Wednesday, July 31, 2013

Large Hedge Funds' Leverage exceeds 2.5X.

The typical large hedge fund would be insolvent if they lost 28%.  That's the risk of levering up 2.5 times.

This article describes data recently collected from large (over $500M in net assets) hedge funds by the SEC.   In aggregate the funds have $1.47 Trillion in net assets and $1.06T in debt, which leaves $0.41 Trillion of equity.  Of course hedge funds are looking at the other side, which is if they achieve 10% growth of net asset the return on equity would be 36%.

Investors in hedge funds are usually very sophisticated, professional money managers, such as pension fund managers.  Why would they pay a hedge fund 20% of gains to take on leverage and the inherent risks with their equity.  Do they believe that hedge fund managers have an edge so that gains are more assured?  Is this their way to buy in to high frequency trading, market manipulation, and insider trading? 

Sunday, July 28, 2013

New Precious Metals Vaults in Singapore

Where is all the gold and silver that needs storing in Singapore coming from? Not from China, Russia nor India.  New vaults in Singapore are strong evidence that bullion is moving from west to east.  They would not build new storage facilities without demand for it.

Inside a gold vault at the Bank of England with a scientist.  Actually, I'm not sure who the host is, but with hair like that he must be a scientist!  And, he seems to get most excited about the physical properties of Au.

Friday, July 26, 2013

Two Major Gold Miners Maintain Production Plans for 2013 Despite Drop in Gold Prices

Goldcorp (GG) and Newmont (NEM) recently reported Q2 financial results and outlook for the rest of 2013.  Surprisingly and contrary to some headlines both miners are maintaining production volume and all-in-sustaining cash cost guidance for 2013.  GG and NEM are not shutting mines or significantly cutting capital spending to generate more free cash flow.  Lower by-product (silver, copper, lead, and zinc) prices are being offset by favorable yields and mix compared to their guidance at the beginning of this year.

As a long time Goldcorp shareowner my concern was peaked by a Citibank analysis shown by Zerohedge.  The analysis implies that Goldcorp and Newmont will not generate free cash flow if gold is below about $1,600 per ounce.  There is much more to the story.

GG and NEM are forecasting an All-in Sustaining Cash Cost per gold ounce of $1,050 and $1,150 respectively for 2013.  Their forecasts assume today's commodity prices for by-products, such as silver, copper, lead, and zinc.  All-in Sustaining Cash Cost includes by-product credits and sustaining capital expenditures and excludes depreciation and expansionary and project capital.  These miners could generate free cash flow if they depleted their current reserves and did not spend on new projects.  Of course this is a poor long-term strategy, but one they could pursue if necessary until gold prices recovered.

GG and NEM have strong balance sheets and financing.  GG completed a $1.5B financing in March 2013.  So they can afford to keep investing in new projects.  Never the less, both have revised their capital spending plans.  Each are reducing their $2B+ capital plans for 2013 by only $200M.  

In Q2 each company wrote-off about $2B of value in inventory (leach pads), in the ground (reserves), and Property, Plant and Mine Developments because of the recent drop in gold prices.  NEM, for example used a long term gold price assumption of $1,400 which impaired the book value of their Property, Plant and Mine Developments by $1.5B.  Presumable, if/when the price of gold increases the companies could write up these assets and recognize a gain.  But, I doubt that accounting rules permit what goes down to go back up again in all these cases.

GG and NEM could generate cash with gold below $1,600 per ounce if necessary.  Fortunately, for them it is not necessary and they plan to continue investing in growth projects thereby doubling down their bets on rising gold prices.  GG and NEW stock prices traded up on Friday by 2.1% and 1.5% respectively, while gold was flat.

Also, note that GG and NEW do not nor do they plan to hedge revenue (e.g. gold).  During the gold price smack-down in April and May some alleged that gold miners' hedging activity was contributing to the price decline.  Not from either of these major miners.

All-in sustaining cash cost is a tricky metric.  It is not GAAP.  Many members of the World Gold Council have adopted this industry metric over the last several quarters.  Goldcorp management explained that GG's all-in sustaining cash cost will be much lower in the second half of 2013 due lower sustaining capital requirements than in Q1 and Q2.  The definition of sustaining must be a bit fuzzy.  So best to use this as a guideline and view it over time.

Kinross, Barrick, and Yamana report Q2 earning on August 1st.

Sprott Sees Physical Gold Shortages Now Reaching Extremes

Here is a link to an article/interview with Eric Sprott.
He lists a nice summary of the evidence that the physical gold market is tightening: declining inventory at the COMEX and GLD, German gold repatriation request, ABN Amro cash settling gold commitments, import restrictions in India, negative GOFO rates, and LBMA shipment delays.  I've written about these data points previously, if you want some background about them.  

It is reassuring to see that Eric and I focus on the same situations and interpret them consistently.  As a precious metals fund owner and manager, Eric certainly has more and better contacts and experience in the gold and silver markets that yours truly.  

Since everyone is in agreement that physical gold supply is clandestinely constrained, the big questions is when will the true supply become evident.  And then the price of physical gold will take off.  Eric Sprott seems to imply that he thinks we are at the bottom now.  So far, Jim Sinclair is the only pundit I have see out on a limb.  He wrote that the COMEX will default in the next 90 days, which should cause a huge jump in gold prices.

Monday, July 22, 2013

More Evidence of Constrained Physical Gold Supply

Andrew McGuire in an interview with King World News provided several points regarding the gold markets:
- The London Bullion Market Association (LBMA) recently extended delivery conditions from 2 days to 5 days.  Traders must now wait 5 days for delivery of their bullion instead of the long established 2 day period.
- Large gold refiners have a large backlog of orders to produce 400 ounce gold bars, which are the standard for trading at the LBMA.
- New vaulting services in the East (e.g. Singapore).

Andrew astutely observes that new vaulting services must be in response to new demand for precious metals storage.  And, new demand for storage in the East shows that bullion is moving to the East from the West (e.g. US and UK).  He adds that his clients and presumably others who need vault service in the East are not 'flippers' and are invested in bullion for the long term.  They will not sell on short term price volatility.  This metal is off the market for the short term and therefore not available if/when short sellers need it to cover.

I also found this interesting bit of news from India: "India central bank further tightens gold import rules to tame demand"
"The RBI asked all nominated banks and agencies to export at least one-fifth of every lot of imported gold in all forms, and locally make it available only for jewellers."  This looks like an effort to placate the jewelry industry in India.  Telling, that gold should be available to jewellers only, and therefore not to investors as coins or bars.  

References: the physical market for gold and silver is distributed globally, most wholesale OTC trades are cleared through London. The average daily volume of gold and silver cleared at the London Bullion Market Association (LBMA) in November 2008 was 18.3 million ounces (worth $13.9 billion) and 107.6 million ounces (worth $1.1 billion) respectively. This means that an amount equal to the annual gold mine production was cleared at the LBMA every 4.4 days, and to the annual silver production every 6.2 days.[1] The Gold Anti-Trust Action Committee claims that clearing data substantially understates the true amount of gold traded, due to the netting of trades in the calculation of Clearing Statistics.[2] They claim the LBMA market is $5.4 trillion a year.[3]
1) Gold bar weighing approximately
400 ounces or 12.5 kilograms and
having a minimum fineness of 995
parts per 1,000 pure gold
2) Silver bar weighing approximately
1,000 ounces with a minimum fineness
of 999
3) Platinum or palladium plate or
ingot between 1 and 6 kilos with
a minimum fineness of 9995

Friday, July 19, 2013

Is the Paper/Physical Gold Squeeze on? at long last?

Gold prices are currently in backwardation:

Backwardation means that the spot price of gold for delivery today is more than the short term, 3-month contract for gold.  Simply gold buyers are willing to pay more for gold in the hand today than for the promise of gold delivered within 3 months.  This implies that buyers do not trust the promise of a contract for delivery in the future, even if it is only than 3 months away.

JP Morgan gold in inventory at the COMEX drops 66% overnight to an all time low.

It seems that JP Morgan is running out of the physical yellow metal.  Where is JP Morgan going to get the physical to deliver to those longs stand for delivery in August?

Let get it on!  This could finally be the month that the paper precious metals markets default on delivery.  

According to the weekly commitment of traders report that Harvey Organ presents the bullion banks are now almost net neutral, the amount of their long contracts equals short contracts.  And, it is the hedge funds that are short.  They are about to get squeezed!

Monday, July 8, 2013

Citibank Analysis of Gold Miners' cost of production. All are >$1,300/ounce.

Zerohedge summarizes a Citibank analysis of 20 top gold miners.  The analysis shows that all 20 have an 'all in cost are over $1,300 per ounce.  And Citibank claims that no miner will generate free cash flow at current spot metal prices.

GoldCorp (GG) is one of my key holdings.  Reading from the chart in Citibank's analysis GG's all in cash cost of production is about $1,550 per ounce.  That's odd.  GG's 10Q report for 1Q13 shows that GG's sustaining cash cost of production is $1,135.  I suspect that the difference lies in 'sustaining cash cost' versus 'all in cost'.  All in cost include capital for new projects and expanding production and I suspect that it includes depreciation expenses as well.  Sustaining cash cost of production, which is not a GAAP metric which most gold miners started reporting this year is cash cost only, no depreciation and only sustaining capital.  Presumably, if GG can cut all exploratory capital they will generate free cash flow if gold sales are above $1,135 per ounce.  

In order to make cash GG could also reduce production at their higher cost mines in addition to cutting capital for new projects.   Mine production cost varies widely.  Two of GG's biggest mines had negative cash cost in 2012 when including the value of the by-products (silver and copper).  And, a couple of GG's mines had gold cash cost over $800 per ounce.

Certainly many gold mines are unprofitable at current gold and silver and copper prices.  Over the last 5-10 years the cost of production for gold has increased almost as fast as the price.  Yet total production volume has remained flat.  Refer to some of my earlier posts for more statistics.  

The strong gold mining companies with low sustaining cash cost will survive the downturn in prices and emerge stronger as their competition folds.  The reduction in supply as high-cost mines are decommissioned, exploration slows, and new projects are moth balled should have quite an impact on gold and silver supply.  This reduction in supply would affect the price in a normal market.  The current markets are anything but normal.

Citibank's report suggests that GG will not be profitable while gold is below $1,550 per ounce.  No wonder valuations for the miners are getting hammered.  Time to brush off my own analysis of GG.  Hopefully, GG will present their own forecast for the rest of 2013 soon, perhaps with their Q2 results.  It will be very interesting to see how drastically GG is cutting back on capital for explorations and new projects. 

Hedge Funds up only 1.4% Year to Date while S&P 500 is up 12.6%

Who is making gains?

Seems that I have a lot of highly compensated company in grossly under performing the S&P 500 so far this year.  

The more interesting aspect of the hedgies performance is the other side of their trades.  Who has been making money?  It must be the central banks and their proxies the global, too big-to-fail banks.  Or are the central banks errand boys for the banks?

Most of the money hedge funds manage is for pension funds.  Pension funds for regular folks such as fire-fighters, teachers, employees of large companies, etc., etc.  The funds are under performing the S&P because the central banks continue to inflate the markets (stocks, bonds, real estate) with new created money.  This new money, created by the central banks adds to national debt which must be paid by higher taxes some day.  Therefore, right now your pension fund is likely losing money and you will be paying for it in the form of higher taxes.  Insult to injury.

Rik Green's Investors Forum Growth Portfolio down 8.9% in June

RG's growth portfolio <Port-faux-lio> lost 8.9% in June and the S&P500 lost 1.5%.  CVX was down 2.7% and GG, PSLV, PHYS, and CEF were down about 14% due to the precious metals price smack downs in mid-April and at the end of June.  PSLV and PHYS were down about 11% consistent with paper gold and silver prices.  GG and CEF lost almost 15% in June.  Mining stocks were down more than bullion as you would expect given their operating leverage.  And, perhaps valuations for mining stocks were catching up to metal prices because valuations in May did not drop as fast as for the precious metals.

Year to date the port-faux-lio is down 15.3% and the S&P 500 is up 12.6%.  Gold and silver are down 26% and 35% year to date, respectively.  SLW and CDE are down 17% and 6% respectively during June and since I purchased them in mid-April.  Should I double down and buy more?  Better to wait a while and see if now really is the bottom.  Missing the bottom won't upset me as much as piling on more unrealized loses.

Tuesday, July 2, 2013

Back from Vacation to More of the Same

I have just returned from 2 weeks of vacation with family and friends.  Good that I was focused on what is really important when I saw that the banksters had manipulated the gold price to $1,200.  Although it should not surprise anyone that the price of paper gold is being further suppressed.  And that the prices were suppressed leading in to option expiry date.  Shocker!!  One step closer to the day that paper gold and silver markets default and are revealed as pyramid schemes.   One day closer to when physical metal is precious.

It seems that this time around,  unlike during the mid-April smack down, coin dealers did not stock out and are not charging excessively high premiums.  The coin dealers must be proficient at hedging their purchases.  I wish I knew exactly how their purchases, from the US Mint for example, are priced.  There are reports of historically high premiums in the wholesale precious metals markets.  China has increased their bullion purchases.  Interesting times in India where government restrictions on gold imports is tampering demand.  According to import data presented by Sprott, Indians have switched to purchasing silver, large amounts of silver, which is currently not restricted.

There is a very interesting situation with JP Morgan on the COMEX that Harvey Organ has been reporting for several weeks.  And now that June is complete the situation is especially pertinent.  According to COMEX reports JPM does not have enough gold in inventory to settle gold contracts that JPM wrote for June.  Please go to Harvey's site to see his writing directly.  I will summarize it here:
JP Morgan, as a dealer on the COMEX previously entered contracts to sell gold for delivery in June.  The buyers of these June delivery contracts 'gave notice' or 'stood for' delivery of 494,600 ounces of gold.  JP Morgan has not yet delivered gold to the buyers of these contracts as evidenced by reports of JP Morgan's dealer vault inventory.  The inventory reports show that JP Morgan has 401,877 ounces of gold in their dealer vault.  Where is JPM going to get the necessary 93k ounces to avoid defaulting on their contracts?  What about for all the contracts that JPM has written for delivery in future months?  Stay tuned.  How will JPM get out of this one - like James Bond after the villain has placed him in another death defying situation.   Of course the villain like a good regulator always leaves the scene allowing Bond to escape his end.  "Can we get some sharks with friggin' laser beams on their heads?", Dr. Evil.