Metals Molotov

August 31, 2012

  • A “mining revolution” in the works, and we don’t mean new technology: Byron King on a workers revolt in South Africa, and the implications for precious metals
  • Silver reaches a key level: The supply shortage that could be just the beginning of a new bull phase
  • Frank Holmes unpacks a ratio that signals a return to $1,900 gold
  • Strange Street logic: Market rallies on a Bernanke speech that delivers nothing new or unexpected
  • An anchovy crisis… the perils of reading The 5 too literally… a final jury duty tale… and more!


  We are going to lead a mining revolution in this country… We will run these mines ungovernable until the Boers come to the table.”

So declared Julius Malema yesterday. “Malema occupies a notably controversial position in South African public and political life,” says his Wikipedia entry.

To put his remarks in context, we need to back up two weeks…

  “The workers charged the cops while tossing spears, bricks and Molotov cocktails and even firing weapons,” our resource guru Byron King reports. “Then the police fired into the crowd and killed 34, with many more wounded.

“We’re not describing a workplace as much as a war zone.”

Byron is speaking of the recent Lonmin riots where hundreds of platinum miners stormed police with clubs and machetes. What began as a 3,000-strong strike turned violent when tempers began rising.

“Since then,” he says, “platinum, gold and silver prices have moved upward sharply.”

  “What does this mean,” Byron asks, “for medium- and long-term platinum prices? How about for gold and silver? Let’s look deeper into the story.

“South Africa is the world’s largest platinum-producing nation. You can find many gold miners outside of South Africa. But you don’t find too many platinum producers elsewhere — not ones that deliver large volumes. Thus, if you want portfolio exposure to large platinum production, you have to accept the political risk of investing in a South African company.”

So what’s the rub for those already in platinum? “There’s the above-noted strike and lost output,” says Byron. “There’s currency weakness, as the South African rand has slipped down in value because of weak commodity prices. Plus, the ongoing world economic slowdown — from Europe to North America to Asia — has scaled back auto production and reduced demand and pricing for platinum.

“However,” he goes on, “labor unrest in South Africa appears to be moving to a new level. Is the recent strike and violence at Lonmin just a one-off tragic event? Or are we seeing a new form of risk to industrial users of platinum, as well as to investors in that sector? And could this problem spread into the gold and silver markets?”

  Let’s dig deeper — so to speak — into South African mining. Unless you’ve been there, it’s hard to wrap your head around how much the mining industry in South Africa relies on human labor — most of it relatively low paid, certainly by Western standards.

“In the West, we’re used to seeing large amounts of automation and mechanization in mines. In the Carlin Trend of Nevada, for example, large gold mining companies have operations that move 200,000 tons of rock per day. In general, at Western mines, people observe and direct operations. Machines perform the hard, dangerous physical labor. But not in South Africa.

“One underground miner may support 20 or more family members

in a township like this,” Byron wrote after snapping this picture

“Why is so much underground work still done by hand in South Africa? Because of the need for jobs,” Byron explains. “The government and the union leaders have traditionally opposed most plans for automation and/or mechanization down in the mines. Every lost job means — using the example above — perhaps 20 or more people without support.”

130  “It’s pretty clear that there’s a new element of political risk within the South African mining industry,” says Byron. “I don’t believe it’s a short-term event, either.

“Labor strife will doubtless affect the perception of South Africa as a reliable future supplier of commodities — certainly of platinum,” he goes on. “Indeed, the price of platinum has jumped to a three-month high on the threat that South Africa, as supplier of 80% of the world’s platinum, could face long-term, unplanned disruptions in output.”

What happens if the riots spread to the gold mines? “Well,” Byron notes, “we’re already seeing gold prices creep upward globally, considering that South Africa remains a key global player.

“And,” he concludes, “rising gold is pulling the silver price upward, as well.”

  Indeed: Gold sits at $1,662 this morning… up more than $40 since the Lonmin riots. Silver’s at $30.75… up $2.50 in that two-week span. And at last check, the bid on platinum was $1,516 — up nearly $100.

  Silver’s recent run-up may be linked to a supply crunch, according to blogosphere buzz.

“Over the past week,” wrote “the Doc” from SilverDoctors recently, “we have learned of at least four cases of large silver purchases (5-10 million ounces) either being flat out refused delivery, or else experiencing severe delays in fulfilling the order.

“This comes as silver has rallied nearly 15% from its recent lows near $27,” the Doc says.

Could we be looking at a silver bottleneck?

A blogger who goes by the handle AGXIIK said as much back in March: “I predict that silver will go into a severe supply shortage by August 2012 or sooner.”

His reasoning?

    • “Greek sort of got bailed out, leaving the price of silver to float upward, as opposed to downward should central banks and private owners need to dump PMs to get liquidity
    • Absorption of silver continues apace with speculative and aggressive longs outnumbering shorts two to one.
    • The discount to real silver value will not go unnoticed for long
    • Sovereign wealth funds in China and Middle East have over $2 trillion in funds ready to deploy.
    • War brings out the best in wealthy buyers. They buy for safety when the chips are down and financial insecurity abounds.
    • The physical silver is being held for personal investment and industrial and

commercial purposes. Miners are holding supply hostage to buyer requests to avoid the taxes on the profits of their silver sales.

  • The numbnuts at EPA are stopping mine production due to environmental issues.
  • Miners are starting continentwide strikes in Africa for gold, silver, platinum and palladium.
  • Nearly 100 million ounces were kept from the market in those recent strikes.
  • Nationalization of silver mines continues apace in South and Central America.”


Interesting, indeed…

  “The long-term fundamentals for gold stand on solid ground,” reads the latest update from U.S. Global Investors chief and Vancouver stalwart Frank Holmes.

Gold reached the same milestone in August that silver did: “After falling below the 200-day moving average, gold had been stuck in quicksand for several months. With the jumps in the price last week, bullion swiftly rose above this critically important long-term moving average.”

One powerful indicator Mr. Holmes follows is a ratio of the gold price to the price of Brent Crude. “Gold still hasn’t made it back to its all-time high, but Stifel Nicolaus’ gold-to-crude oil ratio suggests gold climbing to $1,900.”

At least that’s what’s in store if the ratio returns to its historical average of 16.5:1.

“In other words,” says Frank, “the price of the yellow metal is usually about 16.5 times the price of a barrel of Brent oil. With Brent trading around $116 per barrel last week, the math tells us that gold could go to $1,900.”

With summer winding down, we’re heading into the precious metals’ traditional period of seasonal strength: No better time to load up than the present… but even if you don’t want to add to your position right now, you can give yourself ample flexibility by signing up for a free account with the Hard Assets Alliance.

For the last six weeks, we’ve played up HAA as the simplest way to buy, sell, store and take delivery of precious metals. And HAA has been waiving its account setup fee for new customers. That waiver window is coming to an end tonight. Effective at midnight, it’s $35. So there’s still time to sign up absolutely free. Please note that we may be compensated if and when you fund your account… but we wouldn’t make this offer available unless we believed it offered outstanding value.

 After picking apart Federal Reserve chairman Ben Bernanke’s annual Jackson Hole speech this morning, traders mostly yawned.

As of this writing, the Dow is up two-thirds of a percent, the S&P is up half a percent and the Nasdaq is up a quarter percent.

“Taking due account of the uncertainties and limits of its policy tools,” Bernanke droned, “the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

In other words, he’s ready to once again sacrifice savers on the altar of “quantitative easing”… but not just yet.

 Here’s an angle to the global food crisis we hadn’t contemplated till now: an anchovy shortage.

And its effects will reach far beyond the folks, like your editor, who actually enjoy anchovies and sometimes get a call back after placing a pizza order: “We have to make sure it’s not a prank call.” (Oh, the indignities…)

“Severe storms off the coast of Peru,” reports the U.K Guardian, “have led to a dramatic jump in the price of the oily fish — which will in turn lead to a spike in Scottish farmed fish, Chinese pigs and even Omega 3 tablets.”

Believe it or not, some of us do find them appetizing…

Unfortunately, it appears the easy money’s already been made in this sector: Three years ago, Fidelity plunked money into Copeinca, a Norwegian firm that’s deep into Peruvian anchovies — owning 30 fishing boats, and five processing plants. Its Berlin-traded shares are up nearly sixfold already…

“I totally agree with everyone who abandons the John Paulson fund,” writes a reader with an intriguing take on one of this week’s developments.

“Any investment in GLD or SLV — either directly or through funds — is inherently self-defeating. The slime who operate GLD and SLV do not buy and hold all the physical gold or silver they imply they hold, and they lease it out and take other actions that overtly hold precious metal prices down.

“Any investment that actively works to hold its own price down is a VERY bad, if not inherently corrupt. GLD and SLV are totally of, by and for the banskters, designed to misdirect investment that would go into gold and silver and then double the injury by leasing out the metal they do buy — probably multiple times.

“Better to invest in real, physical gold and silver under your own control via APMEX or HAA, or if you just can’t stand to hold or hide your own assets, invest in Sprott funds, which does hold the full measure of physical metal and does not lease it out or otherwise act contrary to your investment.”

The 5: It’s true, there’s nothing like physical gold. The good folks at Hard Assets Alliance will continue to waive their account setup fee through midnight tonight.

Referring to Charles Lane as ‘Buffett’s dutiful minion‘ would be aggressive speculation if you believe it to be true,” writes a reader in reference to our gold standard discussion Tuesday.

“Since I prefer to give you more credit than that, your words constitute a pretty smarmy characterization. What Mr. Lane wrote in his article in The Washington Post is reasonable and articulate. If you can’t make a case that he’s wrong without lowering yourself to attacking the integrity of the writer, perhaps you should avoid discussing his article.

“Please try to contain the ‘We’ve got the money and know more than anybody else’ attitude. I concede that Agora has plenty of money. I would argue the rest of that attitude is unjustified.”

The 5: We knew — just knew — someone would take us literally, as if major shareholders like Buffett issue a memo and the Post editorial board heels.

Fact is no one has to write such memos. In the corridors of media power, there’s a self-selecting culture and mind-set that’s tied intimately to the corridors of government power — hence the revelation this week that an entire Maureen Dowd column in The New York Times was run past the CIA before publication.

Speaking truth to power? That’s more of a Ron Paul mind-set, which, in the words of Mr. Lane, speaks to Paul’s “radical pessimism, his aggressive and indiscriminate distrust of humanity.”

We’ll have much more to say on the topic next week…

“Your recent spate of letters from readers about their jury experiences,” a reader writes, “has prompted me to tell you about a summons mailed to my grown daughter in the summer of 2008 that included a 35-page questionnaire to be completed and returned to the Clerk of the Superior Court.

“It asked such questions as your age, your religious affiliation, groups and organizations that you were a member of and other questions that would be illegal if asked by an interviewer on a job interview. It looked to me like the clerk was planning to create a database of potential jurors so that they could select jurors to order. Need white males who belong to the Lions Club? No problem. Need nonsmokers to try a tobacco case? No problem.

“When I asked an employee at the clerk’s office, I was told that they had mailed it out at the request of the lawyers. Needless to say, I was outraged. I managed to get the local newspaper to mention it, and I showed it to the Democratic candidate for the clerk’s office and then I carried it door to door to the 300 households in my neighborhood and showed it to as many people as I could. Unfortunately, the Clerk of the Superior Court was re-elected. Fortunately, my daughter had been living in another state since 2002, and I was able to have her excused without her ever seeing the questionnaire!”

“The product is fantastic,” a reader enthuses about the “nutraceutical” that Patrick Cox praises so highly.

“I have been taking it for one week. I feel wonderful, and it has improved the circulation in my legs so much that all of the swelling in my lower legs and feet has disappeared. I have had that condition for the last three years.

“That is a tangible result — an immediate tangible relief — my feet today were swimming around in my shoes!”

The 5: That’s not an uncommon reaction we hear. And as we indicated earlier this week, the company behind the product is about to get a huge boost from a three-month study of the product on Alzheimer’s patients. If you haven’t seen it yet, Patrick lays out the science — and the profit potential — in this presentation.

Have a good weekend,

Dave Gonigam

The 5 Min. Forecast

P.S. Best wishes to EverBank’s Chuck Butler as he goes in for surgery next Wednesday to remove the cancer from his jaw. “Apparently, this is quite the operation,” he writes in today’s Daily Pfennig, “as I will be in ICU for two days and the hospital for a week after surgery. I want to sincerely thank everyone that has sent me notes, thoughts, prayers, encouragement, and other things in the past week.”

P.P.S. U.S. markets are closed Monday for Labor Day. The 5 returns on Tuesday… but don’t forget tomorrow’s 5 Things You Need to Know — our weekly wrap-up for busy people who might have missed a 5 or two (so to speak). It arrives in your inbox tomorrow morning.


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