Gold and Silver Blog

There is a short but excellent article about silver in this weekend's Barron's (see Ho-Hum Silver, and note that the link won't bring you to the article unless you have a paid subscription). The article does an excellent job of summarizing the entire silver situation, and paints a generally bullish case. Let's step though all the silver points:

(1) Silver hasn't risen as much as gold since 2001. It's my opinion that this indicates that silver is undervalued, but the counter-argument is that silver prices just don't respond to the same factors that cause the price of gold to rise.

(2) There has allegedly been a silver production deficit since the early 1990s. Each year the world uses more silver than is mined, with the difference coming from sales of silver stockpiles that will eventually run out, causing the price of silver to increase significantly when that happens. But it's not clear how much silver is left.

(3) India is a major purchaser of both silver and gold, because they are given as wedding gifts. But I don't think that this fact is either bullish or bearish, because this has only been the case, and there are no indications that this is changing.

(4) Silver is used heavily in photography. According to the Barron's article, photography accounts for 32%-35% of world silver demand. Of course the article mentions the recent announcement by Kodak that the company will put more emphasis on digital and less on film. It's my opinion that the Kodak announcement has no effect on silver usage trends, because whether film photography is really on the decline or not has nothing to do with the Kodak announcement. Don't assume that Kodak has any inside knowledge of the future of film photography that I don't have. It's obvious that Kodak has no clue because they think they can compete against Epson, Canon, HP and Lexmark in the inkjet printer market. I say that that Kodak's inkjet printer business is destined to fail.

(5) 80% of silver supply comes from mines where silver is a byproduct (such as copper mines) and from scrapped industrial materials. If copper prices go up, this is bearish for silver, because high copper prices would encourage more copper production that would increase the amount of silver being produced.

(6) 30% of silver demand is for jewelry, and if the price of silver increases, demand fo jewelry could decrease. So says the article. It's hard to say if this would really be the case. The price increase could make silver trendier. Increasing gold prices could cause people to turn to silver jewelry because they can't afford gold. In the United States, the cost of the silver is only a small part of the cost of jewelry. Two birthdays ago, my sister gave me a silver money clip from Tiffany's that probably cost $85, but it weighs less than an ounce. so it contains less than $5 of silver.

The conclusion is that some people think gold is the better investment than silver, but I disagree. I think that if the supply deficit in silver is for real, then eventually there will be a big price increase, and if there is a price increase in gold, then this will drag silver along with it. So there are two chances to make money in silver. Because the silver market is smaller than the gold market, a sudden burst of speculative interest could make silver prices really soar.

If you don't have a paid subsrciption to the Wall Street Journal and Barron's online, I highly recommend it. It's the second best bargain on the internet if you're serious about investing. (The best bargain is this blog, which is 100% free.)

Cambior (AMEX: CBJ, TSE: CBJ) is buying Ariane Gold (TSE: AGD) (see CBS MarketWatch, Gold miners Cambior, Ariane to merge). Cambior will be obtaining the Camp Caiman gold project in French Guiana that is expected to produce 96,000 oz of gold per year for 10 years. Production is planned to begin in 2007.

Cambior is issuing $43 million USD worth of shares to buy Ariane. That comes out to only $44/oz (assuming 960,000 total ounces). I suppose that whether or not this is good for Cambior's shareholders depends on how much it will cost to mine this gold. Cambior is expected to be mining 500,000/oz per year after it shuts down its Guyana mine (that's Guyana, not to be confused with French Guiana). Cambior seems to be about twice as expensive per oz of production as my favorite South African company, Durban Roodepoort Deep (NASDAQ: DROOY), but the advantage of owning a Canadian company is that you don't have to worry about all the political risk associated with a company based in South Africa.

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Today was another painful day for gold and silver investors. Let's hope this is the end of the carnage.

Durban Roodepoort Deep (NASDAQ: DROOY) and the union are still talking about how to save all the jobs at the Haartebeestfontein mine (see Business Report, NUM puts its proposals on the table to save jobs at DRD's mines.)

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Freeport Indonesia, which is Freeport-McMoRan's (NYSE: FCX) Indonesian subsidiary, has been donating money to an Islamic charity with ties to al-Qaeda (see Financial Times, Islamic charity tests Jakarta's political will to tackle radicals). It sounds like Freeport is paying them "protection" money. This seems to me like a good reason to avoid buying any FCX stock.

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There's a very interesting article in China Daily about the possibility that China will allow individuals to buy gold (see Focus: China's gold rush). There's potentially a big demand in China for gold (much like in India), and this could create a lot of gold demand that would surely cause the price to go up.

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Some very uninsightful gold market analysis can be found at Boston.com (see Unclear if gold is a fail-safe investment). Rachel Beck writes "A final reminder to gold investors: Two decades ago, gold was trading at more than $800, and it was supposed to keep rising. Today, it's less than half of that."

When gold was $800, everyone was saying to buy more. That's how you knew it was time to sell. Right now, everyone is still saying to buy tech stocks, so gold still looks good.

Kodak announced a new digitally oriented strategy today (see Kodak Unveils Digitally Oriented Strategy). Some have associated this announcement as being bad for silver prices, under the theory that film photography is a major use of silver, and that this announcement proves that film photography is undergoing a rapid decline. My opinion is that this press release from Kodak says more about Kodak's dysfunctional strategy than it does about the decline of film. I don't think that Kodak has much chance of competing in the inkjet printer market when Epson has already won the hearts and minds of photographers, with Canon, HP, and Lexmark also being competitive players.

The future of film photography is something I intend to write about in much greater detail in the near future. Keep checking in with the blog.

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I know I'm not supposed to write about daily price fluctuations, but today's big drop in gold and silver stocks was very painful :(

The news from New Zealand is that gold really does grow on trees (see Gold Does Grow On Trees).

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In a slow morning for gold news (except for the high price--but I try to avoid writing about daily price fluctuations in the blog), let me bring your attention to this interesting article in Business Week, Fees! Fees! Fees! "Companies can't raise prices, so they're socking consumers with hundreds of hidden charges--and that's creating stealth inflation and fueling a popular backlash."

It's interesting reading. And as you probably know, inflation is good for gold investors.

Barrick Gold (NYSE: ABX) has announced that it plans to reduce, but not eliminate its hedgebook (see Barrick Gold: Volatile Gold Mkt Could Help Cut Hedgebook). Barrick plans to do this by buying the dips. If they can do that, that's great for them. I tend to believe in the random walk theory, which means that there's no way to know you're at a dip until after the fact. This "buy the dips" strategy doesn't make me want to go out and buy Barrick stock.

Many posts ago I mentioned a rumor that Barrick would announce a big de-hedging program. The rumor was only partially correct. There's a de-hedging program, but it's not very big.

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You may notice the ugly blog*spot banner ad on the top of the page. You may think I'm too cheap to pay them the $15/year they charge to make it go away. But actually, I want to pay to make it go away, but they aren't taking any new upgrade orders. Google recently bought out Blogger and blog*spot. I don't know Google intends to make money from the deal if they've stopped taking orders from people who want to buy something.

An article in Mineweb reports on Bema Gold's (AMEX: BGO) great prospects in Russia (see Bema takes million-ounce story to London). But somehow, most of the time there's a great prospect in Russia, the foreign company never seems to make any money out of it. Nevertheless, the Bema story looks interesting, I'll have to do an analysis this weekend.

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I should probably comment on the Randgold, AngloGold, Ashanti thing, except that I really don't follow any of those companies, because Randgold is deeply associated with that crook Roger Kebble, and AngloGold is too big for me to be interested in investing in. Also AngloGold believes in hedging, and as a gold bull I'm opposed to that.

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Jim Jubak's plug at MSN for Freeport-McMoRan Copper and Gold (NYSE: FSX) is noteworthy not because FSX is an undiscovered gem, but because a mainstream pundint is recommending anything related to gold at all (see Bull market in metals is just beginning). As the gold bull market progresses, more analysts and pundits will begin to recommend gold stocks because analyst recommendations are always a contrary indicator. When all the analysts say "buy gold", that's when you know gold is near its peak and it's time to sell.

On Monday, I predicted that the union and Durban Roodepoort Deep (DRD) would sign an agreement at the last minute. And I was right! (See NUM Signs Agreement ....) I sure am glad that I no longer have to worry about an economically painful strike.

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The problem for South African mining companies is that for them the price of gold isn't really that high. Gold has appreciated against the U.S. dollar, but the value of the rand is surging. As pointed out in a Reuters article today, the rand is at a 21 week high against the dollar, and this is hurting all South African mining and exporting companies (see Raging rand takes a swipe at South Africa bourse).

This Thursday there will be a summit to discuss what can be done to devalue the rand (see Rand Devaluation Showdown This Week). Let's hope, for the sake of all investors in South African mining stocks, that they can get the rand devalued.

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The California recall election is back on again! The Ninth Circuit, in an en banc decision, overruled the original three judge panel. I wondered how Mahendra's prediction, that Arnold Schwarzeneggar would be the next governor of California, could come to pass if there was no election. I guess his astrological charts are able to figure this stuff out.

ING is suing JP Morgan and Deloitte, accusing them of participating in a "massive ponzi scheme" carried out by now bankrupt health care financing company NCFE (see ING Sues J.P. Morgan, Deloitte). Looks like GATA and Blanchard aren't the only ones who see J.P. Morgan behind a bunch of crooked schemes.

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Dennis Wheeler, CEO of Coeur D'Alene, says the he sees silver reaching $5.75 later this year and gold reaching $400 (see Coeur d'Alene sees silver at $5.75 per ounce this year).

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Ross Beaty, CEO of Pan American Silver, sees his company producing 20 million ounces of silver by 2005-2006 (see Pan American Silver updates plans at investment conference ). This is a pretty significant increase from the 7.8 million ounces produced by Pan American Silver in 2002. Let's hope the market can absorb all the new silver.

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An article in today's Financial Times reports on the "management shakeup" at Barrick Gold (see Barrick in management shake-up). The article points out that "investors have criticised Barrick for its hedging programme, which has left the company with a potential $1bn liability if the hedges were marked to market."

Oh no! Durban Roodepoort Deep's labor union troubles are in the news again! (See S.Africa miners plan strike at DRD on job losses.) DRD is threatening to close down half of its mining operations, and the union is threatening to go on strike! Us DRD investors sure do have to put up with a lot of bad mojo.

Probably, this is all just a lot of posturing on both sides. In the past, DRD and the unions have always managed to come to some kind of agreement at the last minute and avoid a mutually harmful strike. Dire statements made by DRD management are meant to scare the union into negotatiating a deal, they aren't meant for us investors.

As a side note, it's worth mentioning that a few days ago at allAfrica.com, it was reported that DRD is South Africa's worst employer (see Durban Deep is Worst Employer').

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Gold investors' favorite prophet, Mahendra Sharma, has released yet more prophecies. He says that gold is going to go to $412/oz, and silver to $6.22/oz. He also tells us that the Euro will hit 1.24 to 1.28 USD. The Euro is currently at $1.148, so he sees the dollar weakening quite a bit more. The weakening of the dollar obviously explains why gold is going to go up to $412/oz.

Unfortunately, this predicted rise in gold prices is based on the dollar falling, and not on gold rising. So it won't help South African gold mining companies whose expenses are priced in rands and not dollars. On the other hand, Mahendra is predicting a much larger percentage increase in silver prices. So if you believe that Mahendra's astrology gives him some kind of genuine insights, you would probably want to load up on silver stocks right now.

Mahendra sure has been issuing a lot of prophecies lately.

In his weekly Contrarian Chronicles column at MSN, Bill Fleckenstein writes "[f]or those folks considering the metals or metals stocks, a word of caution: With prices obviously up somewhat, you have to work your way into a position, rather than establishing it all at once. Nevertheless, I continue to believe that precious metals are headed much higher. I hope that folks consider them for their portfolios, as landmines of risk continue to dot the investment landscape."

I understand his cautionary warning, I hold the same view as him. I'm also aware that prices can pull back and this could cause new investors in gold and silver to suffer losses. But prices don't necessarily have to pull back. For all we know, Friday's closing price was lowest price we will ever see again.

This is why I have never sold any of my gold and silver stocks, even though I surely wish I did after they peaked in June, 2002 and then suffered a significant and long pullback.

With higher gold prices comes renewed interest in gold projects that were not worth economic a year ago. For example, Western Warrior Resources (TSX: WWR) is pursuing the re-opening of a goldmine in Valdez, Alaska that was closed in 1942 (see Effort under way to reopen Valdez gold mine).

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Jason Hommel has contributed a well researched article to the Gold Eagle website comparing valuations of various silver companies (see Silver Stocks--Comparative Valuations). I applaud the kind of value based analysis seen in this article. However, Jason's primary valuation method, price per oz of reserves, doesn't capture everything that's going on, because it's clear that the market values production over just having a lot of theoretical reserves sitting in the ground. This explains why Coeur D'Alene (NYSE: CDE), a company with a lot of production, has a high valuation, and Silver Standard Resources (NASDAQ: SSRI) a company that just owns a lot of real estate but doesn't produce any silver, has a low valuation.

Of the non-producing companies, Apex Silver Mines (AMEX: SIL) has a very low anticipated cost of production, and its plans for actually mining the silver are relatively far along. Therefore it has a higher valuation. Also, approximately half of Apex's profits will come from zinc mining, which Jason mentions but doesn't fully value. It is my opinion that Apex is a pretty good investment at current prices, especially after one considers that other silver stocks have surged during the last few months, but Apex has not. (Momentum investors would probably draw the opposite conclusion.)

Jason expresses a preference for tiny companies trading on the Pink Sheets. While I would invest in such companies if I felt that they were truly undervalued, I am highly suspicious of such companies. A company should care enough about its investors to at least maintain a listing on the Bulletin Board.