Monday, May 28, 2012


The term “leverage” is used in several ways. Gold applies to all of them.
The word usually refers to influence. When someone says of a politician, “he’s got
a lot of leverage,” it means influence.
Consider a U.S. Senator. He has one vote out of 100. But if he is the chairman of a
major committee, he has more influence than his single vote indicates. If his committee is
important for generating pork barrel spending projects for the voters in other Senators’
states, he has even greater leverage. Same person; different leverage.
A preacher has leverage in his congregation. But if he is a satellite TV preacher, he
has a lot more leverage. He has leverage in other preachers’ congregations.
The term “leverage” also applies to the world of investing. It usually refers to
certain debt contracts, but not always.
I do not think anyone should buy leveraged gold until he owns $10,000 worth of
gold bullion coins, such as American eagles or Krugerrands. But some people like to
speculate with leverage.

Consider gold. Say that you own a one-ounce gold coin. (I hope this is true several
times over.) Gold’s price in dollars then doubles: $1,800 to $3,600. Your gold coin is
worth twice as much in dollars. Of course, if the price of everything else has doubled,
your gold coin is worth twice as much in dollars, not twice as much in goods. But that’s
still much better than having held dollars instead of gold.
But what if your gold investment was leveraged? What if you had gone into the
futures market to buy the gold coin? The gold price doubles from $1,800/oz to $3,600/oz.
You had $900 of your own money in the deal: 50%. Your investment is now worth
$3,600. Your profit is $2,700 ($3,600 minus the original $900). You sell the gold coin for
$3,600, pay off the $900 loan, and pocket $2,700. It cost you $900 (plus interest) to make
$2,700 free and clear. You made close to 300%. That’s sure a lot better than 100%.
The Gold Wars 5
But what if gold’s price falls to $1,500? You would now owe $300 ($1,800 minus
$1,500). You have lost one-third of your $900 investment. This arrangement called
buying on margin.
I assume that you want a safer kind of leveraged gold, a kind where you can’t be
sold out for this good reason: you never borrowed any money. You don’t have a margin
account. It’s as safe as owning a gold coin -- you can’t be sold out against your will -- but
it still offers leverage upward. Of course, it is risky on the downward side, too, but you
can’t be sold out because you aren’t in debt. You want debt-free leverage. You can get it.
This is what North American gold mining shares offered back in 2001. That was
when I told my Remnant Review subscribers to start buying junior North American gold
mining shares. I got an expert to give specific recommendations: Sam Parks He described
the leverage feature in an interview with me in 2003.
Marginal producers offer the most leverage to gold. Say that a mining
company can show a profit of $5.00 per ounce of production when gold is
$350 per ounce. If we up the gold price by $50 per ounce, and the
company’s profit increases to $55 per ounce of production. This leverage of
course works both ways. If gold goes down $50, the company’s profit per
ounce will go from $5.00 per ounce to a loss of $45 per ounce.
The potential for North American gold shares then was that gold’s price has been
down for so long that investors had forgotten about gold, or were still scared of buying it.
They had heard of gold coins, but hardly anyone ever buys them. The number of
national dealers who make a living by selling bullion coins like American eagles or
Canadian maple leafs can be counted on the fingers of two hands. The general public isn’t
in this market.
Another gold market is the commodity futures market: mostly debt-based, highly
speculative, and very risky unless you put down a high margin. The contracts are so large
that hardly anyone can afford to invest without a lot of margin debt. Also, investors are
personally at risk for every cent borrowed.
This leaves gold mining stocks, which are mostly South African mines -- two miles
deep, operated by Africans with AIDS, and supervised by a socialist government. The
few other mines that stock brokers know about are the larger North American mines. The
most famous is Barrick. But Barrick has a problem: it is sold short. That is, it has
promised to deliver gold in the future at a fixed price. Parks commented in 2003:
In the past, hedging was profitable for the gold producers. In its 2001
annual report, Barrick stated that over the preceding 14 years, it had made
$2 billion from its hedging activities.
Two billion?
Yes, two billion. For several years, Barrick was the most popular gold
stock. Much of its popularity came from its profitable gold-hedging
activities. But, as the gold market began to improve in mid-2001, the effect
on Barrick turned negative. Gold stock investors shunned the company
because it had so many ounces sold forward.
Quantify that -- how many ounces?
At year end, 2002, Barrick had 18 million ounces sold forward at an
average price of $341 per ounce.
What effect has Barrick’s hedging had on its share price since the bear
market in gold ended in 2001?
At the beginning of the 2001, two companies were trading around $17 or
$18. Newmont, the big major known for its disdain for hedging, is currently
about $28 and Barrick is stuck at $17.
Sadly, I got stuck with Barrick. It bought out Homestake, which I owned. But,
even so, it is around $50 these days.
What Parks did for Remnant Review subscribers in 2001 and early 2002 was to
identify smaller gold mines that most stock brokers had never heard of. (They still
haven’t.) These are marginal mines, i.e., they are high-cost producers. But they are well
positioned for highly leveraged returns. They get “more bang for the buck” when gold
rises above their production cost per ounce. These mines are still the Rodney
Dangerfields of mining. They get no respect. Brokers still are unaware of them. Remnant
Review readers who took Parks’ advice are up by 30 to one or more, depending on a
mine’s leverage.
That was then. This is now.
But enough about how to make money. Let’s get back to the other meaning of
leverage: influence.

My initial example of leverage was a U.S. Senator with a committee chairmanship.
In a sense, I want to put you in a similar position within your circle of influence. That’s
what The Gold Wars is really all about.
The number of people who are willing to read a report like this is so small as to
constitute a remnant. I’m using the word in the biblical sense. God told the prophet Elijah,
who believed himself to be alone in Israel,
Yet I have left me seven thousand in Israel, all the knees which have not
bowed unto Baal, and every mouth which hath not kissed him (1 Kings
You have decided to read this report. You have designated yourself as someone
who is interested in gold. This is not the equivalent of being interested in pork bellies or
even copper. But there are more people today who are interested in gold than back in
Gold used to be the industrial world’s money. Then World War I broke out in
1914. The banks suspended redemption of gold for paper money. This broke all contracts,
but the governments all ratified this action. Then the governments had their central banks
confiscate the gold that had been stored in the vaults of the commercial banks. The public
has never returned to a full gold coin standard. Instead, the world went on a fiat money

The governments’ confiscation of the public’s gold transferred enormous leverage
to central banks, which can now issue credit money without the restraining factor of a
threat of a gold run. The last gold run ended on Sunday, August 15, 1971, when President
Richard Nixon unilaterally “closed the gold window.” He announced that the U.S.
Treasury would no longer honor the IOU’s to gold (T-bills) in the possession of foreign
governments and their central banks. In the first half of 1971, there had been a run by
central banks on U.S. gold (meaning gold which was held in the vault of the Federal
Reserve Bank of New York) at $35 an ounce. Nixon ended this run on gold, which was a
run against the dollar, in the same way that the world’s commercial banks ended a similar
run in 1914, after the war broke out. He broke the contract.
If you go to the Bureau of Labor Statistics, you can use the Inflation
Calculator to see what has happened to the dollar as a result of Nixon’s
action. Select 1971 as the base year (or “debased” year). Enter $100. Then
click the CALCULATE button. See how much after-tax money it would
take today to match the $100 in purchasing power in 1971.
The day after World War I broke out in July, 1914, a wise investor with money in
the bank would have gone to the bank and demanded gold. The handful of people who
did this got their gold. But hardly anyone will do this, even when war breaks out. The
masses lose. They trust their banks, they trust their governments, and they get their gold
He who trusts the government to honor its contracts in a major national crisis is a
fool. Most voters are fools. Most investors are fools. They trust professional liars -- the
same politicians who keep promising the moon in election years but who don’t deliver
after the election. They pay a heavy price for their misplaced trust.
If you want a classic pair of examples of those who trust the government and those
who don’t, watch Gone With the Wind. Rhett Butler uses his ship to run guns -- illegal,
the North says. He also gets paid in gold -- unpatriotic, the South says. When he is caught,
he deliberately loses at cards in the yankee prison, so he knows that the commander won’t
hang him. He is in a position to settle his bets in yankee dollars. He has gold hidden
somewhere. In contrast is Scarlett’s father, driven mad, sitting in poverty and holding
bonds -- “good Confederate bonds” -- as his only form of liquid capital.
No, gold is not like pork bellies. Central banks still settle their accounts at the end
of the day by means of dollars and gold. Gold is not just another commodity.

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