Why The Stock Market Took so Long to Crash?

Over the last few years the stock market was defying all logic and kept growing in spite lack of real economic growth in most of the world. The pockets of growth in some of the sectors were all spurred by cheap credit generously provided by the governments. The governments in all developed countries and in many Asian emerging markets kept pumping cheap debt into economy to juice up consumption and capital spending. Cheap debt helped to inflate multiple bubbles:

We now have bubbles in: US and Canadian real estate, global stock markets, Chinese manufacturing over capacity and in many other sectors.

The party comes to an end – as pumping more debt into economic system is not working any more. Look at Japan – they pumped enormous amounts of borrowed (or printed) money into their economy and still can’t beat deflation. Other countries are facing the same problem – the debt levels have reached the end of “diminishing return” curve.

The central banks now don’t know what to do. In the last two decades Federal Reserve and other CBs were able to keep propping up the economies and stock markets with infusions of cheap debt. But now it is not working anymore.

Below I posted an interview of Rick Rule to Mike Maloney where he discusses how thick lies kept the markets going up for so many years.

Gold Closed End Funds vs. Gold IRAs

TGold in a garbage binhere is a lot of advertising and advice in financial media on holding physical bullion in IRA accounts.  Somehow I struggle to understand benefits of Gold IRAs. Any way I look at it I just don’t see how a Gold IRA is better than just holding a gold closed end fund in a regular IRA account.

Let’s do some analysis of what you get when you set up a physical gold IRA account. Typical physical bullion IRA account offer looks like this:

  • Open an IRA account with an IRA custodian which specializes in this type of accounts. When you open the account the custodian will charge you fees for initial set up. The fee might be over a hundred dollars; plus there will be monthly or yearly fees for maintaining the account.
  • Then you transfer money to the custodian with instructions to buy gold bullion from a bullion dealer of your choice and have it stored at a secure storage company of your choice (or the IRA custodian might advice you which companies to use). So you will have to pay premium for purchasing the bullion and then your precious metals will be stored at a storage company like Brink’s where you will have to pay storage fees too!
  • When sometime in the future you decide to close your Gold IRA account you will have a choice of either selling the bullion to a dealer (with discount of course) or have it delivered to you (with fees of course).

Generally with typical gold IRA set up you will have an IRA account which will hold a title to bullion stored with a secure storage company. And it will cost you hundreds if not thousands of dollars to set up and will have ongoing IRA account and metal storage fees.

Now let’s compare Gold IRA with Gold closed end fund strategy:

  • Open a free IRA account with any online discount broker. It is free and there are no monthly or yearly fees unless you are using premium services.
  • Buy shares of a gold close end fund like CEF, PHYS, and PSLV etc. The transaction cost will be just usual trading fee $6-7.

The result will be the same as with Gold IRA: you are holding shares of physical bullion fund which has physical bullion stored in a secure location. As a CEF shareholder you (or your IRA account) will have a title to the bullion held by the closed end fund.  Total fees for the whole investment are negligible. To be fair closed end funds do charge management fees but they are very minor – usually less than ½ percent of assets value per annum. Total fees will be nowhere even close to what a Gold IRA will cost you.

Let’s compare some other features of Gold IRAs and closed end funds:

Safety of the bullion: With Gold IRA your bullion will be stored at a secure storage company in the US or sometimes abroad. Canadian based closed end funds hold their bullion at various Canadian banks’ secure vaults. All bullion is allocated and is audited on a regular basis.  Thus I don’t see how Gold IRA might be safer than a closed end fund.

Central Fund of Canada (CEF) and Sprott management (PHYS and PSLV) are very reputable companies and there can be absolutely no doubts that they actually have the physical bullion with unencumbered title and the bullion is stored in secured vaults.

Government confiscation: Some people might argue that it will be harder for the government to confiscate bullion stored with secure storage company. I strongly doubt it – IRA companies have records of who has what and where and if the government decides to confiscate or force you to sell them your bullion they will be able to do it easily. I don’t think there is any chance of outright physical confiscation – more likely the government might try to tax you out of any gains. In this case holding closed end funds might even be advantageous as the government might have various reason not to tax closed end fund’s shareholders as heavily as outright “gold bugs” with Gold IRAs.

One other argument I have heard is that some Gold IRAs let you hold your bullion abroad – somewhere in Switzerland or Singapore. Supposedly the government won’t be able to confiscate your bullion from there. I am very skeptical about this argument. The government doesn’t need to confiscate your gold – they can just tax you. Plus there is no guarantee against actions of foreign governments or catastrophic events like civil unrest or wars in which case your bullion might get pilfered. Central fund of Canada (CEF) and Sprott funds (PHYS and PSLV) hold their bullion in Canada so this already gives you some diversification from holding your bullion in the US.

Conclusion: Holding gold closed end funds in IRA account is very similar to setting up a physical Gold IRA account. With closed end funds you can save hundreds if not thousands of dollars in fees and buying closed end funds are a lot less hassle and paperwork compared to setting up a Gold IRA.

I am in no way an expert in physical Gold IRA accounts so there might be some nuances which I have not considered. If you have a comment or questions leave your reply below this article and we will discuss.

To find out about other advantages of physical bullion closed end funds read: Physical Bullion Closed End Funds – How to Buy Gold at Discount

Disclosure: none

Coeur Mining’s Wharf Mine Valuation

Coeur Mining (CDE) announced it will purchase Wharf gold and silver mine from Goldcorp (GG).  Wharf mine is an open pit, heap leach operation located in South Dakota.

The mine has been operating for over 30 years and has produced over 2 million ounces of gold.  Historically it was showing very high resource to reserves conversion.

Below is a slide showing Wharf’s mine current reserves and resources.

(click to enlarge)
Wharf Mine Reserves and Resources

Coeur Mining is buying Wharf mine for $105 million in all cash deal. Coeur has enough cash on hand to pay for the acquisition but the management is planning to finance half of the purchase price with notes which most likely will be issued at below 5% interest rate.
We are immensely pleased with this acquisition. Buying assets at the bottom of the cycle in the precious mining industry is a sure sign of a well run company. The gold assets are cheap now and companies who have cash to buy the assets now will benefit their shareholders in the future.

Coeur Mining is getting a very good deal with Wharf Mine acquisition. Below I am showing a quick estimate how much Wharf Mine is worth at current metal prices.

(click to enlarge)
Estimated Wharf Mine Valuation

Using 10% discount rate Wharf Mine’s present value calculates to about $171 million and Coeur Mining is buying the mine for just $105 million. At 6% discount rate the mine is worth close to $200 million.

The other way you could look at it: At the current metal prices Wharf Mine will generate over $30 million in EBITDA over the next 6-7 years.  Coeur is paying $105 million which is only about 3 times over the next year’s EBITDA – it is very cheap.
In addition Coeur is buying the mine with over 100 million in net operating losses which probably worth another 20-25 million.
Based on mine’s 30 years of production we also might expect upside from increasing reserves and resources.  Coeur’s management indicated they have a few drilling targets in the area.

It is obvious Coeur Mining is getting a really good deal on Wharf Mine acquisition. My congratulations to the management and the shareholders.

Disclosure: Long CDE and GG

Is it Time to start Buying Oil Stocks?

The whole world is looking in shock and awe at the fall of oil prices and oil E&P companies. Here at Investor Talkroom we like to buy stocks of cyclical resource companies when they are at the bottom of business cycle and sell at the top of the cycle. Naturally we started to wonder if it is time to start buying oil stocks?

Oil prices for WTI fell to below $50 bbl currently from over $100 bbl as recently as last summer which is 60% drop in just a few months time.

(click to enlarge)
Oil Prices Chart
US oil and gas exploration companies as represented by various ETFs: (XOP) , (PXE), (IEO) are down 30%-40% from their last summer highs.

(click to enlarge)
US Oil Stocks prices
Resource companies are inherently leveraged to commodities they produce so the fact that oil prices are down over 50% and oil E&P companies have declined only 30%-40% indicates that there might be more room to fall for them.
Some of the reasons why oil companies’ stocks have not fallen more so far might be hedging and investor hopes for quick oil price rebound. A lot of oil companies have their sales hedged for the next 12-18 months and won’t suffer immediate revenue declines from oil prices slum.  We also suspect that oil price drop was so quick and unusual that a lot of investors are holding up hoping that the price will rebound quickly.
Notice that US oil majors have declined even less:

(click to enlarge)
US Oil Majors prices chart
Exxon Mobile (XOM), Chevron (CVX ), ConocoPhillips (COP) all have declined only 10%-25% from the last summer highs.  Many of the investors in oil majors are “strong hand” long term investors who won’t sell on decline. Oil Majors’ prices are also supported by high and safe dividends.  It is only natural that majors have declined less than the sector. Nevertheless I think if oil prices don’t rebound in near term US oil majors’ earnings will decline and stock prices will have to go lower.
Europe based major oil companies have declined significantly more than their US counterparts. Total (TOT), British Petroleum (BP) and Royal Dutch Shell (RDS-B) are down between 20%-30% from the summer highs. Many of them also have now dividend yields twice higher than US companies.

(click to enlarge)
Europian Oil Companies
Higher decline in European oil companies is explained by sanctions on Russia. British Petroleum for example owns 20% stake in Russian oil giant – Rosneft. Other European companies also do a lot of business in Russia, same like US Exxon Mobil.  Europe and the world can’t afford sanctions and economic warfare with Russia. Sooner or later the relations between EU and Russia will start normalizing which will be a price catalyst for the companies with exposure to Russian economy.

Overall my conclusion – there is no rush to buy oil E&P companies right now. Oil prices might stabilize at current level or even rise to around $60 bbl but they might gap down to $30 for a short time too. I am planning to put some of the E&P companies on a watch list and monitor them.  The buying opportunity will come when we see companies announcing production cuts and higher cost producers filing for bankruptcies. Like Rick Rule from Sprott Global likes to say – “we need to see a capitulation phase to know that this is the bottom.”

Everything is Lining UP for Thompson Creek Metals

Copper prices are recovering and traded today at $3.19 lbs. It is a four months high. I don’t think anybody believes anymore copper could ever fall below $3 again.

Copper Prices 06.30.2014Gold is rallying too and is over $1,320 oz already.

Gold Prices 06.30.2014Molybdenum prices are in high $14teens and not looking to fall.

Molybdenum price 06.30.2014Everything is lining up for Thompson Creek Metals (TC) shares to break out.

Near term catalysts to watch are:

The company is scheduled to report Q2 operating results in two weeks.

The earnings will be released on the first week of August.

After the earnings and operations update stock analysts will scramble to raise price targets. I expect Thompson Creek shares to trade between $3.50-4.00 per share after the earnings release.

Long term based on present value calculations using current metal prices TC is worth at least $10-12 per share. I am planning to update and post my present value calculations here in a few days.

Key objectives for 2014 from company presentation:

TC 2014 Operating objectives
Disclosure: Long TC

Is There a Silver Shortage?

Yes there is but I would not call it a shortage. There is a supply deficit of physical silver. In 2013 demand for physical silver exceeded supply by 103 million ounces. 103 million ounces deficit is about 10% of the total supply which is quite significant.

Silver Supply and Demand table(data from Silver Institute)

Notice that as silver prices fell in 2013 scrap supplies fell by 60.8 million ounces and bar and coin demand jumped up by 106.3 million ounces.

Silver 2014 prices chartIn 2014 silver deficit most likely will increase even more. So far silver prices averaged around $20 per oz this year which is much lower than $23.79 average for 2013. In 2014 prior year trends will accelerate and scrap supplies will fall even more while investment and industrial demand will continue to grow.

We are entering an era when industrial demand for silver will have to compete with investment demand as there is not enough silver for both uses at current prices. The prices will have to go up but nobody knows when it will happen.

Silver Supply and Demand graph

Industrial demand will continue to grow as population grows and silver is used in more and more applications.

Investment demand will keep increasing too. Asian consumers become more affluent and keep buying more and more gold and silver every year. Imports of Gold and Silver to China and India are breaking records in the first half of 2014. (See In gold we trust )

Silver bars and coins becoming more popular in the West too. This year Canadian Mint already reported 24% year on year increase in coin sales for Q1 2014. (See SRSrocco Report)

So far in 2014 demand for silver is outstripping supplies but when will we see silver prices rising? Nobody knows. There are stockpiles of physical silver exist which are enough to cover the deficit for right now and keep the prices low. But this can’t continue for long and sooner or later silver will have to revalue.

Investing in silver and silver mining stocks might turn out to be the best investment of the decade. Silver and gold mining companies are selling at generational lows right now but it won’t last for long.

Thompson Creek Metals Ready to Roar

Thompson Creek Metals Logo

Thompson Creek Metals Mining (TC) shares finally started moving higher. The stock is long overdue for a break out. I actually still don’t understand why TC is trading at such low levels.

There are many reasons for TC to double or even to triple from the current levels:

Over the last few months Molybdenum prices increased over 50%. Thompson Creek operates two Molybdenum mines Endaco and Thompson Creek. With molybdenum prices back to around $15 per lbs Thompson Creek will generate a lot of additional income which is not reflected in the analysts’ estimates.

The cash from higher molybdenum prices will start coming in in the second quarter of 2014. Money will speak and Thompson Creek shares will be re priced to much higher levels.

Mt.Milligan Copper and Gold mine is ramping up as scheduled. Gold prices are back to over $1,300. Copper holding up at over $3 lbs. Mt.Milligan will be cash flow positive in the second half of 2014. At current metal prices it will generate up to $200M cash flow starting from the next year. Just Mt. Milligan cash flow is enough to value the TC shares at around $6. But the market seems only just right now waking up to the fact the mine is already in the commercial production and de risked from any delays or setbacks.

Today’s move of over 10% is TC share prices was most likely triggered by tMeds exchange offer. The company offered to exchange tMeds (tangible Equity Units – which is hybrid between stock and bond) for its common stock. Many holders of the tMeds which pay 6.5% interest were hedging their tMed positions by shorting the common shares. If many investors accepted the offer they would be covering their short positions. Today’s’ volume was almost three times normal thus it looks like the offer was received positively.

There is still time to buy TC shares. At current metal prices I estimate TC stock to be worth between $6-9 per share. If gold and moly prices continue to rise TC will be 5 to 7 bagger in a few years. Patience will get rewarded.

Disclosure: Long TC

Gold Prices vs Interest Rates

About a year ago or so quite a few market analysts out there declared that there is an inverse correlation between gold prices and real interest rates.
Anyone who actually bothered to look at the long term data saw there was no correlation what so ever. There were periods when interest rates and gold prices correlated positively and there were periods when correlation was negative – overall it is a random walk.
2014 proved so far there is no negative correlation. Interest rates and gold prices were falling simultaneously.

Below is one year chart of 10 year TIPS rates verses Gold prices.

(click to enlarge)

Gold prices vs Interest rates. Data from St. Louis Fed.

Gold Prices vs Interest Rates. Data from St. Louis Fed

Here is also a long term graph where it is clear that long term there is no correlation between gold and interest rates. (click to enlarge).

Gold prices and Interest rates long term

Gold Prices and Real Interest rates on longer term do not correlate. Data: World Bank and Kitco.

While am not smart enough to know what drives gold prices and real interest rates my theory is we don’t really have any “real” gold prices or “real” interest rates. Central banks manage interest rates to what they want them to be and apparently gold prices are managed too. This is why it is futile to try to find any short term correlations between gold and anything else.
Like Dr. Paul Roberts said: “The Fed manipulates price of everything”.
Longer term laws of economics will prevail over central planners. Longer term gold inversely correlates with value of US dollar and all other fiat currencies.

Comment on Hecla Mining Q1 2014 Results

HL Mining company logo

Hecla Mining (HL) delivered surprising results for Q1 2014. Despite low metal prices Hecla actually managed to turn in profit and reported $0.01 adjusted earnings per share.

Positive results were driven by exceptionally low cash costs at Greens Creek mine. HL reported cash costs per silver oz at Greens Creek of only $1.58 per oz. The full year cash cost guidance for Greens Creek is $5 per oz. Low cash costs in Q1 were attributed to low electricity costs at Greens Creek operations as HL was able to use cheaper hydro power available due to higher water levels at this time of the year. The cash costs will rise as HL will have to burn more diesel fuel the rest of the year.

Nothing unusual was happening at the other operations. Lucky Friday continued to ramp up production as expected. Casa Berardi performed in line with expectations too.

Hecla financial position stays very strong. The company ended the quarter with $208M in cash and $100M unused credit line. Current ratio stands at about 2.2 and debt to equity is around 40%.

Overall everybody seems to be pleased with the company performance. I am happy too. At least Hecla is not hemorrhaging cash and has enough resources to finance internal growth projects. Management guidance for 2014 looks impressive too.

HL Mining 2014 Guidance

Hecla Mining 2014 Guidance

There is though one thing which bothers me:

Hecla is still not reporting All in Sustaining Costs (AISC) and total all in costs. And none of the analysts on the CC did not even ask about it? I do understand that it takes time to do all the accounting work to change the reporting but somehow all other miners managed to do that and HL still did not?

Does this have anything to do with the fact that 1/3 of HL revenue comes from by-products and if they start reporting all in costs the myth of low cost producer will be shattered. Companywide revenue from zinc and lead paid for about 85% of all cash costs of production.

Large zinc production could actually be our ride to profits in the next few years. There is zinc shortage expected and HL is one of the largest zinc producers in North America.

China’s Ghost Cities are not a problem

Many pundits and commentators are crying about China building more and more “ghost cities” with empty malls, bridges to nowhere, empty airports, high speed rails and other amenities. Everybody is amazed at the capital miss allocation on such a grand scale and predicts all sorts of economic ills arising from this.

It is obvious that capital spent on building empty cities could be put to more productive use.

But there is one thing most commentators fail to note. And that is

– China can AFFORD to build what ever they want.

China has 4 trillion in foreign reserves and who knows how much in gold and other real assets. If they want bridges, airports and high speed rails they can build it.

Arguing they should not – is similar to arguing that your neighbor should not buy that Porsche because it is not a good use of their capital even if he or she can afford it without any strain on the budget.

Furthermore all those empty cities in China might turn out to be not that bad of an investment after all. The dollar is depreciating and will continue to depreciate so investing into at least something is better than losing your capital to inflation.

Contrast this with the US government which borrows money to prop up failing banks and automotive companies; or spending on “shovel ready” projects. Or with the state and local governments building sport stadiums.