Dollar Falling Gold Rising price commodities rally silver mining production

What's different about this commodities rally is that it's not just the gold price that's up - gold equities and mining stocks in general are starting to exhibit overall growth, even the ones with known risks kinross, anglogold ashanti.

Get Used To The Dollar Falling

• A deteriorating relationship with Saudi Arabia means we might be witnessing the last days of the 'Petro Dollar' - at best this translates into even less support for US dollar denominated trade.
• China backed gold certificates issued by the BRICS fund gain traction
• The Federal Reserve The Fed losing control of situation it attempts to solve due to plunging interest rates and lack of interest in treasury notes

Diversity Is Important

• Don't limit your purchases to just one company spread it around but do favor companies that already have the infrastructure in place to produce gold since it can take a long time to develop a mine.  
• Also keep in mind that many established companies shuttered a large portion of their mine portfolio over the past few years due to declining prices
• Focus in on companies that weathered the storm and didn't resort to closing mines - in the short run they will yield the best returns.

Don't Ignore Silver

The gold silver ratio exceeded 80 for much of the last year but now with a new commodity bull run starting to take place, the ratio has already declined to 70.  Considering the recent past (10-15 years) the ratio has the potential to decline even further to below 40, leaving the possibility of a 2 to 1 return on silver verses gold.  Demand for silver remains strong but remember that central banks don't buy it - this means that global economic instability is less likely to benefit silver price and more likely to benefit the price of gold.  In the meantime make silver mining companies a priority.

Kinross Gold NYSE:KGC - has most to benefit from a new gold rally.  kept mines despite downturn in stock in recent years - weathered the storm.
iamgold NYSE:IAG - stock suffered more than competitors last five years down 85%.  key mines remain operational and showing robust growth.
Seabridge Gold NYSE:SA - 40 million ounces gold 300 million ounces silver and that's just 2P proven reserves.  any news regarding mine development will double the stock price overnight.
spdr gold trust
sprott gold trust - can redeem shares for physical gold

Investing In Bullion, Make Gold A Priority (silver price, platinum)

                      Though it's true that for much of history the gold to silver ratio was 12, that trend ended more than half a century ago at a time when gold and silver prices were a lot lower than they are today.  In recent history the ratio has been somewhat erratic ranging from a low of just over 30 (April 2011 gold avg $1474, silver avg $42) to a high of 85 in 2008;  During this period there was a lot of downward pressure on both ironically coming from one of its biggest buyers central banks - rising interest rates cause money to flow out of gold and into other sectors of the economy but gold still stood out, maintaining a price at least 75% of its high, silver however presently trades at only 40% of it's 2011 high of $50.

During the last recession the price of platinum fell below the price of gold, an occurrence that usually only happens during crises  - the last time it happened was in the 1970's when the world's main economic drivers, the US and Europe were going through recessionary periods of low growth, high unemployment, high debt levels and oil prices.

The more recent inverse relationship between gold and platinum dominated the period of August 9, 2011 to January 2013.  Prior to that, since 1986 the price of platinum always exceeded gold with the exception of very few brief periods but even then the difference was marginal.  What this means is that the current economic climate is not as rosy as it's made out to be - the factors now driving gold closer to platinum are the same ones that come into play during times of economic uncertainty (central bank buying, inflation leads to lower confidence in the dollar, causing people to jump onto the bullion bandwagon).

Platinum versus Gold

For bullion buyers, the platinum group metals (pt, pd, rh) provide an interesting alternative to gold but a couple other key factors to consider may make gold the safer option.  In 2008 when rhodium hit $10,000 an ounce before hitting rock bottom a year later (2009 average $1500) investors lost interest in the white metal.  In a healthy economy, demand for platinum and palladium will still be there since both rely on industrial (catalytic converters) and high end markets (white gold plating, platinum jewelry);  however, yearly demand in general is not nearly as high as it is for silver or gold;  2012 platinum demand was about 6 million ounces, 7 million ounces for palladium which is only a fraction of the 155.4m ounces of gold, 1.16b ounces of silver consumed.

2012 exit year - Global reserves of platinum group metals total 2.328 billion ounces (2013 Mineral Commodity Summaries: 66m kg, annual production represents 0.6% of this) versus 1.799 billion ounces for gold (annual production represents 5% of this).  This doesn't sit well with me given that production of gold is some eight times greater than all platinum group metals combined.  As an investor what this tells you is that it's a lot easier to raise mine output to either match higher demand /or to put downward pressure on the price, than it is for gold.  At current prices, gold is just as rare as the platinum group metals but demand remains many times greater.  This is precisely why the rhodium crash of 2008 could never happen to gold (rhodium supply increased substantially as miners saw an opportunity to sell at higher prices but it turned out that demand was not nearly as strong as anticipated).  Platinum may be brighter but from an investment perspective gold still outshines it. 

Demand for platinum has a shiny future - light vehicle production is expected to increase by 13.6% over the next three years, with each vehicle needing a catalytic converter containing four grams of platinum and palladium what that amounts to is an additional 1.54 million ounces of pt/pd demanded.

Since 2001 The Price of Gold Is Up 600% linked To Central Bank Purchases & Investment Related Demand, overall Net Hedging by Mining Companies Up Only Twice in Last Five Years (quarterly)

   Since April 10, 2001 when the price of gold hit a low of about $256/oz it has been steadily increasing on the back of higher investment related demand (represented 37% of total demand in 2010 up from just 4% in 2000), higher overall demand (3,812.2 tonnes 9% higher than 2009), and greater interest shown in the yellow metal by Asia (China's demand for bars and coins accounted for 13.5% of all gold demand by value, that's up 70% in just one year). (World Gold Council) Jewelry accounts for roughly 50% of gold demand down from 85% in 2000 but up from 43% in 2009. In the first quarter of 2011 Chinese demand for gold (25% of all gold demand) exceeded demand from Indians (23% of global gold demand) who were previous to that the largest consumers of gold (90.9 metric tons compared to India's 85.6 metric tons, China's represented a doubling over the previous year) (China Is Now Top Gold Bug); In 2010 consumer demand in India led all countries, it accounted for 25% (963.1 tonnes) of all global demand for gold, that's up from 16.6% the year before. In other countries like Greece, economic turmoil is causing demand for bullion to spike. (Financial Times: Greek savers rush for gold)

China: If, as many suggest, the People's Republic of China lets the RMB increase in value relative to the USD, that will weaken demand for gold in the short term as investors see the new exchange rate as a sign of economic stability but in the long run, the stronger RMB will increase Chinese demand for Gold due to its greater purchasing power. Also, a stronger RMB will raise Chinese import demand, indirectly propping up gold demand abroad too.

Because of weakened global reserve currencies (euro/usd) and a low portion of portfolios (1% but begining to show growth) and central bank reserves in gold (central banks sold much of their holdings in the early 2000's/since 2009 they have become net buyers) gold prices are in the midst of a long term upward trend. (Pierre Lassonde, Franco-Nevada) In 2009 central banks held 17.5% of all gold estimated to exist above ground (940M out of 5.5B ounces). As recently as 2005 central banks gold selling contributed as much as 14% of the gold supply. (Seeking Alpha: Gold Soars on Falling Supply and Rising Demand) In early to mid 2011, the central banks of Mexico (99.1 tonnes), Russia (41.8 tonnes), South Korea (25 tonnes) and Thailand (just over 9 tonnes) were among the largest buyers of physical gold. As of 2011 the world's largest exchange traded fund, SPDR Gold Shares ranks 6th among all entities in terms of its gold reserves, it owns 1213.9M tonnes of gold which is 4.5% more than China (1161.6M), 30.96% more than Russia (926.9M) and 97.5% more than India (614.6M). SPDR has just over half of all the gold held by gold etf's. (cnbc: The World's Biggest Gold Reserves)

While gold demand is rising from all areas (consumer, jewelry, central banks, industry: total up 9%) total supply is not (up only 2% in 2010) and that's putting even more pressure on the price. (http://www.gold.org/download/pub_archive/pdf/GDT_Q4_2010.pdf) Output from gold mining makes up about 60% of the supply (gold output from mining declined in the seven years leading up to 2008). Another reason to expect higher prices; Companies are closing their hedge books (Barrick Gold led the charge in 2009 it cost them $5.6B, AngloGold Ashanti in October 2010 after it raised $1.58B to close it, Kinross Gold removed 90,000 ounces hedged in the first quarter of 2011 however it was the only major company to do that in 2011). Total gold hedged by miners amounts to 4.88 million ounces (1Q 2011); The first quarter of 2011 was just the second of 21 quarters since 2006 to show any increase in net hedging. (Gold miners hedge in Q1, big sales unlikely: report) Also to consider, the ceo's of Newmont Mining and AngloGold Ashanti the second and third biggest gold producing companies, predict that gold will exceed $2,200 an ounce by 2012. (reuters: Mining CEOs expect gold prices to keep rising)

If, as Franco-Nevada suggests, Asian central banks increase their minimum weighting in gold to 15% another 17,000 tonnes would be added to demand over the next few years. Gold ETF's could hoard more gold too with interest in physical gold higher than at any point in their history (in the USA they only date back to November 18, 2004, StreetTracks Gold Trust exchange-traded fund but since then they accounted for 2,300 tonnes of net demand). Gold companies for the most part have wide profit margins making them popular among both institutional investors and others.

Risks Assosicated With Gold Exchange Traded Funds & The Benefits of Direct Ownership (physical gold)

   Gold ETF's are index traded commodity funds with a total net worth that's tied to the value of its holdings of physical gold (for example SPDR's (ETF) market value on August 26 was $75.07B about the same as the total value of its 39.6M ounces of gold). The physical gold is stored in vaults/warehouses operated either by groups of institutions (London Precious Metals Clearing Limited made up of six entities) or individual ones that have been granted a vault license (as in the case with JP Morgan). Shares are issued, giving individual private investors exposure to commodity price movements. In general, ETF's have low tax costs in addition to other cost efficiencies, making them increasingly popular among investors. The first successful ETF ever launched was the Toronto Index Participation Shares (tracked the TSX exchange's 35 biggest stocks) which began trading in 1990.

Gold exchange-traded funds trade on stock exchanges like any other fund however their portfolio consists of only one asset, physical gold. Two of the most actively traded American ones are IShares COMEX Gold Trust (IAU, large cap) and SPDR Gold Trust (GLD, one of the largest in the world, started in 2004). Jewelry is also an important source of the physical gold supply, in 2007 it accounted for 25% of total supply. In terms of bullion, Kruggerands issued since 1967 and gold bars (some vaults require the stored bars to be a specific size, usually between 350 and 400 ounces) have traditionally been the most widely used. Alternatively, gold mutual funds aren't as dependent on physical gold; Their asset types include a range of gold stocks/companies (gold companies, for the most part have wide profit margins, making them attractive to all types of investors).

In many cases Gold ETF's have management and accountability issues. Since their early beginnings, there has been substantial growth in the size of Gold ETF's (10 largest American ones hold about 2,200 tons (2,000 tonnes/70.4M ounces) of pure gold in the form of bullion bars, other countries like China have launched their own gold trading platforms). (China's Gold Intake:like Sending Oil to Saudis) making the accountability issue an even greater concern. There is also growing angst over just how much gold is actually in the world's vaults; in March 2008 90 kg of fake gold was discovered in the vaults of Ethiopia's National Bank (replaced with gold plated steel), that happened even though gold sold to the central bank is required to undergo certification by the Geological Survey. (BBC News: Fake fears over Ethiopia's gold) In Europe, gold plated Tungsten was found at Germany's largest private gold refinery, though alarming that doesn't necessarily mean the government certified any of it.

There's also risk in the US where SPDR, the world's biggest physically-backed gold trust states in its list of risk factors:
"Because neither the Trustee nor the Custodian oversees or monitors the activities of subcustodians who may temporarily hold the Trust’s gold bars until transported to the Custodian’s London vault, failure by the subcustodians to exercise due care in the safekeeping of the Trust’s gold bars could result in a loss to the Trust." and "Gold bars allocated to the Trust in connection with the creation of a Basket may not meet the London Good Delivery Standards and, if a Basket is issued against such gold, the Trust may suffer a loss."

Owning physical gold eliminates those risks, removing concerns regarding delivery of the asset however the new costs makes it much more expensive to do especially if you're in it as a short term investor (dealer fees can range from a couple dollars to more than ten dollars an ounce over spot, ensuring secure storage of the physical asset is costly as well as time consuming).

Countries are taking more interest in gold; 10% of all foreign exchange reserves are in gold. (World Gold Council) South Korea purchased 25 tonnes of gold in the summer of 2011 for $1.24 billion, making its total reserves 17 times larger (39.4 tonnes) and ranking 45th among all countries. In 2011 Russia (41.8 tonnes), Thailand (9.3 tonnes) and Mexico (99.2 tonnes) also increased their reserves of gold. China's massive holdings only equal about 1.6% of their currency reserves. (S Korea buys gold as safe haven, first time since '98)

Because the prices of gold ETF's is more closely linked to the price of gold than other investment options (individual mining companies, mutual funds), risk also comes from spot price volatility (some companies actually hedge against that by fixing the price at which they agree to sell their gold in the near future). There is also slightly more risk than with mutual funds because like stocks, ETF's trade all day long (like their underlying commodities which also vary in price throughout the day, for mutual funds trading in the underlying stocks ends at the conclusion of the trading day and so they do as well).

Some other notes:
-If any widely used currency ever failed a new gold standard could be implemented as a temporary fix until the situation is resolved.
-Tungsten has nearly the same density as gold but differs in its color and hardness. Thermal conduction of gold (atomic number 79) is about two times that of tungsten (atomic number 74), the ratio of boiling points is also two.