Silver has been in a bear market for almost three years and the recent lack of strength suggests the metal could be headed for new lows. New lows are always bearish until the last one. Our technical work suggests that we should watch for a final low and end to the bear market in the coming months.

This chart plots every major bear market in Silver dating back 45 years (excluding the 1980-1982 bubble bust). It plots them on the same time scale as the current bear market. Excluding the 1980-1982 bear market, we find that the current bear market is inline for being the worst bear market. It is already the fourth longest in time and close to the second worst in price. The current bear is very close to the 1983-1986 bear. This chart and the 1983-1986 bear suggest that if the current bear breaks to a new low then its final bottom could occur about one month later.

Click here for reference chart.

Silver has very strong trendline support on the daily chart around $17. If Silver breaks to a new low then it will run into this trendline support which dates back 11 years.

Click here for reference chart.

In the lower column we plot a 12-month rate of change for Silver. Note how it often reaches or comes close to 100%. After lows in 2003, 2005, 2008 and 2010 Silver gained 100% in a 12 month period. Moreover, following the 1983-1986 bear market which closely resembles the current bear, Silver rebounded 89% in 10 months. Following the 2008 low, Silver rebounded 84% in 11 months. Let’s say Silver bottoms at $17.50 and rebounds 70% in 12 months. That would take it to $30. That would create huge upside in most silver stocks.

Below is a chart of our proprietary silver producers index which contains 14 stocks and is partially weighted by market cap. It contains all of the large, important silver companies as well as junior producers. We didn’t just pick the 14 best. This index recently peaked at neckline resistance and just below the 80-week moving average. Note how the 80-week moving average marked resistance in early 2012 and late 2012. A new bull market will only be confirmed when this index is able to surpass that confluence of resistance.

Click here for reference chart.

From a bird’s eye view, the bear market in Silver is just about over while the bear market in silver stocks probably is over as we don’t expect them to make a new low. However, the silver stocks won’t break resistance and confirm a new bull market until Silver has bottomed. Our analysis shows that Silver’s bear has a bit more to go in terms of price and time. We’ve laid out what we are looking for in Silver which is a new low and a bounce from 11-year trendline support. If that occurs at a time of extreme bearish sentiment then it is a buy signal. This prognosis, if correct means we have some time to research and patiently accumulate the best silver stocks which are positioned to benefit from a resumption of the secular bull market.

Article written by Guest Contributor to MiningFeeds.com, Jordan Roy-Byrne of The Daily Gold.

Like most natural resource sectors, graphite has been hot at times… and not so hot. Back in 2011, when there was extreme excitement about coal, potash, iron ore and precious metals, graphite stocks experienced a day in the sun. However, when gold, silver, coking coal and iron ore prices crashed in 2012-13, so did graphite pricing.

Too Much Graphite Supply?

Tech-savvy investors and industry pundits have long believed that the demand for graphite, used in a wide range of consumer electronics and notably in lithium-Ion batteries, is poised to explode. Higher demand is great, but doubters of the graphite story noted that expected supply additions would overwhelm increased consumption, thereby constraining graphite pricing. While a lower graphite price is good for consumers, it’s not good for emerging graphite players.

For example, Australian-listed Syrah Resources (ASX:SYR) has a proposed graphite project in Mozambique that could be in production of 200,000 metric tonnes of graphite a year by the end of the decade. That’s a heck of a lot of graphite for an overall annual market of just about 1.2 million tonnes. Therefore, a knock on graphite was that Syrah’s project alone could flood the market. Another concern was that a key area of graphite demand that drew breathless attention in 2010-11, might not live up to the hype, i.e. battery demand for electric vehicles.

Supply / Demand Fundamentals Moving in the Right Direction!

In the past few weeks there’s been some highly significant news on both the demand and supply front that’s bullish for graphite juniors. On February 18th, Tesla Motors (NASDAQ:TSLA) announced that it proposed to build a giga-factory to supply car batteries for its wildly popular electric vehicles. It appears that the EV market is more than just hype as Tesla has almost single-handedly revitalized that market.

Tesla a Game Changer in Electric Vehicle Battery Demand

It has been reported that the proposed giga-factory might require the opening of six new graphite mines. While six mines might not seem like a lot, there’s less than 10 prospective mines of considered likely to reach meaningful production levels by the end of the decade. Companies in that group include Syrah Resources, Focus Graphite (FMS.TO / FCSMF), Northern Graphite Corp (NGC.v / NGPHF), Graphite One (GPH.V / GPHOF), Zenyatta (ZEN.V / ZENYF), Flinders Resources (FDR.V / FLNXF) Big North Graphite (NRT.V / BNCIF) and Mason Graphite (LLG.V / MGPHF).

In searching through company filings and corporate websites, it quickly becomes apparent that even the more advanced and/or larger graphite projects proposed by the above listed companies would not flood the market. For example, Northern Graphite’s proposed project could be in production by next year, with upfront capital needs of about $100 million. This project is forecast to generate 21k tonnes of graphite per year. Focus Graphite’s mine plan calls for 46.6k tonnes per year. These are not big mines.

Syrah Resources & Chinalco Sign Blockbuster Off-take Agreement

The 800 pound gorilla is Syrah Resources’ Mozambique project, expected to start production in late 2015 or early 2016. Upwards of 200,000 metric tonnes of graphite per year is forecasted. However, half of that amount appears to be headed to China. Chinalco, the world’s 4th largest producer of aluminum, signed an agreement with Syrah for 80,000-100,000 tonnes. In addition to the Tesla news, this off-take agreement between Chinalco and Syrah is the second piece of bullish news for graphite juniors.

Chinalco is not only soaking up loose graphite supply, it’s also using Syrah’s flake graphite as a substitute for petroleum coke and anthracite in its aluminum production. This is a really important development because this end use was largely not factored into graphite industry growth models. Further, this new segment (anodes in aluminum smelting) is a 14 million tonne per year market. That’s 10 times the size of the flake graphite market.

Chinese Exports of Graphite in Decline

Importantly, annual graphite supply is not static, it declines naturally as existing mines are depleted. Roughly 70% of graphite production is in China. The mines there are small, inefficient and polluting. Therefore, China is cutting back on production and exports above and beyond natural mine depletion. Some market pundits believe that China could become a net importer of graphite by the end of the decade.

Companies to Watch This Year….

Of the above listed companies, two stand out as worthy of further consideration. Graphite One [GPH.v / GPHOF] is a U.S. junior with a massive deposit in Alaska, easily the largest in North America. This deposit is BOTH at surface and high-grade. The size and quality of Graphite One’s deposit is comparable, albeit not quite as good as, that of Syrah Resources’ deposit in Mozambique. Yet, Graphite One has US$ 20 million valuation and Syrah a US$ 500 million + valuation. Neither company is in production yet. Syrah is probably 2.5 years away and Graphite One, 3.5 years away. Key catalysts for Graphite One are 1) a Preliminary Economic Assessment, “PEA,” within 12 months and 2) an off-take agreement within 6-12 months after that. In addition to Syrah’s stock price spiking on its recent off-take news, several others have spiked as well. Look no further than Focus Graphite, Buxton Resources and Kibaran… Kibaran is up 500% from it’s 52-week low.

Tiny Big North Graphite [NRT.V / BNCIF] is a Canadian-listed player with a market cap of just US$6 million. Yet of all the companies mentioned in this article, Big North is the ONLY one actually in production today. Make no mistake, revenues are small, but the growth potential at the company is huge. Big North is buying and mining amorphous graphite in Sonora Mexico. It crushes the run-of-mine ore and sells locally. Again, small potatoes so far, but this simple operation could grow towards 1,000 tons per month by year-end. That’s my estimate, not guidance from management. Next year, this segment could be generating a run-rate $US 2 million of cash flow annually. The real exciting part of the story though is a flake graphite acquisition the company recently announced. This past-producing operation could be up and running next year. Since most infrastructure is already in place, cap-ex to get into production will be quite manageable. By my rough estimates, this operation could be generating US$ 4 to 6 million or more annually by mid-2015, with ample success based, self-funded upside.

Conclusion

Three important developments, all fairly recent, point to a possible strengthening in the supply/demand dynamic of graphite prices. Tesla is single-handedly revitalizing the EV market, Chinalco has effectively taken up to 100,000 tonnes of future graphite supply off the market and China is rapidly cutting exports to the world. These developments are unequivocally good for graphite juniors, especially juniors that could reach production in the next five years. Of the names mentioned, Graphite One and Big North are very interesting investments to consider. Please see click on these links for more information.

Last week I held a series of phone calls with Marc Levy, CEO of junior gold explorer Avarone Metals, [AVM.V]. I first met Mr. Levy in Toronto at this year’s PDAC. Avarone has a market cap of about $6 million and no debt. It is exploring primarily for gold (with secondary targets of silver, copper, zinc and lead) in Saskatchewan, one of the best mining jurisdictions in the world. What makes this company especially interesting is that it plans to drill a property with historical drill holes that showed near-surface, high-grade gold. Therefore, the chances of finding more gold are considered by management to be fairly good and the chances of finding a lot more gold give Avarone tremendous blue-sky potential.

PLEASE NOTE: This is a highly speculative company. There can be no assurances that significant quantities of gold will be found, or that the deposit(s) will be economically viable.

Peter Epstein: Marc, you’re perhaps best known for taking micro-cap Norsemont and selling it to HudBay Minerals for $520 million. Do you see similarities between that opportunity and Avarone Metals?

Marc Levy: Norsemont was a fantastic success for our shareholders and now I’m back in the saddle again. Funny enough, HudBay is our neighbor and a major player in the same district we are working in. We have a great relationship with them. Like Norsemont, Avarone has very substantial blue-sky potential through organic growth, potential tuck-in acquisitions and the possible development of our other properties.

Front and center on Hudbay Minerals’ website it says, “We also partner with junior mining companies on projects where Hudbay can add value by providing technical expertise and funding exploration programs. These investments act as a farm system for future development-stage opportunities.” Is Hudbay the likely exit strategy for Avarone like it was for Norsemont?

ML: That’s a great question, I wish I knew! Hudbay is just one of many groups that could be interested in acquiring us if we prove up a larger, near-surface, high-grade deposit(s). Other companies in the area include Murgor Resources (MGR.V), La Ronge Gold (LAR.V), Claude Resources (CRJ.TO) and Golden Band Resources (GBN.V).

Although your deposit is, “shallow, high-grade and open at depth and along strike,” it’s still fairly small. Is the goal a small but profitable mine or do you hope to define a larger deposit?

ML: Our initial goal at Wildnest is to outline at least 1mm ounces of high-grade gold, as soon as within the next 12 months. By high-grade, I should point out that we have an historical database (non NI 43-101 compliant) gold resource with our best interval reading 17.5 grams/tonne over 6.4 meters. If we are successful in growing Wildnest, we would consider drilling our other properties. Make no mistake, it’s still early days, but we see the opportunities in front of us as highly attractive.

Please describe your upcoming drill campaign, what are the goals?

ML: Our initial diamond drilling program is planned for up to 15 holes in the heart of the deposit. We can’t say for sure what we’ll find, but we are confident we will learn a great deal. We’re very excited because of the historical drilling that was done in the 1980′s. This drill campaign will allow us to outline an initial high-grade deposit and better understand the structure and folds of the deposit to allow for a successful second round of drilling.

How will you fund this drill campaign?

ML: We are talking to several potential funders to raise $1.5mm for this round of drilling. Interest from prospective investors in our company is strong.

Assuming the drill campaign is a success, how soon before we might see a Preliminary Economic Assessment?

ML: I think it’s too early to predict the timing of a possible PEA. The district is very large and we are continually evaluating additional acquisitions. We want to own the district and build out a significant gold camp.

What type of infrastructure would this project require to develop? Is the location a challenge?

ML: Our proximity to infrastructure is good and there is a lot of activity. Our neighbor Hudbay is extremely active in the district. I don’t see any major infrastructure hurdles.

Is there any active mining being done near your project?

ML: Yes, there is active exploration and development being done by a few companies, most notably HudBay. Saskatchewan is one of the most mining friendly places on earth. For example, they provide a tax holiday on initial production which allows you to recoup costs.

How important is the poly-metalic mineralization? The silver, copper, zinc & lead, taken together could they be a major part of the economics? Or, are these metals more likely to be credits against your gold mining costs?

ML: The main commodity we are interested in is obviously the gold. However any credits, such as silver, add to the economic value of the total deposit. Usually in a production situation you would base costs on the key metals, the “bonus” metals would provide extra credits which can add up to significant profits.

What are some near-term catalysts to watch out for?

ML: Our upcoming drilling campaign could deliver significant results in just a few months. We have been negotiating several acquisitions in the area. We are also looking to add another person to our team with significant ideas in the district.

Thank you Marc for your time. Do you have any parting thoughts for readers?

ML: I can’t over emphasize the importance of our historical drill hole data. Dating back to the 1980′s, several million dollars has been spent. This puts us in an advantageous position compared to earlier-stage juniors and gives us the confidence to drill. Given the volatility in the gold price over the past 15 months, one thing is clear…high-grade, near-surface gold deposits in safe jurisdictions are increasingly sought after. We are a small company today, but we have a very real opportunity to grow. Unlike early-stage peers, we hope to see tangible evidence of an economic deposit within months, not years.

This interview was conducted late last week. The author of this article, Peter Epstein, has no existing or prior business relationship with Avarone Metals or its predecessor companies.

Briefly: In our opinion short speculative positions in silver (half) and mining stocks (full) are justified from the risk/reward perspective.

Friday was generally a calm day in the precious metals market and for the currency indices. The initial moves higher (in the early part of the session) were mostly invalidated later on and overall not much changed at the first sight. On second look, the lack of rally confirmed the breakdown in mining stocks. Let’s take a look (charts courtesy of http://stockcharts.com).

Click here for reference chart.

Interestingly, we can summarize the above chart in the same way that we did previously, because the daily move that we saw on Friday didn’t change anything overall:

Gold moved lower once again [on Thursday, but basically it didn’t do anything on Friday] but still not low enough to break below the rising support line. Gold is still outperforming silver and mining stocks (taking this month into account), but now the extent of the outperformance is much smaller. Still, with the situation in Ukraine still being tense, gold might hold up relatively well even if the rest of the precious metals sector declines.

At this time we see that gold’s reaction to the events in Ukraine has been very limited. When markets don’t react to factors that should make them move in a certain direction, they will likely move in the opposite direction relatively soon. In this case, it seems that gold will move lower.

The move below the rising support line (marked in red) could symbolize the start of another big downleg regardless of the geopolitical tensions. For now, the price of gold is already close to this support, but not yet below it.

Click here for reference chart.

Silver declined more than 5% last week. It moved below the rising support lines and closed there on Friday, which is a bearish indication. The situation in silver is oversold, but only on a short-term basis. Consequently, we could still see a corrective upswing here before the decline continues. Miners confirmed their breakdown, but there was no short-term breakdown in gold, so it’s not that clear whether the precious metals sector – including silver – will move lower immediately. It could be the case that miners while decline while metals will pause for a few more days.

The GDX ETF closed below the rising support line and the 50% Fibonacci retracement level for the third consecutive trading day and the breakdown is now complete. If we hadn’t mentioned the extra short position in miners previously, we would suggest it today. Please note that the small move up that we saw in the past 2 trading days materialized on low volume after a huge-volume decline. This suggests that the real move is down and that miners simply took a breather.

Click here for reference chart.

The HUI Index closed the week without a meaningful move back up, and the sell signal from the Stochastic indicator along with its implications remain in place. We previously commented on it in the following way:

We saw a big downswing also in the HUI Index and it resulted in a major sell signal from the Stochastic indicator. In the past 3 years all cases (and many cases before 2011) when we saw this signal were followed by major downswings.

The USD Index finally rallied last week and it seems that this year’s decline is over. There are no sure bets in any market, but this week’s rally looks very similar to what we saw in October 2013. Back then the currency was also a little below the rising support lines only to come back with a vengenace. We saw this type of action last week and the outlook was bullish.

All in all, we can summarize the current situation in the precious metals market in the same way we have been summarizing it for the last couple of days:

It seems that the precious metals sector will move lower in the coming weeks, but just in case the situation in Ukraine deteriorates, we are keeping half of the long-term investment position in gold. In fact, gold has been outperforming both silver and mining stocks since Russian troops entered Crimea.

The technical picture for silver and – especially – for mining stocks is bearish, so in our opinion short positions here are justified from the risk/reward perspective. We might add to the short position in silver and open one in gold relatively soon – we will keep you informed.

It seems to us that if it weren’t for the events in Ukraine, the precious metals sector would be already declining and perhaps testing the 2013 lows or moving below them. This could still take place and it’s quite likely to happen once the situation in Ukraine stabilizes.

To summarize:

Trading capital (our opinion): Short positions: silver (half) and (full) mining stocks.

Stop-loss details:

– Silver: $22.60
– GDX ETF: $28.9

Long-term capital (our opinion): Half position in gold, no positions in silver, platinum and mining stocks.
Insurance capital (our opinion): Full position

Thank you.

Przemyslaw Radomski, CFA of Sunshine Profits, Guest Contributor to MiningFeeds.com

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Unless you’ve been living under a rock, then you have witnessed the now false breakout in Gold and gold stocks. Our expectation was that the breakout would take Gold to $1420 and the stocks up to their neckline resistance (GDX $30 and GDXJ $51) and then we’d see the first real correction since the December low. Before you send in the hate mail, as some already have, let me remind you that we’ve emphasized having an exit strategy and last week wrote, “You sit tight until you decide to take profits or something changes.” Something clearly changed this week. The breakout was nullified and precious metals will finish this week with a nasty candlestick that implies an interim top.

There are multiple reasons why recent price action will damage the recovery. First, both the metals and the stocks were unable to rally back to summer resistance. Second, false breakouts usually mark a key turning point. Recall that gold stocks had a false breakdown in December before rebounding for three months. This decline has also thrown the current recovery off course as compared to history. We will come back to this point later.

Although the two big markets (GDX and GDXJ) failed to reach their necklines, there are several parts of the sector that did reach their necklines. The chart below includes the S&P TSX Index, the BMO juniors ETF (ZJG.to), the explorers (GLDX), silver juniors (SILJ) and the Tocqueville Gold fund (TGLDX). The Canadian market has been aided by the weakening loonie though nevertheless a fair portion of the mining stock sector was able to rally back to resistance. The potential head and shoulder bottom patterns are well intact for Canadian miners, exploration companies, silver juniors and various mutual funds.

Click here for reference chart.

Meanwhile, GDX peaked at $28 and quickly declined below the recent consolidation lows. The next support is the open gap at $24. We anticipate strong support around $23. It marks the summer 2013 low (the left shoulder), the next low in October and the underside of the brief but bullish consolidation that began in late January. A decline to $23 would equate to a 17% correction which is below the 21% threshold for major corrections (mentioned in past articles).

Click here for reference chart.

The large cap miners (GDX) have definitely veered off the recovery course set by the analog chart posted last week. The significance of that, in our opinion is not that the miners are headed to new lows. There is too much evidence that they bottomed. It’s far more likely that the off course movement indicates that no upside move is imminent or likely in the coming weeks and that the bottoming process (for the large caps) may not be complete.

Let’s remember that the analog is only one tool among many and that the gold stocks have only had a handful of major bottoms to study. Moreover, the 2011-2012 topping process in the gold stocks was unique in its length. The topping process began at the tail end of 2010 and the first breakdown didn’t begin until the first few months of 2012. Perhaps the implication of that unusual topping process is a forthcoming longer than normal bottoming process. It took GDX 15 months to begin its breakdown move (December 2010 to March 2012). Currently, the mining stocks as a whole are 11 months into their bottoming process.

To sum it up, a few things are clear. An interim top plus a strong low in place equates to range bound activity over the coming months. Second, the eventual push through neckline resistance is badly needed to kickstart the next bull market. Until then sentiment will remain muted and bears will continue to press their luck. The weaker stocks and indices could have a deeper correction while the stronger stocks and indices will correct the least and presumably form right shoulders. The next several months will offer traders and investors the opportunity to patiently accumulate the strongest and best stocks ahead of what will be, in earnest the start of a rip roaring bull market.

Article written by Guest Contributor to MiningFeeds.com, Jordan Roy-Byrne of The Daily Gold.

After 2 years of falls, potash prices have increased 6% since the beginning of the year. Many expect that this upward trend will continue but there are some elements that could drive the price down again.

What is potash?

Potash is an important group of chemicals containing potassium, which are used predominantly (over 90%) in fertiliser production. Potassium is an essential nutrient needed for crops to grow. There are no alternatives, synthetic or natural, that can replace the nutrient that potash provides.

Most crops are grown in the northern hemisphere, and as the planting season gets underway, the topic of fertiliser use is getting more attention. Looking at global fertiliser prices we can see a slight rise and a couple of questions come to mind: Is fertiliser consumption finally seeing the revival that has been anticipated for many months? And, more importantly – is the upward trend of fertiliser prices going to continue?

Demand drivers

The global demand for fertilisers is gradually increasing in line with the growing population and the consequential higher food consumption. Adding to that, the demand for biofuels has been rising faster in recent years, fuelled by concerns over the destruction of the natural environment and the desire to become more independent from the petrochemical industry. Fertiliser production is linked to biofuels because biofuels are produced from crops. For example, in the US bioethanol is mainly made from maize and in Brazil from sugarcane. Both crops rely heavily on the use of fertilisers.

Two-years of downward trend

The fertiliser industry has been suffering from a slowdown of global demand over the last two years, which caused potash prices to fall about 40%. The drop in demand has generally been associated with global economic difficulties, however in particular fertiliser producers were affected by lower import demand from China and India, both major potash consumers.

At the same time as general low demand, China increased its domestic production capacity and reduced imports as a result. Chinese potash production in 2013 is estimated to have increased 35% year-on-year, reaching 6m tonnes. Indian potash imports also decreased due to high stocks and government subsidies favouring the use of nitrogen-based fertilisers rather than potash ones. The latest news indicates that potash subsidies in India will be cut by as much as 20% after April this year, exacerbating the demand drop-off further.

In July 2013, the collapse of the Belarusian Potash Co triggered a significant fall in prices, a drop of more than 15% in a month. Two large potash producers, Russian Uralkali and Belarusian Belaruskali, ended their trading partnership and the less monopolised market situation increased competition between producers prompting a worldwide drop in potash prices.

Before the collapse, it was one of the two large partnerships that dominated the potash market. The other partnership is American Canpotex (a union between PotashCorp, Agrium Inc., and the Mosaic Company). Together Canada, Russia, and Belarus contribute to about 66% of global potash production, which makes global prices very sensitive to the market condition in those countries.

Several reasons behind rising prices

The upward trend of potash prices at the beginning of 2014 can also be seen in phosphates and nitrogen fertilisers’ prices. Mainly, this is due to recovering demand for fertilisers with the prices becoming low enough to be more attractive to farmers. Following what some are calling a ‘record crop year’ in 2013/14, many major crop producing regions will need the soil to be fortified and nutrient levels replenished, encouraging demand for fertilisers in the coming 2014/15 season. In addition, recently Chinese buyers have set up trading agreements with Canpotex and Uralkali, bringing more confidence and stability to the market.

Outlook

Yet, we can remember the optimistic expectations that were around at the beginning of 2013, and the year did not bring any price recovery, so caution would be advisable.

This is especially true when we turn our attention to the high levels of potash stocks that accumulated during the weak demand years. In North America, potash producers ending stocks at the end of 2013 were significantly above their 5-year average. Also new capacities, which have already been introduced or are planned to come online this year, will add to the global oversupply of potash. High stocks should add downward pressure on prices.

Furthermore, looking at the bigger picture and the long term demand outlook, reports of El Nino occurring later this year have recently intensified. El Nino is a weather phenomenon, resulting in significant changes to the global weather conditions. This could have an impact on fertiliser demand in the future as it can cause extensive devastation to crops. In 1997, the world experienced the strongest El Nino in history, which had a huge impact on food supply. In the USA the cost effect to the agricultural sector was estimated to be more than 1.5bn US dollars. In addition to devastating crops, El Nino affected transportation and infrastructure in many other regions around the world.

So, although the potash market seems to look much brighter this year than the previous two years, many aspects still remain uncertain. To avoid being caught by surprise, the market players should watch the situation closely in case the conditions reverse.

Can the gold price be fundamentally related to some other economic variables? Can we use those variables successfully in trying to predict the future price of gold? Is gold highly correlated with any of those variables?

Last year a very insightful and interesting working paper was published in the webpages of the National Bureau of Economic Research by Claude Erb and Campbell Harvey. The paper is mostly about gold being perceived as either a safe haven or an inflation hedge. After a while it sparked various discussions about gold not being what it is thought of. And rightly so. As we have already mentioned many times in the Market Overviews, gold is not historically an inflation hedge device which will protect you against possible inflation. Of course the special case for the gold price could be a hyperinflationary scenario.

In the same paper Erb and Harvey have found a very interesting correlation in the gold market that lies between the gold price and the interest rates. If real interest rates rise, then gold falls. If real interest rates fall, gold gains. In itself this relationship is nothing new for gold analysts. This observation about gold related to the interest rates has been floating around for some time. It is perfectly understandable since there are good explanations for the phenomenon, and (as opposed to the inflation-hedge hypothesis) this one actually has some confirmation in the data.

Erb and Harvey did a comparison of the real price of gold to TIPS – Treasury Inflation Protected Security – to ten-year government bonds, which are adjusted by the inflation rate. The correlation seems to be very high, especially in the realm of economic data – 0.82! This is pretty high if we compare it with numerous other correlations done in various fields of study.

It is no surprise then that the previously existing theory has been boosted again. Despite the fact that the authors of the paper were very careful and reserved in drawing any serious conclusions from this observation, some of those inspired by the research already attempted to use those observations to predict future gold movements. We could read predictions that if you expect gold to come closer to 2 thousand dollars per ounce, then we should see interest rates first coming lower under the one percent level. At least that’s what the numbers are telling us, and the numbers could not possibly lie to us, could they? Perhaps I forgot to mention that all those predictions have something smuggled in a very smooth and elegant way, which comes down to “provided that history is good guidance…”

Is it in this case?

Actually an observed correlation relates only to the most recent 17 years. That is not that much when it comes to determining long-term relationships. And it can be explained in a different manner. As we emphasized, gold should be treated as a specific currency in the financial market. It is a dollar alternative. Therefore anything that happens to the dollar economy, any negative sign of its weakness will favor gold, and boost its value. Therein is the reason why low real interest rates were so often associated with gold’s increases in value. When the American economy is weak, interest rates are often lowered because of the responsive monetary policy of the central bank. Hence there may have been a common denominator for low interest rates and high prices of gold: bad times for the dollar economy. With distrust in dollar assets, investors get more interest in the shiny asset, and bureaucrats are ready to print money. Those two things perfectly coincide.

Actually any sensible story about investing in gold could be translated into the comprehendible story within the margin.

How is that relevant for the current gold investor? As simple as this: even if the interest rates are raised, it does not mean that gold’s bull market has to be over. Even if the returns on government bonds go up significantly, the gold market need not be decimated because of it. And the other way around. Just because interest rates are at low levels and will stay at significantly low levels (as Yellen tries to assure us), it does not mean that gold is the safest investment on a short-term basis (as recent experience in the market a few months ago has confirmed). Every such change has to be interpreted in the context of the economic situation. We also have to remember that interest rates are a very complex phenomenon.

It is not hard to imagine a scenario in which long-term interest rates are going up, and gold is still booming. In fact it is quite easy. Can there be the case of more distrust in the dollar system and increasing returns on government bonds? Yes, there can be such a scenario. For example, it can simply happen when investors also start distrusting US Treasuries, and not only other (mostly commercial) dollar assets (which could happen if inflation was very high, and in the end a huge outflow of capital from United States would result). Plus, in the previous bull market (70’s), interest rates simply followed gold higher.

All in all, the main reason behind gold’s bull market is the failing dollar system. The Fed’s interest rate policy is a way to deal with this epic problem and gold’s performance is mainly the consequence of the latter, not the former. It therefore seems that the interest rate environment will continue to support higher gold prices, but one should keep in mind that the gold-interest-rates link is not carved in stone.

Thank you.

Matt Machaj, PhD of Sunshine Profits, Guest Contributor to MiningFeeds.com

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Gold’s strong rebound upleg this year has been driven by big gold-futures buying. After abandoning gold last year, American futures speculators are returning to the yellow metal in droves. These capital inflows are a very bullish harbinger, as major futures buying is the primary fuel for young gold uplegs before investors return to take the baton. And this big gold-futures buying is likely less than half done!

From a pure fundamental supply-and-demand standpoint, gold’s crushing losses last year were solely attributable to record gold-ETF selling by stock traders. The World Gold Council’s comprehensive 2013 data showed that global gold-ETF outflows from epic share selling was actually a third greater than the total worldwide drop in gold demand! Without those extreme gold-ETF liquidations, gold wouldn’t have plunged.

Thankfully stock traders are just starting to buy gold-ETF shares again, resulting in capital inflows from the stock markets to gold for the first time in over a year. This critical mean reversion of investor interest in gold has barely even begun. So far, the flagship American GLD gold ETF has only recovered 1/25th of its bullion hemorrhaged in 13 months ending in January! Investors are driving this new gold-ETF holdings recovery.

But a major secondary factor in gold suffering its worst loss in a third of a century last year was record futures selling. In the first half of 2013, American futures speculators dumped gold at blistering sustained rates. Provocatively as soon as their outsized selling peaked mid-year, gold prices stabilized even though the heavy gold-ETF liquidations continued. Futures trading dominates global gold-price action!

There are multiple reasons for this. While gold trades universally in physical form, the actual prices vary slightly. The American gold-futures market provides one centralized price quotation that the rest of the markets can cue off. Actual gold bullion is costly and cumbersome to trade, but futures allow instant leveraged gold-price exposure to large hedgers and speculators. And gold futures have been around for decades.

American gold futures started trading in late 1974, when gold ownership finally became legal again for Americans after being banned for four decades by a Democratic president. Meanwhile GLD wasn’t born until late 2004, three decades after US gold futures started trading. So from a real-time-price and trader-sentiment perspective, American gold futures remain the only game in town. They truly are the gold price.

So just as extreme gold-futures selling slaughtered the gold price in the first half of 2013, heavy gold-futures buying is lifting it this year. The implications of this critical shift are very bullish. Based on multi-year averages, this gold-futures buying is likely only half done at best. As futures buying continues to push gold higher, more and more investors will be enticed back to strengthen and amplify gold’s new upleg.

It’s important to remember that futures are a zero-sum game. Every futures contract has one trader on the long side and another on the short side. The former is betting the underlying price will rise, and the latter that it will fall. Every dollar won by the winner is a direct dollar loss for the loser. Because of this core structure, the total number of longs and shorts outstanding in gold futures are always perfectly equal.

But there are two distinct groups of futures traders, hedgers and speculators. Hedgers actually produce or consume the underlying commodity, so they simply use futures to lock in their future selling or buying prices to minimize market risks on their businesses. But speculators trade futures solely in the hunt for profits, they have no commercial dealings in gold. Their highly-variable buying and selling drives the gold price.

Every week the main US futures regulator releases a great report called the Commitments of Traders that breaks down the futures positions held by both hedgers and speculators. The charts in this essay are built from that CoT data, revealing how American futures speculators are betting on gold. And they have been buying it aggressively, which is why the gold price has surged so nicely in the past few months.

This chart may look complex, but it’s quite simple. The green line shows the number of gold contracts that American futures speculators hold the long side of on a weekly basis. These are leveraged bets the gold price is going to rise, so the higher this metric the more bullish traders collectively are on gold. And the red line shows their bets on the short side, where higher numbers mean they are more bearish as a herd.

In order to grasp the implications of the big gold-futures buying this year, understanding the context of the big gold-futures selling last year is essential. Gold plunged 26.4% in the first half of last year, in three distinct selloffs that all had major futures-selling components. Last February, it all started when gold fell on a futures bear raid while most Asian traders were away for week-long Lunar New Year celebrations.

American speculators triggered this 6.7% 2-week decline by aggressively selling short gold futures. They effectively borrowed gold from other traders, sold it, and then hoped to buy it back cheaper later to repay their debt after its price had fallen. Speculators’ total short-side bets on gold surged about 50k contracts in that time! This is truly a vast amount, as each futures contract controls 100 troy ounces of gold.

The equivalent of 5m ounces of gold hitting the markets in a couple weeks, or 155.5 metric tons, was brutal. By that point in 2013, the total gold-bullion outflows from differential GLD-share selling was just 51.6t over 7 weeks. This pushed gold down near critical multi-year support at $1550, setting it up for April’s shocking panic-like plunge. Once that technical line in the sand crumbled, all hell broke loose.

As $1550 failed in mid-April, gold plummeted 13.8% in just 2 trading days! Gold hadn’t seen anything remotely close to that for three decades, it was crazy. That critical-support break triggered stop losses on speculators’ long gold-futures contracts, so they were forced to liquidate. This sparked margin calls on other traders, spawning a vicious circle of selling. Unfortunately the weekly CoT data masks this anomaly.

The CoT reports are current to each Tuesday’s close. Gold’s panic-like plummet in mid-April happened on a Friday and Monday, right in the middle of a CoT week. While many traders were getting stopped out of long contracts, many other traders were buying them aggressively since gold’s selloff was so extreme. So despite the minor weekly CoT changes, there was massive volume and churn within that week.

That event was so scary that it galvanized futures speculators into a hyper-bearish outlook. Just like at all extremes, they assumed that anomaly was the start of a new trend that would persist for some time. This led them to continue dumping gold futures relentlessly, making their bet a self-fulfilling prophecy. Between late April just after that plummet and early July, speculators fled gold futures at an unprecedented rate.

You can see this on the chart, the falling green line showing long positions being sold while the rising red one shows short bets growing. In futures trading, the price impact of selling an existing long position and selling to create a new short position is identical. The shorting accelerated as gold plunged again in June after Ben Bernanke laid out the Fed’s best-case timeline for slowing its QE3 debt monetizations.

2013 was as far from a normal year in gold as you can get. Not only was it gold’s worst year in nearly a third of a century, the second quarter was gold’s worst quarter in an astounding 93 years! Epic gold selloffs like we witnessed last April and June simply don’t happen, they are exceedingly rare. So there was no doubt that both futures speculators’ extremely-bearish psychology and resulting bets weren’t normal.

As I was trying to figure out just how wildly outlying all this was in the middle of last year, I needed some baseline for normal gold markets. I decided to simply look at their post-stock-panic years before 2013, the 2009-to-2012 era, for that comparison. As the next chart shows in a little bit, both speculators’ total long and short contracts held in gold futures had radically different averages over that secular span.

The total deviation of both speculators’ gold-futures longs and shorts from their 2009-to-2012 averages is represented by the yellow line above. By early July this critical metric had ballooned over 204k contracts. This meant American futures traders had sold the equivalent of 20.4m ounces of gold that they would normally hold, or 634.8 metric tons! This dwarfed GLD’s year-to-date liquidation of 411.1t.

The sheer magnitude of this first-half-of-2013 gold-futures selling defies belief. The World Gold Council reports all the world’s mines supplied 2969t of gold in all of 2013. Since gold is produced at a constant rate, halving that yields 1484t in the first half. So American speculators’ futures selling alone was so great in that span that it was like a 43% boost in mined supply! No wonder gold wilted under such an onslaught.

But the great thing about futures and markets in general is extremes never last. Eventually after anything is sold too long, bearishness peaks and the anomalous selling burns itself out. So there was no doubt that American speculators would have to start buying gold futures again soon to reverse these hyper-bearish bets. On the short side in particular, it was mandatory. Those record shorts had to be covered!

Despite their sophistication, gold-futures traders are human just like the rest of us. They too suffer from groupthink and herd mentality, getting too greedy and bullish when prices are already too high and too scared and bearish when prices are already too low. Historically, the aggregate speculators’ gold-futures positions are actually strong contrarian indicators. Their low longs and high shorts predicted an imminent reversal.

Indeed in July and August the speculators started aggressively covering their shorts, buying about 75k contracts or 233.3t of gold. This drove a sharp 18.2% 2-month gold rally, but unfortunately it fizzled out. Major new uplegs are always born with widespread short covering, as speculators buying to close their shorts at profits are often the only buyers around near extreme lows at peak despair. But their buying is finite.

An upleg can’t continue unless the upside price action initially sparked by short covering leads to enough bullish psychology to bring in other buyers. First futures speculators need to start adding new long-side bets, and then investors must gradually return to take over the capital-inflows lead. While there were encouraging signs of both gold-futures buying and gold-ETF buying, it soon ran out of steam.

So futures speculators resumed shorting gold with a vengeance in November, as they continued to whittle down their long-side bets. By early December, the total deviation of spec long and short contracts from their 2009-to-2012 averages was back up near 201k! But just as this extreme anomaly proved unsustainable in early July, it was no more so in early December. Futures selling was simply exhausted.

Provocatively for most of 2013, futures speculators feared nothing more than the Fed slowing its QE3 money printing to buy bonds. But when the rumor became fact and the QE3 taper arrived by surprise in December, gold only slumped to modest new lows. The American futures speculators didn’t add to their high short positions, and they actually started buying longs again! Thus gold started to reverse higher.

In January and February the speculators’ short covering accelerated, they have bought back over 62k contracts (the equivalent of 194.5t of gold) since early December. Once again this major short covering has birthed what is likely to grow into a major upleg. But even more encouraging, they have also started to buy on the long side in a major way for the first time since last year’s carnage. This is a super-bullish omen!

Futures contracts have expiration dates, so speculators legally have to buy to cover their shorts to effectively repay their borrowed gold in a matter of months after selling it short. But they have no similar obligation to buy on the long side. So new long-side buying reflects a genuine shift in their collective sentiment away from the extreme bearishness that crushed gold in early 2013. And it feeds on itself.

The more futures contracts speculators buy, the higher the gold price rallies. This brings in even more buyers, both in the futures realm initially and later in the far-more-important investment realm. It also puts tremendous pressure on the remaining speculators with short positions to buy back their bleeding bets to stem their mounting losses. And incredibly, this highly-likely futures buying is only half over!

Once again that yellow data series shows the total deviation in speculators’ gold-futures long and short contracts from their respective 2009-to-2012 averages in normal markets. This deviation peaked at 204.1k contracts in early July, and again at 200.8k in early December. All this gold that was sold had to be repurchased, driving gold higher, to return to market normalcy. As of the latest CoT report, it is still at 102.0k!

Gold has run 15.0% higher in the past several months or so almost solely on American futures buying. While stock-market capital has just started returning to gold via GLD, that is just 23.1t so far compared to 317.6t of futures buying. And these futures speculators still need to buy another 102.0k contracts, or 317.2t more gold, merely to mean revert to their secular-average levels of bets in normal market conditions!

This final chart extends this same CoT data back to 2008, to show those critical long-term averages. And the word average is key. It’s certainly not like speculators’ long-side gold-futures bets have to hit new record highs, or their short-side ones have to fall to zero. Between 2009 and 2012, before 2013’s craziness, speculators averaged 288.5k long gold contracts and 65.4k short ones on a weekly basis per the CoTs.

As of the latest CoT report, speculators’ longs were only back up to 208.6k contracts. This is still 79.9k, or the equivalent of 248.6t of gold, below their long-term post-panic average. By mid-December 2013, these bullish bets on gold had fallen to their lowest level in 5 years, since the also extreme and short-lived anomaly of 2008’s stock panic. Just take a look at what speculator longs did after that crazy event!

They rocketed dramatically higher over the subsequent year or so, catapulting the gold price 54% higher and paving the way psychologically for investors to return en masse. This is all but certain to happen again after today’s extreme, as that’s just the way mean reversions out of extremes work universally in the financial markets. Once buying after extreme selling starts, it takes a long time for it to run its course.

There is less gold-buying fuel left on the short side, with speculators total shorts now at 87.4k contracts. This is only 22.1k or 68.6t above their pre-2013 post-panic average. Still, that certainly isn’t a trivial amount of gold. Most short covering happens early on, before long-side buying. Back in early July, speculators’ total shorts hit 178.9k contracts! That was their highest level in at least 14.5 years, if not ever.

Another 102k contracts of gold-futures buying, as much as has already happened, is bullish enough for gold. But one of the greatest things about mean reversions is they seldom merely return to averages after hitting extremes. They nearly always overshoot to the opposite side! Like a pendulum pulled too far to one side, the momentum built in the reversion is so strong that the pendulum can’t just stop mid-arc.

So there is nearly a certainty that we are going to see way more than another 102k contracts or 317t of gold-futures buying by speculators. The odds are overwhelming that their total longs will not stop mid-arc at their 288.5k 2009-to-2012 average, but soar well beyond that up towards 375k or so like after the stock panic. And their shorts are likely to fall far below their 65.4k average, likely challenging 40k again.

Run these numbers, and we’re looking at potentially 214k contracts of gold-futures buying or 665 metric tons in the next year or so! That much futures buying along with the investment buying the resulting gold upleg will create should easily push gold back up over $1800 again, it not much higher. Mean reversions out of extremes are the most powerful trends in all the markets, incredible profit opportunities.

At Zeal we’ve been riding this one since its birth. As battle-forged contrarians, we’ve been brave when others were afraid. We’ve been aggressively buying dirt-cheap gold and silver stocks with outstanding fundamentals, and advising our subscribers to do the same. We’re all already sitting on big unrealized gains (up to +120% since November) that will grow far larger as gold’s recovery upleg continues to run.

The bottom line is big gold-futures buying has fueled this year’s strong gold rally. And it wasn’t just short covering like last summer, but the first major new long-side buying since last year’s carnage as well. This greatly increases the odds that we are witnessing the birth of a major new mean-reversion upleg in gold. And incredibly, even to mean revert to average levels this futures buying is only half done so far.

But mean reversions out of market extremes never simply stop at averages, they overshoot in an often dramatic fashion. So there is likely a lot more futures gold buying coming than merely a return to normalcy would suggest. As this continues to relentlessly push gold higher, more and more investors with their far-larger pools of capital will return to take the baton. And a massive upleg will be the ultimate result.

Adam Hamilton, CPA of Zeal LLZ, Guest Contributor to MiningFeeds.com

Briefly: In our opinion short speculative positions (half) in silver and mining stocks are justified from the risk/reward perspective.

There were basically no changes in gold, silver and mining stock charts yesterday, except for gold moving slightly higher on news about increased tensions in Ukraine. Gold’s reaction was once again weak.

As a reminder, here’s what we wrote on March 3:

Given greater uncertainty and increased geo-political tensions we expect gold to outperform the rest of the precious metals sector in the near future. Technically, as you will see in the following part of today’s alert, the situation deteriorated. Therefore, if the tensions ease, the move lower could be simply bigger – markets would give away the tension-based rally and then move lower just as if this weekend’s events didn’t happen. Consequently, at this time we are not suggesting moving fully back in for the entire precious metals sector. Normally, we would suggest going back in with half of each part of the sector (gold, silver, platinum and mining stocks), but at this time it seems that it would be better to move back fully in with gold and leave the rest out. In this case we are somewhat half-in but are also positioned to utilize gold’s expected outperformance.

Since that time gold has been indeed outperforming mining stocks and, especially, silver.

In today’s alert we decided to show you two charts that seem most critical as far as determining the outlook for the following weeks is concerned (charts courtesy of http://stockcharts.com)

Silver moved higher during the session but did so only initially. The rest of the session was largely about canceling the previous move and ultimately silver closed more or less where it had begun the session. Silver’s slight move higher took place on low volume, which is not a bullish sign.

Click here for reference chart.

In today’s alert we would like to draw your attention to one of the markets that is not the part of the precious metal sector, but that has lead the precious metals quite often in the previous years – copper.

Copper broke below the rising support line many months ago, but it wasn’t until yesterday that it moved below the 2013 lows. The decline here seems to continue and the downside target is quite far away. Could copper decline so far? Of course – it declined even further in 2008.

As you can see on the above chart, the major price moves have taken place simultaneously in copper and the precious metals sector. Copper’s breakdown is therefore a bearish factor for the precious metals sector, which might simply follow copper lower.

Technically speaking, there is strong support in the $2.1 – $2.2 range, and if copper declines significantly, that’s where we expect the bottom to form. That’s quite far from where copper is today, so if precious metals are to move similarly to copper, they too might decline quite profoundly.

It seems that the precious metals sector will move lower in the coming weeks, but just in case the situation in Ukraine deteriorates, we are keeping half of the long-term investment position in gold.

To summarize:

Trading capital (our opinion): Short position (half): silver and mining stocks.

Stop-loss details:

– Silver: $22.60
– GDX ETF: $28.90

Long-term capital (our opinion): Half position in gold, no positions in silver, platinum and mining stocks.
Insurance capital (our opinion): Full position

Thank you.

Przemyslaw Radomski, CFA of Sunshine Profits, Guest Contributor to MiningFeeds.com

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

The following interview was conducted last week at the PDAC convention in Toronto. Answering my questions is Anthony Huston, President & CEO of Graphite One [GPH.V] [GPHOF]. Graphite One is an advanced exploration-stage Graphite company with 100% of its assets in the State of Alaska. The market cap of the company is C$25 million / US$ 22.5 million. The company has a large, NI 43-101 compliant, Inferred resource that is at surface and high grade. Very substantial news in the Graphite space has drawn attention to Graphite One and its peers.

Peter Epstein: Your Corporate Presentation describes Graphite One as the, “USA’s only advanced high-grade graphite deposit.” What makes Graphite One unique?

Anthony Huston: Simply put, it’s the combination of us having the largest and we believe most advanced high-grade, predominantly large-flake graphite deposit in North America. While still subject to further testing, initial metallurgy suggests that we could have 60%-75% large-flake material (greater than 80 mesh). The fact that our deposit is literally at surface, should help us achieve competitive operating costs and robust project economics. As resource nationalism across commodities and across the globe appears only to be getting worse, safe supply is becoming increasingly valuable.

PE: Global graphite consumption approximates 1.2 million metric tonnes per year. How many new graphite projects can be absorbed without flooding the market?

AH: With an assumed 5% annual growth from a base of 1.2 million tonnes, that’s 60k tonnes per year. That might not sound like much incremental demand, many proposed projects hope to be doing tens of thousands of tonnes annually. However, it’s essential to understand that existing supply is contracting due to mine depletion and, more importantly, China is exporting less and less. The is key as China accounts for 70% of global graphite supply. Not only is China exporting less, Chinese companies are importing more flake graphite. Look no further than last week’s announcement by Syrah Resources. In December, Cormark Securities reiterated its view that China could be a net importer of graphite by the end of the decade. Therefore, net NEW mine supply might have to grow by far more than consensus estimates to keep up.

PE: You mentioned the off-take agreement between Syrah Resources and Chinalco, (4th largest aluminium producer in the world). What are some takeaways from this deal?

AH: I believe the Syrah Resources announcement is huge for the industry. A report by Credit Suisse late last week hit the nail on the head. By way of background, Syrah’s giant Mozambique deposit was considered by some industry pundits to be an overhang, i.e. big enough to flood the market. Not only is China’s Chinalco absorbing upwards of 100k tonnes of Syrah’s future output–that flake graphite is headed for a massive new end market… aluminum anodes. It’s as if 100k tonnes of annual supply suddenly disappeared. Even more important, Credit Suisse points out that aluminum anodes is a 13 million tonnes market, nearly 11 times the size of the natural graphite market. If Chinalco, the 4th largest aluminum producer in the world, finds graphite to be superior to petroleum coke and anthracite, other aluminum producers presumably will as well.

Credit Suisse states an order of magnitude of graphite switching that could occur into the aluminum anode market. Upwards of 4 million tonnes of graphite could migrate to aluminum production. In my opinion, this could be nothing short of a paradigm shift in natural graphite demand.

PE: The other big news in the Graphite space was Tesla’s announcement of plans to build a giga-factory in the U.S. Any thoughts on this development?

AH: Yes. Arguably, Tesla’s announcement is a game-changer for the electric vehicle and power storage markets. Unlike the Syrah off-take news, the Tesla news has been widely reported. Annual flake graphite demand from Tesla’s proposed giga-factory is approximately 150,000 tonnes, 30% of the global market for that segment of the natural graphite market. Industry leader Industrial Minerals’ analyst Simon Moores wrote an interesting and informative article titled, “Tesla battery plant will need 6 new flake graphite mines.” I guess that title says it all. I think 6 new mines is the most we might see in the next few years. And, I doubt companies like Syrah and Energizer Resources with deposits in Mozambique and Madagascar, respectively, will be key suppliers to Tesla’s southwestern U.S. plant. Graphite One will be able to offer both security of supply and just-in-time inventory, with deliveries from Alaska to the southwest U.S. taking 1-2 weeks. Deliveries from China would take 4-8 weeks.

PE: Graphite One’s stock spiked on Friday on very heavy volume. Was that due to the Tesla and Syrah Resources news?

AH: We believe our stock price has moved higher because investors are gaining greater comfort on the underpinnings of the Graphite market. The Tesla news certainly helped refocus attention on the Graphite space, but we don’t believe the significance of the Syrah off-take news is necessary in the market yet. In addition to the Tesla news, our meetings at PDAC were an eye-opener for us. Interest in our company is exploding. Yes, our stock price has moved up nicely, but our market cap is up by only about $7 million. Our stock price remains 50% below it’s 2012 high. Given that we believe we have a blockbuster project with a NPV that could reach well into the hundreds of millions, we still believe our company’s valuation is attractive.

PE: Companies frequently claim that the mining jurisdiction they are in is one of the best, how does Alaska rank?

AH: Like most companies, we are biased in liking our own jurisdiction, but we are not alone. The latest version of the Fraser Institute Survey of Mining Companies, 2013 ranked Alaska #1 in a key category, “Mineral Potential.” In order to find minerals, it’s best to go where they’re most abundant. Increasingly, (remaining) mineral abundance is found in places one would hesitate to do business in, places like Papua New Guinea, Indonesia and the Democratic Republic of Congo, also scoring relatively high on the list of Mineral Potential.

PE: It seems like interesting times for the Graphite sector and for Graphite One. Thank you for your time. Any concluding thoughts?

AH: I agree there’s a lot going on in the Graphite sector. As I mentioned, interest in our company is currently high. If Credit Suisse is correct in their assessment of the Syrah Resources situation, large, high-quality projects like ours could attract strategic and financial players sooner than we imagined just a few weeks ago. Make no mistake, we are still 3-4 years from production, but so is Syrah. We look forward to updating the market on our progress in coming months. Thank you Peter for your interest in Graphite One.

Article written by Peter Epstein, Guest Contributor to MiningFeeds.com

Stock-market capital finally started flowing back into the flagship GLD gold ETF for the first time in 14 months in February! Though this buying was small, this is truly a momentous event. Extreme gold-ETF outflows were the dominant culprit behind last year’s epic gold selloff. Without that massive influx of additional supply weighing on the global markets, gold is going to surge on strong physical demand.

The World Gold Council’s latest Gold Demand Trends report published just a couple weeks ago really drives home the importance of gold-ETF selling. In 2013 they suffered their first net annual outflows ever seen since the first one was launched in 2003. As today’s secular gold bull is the first time these gold ETFs ever even existed, the gold market has literally never experienced anything like last year.

The WGC’s comprehensive supply-and-demand data, which is the best in the world, showed that gold-ETF outflows added a staggering 880.8 metric tons of gold supply last year! This was larger than the combined 678.5t physical demand increase from jewelry and bar-and-coin investment, so the gold price fell. Jewelry and bar-and-coin demand actually surged 16.5% and 28.3% last year, very strong growth!

But thanks to that huge gold-ETF supply, overall global gold demand fell 14.9% last year or 659.7t. Thus gold plummeted 27.9% to its worst annual performance in nearly a third of a century. And GLD bears the brunt of the blame due to its dominant size among gold ETFs. It saw a shocking 552.6t of outflows in 2013, a whopping 63% of total global gold-ETF outflows and 84% of the overall drop in global demand!

If American stock traders hadn’t fled GLD shares last year in a wildly unprecedented mass exodus on a colossal scale, global gold demand wouldn’t have slumped. And if gold prices had behaved normally in 2013, the selling from the rest of the world’s gold ETFs wouldn’t have happened. And neither would the resulting heavy selling in the global futures markets. GLD dug gold’s hole, and GLD will claw it back out.

So February’s shift to capital flowing back into GLD is supremely important, likely the vanguard of a major reversal. GLD is a tracking ETF, designed to mirror the gold price. So when American stock traders buy or sell GLD shares faster than gold itself is being bought or sold, this ETF will decouple from the gold price and fail its mission. The only solution to this problem is to equalize GLD-share supply and demand into gold.

So like all tracking ETFs, GLD acts as a conduit for stock-market capital to flow into and out of physical gold bullion. When stock traders are bidding up GLD shares faster than gold, GLD threatens to break away to the upside. So GLD’s custodians have to neutralize this differential GLD-share demand by adding more supply. So they issue new GLD shares and sell them, absorbing the excess demand.

They use the resulting cash to buy more physical gold bullion, growing GLD’s hoard. So whenever GLD’s holdings are growing, stock-market capital is literally flowing into gold through this ETF. This naturally boosts the global gold price, since more demand is being shunted into the gold markets. And its holdings relentlessly growing on balance was the story of this ETF before last year’s extreme anomaly.

ETF capital conduits between markets are a double-edged sword, amplifying the underlying asset’s downside as well as upside. When stock traders sell GLD shares faster than gold, this ETF is going to decouple to the downside. So its custodians quickly step in to sop up this excess share supply. They buy back GLD shares to maintain tracking, and the cash to do this comes from selling some of the ETF’s gold bullion.

So when GLD’s holdings are falling, stock-market capital is actually moving out of physical gold bullion. And as investors and speculators learned last year, this can happen on a massive-enough scale to overwhelm even large physical demand increases. Differential GLD-share selling pressure crushing the gold price was almost the entire gold story of 2013, which makes February’s buying so significant.

This first chart looks at GLD’s holdings superimposed over the flagship American S&P 500 stock index (SPX) over the past year and a half or so. Stock traders were dumping GLD at dizzying rates to chase the Fed-driven stock-market levitation. GLD selling generally slowed dramatically during SPX pullbacks, and surged again when the SPX resumed melting up. That precedent makes February even more impressive.

Last month, there was enough differential buying pressure on GLD shares to drive a 10.5 metric-ton build in this ETF’s gold-bullion holdings. These capital flows from stock markets to gold are still small, worth just $441m at February’s $1301 average gold price. And on this chart, the upturn is barely a blip. But it was still enough to push gold 6.5% higher, which was this metal’s best month since July 2013.

February 2014 was GLD’s first holdings build in 14 months, since December 2012. Its 10.5t was the largest absolute holdings build since November 2012, and its 1.3% gain was the best seen since way back in September 2012. In each of those three months, the gold markets were still normal with prices averaging $1684, $1722, and $1749. 2013’s epic sentiment-cratering slaughter hadn’t happened yet.

10.5t looks trivial on this chart because American stock traders’ gigantic mass exodus from GLD shares sucked an astounding 563.8t of gold out between December 2012 and January 2014. From its holdings’ all-time record high in December 2012, they plummeted by 41.7% in just over 13 months! Before that, the biggest draws GLD had ever suffered maxed out at merely 129.1t and 13.0% in two separate events.

So 563.8t and 41.7% is an outlying draw so extreme it defies superlatives. American stock traders chose to abandon gold (via their GLD positions) because of the amazing stock-market levitation. Through both its enormous QE3 bond-monetization campaign and parallel jawboning, our central bank worked to convince stock traders that they had nothing to fear. The Fed would step in to head off any major selloff.

This so-called Fed Put made stocks the only game in town. Alternative investments like gold lost their luster, and the essential and prudent concept of portfolio diversification was tossed out the window. The professional money managers no longer worried about losing their customers’ money thanks to the Fed’s effective backstop, they instead started intensely fearing falling behind their peers’ performance.

So they aggressively bought what was rising, general stocks, and dumped what was falling, gold. This quickly became a vicious circle for gold. The more it was sold, the farther its price dropped. And naturally the lower its price went, the more GLD shareholders were scared out of their positions. So month after month after month, stock capital flowed out of GLD at staggering rates as this chart reveals.

This inverse correlation between the stock markets’ performance and GLD’s holdings is readily apparent. While there are occasional exceptions driven by specific gold events I’ve discussed in much depth in past essays, for the most part GLD differential selling accelerated when the SPX was melting up. This is especially true in the second half of 2013, after April’s panic-like gold plunge had passed.

When the stock markets were levitating, GLD-share selling intensified. The stock traders who held GLD shares were tempted enough by the general-stock gains to rotate capital out of gold into stocks. And then when the SPX pulled back in one of its periodic minor selloffs, GLD’s holdings would stabilize or even start rising like in August. The light-red shading above highlights these SPX pullbacks visually.

GLD’s holdings first appeared to be bottoming and reversing in August, thanks to a sharp SPX pullback. And then after getting dragged even lower by the greedy stock psychology brazenly nurtured by the reckless Fed, they look to have bottomed and reversed again in January as another sharp SPX pullback was getting underway. Interest in and demand for alternative investments grows when general stocks droop.

Understanding this past year’s strong inverse relationship between SPX performance and GLD-share demand is essential to grasping the significance of February’s GLD build. Last month’s GLD capital inflows weren’t only the first and biggest since late 2012, they happened in a month where the SPX was exceedingly strong! It rocketed 4.3% higher, its best month since October when the partial government shutdown ended.

Now after last year’s precedent, you’d think that any differential buying pressure on GLD shares would require a significant stock-market selloff. Yet stock capital still flowed back into gold bullion via the conduit of this flagship gold ETF despite a big SPX surge to new nominal record highs. This strongly suggests that the GLD selling is exhausted, that all stock traders who wanted out of gold have already exited.

So what will happen to demand for GLD when the overbought, overextended, overvalued, and euphoric stock markets inevitably roll over? Odds are it will soar! Not only has gold always been a safe haven in times of market weakness, it is probably the world’s cheapest asset class after last year’s epic selloff. So investors and speculators won’t only gain diversification through gold, but large gains as it mean reverts higher.

The World Gold Council’s comprehensive global supply-and-demand data proves that gold would not have plummeted in 2013 without the extreme American selling of GLD. Depending on how much of that worldwide surge in physical demand the low prices resulting from that GLD mass exodus drove, gold may have even rallied. But without the enormous and relentless GLD outflows, it certainly would have been far higher.

GLD holding gold down has been quite apparent for the better part of a year now, as the WGC releases its excellent fundamental gold reports quarterly. I’ve contended since the middle of last year that if the excessive GLD selling merely slows, gold is going to surge. And as this next chart superimposing gold over GLD’s holdings shows, that is exactly what is happening now. This is very bullish harbinger.

Back in July and August as GLD’s holdings stabilized, the gold price surged dramatically. Though American futures short covering played a big role in August’s surge, early July’s gains were from physical demand growth outpacing gold-ETF liquidations. Gold didn’t resume retreating until American stock traders again aggressively dumped their GLD positions as the SPX yet again resumed levitating.

And once again since mid-December, the gold price has surged as the stock-capital outflows from GLD stopped as evidenced by its stabilizing holdings. The strong worldwide physical demand has been forcing the gold price higher without the supplies from big gold-ETF selling to offset it. The stage for this reversal in both gold’s price and GLD’s capital flows was stealthily set in the second half of last year.

Between gold’s January 2013 high before last year’s anomalous selling and its late-June low after the Fed laid out its best-case QE3-tapering timeline, gold plunged 29.1%. This was mostly driven by the huge 27.4% or 366.4t drop in GLD’s holdings over that same span. I say mostly because American futures speculators were also selling gold longs and adding gold shorts at incredible rates, augmenting the pressure.

Despite its mid-year rally, gold ended up slumping back down to those lows over the next 6 months or so. In mid-December when the Fed actually surprised and started its QE3 taper earlier than expected, gold slumped to a new low. But that was only 0.8% under late June’s, despite the mere threat of the QE3 taper being the catalyst that whipped gold-futures traders into a hysterical bearish frenzy during 2013.

Considering that psychology, a sub-1% gold loss in 6 months was trivial. Gold effectively held steady at strong support despite continued big GLD selling. Its holdings dropped another 16.6% or 160.8t over that span. Remember that before 2013, that would have easily been the biggest GLD draw ever witnessed! Yet gold still held strong, which means physical demand growth was absorbing these GLD supplies.

If gold could hold its own in last year’s second half despite heavy capital outflows from GLD, how much will it thrive this year if GLD’s holdings don’t slide lower? We already have the answer in January and February, gold is surging without gold-ETF differential selling. And what if GLD’s holdings actually continue growing? Then its custodians would be forced to buy bullion back, amplifying gold’s upside.

GLD experiencing differential buying pressure in 2014, and thus shunting stock capital into gold, is all but a certainty for multiple reasons. Once the stock markets inevitably roll over, alternative investments and prudent portfolio diversification will gradually return to favor. Gold will no longer be spurned, but increasingly bought. And as the SPX melt-up perfectly illustrated, nothing begets buying like higher prices.

The more gold recovers, the higher its price gets, the more attractive it will become to stock investors and speculators. As they return to gold via GLD, and buy GLD shares faster than gold is being bought, the gold rally will accelerate. GLD’s custodians will of course need to supply additional shares to meet this excess demand, and they will then plow the resulting capital raised back into underlying gold bullion.

But provocatively, GLD might not have an easy time buying back gold bullion! This massive ETF can’t buy just any gold, it can only own the world-standard London Good Delivery bars. These LGD bars averaging 400 ounces are essential for a large-scale gold-tracking ETF because they can be easily and quickly bought and sold. ETF custodians have to act fast to equalize differential pressure on GLD shares.

The World Gold Council just reported that most of the LGD bars spewed out by gold ETFs last year no longer exist! They were actually melted down and transformed into tiny bars and jewelry that was purchased by Asian consumers. So we may actually experience an LGD-bar shortage this year if enough differential buying pressure is placed on GLD shares by Americans! That will really ramp up gold prices.

February’s modest GLD build and apparent reversal of its unbelievably extreme 2013 liquidation is truly a watershed event for the gold market. Even if GLD’s holdings merely stabilized, gold would head much higher on strong global physical demand. But if American stock capital actually continues flowing back into GLD, and likely accelerates due to the seductive psychology of rising prices, gold is going to be off to the races.

While gold’s upside performance this year is likely to be excellent to outstanding, it will be dwarfed by the beaten-down gold and silver stocks. Even the best of these miners’ and explorers’ stocks fell so low in late 2013 that they were trading as if the gold price was a small fraction of current levels. As gold continues to run higher on stable or growing GLD holdings, these stocks will have to skyrocket to catch up.

The bottom line is stock capital has started flowing back into gold ETFs for the first time in over a year. Since global gold-ETF outflows were responsible for much more than the total drop in worldwide gold demand last year, this new reversal is a momentous event. Without the massive additional gold supplies added by differential gold-ETF selling, gold will power higher on very strong global physical demand.

This is true even if gold-ETF holdings merely stabilize around current decimated levels. But if stock traders start migrating back into gold in a meaningful way via these tracking vehicles, the gold price is going to soar. The more differential buying pressure they put on gold-ETF shares, the more physical gold bullion these ETFs’ custodians will have to buy. This self-feeding process will amplify gold’s recovery upleg.

Article written by Guest Contributor to MiningFeeds.com, Adam Hamilton, CPA of Zeal LLC.

Briefly: In our opinion short speculative positions (half) in silver and mining stocks are justified from the risk/reward perspective. We are closing half of the long-term investment position in gold.

As you know, we had been expecting the tensions in Ukraine to cause a significant rally in gold (not necessarily in the rest of the precious metals sector). Not only wasn’t that the case on Monday – the rally indeed took place, but it was rather average, but gold managed to decline on Tuesday while there was no visible improvement in the situation in Ukraine and on the Crimea peninsula.

Gold is not performing as strongly as it should. That is a major bearish factor. Let’s examine the situation more closely (charts courtesy of http://stockcharts.com):

Click here for reference chart.

The move above the 61.8% Fibonacci retracement level was invalidated yesterday. The move lower took place on low volume, which doesn’t confirm the rally. However, that’s not the most important thing to focus on – gold’s performance in light of the most recent events is. As mentioned earlier, it didn’t rally. In fact it’s more or less where it was a week ago. The implications are bearish.

From the gold to bonds perspective, the downtrend simply remains in place. There has been no breakout above the declining resistance line (marked in red), so the precious metals market is still likely to decline once again.

Click here for reference chart.

Silver’s performance has been weak, if not very weak. Not only did it not really rally on Monday, but it declined more on Tuesday than it had rallied on Monday and it’s now 0.42% lower than it was last week.

Some might say that the white metal is almost flat, and that is correct, but the point is that it’s almost flat (on the south side of being flat) when the geopolitical tensions are rising significantly. This is a significant underperformance relative to what’s going on in the world.

What we wrote yesterday remains up-to-date:

Meanwhile, silver invalidated the breakout above the 50-week moving average, the 2008 high and the 61.8% retracement level based on the entire bull market. The weekly volume is highest in months, which confirms the significance of the invalidation. Actually, the last time we saw volume that was similar was at the beginning of the previous decline in mid-2013.

Silver is still above the declining red support line, but drawing an analogous line in mid-2013 would also have given us a breakout that turned out to be a fake one.

The situation in silver was bearish based on Friday’s closing prices and it has further deteriorated based on the lack of rally this week despite reasons to make a move higher.

Not too long ago we wrote that the juniors to stocks ratio could indicate local tops in the precious metals market if one looked at it correctly. The things that we were focusing on were spikes in volume (we have seen a major one) and sell signals from the ROC indicator (a decline after being above the 10 level) and the Stochastic indicator. We have seen both recently. Consequently, it seems that the precious metals market will move lower sooner rather than later.

The USD Index moved a bit higher and mining stocks declined, both of which confirm the above bearish indications.

All in all, it doesn’t seem that keeping the full long position in the investment category is justified at this point in our view. Based on this weekend’s events it was likely that gold would move much higher – but its reaction has been very weak. It looks like there will be no rally in gold before a bigger decline. We are keeping half of the funds in gold, though, just in case the next days bring improvement. If not – things will become even more bearish and we will likely adjust the position once again.

We might suggest changing the short-term speculative position and / or the long-term investment one shortly, based on how the markets react and what happens in Ukraine.

To summarize:

Trading capital (our opinion): Short position (half): silver and mining stocks.

Stop-loss details:

• Silver: $22.60
• GDX ETF: $28.90

Long-term capital (our opinion): Half position in gold, no positions in silver, platinum and mining stocks.

Insurance capital (our opinion): Full position

You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.

Thank you.

Przemyslaw Radomski, CFA of Sunshine Profits, Guest Contributor to MiningFeeds.com

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

The buzz phrase at PDAC 2014 could be described as “cautious optimism.” Executives, analysts and investors seem to believe a corner has been turned but failed to show any excitement or hope beyond that. Some participants estimated that attendance was down 20% from last year and much lower than 2012. I did not attend last year but definitely noticed foot traffic was significantly lower than in 2012. Interest in my presentation this year was much lower than in 2012. Mind you, these are only anecdotal measures of sentiment. However, for me they further underscore that very few seem to believe in the immediate continuation and sustainability of this recovery.

During my flight home I read Mining Weekly’s cover story (the publication given to every attendee) which further exhibits the mild, cautious optimism pervading the industry. The various assertions and comments included: “Road to recovery will be bumpy,” “Most juniors will fail,” “Control costs in an era of lower metal prices,” and “Metals prices have reached a plateau.” Also, there was a mention of strong deflationary forces and deflation, not inflation as the risk. Furthermore, industry titan Rick Rule was quoted in the story and in the Financial Post as saying juniors still need to capitulate. This is simply not the kind of talk that precedes a market decline or prolonged underperformance.

Moreover, some of these comments are divorced from a new reality. The chart below shows the CCI (commodities), CDNX and GDXJ. Commodities have broken out from a three year downtrend and advanced above the 400-day moving average for the first time in two and a half years. Canada’s Venture (CDNX) which consists of mostly commodity exploration companies declined 65% from top to bottom but is now currently trading above its 200-day moving average and at a 10-month high. It was last above that moving average in spring 2011. Meanwhile, GDXJ is holding strong after declining 82% over a more than two and a half year bear market.

The breakout in commodities and end of the downtrend suggests that inflation and not deflation will be the next concern. It also suggests a potential future tailwind for metals prices. The road to operational recovery may be bumpy but that doesn’t mean it will be for the related capital markets. The CDNX is at a 10-month high and GDXJ has rebounded 50% in two months. Meanwhile, I’m surprised by Rick Rule’s bizarre comment about capitulation considering GDXJ just endured an 82% bear market. (Major kudos to Rick for his market skepticism in 2011 and 2012). Capitulation occurred in spring 2013 and a final wave came in December 2013. Since then, most quality juniors have rebounded 100% or more.

Ironically, the time we should be most optimistic is at a market bottom. That is the best time to buy because it has the lowest risk and is when the biggest gains are made. However, the recent bear market remains fresh in the mind of the majority of market participants and company executives. They worry about making another mistake or misleading people so they hedge their views. The toughest time to buy is where we are now, a few months following a major bottom. Prices are materially higher yet sentiment has not shifted enough to displace the bad memories from the preceding bear market. Essentially, there are two reasons (instead of the usual one) not to buy.

It is incredibly difficult to buy at this juncture but, as we noted in our last editorial, the evidence favors doing so. Pullbacks, until we see much larger gains should be brief and should be used as an opportunity. ETFs such as GDX, GDXJ, and GLDX have spent the last 11 days consolidating and digesting gains. This is not rocket science. Do your due diligence and take advantage of opportunities when there. Don’t overthink it. Be long, sit tight and have an exit strategy (to limit losses) in case things play out differently.

Article written by Guest Contributor to MiningFeeds.com, Jordan Roy-Byrne of The Daily Gold.

The following news item caught my attention. We all know that China, Russia, India and Brazil are deploying a large number of new reactors. England and a few middle eastern countries like Saudi Arabia and the UAE also have BIG plans. But, if a country like Pakistan, has demand for 32 reactors, that says a lot!

Not only is the world’s population growing from 7 billion to 9 billion + by 2050, the percentage of the population using significantly more electricity, i.e. middle-class citizens of the world– is growing as well. The world’s middle-class could rise from 4-5 billion today to 7-8 billion. On top of that, there’s the possibility (some would say likelihood) that the MIX of base load power generation (coal, gas, nuclear, hydro, etc.) will shift towards nuclear. Taken together, these two trends could easily result in a doubling in nuclear power generation, especially if we see a widespread adoption of Small Modular Reactors.

Only about 30 countries currently utilize nuclear power. That’s less than 20% of the world’s nation states. No matter how one slices it, there’s going to be a huge increase in the amount of uranium required. Cameco just revised it’s 10-yr forecast to a CAGR of 3.5% from 3.0%. Where will an additional 70 million pounds of annual supply it come from? That’s a GOOD question. There are many problems on the supply side, ranging from terrorist activity and resource nationalism in select African countries, to severe water scarcity concerns, to depleting reserves in key countries, most notably Kazakhstan. While we may not be looking at, “Peak Uranium,” I can assure you that the low hanging fruit has been harvested in many parts of the world, especially the lower-cost supply.

That’s why I believe uranium prices are headed higher, perhaps a lot higher. I’m not talking about the long-term price getting back to $65-$70/lb like most pundits and sell-side analysts predict. That seems a sure thing, it’s still at $50/lb despite a painful 3-yr decline in the spot price to $35.5/lb. While it might take 2-3 years, I believe the long-term uranium price could settle in the $80′s-$90′s/lb. WHY? Look back at 2007 when the spot price spiked to $135/lb. Clearly that price was unsustainable, but less noticed was that the long-term price remained fairly steady in 2007 and into 2008, averaging about $90/lb for well over a year. That’s very important to understand. A long-term price of $90/lb (arguably above $100/lb in 2014 dollars) was tolerated because the cost of uranium in the overall nuclear power generation equation is quite low.

Of course, the long-term uranium price fell in 2008-9 due to the global financial crisis, but in 2010- early 2011 it climbed steady, reaching the low $70′s/lb (both spot & long-term). This low $70′s/lb figure is the very bottom end of the range I envision going forward. There are 2 simple reasons why the new long-term uranium price might settle above that of early 2011 (pre-Fukushima). First is the supply challenges I mentioned earlier. Draughts, terrorism, resource nationalism, reserve depletion– none of these problems are going away or even diminishing. In fact, if anything these problems are only getting worse. Overcoming these challenges, if even possible, will take capital investments in exploration, security, community relations, infrastructure, etc., which leads to my second reason– mining cost inflation.

Over the past decade, mining cost inflation has ranged from 5%-15% PER YEAR depending on location and commodity. Assuming just a 5% annual increase, (from 2011 when the long-term uranium price was in the low $70′s/lb), by 2016-17 the marginal cost could be $10/lb higher! Therefore, the new long-term price could easily be in the $80′s/lb for the latter half of this decade. In fact, an even higher long-term price is quite possible. Since the risk and upfront capital costs of mining is growing, the operating margin demanded by producers to bring supply to market could grow.

Conclusion

If Pakistan ultimately requires 32 new reactors in coming decades, the 150 + countries that currently get zero electricity from nuclear power will likely generate substantial demand, perhaps far more than is reflected in current projections. It’s essential to recognize that even though projections stretching out decades appear quite robust and detailed, these projections only count countries already using nuclear power or with a plan to start. Dozens of countries could (and probably will) join the club over the next 3-4 decades.

Here’s the blurb on Pakistan’s plans…

ISLAMABAD: Pakistan is in the process of selecting eight sites for the installation of 32 nuclear power plants, which will generate a total of 40,000 MW electricity, said Pakistan Atomic Energy Commission (PAEC) chairman Dr Ansar Parvez. He did not specify a time frame.

In an exclusive interview with The News, Parvez spoke of the need to change the energy mix and overcome the issue of circular debt. “Our future plans are to have nuclear power plants supply one-fourth of our total required capacity. On the directives of the prime minister, we are selecting eight sites for installing more nuclear power plants. Each site will feature a total of four plants – having a capacity of producing 1,100 MW each – which will be built in two phases,” explained Parvez.

According to the PAEC chairman, China has agreed to finance 82% of the total cost for two Karachi Nuclear Power Plants (KANUPP-2 and KANUPP-3) and will be providing a loan of $6.5 billion for the same. The deal is going through despite objections from the Nuclear Supplier Group – the international body that regulates nuclear power trade. China has rebuffed call from the body saying that its nuclear exchange with Pakistan predates the group’s charter and is thus exempt from it.

The remaining 18% of cost will be borne by Islamabad. “Since the government will be providing its share in rupees, it won’t need to arrange foreign exchange for the K-2 and K-3 plants,” he added. According to Parvez, the government has also selected a site at Muzaffargarh for installing a 1,100 MW plant.

Article written by Peter Epstein, Guest Contributor to MiningFeeds.com