There are various categories of gold shares.
1. The most popular are the majors.
The least understood part about them is their serious short of gold derivative problem, and the balance sheet and price of cover implications thereof. No one will deny that they get the most attention because they have the capitalization required and the brand name that invites institutional buying.
Not much attention is being paid to the fact that they have sold their gold years into the future at prices well under $400. Their calculations on their sales price of the short of gold adds in the interest paid to short of physical bullion over the period of the short position into present time calculations as per their risk disclosure filings. Yes, if you sell physical you get paid interest, and if you buy physical on the cuff you pay interest in all the major cash markets. OTC derivative short of gold factors interest, yet to be earned, into the reported sales price going out in time. When they close the transaction before maturity, as is happening now, the debit does not include unearned interest and therefore charges at the real lower sales price. That is why the majors are borrowing their billions. This will limit their gain versus the gold price as it rises.
2. Junior producers are entities that have opened production facilities which are modest or not yet at full capacity. In the main they have the same problem but it is less visible. Recently the trend has been to bury the OTC short of gold derivatives in the loan documentation, but it is still there with somewhat the same effect. What matters is when the loan was made. The more recent it is the higher the short strike price in the OTC derivative and therefore the less the loss the company faces.
3. Exploration and development issues have been the favorite of the mix of all gold share categories for short operations. The gold explorer business is capital intensive, so if the price can be depressed, the short starves the company of its ability to finance. Before you can have production you must pay all the costs of exploration which usually comes from seed capital. In the last five years there has been practically NO seed capital anywhere for gold.
There are other categories and as a company transmutes between categories. In this unprecedented gold bull market price adjustments should occur with category transmutation of gold entities as they climb the ladder of success.
There is a separate group known as Senior and Junior Gold Royalty companies that will generally outperform as hyperinflation that impacts mining costs occurs. This outperformance should be a product of the cost of production falling upon the royalty partner, not the royalty holder whose participation is an amount of the gross production.
There is the exploration company that begins production and therefore moves up the scale toward the category of junior producer. Usually this is accompanied by improvement in price as many investment entities will not buy non-producing exploration companies.
There is the exploration company that has success and will be evaluated by the quality of its success and deal making. Historically success and deal making for such a company increases interest in the company.
It has been almost 30 years since any meaningful segment of the general marketplace has taken an interest in gold shares. Most mineral underwriters have moved away from all but the Major Producer category. When was the last time you saw any known, respected mineral underwriter working for companies in the bottom half of the Junior Producer or any Gold Exploration entities?
The only money available to the exploration Gold Exploration entities has been PIPEs which when participated in were the start of the company’s death spiral.
At the beginning of a gold bull market it is gold itself, then Major Producers that perform.
As gold makes its way past $1000 to $1650 and beyond, the order up to now has been Major Producers and the top half of Junior Producers benefitting with while the short attacked the bottom half of Junior Producers and all of Gold Exploration entities. Watch closely now as a shift takes place.
No short of any viable gold share can be happy this evening even though across the board they are still short and in some cases still sitting on the price.
You might have noticed recently in the heavily shorted gold situations in the bottom half of the Junior Producers and many of the viable Gold Exploration entities that there was an at the close and after close attempt to destroy prices when in some instances million of shares were sold and bought. This occurred in some cases on volumes 18 times larger (volume on the day) than the previous norm. Exchange short figures indicate that these were long buys and only minimal short covering.
The leverage is always on the bottom side of the category scale, so I anticipate that the bottom half of Junior Producers and the viable companies in Gold Exploration entities to outperform the top half of Junior Producers and Major Producers as the price of gold continues higher in late 2009 and 2010.
History tells us this is how it has always happened, and I believe it will again.
That is called leverage coming out higher gold prices, high in ground values, higher profits in the start up mining and in many cases much less shares outstanding than in the Major Producers and the top half of Junior Producers.
Gold shares presently in the more leveraged categories have practically no participation compared to other hard asset equities such as energy thanks to the action of the shorts.
In general it is more than likely the wrong time for a long suffering long to throw in the towel, but many are and will.
That is also the way it happens and explains the deluge of questions coming in today about the more leveraged gold shares.
The window of opportunity for the gold stocks is wide open. This one will be bloody obvious in retrospect. Yes, that’s a 3 to 4 bagger to the upper band.