TRICK OR TREAT: Fed Smashes Gold & Silver While 2,000 Gold Eagles Were Sold

Halloween Silver Chart

In keeping with the mood of Halloween, the monsters came out early this morning to scare the living Hades out of the gold & silver market.  We had the typical FOMC precious metal smash-down today to balance out the bullish move in gold and silver yesterday instigated by the Fed’s policy of continued QE stimulation.

In a 24 hour period, silver traded more than 5% from highs to lows.  Nothing like a dose of volatility to get investors ready for the Halloween festivities.

While the traders were focused on the “FED TRICK”, in the precious metal markets, few realized the “GOLD TREAT” as the U.S. Mint updated its Gold Eagle figures showing another 2,000 oz of the coins were sold since their update yesterday.

This is an interesting development as the U.S. Mint normally dumps the sales for the last few days of the month on the following month.  In that case, we would have not been able to realize that an additional 2,000 oz of Gold Eagles were sold within the past 24 hour period.

Furthermore, this goes to show that sales for the Gold Eagles are picking up substantially and at this daily rate we could see a much higher sales figure for November compared to the 48,500 oz sold in October.

Precious Metal Investors Better Wake Up

The precious metal sentiment is still at all time lows.  This is partly due to the continued “Fed Taper” calls by Banks & Brokerage Houses.  There is no way the Fed can taper its $85 billion a month of stimulus as the U.S. economy continues to weaken.  However, this doesn’t stop the Banks & Brokerage Houses from doing their part in keeping the Fiat Monetary Regime alive as long as they can.

Investors must realize, when the Fiat Dollar Monetary Regime disintegrates, so do most of the assets that these Banks & Brokerages hold and represent.  Basically, the continued treat of FED TAPER allows monetary authorities open season to smash the precious metals, while they prop up the broader stocks markets and bonds.

This tactic has worked wonders on those who are not invested in the precious metals, but were thinking about it.  Ever since the metals tanked from their highs of $1,750 gold and $35 silver in the fall of 2012, the ignorant public now has lost faith in the precious metals as a store of value.

This is very unfortunate, because the opposite is the case.  In addition, I’ve noticed that even some of the more diehard precious metal investors are starting to question the fundamentals of gold and silver.  All I can say to those who are starting to throw in the towel on the precious metal investments…. the best is still yet to come.

Watch Out For Misleading Analysis on the Gold Miners

I read an article last week titled “GOLD – Mining Profits Fallacy”, written by Adam Hamilton of Zeal Intelligence.  Hamilton states that investors are being misled by some “fool perma-bear’s self-serving falsehoods.”

According to Hamilton’s article:

Chief among them today is the widespread notion that gold miners can’t earn any profits.  I get dozens of e-mails a week explaining to me why the gold stocks are doomed to fall much lower because they simply can’t earn sufficient money where gold is today.  After having spent 14 years studying the markets full-time and trading gold stocks, the sheer popularity of this notion blows my mind.  It is completely and utterly false!

Last year, the HUI gold miners that produce over a third of the world’s mined gold supply averaged $950 per ounce cash profit!  Their gross margins have hovered in the 50% to 60% range continuously since 2006.  There are very few industries in the world that have such high gross margins, the profitability of mining gold has been extraordinary.  And this provides a fortress-like buffer to survive this year’s gold plunge.

In about half the feedback I get parroting these silly bearish rationalizations, the writers cite energy prices.  They tell me gold mining isn’t profitable today because energy is so expensive, and gold mining is usually very energy-intensive.

——————–

I am only going to touch base on this today as I will be writing in more detail on this subject in the following weeks.  Hamilton is making the case that the gold miners are still making huge profits due to their low cash costs.  He provides a chart showing huge cash margins that were $950 an ounce in 2012.

While I enjoy Hamilton’s articles, he surely misleads the investing public on this “Huge Gold Cash Profits Crusade.”  Below is a chart I came across from one of those supposed Perma-Bearish gold analysts:

Nick Holland Gold Margins EBITDA

As you can see from the chart, as the index gold price has risen 21% CAGR – compounded annually, EBITDA margins – Earnings before Interest, Tax, Depreciation & Amortization have only increased 8%.  The chart clearly shows that the top gold producers did not take advantage of the much higher gold price.

So, what Perma-Gold Bear put out this chart?  It was Nick Holland, CEO of GoldFields.  Nick spoke to a group at the Melbourne Mining Club back in July 2012 on why the top gold miners have under-performed the market and hurt shareholder value.

From the data that Holland is presenting in this chart, the gold miners profit margins have not been rising along with the gold price as Hamilton suggests.

Again, I will get into this in more detail in the coming weeks.  While Hamilton puts out some excellent work on the precious metals and miners, he is clearly misleading investors that the gold miners are making significant profits at the current low price of gold.

I am not saying that the gold miners aren’t making profits… they just aren’t making huge profits — and actually some are indeed losing money.

Happy Halloween

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29 Comments on "TRICK OR TREAT: Fed Smashes Gold & Silver While 2,000 Gold Eagles Were Sold"

  1. That chart seems to go to the beginning of 2011. Gold price in the beginning of 2011 was ~1350$.

    Right now, 3 years later, with the gold price essentially the same, guess how much production cost has risen in that time? That chart, extended to today, would show a downward trend for miner margins.

    • Markus,

      You are probably correct. Furthermore, I am going to get into the subject of FREE CASH FLOW as it pertains to the gold miners. Who cares if a company is showing net income profits, if it’s spending a great deal more on Capital than it receives from cash flow.

      This has been the case for many of the top gold miners since 2012.

      steve

  2. Their are 4 billion people throughout the Middle East and Asia who reconize it as a currency. Also as of today their are 5 precious metal exchanges in Singapore, Dubai, Russia, China & india. These are not paper future exchanges that can be manipulated as they do the Comex.Americans buying gold will be irrelevant. So will the price mechanism at the Comex.

  3. Spartacus Rex | November 1, 2013 at 3:41 am |

    Doesn’t anyone else want to know who was the fabulous artist who drew that kitco chart? Is that your handiwork Steve?

  4. If you invest in gold and silver to make a quick buck, then you are going to be disappointed more often than not. Those who want to make a quick buck and should rather invest their money in the futures. The physical market is not for the faint hearted. I’m not worried at all if the market is manipulated. I will continue to stack silver. I look at it as a pension fund. Silver will become valuable one day. It is one of very few commodities which has a price drop when the demand goes up. The manipulation is obvious but cannot continue forever. People must remember that silver is not gonna have a gradual rise. It will go sky high overnight when the whole ponzi scheme falls apart like was the case in 2008. Only this time it will be too big to bail and will be catastrophic.

  5. “Last year, the HUI gold miners that produce over a third of the world’s mined gold supply averaged $950 per ounce cash profit! Their gross margins have hovered in the 50% to 60% range continuously since 2006. There are very few industries in the world that have such high gross margins, the profitability of mining gold has been extraordinary. And this provides a fortress-like buffer to survive this year’s gold plunge”.

    I don’t think silver miners are seeing profits with the silver spot where it is, and having been lower for much of the year. Those in the know say profits are unlikely for many Canadian or U.S. mines, and some have “mothballed”. In Mexico or Peru where labor is cheaper and government regulations less onerous maybe they can make a profit…but their need for cash flow is so acute they would probably operate mines at a spot of $16/ounce; a fact the ETF & Comex folks have used to their advantage in maintaining enough inventory to maintain the paper prices scheme.

    What do you think Steve?

  6. People can bad mouth gold all they want to but the trends speak for themselves:

    – gold forward continue negative. 11/1/13 rates worsened across the board indicating scarcity. 99.5% of the time gofo is positive. Today gold rate says that you can lend gold for 30 days and call it back at a cheaper price at the end of 30 days. Very unusual.

    – comex registered gold stock reported at about 22 tons. October deliveries of around 14 tons have not been deducted from totals. In 2012, gold for most comex deliveries remained in comex vaults. In 2013 that changed – around 90% of it is being removed from comex vaults. Probably most of it is ultimately going to China.

    – China has $3.6 trillion of fx. 3% of their reserves equal 100% of annual global gold production. China in 2013 is purchasing approximately 100% of global production.

    – Gld tonnage has dropped 478 tons ytd or around 35%. Maybe even more because that’s reported tonnage by hsbc where bullion bankers have been using the trust’s physical gold as their personal piggybanks. So far this week gld tonnage has been unchanged. The liquidation will be over at some pt. and then what?

    -Japan and USA are printing around $150 billion of paper per month – $2 trillion per year and the excess reserves continue to swell. Eventually, the excess reserves are going to go after physical assets.

    I’m a buyer of gold physical etf and low cost gold miners. The mix is 30% metal, 70% miners. If the gold etf turn out to be a sham, I’ll still benefit because miner gold in ground will be worth much more. Only way I lose if Fed attempts to confiscate gold and the miners – but that will never fly.

    • Norm,

      You bring up some excellent bullish reasons to own gold investments. I agree with them wholeheartedly. My only beef is with Adam Hamilton’s ultra bullish stance that the gold miners are making huge profits due to low cash costs.

      I only touched on one point in his article…. he had many I disagreed with. I believe Nick Holland, CEO of GoldFields is absolutely correct why the gold stocks have underperformed the metal.

      On the other hand, I do see substantial moves in the gold equities going forward when gold and silver get revalued. I believe the physical will be hard to obtain, so investors will be rushing into the mining shares.

      This is when the fireworks are going to happen.

      steve

  7. All I can say is that this COMEX manipulation has driven out PM investors with weak stomach. What’s left are those ones playing double dare – solid belief on the fundamentals. None of these investors will shake a bit even when PMs eventually goes up to $2,000 – 3,000. When that happens, it will be a very small window of time frame and I wish people luck in finding PM sellers in that price. The harder the western central banks push, the tougher PM investors left.

    Lets see who blinks first.

  8. “My only beef is with Adam Hamilton’s ultra bullish stance that the gold miners are making huge profits due to low cash costs.”

    Agree. Margin is relative. The other part of the formula is investment. Cost of mine exploration and construction is huge. Sustaining capex often approaches cash costs. The economic equation for miners is much different than retail businesses. Current margins are inadequate.

    Today gold investors, including me, are getting walloped. That’s ok. I’m adding. Right before Lehman, the Fed could not see the blow up of mtg securitization. I think the same thing today applies to gold. If Fed loses control of gold pricing, they lose control of interest rates. Gold futures will set rates. The Fed and bullion banks have manipulated gold for decades but they’re losing control. They’re running out of physical gold. The Chinese have a short leash on the Fed. When gold drops to sub $1300, the Chinese are big buyers. Don’t understand why the Fed can’t see the writing on the wall and cut their losses. Their approach to date is making a monster problem even bigger – leasing many 1000 of tons of usa and foreign safekeeping gold to bullion banks who sold the gold to buy gov’t debt. Imo, this will result in huge financial instability and market volatility. We’ll see who is right.

    • Norm,

      I couldn’t agree more with your comment. Newmont just released their Q3 results and it looks like they stated a $408 million net income gain. They cut exploration in half compared to the same quarter last year as well as their operating costs.

      However, Newmont’s Free Cash Flow was a negative $322 million Q2 2013 and a negative $77 million Q1 2013. I just looked at their nine months for 2013 and their cash flow from operations was $1.16 billion while their capital expenditures were $1.53 billion. Thus their Free Cash Flow for the first nine months of 2013 was a negative $370 million.

      Furthermore, their capital expenditures for the first nine months of 2012 was $2.39 billion or $840 million more than same period in 2013.

      So, not only is Newmont cutting back on exploration, they are cutting back big time on capital expenditures. This will impact them in the future.

      steve

      • This doesn’t make sense. How can they state a net income gain of $408 million for one quarter, if in the whole 3 quarters of this year their total cash flow was $1,16 bn and their net cash flow was a negative $370 million?

        Now, I am not an accountant, I might misinterpret this data. Probably will have some googling to do.

        • Markus,

          Cause net income does not include capital expenditues. Furthermore, operating cash flow does not include capital expenditure either.

          Steve

  9. A lot of people believe that gold will trade sideways for the foreseeable future, or until the necessary black swan event occurs. I also believe this. Fed price suppression will keep gold stopped in its tracks until the price just can’t be suppressed anymore. Thats when we will see a huge price rise. No one can know when this will happen, but I suspect we got a year or so to wait. Its discouraging since there is so much uncertainty.

    • “Thats when we will see a huge price rise. No one can know when this will happen, but I suspect we got a year or so to wait. Its discouraging since there is so much uncertainty.”

      Indeed. But I do think it’s worth pointing out that gofo rates historically have only been negative a few times and it’s only lasted a couple of days. Gofo is different in 2013. It went negative July 13th and has been in largely negative territory. How does one reconcile gofo with gold pricing? I believe scarcity will get much worse and it will be reflected in gofo. I’m holding a lot of dry powder for this day.

      If you’re interesting in gofo check it out http://www.lbma.org.uk/pages/index.cfm?page_id=55

      • Glen & Norm,

        Also, China imported another 109 tonnes of gold in September. Ya know, a 100 tonnes here and a 100 tonnes there… it adds up.

        The biggest GOLD BLACK SWAN EVENT will be the collapse of the LBMA Fractional Reserve Gold system. There is so much paper backing so little gold, it isn’t funny.

        steve

  10. I don’t know as much as many of these people posting; they obviously know more than me.

    I do know starting about two years ago many pundits or “experts” were certain it would be physical silver shortage that broke the manipulation. Now I’m certain it will be gold shortage that leads silver, as it almost always has been. And while the current ratio of about 60 to 1 will change, I don’t see 10 to 1 or anything like that unless industrial need becomes so acute critical industrial functions are severely choked due to shortages.

    • Shortages are the only reason why gold and silver prices would ever rise significantly over their cost of production.

      The bankers can always keep the metals near the cost of production, when there is enough of it to go around. When supply isn’t an issue, then the paper market will set the price, and the physical market (which is big industrial buyers in silver, and central bank buyers in gold) will happily accept the artificially low prices and thank the manipulators for them.

      Only when there is a scramble for the metal on the physical market, will the physical market ever bid up prices. When the physical market bids up prices, the paper market can either go along with them, or maintain lower prices and be discredited as a price discovery mechanism.

      So, for whatever the reason will be (banking crisis, loss of confidence in paper currencies, growing awareness of fractional bullion banking, increased central bank buying, solar demand, …), a physical shortage has to develop for prices to rise beyond the control of the paper market and its masters/manipulators.

      So I am quite happy and content that both PMs are below the cost of production, because this is the surest way a shortage will develop in the future. I was happy for the smackdown this week. I want silver to stay below 25$ for another 6 months.

      “The best cure for low prices are low prices”, as they say.

      To close, here’s a short article by Israel Friedman, Ted Butler’s mentor, on silver shortages: http://goldsilverworlds.com/gold-silver-experts/izzy-friedman-what-now-for-the-price-of-silver/

      • “When supply isn’t an issue, then the paper market will set the price, and the physical market (which is big industrial buyers in silver, and central bank buyers in gold)”

        That use to be the case in silver, but signs are that is changing…at least in Asia. Check out India’s silver imports for this year. A significant amount is for investors since premiums on gold are so high.

        • The signs are changing when people bid up prices to get their silver. We have been hearing of shortages for years now, but fact of the matter is the physical market is still not tight enough to cause any serious competition.

          We know there is a shortage when there’s a competition for physical metal and the prices are bid up. Until then, we know nothing. We *assume* that supply is tight, and we don’t know where the metal is coming from to satisfy the demand. But the metal is coming from somewhere, and we don’t know how much is left in these stockpiles that we obviously don’t know about.

          So, we basically know nothing. Being arrogant and trying to predict at what point a change in coming will do you no good, except probably cost you a lot of money.

          • Markus,

            You are right when it gets down to the facts of the matter, and away from the guesswork and speculation. It should be getting in short supply; the executive director of one of the largest physical sellers in the nation told me he saw signs of tightening supply, but I agree with you; we should believe shortage when we see it. With a degree in Geology and some information sources I believe there may be some undisclosed stockpiles or mining sources such that people who think they know worldwide mining production don’t know of. It may be like diamonds; there are official production numbers and “underground” or undisclosed sources into the marketplace. I do think the physical is one hell of a bargain at these prices.

  11. OutLookingIn | November 1, 2013 at 1:10 pm |

    “Ya know, a 100 tonnes here and a 100 tonnes there…”

    China is playing a globally, masterful financial game! The yuan has gained 17% against the dollar, despite herculean effort by the Chinese to keep its appreciation under control.

    When China’s gold reserves surpasses their US dollar treasury holdings, the yuan will be allowed to rise against other currencies. Just within this past decade the yuan has gone from nothing, to 17% of global trade settlements. Thats 17% of world trade!

    The physical gold that is flowing east will not be seen again in western hands for generations, if not at all. These are very “sticky” strong hands, that hold it now. The big ‘reset’ will occur when the yuan rises and the US dollar does a corresponding fall, doubling its depreciation.

    The above scenario is JMHO, but it will spell the end of the Anglo/American hedgemony, of the global precious metals and financial markets.

  12. I haven’t read Hamilton for years. He is just too annoying. He is one of the TA crowd (of course) that refuses to accept that these fractional reserve markets are rigged.

    And, of course, TA does not work in a rigged market. So at the back of my mind I wonder how much wilful disregard is at work for the sake of selling subscriptions.
    FWIW,
    G.

  13. @Glen,

    Actually I rather think that few think (and state?) that the suppression will be all that successful. I rather think that those selling the subscriptions are loathe to voice that concept at all.

    I note Jim Willie has come out with another blockbuster article: http://www.silverdoctors.com/jim-willie-the-game-is-over-king-dollar-is-dead/ wherein he states a starting (agreed upon) price for gold at $7000 per ounce and a silver price at $250. But he is a bit vague about whether he is talking about opening the mint, or a starting market point from the Great Reset….And I do know he doesn’t pay much attention to the paper prices these days.

    I do, but just for the masochistic pleasures of understanding what I am watching.

    The Greg Hunter interview with Jim Sinclair is also worth a listen. He states $3600 gold by 2016. So he still believes paper will perform – if you can call that performing…. And then the Great Reset will see gold to $50,000 by the end of the decade.

    Incidentally, if he thinks paper gold will last that long, that is when the bail-ins will start (and finish) the process of the Great Reset….Hmmmm. Could be. But since I cannot see how a Great Reset is going to leave a market system left standing in the West, perhaps we should get used to reading Chinese for our gold and silver prices…..

    All of these guys are traders. And Jim Sinclair is a stock promoter. And yet he is stating very emphatically to get out of the system….That is quite heroic, yes?

    G.

    • People like Sinclair are so wealthy and so diversified investing is a game to them. When one has massive quantities of gold, silver, plus ownership or “priority” access to food, water, security, etc., one can play the riskiest of investments as well. Here is another take on Sinclair: http://www.youtube.com/watch?v=Ped9BrJ5lmg

  14. Steve, i have a question. Oil is settled in dollars. How about crushing the dollar to make oil affordable in other currencies, “for the time being”? They are working hard on that in my opinion.

    Regards.

    • houtskool,

      That does sound like a good idea, however all central banks are devaluing their currencies to keep up with the Dollar. If the Dollar devalues too much, other currencies become too strong which hurts their exports and their economies. It’s a very complex and messy game.

      steve

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