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Hold on to your hats (Part II)!

 -- Published: Thursday, 7 January 2016 | Print  | Disqus 

On December 11, 2015 we wrote the following and showed the chart that follows. The chart below paints a disastrous picture for the $/Yen. This chart is extremely bearish.

Based on this chart alone, it is my opinion that the FED is going to make a mistake. Either it will raise and find out it cannot get the Funds rate to .25% or worse, they choose not to raise and lose credibility for a very long time.

This morning, January 7, 2016 we see the following chart of $/yen.

It is now quite clear in light of former Fed governor Fischer that the Fedís whole idea was what we conspiracy people said it was all along, blow a massive equity bubble. But the question now is what happens next? In light of how stocks are reacting to this $/yen chart it would appear chaos is about to reign.

Next up, I would like to address the under performance of the miners relative to gold. There seems to be a great deal of very bad information out there. I recall as gold was moving up in the latter part of the last decade pundits galore giving all sorts of reasons as to why miners were doing poorly. It was costs, it was bad management, and it was everything but the obvious.

The most important thing for miners outside of the price of gold is interest rates and here is why. Ounces in the ground are worth nothing in a very low interest rate environment. The reason is very simple. The forward rate of gold or the price of gold into the future is determined by the price of gold today, time and the interest rate the market sees into the future. In options, we refer to interest rate risk as rho.

Firstly, you should never hedge forward production in a low rate environment. There is nowhere near enough cushion. Secondly, gold miners will get zero valuation for their ounces if the forward rate is not high enough for bank financing. That is fact.

If you wish to know why so many explorers and juniors have plummeted toward zero, it is due to the difference between the forward rate of gold and the spot rate. Only when rates are high and the forward rate of gold relative to spot is high enough will banks lend and they will require a hedge of production and yes that is prudent for both parties. But to say miners should have hedged at 1900 gold is simply false. The forward rate of gold was not high enough.

It is also why, when sovereign rates start to explode higher in the next several years that gold miners, especially juniors will be market darlings. Ounces in the ground will once again matter!

Itís a Mystery

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 -- Published: Thursday, 7 January 2016 | E-Mail  | Print  | Source:

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