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The Sweat of the Sun

As a general rule, the most successful man in life is the man who has the best information

Gold miners, because the number of discoveries was falling and existing deposits were being quickly depleted, have had to diversify away from the traditional geo-politically safe gold producing countries, ie Canada, the U.S. and Mexico. The move out of these “safe haven” countries has exposed investors to a lot of additional risk.

In many parts of the world capitalist hating Marxist governments are becoming greedy. Many countries might come to mind as places where shareholders could, without warning, receive news that their operations have been taken over, expropriated, by the government and/or its friends, or that permits are suddenly suffering delays or have been cancelled outright.

One of the most serious and unpredictable risks facing mining operations and investor interests is "country risk" - where the political and economic stability of the host country is questionable and abrupt changes in the business environment could adversely affect profits or the value of the company’s assets.

We’ve seen far too many instances of companies losing assets that were lawfully theirs.

If the management side of the companies we invest in is so important then maybe we should start regarding the management of the country they operate in as at least as important? There is nothing quite so heartbreaking to an investor as having his company’s flagship project taken over, nationalized, by the "El Presidente for life" of the country they’re working in.

Gold Production

Below is a chart from statista.com showing slowing global gold mine production.

According to the World Gold Council; Gold demand rang in at 4,212t for 2015, virtually the same as in 2014. Annual gold mine production increased at the slowest rate since 2008 and re-cycling has dropped to multi year lows.

Gold Demand

Gold demand growth rose in the fourth-quarter 2015 - demand was 1,117.7 tons, up 4% from the same period a year earlier.

 


World Gold Council

“Back in 2012, mining companies slashed their corporate costs, their exploration and development budgets [and so] the pipeline of new gold mines is really thin.” Alistair Hewitt, World Gold Council


Mining.com

1st Quarter 2016

GFMS reported India's physical gold purchases were down 65% during 1st quarter 2016 yoy while China's buying dropping 27.3% year-on-year. Overall physical buying was down 23.8% as compared to Q1 2015 - to 781 tonnes, down from 1,025 tonnes 2015.

GFMS estimated exchange-traded funds (ETFs) purchased by 330 tonnes of gold during Q1. That’s almost ten times higher than the 36 tonnes that ETFs bought in Q1 2015 putting the global gold market in deficit by 25 tonnes for the 1st quarter 2016. 

Juniors, Company stage – risk v. reward

I believe junior resource companies offer the greatest leverage to increased demand and a rising gold price.
  
Juniors, not majors, own the world’s future mines and juniors are the ones most adept at finding these future mines. They already own, and find more of, what the world’s larger mining companies need to replace reserves and grow their asset base.
     
Juniors are risky, managing that risk is what investing in the junior resource sector is all about – in a nutshell it’s all about when you invest. Some people invest extremely early because of management, some on the possibility of what a property might host, some people will wait and invest as you start to drill and build resources thus reducing their risk. Only you can decide the level of risk you can tolerate and how much patience you have to sit while developments, the story, plays out.

The greatest risk, and by far the most upside, comes from buying a junior when they are exploring and make an initial discovery. Great drill assay results can send a juniors share price skyrocketing. The reverse can also be true. Junior explorers, the green field plays, are the riskiest plays by far.

My favorite stage juniors mediate some of the risk, these juniors are in the post discovery resource definition stage. Our chosen junior has already discovered something, and they are going in to see what they have – to hopefully produce a 43-101 compliant resource estimate, or build upon an existing resource. The risk for an investor at this stage has been greatly reduced, the waiting time for a discovery non-existent and the reward very nice considering the much lower amount of risk. If there’s still enormous blue-sky discovery potential on the rest of the claims, so much the better.

Conclusion

The Incas believed gold was the “Sweat of the Sun.” Gold represented the glory of their sun god, Inti.

In ancient Egypt, gold was considered the skin or flesh of gods, in particular the Egyptian sun god Ra. Gold was unavailable to anyone but the Pharaohs.

The Egyptian word for gold was “nub,” taken from gold-rich Nubia - shown on the Turin Papyrus as a major gold producer in antiquity.

Consider these two facts:

  • The world’s governments and central banks are buying gold, a lot of gold
  • The supply of fiat paper money is infinite while the supply of gold is finite

Let’s leave the last words to King Ferdinand of Spain who said, in 1511; “Get gold, humanely if possible - but at all hazards, get gold.”

Richard (Rick) Mills
www.aheadoftheherd.com

 

 

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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