1. The majors.
The least understood part about them is
their serious short of gold derivative problem, and the balance sheet and
price of cover implications thereof. No one will deny that they get
the most attention because they have the capitalization required and the brand
name that invites institutional buying.
Not much attention is being paid to the fact
that they have sold their gold years into the future
at prices well under $400. Their calculations on their sales price of
the short of gold adds in the interest paid to short of physical bullion over
the period of the short position into present time calculations as per their
risk disclosure filings. Yes, if you sell physical you get paid interest, and
if you buy physical on the cuff you pay interest in all the major cash
markets. OTC derivative short of gold factors interest, yet to be earned, into
the reported sales price going out in time. When they close the transaction
before maturity, as is happening now, the debit does not include unearned
interest and therefore charges at the real lower sales price. That is why the
majors are borrowing their billions. This will
limit their gain versus the gold price as it rises.
2. Junior producers
These are entities that have opened
production facilities which are modest or not yet at full capacity. In the
main they have the same problem but it is less visible. Recently the
trend has been to bury the OTC short of gold derivatives in the loan
documentation, but it is still there with somewhat the same effect. What
matters is when the loan was made. The more recent it is the higher the short
strike price in the OTC derivative and therefore the less the loss the company
faces.
3. Exploration and development companies.
These issues have been the favorite of the mix
of all gold share categories for short operations. The gold explorer business
is capital intensive, so if the price can be depressed, the short starves the
company of its ability to finance. Before you can have production you must pay
all the costs of exploration which usually comes from seed capital. In the
last five years there has been practically NO seed capital anywhere for gold.
4. Other companies
There are other categories and as a company
transmutes between categories. In this unprecedented gold bull market price
adjustments should occur with category transmutation of gold entities as they
climb the ladder of success.
There is a separate group known as Senior
and Junior Gold Royalty companies that will
generally outperform as hyperinflation that impacts mining costs occurs. This
out performance should be a product of the cost of production falling upon the
royalty partner, not the royalty holder whose participation is an amount of
the gross production.
There is the exploration company that
begins production and therefore moves up the scale toward the category of
junior producer. Usually this is accompanied by
improvement in price as many investment entities will not buy non-producing
exploration companies.
There is the exploration company that has
success and will be evaluated by the quality of its success and deal making.
Historically success and deal making for such a company increases interest in
the company.
It has been almost 30 years since any
meaningful segment of the general marketplace has taken an interest in gold
shares. Most mineral underwriters have moved away from all but the Major
Producer category. When was the last time you saw any known, respected mineral
underwriter working for companies in the bottom half of the Junior Producer or
any Gold Exploration entities?
5. How is the performance of
the Gold sector?
At the beginning of a gold bull market it
is gold itself, then Major Producers that perform.
As gold makes its way past $1000 to $1650 and
beyond, the order up to now has been Major Producers and the top half of
Junior Producers benefiting with while the short attacked the bottom half of
Junior Producers and all of Gold Exploration entities. Watch closely now as a
shift takes place.
No short of any viable gold share can be happy
(August 2010) even though across the board they are still short and in some
cases still sitting on the price.
You might have noticed recently in the heavily
shorted gold situations in the bottom half of the Junior Producers and many of
the viable Gold Exploration entities that there was an at the close and after
close attempt to destroy prices when in some instances million of shares were
sold and bought. This occurred in some cases on volumes 18 times larger
(volume on the day) than the previous norm. Exchange short figures indicate
that these were long buys and only minimal short covering.
The leverage is always on the bottom side
of the category scale, so anticipate that the bottom half of Junior Producers
and the viable companies in Gold Exploration entities to outperform the top
half of Junior Producers and Major Producers as the price of gold continues
higher in late 2009 and 2010.
History tells us this is how it has always
happened, and I believe it will again.
That is called leverage coming out higher gold
prices, high in ground values, higher profits in the start up mining and in
many cases much less shares outstanding than in the Major Producers and the
top half of Junior Producers.
Gold shares presently in the more leveraged categories have practically no
participation compared to other hard asset equities such as energy thanks to
the action of the shorts.
In general it is more than likely the wrong
time for a long suffering long to throw in the towel, but many are and will.