Newmont was a longtime darling of “pure gold” stock investors, having eschewed the hedging and the forward sales that its rival Barrick Gold so often bragged about. However, in 2002 a three-way merger brought Newmont a hedge book and the supposed genius who formulated it.

Whereas prior to the merger Newmont boasted of being a “pure gold” stock play, Newmont reversed course by continuing the acquired hedge book. That turned out to a costly decision. Now, Newmont has seen the error of its ways.

With its shares selling at a 22-month low, Newmont announced it is eliminating its entire 1.85 million-ounce gold hedge position. In June, the company spent $578 million to eliminate its forward sales contracts, and will report a pre-tax loss of $531 million on the early settlement of these contracts, after a $47 million reversal of previously recognized deferred revenue.

Although the company tried to spin the announcement that its “merchant bank” unit was not all that bad, the fact is “the company expects to incur a non-cash impairment charge of approximately $1.7 billion, to be recorded as part of discontinued operations, in the second quarter of 2007,” reports the mineweb.com.

One point seven billion dollars, that’s a major hit for anyone’s pocket book. However, what’s bad news for Newmont shareholders is good news for gold and silver investors.

Although there is the possibility that the hedge book can be sold to another brave speculator will continue it, it is more probable that large quantities of gold, and probably silver, will have to be purchased to settle some of the hedge book deals. Perhaps today’s solid jumps in the price of gold and silver can be attributed to Newmont’s announcement.

The really goods news for gold and silver investors is that one of the world’s largest gold producers will no longer be in the involved in hedging and forward sales of gold and silver. Hedging and forward sales result in artificially increasing the supply of gold, which puts downward pressure on the price of gold. Both activities “bring gold to the market” before it is actually mined. Newmont’s announcement is indeed good news for gold and silver investors.

For further details about Newmont’s decision, read mineweb.com’s article.

It was only June 26 that I reported on the large commercials (LCs) dumping their long positions in the dollar. Such a move can generally can be construed as negative for the dollar and positive for gold and silver as the LCs are considered the best informed (not to mention best connected) traders around. If they see a lower dollar, then they see higher PM prices. However, the LCs have reentered the forex market long the dollar in a big way. Is this negative for gold and silver?

For the last reporting week, the LCs added 8,217 contracts to their long dollar positions, a huge one-week addition. Now, the LCs are long a net 11,028 dollar contracts, whereas the week before they owned only 2,811 net long contracts.

Still, the 11,028 net long contracts are less than half the 23,380 net longs they carried May 1, only two months ago. What’s going on here? Are the LCs confused? Do they see mixed signals? What will the report show next week?

Meanwhile, the LCs, “the largest traders of gold futures on the planet have been furiously reducing their collective net short exposure to gold,” says Gene Arensberg in his latest Got Gold Report, a bi-weekly feature published by resourceinvestor.com. As of June 26, the LCs held their smallest net short gold position since January 9. Long the dollar, reducing their new short exposure to gold? This isn’t making sense. What to do? As Richard Russell says, “It’s never easy.”

Actually, I think it is easy, as long as you do not try to catch short-term price swings. Trading gold and silver is difficult at best. Trading gold and silver is not for the average investor. Even the LCs, supposedly the most sophisticated and best informed speculators in the world, bumble from time to time. Remember, these guys held huge short positions in gold and silver when they ran to decades-high levels in May 2006. So, following the LCs is not a guarantee of being on the right side of the market.

Investors simply seeking protection against a declining dollar should buy gold and silver on dips and hold them. At CMIGS, we firmly believe that the dollar is in a long decline and that gold and silver are in secular bull markets. As a rule, gold and silver can be bought, with little downside risk, when they trade near their 200-day moving averages.

See the last paragraph in Arensberg’s Got Gold Report for his views on this precious metals bull market.

Resourceinvestor.com has released an article reviewing what appears to be CPM Group’s Annual Silver Survey. We say “appears to be” because the article only calls the CPM work a “report.” Looking at the nature of the CPM observations about silver and the silver market, and the fact that it is May when CPM Group usually releases its Annual Survey, it our guess that resourceinvestor.com is referring to the annual report by CPM Group.

CPM’s Annual Silver Survey is one of the two authoritative annual silver surveys. The other is compiled by Gold Fields Minerals Services for the Silver Institute.

Anyway, the report is quite bullish on silver, noting that in recent years silver investors were net buyers of silver in 2006 for the first time since 1990. The review says:

For the past 15 years, investors have been net sellers of silver from long-held inventories, which is reflected by both increased buying by new investors entering the silver market and decreased selling from long-held silver investment inventories built up from the 1950s through the 1980s, the CPM Group explains in the report.

CMIGS disagrees with the above assessment, based on our observations of premiums on the products we sell.

Between January 2000 and the end of 2003, silver traded below $6. During that time, our clients bought more silver than they sold, which required us to buy 100-oz silver bars and 1-oz silver rounds from refineries.

Further, with silver below $6, buyers had to pay up to sixty cents an ounce premium for 100-oz silver bars, which was a premium in excess of 10% (and at time nearly 15%). Premiums on 1-oz silver rounds, which have a higher cost of production and handling, were even higher.

However, for the last several years, we have not had to go to refineries for either 100-oz silver bars or 1-oz silver rounds. Both have been readily available in the secondary market because of investor selling. And, premiums are significantly smaller on a percentage basis, and they are even smaller on an absolute basis.

In 2006, premiums on 100-oz silver bars were as low as twenty-five cents and were there again a few weeks ago when silver traded near $14. As this is written, premiums on 100-oz bars are closer to forty cents, which is only 3%.

What we see is diametrically opposite of what CPM sees concerning individual investor activity in the silver market.

Yet it should be noted that CPM is looking at the really long-term situation, talking about supplies from the 1950s. But, for the last couple of years, while prices have climbed higher, there has been an abundance of silver in the secondary market, which can only mean selling by individual investors.

For months the precious metals markets have shown strength in the face of continued bear raids by the large commercial traders seeking their $40-$50 price swings. Recent comments by John Williams’ Shadow Government Statistics reveal just how strong gold and silver really are.

According the Williams, the monthly-average gold price hit an all-time high of $679.37 per troy ounce in April 2007. That beat out the prior monthly-average high of $676.51 in May 2006, when daily trading hit $725.00, and topped the previous high of $675.31 in January 1980, when daily trading hit an all-time high of $850.00.

April was a good month for silver as well; silver posted its strongest monthly average in more than two decades, $13.74 per troy ounce.

Williams further notes that the nature of gold trading is such that high volatility likely will continue, as will sporadic central-bank manipulation and intervention. Yet he sees the upside potential for gold being explosive, particularly when heavy dollar selling begins.

Lawrence Williams, writing for mineweb.com, questions silver’s “tracking the price of gold.” He writes, “There is no longer any serious monetary element to silver . . .” In case Williams hasn’t noticed, there is no longer any serious monetary element to gold. No country backs its currency with gold; no currency has been convertible into gold since August 15, 1971 when President Richard Nixon closed the gold window.

Although the world’s nations (in many cases, those nations’ central banks) report their “gold holdings” to the IMF, they do not back their currencies with gold. In fact, under IMF rules, member countries cannot back their currencies with gold. Silver holdings are not reported at all to the IMF, but does that remove the “serious monetary element?” No, and here’s why.

Since time immemorial people have used silver as money, even more so than they have used gold. The Bible mentions silver more times than gold, and in more recent times silver was used as money in the United States for 32 years after Roosevelt required Americans to turn in their gold coins for paper money.

Although gold and silver officially have been “demonetized,” does that mean gold and silver are not money to the people? We do not think so.

Our experience suggests the only reason more money is invested in gold is that silver is much more difficult to handle and secure. Silver investors get fifty times the weight and more than fifty times the volume (because gold is more dense than silver). But, will “the masses” prefer gold to silver when they become precious metals buyers?

For the sake of argument, let’s say that “silver continues to track gold” and both double in price, putting gold at about $1375 and silver at $27. Then let’s say “the masses wake up” and see the need to own gold or silver. By the hundreds of thousands, they convert their $10,000 or $20,000 or $40,000 in savings to gold or silver. Which will they choose, gold or silver?

Let’s go with the $20,000 investor. At $1375 gold, he could get about fourteen 1-oz Krugerrands. However, if he chooses silver, he could get about 700 ounces of silver (Premiums guesstimated). Our experience causes us to believe that the masses will buy much more silver than gold simply because they will get much more metal for the money.

And, here’s the really important point: in the aggregate the masses have much more money than the wealthy because the masses comprise the bulk of society. We think buying by the masses will cause the price of silver to outstrip the price of gold. (This is not a prediction that the masses will wake up when gold hits $1375 or silver hits $27. We are making no predictions as to when the masses will become gold and silver buyers, only that they will before this precious metals’ bull-run is over.)

Additionally, Williams says that he is worried “that a huge number of new producers seem to be able to bring new silver production on stream extremely quickly.” In other words, he is worried that future production may increase more than demand, causing a surplus of silver. He appears to have overlooked the great 1970s precious metals’ bull market.

During that run, the price of silver rose many times more than the price of gold while literally billions of ounces of silver lay in warehouses around the world. Today, those warehouses claim to hold only a few hundred million ounces, and some of those claims are questioned by many analysts. Yet Williams is worried about silver not yet mined holding back the price of silver while billions of ounces in warehouses in the 1970s could not contain silver’s meteoric price rise.

For the buyers who can handle silver’s bulk and weight, we recommend it.