Cluff Gold, a gold mining concern focused on West African assets, recently signed a Memorandum of Understanding with Samsung. Under the unusual agreement, the huge Seoul, South Korea based industrial company will be offering substantial funding to the mining concern to help develop its mining portfolio in the initial form of a $20 million unhedged loan facility.
This is the very first financing deal of its kind, where a non-mining concern has shown an interest in a mining company to help provide it with a reliable supply of bullion over the longer term.
For whatever reason, capital from outside the mining industry is now starting to become available to it. Interestingly, the well-known shorts in the mining shares could well be in trouble, although the fact that Samsung is buying into a gold miner highlights the fact that it is probably too late to do the same for silver.
Silver Miners are Spread Thin & at the Mercy of the Banks
Although a desperate need for consolidation exists in the silver mining sector, the capital to do so seems quite hard to come by since miners are typically viewed as risky borrowers by funding banks. This situation creates significant problems for the supply of silver going forward.
If a tech company announced a similar joint venture with a silver miner, it would very likely create an industrial panic and see the price of silver push sharply higher. This move could be large enough to break the global financial system, especially if the famously short bullion banks are not as hedged by offsetting transactions in the OTC sector as they claim to be.
Basically, the worldwide surge in investment demand for silver is competing with constant industrial demand for a metal that is universally believed to be vastly more ubiquitous than it is due to years of extreme price distortion.
Furthermore, silver’s monetary history ties it to gold, even though they have different intrinsic values. Nevertheless, no central banks own silver in comparable quantities to their gold holdings.
Impact of the Samsung/Cluff Gold Deal
Overall, as noted by many, including the legendary gold mining CEO Jim Sinclair, the story is a major game changer that demonstrates substantial international corporate investment in a monetary metal.
It also highlights the persistent undervaluation in the sector, and the desire by industrial concerns to secure their long term supply of a precious metal.
Furthermore, the creative financing deal demonstrates the recognition of the facts that:
(1) Gold mines mine money,
(2) The supply of gold is dwindling and
(3) Gold plays an important role in the high tech industry, which is actually quite minimal compared with silver’s broader industrial importance.
The deal also indicates that the precious metals bear market inflicted by widespread hedging of gold shares is now coming to a close. Just think about it, if Samsung or another large tech company tried to source silver in this way, it could very well trigger a spreading crisis.
The Samsung/CluffGold deal also comes in the era of rehypothecation, which involves a broker pledging as collateral for a bank loan the securities in customer margin accounts.
Basically, the rehypothecation of assets, which infinitely dilutes claims on real assets, can and will ultimately lead to total losses even for investors who thought that they had strong collateral backing.
Furthermore, the inventory of the world’s credible assets is literally evaporating in absence of CapEx spending, which is also one of the reasons behind the ECB’s seemingly endless lowering of its collateral requirements.
Why Buy Silver?
Within this investing and supply environment for silver, a substantial buying interest could well have a remarkable upwards impact on the price of silver for the following reasons:
(1) Not much silver left. This is the same reason that central banks are not buying silver. Basically, silver has been dis-hoarded and any major buyer would immediately induce a short covering panic that would end all panics.
(2) Silver miners are spread thin. The supply of silver is largely a byproduct of the mining of other metals because the primary silver producers are still viewed as risky. They also often have trouble finding funding for their mining operations and exploration activities.
(3) Strategic threat. No one wants to be the one that blows the silver market sky high with large purchases, so gradual accumulation often seems a more prudent investment strategy in the relatively thin silver market.
Although Samsung may not be buying silver – yet – this innovative deal with Cluff Gold indicates that conditions are favorable for more “finance for supply” transactions of this type over the years to come.
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