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Gold: “Heads You Win, Tails You Don’t Lose”

Gold: "Heads You Win, Tails You Don’t Lose"

Authored by James Rickards via DailyReckoning.com,

Boring. I never thought I would say that about…

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This article was originally published by Zero Hedge
Gold: "Heads You Win, Tails You Don't Lose"

Authored by James Rickards via DailyReckoning.com,

Boring. I never thought I would say that about gold prices, but the gold price action for the last nine months has been boring.

And that’s actually a good thing. Why?

After beginning with the boring part, I’ll explain. Let me unpack this…

Gold prices hit an all-time high of $2,069 per ounce on August 6, 2020.

The yield-to-maturity on the 10-year Treasury note hit an interim low of 0.508% on August 4, 2020. The near simultaneity of those two benchmarks is no coincidence.

The interest rate on the 10-year note has been practically the sole determinant of the dollar price of gold since that August convergence of low rates and high gold prices.

But that isn’t always the case…

More Than Meets the Eye

Many factors can affect gold prices, including fundamental supply and demand, geopolitical and other external shocks, liquidity preferences in market drawdowns, and the distinction between real rates and nominal rates.

I watch all of those factors closely and include them in my analyses.

Still, those other factors haven’t mattered much to the gold price lately.

Supply and demand are in a rough balance. Global mining output is flat, and Russia, a major gold buyer, is curtailing its large-scale buying. We’ve also had geopolitical shocks in Ukraine and, most recently, Gaza.

We’ve had other external shocks, such as the U.S. presidential election debacle and a riot in the Capitol.

None of these events seemed to matter to gold.

In short, these external, non-rate factors haven’t mattered to gold. The gold price is looking exclusively at the yield on the 10-year note.

At the same time, there haven’t been any major market drawdowns in stocks.

Information Rich

The yield on the 10-year note is not an isolated data point. In fact, it’s information-rich. That yield represents expectations on economic growth, inflation, disinflation, exchange rates, capital flows, and returns on alternative asset classes such as stocks, private equity, venture capital and commodities.

The yield on the 10-year note is also a good proxy for capital spending and business investment plans because they involve a five-to-twenty-year forecast.

If you’re building a skyscraper, for example, you don’t finance it in the overnight repo market. You get a two-year construction loan and replace it with a 30-year mortgage. The average period of home ownership for a particular property in the U.S. is approximately seven years.

In short, the 10-year note rate is a summation of a range of rates for investment activity in the real economy. This means we have to break down the drivers of the 10-year note rate to see what it’s really telling us…

Lower Highs, Lower Lows

The 10-year note rate — which is currently about 1.61% — is almost exclusively a reflection of inflation expectations.

There’s no doubt that inflation expectations have been rising, especially after a spike in the CPI core and non-core data, which was reported on May 12.

From the low yield of 0.508% on August 4, 2020, the 10-year note yield peaked at 1.745% on March 31, 2021, and hit a recent peak of 1.704% on May 13 (intraday) on the CPI news before backing down a bit to the current level.

The dollar price of gold has moved down in lockstep as the yield on the 10-year note has risen.

Still, there’s less than meets the eye in the recent increase in rates. As recently as November 4, 2018, the yield on the 10-year note was 3.238%. On November 4, 2019, the yield was 1.942%.

The fact is today’s “high yields” are actually quite low and are much lower than the two interim peaks of the past three years. That means the historic 40-year bull market in bonds, which began in 1980 with yields around 14%, is alive and well.

What we’re seeing is a classic technical pattern of lower highs and lower lows. Based on that pattern, I expect that rates are near their highs for this cycle and will soon retreat to new lows around 0.50% or lower.

I know that puts me out of the consensus. All you hear about now is inflation and rising interest rates. But I’ve seen this movie before.

The One Wild Card

The only shock that would break this cycle and cause rates to reach 3.0% or higher is real inflation. But real, sustained inflation is unlikely to materialize soon. The same forces that have held inflation in check for the past decade and more are still in effect. We’ll have inflation eventually, but not yet.

You can’t look at recent price increases as proof of sustained inflation. Temporary price spikes in lumber, for example, are the product of pandemic-induced shortages, not a general rise in overall prices.

The surge in CPI reported on May 12 was driven predominately by base effects (lockdowns produced such low numbers that the year-over-year numbers were bound to be stronger). April 2020 marked one of the steepest output declines in U.S. history. Prices plunged.

Many of those prices are recovering especially in the areas of travel, airfares, hotels, restaurants and other service sectors that were almost completely shut-down in the first half of 2020. Year-over-year price gains off the low 2020 base are normal. They are also transitory because the 2020 output collapse was transitory.

As we move into the third quarter of 2021, the new base will reflect the strong growth in Q3 2020, when many lockdowns eased. That’s a higher baseline. That means a much steeper hill to climb for inflation metrics.

That’s why I believe inflation will come down sharply, and the ten-year note yield will come down with it.

That’s also why gold’s boring price performance has been a good thing. Essentially, gold is off the top but is nowhere near new lows; (gold was only $1,184 per ounce as recently as August 12, 2018).

The gold bull market is entirely intact…

The Running of the Gold Bull

Gold has traded in a narrow range between $1,700 and $1,900 with very few exceptions since last summer. That’s about a 10% overall range and just 5% above and below the central tendency of $1,800.

In a world of volatile stocks, commodity prices and exchange rates, the price of gold has been well-behaved.

And that’s the good news.

Given rising interest rates, a case could be made that the price of gold should be much lower. But gold has held its own against stocks and fixed income alternatives (not to mention Bitcoin and other high-flying speculations that compete with gold for investor dollars).

If inflation does not appear and rates retreat, gold will rally. If inflation does appear, rates may rise but gold will also rally on inflation fears.

We have been stuck in a rut where inflation expectations are driving rates higher but no sustained inflation has appeared. That’s a tough environment for gold. Still, gold has held its own.

Technically, this is what we call an asymmetric trade.

Downside is limited because of residual inflation fears, but upside is huge because gold prices have been moving inversely to interest rates and a plunge in rates is likely to occur.

You can call it, “Heads I win, tails I don’t lose.” When it comes to investing, that’s as good as it gets.

Tyler Durden Sat, 06/12/2021 - 15:30

Precious Metals

Constant Inflation Doubletalk from Fed Erodes Confidence

The summer doldrums in precious metals markets have tested the patience of bulls. The silver market has been hit especially hard…

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Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

The summer doldrums in precious metals markets have tested the patience of bulls. The silver market has been hit especially hard in recent weeks, but price stayed above the $24 level and avoided dipping to new lows for the year.

Nervous and frustrated investors who bailed out this summer may have made a huge mistake. Gold and silver markets appear to now be catching a break on the upside.

On Thursday, gold gained 2% to record its best close since mid-June. As of this Friday recording, the monetary metal trades at $1,830 an ounce and is up 1.1% for the week.

Turning to silver, prices are advancing by 1.4% this week to check in at $25.62 per ounce. Platinum, which was basically flat through Thursday, now shows a weekly loss of 1.8% to trade at $1,056. And finally, palladium is drifting slightly lower by 0.9% to come in at $2,682 per ounce.

Metals markets stand to benefit from renewed weakness in the dollar.

Since late May, U.S. dollar strength versus foreign currencies had put downward pressure on hard assets. The U.S. Dollar Index rallied from about 89.50 to just over 93 before momentum waned in recent days.

The Index failed to make a new high for the year on its summer rally, setting the stage for a potential bearish reversal. That reversal appears to have taken place this week, with the Dollar Index breaking down below 92 yesterday.

Currency traders were unimpressed by the Federal Reserve’s latest policy briefing. On Wednesday, the Fed announced it would leave its benchmark Funds rate unchanged and continue its $120 billion in monthly asset purchases.

No tapering was on the table, though there was some taper talk. It amounted to vague indications of future tightening after the U.S. economy attains "substantial further progress."

Fed Chairman Jerome Powell tried to quell inflation concerns. He reverted again to his “transitory” claims, but in remarks to the media he seemed confused about what his own definition of transitory inflation means.

Jerome Powell: The increases will happen. We're not saying they will reverse. That's not what transitory means. It means that the increases in prices will happen. So, there will be inflation, but that the process of inflation will stop, so that there won't be ...

When we think of inflation, we really think of inflation going up year, upon year, upon year, upon year. That's inflation. When you have inflation for 12 months, or whatever it might be, I'm just taking an example, I'm not making an estimate, then you have a price increase but you don't have an inflation process. And so, part of that just is that if it doesn't affect longer term inflation expectations, then it's very likely not to affect the process of inflation going forward.

So, what I mean by transitory is just something that doesn't leave a permanent mark on the inflation process. Again, I don't mean that producers are going to take those price increases back; that's not the idea. It's just that they won't go on indefinitely. We have two mandates, maximum employment and price stability. Price stability for us means inflation average of 2% over time. And so, we've got to be very careful about that, but I think it's a good point that it's a term, what it really means is "temporary." But then you've got to understand that it doesn't mean that the increases will be taken back. Some of them will be, but that's not really what it means.

Well, anyone wants to make sense out of all that would need a degree in Fedspeak. We are supposed to believe that stable prices actually means prices rising at a 2% average rate – except when the Fed wants inflation to run higher. But when it does, it’s only transitory – except when it affects the inflation process, which happens when long-term inflation expectations rise, which the Fed says won’t happen but at the same time doesn’t really know what will happen in the future.

Maybe what the Fed says matters less than what economic realities say. Investors would be better served focusing on fundamentals than trying to decipher central bankers’ forecasts.

Unfortunately, investors can’t ignore the Fed entirely. Since its monetary policy decisions can and do drive financial markets, it is necessary to pay attention to what the Fed is actually doing.

Right now it is still stimulating rather than fighting inflation, still holding interest rates artificially low, and still offloading negative real yields upon savers and investors.

That puts both the bond and stock markets in precarious positions. If inflation expectations were to shift to rising prices being a long-term rather than a transitory problem, a dramatic downside readjustment in interest-rate sensitive financial assets would commence.

There would also likely be a dramatic upside revaluation of hard assets including precious metals.

Whether investor psychology shifts suddenly or gradually toward an inflation-protection mindset remains to be seen. Metals markets tend to move slowly at the beginning of bull markets, then rapidly and even violently toward the end.

Market timing is an impossible task given the unpredictable nature of people and circumstances. What is possible is to capitalize on opportunities when markets are over-pricing financial assets and under-pricing hard assets.

The opportunity exists now, but it won’t last forever. There may even come a day when the opposite is true – hard assets are overpriced with inflation expectations running way ahead of actual inflation realities and financial assets offering tremendous value as a result.

Yes, that could happen. It did in the early 1980s.

But the early 2020s look more like the start of a new inflationary cycle rather than the unwinding of one.

Well, that will do it for this week. Be sure to check back next week for our next Weekly Market Wrap Podcast. Until then this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a weekend everybody.

      

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Precious Metals

First in Gold Reserves- Russia Plans for Significant Ramp Up of Gold Mining

By Eugene Gerden Russia plans a further major increase of domestic gold mining in years…

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By Eugene Gerden

Russia plans a further major increase of domestic gold mining in years to come that will be achieved through the development of new gold mines and accelerating the further development of the already existing gold mines, according to recent statements made by representatives of some leading Russian gold mining companies and local media reports.

In terms of gold reserves, Russia currently ranks first in the world with a share of about 13%, while ranking 3rd in terms of production with a share of about 9%. Last year, gold production in Russia amounted to 340.17 tons, slightly less than in 2019 with a reduction of 0.98%. There is a possibility that gold production in Russia may have already significantly increased this year.

The majority of gold produced in Russia in 2020 was sold for exports, the volume of which amounted to about 320 tons. While a few years ago, exports were insignificant, as the bulk of domestic gold was purchased by the Bank of Russia, the situation has changed in recent years.

Alexey Kalachev, a senior analyst at FINAM Group, one of Russia’s leading analyst agencies in the field of mining and finance, said in an interview with the local Regnum newswire, “active gold purchases by the Central Bank supported the domestic gold mining industry during the period of low prices and allowed the state to form significant gold  reserves.”

According to recent statements made by the Minister of Natural Resources of Russia, Alexander Kozlov, “at the current rate of production, gold reserves in Russia will be enough to ensure stable production for the next 40 years.”

Mr. Kozlov goes on to say, “Russia regularly increases its resource base for gold.” This is reflected by official data, since 2010 the country has increased its gold reserves by about 6,000 tonnes.

Over the past decade, three large area plays have been further explored, among them are the Natalkinskoye and Pavlik gold deposits in the Magadan region, the Gross gold deposit in Yakutia and the Verninskoye in the Irkutsk region. Kozlov added, “the Sukhoi Log field in the Irkutsk region and several large areas in the Far East are also being prepared for development.”

According to local analysts, a significant increase in gold production in Russia can be expected from 2026, when production will start at the Polyus owned Sukhoi Log field, one of the largest gold fields in Russia and the world with 40 million ounces proven and probable gold reserves and 67 million ounces measured, indicated and inferred mineral resources.

In recent years, Polyus has significantly strengthened its position in the domestic market as one of the largest gold producers in Russia, which accounts for approximately every fourth ounce of gold mined in Russia at present.

With Sukhoi Log reaching full capacity, the company will increase its production by about 80% and will be one of the top three gold mining companies in the world.

In general, with the commissioning of Sukhoi Log in 2026 total gold production in Russia could grow by about 20%.

According to Deputy Prime Minister and Plenipotentiary of the President of Russia in the Far Eastern Federal District Yuri Trutnev, hopes are also put on the intensification of geological exploration in the Magadan Region, the least populated region of Russia, which could become a new center of gold mining in Russia in years to come.  In 2020, the region’s mining enterprises extracted 49.14 tons of gold from ore and placer deposits. That became a record result over the past 45 years, when 49 tons and 600 kg of gold were mined within a territory of the region in 1974.

In addition, a further increase of production is planned for Kamchatka, where a new underground mine and a new stage of processing complex will be established on the basis of the Ametistovoe region in the Kamchatka priority development area, which is the largest gold mining enterprise in Kamchatka.

In general, the authorities of Kamchatka plan to increase gold production to 10 tons by 2022 by commissioning new mining and processing plants. These include an enterprise at the Kumroch gold deposit with a capacity of up to 500,000 tons of ore per year and a processing complex with a capacity of 600,000 tons of ore per year at the Ozernovskoye gold deposit.

For 30 years after the collapse of the USSR, Russia has been developing its gold mining industry. During this time, the country produced more than 6,000 tonnes (194 million ounces) of gold, including associated, secondary and gold in concentrates, providing about 10% of the annual world production.

 

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Precious Metals

Mineral resource expansion at one of the largest precious metal and polymetallic deposits in British Columbia

Rokmaster Resources Corp. [RKR-TSXV, RKMSF-OTCQB, IRRI-FSE] is focused on developing the Revel Ridge project, one…

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Rokmaster Resources Corp. [RKR-TSXV, RKMSF-OTCQB, IRRI-FSE] is focused on developing the Revel Ridge project, one of the largest precious metal and polymetallic deposits in British Columbia.

Rokmaster is headed by President and CEO John Mirko, a 40-year veteran of the mineral exploration sector. He is recognized for permitting, constructing, and operating mines, including through receipt of the E.A. Scholtz Medal for Excellence in Mine Development from the Association for Mineral Exploration of British Columbia, and the Mining and Sustainability Award from the Mining Association of British Columbia. Mr. Mirko was the founder & President of Canam Alpine Resources Ltd. prior to its recent sale to Vizsla Silver Corp. in September 2019.

Mineral resource expansion at Revel Ridge is top of mind for Mr. Mirko and Rokmaster, who expect an updated resource estimate by year’s end. The project has an existing measured and indicated resource in the Main Zone of 1.1 million ounces of AuEq at a grade of 8.07 g/t AuEq, and an inferred resource of 961,000 ounces of AuEq grading 6.55 AuEq (excluding Hanging Wall and Footwall Zone resources).

The separate Yellowjacket Zone is a stacked series of subparallel carbonate hosted silver-zinc-lead zones. It contains an indicated resource of 771,000 tonnes of grade 9.93% zinc, 2.61% lead, 0.09 g/t gold and 62.8 g/t silver. The mineral resource estimate does not include results from the company’s recent and ongoing drill program.

Rokmaster’s underground drill program saw an exceptional 85% of drill holes with completed assays intercept above-threshold net smelter return gold equivalent grades. The company also identified visible, particulate gold grains in deeper drillholes. This is important for mineral economics as potentially free milling particulate gold that isn’t locked into a sulphide phase has a high probability of being recovered by standard and lower cost metallurgical processes, including gravity.

In a June 2021 update, the company said exploration data suggests that the volume of mineralized rock outside of the 2020 resource area may be significantly larger than the volume of rock within the 2020 resource domain.

With an active surface drill program currently underway, results continue to confirm and expand on the exceptional continuity of the gold-rich Main Zone mineralization and the silver-zinc rich Yellowjacket style mineralization. Recently returned assays cored 3.9 m of 1,093 g/t AgEq within 14.38 m of 482.4 g/t AgEq. Drilling and geochemical sampling are demonstrating that the Revel Ridge orogenic gold system extends for kilometers beyond historical diamond drill holes.

“Every successful drillhole in this greenfields exploration environment further expands the larger scale potential of the Revel Ridge camp, and in these drill holes we are effectively looking for a new mine,” Mr. Mirko said in a July 16, 2021 news release. “Results from the first seven surface diamond drill holes (RR21-41 to RR21-47) document the significant contribution that the expanded silver-rich, carbonate hosted Yellowjacket Zone will provide to the net resource at Revel Ridge. “

In recent media, Mr. Mirko said the company hopes to release a revised 43-101 Gold equivalent resource once the drilling is complete. Drilling is still underway with assay results pending.

“A welcome challenge for our team is seizing on the impressive size and growing number of tier-one targets,” Mr. Mirko said, adding “This is an enviable position for any junior explorer and a position which is likely unique for many projects in the Western Cordillera.’’

Targeting mine development, Rokmaster released a preliminary economic assessment (PEA) in December, 2020 demonstrating that Revel Ridge has the potential to become a long life, low-cost, robust polymetallic gold-silver mine with strong project economics with a base case price of US$1,561 an ounce gold. Preproduction capital expenditures are forecast to be $396 million.

The PEA leverages Revel Ridge’s extensive infrastructure, including all-weather access roads, local hydroelectric facilities, 3.0 kilometres of underground development, permitted waste rock storage facility, full camp facility, and proximity to the City of Revelstoke.

Key project infrastructure would include a 2,300 tonne per day mill comprising crushing-sorting-grinding-gravity-flotation-POX plant, producing gold/silver doré and saleable zinc and lead concentrates. See a conceptual video of Rokmaster’s mine site and process plant for more.

On July 30, 2021, Rokmaster shares were trading at 51 cents in a 52-week range of 76 cents and 20.5 cents, leaving the company with a market cap of $54 million, based on 104.9 million shares outstanding.

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