Have Gold and Silver Stocks Peaked? Challenging the Analysts

Recently a handful of U.S. based financial analysts have made a big fuss over the many secondary equity offerings of many major mining companies, stating that is a sure sign that prices of gold and silver stocks have peaked and will soon come crashing down. The reason for these dire predictions? These analysts claim that the executives of these companies are taking advantage of an opportunity to raise capital when their stocks, in their words, have absolutely peaked.

Furthermore, they state that recent stories of gold jewelry sales in Abu Dhabi sliding 70% and gold imports dropping in India from 18 tonnes in January 2008 to just 1.2 tonnes in January 2009 are further proof of gold’s imminent demise. In the past couple of months alone, some of the big names in the mining industry that announced plans for a secondary offering included Newmont Mining (NYSE: NEM; $1.2 billion in stock and convertible debt), Silver Wheaton (NYSE: SLW; $250 million), and Redback Mining (TO: RBIFF.PK - $150 million). There’s only one problem with these tunnel-visioned analysts – they’re wrong.

Yes, my analysis of numbers in the COMEX futures markets for gold and silver leads me to believe that a short-term correction in gold and silver prices and their associated stocks is probable, though COMEX numbers have to be monitored weekly to understand if short-term behavior in gold and silver markets is likely to reverse. Still, given the strong up leg that quality mining stocks have experienced in the past two months, with many tacking on gains of 100%+ in a very condensed period of time, a correction now in stock prices if it happens would be nothing out of the ordinary.

Consequently, the analysts that predict the death of mining stocks use a probable setup to predict likely short-term behavior to support an ill-conceived conclusion. For example, many gold doomsayers that predicted the death of gold at the end of 2007 as we entered 2008 wrote “I told you so” articles when gold spot prices dropped below $700 in October, 2008 and used that fall to predict imminent further plunges to the $250-$300 an ounce level. When gold instead reversed from $680 to above $800, then to $900 an ounce, these analysts all but disappeared with the exception of those that jumped back on the bandwagon. However, any short-term correction that may manifest itself will be just that, a short-term correction in a fundamentally strong and intact gold and silver bull market.

The problem across the board with these “analysts” is the fact that [1] they have no understanding of the fact that the impetus for this global crisis is a monetary crisis; and [2] they evidently have very little experience, most likely 2-3 years or less, in dealing with gold and silver markets; consequently, they understand nothing about the typical volatility of these markets and the intervention of the Federal Reserve into such markets, and how to interpret this volatility and intervention.

Let’s look at what’s wrong with their above analysis. To begin, one can easily discount the 70% drops in the sale of gold jewelry in Abu Dhabi because luxury goods always suffer during times of severe economic malaise. The market for gold jewelry is a totally distinct market from gold bullion or gold coins. The typical markup for gold jewelry is 300% to 400% of its melt value. Thus, nobody that is interested in buying gold as a store of value would ever buy jewelry to fulfill this purpose. Jewelry is truly a luxury item, not an investment or a store of money. The drop in jewelry sales, though severe, is not only meaningless, but would be expected by anyone that understands the gold market and offers no “proof” that the gold bull is about to collapse.

Furthermore, increases in global gold and silver ETF inventories are reported seemingly every month. There is a huge number of what I term as “lazy” gold and silver investors that buy paper gold and paper silver and use gold and silver ETFs as a proxy for the real thing. I term the investors that buy the gold and silver ETFs as lazy because personally, I would never choose to own paper representations of silver and gold for any physical gold and silver that I desire.

However, if you look at these numbers, certainly nothing is wrong with the gold and silver bull. According to the most recent figures, the U.S. based GLD ETF added another 320,000 ounces to reach 10 tonnes, the U.S. based SLV ETF grew to a record level of 7,063 tonnes of silver, the Swiss-based gold ETF added 364,100 ounces, and the Swiss-based silver ETF supposedly 5,776,000 ounces. Whether you trust these ETFs to have the physical gold and silver in their vaults that is represented by the shares purchased is up to you.

As my final point of contention with those analysts that claim mining stocks have reached a multi-year peak now and are set for a huge decline, let’s look at their assertions about secondary equity offerings being a sure sign that mining company CEOs have recognized that their stock prices have peaked.

Number one, remember that last year, many large banks tried to raise capital for day to day operations with secondary equity offerings and failed because no market ever materialized for their secondary offerings. The fact that mining companies are cumulatively raising billions of capital in such a tight credit environment is not worrisome to me, but very impressive.

Secondly, the CEOs of mining companies have stated that their reasons for raising capital through secondary offerings are threefold. One, to fund acquisitions of more producing mines; two, to expand and hasten the pace of development of existing mines; and three, to increase production during a time when price inputs for production have drastically declined. Secondary offerings of equity almost always have dilutive effects on existing shares of equity in the short-term. If the CEOs of these companies also believed that this was a top for their industry, growth expansion would be the furthest thing on their minds.

It is often stated that a slick analyst can use and distort any statistic to arrive at the conclusion he or she so desires. In the end, with the proper perspective, all numbers that are used by analysts to conclude that the gold and silver bull markets are dead can be proven to have very weak legs.

Disclosure: Author owns SLW, but does not own NEM or RBI.TO

Comments

[Conan the B...:]

You are a little late to the party, but better late than never.

A scary correction for Gold, but silver will be stronger because of the Industrial Use factor.

Fear and fear of inflation have kept gold strong, less fear and a revised stimulus package will allow for short term profit taking and a shift into stocks.

Jell Pierce noticed that resistance was quite obvious in both Gold and GLD just above $900.

Feb 04 04:31 AM

[JudeJin:]

fear of fiat money losing purchasing power will propel gold higher than ever.

Feb 04 06:32 AM

[ROLEX18:]

Very good that you give a warning sign about GLD and SLV owning of physical metals, because people who understand what is Wall Street and how people are fooled into different kinds of Ponzi Schemes that promise stability and fairness, I want only to remind to the direct shareholders of GLD, SLV - call them today and tell them ( they won't even speak to you even if you have 1,000,000$ in their ticker symbols that you think is Gold ), I would like to exchang my shares for physical Gold and Silver, depending what you own, I understand that minimal size of Gold on COMEX is 100oz, this is exactly what I have in GLD stock, and 5000oz of Silver, this is also exactly what I have in SLV stock.
Tell them you want a delivery to your bank or even home delivery by BRINKS, and wait for an answer.
The best answer you will get, if you have a 1 mln $$$ in GLD, will look like this:
Sir, if you want to get your 100-1000oz of Gold, just sell your shares that equal your cash Gold holding, then you can buy Gold directly on COMEX and get a physical delivery, we don't do that blablabla.
To the smart investor it will rise red flags, where is my Gold?
Why they can't pass my physical Gold to me if their structured as physical buyer, OK, they hold it in my name in their accounts with the COMEX exchange or banks that deal with COMEX and clearing corporation that clears transactions, but if I was able to get paper shares when I was a shareholder of GE or MOT even 10-20 years ago, why I can't have my shares now that are meant to be a physical Gold?HMMM...
GLD and SLV are a Ponzi scheme that will never be discovered, because they lie only 50% of their prospectus, the rest 50% is true.
They really trade Gold and Silver futures and OTC in your name, they will pay you whatever you have with them, they are not going broke or anything, but they don't have even 10% of cash Gold,Silver they suppose to.

Mark Medayski

Feb 04 06:35 AM

[HarryR:]

Gold prices, like everything else depend upon supply and demand. Supply is down a fraction (2-3% YoY). Over 80% of demand is from jewellery and other industrial usage, when you add in coins and medals it is over 90%. If consumers are hurting (and we obviously are) and this leads to a significant and sustained drop in retail demand then gold prices will fall. Who cares about ETFs and investment/safe haven demand? They are the icing on the cake - they are not the cake.

Feb 04 09:09 AM

[Cesato:]

Then buy/sell paper Gold, why should I own physical Gold that is only worth whatever anyone is willing to pay for it? I can cash out in my e-platform anytime I want at the spot price. Masters please illustrate me!!!

Feb 04 10:04 AM

[skeptictoo:]

If you want physical gold, buy a futures contract and then take delivery. GLD is not set up that way


On Feb 04 06:35 AM ROLEX18 wrote:

> Very good that you give a warning sign about GLD and SLV owning of
> physical metals, because people who understand what is Wall Street
> and how people are fooled into different kinds of Ponzi Schemes that
> promise stability and fairness, I want only to remind to the direct
> shareholders of GLD, SLV - call them today and tell them ( they won't
> even speak to you even if you have 1,000,000$ in their ticker symbols
> that you think is Gold ), I would like to exchang my shares for physical
> Gold and Silver, depending what you own, I understand that minimal
> size of Gold on COMEX is 100oz, this is exactly what I have in GLD
> stock, and 5000oz of Silver, this is also exactly what I have in
> SLV stock.
> Tell them you want a delivery to your bank or even home delivery
> by BRINKS, and wait for an answer.
> The best answer you will get, if you have a 1 mln $$$ in GLD, will
> look like this:
> Sir, if you want to get your 100-1000oz of Gold, just sell your shares
> that equal your cash Gold holding, then you can buy Gold directly
> on COMEX and get a physical delivery, we don't do that blablabla.
>
> To the smart investor it will rise red flags, where is my Gold?
>
> Why they can't pass my physical Gold to me if their structured as
> physical buyer, OK, they hold it in my name in their accounts with
> the COMEX exchange or banks that deal with COMEX and clearing corporation
> that clears transactions, but if I was able to get paper shares when
> I was a shareholder of GE or MOT even 10-20 years ago, why I can't
> have my shares now that are meant to be a physical Gold?HMMM...
>
> GLD and SLV are a Ponzi scheme that will never be discovered, because
> they lie only 50% of their prospectus, the rest 50% is true.
> They really trade Gold and Silver futures and OTC in your name, they
> will pay you whatever you have with them, they are not going broke
> or anything, but they don't have even 10% of cash Gold,Silver they
> suppose to.
>
> Mark Medayski

Feb 04 11:19 AM

[Gedankonomist:]

The value of gold holds constant. Even if the worth of gold goes down relative to dollars and stocks, it will eventually return to it's former relative value, and then some, as long as the Fed continues with it's fiat money shenanigans.

Law of gold/silver #1: What goes down, must go back up.

Law of gold/silver #2: Gold and silver will never go out of business or bankrupt.

Feb 04 02:14 PM

[jailhousela...:]

If you own 50,000 shares of SLV, you can redeem those shares as one "basket" for 50,000 ounces of COMEX deliverable silver bars. It's all described in the prospctus. When you read about new silver being added to the SLV vaults, people are doing that in reverse and delivering units of 50,000 ounces of silver and getting 50,000 shares of SLV in exchange.

GLD has the same mechanisms for creating and redeeming shares.

Any shareholder of these ETFs should read the prospectus before spouting libelous accusations of fraud. If you're gonna libel them, don't do it in the UK because if you succeed in scaring away investors they can sue you big-time for any harm they suffer as a result.

Feb 05 01:36 AM

[Conan the B...:]

ROLEX 18: You made a mistake in the above comment, you signed it..."Mark Medayski".

ROLEX18K has been using "Mark Medayski" on a regular basis on many of his comments.

Have you decided that one comment stream is not enough?

Feb 05 01:59 AM

[J. S. Kim:]

Hello paultaut
thanks so much for your comments. in fact, thank you everyone for your comments, whether you agree or disagree, as long as you keep the comments constructive. However, if you visit my blog, theUndergroundInvestor... which I have been maintaining since August, 2006, I started publicly blogging about the merits of owning physical gold in September, 2006 and have owned physical gold prior to posting my blog on the internet.

Yet, I guess since I did not first buy in 2001, I admittedly have been a little late to the party, but for those that had the foresight to start building physical gold positions back in 2001, I tip my hat to you. However, it is my strong belief that this monetary crisis is just getting started and that even now, people that prepare now will have the opportunity for massive profits over the next several years. Better yet, the US Federal Reserve and US Treasury engineered sell off in gold and silver futures market last year (at least this is my strong belief as to what happened) provided another great entry point for those that have been "late to the party". All the best, JS

Feb 05 07:02 AM

[kathman:]

your comment about gold jewellry being marked up 300-400% in Abu Dhabi is wrong. In the indian market, where jewellry is over 22k gold (almost pure gold), it is sold by weight. Very little incremental value is placed on the design of the jewellry items, so it actually is purchased in large part as a store of value. You are seeing people melt their existing jewellry and convert it into cash at these prices. it has a big impact on worldwide supply/demand so it is not a trivial issue.

Feb 10 04:21 PM

[PROXIMO:]

Thanks for the heads up.


On Feb 04 06:35 AM ROLEX18 wrote:

> Very good that you give a warning sign about GLD and SLV owning of
> physical metals, because people who understand what is Wall Street
> and how people are fooled into different kinds of Ponzi Schemes that
> promise stability and fairness, I want only to remind to the direct
> shareholders of GLD, SLV - call them today and tell them ( they won't
> even speak to you even if you have 1,000,000$ in their ticker symbols
> that you think is Gold ), I would like to exchang my shares for physical
> Gold and Silver, depending what you own, I understand that minimal
> size of Gold on COMEX is 100oz, this is exactly what I have in GLD
> stock, and 5000oz of Silver, this is also exactly what I have in
> SLV stock.
> Tell them you want a delivery to your bank or even home delivery
> by BRINKS, and wait for an answer.
> The best answer you will get, if you have a 1 mln $$$ in GLD, will
> look like this:
> Sir, if you want to get your 100-1000oz of Gold, just sell your shares
> that equal your cash Gold holding, then you can buy Gold directly
> on COMEX and get a physical delivery, we don't do that blablabla.

>
> To the smart investor it will rise red flags, where is my Gold?

>
> Why they can't pass my physical Gold to me if their structured as
> physical buyer, OK, they hold it in my name in their accounts with
> the COMEX exchange or banks that deal with COMEX and clearing corporation
> that clears transactions, but if I was able to get paper shares when
> I was a shareholder of GE or MOT even 10-20 years ago, why I can't
> have my shares now that are meant to be a physical Gold?HMMM...

>
> GLD and SLV are a Ponzi scheme that will never be discovered, because
> they lie only 50% of their prospectus, the rest 50% is true.
> They really trade Gold and Silver futures and OTC in your name, they
> will pay you whatever you have with them, they are not going broke
> or anything, but they don't have even 10% of cash Gold,Silver they
> suppose to.
>
> Mark Medayski

Feb 17 05:35 PM