Mar 29, 2007

Mineweb: World's hottest uranium stocks

Author: Barry Sergeant
Posted: Tuesday , 27 Mar 2007

Prices for uranium (uranium oxide, U3O8, to be exact) have soared in the past few years as record crude oil prices have forced public and private sectors to announce rafts of nuclear reactors as a cost-effective energy alternative. Long-established uranium producers have benefited enormously; the market capitalization of the No 1 producer, Cameco, is close to US$14bn.

Uranium prices have grown ten fold in just five years. Between the early 1990s and 2004, uranium markets were in a supply/demand deficit, balanced by inventories held by nuclear generators and traders. Prices started turning in 2001, from between $5 and $10/pound, to current quotes around the $80/pound mark. Over the past five years, Cameco's NYSE stock price has increased from less than $3 a share to more that $45, with current quotes around $40.25.

The global uranium rush has triggered an explosion in exploration, along with entrepreneurs dusting off dormant projects, and rushing to the market. This raises serious questions of potential risk for equity investors, confronted by a plethora of choices.

In a major new report, RBC Capital Markets (RBCCM) notes that "many uranium exploration and development projects are being advanced by numerous companies", and finds it "inevitable that some of these companies will successfully bring their projects into production in the coming years - something the market will need in the future to bridge the supply/demand gap that we expect to exist after 2013".

There are many ways of valuing mining companies, and uranium has been out of fashion for so long that a number of additional risks may require consideration. In an examination of 21 listed uranium stocks, RBCCM has chosen from several different valuation methodologies, depending on the company. For uranium companies with existing operations, a forward EPS (earnings per share) or CFPS (cash flow per share) multiple is applied, reflecting valuation relative to peers and the market cycle.

For companies developing new projects, RBCCM often applies a net asset value (NAV) approach, sometimes coupled with a forward EPS multiple. For exploration companies where it is too early to calculate an NAV, RBCCM looks to the enterprise value (EV) per pound of U3O8 in resource. While the EV/pound metric is "easy" to calculate, RBCCM cautions that it should not be used in isolation.

Cameco is, of course, the world's No 1 producer of uranium oxide. Its principal interests comprise Canada's McArthur River and the flood-affected Cigar Lake, Inkai in Kazakhstan, and the US's Crow Butte and Smith Ranch/Highland operations. Rio Tinto, one of the world's biggest diversified resources entities (along with BHP Billiton and Anglo American) rates as No 2 world producer of uranium oxide, thanks to its stake in Energy Resources of Australia (ERA), and its 69% interest in the Rossing mine in Namibia.

France-based Areva is No 3, and like Cameco, has interests in Canada's McArthur River and Cigar Lake. KazAtomProm rates as No 4 producer, thanks to its interest, like Cameco, in Inkai. BHP Billiton is next on the list, followed by TVEL (Russia), Navoi (Uzbekistan), Vostgok (Ukraine), Nufcor (South Africa) and CNNC (China). There are also lesser-known producers of uranium oxide, such as AngloGold Ashanti, as a by-product from its gold mines in the Vaal River district in South Africa.

These big names among uranium producers present at least two problems for the investor: many are not listed, and where listed, uranium income, while substantial, may not be material to the stock as a whole. BHP Billiton, the world's biggest diversified resources stock, is a prime example. Its huge Olympic Dam operation in Australia, run primarily as a copper producer, owns by far the biggest uranium oxide reserves in the world. Its uranium income is, however, substantially "diluted" by income from a number of other divisions.

As such, 21 listed stocks with exposure to uranium may be considered as investable. There are six with a market capitalisation of $2bn or more: Cameco, ERA, Paladin Resources, UrAsia, Denison Mines, and sxr Uranium One. Following in terms of market capitalisaton are UraMin, First Uranium, Aurora, Energy Metals, Mega Uranium, Laramide Resources, Forsys Metals Corporation, Ur-Energy, Tournigan Gold, Strathmore Minerals, Khan Resources, Western Prospector, OmegaCorp, Berkeley Resources, and Uranium Power Corporation. sxr Uranium One is currently involved in potential corporate action with UrAsia.

RBCCM rates just five of these stocks, starting with Cameco, as "top pick, above average risk". Risks that are seen as applying to ERA can be seen as equally important for all other uranium stocks: fluctuations in the uranium price, currency, and project capex (capital expenditure) and opex (energy, material and manpower costs).

First Uranium is notable for its absence of "prior corporate history", along with "no meaningful comparisons in the market and no meaningful short-term cash flow". Paladin Resources faces notable hurdles at its Langer Heinrich and Kayelekera operations, while sxr Uranium One will be carefully studied for its ability to bring Dominion and Honeymoon into production on time and on budget.

Back on the fundamentals, RBCCM believes that uranium oxide prices are in the "middle" of a "bull market", with 2007 forecast prices expected to exceed $100/pound.

There is a cautionary note, in that prices could move beyond that threshold.

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Mar 27, 2007

John Embry: Time for gold 'to go ballistic' approaches

Sprott Asset Management's chief investment strategy, John Embry, writes in the March 30 edition of Investor's Digest of Canada that we're nearing the exhaustion of central bank gold reserves in the face of rising demand, which is when the price of gold will "go ballistic"...

You can read this article in Adobe Acrobat (pdf) format HERE

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Got Gold?..

The following short Flash video could help you save your financial sanity!

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Mar 26, 2007

Jones on Gold and Silver

Two things to notice (and ponder on) in the following Jones commentary on money:
  1. the bling-bling sound of REAL MONEY on the desk, and
  2. the chinese (!) music in the background ...

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The shape of to come!

For those of you still pondering on the future value of the greenback, here's a hint on the shape of things to come...

Those with more "Democratic" gusto might prefer the following variation. Of course when the proverbial $#!+ hits the fan, the final result will always be the same: ([value of]fiat$<[value of]gold$)

For more variations on the fiat theme check out HERE

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Mar 24, 2007

Gold Eagle's Vronsky: "I am biased, but..."

Gold Eagle's co-editor Vronsky is no word mincer, and laconically shows with the aid of a graph the way to go for investors who wish to be on the safe side of this bubbly stock market:

"...To be sure, I AM BIASED. But my bias is predicated on many years of study, experience and recent investment history, which teach me that it behooves all investors to have a significant amount of their total net worth in some form of precious metals (ie bullion, select gold and silver stocks and/or precious metal coins). The chart below should convince all but financial masochists and the clinically retarded where the best return might be obtained going forward. It demonstrates 6-year comparative performance of HUI (+731%), SILVER (+190%), GOLD(+144%), DOW (+16%) & NASDAQ (-23%). It is almost axiomatic to observe, WALL STREET STOCKS AIN'T CUTTING THE MUSTARD !!

click to enlarge
Not to comprehend the awesome and illuminating ramifications of the above chart may prove to be hazardous to your financial health…as HUI (gold and silver equities) leaves the rest dead in the water.

Mirror, mirror on the wall, WHO is the fairest of them all? Yesterday, today and the foreseeable tomorrows!..."

Please click HERE for the whole article.

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Mar 20, 2007

Blanchard & Co: Gold rose last week despite heavy ECB sales

By Neal R. Ryan
Vice President and Director of Economic Research
Blanchard and Co. Inc. New Orleans
Tuesday, March 20, 2007

"GFMS reports that it expects the gold dehedging figure to pick up in 2007 from its forecast at the end of 2006. We've already seen about 3 million ounces dehedged in just the first quarter. GFMS now tags the expected reductions at 7.5 million ounces in 2007.

I feel pretty confident that at some point this year we will see another major gold hedge buyback announced by Newcrest or AngloGold. Both companies are sitting on millions of ounces hedged back at $300 per ounce. Institutional investors will put enough pressure on these companies to dump their foolish hedging positions. Buenaventura has already said it is amenable to further reductions.

Just out is news that the governor of the Chinese central bank, Zhou Xiaochuan, has said publicly that the China will stop accumulating foreign reserves. Let's hope we get more detail on this shortly, since it has massive implications for the markets.

Finally, European Central Bank gold sales for the past week have been updated, and, interestingly, more than 16 tonnes of gold was sold into the market last week by two ECB member banks.

The last time tonnage of this magnitude was sold into the market by ECB banks was the week of December 11-15, when prices declined $15 through the week. By contrast, gold prices increased in the past week, from March 12 to 16, by $4 per ounce.

There has been weakness in gold prices in weeks when significant amounts of gold hit the market via ECB sales, specifically the second week of September, when prices dropped $20 per ounce on sales exceeding $600 million, and in May 2006, when prices hit $730 and nearly $1.4 billion in gold was sold into the market over three weeks via ECB banks.

But last week is the first time in a number of significant sales weeks when prices have moved up in the face of major increases in gold sales. This is a signal of strong physical demand in the market."

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Mar 17, 2007

Blanchard & Co: Mine consolidation means less gold supply

By Neal R. Ryan
Vice President and Director of Economic Research
Blanchard and Co. Inc., New Orleans

Friday, March 16, 2007

News is circulating around the market today of a potential bid by Barrick for Newmont. This story gets trotted out every so often as analysts start trying to jump out in front of the next big deal.

While such a deal would make a lot of sense, since the two companies joinlty own a number of properties or have royalty interest in each other's mines, the gold market itself will be the biggest beneficiary of any huge merger like this.

For the one thing that has been confirmed since the major gold mining company mergers began in 2000 is that the result will be lower production.

Case in point: The top three gold producers are all projecting less production in 2007 than in 2006, just a few years after each was involved in major acquisitions. Major companies pursue the world-class deposits that will add significantly to their bottom lines, not the marginal projects that have a smaller return on investment. Consolidation equals less production.

For example:

-- In 2000 Homestake, Barrick, and Placer Dome prroduced 8.95 million ounces of gold altogether. With Homestake and Placer Dome combined in Barrick in 2006, Barrick produced 8.5 million ounces and expects to produce 8.2 million ounces in 2007.

-- In 2000 AngloGold and Ashanti produced a combined 8.98 million ounces of gold. Combined in 2006, AngloGold Ashanti produced 5.6 million ounces and expects 2007 production to be 5.5 million ounces.

-- In 2001 Newmont and Normandy produced a combined 7.85 million ounces. Combined in 2006, Newmont produced 5.9 million ounces and expects 2007 production to be lower.

So we welcome more industry consolidation.

Also, we remark quite a bit about China's liberalizing its gold business. The country is continuing to ease trading restrictions and taxes on purchases in the country. The system isn't fully effective yet but it's getting there. It's our feeling that investment demand from China for precious metals is just beginning. We will see massive drawdowns of gold supply via Chinese demand over the coming few years. Because of this increased investment demand and contracting supply, precious metals are entering a two-to-three-year sweet spot where, we believe, price appreciation will surprise even the most bullish analysts.

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Gold: the Big Picture

So as not to loose sight of what we're talking about here, feast your eyes on this bird's-eye-view monthly chart of the gold bull market that started with the new millenium, and keeps nicely chugging on...
As Richard Russell writes: "..Gold's in good shape, as it has been for the last 5000 years. And oh yes, the gold bull market is still only in its early second phase."

click for larger version

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Mar 16, 2007

Casey Research: A Walk on the Sunny Side

Snippet from Casey Research newsletter "The Room"

"..Okay, now let’s get to the real fun. The kind of laugh-out-loud, do-a-silly-little-dance kind of fun.

I refer to the mood I found myself in all week. First, in the earlier part of the week, when watching the price of gold falter due to the aforementioned “flight from risk”… knowing as much as one can know, that gold would bounce right back.

And knowing in my heart of hearts that the gold stocks knocked back would quickly rebound and continue their somewhat jagged trajectory to the moon. (To say that Doug and I have been buying with both hands and both feet this week would be a serious understatement.)

That gold and the gold stocks have performed exactly as expected, refusing to stay down, has just added that much more sunshine to the week and snap to our steps around here at Casey Research.

It is important, even critical, however, to clearly keep in mind that bull markets make anyone on the right side of the trade think they are smarter than they actually are. And so one has to be constantly on guard against arrogance, because pride really does come before the fall (just think about all those people you know who were profitably early into the dot-com bubble but failed to sell when the selling was good).

So, being on guard, I thought it would be worth revisiting the question of how gold stocks perform in a general stock market collapse.

As you can see from the chart below, while gold stocks and the broader markets, represented by the S&P 500, can move together, they can also move in distinctly different directions.

Look especially at the time period around the last big stock market meltdown in 2000. While there were spikes in the volatility of gold stocks during the period, the general trend for gold stocks was up at the same time that the general trend in broader stock indices was decidedly down.

It is worth noting that while the market was suffering a solid thwapping (a technical term meaning a hard slap up the side of the head) during this period, it was not related to a monetary crisis, nor even any particularly dire economic fundamentals, but rather the panicked unwinding of a speculative bubble in dot-com stocks.

By contrast, the crisis now closing in on us is all about a monetary meltdown… a set-up that can only favor gold. Even so, the picture below paints a pretty clear picture of gold’s – and gold stocks’ – role in a market crisis.

Sit tight, and you’ll be more than alright.

David Galland "

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Mar 14, 2007

Blanchard & Co: European central bank gold sales declining

By Neal R. Ryan
Vice President and Director of Economic Research
Blanchard and Co. Inc., New Orleans
Tuesday, March 13, 2007

The European Central Bank system today updated gold sales for the past week. There was a half tonne in sales -- 16,000 ounces of gold. I expect that at some point we'll see a pickup in selling by the central banks, but we're trending even lower in terms of weekly sales.

If such figures continue showing up in the sales update, we'll be 8-9 million ounces short of the Central Bank Gold Agreement sales quota instead of the 6-8 million ounces short I had expected. The lack of selling bodes very well for price increases. When gold gets back over $700, we'll probably see an increase in sales from the central banks, but there just aren't any more selling materializing at these prices.

Another important point to note is that the banks are slowly running out of gold they're willing to part with at any price. The Bundesbank has stated again that it will be selling no gold in 2007 and doesn't expect any sales in 2008. Good for them for having an outlook longer than one month.

The World Gold Council today has updated official bank activity today. We've been notifying clients of these changes for months now.

Russia has added 17.3 tonnes (560,000 ounces) of gold to reserves in the last six months.

Belarus has added 6.2 tonnes (200,000 ounces) of gold to reserves in the last three months.

Kazakhstan has added 7.6 tonnes (245,000 ounces) to reserves in the last three months.

Greece added 3.8 tonnes (123,000 ounces) in the last 3 months.

An unidentified ECB bank or banks added 14 tonnes (450,000 ounces) in February alone.

France has continued to be the lone major seller in the market as the central banks of Portugal and Spain seem to have finished selling programs.

In their call with analysts, officials of Buenaventura (the Peruvian mining company that slashed nearly 500,000 ounces from its gold hedge position yesterday) stated that they would consider further reducing their hedge position. The gold hedge market total is below 40 million ounces, with an unrealized loss of around $15 billion. While we obviously don't have 70 million more ounces to cut from the hedge total -- the cuts made from 2001 to today -- that 40 million ounces eventually should settle down to less than 20 million as mining companies sell into their hedge books. That means 20 million more ounces of demand into this market over the coming few years will continue to create a great floor for the gold market.

Finally, there lately has been a correlation between equity markets and the precious metals sector. I don't believe it is something that will continue as the markets finish shaking out. Investors can't keep retreating into cash, especially the dollar. I don't know when exactly it will happen, but if we continue down this path with stock market uncertainty, there will be a point when precious metals assets will "spit the bit" and head higher.

Supply/demand fundamentals of this market are dictating higher prices. The easy money is going to be made by investors in precious metals who recognize that this correlation will be a short-term occurrence and something that can be taken advantage of in expectation of higher prices.

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Richard Russell: This Gold Bull Market is based on fear of the viability of the dollar and all fiat money.

"...There are four kinds of gold or non-gold people (1) They know nothing about gold and never even think to ask. (2) They know a little about gold, but can't afford to buy any. (3) They trade small amounts of gold, but as soon as gold moves up or down 5 dollars or more, they sell it or are stopped out. (4) the so-called "gold bugs," the small minority who understand gold and money and adhere to a policy of accumulating gold.

I'm in category number 4. But let me give you my reasons.

The great majority of investors don't understand bull markets or the concept of the primary trend. When the primary trend of an item turns up -- whether it be stocks, commodities, agriculturals, precious metals -- we call that a bull market. There are small, medium and large bull markets. Once the primary trend of a category turns bullish, there's no way of knowing beforehand, how big the coming bull market is fated to be -- nor exactly what path the bull market will take.

We do know that in major bull markets there are psychological or sentiment phases. The first phase of a bull market is the accumulation phase. This is the early phase where informed investors accumulate an item because they know the item is underpriced or that the item is underused or simply not understood.

The second phase of a bull market, usually the longest phase, sees the professionals, the funds, the big money, the smartest of the public, taking positions in the item. The second phase tends to be characterized by many reactions, corrections, adverse news events that cause the public to dump the item.

The third phase of a bull market is the speculative phase, Here we see rising volume, the wholesale entrance of the public, accompanied by news and endless hype by the Wall Street "experts." People who wouldn't touch the item during the first and second phases, are now enthusiastic buyers. The third phase sees systematic distribution by the early first phase buyers. Third phase buying can easily turn to hysteria and madness. Towards the end of the third phase, we see hints of the beginning of the next primary bear market.

Question -- Do all bull markets progress as described above?

Answer -- Almost all major bull markets do. It's a judgment as to whether an ongoing bull market is fated to become a major bull market or not. There's no definitive answer to that question.

Now I want to talk about the current bull market in gold. This is a bull market that began in August 1999 with gold priced at 252 an ounce. Gold is the most emotional of all items -- loved by much of mankind, hated by certain elements including governments and central banks. Because gold is real money, and because gold is collected, traded and accumulated by millions of people the world over, gold bull markets tend to be BIG bull markets.

The gold bull market that started in 1999 has already taken gold up 291% to a high of 734 recorded in May of 2006. But what's so interesting about the ongoing gold bull market is that neither the public nor the funds have entered the picture. In fact, most people really have no idea that gold is in a primary bull market, this despite that fact that since 1999 gold has consistently outperformed the Dow and the S&P.

I believe that the gold bull market is now in its very early second phase. Informed investors have already established healthy positions in gold. I think that a very minor sector of the investing public has now taken some kind of a position either in gold or gold stocks or a gold ETF or a gold fund. Nevertheless, it's still unusual today to find an individual who has any kind of a position in gold.

Gold has been in a corrective phase ever its May high of last year. This backing-and-filling has served to discourage many Johnny-come-lately and in-and-out traders. Meanwhile, gold remains in what I consider its "bargain phase" below 734. But what about the future?

This is important. Almost all BIG bull markets (and I believe gold is in one) ultimately move into a third speculative phase. I believe this phase lies ahead for gold, maybe a year or so, maybe three, four or five years out. It doesn't matter -- in my opinion, the longer the time elapsed prior to the entrance of the third phase, the bigger the third phase for gold is fated to be. But before entering the third phase, we have to complete the second phase. The second phase, from the looks of it, may has quite a while to go before it is completed. Question -- how many of your friends own any gold?

My thinking is that when gold finally moves into its third phase, we may see one of the most speculative third phases in history. I believe we will see gold in the thousands of dollars. I believe we will see one of the most emotional bull market third phases in history. People will look back on the year 2007 and wonder what the world was thinking about with gold selling for $650 US dollars, dollars that were created out of thin air, fiat dollars which could be created by central banks in any quantity in at any time.

At any rate, that's the way I see this sluggish, unexciting, slowly-moving gold bull market here in 2007. I lived through and profited during the gold bull market of the 1970's. That bull market was based on inflation fears. This bull market when it moves into its third phase will be based on fear of the viability of the dollar and all fiat money. This bull market is fated to be much bigger than the bull market of the 1970's. "

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Mar 12, 2007

Australia's gold production falls to lowest level in 13 years


03/11/07 10:31 pm (GMT)
SYDNEY (XFN-ASIA) - Australian gold output has slipped to its lowest levels in 13 years, but the industry's unhedged producers are enjoying strong revenue gains, thanks to continued price increases, the Age newspaper reported, citing an industry survey.

It said the survey by Melbourne-based consultant Surbiton Associates, showed Australia's gold output fell 5 pct to 249 metric tons in 2006 from 263 tons in 2005 -- the lowest annual total since 1993.

The Age said the production fall moved Australia's global ranking as a gold producer from second position behind the dominant but also falling South Africa to third position, with the US industry regaining the second slot.

Surbiton director Sandra Close said that despite the production fall, the value of Australian gold production increased substantially.

"The average spot gold price of around 800 aud an ounce for 2006 was more than 200 aud an ounce higher than for 2005," the Age quoted Close as saying.

She said the value of Australian gold production for the year increased almost 30 pct to 6.4 bln aud.

(1 usd = 1.28 aud)

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Mar 9, 2007

Doug Casey: Gold? What Gold?

Excerpt from "The Room", a Casey Research subscribers newsletter:

"..Working apart from the investment multitudes, a very small minority of investors over the past few years have been building portfolios of precious metals and Canadian precious metals stocks. It’s a minority I’m happy to be a part of, as it allows me peace of mind and the considerable advantage of viewing these crises somewhat dispassionately.

That doesn’t mean I’ll enjoy standing on the sidelines and watching the impact of a monetary crisis on the lives of the unprepared. Of course not. Yet I would be a fool, having recognized a crisis shaping up, not to take the fairly obvious steps to profit.
Which brings me to the opportunity that the crisis is carrying on its back.

For any number of reasons, but first and foremost its use as money in all the world’s cultures, throughout all recorded history, gold has begun to find renewed favor with in-the-know investors as the currency of last resort.

Make no mistake, despite gold’s rise from its $255 low in April of 2001 to over $650 as I write, so far only the thinnest of trickles, a minor fraction of global capital, has made it into gold. When the flight to safety really heats up, the real fun will begin, and the price of gold won’t just add dollars, it will add digits.

If that sounds like hyperbole, remember that, unlike the U.S. dollar, which can be created at the speed of light, the available supply of gold is finite and is painfully slow to change.

You can’t print gold the way you print paper money. And you can’t just build a gold mine the same way you might build a Starbucks almost anywhere and on short notice. Instead, you first have to find a promising ore body—which is, without exaggeration, like finding a needle in a haystack… a haystack buried “somewhere” in the earth’s crust.

Then you need to go through the immensely complex and expensive exercise of confirming that the ore body is economically viable. Then, years after you started exploring, you can start the even more time-consuming and expensive process of actually building your mine. That entails finding a labor force, bringing in power, roads, mills, etc., etc… with every step hindered by environmentalists waving court injunctions.

The long and short is that there are hardly any gold mines of size scheduled to come on stream… and we are not talking about just over the next year or two, but ever. Most people in the know see annual gold production falling from here on.

For proof, there was recent news out of South Africa, the most world’s prolific gold producer. Despite the loud incentive of higher gold prices, South African gold production in 2006 dropped to the lowest level since 1922.

And above ground, there just isn’t much gold to go around, either. The U.S. government, for example, possesses the world’s largest gold reserves… and those reserves amount to only about $170 billion at today’s prices… not even a rounding error on the trillions of dollars in debt the government has guaranteed.

Put simply, the amount of gold available to investors and central banks is like the number of beachfront home sites at Malibu—it’s not going to change much. As a result, when the rush for the lifeboats begins in earnest, the upward pressure on gold will be unimaginable. As will be the profits for anyone who acts now, ahead of the crowd."

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Mar 7, 2007

South African Gold production plummets

Johannesburg - South African gold production fell by 7.5 percent in 2006 to 275 119.4 kilograms, its lowest level in 84 years, as lower grades were mined because of higher gold prices, according to the Chamber of Mines.

"This is the lowest level of gold production since the strike in 1922 reduced production to 218 031 kilograms," said the Chamber adding that members of the industry body, representing about 85 percent of production, reported a 1.5 percent increase in tons but a 9.3 percent decrease in the average grade mined.

In 2005, 297 311.6 kilograms of gold were produced out of South Africa's mines.

Costs were up by substantially more than inflation according to a statement. Total production costs before capital expenditure were up 11.9 percent year-on-year at R99 725 per kilogram, while the figure including capital rose by an even higher 20.8 percent to R125 030 per kilogram.

In the final quarter alone, the country's gold production fell by 3.1 percent quarter-on-quarter to 68 117.9 kilograms, while on a year on year basis this figure was 9.3 percent lower than in 2005. Again lower grades were attributed to the decrease.

"The 0.1 percent increase in the tonnage of ore milled to 12.9 million tons was not sufficient to offset the 2.7 percent decline in the average grade achieved hence the decrease in production," said the Chamber.

"On a year-on-year basis gold production declined by 10 percent in the last quarter of 2006 as the 4.9 percent increase in tons of ore milled was not sufficient to compensate for the 14.2 percent percent decline in the average grade mined."

South Africa’s gold output at 84-year low

By Chris Flood (The Financial Times)

South Africa’s annual gold production has sunk to its lowest level since 1922, extending the decline from the world’s biggest source of the yellow metal that has also helped drive an almost continuous rise in prices this decade.

Production levels have fallen steadily since 1973 as higher grade ore has been gradually depleted. However, with higher gold prices encouraging more costly extraction techniques from deeper mines and lower ore grades, falling production volumes could begin to slow or stabilise.

Gold output from South Africa fell 7.5 per cent in 2006 to 275.1 tonnes. This means the country’s annual output has now halved over the past 10 years.

Roger Baxter, chief economist at South Africa’s Chamber of Mines, said that if certain key projects were successful, the rate of decline in the country’s gold production was likely to slow or possibly stabilise.

The mining of lower grade deposits that would have been uneconomic to pursue previously has seen the average grade of ore mined in South Africa fall by 9.3 per cent last year.

However, to extract gold from these sources, companies are facing increasingly challenging conditions with workers having to operate in extremely high temperatures at ever greater depths below the earth’s surface.

This is putting significant upward pressure on costs. Total production costs (including capital expenditure) rose 20.8 per cent last year in rand terms.

“[Companies] have the flexibility to mine lower grades to break-even with costs as a result of the higher gold price,” Mr Baxter said. But he was unsure how soon higher capital spending would feed into increased production because developing a mine from a new discovery to full production takes about eight years.

The industry is still suffering from cut-backs in exploration budgets and a dearth of new discoveries between 1997 and 2001.

John Reade, head of metals strategy at UBS, said South Africa would remain an important gold producer, but higher capital expenditure was likely only to slow its long-term decline.

South Africa remains the world’s largest producer, but its share of global mine production has now shrunk to about 11 per cent from 50 per cent in the early 1980’s.

Falling output from South Africa has contributed to a steady decline in global production and an almost continuous rise in the gold price since 2001. Gold averaged just over $271 a troy ounce in 2001 and Goldman Sachs expects the price to reach $750 by the end of this year from just under $650 currently, helped by further weakness in the dollar.

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Richard Russell: "I'm convinced that gold is cheap here.."

"..I note that many gold "experts" are claiming that they saw the gold correction coming, and that it has even further to go. All sorts and varieties of proofs are offered. Personally, I'm not interested in their crystal balls. What I want to do and have been doing all along is accumulating gold in terms of ounces. I'm convinced that gold is cheap here -- dirt cheap compared with the oceans of fiat paper floating around the world

Looking at the chart of GLD (this is the ETF which I use as a proxy for gold) no real damage has been done. GLD has dropped five boxes to the 63 level, it is still above its ascending bullish trendline. Gold is simply a better buy now that it was a month ago. Those are my thoughts on the gold action. My other thought on gold is that my gold position is not for sale. I'm a systematic buyer, not a panic-stricken seller."

click to view larger version

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A fairy tale world

In a new essay Hugo Salinas Price -founder of the Mexican Civic Association for Silver, foremost advocate of returning silver coinage to use as savings and currency in Mexico- reflects on the distinction between money and payment. He concludes that the world, using largely the U.S. dollar as a means of exchange, is actually functioning without money, the dollar having become largely imaginary.
Central banks, Salinas Price writes, are becoming dimly aware of this. You may want to act on it before they do.

A fairy tale world

By Hugo Salinas Price

The World is exchanging goods and services by various national means of exchange. We are using those same means of exchange as a vehicle for savings. We are denominating credit contracts in any one of various national means of exchange. The predominant means of exchange is the US dollar.

However, a means of exchange voluntarily accepted as such, by those who participate in exchanging goods and services, by those who use it as a vehicle for savings and by those who denominate credit contracts in it, is not per se money.

Money must, sine qua non, function not only as a means of exchange, but also as a means of payment.

The world, as of February 2007, does not possess a means of payment. In economic terms, payment is the exchange of something for something. In today’s world, when units of what is called money are tendered in payment of a purchase, or in settlement of a balance after an exchange, or in settlement of debt, there has been in reality and economically no such payment. We are in these cases using the term “payment” merely as a legal convention and a leftover from a previous era, when payment did in fact exist and govern all economic activities.

Money, properly speaking, must be definable! The dollar cannot be defined: so said Alan Greenspan himself, the Pope of Central Bankers, in reference to the dollar, which is the reserve currency of the world and which “backs” all other currencies. When something is not definable, it has no physical existence. A thing that has no physical existence is imaginary. An imaginary thing such as money is today, is as different from real, actual money, as an imaginary loaf of bread is different from a loaf of bread in one’s hand.

A money payment must involve a tendering of tangible money, gold or silver, or of a credit instrument which is recognized as entitling the owner to the undoubted right to immediate redemption of that instrument, in gold or silver.

Humanity is unaware of the stupendously important fact that it lives in a world without money. This lack of awareness is perhaps the most singular feature of our contemporary world, upon which historians – if the world does survive this episode and produce historians at some future date – will remark with amazement: “How was it possible that billions of humans could delude themselves into acting as if what they used for payments, credit contracts and savings, was actually money?”

About 1997 I began to look for data concerning the amount of “reserves”, excluding gold, held by the world’s Central Banks. In other words, the amount of imaginary money they were holding, otherwise called “paper money”. In 1997, those “reserves” totaled $1,300,000,000,000 ($1.3 Trillion) dollars. Not all those “reserves” are dollars, but most of them are.

Back then, not many people were paying attention to that datum. Since then, it has received increasing attention, which is not surprising, for the “reserves” are piling up and showing numbers that are clearly “going ballistic”. As of January 2007, world Central Bank “reserves” were hitting $5 trillion dollars, an increase of 385% in ten years. The last increase of $1 Trillion only took five months, from August 2006 to January 2007. (“Bloomberg”)

Before 1971, Central Bank reserves were mainly gold, plus component of foreign exchange redeemable in gold. Reserves could only grow very slowly. Imbalances in trade were shunned because the settlement of deficits had to be made in gold or dollars exchangeable for gold. International trade was stable. Imports could not affect the economies of importing countries as much as they do today, with “globalization”. Therefore, local productive activities were stable. Jobs were generated through reinvestment in productive activities.

The present situation is chaotic, because the creation of reserves of fictitious, imaginary “money” originates mainly in Dollars which are spewed forth by the out-of-control US economy, plus other fictitious moneys like the Euro born in the European Union, the Yen born in Japan, the Pound born in the UK, all of which are held by other countries as “reserves”.

Since today “money” is imaginary, fictitious, imports no longer have any limit, for it actually costs nothing to “pay” when “money” is imaginary. Thus, “globalization” based on the unlimited creation of fictitious money is a totally false globalization unsupported by economic facts.

The more important Central Banks are becoming skittish about the enormous amounts of “reserves” which they are accumulating. The Central Bankers are bureaucrats, but they are sensing that these enormous holdings are rather worrisome; however they do not know what to do about them. The fact is, they have been had. Their “reserves” are simply numerical and lack any substance. They are imaginary and as useless as castles in the air, unless they can manage to get rid of them by passing them on to some unsuspecting seller of tangible goods.

China is now going around the world – especially Africa – looking for opportunities to buy raw materials (a Chinese delegation will be present at the First International Mining Forum in Mexico, the middle of March). For the same reason, the Central Banks that subscribed the Washington Agreement (to sell no more than a certain amount of gold each year) have since 2006 lost their former appetite for gold sales and they are not covering their allotted sales quotas. It appears that they have finally realized that the reserves that are actually worth something are the gold reserves, and not the “foreign currency” bond holdings which they were so eager to hold because they “provided earnings”.

However, if they start to unload their imaginary holdings, the exchange value of the holdings will begin to fall. So they are in a dilemma, a choice between two distasteful alternatives: “Shall we hold on to the imaginary money and wait and see what happens, or shall we begin to unload it and risk collapsing the value of the larger part remaining with us?”

Up till now, the Central Bankers have been doing what bureaucrats usually do when they are faced with a difficult choice: nothing. They are waiting to see what happens.

More than half of the world’s Central Bank “reserves” are held by the Central Banks of China, Japan, South Korea and Southeast Asia. These Central Banks ended up with these huge “reserves” because they accepted a means of exchange - which was no more than imaginary money, digits on computer discs - as if it was payment. In other words, they believed a fairy tale, like the one where Jack trades his cow for a handful of colored beans.

So, we are living in a fairy tale world, where money is not money at all. Alas, reality cannot be fooled by means of fairy tales. How we shall fare, when the dream has vanished into thin air and the last fool has had to recognize the difference between a payment and a fairy tale?

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Mar 6, 2007

The Paper Game

by James Turk
March 5, 2007

The World Gold Council recently announced that the assets of StreetTracks Gold Shares (ticker symbol: GLD), the NYSE-listed exchange-traded fund it sponsors, exceeded $10 billion. That remarkable accomplishment makes its fund one of the fastest growing ETFs in history, which in itself is a significant achievement given the growing popularity of these investment vehicles.

In view of this milestone, I decided to take a fresh look at GLD. I’ve looked at GLD many times in the past, but always came up with the same conclusion.

Despite the way it was originally presented before its launch, GLD is not an alternative to owning physical gold. I have written about this point extensively, and here are the links if you would like to read my analyses.

  1. Dec 8 2003 -- Securities & Exchange Commission vs. World Gold Council

  2. Nov 22 2004 -- Where Is the ETFs Gold?

  3. Dec 5 2004 -- More Questions About the ETFs Gold

  4. Dec 12, 2004 -- An Open Letter to the Bullion Desk

  5. Jun 10, 2006 -- An Exchange with World Gold Trust

Notwithstanding my previous writings, with an open mind I downloaded GLD’s latest prospectus and 10-Q to see if anything has changed. It hasn’t.

The same loose custodial controls remain in place, which is a critical shortcoming. GLD has not been structured to provide the assurances of integrity needed to establish that all of the gold that it supposedly owns is safe, secure and properly accounted for.

In the absence of these strong custodial controls, there is not any certainty that GLD has been increasing the physical demand for gold, which means that it has not achieved its original objective. It set out to create a vehicle that would provide the ownership of physical gold through a listed security that can be conveniently purchased and sold through stockbrokers. The idea was to increase the demand for physical gold through this new investment vehicle, thereby improving the gold price and as a consequence, increasing the revenue of the gold mining companies that fund the WGC.

GLD is of course a listed security, but there are many reasons to conclude that it is not an alternative to owning physical gold. The most important is that the gold supposedly held by GLD is not audited.

To explain this point, GLD’s financial statement is audited, but the gold is not. Its 10-Q reports the major asset of GLD to be an “Investment in Gold”. It does not say just “Gold”. This is an important distinction because these two labels are different for a reason. They describe fundamentally different assets. These two different labels make clear that “Investments in Gold” are one thing, but “Gold” is something else.

Investments in gold can be nearly anything gold related. For example, they can be gold certificates and other promises to pay gold. Importantly, they do not have to be physical gold.

Therefore, all GLD has to do to satisfy its auditor is to show them the bank statement (i.e., a piece of paper) that says gold is stored in any Subcustodian appointed by the Custodian. The auditors do not have to go to the vault of the Subcustodian to prove that the gold actually exists, is not encumbered in any way, is securely placed in allocated storage, and accurately records the ownership of the fund.

If GLD declared its asset to be “Gold”, the fund’s auditor would have to substantiate that the gold really exists, which GLD of course cannot do because of the inability to audit or even inspect gold stored in subcustodians and sub-subcustodians, which is a risk noted in the prospectus. This reality just re-confirms what I and others have concluded all along – GLD is just a paper scheme. It should not be considered as an alternative to physical gold ownership because it is not.

Here’s another example to demonstrate this point. The ETFs can be sold short. To sell short, the person going short needs to borrow shares, so he borrows the shares of the ETF. He then sells these borrowed shares to an unsuspecting buyer who thinks he is buying shares of an ETF backed by metal stored in a vault. But do you see what is happening here? The same metal backing the ETF (to the extent that the gold really exists in the first place, which is a separate issue) can be owned by two people to the extent of the ETFs short position. The following example will make this point clear.

Let's assume the ETF has 100 shares outstanding, with 100 ounces of gold backing those 100 shares. Let's further assume that 10 of those shares are owned by Bob (so he indirectly owns 10 ounces of gold). Assume that Alice wants to sell short 10 shares, so through her broker she borrows the 10 existing ETF shares owned by Bob that are registered in street name with his broker. Then Alice sells these 10 borrowed shares to Harry. So Bob and Harry now both own the same 10 ounces of gold.

This reality is just another reason to explain why the GLD is not what it is being portrayed to be. But the fault is not with the GLD prospectus; it makes clear that the buyer is simply tracking the gold price and not owning physical metal.

Before GLD launched, there was a lot of media attention about the gold-ETF being proposed. It was portrayed as gold ownership, 100% backed by physical metal in allocated storage. What emerged is actually quite different, but unfortunately, the media continues to portray the initial, pre-launch notion about the gold-ETF, which is what everybody wanted GLD to be.

My view is that GLD should be compared to futures contracts. Both futures contracts and GLD are trading vehicles.

No one who buys a futures contract thinks for a moment that they own gold. They understand that all they own is exposure to the future gold price (through a futures contract). The same logic should apply to GLD. When you own GLD, you don't own gold; you own exposure to the spot gold price (through a listed share).

Wall Street loves paper. No one can deny that. Just look at the mountain of derivatives that Wall Street has created in recent years. So it is not too surprising that Wall Street created a gold-ETF that is more paper than gold.

The information available at the StreetTracks Gold Shares website ( says that it has 156.1 million shares outstanding backed by 15.5 million ounces of gold (one share is slightly less than the 1/10th ounce it is supposed to represent because of the fund’s other assets). What that website does not tell you is that at the end of February, 2.9 million shares (according to have been sold short (up from 2.1 million the prior month-end). That’s nearly 300,000 ounces of gold double-owned by GLD shareholders, which has a value of $195 million.

How much higher would the gold price be if that $195 million had actually gone into the market to buy physical gold instead of someone’s short sale? Given that there is in any case no independent verification that the gold supposedly backing GLD actually exists or isn’t double-counted, one must reasonably ask how much demand for physical gold GLD has really created?

So that people don’t get the wrong idea, I think exchange traded funds are a great idea – but only when created properly. In other words, they need prudent safeguards. In this regard, GLD comes up short. The gold needs to be audited to prove that it exists and that it is unencumbered asset owned by the fund.

Here’s another piece of financial data from the 10-Q. In the three months ending December 31, 2006, GLD paid $8.3 million of fees, of which $2.9 went to its sponsor and $2.9 million went to its marketing agent. On an annualized basis, that works out to $23.2 million to just these two parties. Isn’t it about time that the WGC took some of that money and had GLD’s gold audited to prove that it exists? In the absence of that independent third party verification, one can only prudently assume that GLD is just part of Wall Street’s paper game. But maybe the WGC is just part of that game anyway.

Here’s how the World Gold Council describes itself in the press release announcing the $10 billion achievement by GLD: “World Gold Trust Services, LLC is a wholly owned subsidiary of the World Gold Council (WGC) which is a commercially-driven marketing organization that is funded by the world's leading gold mining companies. A global advocate for gold, the WGC aims to promote the demand for gold in all its forms through marketing activities in major international markets.”

Note that I have emphasized, “…the WGC aims to promote the demand for gold in all its forms”. I guess that means paper gold too through vehicles like GLD, but how does the promotion of paper gold help the WGC’s mining company members?

So view GLD like you would a futures contract. It’s a trading vehicle, and it seems that the World Gold Council has come around to my point of view. The website for StreetTracks Gold Shares starts out with a description of gold’s attributes and advantages and then goes on to say that GLD offers “investors an innovative, relatively cost efficient and secure way to access the gold market.” It does not say that when you own GLD you own physical metal.

In conclusion, it is clear that with GLD you own exposure to the gold price. You don't actually own physical gold for several reasons:

  1. GLD does not prove the gold exists with independent third party audits.

  2. The same gold in GLD may be owned by two people because of short selling.

  3. Even if GLD were in reality backed by gold, there are too many parties between you and the gold to claim that you really own it. So while you may have “access” to the gold price through GLD, you do not have access to any physical metal that it may be holding.

Physical gold is the bedrock asset in your portfolio. Do not take risks with it. Own it, and keep it safe, just in case there comes a day when you may need it.

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Are gold production shortages looming ahead?

It sure looks like there's a gold production bottleneck (and prices varying accordingly ...) on the horizon. That's the moral of the following mineweb article:

Dearth of mid-cap gold companies, combined with lack of decent projects may force diversification
Dorothy Kosich
'06-MAR-07 04:00'

TORONTO--( National Bank Financial Managing Director and Mining Group head Gordon J. Bogden said Monday that a dearth of mid-cap gold companies, combined with “a shortage of decent projects” could force the diversification of pure gold companies.

In a presentation to the Prospectors and Developers Association Conference in Toronto, Bogden declared that the mining industry “shot itself in the foot” by not spending enough money for exploration, resulting in a shortage of decent projects available to gold companies.

To compound the situation, Bogden suggested that global exploration spending may not have increased quickly enough to meet today’s needs.

Bogden noted that the global pipeline of gold projects begins to dwindle after 2009. Meanwhile “marginal assets are being dusted off” and promoted as future mining projects.

The void of mid-cap gold companies needs to be filled, Bogden warned, if the future of the gold mining industry is to remain secure. Meanwhile, big players in gold mining tend to combine with other big players, leaving smaller gold companies behind, he added.

The result is a shrinking pool of fewer and fewer large and mid-cap merger and acquisition combinations available to the gold mining sector, according to the investment banker. As a result, Bogden feels the consolidation of junior mining companies is inevitable.

As good gold projects become scarcer, Bogden suggested that pure gold companies will have to look to other commodities for their future. As an example, he cited Goldcorp’s 46% holdings of non-gold assets.

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Mar 5, 2007

Monday Metals update

The pressure is still on and not abating as the Sell-off continues on Precious Metals. Traders closed urgently their losing positions in the Emerging Market and the domino's effect in full swing spilled over to Precious Metals. Markets love to exaggerate the moves and we are now coming to Support zone that if we break could send us much lower.

May Copper is on support zone around the 265.50 level and so is May Silver and April Gold respectively at 12.50/70 and 638/640. We expect the Market to take a breather around theses levels and try to bounce back. Precious Metals to stay under pressure this week going into the US Unemployment.

Trade Ideas: -We enter a Long April Gold position at $642 and are targeting the 650/652 area. Stop below 635.

-May Silver around 12.70 with a Stop below 12.50 and Target 13.30.

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Lemming week! Markets, gold and silver plunge

Lemming week! Markets, gold and silver plunge
Lawrence Williams
'04-MAR-07 01:00'

TORONTO ( --Jittery markets for precious metals and stocks in general saw huge sell-offs following an 8 percent plus fall in the Shanghai Stock market Tuesday. Together with other data, this precipitated one of the biggest sell-offs seen in recent years with firstly Wall Street and London droppinging dramatically, followed by a big dip in gold and silver prices on Friday, just as the world’s major stock markets appeared to be stabilising.

Was there any logic behind the falls? Not really but maybe! The Shanghai market, which had been rising at an unsustainable rate, was almost certainly due a correction. But whether Western markets should logically have followed it down is definitely debatable. Whether gold and silver should have followed suit is even harder to understand.

The nervousness which affected the markets seemed to be because of the apparent dependence of the markets on the health or otherwise of the Chinese economy these days. The Chinese fall was seen, not as a correction, but perhaps as an indicator that there was something deep rootedly insecure about the state of the Chinese marketplace.

Yet market indicators in China suggest nothing of the sort! There seems to be no fundamental change in the state of the Chinese economy at all and its rise in consumerism and metals demand seems unaltered. Perhaps the big Chinese fall was just a correction brought on by profit taking after all, with spooked Western markets just following it down. Technicalities mean that when markets fall, stop-loss sales can be triggered automatically and these falls are exacerbated, triggering more stop-loss sales. Dealers follow the market down like lemmings over a cliff-edge (although apparently there is no truth in that particular old wives tale.)

Some analysts feel that the gold price sell-off at the end of the week was due to investors who had gold as part of their portfolio, needing to sell to cover their positions in the stock market in general. Silver just followed the gold price down.

Interestingly, base metal prices, which should have been most affected if there was a real Chinese downturn ahead, were largely unmoved by the general declines, although the same could not be said for base metals stocks. There were some falls on Friday, but on nothing like the same scale of the gold and silver price declines. Of course there could be some delayed reaction in base metal prices this coming week.

So does this signify a buying opportunity. Logic says yes. The Chinese market had already regained some of its losses by the end of the week, although Western markets have so far failed to follow suit to any significant extent. There are few fundamental reasons for the market falls, let alone for the falls in gold, silver and base metal mining stocks. Even the superheated Chinese market only lost a couple of months of gains. These things need to be put in perspective.

I would personally expect markets and metals prices to recover rather rapidly – the only problem being that if the market is that easily spooked then similar large corrections could happen at any time. But these may all be buying opportunities for those who have missed the earlier runups – particularly for those base metals mining stocks which fall back. Until fundamentals change, markets should keep moving up overall. The key is to spot a true change in pattern occurring before the bear-oriented lemmings take control again.

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Mar 4, 2007

Jim Sinclair's personal advice...

...and recommendation during volatility in the gold markets: Don’t worry about it!

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Mar 3, 2007

Off Topic: total lunar eclipse tonight...

Total Lunar Eclipse - 3rd March 2007

A total lunar eclipse takes place on 3rd March 2007. All six hours and five minutes of the event, from its first to its last penumbral stage, will be visible in its entirety from all parts of the UK, Europe and Africa. The Moon will appear to rise already eclipsed from all parts of the Americas, with the exception of Alaska, while the Moon will set during the eclipse from most of Asia, India, the far east and western parts of Australia.

The Moon clips through the northern part of the Earth's shadow, giving an umbral magnitude of 1.233 and a totality lasting an hour and thirteen minutes. At mid-eclipse the Moon will be 42° high in the 'underbelly' of Leo.

P1First penumbral contact20h 18m 11s UTC
U1First umbral contact21h 30m 22s UTC
U2Totality begins22h 44m 13s UTC

Maximum eclipse23h 20m 56s UTC
U3Totality ends23h 57m 37s UTC
U4Last umbral contact01h 11m 28s UTC
P4Last penumbral contact02h 23m 44s UTC

You can watch it all (clouds permitting) HERE

Mar 2, 2007

John Embry: Manipulation couldn't be more blatant now

Sprott Asset Management's chief investment strategist, John Embry, writes in today's edition of Investor's Digest of Canada that manipulation of the gold market has "become so blatant that it is revealing distinct signs of desperation, a necessary precursor to its eventual cessation." Analysts "who do not acknowledge central-bank manipulation of the gold price," Embry writes, "have been embarrassed into silence on the subject."

You can find Embry's commentary, "True State of the Economy Not Grasped by the Public," at the Sprott Internet site here.

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