Miners Stagger As Terrors Loom Over Economy, Markets

by: Emmet Kodesh

Don't panic: though terrors loom over markets and economies and financial systems buckle, don't panic. Though Precious Metals have been hit and miners staggered, buying opportunities present themselves. Most people should move to a more defensive position but panic selling is the antithesis of sound defense.

Military history shows that a unit is most vulnerable when it is in retreat. More than any other maneuver, a retreat must be strategic and orderly or it becomes a rout and slaughter ensues: divisions, armies and entire nations may be lost if retreat becomes panic. A sensible re-ordering of allocation and strategies is urged. What has just occurred in markets is illumined by the following lines:

"A robber does not hit the victim over the head to indicate dislike for that person. It is about taking that person's money or other valuable items. The purpose of Friday's mugging was about confiscating wealth through fear, and it worked beautifully. Untold billions of real wealth was forcibly transferred to concentrated positions at certain institutions and countries through this act of financial terrorism. It is not personal. It is simply about taking your wealth." -- Robert Fitzwilson, The Portola Group 4-15-13

In the three trading days since the influential global investment bank Goldman Sachs lowered its gold price predictions for the near term and 2014 and urged shorting gold on COMEX, PM prices fell and then plunged. So far it has been a lucrative self-fulfilling prophecy for the shorts: up 5.4% in three days while holders in metals and miners were flayed. Hopefully they did not own on margin or need to lock in losses at sandbagged prices. Investors have experienced a terrifying example of wealth consolidation that stiffed fundamentals to collapse entire sectors. It is one thing for a commodity super cycle to end (though Dr. Marc Faber does not believe it has ended, quotes below); it is something else when it appears to end by fiat. As Fitzwilson said, "it is financial terrorism." In any case one must adjust to reality while not entirely dispensing with fundamental principles and reason anchored to the reality now eclipsed by the chaff of manipulation.

The core pillars of my thesis remain unchanged as do the fundamentals for PMs and PGMs (Platinum Group Metals). The basics of our situation are:

  • A large disjunction between the indices and economy, which the April 15 correction did little to defuse.
  • The real value of fiat currencies keeps falling with every Central Bank purchase of sovereign debt and bank bail-in.
  • Purchases of gold by Asian Central Banks, principally but not only in China continue to increase rapidly.
  • ex-USD trade exchange facilities are increasing.
  • Resource nationalism and indebted sovereigns will damage miners and basic materials, crippling growth and harming economies.

The intervention in the PM markets in recent days is based on a crisis-shortage in physical metals in Western banks. While it opens buying opportunities in the metals and mining sector the ferocity of the intervention and the fiscal and economic problems beneath it urge taking more defensive investment positions. There are good reasons for targeted buying in metals and mining (those with more substantial income stream may buy more heavily) and increasing allocation to cash including in investment grade short-term bonds.

Why so: because "there is a financial and economic train wreck coming" and the take down of precious metals masks the growing insolvency of the fiat system and the disjunction between the markets and structurally weak economies. Real incomes, net worth, workforce participation and a falling loan/deposit ratio that reflects diminished consumer liquidity present a grim macro picture.

After GS's guidance, Thursday precious metal prices dropped and Friday April 12 they plunged. The collapse spanned paper contract ETFs like SPDR Gold (NYSEARCA:GLD) and Silver (NYSEARCA:SLV), bullion-backed instruments like Sprott Physical Silver (NYSEARCA:PSLV) and Sprott Physical Platinum & Palladium Trust (NYSEARCA:SPPP) and royalty and streaming companies like Franco Nevada (NYSE:FNV) and Silver Wheaton (SLW). The mining ETFs for Gold Juniors (NYSEARCA:GDXJ) and Silver (NYSEARCA:SIL) lost 20% and 14% respectively in three days. Spot bullion prices broke through the tightening descending wedges they had formed since September and May 2011. Monday April 15 saw silver fall $2.59 to $23.20 for an 18% drop in three trading days. Gold was just a bit less bad as it fell $113/oz further to $1362. It is as if Goldman Sachs had decreed the drop with a magic word or wave of a wand the way the Fed creates debt currency by electronic purchase of T-Bills.

The collapse included the GSCI world-production weighted index of commodities down 6% in three days. Watch the GSCI and producers of basic materials for economic trends and health.

Citigroup sees the slump in the GSCI as the "death bell" [knell] for the commodities super cycle… Dr. Marc Faber however has a different and more nuanced view: "Gold breaking down marks a major buying opportunity. We have a major sell off … but the bull market in gold is not completed." He notes that Apple (NASDAQ:AAPL) is down far more than gold since 3Q 2011 and adds, "since the 2000 crash the S&P is up 2% and gold is up 240%. We are as oversold in gold as we were in 1987. As a trader I would enter to catch a $40 bounce. As a long-term investor I would wait for a solid low to buy…patience is very important in this environment."

Bob Rinear termed the fiat-driven markets "a circus side show," a carnie act. "Markets don't lie and what they're saying now is 'we're inflated'." The Fed creates asset bubbles while consumer confidence and liquidity drop. My last piece noted ominous new banking regulations in major economies like America, the U.K., Canada and NZ that permit re-classifying deposits as investments and seizing them in the event of bank crises. Cyprus was a template for what already has been prepared by major nations. Given bank derivative holdings in hundreds of trillions of dollars, failures seem inevitable: so do consequent seizure of deposits under color of law. This trend institutionalizes terror as a basic cultural principle.

Since the GS call to short gold, a virtual act of terror there has been sector collapse by decree or "fiat." All major, mid-cap and junior miners, basic commodities as well as PMs dropped double digits. For example, on the two days, mixed commodity miners like Freeport-McMoRan (NYSE:FCX) fell 11% as if it had been downgraded to sell rather than merely to hold. Southern Copper (NYSE:SCCO) fell 10.40%. Mid-cap Eldorado Gold (NYSE:EGO) also a significant iron ore producer dropped 8.34% after shedding 5.15% Friday. Pure precious metals miners like large-cap Goldcorp (NYSE:GG) fell 6.67% Monday on top of 4.80% Friday while mid-cap Kinross Gold (NYSE:KGC) fell 21.14.% on triple volume in two days and Barrick Gold (NYSE:ABX), no longer the largest gold miner in the world dropped 20% on enormous volume. Juniors fared worst with small caps McEwen Mining (NYSE:MUX) and Vista Gold (NYSEMKT:VGZ) falling 16% and 18.30% over the two days. Junior gold streamer Sandstorm Gold (NYSEMKT:SAND) lost 23% in two days on quadruple volume. It is panic and panic both kills and uncovers value. Note that Eldorado was the least bad in this bunch. Only in the last two days did Sprott Resource (OTCPK:SCPZF) share in the rout, down 14% (not much, comparatively) and under $4/share is a good buy.

The thesis that PM prices and the miners that produce them hedge against fiat currencies and will rise as currencies are devalued by debt-laden sovereigns is intact though battered by paper contract short selling. Those with strong income streams and thus able to ride out the storm can take solace from fundamentals. Other investors, however, must bend to selling pressures by forces linked to major sovereigns and the IMF and trim their equity holdings while adding allocation to cash and short-term investment grade issue ETFs with a very low beta: consider them as cash that pays about 1.3%.

Remember: while paper short-selling beats PMs and thus miners to the ground, Central Bank purchases boom. China bought 283 tons in March and 137 tons the first two weeks of April, as much as the paper gold contracts sold April 11-12 in NYC. In two recent articles, Andrew Maguire a whistle blower on the workings of the LBMA (London Bullion Market Association) and the London Daily fix explained that the crushing of the PM markets April 11-12 involved paper contract short-selling and that "there was no physical selling." Paper contracts short-selling breached secular support in a coordinated fiscal-market-media game to push Americans into the inflated markets and into T-Bills in time for worse drops than today.

Maguire also stated that on April 15, 155 tons of paper gold contracts sold in one hour in London while "Central Banks were purchasing 55 tons" of hard metal in the same hour. Western Central Banks "have sanctioned leveraged paper selling by their proxies the bullion banks while they are increasing their long gold positions. This has nothing to do with the physical market which is on fire." Dan Norcini commented that "the margin clerks are out in full force" as the plunge triggered stops and coincided with the bombings in Boston to create a perfect storm of panic.

So we receive an inverted view from major firms and media. The reality is increased buying. Maguire concluded his overview, stating, "there was an imminent danger of an LBMA default because of shortages of physical metal." He adds "we are nearing the end of this decline. If the price falls into the low $1300s physical demand will push prices back up."

For five years there has been devaluation of all major fiat currencies. What often are called currency wars may be coordinated work by the Central Banks of the fiat bloc to concentrate wealth in the financial system, that is, to impoverish nearly all people by destroying the value of their assets while stifling economic growth and fixed income. The Banks know the economy is sick as reflected in the plunging loan/deposit ratio. This wealth impairment works in tandem with suppression of the price of precious metals by bullion bank short selling and massive open sell orders that warp the daily price fixing to undercut and obscure growing PM demand.

Some point to the DXY $ Ice index holding strong at 82.26 but assets valued in USD are relative to other fiat currencies. The ICE basket misleads by measuring the dollar against euros (57%), yen, U.K. pounds and the CAD. Shinzo Abe and Japanese Central Bankers are helping the Fed and State Department (the heated Korean situation probably is part of this matrix) by destroying the yen and, in a harbinger of events here, of the income of Japan's savers and senior citizens. The dollar looks strong but is wearing thin.

It is important to diversify out of fiat currencies or if you can to hold securities denominated in other currencies. Good candidates are the yuan-renminbi (NYSEARCA:RMB), Swedish krona, Norwegian krone, Israeli shekel or the Turkish lira. Turkey has been a significant gold buyer and AU now is used as collateral in the banking system. USD/CAD 1.01 makes CADs a good choice and likely to be at a premium to USD before long. Watch the rise of ex-USD trading to direct your diversification into other currencies and evaluate USD durability.

Chagrin at what is happening in our markets and financial system inclines some people to idealize China's growth and solvency. But China's provincial governments have lots of highly leveraged debt unanchored to income streams. Adding to the national debt from PBC (People's Bank of China) currency printing, China's debt/GDP is about 75%, perhaps as high as 90%, less bad than ours but not great. It's probably unwise to expect their economy to save the world.

China could retire a significant portion of its provincial (State) council debts by selling its $3 trillion foreign reserves that include about $2 trillion in T-bills. There might not be enough buyers to absorb such a dump unless the Fed vastly increased its electronic-fiat purchases, which would further distort debt and equity markets. Thus the economy has been positioned for a systems' crash.

The Fed-BOE plan for "Resolving Systemically Important Financial Institutions" is writing on the wall. If you have a business or have sold property recently distribute your money into various Banks or Credit Unions. It has become dangerous to have more than $25k in any one institution, particularly the derivative-laden major Banks that will be first to use their depositors as collateral. You might not want to trade $50-$100k for bank shares. Again I urge that you explore the currency baskets offered by Everbank or the options for owning bullion in overseas accounts through goldmoney.com and others. Also watch what Sprott does, for example the recent joint facility with China's biggest gold miner, Zijin Mining. Note that in Q1 2013 $14.2 million in American Silver Eagles were purchased.

Safe havens become increasingly important. When bond prices plunge, look for days to increase your fixed income holdings but only intermediate or short-term issues and use ETFs to facilitate trading. Hold your cash mostly in money market accounts at major fund families like Vanguard or Fidelity: they are safer than Banks at this point. Given current uncertainty about everything but manipulation, the case for low-cost index funds or ETFs grows: try Vanguard's S&P ETF (NYSEARCA:VOO) at 5 basis points (.05/ $10,000 invested), Consumer Staples ETF (NYSEARCA:VDC), Consumer Discretionary (NYSEARCA:VCR) and Health Care (NYSEARCA:VHT) with Short-Term Corporate (NASDAQ:VCSH) as a cash substitute. So increase cash, add bullion, a bit of miners if your income stream allows and don't panic.

Disclosure: I am long OTCPK:SCPZF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.