Has the gold market bottomed in 2013?

Several little-know macroeconomic factors are changing the global supply and demand of gold. Read on to find out what they are.

-Posted by Alejandro Guillú Mendoza

Introduction

This article tries to explain in a simple way to readers without a college degree in economics or finance some macroeconomic factors that are currently changing the global supply and demand of gold. They’re not often talked about, but they are very important to understanding the precious metals market!

Ground rules

Gold coins ARE NOT INVESTMENTS. Gold coins are still minted by countries to satisfy the unlimited demand for numismatists around the world. When you acquire a gold coin you are not only paying for the precious metal itself but also for the graphic design and for the minting.

Countries make billions of dollars each year buying gold by the ton and reselling it as coins.

There is nothing wrong with collecting coins if you ARE ALREADY A MILLIONAIRE. If you are not, then you need to sell your coin collection right now to the highest bidders.

The problem with gold coins is that you need to pay for insurance each year, and that cost eats some of your profits.

If you want to invest in gold then you need to buy either a gold mine or the ETFs IAU or GLD.

There are other financial instruments for more sophisticated investors that I am not going to cover in this article. If you want me to write about them then drop me a line.

Mexico is now a bullion superpower with a little help from Carlos Slim Helú

Only ten countries in the world produce more gold than Mexico. However, the annual gold production has grown at double-digit rates in 2005, 2006, 2008, 2010 and 2011.

Unlike other countries, in Mexico you don’t own the gold in your own land. If you find gold in your backyard then the government takes it. There is no such thing as a Mexican prospector.

There is no point in using modern technology to search for gold mines in Mexico and buy the land to make literally a ton of cash. As you can imagine, there is little demand for a geologist in Mexico because you cannot monetize the natural resources.

After over 300 years of gold mining, the United States of America, Peru and Canada remain the third, sixth and seventh largest gold producers in the world. Mexico is very similar to those countries from a geological point of view but nobody has mined that gold yet. In other words, there are mountains of gold in Mexico.

The supply of gold in the continent of America is too vast and unlimited if you consider the current global demand. We have enough gold to pay the entire debt of every country in the continent of America to the rest of the world.

Each year we find faster and cheaper ways to extract gold. Innovation also applies to the extraction of gold. One very important factor that you need to consider is that gold is usually found in very remote locations very far from civilization. Gold mines invest a lot of money in diesel to transport the precious metal to the nearest DHL, UPS or Federal Express location.

Electric cars will only increase the profits of gold mines in the coming years.

After the 1994 economic crisis in Mexico, experts were hired to avoid another economic crisis in the future, and one of the suggestions was to allow billionaires and foreign, publicly-traded mining companies to extract the gold and save it for a rainy day.

Fresnillo (London: FRES) is now a FTSE 100 company and the 30th-largest diversified metals and mining company in the world, according to Forbes. Annual profits are over $700 million. It is not a bad idea to set up a limit order to buy this company at $1,000 in case the price drops from current levels due to a panic sell-off.

Mexico currently holds over 125 tonnes of gold, and they will keep buying gold from Fresnillo and other mining companies currently operating in Mexico until the gold reserves are over 365 tonnes, which is what Venezuela currently holds.

Mexico is one of the richest countries in the world, and with over $170 billion in foreign exchange reserves, they certainly can afford to buy more gold. This “I will buy any amount of gold that you can extract” will attract a lot more gold mining companies. They don’t even have to invest any capital. Mexico will lend them any cash they may need to install the mine, and they can pay for the loan in gold.

You cannot even pay for your MasterCard at Bank of America with a gold coin, let alone a billion-dollar syndicated loan if you are a mining company. Unless Russia, South Africa, Peru, Canada, Indonesia, Uzbekistan and Ghana start a Golden Arches Bank where foreign publicly-traded mining companies like BHP Billiton (BHP) and Freeport-McMoRan (FCX) can apply for a billion-dollar loan to build new gold mines, everybody will just move to Mexico.

What is a Gold Mart?

India likes gold jewelry a lot. In fact, they buy more gold jewelry that anybody else with the exception of China.

One smart way for China, Australia, the United States of America, Russia, South Africa, Peru, Canada, Indonesia, Uzbekistan, Ghana and Mexico to increase exports of gold jewelry is to simply lend money to young entrepreneurs in Pakistan, Nepal, Buthan, Burma, Bangladesh, Sri Lanka and the Maldives to open a Gold Mart franchise.

The fictional Gold Mart franchises will be strategically located in cities near the border with India to encourage small business owners to buy gold jewelry and sell it to consumers in India.

Each Gold Mart will include a large selection of jewelry from small companies that just don’t have the infrastructure to export small quantities of gold jewelry to India. Each country will handle the logistics to ship their products near the largest market for gold jewelry. This will create a lot of jobs in the gold jewelry industry and a lot of tax revenue.

Obviously, I am not a consultant for any of the countries previously mentioned, but I am sure they hired people way smarter than me to help them keep the demand for gold high and they will come up with a lot more clever solutions to export more gold jewelry to India.

I am just a regular guy. Countries have entire armies of consultants just thinking how to solve their problems all day long.

Conclusion

India cannot force their people to stop wearing gold jewelry, but they can systematically sell their gold reserves every time the price of gold goes up more than usual until their reserves are depleted.

Gold stored in vaults does not produce any cash (unless of course, you lend the gold)

You can also lend shares in gold mines. Perhaps it is time for India to invest in the Ghana Stock Exchange, the Uzbekistan Stock Exchange and the Indonesia Stock Exchange. Just a thought.

As always, be prepared for volatility in the gold market, no matter what you do, and never allocate more than 30% of your portfolio to precious metals. Remember, gold is a hedge against a currency collapse, and no one can guarantee there will actually be a currency collapse. Preserving your capital should always trump the desire to make large profits!

Photo by TheRivo

Who is the world’s largest silver producer?

For years, the title of the ‘World’s Largest Silver Producer’ has been dominated by two companies: Fresnillo PLC (LON:FRES) and BHP Billiton Ltd. (NYSE:BHP). That changed in 2011.

For years, the title of the “World’s Largest Silver Producer” has been dominated by two companies: Fresnillo PLC (LON:FRES) and BHP Billiton Ltd. (NYSE:BHP). Fresnillo is named after it’s mammoth Fresnillo silver mine in Mexico while BHP operates the Cannington mine in Australia.

Both the Fresnillo and Cannington mines are “primary silver mines,” which means that silver is the predominant metal that’s being mined at the sites. For years, those two mines have helped BHP and Fresnillo take the title as the world’s largest silver producers.

In 2011, though, that crown went to the Polish mining company KGHM Polska Miedz (PINK:KGHPF). What’s interesting about that is the fact that the KGHM doesn’t even have a primary silver mine. It captured the title of the world’s largest silver producer by mining silver as a byproduct of other metals.

The world’s Top 3 silver producers in 2011

1) KGHM Polska Miedz (PINK:KGHPF). 40.5 million ounces of silver.

2) BHP Billiton Ltd. (NYSE:BHP). 38.9 million ounces of silver.

3) Fresnillo PLC (LON:FRES). 37.9 million ounces of silver.

What lead to the changing of the guard? Silver production at the Fresnillo and Cannington is on the decline as the quality of ore coming out of both sites has dropped. Check out last year’s numbers to see the difference.

The world’s Top 3 silver producers in 2010

1) BHP Billiton Ltd. (NYSE:BHP). 46.6 million ounces of silver.

2) Fresnillo PLC (LON:FRES). 38.6 million ounces of silver.

3) KGHM Polska Miedz (PINK:KGHPF). 37.3 million ounces of silver.

[Source: The Market Oracle]

Of course, we can’t read much into these numbers when we’re looking for potential investment opportunities. To do that, I recommend searching for junior mining companies that make good buyout candidates (companies that might get acquired by a BHP or Fresnillo, for instance). Check out some of our recent posts on silver mining stocks for more:

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Top 5 best uranium mining stocks

Outside of the obvious industry leaders in uranium mining, it’s difficult to find small and mid-cap mining stocks that have differentiated themselves in the sector. Here’s a look at five uranium mining stocks that warrant a deeper look.

Outside of the obvious industry leaders in uranium mining – Cameco Corporation (NYSE:CCJ) and BHP Billiton Limited (NYSE:BHP) – it’s difficult to find small and mid-cap mining stocks that have differentiated themselves in the sector. Pinetree Capital’s VP of business development Philip Williams recently offered up five of his favorite uranium mining stocks in an interview with The Energy Report. Here are their tickers as well as some commentary on each of the names:

Mega Uranium Ltd. (TSE:MGA). Based in Canada, Mega Uranium is focused on properties in Cameroon, Canada and Australia – home to the world’s largest uranium deposits. Mega’s massive Lake Maitland Project is in the feasibility study stage. The project has an Indicated Resource of 28.7 million tons of U3O8 and an Inferred Resource of 3.6 million tons. The stock is down 7 percent year-to-date and up 60 percent over the past 12 months.

Rockgate Capital Corp. (TSE:RGT). Shares in Rockgate have been on fire, rising 30 percent since the start of the year and more than 400 percent over the past 12 months. The company’s flagship project is the 100 percent owned Falea Uranium/Silver deposit Mali, which has shown an uncapped resource of 20,252,000 pounds of uranium and 31,600,000 ounces of silver. Rockgate could be a potential takeover target as large foreign uranium miners look to grow their holdings in Africa.

U3O8 Corp. (PINK:UTREF). With projects in Guyana, Colombia and Argentina, U3O8 Corp. has significant footholds in South America – an area that’s long been ignored by uranium-mining companies. The company’s Cerro Solo area in Argentina could hold up to about 100 million pounds of U3O8, and its Kurupung Batholith project in Guyana could hold even more. Williams calls South America “the next frontier for uranium development,” and he expects U3O8 will expand its NI 43-101 resources at its projects by almost tenfold this year. Shares are up 15 percent year to date and more than 170 percent over the past 12 months.

Energy Fuels, Inc. (TSE:EFR). Based in Canada, Energy Fuels is focused on uranium deposits in the southwestern U.S. from Utah to Colorado. The stock got a big boost earlier this year when the company’s application for its Pinon Ridge uranium mill was approved. That could turn Energy Fuels into a consolidator in the U.S. uranium mining space as it seeks out rights to more properties in the area. Shares are up more than 55 percent year to date and more than 500 percent over the past year.

Mawson Resources Ltd. (TSE:MAW). Based in Vancouver, Mawson’s flagship project is its high-grade uranium and gold deposit at Rompas in Finland. Surface samples have shown up to 373 ounces per ton in gold and 43.6 percent uranium. Williams calls it “almost freakishly high-grade gold and uranium.” Shares have exploded upward on the strength of these early results. Year-to-date, MAW has returned 5 percent and more than 600 percent over the past 12 months.

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