July 2007


Canadian Junior Mining Shares Ripe For The Picking

by Captain Hook

The opportunities in Canadian junior mining shares has never been better. And now is the time to get in before prices skyrocket higher in my opinion. As mentioned the other day in pointing out the precious metals sector is turning higher, when the Canadian $ heads over parity against the Greenback, American investors will be looking for a home for excess cash they wish to hold in Loonies. And as they work their way down the food chain, eventually they will arrive at junior mining shares, a group that has been all but forgotten by the institutional types because either company or trading characteristics don’t meet desired models at this time.
That is to say the shares are in the pennies, generally illiquid, and have been heading in the wrong direction (down) for some time now, a characteristic set definitely outside of the desired formula most momentum chasing behemoths (hedge funds) are chasing these days…

To read the rest of this article, click HERE

Peter Grandich interviewed by Al Korelin:

Latest on gold from Jim Sinclair’s Mineset.

Friday, July 27, 2007, 6:27:00 PM EST
By Dan Norcini

Gold and Dollar Market Summary

Dear CIGAs,

I mentioned last week that the commercial shorts (aka the perma gold shorts or the bullion banks) would have to absorb a tremendous amount of buying to keep gold from surging to $700 since the fund net long position was comparatively small by recent historical standards. Well guess what? They did exactly that.

As you all know by now, the COT data only includes the action from Wednesday of the previous week thru Tuesday of the current week. If you recall, on Friday of last week and Tuesday of this week, gold had strong upside price action in which it ran to $687.50 on Friday and $688.40 on Tuesday. In both cases it was pushed down by the close just shy of $4.00 from the intraday high by aggressive selling which literally ate through the huge influx of incoming bids. Friday alone witnessed a massive increase in open interest of nearly 17,000 contracts – an almost unheard of number for one day with Tuesday’s surge higher being met with an additional increase of nearly 7,000 contracts. Clearly, some powerful entity was opposing the price rise with a vehemence that has not been seen for some time.

Those of us who have seen this drill for the last 6 years know exactly who that entity is and it was again confirmed today as the COT data was released. Once again, the INCREASE in the new shorts came from the commercial category, which by and large are dominated by the bullion banks. That group alone added a whopping 29,327 new short positions. Folks – this is the LARGEST WEEKLY INCREASE IN THE NUMBER OF NEW SHORTS IN ONE WEEK’S TIME since June 2005!

In other words, this same group, which was determined to hold the gold price under $450 two years ago and threw everything but the kitchen sink at it back then, apparently felt the need to ensure that the gold price did not reach the magical $700 level this past week. Even last year’s surge in May which saw the price of gold blast through the $730 level did not engender the amount of new selling by the bullion banks and their friends. Clearly someone is extremely concerned about a rising gold price given the current economic environment and the implications that such a price rise would raise.

One thing that I might mention to provide some solace for the friends of gold – yesterday’s collapse in the gold price come on the heels of the largest volume traded for a single day on the Comex that my records going back 6 years indicate. Nymex reported a mind-numbing 257,914 contracts traded hands yesterday during the rout that hit the gold market from the fallout of the rush into liquidity. That is humungous! The good news for gold’s friends is that such huge volume days that occur either on the way up or the way down typically tend to portend exhaustion waves when it comes to the futures markets. During such times, blind panicked buying or selling is the order of the day. People want out at any and all costs and simply do not care about anything else except to “GET ME OUT!” In the case of yesterday, it was terrified longs bailing out in droves. The result was a SHARP DROP in the open interest of nearly 20,000 contracts. The previous day’s down leg was marked by a drop of 15,000 contracts. In just two day’s time, we have cleaned nearly TWO MONTH’s worth of buyers since that is the last time open interest was near the current levels.

Again, while I hate to be prematurely optimistic given the current climate of fear and confusion, it is difficult for me to see how much more downside is left in the gold market especially seeing how well it held up today after yesterday’s exhaustion day. Even as stocks continued tanking later this afternoon, gold held rock steady. Just as what happened yesterday, its price descent down into the lower nether regions of the mid $650’s brought out strong buying which took the market back up into the plus column at one time during the day. Not too bad all in all considering how the currency crosses were getting whacked today and how the dollar was experiencing another dead cat bounce.

While the gold shares did not fare as well being caught up in the general market downdraft, the bullion price appears to be making an attempt at stabilizing here. I repeat from yesterday – I am of the opinion that the metal will lead the shares out of the bear’s woodshed.

Stay tuned as we all watch history unfold. What stories we will have to share with our children and grandchildren about these days!

Dan

Click HERE for charts (in pdf) with commentary by Trader Dan Norcini

****

From GATA’s newesletter:

Dear Friend of GATA and Gold:

Agora Financial’s free daily letter, Whiskey and Gunpowder, yesterday carried an excellent essay by Nick Jones about the manipulation of the gold market, “The Gold Carry Trade.” It is appended but needs two corrections.

First, Jones writes that the gold carry trade will end when the gold leased from central banks has to be repaid to them. In fact, most central banks do NOT want their leased gold back, since calling it back would create a short squeeze, explode the gold market, and destroy the financial houses that were encouraged by the central banks to short gold on the understanding that the central banks would cover for them if necessary. That’s what the constant Western central bank gold “sales” are about — the writing off of leased gold at current prices.

This is no mere speculation; it has been confirmed by the biggest gold shorter among the mining companies, Barrick Gold, which admitted in U.S. District Court in New Orleans in 2003 that it was the agent of the central banks in the gold market —

http://www.lemetropolecafe.com/img2003/memoformotiontodis.pdf

— and which proclaimed that its gold leases had 15-year terms and were “evergreen,” always allowed to be extended for another year so that they might never have to be repaid.

So the gold carry trade will end not when central banks call their leased gold back but simply when they decide to stop dishoarding their diminishing reserves, or when they simply exhaust those reserves.

Secondly, Jones writes that Barrick’s bullion bank, JPMorgan Chase, has admitted to manipulating the gold market along with Barrick. Morgan Chase has admitted nothing in this respect; the only admission about manipulation was Barrick’s as cited above. But of course Morgan Chase cannot be ignorant of what’s going on; like the other Wall Street financial houses that serve as U.S. government agents in the markets, Morgan Chase is well-rewarded with inside information on government policy that will move the markets.

Nevertheless, Jones has provided a good outline of the gold-price suppression scheme and its purposes. It’s below.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

Whiskey & Gunpowder
July 25, 2007
By Nick “Child Prodigy” Jones
Minneapolis, Minnesota, U.S.A.

The Gold Carry Trade

On July 24, 1998, Alan Greenspan stood before the House Committee on Banking and Financial Services and said, “Central banks stand ready to lease gold in increasing quantities should the price rise.”

That is exactly what the gold carry trade consists of. It is the process in which central banks lease out gold bullion to be sold on the open market to suppress prices.

Here’s the thing: The large majority of these transactions take place on the London Bullion Market (LBM). This is an over-the-counter (OTC) market in which there is little-to-no transparency. A number of organizations have conducted studies on the amount of gold lending that takes place. Some of the organizations include Gold Fields Mineral Services (GFMS), the World Gold Council (WGC), and Virtual Metals (VM). As a result of the lack of transparency, the numbers reported in regard to gold leasing vary slightly from one another. For the sake of argument, I will be using the most conservative figures reported.

This may be the most significant piece of the gold bull puzzle that will push gold to $2,000 and beyond. I will dig in and share my in-depth research with you, starting with how the process is carried out, then going into the market impacts of the gold carry trade, and concluding with the future of the market for gold leasing.

How Does the Gold Carry Trade Work?

Gold leasing takes three different forms: direct leasing, central bank swaps, and forward hedging.

Direct Leasing

I am going to run through this in a simple step-by-step process. Central banks don’t directly take their bullion to the market and lease it out. They use a vehicle called a bullion bank (BB).

Although bullion banks are numerous, some of the more well known are Barclays, Goldman Sachs, JP Morgan, Bank of America, UBS, and Citibank.

The central banks loan gold to the BBs at a rate of approximately 1%. The BBs take it to the LBM and sell it on the open market. The BBs take the cash from selling the bullion and in turn buy Treasuries.

So if the story were to end here, the bullion banks would just walk away with a net 4% return. But it doesn’t end, because they only have the leased gold for a certain length of time. They eventually have to give the gold back to the central banks, but now they are at risk of price swings in a very volatile market.

The answer to their problem is to go long the futures market. Essentially, they buy futures contracts to hedge their risk. In other words, they secure gold for delivery at a specific price, on a specific date in the future. Once they buy their futures contracts, it doesn’t matter what the price action of gold is.

In a perfect scenario, after the gold lease rate and price risk hedging, the bullion bank will walk with a modest 1–2% gain. The central banks will receive a return on their gold, keep the price of gold suppressed in order to keep real inflation suppressed, and get a boost in the demand for Treasuries. It’s a win-win situation for both the bullion and central banks.

Gold Swaps

Gold swaps are very similar to direct leasing. The difference is that gold swaps usually take place between two central banks. These types of transactions occur in two different forms.

The first is very simple. Essentially, two central banks swap gold reserves and then carry out the action of direct leasing of each other’s gold. The reason for this is that it just adds more confusion for the accounting of the leased gold.

The second is slightly different. This transaction occurs when one central bank exchanges gold for currency with another central bank. Like gold leased to the BBs, a future date and price are set for the redelivery of the gold back to the initial central bank.

The IMF says of this type of gold swap, “Typically, both parties will treat the transaction as a collateralized loan.” Or the CB leasing the gold doesn’t remove the gold from its balance sheets, and the CB receiving the gold doesn’t add it to its balance sheet. As far as accounting goes, no transaction has even taken place. The gold market is flush with new supply and would beg to differ that a transaction hasn’t taken place.

In other words, the CB receiving the gold loans it out on the market while it is still on the balance sheet of the initial central bank. One might refer to this practice as double-counting the reserves.

Forward Hedging

Forward hedging is a form of gold leasing practiced by gold producers. The most famous of these is Barrick Gold, but there are many other producers who partake in forward hedging.

Forward hedging is when a producer presells gold on the spot market that has yet to be extracted from the earth. Most of the buyers want delivery of physical gold. So the producer leases gold from a CB, with the idea that it will pay the CB back with future production.

The problem is that these producers often sell their gold at suppressed prices on the spot market and they often sell more gold then they can produce.

On the note of Barrick, did I mention that it has recently been sued for price fixing and price manipulation of the gold market? Barrick and its bank JP Morgan have admitted to price manipulation and that they have worked with the central bank in this process.

Implications of the Gold Carry Trade

The gold carry trade has one main goal, and that is to add huge amounts of supply to the market in order to suppress the price of gold. Although there are other added bonuses along the way for the participants, the main reason for suppressing the price of gold is so the world doesn’t know the true value of worthless fiat currencies.

I would like to use some statistics to inform you as to the implications of gold leasing on the market for gold. Remember that I will use the most conservative numbers I could find.

In 2005, according to GFMS, gold leasing was estimated to have added 2,970 tonnes of supply to the market. In that same year, jewelry demand was 2,700 tonnes, world investment was 736 tonnes, and official central bank sales were 656 tonnes. Over the last 10 years, average mine production has run at an estimated 2,500 tonnes per annum. So the amount of leased tonnage exceeded all of the above-mentioned statistics.

Remember that central banks are not required to report at all on their transactions of loaned gold. So those 2,970 tonnes of extra supply were also counted in central bank reserves, or they were double-counted.

Central banks are the largest holders of gold tonnage, estimated to have around 30,000 tonnes. So they have loaned out approximately 10% of their total reserves.

How Long Can This Go On?

If you are looking at this in a practical way, you probably came up with the exact questions I did when I first started to read about the gold carry trade. When the gold enters the market via a BB, it all has to be bought back at the end of the lease contract. Doesn’t that put us back at square one with the amount of supply in the market negating any long-term implications?

The answer would be yes if there were just a couple of transactions. But there are several gold leasing contracts signed every day. All the supply is constantly being recycled in and out of the market and there is always fresh gold being leased into the market.

The length of a gold leasing contract can extend anywhere from one month to several years. This allows for the central banks to analyze these markets and best time their transactions and how long they will be, in order to suppress the price of gold.

So can this go on forever? Definitely not, and the implications of the gold carry trade coming to end will bring with it the most spectacular price actions ever seen in the gold market.

Let me tell you why the gold carry trade will not be sustainable forever. It’s very simple. All we have to do is look at the step where bullion banks have to buy back the gold sold on the spot market in order to pay back the central banks.

In order for this to be profitable for the BBs, the price of gold has to experience very limited gains during the time the gold is leased out. Or the price of the futures contract purchased by the BB has to be near enough to the price of gold when the bullion bank initially unloaded the leased bullion on the spot market. If the price of gold heads too high, it will not be profitable for BBs to partake in being the intermediary for such transactions.

All we have to do is look at the fundamentals for gold and we realize very quickly that the price of gold is definitely going to go higher one way or another, which will disallow future leasing in the gold market. You are probably well aware of the fundamentals: Every one of the major economies of the world printing money at a rate of over 10% per annum; the Mount Everest of debt from both budget and trade deficits; an inevitable recession here in the U.S.; the inability of the U.S. to raise interest rates, due to the complete mess of the housing market; rising energy costs putting downward pressure on the U.S. dollar and increasing inflation in every other aspect of the economy; mine supply at historic lows; a possible U.S. policy that would include trade protectionism against China; and, last, but definitely not least, a U.S. Federal Reserve whose main goal is to create credit by keeping interest rates below the rate of inflation (negative real interest rates).

Fundamentals are fundamentals, but there has been some action in the International Monetary Fund (IMF) recently on this very topic. Before I go any further, I just want to let you know that I don’t trust the IMF any further than I can throw it. And I don’t really expect any timely results from its actions. What is important is that the notion of the gold carry trade is coming forefront. Here’s what’s going on in the IMF.

Hidetoshi Takeda of the IMF’s statistics department recommended in early 2006 that all loaned gold be excluded from the central bank’s reserve figures. The IMF’s committee on reserve assets considered Mr. Takeda’s paper and came to the conclusion that a new definition of gold reserves excluding loaned gold needs to be officially documented. It also stated that unallocated gold loans should be disallowed. Nothing recommended in Mr. Takeda’s proposal was rejected. Full details of his report can be read here.

The IMF continued its research regarding the issue and made another report with a similar conclusion. What does this all mean? Well, the IMF is currently working on another official proposal to be worked through the system making it necessary to make all loaned gold public information and to exclude loaned gold from reserve accountings. The IMF currently “encourages” central banks to record gold loans/swaps, but does not “require” the recording.

If everything goes perfectly, and I don’t believe that it will, we could see these actions implemented by the IMF at the end of 2008. As I said, it seems like a far reach, but the more people become aware of the gold carry trade, the sooner it will come to an end. And I don’t like to put my bets on the IMF to make progress with in the accounting of leased/swapped gold, but it DOES have the power to change how central banks report the reserve holdings of gold.

The eventual unwinding of the gold carry trade, whether it be from the IMF or just market fundamentals, will bring amazing action to the gold market. Remember that gold leasing didn’t begin until after the precious metals run from 1979–1980. For the bull market in gold to continue, it will need to overcome the barriers set by central banks’ leasing of gold. But when this does occur, the floodgates will open and we can expect to see the price of our favorite yellow metal skyrocket.

By Alex Veiga,
Associated Press,
via Yahoo News
Wednesday, July 25, 2007

LOS ANGELES — Here’s a scary thought about the latest bad news on housing:

A surprising increase in late loan payments and defaults among home owners with good credit is so far coming from traditional woes, like divorces, job losses, and unexpected medical bills.

The next and biggest wave of problem loans could come as monthly payments soar for both prime and subprime borrowers who took out adjustable-rate loans with little or no documentation, or who used so-called piggyback loans on top of their first mortgages to make up for small down payments, analysts said.

These exotic loans were the only way many borrowers — even those with good incomes and sterling credit histories — could afford to get into the housing market as home prices soared in the last decade. But now those decisions are looking suspect.

That was one of the messages that sent a jolt through the mortgage industry and the stock market on Tuesday after Countrywide Financial Corp. reported its second-quarter profit shrank by nearly a third as softening home prices led to rising delinquencies and mortgage defaults.

Countrywide, whose shares have lost 11.7 percent of their value in the last two days, laid part of the blame for the uptick in delinquencies on borrowers with good credit who had taken out prime home equity loans.

Analysts said the trend could continue, particularly in areas of the country that have been hardest hit by job losses in general or seen a decline in speculation-driven construction, such as South Florida, parts of California and Las Vegas.

“As housing values weaken broadly and the job market slows in these areas that we’re focused on, all borrowers will be touched,” said Mark Zandi, chief economist at Moody’s Economy.com.

He said subprime borrowers, those with spotty credit records, will likely show the greatest number of defaults. “But even prime, fixed-rate first mortgage borrowers will experience more credit problems,” Zandi said.

The problems are expected even though the U.S. unemployment rate is currently at 4.5 percent, still low by historical standards.

More signs of the housing slowdown surfaced Wednesday as the National Association of Realtors reported that sales of existing homes fell by 3.8 percent in June to the slowest pace in more than four years.

In reporting its earnings, Calabasas-based Countrywide, the top U.S. mortgage lender, said it was forced to take impairment charges as it braced for the possibility of more people failing to make their mortgage payments on time.

The company said borrowers becoming unemployed or divorcing were the leading reasons why many borrowers with prime loans were falling behind on payments. And company officials told analysts on a conference call that the uptick in missed payments was not due primarily to borrowers seeing their loans’ interest rate reset, triggering higher monthly payments.

Still, the mortgage industry anticipates that it could face a rash of defaults in coming months as many adjustable mortgages originated in 2005 and 2006 during the height of the housing market frenzy begin to reset to higher interest rates.

The loans, initially attractive options for buyers because of their cheaper “teaser” interest rates, can adjust higher after as little as two years. Even a small percentage increase can translate into a payment shock.

“The losses are just beginning,” said Christopher Brendler, an analyst with Stifel Nicolaus & Co. Inc.

“Housing is increasingly a problem, prices are likely to go down, and so these loans underwritten in the best of times will now season in the worst of times,” he said.

The mortgage industry has already tightened lending standards in response to the jump in defaults by subprime borrowers.

With fewer first-time buyers entering the market, homeowners in the mid-tier of the market, who tend to be among the most creditworthy, prime borrowers, are having a tougher time selling their homes.

“The same problems you saw in the subprime sector that caused the big meltdown in March is now a broader industry problem that’s hitting the prime sector,” Brendler said.

* * *

As expected, the “usual suspects” acted timely (while gold stocks last) and saved the US$’s butt (once again) from the below 80’s precipice (read relevant post):

Gold Falls as Central Banks May Increase Sales

By Claudia Carpenter, Bloomberg News Service
Wednesday, July 25, 2007

LONDON — Gold fell in London on speculation European central banks will increase sales of the precious metal. Silver also dropped.

The European Central Bank said yesterday three members of the Eurosystem of national banks sold 288 million euros ($397 million) of gold last week, equal to about 18 metric tons and up from 88 million euros the week before. European central banks may sell 157.6 tons in the next nine weeks, or an average of about 18 tons a week, according to World Gold Council figures.

“We may need to get very used to the fact that 18 metric tons of gold are going to become commonplace for the next two- and-a-half months,” Dennis Gartman, trader and editor of the Virginia, U.S.-based Gartman Letter, said in his daily report today. That amount will “make it difficult for gold.”

Gold for immediate delivery dropped $4.41, or 0.7 percent, to $676.59 an ounce at 2:17 p.m. in London. Silver fell 10 cents, or 0.8 percent, to $13.14 an ounce. On the Comex division of the New York Mercantile Exchange, gold futures for August delivery fell $8.20, or 1.2 percent, to $676.60 an ounce.

European central banks have sold 342.4 tons of gold as of July 20 under an agreement that caps annual sales at 500 tons through Sept. 26, London-based World Gold Council investment research manager Natalie Dempster said. That includes 13.9 tons sold by Switzerland in June, she said. They were the biggest sales by the Swiss National Bank since March 2005, according to figures on the bank’s Web site.

The Eurosystem comprises the ECB and the national central banks of the countries using the euro.

* * *

Here’s a couple of well educated guesses (firmly anchored in fundamentals) for gold price resilience during this “shopping season”.

“The countries of the Far East have had a strong historical appetite for gold and this past month, for citizens of two of them, ownership just got easier.

In China, the Shanghai Gold Exchange is launching individual gold bullion trading through a partnership with the Industrial Bank.

This follows last year’s establishment of special bank accounts that let holders trade in virtual gold. Now they can buy the real thing, with only a 100-gram minimum. And investors can take home the bullion at lower prices than those charged by jewelers and coin makers.

Since the Chinese have traditionally kept gold bullion as a safe haven to hedge against currency mismanagement, political crisis and as a symbol of good fortune, we can expect demand to track that country’s growing wealth.

Perhaps sensing this, the Chinese government in mid-July moved to ramp up domestic supply by allowing overseas firms, “with the latest and best technology,” to bid for exploration rights at the country’s largest potential gold deposit, the Yangshan in Gansu Province. Yangshan has at least 5,120,000 ounces of gold in proven reserves.

Meanwhile, in Japan, the Osaka Securities Exchange announced that it will list Japan’s first exchange-traded gold fund in August. The minimum trading lot for the ETF will be 10 units, with each unit equal to one gram of gold. While this new product makes it simple for individuals to participate in the gold trade, it could be also be attractive for Japanese institutional investors, as it is denominated in yen while its price will be linked to the gold fix in London.

Japanese demand for gold was over 200 tons in the year ended March 31, but 85% of that went for industrial uses. Some analysts estimate that, with the introduction of the ETF, that number could double, or more. If that sounds optimistic, consider that the holdings of streetTRACKS, the largest U.S. gold ETF, is closing in on 500 tons.”

Furthermore

“In the past month alone, the dollar has experienced about a 3% slide in value against the euro, and nearly as much versus the British pound and Canadian dollar. The closely watched dollar index is now at lows not seen since December of 2004 and, before that, 1995.

The decline is not limited to only industrialized countries, it has lost ground against the currencies of emerging markets, as well. In a year, the dollar has tumbled 15% against the Brazilian real, 13% against the Indian rupee, and 5% versus the Chinese yuan.

Things have gotten so bad that the Russians are actually trading their dollars for once-spurned rubles. The amount of U.S. dollars held by private Russian citizens has purportedly plunged, from $35 billion in 2002 to less than $12 billion as of July 1 of this year, according to a statement from the Russian Central Bank in mid-July.

Shamelessly, the Federal Reserve continues to put the blame for inflation on, believe it or not, us. Or, our expectations, to be more exact. In the recent words of Chairman Ben Bernanke: “Undoubtedly, the state of inflation expectations greatly influences actual inflation and thus the central bank’s ability to achieve price stability.”

That’s right, it’s not the flood of dollars deluging the market that is pushing down the buck’s value both here and abroad. No, it’s our fault for worrying about inflation.

Bernanke may think we’re stupid enough to buy this foolishness, but he can’t deny that foreigners are increasingly unwilling to accept it anymore. Moreover, those holding dollars are turning not only to euros and rubles, but to gold. A couple of weeks ago, the Qatar Central Bank reported that it had quadrupled its gold holdings between January and the end of April. Though Qatar’s vault is small, this is an indication of where the Middle East, and much of the rest of the world, is heading.”

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