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ExpectationsFrank Lechner   Now that gold and silver have again achieved new highs for the move, there is a rampant excitement pervading the markets. The gold and silver bugs are quivering with desire, expectant that this move is the genuine 'one'. Let's back up for a minute or two. Gold and silver have been on a very nice rise as of late. This is very typical for this time of year. Nothing is new under the sun here. Gold and silver stocks are putting in nice gains if they are producers, advance stage explorers, or explorers announcing outsized results from drilling (basically news driven). This brings us to my next point. In order for this gold and silver bull to really achieve the heights that we all understand and are waiting for, it is a given that the typical retail investor must be participating. What is it going to take to get this participation? Firstly, they must be rising in price with the potential for further gains. There must be a convincing energy to the market as if screaming from the rooftops. Secondly, they must have the backing of advisors and the big dogs or mutual fund buyers. This must be so in order to get the word out to the retail investors. Lastly, they must have the 'goods' in the form of a profitable business model to give it staying power, instead of a rally that fizzles after a short period. Arguably, the retail investor is not participating at this time. Around the world, the gold price has decoupled from its' link with the dollar, causing a rise in gold price across many currency types. I had predicted, and mandated this to happen in order for gold to begin the next leg of the bull market or Phase II. Phase II has begun. Quite some time ago, I had written that in Phase II, the solid producers would be throwing off dividends on a consistent basis. This is only beginning to happen, and on a very limited scale. Hence the reasoning for lack of backing by large retail players, and the follow on participation of the small investors. Very few companies in the gold and silver sector are operating profitably on a consistent basis. There are many reasons for this. Chiefly, the costs have been rising faster than the price achieved at the sale barn. Mining is a capital and input cost sensitive business. It is very expensive to produce, as is the oil and gas industry. The type of equipment used in drilling, to excavating, to crushing, separation, and finally producing the raw material, is large and expensive. It is highly specialized and requires large inputs of labor and black gold. You aren't going to jump online, order a 100 ton truck, and expect delivery within a couple of weeks. It isn't happening. Much of the mining equipment is in short supply, and takes months to take delivery of more. This doesn't even address the costs of this type of equipment, or in other words, we aren't talking of checkbook accounting here. These are large decisions, that must be made prudently, and on the basis that this equipment will be used upon arrival, and not parked due to decreasing prices. We have agreed that the equipment
is not readily available, and very expensive to acquire. Can
we also agree that this equipment requires very large inputs
of petroleum products to keep it running and producing for the
mine? Great, well what has happened to oil and gas prices? Although
they have given up some gains, oil and gas are at very inflated
levels. Our gold and silver producers are required to deal with
this. Where is this taking us? Well, there are very few mines around the world producing at such low cash costs, that they can absorb the inevitable ancillary cost input increases that are so detrimental to the dividends and share price. Many of the mines in production, have been in production for some time. As depth of recovery increases, so do the cash costs of production, sometimes negating the increasing physical price received at the sale.. With the rising gold and silver prices, it of course adds more recoverable assets to a producers balance sheet. (As prices rise, it is economic for marginal projects to be brought forward). As these marginal projects are mobilized, remember that they were uneconomic at lower metal prices, more supply is added to the market but not necessarily at exceptional profitability levels. This then would argue that they are sensitive to higher input costs, or they could become uneconomic even if there were a rising gold and silver price. So we are coming into the beginning of Phase II, which is still a typical insiders Phase. The gold and silver bugs will be up to their collective beards in physical metal and stocks whose names you may or may not be able to pronounce. They have been studying, following, and looking at these for years now. They know the market better than anyone. But, at the end of Phase I, they were trading amongst themselves, as opinions moved to and fro. Phase II will usher in the initial return of the big boys. The boys who will jump on board prior to the retail investor. They will have caught the scent, and will be on the hunt, much like the gold and silver bugs. Oh, their opinions will indeed vary, but overall it will add to the market in the form of rising physical and share prices. The best of the best will continue to catch a bid, and the marginal producers will be dabbled in. This will provide the impetus for the best to scour the earth in search of acquisitions. These acquisitions will be the source of the lower cost mining projects. Some of the Junior's have indeed stumbled into a project that actually makes economic sense. These will be sorted, and they will either take it to production themselves, or be eaten alive, and the project will belch out gold and silver under the flag of a larger player. These lower cash cost projects must be brought to market, as the continued increasing demand for the metals will require it. If the Junior with the keys doesn't have the financial resources to accomplish it, they must look to a company that can invest in the project and bring it home as it were. As these projects are brought online, a decreasing cost of production can be achieved, and the resultant increase in shareholder dividends can be realized. Because of the fluid nature of this market, ie currency exchanges, input costs, and of course fluctuating revenue from sale of the product, increasing dividends are a rare site indeed. Once a history of increasing dividends can be shown, and confirmed over a period of time, a more normal business valuation model can be utilized. It is at this point, that the question of 'are they making money', or 'are they paying dividends' can be applied to gold and silver producers on a more inclusive basis. This will be true for a more comprehensive list of miners, instead of a select few. This is when the retail investors can be brought on board, and take these markets to the levels that few of us discuss. It is at this point that the larger players will be able to recommend gold and silver to the masses. We must never forget that the average retail investor is too lazy, stupid, or just plain non-committal to do their own research. These retailers listen to the voice of a waitress, a buddy at work, or a smooth talking mutual fund huckster. It is going to be quite some time yet for the retail investor to show up in these markets. It will be some time before we can say no dividends are a thing of the past. It will be some time until these companies are actually buying back stock, rather than issuing it and diluting their shareholder equity. It will be quite some time before the real fireworks begin. Relax, there is plenty of time to continue to accumulate your share of gold and silver. Just follow your plan, and invest on a periodic, yet focused manner. There will be plenty of time later to watch the fireworks. For now, you should pretend you are the grey squirrel, scurrying about gathering nuts for the inevitable winter. Continue to buy the breaks, and don't forget that there are many who will never see the finish line because of short term greed and angst. They will be sitting on the sidelines, while you will have a front row seat for the upcoming show. Don't worry about the ever present pullbacks, or the day to day fluctuations. In the grand scheme of things, they are immaterial. Keep your eye on the long term fundamentals to guide you forward. Have a Merry Christmas, and a very profitable New Year !! Best of Investing to You, Continue to accumulate physical gold and silver on the breaks. You will be justly rewarded over time. Everyday is the right day to accumulate gold and silver !! Frank A. Lechner
321gold Inc |
