Weekly Chart GBN.V

The weekly chart for Golden Band Resources is probably the best depiction of just what our trend in the stock is going to be. An Elliot Wave Theorist might say that, based on the short term daily chart, we are going to see a re-test of the low for the coming weeks. This would give great advantage to any naked shorting scheme to settle whatever outstanding net settlements they may wish to clear off the books.

The massive sell-off in the stock on the announcement of production startup was primarily intended to discourage investment or any price rise. For the most part, the bond holders are probably very intensely frustrated people, not knowing exactly what is causing the defined trading range in the stock. Not only that, they are watchful that the discount rate in the U.S. rises to their advantage, which has not occurred. A rise in the discount rate is sure to see news released for GBN.V, since the company defers to the bondholder interest.

The company also missed the opportunity to release news into the gold price correction, since they had no advance knowledge that this would occur, mostly because it was European based physical sales. We are into August, and oversubscribed financing announced in June hasn't closed? C'mon, let's have the news.

And then we have Canadian sell side brokers who are essentially naked shorters with no life that sat staring at their screens as the treasury bill rate in Canada actually rose some more, while longer term rates declined to historical lows. And no wholesale sell-offs with relatively minor exceptions.

The waiting game continues, but in the meantime, the stock re-tests the long term resistance. You can table any result, achieve any milestone, but what will advance the share price is exogenous to the company. Two things over which the bond holders and naked shorters have no control is the advance in the gold price, and the decline of short term rates.

These people are stuck in a magnificent bear trap.

supersize: http://www.flickr.com/photos/11747277@N07/4845665841/sizes/l/

stockcharts.com

A Decline In Short Term Interest Rates

Last week, I made much ado about the relationship of the NPV to the discount rate differing from NPV based on gold vs. the discount rate, that the gold-based NPV of any company in the sector will differ markedly from the rest of the economy should the discount rate continue to decline:

supersize: http://www.flickr.com/photos/11747277@N07/4825171381/sizes/l/

As the discount rate in the U.S. declines further, and we are very near zero now, or remains this low, then NPV of all companies are directly affected by this unless vast amounts of money are flushed into the banking system.

Rosenberg on economy - Interview on Yahoo! Finance.

A further proof using inflation-adjusted earnings of what Rosenberg is talking about is the following chart:

inflationdata.com

The inflation-adjusted earnings for gold mining companies probably differs markedly from this trend, because as you can see, chronic declines in the discount rate have led to much higher gold prices. There are also times when the gold price moderates, which is over long periods when interest rates moderate:

inflationdata.com

Now, the low for the gold price occurred just when the discount rate declined below longer term rates in year 2000. If you check to see if inflation data are correct, then you can see that, adjusted for inflation, the low gold price fix of 1929 of $20.67/oz. U.S. corresponds almost exactly with the low in inflation adjusted terms of year 2000:

Tom's inflation calculator

Now, only the most draconian price fixing scheme would see the price of gold fixed at those levels. The price fixing scheme in gold is due to gold bullion leasing, which is really a swap mechanism that keeps bullion lease rates well below the discount rate. The only piece of paper in existence that is fixed to the price of gold, and somewhat vice-versa is the gold lease arrangement. This is how gold prices are kept in check with inflation. But the prices of absolutely everything else are wildly out of kilter with the gold price fix, and have sometimes gone well in advance of inflation, though those have blown out by now.

The bullion leasing arrangement, as a swapping facility meant to keep control over failures to deliver gold, falls apart when the discount rate declines, as part of a legacy of short term rates being higher than long term rates during peak boom times. Swap arrangements are entered into when failures to deliver are built up in the system, which is a chronic condition of the precious metals sector.

As you can see, we have gone well past the inflation-adjusted value for $35/oz. U.S. gold in 1933, which is $547.72 U.S. per oz. A gold miner can barely squeeze out a profit at this price. So the gold price going well beyond this number is signalling that, even with a draconian price-fixing regime, there is much more inflation in the system than acknowledged and intense demand for bullion. My theory on that is that gold has begun to soak up excess liquidity and is devaluing currencies.

It has to show up somewhere. You see it in the advance of the bond market and low interest rates, though the media would very much like to impress upon you that interest rates are rising:

http://watch.bnn.ca/market-morning/july-2010/market-morning-july-23-2010/#clip328186

Negative Interest Rates

Negative interest rates have very serious implications for the bullion banks, who are presumably net short in gold. They will no longer be able to enter into swap arrangements with central banks for their gold and get paid to enter into these agreements, because with a negative discount rate, the face value of bullion leases declines while the gold price rises and leasing grinds to a halt.

Can it happen? Here is a screen shot of an NY Times article from 1938:

source article in the NY Times

Note that since the onset of depression in 1929, it took approx 9 years for discount rates to go into the negative.

“Within the next few months, it may be expected that succeeding issues of Treasury bills will attract high tenders, because some of the most important tax dates will be included in the 90-day life of the bills being sold in the near future. The highest rate paid by the Treasury in its bill financing was 0.146 percent on April 11. The low record prior to this week was 0.006 percent, the rate at which last week’s issue went.”

Now an article from 2009:

Treasury Bills Trade at Negative Rates as Haven Demand Surges

Bloomberg

And now, an article from April, 2004. Gold prices only exceeded the inflation-adjusted price fix of ~$547/oz. U.S. after lengthy sideways trade in 2006.

Repurchase Agreements with Negative Interest Rates

April 2004 Volume 10, Number 5	Contact Authors
JEL classification: G28, G18, H63	View PDF version
	7 pages / 252 kb

NY Fed Article

The key to all this are "failures to deliver." Mostly they're talking about failures to deliver on 10-year bonds, but the market that most characterizes the failure to deliver is the gold market. But not only does the gold market have a backlog of these failures to deliver, there is a mountain of derivatives to clear from the books not necessarily to do with the gold markets based on interest rates sitting in bad banks.

The low on the monthly $IRX chart is 0.005% last year, the decimal place is in the wrong spot:

supersize: http://www.flickr.com/photos/11747277@N07/4845927565/sizes/l/

stockcharts.com

Now tax cuts implemented by George Bush during his presidency are set to expire. This means that a lot of banks are sitting on huge mounds of cash supplied by the taxpayer that they may actually have to pay tax on. They would be able to use the loophole of negative repos to avoid taxes, make a marginal profit, and write down some of the paper held in bad banks in an ongoing process. Some of this paper is tradeable and they have to get the lead out.

Here is a clip from Cramer on The Street saying that the bad banks theme is lifting. Now, how would he know?:

The Street Video

After watching that video, watch this video posted to the VRGold website featuring Cramer talking about gold junior companies being crushed:

http://vrgoldletter.com/GoldLetter/Index.html

-F6