canary in the coal mine a good read

Canary in the Coal Mine

As year end approaches, we continue to see the same kind of price action in the precious metals and mining stocks that has devastated our portfolio values throughout the year. It has been a gut wrenching 2008 to say the least.

This activity is mainly due to the ongoing deleveraging from speculative players (hedge funds and commodity index funds) who need to raise cash to meet a flood of redemption requests from their clients. These hedge and commodity funds were long gold, silver, platinum, palladium, oil, natural gas etc. They were also long the mining stocks and short the dollar. Many of these positions have been unwound to raise the necessary cash to meet those redemption requests.

The clients of these funds have been forced to move to cash instead of keeping safe haven positions for a variety of reasons, including massive losses associated with derivatives. This has been very unfortunate for the commodities and precious metals sectors in the short run.

We also continue to see ongoing interventions in the market on the part of the powers that be (PTB) to keep the illusion of dollar strength and weak precious metals. I don't want to get into this too deeply other than to say that it is in the interest of the PTB that precious metals not rise at this point. Ultimately, they will have no say in what price level the precious metals go to, but for now are doing everything in their power to maintain the grand illusion that things will be just fine, despite what the public is beginning to learn and understand.

The best analogy to describe the situation regarding this intervention is the canary in the coal mine scenario. Miners kept caged canaries in the mines as an "early warning device." If the air was bad enough to kill the canary, it would soon be bad enough to kill people. The canaries were more sensitive to the deadly fumes, so their dying would warn the miners to get out.

Rising gold and silver prices serve as a "canary in the coal mine" for concerned citizens who don't want to see their savings and investments destroyed by the deadly fumes of deflation, inflation or a market meltdown. The PTB at this point simply cannot have rising gold and silver prices as they deal with the financial crisis and the upcoming elections, so they intervene as they said they would. On this matter I take them on their word.

But in the end, their interventions will completely and utterly fail.

For the citizens of the country, not only has the canary died at this point warning you to get out, unfortunately the coal mine has already collapsed trapping many. Further collapses within the mine are imminent!

The Paper Market versus the Physical Market

It is important for you to understand at this point the differences between paper representations of gold and silver and the actual physical metals themselves.

There are two sides to the precious metals market. One is the paper side, which encompasses all transactions denominated in terms of gold and silver for which the metals never change hands. The other is the physical side, meaning that a transaction actually involves a change in ownership of gold or silver bullion, i.e., physical metal.

These two sides are fundamentally very different. Most notably, the number of paper transactions each and every day always totally overwhelms the number of transactions in which physical metal is traded.

While the amount of paper traded gold and silver compared to the exchange of physical metal is staggering, don't draw the wrong conclusion about their relative importance. It is easy to assume that paper is far more important than physical metal, but in fact, the opposite is the case. The physical market is by far the more important of the two, and the reason is simple.

Paper transactions are based on physical metal. Whether futures contracts, forward contracts, options or any other form, paper contracts are derived from physical metal, and are traded as substitutes for physical metal. Consequently, as a derivative of a physical, tangible commodity, a paper trade can always be turned into physical metal.

In other words, the longs can always force the shorts to make delivery, or vice versa. It rarely happens that way, as evidenced by the relatively small amount of physical metal traded compared to paper. But the potential is always there, and sometimes it does happen. Every once in awhile, the physical market takes center stage and I believe that day is soon at hand.

In effect, the longs can, if they choose to do so, dominate the market. Again, the reason is very simple. The aggregate promise of everyone holding paper derivative contracts to deliver gold and silver far exceeds the capacity of these shorts to make good on their promise to deliver.

What the mindless PTB robots want you to believe is that they can control the gold and silver prices by massively shorting contracts of gold and silver on the COMEX. Thus far it has worked.

But the COMEX is NOT the gold or silver market. It is a paper market that has been the recipient of large speculative buys by hedge funds and commodity index funds over the past two years. As these funds have had to sell these positions because of forced liquidation on account of redemption requests, the PTB have easily been able to work their magic so to speak in shorting gold and silver. This has allowed them for the time being to keep gold and silver prices in check and the illusion that all will return to normal.

But the physical gold market where real demand remains at unprecedented levels, is telling us something very different. The recent shortages for would be buyers worldwide of the physical precious metals is beginning to tell the real story. This is what is producing the increasing dichotomy between the COMEX and the real gold market. This battle between the paper representations of gold and silver and the real thing is going to intensify in a major way.

Update on Bullion

With that being said, it should still be noted that while every single commodity futures market is in the red today on account of this forced selling mentioned above, GOLD IS STILL RELATIVELY STABLE! Even in spite of the forced liquidation, gold is hanging in there precisely because there are enough buyers to offset a great deal of this continued forced liquidation in the paper market. In the real world, physical gold is fetching $900 an ounce out there in some instances. Premiums for one ounce gold bullion coins are running anywhere from $65 - $100 above the quoted spot price and certainly above the phony and artificial price quoted on the COMEX. Last year at this time you could buy all the one ounce gold bullion coins you wanted for $20 - $30 over the spot price. That is no longer the case. Those who don't own any physical metals at this point shouldn't quibble too much about the premiums if they want to own physical metal. That is because the only way we are going to see a lower premium is with much higher spot prices.

I have been swamped with thousands of emails lately with questions regarding the precious metals. Many of the popular items that investors love to buy such as the Swiss 20 Francs and British Sovereigns are simply no longer available. The last orders we took on that material was a couple of weeks ago. The source of those coins, which comes from banks vaults in Europe are suddenly no longer being offered. I would guess these banks no longer want to sell their gold, but are now opting to keep it. That means the only way we can get this material is if existing clients are willing to sell. I can tell you at AmeriGold we have had zero clients wanting to sell gold or silver in the past two and half months. This is extremely unusual as I have never seen a day go by in the ten year history of AmeriGold when there was not at least some sellers.

This causes the dealers to get all their material from the mints or the fabricators thus driving up the premiums on the items we can still get.

I do have a new source on brand new silver rounds and 100 oz silver bars. Orders can be place late this week with orders being shipped out within a week. This is the only source of material that I know of that has such a short delivery time. In most cases buyers of precious metals are waiting at least three to four weeks for delivery and on some items even more. Silver eagles for instance are quoted at six weeks.

This tight situation in owning the physical metals has prompted many questions as to what is the next best choice for having exposure to the physical precious metals. As I have always maintained, there are not many valid or honest options to consider out there when looking to own the precious metals themselves. There are plenty of scams so be very careful.

The two options that I would recommend as alternatives to taking physical possession of your metals are the Central Fund of Canada which trades on the AMEX under the symbol CEF and Gold Money.com.

The CEF stores physical bullion at their depository which is located in Canada, a real plus. The problem with the CEF is the transactions costs are high (10%) and the stock exchange needs to be open to trade it. I could see this being a potential problem in our future as we start to see markets and banks being shut down because of severe volatility.

Gold Money.com is an audited depository with two storage facilities, one in London and the other in Switzerland. While this option offers investors the convenience of not having to store metal themselves, it does attract monthly storage costs. I personally know James Turk who is the founder and CEO of Gold Money.com. I recently saw him at the Toronto Cambridge House show and I explained to him the difficulty AmeriGold was having in securing material within a reasonable time frame. He offered to me and any of our subscribers a six month trial period with no storage charges to see check out what Gold Money is all about. James has provided us with a link to sign up with Gold Money.

Personally, I already started my account and see this as a diversification of my gold holdings. Most of my holdings will remain in the physical precious metals I already own, but moving forward, I think this is a good option. In order to take James up on his offer for six months of free storage you have to sign up through the link below.

https://secure.goldmoney.com/?gmrefcode=amerigold

Places I would NOT consider as being worthy options to holding the physical metals themselves are the gold and silver ETF's, the Perth Mint, and any program that is deemed a certificate program or pooled account. In my opinion, many investors will not benefit from these products when the upside in the precious metals happens. This will be an unfortunate reality for many when that day comes

Our Junior Mining Shares

At the moment, we are in a very tough situation in the immediate term, but we do have some good news we can share.




One of the indicators I use to track what is happening in our mining share market is the ratio of the XAU gold stock index to the price of gold. As the chart below shows, whenever that ratio has hit 6, gold stocks have soared by hundreds of percent.








As you can see, the ratio is well above 6 indicating we could be in for a wild ride to the upside.

The bad news is we still don't know when this deleveraging that has been rippling through our market will ever end. At some point it will end and gold and silver prices will find there rightful places, but how long is the big question.

The big problem for analysts and miners alike is that we are now in virtually uncharted territory. Probably the nearest the world has ever seen to this kind of carnage has been the 1929 crash. The loss in confidence in the markets and the governments' inability to control the devastation is putting the markets under huge pressures and no-one is quite sure where things will end.

The scale of the carnage will depend on how long the loss of confidence in markets persists. Capital projects will have to be put on hold and with metal prices selling off those projects which may have looked supremely profitable only six months ago may no longer be so at current price levels.

On the value/opportunity side of the equation, the market capitalization per proven ounce of gold reserves for mining companies at this point has never been lower or cheaper in the recorded history of the TSX!

But while the market crash may provide opportunities for the strong, it is very much the Darwinian theory of survival of the fittest which will prevail. The industry has seen crashes before which have also resulted in huge consolidations in the numbers of junior miners. But it always recovers. The world cannot do without mined minerals. There are going to be incredible opportunities out there for the strong and the brave, and this is where great fortunes can be made or lost. If you have the moxy, the next few months could offer a bottom and prove to be the buy point of a lifetime.