Gold and Silver Fundamentals Will Take Hold

Crisis-induced asset price weakness puts a terrible strain on the banking system and takes us back to 2008 when people realized they were better off putting money in gold and silver than propping up the banks. As a precious metals investor, my biggest concern is what happened to the banking business during that crisis. The Federal Reserve bailed out the banks, but never fixed the problem. The banks are still overleveraged and negative real interest rates aren't giving account holders a reason to keep their money there. When people come to that realization en masse is when gold and silver prices will return to where they should already be based on the fundamentals.

In this environment, the royalty companies seem to have done the best. They essentially have almost zero cost. All they have is revenue. Now, the revenue goes down because the price of gold and silver goes down, but you're not going to go broke.

However people invest in precious metals I would like to stress what I said in the roundtable: People need to stay the course. I think the returns can be very large if what should happen is allowed to happen in the physical market. I think it will happen very shortly.

- Source, Eric Sprott via Market Oracle

Disease Could Cause a Financial Armageddon

Unfortunately, recent events have suggested that travel protocols, monitoring programs and hospital procedures are not working. It's a mess of incompetence, and it goes back to central planners focusing on the economy and the stock markets and bond yields. They forget about people and their response is wholly ineffective. When Doctors Without Borders was screaming months ago that it needed more help, nothing happened. No one understood the simple equation of numbers that if you let this thing go, you've lost control. We have certainly lost control in Sierra Leone and Liberia. The Ebola virus doesn't know where the border is and the likelihood of it spreading to Ivory Coast and Ghana is very high. The jury is still out on how the developed counties will do.

Fear of travel and business disruption is definitely going to have an impact on a fragile economy already weakened by recessions in Europe and Japan. An event like this could have serious negative repercussions because it changes people's behaviors. If people worried about the security of bank deposits start pulling their money out, they would logically want to shift to gold and silver. All of a sudden, investors would come back into these markets and push the price up. No one is considering that. The natural Armageddon of disease could cause a financial Armageddon and precious metals are the natural comfort play.

- Eric Sprott via Market Oracle

Closing Mines in Africa due to Ebola Could Cause Gold and Silver to Move Rocket Higher

There is already a shortage of gold and silver in the markets without a corresponding increase in the price. I wrote an open letter to the World Gold Council questioning its data on China. If you believe the Shanghai Gold Exchange data, China consumes more than 2,000 tons (2 Kt). In 2011, it consumed only about 1 Kt. In the last two years, China has bought an extra 1 Kt gold—25% of a 4 Kt market. If any country came in and bought 25% of the oil market, the wheat market or the orange juice market, the commodity price would not go down. Obviously, the physical gold market is not manifesting itself in the price changes.

We also see that in silver. Last year, Indians bought an extra 18% of the silver market, yet the silver price declined. That's because the price is being run by someone who has avoided the physicality of the market. I hope the U.S. Mint will announce that it has to stop selling 2014 silver because the demand has picked up so much. That's what I expect the Mint to do if it's running out of silver. It would be interesting if some of these futures players were to stand up and demand delivery, because I don't think the Mint could deliver.

Closing mines in Africa would just exacerbate the supply problem and cause things to finally change dramatically to the upside in prices as people publicly acknowledge the fundamentals.

I'm really focusing on the impact of Ebola on the demand side. The numbers suggest that Ebola will be difficult to contain. The death rate is incredibly high and it is highly contagious. It has already spread to Spain and the U.S. Unfortunately, the powers that be at the Centers for Disease Control (CDC) and the World Health Organization (WHO) have totally misunderstood and understated what's going on. Four weeks ago the U.S. government magnanimously announced it will spend $22 million to build a 25-bed facility in Liberia. What would 25 beds possibly do in Liberia? Sierra Leone has already given up trying to treat people in hospitals. The country could have 100,000 cases in just a few months. The CDC estimated that we could see between 550,000 and 1.4 million cases by Jan. 20 in just those two countries. There aren't enough hospitals or healthcare workers there to deal with those numbers.

Eric Sprott via The Gold Report

Why Billionaire Eric Sprott Thinks Ebola Will Cause Gold and Silver to Skyrocket

In an interview earlier this week, billionaire Eric Sprott was interviewed by The Gold Reporton why he is betting so heavily on gold and silver. Why is he such a believer? Below, we take a look at a couple of reasons, then reveal the best ways to make this bet.

The Ebola Outbreak

First of all, it’s important to make one thing clear: Gold is not really a hedge on inflation. Recent data has proved as much. Rather, the metal is a hedge on the fear of inflation. That’s why crises such as the Ebola outbreak prompt spikes in the gold price — investors speculate that economies will be hurt, prompting central banks to print more money, which leads to greater inflation. So investors snap up gold, prompting the price to rise.

And the Ebola outbreak could get much worse. To make things clear, no one is hoping for such an outcome, and Mr. Sprott said as much as well. But Sierra Leone and Liberia have proved incapable of handling the epidemic. Worse still, the virus could easily spread into countries like Cote D’Ivoire and Ghana. From there, it will only be harder to contain.

The virus could also have an impact on supply — for example, Ghana is the world’s 10th largest gold producer. Mali and Burkina Faso are also significant producers in West Africa.

Supply and Demand

If you look at the world supply of gold, it’s in serious trouble. Mining companies are cutting exploration budgets, junior explorers can’t get funding, and mines are being depleted. So in just a few years, global mine supply will fall, under practically any gold price scenario. A similar case can be made for silver.

Meanwhile, China has been buying ever-increasing amounts of gold. In fact its gold consumption has doubled since 2011. As Mr. Sprott put it, “Obviously, the physical gold market is not manifesting itself in the price changes.” There’s a similar story going on in the silver market. Last year, India bought an extra 18% of the silver market, yet prices somehow went down. Over the longer term, especially with depleting mine supply, this could cause prices to skyrocket.

So how do you profit?

Mr. Sprott and his team offer an ETF of gold companies, and he screens for two items in particular: revenue growth and a lean balance sheet. Revenue growth is important because it signifies growing production. Meanwhile a clean balance sheet is important because high debt levels increase risk, take a bite out of profitability, and also make a company less flexible.

With that in mind, two companies stand out: Franco-Nevada Corporation (TSX: FNV)(NYSE: FNV) and Silver Wheaton Corp. (TSX: SLW)(NYSE: SLW). These companies don’t operate existing mines, but rather sign royalty agreements with other miners. This helps them grow revenue more consistently. The companies also have pristine balance sheets.

If you’re insistent on buying a miner, you should consider Goldcorp Inc. (TSX: G)(NYSE: GG). The company has been a very responsible actor, and as a result, it has less than $1 billion in net debt. Better yet, it is still growing production.

- Source, Motley Fool

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