After a record fourteen days of decline silver looks as if it's ready for a dead cat bounce. Back in mid-March I did write about a pending correction. The open interest and speculator longs in silver futures were at record levels. Precious metals did turn about that date.
The COTs released on Friday, May 5, 2017, tell the story about who is moving the metals markets lower.
I did an interview about ten days ago where I commented on the number of speculator long positions. I said that I expected to see a decrease of 40,000 to 50,000 speculator long positions before we see a bottom in silver. Last Friday's COT reports do a wonderful job of demonstrating just who it is that drives markets lower.
If you look at the chart above, you can see that large speculator long positions dropped by 19,480 and small speculator long positions increased by 2,187 contracts for a net decrease of 17,293 for the week ending May 2. And since we want to see just who is driving the market we look at the commercial shorts and see they closed 21,199 positions.
Now we know that all commodities are a zero sum game. That is, for every contract you have one buyer and one seller. Each person trading a contract has to either buy first and close by selling or sells first and closes by buying. There can be no "naked short sellers" since it is a zero sum game with one winner and one loser and all contracts are covered by an equal and opposite position. Anyone using the term "naked short sellers" referring to commodities is only advertising their ignorance of how the markets work.
In the week ending May 2, silver prices dropped a lot. In fact so far they have gone done 15 days in a row and went down every single day of the week the COTs cover. So if the commercial shorts were actually driving the market by closing 21,199 positions in some sort of panic, just how could they have done that?
For the shorts to close a position, they have to buy a contract back. So the commercials bought 21,199 more contracts than they sold. And the speculators sold 17,293 more contracts to close their positions than they bought. You can't make prices go down by buying so simply and clearly it was the speculators in a panic who drove the market lower as they always do.
Without any doubt this week's COTs will also reflect the speculators still in a panic and prices will continue to go lower until the weak hands have all sold at the bottom as they always do. The lower the speculator long positions, the safer it is to be a buyer. Speculators always buy at tops and sell at bottoms. I cover this at length in Nobody Knows Anything.
At the end of February I wrote a short piece about an Australian gold company named Millennium Minerals (MOY-ASX). Since that report, the market cap of the company dropped about 30% but lots of resources shares have dropped that much and more. The shares went down even as the price of silver and gold were increasing from the 10th of March.
The article was pretty simple and easy to understand. Through a lot of mismanagement Millennium Minerals seems to have painted themselves into a corner. For the last year they have spent all their free cash drilling out some 28 different deposits. Their largest gold resource is a transitional sulfide ore that can't be recovered with the mill they have. They really aren't running a mine, but an employment agency.
The company came out with a press release a week after my piece came out listing more drill results. It did nothing to increase my confidence in the company; in fact it did the opposite. When companies bury you in more or less meaningless data it been my experience that they are trying to conceal more than to reveal. It comes under the "If you can't dazzle them with brilliance, baffle them with bullshit" rule.
Basically, Millennium has a mill designed for oxide gold. They are drilling a lot of sulfide material that can't be recovered economically without spending $50 million or more to upgrade their mill.
I suspect large shareholders in the company are pushing management to unload the mine and mill while their shares are still in the stratosphere. The shares traded below $0.04 Aussie in December of 2015 and probably that more reasonably represents their true value than the $0.40 they reached in August of 2016. Having a tenfold increase in the share price I feel certain made major shareholders try to figure out how to unload them under the Greater Fool Theory.
I think Millennium Minerals is trying to sell the company and management has been told to spend all their free cash painting lipstick on the pig. Their latest press release dated May 4, 2017, gives me even more confidence in my belief. I have made the comment many times and in my book that when someone is trying to con you, they tell you things that are both perfectly true and perfectly meaningless at the same time.
The company claims in the release that met studies show they can recover more than 90% and some 850,000 ounces of this "fresh ore" using conventional sulfide floatation and furthermore up to 30 deposits at Nullagine are open at depth.
As to the first claim, nobody get better than 90% recovery of sulfide ores using floatation unless they roast the ore. 90% recovery would be excellent using even the most suitable oxide ore. I'm skeptical when I hear anyone claim more than 90% recovery of any ore, much less sulfide ore. Millennium is off the grid and their power costs are probably in the $0.50 a kWh range. Roasting and floatation are expensive even when power is cheap. It's not cheap in Northern WA.
As to 30 deposits being open to depth, of course they are. The fact they are drilling 30 deposits should tell even the most ignorant of investors something important. How many other mines, not matter how large, are getting ore from 30 different holes in the ground some up to 40 km from the mill? One of the biggest costs in any open pit mine is stripping costs. And the more holes you dig for ore, the more you have to strip. If they had a low strip ratio, you can safely bet they would be bragging about it.
Millennium Minerals can only extend the life of their mine with a giant infusion of cash in the tens or hundreds of millions of dollars. They are spending all their free cash right now on generating numbers that are as meaningless at the U.S. dropping the MOAB on a hole in the ground in Afghanistan. That's the only country in the world where bombing the place back to the stone ages improves the standard of living. They can always sell the iron from the bombs.
When you have dug yourself into a deep hole, the very best thing you can do is to stop digging.
I have no financial relationship with Millennium Minerals in any way. I am neither long nor short any shares.
MOY-ASX $0.21 (May 05, 2017)
780.9 million shares
Bob and Barb Moriarty brought 321gold.com to the Internet almost 16 years ago. They later added 321energy.com to cover oil, natural gas, gasoline, coal, solar, wind and nuclear energy. Both sites feature articles, editorial opinions, pricing figures and updates on current events affecting both sectors. Previously, Moriarty was a Marine F-4B and O-1 pilot with more than 832 missions in Vietnam. He holds 14 international aviation records.
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