AN ALTERNATIVE VIEWPOINT WHY THE GOLD AND SILVER MINERS HAVE UNDER PERFORMED

By SRSrocco:

I used to believe that the gold and silver miners were being manipulated as per the industry’s largest spokesmen… Jim Sinclair. However, I now believe the HEDGE FUND TRADE of being Long the Metal and Short the Miners is not particularly a manipulative trade to keep these gold and silver companies depressed. Rather, I think they may be making a smart trade.

 

 

Hear me out….

As I have been discovering, falling ore grades especially in the gold mining industry have played havoc on their bottom line. Costs are increasing exponentially due to the fact the world expects a growing supply of gold and silver. To continue growing the world supply of gold and silver, ore grades are falling faster and faster each year.

We must remember, back in the earlier part of the 1900′s, the world supply of gold or silver was a fraction of what it is today. To increase production year over year the mining industry didn’t have to burn through as much ore as they do today. Basically, the yearly increase in gold or silver production 100 years ago didn’t reduce average ore grades all that much.

However, we are seeing tremendous percentage declines in both gold and silver ore grades and yields due to the fact that so much more of the metals are being produced.

As Keith Baron stated…. World Gold Production is ready to fall off a cliff. I also believe silver will fall as well.

THE REAL REASON WHY THE MINERS ARE UNDER PERFORMING

I believe the real reason for the under performing gold and silver miners is due to the ongoing manipulation of the price of gold and silver. If gold was $5,000 an ounce and silver $200, the miners would be making excellent profits even if the costs increased due to the repricing of commodities when the worlds fiat monetary system implodes.

Again, I believe the Hedge Funds may have been making the right trade (even though we don’t like it) to take advantage of the ongoing CAMPAIGN TO MANIPULATE GOLD AND SILVER.

Comments

  1. The Problem I see with all “funds” are that the money should hypothetically be used for R&D, Exploration, Machinery, Labor, Accounting, Paper clips, copiers, Limosines, Comfy Offices, Good Looking Secretaries, Bonuses, you know, all the things that a good American company should have…but does all the money really get spent wisely?

    • By that reasoning the gold and silver royalty companies, with all their exposure to metals price appreciation but with none of the operational costs -ie Franco Nevada and Silver Wheaton- are the best trades of all.

    • Unless you really do your homework on individual mining companies and have a crystal ball to handicap the geopolitical risk, royalty plays make a lot of sense. 

    • Royalty companies can and will probably become worthless as soon as their PAPER contracts are defaulted/not delivered as promised. I can’t wait to see how the ABX, SLW cluckterf*** is going to play out. 

  2. This is a really good article.  Many of the mining companies are getting starved and having major layoffs in order to remain profitable.  There was a recent article that silver costs around $30 – $32 / ounce to mine yet that’s near the actual spot price so most silver companies are just treading water.
    Without a question this really hurts supply.
     

    • Yes, there sure was a recent article telling us that silver now cost around 30$ to 32$ per ounce to mine it and that news was on SilverDoctors. That’s why silver didn’t went lower than 30$ per ounce when it dropped recently from 35$. I was hoping for silver to go back to the 27$ per ounce price level. :(

  3. Still does not explain why the low cost producers with solid balance sheets have very low share prices.

    Does not explain why the high-grade exploration names with proven reserves are trading at all-time lows.

    Some of the smaller producers are still trading at PE’s of 3-4, with no debt and cash, they are doing everything correct yet the shares are still down -50 to -75% with gold at 1700oz.

    It’s a rigged market for the shares, yes costs are up, evaluations are at all-time lows, regardless of the lower grade.

    With the gold/oil ratio at around 20, that should be more favorable for many miners, yet no love.

    • Zman, I agree.    The silver miners have been the unjustifiable recipient of massive predatory shorting for many years.    The valuations are pretty dumb.   PAAS with what, half a billion cash and no debt, churning out a few hundred million cash flow per year, producing over 30M oz silver equivalent and can barely muster $3B market cap?!?   I know, the Minefinders aquisition was not cheap, and they increased shares out by about 50%, so I can see why there is some pressure, but Dolores is a flagship mine in a good jurisdiction and MFN had a several other properties that are economic and also in Mexico that can be developed.    PAAS needed to get more into North America and less into Peru, Argentina, Bolivia, etc. and that’s a positive step.    Dolores is also a big gold byproduct, which is, you might guess, a good thing.  LOL

      Look at CDE, they are generating decent cash even at $28-30 silver, paying down debt, increasing cash balance, 18M oz silver production a year, 220k ozs gold per year and barely $2B market cap?!?!   Cmon, I know they had bad CEO for 30 years, but he’s gone and company has made a lot of progress last few years.    The only thing I can see wrong with them is they may lose a portion of Rochester claims to Rye Patch in court, and they also have a major mine in Bolivia.   (PAAS has 1 mine in Bolivia, but its a smaller share of total output.)

      Even the leaders in the silver space are cheap.   First Majestic, trading at about 20 times earnings is considered “rich” even though they are in process of doubling output in the next few years.     Silver Wheaton can never get over $35-40 and hold even though they will be earning several dollars in cash every year for the rest of our lives, barring WWIII in South America LOL.  

      Look at Aurcana.   They are only producing about 1.8M oz a year now, but they are going to get to what looks like at least 7-8M ozs a year in 2 years.    Mgmt thinks they can achieve 10M oz run rate with phased expansions of their 2 core mines.   It has market cap of about $550M.    Pathetic.   1 mine in Mexico, and 1 in Texas both with a lot of mineable silver.    No debt.   $1 stock.    They earned 1 cent last Q.    They’re going to make a lot more next year and it won’t be $1 stock anymore.

      Wall Street doesn’t want to see PM investments do well, it’s that simple.     They do not realize that by supressing miner valuations they are literally forcing more people directly into physical bullion, which is what makes it impossible for them to perpetually supress the spot metal prices.     If I have a large amount of cash and I really want to PROTECT it, do most people want to go to bullion, or miners at this point?    The cartel has met their goal.    That said, I think the miners are in the trough now and good buys.   Were the market to get really shitty, I would be keen to buy another late 2008 debacle with both hands.    That’s the only reason really to hold a good amount of cash, to possibly be able to buy PMs at bargain basement prices one last time.

      If Wall Street was smart, they would let gold and silver go to $6000 and $400 (15:1 natural and historic ratio) and create a internet stock type bubble, and they could actually create some excitement in equities again.     Then after all the miners go to $300 a share they can let the air out of the bubble and herd people back into general equities again, with CNBC pointing out how bad PM miners are.    Gold miners have never been cheaper relative to the price of gold and the margin has never been WIDER.   It’s going to get even wider.    Oil price has a limit to where demand stops.    Gold not so much.  

      I know I know,  SRS makes some great points about energy consumption, cost structures, and declining ore grades industry wide, but price will correct all that.    Silver miners will do great at $100 silver even if oil is $200/bbl.     And we are never going to run out of silver in our lifetime.   There is a LOT of low grade stuff out there that can be mined if silver was $133 and not $33.     I hold a small amount of Levon, which is a massive polymetallic porphry in Mexico with about 400M ozs of silver.      It ain’t worth a pile of toliet paper if silver is $20, is marginally economic at current silver prices, but at $100 silver would be a smashing success and make billions.     Levon only has MC of about $80M but they have over $50M cash and not burning it very fast…   The major silvers have been such a disappointment I like to spice it up with the smaller names like Aurcana.    I would suggest Wildcat Silver has a lot of economic silver and could be a large operator and their stock is only $1.    They don’t have cash and need financing though…   On the radar anyway for now…
         

  4. Keep the discounts coming and I won’t be complaining. 

  5. SRS…you may want to rethink this one.  You’re very good, but Sinclair has made millions in the gold and silver space and has been around legendary traders his entire life.  No disrespect, but his opinion carries with it the credibility of a lifetime of experience.  Miners are mercilessly naked shorted.  Gold and silver price is high enough right now to justify higher share prices.  You make a good point, however I think there is more to it.

  6. GENTS… the mistake you are making is one of ENERGY.  I have a great deal of respect for Jim Sinclair.. and yes he knows more about gold than I will ever.  However, Jim does not know about energy.  Without detailed knowledge of the global energy supply, one cannot make forecasts about future gold mining companies.

    Furthermore, if silver gets to $250 an ounce and we can mine silver at say 30 g/t…. thats great.  But if the global oil supply declines in the future it doesn’t matter what the price of silver is. 

    Again, mankind is not aware of this problem as he has not had to deal with PEAK ENERGY like this before.

    • Peak this, peak that, peak 27 other things… too bad that we are not at peak BS.  Seems as if there is a never-ending supply of that and almost all of it is brought to us via central banks and governments.  :-(

    • It’s all thanks to gasoline that we are able to get commodities very cheaply. Gasoline allows to produce a lot of commodities to meet up with the growing demand from the big human population or else, our population would stay lower than today. It is a lifetime opportunity to buy commodities at low prices!
       

  7. Trader Dan mentioned last week that he believed the massive drop in the HUI etc. was the result of the hedge funds re-activating the Long Metal/Short Miners. Jim Sinclair believed it to be the work of only a couple of Hedge Funds. If the silver price is suppressed long enough surely it would put out of business most of the primary silver miners who produce 30% or 200 million ounces a year. This would reduce total mined silver to only 550 million ounces a year. Industry consumes over half of the 1 billion ounces of silver that is mined or supposedly re-cycled each year. A 200million ounce reduction in annual silver production would have to lead to a mad scramble between industrial users and investors to obtain the remaining physical metal. Surely the resultant spike in silver prices would lead to a massive re-rating of the remaining primary silver miners even with increased energy costs.  At the end of the day the hedge funds are there to make money. If they don’t they will have to deal with large scale redemptions. I think you will find that once silver takes off the silver miners will also move up in a big way. Like in the 1930′s the precious metal mining shares may be one of the only games in town.

  8. In my opinion, it doesn’t make any sense that miners aren’t able to make profits in terms of dollars on precious metals that are rare! It also doesn’t make any sense when it cost more to produce a commodity then its value. The only explanation in my opinion is due to manipulation!
     

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