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GOLD
BREAKOUT DELAYED
Jim Willie CB is the editor of the “HAT TRICK LETTER” Use the above link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise like a cantilever during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by heretical central bankers and charlatan economic advisors, whose interference has irreversibly altered and damaged the world financial system. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy. A tad of relevant geopolitics is covered as well. Articles in this series are promotional, an unabashed gesture to induce readers to subscribe. All the conditions were there, a euro currency breakout, a British sterling currency breakout, and pronounced USDollar weakness. The sterling exchange rate even hit $2.00 to capture a tremendous amount of attention. The denials streamed in on how the weaker USDollar is not such a big deal, which always serves as a confirmation of a dire situation. Imagine a harlot on a London Piccadilly Square citing her extra 30 pounds around the haunches, her heavy paint to cover remnants of faded femininity, the complexion lost long ago, and her deep whisky voice, as she actually claims she still possesses her intense sexual spark. The crippled USDollar cannot buck the passage of time and inexorable destruction through unfettered monetary inflation abuse and colossal irresponsibility. The protection racket actually open the door for executive perks which dwarf whatever was condoned at Tyco with lavish Roman toga parties and gold bathroom fixtures. The world reserve currency is in the process of upchuck rejection. GOLD SLAMMED BUT FIRM Anyone wondering why gold has not made new highs during a time when the USDollar is teetering need only look to the official Euro Central Bank gold sales. Thanks to the Gold Anti-Trust Action (GATA) organization for their steady professional reporting on activity behind the scenes. Intrepid Blanchard reports the ECB sold a whopping 76 tonnes of gold bullion in the five weeks ending April 24-th, including 17 tonnes in the fifth week. That is a huge jump over their pattern in the last six months. They clearly waited for a time when the USDollar was exceptionally weak to dump gold. They call it dishoarding, in blatantly irresponsible fashion, since bullion is bank collateral for currency, the banking system, and their economy. These Keystone Gold Cops can only succeed in delaying the inevitable crescendo of a gold breakout. In the process they will destroy their currencys and banking systems. New highs for gold come soon! In the spring of 2006, when the ECB last dumped a tremendous volume of gold bullion on the market, the gold price fell from $730 to $550. So the resilience of gold is vividly clear, powerfully strong. In the same cited five week time span during the most recent ECB gold dump, gold actually rose from $640 to $690, only to take a hit and find some temporarily stability near $680. When official ECB gold sales abate, look for gold to easily surpass the $700 mark and make new highs. Pressure is relentless and ECB sales will dwindle. Gold will continue to be disgorged from the vaults of these crippled and mindless central banks, intent on supporting an unsustainable fiat system. Experts believe Western banks are underwritten by gold pledges from the US Dept of Treasury in what is called in Orwellian style ‘deep storage gold’ to mean future mine output. But there is much more to the story.
THE HEDGED MORON MINERS Enter Barrick Gold, self-admitted agents for the Western central banks. Barrick exited two million ounces of gold forward contracts from its acidic black hole hedge book in the first quarter of 2007, thus incurring a whopping $557 million loss. Why a certain prominent Toronto analyst (who provides excellent information about China regularly) supports this stock is beyond me. The contract price of exited contracts was 41% below current gold prices! Barrick fetched a mere $386 per oz in Q1, 28% below a year ago. The average market gold price during Q1 was $652.8 per oz. Barrick announced another half a million ounces to be sold from their hedge book in Q2. In 2006, they exited 9.4 million oz in gold hedge book contracts, comprising 62% of global total. Without any doubt, a coordination took place between this scummy company and Western central banks so as to obstruct any gold rally to new highs. They wanted at all costs to avert a gathering storm for the USDollar, confirmed by a gold price explosion. The ECB has agreed to limit its gold bullion sales to 500 tonnes annually, but experts do NOT expect them to come close to their permitted limit. What’s more, Australian miner Lihir Gold announced a nearly $1 billion secondary dilutive stock issuance in order to close its hedge book, repay debt, and fund expansion. They will close a 934.5k ounce forward contract set at $343/oz, and repay a 480k ounce gold loan at $449/oz, each a disaster. Together, Barrick and Lihir will remove $1.1 billion in gold off the market to worsen the critical supply shortage already. Furthermore, a global survey by Mitsui of 118 producers revealed a 25% decline in forward contracts sold by gold miners in 2006. So hedging is lessened, often reversed, when misguided desperate central banks are running low of bullion to dump, much like secure ballast on a ship at sea during a big storm. INELASTICITY IS HIGHLIGHTED In a February 2006 article of mine titled “Inelastic Gold Supply” (click here), an attempt was made to explain how gold mine output would not rise in ANY significant way with a higher gold price. Many factors were covered, from hedge books to rising costs to labor shortages. WE ARE SEEING THAT PRECISELY NOW. The recently applied trick for heavily hedged miners (see Lihir Gold of Australia) is to dilute the stock or to burden the debt load in order to finance the hedge book buybacks. Either way, the stock looks less attractive. If energy firms are not buying back shares instead of investing in their companies, we see gold miners buying back their acidic hedge books instead of investing in their companies. Outcry should be shrill and endless, except that Barrick answers to central banks, not share holders. And the big energy firms answer to the White House and Military. The major point is that higher gold price is NOT resulting in higher gold output. This is the ESSENCE of inelasticity. Barrick and the other corrupt financial appendages to bankers (I mean miners) testify to the failure to produce greater amount of gold bullion at higher prices. An unflattering portrayal of Barrick Gold was given 15 months ago, now firmly established. For those Americans who slept through chemisty, math, and other science classes, if you mix acid with an alkaloid (its opposite in hydrogen surplus), you get harmless water. Barrick Gold hedge book losses have begun now to be quantified. Don't expect setbacks are over for either this firm or other hedge device abusers. Barrick was once accused of being a financial firm masquerading as a gold miner, for the unexpressed purpose of selling forward gold contracts far in excess of actual production. Its entire existence is an anomaly, most likely from its inception being a corporate illicit hedge apparatus, a gold cartel tool. Their senior management hailed from financial firms, not mining firms, and surely not of geologist background. Their central unstated non-chartered modus operandi was founded in neglect of their mine operations, sure to exacerbate their future (like now) gold output. Their reported 13 million gold ounce short position vastly eclipses any future production schedule, an outpouring of acid on their balance sheet of as much as $560 million lost in a single recent quarter. To put that quantity into perspective, 13 million oz short position exceeds all gold exchange traded fund (ETF) holdings. In the past six quarters, try imaging the harsh reality of a $1000 million loss for Barrick. Anyone who cannot conclude that their acquisition of Placer Dome was motivated by a desire to blend acid with some valid production and cash (alkaloid) is naďve at best or blind at worst. Their combined short position is 21 million oz gold. To date, a $3 billion loss on the Barrick books is staggering, but that amount is likely less than half of the sum necessary to close out their "ingenious" hedge book. Again, perspective is needed. Such a cumulative loss over the years offsets the entire profit generated by Barrick from its ill-designed inception. One can serve up Barrick in an MBA business school program as the quintessential hedge disaster in all of history. My view is that at least one mining firm, and very probably Barrick, will blow up in the next derivative disaster with full publicity and notoriety. My conjecture is that Fanny Mae already blew up, but its publicity has been smothered in secrecy under the aegis of the US Federal Reserve. My other evil conjecture is that the USFed is illicitly transforming Fanny Mae mortgage backed bonds into US Treasury Bonds. Does anyone watch? Does anyone care? Is the law even apply? Are laws relevant to the game anyway? Finally, the point to be gained from this line of thought is that Barrick, like some other gold miners, has been forced to exhaust its precious cash position. They have therefore denied themselves needed funds for mining operations, to satisfy their charter for gold production (seemingly a nuisance), in order to secure current precious metal output. They aint producing anywhere near as much gold, silver, and other byproduct metals due to their greed, stupidity, arrogance, and fractured fallacious phony business plan. The irony is that first, miners are buyers of gold contracts in a very very big way. Second, as the gold price rises, they might actually produce LESS GOLD. They are being bled dry of cash. A mining stock investor must lick chops, salivate, and find glee in their highly deserved misery. Overly hedged gold miners actually produce less with higher prices. Numerous points were made in that article of February 2006, each now prominently cited as part of a systemic problem. At the market bottom, enthusiasm with demand was absent, typical of an inelastic system. As the market advances, supply is curiously absent as well, again typical of an inelastic system. Mine output globally for gold was down in 2006, despite a higher gold price.
FUTURE CONSIDERATIONS Barrick is typical of large stodgy producers. Both Barrick and Newmont report much higher average cost of mining gold per ounce, compared to just a year ago. Output for Barrick is down also, from 8.6 million oz in 2006 to an expected 8.25moz this year. These large lumbering giants hold back the HUI stock index, since overweighted. They discover next to nothing, gobble up smaller firms, acquire their gold (not discovery), and assume gigantic hedge book losses. In short, they create a false impression for smaller, smarter, more nimble, and less burdened gold miners to invest in. The nightmare for Barrick Gold is not over. In fact, it is only half complete. After their desperate grab for Placer Dome, their combined hedge book was 21 million ounces (moz) gold. In 2006, they covered 9.4 moz on that disastrous millstone around their financial balance sheet neck. In Q1 they covered 2.0 moz. They state plans to cover another 0.5 moz in the next Q2 quarter. So by mid-2007 they will have covered 11.9 moz of their 21 moz total hedge book. THEY ARE HALF DONE WITH THEIR NIGHTMARE. So Ing and his ilk still like this acid-ridden firm which needs tons of milk to form water? Methinks not, as one can smell compromise. NEXT: BREAKOUT TOWARD $750 In the next few weeks, gold will cut through the $700 price mark like a quiet hot knife. It would have done so already, if not for the COLLUSION between Barrick and Western central banks. The Euro Central Bank cannot keep its pace of official gold sales. They will undoubtedly NOT SELL as much as the corrupt Washington Accord dictates as allowable. This is much more destructive than burning the home furniture for winter heat. It is akin to burning the wooden support beams, burning the wooden load bearing pillars, burning the basement den, burning the recreation room, destroying the entire foundation to the home!!! The contractors are the corrupt gold miners who masquerade as miners, but are actually gold cartel agents. Imagine the wisdom of selling off your entire collateral for the currency and banking system, in utter desperation, hopelessness, and anguish!!! Keep up the hedge book covering, guys. We have been counting on you for a couple years. Continue to sop up and exhaust supply, wherever it comes from. BECAUSE WHEN YOU GUYS REST (COVERING HEDGES, DUMPING ECB GOLD BULLION), GOLD WILL ZIP EVER HIGHER. Its destiny is to do so.
The opinions of FSU contributors do not necessarily reflect those of Financial Sense. |
Jim
Willie CB is a statistical analyst in marketing research and retail
forecasting.