When the markets go down, headlines are made. But when the markets go up, it seems like no one cares. The markets have been moving up rapidly, but where's the media coverage? While I believe a revived market trend will truly begin after America's Labor Day, the timeframe of snapping up bargain precious metals stocks is closing in.
The majority of the juniors, mid-tiers, and big producers have already climbed from their recent lows. Come September, the real move towards the upside will begin for these companies. That means if you don't act within the next few months, you're more than likely going to miss out on some early profits.
I've been tracking the trading patterns of dozens of precious metals stocks recently - from junior explorers to producing giants - and have witnessed bid support increasing and positive sentiment picking up. The smart money is loading up. There's no doubt about it.
HSBC Global Asset Management just recently unloaded most of its holdings of physical gold in favor of gold shares. So while gold and silver fell over the last few weeks, the recent and immediate rebound has been even better. Aside from all of the reasons I have mentioned in the past, there's yet another reason why: China. Over the next year, we're going to see all precious metals (including the rare earths) rise even further in price.
From Paper to Metal
On June 28, 2011, China launched the first precious metals spot exchange in the country, the South Rare Precious Metals Spot Exchange. The exchange offers long-term electronics transactions including spot trading, precious metal products and raw materials, and spot deferred transactions on up to 18 precious metals products, with the first four being silver, bismuth, indium and tellurium.
Since the launch of the exchange, the iShares Silver Trust ETF (SLV) has already bounced back from its lows of $32.63 back on June 27, while the price of bismuth, indium, and tellurium have done the same. China undoubtedly has the strongest purchasing power. When they buy, we notice.
An estimated 800 to 1,000 companies from Shenzhen, Guangzhou and Yongxing are expected to trade on the new exchange in China's Yongxing County, the silver capital of China. The county accounts for one fourth of China's total silver production, producing 2,050 metric tons of silver, 7.1 tonnes of gold, 4,300 tonnes of bismuth and 2.6 tonnes of platinum in 2010.
The exchange is expected to reach a trading volume of 1 trillion Yuan (US$155 billion) by the end of 2015. When it's all said and done, it will dramatically influence the price of the proposed 18 precious metals to be traded on the exchange. But that's not all.
Look Out Comex?
Earlier in the year, China announced the launch of The Pan Asia Gold Exchange. In brief, the Pan Asia Gold Exchange features a market-driven mechanism and provides two basic services: a physical gold purchase and distribution network and innovative products based upon physical gold - for anyone.
In short, that means simpler, quicker, and more cost-effective transactions between all parties for gold-related transactions. But more importantly, it means a new wave of capital injection for the gold market. Here's a video about the Pan Asian Gold Exchange (Make sure you watch it):
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Even whistleblower Andrew Maquire, who is no stranger to shorts and leverage employed by the banks against precious metals, was seen featured in the video. He says the exchange promises better price discovery, less leverage, and should in-time dilute the effects of short-side concentration in both gold and silver. We all know what happens when shorts have to cover...
The Pan Asian Gold Exchange could very well help send the price of gold into new territories.
A New Wave of Capital
The Pan Asian Exchange has signed an agreement with The Agricultural Bank of China (ABC), integrating its customer account information system with their platform.
That means the exchange will have direct access to the accounts of 320 million retail customers, 2.7 million corporate clients, and nearly 24,000 branches. ABC is China's third largest lender by assets. When it went public last year, it became the world's biggest ever initial public offering. It currently ranks No.8th among the Top 1000 World Banks and Forbes Global 2000 named it the 25th-largest public company in the world. This is where it gets big. Real Big.
Imagine buying gold through your bank with the click of a mouse. The Pan Asia Exchange has now created the first ever rolling spot contract that will allow Chinese banking clients to buy 10 ounces (the minimum transaction) of gold contracts in RMB, through their account, and directly linked to the exchange. If you have an account with ABC, you can instantly buy gold, or gold contracts.
Think about it: 320 million retail customers and 2.7 million corporate clients, all with the same Chinese appetite for precious metals; all now able to buy gold in 10 ounce increments with the click of a button.
Once more of these international contracts go live, we're going to see a strong demand for physical gold as the drawdown of physical gold begins to meet the obligations of the contracts. Buying gold directly from your bank account - that's real demand. It's essentially like the SPDR Gold Trust, or GLD, with much stricter leverage guidelines.
Putting it All Together
Back in April 2010, we published a letter talking about how silver was being manipulated. Then in October 2010, we published another letter proving our theory and why silver will climb to new highs. Silver has more than doubled in value since that time, nearly reaching an all-time high of $50.
In both letters, I mentioned how the trading of both silver and gold is not only highly leveraged, but easily manipulated - especially on the silver side. Many of the shorts used to manipulate the price are both naked and heavily leveraged. Because of the massive short positions against silver, and gold, every physical ounce of the precious metals taken out of the physical market and into the new Chinese exchange will force a massive short squeeze as leveraged short sellers have to cover their positions in the paper market.
For years, most people have assumed that the London Bullion Market Association (LBMA), the world's largest gold market, had actual gold to back up the massive "gold deposits" at the major LBMA banks. In my original letter, I revealed that most of the gold traded in the markets is not actually fully backed by the actual metal itself, as many believe.
This was confirmed during the CFTC hearings when Jeffrey Christian of the CPM Group said that the LBMA banks have approximately 100 times more gold deposits than actual gold bullion. This means that for every ounce of gold traded in these markets, 99 of them appear from thin air. That's nearly $153,000 of leverage for every ounce of gold actually available in the banks.
What happens if everyone decides that they want actual physical delivery of their gold? What about silver? When this story was uncovered last year, we saw some strong action in the markets from the information presented at the CFTC hearings. Before the hearing, silver was trading under $20. Since the hearing, silver nearly hit $50 as many silver shorts were squeezed out.
There's no doubt these highly leveraged shorts are extremely vulnerable and can easily be taken out by physical demand. When you go from trading paper to actual physical metals, that's when the prices of these metals will skyrocket as the demand doesn't meet supply.
The Pan Asia Gold Exchange, with its first ever rolling spot contract, could force many of the paper shorts to cover as the exchange increases its holdings of both gold and silver to supply the new demand and back up their trades with physical bullion.
It's Time to Pay Up
In a recent report (pdf), Eric Sprott and Andrew Morris pointed out the significant discord between paper and physical supply on the Comex relating to silver:
"...Over 800 million ounces traded each day in April on (the Comex). Further, consider that as at the end of April there were only 33 million ounces of registered inventories to back up all of that paper trading. Just imagine if a mere 5% of all of that buying actually stood for delivery; the entire inventories would be more than wiped out." He concluded that, "With more and more dollars flowing into the silver markets and a finite supply of physical to meet that demand, the theoretical losses for the paper silver short-sellers are near infinite. And with such a skewed and obvious risk/reward payoff vastly favoring the longs, we pose the following question. Who is most at risk in the silver markets: the buyers of a scarce and real asset that serves a growing multitude of purposes, or the sellers, who are short a quantity of silver that may very well not even be obtainable at anywhere near current prices? Let the seller beware!"
The reasons why both silver and gold will climb are apparent. Now is the time to start looking for precious metals plays, if you already haven't done so.
While there are a lot of battered stocks trading near 52-week lows, that doesn't mean they are all bargains. I am currently looking into more speculative plays, as these are the ones that will see the biggest returns during the next phase of the precious metals bull run. The key is to look for companies with a great project in mine-friendly jurisdictions, but more importantly, a management team that can get things done.
While there are many great management teams loaded with geologists capable of advancing projects, I'll be looking specifically for those who are capable of raising money and supporting their own stock.
Too often I see great projects destroyed by teams comprised only of geologists with no market experience. I can't stress enough how important it is to have a management team with both strong market experience and geological know-how.
While I would not generally release a Special Report during the summer, the bargains are too hard to pass. I've narrowed it down to a few companies, so it's just a matter of meeting with the management teams to see if they are worthy. It's going to be a great Q4...if you prepare.
