A Portent From The New York Times

Patrick A. Heller of Liberty Coin Service list seven reasons why gold is going to resume its bull trend come July in his latest commentary; one of them deserves special mention. The New York Times is not exactly a friend of gold, but a recent article had some good things to say about the metal. In Heller's words:

The New York Times has consistently skewed its news coverage to either ignore positive developments for precious metals and only occasionally ever mentioned gold and silver at all, invariably with a negative slant. The June 13 edition of the online Times carries one of the most positive stories for gold that has appeared in the mainstream media in a long time. The story is titled “Uncertainty Restores Glitter to an Old Refuge, Gold”... The article quotes what used to be considered crackpot ideas like 1) the possibility of merchants refusing to accept paper money and only accept payment in gold; 2) the debts of the United States, Japan, and Britain could be unsustainable and could hurt confidence in all paper money; and 3) the global credit system could be now entering “the end game.” This story represents a major breakthrough for covering the positive aspects of precious metals and the heightened risks of owning paper assets like currencies, stocks, and bonds.

My guess is that the recent concern expressed by some heavyweight money managers over U.S. government confiscating gold kicked this story into gear. Unusually, this Times piece is straight reporting. Evidently, the news doyens at the paper have decided that gold is having its day.

By the way: when I checked, that Times story was the second-most read on its top-ten online list.

Afghanistan: The Next Frontier

Gold is among the minerals to be found in lightly-explored sections of Afghanistan, according to a report by the New York Times. The data come from a U.S. Geological Survey updating some exploration work done in the Soviet era, which was never followed through upon. An opinion compendium by This Week also includes some skeptical pieces, but it provides a good listing of reports and comments on what may be the next frontier in mining.

William Pesak: '08 Never Went Away

Taking as his cue Ben Bernanke's puzzlement at gold's price rise, Pesak says that gold is rising because the end-game of Keynesianism seems at hand.

Greece’s unraveling was a sobering reality check. It wasn’t that a fiscally irresponsible economy smaller than Iran’s was stumbling. It was how, as in the case of Iceland before it, Greece was cast in the role of canary in the financial coalmine. European banking shares suggest a Greek debt default may be just a matter of time....

It was suddenly clear that the contagion that emanated from the U.S. in 2008 had never really gone away. Greece’s troubles cast a huge shadow over far more important economies, like Spain’s. The idea that the 10th biggest economy, one bigger than Canada’s, might someday renege on debt put an end to hopes for a smooth 2010.

Perhaps the best explanation of these all-too-tangible risks comes from Anthony Crescenzi, a strategist at Pacific Investment Management Co., the world’s largest bond-fund manager. The question is this: As the U.S. is aggressively backing its financial system, who is backing the U.S.?

Thinking back to the darkest days of 2008, few will quibble with government efforts to stave off Armageddon. The promise was that if investors tolerated a surge in debt issuance, capitalism and prosperity would be saved. As fear is returning to the global economy, the worry is that industrialized nations are out of ammunition....

Have nations reached a “Keynesian endpoint” as exhausted balance sheets leave policy makers with few options to bolster growth? We’ve known for years that the Group of Seven nations were losing their ability to guide markets. Now, they’re losing hope of shielding economies from them.

'08 was a real watershed, as rules that seemed to work fell apart. Some may remember the joy on Wall Street when the TARP was unveiled. That hope carried the financials through to December, but they took a pummelling in February because Tim Geithner's stress-test proposal for further aid was too vague. The financials didn't sustainably recover until mark-to-market was suspended in early April.

Another rule - that governments have effectively unlimited capacity to cushion any economic shock with only temporarily bad effects - is eroding too. Should the crisis of '10 turn into a disaster in '11, we'll see governments being humbled in a way they haven't been since the 1930s. This time, without any influence from the 'barbarous relic'.

Gold Refining Goes Digitally Enhanced

This item is an interesting convergence between gold and tech, which may be a portent of a more thoroughgoing wave of innovation in molecular chemistry. Andy Robinson has come up with a digitally-derived process to extract gold from waste materials and rock. On the innovation front, the trick is to use computers to digitally simulate molecular reactions and pick out ones that will get the job done more efficiently and with less waste. The Institute of Digital Innovation (IDI) at Teesside University is an organization geared to that kind of study.

“In many ways, the greatest innovation with this project is moving a heavy element of process design onto a computer screen and out of the laboratory where the greatest expenses occur.

“There is an additional benefit in that the resulting gold won’t have any toxic impurities associated with current extraction techniques – especially important for medical research,” he added....

He added: “With gold trading at record prices they are opening up old gold mines where there is a lot of waste material that most people would think is of little or no value. But if you can extract and purify the gold you can get very high-value material.

“To achieve this you would normally need a very expensive scientific lab. However, thanks to the IDI and university facilities, I have access to the software needed to digitally design how to map out scientific reactions at a molecular level and predict what will happen to the raw materials.”...

It seems quotidian, but the significance of it is huge. Chemistry traditionally worked by slogging through the books, calculating reactions out on paper, forming hypotheses based on that work, and testing them in the lab. Much like a spreadsheet worked before the first spreadsheet programs came along. I don't know enough chemistry to spell out what would be affected by this advance, but the pace of innovation is going to be speeded up considerably as computing power increases. Right now, it takes either a supercomputer or an Internet-connected network of a large number of PCs to get the job done. Given advances in computer power, though, it's foreseeable that one single computer will complete the task in (say) ten or fifteen years. Once the tech reaches that level, and the corresponding software is properly coded, there will be a lot of new reaction hypotheses generated a lot more quickly. It's almost a certainty that some of them will make current processes cheaper and/or less wasteful.

It's not nanotech, but it's a lot closer to feasibility than nanotech is.

Indian Gold Demand Sinks Back

After a slight pick-up on Friday, Indian gold demand slumped back.

"There is not much business even at current levels, we did about 200 kgs at about $1,215 (an ounce)," said a dealer with a state-run bullion dealing bank in Mumbai....

"There could be some buying below $1,210," said another dealer with a private bank.

With respect to June demand, imports are expected to halve in comparison to demand in the same month last year.

"June and July are bad months for gold demand and even prices are at record high... we may import less than 15 tonnes (in June)," Prithviraj Kothari, director of the Bombay Bullion Association told Reuters.

Normally, this slowing would be reflected in a drop in the gold price around this time. So far, one hasn't kicked in.

Gold Moves Up, Then Slumps In Overnight Trading

Indian gold demand hasn't been as as strong as it was, but one of the reasons for continued buying even at higher prices was made clear by the latest inflation report for the country. Inflation is now in double-digit territory as it hit 10.16% in May. Interestingly, the 10-year long bond rate is 7.64%.

In response to recent U.S. pressure to revalue the yuan, spokesman for the Chinese foreign ministry Qin Gang said last night that appreciation will not solve the structural imbalances between the two countries. He noted that one of the reasons for the trade deficit was the U.S. government preventing certain technology exports to the PRC, although the overall force he ascribed the trade imbalance to was globalization leading to specialization.

Although gold started off last night's trading with a small gain, it fluctuated around $1,230 until a little after 2:30 AM ET. A jump to $1,235.40 proved to be a false start; after reaching that level, the metal descended to the high 1220s as the fading of pessimism in the stock markets continued. That pullback was enough to drag the metal into the loss column. As of 8:03 AM, the spot price was $1,226.40 for a drop of $1.40 since Friday's close. The Kitco Gold Index attributed -$12.30 to predominant selling and +$10.90 to a weakening greenback.

The U.S. Dollar Index weakened a fair bit, also in consequence of pessimism fading. A drop below 87 last night preceded a range that kept it between 86.9 and that same number. A dip down to 86.8 starting at 1:45 reversed, but it was followed by a more serious decline two and a half hours later that took the Index down to 86.44 by 6:00. A relief rally was followed by a renewed descent down to the 86.5 level. As of 8:13 AM, it was at 86.47.

A Wall Street Journal report sums up the overnight action as gold barely moving.

Asian and European equity markets were higher in a sign that investor confidence in growth is recovering, but demand for gold remains firm, traders said. Worries over the euro zone's sovereign debt load continues to sustain safe-haven demand for gold, while some investors are also afraid of missing out on another gold rally. Gold has risen 5.5% in the past three weeks.

"[We] still see good bits [of buying] around from private customers," said Michael Kempinski, a precious metals trader at Commerzbank in Luxembourg. "I think every dip in gold people will buy in."

Also mentioned is another report from UBS, which notes that jewelry demand has been soft and scrap gold sales are steady. In order for gold to rise more, last month's ETF demand has to be duplicated from some source.

The morning Bloomberg report, as webbed by Business Week, says that gold may rise in sympathy with crude and industrial metals.

Higher commodity prices “provide an additional excuse to get involved” in gold, said Afshin Nabavi, a senior vice president at bullion refiner MKS Finance SA in Geneva. “A lot of people were a bit surprised that gold held so well last week. It makes the market healthier, and it’s a positive sign.”...

“There is still so much money looking for safer investments, with growing interest in gold due to the prospect of higher prices,” said Hwang Il Doo, a senior trader with KEB Futures Co. “I expect gold to resume its rally to a record.”

The article also notes that holdings in the SPDR Gold Shares trust were unchanged on Friday.

An earlier Reuters report ascribed gold's rise last night and early this morning to bargain hunting.

"We've had odds and ends bargain hunters, private banks, investment guys are still concerned," said Afshin Nabave, head of trading at NKS Finance.

"We're getting into the summer so I wouldn't be surprised if things quieten down for a while, but overall as long as the economic and political situation continues I think gold has good chance of eventually breaking the $1,250-ish area and heading
for $1,300," Nabave added.

The article also said that the recent rally in the Euro was the result of short covering.

As regular trading opened, the high 1220s gave way to the low 1220s. A drop accompanying the opening of the pit session drove gold down below $1,223, and below $1,222 shortly afterwards, as the receding of the fear trade as shown by the greenback drop reverberated to the gold market. The bottom of the early-session decline was $1,220.70. As of 8:50 AM, the spot price had rebounded a little to $1,223.40 for a drop of $4.10 since Friday's close. The Kitco Gold Index assigned -$16.70's worth of change to predominant selling and +$12.60's worth to a weakening greenback. The U.S. Dollar Index continued its decline in the same timeframe, sinking to its lowest level of the day as it touched 86.35. As of 8:53, it was at 86.39.

So far, gold has been held in check due to its recent positive correlation with the greenback. Although they diverged in last night's trading, the pit session has brought them back into line. Easing fears has drained the safe-haven trade, and may continue to do so in today's regular trading.

Financial Sense Interviews Rob McEwen

This week's Financial Sense Newshour podcast featured an interview with Rob McEwan in the third segment, right after one with Jim Rogers about his latest book A Gift To My Children [.mp3 file.] McEwan, the chair and CEO of US Gold Corp., spent some time focusing on an issue that's important to gold mining investors but doesn't get a lot of mention: dilution. He said that some managers of exploration companies are tempted to overdilute along the way, to the point where their actions seem to contradict their words regarding the worth of their properties and their opinion on gold's prospects. He ascribed it to managers falling under the spell of the investment bankers, who tend to advise getting as much money as possible when the private-placement market is good. He also noted that some junior stocks fall because expectations got too high for amangement to meet.

His advice for junior investors comes down to waiting patiently and not being bothered by even large declines as long as the companies have good and improving fundamentals. Since many promising projects do not become mines, it's best to take a portfolio approach. In some cases, if the investor has the stomach for it, buying more shares of a good company whose price has been slaughtered is a good idea.


He doesn't mention it, but the dilution he speaks of is likely the result of cash-strappedness. Unless the private-placement market is good, it's hard for the typical junior to get money. Even though it's not good for the shareholders, getting a large private placement and lots of money in the treasury seems like a great idea when previous private placements fell short or were even cancelled. I think more than a few top managers fall into McEwan's dilution trap because they're too used to seeing even a great deposit being greeted with yawns. The investment-banking spell comes with the relief reflex kicking in: "My Gawd, they finally see it!" There's also the safety factor that come with having a large surplus of cash to draw on.

McEwan noted that top managers of senior producers don't take over juniors when the market is lousy and the juniors are undervalued because they're like ordinary investors: fear takes over. The relief reflex is a lot like ordinary investors who buy an undervalued stock and sell way too soon when it begins to recover. Top managers of junior explorers are like ordinary investors too, only ones that become frustrated with an undervalued stock that stays undervalued for a long time.


An example of a junior mining corporation that's fallen into the dilution trap is Premium Exploration. Recently praised by 321Gold's Bob Moriarty, Premium recently closed a $10 million private-placement deal resulting in the issue of 40 million additional shares and warrants. The warrants kick in at 35 cents. At the time the deal was announced, the stock price had shot up above the warrants' strike price. There are going to be twenty million of those warrants outstanding as a result of the deal.

There are currently 65.38 million shares outstanding. With the additional 40 million shares, there'll be 105.38 million. If all the warrants are exercised, there will be 125.38 million shares. Should Premium take off as a result of further good news, and should the warrants all be exercised, the company will have doubled its total shares outstanding. They'll still have the ten million, plus seven million from exercise of the warrants, but each share will only be entitled to half of what a pre-PP share was entitled to. The price of the shares-plus-warrants was recently lowered to 25 cents because Premium's stock was in a bear trend, which was reversed a little more than a week ago. [Chart here.]

Disclosure: It doesn't make me look very good, but I have a small position in Premium. Currently, I'm riding a loss on it.