by Travis Johnson, Stock Gumshoe | July 15, 2013 2:57 pm
Shah Gilani[1] has a new pitch going around for his Capital Wave Forecast[2], all about how the short-selling and manipulation by the six big bullion-trading banks brought the “flash crash” in gold[3] and drove it lower … but will certainly drive it higher now that the move is done, with his expected price of $2,500 an ounce in the next year.
Which is interesting, I guess, though he’s generally a short-term trader so I expect his picks to play off of this move will not be in his portfolio for a full year from now. And the picks are both in that most maligned part of the market, the gold miners.
(Gilani’s service, by the way, is “on sale” for $1,199 a year — so you can buy it if you want to, or review it for us if you’ve tried it[4], but don’t buy it just to figure out which gold miners he’s keeping secret — that we can do for you. Free. Because we love you, and we want you to be happy.)
So we’ll try to dig in and figure out which stocks he’s teasing, as always, and give you a chance to discuss whether or not you think he’s right about the rise of gold over the next year as it recovers from this fall and then sets new highs … but first, let’s give you a little taste of the pitch so you can tell where he’s coming from:
“People have been trading with gold since 3,100 BC – that’s more than 5,000 years.
“But even in all that time, what’s been happening in the global gold market since April 12th of this year…
“Has never occurred before.
“And even though this historic occurrence is virtually guaranteed to send gold skyrocketing to $2,500 an ounce within the next 12 months…
“The financial mainstream is completely clueless about it.”
Of course, the gold market has never been this international or this liquid and aggressively traded in those 5,000 years either, nor often more jittery.
More from the ad:
“Nobody – anywhere in the media…
“Has even come close to reporting what’s really driving the gold market right now.
“If they had, you’d have spent the last three months pouring every penny you’ve got into plays on this situation…
“Like the two specific trades I’m about to show you.
“Now, don’t worry…
“It’s not too late to get in on these. And you don’t have to be a ‘gold bug’ to do it.
“You just have to stay with me here – as I blow the lid off this virtually unreported opportunity.
“And let me be clear about something right up front: I’m not talking about making a typical 20%, 30%, or 40% on your money…
“You could do that by simply buying gold – or even in the stock market at large.
“I’m talking about something that’s potentially 10 times as lucrative as this…
“A moneymaking move that could score those who know the truth potential gains of up to 456%!”
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That difference between a 20, 30, or 40% gain and the “potential gains” of ten times that much is the difference between owning the actual precious metal and owning a miner who’s leveraged to that precious metal, we’re told. And that more or less holds true — if gold is in a sustained uptrend and everyone’s feeling optimistic about it then the gold miners will go up faster than the price of gold itself, they are levered to gold and their profits should, if all else is equal, go up even faster than the price of gold.
Of course, “all else” is rarely equal — and gold miners sometimes fall when the price of gold is going up.
And, frankly, it’s the worst of the miners that are generally the quickest to rise when gold recovers. If it costs you $1,200 an ounce to mine gold and the price of gold goes from $1,250 to $1,300, your profit doubles … if it costs you $800 to mine gold and the price goes from $1,250 to $1,300 then your profits rise by about 11%. So be careful about predicting huge rises for less-levered or “safer” or lower cost miners — not that there are all that many miners that are really low cost these days, with labor and energy and exploration costs all rising — the most extreme profit leverage is for the highest-cost miners.
But anyway, the ad describes this year’s takedown of the gold price as a “secret market coup” — with April’s swoon, including the “biggest unexplained gold crash in history” … here’s some more from the spiel:
“The actual cause of history’s biggest and fastest collapse in gold prices…
“Was a secretive market ‘coup’ orchestrated by six of the most powerful behind-the-scenes gold traders on the planet: The bullion banks….
“… starting as early as January of this year, the six bullion banks…
“And a couple of the biggest trading houses they’re cronies with – again, whose names I can’t mention because of the potential legal ramifications…
“Began amassing huge short positions against gold.
“Based on days of global production needed to cover them…
“These leveraged gold shorts were almost three times the size of their next-largest commodity short bet – against coffee[5].
“And a whopping five times as large as their next closest metals short, on copper[6]…
“… for the bullion banks’ leveraged short plays to pay off huge…
“The gold market had to tank huge.”
So then this “coup” apparently moved forward by picking a perfect moment and nudging the market to believe that gold would fall even further …
“The next step in this ‘coup’ was to plot out the precise moment when a raid on gold would have the biggest impact…
“That moment turned out to be April of this year.
“Conditions were perfect to nudge bullion into a historic crash.
“At that time, gold prices had already steadily declined over a period of six months, and trading volume was thin….
“on April 10th, one of these “crony” institutions suddenly recommended that its clients short gold…”
And that was, we’re told, supported by a coordinated propaganda campaign in the financial press and among analysts and other “crony” banks to cut forecasts for gold and drive pessimism.
Which all served to soften up the market for the big attack — again, this is not me, this is coming from the ad for Gilani’s letter:
“The last step in the bullion banks’ coup was to flood the futures market with enough ‘paper’ gold to trigger a mass sell-off…
“The opening salvo of this attack happened Friday, April 12th – within minutes of the opening bell on the New York gold futures market.
“Starting just after 8AM…
“A stunning 3.4 million ounces worth of gold futures contracts for June delivery were dumped into the market all at once.
“The effect was immediate.
“In minutes, gold fell below an important psychological barrier – its 2012 low point of $1540 an ounce.
“But that opening shot wasn’t intended to crash the gold market…
“It was just to gauge the market’s resistance – so they could calculate how big their main attack needed to be in order to send gold into a tailspin.”
And, of course, that tailspin ensued — with a bigger “dump” of gold into the market later that morning, when everyone was already paying attention and when the London markets were still open. Then, according to Gilani’s ad, the stage was set for a weekend of fretting and an even larger crash on Monday …
“… by wreaking havoc with gold prices on a Friday, the coup’s masterminds ensured that for two solid days between trading sessions…
“The ‘gold crash’ they engineered would be front and center on every TV money show, every radio financial hour – even in the mainstream news.
“And that come Monday, when trading resumed…
“Bullion would crash all by itself on investor panic to get out of anything gold related.
“As you’ll recall, that’s exactly what happened. On mass investor hysteria, gold fell farther on Monday, April 15, 2013…
“Than on any other day in the history of money!”
And then, of course, we’re told that this is turning and that gold will recover now — because the same folks who orchestrated the collapse in the price of gold have begun acquiring gold. Here’s how they put it:
“What would convince you beyond any possible doubt that Shah’s right to predict a historic rebound in gold over the next 12 months?
“Yes – it’s if the bullion banks started accumulating long positions on gold.
“Well, barely a month after their “coup” to intentionally crash the gold market to cash in on their multibillion-dollar shorts…
“The bullion banks have suddenly completely reversed their stance on gold.
“That’s right: As of May 14th of this year, the bullion banks are ‘net long’ on gold for the first time in six years.”
So Shah Gilani told his readers on June 21st to go long gold because there’s a “Capital Wave” building to drive more money into the precious metal. He has four drivers of this gold wave that he says are pushing the bullion banks and other savvy investors to snap up gold now, I won’t go into great detail but here’s my summary of the four:
#1 — mining is in crisis. That’s a “no duh” statement. Depending on who you ask, the average “all in” cost of mining an ounce of gold is somewhere in the $1,100-$1,300 neighborhood, though some of that is “sunk” costs of exploration and construction or future costs of remediation that don’t impact cash flow immediately (that’s why you see miners report “cash cost per ounce” that’s typically much lower — big miner are moving to a more transparent “all in” standard for reporting costs per ounce but that will take some time before it becomes standardized across the industry. Barrick, by way of illustration, reported the old style “cash cost” per ounce at less than $600 in 2012, but “all in” costs were more like $950 an ounce for that year). When miners face margins this low they explore less, they mine less, they shut down mines, and they go for just their highest-grade deposits and cut volumes. All that means the actual production of gold could slow markedly with prices down below $1,300 … and slowed production should mean less supply. Which would, for those who remember economics class, mean higher prices. Unless demand falls even more quickly, of course.
Which brings us to #2 — China[7] is still buying gold. And more of it. They are not only keeping all of their production for the People’s Bank of China, but they’re also having their miners go out and acquire mines around the world to increase their supply of gold.
And #3 — Indian demand for gold jewelry is a huge driver of the global gold market, and it apparently jumped again when gold prices fell, even with a high import tax on gold. So he thinks Indian demand will continue to drive higher.
But #4 is apparently a less-covered driver of those future higher gold prices — Gilani says that Japanese pension funds are moving to small gold allocations for the first time, with deflation[8] in Japan being fought off and inflation a threat as they try again to drive down the Yen to spur export growth. He says a 1% allocation to gold among the big Japanese pension funds could drive the price back up to about $1,500 an ounce, and a 3% allocation would drive it above $2,200. He also says that’s just the start of the potential “hidden” demand that is coming out now that gold prices have fallen to more compelling levels, with gold buyers, particularly physical gold buyers, outnumbering the sellers at these prices.
So after all that, we’re back to the basic argument: Gold will rise, and if you buy the right gold mining[9] companies they should rise much more quickly than the price of gold. So what are his mining companies?
Finally, time to take the Thinkolator out for a spin — we do get a nice little pile of clues for our consideration today:
“THE WORLD’S LEANEST, MEANEST MINER
“The first miner Shah’s recommending may well be better able to thrive in the current pricing climate than any other gold miner on Earth….
“President and Executive Chairman are two distinguished veterans of the gold mining industry… they’ve both served as President or CEO of gold mining companies that are now practically household names… management is heavily invested in this company – to the tune of over $100 million worth of shares.”
That sounds pretty good — and we’re told that this is a “relatively new company” … and that they’re a low-cost operator:
“This company is heavily involved in all aspects of the mining process: Exploration, extraction, and refining. And they’re experts at all of it.
“That’s why they’re able to pull gold out of the ground for only $875 per ounce.
“This is far less than most gold producers – and miles below the $1,200 average global cost of extracting an ounce of gold….
“They also have some of the industry’s lowest costs for copper mining – which is a by-product of their gold mining.”
Any more clues? Just a few:
“… its mining territories are all in politically stable zones – places like the U.S., Canada[10], Australia[11], Chile[12] and Mexico[13]…
“You’d be surprised how often that’s not the case with miners.
“They’re also steadily increasing both gold production and revenue. From 2010 to 2012, they ramped up gold production 7.5%…
“But managed to grow their revenue more than 49% – to $791.3 million!
“Yet despite all the arrows in their quiver…
“This company is trading right now just off its 52-week lows – and well below its 200-day and 50-day moving averages.
“Their forward P/E is 14.9 – significantly less than the market’s P/E of 16…
“And their share price today is 40% less than the median analyst target for the stock!”
OK, that’s all we’re going to get out of Gilani and the ad about this stock — so who is it? Thinkolator sez: New Gold[14] (NGD)
New Gold does indeed have experienced management — Executive Chairman Oliphant and CEO Gallagher both came from major miners, Oliphant was CEO of Barrick Gold for a few years and Gallagher was a VP at Newmont, among other things. They are a gold miner with some secondary copper production, they have four operating mines and two developmental projects, and they are all in politically stable and generally mining-friendly countries. (They’re also trying to acquire another one, they have a takeover bid pending for Rainy River Resources that seems likely to go through — they’re developing a project in Ontario.)
And yes, the specific are a perfect match too — they did report revenue of $791.3 million in 2012, the forward PE is a discount to the market (though that depends on which estimates you’re using, of course — the forward PE is somewhere between 12 and 15 depending on the source … trailing PE is just over 15.
And like most gold miners, it has recovered over the last few weeks but is still very close to the 52-week lows — and in New Gold’s case, they just bumped back up over book value, though book value could certainly change the next time they report their results. That will be on the morning of July 31, in case you’re wondering. They did also report in their last quarter that their “all in sustaining costs” were $875 an ounce, and that they don’t see that changing significantly through the rest of the year — their “old style” cash costs that don’t incorporate are less than $500 an ounce, thanks to copper and silver[15] byproducts. Copper and silver are obviously not doing really great either at the moment, but still, that does help the gold cost and they are a relatively new and relatively low-cost producer of gold.
And that’s about all I know about ’em. If you like the looks of this “Leanest, Meanest Miner” then please chime in and tell us why.
How about that other pick of Gilani’s? Here are the clues:
“CHINA’S SHARKS ARE CIRCLING THIS MINER
“Shah’s second gold mining company is a horse of a different stripe…
“But that doesn’t mean it’s not potentially just as lucrative.
“It’s a firm that’s taken some lumps in the last year – and according to Shah, that’s part of what makes it attractive.
“Right now, its price is beaten down because of a prolonged work stoppage at one of its two gold mines.
“That’s one of the reasons it’s trading at just off the bottom of its 52-week range – and is down 40% over the last three months.
“But it won’t stay that depressed for long…
“Because the labor standoff has just been resolved – and the affected mines have been re-opened.
“Which means that its share price is likely to bounce back up to where it’s supposed to be at virtually any minute…
“Especially since Goldman-Sachs just upgraded the stock!”
And apparently it’s a takeover candidate, with the Chinese looking …
“The ‘twist’ on this company is that it’s very likely one of the most attractive takeover targets on the planet…
“According to Shah, at least one – if not multiple – Chinese state-owned gold mining companies are licking their chops over this firm right now….
“… this company is a recent spin-off of a larger mining firm.
“That means it’s got far less baggage than a bigger, older miner might bring to the buyout table. It also means that it’s cheap.
“In fact, at a market cap of right around $700 million…
“This firm is right in the sweet spot for any Chinese miner bent on growing bigger without breaking the bank.”
And we’re told that this miner’s assets are in Africa[16] — but not the “politically unstable” part(s).
So who is it? Thinkolator says that Gilani’s second pick is almost certainly: Sibanye Gold Limited (SBGL)
And yes, this is a South African mine — so your interpretation of whether they’re really in the “low risk” part of Africa may or may not be the same as Gilani’s, South Africa is host to several world-class gold mining operations but it’s also host to serious issues including labor unrest and power access that have brought down the South African miners, including Harmony Gold (HMY) and AngloGold Ashanti (AU). Sibanye did get an upgrade from Goldman Sachs a few weeks ago[17], though that followed their downgrade of several African gold miners a month earlier[18] that followed the familiar “costs are too high, politically unable to decrease production or staffing” argument that many have used to sell these miners.
Interestingly, according to those notes on the upgrades and downgrades the upgrade was just to “neutral” and Goldman is generally negative on the prospects of African miners, partly due to upcoming union negotiations … and the revenue vs. cost issue didn’t disappear in the month between the downgrade and the upgrade, the price of gold actually fell during that time and the price of Sibanye shares didn’t change much. Their prolonged stoppage and most recent labor issue has been over one of their shafts that had a significant enough fire that they’ve pretty much abandoned it, which means they had some “redundant” workers — not sure how that will shake out, but it is just one shaft in one of their two mines.
Oh, and yes, this is a spinoff of one of the major global miners, Gold Fields (GFI), which held onto one South African mine but spun off the Beatrix and KDC Mines. It was a true spinoff, not an IPO[19] or anything, so as far as I can tell GFI does not own any SBGL shares. Sibanye did announce that they were looking for Chinese investors to fund their expansion in Africa, with the goal of acquiring other assets, but that was back in February when they first traded as a separate company and I don’t know what has come of those goals — they could certainly be talking with Chinese investors, as I expect most miners are these days. There aren’t many other places to go for capital at the moment if you happen to be a gold miner in need of some backing.
So … will Sibanye and New Gold have tremendous years on the back of Gilani’s projected climb in the price of gold? Will gold actually rise back to $1,500 and give all the miners a sigh of relief … and then hit $2,200 and make them all rich again? Well, that I can’t tell you. My personal thinking is that gold is likely to do better than the US$ over the coming decade … but that’s thinking, not knowing, and it sure doesn’t mean I have any idea where the price of gold will be a year from now, so if you’ve got your forecasts ready feel free to share them with a comment below.
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Who would pay $1199 for a couple of lousy gold picks that may not move up? I belonged to Mr. Gilani’s advisory before but quit after realizing he was just another over-hyped self promoter with nothing special to offer. My feeling now is that the best way to invest in gold is buy the one ounce real things and stay away from stock market promotions.
My gut feeling says AU will go up- for a bit, then back down. People want to hold gold physically and are willing to pay for that “pleasure” . BUT
Take a look at the output capacity numbers of the miners and then contrast that output with world demand.
Funny- Output is a bigger number than demand.. Meaning to me any miner investment now needs to be watched and abandoned when it starts down again.
Well, the ETF NUGT has been beaten down so hard this year that it only can go up. More downside is virtually impossilble I would say. Trades around 5.50USD and was once over 200USD when gold was 1900USD. You do the math.
Could certainly be true, but be careful about those “down so far it can only go up” assessments — you can lose 100% from $5.50 just as easily as from $200. Maybe more easily. That’s triply true of the leveraged ETFs like NUGT, they don’t compound or hold value at all if the underlying asset they’re tracking isn’t consistently rising — I’ve seen several of them seem like they had lost as much as they possibly could, going from $100 down to $10 and down to just a couple dollars, then they do a reverse split and keep going. Of course, if gold shoots up by a couple hundred dollars in a series of rapid fire “up” days, NUGT will probably do spectacularly well.
3x ETFs are for gamblers. They should be made illegal IMO.
While not prepared to join the “analyst bashing” engaged in by AIB because I have been reading Shah Gilani for many years, and KNOW he has made some excellent picks in the not so recent past. I do agree that paying $1200. for 2 picks would not be a wise use of capital. but trashing him because of the failure of a few picks would hardly be a balanced approach, and who knows, he may still prove to be right in the longer term.
As to the ACTUAL picks cited by Travis, I have not done enough research to express an opinion as to their accuracy, though New Gold would seem to be a good choice to fit the clues given, and one I have on my buy list when the time is right! Would like to buy it a little cheaper than available now, so it could be a candidate for PUT selling hoping to pick it up 20% cheaper, or at least make some money towards a future purchase once the market shows a sustainable uptrend.
I have recently read some reports on Chinese interest in African Barrick, but there were some problems, so maybe they have targeted Sibanye as an alternative, even if only to get themselves a better price on their original target. Personally I would not buy ANY S. African gold miner until there is a clear resolution to their power and union problems. There have also been rumours that the Chinese might take a run at Barrick itself, and after writing down their high cost (CAPEX) mine high in the Andes with high proven resources, the Chinese could indeed finance development if sufficiently interested in the VOLUME it would produce for them. At a recent $14.98, (60% drop Y/Y) and more like 100% from its highs, ABX looks like a bargain on the surface, (I was tempted) but I would have to hold my nose to buy this stinking and grossly overpaid management history even at these prices. Even with new management, it would have to prove itself pretty substantially before I would seriously consider owning it, however, option plays based on reliable news could be potentially profitable if indeed takeover bids materialize.
I subscribed to his Short-Side Fortunes about a year ago. I set aside $8000.00 to trade with. I just closed out my account with $200.00! Don’t trust this Guy! He knows nothing! He’s just another Storm and Gloomer trying to make a living off of negative headlines!
Then there’s Harry Dent, predicting $750 gold, but no “when” or what happens between now and then. I’ve seen the coefficient of variation of predictions as
heme
correction: I’ve never seen the coefficient of variation of predictions as wide as this in commodities. The metal is clearly manipulated by Central and Bullion Centered Banks.
Apologize for hitting the send too early.
heme
New Gold has to be the stock mentioned first. Great company and if you want to roll the dice a little, the warrants don’t expire until 2017. Giddy up!
fyi
http://newgold.com/investors/share-structure-and-warrant-information/default.aspx
I wondered if you would pick up on Mr Gilani’s teaser on the gold miners. Thanks very much for excellent analysis. Well up too your usual high standard.
New Gold seems to be a solid pick with low costs. GG Goldcorp compares. I would think twice about an African Junior, and Sibanye would not be my first in this area. I would go for Pan African Resources PAF.LSE on London stock exchange. It is quoted on JHB EX too but the LSE full details via the FT are much better. Check out the Return on Investment, very good in absolute terms but especially for a gold miner. Production costs are in the $800 to $900 range. They expect to restore the dividend this year.
This essay seems a balanced perspective on NGD:
http://seekingalpha.com/article/1551972-new-gold-s-consistency-in-a-volatile-market?source=yahoo
Namely, present mines are getting depleted and the undeveloped mines they own will take a long time to get going–if they can get permits, which is itself controversial.
I recall briefly subscribing to Shah’s newsletter when he urged shorting gold. As I recall gold was somewhere between $900 and $1100 per ounce at the time. So, Shah is a swami who claims to catch falling knives between his teeth. But he doesn’t look like he sleeps on a bed of nails.
Investors should note this well: You Need To Minimize Risk.
I do not think that gold and silver has bottomed yet! But on the other hand a bit of insurance is a good idea. The TBTF banks are a lot more fragile due to derivatives than most people think. A Lehman moment is a lot more risky today as it were in -08.
PM´s can skyrocket for a lot of reasons in a very short time. So play it safe with 10% of investment in PM miners.
Good detective work Travis.I red the Gilanis pitch and you saved me al lot of work.I can only ad that NGD chart looks interesting it did cross the Golden Cross that is it crossed the 50 day movin aveage now @ $7.03. Arket Cap 3.4 B Sares477M did not uncover any financial metrics so far.I did nor pursue SBGL.Cheking on Rubicon RBY.
My Thanks
This appears to be a more relevant discussion now given recent PM movement… Does Sibanye still look like the second, smaller pick.
Proof is in the pudding … his forecast for Gold prices was no where near correct!
Bought New Gold last May. Up 41% since then. I’ll take it, gladly
As you should! Though at the moment, with the huge surge in gold stocks over the past month, it’s worth noting that the fundamentals of an individual miner might not matter all that much to investors. New Gold is a decent-sized miner, it’s one of the smaller components in the GDX index, and that index is up 24% since May. The smaller index of “junior” miners, represented by GDXJ, contains more companies that are comparable in size and assets to NGD, and that’s up almost 50% over that time.
Hi Travis, many thanks for your exposition a while back on Sandstorm Gold $SAND. I have called it “The GDXJ with brains”. They are weighted to the best deals they can find, instead of market cap. They had a few hiccups with some early deals but I love Nolan Watson and I love what they are doing. It has become a foundation pick for me.
As far as the meanest leanest, my vote goes to Ivanhoe Mines. They are so lean they are almost not mining. A super optionality play in base metals and platinum group metals.