No Way Out

By: Peter Schiff, CEO of Euro Pacific Capital

-- Posted Friday, 14 December 2012 | Share this article | Source: GoldSeek.com

By upping the ante once again in its gamble to revive the lethargic economy through monetary action, the Federal Reserve's Open Market Committee is now compelling the rest of us to buy into a game that we may not be able to afford.  At his press conference this week, Fed Chairman Bernanke explained how the easiest policy stance in Fed history has just gotten that much easier.  First it gave us zero interest rates, then QEs I and II, Operation Twist, and finally "unlimited" QE3. 

Now that those moves have failed to deliver economic health, the Fed has doubled the size of its open-ended money printing and has announced a program of data flexibility that virtually insures that they will never bump into limitations, until it's too late.  Although their new policies will create numerous long-term challenges for the economy, the biggest near-term challenge for the Fed will be how to keep the momentum going by upping the ante even higher their next meeting.

The big news is that the Fed is now doubling the amount of money it is printing. In addition to its ongoing $40 billion per month of mortgage backed securities (to stimulate housing), it will now buy $45 billion per month of Treasury debt. The latter program replaces Operation Twist, which had used proceeds from the sales of short-term treasuries to finance the purchase of longer yielding paper. The problem is the Fed has already blown through its short-term inventory, so the new buying will be pure balance sheet expansion.

To cloak these shockingly accommodative moves in the garb of moderation, the Fed announced that future policy decisions will be put on automatic pilot by pegging liquidity withdrawal to two sets of economic data. By committing to tightening policy if either unemployment falls below 6.5% or if inflation goes higher than 2.5%, Bernanke is likely looking to silence fears that the Fed will stay too loose for too long. While these statistical benchmarks would be too accommodative even if they were rigidly enforced, the goalposts have been specifically designed to be completely movable, and hence essentially meaningless.

Bernanke said that in order to identify signs of true economic health, the Fed will discount unemployment declines that result from diminishing labor participation rates. It is widely known that a good portion of unemployment declines since 2009 have resulted from the many millions of formerly employed Americans who have dropped out of the workforce. But like many other economists, Bernanke failed to identify where he thinks "real" employment is now after factoring out these workers.  So how far down will the unemployment number have to drift before the Fed's triggering mechanism is tripped? No one knows, and that is exactly how the Fed wants it.

A similarly loose criterion exists for the Fed's other goalpost - inflation. Bernanke stated that he will look past current inflation statistics and look primarily at "core inflation expectations." In other words, he is not interested in data that can be demonstrably shown but on much more amorphous forecasts of other economists who have drunk the Fed's Kool-Aid. He also made clear that rising food or energy prices will never fall into the Fed's radar screen of inflation dangers.

For as long as I can remember (and I can remember for quite some time) the Fed has stripped out "volatile" increases in food and energy, preferring the "core" inflation readings. But in the overwhelming majority of cases, the headline numbers are significantly higher than the core. In other words, Bernanke simply prefers to look at lower numbers. In his press conference, he made it clear that the Fed will avoid looking at price changes in "globally traded commodities," that are all highly influenced by inflation.      

These subjective and attenuated criteria give Fed officials far too much leeway to ignore the guidelines that they are putting into place. If the Fed will not react to what inflation is, but rather to what it expects it to be, what will happen if their expectations turn out to be wrong? After all, their track record in forecasting the events of the last decade has been anything but stellar.

The Fed officials repeatedly assured us that there was no housing bubble, even after it burst. Then they assured us the problem was contained to subprime mortgages. Then they assured us that a slowdown in housing would not impact the broader economy. I could go on, but my point is if the Fed is as spectacularly wrong about inflation as it has been about almost everything else, will they be able to slam on the brakes in time to prevent inflation from running out of control? And if so, at what cost to the overall economy?

The Fed is committing to more than a $1 trillion annual expansion in its balance sheet, an amount greater than the total size of its balance sheet as late as 2008. Most forecasters believe that the Fed will have $4 trillion worth of assets on its books by the end of 2013, and perhaps more than $5 trillion by the end of 2014. If conditions arise that require the Fed to withdraw liquidity, the size of the sales that would be required will be massive. Who exactly does the Fed believe will have pockets deep enough to take the other side of the trade? 

As the biggest buyer of treasuries, it is impossible for the Fed to sell without chances of collapsing the market. Surely any other holders of treasuries would want to front-run the Fed, and what buyer would be foolish enough to get in front of the Fed freight train? The bottom line is that it is impossible for the Fed to fight inflation, which is precisely why it will never acknowledge the existence of any inflation to fight. 

But perhaps the most absurd statement in Bernanke's press conference was his contention that the Fed is not engaged in debt monetization because it intends to sell the debt once the economy improves. This is like a thief claiming that he is not stealing your car, because he intends to return it when he no longer needs it. To make the analogy more accurate, there could not be any other cars on the road for him to steal. 

Without the Fed's buying, it would be impossible for the Treasury to finances its debts at rates it can afford. That is precisely why the Fed has chosen to monetize the debt. Of course, officially acknowledging that fact would make the Fed's job that much harder. Without the monetization safety valve, the government would have to make massive immediate cuts in all entitlements and national defense, plus big tax increases on the middle class.

As I wrote when the Fed first embarked on this ill-fated journey, it has no exit strategy. The Fed adopted what amounts to "the roach motel" of monetary policy. If the Fed actually raised rates as a result of one of its movable goal posts being hit, the result could be a much greater financial crisis than the one we lived through in 2008. The bond bubble would burst, interest rates and unemployment would soar, housing prices would collapse, banks would fail, borrowers would default, budget deficits would swell, and there would be no way to finance another round of bailouts for anyone, including the Federal Government itself. 

In order to generate phony economic growth and to "pay" our country's debts in the most dishonest manner possible, the Federal Reserve is 100% committed to the destruction of the dollar. Anyone with wealth in the U.S. dollar should be concerned that economic leadership is firmly in the hands of irresponsible bureaucrats who are committed to an ivory tower version of reality that bears no resemblance to the world as it really is. 

 

A Look at Junior Gold Producers

-- Posted Friday, 14 December 2012 | Share this article | Source: GoldSeek.com

By Jordan Roy-Byrne

GDX is our favored index or ETF for tracking the gold stocks but it only tracks the large cap unhedged companies. In the world of gold mining and exploration, there are several sub sectors below the largest producers which comprise GDX, the HUI and the XAU. In recent weeks we have charted GDX to death. We know the market has initial support at $46, secondary support at $43 and very strong support at $41. That being said, I wanted to check the junior producers to see if they gave us a different read on the market or if they are in a similar boat as the large producers.

Below is a chart from an equal-weighted index we put together. It contains 20 companies which are gold producers. The median market cap is $900M, which is quite large. For the most part, these are the junior producers who were successful from the 2008-2010 bull market. After all, if a junior producer is successful during a cycle, then it’s no longer a true junior!

 

The price action in 2012 is remarkably similar to that of GDX. The large gold stocks made a double bottom and then rebounded strongly. Like GDX, the junior producers have shed most of the gains and very well could test those two support levels. There is 10% downside to the first support level and 15% downside to the double bottom support level.

The 5% and 50% are breadth indicators (which we discussed last week). They refer to the percentage of the index (20 stocks) which is trading above its 200-day moving average. Currently, the 50% is quite high and shows strong breadth. Even if the index falls another 10%, breadth should remain comfortably higher than at the double bottom. This is what we expect at secondary lows following a major bottom.

Ultimately, this is still a very bullish long-term chart provided the market makes another low and resumes its fledgling cyclical bull market. In that case, in 2013 both large and junior producers will attempt to rally through the overhead resistance and retest the 2010-2011 highs. We could see the next major breakout at the end of 2013 or early 2014. Now is the time to be vigilant as large and junior producers are likely to bottom in the coming month. Speculators and investors are advised to carefully seek out the large or small companies which are poised for the best rebound. If you’d be interested in professional guidance in uncovering the producers and explorers poised for big gains then we invite you to learn more about our service. 

Gold and Silver: Of Cartels, Algorithms and Artificial Prices

-- Posted Friday, 14 December 2012 | Share this article | Source: GoldSeek.com

Those who follow the day to day developments in the gold and silver markets have typically seen rampant market manipulation by large traders and bullion banks.

Although supposedly against the rules — and even being subjected to an ongoing investigation by the CFTC that now reaches into its fifth year — this market bullying is nevertheless allowed to happen over and over again without effective regulatory intervention.

Some of these big players even employ algorithmic trading systems to move into and out of the market faster than any human can. The transactions initiated by these computerized trading programs happen rapidly and often in huge size.

Algorithmic Trading Contributes to Manipulation

Despite these challenges, both precious metals have been able to rise over the last decade, so the real question is how high the prices of silver and gold would be if the market had not been subjected to recent downside price volatility?

The bullion banks typically need only a minute — as their algorithms quickly trade tens of thousands of Comex futures contracts — in order to induce a dramatic shakeout of weak long positions.

According to Nanex, that is an average of 200 or more contracts traded per second. Furthermore, these sharp moves almost always occur just prior to the trading pit’s open, which is a time frame when the algos tend to dominate the market.

As a very well-informed discussion forum writer contributing under the name James Mc of GATA Chairman Bill Murphy's Lemetropolecafe recently noted on November 28th:

"Unlike last Friday, when it took over 165,000 contracts trading to net a gain of $23.20, gold fell $25.60 between 8:20 and 8:21 AM this morning. Furthermore in just 5 minutes (8:20-8:25AM) a whopping 21,205 contracts traded. No long would ever dream of unloading a position in this manner"

Basically, only a very deep-pocket entity, cartel, or bullion bank aided by an intimate knowledge of where the sell-stops are located could make this happen with the help of algorithmic trading.

This price action effectively negated yet another widely observed technical breakout, which is the result that the manipulators typically accomplish in the market’s managed retreat toward ever higher and higher precious metal prices.

Predictable Trading Patterns Observed

For years, it was GATA speaking out as the lone voice against this practice, but now ZeroHedge has somewhat begrudgingly brought the issue to its fight club by pointing out the increasingly obvious pre-opening trading pattern typically employed by a large “not-for-profit”.

A review of the predictive trading patterns shows these tendencies:

·         On most trading days, gold and silver prices are bombed just before the Comex market opens.

·         Fresh speculative longs get washed out, creating sentiment "at the margin" — which is poor.

·         The price of both metals gets crushed at and around options expiration.

·         If one metal trades higher or looks stronger, it matters little, and they are not allowed to follow each other higher. For example, over the past few weeks, silver has traded relatively strongly, but gold was leaned on despite this strength.

·         Over and over, the HUI or the miners index, works as a tip off indicator. When the mining index is weak, the likelihood of a manipulative raid the following day rises substantially.

This all reflects the real interests working behind the scenes to move gold and silver prices in ways that suit their manipulative purposes. Not the Fiscal Cliff, the FOMC meetings, the Debt Ceiling, nor any other well publicized geopolitical crisis. Precious metals pricing happens in the pits, apparently oblivious to world events or actual physical demand.

For more articles like this, and to stay updated on the most important economic, financial, political and market events related to silver and precious metals, visit http://www.silver-coin-investor.com

Inflation-Targeting Dead, Long Live Inflation

By: Adrian Ash, BullionVault

-- Posted Friday, 14 December 2012 | Share this article | Source: GoldSeek.com

The Fed actually thinks it can drive 315 million souls through a 0.2% gap in its forecasts...

REMEMBER INFLATION? Central bankers do – and they want to get rid of it, writes Adrian Ash.

Not in the way they used to get rid of it. Back then they would raise interest rates to curb debt-fuelled spending. Whereas now they want to throw inflation out of their policy targets instead.

The true aim being to welcome it back to the real economy.

America's zero interest rates, said the US Federal Reserve on Wednesday, "will be appropriate at least as long as the unemployment rate remains above 6.5%." Coming just a day after 2013's new Bank of England governor Mark Carney said he wants to swap inflation for GDP targeting, this marks a new stage in a big and global shift.

Yes, inflation does get a look-in. The Fed swore Wednesday that it will keep rates at zero only so long as inflation "is projected to be no more than a half percentage point above the Committee's 2% longer-run goal" over the next one to two years. But that projection is of course the Fed's to make. And its 2.0% inflation target is already being fudged.

Half-a-point here, half-a-point there, who cares? Other than consumers, businesses, savers and everyone else.

Also note – the Fed didn't say that hitting its new jobless rate will definitely trigger a rate rise. And that 6.5% level for US unemployment is itself an ambitious goal. Since 1948, US unemployment has averaged 5.8%. It stood at 7.7% in November, and it has stood at or below 6.5% in only 550 of the last 780 months.

In short, strong returns to cash savers remain a very long way off yet. Higher inflation will meantime be tolerated – welcomed, even – as part of cutting Western governments' huge debt burdens. Real rates of interest, after inflation, are likely to get worse below zero. Not least because, while failing to raise interest rates, central banks will continue to print money to buy government bonds – thereby pushing down the interest rate they offer to other investors (ie, you and the entire retirement savings industry).

"If Ben Bernanke thinks 4% is an appropriate level for inflation in the US," says Jim Leaviss, blogging at UK fund giant M&G, "you wouldn’t be lending money to the government at 0.65% for the next 5 years would you?

"And with Mark Carney taking over at the Bank of England next year, market inflation expectations [you would imagine] would be overshooting the 2% inflation target over the next few years too?"

Put another way, "It's fairly clear, although not explicitly stated," says the Fed chairman's sometime colleague and chum, Paul Krugman, "that the goal of this pronouncement is to boost the economy right now through expectations of higher inflation and stronger employment than one might otherwise have expected."

So why would anyone hold fixed-income government debt? Abandoning all pretence (at last) of targeting low inflation, central banks clearly want to see higher inflation. Because in the Fed's plan – if not in reality, history or anyone else's model since the late 1970s – the idea is that this will boost employment. So looking ahead to 2015, the US Fed's previous dateline for any fear of a rate hike, "Financial institutions that want to report nominal earnings, let alone avoid real losses on portfolios that will then include $15.5 trillion of US obligations that pay essentially zero, will be desperately reaching for yield and risk," writes Berkeley professor Brad DeLong. "And whatever risky assets they buy to get some yield into their portfolios will trigger somebody to then spend more on currently-produced goods and services.

"[So] that possible future world," says DeLong, "is not a future world in which unemployment is still above 6.5% and forecast core inflation is still below 2.5% per year." And yet the US Fed itself, also issuing new forecasts after Wednesday's new policy announcement, says precisely that. All the new policy aim has achieved, together with a fresh $45 billion of quantitative easing each and every month from hereon, is to tweak the forecast 2015 range for US joblessness from September's guess of 6.0-6.8% to this month's guess of 6.0-6.6%. Core US price inflation is actually forecast to fall, hitting a 2015 range of 1.8-2.0%.

Is DeLong saying Ben Bernanke is lying? Or did he fail to check the Fed's new predictions? Maybe the Fed is being disingenuous, ignoring the impact of its policies on inflation so it can gain the political support needed to allow them. Or maybe, just maybe, the fact is that the Fed – like all other central banks today – is worse than clueless.

Frantically yanking its levers and smashing its dials, it actually imagines it can direct the economy, now this way, now that, and drive 315 million souls through a 0.2% gap in its forecasts. Yet instead, it risks driving the currency over a cliff.

"At the surface level," Brad DeLong explained long ago, in a 1996 paper, the awful inflation of the 1970s happened because no one who could "placed a high enough priority on stopping inflation." Worse still, "no one had a mandate to do what was necessary." Beating unemployment with cheap money was thus the only tool in the box. So by God they would use it, even if it worked about as well as beating an egg with a shovel.

Viewed from the zenith of central-bank independence in the mid-1990s, "It is hard to see how the Federal Reserve could have acquired a mandate [to tackle inflation by raising rates sharply] without an unpleasant lesson like the inflation of the 1970s," concluded DeLong in that paper.

You might think that keeping inflation low is what central banks are for. But that's so late-20th century! And the Fed this week walked further away from that mandate. Central banks everywhere are similarly losing their "independence" to keep inflation in check. So guess what comes next – what must come next – before there's any true chance of central banks hiking their rates to try and curb your cost of living.

Golden Points To Ponder

-- Posted Friday, 14 December 2012 | Share this article | Source: GoldSeek.com

By Richard (Rick) Mills

Ahead of the Herd 

As a general rule, the most successful man in life is the man who has the best information

Investors seeking leverage to precious metals should focus on junior resource companies who own the world’s undeveloped gold and silver deposits as they provide the best exposure to a rising precious metals price environment.

You need to find the quality management teams with money in the treasury, the ability to raise more and owning the advanced projects that are well along the development path towards a mine. 

A mine that is going to be a long life, lowest quartile all-in cost producer in a geo-politically safe country. 

These companies are the world’s future gold/silver producers and of course many will be in the sights of mid-tier and major producers for takeover candidates as reserve replacement targets.

The gold mining industry needs to discover 90 million ounces of gold every year just to stay even.

But despite increased exploration expenditures, a record US$8b in 2011, and an increasing gold price, gold ounce discovery is not keeping up to the rate needed to replace mined ounces.

The Metals Economic Group estimates that the 99 significant discoveries (defined as greater than 2 mil oz) found between 1997 and 2011 replaced only 56 percent of the gold mined during that same period.

According to the Thomson Reuters GFMS’s Gold Survey 2012 global gold mine production was flat (output rose 0.1 percent to 1,366 metric tons) in the first half of 2012.

The average grade of ore processed globally dropped 23 percent from 2005 through the end of last year and is forecast to decline another four percent in 2012. 

The GFMS report also said the average cash cost across the gold mining industry for mining an ounce of gold is a record $727 per ounce. The average cash margin dropped to $872 an ounce in the second quarter from as much as $1,032 an ounce in last year’s third quarter

Average operating/cash cost figures include only those costs directly associated with the production of the gold such as;

• Wages
• Cost of energy
• Raw materials such as steel, explosives etc

 

A complete breakdown of costs, an all-in cost figure, courtesy of CIBC, shows cash operating costs pegged at $700 an ounce.

Sustaining capital, construction capital, discovery costs and overhead at $600. Add in $200 for taxes and you get US$1500.00 as the replacement cost for an ounce of gold.

 

Using the all-in figure provides a more accurate and definitive picture of actual mining cost and profit.

Also, according to CIBC World Markets, the sustainable number gold miners need is $1,700/oz. The long term gold price chart from the World Gold Council shows gold has been in consolidation since late 2011.

Capital inputs account for about half the total costs in mining production - the average for the economy as a whole is 21 per cent. Obviously many of the costs, once incurred, cannot be recovered by sale or transfer of the fixed assets.

Mining is an extremely capital intensive business for two reasons. Firstly mining has a large, up front layout of construction capital called Capex - the costs associated with the development and construction of open-pit and underground mines. There are often other company built infrastructure assets like roads, railways, bridges, power generating stations and seaports to facilitate extraction and shipping of ore and concentrate.

Capex costs are escalating because:

• Declining ore grades means a much larger relative scale of required mining and milling operations
• A growing proportion of mining projects are in remote areas of developing economies where there’s little to no existing infrastructure

Secondly there is a continuously rising Opex, or operational expenditures. These are the day to day costs of operation; rubber tires, wages, fuel, camp costs for employees etc.

The bottom line? It is becoming increasingly expensive to bring new mines on line and run them.

“In the next few years, escalating costs, talent shortages and competing infrastructure builds will make it very difficult for mining companies to complete their capital projects on time and on budget. These types of cost and time overruns can create significant risks for miners, including the danger of scaring off potential investors.” Deloitte, David Quinlin, European Mining Lead, Switzerland

Since 2006 the major gold producers have spent 40 percent of their entire market capitalization building new mines. As you can see in the chart below it isn’t going to get any cheaper - major miners will need to spend 60 percent of their market capitalization building new mines in order to sustain the same level of production going forward.

The major gold producers desperately need to replace their mined gold reserves yet can’t afford to build many of the large deposits slated to be built.

The reasons behind flat-lining gold production, and record cash and all-in costs, are numerous:

• Production declines in mature mining areas
• Slower than expected ramp-ups of output
• Development time up
• The entire resource extraction industry suffers from a lack of skilled people
• Extreme weather
• Labor strikes
• Protests

Additional challenges include:

• Increasingly more remote and lacking in infrastructure projects
• Higher capex costs
• Increased resource nationalism
• Increased environmental regulation
• More complex metallurgy
• Lower cutoff grades

The declining mined and mineable gold grade is a direct result of the industry’s inability to discover new high grade/high margin deposits.

 

Junior market caps have been savaged - 25 percent of the stocks on the TSX.V are under a nickel, another 25 percent are under a dime – 50 percent of the stocks trading on the TSX.v are under a dime, a total of 70 percent are under .20 and 80 percent are under .30 cents. Less than 20 percent of stocks on the Venture are over .30 cents and only seven percent of stocks are over a dollar.

Producers are not able to replace their reserves because there’s a lack of discovery, few large high grade deposits are being discovered and most of those that have been discovered aren’t owned by producers …

 

“Today, the major producers and their majority-owned subsidiaries hold 39 percent of the reserves and resources in the 99 significant discoveries made in the past 15 years.” Metals Economics Group (MEG)

The junior exploration sector is presently in the midst of one of the worst financing environments ever experienced by the sector.

 

One market analyst recently said that out of the 1800 companies he tracks, as many as 524 have less than $200,000 in working capital.


With today’s extremely low share prices, financing - if money is even available - is going to massively dilute shareholders forcing a tremendous number of future rollbacks. 

Financing for many juniors is going to be challenging – very ironic that just a few short years ago, with gold at only $400 oz, it was much, much easier to raise money then today with gold at $1700.00 oz! Those juniors with some money, and not wanting to excessively dilute shareholders raising more with devastated share prices, will conserve their cash and drastically cut expenditures.

The outlook for many juniors in 2013 is grim, many will not survive. Expect rollbacks, property sales for cash, shares for debt and mergers and acquisitions (M&A) to become the norm. Exploration will drop, the discovery of the future supply of gold, silver and other metals will be put on hold.

A Junior exploration company’s place in the food chain is to acquire and explore properties. Their job is to make the discoveries that the mid-tiers and majors takeover and turn into mines. Junior exploration companies own the majority of the world’s future gold mines.

The juniors who do have money for exploration and development of their properties, and those few who can get financed, will be well rewarded in the market place for discoveries and bringing the lowest cost projects to production.

This author believes that there is exceptional, and as of yet, undiscovered value in junior companies with quality assets in safe stable countries.

The bottom line for investors in the resource sector is that many juniors working in safe stable jurisdictions, already own what the world’s mining companies increasingly, desperately need.

Ahead of the Herd has posted a short  list of junior resource precious metal companies with defined deposits operating in North America. The AOTH list is free, you may access it here.

How to Find Success with Latin American Miners

-- Posted Friday, 14 December 2012 | Share this article | Source: GoldSeek.com

Source: Brian Sylvester of The Gold Report   

Miners in Latin America are facing both growth and challenges. Heiko Ihle, senior research analyst with Euro Pacific Capital, examines the factors behind these trends. In this Gold Report interview, Ihle urges investors to evaluate mining companies based on three important features rather than on the performance of others in the region.

The Gold Report: Heiko, you cover many companies in Latin America. One silver miner in Mexico is challenging an eviction notice from its property in Chihuahua, Mexico, which is causing a stir in the mining industry. Does that give you cause to reevaluate Mexico as a mining jurisdiction or is this an isolated incident?

Heiko Ihle: Mexico is a more challenging mining jurisdiction than the United States or Canada, but it's also a much easier place than Bolivia, for example. There are some common challenges with mining there. One of the companies I cover has some issues with the community in Oaxaca. This sort of thing happens all the time, and it's mostly business as usual.

TGR: What sort of gold and silver prices are you using in your models to evaluate these companies?

HI: I'm a stock analyst, as opposed to a macroanalyst, so I use conservative numbers: $1,600/ounce (oz) long-term gold prices and $34/oz long-term silver prices. In the long term, those numbers are likely to be a little too low, but they produce a margin of safety to our net asset value (NAV) and cash-flow models.

TGR: The silver companies you cover in Latin America are for the most part outperforming your gold companies. Does this make you more bullish on silver than gold, or are you evaluating specific cases and what those specific equities offer?

HI: I look at specific cases because the best gold company can't prosper if it can't get gold out of the ground at a decent cash cost. Similarly, the best silver company won't flourish if a community demonstration shuts down its plant. Again, I am an individual equity analyst; I look at the microeconomic company-specific factors and make my decisions accordingly.

TGR: What are three must-haves for the companies you cover?

HI: The number one thing is good management. Bad management can run the best company into the ground. I've seen it in stocks that I covered and in stocks that I owned.

TGR: How do you quantify good management?

HI: If I speak with a management team and I get the sense that it doesn't understand what's going on, then that would put it into the bad management category. If it continuously disappoints, if it continuously over-promises and under-delivers, that would put it into the bad management category. I worry, too, if there is no coherent team—even if the CEO, CFO and chief geologist are great people, there is a chance that they do not work well together. It sounds simplistic, but I always pay close attention.

TGR: What are the other must-haves?

HI: A company must have a good asset. Even if it has great management, if a company doesn't have a good asset, nothing's going to be pulled out of the ground. It needs to have a decent land package with room for expansion. The grades need to be right. The type of ore needs to be right. It needs to be permitted or have decent progress toward permitting. The third must-have is a functional mill with potential for expansion. The chain is only as strong as its weakest link, and if one of these factors is broken, the whole system is going to crumble.

I do a lot of site visits to evaluate the mills. I look for spare capacity, and I go through all the geological reports for permitting.

TGR: What segment of the precious metals market is going to provide retail investors with the best bang for their buck in 2013?

HI: I suggest people figure out what area they want to invest in, then narrow it down to a couple of companies. Go back to those three must-haves that I mentioned. Look into management, look into the assets and look into the permitting and the operational phase of the firm.

I would also say people should diversify. And if they just go across base metals, gold and silver, they will be doing themselves a favor.

TGR: So your advice is to evaluate individual companies and divide the portfolio up by commodity.

HI: Yes, and commodities shouldn't be your full portfolio.

TGR: Thank you so much, Heiko.

Heiko Ihle joined Euro Pacific Capital in November 2011 as a senior research analyst covering companies in the mining and engineering and construction (E&C) industries. Prior to joining Euro Pacific, Ihle spent over six years with Gabelli & Company, more than five of which as a research analyst. While at Gabelli, he was awarded second place in the 2010 Financial Times/StarMine Top Analyst Awards for the Engineering & Construction space. A native of Germany, Ihle received his bachelor's degree in finance and management from the University of Illinois at Chicago in 2004, and his Master of Business Administration from the University of Miami in 2006. He has been a CFA Charterholder since 2010 and is currently a member of the CFA Institute and the Stamford CFA Society.

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The European Flag, Reversal Candlestick in Stocks and Precious Metals

-- Posted Friday, 14 December 2012 | Share this article | Source: GoldSeek.com

Yesterday we saw substantial declines in the whole precious metals sector (the only important exception was palladium that actually managed to close higher after a huge price drop earlier during the day) even though the Fed announced Wednesday that it would continue its monthly purchases of $85 billion in Treasury bonds and mortgage-backed securities. This makes it probable that the Fed announcement was already priced into the market, hence the lack of its reaction.

The Fed’s action is clearly bullish for gold, silver and other precious metals in the long run, but recent developments along with weak correlation between metals and the dollar can keep precious metals bulls awake at night. Let us then move on to today’s technical part to find out whether these fears are well-grounded. Today we’ll focus on two groups of assets that usually influence precious metals the most: stocks and currencies. We’ll start with the analysis of the Euro Index long-term chart (charts courtesy by http://stockcharts.com.)

A confirmation of the breakout above the flag pattern (which was a period of consolidation) has been seen in the chart. We expected this to be broken to the upside, and that’s what happened. The index did pull back to the support line and has moved higher once again. The situation is now more bullish than not, but we’ll wait for a move above the 132 level before stating that the outlook is indeed bullish for the weeks ahead.

Now, let’s move on to the general stock market.

Please view a larger chart here.

In the long-term S&P 500 Index chart, the situation continues to be bearish for the short term. Based on the weekly closing prices, a “gravestone doji” candlestick pattern has formed this week. This is similar to the bearish shooting star candlestick pattern. Opening and closing prices being very similar are what create the “gravestone doji”. The implications of this candlestick pattern are exactly the same and are a bearish signal.

The bearish signs are actually doubled here because stocks reversed after moving to their 2008 highs and then reversing to the previously broken rising resistance line (several weeks ago). At this time, the outlook for the general stock market is bearish, but, with a support line at the $1,350 level, the downside seems to be quite limited.

Let’s now have a look at the intermarket correlations to see how the above chart could translate into future precious metals prices.

The Correlation Matrix is a tool which we have developed to analyze the impact of the currency markets and the general stock market upon the precious metals sector. This week, there are not many implications here for the precious metals sector. The short-term correlations are very neutral this week so we really can’t say much about the next week or two based on the currency and stock market charts.

The medium-term precious metals’ picture remains bullish as there are significant negative correlations between the precious metals and the USD Index (thus the positive situation in the Euro Index is positive also for gold). Positive correlation is seen between stocks and the precious metals, so the limited downside for stocks is a bullish factor for the metals in the medium term.

Summing up, the outlook for the Euro Index is more bullish than not which directly translates into a bearish one in the U.S. dollar, especially after what we saw on the charts for the U.S. currency in our article a week ago. Stocks have a short-term bearish outlook but the downside is limited. Both: the medium- and long-term perspectives are bullish. This is not due to an improvement in US economic indicators, however, but rather due to the steps taken by the Fed, which are likely to push nominal stock prices higher.

This does not directly translate to any precious metals price moves since correlations are quite insignificant with both markets over the past 30 days. However, when we take the medium term into account, the positive correlation between precious metals and the general stock market suggests that the limited downside potential in stocks as well as their positive medium- and long-term outlooks are bullish for metals. Since the medium-term correlation between precious metals and the dollar is strong and negative, the same bullish implications for the metals follow.