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Feel like going fishing for gold and silver?Frank Lechner  Be cautious, you could get wet. Give it until after the first of the year to determine direction. For now, the market is going to be very volatile and probably heading down as traders do the profit taking thing. The seasonal tendency for gold to move forward through this time of year is certainly evident once again. While stocks and bonds here in the US are having a very difficult time determining direction, gold has moved to new highs for the move around $540. Having gotten way ahead of itself, it is back around $505. We could easily see a correction back to the $475 levels. The time is not ripe for an all out shouting match in the gold pits, that day will come later when the retailers arrive to purchase gold. Silver too has been putting in solid gains, now painting $9 per ounce, and then pulling back again. These are significant, but not of the stature of Platinum + $1000 and Copper of + $2 a pound. Not only is this exciting for the physical holders, but it can really set the tone for the rest of your portfolio. This is why I have been pushing physical purchases since 2000. Paper is paper, and physical is real. If we need to remember one thing, it is simply PAPER IS BASED ON THE PHYSICAL. With the breakout in gold price reflected in many currencies across the world, a new energy pervades the physical market. A buyer in India isn't looking to buy Newmont for instance, they are looking for the physical. Average worldwide purchasers do not have access to the share markets as we do for instance in Canada, the US, or some European areas. We are no different, as unless we are quite sophisticated investors, we do not have access to other world stock markets directly. This is one of the reasons why physical prices have zoomed, while shares have held back. There is worldwide demand for gold and silver, and the only real way to satisfy this demand is through physical purchases. Other investors/puchasers across the world have been through currency collapses, arguably making them more sophisticated in the purchase of physical metals. They understand intuitively what can and has happened to a fiat currency. This most recent run in gold and silver has been a worldwide demand issue, much like copper, oil, or other primary products. We here in the US, accustomed to a reserve currency, still are unable to grasp this most basic logic. All appears well on the surface to the average US investor, consequently gold and silver have not gone 'retail' here. When the metals do go retail, the shares will explode in price. Side note on paper----did you see the Japanese trader who made a major boo boo by entering 620,000 shares of a company instead of 620,000Yen worth of stock. OOOOppps! They are still trying to sort out the mess. Cost his company a bundle and probably will have to fall on a sword or something. Again, paper is paper. Moving on, we need to make allowances for the fact that there are times of disagreement of physical to share prices. But, on the whole, the shares are based on the current and projected physical price of gold and silver. It seems as though everyone these days is very concerned with the share prices in gold and silver as the physical market has moved up. Many theories have been put forth, but in reality it is quite simple. The miners as a whole aren't making enough money to be considered a blue chip solid investment. They are strictly speculative, and the nature of the beast in speculative investing is 'emotion', 'fear', and 'greed'. While you can count the number of companies actually making money and paying out dividends, probably on your hands without using your toes, the number of companies still hemorrhaging cash, even with this physical price, is very large. The number of low cost gold and silver mines is infinitesimal on a world stage. The majors are having an extremely difficult time trying to replace used up resources because of this. The high cost producers will eventually make money enough to pay dividends, providing of course the gold and silver physical prices continue to march ahead. From a producing miners perspective, the overall volume of fiat created worldwide is manifesting itself into base inputs and products. By this I mean that the cost of copper piping is up, the cost of oil to run equipment is up, and so on. A producing miner "needs" an increasing gold or silver price just to keep pace with this monetary/product inflation. This is prior to paying dividends, or this is just to stay operational. Throw in the currency disparities, or relative strengthening of other currencies vs the dollar, and you have a very difficult situation to manage. Remembering back when gold was $276, I was thinking that at $500 gold, the dividend streams would become a river. I did anticipate the currency flop differences, but not the incredible rise in input costs. Copper at + $2.00 a pound, nobody would have believed that at the turn of the millennium. Add on oil prices north of $60 bucks a barrel and you can see where this is all heading. Agreed, I did anticipate that there would be some input cost inflation, but not on the scale we are talking of here. If I would have fired up the crystal ball, and knew this were to happen, I would have actually decreased my gold and silver prices relative. This is why the companies are still not enriching a shareholder through dividends. This is why shares in mining companies are lagging. What is it going to take to really get them moving? A greater physical price for the metals, period. The majors will continue to participate, but in relative terms, if they do not replace used up resources, there is actually going to be a comeuppance in the majors. Unless you have more gold or silver to sell, or a steady stream of continuing resources, you are eating your young. You must also consider that the gold and silver stock markets are relatively small, thereby unable to accept very large inputs of money across so few producers without driving PE ratios to excessively high levels. This is going to affect the producers who are paying dividends, unless the physical price continues to support further increases in price of shares, or expands the profitability. Case in point, Durban, which is a high cost producer, used to crank out a million oz per year. With the closing of mines due to cost reasons, they are down to plus or minus 6-700K oz per year. If they can get their fixed costs to match their production levels, and bring more projects on line, they too will be able to participate in this bull market. As gold has marched north in dollars, and the Rand has stabilized, there is the real possibility that they can finally start paying some dividends. There are very few Gold or Silver miners, existing or projected, out there that can extract gold at low cash costs. Looking at this deeper, it is much more difficult to take a large company and make it 'small', than it is to start small and grow. The built in excitement level or emotion is much different. I am telling you to find the Juniors that will be tomorrows producers. The Juniors will be the takeover targets of the majors. They will be the stars of the gold and silver bull market. They are going to bring their production online without all of the decades old baggage of the 'old timers'. They will be the ones' who find the lower cash costs in extraction mines. Watch for those that are nothing
but liars standing over a hole in the ground. For this phase,
look for those that are at some stage of pre-production. The
mine must have been found economic, they must be financed, and
they must be in feasibility or ramp up stage. They must be acquiring
equipment to work with, as this is always a lead time issue. The gold and silver markets are coming to a new reality, and that is that the costs of production are going to continue to maintain these higher levels, that there are going to be very few economic mines at low gold prices, that demand is increasing, and that lower physical prices with the new cost structure will certainly remove production from the table almost immediately. Effectively, what I am saying is we absolutely deserve a decent sized correction in gold and silver to keep this market healthy, but over the long term, the physical prices will be much higher. Get Physical Stay Physical Frank A. Lechner
321gold Inc |
