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Weekend Edition

The gold secret the Chinese won't admit
Saturday, February 22, 2014

 Bad news is good news this week.
Newly appointed Federal Reserve Chair Janet Yellen has said she'd step in at any signs of economic discomfort with more quantitative easing. Perhaps that's why gold is up to more than $1,300 an ounce.
The Market Vectors Gold Miners Fund (GDX) – which holds many of the market's largest gold-mining stocks – is up 25% so far this year.
According to S&A Short Report editor Jeff Clark, we could see a further correction in gold stocks before the bulls take hold again. In his Direct Line real-time blog for S&A Short Report subscribers, Jeff wrote:
Gold stocks have had a terrific run. But they're now due for a pullback or consolidation. We'll be using that pullback to add exposure to the sector. The intermediate and longer-term picture remains bullish. My ultimate target for GDX is up near $37 per share. First, though, I think we'll see a pullback to less than $25, at least.

 But the long-term bull market for gold is still on... Gold stocks are still way down from their peak. And lots of money is waiting to enter the sector. In a private e-mail, S&A Resource Report editor Matt Badiali explained how private-equity firms are getting into the game...
What do ex-mining executives do in bear markets? They get private-equity backing and form "vulture" funds to buy assets from their former companies. Former executives of mining firms Xstrata, Vale, and Barrick Gold all now head funds looking to buy mining assets.

Matt said these funds are "circling the carcass" of the mining industry. And these executives know which assets are the best to acquire.
The mining industry wiped about $60 billion off their ledgers in write-downs in this bear market. Now, the giant companies are selling assets to shore up their cash positions. According to the Wall Street Journal, Glencore Xstrata will likely sell its Las Bambas copper mine in Peru. BHP Billiton looks to raise $25 billion by selling 10 businesses, including the Ekati diamond mine in Canada and coal assets in Australia. Rio Tinto will likely sell its aluminum divisions. Anglo American will likely divest both its Minas-Rio iron-ore mine in Brazil and its platinum division.
The sales began this year. Major gold miners Barrick and Goldcorp sold the Marigold mine in Nevada to junior mining company Silver Standard Resources.
Canadian miner Sherritt International sold its coal assets and royalty portfolio for $891 million. Buyers for its assets were junior miners Altius Minerals (which took the royalties) and Westmoreland Coal (which took the coal production).

 According to Matt, private-equity funds are in the mix, too... Bloomberg reports that private-equity groups put up $9 billion over the past 18 months to invest in mining assets.
Aaron Regent, former CEO of Barrick Gold, put together Magris Resources to invest in mining assets. It recently missed BHP Billiton's Pinto Valley copper mine in Arizona. Capstone Mining ended up winning that deal for $650 million.
A former mining banker, JPMorgan's Lloyd Pengilly, runs the QKR fund. Former BHP Billiton executive Andre Liebenberg backs him up as chief financial officer. QKR bought AngloGold Ashanti's Navachab mine in the African country of Namibia for $110 million. The mine produced 19,000 ounces of gold in the third quarter of 2013. Its average grade was 1.57 grams per ton. According to the latest reserve estimate (from December 2012), the mine contained 2.1 million ounces of gold at 1.3 grams per ton.
That's an outstanding mine, from a grade and volume point of view... and it was acquired at a great price.

Some mining companies have enough cash to execute deals. But Matt says he expects to see private-equity funds get more active in the next few months. "Acquired at the right price, many of these mines will be excellent businesses for years to come," he said.
 A few more bullish notes on gold...
Hedge funds raised bullish bets on gold to a three-month high last week... The net-long position rose 17% to 69,291 futures and options in the week ended February 11, according to data from the U.S. Commodity Futures Trading Commission (CFTC).
Also, investment bank Citi released a recent report predicting gold could hit $1,685 an ounce, based on technicals.
 And China is still buying...
According to the latest data from the gold-industry trade association World Gold Council (WGC), China overtook India as the world's largest buyer last year. China's demand for gold bars, coins, and jewelry soared 32% to a record high in 2013.
And China should be able to sustain the No. 1 spot...
"China is 10 years behind India in terms of deregulation and growth of demand," Marcus Grubb, WGC's managing director of investment strategy said. "Given last year was such a strong year, it will be hard to equal that again in 2014, [but] the stock of gold in China is less than half of that in India, so we think there's plenty more room to grow."
 It was illegal for Chinese citizens to own gold up until 2002. Now, they are buying and storing gold as affluence increases. From the Wall Street Journal:
"I consider gold [bars] a storage of value and it makes me feel safe," said Kiki Fang, 26, a human-resources worker at a Shanghai consulting firm.
Ms. Fang, who bought a couple of 50-gram gold bars last year and plans to buy more this year, said she buys gold, too, because of concern about a "bubble in [China's] real-estate market."
She isn't alone. Huang Jiwei, an engineer at a Shanghai car company, also bought some gold bars to diversify his investments. "No one knows what will happen to the property market, so I might as well put my money into gold," said Mr. Huang.

 Also, the Industrial & Commercial Bank of China, China's largest bank by assets, said trading volume in precious metals increased 22% in the first three quarters of 2013 year-over-year to 1.07 trillion yuan ($176.6 billion). And sales of gold bars are at their highest level in four years.
 We've long known China and its citizens have been buying up every bit of gold they can get their hands on... And they took advantage of last year's price weakness to accumulate even more. We're seeing a massive transference of wealth and power from West to East.
There's no doubt China is nervous about the United States' unsustainable debt load... After all, China holds nearly $4 trillion in reserves. And 60% of that is in U.S. Treasurys. But China can't simply dump its Treasurys... It would hurt them as much as it would hurt us.
That's why the country is vacuuming up the world's gold... We believe they have a secret plan behind their actions (something the Chinese government would never admit). Matt explained what he thinks the Chinese are preparing to do with all this gold in a special presentation. Click here to learn more...
Sean Goldsmith

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