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Friday
Jan292010

What’s a Company’s Gold Worth?

Gold Mining.JPG


Louis James & Andrey Dashkov, Casey’s International Speculator

At any given time, there's a single international spot price for an ounce of refined gold. Gold is priced in U.S. dollars: $1,076.50 per ounce as we go to press. But what about the gold an exploration or mining company has in the ground – how do we value that?

Given sufficient data, you can estimate a reasonable net present value (NPV) for a project and deduce what each of the company's ounces should be worth. To do this, you need to know annual output of the proposed mine, proposed capital expenditures, energy and other costs, and many more things. For most deposits held by the junior companies we tend to follow, there's just not enough data available.

Another approach is to compare the value the market is giving a company per ounce of gold in hand against the average value the market gives companies with similar ounces.

The most obvious way to define “similar” ounces in the ground is to use the three resource and two mining reserve categories defined by Canada's National Instrument NI43-101 regulations – the industry standard. We combine these into three broad groups, as we believe the market tends to do as well:

Inferred: the lowest-confidence category, based on just enough drilling to outline the mineralization.

Measured & Indicated (M&I): these higher-confidence categories have been drilled enough to establish their geometry and continuity reasonably well.

Proven & Probable (P&P): These are bankable mining reserves – basically Measure and Indicated resources with established value.

So, what does the market give a company, on average, for an Inferred ounce of gold? M&I? P&P?

To answer this, we combed through every company listed on the Toronto Stock Exchange (TSX) and the TSX Venture Exchange (TSX-V) and pulled out the ones with 43-101-compliant gold resource estimates (or mostly gold) – no silver, copper, etc. Of these, we kept only those with resources that fall almost entirely into only one of our three broad groups: Inferred, M&I, and P&P. In other words, we did not include companies with half Inferred and half M&I resources (though we did include companies with mostly P&P reserves, because most are producers – or soon will be – and are regarded that way). That left us with about 90 companies to calculate some averages on.

That's not a large sampling universe, and we had to make some judgment calls when it came to defining what companies should fall in each category, but it's what we have. So take these averages with a large grain of rock salt, but here they are:
US$20 per ounce Inferred

US$30 per ounce for M&I

US$160 per ounce for P&P

Armed with this information, if you didn't know anything else about an M&I resource (political risk, type of ore, etc.), but you saw that the company that owned it was trading at $10 per ounce, whereas its peers are valued at around $30 an ounce, you can conclude that there must either be something very wrong with the project or the stock is a great speculation. If there's nothing wrong with the project, there's an implied growth potential in the stock price, based on the difference between what the company is getting per ounce and the market average for similar ounces. In this case, it would be:

$20 x # Ounces ÷ # shares.

As a matter of perspective, a few years ago the market was giving a company about $25 per ounce Inferred, $50 for M&I, and about $100 for P&P. Then, when gold ran up over $1,000 before the crash of 2008, these valuations went out the window, and some companies were getting over $100 for merely Inferred ounces – do we have your attention now?

Conversely, just after the crash, there were companies having a hard time getting $10 for M&I. That was clearly a sign that it was time to buy, and we did, with gusto.

It's also why, when the Mania phase gets underway, we'll be selling into it as gold approaches the top; we will not be attempting to time the top. It's far better in this business to be a day early than a day late.

Today, the market is willing to pay more for advanced and producing stories ($160 P&P) but is discounting earlier-stage stories, hence the lower M&I valuation than in previous years ($30). These figures will change again as the market's appetite for risk changes.

Now let's compare these numbers to those of a few sample gold companies. This table includes the market capitalizations (share price x # shares) of our sample gold companies expressed in USD (because that's what gold is priced in), not the usual CAD. The second column has the value of each company's resources, as per the average numbers given above (i.e., [# Inf. ounces x $20] + [# M&I ounces x $30] +[# P&P ounces x $160]). The implied growth is a simple ratio of these two numbers, expressed as a percentage.


MCap (US$M)
Value of Gold Underground (US$M)
Implied Growth (%)

Luiri Gold (LGL.V)
18.6
17.44
-6.2%

Gabriel Resources (GBU.T)
1,420.5
2,230.13
57.0%

Coral Gold Resources (CLH.V)
16.3
68.0
317.2%

Gabriel and Coral Gold look pretty cheap, Luiri slightly expensive, but in most cases there are good reasons for this. For example, these averages by confidence category ignore the typically greater cost of extracting gold from low-grade sulfide ore, as compared to high-grade oxide ore.

We don’t follow the companies in the table above -- they are just examples -- but here's our take on their implied growth ratios:

LGL: Luiri's flagship Luiri Hill project, located in Zambia’s Central Province, has only 800,000 ounces in total resource, 82% of which fall within the least reliable Inferred category.

Although the current resource estimate is based on lower-grade material, the company’s gold looks fairly valued. However, LGL is working to define more high-grade areas of mineralization both within and outside the resource boundaries, and not without success. For example, drilling from the Matala deposit, lying in the heart of Luiri Hill, has delivered high-grade intercepts from the central shallow zones, like the recently published 21.1 g/t Au over 5.6 m (starting from 56 m), including 41.1 g/t Au over 2.8 m (starting from 56 m of the same hole #114).

Conclusion: The company looks a bit expensive at the moment, probably because the market sees Luiri’s upside potential coming from the new high-grade ounces being added in forthcoming resource estimates. If the marker were underestimating how much gold Luiri might be adding, it could still be a good speculation, but you’d have to be pretty sure of your calculations projecting that greater value to be added soon.

GBU: Gabriel Resources appears undervalued when using average ounce prices, plus there is a lot of upside outlined in the economic study on the company’s Rosia Montana project in Romania, released last March. The study suggests excellent project economics, including low cash cost (US$335/oz), after-tax NPV of almost 1 billion USD at 5% discount, and after-tax IRR of 20.4%, all at an uber-conservative US$750/oz base case gold price.

However, the company was sued by environmentalists in September 2007 and suffered regulatory setbacks. GBU shares tanked, and this is why the company’s gold is still selling at a discount; there is high political risk. Gabriel’s share price has soared recently on words of support from the government officials, but it’s still perceived – rightly – as high-risk. If Rosia Montana gets permitted to go into production, GBU shares should make very rapid gains.

Conclusion: The government of Romania has made supportive noises about Rosia Montana before, to no avail, and the company doesn't appear screamingly cheap right now, so the risk-to-reward ratio looks too high to us.

CLH: The company is focused on the Robertson project located on the Cortez Trend in Nevada. Coral Gold has recently revised the project’s resource estimate at $850/oz gold (which looks fairly conservative, given the recent price action) to 3.4 million ounces, all Inferred. Our guidelines suggest that these ounces should be worth about US$68 million. Mind you, this gold is contained within what CLH believes to be well-known Carlin-type mineralization in a mining-friendly jurisdiction. Why does the market value these ounces way cheaper then?

We think it’s a metallurgy issue. Lacking sufficient metallurgical data from all Robertson targets, CLH used numbers from a deposit called 39A to stand in for the whole project. The problem is that 39A is one of the deeper Robertson deposits, and large-scale heap leach operation, the preferred scenario for Robertson, showed high strip ratio, which would probably result in high capital expenditures and operating costs.

Conclusion: Robertson ounces are cheap due to valid concerns over the project’s economics. If the company can fix these problems, its resources could be revalued upward dramatically.

Bottom Line
We often get asked what an Inferred, or M&I, or P&P ounce is worth in the ground. The $20, $30, and $160 figures are only rough guides, and you must consider the reasons why some ounces are given more or less by the market, but they're a good starting point.

What makes Casey’s International Speculator so different from other investment newsletters? You don’t just get stock picks, you get an education… and before you know it, you’ll be recognized as the mining expert in your social circle. And most likely as “the wealthy guy” as well. For more on how Canadian junior mining stocks can literally make fortunes for smart investors, click here.



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Tuesday
Jan262010

HIGH RIVER GOLD (HRG.TO) – should trade 4-5 times current price.

HRG Logo 31 July 2009.JPG

In the mail bag this morning is this update sent to us by Chris Charlwood who is doing a fantastic job on keeping us all in loop with HRG.

        (All numbers below are approximate and in C$)

Summary

High River Gold (HRG.TO) is a very established Canadian un-hedged gold mining company. It generated $33M in positive cash flow from operation in Q3 2009 and is expected to generate $45M in Q4 due to the increase in gold prices. At the current $.75 share price it is trading at 4.5 times annualized Q3 cash flow and 3.4 times annualized Q4 projected cash flow. It’s gold mining peers are trading at an average of 18.1 times Q3 cash flow. If HRG were trading at this average multiple on Q3 and projected Q4 cash flow, the share price would be C$2.99 and $4.08 respectively. HRG was trading at $3.50 in 2008. For yearend 2009, the company should have enough liquid assets to cover off all debts with a surplus of $50M. One of Russia’s largest steel companies, Severstal, is the majority shareholder and has done a good job of turning this business around. During 2009, it was Severstal’s intention to buy out minority shareholders. Clearly, there is the potential for a significant short term return if Severstal makes another offer. However, if  no buyout offer materializes, there remains an even more significant upside of 4-5 times the current  price if HRG reaches the cash flow multiples of its peers. These price predictions exclude any value generated from the Prognoz silver deposit – one of the world’s largest and highest grade. Olma Investment Firm recently put a $2.48 target price on HRG
 
Financial Performance first 9 months 2009 
1)     $263M revenues vs. $123M in first 9 month of 2008 – a 114% increase
2)     increase in Gold production to 241,781 from 133,130 in first 9 months of 2008 – an 82% increase.
3)     $86M positive cash flow from operations – an increase of 12 times over first 9 months last year. (HRG projected Q4 cash flow at $180M annualized).
4)     $67M of debt paid down to a balance of $121M at end of Q3. At 2009 year end, HRG likely had a $50M surplus in liquid assets after allowing for all debts.
5)     $18.5 million in working capital at end of Q3, up from a $42.1 million deficit at 2008 yearend.
6)     25% and 38% decrease in Q3 direct mining costs (cost per ounce produced) compared to Q2 2009 and Q3 2008, respectively.
 
Prospects
11) HRG says 300,000 oz to be  produced in 2009
12) Bankable Bissa feasibility study to be completed in 2010 with goal to advance resource to multi-million oz level.
13) Prognoz value not reflected in price. It is ranked # 10 Silver deposit in world with highest grades in the world.             
14) Many analysts predict gold prices to trade in the $1200-1300/oz range in 2010. This could increase 2010 cash flow from operations by $88-127M.
15) Low entry price at $.75 with Q4 expected cash flow multiple at 3.4 times with peers trading at 18.1 times.
16) There may be asset write-ups in 2010 once reserves are increased from new exploration and drilling programs.
 
Debt coverage & Surplus
Based on the Q3 numbers and the completion of the Troika investment, HRG has a significant surplus after allowing for all debts. At the end of Q3 the total debt was $121M plus $23M in payables for a total of $144M. To counter this, there was $39M in cash (and equivalents), plus $53M in third party stock investments (at latest share prices) plus $57M investment from Troika - bringing the total to $149M. If HRG produces gold at the same rate as in Q3, the Q4 cash flow is expected to have improved by $12M to $45M -  due to $141.57/oz  increase in gold prices (Q3 gold price avg. 960.07, Q4 price avg. $1101.64). If so, HRG will have a surplus of $50M on a net basis at year end 2009.
 
HRG’s Peer Comparison
HRG’s peer group of mid-tier public gold companies (Randgold Resources, Northgate Minerals, Centerra Gold, Golden Star Resources, Red Back Mining, Eldorado Gold, Semafo Inc., Gammon Gold, New Gold Inc., Alamos Gold, Aurizon Mines, Jaguar Mining) is trading at an average of approx. 18.1 times Q3 Operating Cash flow on an annualized basis. If HRG were trading at this average multiple on Q3 and projected Q4 cash flow, the share price would be C$2.99 and $4.08 respectively.  HRG was trading at $3.50 in 2008.
 
2010 Cash flow

The average price of gold was $972.34 in 2009. In Q3 2009, HRG achieved $388/oz in cash flow from operations. If the gold price moves to an average of $1200-1300/oz in 2010, then HRG would likely increase its cash flow by $88M - $127M.
Ownership
There are  approx. 799.2M shares outstanding. Severstal owns approx. 400.7M shares (50.1%). Minority own approx. 398.5M of which institutions own approximately 270M shares. Troika is the largest institutional holder followed by Sprott Asset Management. Eric Sprott has confirmed that he believes HRG’s shares are worth $2 minimum currently.
 
References
National Post Article
http://network.nationalpost.com/np/blogs/tradingdesk/archive/2009/12/16/high-river-on-track-massively-undervalued.aspx
 
Olma Investment Research Report ($2.48 target price)
http://freepdfhosting.com/8264920e79.pdf  
Note: If you are distributing any info from the Olma report to your subscribers, please include the disclaimer located at bottom of Olma report.
 
HRG Global Peer Group Comparison & Third Party Investments
http://freepdfhosting.com/da69a70746.pdf
 
Prognoz Silver Deposit rankings:
http://news.silverseek.com/SilverSeek/1172041200.php
 
High River Gold:
http://www.hrg.ca/s/Home.asp          
 
HRG Q3 2009 press release:
http://finance.yahoo.com/news/High-River-Gold-Reports-Third-ccn-1899805673.html?x=0&.v=1  
 
HRG 2008 yr end press release:
http://www.sedar.com/GetFile.do?lang=EN&docClass=8&issuerNo=00002764&fileName=/csfsprod/data97/filings/01410540/00000001/s%3A%5CHRG429.pdf          
 
HRG Q3 2008 press release:
http://www.sedar.com/GetFile.do?lang=EN&docClass=8&issuerNo=00002764&fileName=/csfsprod/data94/filings/01359505/00000001/y%3A%5CSEDAR%5CPRs%5Cpr_press_081218.pdf        
 
Disclosure
I am a retail investor who has been very active in HRG and I own 5.5M shares.
 
Disclaimer
I have gathered the above information from the above sources and others on the internet. Please do your own research to confirm the findings. Please do not rely in this information solely to make your investment decision.
 
If you received this communication by e-mail, you are already on the communication list. If not and you would like to be on the list, please e-mail to my address below.
 
Chris Charlwood
Retail Investor
Rainerc7@gmail.com
604-718-2668 office
604-718-2638 fax

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Tuesday
Jan262010

Why I Hope Gold Falls to $1,000

Jeff Clark, Senior Editor, Casey’s Gold & Resource Report

As a self-professed gold bug, why would I possibly want my favorite investment to fall in value? Have the long hours finally caught up with me?

Au contraire; my near-constant devotion to all things gold has only served to crystallize one of the things I really want out of this. Here’s a hint.

I had lunch with a reader at a recent conference, and while talking about one of my favorite subjects – gold stocks – I asked why he was invested so heavily in them. “Greed,” he said bluntly and with little hesitation. I appreciated the honesty.

Let’s be frank: I’m here to make money, and so are you. And that’s why I hope gold falls to $1,000 again.

Let’s say Bob has taken our advice and has been storing cash. I’ll use $1,000 as an example. If Bob buys Yamana Gold now, he’d get about 93 shares as I write (at $10.73 per share).
Now, let’s say gold drops to $1,000, about a 10% fall from here, and due to its leverage, AUY sells off by a 2-to-1 margin, meaning 20%. So with that same $1,000, Frank, who’s waited for the downturn, buys 116 shares at around $8.58. Thus, instead of owning 93 shares at $10.73, he owns 116 shares at $8.58.

When Frank sells, he doesn’t just make the difference between $8.58 and $10.73 (an extra 25%), he also makes 125% on the extra 23 shares he owns if Yamana doubles in a couple years, which I expect it to. So two years from now, Bob would have $2,000, but Frank would have $2,500 because he bought more shares and at a lower price. Frank makes 25% more than Bob on the same dollar investment simply by buying when gold and gold stocks fall in price.

Got $5,000 saved up? Multiply the profit by 5. And with larger amounts, you can see we’re talking serious money.

I don’t know if we’ll see $1,000 again or not, or if Yamana will fall that low, but I would point out that corrections in the gold price can range as high as 20% (2008 notwithstanding), so a further sell-off in price would not be out of the ordinary. A 20% correction from gold’s peak at $1,212.50 on December 2 would equal $970. That’s not necessarily a prediction, but it shows you that price is certainly possible.

Don’t like my wish? Remember, it’s called a bull market for a reason; it’s not a cow market or a puppy market. It’s going to try and buck you off. But a correction to $1,000 or even lower can give you the chance to buy more, cheaper. Don’t view sell-offs as a bad thing but rather as an opportunity.

Bring on $1,000! 

Precious metals and energy are two of the hottest markets in 2010 and beyond. Learn all about today’s pressing investment topics: America’s hidden wells, a potential game changer for natural gas stocks… Predictions for 2010 -- what the 18 most respected investment pros see for gold and the economy… Big Oil’s takeover targets and how to profit from them… and much, much more. Right now, get one year of Casey’s Gold & Resource Report PLUS one year of Casey’s Energy Opportunities for only $39 – a 50% savings. Offer ends January 31; click here for more.

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Monday
Jan252010

Agnico-Eagle Mines Limited: Bought Today

AEM Chart 26 January 2010.JPG

On the 25th January 2010 we signaled our intention to acquire more of this stock and some Call Options when we posted an article entitled Agnico-Eagle Mines Limited (AEM) in the Buy Zone.

Today we purchased more stock at an average price of $53.24 and we also acquired a few Call Options and they are the MAY 2010 series at a strike price of $60.00, symbol AEMEL for which we paid a price of $2.85 per contract.

If you pop back to early December 2009 these very same contracts were trading at $12.00 plus so they have dropped significantly since then. Lets hope that they can bounce back to a profitable level and quickly.

Agnico-Eagle Mines Limited opened the day in positive territory so we waited until around 2.00pm EST before making a move by which time the stock had touched $53.00 and gold appeared to have steadied. Our order was filled at the slightly higher level of $53.24, but we are happy to buy them at this level as we do expect them to trade much higher. If a bounce in the stock price comes soon then we may treat this purchase as a short term trade and take a profit, otherwise we are content to hold as this is a quality stock.

As for the Call Options we have chosen the May Series which allows a little time for gold to improve and hopefully Agnico will improve with it. Should we be fortunate enough to register a reasonable profit then we will either take some profits and/or place a stop in an attempt to lock in any profits should the stock price fall.

Good luck with them if you do follow us on this one and remember not to hit any one trade too hard, live to fight another day etc.


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Sunday
Jan242010

Agnico-Eagle Mines Limited in the Buy Zone

AEM Chart 23 Jan 2010.JPG

Over the past six months Agnico-Eagle Mines Limited (AEM) has moved violently between the $52.00 level and about $74.00 per share. These movements offer investors the opportunity to add to their portfolios by buying a few more of their favorite stocks or by venturing into the more volatile options arena where a greater amount of leverage is available.

From the above chart we can see that AEM has formed two lower highs since hitting $74.00 which is worrisome for us as we believe this stock is once again undervalued, so thats a bit of a negative. However, the $52.00 level has acted as a support to AEM recently and we hoping that it will hold once again. The technical indicators are almost on the floor and suggest that AEM is now oversold so we are looking for a bounce around now followed by a reasonable rally. As we mentioned when writing about Silver Standard there are a number of political considerations to add to the pot, such as President Obama's stance regarding the banks. Should the banking sector continue to fall bringing the remainder of the market with it then the dollar could be the beneficiary and not gold and silver. Thats a chance that we may have to take but on balance we will probably move early next week.

Have a sparkling week.





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Saturday
Jan232010

“Get Your Gold the Hell Outta Here!”

COMEX DEPOSITORY WAREHOUSE GOLD STOCKS.JPG

By Doug Hornig, Casey’s Gold & Resource Report

That’s the directive that came down from HSBC USA in late November.

It seems that everyone these days wants gold. Real, physical gold coins that they can hold in their hands, or bars that they’re assured are resting safely in a well-guarded vault. HSBC’s New York vault, for example, buried deep below its 5th Avenue tower, where it has stored people’s gold since it inherited the facility from Republic Bank a decade ago.

But no more.

HSBC has served notice to its retail customers – many of whom are simply middle-men and custodial services which store gold with HSBC on behalf of hundreds of their own account holders – that all their gold must be out of its facility by July 2010. Otherwise, folks, prepare for an unwelcome knock at your door. HSBC’s letter says that, in the absence of directions to the contrary, clients’ metal “will be returned to the address of record... at your expense.”

Picture, if you will, what the Wall Street Journal reported: “fleets of armoured cars laden with gold ferrying the precious metal out of New York.”

Where to? That’s a good question. One destination is a pair of warehouses operated by FideliTrade, the parent company of Delaware Depository Service Co. Its vaults in Wilmington have been filling up quickly, leading Jonathan Potts, the managing director, to comment that, "I have never seen any relocation like this.” Other depositories have seen a similar run.

The logic behind HSBC’s decision, according to the Journal, is simple. The vaults are being cleared of smaller clients in order to make more room for institutional holdings, because “retail customers tend to be more expensive [to service] in part because of their diverse holdings. They usually buy American Eagle or Canadian Maple Leaf coins, and bars of various weights and sizes, all of which need to be categorized and stored separately. In contrast, institutions typically buy standardized bars of 100 or 400 ounces, making them easier to store. Institutions also tend to hold the metal for long periods.”

HSBC itself didn’t say why it’s doing this (in fact, its letter wasn’t intended for public release). So, predictably, the Internet exploded with rumors that its action had more sinister motives.

Chief among them has been the tungsten story. That one, in case you haven’t already heard it, maintains that a foreign gold buyer – some say Indian, some say Chinese – found to its dismay that bars it recently purchased were merely gold-plated tungsten. (Tungsten would be the metal of choice for a counterfeiter because it’s the closest metal to gold in specific gravity, and can fool the most basic test for purity.) Some go as far as to claim that Fort Knox is full of fakes, deliberately placed there to make our official stash appear bigger than it is. A suspicion that’s easily stoked since no outside auditor has inspected U.S. gold holdings in over 50 years.

Be that as it may, the latest rumor claims that the appearance of tungsten bars at this time is going to cause widespread chemical testing of gold bars, and HSBC doesn’t want to be caught with anything bogus. Thus they’re preemptively moving their gold out, protecting themselves and at the same time laying off the need to do any testing onto someone else.

This is a great tale, but it ignores the fact that it’s largely coins and small bars that are being moved, and those are not cost effective to counterfeit in tungsten. In addition, that the story is presently confined to the Net means it’s fiction until proven otherwise. As Ed Steer – GATA activist and author of Casey Research’s Gold and Silver Daily – points out, “If it were true, Bloomberg would be all over it in a heartbeat.”

Or someone would. And even if the mainstream media failed to do their job, there’s still the absence of a smoking gun. Who’s seen the tungsten bars? What are the names of officials who can confirm the fraud? Why aren’t the Indians who’ve been ripped off waving the phonies in front of a TV camera? These questions don’t yet have satisfactory answers. Thus the rumor will have to remain just that.

Rumor #2: HSBC has less gold on deposit than it promises, and it’s doling out what it does have to its best friends. This one might make some sense if HSBC were getting out of the gold business entirely. But it isn’t. And if it does have any physical shortages, it can cover them indefinitely with paper “equivalents.”

Rumor #3: HSBC is going under. Those storing large amounts of gold know it, and they’re protecting their assets from future claims by creditors. HSBC is hiding the mass exodus of gold by claiming to have ordered it. No way to confirm this, of course, but the volume of gold that’s leaving means an awful lot of people know what’s happening. Word of the bank’s fragility would surely have leaked out by now. That it hasn’t makes this one highly doubtful – not to mention that HSBC likely falls into the “too big to fail” category and would be propped up if it faced collapse.

Rumor #4: The most outlandish of all. Under this scenario, Washington suspects an attack in conjunction with the terrorist trials, and it’s ordered gold moved out of New York so it isn’t contaminated in the event of a dirty bomb. (Those with the deepest, darkest level of cynicism claim that this would also provide the government with a handy excuse to default on foreign claims to physical metal – as in, sorry, it’s gone, but here’s what you’re owed in dollars.)

All of these make for spicy Web chatter, but after checking with our own sources, we believe that the truth is far more mundane, yet quite exciting in its own right. In essence, we think the WSJ’s analysis is pretty close, with a twist.

It all has to do with the COMEX. That exchange, which handles futures activity in gold, has to maintain a cache of metal with which to settle trades. As a courtesy, it will also arrange to store gold for buyers who don’t want to take physical delivery. But it has no vaults of its own. It contracts with four banks to do the actual storage, though only two maintain significant amounts: of the 9.73 million ounces of COMEX gold, Scotia Mocatta has the most, nearly 5.1 million; HSBC USA is next, with over 4.1 million.

The amount of gold warehoused by the COMEX has exploded since the metal’s bull run began in 2001, as you can see from the following chart (where “registered stocks” are sitting there with someone’s name already on them, and “eligible stocks” are awaiting either registration or delivery): See the above chart.



The trend is obvious, and what it means is that HSBC needs an ever-increasing amount of space for its COMEX gold. Provided, of course, that the trend remains in place. Or accelerates.

HSBC has cast its vote. It clearly believes that it’s going to be getting more gold from the COMEX, maybe a lot more, and it’s making room by giving the boot to other depositors. Perhaps the bank knows something we don’t know, or perhaps it’s just acting out of reasonable expectation.

Either way, it’s telling us that the demand for gold is going to continue rising. And coming from a major bullion bank, that’s about as bullish a signal as anyone could want. If you don’t own any physical gold, it’s time.

Right now, gold is a bit off its recent highs… so, as believers in sound money, the Casey folks are stocking up on their yellow metal before its price resumes its journey to the moon. This is the time to learn everything you can about how and from whom to buy gold, where to safely store it, gold proxies, and major gold stocks. Check out Casey’s Gold and Resource Report risk-free for 3 months – it’s only $39 per year, a mere pittance for what you’ll get out of it. Click here to learn more about gold and gold’s “slingshot effect.”

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Friday
Jan222010

Dude, Is That Gold Bar for Real?

By Doug Hornig, Sr. Editor, Casey’s Gold & Resource Report


As the 10-year gold bull continues its stunning run, rumors of fakery seem to be cropping up as fast as new Eagles can be minted. Should you be worried? Do you need to run to the coin shop for a home test kit?

Well, the counterfeiters are out there, and have been for millennia, but how to counter them?

You probably remember movies about the Old West, wherein a shady-looking character would offer to exchange a gold coin for a horse, and the nag’s owner would bite down on the coin. That was about all you could do, if you lacked proper assaying equipment and had to make a snap judgment on the fly: depend on your teeth to tell you whether the metal in your hand was sufficiently soft to be genuine gold.

The bite test is actually a pretty good one since gold, despite being among the heaviest metals, is also very soft. If you chomp down and shatter a tooth, it ain’t gold. But does that mean you need to munch your way through your coin collection? In a word, no.

Not that faking coins would be that hard to do. This is the 21st century after all, and if there’s one thing we do well, it’s making copies of things. Given contemporary 3-D laser imaging, a die could be created that mimicked the real deal in perfect detail. It’s not as if you could hold your coin up to the light and see the kinds of safeguards built into paper currency these days.

Predictably enough, counterfeiting concerns eventually hit the Internet. About a year ago, the blogosphere bloomed with doomsday warnings after the publication of a series of articles in Coin World, dealing with the subject of coin counterfeiting in China, where it’s quasi-legal. The Web was abuzz with the worries of coin holders and eBay shoppers, as well as the pontifications of pundits about the coming flood of knockoffs from the far East.

Now that didn’t seem right to us. We’ve been at this a goodly while, and we’ve never heard of anyone being slipped a fake Eagle or Maple Leaf. Just to be on the safe side, though, we checked with a dealer of 30 years’ experience and got the same answer. Nope. Only seen a couple over the past three decades.

The thing is, it’s really impractical. Any counterfeit bullion coin would have to be gold in order to pass. If it were pure, then what would be the point? And if the counterfeiter skimped on the gold content, the coin’s weight would be a dead giveaway. The only alternative would be to gold-plate a coin made out of some other metal. But again, getting the weight right while preserving the correct size would be a challenge. In the end, there’s just not enough of a profit margin to make it worthwhile.

The exception is rare coins. These can be made with the proper gold content, then artificially aged so that only an experienced numismatist could pick them out. Because of the premium they command, faux rare coins made with real gold could be highly profitable where a bullion coin would not.

This is one of the reasons (impartial grading is the other) why many collectors will only trade coins graded and slabbed by third-party specialists like Professional Coin Grading Service (PCGS) or Numismatic Guaranty Corp. (NGC).

Ominously, though, some counterfeit coins are turning up inside phony slabs, and the graders are taking the threat seriously. Both the major services have warned about this, with NGC providing guidelines about how to spot fakes of their slabs here http://www.ngccoin.com/news/viewarticle.aspx?IDArticle=954 . The counterfeits all seem to be originating in China, so one prudent response would be not to trust rare coins offered for sale from that country, especially on eBay.

Gold bars are a separate category. Fakes do show up in the market from time to time, and they’re hard to identify. Generally speaking, counterfeiters don’t bother with the smaller ones, which are stamped, numbered, and sealed. They concentrate on 1-kilogram or larger sizes. These are poured, rather than stamped, and can be easily adulterated or even hollowed out and filled with some other, cheaper metal.

And that’s exactly what has happened, on a massive scale … at least if you believe the rumor that exploded across the Net late last year, stating that “someone” in Hong Kong had blown the whistle on thousands of tungsten-filled 400-oz. “gold” bars that are now circulating throughout the world. Others picked up the story and ran with it, some going so far as to allege that Fort Knox is filled with 640,000 fakes. Either because we were duped many years ago, or because the government deliberately put them there to hide the fact that most of our gold is gone. Take your pick.

That tungsten was cited as the culprit is no surprise, because it’s the metal of choice if you want to imitate a big chunk of gold. Put some gold plating on tungsten and it will fool all the cheap, non-invasive tests, such as specific gravity, surface conductivity, scratch, and touch stone. For a conclusive result, you have to drill into the bar, take a core sample, and submit it to more sophisticated verification techniques – fire assay, optical emissions spectroscopy, or X-ray fluorescence – and that involves a lot of time, trouble, and expense.

The market, of course, long ago realized it would be a hassle to fully assay every large gold bar every time it changed hands. That would create bottlenecks all over the place. Thus, to facilitate liquidity and protect large traders, the London Bullion Market Association (LBMA) came up with the good-delivery bar system, otherwise known as the “good delivery circuit.”

The system begins with a group of accredited refiners, all of whom have been certified by equally accredited assayers. The refiners manufacture the 400-oz. bars, applying their stamps and serial number before sending them out. Requirements for making and remaining on the LBMA’s good-delivery list are stringent, and those on it zealously guard their status. It’s of great importance to them because most of the vaults to which they ship product – the next step in the circuit – won’t accept anything but good-delivery bars.

This thing isn’t foolproof, nothing is, but it ensures a pretty decent paper trail, a formal, recorded history of who held the bars, when, and in which approved facility – all the way from refiner to end user, whether that be an individual, a central bank, or an ETF. No buyer wants something from a non-accredited seller, and no one else in the chain wants to get fingered for supplying phony gold. That would get them kicked out of a very lucrative loop, and sued into the bargain.

What about gold bars that come from a non-accredited source or are otherwise circulating outside the good-delivery circuit? That could mean you. You’re not part of the circuit to begin with. And yes, if you bought something that wasn’t good-delivery certified, the possibility that you have acquired some fake gold exists.

If you’re concerned about the source, you might want to have your gold assayed in order to alleviate your worries. This will become an issue when you choose to sell. In that instance, a dealer will almost certainly require an assay as part of the bargain, even if you have the chain of custody paperwork and it all checks out. And you can’t blame him. There’s no way he can be certain of what you did to it while it was in your possession. The only exception might be if you have a long-standing, mutually trusting relationship with him, originally bought it from him, and are selling it back to him. But even that’s no guarantee. What you most emphatically want to avoid is the worst-case scenario: arranging a sale, then having your gold flunk an assay, laying you open to charges of fraud.

If you sell to another private owner, rather than a dealer, he will surely ask for an assay, and you shouldn’t be offended if he does. Nor should you hesitate for an instant to demand one if you buy from a private party. Although this is not a recommended way to acquire gold bars, it may be possible that something comes along that you can’t refuse. Just be very careful. If someone has a gold bar for sale but is in too much of a hurry to wait for an assay, walk away.

Your takeaway from all the hoo-hah about tungsten bars should be that whenever a sensational rumor like this hits the Internet, and it doesn’t immediately graduate to Bloomberg, you always have to ask why. Financial reporters read blogs, too. You can be sure they’ve seen the rumor and asked the obvious questions: What’s the source? Who are the people who reported the appearance of the tungsten bars named? For that matter, why aren’t they raising holy hell if they’ve been ripped off? Where are the lawsuits? No serious journalist who can’t turn up the answers is going to give the story credence.

If it were true, the appearance of several thousand tungsten bars, for each of which someone has been suckered into paying a hundred grand or more, this would be big, big news. It wouldn’t stay confined to a few websites for long.

This isn’t to say that someone good isn’t digging deeply into this story right now. Nor that they won’t be able to prove it out. It is to say that, more than likely, the rumor is false.

In summary, there’s no reason to believe that there is a real issue with counterfeit bullion coins at the moment. That doesn’t mean they don’t exist, nor does it mean that evolving technology might not make them more profitable in the future than they are now. If you’re at all worried, simply deal with someone you trust. Establish a relationship with a gold dealer who has built a strong reputation, preferably over a matter of decades. Buy from them even if you stumble across some mail order supplier who is charging less of a premium.

Some basic guidelines:

For coins, avoid “commemoratives.” Stick with universally recognized government bullion coins (American Eagle, Canadian Maple Leaf, Austrian Philharmonic, Australian Kangaroo, South African Krugerrand).

For small bars, purchase only those that carry the stamp of one of the known, trustworthy refiners, such as PAMP, Credit Suisse, or Johnson Matthey.

For bigger orders, 1 kilo and up, ask your dealer if he has an assay or is willing to have one done. If you want 100 ounces, insist on an assay or consider buying directly from the Comex, which means you’ll be assured of getting a good-delivery bar that has never left the circuit. And the Comex will also vault it for you if you like. Do not, under any circumstances, buy a larger gold bar on the Internet; we’d even balk at buying coins there unless it was from someone we already knew.

We don’t believe there is reason to be concerned about bullion coins, but if you are the supremely cautious type or perhaps already own some commemoratives, there are tests you can perform at home to check them out.

First off, you can simply apply a magnet. Gold is non-magnetic, but if you’re unlucky enough to have gold-plated steel, it’ll stick.

Size and weight are good measures. Get a scale calibrated to hundredths of a gram. If a bullion coin weighs light (or possibly heavy), it’s bogus. Here’s a handy list of the major gold coins with their weights, diameters and thicknesses: http://www.onlygold.com/TutorialPages/Coin_specsFulScreenVersion.htm

Since real gold has a higher specific gravity than other metals, you can test for that. Many Internet reference sites will tell you how.

You could buy a commercial counterfeit detector. They aren’t cheap, but will quickly and easily perform the basic tests.

If you have any suspect, non-governmental coins and happen to have some nitric acid handy, you can immerse your coin in the acid. Base metals will react, gold won’t. However, this is not something to try unless you are highly competent at handling dangerous chemicals; you do not want to test your skin along with the coin. In addition, of course, if you do have an alloy coin, the acid will ruin it.

Rare coins are more of a challenge. If that’s where your interest lies, look for specimens that have been graded and slabbed. Buy from someone you trust. Never fall for a salesman’s pitch that a particular numismatic coin is a premier investment, sure to double your money. Don’t merely dabble in this area. What’s best is if you’re in it because coin collecting becomes a hobby you’re passionate about; worst is if you know and care nothing about what you’re buying. Read up on the subject, examine coins, get to know what the real thing looks and feels like, learn to spot the kinds of imperfections that characterize phonies. Become your own expert, or else risk being the dupe of the day. And if you do decide to pick up something on your own, send it to NCG or PCGS for grading. You’ll quickly learn whether you’ve been had.

Precious metals are going to be attractive to con artists, just like anything else of real value. No question about it. But there are some decent safeguards already built into the system. If you supplement them with your own knowledge and common sense, it shouldn’t be difficult to avoid becoming a victim. And for goodness sake, look after your own interests and don’t fret about what’s in Fort Knox. If it truly is full of tungsten, so much the better for your own holdings.

Right now, gold is off its recent highs… so, as believers in sound money, the Casey folks are stocking up on their yellow metal before its price resumes its journey to the moon. This is the time to learn everything you can about how and from whom to buy gold, where to safely store it, gold proxies, and major gold stocks. Get Casey’s Gold & Resource Report for just $39 a year – click here to learn more.




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Thursday
Jan212010

Gold and Silver Update

President Obama.JPG

The DOW dropped 213 points today apparently on the back of the President Obama's stated intent to regulate the banks causing the Bank of America, for example, to fall 6.13% shortly afterwards. Is he really going after the banks with a big stick or is this a smoke screen for the dramatic political failure in the state of Massachusetts?

The loss of Massachusetts to the opposition would appear to sink the health care legislation which is a big blow to the President.

Either way the precious metals also took a pounding with both gold and silver dropping significantly. The HUI Index lost 19 points to close at 403 leaving our portfolio covered in red. The dollar closed at 78.38 just below its 200dma and appears to be the place to run to when the stocks sell off. So we now need to watch this situation closely as some of our favourite stocks could present us with buying opportunities and possible options trading opportunities. As we have said many times this is and will continue to be a very volatile ride, with $50/oz to $100/oz up and down days, its a white knuckle ride. The bull will try to throw you off, all we can say is hold onto your core positions and look to take advantage of these dips as they come along with the cash that you have in your trading account. Please don't hit any one idea too hard as it can hit back very hard when we get it wrong.

So back to the charts, stay alert and on your toes we may have to move fast. Do take a look at Agnico-Eagle, Kinross Gold and Silver Standard as they appear to have suffered a tad too much in this sell off.

Gold and silver will of course determine the direction of the stocks so we would like to see them both settle and find support before we pounce on our next trade.

Finally we have this:


A missive we received from Jim Sinclair, if you have the time it is well worth visiting his web site called MineSet, just click here.




Because of paper gold, market games can be played. What cannot be done is for paper gold to produce bullion.
 
The bullies can attack the paper gold market in unison, but they cannot create supply in real bullion with the ease of highly leveraged paper.
 
The pros depend on the under-financed public to stampede under the pressure of fear of loss.
 
Believe me, I used to run the locals (pros) all over the lot, and on occasion I got significant paybacks.
 
However, in the final analysis all we did was add noise to a market that went from $40 to $887.50 Real gold (bullion) is in meagre supply.
 
What that means is algorithms must lose and fundamentals must rule.
 
All the violent trading resulting in ever increasing volatility in the gold price is but manic noise inside of a major uptrend that will make me look bad for having been too conservative in my year 2000 price objective of $1650.
 
If you had lived through a top in the gold market, you would know that without any question whatsoever, this is not it.
 
Ignore those writers who wish to sell a service by feeding on your fear. Gold is going to and through $1224.10 on its way to $1274-$1278. Following that it is on to $1650 and Armstrong and Alf's numbers.
 
Respectfully yours,
Jim


So there you have it.

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Tuesday
Jan192010

Oceanagold Corporation Going Places

OGC Chart 20 Jan 2010.JPG

As we can see from the above chart this stock has been making pretty good progress of late, as each news release brings more good cheer to their investors.

For example 18 January 2010:

(MELBOURNE) OceanaGold Corporation (OGC) is pleased to announce an increase of 259,000 ounces of gold to the mineral reserve inventory at the Macraes mine in Otago, New Zealand, which extends the mine life out to at least 2016.

These reserves are in addition to the Company’s December 2009 announcement of an increase of 495,000 ounces of reserves. When combined, this brings the total additional gold reserves at the Macraes mine to 754,000 ounces.

The Company’s assets encompass New Zealand’s largest gold mining operation at the Macraes goldfield in Otago which is made up of the Macraes open pit and the Frasers Underground mines. Additionally on the west coast of the South Island, the Company operates the Reefton open-pit mine. OceanaGold expects to produce approximately 300,000 ounces of gold from the New Zealand operations in 2009. The Company also owns the Didipio Gold-Copper Project in northern Luzon, Philippines.

OceanaGold Corporation (OGC) is a significant Pacific Rim gold producer, with a diverse portfolio of operating, development and exploration assets. Assets are located on the South Island of New Zealand and the Philippines.

This company has a market capitalization of $397.78 million, with a 185.88 million shares outstanding, a 52 week low of $0.28 and a high of $2.14 and a P/E of 8.14.

Don't that you cant find it they are appearing on a screen near you, OceanaGold Corporation trades on the Toronto Stock Exchange as OGC and the same on the Australian Stock Exchange and the New Zealand Stock Exchange.

We don't own it yet but we are taking an interest and looking for a suitable entry point, however you cant always get a 'dip' just when you want one.


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Sunday
Jan172010

Gold-prices.biz portfolio Update 17 January 2010

Gold Chart 18 Jan 2010.JPG

Gold is currently standing at $1130/oz having ran up to $1220/oz before a December rally by the US Dollar brought about a correction in gold prices. We have warned in the past that this is a volatile sector and the last few months have been turbulent, however the trend is still up despite this recent correction as the above chart indicates.

Our portfolio as been updated as follows:

Randgold Resources Limited (GOLD) On the 18th of June 2008 we bought Randgold Resources Limited for $37.65. This stock quickly rallied to $55.00 before being caught in the ensuing sector sell off to trade as low as $27.70, on the 28th May 2009 we sold our entire holding for an average price of $68.69 for a return of 82.44%. This is a quality gold producer so we waited patiently for a suitable entry point at cheaper price levels as per our post “ Randgold: As Good as it gets”when Randgold traded at $58.71 and we wrote the following:


On balance we think that this may be as good as it gets for Randgold and that a purchase here would prove to be a profitable one, however we are looking for an absolute bargain and have chosen to wait a little longer. This decision is not unanimous within our team so as always the final decision is yours and yours alone to make.

If you made a purchase at this point then well done, however we held out too long and missed the buying opportunity by being too tight, rats! Randgold is now at $81.41.

Agnico Eagle Mines (AEM) we originally paid $30.88 and it now stands at $31.15. On 31st January 2008 we reduced our exposure to this stock and sold about 50% of our holding for an average price of $63.27, locking in a profit of 104.8%. On the 24th July 2008 we bought again at $59.17 doubling our position with the average cost now standing at $45.03. Agnico Eagle traded at $71.27 at the last update but due to mine commissioning/start up problems the stock was aggressively sold off and closed recently at $57.02, having suffered through dramatic oscillations.

Kinross Gold (KGC) we originally acquired Kinross at $10.08, Kinross then went through a bit of a pull back so we signaled to our readers to “Add To Holdings” at those discounted levels of around $11.66. We also gave another ‘Kinross Gold BUY’ signal when we purchased more of this stock on the 20th August 2007 for $11.48. On 31st January 2008 we reduced our exposure to this stock when we sold about 50% of our holding for an average price of $21.96 locking in a profit of about 93.60%. On the 24th July 2008 we doubled our holding with a purchase at $18.28 giving us a new average purchase price of $14.50. Kinross closed on at $19.58 on Friday, we had expected a better performance.

Silverado Gold Mines (SLGLF) we bought at $0.08 and on 12th October our patience with its poor performance came to an end and we sold the lions share of our holdings for $0.018, it now stands at $0.0076. We have retained just a token amount of stock in the event that one day they do find the elusive mother load but we are not holding our breath. The stock dilution is such that there are now 1.5 billion shares in the company, just a tad too many in our opinion.

Yamana Gold Incorporated (AUY: NYSE) we paid $9.37 on 27 September 2006, and we bought again at $12.89 on the 7th December 2007 and so our average price moved up to $11.13. On 31st January 2008 we reduced our exposure to this stock and sold about 50% of our holding for an average price of $16.50 locking in a profit of about 49.41%. Then on the 3rd April 2008 we bought our Yamana position back at $14.43 in expectation of a bounce, which arrived on The 23rd May 2008, and we sold for $16.00. On the 11th July 2008 we bought again at a price of $14.95 taking our average purchase price up to $13.04. This stock closed at $11.59 yesterday, so we are still looking for a significant increase in the stock price.

High River Gold Mines: (HRG: TSX) We bought this at $2.49 and we increased our position in the company on December 7th, 2007 and we are still holding on to it despite the wrangle of being acquired by others. HRG closed at $0.76 yesterday, up from $0.44 at the last portfolio update.

Fronteer Developments Group (FRG) Fronteer was originally bought as both a uranium and gold play as FRG owned the lion’s share of Aurora Energy Resources making it a gold/uranium play. On the 24th September 2007 we sold 50% of this stock for an average price of $10.44, banking a profit of 122%. Fronteer is currently trading at US$5.24 so we are now in positive territory with this portion of the purchase as our our original purchase was made on the 15 July 2006 at around the $4.70 level, so we are sitting on a small gain at the moment. Still expect this group to do a lot better and it is getting there slowly.

Fronteer Development Group Inc., has now acquired all of the remaining common shares of Aurora Energy Resources Inc. So this investment is well and truly a two pronged attack via both gold and uranium.

Options Trades:

We attempted two options trades since September and they are as follows:

The first trade was with Randgold:

On the 1st December 2009 we wrote: We are pleased to report that today we closed our position in Randgold Resources Limited (GOLD) by selling our Call options at a profit of 100%.

On 8th October 2009 we purchased Call Options on Randgold Resources Limited (GOLD) they were the December 2009 series with a strike price of $80.00 (GUDLP) and we paid an average of $4.70 per contract for them. Today our sell order was triggered at $9.40 as gold prices traded as high as $1200/oz and Randgold gained over $3.00 per share.


The second trade was with Agnico-Eagle:

On the 1st November 2009 we wrote the following after this stock had just taken a hammering:

In conclusion we think that the punishment does not fit the crime and that the selling has been overdone. So we see it as a buying opportunity. This week we will seriously consider making another purchase of the Agnico’s stock and may also buy a few of the longer dated Call Options.

Our approach was to wait until the carnage had settled and the panic selling had subsided with Agnico showing signs of recovery. The trading session started with Agnico looking a little sluggish so we low bid the Call Options with no luck. Then gold popped up and Agnico followed at a rattlingly good pace, we tried to be patient and reviewed the charts and our research again and decided that this stock should be trading at $75.00 or so so we took the plunge, rightly or wrongly and acquired some Calls.

We bought the JAN 2010 series at a strike price of $60.00, symbol AEMAL for an average price of $5.10. The series finished the day with a bid price of $5.50 and an ask price of $5.70, so not too bad a start. If you pop back to the 13th October 2009 these very same contracts were trading at $16.22 so they have fallen dramatically of late. Lets hope that they can bounce back to those levels and quickly.

On 2nd December 2009 the options were up 81.46% when we wrote:

we had placed sell orders at double the purchase price so its fingers crossed that the old Buzzard can hit $10.20 in the next day or two, which would give us a return of 100% in one month.

Alas, this wasn't to be as gold corrected and took us south rather quickly.

So we decided to average down by purchasing more of the same Call Options at an average price of $0.90 just before the close on Friday thus reducing our average price to $1.28, writing at the time that it is a real gamble when trying to predict the price movement of a stock over such a very short time frame. Again these options started well enough to trade as high as $1.80 before falling back so we then reduced our exposure and commented as follows:

Team,
Sold around 50% today at about a $1.00 as the market faded. There were opportunities to sell earlier at higher prices but we decided to wait. Lets see what tomorrow brings.


Gold Chart 13th Jan 2010.JPG

Tomorrow arrived and gold falls taking our options down with it so today we sold the remainder of our contracts for around $0.20 per contract, registering an overall loss on this trade of approximately 50% of the cash put into it.

In conclusion we played this one really badly, the use of stops and had we taken some profits when they were presented to us would have given us a far better result. In future trades we will certainly try and take steps to lock in profits once they are there as they cant all work out as good as Randgold did. On the other side of the track our options trader is doing very well having closed 7 trades, with an average gain of 51.17% in an average of 37 days per trade, worth a look.



Trading decisions belong entirely to you as your circumstances are different from ours and we trade to suit our investment criteria and cash position.

Have a sparkling week and please feel free to share your comments with our readership.

Conventional wisdom suggests having 5% or so of your portfolio in precious metals with some commentators upping this figure to around the 15% mark. We however are far more cavalier in our approach to investment and only invest in the precious metals sector such is our enthusiasm for it. We currently have 85% invested and 15% in cash.


To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address.

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

For those readers who are also interested in the nuclear power sector that is currently coming back to life, you may want to subscribe to our Free Uranium Stocks Newsletter, just click here.