Apples of Gold, Settings of Silver, and Barrick Gold

March 21, 2009 | By: Marc Courtenay

"I happen to be very optimistic right now about gold prices," Peter Munk, Barrick's chairman, told Reuters in a telephone interview from his home in Davos, Switzerland on Wednesday. Looking at the chart below compliments of StockCharts.com one would have to agree with Mr. Munk.

Gold Equities VS Gold – Weekly Chart

"I have to think they [gold prices] are going to be significantly higher than last year, just like last year was higher than the year before."

The huge cost of the U.S. government programme to revitalise the economy amid lower revenues is likely to introduce "an enormous, enormous inflationary factor into the U.S. dollar, which I think will make gold more and more desirable", he said.

Munk, 81, said gold was akin to a thermometer of world economic health, and he saw little reason for optimism about a global recovery in the short term.

"Gold has got a very strong and stable support right now as long as we have this enormous uncertainty out there and I think this uncertainty will probably last for a while because I don't see any major catalyst that can turn this around," he said.

"Every year in the last three years as the world becomes less and less secure in terms of normal investments and people lose faith and confidence in bonds, stocks, secured debt instruments, people turn to gold," he said. "It automatically attracts people in direct proportion to their fear, and that is fear of losing their money."

RECOVERY COULD HURT GOLD

"Munk spoke to Reuters in a wide-ranging interview that included discussion of his plans to develop a luxury yacht port in the Adriatic Balkan state of Montenegro.

"An economic recovery could bring a fall in gold prices, but Munk did not see that happening soon. Gold traded at a six-week low on Wednesday at around $886 an ounce, but has sharply risen in value in recent years.

"If stability and growth and economic well-being comes back universally throughout the globe and it can be done without inflating our currencies, gold can fall out of bed," the billionaire said.

"Founded by Hungarian-born Munk in 1983, Barrick has become the world's dominant gold player through expansion. Its founder said his firm would continue acquisitions.

"Barrick has grown primarily through an aggressive acquisition program in the last 25 years so of course we'd be on the look out all the time for strategic acquisitions or mergers, that hasn't changed," he said.

Another factor impacting gold prices are lower returns from mining than in the past.

"The major gold deposits throughout the world in the main have already been found, so it's getting more and more difficult, and that's why you see global gold production heading downwards, despite higher prices and increased spending on production," Munk said.

"Barrick was unlikely to diversify further into base metals, but would likely recover greater amounts of copper in the same areas in its quest for new gold" according to the Reuters story.

"It is inevitable that our copper production will grow," Munk said. "If the world straightens itself out and we resume growth and expansion -- and I don't think we will, by the way, not on the short term -- then copper is a wonderfully profitable base metal to mine."

So if you like gold and want a well-managed company that partially hedges its production and is increasing their copper production, Barrick is a company to keep your eyes on. Gold appears to be an investment with "staying power" as it becomes not only a substitute currency but a hedge against any future inflation (think Bernanke and Wednesday's FOMC annoucement).

Settings of Silver

Our sources tell us that the stage is already set for an explosive rally in silver to commence in the months ahead. Jason Hamlin at http://www.goldstockbull.com/ recently put the shine on silver's amazing potential from here.

"What does it [current excitement about silver] all mean? One reasonable assumption would be that the silver price has some catching up to do in order to return to its equilibrium or more natural price relationship to gold. Using the most conservative of estimates, the price of silver should be fetching around $60 per ounce! Even if you believe the price of gold is overvalued and should be closer to $750, that still gives us a silver price of $50. Any way that you look at it, silver is way undervalued versus gold.

"These abnormalities are typically caused by some form of artificial interference and always have a way of working their way out and returning to levels dictated by free market economic forces. From the current price of $12.71, silver would enjoy a 372% price increase to reach $60. While this sounds a bit far-fetched, it could happen more rapidly than you can imagine. Paper short positions in silver (up to 800 million ounces) are several times larger than all of the annual physical investor demand for silver (50-100 million ounces). And the majority of these paper shorts are held by only a few investment banks, with JP Morgan being the principal culprit.

"So, if investors start to demand delivery and paper shorts scramble to cover, $60 silver is suddenly not such a far-fetched theory. I will direct you to the archives of Jason Hommel http://silverstockreport.com/ssrarchive.htm or Ted Butler http://www.investmentrarities.com/03-16-09.html if you want to dive deeper into the numbers.

"And be sure to check out GATA http://www.gata.org/ or a wealth of information and documentation supporting the manipulation argument." [Investors remember, manipulation drives prices both directions and makes price predictions quite unreliable].

Hamlin's article quoted from two "heavy-weights" in the precious metals and silver divisions.

James Turk reports on the extraordinary amount of stress in the silver market, saying:

No one is stepping in to sell physical silver in exchange for future delivery, so there is only one possible conclusion. There is not sufficient physical silver available at current prices to meet demand. So unless the shorts can somehow come up with the physical silver they need to meet their obligations to deliver and thereby relieve the backwardation, the price of silver needs to climb higher. It needs to rise high enough to induce holders of physical silver to sell their metal, which the shorts need to buy to meet their obligations to deliver.

Ted Butler also wrote an article a few days ago suggesting that it was "crunch time for silver". Hamlin writes:

Allow me to summarize what all these micro and macro signs of wholesale shortage mean to silver investors. Quite simply, it means that the price of silver should explode soon. If the short-term signs I see, both micro and macro, are true representations of what is occurring with supply and demand, then it may be crunch time in silver. If that’s the case, buckle up and get ready for the ride of your life.

As a seasoned 30 year investor in silver can tell you and as I warn you here at The Money Rumor Mill, silver is a highly volatized and very small market. Butler has called it "the most manipulated market in the world" and he might be correct.

The "Marc Courtenay precious metals contra-indicator" has proven time and again that if I write an article about gold and silver we must be getting close to a meaningful correction...at least within 8 weeks. This time might be no exception.

Perhaps this is the time to "get ready, get set, not yet" when it comes to silver. On the other hand, if I didn't have some meaningful investments in silver at the moment (like the Silver ETF, symbol SLV or Silver Standard Resources, symbol SSRI or perhaps Silver Wheaton, symbol SLW, and "you know what" silver) I would be even more uncomfortable.

Based on so many ratios, gurus, and uncommon sense, silver appears to have much more upside potential than downside risk. But that is just the reason the manipulators like to bring it into "correction mode" between May and November virtually every year since 2001.

Those who control the direction of silver love to "buy low and sell high" at least once a year and sometimes even more frequently.

So here's a word "fitly spoken". Watch gold and silver carefully over the next few months, decide for yourself when the best time for investing in these precious metals might be, and always, always be a longer-term investor...and expect the unexpected.

Disclosure: Long SLV, SSRI, SLW.

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