China is getting ready to challenge the hegemony/monopoly of the London Metals exchange and COMEX in New York. The Pan Asia Gold exchange (PAGE) is set to open in June 2012, and after that things might never be the same again. Six major Chinese banks will fix the gold price every morning at 8am their time, which means that the world could now turn to China to get its price for Gold. Each contract will represent 10 ounces of Gold; that is the size of the PAGE contract currently. Individuals who purchase contracts on PAGE will receive a 90-day International Spot Contract and actual title to the gold; it will not be some worthless futures contract or an unsecured note from a bullion bank/international banking institution.
Why is this a big deal?
- PAGE will for the first time allow individuals to trade futures contracts that are fully backed by Gold. These contracts are not going to be the paper type future contracts that trade on the London and New York Gold exchanges. This single development is a huge game changer; for increasingly investors are turning to gold due to the uncertain times they find themselves in. Now they won't have to worry about taking delivery; delivery will be guaranteed.
- The contracts will trade in Yuan, which means that Yuan and not US dollars will for the first time become the dominant currency used in one of the most speculative commodity markets. In June, the world could be looking at China instead of New York or London. We think it will be a game changer. For example, when COMEX suddenly raises the margin requirement (one could call this almost illegal as it is done with such short notice and usually when the market appears to be soaring to new highs), forcing many traders out of their position, China will not have to follow suit. In fact, they will most likely act independently. Traders are sick of being at the mercy of COMEX and the London metals exchange. Thus, this degree of separation will serve as a magnet to attract all these dissatisfied and disenfranchised traders.
- The biggest game changer is that Citizens of China will now be in a position to purchase Gold via futures contracts with the click of a mouse. Initially, these contracts will only be available to the Agricultural bank of China’s 320 million customers. If just 2% of their customers bought one contract, it would equate to 2,000 tons of physical gold being drawn down (taken out of the markets). This is a massive development on its own, but soon these contracts will be open to the world. Now that the Chinese have such an easy means to speculate, demand for Gold could truly spike. I was recently in Indonesia and could openly see the love Asians have for Gold. In the small towns, you will find that everyone knows what the daily price of Gold is but very few know or care to pay too much attention to the daily exchange rate of the Indonesian Rupiah to the dollar. This exchange is going to allow the Chinese and eventually individuals from all over the world to speculate via the futures markets with contracts that are fully backed by Gold.
Once this exchange is up and running it will provide gold investors with an alternative playing field, who up to now have had to rely on unsecured Gold futures contracts, bullion banks and international banking institutions to set the price of Gold. This monopoly is about to come to a screeching halt.
As the Gold market has been heavily manipulated by the Bankers in the west, PAGE could truly turn out to be a huge game changer and potentially displace London and New York as the premier Gold exchange in the world. Asians love gold and with the opening of this exchange they will soon have the ability to purchase futures contracts that are backed by gold with the click of a mouse. As the contracts will be trading in Yuan, China will be the first country to directly challenge the dollar in one of the most speculative and lucrative markets today. We believe this is another slow and subtle move by China to prepare the world for a new reserve currency.
COMEX reportedly has only enough Gold to cover 10% of the total contracts traded. In other words, for every 100 ounces of paper gold, there is only 10% in real gold backing them. Some other analysts such as Eric Sprott claim that if individuals took delivery of just 5% of the traded contracts it would be enough to deplete COMEX of its entire inventory. Regardless of what the actual figure is, it is highly unlikely that COMEX could come up with enough Gold to cover 20% of the contracts. Now contrast this to PAGE, where every contract is going to be backed by 10oz of Gold, and it wins hands down. The Chinese love to speculate/gamble and with the opening of this exchange not only will be they be able to speculate, but they will also be in a position to buy a commodity that is highly priced in their society.
Even George Soros thinks this is a big event for he has bought back nearly all the Gold he sold when it was trading around $1600 an ounce. The long term picture for Gold has just become even more attractive. How should investors position themselves to take advantage of this development? First of all, let us start of by stating that in the intermediate time frames (6-12 months) we believe that Gold will continue to correct/consolidate before resuming its upward trend. We turned bullish on Gold in late 2002 when it was trading under 300 and bullish on Silver when it was trading roughly at $4 per ounce; this development further cements the view that the long term bull market in precious metals is still not over.
If you believe that the precious metals market still has a lot of upside potential, then you could implement the following strategies:
If you have no position in Bullion, then it would be wise to allocate some of your money to bullion (Gold, Silver and Palladium bullion); use pullbacks to establish a position. Those that already have positions can wait for stronger pullbacks to add to them. In addition, opening up positions in some key Gold and Silver companies could put you in a position to lock in substantially larger gains.
In the Gold sector, investors could deploy some money into the following three companies; on a relative strength basis, they are among the strongest companies in the gold sector.
Royal Gold (NASDAQ:RGLD) has quarterly earnings growth (yoy) of 42%, Gross margin (ttm) of 95.49% and an EPS of 1.48. Gross profits have increased significantly for the last three years. In 2009 gross profits were $73 million, in 2010, they were $136 million and in 2001 it jumped to $216 million.
Franco Nevada Corp (NYSE:FNV) has quarterly earning's growth (yoy) of 443%, EPS of 1.04 and levered free cash flow rate of 185 million. It also pays a dividend of roughly 1.2%
Rand Gold Resources (NASDAQ:GOLD) has quarterly earnings growth (yoy) 149%. Gross profits for the last three years are as follows, $76 million for 2008, $148.8 million for 2009 and $148.9 million for 2010 Net income has increased at a much faster pace; $47 million in 2008, $84 million in 2009 and $120 million in 2010. It also pays a dividend of 0.8%.
In the silver sector, investors might find the following 2 companies interesting. On a relative strength basis they are among the top companies in the silver sector.
Silver Wheaton Corp (SLW) has quarterly earnings growth rate (yoy) of 99.5% and a gross margin rate of 87%. Gross profits have increased nicely for the past three years; in 2008 they came in at $122 million, for 2009, they were $175 million and for 2010 gross profits almost doubled to $340 million. It pays a dividend of 1.1%
First Majestic Silver Corp (NYSE:AG) has quarterly earnings growth rate (yoy) of 88.3% and a ROE of 34.65%. In 2009, gross profits amounted to $23 million and in 2010; they more than tripled to $71 million.
I am not stating that one needs to get out of companies such as Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL) which are great long term plays and still have a lot of upside potential; both are dominant players and both have great forward PEs of 14 and 10 respectively. They are also sitting on boat loads of cash and have great quarterly earnings growth rate (yoy) rates - 53.7% for AAPL and 25.9% for GOOG. However, it would not hurt to put some money into the above-mentioned companies as the long term demand for precious metals is set to increase in the years to come; PAGE has just made it a lot easier for citizens of the most populous country on earth to purchase Gold. There is an old adage which states one should never put all of one's eggs in one basket.