arithmetic is more than just an abstraction, we offer a modest observation.  The social safety nets of industrialized economies, including the United States, have frayed at the edges.  Soon the safety net’s fabric will snap. This recognition is not an opinion.  Rather, it’s a matter of basic arithmetic.  The economy cannot sustain the government obligations that have been piled up upon it over the last 70...
  • Views From the Top of the Skyscraper Index
      Views From the Top of the Skyscraper Index On a warm Friday Los Angeles morning in spring of 2016, we found ourselves standing at the busy corner of Wilshire Boulevard and South Figueroa Street.  We were walking back to our office following a client wire brushing for events beyond our control.  But we had other thoughts on our mind.   Iron workers (the non-distraught variety) atop the 10 ton spire of the Wilshire Grand Center in Lost Angeles. This image is vaguely...
  • Prepare for Another Market Face Pounding
      “Better than Goldilocks” “Markets make opinions,” goes the old Wall Street adage.  Indeed, this sounds like a nifty thing to say.  But what does it really mean?   The bears discover Mrs. Locks in their bed and it seems they are less than happy. [PT]   Perhaps this means that after a long period of rising stocks prices otherwise intelligent people conceive of clever explanations for why the good times will carry on.  Moreover, if the market goes up for...
  • Bitcoin, Gold and Silver
      Precious Metals Supply and Demand Report That’s it. It’s the final straw. One of the alternative investing newsletters had a headline that screamed, “Bitcoin Is About to Soar, But You Must Act by August 1 to Get In". It was missing only the call to action “call 1-800-BIT-COIN now! That number again is 800 B.I.T..C.O.I.N.”   Bitcoin, daily. In terms of the gains recorded between the lows of 2009 and the recent highs (from less eight hundredths of a US cent per...
  • Seasonality: Will Patterns that Worked in the Past Also Work in the Future?
      Historians of the Future Every investor makes trading decisions based on what happened in the past – there is no other way. What really interests us is the future though. After all, what happens in the future ultimately determines investment success.   When in doubt, you can always try to reach the pasture...  In Human Action, Ludwig von Mises described stock market speculators as akin to “historians of the future”. This is without a doubt the most trenchant definition of...
  • Bitcoin Forked – Precious Metals Supply and Demand Report
      A Fork in the Cryptographic Road So bitcoin forked. You did not know this. Well, if you’re saving in gold perhaps not. If you’re betting in the crypto-coin casino, you knew it, bet on it, and now we assume are happily diving into your greater quantity of dollars after the fork.   Bitcoin, daily – adding the current price of BCH (the new type of Bitcoin all holders of BTC can claim at a 1:1 ratio), the gain since the “fork” amounts to roughly $1,000 at the time we...
  • What Went Wrong With the 21st Century?
      Fools and Rascals   And it’s time, time, time And it’s time, time, time It’s time, time, time that you love And it’s time, time, time… - Tom  Waits   Tom Waits rasps about time   POITOU, FRANCE – “So how much did you make last night?” “We made about $15,000,” came the reply from our eldest son, a keen cryptocurrency investor. “Bitcoin briefly pierced the $3,500 mark – an all-time high. The market cap of the...
  • Czar vs. Pope
      Vladimir the Great Sums Up Pope Francis the Fake Vladimir Putin has once again demonstrated why he is the most perceptive, farsighted, and for a politician, the most honest world leader to come around in quite a while.  If it had not been for his patient and wise statesmanship, the world may have already been embroiled in an all-encompassing global conflagration with the possibility of thermonuclear destruction.   Vladimir Putin is sizing up Pope Francis with his “good...
  • Bitcoin Has No Yield, but Gold Does – Precious Metals Supply and Demand Report
      Bitcoin and Credit Transactions Last week, we said:   It is commonly accepted to say the dollar is “printed”, but we can see from this line of thinking it is really borrowed. There is a real borrower on the other side of the transaction, and that borrower has powerful motivations to keep paying to service the debt. Bitcoin has no backing. Bitcoin is created out of thin air, the way people say of the dollar. The quantity of bitcoins created may be strictly limited by...
  • Is Historically Low Volatility About to Expand?
      Suspicion Asleep You have probably noticed it already: stock market volatility has recently all but disappeared. This raises an important question for every investor: Has the market established a permanent plateau of low volatility, or is the current period of low volatility just the calm before the storm?   All quiet on the VIX front... what can possibly happen? [PT] - click to enlarge.   When such questions regarding future market trends arise, it is often...
  • Will They Haul Off Trump’s Statue, Too?
      Confused by Shadows POITOU, FRANCE – This week, we are talking about theperishable nature of gods. Yesterday, the city fathers of our hometown of Baltimore let it be known that it was time to toss out the old deities.   The Robert E. Lee and Thomas. J. “Stonewall” Jackson Monument in Baltimore, which the mayor inter alia wants to remove. Suddenly it has become fashionable to erase the memory of an important part of US history all over the country. By experience, this...

Support Acting Man

j9TJzzN

Austrian Theory and Investment

Own physical gold and silver outside a bank

Archive

350x200

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com