Gold: The Inside Scoop 

How can investors of Gold get the Best Bang for the Buck? – Developmental Companies

Companies developing mines should experience strong share price increases as they approach production even with lower metal prices. Gold is approximately $1,100 an ounce. Many companies use $325-350 as a guide to take a mine into production profitably. Gold at $425-450 would make these mines extremely profitable and $500 gold and above hugely profitable. Therefore investments in developing mining companies usually have solid 1-2 year upside potential even if metal prices decline. One has to have patience with these future producers, but the upside is usually worth the wait.

What Is Driving The Price Of Gold?

The fundamentals for higher gold prices are tied to basic economic scenarios. Strong economic growth increases jewelry demand and the past robust housing market increased commodity demand in general which helped gold. Currently the global economy is doing better than expected and will for the time being help the mining industry and gold consumption. But the housing market slowing down in the U.S. and consumers being overextended and cutting back on their buying habits will slow down the economy. A severe recession is also possible because of the high debt levels in this economic cycle. A slow down in the U.S. slows down a percentage of the world’s economy. Therefore oil demand, commodity demand and even jewelry demand will suffer to varying degrees.

But there are four points that are not in the above equation:

1) Any slow down should be accompanied by inflation. Recessions with inflation in the past (1974, 1980) saw gold hit the highest levels in history! Consider these facts: a) huge long term global money supply increases, b) commodity prices 200% higher than just four years ago, c) intermediate and crude goods inflation in the U.S., according to The Department of Labor has averaged 10.2% annually in the last two and half years. This will soon show up in producer prices and consumer prices. This leads to only one conclusion. It is only a matter of time before consumer prices start to increase sharply. Inflation is already baked into the cake and all the jawboning by politicians and economists and financial journalists will not change these facts and the past inflationary effects they have always had, including higher gold prices.

2) Increased gold demand based on new middle class buyers is global. Slow downs in China from 10% growth to 2% will not stop this trend.

3) Money supply increases for six important countries in the last year allow one to envision even more gold and silver demand: China +15%, India +20.3%, U.K. +10.8%, Russia +42.5%, France +7.5% Brazil +16.8%. These are printing presses out of control and many of these citizens will be gold and silver buyers to protect against this currency depreciation.

4) The dollar is also vulnerable. We just experienced the largest quarterly trade deficit in history and sooner or later the Chinese and Japanese central banks will have to sell and stop buying U.S. Treasuries which finance our budget deficits. If foreigners do not buy our debt with their money then the Federal Reserve would be forced to buy. When the Fed buys Treasuries it creates new money. More money issued depreciates the dollar. With inflation already in the mix, a slowing U.S. economy, and international money flows out of the U.S., the dollar is vulnerable. This is bullish for gold.

The powers that be, if faced with inflation, would have to no choice regarding interest rates as rates must go up with inflation. Rates at very high levels would bring on a severe stock and bond market retrenchment. This is what happened in 1974 and 1981. The Fed would then once again have to come to the rescue. This would mean printing as much money as is needed to make the nightmare end. We would then go through the next economic cycle but gold would stay at a much higher range for that cycle.

How Are Oil and Gold Related?

Oil pulling back affected the gold market. Linking the price of oil and gold is half correct because one is energy and the other is money but both are also commodities so the linking does have some truth to it. For those looking at this relationship from a commodity standpoint, I give the following stats from the respected Energy Information Agency (EIA). The U.S. consumes 3 gallons of oil per day per person. China consumes .2 gallons per day per person. This is 15 times less per person in a country with 4 times the population. Doing the math shows a staggering 60x long-term demand ratio that may take decades but is now underway as China’s economy advances toward becoming like the U.S. This ratio will also apply to many other commodities in the years ahead.

Is There Real Value versus Market Value?

Mining stocks are notorious for fluctuating far out of the price range of what a reasonable value should be. Because of this, investors have a difficult time making correct investment decisions. The correct valuation method is to take the estimated resource and figure out only how many ounces or pounds of minerals or metals will be able to be recovered. Next, apply a conservative future price to these metals and then estimate how much capital and how much mining cost will be needed to dig the metals out of the ground, crush and grind the rock and then process the crushed rock or powder and then extract the metal. You have to figure how much debt and how many millions of new shares must be sold to finance this whole procedure. After all this you will be left with a multi – year future cash flow from the project. Discount this future value back to present time and then you will have a good idea of what the projects(s) or company is worth.

A reasonable value can be estimated for many companies. Also future upside can come from higher metal values and future discoveries and additions to their reserve base. On the downside is lower metal prices, permitting and engineering problems and political (country) risk. But if you are already using $1,100 to $1,500 gold as a future price to determine future profits and you come up with a stock that should be valued at $15 (at $1,200 gold in the future) and the stock is trading at $5, then you probably have a winner.

The ideal company shows that recoverable value in the ground will eventually translate into value in the market even if gold trades well under $1,000 in the future. In these types of analyses, a lower gold price in the end will not even matter. Gold going down to $400 is a non factor to an undervalued project that will make plenty of money at the $400 gold in the future. Even a crash in the gold price for non producing developmental companies can be offset by substantial profits from the business of mining the metal. This does not apply to producers. Producers will be affected by the current gold price. That is why when owning producers try and own some with future projects in the pipeline.

The mining sector is not alone in these illogical pricings by the stock market. Northern Trust a major financial institution with over $620 billion under management had this to say about net asset values in real estate and various closed end mutual funds.

“As with closed-end funds, it is one of the enduring mysteries of academic finance how REIT share prices can be so volatile and can pull so far away from their net asset value (NAV) when this value is firmly grounded in hard assets”

Gold stock investors can certainly relate to the above. Therefore don’t despair when your stocks are being sold off by uninformed or scared or fast buck traders and investors. If you know for sure that the company already has found the minerals and the engineering studies by the company or an outside company are positive, then you should be able to know what the company will be worth in a few years. That number should be more valid than the short term market value.

Your success in investing in companies is making sure the cash flow from all the hype and hoopla in the future years will support a higher share value. 10 million ounces in the ground is meaningless if it is too low grade or too expensive to mine. A company that will have to sell a lot of stock and dilute the value of existing shareholders if it is overpriced already, has no where to go but down even as they become a successful mining company. If they are already overpriced you better know it.

Mining insiders and people that study the engineering reports and can make the many calculations that are necessary to figure all this out are the ones most likely selling when you are buying or buying when you are selling.

The key to this business is to find companies that have already found the goods in the ground and are developing quality and large projects. I am always comfortable with a three year time frame to production and at least a 3x return using much lower metal prices and a reasonable multiple of cash flow. Even if a lot goes wrong - and it usually does there is plenty of room for capital gains.

All About Gold

Gold is a rare metal. It has the chemical symbol Au, named after Aurora, the Roman goddess of the dawn. The purity of gold is described by its 'fineness' in parts per 1,000 or by the carat scale which is parts per 24. The word 'carat' derives from the Italian carato, Arabic qirat or Greek keration, all meaning the fruit of the carob tree. Ancient traders used carob seeds as the means to balance the scales in oriental bazaars. Pure gold is 24 carat or 1,000 fine.

The price of gold and other precious metals is quoted in terms of troy ounces. The term 'troy' is derived from Troyes, France, a major trading city of the Middle Ages. One troy ounce equals 31.1 grams.

What are the properties of gold?

Pure gold is soft and wears easily. It is often mixed with other harder metals. A mixture of metals is called an alloy. Gold is very unreactive. This means it is resistant to corrosion and tarnishing. That is why a gold nugget can be buried in the ground for thousands of years and still come up looking shiny.

Gold is malleable (easily shaped) and ductile (can be drawn into very thin wire). A square lump of gold about the size of your thumb nail would weigh an ounce. That ounce of gold can be flattened into a sheet so thin that it would be thinner than a piece of refill paper, and light could pass through it. It would cover an area about the size of a small bedroom. The same lump of gold can be drawn into a piece of wire 80 km long. That's long enough to go around a rugby field 23 times.

Where is gold found? Gold is found as a free metal in nature. It can be found as nuggets or bound up with rock and too small to see with the naked eye. It is sometimes found in association with other metals.

What has gold been used for in the past? Decoration - Gold has been used for ornaments and decoration and as money for over 5,000 years. Gold leaf has been used for the decoration of tombs and statues, cathedrals and temples, fine books, and picture frames since Egyptian times. Many Egyptian burial cases, including King Tutankhamun's (1352 BC), were overlaid with beaten gold (called gilding). Gold leaf is still often preferred for adorning the domes or ceilings of buildings (such as the Metropolitan Opera House in New York) because its resistance to corrosion means that it will outlast paint by many years.

Gold was made into jewellery long before it was used as currency. The earliest gold jewellery dates from the Sumeric civilization around 3,000BC. The jewellery was worn by both men and women. Goldsmith’s skills that were understood and mastered at that time are still used today, although some of the techniques have been lost. Gold wedding rings, used in marriage ceremonies since the 9th century, date back to the ancient Egyptians. The ring is placed on the third finger of the left hand because it was believed that this finger carried an artery leading directly to the heart.

Gold Chemistry

Gold (Au), is a chemical element, a dense, lustrous, yellow precious metal of Group Ib, Period 6, of the periodic table. Gold has several qualities that have made it exceptionally valuable throughout history. It is attractive in color and brightness, durable to the point of virtual indestructibility, highly malleable, and usually found in nature in a comparatively pure form. The history of gold is unequaled by that of any other metal because of its value in the minds of men from earliest times.

Gold is one of the heaviest of all metals. It is a good conductor of heat and electricity. It is also soft and the most malleable and ductile of metals; an ounce (28 g) can be beaten out to 187 square feet (about 17 square m) in extremely thin sheets called gold leaf. Note that mining industry standards refer to troy ounces (1 troy ounce = 31.12035g).

A History of Gold

Because gold is visually pleasing and workable and does not tarnish or corrode, it was one of the first metals to attract human attention. Examples of elaborate gold workmanship, many in nearly perfect condition, survive from ancient Egyptian, Minoan, Assyrian, and Etruscan artisans, and gold has continued to be a highly favored material out of which to craft jewelry and other decorative objects.

Owing to its unique qualities, gold has been the one material that is universally accepted in exchange for goods and services. In the form of coins or bullion, gold has occasionally played a major role as a high-denomination currency; although silver has generally been the standard medium of payments in the world's trading systems. Gold began to serve as backing for paper-currency systems when they became widespread in the 19th century, and from the 1870s until World War I the gold standard was the basis for the world's currencies. Although gold's official role in the international monetary system had come to an end by the 1970s, the metal remains a highly regarded reserve asset, and approximately 45 percent of all the world's gold is held by governments and central banks for this purpose. Gold is still accepted by all nations as a medium of international payment.

The Geology of Gold

Gold is widespread in low concentrations in all igneous rocks. Its abundance in the Earth's crust is estimated at about 0.005 parts per million. It occurs mostly in the native state, remaining chemically uncombined except with tellurium, selenium, and possibly bismuth. The element's only naturally occurring isotope is gold-197. Gold often occurs in association with copper and lead deposits, and, though the quantity present is often extremely small, it is readily recovered as a byproduct in the refining of those base metals. Large masses of gold-bearing rock rich enough to be called ores are unusual. Two types of deposits containing significant amounts of gold are known: hydrothermal veins, where it is associated with quartz and pyrite (fool's gold); and placer deposits, both consolidated and unconsolidated, that are derived from the weathering of gold-bearing rocks.

The origin of enriched veins is not fully known, but it is believed that the gold was carried up from great depths with other minerals, at least in partial solid solution, and later precipitated. The gold in rocks usually occurs as invisible disseminated grains, more rarely as flakes large enough to be seen, and even more rarely as masses or veinlets. Crystals about 2.5 cm (1 inch) or more across have been found in California. Masses, some on the order of 90 kg (200 pounds), have been reported from Australia.

Alluvial deposits of gold found in or along streams were the principal sources of the metal for ancient Egypt and Mesopotamia. Other deposits were found in Lydia (now in Turkey) and the lands of the Aegean and in Persia (now Iran), India, China, and other lands. During the Middle Ages the chief sources of gold in Europe were the mines of Saxony and Austria. The era of gold production that followed the Spanish discovery of the Americas in the 1490s was probably the greatest the world had witnessed to that time. The exploitation of mines by slave labor and the looting of Indian palaces, temples, and graves in Central and South America resulted in an unprecedented influx of gold that literally unbalanced the economic structure of Europe. From Christopher Columbus' discovery of the New World in 1492 to 1600, more than 225,000 kg (8,000,000 ounces) of gold, or 35 percent of world production, came from South America. The New World's mines--especially those in Colombia-- continued into the 17th and 18th centuries to account for 61 and 80 percent, respectively, of world production; 1,350,000 kg (48,000,000 ounces) were mined in the 18th century.

Gold: Science of Metallurgy

Because pure gold is too soft to resist prolonged handling, it is usually alloyed with other metals to increase its hardness for use in jewelry, goldware, or coinage. Most gold used in jewelry is alloyed with silver, copper, and a little zinc to produce various shades of yellow gold or with nickel, copper, and zinc to produce white gold. The color of these gold alloys goes from yellow to white as the proportion of silver in them increases; more than 70 percent silver results in alloys that are white. Alloys of gold with silver or copper are used to make gold coins and goldware, and alloys with platinum or palladium are also used in jewelry. The content of gold alloys is expressed in 24ths, called karats; a 12-karat gold alloy is 50 percent gold, and 24-karat gold is pure.

Because of its high electrical conductivity (71 percent that of copper) and inertness, the largest industrial use of gold is in the electric and electronics industry for plating contacts, terminals, printed circuits, and semiconductor systems. Thin films of gold that reflect up to 98 percent of incident infrared radiation have been employed on satellites to control temperature and on space-suit visors to afford protection. Used in a similar way on the windows of large office buildings, gold reduces the air-conditioning requirement and adds to the beauty. Gold has also long been used for fillings and other repairs to teeth.

The characteristic oxidation states of gold are +1 (aurous compounds) and +3 (auric compounds). Gold is more easily displaced from solution by reduction than any other metal; even platinum will reduce Au3+ ions to metallic gold.

Among the relatively few gold compounds of practical importance are gold(I) chloride, AuCl; gold(III) chloride, or gold trichloride, AuCl3; and chlorauric acid, HAuCl4. All three are involved in the electrolytic refining of gold. Potassium cyanoaurate, K[Au(CN)2], is the basis for most gold-plating baths (the solution employed when gold is plated). The soluble salt sodium aurichloride, NaAuCl42H2O, is used in the treatment of rheumatoid arthritis. Several organic compounds of gold have industrial applications. For example, gold mercaptides, which are obtained from sulfurized terpenes, are dissolved in certain organic solutions and used for decorating china and glass articles.

Gold has an atomic number 79, atomic weight 196.967, melting point 1,063º C (1,945º F), boiling point 2,966º C (5,371º F), specific gravity 19.3 (20º C), valence 1, 3, electronic configuration 2-8-18-32-18-1.

Hard rock mining is removing rock from the ground, in which miners tunnel and blast into rock, seeking deposits of gold. Veins of gold ore are often found several inches or feet wide in certain rock formations in a volcanic deposit and in certain bed layers in a sedimentary deposit, hence the minerals may be removed, collected, and treated to process the gold and other valuable metals (such as silver) from them. This technique uses the most energy and is typically viable only where exceptional gold grades warrant the associated expense. Deposits where this is the case may have significantly higher grades than those needed to offset the costs and so underground mining can be quite profitable. Hard rock mining produces much of the world's gold.

Typical hard rock mining involves a cycle wherein holes are drilled in the rock to be broken, explosives are placed in the holes then detonated. Rock broken by the explosion is then removed from the area, typically with mechanized equipment. Where ground conditions warrant, rock bolts and other means of ground support may then be installed and the cycle can be begun again with drilling. By this means an advance of some few meters may be achieved. Hard rock mining is the most dangerous type of mining.

Refining
Gold extracted by amalgamation or cyanidation contains a variety of impurities, including zinc, copper, silver, and iron. Two methods are commonly employed for purification: the Miller process and the Wohlwill process. The Miller process is based on the fact that virtually all the impurities present in gold combine with gaseous chlorine more readily than gold does at temperatures equal to or greater than the melting point of gold. The impure gold is therefore melted and gaseous chlorine is blown into the resulting liquid. The impurities form chloride compounds that separate into a layer on the surface of the molten gold.

The Miller process is rapid and simple, but it produces gold of only about 99.5 percent purity. The Wohlwill process increases purity to about 99.99 percent by electrolysis. In this process, a casting of impure gold is lowered into an electrolyte solution of hydrochloric acid and gold chloride. Under the influence of an electric current, the casting functions as a positively charged electrode, or anode. The anode dissolves, and the impurities either pass into solution or report to the bottom of the electro refining tank as an insoluble slime. The gold migrates under the influence of the electric field to a negatively charged electrode called the cathode, where it is restored to a highly pure metallic state.

Although the Wohlwill process produces gold of high purity, it requires the producer to keep on hand a substantial inventory of gold (mainly for the electrolyte), and this is very costly. Processes based on direct chemical purification and recovery from solution as elemental gold can greatly speed gold processing and virtually eliminate expensive in-process inventories.

Assaying

Fire assay is considered the most reliable method for accurately determining the content of gold, silver, and platinum-group metals (except osmium and ruthenium) in ores or concentrates. This process involves melting a gold-bearing sample in a clay crucible with a mixture of fluxes (such as silica and borax), lead oxide (called litharge), and a reducing agent (frequently flour). The fluxes lower the melting point of the oxidic materials, allowing them to fuse, and the molten litharge is reduced by the flour to extremely fine drops of lead dispersed throughout the charge. The drops of lead dissolve the gold, silver, and platinum-group metals, then coalesce and gradually descend through the sample to form a metallic layer at the bottom of the crucible. After cooling, the lead "button" is separated from the slag layer and heated under oxidizing conditions to oxidize and eliminate the lead. The shiny metallic bead that is left contains the precious metals. The bead is boiled in nitric acid to dissolve the silver (a process called parting), and the gold residue is weighed. If platinum metals are present, they will alter the appearance of the bead, and their concentration can sometimes be determined by use of an arc spectrograph.

In the jewelry industry, gold content is specified by karat. Pure gold is designated 24 karats; therefore, each karat is equal to 4.167 percent gold content, so that, for example, 18 karats equals 18 4.167, or 75 percent gold. "Fineness" refers to parts per thousand of gold in an alloy; e.g., three-nines fine would correspond to gold of 99.9 percent purity.

Gold Facts:

Gold rocks. Compact discs pressed on 24-karat gold provide the ultimate in sonic quality. Artists available on ULTRADISC II, by Mobile Fidelity Sound, include Elton John, Steve Winwood, B.B. King and Aretha Franklin.

Gold travels. The Pathfinder "robotic geologist" relies on sophisticated electronics to direct its Mars landing and movement. Its intricate gold circuitry enables new computer technology to transmit the Pathfinder's information back to Earth.

Gold communicates. Every time you type an e-mail on your computer, gold circuits relay the keyboard data to the microprocessor. Gold is essential in computer circuitry because of its electrical conductivity and because it does not degrade over time.

Gold protects. Gold-plated reflectors used on Air Force One, the U.S. President's airplane, confuse an incoming missile's heat-seeking signal so the missile's guidance system cannot focus on its target. Gold provides the highest reflectivity of heat radiation.