Market Update May

7/31/2019 Market Update May

1/6

THE MARKET MIRAGEAlways test of your conviction for a certain outcome by maintaining constant objectivity.

"A Thing Long Expected Takes the Form of

the Unexpected When at Last it Comes"

- Marc Faber

A mirage is a naturally occurring optical

phenomenon in which light rays are bent toproduce a displaced image of distant objects

or the sky. The word comes to English viathe French mirage, from the Latin mirare,

meaning "to look at, to wonder at". This isthe same root as for "mirror" and "to

admire".

In contrast to a hallucination, a mirage is a

real optical phenomenon, which can becaptured on camera since light rays actually

are refracted to form the false image at the

observer's location.

The interpretive faculties of the human

mind, however, determine what the image

appears to represent. For example, inferiorimages on land are very easily mistaken for

the reflections from a small body of water.

(Wikipedia)

The human mind is a very complex thingwith the ability to fool even the most

intelligent people. We understand this here

MARKET UPDATE MAY 2012


2/6

;

Market Update May 2012

2

at KSIR, and so we try our best to sit

back, ponder our investment thesis, and

ask ourselves what brought us here? Whatis keeping us here? Has anything changed?

One of the keys of maintaining anobjective outlook is to be comfortableknowing that you dont know everything.This state of mind will allow one to

continue to play out an investment thesiswith the facts.

We launched the KSIR gold and silver

mining fund in January of this year toexploit a pricing arbitrage that formed in

the near term producers and early stage

production companies. We often invest insectors derided by the majority, and

currently the few fund managers that haveinvested in this sector have been forced

into throwing up the shares because of the

intense negativity led by the main streampress, Mr. Buffet and Mr. Munger, and

talking heads alike.

As we take a hard look at the facts, wecurrently feel there is a mirage that has

formed in the markets. Most of this is dueto the central banks optical backstops that

have been so successful in paving a fewextra miles of road for the Fiat paperregimes to kick the can down.

To focus in on the true value of the sectorwe look at the blue chip miningcompanies for the macro trends. Instead of

pricing them in US dollars we look at the

value relative to the metal they produce.

As you can see relative to the metal mostof the major gold and silver mining

companies are cheaper today than at the

lows in gold at $300 and silver at $4.50 anounce!

We ask: how can this be? Are input costs

rising faster than the metal price andforcing margin pressure on the companies?


3/6

;


3

The margins, as a group, are today 10 timeswhat they were back in 2000 and 2001, and

yet the stocks producing the metal arerelatively priced the same or lower.

Maybe it is because the introduction of the

physical metal ETFs differing close to 100billion away from the equities.

Name Mtkcap

SPDRGoldTrust(ETF) 67,179

iSharesSilverTrust(ETF) 9,274

CentralFundofCanada 5,265

ETFSSilverTrust 565

ETFSGoldTrust 1,788

CentralGold-Trust 1,188

iSharesGoldTrust(ETF) 8,999

SprottPhysicalGoldTrust 2,053

SprottPhysicalSilverTrustETV 1,067

TotalValueinMillions 97,379


4/6

;


4

Or could it be that worldwide governments

austerity measures are going to turn

everything around. The chart below from

the Federal Reserve shows that the trendfor more debt financing is still intact; in factit is accelerating at an almost vertical rate

since 2008.

Sentiment among small businesses, whichis what traditionally drives the recovery

cycle, is at a multi decade low!

The Federal Reserve is adding

unprecedented amounts of liquidity to thesystem.

So where is the money going? In an effort tokeep interest rates low, fixed incomeinvestments have gone parabolic as the reach

for yield goes to levels previously unseen.The chart above shows the Bank of AmericaMerrill Lynch High yield total return indexvalue.

The US still has to fund over $600 billion ofdebt for the year and the top 3 foreign buyersare basically net flat over the last 7 months.The Fed will be forced to pick up the slack.We forecast that the Fed comes out withsome type of programwhatever it may becalledby the end of June.

The government spent $454 billion for thefiscal year 2011 on interest.(http://www.treasurydirect.gov/govt/charts/charts_expense.htm) The average on

balance sheet cost of borrowing was around2.9%. For the fiscal year of 2012 the interestrate is averaging 2.7% so far with projectedexpenses north of last years $454 billion.


5/6

;


5

Since most of the debt has been rolled over toshorter maturity dates to push the overall costof borrowing down an uptick in rates could

be disastrous. 2012 interest rate expenseshould be closer to the $500 billion numberwith average rates around 2.65%. If we had amodest bump to 5% it would eat up abouthalf of all tax receipts received for the USGovernment.

The main point to take away is that we aregoing to see continued debt monetization forthe foreseeable future. With no foreign buyerslarge enough to take on the deficits of the USthe Federal Reserve will have to pick up thedifference and continue to buy these bonds inorder to keep interest rates low.

Look what is going on in the mortgagemarket below: With rates well below what

you could get at the top of the real estatemarket and home prices continue to decline!The banks are now holding excess reserves,mostly

from the Fed, in the event that the real estatemarket goes south once again from higherinterest rates and the banks are forced into

another wave of foreclosures and short sales.

So now we have established the fundamentalsof Gold and Silver, the output products of ourmining stocks. Both are still in stronguptrends. The negativity in the shares andmetals themselves has reached a pinnaclelevel never before experienced. How can this

be when gold is only 15% off its all-time high?The correction in gold in 2008 was about 35%and silver was 60% yet a lot of the underlying

equities are priced today at the same levels.These types of consolidations have been someof the most powerful as gold went from 1000-1900 in less than 24 months.


6/6

Both metals are still in a short term neutraltrading position, in very strong uptrends. Whatwe need to ponder as fiduciaries is as follows:is the bull market in the metals over? Or willthis play out as one of the more difficultconsolidations that shake out the weak andeven some of the strong hands! If this is thecase you better believe we are in for an evenmore violent up move in the near future asmost of the sellers have already sold. As far asthe mining sector goes KSIR does not own anyof the featured large cap miners. We specializein early stage producers that are, believe it or

not, trading at cheaper levels than the majors!As the capitulation continues we will be veryhappy to take those shares off your hands. Ifyou would like to invest you can reach us at:

[email protected]

[email protected]

The information provided on or within this document available herein is forassistance only and is not intended to be and must not be taken alone as thebasis for an investment decision. Each recipient of this information should

make such investigations as it deems necessary to arrive at an independentevaluation of an investment in the securities offered hereby, and should consultits own legal counsel and financial, accounting, regulatory and tax advisors todetermine the consequences of such an investment. The securities offeredhereby have not been and will not be registered under the Securities Act of1933, as amended, or the securities laws of any state or any other jurisdiction,and are being offered and sold in reliance upon exemptions from theregistration requirements of the Securities Act and such laws. In addition, thePartnership will not be registered as an investment company under theInvestment Company Act of 1940, as amended. The securities offered havenot been approved or disapproved by the securities authority of anystate or any other jurisdiction, or the Securities and ExchangeCommission of the United States, nor has any other authority orcommission passed upon or endorsed the merits of this offering or theaccuracy or adequacy of any supporting documents. Any representationto the contrary is unlawful. The securities being offered are suitable only forsophisticated Investors for whom an investment in the securities does notconstitute a complete investment program and who fully understand, are willing

to assume, and who have the financial resources necessary to withstand, therisks involved in an investment in the Partnership. Each purchaser of thesecurities offered hereby must be an Accredited Investor within the meaningof Regulation D promulgated by the SEC under the Securities Act and will berequired to make certain representations and provide documentation to assurecompliance by the Partnership with applicable anti-money laundering laws. Thesecurities offered are subject to prior sale and subject to the right of thePartnership, in its discretion, to reject any subscription in whole or in part. ThePartnership and its affiliates reserve the right to modify any of the terms of theoffering and the interests in the securities described herein or to withdraw theoffer at any time.

Market Update May

Documents

Transcript of Market Update May