India's anti-gold policies: Symptom, not cure

What's going on in India is nothing new. We've seen it over and over again throughout struggling economies.

These attempts to control movement of currency are very common when a government is faced with problems like India's. They actually create a more crippling environment than the one they are put in place to improve.

Gold (COMEX:GCZ13) has always been and will always be the safe haven of choice when people lack confidence in their government. Lacking confidence doesn't only mean that they're not certain they'll perform well, but it also may mean that they don't trust their government to operate in their best interest. Starting with allowing economic freedom, and defending the value of the currency.

Will gold climb with tapering?

In yesterday’s Social Gold Mine we featured a couple of tweets regarding India’s ongoing currency wars; the rupee vs. gold. Despite the rupee sitting at an all-time low against the dollar, for the time being it is officially winning the war. Thanks to the weak currency the price of gold bullion is at a record high and August’s gold imports fell by 90% from the previous year.

Now that tensions over Syria appear to have calmed, gold appears almost entirely focused on the FOMC meetingnext week and the subsequent decision. Consensus remains that the Sept. 17-18 meeting will result in an announcement that the Fed will reduce the $85billion monthly purchases by around $10-$15 billion.

Goldman Sachs, not really known for their record gold price predictions, said this morning that gold’s drop will extend into 2014 when the Fed tapers asset purchases. The bank’s economists expect tapering to be the catalyst to push gold lower, “gold prices will decline into 2014 on the back of an acceleration in U.S. activity and a less accommodative monetary-policy stance.”

Goldman Sachs joins a host of other major institutions including SocGen, Citigroup and ABN Amro all of whom have predicted lower gold prices for 2014.

BofA Merrill Lynch Global Research said yesterday that gold is likely to rise even if the Fed does embark on tapering, but only if it is less than expected.

Platinum price

The same group also mentioned platinum yesterday, which they expect to perform well in light of ‘tighter monetary policy’ and improvement in developing markets. Despite this, they have reduced their 2013 platinum price target, by 6%, to $1,575 an ounce. Predictions for 2014 and 2015 are $1,850 and $1,900 respectively.

Whilst India looks likely to lose it shine in the gold market, China is no doubt set to buy even more given their industrial output data released yesterday. August’s industrial output for the country rose by 10.4%, 0.5% higher than expected. Retail sales were up 13.4%.

COMEX default

Is Comex facing a default risk? Inventories have fallen by 36% so far this year, from 11.059 million ounces to 7.034 million. Whilst a default can never be ruled out, we draw your attention to our earlier research that shows the delivery ratios were exceptionally low at present. Having said this, as many are pointing out this does not mean that the Comex is not open to being cornered by a sovereign nation or even a group of wealthy individuals.

Gold’s Superman

Here in the West we are all aware of Warren Buffet’s views on gold. But when it comes to Asia’ own Warren Buffet, Li Ka-shing, it’s a different story.  Also known as ‘Superman’ (much cooler than the ‘Sage of Omaha’), he is the wealthiest Chinese person of descent in the world. And he is buying gold having just invested in CEF Holdings, a joint venture that will acquire gold mining companies and other gold-related assets.

Gold: When western supply meets Asian demand - Issue 3 of 5

TGR: What do patterns in the market trends tell you?

BL: This year the gold market has experienced a number of head fakes, where we thought we had a bottom, then it dropped to a lower plateau, then dropped again. I think the June 28 bottom will hold. The fundamental evidence argues for an extremely tight situation in the gold market, which will keep the prices from dropping to an even lower plateau.

A lot of evidence, from stochastics to moving averages, is delivering very strong buy signals. There is anecdotal technical evidence like the negative GOFO rate and backwardation in the near-term futures. All this added together points to higher gold prices and a more sustained rally.

Yet, in the broader market, sentiment is still not very positive for gold. We're still climbing a wall of worry in regard to sentiment, yet, for those willing to look, an increasing amount of evidence is pointing toward higher prices. This is really the perfect situation.

TGR: Your newsletter reports on a host of companies. Can you tell us about some junior plays with leverage to the gold price, starting with those that have assets in safer jurisdictions like Canada and the U.S.?

BL: Safer jurisdiction is an important point. In this market, there are so many undervalued companies out there that there is no reason to take on sovereign risk if you don't have to. As we start this rebound, it's important to look for undervalued juniors that have proven resources or are in production. You can get them at bargain level prices, and they will be the first to respond.

I expect Brigus Gold Corp. (BRD:NYSE.MKT; BRD:TSX) to surprise a lot of people. The company spent a lot of money to upgrade its facilities and prepare for a higher production rate. Its capital expenses will therefore drop considerably going forward, while it benefits from the higher production rate.

TGR: Brigus just recently increased its guidance by 5,000 ounces (5 Koz) through the end of 2013.

BL: And the exploration potential in the Grey Fox deposit gives it a good growth profile.

TGR: Brigus' new estimate for Grey Fox, issued in July, is up to 736 Koz. How big could Grey Fox get?

BL: It's hard to tell, but grade is just as important as size. Its grades are so exceptional that, if Brigus were a junior, it would be the exploration story of the year. The widths are good, too. Grey Fox should generate fairly high-margin production given the richness of the mineralization. It will be significant to the company's growth profile because of its size, and significant to its earnings profile because of the high grades.

TGR: How about some other names?

BL: A number of exploration stories in the U.S. and Canada are undervalued. Gold Standard Ventures Corp. (GSV:TSX.V; GSV:NYSE) had great exploration success in 2011 and 2012 in Nevada, then was forgotten by the market in the downturn. It has a great geological staff. I think it has narrowed down on the trend and the mineralization. The company is selling at prediscovery price levels, which I find very attractive.

TGR: Gold Standard Ventures recently raised $5 million ($5M) to continue exploring the Railroad project in Nevada. How important was that?

BL: Its ability to raise money validated its project and its upside. Any experienced, knowledgeable hand in Nevada exploration will tell you that Gold Standard Ventures is as close to a sure thing as you can find in Nevada. It's the wise guys' play in Nevada exploration.

Comstock Metals Ltd. (CSL:TSX.V) has a project in the Yukon that could be an analogue to the Underworld Resources Inc. discovery at Golden Saddle—the discovery that sparked the new Yukon gold rush. Recent results were mixed, but did nothing to extinguish the upside potential because it has a number of targets on the project. The question is whether the grades will be high enough over the current widths to justify development in the Yukon. I think it has a really good shot at it.

Gold: When western supply meets Asian demand - Issue 2 of 5

TGR: Could you expand on why you believe China will soon be "driving the bus" for the global gold market?

BL: The Shanghai Gold Exchange (SGE), putatively a futures exchange, is actually a physical delivery mechanism for the Chinese market. Most of the gold traded on the SGE is actually delivered to end-users. As of the end of June, SGE reported nearly 1,100 tons of gold have been traded so far this year. That equates to all of the metal that had been traded on the SGE in 2012, which itself was a record year.

Put another way, at this rate of consumption, demand on the SGE this year will equal the entire newly mined global output projected for 2013. In effect, all of the new gold supply in the world is being consumed by a single exchange in a single nation.

China will soon exceed India as the largest source of gold demand in the world. There are demographic factors behind this: a deep cultural affinity for gold, a growing population and a rapidly growing middle class. The per-capita use for gold in China is still relatively low but has a lot of upside. As incomes grow in China, gold demand will grow on a per-capita basis even as the population grows. The potential for growth in the demand for gold is almost exponential.

TGR: Who in China is buying gold?

BL: The assumption is that the People's Bank of China is buying gold to build up the nation's gold reserves. China also has become the world's largest gold producer, yet none of the gold it produces ever gets exported.

There is tremendous upside potential in central bank buying of gold in China, in that China holds a huge amount of U.S. dollars in its foreign currency reserves. If it were to increase its gold reserves to the average level of most developed nations, it would quickly absorb all of the available metal in the global gold market.

TGR: Would the gold price be on an even stronger upward trajectory if India hadn't taken measures to curb gold buying?

BL: Yes, Indian demand would have been much stronger if its central bank hadn't increased the tariff in phases to 10%. Just as importantly, it imposed an 80/20 rule, which requires that 20% of all of the gold imported into India must be subsequently exported as finished goods. Those rules, imposed without explanation of how to follow them, effectively shut down Indian gold imports from the end of July through the end of August.

TGR: You recently wrote "Gold has bottomed. The market is set up for a large sharp rally when and if a short covering stampede is sparked." What could those sparks be?

BL: One appears to be the situation in Syria, although we don't know how that will develop.

A more important and fundamental driver for a short-covering rally would be the flow of economic data in the U.S., where economic growth had been showing signs recently of slowing. That slowdown, if it were confirmed, would eliminate any justification for tapering off the Federal Reserve's QE program. A growing consensus that QE will be here for a while will be the driver that gets the shorts to abandon their bearish gold positions.

TGR: How does all this translate to gold equities?

BL: The majors had a fairly good rebound and were outperforming gold until the Syria situation erupted. That touched off broader equity market selloffs, and the gold stocks were victimized.

Interest is just starting to filter down to the junior resource stocks. I'm not as negative on that subsector as some of my compatriots. Greed is the most powerful motivator in the investment markets, and greed will draw investors to the juniors like iron filings to a magnet if we see a sustained upward trend in gold and silver.

Gold: When western supply meets Asian demand - Issue 1 of 5

The global rally for gold underway since late June will soon translate to juniors, says Brien Lundin, CEO of Jefferson Financial and the publisher/editor of Gold Newsletter. With so many undervalued companies in safe North American jurisdictions, he sees no reason to add sovereign risk to a portfolio. In this interview with The Gold Report, Lundin details which companies he follows and why, highlighting one area where major discoveries are "lined up like pearls on a string."

The Gold Report: Brien, judging from the tone of the September 2013 issue of Gold Newsletter, you have renewed excitement for precious metals equities. Why?

Brien Lundin: You're absolutely right, and it's all based on the metals markets. In a typical year, the precious metals markets bottom out at the end of July to early August, when physical demand from Asia abates, before kicking back up in late August and September.

This year, gold bottomed out in a final downward thrust at the end of June and then started building back up. At the same time, a lot of anecdotal evidence began to reveal an extremely tight supply situation in the global gold market. Taking all of that together, I was fairly confident in calling a bottom for gold.

Then, the equities started to respond. However, the situation in Syria prompted some safe-haven demand in the last few days and the mining equities stepped back; with safe-haven demand, investors want the metal, not the paper. But that was just a brief blip. I see an open road ahead for gold metal and gold equities.

TGR: Gold is moving higher, but without much of an explanation. What is your take on the situation?

BL: The market has had some strong performance, jumping $15, $25, even $35 in a day. I think those spikes are a result of the extremely tight demand situation in the gold market. In the spring, Western speculators and some of the big holders of SPDR Gold Trust (GLD), the gold exchange-traded fund (ETF), abandoned the market in anticipation of the imminent end of quantitative easing (QE). We also had some manipulation, notably on April 12 and April 15, in a blatant attempt to force the market through sell stops, thus benefiting from short positions. As a result of these speculative selloffs, the market was dramatically oversold.

But this rapid price decline sparked tremendous bargain hunting in Asia. Asian demand more than overcame the selling by Western speculators. The supplies of gold in the Comex warehouses dropped to record low levels. We saw gold being transferred from vaults in the West to the East, causing the rare occurrence of a negative Gold Forward Offered (GOFO) rate—the interest rate difference between gold holdings and LIBOR. That has happened only twice in this bull market, at the beginning of the major bull trend around 2000, and in 2008. Both times it marked a major turnaround in the metal.

There is a lot of evidence that this unprecedented supply situation was behind the sharp, brief upward spikes in the gold price. As you add up these sharp spikes, gold was gradually and then more rapidly coming off that bottom in late June.

There are number of players in the East who want gold and are willing to pay higher prices. There also is a shortage of gold in the West. From a fundamental supply-demand standpoint, we still have some room to go in this oversold rebound.