During 2001-2011, buying exploration-stage gold stocks with large in-ground resources at low per-ounce valuations worked well. It worked well because ‘the market’ was often more concerned about leverage and quantity than economic viability and quality. Since 2012, however, buying an exploration-stage gold-mining stock on the sole basis that owning the stock gave you relatively low-cost exposure to a lot of in-ground gold has generally not worked well, to put it mildly. For the past three years, one of the most important rules to be followed by value-oriented speculators in gold-mining stocks has been: if it ain’t economic, it ain’t worth anything. This rule will probably apply for at least two more years.

Here’s a specific example to illustrate how the per-ounce market value of an exploration-stage gold-mining stock can be very misleading.

At the closing stock prices on Tuesday 17th March, I estimate that the 1M ounces of Measured-and-Indicated (M&I) in-ground gold owned by Dalradian Resources (DNA.TO) were being valued by the market at around US$80/ounce and that the 15.7M ounces of M&I in-ground gold owned by International Tower Hill Mines (THM, ITH.TO) were being valued by the market at around US$2/oz (taking into account the net cash of the companies). This simple comparison suggests that THM offers much better value than DNA.TO, but this isn’t the case.

Based on the economic studies that have been completed to date by each company, I think that DNA offers the better value. The reason is that DNA’s deposit is economically robust at $1200/oz whereas THM’s deposit would require a gold price of more than $2000/oz just to become economically viable. Any gold deposit that currently needs a gold price of at least $2000/oz to become viable will never be worth anything, because by the time gold rises to $2000/oz, which it very likely will within the next 5 years, the deposit that needed a price of $2000/oz to be viable in early-2015 will probably need a gold price of $2500-$3000/oz to be viable.

Now, it’s certainly possible that THM will come up with a totally different mine design that enables the project to become viable at a much lower gold price. However, that’s a long shot. Based on what’s known today about the economics of THM’s Livengood project, the project’s appropriate per-ounce valuation is zero.

I’m not saying that buyers of THM won’t make money. THM and other gold stocks with blatantly uneconomic deposits will be bought during gold rallies and are capable of delivering large percentage gains in quick time. For example, THM’s stock price more than tripled from its Q4-2013 bottom to its Q1-2014 peak and almost doubled from its December-2014 bottom to its January-2015 peak. That is, stocks like this can still work well as short-term trades, despite the reality that their mining assets aren’t worth anything.

The important thing is not to kid yourself that an extremely low per-ounce valuation necessarily means that you are getting an excellent deal.

An article by Wolf Richter contains some interesting charts showing the response of the US oil industry to the huge decline in the oil price. Two of these charts are displayed below.

The first chart shows that there has been a collapse in the rig count (the number of drilling rigs in operation), which is not surprising considering the magnitude of the price decline. It also shows that the daily oil production rate has continued to climb and has just hit a new all-time high, which is a little surprising.

The second chart shows that with flagging oil demand and the on-going upward trend in oil supply, the amount of oil in storage in the US has moved sharply higher and is now about 21% above the year-ago level.

Can the oil price bottom while supply/demand fundamentals are becoming increasingly bearish? The answer is yes, because the market is always trying to look ahead. However, at this time there is no evidence in the price action of a bottom.

A WSJ blog post by Josh Zumbrun contains charts suggesting that an upward reversal in US consumer prices is underway. The evidence is in data compiled by the “Billion Prices Project”, which “scrapes the Internet daily to capture changing prices online and has often foreshadowed subsequent changes in official price indexes.“

Here is one of several interesting charts from the above-linked post. The “PriceStats” index is calculated by the Billion Prices Project. Based on past performance, the turn that’s showing up in the PriceStats daily index probably won’t be captured by official measures of “inflation” until reports in late April.

Depending on how it is manipulated, presented or interpreted, a set of data can be used to validate almost any theory or conclusion. For example, as I explained HERE, by changing the starting assumption the intraday London gold price data can be used to ‘prove’ either long-term suppression of the gold price or long-term elevation of the gold price. For another example, as I showed HERE, by cherry-picking the timescale of the data it is possible to demonstrate a relationship (in this case a relationship between the gold price and the US federal-debt/GDP ratio) that wouldn’t be apparent if a different timescale were chosen. I’ll now discuss a new example that was part of a 12th March article at Marketwatch.com.

I agree with the gist of the above-linked Marketwatch article, which is that the US stock market is stretched to the upside in a big way. However, the chart used in the article to make this point is a great example of data mining. Here is the chart.

The chart uses a 6-year rate of change (ROC) to suggest that the US stock market is almost as extended to the upside as it was at the top of the late-1990s mania, but why a 6-year ROC? Why not a 7-year or a 5-year ROC?

The answer is that only a 6-year ROC creates the impression that the author wants. A chart showing a 7-year ROC, for example, would actually appear to support an opposing view — that the market is not remotely stretched to the upside. As evidence I present the following chart of the Dow’s 7-year ROC. It makes the market look cheap!

The reason that the 6-year ROC works so well to support the view that the market is dramatically extended to the upside is that the bottom of the major 2007-2009 bear market occurred exactly 6 years ago. What you are seeing in the past year’s spectacular rise in the market’s 6-year ROC is the reverse of the 2008-2009 crash. Even if the US stock market had traded sideways over the past year, the extraordinary market collapse of 2008-2009 would have ensured a moonshot in the 6-year ROC.

To put it another way, the near-vertical rise in the 6-year ROC over the past 12 months reflects the waterfall decline that happened many years ago. It does not reflect a manic upside blow-off in the current market.

If the market trades sideways from here then a year from now the 7-year ROC will show the moonshot that the 6-year ROC currently shows.

Some commentators who claim that the gold price has been relentlessly and successfully suppressed over many decades cite something they call the “London Bias” to support their claim. For example, a recent article by Ed Steer puts the London Bias forward as evidence of long-term price suppression. However, what the so-called “London Bias” actually proves is that some pundits who want to present evidence of unidirectional price manipulation are not above using data manipulation. As I’ve previously said, by carefully mining the data you can ‘validate’ almost any theory, even the most cockamamie one.

The idea behind the London Bias is that there is a tendency for the London PM gold fix to be lower than the London AM gold fix. The result is that you would have lost money almost every year, through gold bull markets and gold bear markets, by simply buying a position at the London gold AM Fix every day and selling the position at the London PM Fix the same day. More specifically, here’s how it’s described in the above-linked article:

“…if you invested $100 at the London a.m. gold fix on January 2, 1970, sold your position at the London p.m. gold fix the same day, then reinvested the proceeds the next day at the London a.m. fix and sold at the p.m. fix once again — and did that every business day for 45 years in a row — you’d have had the magnificent sum of $12.13 in your trading account at the close of business on February 27, 2015.

…from January 2, 1975 going forward and with the exception of only a couple of years between 1975 and 1980, the yearly London price bias in gold has been negative ever since — for more than two generations. In other words, since January 2, 1975 — and with the very odd exception in the interim — the gold price has closed for a loss between the London a.m. and p.m. gold fixes for 40 years in a row regardless of what was happening in the overall gold market.”

The blue line on the following sharelynx.com chart illustrates how someone would have fared if they had started with $100 and then bought/sold at the daily fixes as described above. The yellow line on the chart is the US$ gold price.

Can anyone spot the problem with the assertion that the “London Bias” proves long-term downward manipulation of the gold price?

There’s more than one problem, but the main one is that exactly the same data could be used to prove long-term UPWARD manipulation of the gold price. Here’s why:

The assumption underlying the claim that the London Bias shows relentless downward manipulation is that the London AM Fix is the right price and that downward manipulation regularly occurs between the two fixes, leading to the London PM Fix consistently being lower than it should be. This assumption is groundless. An equally valid (meaning: equally groundless) assumption would be that the London PM Fix is the right price and that upward manipulation occurs between the two fixes, leading to the London AM Fix consistently being higher than it should be. In this case the logic would be that the manipulators get to work boosting the gold price during the relatively thin trading hours, leading to an artificially high London AM fix, and that the price settles back to its correct level during the higher-volume trading hours.

Based on the second assumption, a chart could be constructed to illustrate the financial extent of the upward manipulation. The chart would assume that $100 was invested at the London PM gold fix on January 2, 1970, and sold at the London AM gold fix the following day, with the proceeds then reinvested later that day at the London PM fix, and so on, for every business day for 45 years in a row. The chart would show a huge return on investment thanks to the positive “London Bias”.

The point is that depending on your starting assumption, the same London gold-price data could be used to illustrate long-term price suppression or long-term price elevation. That is, you could assume that there is a negative bias in the PM Fix or you could just as validly/invalidly assume that there is a positive bias in the AM Fix. Alternatively, you could assume that the data is indicative of a market characteristic that has nothing to do with manipulation in either direction.

Clearly, there are people analysing the gold market who have a very strong belief that a successful, long-term price suppression scheme has been operated in this market. These people are eager to interpret data in a way that supports their belief. This is a bias that YOU should be aware of.

You can obviously choose to believe whatever you want, but if you choose to believe that powerful forces have both the motivation and the ability to suppress the gold price over the long term then it would be irrational of you to be involved in the gold market on the ‘long’ side. So, why are you?