Auguries—Paper Chase

March 8, 2012

By Kevin Michael Grace

Gold was down (at press time) $21.80 (-1.3%) for the week to $1,701.20, and silver was down $1.71 (-4.8%) to $33.91. Gold rebounded Thursday but only after earlier in the week falling below its 200-day moving average, a decline Reuters attributed to “dimmer near-term prospects for another round of quantitative easing from the US Federal Reserve.” This explanation was rubbish when it was first advanced last week and remains so this week, but it is the narrative (dread word) of the moment.

At MarketWatch, Peter Brimelow says of the Leap Day Massacre: “This abrupt and decisive shock did more than raise eyebrows.” He notes that GATA “has been much derided for its view that the gold market is manipulated. Now it was able to report a whole procession of significant observers making unprecedented sympathetic noises.”

Not least, “one long-time vociferous skeptic, The Gartman Letter,” which wrote, “The market’s plunge may not have been solely the result of pure market forces but may have been the result of a very real effort to ‘manipulate’ the market lower…perhaps on orders of a central bank hoping to break the market in order to buy gold more cheaply after the surge of selling or perhaps on the order of a government wishing to drive gold down for the ‘optics’ of weaker gold prices.”

A rather significant optic is exactly what is meant by “gold.” John Embry, Chief Investment Strategist at Sprott Asset Management, comments, “It’s all just paper. I can assure you that there is very little physical gold being sold at distressed levels here. Any transaction in physical is probably being motivated by the buyer who is taking advantage of these low prices.”

Similarly, the “London Trader,” interviewed by King World News, reported, “[March 8] when we dropped through $1,700, you would not believe the amount of physical tonnage orders that filled. US-centric traders tend to concentrate on the COMEX, but the real market is made in London.”

Another optic much influencing the paper price of gold lately has been Europe, the sick man of continents. Reuters reports Thursday that Greece’s bailout deal survived its first test, “an overwhelming acceptance of a bond swap offer to private creditors…beat[ing] its own most optimistic forecasts.”

Optimistic being the operative word here. For Greece not to collapse and bring the rest of the PIGS down with it would require a concatenation of implausibles too much even for Alfred Hitchcock. Or as Egon von Greyerz, managing partner of Matterhorn Asset Management, puts it, “This is the bankrupt leading the bankrupt. It’s absolutely ridiculous.”

What’s the most plausible future for the Canadian mining industry? According to the Globe and Mail, “Miners hopeful of emerging from a late 2011 funk.” Yay! According to the Financial Post, “Even amid a commodity bull market, gloom hangs over mining industry.” Boo!

Peter Koven reports in the Post that the industry is much exercised by “resource nationalism,” foreign countries claiming an ever-bigger slice of mining profits. This is worrying, to be sure, but perhaps a greater concern should be what might be called “resource irredentism,” Indian bands claiming veto power (sorry, “consultation”) over Canadian mining projects.

Drew Hasselback explains in the Post, “If you want to develop a mine any place that affects a First Nations community or its land rights, the Crown has a duty to consult with that native community before the project gets a green light. Now the hard part: trying to figure out what consultation means. How much consultation is needed before the legal duty is satisfied? And since it’s the Crown that holds the duty to consult with the native band, why is it that it’s the company that winds up having to do all the work?”

Why, indeed? Hasselback concludes, “We do have rule of law in Canada, and those with full legal rights do have access to the courts to enforce them. The rule of law either means something or it doesn’t. But good business people should know how to pick and choose their battles. Clinging to a purely legal strategy may be short sighted, and it may be a strange business strategy. There are too many projects chasing too few investment dollars for a stubborn legalistic approach to make any sense.”

Yes, the rule of law either means something or it doesn’t. And advising companies that a “stubbornly legalistic approach” is probably best avoided suggests strongly that the rule of law in Canada plus five bucks will buy you a grande caramel macchiato and nothing more.

Even after escaping from the regulatory miasma, many gold stocks that should be doing better aren’t. At Seeking Alpha, Stanley Barton offers three theories why. 1. “Investors would rather hold physical, refined gold than gold stocks, despite the gold reserves that those stocks represent.” 2. “Gold stock investors have been burned by the volatility of the yellow metal in the past and…are reluctant about diving back into those investments as gold is peaking.” And 3. “There is not much interest in gold stocks…because their managements are reluctant to distribute the profits to the investors.”

And now to cases. Barton cites AuRico TSX:AUQ as a good example of a stock as “motionless as a deer in headlights,” despite “upgrading their operations, increasing production, expanding their resources and adding a plum of an acquisition. Oh yes, there was also the 50% spike in the price of their product.” He offers two goldminers he believes well placed to break out of the pack: Banro TSX:BAA and Sandstorm TSXV:SSL.

From the same source, Marco G notes “4 Small Cap Silver Stocks That Have Soared 40% In 2012″: Avino TSXV:ASM, Aurcana TSXV:AUN, Impact TSXV:IPT and Mag TSX:MAG. He describes these companies as “smaller silver miners working on increasing production and thereby providing a growth outlook for the company. The market respects this production growth and being coupled with the gains in the prices of their main commodity…gives these particular stocks good leverage over the silver prices.” They might, he ventures, hit the “sweet spot…along the road to full production” managed by First Majestic TSX:FR last year.

And at the Gold Report, Bo Chew, manager of the Magna Opportunity Fund, likes Barkerville Gold TSXV:BGM, Scorpio Gold TSXV:SGN, Mag Silver TSX:MAG, Pretium TSX:PVG, South American Silver TSX:SAC, Metanor TSXV:MTO, Avino Silver & Gold TSXV:ASM, Gran Colombia Gold TSXV:GCM, Gryphon Gold TSX:GGN, Geologix TSX:GIX, Xtierra TSXV:XAG and Minco Gold TSX:MSV.

Finally, Sherree DeCovny of CFA Magazine reports, “Studies conducted by Canadian forensic psychologist Robert Hare indicate that about 1% of the general population can be categorized as psychopathic, but the prevalence rate in the financial services industry is 10%. And [Wall Street psychologist] Christopher Bayer believes, based on his experience, that the rate is higher.” In related news, the business schools at Harvard, Yale and the University of Pennsylvania have all added The Killer Inside Me by Jim Thompson to their required reading lists.