We believe there is room for more gold price gain, near term.   A “true” gold market in which the yellow metal is being treated as an asset class in its own right is building around the uncertainties in other markets.  That is different from recent warehousing cycles when gold moved most strongly during the final up stage of a resource/economic cycle.  This time around gold is being treated as a market and currency hedge, not as a goody bag being handed out at the end of a party.  The most interesting note on that score of late is news from India that October saw a large uptick for buying gold in forms such as bars that are used to invest.  This is rather than as jewellery (which often has a low manufacturing premium in India by western standards at any rate) that is bought this time of year for the festival season.  India’s gold and silver traders are amongst the world’s best and it is prudent to note when they stop buying or selling as sign of a top or bottom.  However, India’s is also the world’s biggest physical market for precious metals, so they do come back in to buy if they appear to have misjudged a top.  The early year buyer’s strike in India was quite real as its jewellery market was damaged like others by the credit crunch. In fact Indians were big sellers early year as should be expected of a hedge during a crisis, so there was no misjudgement.  We nonetheless view a large uptick of buying from India at historic high prices (in both $ and Rupee terms) as positive, with the caveat that we need to watch for a reversal of that trade.     

While there is a real enough scent of change in the air, this doesn’t have to be viewed as a large shift from the norm.  A subject we rarely deal with is whether gold is a “commodity” or “money”, for the simple reason that doing so sharpens our sense of the market very little.  In fact, we have little problem with either concept since we view copper and most other metals as a bit of both too, and focus on which is the better choice to deal with at a given moment.  Certainly copper is acting the part of money these days.  The inverse relationship between gold and the US$ can never be worked out of the equation, and should be borne in mind both for holders of the metal and for shareholders.  The two most important off-site variables for a gold mine, or any mine, are energy costs and the interplay between the Dollar and the mine’s local currency and the company’s accounting currency in which operating costs are borne and recorded. 

In a rising price environment almost all producers will see gains, but the better choices will be companies undergoing expansion and those in friendlier cost environments.  Asset holding companies with large deposits of low grade should also being doing well in this environment, and it’s wise to consider why they aren’t if they appear to be going nowhere.  Asset expansion companies still in exploration phase have been seeing mixed results, with some darlings bounding ahead while others seemed fixed in place.  So long as the latter group are relatively undervalued based on current data, they should have their day again as profit-takings take place for the darlings.  Now through the year end, and especially into next year, is typically when that takes place.  Our top producer pick from the Gold Mining Stock Report list has had a +25% uptick since we noted it as such in last month’s Dispatch.  Now that most Q3 reporting is now out, it’s time to update it and some others.  It’s also important to keep in mind that a portfolio winnowing process can and often should also get underway in a rising market.     

(Famous in the sector, the Gold Mining Stock Report (“GMSR”) was published by Robert Bishop until 2007.  When Bob decided to retire from newsletter publishing he honoured us by passing his subscribers on to HRA with the agreement that we would continue to follow his active company list and update his former readers for at least a year. We added GMSR subscribers to the HRA list at the SD Alert level and continue to send them periodic updates on GMSR companies, along with the full compliment of HRA news services. – Editors)

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Gain access to potential gains of hundreds or even thousands of percent! From March to June, HRA introduced four new gold explorers to subscribers. Those four companies have generated an average gain of 205%, to date! SPECIAL HRA OFFER: For a limited time only, HRA is offering free reports when you sign up using your email address! Click here for more information: http://www.hraadvisory.com/sh2009.html

Published by Stockwork Consulting Ltd.
Box 85909, Phoenix AZ , 85071 Toll Free 1-877-528-3958
hra@publishers-mgmt.com    http://www.hraadvisory.com

When gold reached its record high against the US dollar of $1064.20 on October 13th, the price of gold in euros, Swiss francs and British pounds did not confirm. On that day they were still below their recent high by 10.1%, 7.5% and 4.4% respectively.

Technically, this result was a bearish divergence, which can be a warning sign that the market’s internal condition is deteriorating. For example, bearish divergences often signal a top.

Whether or not gold was signaling a potential top, the argument could be made – and many have made it – that gold was rising solely because of dollar weakness, rather than underlying fundamental strength. It is an argument that on the surface seems plausible, but it is one that is not supported by an obvious fact. Namely, gold has been rising against all of the world’s major currencies this decade, and for the past eight years has appreciated by double-digit rates of return against all of them. However, gold’s progress at any moment in time is very much dependent on relative currency movements.

For example, in 2008 gold dropped -14.9% in terms of the Japanese yen while at the same time it appreciated 44.3% against the British pound. But from 2001 through 2008, gold’s performance against these two currencies is similar, rising 13.6% p.a. on average against the yen and 17.1% p.a. against the pound.

What’s more, last year’s results are to a certain extent being corrected this year. Through October, gold is up by 16.7% against the yen and only 4.8% against the pound, which makes my point. We live in a world of floating currencies that bob up-and-down relative to each other, but they are all sinking against gold, as evidenced by gold’s double-digit rates of appreciation this decade against all of them, as shown in the following table (which also presents separately, gold’s results this year for the ten months through October 31st).

Interestingly, the results for silver are similar. Silver had a relatively bad year in 2008 against most currencies because it was sold aggressively in the deleveraging that occurred after the collapse of Lehman Brothers. But look in the table below at the remarkable results that silver has achieved so far this year.

So the point of this analysis is to forget about the bearish divergences and other noise that can easily distract one from the big picture, which is clear from the above tables. It does not really matter whether gold is up or down one week or one month in terms of one currency or another. Let the professional currency traders and speculators worry about those fluctuations. Focus instead on the big picture and take a long view.

In the long run, all currencies are losing purchasing power against gold, which is the important point. Don’t get caught up in the daily, weekly or even monthly price changes in the precious metals that occur as a result of the volatility of fiat currencies.

We therefore need to ignore the noise that can easily distract us from the big picture. And one way to do that is to continue following the strategy I have been recommending all decade. Save gold, and/or save silver. Accumulate precious metal month-in and month-out under a cost averaging program, and view the gold and silver accumulated in this way to be your savings account. Savings are always a good thing, particularly so when you are saving sound money.

Published by GoldMoney
Copyright © 2009. All rights reserved.
Edited by James Turk

This material is prepared for general circulation and may not have regard to the particular circumstances or needs of any specific person who reads it. The information contained in this report has been compiled from sources believed to be reliable, but no representations or warranty, express or implied, is made by GoldMoney, its affiliates, representatives or any other person as to its accuracy, completeness or correctness. All opinions and estimates contained in this report reflect the writer’s judgement as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. To the full extent permitted by law neither GoldMoney nor any of its affiliates, representatives, nor any other person, accepts any liability whatsoever for any direct, indirect or consequential loss arising from any use of this report or the information contained herein. This report may not be reproduced, distributed or published without the prior consent of GoldMoney.

Article found at Gold Investor

That’s what Nouriel Roubini said a few days ago at the Inside Commodities Conference in New York.

The comments from the economist credited with foreseeing the banking crisis were aimed squarely at investing legend Jim Rogers. According to reports, Roubini specifically referred to Rogers’ call for $2000 gold as “utter nonsense.”

Since then, gold has continued to set new highs and is attracting a lot more attention from some of the best investors in the world.

The Day Gold’s Fate was Sealed

Back in March, when the S&P was sliding back to 1997 levels and wiping away years of gains every couple of weeks, the prospects for gold became more attractive than ever.

In March the Fed officially announced it would be monetizing government debt. In an official announcement the Fed announced it would “purchase up to $300 billion of longer-term Treasury securities over the next six months.” This was in addition to its purchases of more $1 trillion worth of agency debt and mortgage-backed securities.

On top of all that, Chairman Bernanke forthrightly declared in a 60 Minutes interview the Fed was “printing money.”

There’s no turning back from this point. The U.S. government continues to set record deficits. Even the rosiest projections – those from the Whitehouse – have the annual deficit remaining at $700 billion a decade away. The U.S. dollar is in a big hole and there are no responsible (i.e. non-inflationary) ways out of it. And gold is becoming an increasingly attractive save haven.

When our free gold report was released last March (click here to claim you’re copy), the central bank’s open admission of money printing was an essential condition as sealing gold’s fate as an increasingly dear asset. In the report we noted, “Every few decades, the right conditions come along to make an absolute fortune in gold and gold stocks. Right now the conditions are right.”

Regardless of the fundamentals, some – like Roubini – see the gold run coming to an end sooner than later. Others, including some of the most successful investors in the world, see a much different story playing out.

Not Just for Gold Bugs Anymore

Since the official announcement earlier this year, it’s no coincidence a number of the world’s best investors have jumped on the gold bandwagon and have earned exceptional results, and they’re just getting started.

Leading the way has been hedge fund manager John Paulson. The man who “made too much” by betting against subprime mortgages has been buying gold and gold stocks since “the day gold’s fate was sealed.” Since Paulson’s firm’s disclosure in May, gold prices have risen 23% and gold stocks have more than doubled that.

But here’s the thing about Paulson – he’s not a “hot money” hedge fund manager looking for a quick score. He’s always after the truly big opportunities.

As we noted back in May in the Prosperity Dispatch:

Paulson began betting against subprime mortgages in 2005. That was well before the housing market peaked and nearly two years before subprime markets started to falter in 2007.

He was right, but he was early. He stuck to his bet even though the housing market continued to do well. Eventually, it paid off.

Paulson may be getting most of the headlines for gold, but a slew of other great investors have been moving into gold.

For instance, Steven Leuthold has been on a roll lately. His Grizzly Short Fund returned 73% in 2008. Granted, it was tough not to make money being short in 2008, but 73% far outpaced the overall market’s decline.

Leuthold also called a major market bottom on March 5, stating comparisons made between the credit crunch and the Great Depression were “out of touch with reality.”

Leuthold explained in his firm’s quarterly update for shareholders of his Core Investment Fund:

As mentioned in our last quarterly letter, the Core Fund established a small position in Physical Metals (now about 2% in Gold and a little less than 1% in Silver).We plan to add more when (if) prices come down from current lofty levels. We continue to be concerned about the long term prospects of currency debasement inflation (a run on the dollar). Essentially, this holding is viewed as an insurance policy, and will likely be increased in coming months.

The line-up of newly minted gold bugs doesn’t stop there. One of the greatest traders in the world, Paul Tudor Jones, has recently declared his interest in gold.

Jones, who built Tudor Investments into an asset management powerhouse with $11 billion under management, recently told his fund investors:

I have never been a gold bug. It is just an asset that, like everything else in life, has its time and place. And now is that time.

As one would expect, rising inflation suggests higher gold prices, especially when the Fed is perceived to be behind the curve. Gold appears to be cheap. In our view, gold’s value should increase as its scarcity relative to printed currencies increases.

Now, it’s only a matter of time until the herd piles in. Big institutions still have very little exposure to gold and most retail investors still haven’t even considered it yet. But there’s still time left to get in.

Two-Step Strategy to Making a Fortune in Gold

Everything is in place for gold. And as gold makes incrementally new highs and rebounds from the eventual and unexpected corrections, there will be more opportunity.

But at this stage in gold’s run, there’s a simple two step strategy to make a fortune in gold in the next few years.

Step 1) Make a plan to buy gold and gold stocks over the next three to five years
Step 2) Stick to the plan

That’s the beauty of getting in something relatively early. Gold has made a good run over the last eight years, but the biggest money will likely be made in the next eight years as a lot more money piles into the “utter nonsense” that is gold.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Precious metals have always been intriguing to investors because they tend to hold their value. In times of geopolitical crisis or currency devaluation, for example, the value of paper money might fluctuate, but a hard asset will always be worth something. As a result, historically, precious metals have been considered  a “safe haven” in times of economic and financial instability.

That brings us to why gold is on a tear today. It declined in 2008 and early 2009 as panicked investors rushed into cash in an attempt to weather the financial crisis. But sometime in the middle on 2009, when investors began to move their money from the sidelines, gold started to rally. It returned 32.59% through the third quarter of 2009, vs. 19.26% for stocks.

The question is, where can we expect gold to go from here? In order to predict whether gold prices will skyrocket or come crashing down, it’s important to understand the principal factors that affect the price of any commodity: supply and demand.

The supply side of the equation is not particularly relevant in regard to gold because gold supplies remain fairly constant. That’s because production has not significantly increased due to a lack of new mining sites. Should supplies increase, however, investors may want to be cautious.

The demand side of the equation, then, is the one gold investors must look at. And as we noted above, demand for gold tends to increase when investors have a lack of confidence in the U.S. economy and financial markets.

That’s certainly the case today. In fact, we see two factors, that could lead gold to outperform in the near future: inflation and currency devaluation. In response to the financial crisis of 2008 and 2009, the Federal Reserve injected massive amounts of liquidity into the money markets. Ultimately, that increase in the money supply could devalue the U.S. dollar and lead to inflation. In fact, the U.S. dollar is already shockingly low. On October 14, 2009, it fell to a 14-month low against the euro, hitting $1.4947, the weakest since August 2008, according to Bloomberg. And while inflation is not yet a problem, economists are on the lookout for it.

These conditions led Standard & Poor’s (S&P) to raise its gold price assumption for 2010 from $750 per ounce to $800 per ounce. “Investors seeking a hedge against inflation risks and uncertainty in the financial markets continue to support gold prices,” the S&P analysts write. “The metal’s properties as a safe haven, and to a lesser extent the demand for jewelry, also support its longer-term price prospects.”

S&P’s estimate, however, may be on the low side. As of November 2009, gold was trading at more than $1,000 per ounce. And since gold exceeded $1,000 per ounce level, the price has been extremely resilient, with no meaningful pullback seen. There have been periods of profit-taking, but increased demand quickly appears on any weakness in price.

In sum, then, good old-fashioned gold fever is back—and investors who are looking for a promising trend may want to consider investing in it and other precious metals.

But don’t consider gold an investment only for troubled times. One of the greatest advantages of precious metals exists regardless of economic and market conditions. Precious metals tend to perform differently from other assets. As a result, investing in precious metals may be a good diversification strategy for a portfolio comprised mainly of stocks, bonds and real estate—in all environments.

This article was written by OilPrice.com – who offer free information and analysis on Energy and Commodities. The site has sections devoted to Fossil Fuels, Alternative Energy, Metals, Oil prices and Geopolitics. To find out more visit their website at: http://www.oilprice.com

When gold broke out of a triangle formation in early September, a technical buying signal was generated. I discussed this bullish signal in my Money and Markets column and told readers that a move to new all-time highs had probably begun. Hence, I strongly recommended gold.

A few weeks later gold gave another buying signal. This one was even more important than the first, because gold had entered new high ground.

As you can see on the weekly chart below, gold broke out of a huge consolidation pattern that lasted from March 2008 until October 2009. This signal was telling us that the long-term bull market that began in 2001 was still intact and getting ready for its next medium-term up leg.

Since then, gold has continued its ascent by more than 10 percent. And the strong technical picture calls for the gold bull market to continue.

Yet in spite of gold’s strong gains there is still a lot of skepticism in regards to the durability of this price rise. The same old argument of the gold permabears is being repeated time and again: Since gold doesn’t pay interest or dividends, it must be a bad investment.

Of course we know that gold does not pay interest. Nor does crude oil, wheat, or any other commodity. But we also know that this shortcoming does not forestall rising prices. And yes, gold is a non-productive investment. It doesn’t help economic development.

Gold is the ultimate inflation hedge.

However, its usefulness is very different: Gold is insurance against the follies of government, especially against inflation. No more, no less.

I bring this up because …

Big Spikes in Inflation
Share Two Characteristics …

If you have ever glanced through a history book, you may have read how governments all over the world implemented foolish and dangerous policies time and again. Unfortunately, today we’re living through one of those sad times.

Economists and historians have examined the important topic of inflation. And their findings are clear: Inflation is always a monetary phenomenon … it does not appear out of thin air … and it’s always the result of specific monetary and fiscal policies.

Empirical studies have plainly shown that all big spikes in inflation had two common characteristics:

1. Fiat money, and

2. Strongly rising budget deficits mainly financed by monetizing government debt.

Both characteristics are present today, and not just in the U.S. but globally. Historically, most monetary regimes were based on money backed by gold and silver. But now the whole world is using money based solely on promises and faith.

When the financial crisis hit in 2007/08, governments all over the world reacted the same way: They started a debt binge accompanied by an extremely lax monetary policy. And central banks monetized government debts. They termed the notion “quantitative easing.”

These are the very same policies that were present during every large jump in inflation in the history of mankind! And these are the main fundamental drivers behind gold’s advance today.

As long as there is no major fiscal and monetary policy change, I expect inflation to heat up and gold’s bull market to continue. So I suggest you consider including gold as a hedge against inflation in your portfolio.

Best wishes,

Claus Vogt 
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Aaron Regent, president of the Canadian gold giant, said that global output has been falling by roughly 1m ounces a year since the start of the decade. Total mine supply has dropped by 10pc as ore quality erodes, implying that the roaring bull market of the last eight years may have further to run.

"There is a strong case to be made that we are already at ‘peak gold’," he told The Daily Telegraph at the RBC’s annual gold conference in London.

"Production peaked around 2000 and it has been in decline ever since, and we forecast that decline to continue. It is increasingly difficult to find ore," he said.

My comment: Tighter gold supply and higher gold demand coupled with a flood of paper from central banks sounds like a recipe for a higher gold price long term.

John Polomny
The Real Deal

Fortunately, for all concerned, a new index has been introduced that provides a much more all-encompassing mix of companies associated with a wide variety of commodity-related products. It is called the Commodity Companies Index (CCI).

Unlike the large-cap centric HUI, XAU and GDM indices and the nano-cap centric and less commodity-oriented CDNX index, the CCI is broadly diversified across a wide range of commodities and company formats. The index consists of 35 commodity-related companies with associated warrants of at least 24 months duration that trade on the U.S. and Canadian stock exchanges.

20 of the companies in the index are either in the production, development and/or exploration of gold and silver or as royalty payment participants; 10 companies are engaged in the mining and/or development/exploration of uranium, coal, iron ore, zinc, cobalt, molybdenum, lead, copper or nickel; 3 are venture capital ‘banks’ specializing in commodity-related company financing and 2 companies are involved in oil and gas production. Talk about an all-inclusive cross-section of companies involved in the commodity business.

In addition to broad product diversification the 35 companies have a broad market capitalization spectrum with 11% being large-cap, 11% mid-cap, 11% small-cap and 66% micro/nano-cap constituents. Please refer to www.preciousmetalswarrants.com/FreeBasicDatabase.htm for a list of the actual constituent/component companies.

Below is a table that differentiates the performance of the major commodities and related indices which sheds considerable light on the performance of the commodity companies as a sector (i.e. the CCI) vis-à-vis the other categories:

All calculations are based on U.S. dollar equivalents
(1) Week ending November 6th, 2009
Sources: preciousmetalswarrants.com (warrant and stocks-with-warrants data), oanda.com (exchange rates) and stockcharts.com (index and commodity prices).

There you have it! Finally, a better way to analyze the performance of companies involved in commodity related activities be it precious metals, base metals, oil and gas production or venture capital merchant banks. No longer need we rely on the HUI, the CDNX and the CRB for our understanding of what is happening in the commodities sector. Now we have a much broader picture.

Lorimer Wilson is Editor of www.MunKnee.com and Director of Marketing for the two sites mentioned below. He can be contacted at Lorimer@preciousmetalswarrants.com.

1. www.PreciousMetalsWarrants.com provides a free one-of-a-kind database (updated weekly) on all commodity-related warrants trading on exchanges in the United States and Canada. PMW also offers a modestly priced subscription service that ranks all warrants according to our proprietary leverage/time calculations at four projected stock price appreciation levels. You can also sign up for a free weekly email highlighting events in the precious metals marketplace and in the wonderful world of warrants in particular.
2. www.InsidersInsights.com, another modestly priced subscription service, alerts subscribers as to when corporate insiders of a limited number of junior mining and natural resource companies are buying and selling.

My comment: I am shocked, shocked I say that a government sponsored entity would lie about oil reserves and future production.

The senior official claims the US has played an influential role in encouraging the watchdog to underplay the rate of decline from existing oil fields while overplaying the chances of finding new reserves.

My comment: The US politicians cant allow the sheeple to call into question the unsustainable suburban lifestyle of idiots living fifty miles from work and each person commuting to a cubicle downtown in a Ford F-350 or a Hummer.

The allegations raise serious questions about the accuracy of the organisation’s latest World Energy Outlook on oil demand and supply to be published tomorrow – which is used by the British and many other governments to help guide their wider energy and climate change policies.

My comment: Peak Oil is a fact and it is going to impact you more then healthcare, taxes, or anything else. The governments of the world are going to deny this until it is to obvious to ignore. Once peak oil is an accepted fact guess what happens to oil prices? They go up and they do not come down. The market is a discounting mechanism and will price a scarce resource now based on where it thinks supply/demand will be in the future.

(skip)

A second senior IEA source, who has now left but was also unwilling to give his name, said a key rule at the organisation was that it was "imperative not to anger the Americans" but the fact was that there was not as much oil in the world as had been admitted. "We have [already] entered the ‘peak oil’ zone. I think that the situation is really bad," he added.

My comment: Ask yourself this question. In the future will oil exporting nations be agreeable to exporting a nonrenewable commodity in sufficient quantities to allow Americans to continue wasting it driving around in cars? Will they choose to limit exports in order to preserve this commodity for their own use? Now ask yourself why we are really in Iraq which has an estimated 300 billion barrels of oil reserves. People laughed at me when I suggested this years ago but the evidence is mounting I was right. Another thing you might want to ask yourself is why is news like this always printed and discussed in foreign news outlets but never in the US? By the way the stock of the year pick for 2010, which I am finalizing, is a junior oil explorer that will be able to take advantage of this situation.

John Polomny
The Real Deal

India’s central bank taking 200 tonnes (6.4 million oz) of gold from the IMF in an off market trade has certainly lit a fire under the yellow metal.  While a trade of that nature was anticipated, India, which is about the savviest of commercial gold players, was not atop the expected buyers’ list.  Given the greenback was steady and that gold’s chart went near vertical when the overnight rumor became official, it is likely that the big long position that came into the market forced some covering on the short side.  Is this more than a spike? 

We think India’s move could be, in part, a signal it should have a bigger chair at economic tables, which we agree with.  Since Indians are the biggest gold buyers on the planet, lifting a perceived overhang from its market has the side benefit of protecting an existing wealth pool of its citizens.  And the near US $7 billion price tag is not large against India’s $260 billion foreign reserve holdings. 

However, it does have a bigger impact on gold’s market (about $115 billion annually, now) and that got noticed.  Also, it will further establish the notion of a currency basket that includes gold as a global trading medium, and conversely a weaker greenback.  That should continue the move of capital into gold as $ hedge.

In saying that, we realize that it would be tough for gold to replace the oil market as a home for dollar hedge trades simply because of the oil markets much larger scale.  But oil can not continue to gain without causing major problems for the near term economy, nor can oil rise if other energy components are not doing the same.  Scale aside; gold makes sense as a place to place anti-dollar bets, and especially for players worried about longer term wealth preservation.  But so too do other metals.     

If copper does truly have a PhD in economics (not that that title has quite the allure of a few years ago), our take has to be that the Doctor is mulling over an extended lunch.  The red metal’s price continues to bounce against the $3/lb ($6600/t) level even while available stockpiles have grown.  There has been a slight decline of stockpiles in the past few days, but that was after having recouped 60% of the drawn down earlier in the year.

Clearly, new metrics are at work.  We and others have already pointed at Dollar roulette as one.  In fact that is a big part of the whole market these days, and it’s an issue that will grow in the telling.  There has also been a build up of small supply disruptions in copper, such as the shut down of most output from BHP’s Olympic Dam mine in South Australia.  The mine’s capacity is less than 1% of global copper supply (but a big chunk of uranium output), but this isn’t the only mine at reduced capacity.

The psychology of relatively minor supply disruptions when new mine development is still limited may be adding some price support.  The other base metals are similarly in a neural pose these days.  Rumblings about a better market are most prominent around zinc, as are concerns about maintaining concentrate streams to smelters outside of China.  That would be next year’s story, but it is worth noting.  For the past century or so mines were dictated to by smelters, but now smelters are worried about keeping their market shares and the balance of power has been shifting. 

As with most things in this changing market landscape, it is tough to make assumptions about the next six months.  That simple truism is driving things right now, if being in neutral could be called “driving”.  Producers’ share prices are shifting down with the market, but still finding support.  It may well be the balance of the year will mostly be about ensuring gains after a strong uptick, and making cash for future events.

There has been more weakness due to profits taking in some of the early exploration gainers.  Conversely, former laggards have been able to pick up steam by showing project advancement.  There is a general sense of rotation out of strength and into future potential, at least in our part of the playground.  That is meaningful.

As broader stock market gains began to peel away, we have been struck by a consistent lift in one measure.  While other North American equity markets saw share turn over slide along with prices, the TSX Venture exchange has actually seen daily volumes as strong as they have ever been.  This is not dollar-volume, and some of it can be accounted for by share issuances that are bloated by historic standards.  It does however indicate that there are still punters out there.

While we think of the Venture exchange as a proxy of the junior resource sector, other sectors are obviously part of it.  Funding for the Tech space is reviving a decade after that bubble burst, and green energy concepts are growing in number.  However, on checking volume leaders most days the lists are at least nominally composed primarily of resource deals.

Bears might argue this is desperate averaging down ahead of the next major down shift in the market.  It doesn’t look to us like the random buying during the bounce of a bear market rally.  That type of buying typically comes in spurts, and focused on companies based on their previous market strength. Nor frankly do we think such buying is very likely after last year’s market drubbing. 

This is a sustained turn over that relates to broader markets only in terms of showing patience on weak days.  It is focused on companies that do have underlying assets, regardless of how well they made markets in the past.  We see a concerted effort to own resource assets in juniors while they are still in the bargain bin.  And we believe this is being done by folks who have been around the sector long enough to recognize that US$ roll over and supply constraints are still near and mid term factors.

To anyone who thinks we are drinking our own bathwater we can only say, you’re right.  We are not suggesting that simply because “the usual suspects” are coming to the venture side of mining that prices will go up.  Nor does this buying mean they all expect immediate gratification.  However, there is a mood building for significant gains for the sector this coming year.  Even market watchers with large concerns about the broader economy are recognizing that the resource sector has good fundamental potential.  Both supply-demand against Asian growth and the shifting currencies market favour it.

We do expect the balance of the year to have a significant cash generating ethic.  After the roller coaster ride we have had that kind of prudence is to be expected.  Despite base metal prices holding up, that kind of thinking is evident by consolidation amongst the producers in that space.  Gold producers have been doing better, and for the time being we continue to expect this to be the preferred subsector in the metals market.

There may be some frustration with explorers who seem not to be living up to their results, relative to peers, after putting in strong performances.  Taking gains along the way will continue to be important, but we also expect rebalancing that will include stronger recognition for undervalued assets.  That is usually a question of moving through volume, and the market shifts that take place through year end.

Barring an “event” of some magnitude, it will take an accumulation of stats indicating how well economies are doing as their government stimuli slow down to shift the market too far off its current groove.  That is will be next year’s story, and we think it’s too soon to make assumptions on the outcome   

For the time being we will remain on volume watch, both in terms of metals directly and the equities that deal with them.  We continue to favour speculations that can generate drilling success, while accumulating those that are still waiting for a mood shift in the market that will lead traders to recognize their already established values.

Ω
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Published by Stockwork Consulting Ltd.
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Today they’re coming back—and getting roughly the same deal that was on the table during the summer. On Nov. 2, ENI initialed a contract to boost production in the Zubair field near Basra, which it estimates has 6 billion barrels of reserves. Shell, Exxon, and ConocoPhillips also are in talks that could help boost Iraq’s oil production to more than 6 million barrels per day—behind only Saudi Arabia in OPEC. "This is the window in which if anything can happen it will happen," says Alex Munton, an Iraq specialist at Edinburgh-based energy consultants Wood Mackenzie.

The big oil companies are reconsidering Iraq because they realize this may be among their last opportunities to get large volumes of crude.

My comment: The last sentence is interesting in that it is a validation of the peak oil theory. If so much oil exists around the world why do these majors need to accept the relatively low returns being offered by the Iraqi government. the answer of course is that new oil finds of significant size simply do not exist.

On another note I was able to pick up some more WesternZagros shares at around seventy cents per share. I would again note that this is a highly speculative stock.

John Polomny
The Real Deal

With primary secular bull or bear trends easily running from 10 to 20 years of the average investor’s 40 year investing lifespan it is crucial to identify optimal accumulation points within these primary trends to avoid prolonged periods of under-performance and potentially negative returns and to avoid dramatically reducing the number of productive years in which to build one’s fortune.

Within these trends are zigs and zags, up and down, and we can ride these medium term and short term waves to profits by either buying what is going up and/or shorting what is going down. As such, it is critical to step away from all the noise and clutter that passes for knowledge and take the time to gain perspective on where the market is in terms of the ‘big picture’ and to determine which investments are in a powerful unfolding trend so that an informed investment strategy can be developed and implemented.

Probably the best way to gain perspective on where the different asset classes are in their performance channels is to do a comparative analysis of the various components in the market and how they correlate to each other over the long, medium and short term and, based on those relationships, how they might perform in the near term.

This is part 1 of a 6-part series of articles to provide an informed, objective analysis as to how gold and silver bullion (part 1); the various stock market indices (part 2); precious metals mining shares (part 3); the US dollar (part 4); bonds (part 5); and crude oil (part 6) will likely perform into the next decade.

Gold

The key to a secular gold bull is the collective gold transactions of hundreds of millions of individual investors worldwide buying and selling gold that ultimately sets the price and determines its fortunes. The collective demand trends of private gold investors worldwide effectively divide gold bulls into 3 distinct demand-driven stages, namely:

a) Stage One which occurs when a devaluation of the dominant currency in which gold is priced, i.e. the USD, leads to a moderate increase in the price of gold. Stage One for gold began on February 15th, 2001 when it reached a 22-year secular low of just $255.10.

b) Stage Two occurs when the decoupling of gold from local-currency devaluation begins to outpace the dollar’s losses and gold starts rising significantly in virtually all currencies worldwide. Stage Two began on June 5th, 2005 when gold (at $417.67US) first surpassed 350 euros for the first time after repeated attempts.

c) Stage Three occurs when the general public around the world starts investing in gold and this deluge of capital into gold causes it to escalate dramatically (i.e. to go parabolic) in price. We are close to Stage Three and it will become clearly evident when the price for gold begins its daily record ascents to dramatically higher prices.

An analysis of the various trend channels indicates the following:

a) The longer term trend channel for gold is up and has been since early 2001 with a current top line resistance of $1650 and a lower resistance line of $600.

b) The medium term trend channel has been in place since August 30th, 2005 and has a current top line resistance of $1200 and a lower resistance line of $750.

c) The short term trend channel began with a June/July/August 2007 consolidation base of $650 and has an upper resistance line of $1100 and a lower line resistance of $875 which the current price is within.

Conclusion: Gold is now in a consolidation phase between $875 and $1100 and, as such, has limited upside short term potential from its current base. During the past 7 years of bull market activity gold bought by the end of July has appreciated by an average of 12.9% (the equivalent of 30.9% annualized) during the balance of the year. Based on the price for gold of $939.30 as of July 31st, 2009 we could well expect a year end price of $1060.50 which would still be within the short term trend channel upper resistance line.

And long term? That is anybody’s guess but there is no shortage of prognosticators who see gold going parabolic. Adam Hamilton of zealllc.com forecasts a price considerably above $1000 before Stage Two ends in 2009 and a price of over $3,500 by 2010/11 if the public enters and ignites a popular speculative mania; Mary Anne and Pamela Aden, as mentioned in a previous article, state that a price of $5,800 is possible by 2012 if gold were to appreciate from its 2001 low of $255 by the same percentage as it did between 1971 and 1980. Now that’s momentum!

Silver

Silver has proven itself, time and again, to be a safe haven for investors during times of economic uncertainty and, as such, with the current economy in difficulty the silver market has become a flight to quality investment vehicle. The 85% increase in silver in the past 12 months attests to that in spades. In fact, during the last bull market during the 70’s silver went from  $1.30 in November 1971 to $42 on January 21st 1980 for a 3,131% gain. A similar rise from silver’s low of $4.35 in March 2003 could take silver to $140 or beyond before this current bull market is over.

An analysis of the various trend channels indicates the following:

a) The longer term trend channel for silver began on March 21st, 2003 at a low of $4.35 and has upper resistance of $51 and lower support at $12. Such volatility has always been very high because, with the silver market only about 2% that of gold, even a small amount of money flowing into silver has a huge impact.

b) The medium term trend channel began with a lengthy March through August 2007 consolidation base of $13 – $14 and currently has upper resistance at $32 and lower support at $13.

c) The current short term trend channel began in November 2008 at $8.79 and currently has upper resistance at $22 and lower support at $15.50.

Conclusions: Silver has considerable upside potential short term (to $22), medium term (to $32) and long term (to $51 and beyond).

Gold:Silver Ratio

The Gold:Silver ratio has ranged from 14.9-to-1 in January 15, 1980 at the time of the record high gold and silver prices to 99.8-to-1 on February 22, 1991 when the price of silver was particularly depressed. During the past 5 years it has ranged from 43.6-to-1 (April 19, 2006) to 84.4-to-1 (October, 2008). It is currently at 64-to-1 having breached the 28 year support line of 58-to-1 (and 200dma) in August 2008.

An analysis of the various trend channels indicates the following:

a) The longer term channel upper resistance is 58-to-1 with a lower support at 43-to-1.

b) The medium term channel upper resistance is 54-to-1 with a lower support of 47-to-1.

c) The short term channel upper resistance is 52-to-1 with a lower support is 50-to-1.

Conclusions: There are many! Let’s look at the various price levels for gold and the various gold:silver ratios mentioned above one by one and see what conclusions we can draw.

Let’s use today’s (Nov. 4th, 2009) price of $1085 for gold and apply the various gold:silver ratios mentioned above and see what they do for the potential % increase in, and price of, silver.

Gold @ $1085 using the current 63:1 gold:silver ratio puts silver at $17.22 (Nov.4/09)

Gold @ $1085 using the above 58:1 gold:silver ratio puts silver at $18.71 (i.e. +8.6%)

Gold @ $1085 using the above 54:1 gold:silver ratio puts silver at $20.09 (i.e. +16.7%)

Gold @ $1085 using the above 52:1 gold:silver ratio puts silver at $20.87 (i.e. +21.2%)

Gold @ $1085 using the above 50:1 gold:silver ratio puts silver at $21.70 (i.e. +26.0%)

Gold @ $1085 using the above 47:1 gold:silver ratio puts silver at $23.09 (i.e. +34.1%)

Gold @ $1085 using the above 43:1 gold:silver ratio puts silver at $25.23 (i.e. +46.5%)

Were we to apply the various channel upper resistance level prices for gold to the range of gold:silver ratios mentioned above we would arrive at the following potential prices for silver:

Gold @ $1100 using gold:silver ratios between 63:1 and 43:1 puts silver between $17.46 and $25.58

Gold @ $1650 using gold:silver ratios between 63:1 and 43:1 puts silver between $26.19 and $38.37

Gold @ $2500 using gold:silver ratios between 63:1 and 43:1 puts silver between $39.68 and $58.14

Gold @ $3500 using gold:silver ratios between 63:1 and 43:1 puts silver between $55.56 and $81.40

Gold @ $5800 using gold:silver ratios between 63:1 and 43:1 puts silver between $92.06 and $134.88

From the above it seems that, any way we look at it, physical silver is currently undervalued compared to gold bullion and is in position to generate anywhere from 10 – 50% greater returns than investing in gold bullion.

What about the shares of silver mining companies and the royalty companies that buy mines’ secondary silver production? Well, a look at those companies that make up the silver component of the Gold and Silver Companies Index (GSCI) reveals that the stocks of such companies have appreciated 15% more than that of silver itself YTD and the warrants associated with those stocks by 30% more than the company stock. Below is a table showing the performance of a broad segment of the market.

Last Week’s % Performance

All calculations are based on U.S. dollar equivalents
(1) Week ending October 30th, 2009

Sources: preciousmetalswarrants.com (warrant and stocks-with-warrants data), oanda.com (exchange rates) and stockcharts.com (index and commodity prices).

In conclusion it would seem that if one wants to invest in commodities that silver has more upside potential relative to gold; that silver mining/royalty stocks have greater upside potential than silver itself; and that the warrants associated with the silver mining/royalty stocks have even more upside potential (i.e.leverage) than the stocks themselves. It certainly appears evident that now is the time to buy all things silver.

Lorimer Wilson is Editor of www.MunKnee.com and Director of Marketing for the two sites outlined below. He can be contacted at Lorimer@preciousmetalswarrants.com

a) www.PreciousMetalsWarrants.com provides a free one-of-a-kind database (updated weekly) on all commodity-related warrants trading on exchanges in the United States and Canada. PMW also offers a subscription service that ranks all warrants according to our proprietary leverage/time calculations at four projected stock price appreciation levels. You can also sign up for a free weekly email highlighting events in the precious metals marketplace and in the wonderful world of warrants in particular.

b) www.InsidersInsights.com, another subscription service, alerts subscribers as to when corporate insiders of a limited number of junior mining and natural resource companies are buying their company’s stock.

On Thursday, it was announced GDP is back on the climb. That was followed with the claim one million jobs were created or saved due to stimulus spending. And that’s right on pace to meet the goal (imagine that?). So the best marketers don’t want to let an opportunity to take credit for the free exchange of goods and services between individuals.

But on NBC’s Meet the Press, Treasury Secretary Geithner may have inadvertently signaled the gold bull market has a long way to run. In the interview, Geithner said, “[The recent positive economic news] shows that — when you act with force — you can stabilize a crisis like this.”

Force…Force is good!?!

Cranking up the printing press, nationalizing major industries, and increasing taxes (healthcare, cap and trade, VAT, and whatever else happens after 2010 elections) will, in the long run, go a long way to preventing a genuine recovery.

But this is part of the process. It’s training the monetary managers to make terrible mistakes, yet not realize they were mistakes. They’re learning the wrong lessons. And when the next downturn comes, whatever the catalyst, they’ll respond with even more “force.”

And it will be that move that pushes gold to much higher levels. In the interim, anticipation of that eventuality will help keep gold prices propped up.

That’s why now, with the markets showing their greatest weakness in months, gold stocks getting hit 10% to 30% across the board is a great time to continue getting in place for the next “forceful” response. Here are the two best spots to start putting your dollars to work in gold.

Exploration is Back

One of the hardest hit sectors during the credit crunch were the gold exploration companies. Their cash-draining business models were left for dead as the gold price fell, institutional investors saved cash to meet redemptions, and hedge funds deleveraged.

That was over a year ago though and a lot has changed. Gold is setting new highs and money is flowing back into the exploration market. More importantly though, there have been some major discoveries in the past few months which will bring even more speculators back into the market.

The biggest discovery of them all has been Ventana Gold (TSX:VEN). It’s a Columbian gold explorer which has leapt from discovery to development in a few short months.

Since we said Ventana was “the next bonanza discovery” and that it “struck gold – lots of gold!” in our free gold stock report a little more than six months ago, its shares have climbed more than 700%. And the company now counts mining entrepreneur Ross Beatty and Brazil’s richest man, Eike Batiste, among its shareholders. Both now own more than 10% of outstanding Ventana shares.

It has gone from unknown penny stock with a small cash position and an aggressive exploration program to a bona fide discovery with a market cap of more than $800 million which just closed a $40 million financing deal.

This is the type of discovery and massive gain (Ventana went from 20 cents per share to $10 per share in about a year) which sparks the greed necessary to help keep the money flowing into gold exploration stocks.

Of course, a lot of things have to come together before gold exploration really gets going. The combination of high gold prices, a rising stock market (increasing risk appetite), and a couple of major new gold discoveries have made it much more enticing though. Right now, there are still a lot of small exploration companies trading for less than $20 per ounce of gold in the ground and they were fetching as much as $50 per ounce of gold in the ground two years ago.

It’s not just the high-risk/high-reward gold exploration stock sector getting some attention; junior gold stocks are still in the relatively early stages of recovery too and offer exceptional value.

Junior Gold Stocks: 60% Undervalued

The other gold sector which just got a lot more attractive in the past week has been junior gold stocks.

A quick look at the McEwen Junior Gold Index shows it all. The index tracks junior gold stocks that are actively traded (minimum $50,000 average daily trading volume) and have minimum market caps of $50 million.

Since November 2007 when the index was hitting all-time highs, gold prices have climbed 30% and the junior gold index is down 60%.

That’s just half the story though. Their outlook gets even brighter when you look at the big gold stocks. The Philly Gold/Silver Index (XAU), which tracks the major gold and silver miners, is down only 15% from its November 2007 highs.

This is a really simple one. Gold is up 30%, major gold stocks are down 15%, and junior gold stocks are down 60%. Which one would you like to buy now?

If you like gold, you have to love the juniors.

The Trend is Still Up

Those are the best two opportunities in gold right now and this is as good a time as ever to start reloading on gold stocks.

You can practically see the confidence of administration and Federal Reserve officials growing by the day. They are now trained and will know exactly what to do next time. Regretfully, that move will likely be what propels gold prices to the next level.

It’s no wonder that while the government claiming “success” and “back from the brink” talk abounds, some of the world’s best investors are loading up on gold and gold stocks. Hedge fund manager John Paulson has led the headlines, but the ranks of newly minted “gold bugs” now includes top-performing investment managers Steve Leuthold,  and many others.

They see what’s coming and I hope you do to. Now, you just have to maximize the opportunity.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

To meet the growing needs of investors interested in investing in the broader, yet small-, micro- and nano-cap skewed, precious metals mining sector (i.e. the ‘juniors’)  4 new indices have come on the scene lately to wide acclaim. They are the Gold and Silver Companies Index (GSCI) and the Precious Metals Warrants Index (PMWI) and 2 all encompassing commodity-related company indices (i.e. also including commodities other than just gold and silver) the Commodity Companies Index (CCI) and the Commodity Warrants Index (CWI).

These new indexes are ideal supplements or even replacements for the HUI and the XAU which only track the performance of large-cap gold and silver mining/royalty companies. The GDM is only slightly more skewed to small-cap mining companies. The CDNX is, at best, a make-do proxy for the performance of micro/nano-cap ‘junior’ mining companies that are almost exclusively involved in the exploration for gold and silver and the development of such sites for possible mining.

Below are descriptions of all the above mentioned indexes:

1. HUI is the symbol of the AMEX Gold BUGS (Basket of Un-hedged Gold Stocks) Index and is a modified equal dollar-weighted index of 15 gold mining companies that do not hedge their gold beyond 1.5 years. The best way to invest in this index is in HUI options.
See: http://amex.com/othProd/prodInf/OpPiIndComp.jsp?Product_Symbol=HUI for current updates.

2. XAU is the symbol of the Philadelphia Gold and Silver Sector Index and is a market capitalization index of 16 companies in the gold, silver and copper mining industry.  The best way to invest in this index is through options traded on the index. See: www.nasdaqtrader.com/Dynamic/PublicIndex/XAU.txt for current updates.

3. GDM is the symbol for the NYSE Arca Gold Miners Index and is a modified market capitalization weighted index of 31 gold and silver mining companies.  To invest in this index buy the Market Vectors – Gold Miners ETF. See:  http://www.amex.com/othProd/prodInf/opPiIndComp.jsp?prod_Symbol=GDM for current updates.

4. CDNX is the symbol for the S&P/TSX Venture Composite Index. This largely overlooked index consists of 558 companies of which 63% are involved in either extracting natural resources from the ground or involved to some degree in the exploration and/or development of such resources. 44% of the companies are engaged in the mining, exploration and/or development of gold and/or silver and other mineral resources; 18% in oil or natural gas pursuits and 38% in non-resources operations.  For current updates see: ftp.cdnx.com/SPCDNXIndex/Components.txt.

5. CCI is the symbol of the Commodity Companies Index. It is an equal dollar-weighted index consisting of 36 commodity-related companies (with warrants of at least 24 months duration outstanding) that trade on the Canadian and U.S. stock exchanges. For index components see: www.preciousmetalswarrants.com/FreeBasicDatabase.htm

6. CWI is the symbol of the Commodity Warrants Index. It is an equal dollar-weighted index consisting of 47 warrants of at least 24 months duration associated with the 36 companies in the CCWI.   For index components see above URL.

7. GSCI is the symbol of the Gold and Silver Companies Index. It is an equal dollar-weighted index comprised of the 23 gold and silver mining and royalty companies in the CCI.

8. PMWI is the symbol of the Precious Metals Warrants Index. It is an equal dollar-weighted index comprised of the 27 gold and silver warrants, of at least 24 months duration, found in the CWI.
Last Week’s % Performance(1)

All calculations are based on U.S. dollar equivalents
(2) Week ending October 23rd, 2009
Sources: preciousmetalswarrants.com (warrant and stocks-with-warrants data), oanda.com (exchange rates) and stockcharts.com (index and commodity prices).

And why do we need 4 or 5 more precious metals mining company indexes? Simply because those in use today do not tell the whole picture and what they do tell is large-cap centric. As the above table clearly identifies, while both the HUI and GDM (representing the large-cap companies) are up 42.1% and 37.8% respectively YTD, the micro/nano-cap gold and silver mining/developing/exploring and royalty companies, according to the Gold and Silver Companies Index (GSCI) are up 64.4% YTD. That is a 60% difference in performance!

Were we to only rely on the performance of the HUI or GDM (or the XAU for that matter) indices we would not be getting an accurate picture of what was actually happening in the mining sector. The performance of the broader small/micro/nano-cap sector would be totally misrepresented. That is no longer the case with the presence of the GSCI.

It is not a perfect world in that the GSCI only includes gold and silver companies which also have warrants that trade but it is a major improvement from relying on the CDNX whose gold and silver companies make up only 44% of the total index components leaving it wide open to major influences by its oil and gas components and majority of its non-natural resource companies. A case in point is the new Commodity-related Companies Index (CCI) which, because it includes oil and gas operators and merchant banks, is up 102.4% YTD. The GSCI is not the absolute end-all but is a major improvement over the formerly available indices.

When and how should the various indices mentioned above be used by investors, analysts and financial and newsletter writers alike?

a) the HUI is a small-based and narrow index of companies engaged in the mining of gold (99.0%) in which the largest 5 companies account for approximately half of the total index weight.
Conclusion: The HUI Index is best used to assess the trend of large and medium cap gold mining companies and should not be used to assess the trend of precious metals mining companies as a whole.

b) the XAU is also a small-based index of companies but engaged in both gold and silver mining. The largest 5 companies account for two-thirds of the total index.
Conclusion: The XAU Index is best used to assess the trend of large cap gold and silver mining companies but should not be used to assess the trend of the precious metals mining sector as a whole.

c) the GDM is a more broadly based index both in number of companies included, the products mined and in the diverse range of companies included. 26% are large cap companies, 25% medium cap, 39% small and 6% micro). Indeed, the largest 5 companies only account for 41% of the total by index weight.
Conclusion: The GDM Index is best used to assess the trend of the precious metals sector recognizing that the micro/nano sector is not well represented.

e) the CDNX is an extremely broadly based and diverse index of micro-cap companies of which  63% are involved in either extracting natural resources from the ground or involved to some degree in the exploration and/or development of such resources.
Conclusion: The CDNX Index is best used to assess the trend of micro/nano-cap companies of which the junior natural resource sector is a major component.

f) the CCI includes:
– 100% of the commodity-related companies (with warrants of at least 24 months duration) – trade on the U.S. and Canadian stock exchanges i.e. 36
- the large-, mid- and small-cap components each make up 11%, i.e. 33% in total
- the micro/nano sector components make up the balance of 67%
- 21 of the component companies are gold/silver miners or royalty companies, 9 are misc. mining companies (uranium, molybdenum, zinc, etc.), 2 are in oil and gas production, 3 are commodity associated merchant banks and 1 is a precious metals mutual fund.
Conclusion: The CCI is best used to trend the performance of a broadly diversified number of junior companies related to the commodity business.

f) the GSCI includes:
- gold and silver miners and royalty companies (with warrants) that trade on the U.S. and Canadian stock exchanges
- 22% of the companies in the index are large-cap, 17% are mid/small-cap and 61% are micro/nano-cap companies.
Conclusion: The GSCI is ideal for tracking the performance of the full spectrum of gold and silver mining and royalty companies with warrants trading in Canada and the USA today.

g) the CWI includes:
-  all (47) of the long-term warrants (+24 months duration) associated with commodity-related companies (36) that trade on the U.S. and Canadian stock exchanges.
Conclusion: The CWI is the only such index available and should be used as a basis for commodity-related warrant selection and the tracking of their performance.

h) the PMWI includes:
- all 27 gold and silver mining and royalty warrants of at least 24 months duration that trade on the U.S. and Canadian stock exchanges.
Conclusion: The PMWI is the only such index available and should be used as a basis for gold and silver mining and royalty warrant selection and for the tracking of their performance.

The next time you read an article in which someone is claiming that one of the indexes discussed here is revealing this or that about the trend of precious metals mining stocks (and usually gold and silver stocks in particular) you will be in a position to know whether you are being given biased or informed advice and be able to take action accordingly.

The introduction of the Gold and Silver Companies Index (GSCI), and its subcomponent Precious Metals Warrants Index (PMWI), now make it possible for investors, analysts, financial and newsletter writers alike to better understand what is happening in the broader-based gold and silver marketplace and to accurately track its performance. It is about time!

Lorimer Wilson is Editor of http://www.munknee.com/?refer=Jutia and Director of Marketing for the two sites outlined below. He can be contacted at Lorimer@preciousmetalswarrants.com

a) www.PreciousMetalsWarrants.com provides a free one-of-a-kind database (updated weekly) on all commodity-related warrants trading on exchanges in the United States and Canada. PMW also offers a modestly priced subscription service that ranks all warrants according to our proprietary leverage/time calculations at four projected stock price appreciation levels. You can also sign up for a free weekly email highlighting events in the precious metals marketplace and in the wonderful world of warrants in particular. 

b) www.InsidersInsights.com, another modestly priced subscription service, alerts subscribers as to when corporate insiders of a limited number of junior mining and natural resource companies are buying and selling.

With all the ’strong dollar’ rhetoric coming from the Fed and broken-record Bernanke, it’s a wonder any investors are making money. But one we know and trust is. . .because he’s not listening. "The U.S. will continue to take a laissez faire approach to the dollar," says John Doody, Economics Professor for nearly two decades and current author and publisher of Gold Stock Analyst. In this exclusive interview with The Gold Report, John explains how he measures gold’s price performance, why he believes most investors don’t have enough gold stocks in their portfolios and which companies he’s making money on right now.

The Gold Report: John, why hasn’t the mainstream media caught on to what’s going on with gold?

John Doody: The CNBC types are always talking their own "book," which is mainstream stocks. If no one buys the broad market stocks, there are no jobs for the talking heads, et al., at CNBC. They’re always pooh-poohing gold and love saying that gold at the current price, $1,060, hasn’t really done much from the $850 high in 1980. That’s a false comparison. If you want to use that, then why not point to the S&P high in the 1500s or the Dow high in the 14,000s as a measure, instead of the March 2009 lows?

The gold price was controlled from the 1930s until March 1968 by eight Central Banks (CBs) that were the gold cartel and fixed the price of gold at $35 an ounce. That ended in March 1968 when market forces overwhelmed the CBs. Unable to enforce $35/oz, they let gold’s price float in the free market. Between themselves, they still traded at $35 and then, of course, all of that fell apart when Nixon went off the gold standard entirely in ‘71.

The appropriate measure for me as to how gold has performed is to go back to when the price was set free, March 1968. If you take the $35 gold price and adjust it for 41 years of the U.S. CPI increases, the gold price would be about $220 an ounce, increasing at an average compound rate of about 4.5% a year. But since being set free in 1968, the gold price is now $1,060. So gold has provided great inflation protection, and growth. From $35 to $1,060 — that’s about an 8.5% compounded annual rate per year. That’s the true measure of gold’s value for inflation protection. (See chart.)

TGR: So what’s driving the price of gold? Is it just the devaluation of the U.S. dollar?

JD: Well, that’s part of it; but gold is still about 10% below the all-time high in other currencies, such as the euro or the yen. So part of the growth of gold price is due to all fiat currencies falling, but it’s mostly due to the dollar going down because it’s a dollar-denominated commodity and that’s what people want to escape—the dollar’s declining value. Gold provides appreciation and a safe haven.

TGR: How long do you expect this trend to continue?

JD: It could go forever. I don’t think we’re going to see the hyperinflation of Zimbabwe or the Weimar German Republic. The falling dollar will eventually cure the trade and current account deficits because we’ll stop buying foreign-made goods. They’ll just be too expensive. Currencies go through these ebbs and flows of value. In the ’80s we had high interest rates and the dollar was too strong. Central Banks met at the Plaza Hotel in 1985 to knock down the buck’s value, and they were successful. Now I’m not so sure, because foreign exchange markets and the dollar amounts are so big that the Central Banks can really change the dollar’s direction. Like a tugboat changing the direction of a battleship, they can nudge it a little bit in the short term; but long term, it’s the economic fundamentals that control. The U.S. will continue to take a laissez faire approach to the dollar. They talk a good game, they talk strong dollar, but they don’t do anything to defend it and that’s because they want a weak dollar. A weak dollar stimulates U.S. exports and job growth.

TGR: What’s your long-term target for the gold price?

JD: I really don’t have one because my investing strategy is to find undervalued gold stocks at every gold price. So it’s not necessary for me to say that the stocks I recommend are going to go up because gold’s going to go up. My Top 10 Stocks should go up because they are not properly valued vs. others of comparable stature based on the three metrics I use: 1) market cap per ounce of reserves, 2) market cap per ounce of production, and 3) operating cash flow multiple. My Top 10 so far this year is up 124% and that’s with one stock being flat. So the other nine have, on average, more than doubled. That’s vs. gold at $1,060 up 22%, and the XAU up 45%.

This appreciation is why you should own the stocks more than the metal. Every dollar of price increase gives you a dollar more profit from current production, and it makes all the ounces that you’ve got in the ground that haven’t been mined each worth a dollar more. Typically, a mining company has 10 times the reserves in the ground vs. what it’s currently producing. So that 10 multiple—it’s even higher for some—that’s where you get the leverage from a gold price.

TGR: At a certain point, of course, stocks become overvalued. In your recent newsletter you said that they’re fairly valued at a gold price of $997. We’re now at $1,060. Are we getting close to being overvalued?

JD: Not yet, because the gold price of $1,060 now justifies higher values than at last month’s $997 gold price. What I’m looking for is the market to go to overvalued, as it’s done in the past. I measure overvalued and undervalued based upon past relationships between the market cap per ounce values we calculate every month vs. gold price at that time. Right now we’re at a fairly valued situation. But there’s been four instances, in 2002, 2003, 2006 and 2007, when gold stocks were 20% or more overvalued based on my market cap/oz. metrics. It’s investor enthusiasm that creates these overvalued situations, and as can be seen in the chart, we’re not there yet.

People bid up the prices of the stocks so that the market cap per ounce we calculate goes to overvalued levels vs. where they’ve been in the past. So, even if gold did nothing from here and just stayed around this $1,050–$1,060 area, investor enthusiasm could drive the stock prices higher to make the stocks 20% overvalued.

So I see a lot more upside from here and I think this is evidence that we don’t have a big retail participation in this market yet. People have been thinking there’s a $1,000 an ounce ceiling and they don’t realize that it’s become the floor. Maybe it’s going to take a few months hanging over $1,000 or maybe we’re going to have to get to $1,100. At some point investors are going to realize this gold bull market has much further to go and as they pile into the small gold sector with only a $250 billion market cap, they’ll drive stock prices much higher.

One rationale for more investors coming to gold can be found in studying the S&P500 vs. gold price. As seen in the chart below, from 1973 to 1991, the gold price was higher than the S&P. From 1992 to 2008, the S&P 500 was higher than the gold price. Now we’re back in the area of uncertainty where the gold price and the S&P price are about the same. As you look forward, I can’t make any argument for the S&P going higher. I think that it’s overpriced now and that analysts are building in earnings numbers for the S&P that aren’t going to be earned. The consumer’s tapped out. So the banks have come back some, but they’ve got a lot of bad debt still to write off from credit cards and commercial loans The consumer is 70% of the economy. Without them aggressively participating, I just don’t see any driver for the S&P 500 to even support this level. But I can see lots of drivers to support a higher gold price. Just look at monetary and fiscal policy, printing and borrowing too many dollars The years ahead, in my opinion, have to be good for gold and not so interesting for the S&P 500 and I think as people realize this, we’re going to get more retail investors coming to the gold sector.

TGR: So your Top 10 list that you came out with last January is up 124%. Nine winners and one flat one. Do you come out with another Top 10 list in January 2010?

JD: We do it on an ongoing, not an annual basis. We calculate the results on an annual basis, which is very unique in this industry. Nobody else does this unless they’re a mutual fund. Every other newsletter wants to tell you what their results were based upon when they first recommended the stock, which might be five years ago. But we track the Top 10 the way any private investor would their portfolio and we put a monthly statement in the newsletter. We’ve had one sell in 2009. We took one off that was up 58%. It hit our target price and we didn’t see a reason to raise the target price. We sold it and we had 10% cash for about four months, and we just found a new company, Terrane Metals Corp (TRX: TSX.V), which we put on the Top 10 list in September.

We put Terrane Metals on at 50 cents. It’s 80 cents now and our initial target was $1.50, but we said if a feasibility study update comes through as we expect—and we expect it to see a 30% increase in the reserves — that would make our target price $2.50. Well, yesterday the feasibility results were released and we’ve raised our target price to $2.50. The stock’s still at 80 cents.

Of my Top 10, the flat one is Royal Gold Inc. (TSX:RGL, Nasdaq:RGLD), which started the year around $49 and that’s where it is now. It was the only winner of any note last year in 2008. It was up 60% and I think that 2010 is Royal’s year because it has two big mines coming on line. On Goldcorp’s (TSX:G) (NYSE:GG) Penasquito it gets a 2% royalty that’s worth about 78 cents a share in royalty revenues and another big mine, the Andacollo mine, owned by Pacific Rim Mining Corporation (TSX:PMU, NYSE/AMEX:PMU), will be coming on line towards the end of next year to add almost $1.00 a share. Stocks have cycles, and sometimes we sell and try to buy them back, but sometimes we just stay with them because we know it’s hard to buy some, particularly since Royal’s only got 40 million shares outstanding.

TGR: John, I believe you said to your subscribers, if Royal Gold gets below $40, back up the truck.

JD: I did and it did.

TGR: It did, absolutely, and those subscribers who listened to you have got a nice 30% gain because that did happen.

JD: Well, you know, these all can trade up and down. They’re volatile. Sometimes you get a new fund manager that doesn’t like the story and so he dumps whatever’s in the fund that he doesn’t like. They’re going to get judged on what they buy, so they buy the stories they like. I’m not saying that’s what’s happened to Royal, but it does happen with these stocks, where all of a sudden you can get a 20% or 30% selloff. I tell investors they should keep a mental 20% trailing stop. But then if the stock falls 20%, is that a reason to sell or buy more? And, more often than not, it is a reason to buy more. Sometimes if something basic changes, we’ll take the stock off the Top 10 and tell people to sell. But if nothing basic changes, it becomes a back-up-the-truck opportunity.

TGR: Many of your stocks are starting to approach your target price, yet you still sound pretty optimistic that there’s a lot more upside.

JD: Yes, and we have to change the target prices. We’ll probably do that in the November issue. The target prices were basically set when gold was $900. That’s been my working price for the year and for the first six months, the average price was $912, so that was a good enough number. Now we’re getting not only to the end of the year and we’ve got a much higher gold price, but we’re also starting to look forward to what production is going to be next year. One of the things we look for, in addition to the three main metrics, is growth in production. So we’ll start looking at what higher production will do for the stocks next year. We raised the target prices for two stocks in the October mid-month update, and because the November issue updates our reports on four of the Top 10, we’ll probably be raising more targets.

TGR: Are there some other stocks that are in your Top 10, or ones that you’re watching that you can share with our readers?

JD: Sure. Goldcorp (TSX:G) (NYSE:GG) has been a Top 10 stock. It’s up 36% so far this year and, basically, I think the market’s waiting to see that its Penasquito Mine, which is also important to Royal Gold and Silver Wheaton Corp. (NYSE:SLW, TSX:SLW), comes on line as planned. Mines don’t always start up smoothly. They’re not like buying a television and you just turn it on. It’s more like buying a computer that doesn’t work when you start it up. It doesn’t mean they can’t be fixed, but usually there are issues and little glitches and it takes a while to ramp them up.

The Penasquito Mine won’t be fully operational until sometime in 2011. That’s almost a two-year ramp up, but it’s a huge mine. The revenues at these prices are going to be about $1.6 billion a year. It produces a half a million ounces of gold, 31 million ounces of silver, and millions of pounds of lead and zinc a year. It’s going to be the biggest mine by far in Mexico in terms of revenues and in terms of gold production. And I think the market is waiting to see that this is coming on smoothly for Goldcorp to begin to reflect it in its price. And the stock’s 36% increase so far this year is still about double that of gold.

I expect that everything’s going to work fine and that Goldcorp’s big year may be 2010 and that’s the same for Royal Gold, as I said. It’s got a big royalty on the site. At current prices, the revenues of the site are $1.6 billion, Royal Gold’s 2% is $ $32 million a year; close to 78 cents a share.

Silver Wheaton is producing right now about 18 million ounces and it’s really a royalty stream situation, much like Royal Gold . Silver Wheaton’s royalty is 18 million ounces a year times the difference between silver price and the $4 per ounce it pays miners. If silver averages $16 in 2009, that’s $12 net times 18 million ounces for $216 million in royalty income. The silver stream increases by 7 million ounces when Penasquito comes on line fully. So Silver Wheaton is a great way to play silver, though there was a great deal just made today by Pan American Silver Corp. (TSX:PAA; NASDAQ:PAAS), who, in my mind, is the best operating silver miner in the business by far. They’re buying Aquiline Resources Inc. (TSX: AQI) for $600+ million. There’s 700 million ounces of silver, with more expected. This is exactly what Pan American has been missing, in my opinion, as a stock. It’s had a number of smaller mines that add up to about 20 million ounces a year, but the Aquiline deposit is going to give the potential to add another 10 million ounces right on top of that or more and give it the real flagship it lacked.

Another stock that has done well this year is Yamana Gold Inc. (NYSE:AUY), up 63%. And, again, this has been a situation of bringing on line a new mine in Argentina. It’s now operating on a commercial basis and seemingly running fine. If Yamana makes a good jump up in production next year and 2012, the market will soon begin to factor it into the stock price.

Minefinders Corporation (TSX:MFL, NYSE.A:MFN) has doubled this year. It’s up 104%. And, again, it’s not fully up and operational on its new Dolores Mine. It’s not until January of next year that it begins to hit its full recovery for silver. It’s already hit its recovery rate for gold, but silver still is to come. So there’s going to be plenty of basis to raise its target price.

European Goldfields Ltd. (TSX:EGU, AIM:EGU) is up 130% this year. They got a key permit just the other day in Greece and European has 9 million ounces of reserves, almost $200 million cash in the bank. It’s got three mines that it’s building and the one base metal mine that’s currently operating. European has had a $6 stock target, which it hit and I’ve raised the 2010 target. When all of the permits are issued, which should be early 2010, I think the stock could be a long-term triple from here.

My philosophy is you’ve got to buy 10 because if you buy one stock and it’s got a permit or similar issue and it doesn’t get it, you’re going to get killed. But if you’ve got all 10, you can take that risk. But too many investors think that they’ve got gold exposure with one or two stocks. And then when I ask them what the one or two are, they’re exploration plays. That doesn’t give you any gold exposure at all. That’s just exploration exposure.

At the gold shows I speak at, such as the coming one in San Francisco, people show me their portfolios. Most of them suffer from not having enough gold stocks. They have a big enough percentage, the proverbial 10% or 15% of the portfolio. But too often it’s all in a couple of stocks and that’s too much risk. You need to diversify your risk. In the old days when it cost you $200 commission, it was expensive to own 10 stocks. But now with $10 internet commissions it’s no big deal. Or they own too many and the risk of that is that you’re just going to mimic the market at best. The typical gold mutual fund has 40 stocks in it and that’s why they can’t do so well. There aren’t 40 gold stocks worth owning.

TGR: John, you offer a trial subscription, correct?

JD: Yes, you can subscribe for three months, and there’s a free issue on the Gold Stock Analyst website, which you can download. It’s not the current one, but it’s free, and you’ll get an idea of the detail of our work. It takes seven issues to cover all 75 stocks, plus we have the mid-month update of two to six pages. And we often make changes to the Top 10 in the update. The main monthly issue features reports on all the stocks we cover. The updates focus more on what’s going on in the gold market and what’s happening at just the Top 10.

TGR: John, thanks once again for your input. This has been great.

DISCLOSURE: John Doody
I personally and/or my family own shares in all the companies mentioned in this interview.

Success with his method of finding undervalued gold mining stocks led Doody to leave teaching and start the Gold Stock Analyst newsletter late in 1994. The newsletter covers only producers or near-producers that have an independent feasibility study validating their reserves are economical to produce.

And it’s as simple as supply versus demand.

Big investors in the East are concerned about their supply of oil.  Investors in the West are more concerned about the lack of demand.

In an October 18 research note, Goldman Sachs echoed this theme, explaining that China cannot produce enough oil to meet their domestic needs, and will need to consistently acquire foreign reserves.

The Goldman analysts who authored the report also say that in their opinion, China’s growth and infrastructure build out will continue for many years.  And so nervous investors in Europe and North America who are fretting about a collapse in China and oil prices will be miss the boat on oil stocks.

The report stated: ”China-based investors focused on supply side of our bullish view as opposed to demand in sharp contrast to most investors in US and Europe we meet with that are focused on demand uncertainty as opposed to oil supply…Given that China is emerging as an economic super power at a time of limited oil supply growth, we think it is likely to lead to the country adding to its SPR (Strategic Petroleum Reserve) continuously for many decades to come.”

Oil bulls are quick to point out that China only used 2.2 barrels of oil per person in 2008, versus the 23.3 barrels used in the USA.

Supply versus demand.  East versus West.  And with oil at US$80, it looks like the Eastern philosophy is winning out.

There is another huge benefit to national oil companies (NOCs) buying oil assets, and it is this: they get to spend their large currency reserves in US dollars into an asset that basically hedges against the greenback’s decline.

Asian countries like China and South Korea run a large trade surplus with the US.  They then use those excess dollars and buy US Treasuries, the largest, the most liquid, and the most transparent investment vehicle in the world.

But the US dollar is moving steadily down, eroding value for Treasury buyers.  So instead, they diversify and buy hard assets like Canadian oil companies such as Harvest Energy Trust. 

Harvest’s stock was a huge laggard compared to its peers, because of the high debt levels in the company.  But KNOC didn’t care about that – not with South Korea running a trade surplus of $5 billion in September alone.

KNOC’s $4.1 billion bid values Harvest at $77,700 per flowing barrel of production, which is almost exactly the average for the energy trust valuations in BMO Nesbitt Burns coverage universe this week.  (Peters & Co. out of Calgary called it $63,000 after removing value for Harvest’s downstream assets.)

Regardless, it was a 47% premium over what western investors thought it was worth.

How typical.

Keith Schaefer
Oil & Gas Investments Bulletin

When the markets were in a state of confusion last fall, we tried to keep our heads level and focus on the future.

One of the areas we inevitably turned to was agriculture:

This is a pretty simple one. The world’s population is growing and the world’s available farmland is not. The question here is not if there will be a big payoff, but when.

Of course, the whole investment world knew that. And it’s why agriculture stocks made such a big run between 2006 and 2008.

The good news is, however, the run in agriculture is far from over. In fact, it looks like agriculture stocks are just starting to get attention again. It really looks like the world is finally starting to see the “agtastrophe” approaching and now is a great time to get on board. Here’s why.

Supply and Demand: It Really is Just That Simple

The most obvious (and often touted) reason to buy agriculture stocks is simple.

The recent United Nations Food and Agriculture Organization (FAO) predicted:

Worldwide food production will have to rise by a staggering 70 per cent by the middle of this century if food riots are not to become commonplace…Almost 400 million people will face famine unless food production is dramatically and urgently increased.

Although I have reservations about accepting predictions from an organization whose funding is highly correlated to its predictions (the more dire the picture you can paint, the more funding you will receive), the FAO does sum up the core of the opportunity. Demand for food was, is, and will continue to be rising. Meanwhile, supply just isn’t keeping up.

The chart above shows world agriculture production has increased a paltry 12% in the past two decades.

That’s an annualized growth rate of 0.56% per year. That’s just not going to cut it. In order to meet the FAO’s statement agriculture production must grow by 70% in the next 30 years and would require and an annualized growth rate of 1.6% – almost three times faster than the rate over the past 20 years.

It’s not just the basic supply/demand argument though. There’s also substantial upside in agriculture.

If Oil’s Headed to $200 a Barrel…

Commodities have proven to be one of the favored safe havens of Wall Street over the past few months. Oil is trading hands for more than $80 a barrel. Natural gas prices have more than doubled in the past few months. Metals prices have soared across the board. You name it – copper, gold, silver, etc. – and its up.

Agriculture commodities, however, have seemed to miss out on the majority of the race to real assets. The most actively traded agriculture commodities, like wheat and corn, have fallen back to 2007 price levels. And any recent rallies have been quickly squashed.

That’s actually good news for those of us looking at agriculture commodities now. You see, they always seem to lag behind the headline-makers like oil.

For instance, the FAO found “nominal food prices doubled between 2002 and 2008. Energy prices, led by crude oil, began rising earlier, in 1999, and have trebled since 2002.”

The chart below shows it all:

As you can see, food prices have seriously lagged energy commodities.

There are a number of reasons for this, but they will catch up. So if oil is going to $200, corn could shoot to $15 to $25 per bushel (currently trading around $4) and still be reasonably valued on a relative basis.

There’s a lot of upside from here and, as you’ll see in a moment, there just isn’t much capacity.

Technology vs. Nature

Farm productivity has improved steadily over the past few hundred years. The world has come a long way since the days when a farmer and his team of oxen were able to cultivate an acre a day.

In the past 60 years, though, farm productivity has grown by leaps and bounds. Since the Green Revolution of the 1950’s (side note: that’s the last time the world was “going to run out of food”) the amount of production per acre has increased sharply. The advent of genetically modified seeds (GMO), development of chemical fertilizers, and introduction of soil sampling and bringing science to the farm has had a tremendous impact on productivity.

Despite all the technological advancement, farming is still a very basic process. Crops still need soil, sun, and water. And one of those important factors is where the problem lies.  

The lack of quality soil can be offset, to a point, with fertilizer. And there’s also the modernization of the still fertile fields of Eastern Europe and Russia, which opens up a bunch of other issues.

As for water, modern irrigation systems can transport water much farther and distribute more efficiently. Granted, water tables are falling and there are other issues, but for now, there’s enough water in most key agriculture areas.

The sun will turn out to be the problem. As we’ve been covering for a long time, the sun is entering the dormant period of the sunspot cycle.

This means generally cooler temperatures, more droughts, and other less-than-ideal farming conditions. We’re just entering the low part of the sun spot cycle and this will mean lower crop yields and higher crop prices.

The relationship of the sun spot cycle to agriculture is not some new-fangled theory though. In his book Financial Astrology, David William’s states, “In 1875, English economist William Stanley Jevons…announced a correlation in the fluctuations in the prices of wheat, barley, oats, beans, peas, vetches, and rye with [the] sunspot cycle.”

The chart below shows the history of sunspot cycles:

We’re clearly in the downtrend and that is not good news for farmers. If you look closely and think historically, you can see a strong correlation with many of the major famines.

Odds Favor “Agtastrophe”

Now, the sunspot cycle isn’t anything new. We’re actually in the 24th sunspot cycle. The world knows it’s coming. The world knows the effects. And the rational person would expect the world to be getting prepared, right?

In fact, the world as a whole isn’t getting prepared at all.

As the chart below reveals, stockpiles are at record lows for wheat, rice, and coarse grains:

This reminds me of Aesop’s fable about the grasshopper and the ants.

Everyone knew winter was coming. The ants toiled away all summer and during the fall harvest season while the grasshopper just lounged around. In the end, the ants had all the food and, through their own benevolence, allowed the grasshopper to eat.

Sound similar? A period of reduced agriculture production is coming. Some investors are putting their money to work. Others are just lounging around chasing other much more fun and exciting hot money trades.

Fear and Greed

The combination of rising demand, low stockpiles, and falling production are creating the very real risk of an imminent “Agtastrophe.” Add in the upside potential of commodities and you’ve got a tremendous investment opportunity.

There’s one other very important factor here though. If and when agriculture commodities start to run up, people will start stockpiling food. That will only exacerbate the supply/demand imbalance. That’s what happened in late 2007 with the Asian rice riots and it’s still happening all around the world. There have been a total of 70 food riots in the past three years.

That’s what makes a strong bull market in agriculture commodities different than others. When it does eventually peak, the run in agriculture will be driven by fear and greed. Those are two forces which by themselves are tremendously profitable for early investors, but are downright explosive when combined.

The big run in agriculture is coming. It may not be this month or next month, but everything is in place. And, quite frankly, it’s tough to imagine a scenario where you won’t regret owning agriculture stocks in the next five years.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Since the bull gold market began in 2001, Gold Drivers Report publisher and Bullion Store proprietor Eric Hommelberg argues that gold has significantly outperformed the Dow in terms of valuations, and as he sees it, the bull run will last at least until the middle of the next decade. The rhythm of this market over the past eight years tells him that $1,000 gold is history, and we can expect the current climb to push the price past the $1,250 mark next spring. In this exclusive Gold Report interview, Eric tells readers why. He also explains that while he prefers the precious metals in physical form, he recommends holding a select set of junior explorers, too—ones with trustworthy, savvy managements and promising drill results.

The Gold Report: The big jumps in the gold price lately have taken a lot of people by surprise. What’s behind these jumps?

Eric Hommelberg: Investors were waiting for a sharp move, anticipating it for weeks, whether up or down. Giant speculative long positions have been taken on versus giant commercial short positions. Something had to give. It was time for a trigger.

Most of the analysts predicted a crash in the gold price due to the extreme commercial short position, arguing that commercial traders know what they are doing and always win. They’re always right so they’ll most probably be right again they say. But as weeks passed, it became clear that some big buyers were waiting just below the $1,000 mark

Again, investors were waiting for a trigger. When the news came out that the Gulf Arabs—along with China, Russia, Japan and France—plan to end dollar dealings for oil, all heck broke loose. The news made it very clear that a new basket of currencies will most likely include gold—as well as the yen, the yuan and the euro. Sure enough, it was very dollar-bearish—and therefore very gold-bullish news. This prompted, of course, a buying spree for gold, which overwhelmed the short players in the short term.

TGR: Not long ago, you aired a fictitious dialog between "GB" (a staunch gold bull and GATA supporter and "MI," a mainstream investor. Through their discussion, you brought up several themes that explained why the price of gold is increasing. One, argued by GATA (the Gold Anti-Trust Action Committee), is the notion that governments have been suppressing the price of gold artificially and that practice has run its course. Another is that a bunch of commercial shorts are coming due. Other themes included the current recession, pending inflation, and the U.S. dollar devaluation. As you look forward, which of these themes do you expect to influence the price of gold the most?

EH: When you look at the big picture, the main driver for gold has always been the U.S. dollar. Look at the long-term charts for both the dollar and gold. You’ll find a major bottom for gold at the same time you’ll find a major top for the dollar around 2001-2002. In 2009, we find ourselves with record high gold prices and a major low for the dollar. So that’s the big picture, dollar down, gold up.

Now the dollar will continue to sink so gold will continue to rise, it’s as simple as that. As we all know, confidence in the U.S. dollar is waning by the day. That’s why countries such as China, India and Russia are demanding a new world reserve currency. There will be a new world reserve currency. Whether it takes five years, 10 years from now, I don’t know. But until something replaces the dollar as a world reserve currency, the dollar will keep going down and gold will keep going up.

TGR: But what about an economic recovery? Wouldn’t that be good for the dollar?

EH: There is a lot of talk about recovery but the simple truth is you can’t have a recovery without people getting back to work. Consumer spending accounts for 75% of GDP, and consumer spending is not going to increase on the back of record high unemployment figures month after month. Housing prices, which are still in decline, aren’t a big help either. The recovery people talk about these days is simply the result of huge stimulus packages thrown at the economy. Sure enough, these stimulus programs are being paid with money the U.S. government doesn’t have. Since they don’t have the money they simply print it. By printing new money the U.S. government is adding more debt to its already exploding debt levels. In fact the U.S. tries to solve its debt problem by issuing even more debt, and this, of course, is not sustainable and drives down confidence. At one point confidence will reach such a critical low that no one wants to own the dollar anymore, the dollar will crash and then we’re not talking about inflation anymore, but about hyperinflation.

TGR: You’ve been among those who say GATA is right about gold prices having been suppressed artificially. In that context, why shouldn’t other governments, in essence, try to bulk up the confidence in the U.S. dollar by keeping a lid on the gold price, at least until the issue of an alternative reserve currency is resolved? It certainly doesn’t help other countries around the world to have hyperinflation in the U.S.

EH: Of course, it’s not in the interest of China or Russia to see the dollar crash because they have so many dollars. On the other hand, they don’t want to go forward with a world reserve currency that no longer has any value. Something needs to be adjusted. They demand that the U.S. do something about its ballooning deficit and the U.S. promises to take care of it. The problem, however, is they can’t. It’s impossible. If you try to run a business with debt growing much faster than income, you know you’re heading into bankruptcy. It’s no different for a nation.

Regarding the manipulation you referenced, the U.S. has been very much involved in suppressing the gold price for more than 30 years. The reason is quite simple—in order to maintain the illusion of a strong dollar they had to keep a lid on the gold price. A sharp rising gold price would set off all kinds of alarm bells which would undermine the dollar’s credibility as a world reserve currency.

Now GATA has done an outstanding job by exposing the gold manipulation scheme by western central banks. After more than 10 years of extensive research, GATA concludes that more than half of all central banks’ gold, which is about 15,000 tons, has been leased/sold into the market. Sure enough, this gold was mobilized in order to stem the rise of gold. Even Alan Greenspan admitted this when he said in his testimony before the U.S. House Banking Committee in 1999 that central banks stand ready to lease gold in increasing quantities should the price rise. Now GATA demonstrates that about 15,000 tons of central bank gold has been mobilized over the years and sold into the market. The problem, however, is that it’s impossible for these central banks to get their leased gold back without catapulting gold prices to new record highs. Are the central banks going to lease their remaining gold reserves in order to stem the rise of gold? Most likely the answer is no, since central banks became net buyers recently for the very first time since 1987. So central bank gold coming to the market is no longer an issue here, something GATA already predicted in 2001—that this would happen in seven to ten years. Without central bank gold hitting the market there’s no way to prevent gold prices to rise in coming years.

TGR: Given the recent run-ups, would you expect a pullback before the price rises again?

EH: I don’t expect a sharp pullback; nothing like the correction last year. That’s not going to happen. Since gold breached the $1,000 mark for the first time in March 2008, the $1,000 area had been a resistance area. It took about five attempts to slash the $1,000 mark. A long-time resistance area becomes a support level once that level has been breached to the upside. That’s exactly what happened a few of weeks ago, when we saw our first weekly close above the $1,000 mark in history. Furthermore we had our highest monthly close ever as well and this marks the beginning of a new up leg. The charts leave no doubt; they point to gold prices of $1250+ within the next six months. When you analyze the long-term charts you’ll notice a pattern of long consolidation phases followed by sharp up moves. The consolidation phases last for about 18 months, the sharp up moves last for about six months, whereby gold can appreciate by 50% or more. We saw it in 2005 when gold just finished an 18-month consolidation period and then it shot up within six months from $430 to $730. That move started with a commercial signal failure, today with record high commercial shorts outstanding we could be on the verge of a commercial signal failure again.

TGR: So, how should investors play this market now?

EH: I wouldn’t try to trade it at all. The risk is to be out of the market, not to be in. I would just sit tight and enjoy the move. When confidence in the dollar is going to collapse, anything can happen to the gold price. It’s no use to predict gold prices of $1,500, $2,000 or $3,000. It’s just a matter of how much the dollar will be devalued. As I pointed out, I think we’re at the beginning of a sharp up move again and going to new record highs.

TGR: You obviously like the safety aspects of physical gold. Can you describe why you prefer that over investing in gold equities?

EH: Physical gold in your hand is the safest investment you could ever think of. Of course, you can go to the stock market and buy ETF gold. For example, you could buy SPDR Gold Trust (ETF) (NYSE:GLD) or other instruments that represent gold. But what happens when a major financial crisis hits, stock markets are closed, banking holidays or whatever? Then what? It will be impossible to withdraw your money. Besides that, there’s a growing distrust against the gold ETFs—do they really own the gold they claim? How could it be that a gold ETF accumulates more than a 1,000 tons of gold without causing a tremendous spike in the gold price? Why is it that no independent audit can be done regarding their supposed gold holdings? Why should we just believe the custodians of the bullion EFTs that are coincidently also the biggest short players in those bullion markets? What happens with the silver ETF ( iShares Silver Trust (ETF) (NYSE:SLV) if JPMorgan goes bust? What happens with GLD if HSBC goes bust? Too many uncertainties here; that’s exactly why more and more investors withdraw their gold ETF holdings and switch to the real metal. A good example, of course, is Greenlight Capital, a $6 billion hedge fund that switched $500 million of investment in GLD to physical gold recently.

TGR: With greater risk, of course, comes higher returns. And aren’t the risks that you outline an extreme? Aren’t there upsides along the way?

EG: Sure. I’m not saying you shouldn’t invest in equities at all. I’m invested in equities myself. The only thing I’m advocating is you should own some physical gold just for the worst case. That’s all.

When you look at gold equities, especially the mining shares, they could provide a good leverage to gold. If gold goes up by 5%, your gold mining shares could go up by 10% or 15%. There’s definitely a leverage there. Especially when it comes to the junior sector, the leverage could be astronomical. So, yes, some of your money should be devoted to equities.

TGR: What percentage of physical gold should be in a portfolio?

EH: That’s very personal. It depends on how much risk you’re willing to take. If you come up to me and you say, "I’m not willing to take any risk at all, nothing. I want to have the safest bet." Then I would say you should invest 100% of your money into physical gold. But if people ask me what I am doing, I’d say half of my money is in the physical metals— about 30% in physical gold, 20% in physical silver. I just split the remaining 50% in half—25% in senior shares and 25% into junior shares. And I spread the juniors’ share among at least 10 different companies.

TGR: So your portfolio is all in precious metals, either physical or equities?

EH: Yes, that’s correct.

TGR: If you’re looking at the juniors—taking more risks but potentially getting greater upside rewards— is this the time to start accumulating juniors?

EH: Let’s go back a bit first. The gold bull market began in 2001; in early 2004, we had a small mania in the junior sector. Juniors that came out with good drilling results back then were rewarded tremendously. Four years later they moved to the exact opposite end of the spectrum to extreme undervaluation. Most of the juniors had been decimated to penny levels, levels not seen since the beginning of the gold bull market. We saw a junior sector so depressed that no one wanted to own junior shares anymore.

Now investing is quite a simple game. You buy equities when stocks are extremely undervalued. You sell when they are extremely overvalued. The pendulum is swinging back and forth all the time. We are now one year further from late 2008, and the junior sector certainly started to recover from its most depressed levels then. Finally the juniors started outperforming gold and we’re seeing most juniors trading at multiples (100% to 500%) of levels seen last year.

So is it a time to get in junior shares? I think, yes, but you have to be careful to pick the high-quality ones because many juniors are not going to survive this dark winter. The problem is money. Most junior business models are simple. They raise money and drill it away, then they raise money again and drill it away again. If they’re lucky, they make a discovery and the stock starts moving up. But generally it takes a lot of money to make a discovery if the junior makes a discovery at all.

TGR: So what do you look for in juniors then? What is important?

EH: First of all, I like to see juniors whose management demonstrates the capability of raising money even during the most difficult periods in our financial history. Furthermore, I would like to see juniors that are producing or on the verge of becoming a producer, because then they can generate their own cash flow and are less dependent on external financings. Last but not least, I would like to see juniors with promising properties, which increases the odds of a significant discovery. If you’re lucky enough to be invested in a junior that makes a big discovery, the reward can be astronomical—which is why I think you should always own a few juniors in your portfolio. But I never have more than 2.5% of my entire portfolio in any one single junior company.

TGR: Could you give us an example of a junior that meets these criteria?

EH: Sure, I think a typical example of what a junior should be concerns Endeavour Silver Corp. (TSX:EDR) (NYSE.A:EXK). What they’ve done over the last five years is really phenomenal; four discoveries in just five years’ time is amazing. In 2004 management turned Endeavour from an exploration company into a producing company overnight. Although they had no money to do it, they did it. They raised the money, became a producer and have reported record high silver production almost every single quarter since then. Besides that, they keep expanding their resource base year after year. Their growth profile is so aggressive that they will most likely become a mid-tier silver producer within the next two years, which will make it an attractive target for the major silver producers. What I like about Endeavour’s management is their transparency. They simply do what they’ve said they would do; that’s what you should demand from management from any junior company.

TGR: Absolutely. Keeping the promises they make. The upside potential would also be limited in companies in that are in politically shaky areas or have managements that aren’t as savvy.

EH: Exactly. If you talk to management of a dozen companies, they will all tell you, "Oh, listen, we’re on the verge of a big discovery." Anyone can tell you anything. They all say that.

And what we have seen in the last couple of years? Only a very few big discoveries. So it’s a matter of faith in management. Even if you’re a geologist yourself, it’s difficult to see the real potential of a company. So in the end, they have to deliver. That’s why I like to see companies go out and start the drilling programs; the results will tell me whether I should buy or not. Drill rigs are the real truth machines.

Many of the juniors that are priced at penny levels are telling shareholders they aren’t going to raise money because they don’t want to dilute their shares. I couldn’t disagree more; an investor wants to see a company go forward. An investor wants to participate in new discoveries. To make new discoveries, you need to drill; in order to drill you need money. But if you aren’t going to raise money to go out for exploration, nothing will happen. I don’t buy into the argument of waiting for better times and higher share prices before raising money. I don’t like it.

TGR: What do you think about new equities that represent a basket of seniors or juniors?

EH: I like the ETF GDX (Market Vectors Gold Miners (NYSE:GDX)), for example, which tracks the HUI (Gold BUGS Index) quite closely; it’s a basket of senior mining companies. Why do I like it? If you’re investing in single companies, you have to follow the company. You worry about management, about their cash position, about trustworthiness, about the political situation where they operate and many other things. But if you invest through an ETF, you’re investing in many companies at the same time and you just know you’re tracking an index. It saves a lot of headaches.

TGR: Any final thoughts you’d like to give our readers?

EH: Yes, most likely you’ll be hearing bearish gold tunes in coming months from the traditional gold institutions, saying that gold’s rise is not justified by its fundamentals and therefore bound to fall. They did so in 2003, they did so in 2005 and now they are at it again. The traditional gold institutions simply don’t appreciate the fact that gold is money and how it has been manipulated over the years. Traditional gold institutions in 2005, with gold prices at $425, were saying that increased gold production would bring down gold prices; that certainly didn’t boost their credibility. Still many analyst quote these very same institutions today for the very same argument— that increased gold production will bring down gold prices in the years ahead. GATA, on the other hand, said in 2001 that gold was going to $850 and that central bank selling wouldn’t be an issue anymore within seven to ten years from then. We find ourselves right in the middle of that projection and gold is trading well above $850 and central bank sales have dried up completely. You are not going to hear these kind of predictions from the traditional gold institutions. No one has been right on the money more than GATA. It’s therefore no wonder that GATA’s credibility is rising fast. To give you an example here, the Chinese sovereign wealth fund ,which manages over $200 billion, has held already three teleconference calls with GATA—they wanted to know what GATA knows. We all know now that China has been accumulating gold for years; we all know now that China wants a new world reserve currency. This, of course, won’t happen overnight, but it’s quite obvious that the U.S. dollar as a world reserve currency is not going to survive. Gold will continue to rise until something new has been put in place on the monetary front and I think we are years away from that. So what I’d say is. "Stick to it and stay the course."

DISCLOSURE: Eric Hommelberg
I personally and/or my family own the following companies mentioned in this interview: Endeavour Silver.

Eric Hommelberg started writing about the gold market in 2002, and is the founder and chief editor of GoldDrivers.com a Caribbean-based gold company. His analyses and commentaries can be found all over the Internet on major gold sites such as The Gold Report (of course) as well as KITCO, Gold-Eagle, Goldseek, 24HGold and LeMetropolecafe. This past June, he signed an exclusive deal with Valcambi Suisse and launched his GoldDrivers Bullion Store—which is the first online retail seller for Valcambi gold that deals with Valcambi Suisse directly.

The only bull market we can compare the current eight year rise in the price of gold to is the ten year rise in the 1970s. The Aden sisters, Mary Anne and Pamela, have extrapolated the future price of gold using the same growth rate as in the ‘70s and applied it to the current bull market and reported their findings in their latest Aden Forecast. They determined that if one were to compare the bull market’s second rise from 1976 to 1980 to the current bull market we could see gold eventually reach $4,100 during the next run-up. They further reported that if one were to take the entire bull market gain in the 1970s at 2,300% and extrapolate it to today’s situation then $5,800 would be the equivalent upside target.

The Adens concluded that “with today’s bull market being far more global in scope compared to the 1970s, we could eventually see these much higher gold price targets realized. This is especially so factoring in that gold’s peak in 1980 at $850 is the equivalent of about $2,400 in current dollars. Gold has not even approached that level yet and the situation is far more serious now than it was then.”

And silver? “Silver is more volatile than gold. It fell more than gold last year, and it has risen more than gold this year (See table below: silver +55% vs. gold +19% YTD). This makes sense because silver is both a precious and a base metal. To foresee silver’s potential compared to gold, look to copper as a guide. Copper is a good barometer because it rises during times of global economic growth. That is, when you see both gold and copper rising together (See table below: gold +19%; copper + 95% YTD), then silver will most likely be stronger than gold… If global growth remains on a positive track, we will continue to see silver outperform gold.” And such is holding true today.

I mentioned in my previous article “Can Gold and Silver Equities Expect +5,000% Returns Again?” that gold and silver stocks realized absolutely amazing gains in the 1970s with several increasing in excess of 50,000% – yes, 50,000%! – as gold skyrocketed in price from $35 to $850 per ounce. And that was gold stocks not the warrants of gold mining/royalty companies that perform dramatically better than their associated stocks (more on the secret of leverage later in the article). So what can we expect in the price of gold and silver equities should we indeed see $4,100, let alone, $5,800 gold prices in the near future?

Well, the stocks of the 22 companies (5 large-cap; 3 mid-cap; 2 small-cap and 12 micro/nano-cap) in our proprietary Gold/Silver Companies with Warrants Index (GCWI) have appreciated by 215% from their 52-week lows in 2008. In addition, the 24+ month duration warrants of those 22 companies (26 in total) in our Precious Metals Warrants Index (PMWI) have already gone up 445%. That is correct: 445%. During the same period gold has gone up 49% from its low of $705. Talk about leverage. That represents a 4.4 times greater increase for such stocks and 9.1 greater increase for their associated warrants. Very impressive!

As the table below shows, the average large cap gold and/or silver mining/royalty company, as represented by the HUI, is up 2.5 times that of gold bullion YTD while the micro/nano cap companies, as represented by the CDNX, are up 5 times that of gold bullion YTD. Carrying that comparison one step further, those gold and silver companies with warrants (GCWI) are up almost 4 times that of gold bullion YTD and their associated warrants (PMWI) up by almost 6 times that of gold bullion YTD. Therein lays the advantage of investing in the shares and/or warrants of gold and silver mining/royalty companies rather than in the bullion itself.
Last Week’s % Performance(1)

All calculations are based on U.S. dollar equivalents
(2) Week ending October 16th, 2009

 (3)HUI is the symbol of the AMEX Gold BUGS Index consisting of a Basket of Unhedged Gold Stocks. It is a modified equal dollar-weighted index of 15 large/mid cap gold mining companies that do not hedge their gold beyond 1.5 years.

(4)GDM is the symbol for the NYSE Arca Gold Miners Index. It is a modified market capitalization weighted index of 31 large/mid/small cap gold and silver mining companies.

(5)CDNX is the symbol for the S&P/TSX Venture Composite Index. It consists of 558 micro- and nano- cap companies of which 44% are engaged in the mining, exploration and/or development of gold and/or silver and other mineral resources and 18% in oil or natural gas pursuits.

(6)CCWI represents the Commodity Companies with Warrants Index. It is an equal dollar-weighted index consisting of 36 commodity-related companies with warrants of at least 24 months duration outstanding trading on the Canadian and U.S. stock exchanges.

(7)CWI represents the Commodity Warrants Index. It is an equal dollar- weighted index consisting of 47 warrants of at least 24 months duration associated with the 36 companies in the CCWI.

(8)GCWI represents the Gold/Silver Companies with Warrants Index. It is an equal dollar-weighted index comprised of the 22 gold and silver mining and royalty companies with warrants in the CCWI.

(9)PMWI represents the Precious Metals Warrants Index. It is an equal dollar-weighted index comprised of the 26 gold and silver warrants, of at least 24 months duration, found in the CWI.

Sources: preciousmetalswarrants.com (warrant and stocks-with-warrants data), oanda.com (exchange rates) and stockcharts.com (index and commodity prices).

The Advantage of Owning Precious Metals Mining/Royalty Stocks instead of the Bullion Itself: Leverage
If gold, for example, were to escalate considerably in price (i.e. to $2,000, $3,000, or even more) in the next few years it would have a significantly positive impact on the profitability of the companies who mine it and the royalty companies that buy it from marginal producers. For example, with gold priced at $1,000/oz., and the cost of production at perhaps $600/oz. the gross profit margin of gold mining companies would be 40.0%. If 2 years from now, however, gold were to increase to $2,000 and the cost of production were to increase by only 20% to $720/oz. then the mining companies’ gross profit margins would have gone up from $400/oz. to $1280/oz. or 220%!

That’s called leverage and historically, in a rising market, the ratio for gold and silver mining/royalty shares vs. physical gold ranges from about 2.5:1 for large-cap gold and silver mining/royalty companies on average to as much as 5:1 for smaller cap gold and silver mining/royalty companies, on average, (currently up 4.4:1 from its 52-week low) and even 10:1 in exceptional circumstances for certain truly outstanding performers. All the more reason to do your due diligence to find and invest in those gold and silver mining and/or royalty companies with the right mix of capable management, strong financing, major resources and geographically and politically well-located properties to reap the major benefits a surge in the future price of gold and silver will present.

The Added Advantage of Owning the Right Warrants of the Right Precious Metals Mining/Royalty Companies: Leverage-on-Leverage
For those who buy the right long-term warrants associated with the right gold and silver mining and/or royalty companies at today’s still undervalued prices, your eventual returns would likely be 1.5 to 3 times greater (currently 1.5:1 YTD for the Precious Metals Warrants Index – PMWI – vs. the Gold/Silver Companies with Warrants Index – GCWI) on average than had you invested in their associated stocks. For companies whose warrant prices go through the roof with extraordinary gains, in and of themselves, or from extremely depressed values, as experienced in 2008, that ratio could represent a ratio as high as 10 times greater than having invested in the metal itself (currently up 9.1:1 from its 52-week low).

Such over-and-above gains are referred to as leverage-on-leverage or doubling-up on the leverage factor. The catch is, however, that you have to know whether or not the warrant associated with the stock you are interested in buying is the right warrant i.e. has a leverage/time value sufficiently high enough to justify its purchase given the anticipated appreciation in the price of the associated stock. For those who don’t have a clue what a warrant is, which companies have them, which have the best values and exactly how to go about buying them check out the Precious Metals Warrants site hyper-linked below.

Conclusion
If gold were, in fact, to increase from its current $1050 or so to $5,800 that would represent an increase of 452%. The current leverage exhibited by the component stocks of the HUI is 2.5:1 vis-à-vis gold. Were that leverage applied to future gold and silver mining/royalty company equity prices it would extrapolate into an average price increase of 1130% for such large-cap stocks.

Applying the current YTD performance of the GCWI, which is out-performing gold bullion by a 3.9:1 margin, one could anticipate an average increase of 1,760% (452×3.9) in the average stock price of gold and silver mining/royalty companies with warrants. The component warrants in the PMWI have out-performed the price of gold by a margin of 5.9 to 1 YTD which would suggest that the average warrant could expect to increase by approximately 2,668% (452×5.9) were gold to escalate to $5800! And that is on average. Indeed, if the trend to date from their 52-week lows were to continue the projected 452% increase in gold would extrapolate into a 1989% (452×4.4) increase in the price of the average precious metals mining/royalty stock and an amazing 4,113% (452×9.1) in the price of the average warrant!

Certain junior mining/royalty companies will hit the mother-lode and experience dramatically greater increases in their stock prices than the average and the leverage-on-leverage benefit of warrants should cause some of the right warrants of the right mining/royalty companies to experience 5,000% or more. So “Does the Adens’ $5,800 Gold Projection Suggests +5,000% Gains in Junior Equities?” In some cases it appears so!

Contact me at Lorimer@preciousmetalswarrants.com with questions and comments. I promise a reply. Don’t be shy – drop me a line or two.
Guest Contributors are welcome – just send me a draft of your proposed article for consideration. That’s how I got started. It is a very enjoyable and stimulating activity.

We have two web sites that we believe will help you make money in these very volatile times.
a) www.PreciousMetalsWarrants.com provides a free one-of-a-kind database (updated weekly) on all commodity-related warrants trading on exchanges in the United States and Canada. PMW also offers a modestly priced subscription service that ranks all warrants according to our proprietary leverage/time calculations at four projected stock price appreciation levels. You can also sign up for a free weekly email highlighting events in the precious metals marketplace and in the wonderful world of warrants in particular. 
b) www.InsidersInsights.com, another modestly priced subscription service, alerts subscribers as to when corporate insiders of a limited number of junior mining and natural resource companies are buying and selling.

Source: www.decisionpoint.com

On that date, I said, “This breakout of a huge triangle is a clear technical buying signal.” I added that the minimum price target of this triangle formation was roughly $1,100. This was well above major resistance in the $1,000 area, thus hinting that another major breakout and buying signal would take place soon.

Well, that’s exactly what happened last week!

Gold Hit 1,059 …
Triggering Another Major Buy Signal

Take a look at the weekly chart below. It gives you a good perspective of how important this breakout to new high ground actually is. As you can see, it signals the end of a medium-term correction that began in March 2008 and the beginning of the next medium-term up trend of a secular bull market that started in 2001.

Source: www.decisionpoint.com

The minimum price target of this huge consolidation pattern is $1,300. And I believe much larger gains are certainly possible.

Also consider this: Four weeks ago the Hulbert Gold Newsletter Sentiment Index (HGNSI) stood at 25.2 percent. Now, four weeks later and gold nearly $100 higher, the HGNSI has actually fallen to as low as 18 percent! A rising market accompanied by a declining number of bulls is a rare development. And it’s clearly bullish.

Longer Term Fundamentals
For Gold Are Very Bullish, Too

There are many fundamental reasons to own gold.

Besides the technical buying signals I’ve given you today, I want to repeat the major fundamental arguments for owning gold:

• As a consequence of the current financial and economic crisis, government debt is going through the roof — not just in the U.S., but all over the world.

• Worldwide central banks are printing money like there is no tomorrow.

• Gold demand is rising due to wealth creation in emerging economies where gold still plays a large role as a store of value.

• Gold demand is even rising in the West as more investors doubt the wisdom of central banks and governments.

• Gold supply is stagnating or even slightly shrinking — despite the metal’s price rise since 2001. This is because it’s getting ever more difficult and expensive to get gold out of the earth.

• Finally, central bankers who were eager to sell government gold at much lower prices a few years ago, are getting increasingly reluctant to keep doing so. Emerging market central banks are even buying.

As long as most of these catalysts for higher gold prices remain in place, I expect the long-term bull market to continue. And much higher highs are very likely.

Best wishes,

Claus Vogt
Money and Markets

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Rogers’ confidence gold will continue to rally stems from a view the U.S. dollar is on its way to losing status as the world’s reserve currency.

"Is it going to happen? Yes," Rogers says. "I don’t like saying it [and] I’m extremely worried about it but we have to deal with the facts. America is not getting better [and] the dollar is going to be replaced just like pound sterling [was]."

Rogers didn’t offer a timetable, and it’s likely gold would exceed $2000 per ounce if the dollar were to lose its reserve status.

Still, "I wouldn’t buy gold today," Rogers says. "I think I’ll make more money in other commodities, which are cheaper," as discussed in more detail here.

My comment: I think you really have to love the leverage the gold stocks have at these levels. If you own a gold stock that is mining gold at $400 per ounce or less and selling it for over a thousand dollars per ounce the math works out rather nicely. One must remember that gold stocks are stocks and if the general stock market goes down then gold stocks usually go down in sympathy. However as the gold mining companies start reporting record cashflow and earnings I think they get revalued upwards. Speculating in gold stocks can be very profitable but it is very difficult separating the wheat from the chaff. the Real Deal Actionable Intelligence Report identifies those gold mining stocks with real prospects and separates out the liars standing next to a hole in the ground. Click here for more information.

John Polomny
The Real Deal

The convergence of an assortment of forces—probably the least compelling of which is jewelry demand and the possible role of gold in oil transactions probably the most powerful—promise to keep driving up the price of gold, according to GoldSeek.com founder and president Peter Spina. Still, in this exclusive Gold Report interview, as the gold price climbs toward $2,000, he suggests that investors might wait for another market rally in mining stocks, take some profits and invest the proceeds to add some physical gold to their portfolios. A year from now, says Peter—who also co-founded GoldForecaster.com—we’ll look back on $1,000 gold as a bargain.

The Gold Report: We’ve seen some big bumps for gold several times this month, with the price nudging the $1,050 mark now. What’s behind the spike?

Peter Spina: There’s a lot of confusion out there now, but the bull market in gold is not about jewelry demand; it’s about money. As gold keeps reaching new record highs, it’s becoming more apparent what’s driving it. The true issue at hand is trust (or lack of it) in the value of paper money—specifically the U.S. dollar. What’s really made this country so strong has been the value of its currency.

We’re seeing a shift away from U.S. dollar reserve assets. The value of the dollar had been primarily driven by demand in its global use, including trade in dollars, specifically, the oil trade. There are growing rumors about shifting some of that oil trade away from the dollar, and at the same time, central banks around the world are diversifying away from it. Combine that with other factors we’re experiencing—trade deficits, internal deficits, the incredible amount of printing of dollars to bail out banks and provide stimulus and so on. It can’t go on.

The U.S. internal deficit is nearing $2 trillion a year and growing, especially in the last year. Now they’re talking about projections from the recent financial bailouts total obligations exceeding $20 trillion. That doesn’t take into account future banking and derivative issues, which are upcoming. Already, we do not have the ability to finance our debt. It requires about 80% of the world’s savings to support our debt habits, and we’re just increasing our debt load so quickly—our appetite for a debt is increasing.

How do we continue to finance this kind of system? This has to play itself out at some point and I believe inflation will be the outcome from all this paper printing via growing monetization of U.S. debt. It will cheapen the debt load, but there will be some severe consequences to pay. The price we’ll pay will be reflected in devaluation of the U.S. dollar along with a degree of influence such power provides. Gold will benefit from this process. As people look for sound money and a safe-haven asset, gold will be the obvious choice.

TGR: Aren’t most governments printing more currency to do some form of stimulus in their own countries, and not just the U.S.?

PS: Yes, they are. Gold is actually moving up in foreign currencies as well as U.S. dollar terms, and we could see a widespread devaluation of paper currencies versus gold. A global paper currency problem really brings gold to the forefront.

TGR: Why didn’t gold take off earlier in the year, when a lot of that activity you described was already taking place? This is not news.

PS: It’s a process. In relative terms, gold is such a tiny market that it commands quite limited attention in the financial world. That’s changing, but it’s a process that takes time. Some heavy accumulation behind the scenes helps support the gold price to this point, but some other factors tended to calm down the price appreciation. Primary among these factors has been general stabilization of this turmoil that engulfed us toward the end of last year and early this year. The mass psychology of the markets has shifted and is actually quite good, all things considered. Removal of the fear factor has driven away tension and stabilized things.

I just think there’s not a broad understanding of the process, which is ongoing. I believe the U.S. dollar is going to really start losing its footing but the stock market is going to continue to stay firm and grow. As the dollar begins losing its value and gets to the point where that may happen very quickly, the situation will change and people should realize quickly what’s going on. The squeeze on the dollar will be reflected in the gold price taking off.

TGR: How high can gold go? Won’t people who aren’t invested in it already going to get minimal return because it’s already spiked up so much?

PS: There are definitely short-term risks after spikes. Gold reached $1,000 a couple of times and then pulled back to the $900 for most of this year. Now, after breaking through $1,000 again, it could rally to $1,100 to $1,300 and then pull back somewhat. That said, same time next year I believe we’ll look back and say, "Wow, $1,000 was cheap; it was a bargain." So $1,500 to $2,000 gold in the next 12 to 18 months seems definitely within sight.

TGR: Do you see a situation where we might use gold as actual currency and actually go back to a gold standard?

PS: Direct use of it, while possible, is not likely. But I believe we’ll be using gold in form or other in trade and/or in backing a new currency. We’ll see central banks holding more gold in attempt to stabilize their currencies. They’ve already shifted from disposing gold on a net basis to accumulating gold to their reserves.

TGR: As you look at the gold sector just in the last year, the spot gold price has gone up 20% to 25% up until these recent bumps. But during that period, the gold equities have doubled, tripled, quadrupled. It’s been amazing. Is the play here in gold the physical or the gold equities?

PS: When you invest in mining stocks you take on a greater degree of risk; for that you are entitled to a greater reward. As we saw last year when the markets collapsed, mining equities dropped quite severely. Valuations on many of the stocks went down 70%, 80%, 90%—so these equities are a lot more volatile and sensitive to general market conditions. There are arguments for and against, but I believe a good portfolio should contain both bullion and mining stocks and, within the mining stocks, include more stable mining equities and some high-risk speculative investment opportunities such as exploration plays. But I believe the mining stocks, the gold stocks, will outperform the metal itself.

TGR: You mentioned that an investor should be looking at fairly stable equities along with some more speculative exploration opportunities. Do you define "stable" as the majors?

PS: Yes, the Goldcorps (TSX:G) (NYSE:GG) and Agnico-Eagles (TSX:AEM) of the world, those that would be classified as senior gold companies, with annualized gold production in the multi-millions of ounces. With a basket of those companies, you can march down to the mid-tiers and the smaller-cap gold stocks for more leverage.

TGR: A couple of years ago, when we had a handful of uranium companies, uranium had a run up, and then suddenly hundreds and hundreds of uranium companies flooded the market. Does that happen any time a mania begins? Are we likely to see the same thing in gold, except that hundreds of gold companies may multiply into thousands? If that happens, how do you decide where to invest?

PS: As the gold prices rise, I think we will see some companies coming in that people should be very careful about investing in. They may do well in the bull market, but when all is said and done, if there’s nothing really behind them, they will be the ones that will go away first. As you know, we saw a bit of a washout last year with the market correction. Some good quality companies took a hit and went under or emerged as somewhat different companies. But there were others that I would never have invested in, kind of moose pasture want-to-be gold investments. When those faded away while the good assets remained, that was good for the market.

TGR: So what would a careful investor look for?

PS: When investing in junior exploration gold and/or silver stocks, I first look at the management, look at their history. A company comprised of solely financial backgrounds who have no mining experience should be an obvious red flag. Junior explorers typically have to go to the capital markets to raise equity to explore and develop a project, so company with a bloated share structure to start off with will have a difficult time building a strong share price as it develops these assets. So in the junior exploration stocks, share structure also is very key.

With any of these small capitalization companies, it is typically about raising money in the public markets. So has the company been capable of obtaining a proper value of their assets for their shareholders? So ask yourself some questions: Are they communicating with the public? It’s a publicly traded company; are they telling their story to the public? That’s very important factor to attract investors and to preserve a small capitalization’s primary key advantage which is share structure

And then, of course, the property. You want to look at various criteria in that respect including geography. I prefer locations in Mexico, Canada and Nevada for mining companies. Grades, environmental location, etc. are all very key investment decision makers.

Also look at the business model. Does the company provide any cash flow or is it expecting any near-term cash flow perhaps because it’s close to production? You don’t want to get into another situation like last year where your business model is entirely dependent on raising capital in the equity markets and the capital markets fall apart. However, that seems to be less of a threat if the gold price continues to rally and new capital sources, interest in the gold sector continues to grow. That would keep investment capital flowing into the sector at an accelerated pace

Those are several of the criteria that I look at. All things considered, you have to be very careful. The best thing an investor can do is to just do your research. Call up the company and speak with them and really get a feel for who’s managing the company. Public filings provide excellent insights into the financial condition and management discussions. The resources available online add other easily accessible data and information.

TGR: Can you give us examples of some junior stocks that meet your criteria?

PS: One is Timberline-Resources Corp. (NYSE/AMEX:TLR) which has a terrific share structure, around 35 million shares. They’re about a year away from gold production in Montana, an underground high-grade gold project. They’re in a 50-50 joint venture with Small Mine Development, Llc (SMD), one of the largest underground mining contractors in the United States – serving clients including Newmont Mining Corp. (NYSE:NEM) and Anglo Gold (NYSE:AU, JSE:ANG, ASX:AGG, LSE:AGD). With Small Mines Development carrying the project to production, Timberline does not require to finance to reach production point, which means their share structure should stay intact. At $1,000 gold, they should be bringing in up to $20 million in pre-tax cash. For a company with about $25 million market cap, that’s quite the value.

Additionally, Timberline is looking at other near-term gold production assets and has two drilling divisions, which I believe pull in around $15 million a year. Drilling margins are not very exciting right now because a lot of exploration activity has been slow to come back from last year’s market correction. Still, I believe we’ll see a nice uptake in the next six to 12 months in exploration and thus drilling services. So that company is definitely of interest.

TGR: Who else is on your radar?

PS: Another would be Gold Resource Corp. (OTCBB:GORO, FSE:GIH), which has several properties in Oaxaca in southern Mexico. They have under 50 million shares, no debt. They have several large shareholders, including management. One of the largest investors is Hochschild Mining (HOC: LSE) and the Tocqueville Gold Fund. Gold Resource Corp. is expected to produce 70,000 ounces of gold in the first year at $100 an ounce production cost at its El Aguila property. That’s very high-grading gold. They’re going to increase that to 110,000-plus ounces in years two,177,000 gold equivalent ounces in year three and onwards. As they encounter more base metals, those will be used as credits against production, so their production costs will go to zero or even go to a negative cost.

A lot more exploration work is needed to define the size of this project because of the significant upside their property remains huge. Right now they have several years of production reserves, and we’ll see how that exploration work pans out.

TGR: How close are they to production?

PS: They’re actually mining the open pit ore right now. They have all permits in hand. From what they’ve said in the recent past, the mill should be completed within a matter of days, weeks. I would expect some sort of initial production to begin this month or next.

TGR: So they meet your criteria of being able to essentially live on their own cash flow, not needing to go to the capital markets.

PS: Exactly. They’re going to be producing an incredible amount of cash flow. If you’re looking at 70,000 ounces with a net $100 an ounce margin in the first year alone, that’s up to $1.50 a share right now in free cash flow. Gold Resource also plans to pay out about a third of their cash in the form of a dividend payment, which could be quite the dividend going forward. That’s definitely a company to consider.

TGR: Any others?

PS: Timmins Gold Corp. (TSX.V:TMM) is another one in Northern Mexico. They’re just starting production in an old open pit gold heap leach operation in Sonora. I believe this class of gold producers will soon see additional attention from investors and larger gold miners looking to grow their reserves and production levels therefore providing more upside. With just over 100 million shares, it’s not as attractive of a share structure, but Timmins is now fully financed and soon producing cash flow with their first gold pour expected in January. They’re looking at 80,000 ounces a year, $400 or so an ounce production cost, and they’re trading around 70 cents a share. They have other prospective projects and some strong investor backing. That looks like a pretty good value to me.

TGR: Great. That’s a pretty good list.

PS: Then there’s a new company, Canada Gold (TSX-V:CI; FSE:T9N; OTCBB:CNGZF). They’re just getting going, actually, and I’m not an investor in the company yet. They have a unique business plan, to build a toll mill facility in northern Peru and work with several thousand plus local small and independent gold miners that don’t currently have an ideal place to have their gold ore milled. The Peruvian government estimates that around 3,000 tons per day of high grade gold is currently being extracted. I would expect this number to swell along with the gold price. These miners have been either loading their pickup trucks with ore and driving roughly 1,400 kilometers for processing at a cost of up to $100 per ton, or using mercury for on-site gold recovery, which is health risk to the artesian miners and a potential environmental biohazard. Inevitably these miners only get a fraction of what they could and should.

So within a year, Canada Gold is looking to open its first toll mill and to cater to these small miners, giving them a higher payout and milling the gold for them so they will no longer need to involve themselves in using mercury for extraction. Starting at 300 tons a day with grades pushing ¾ to 1 ounce a ton average, there is significant cash flow potential. Add mill number two, three and more, Canada Gold could grow into a significant gold operation and they can do this without having to deal with the mining and exploration risks.

That’s definitely an interesting and new story. They have a $4 or $5 million dollar market cap and the several million dollars required to get the first mill going has already been financed, so additional capital needs are minimal Definitely, it’s a good win-win situation, which I think will find good backing from some non-traditional sources, including environmental groups and NGOs.

I try to look for stories like that—unique business models and win-win situations.

TGR: It sounds good, but the value of a mill depends on the ounces it can process, so this one will depend on what these small miners can produce. Where’s the guarantee their production will continue in some meaningful fashion through the life of the mill?

PS: With the price of gold where it is and the fact that these miners bring in on average about three-quarters of an ounce a ton of gold with no mill capacity nearby, the payback period could be within a year. Thus, there shouldn’t be much fear that this won’t progress for some years down the road. Because Canada Gold doesn’t have to spend all kinds of money and time trying to find a deposit and mine it, this puts them in a much lower capex situation to get cash flow going. And at the same time these miners who are spending a day mining and two days extracting gold now will be able to focus strictly on mining.

TGR: So the payback period is a year. Why didn’t someone jump on this earlier?

PS: I’ve been asking myself the same thing. I wish I had an answer. I know one or two private firms that do work like this, but no other public company has gone this route that I am aware of. I believe the business model is going to be quite successful, and from everything I’ve looked at initially, it strikes me as a really good story. They want to build this thing up quite aggressively, to the point where they could be producing half a million ounces annually within two, three or so years down the road. The gold’s there. It’s being processed. I believe their advantage will be in making higher payouts to the locals for their gold and being in a strategic location where a lot of this mining is going on along with all the necessary circuits to process various ore types

TGR: Is the Peruvian government likely to facilitate things for Canada Gold, given the ecological question?

PS: They already have government support and see continued support coming in for these environmental reasons as well as general economic ones.

TGR: So there’s another win in this win-win scenario for Canada Gold.

TGR: Are there any other companies that you’re following?

PS: Otis Gold Corp. (TSX:OOO) has five projects in Idaho and one in Nevada. I just visited their flagship, the Kilgore Gold Project in southeastern Idaho. It’s an old gold property with some old production workings on it from the mid-’90s. A few companies such as Placer Dome, Echo Bay and Pegasus have previously worked it. Over 120,000 feet of drilling has been performed on the property to date. The deposit they’re trying to define with the drilling exploration work that’s ongoing as we speak, is to step out on some historic high-grade gold intercepts in an effort to define a high grade deposit that could be mined by underground mining methodologies . In addition, there is an existing bulk tonnage, open-ended 700,000 ounce gold resource that has significant expansion potential. This could turn out to be a multi-million ounce gold deposit. With a market cap of around $12 million dollars right now, Otis is looking pretty cheap. Their per-ounce gold valuation is in the neighborhood of $12 an ounce with their million ounce or so gold resource. The drilling expansion should continue to bump up those numbers. We’re seeing around $40, $50 an ounce valuation now for this kind of deposit reserves, so they’re looking rather inexpensive to me.

TGR: When will they be able to validate the presence of that high-grade intercept?

PS: The high grade exists. They need to continue to drill it out both the high grade and bulk tonnage targets to build the model better to confirm their ideas of this gold deposit. I think they’re doing a 12,500-foot drill program now and the first results should start coming out soon. This first round will help define the deposit and see if indeed this high-grade gold deposit can be expanded. There are a lot of signals that it has the potential.

Once gold really gets at $1,200, $1,300, $1,500 an ounce and these majors need to replenish reserves, deposits that fit certain criteria—and I believe the Kilgore Project that will be one of them—definitely will become quite attractive. So it’s a good opportunity to still get into some of these junior exploration stocks that have very inexpensive per-ounce valuations. Otis also has a terrific share structure, under 20 million shares. With some exercise of warrants coming up, they should have a couple of million dollars in the bank, so they’re cashed up and have quite a few drill holes coming through soon. That could provide some upside pressure on the stock.

TGR: Sounds like another winner.

PS: It could be. If these exploration stocks hit some high-grade gold, you can see things really take a pop. Especially I love these older gold projects that had work done on them. Back in the mid-’90s a lot of these projects had millions and millions of dollars worth of work done on them. But then the gold price drop made them uneconomical and exploration development budgets were extinguished, so they just sat there. With the gold price making them very economical now, I’d say a lot of good gold projects like that are just waiting to be developed.

TGR: It was in the mid-’90s—1995 to be precise—that you founded GoldSeek.com. What did you see then, when everyone else was looking at the high-tech bubble?

PS: At that time, interest in the gold market related to the imbalance of supply and demand. A declining supply was coming from the major gold-producing countries, specifically South Africa, and demand was well above the supply. Investors perceived the imbalance as a market opportunity. But unfortunately it was too early. Central Bank selling closed a big part of the gap along with gold producer forward selling.

The gold market bottomed out in the late ’90s-early 2000. At that time it was about that opportunity to buy low. Today it’s different. It’s the interest in gold market and gold itself as money that led us to the point we are today. Gold is now finally becoming more and more recognized for historical attribute as money.

TGR: GoldSeek.com is still going strong, and more recently, you’ve also co-founded GoldForecaster.com. Could you tell us a bit about major trends you’re recommending there?

PS: GoldForecaster.com follows the gold markets from a global perspective on a weekly basis. We’re watching the record high gold price around $1,035. If we have some consecutive closes above this, we expect another surge, a wave of demand to take the price a lot higher, so we’re in the view that any pullbacks are excellent buying opportunities.

It looks as if the sub-$1,000 gold phase may be coming to a close, so we’re looking for gold to move up to a much higher range and, in the process, take these mining companies to much higher values. So we see a lot of opportunity in all parts of the gold mining stock sector. As the price gets higher and the bullishness and excitement grow, the smaller caps and the juniors will start getting a lot more interest, too.

TGR: Are we in the mania stage yet?

PS: No, not at all. I believe we’re entering the next phase of this global market, which will bring it more into the mainstream. Right now the average investor still doesn’t own gold. They’re starting to know what’s going on. They know gold is getting to a record price but not exactly fully understand why. The big institutions, the big buyers are just starting to get coming in, but it’s still not a mainstream investment yet. That still may take years—not just months—to develop. The mania stage is still quite a way off.

TGR: Thank you, Peter. Any parting thoughts that you want to give to our readers?

PS: I believe the key here in the gold market is what gold represents, what it has been and that’s honest money and as we see this bull market develop, the reason for it is going to be from investment demand. It’s going to from people looking for stable, honest money and with declining trust and confidence in paper currencies and as they continue to devalue, gold will become one of the choices for investors to preserve wealth.

I think we’ll see some extreme volatility continuing on forward. We saw some examples of that last year and mining stocks will just amplify that. So you have to recognize that there will be some extreme wild swings in this market. Taking profits on the way up and diversifying those profits, I think, is always a great idea. Personally I am more overweight in the mining stocks. My strategy at this time would be to wait for the next significant rally and then start monetizing those profits into physical gold and silver.

DISCLOSURE: Peter Spina
I personally and/or my family own the following companies mentioned in this interview: (partial: Timberline Resources, Gold Resource Corporation, Timmins Gold, Otis Gold).

I personally and/or my family am paid by the following companies mentioned in this interview: (partial: Timberline Resources, Gold Resource Corporation, Timmins Gold, Otis Gold)

Peter Spina’s experience with the precious metals markets dates back to the 1990s, and the GoldSeek.com website he debuted in 1995 now ranks among the top three most popular gold websites globally. When a secular bull market in precious metals was taking shape, Peter established the technically focused subscription newsletter, Gold Seeker Report; early in 2005, he merged it into the more comprehensive GoldForecaster.com service. In addition to the newsletter and websites, Peter frequently appears in the media, including Investor’s Business Daily, Wall Street Journal’s MarketWatch, Reuters and TheStreet.com.

In 2000 when the technology bubble burst and the birth of a new bear market began gold was trading under $300 an ounce. The Federal Reserve Bank, then lead by Alan Greenspan, began to lower interest rates and gold began to rise. Even as the stock market seemed to recover in 2003 gold continued to move higher trading around $400 an ounce. As the housing market boom began gold just kept moving higher and has never stopped. It seems gold was signaling to world that another bubble and bust was in the making. In 2007, when the next great phase or perhaps the second bear campaign was beginning gold traded at just over 1000 an ounce. This metal or so called currency was up over 300 percent since Federal Reserve Chairman Alan Greenspan began lowering the Fed funds rate to 1 percent and giving birth to the housing boom. Could another bubble be in the making? Could this be a repeat of the recent past (2000-2007) as the current Federal Reserve Bank Chairman Ben Bernanke has lowered rates to zero and gold has soared to new all-time highs trading at $1049 an ounce as of the close on October 9th 2009? This time, however, the housing market has not reacted as it did in 2002-2003 and the unemployment picture is much different this time around as well.

Where does the U.S. Dollar fit into this picture? The dollar has steadily declined since the 2000 stock market bust. It is now very close to it’s 2008 low again when oil traded as high as $147 a barrel. Currently oil is traded around $72 a barrel and has been very volatile since it’s recent peak of $89 a barrel. Is it possible that the market is still fighting a deflationary picture? Everywhere we turn we hear about the inflationary scenario being painted in the media. Perhaps the U.S. government and the Federal Reserve bank would actually prefer inflation and are actually trying to create it. If inflation takes over then the Federal Reserve Bank could simply raise interest rates to solve the problem. Can the world survive another dose of the same remedy that Alan Greenspan prescribed in 2001? What if this is not even the same illness?

What if this is a fight against deflation? Japan is still fighting deflation from the late 1980’s. At the peak of the Japanese economy the Nikkei stock market index was trading near 40,000 and today it is at 10,000. It was even lower before the recent global coordinated stimulus plan and has never even retraced 50 percent of what it lost since the late 80’s decline. Please understand that that was 20 years ago since their deflationary economic spiral began. The one thing that probably saved the Japanese people from a much worst personal economic environment was that they had a high savings rate and very low debt. This is something that the people in the United States do not have. They simply have the opposite. They have very little savings and are drowning in debt. On top of that they have a government that tells them to go out and spend too.

So while we hear about the great recovery that is taking place all over the world our friend gold is telling us a different story. Yes, gold could be due for a pullback in the near term as it is getting very crowded with speculators at it’s new all-time trading high price. However, it is signaling the warning signs of something that is not healthy with this new stimulus, bailout, or whatever else you want to title it. Whether it is inflation or deflation that is on the horizon gold is telling us to watch out.

Nicholas Santiago,
Chief Market Strategist
www.InTheMoneyStocks.com

Gold is at an all-time high and the XAU index has recently achieved a new recovery high for the year. Is there a basis for this latest gold and silver stock rally in light of the recent 10-year cycle peak? What would be the justification for it based on the cycles? According to savvy market technician, seasoned chart reader and cycle analyst Clif Droke, the answer is that investors are responding to the 10-year cycle peak by running to the precious metals and its related vehicles by treating them as safe havens. The public’s fear of a dollar collapse is no secret and has reached the saturation point

The XAU Gold Silver Index closed 1.38% higher on Thursday, Oct. 8, at 177.22. The Gold Bugs Index (HUI) was 1.43% higher at 449.61. October gold closed 1.14% higher at $1,056. December silver was 1.80% higher at $17.81. Gold is at an all-time high and the XAU index has recently achieved a new recovery high for the year.

Is there a basis for this latest gold and silver stock rally in light of the recent 10-year cycle peak (as discussed in the interview with The Gold Report in September)? What would be the justification for it based on the cycles? My answer is that investors are responding to the 10-year cycle peak by running to the precious metals and its related vehicles by treating them as safe havens. The public’s fear of a dollar collapse is no secret and has reached the saturation point. According to one recent poll, fully 98% of the public is bearish on the dollar’s prospects going forward. This makes for a crowded trade to be sure, but this extreme in sentiment also can create its own momentum and feed on itself for a while. As we’ve seen in the recent past, fear can become self-fulfilling and while a market move based solely on fear never lasts for long, it can be extremely powerful while it lasts.

Gold, meanwhile, has already reached the $1,040 level, which as mentioned last month as a conservative minimum upside target. In my previous commentary I stated my belief that $1,040-$1,050 would be the upside target for the gold price before the 10-year cycle peaked. It looks increasingly likely that gold will exceed this conservative target and possibly hit the nearest round number benchmark of $1,100 before running into some resistance.

Gold stock internal momentum (GOLDMO) is sufficiently buoyant to allow some (though not all) of the actively traded gold shares to rally. The dominant long-term and intermediate-term momentum indicators (circled) are still in an uptrend, a positive factor for the golds. However, the sub-dominant interim momentum indicator (orange line) isn’t to be snuffed at. It’s currently in a downtrend and this is what’s going to create some cross-currents among the mining shares in the coming days.

We saw a similar configuration in the momentum indicators earlier this summer and it caused us to become selective with our stock picking since some stocks obviously stand to benefit from the rising long-term and interim momentum while other stocks are more responsive to the declining momentum indicator shown here. Of course the question is how to determine which stocks to choose and which to avoid. The answer is *relatively* simple: relative strength. Those stocks which remain above their rising 30-day and 60-day moving averages can be held (a select few can even be purchased from here) while those that are lagging behind and struggling below the 30-day MA should mostly be avoided.

Speaking to the heads of several junior and mid-tier mines recently, I still get a sense that producer sentiment has done a complete about-face from the year-ago period. Mining company leaders have, for the most part, embraced a growing conviction that the gold and silver prices, including base metals, can continue its march higher from here.

Neil McMillan, president and CEO of Claude Resources (TSX-CRJ; NYSE Amex-CGR), believes that the gold price can continue its march higher. His company was prepared for the credit crisis before it descended and McMillan has a strong track record of riding out storms and coming out stronger. His view of the yellow metal price is admittedly sanguine:

"I’m very optimistic about the value of gold to purchasers going forward. I put it in perspective this way as others have done: in 1980, adjusted for inflation, gold got to over $2,000 an ounce under a set of financial circumstances that people considered quite extreme. Back then it was inflation. The inflation rate was very high and people were really concerned it was going higher and they sought out gold as an asset where they could preserve their wealth in that environment. So under those circumstances gold got to over $2,000 an ounce."

McMillan acknowledges that a "different set of financial circumstances [exists] today," but adds that these circumstances "provide far greater risk to investors and savers than we saw in 1980 and gold is still at only $1,000 an ounce." He concludes, "There’s no reason in my view why [gold] won’t continue to increase back through $2,000 an ounce over the next two to three years as people realize that these financial concerns are not going away and in fact may be getting worse. So I think this is a long ways from being over and I’m not convinced we’ll see dramatic changes in the price but I think you can expect a steady march through $1,200 and $1,500 and over the next two to three years, possibly through $2,000 an ounce."

The president and CEO of Bard Ventures Ltd. (TSX.V:CBS), Eugene Beukman, sees a stabilizing global economy as the key for the molybdenum and base metals price recovery. Bard Ventures is a junior mining and exploration company with mineral interests in British Columbia and Ontario, focusing on molybdenum, copper, zinc and silver.

"I think that’s the million-dollar question," he said when asked if the global economic recovery would continue. "I do believe that we’ve actually turned the corner and we’re at the stage where there are a lot more plans coming available for venture capital and exploration. We’ve seen only in the last two to three weeks that some of the large financings that have occurred in the sense that $20 to $70 million bought deals have been announced and completed. So we believe that the whole resource market will be turning and we look forward to a great 2010 and who knows what after that but I believe there’s definitely been a turnaround."

Ross Orr, president and CEO of BacTech Mining. (TSX.V:BM), said he would be happy if the price of gold continued at current levels without rising from here. His company uses bacterial oxidation and bioleaching technologies for separating precious metals from sulphide ores and concentrates for gold mining companies.

Said Orr, "If [the gold price] did nothing from here I would be very happy. I don’t need $2,000 gold. This is perfect. I’m looking at projects where I’ve got production and capital costs and everything all in for say $400 [an ounce]. That is a nice margin. If it goes to $2,000 it’s just anarchy out there. It’s hard enough finding projects now with the price of gold where it is because everybody just sort of pulls everything close to their chest."

He added, "As the price of gold goes up people’s expectations change dramatically. It just becomes more of a greed factor I guess is what it really is. One thing about gold is that it definitely has a mind of its own. I see it has hit a new high again this morning [Oct. 8]. But we haven’t seen that frothiness that we’ve seen in the past. And I don’t know if it’s because the ETFs are involved now or whatever because it seems that maybe the retail guys have just been handed their rear end too many times and finally said, "You know what – forget it! I’ll buy the ETFs instead."

DISCLOSURE: Clif Droke: I personally and/or my family own the following companies mentioned in this commentary: None

I personally and/or my family am paid by the following companies mentioned in this commentary: None

Savvy market technician, seasoned chart reader and cycle analyst Clif Droke is a popular and prolific author. His Gold & Silver Stock Report (published every trading day since 2002) examines daily and weekly technical outlooks on individual stocks and forecasts the near-term outlook for leading indices. In addition to gold and silver, it covers uranium and energy stocks from a short-term technical standpoint. In his Momentum Strategies Report, launched in 1997, Clif shares forecasts and reviews of U.S. equity markets using his proprietary blend of internal momentum indicators, moving averages, various analytical methods and investor sentiment to isolate the best sectors for short- and intermediate-term trading gains. Updated three times a week, Momentum Strategies addresses six major sectors (gold/silver, oil/gas, transportation, financial, REIT and semiconductor/nanotech), in addition to covering real estate, natural resources, money supply and trends in bank credit and the general economy. Also launched in 1997, Clif’s monthly Gold Strategies Review covers gold, U.S. and Canadian precious metals equity markets and mutual funds and other natural resources. He also puts out Silver Strategies Review and Junior Mining Stock Report each month—and more. A frequent contributor to Kitco commentaries and Financial Sense, he has an impressive array of critically acclaimed books to his credit too. They include a variety of how-to volumes (channel busting, parabolic analysis, selling short, chart reading and turnaround trading, to name just a few) and cover topics as diverse as the housing bubble and cattle futures. Visit his website.

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Rick de los Reyes, a metals and mining analyst at T. Rowe Price, believes the gold rally still has a long run ahead of it. Pointing to similar trends observed during the gold rally that started in the late 1970’s, he said gold prices are in the early stages of a transition of being driven more by investment demand than by jewelry demand. Since investment demand is likely to remain strong with the market worried about inflation and investors buying on pullbacks, Reyes sees gold reaching new highs in the long-term.

My comment: As long as the FED and Treasury continue pursuing a low interest rate strategy, which leads to a weaker dollar then gold will continue higher. You will notice that when Australia raised interest rates yesterday that the Australian dollar gained value against the US dollar.

John Polomny
The Real Deal

Consumption, speculation and growing demand by emerging economies add up to a rather rosy outlook for copper, says Steve Parsons, Senior Research Analyst for Wellington West Capital Markets. In this exclusive Gold Report interview, Steve explains how investors might capitalize on a theme that’s picking up momentum on the copper concentrate side of the industry. He also sheds some light on a great copper story that’s unfolding on the northern shore of Lake Superior in northeastern Minnesota, not far from the Ontario border.

The Gold Report: Steve, it’s often said that copper is a great way to play a period of economic growth. Do you agree with that?

Steve Parsons: I absolutely agree. Copper is an essential metal for developing nations. Generally speaking, an increase in GDP/person coincides with an increase in copper usage. The story here is that China and India are still coming from a low base. If you look at where copper usage is in developed nations, it is upwards of 9 kilograms of consumption per person annually. China’s consumption currently weighs in at approximately 3.5 kilograms per person. So China is still at an early stage of development. The move to urbanization should keep upward pressure on copper usage. By 2025, it is projected that China will have 221 cities with a population of more than one million. At present, Europe only has 35.

TGR: Some are saying that $2 will be the new copper floor. What’s your thinking on that?

SP: Deposits are getting deeper and they’re getting lower grade. In certain cases in Chile, whether it’s Escondida or Chuquicamata, the deposits are moving into ores with more impurities, such as arsenic. A general deterioration in the quality of deposits will almost certainly push operating costs higher, in turn helping to underpin a higher copper price.

Although $2 is not unreasonable, we use $1.85 long term—with long term starting in 2014. That $1.85 is actually very conservative, and it’s really a function of currencies too. We’re tying the $1.85 figure to an 85-cent Canadian dollar. To the extent we start using a 90-cent or current FX rates, we’d be closer to $2, if not higher.

If you believe in the Chinese story and if you believe there are going to be 221 cities with a population north of a million, $1.85 copper is likely too conservative.

TGR: You mentioned that a lot of this copper is getting deeper and, thus, more expensive to produce. Do you see a scenario where we are at peak production now and that we face a scarcity of copper as we move forward? Or there’s plenty of copper, but it just costs more to produce?

SP: Of course, it takes a long time to discover a new copper deposit, then get it through permitting and regulatory hurdles. A good example of that is the Ivanhoe Mines Ltd. (NYSE:IVN) Oyu Tolgoi in Mongolia. It’s a fantastic copper deposit, but it’s taking a long time to get into production. So there are some very large copper projects out there. The Chinese are developing a couple of very large copper projects in Peru. I think we have the potential to produce more copper than we are today, but many of those opportunities come with higher operating costs. In many of the cases, they are second-tier assets with lower grades than today’s world-class deposits. You might have higher production, but it will come with certainly higher capex costs and higher operating costs.

TGR: Could you review for our readers the differences in terms of investment opportunities between copper concentrate and the actual metal?

SP: Sure. It is important to make the distinction. At the mine level, copper is produced either in concentrate form or as cathode. Concentrates require further upgrading via smelting and refining, whereas copper cathode can be LME grade at the mine gate.

The opportunity we see—and it’s probably one of the most prominent themes in the copper space—is that in the copper concentrate market specifically, there is too much smelting capacity chasing too little concentrate. Smelting and refining capacity expansions in China, Korea and India have bred stiff competition for dwindling sources of Cu concentrate. We believe that China’s mandate to protect employment requires the country to maintain smelter output, thereby exacerbating the situation. Their decision to keep those smelters open has forced treatment and refining charges—levied by the smelters to the miners—to all-time lows. We don’t see this situation changing at least until 2013.

With TC/RC (treatment charges and refining charges)rates falling and the availability of concentrate and scrap copper limited, we believe smelter groups are likely intensifying their efforts to become fully integrated—that is to acquire interest in mines or development projects with copper concentrate production. Such a move not only keeps the smelter fed, but also supplants third-party concentrates that are currently being processed at low treatment and refining charges. Under the current economic environment, the tactic also has the potential to conveniently deliver assets at a discount to NAV while at the same time negating the adverse effect of low TC/RCs on smelter operating margins. This goes back to a model that was more typical of the 1970s and 1980s, when it wasn’t such an adversarial relationship between the smelters and the miners.

TGR: Do you see this trend of foreign smelters buying copper mining companies continuing for the next year or two? Will it result in the whole industry being consolidated under the umbrellas of a few smelters?

SP: We initially saw the smelter integration theme emerge in late 2007/early 2008, with the acquisitions of Northern Peru Copper Corp., Peru Copper, Monterrico Metals plc and Tyler Resources (all of which are expected to produce copper concentrate) by China Minmetals/ Jiangxi Copper Company Limited (OTCBB: JIXAY), Chinalco (Aluminum Corporation of China Limited (NYSE:ACH), Zijin and Jinchuan (all of which have smelting capacity), respectively. The movement seemed to take a hiatus late last year as surplus conditions emerged bringing visibility for higher TC/RCs. Earlier this year the theme re-emerged in no uncertain terms with Japan’s second-largest copper producer Sumitomo Metal Mining Co. Ltd. (STMNF:US) publicly stating plans to take a stake in at least one copper mine in a bid to gain more control over the source of ore feed, with the ultimate goal of increasing the proportion of internally supplied ore to 70% from the current 40%. The opportunity here as it relates to copper concentrate stories is that in an environment where development assets remain at depressed valuations due to a lack of conventional financing, we believe the emergence of smelter groups as motivated buyers should help alleviate these concerns and ultimately enable a re-rating of company shares.

A few recent data points demonstrate that this theme is taking hold, with the most recent one being the deal between Copper Mountain Mining Corp (TSX:CUM) and Mitsubishi. Mitsubishi acquired a 25% stake at the project level and has agreed to arrange a $250 million project loan. This is a good example of how smelters will help finance mine development, all in an effort to secure a steady supply of copper concentrate.

This is a near-term theme and we believe other deals are probably in the offing. In fact, I wouldn’t be surprised to see more deals come out of the LME Metals Conference in mid-October.

TGR: What are some of other potential plays?

SP: One of the most logical plays that could benefit from the same theme is the Augusta Resource Corporation (NYSE/AMEX:AZC) project—Rosemont in Arizona. It’s one of the largest undeveloped copper stories that has no off-take deal in place. Importantly, the concentrate should be of a very high quality, with a high copper grade and few deleterious elements. Of course, the smelters also want stability of supply, which should be very good in Augusta’s case because it’s coming from the U.S. For these reasons, I’d say smelters probably are vying for the Augusta concentrate.

TGR: Do you see other companies with similar potential?

SP: Taseko Mines Limited (NYSE/AMEX:TGB; TSX:TKO) also the potential to deliver substantial amounts of copper concentrate. They’re looking to get a permitting decision on their very large Prosperity Copper-Gold Project in British Columbia probably by the end of 2009. This is the largest undeveloped copper-gold project in Canada, and Taseko quite likely will look to do a deal similar to Copper Mountain’s—where they get a smelter to earn-in on the project, negotiate an off-take agreement, inject cash and help provide the debt financing.

TGR: So these smelters are essentially taking on specific projects rather than ownership positions in the companies themselves?

SP: I think that’s going to be the case in North America if you look at Augusta, Taseko and Copper Mountain. That’s true in Australia, too, where there is also, in effect, more resource nationalism and the Chinese have come to realize that it actually might be hard to acquire such companies outright. They’re better off approaching it at a project level.

However, the situation in South America is a little different. Various Chinese groups were involved in taking over outright some very large strategic copper assets in Peru—Peru Copper, Northern Peru Copper and Monterrico Metals. I think that possibility still exists in Peru and maybe some other South American countries.

TGR: If the trends you’re seeing continue, with Chinese smelters acquiring either projects or entire companies, won’t the smelters end up dictating copper prices?

SP: I don’t think this will have much impact on the copper price. Certainly the mining companies will have less ability to negotiate cheaper refining charges. Right now they have the smelters over the barrel. They can dictate very, very low terms for treatment and refining—to the point where they run the risk of putting the smelters out of business. These integrations will put the ball back in the smelters’ court to a certain extent, and give them a better chance to negotiate on higher TC/RCs.

TGR: How should individual investors take advantage of this trend?

SP: I think you want to get in on copper development plays, particularly ones that produce copper concentrates, as the offtake contract can be a source of financing. Ideally, you want something that will produce a high-quality copper concentrate and have a mine life of 15-plus years. In addition to Augusta and Taseko, you might look at Norsemont Mining, Inc. (TSX:NOM) and even some newcomers such as Nevada Copper Corp. (TSX:NCU).

I just can’t see this thing stopping. The reason I say you want to play copper development stories is, one, because you’ve got the opportunity to get a bid from a smelter and help you finance a project or they take you outright. Larger cashed-up companies such as HudBay Minerals Inc. (TSX: HBM), Quadra Mining Ltd. (QUA.TSX) , Thompson Creek Metals Co Inc (NYSE:TC; TSX:TCM) and KGHM Polish Copper Ltd. (KGHMF) are all talking about rolling up the mid-cap copper space. But the reality is that there’s very little to roll up, so they’re going to have to look at near-term copper development stories. That means they’re competing with the smelters for the same assets.

There is a logical argument to be made that copper development is the place to be.

TGR: One of the data points you mentioned early on involved Copper Mountain and Mitsubishi. That deal was just finalized in late July. What do you see now that this has been finalized?

VSP: Copper Mountain just completed an equity deal, about $50 million, which quite likely provides full financing through to production. The stock trades about 0.5 times our NAV estimate, which is among the cheapest in our coverage universe. We believe the potential for a re-rating is high. As they start building and get close to production, we would expect Copper Mountain shares to re-rate toward 1.0 times our NAV estimate, which is C$3.00/share.

A while ago we were talking about these cashed-up companies looking to roll up the mid-cap producer space. While there aren’t a lot of companies to acquire, this one is logical target. I think the fact that a couple of weeks ago Taseko put together a proposal to merge the two companies—Taseko and Copper Mountain—lends credence to that view.

TGR: Are you looking at any other copper plays?

SP: PolyMet Mining Corp. (NYSE/AMEX:PLM; TSX:POM) is a story that I haven’t mentioned yet. PolyMet differs slightly from the copper concentrate theme. It’s another topical story that I think would interest investors. It has a development story in Minnesota. Minnesota has been an iron mining state for many, many years, but hasn’t had a commercial non-ferrous operation. We believe that is poised to change and PolyMet’s large NorthMet project could be Minnesota’s first.

PolyMet been involved in permitting activities for several years now, and it would appear that they’re finally down to the fine strokes. The Draft Environmental Impact Statement is expected to be filed in the coming weeks. Getting the Draft EIS prepared and filed is arguably the most critical step in the permitting process. There’s a very good opportunity of being issued final permits within six months of the Draft EIS.

So come 2011, we could see Minnesota’s first non-ferrous mine in what is the third-biggest copper-nickel district in the world after Sudbury and Norilsk Nickel (NASDAQ:NILSY, LSE:MNOD).

TER: Wow!

SP: The district has been known by geologists for many years, but it is relatively new to the investment community. I think that is about to change. You ask, "Where is copper going to come from?" If you look at deposits owned by PolyMet, Duluth Metals Ltd. (TSX:DM), Franconia Minerals Corporation (TSX:FRA) and Teck Cominco Ltd. (NYSE:TCK; TSX:TCK.A; TSX:TCK.B) —which are all in the Duluth Complex—this is among the largest copper/nickel districts in the world that is available for development.

TGR: How close are Duluth and Franconia to getting permitting?

SP: They’re years behind PolyMet, but I believe PolyMet has helped pave the way. Any subsequent studies should be completed at a faster rate, and that should only make Duluth’s and Franconia’s lives a little bit easier. If the final permits are received, as we believe they will be, that will send a strong message that Minnesota is open for business, which in turn should help spur merger and acquisition activity.

TGR: That’s just so amazing that no one’s really talking that much about it.

SP: Very surprising, given that the projects are close to railway, close to power. Moreover, PolyMet is a brownfield development. The company purchased a bulk tonnage taconite mill from Cliffs, so the capex intensity is lower than it would have been otherwise. So the stars are aligning for PolyMet and the other companies in the Duluth Complex. And to top it off, this could materially transform Northern Minnesota economically.

TGR: One of the greatest stories never told. Thanks, Steve, for all of your insights.

DISCLOSURE: Steve Parsons
I personally and/or my family own the following companies mentioned in this interview: None.

Steve Parsons, P.Eng., a member of Wellington West Capital Markets’ equity research team since April of 2008, is a Senior Research Analyst focused on the mining sector. Wellington West is an institutional equities firm that specializes primarily in the mining, energy and technology sectors. After earning his bachelor’s of engineering degree in mining at Queen’s University, Steve worked as a metallurgical engineer for Placer Dome, and then moved on to a metallurgical consulting firm. Shifting to the investment side of the business after that, he signed up as a Research Associate with GMP Securities, concentrating on base metals initially and later joined MGI Securities as a Research Analyst.

Back in the mid- to late 1970’s, as gold went up from its 1972 low of $60 to $850 in 1980 (and silver to $50), gold and silver stocks realized absolutely amazing gains:

·                                 Lion Mines – 1975 price: $0.07 / 1980 price: $380 i.e. an increase of 542,757%!!!

·                                 Azure Resources – 1975 price: $.05 / 1980 price: $109 i.e. an increase of 217,900%!!

·                                 Wharf Resources - 1975 price: $.40 / 1980 price: $560 i.e. an increase of 139,000%!!

·                                 Mineral Resources – 1975 price: $.60 / 1980 price: $415 i.e. an increase of 69,067%!!

·                                 Steep Rock – 1975 price: $.93 / 1980 price: $440 i.e. an increase of 47,212%!!

·                                 Bankeno – 1975 price: $1.25 / 1980 price: $430 i.e. an increase of 34,300%!!

The percentage returns above, averaging 70,627%, seem totally unbelievable but they are verifiable. They were achieved by investing in the right stocks at the right time. Imagine, and the above companies were only a handful of the gold and silver stocks that generated such astounding returns.

To put things in perspective let’s look at it this way. Had an astute investor divided a $10,000 investment equally among the 6 companies mentioned above in 1975 it would have grown to $7,072,700 just 5 years later!  I can’t imagine that ever happening again but that is what actually happened back then. It is absolutely amazing, isn’t it? Even a 10,000% appreciation would have turned that $10,000 into $1 million dollars! Remember, it only takes a few good investment decisions in one’s life to be exceedingly successful and that was such a time.

I know, I know, you think that was then and this is now and increases in excess of 500% let alone 1000% or more would never happen again. Well, that was not the case. Take a look below (chart compliments of Doug Casey’s International Spectator) at what happened to the shares of mining companies during the mini-bull market in gold in 1993-1996. The larger producers did well (+84.2%) but look at what happened to a selected group of juniors during that 3 year period. The returns averaged 1,546.4%!

Will such happen again within the next 5 years? Most likely! In fact, just in the past 12 months the Gold/Silver Companies with Warrants Index (GCWI) of 22 such companies (5 large-cap; 3 mid-cap; 2 small-cap; 12 micro or nano-cap) has already appreciated by 183.7% from its 52-week lows while the 24+ months duration warrants of those companies (26 in total) in our Precious Metals Warrants Index (PMWII) have already gone up 366.2%. That is correct: 366.2%!  And that only represents the first year of major gains.

As seen below the GCWI is up 51.6% YTD and the PMWI is up 73.8% YTD. Yes, the Commodity Companies with Warrants Index (CCWI) and Commodity Warrants Index (CWI) are up by even greater amounts (85.5% and 153.7% respectively) but these indices also include other mining companies (8), oil and gas companies (2), merchant banks (3) and 1 mutual fund with one or more warrants each (47 in total).

Last Week’s % Performance(1)

All calculations are based on U.S. dollar equivalents

(2) Week ending October 2nd, 2009

(3)HUI is the symbol of the AMEX Gold BUGS Index consisting of a Basket of Unhedged Gold Stocks. It is a modified equal dollar-weighted index of 15 large/mid cap gold mining companies that do not hedge their gold beyond 1.5 years.

(4)GDM is the symbol for the NYSE Arca Gold Miners Index. It is a modified market capitalization weighted index of 31 large/mid/small cap gold and silver mining companies.

(5)CDNX is the symbol for the S&P/TSX Venture Composite Index. It consists of 558 micro and nano cap companies of which 44% are engaged in the mining, exploration and/or development of gold and/or silver and other mineral resources and 18% in oil or natural gas pursuits.

(6)CCWI represents the Commodity Companies with Warrants Index. It is an equal dollar-weighted index consisting of 36 commodity-related companies with warrants of at least 24 months duration outstanding trading on the Canadian and U.S. stock exchanges.

(7)CWI represents the Commodity Warrants Index. It is an equal dollar- weighted index consisting of 47 warrants of at least 24 months duration associated with the 36 companies in the CCWI.

(8)PMWI represents the Precious Metals Warrants Index. It is an equal dollar-weighted index comprised of the 26 gold and silver warrants, of at least a 24 months duration, found in the CWI.

(9)GCWI represents the Gold/Silver Companies with Warrants Index. It is an equal dollar-weighted index comprised of the 22 gold and silver mining and royalty companies with warrants in the CCWI.

Sources: preciousmetalswarrants.com (warrant and stocks-with-warrants data), oanda.com (exchange rates) and stockcharts.com (index and commodity prices).

Are you are of the opinion that the U.S. dollar is going to continue to weaken against other currencies? Are you of the opinion that we are going to have significant inflation in the next few years? If so, then we are going to see gold and silver doubling or tripling in price as a result. As such, it is imperative that you invest in either the stocks of the companies that mine the gold and silver and/or in the royalty companies that buy the gold and silver from mining companies at predetermined fixed prices. Better yet, much better in fact, is that, wherever possible, you should purchase certain of the long-term warrants offered by some of the gold and silver mining and royalty companies as a means of realizing your +5,000% returns.

Why Buy Gold and/or Silver Mining/Royalty Stocks instead of Physical Gold or Silver?  To Double Your Returns – or Possibly More!

If gold, for example, were to escalate considerably in price (i.e. to $2,000, $3,000, or even more) in the next few years it would have a significantly positive impact on the profitability of the companies who mine it and the royalty companies that buy it from marginal producers. For example, with gold priced at $1,000/oz., and the cost of production at perhaps $600/oz. the gross profit margin of gold mining companies would be 40.0%. If 2 years from now, however, gold were to increase to $2,000 and the cost of production were to increase by only 20% to  $720/oz. then the mining companies’ gross profit margins would have gone up from $400/oz. to $1280/oz. or 220%!

That’s called leverage and historically, in a rising market, the ratio for gold and silver mining/royalty shares vs. physical gold ranges from about 2.5:1 for large-cap companies (currently 2.6:1 YTD for HUI companies according to the table above) on average to as much as 6:1 for gold and silver mining/royalty companies (currently 3.9:1 YTD according to the Gold/Silver Companies with Warrants Index), on average and even 10:1 in exceptional circumstances for certain truly outstanding performers. All the more reason for you to do your due diligence to find and invest in those gold and silver mining and/or royalty companies with the right mix of capable management, strong financing, major resources and geographically and politically well-located properties and reap the major benefits of such a surge in the future price of gold and silver.

Why Buy the Warrants instead of the Stock of Certain Gold/Silver Mining and Royalty Companies? To Further Double Your Returns – or More!

For those of you who are prudent enough to do your homework and buy the right long-term warrants associated with the right gold and silver mining and/or royalty companies at today’s undervalued prices, your eventual returns would likely be 1.5 to 3 times greater (currently 1.4:1 YTD for the Precious Metals Warrants Index vs. the Gold/Silver with Warrants Index) on average than had you invested in their associated stocks. For companies whose stock prices go through the roof with monster gains that ratio could even be as high as 5:1.

That’s referred to as leverage-on-leverage or doubling-up on the leverage factor. The catch is, however, that you have to know whether or not the warrant associated with the stock you are interested in buying is the right warrant i.e. has a leverage/time value sufficiently high enough to justify its purchase given the anticipated appreciation in the price of the associated stock. For those who don’t have a clue what a warrant is, which companies have them, which have the best values, exactly how to go about buying them and which on-line brokers are sufficiently knowledgeable and capable of placing American, European, Australian and Asian orders (there are no problems for Canadians placing such orders with their brokers as most such securities are traded on their TSX or TSX Venture exchanges) check out the PreciousMetalsWarrants site below.

Can Gold and Silver Equities Expect +5,000% Returns Once Again?

Using the above ratios the answer is: “Yes they can!”  True, not all such companies with reap such returns but a few of the well chosen ones will once again see returns that most gold bugs dream about. All it is going to take is an environment in which some combination of a declining U.S. dollar, rampant inflation (or fear thereof), high interest rates, ongoing financial instability, further economic turmoil and occasional acts of terrorism come together to interact with high gold and silver prices and some trading mania. We are moving in that direction right across the board so it is just a matter of time.

We are in the eye of the storm and when the other side of the vortex engulfs us gold and silver will increase considerably, their associated stocks will go up substantially and their warrants, where available, will escalate dramatically. Those mega returns can be yours in the future if you start today to prepare for that day.

To my readers:

Contact me at Lorimer@preciousmetalswarrants.com with questions and comments. I promise a reply. Don’t be shy – drop me a line or two.

Guest Contributors are welcome – just send me a draft of your proposed article for consideration. That’s how I got started. It is a very enjoyable and stimulating activity. I will be speaking at the World MoneyShow in Toronto in October. If you attend please introduce yourself.

We have two web sites that we believe will help you make money in these very volatile times.

a) www.PreciousMetalsWarrants.com provides a free one-of-a-kind database (updated weekly) on all commodity-related warrants trading on exchanges in the United States and Canada. PMW also offers a modestly priced subscription service that ranks all warrants according to our proprietary leverage/time calculations at four projected stock price appreciation levels. You can also sign up for a free weekly email highlighting events in the precious metals marketplace and in the wonderful world of warrants in particular.

b) www.InsidersInsights.com, another modestly priced subscription service, alerts subscribers as to when corporate insiders of a limited number of junior mining and natural resource companies are buying and selling.

Thanks for the read.  – Lorimer.

Last Friday the folks at Fox Business News invited your editor on to talk about gold (view clip here – I come on at about the 21 minute mark).

If you watch the video, it won’t take long to see Fox Business probably won’t be having me back on
anytime soon.

The reason I won’t be back is not because I did a terrible job or anything like that. It’s because of something else. It’s because of something 99% of investors don’t know, but if they did, most of them would instantly become better investors and, in this case, reveal to them exactly how to maximize their gains from the ongoing gold bull market. Let me explain.

The Truth about TV

The media industry is different than any other.

Media companies are simple businesses. They make money by keeping viewers tuned in. They provide the information the masses want, whether that is good information at the right time or not. That’s why they chase after “hot” news stories just like most investors. It’s more exciting. It’s more fun.

That’s why with gold passing $1,000 an ounce and holding up, the herd wants more information about gold. They want predictions. They want to hear someone say gold is going to $500 or someone who’s going to say gold’s going to $5,000. And from the media company’s perspective, the more outlandish the prediction the better (outlandish = entertaining/interesting = viewers staying tuned).

Why I Won’t Be Back

Take my Fox Business spot about gold for instance. We went over what are the potential prices of gold, the different ways to value it, and the key things that need to happen before gold prices take the next big step forward.

The general tone of everything was the big run in gold is going to take a lot longer than most folks expect.

The U.S. dollar has been the world’s reserve currency for decades and it’s not going to unwind in a year or two.

Also, there still needs to be a shift in most investors’ perspective towards gold. Although gold has gotten quite a few headlines over the past year, it’s still far from a “mainstream” investment. When most investors think safety, they think of large-cap stocks like Wal-Mart, GE, and IBM. Not hard assets like gold, silver, and oil. Although the hard asset camp is certainly growing, it’s still very small compared relative to the large-cap stock camp.

All that leads into the real reason I probably won’t be back anytime soon: because I’m boring.

Most mainstream investors don’t want to hear about the best opportunities in gold (more on them below). They just want to hear some predictions, a two minute “elevator pitch” on why they should buy gold, and then buy the major gold stocks or some gold or gold related ETF. Meanwhile, they’ll gloss right over the safest and highest potential opportunities in the gold sector and get the timing completely wrong on top of it all. That, again, is why most investors are not successful even though this market environment is potentially the most lucrative in the world..

When to Buy Gold Stocks

A few months ago we looked at the three stages of market sentiment. After all, if you pay close attention to sentiment, you can significantly increase your upside potential and reduce your risk. You’ll achieve that by focusing on the micro-cycles within the long-run bull cycles.

Just like in the long-run gold bull market, there are three stages in the shorter cycles as well. For instance, back in July we identified how the temporary dip in gold stocks was a great time to buy as gold was entering the three stages.

From the Prosperity Dispatch, July 10 2009:

Stage 1:We went through the first stage about a month ago. At the time gold was in all the headlines, hedge fund manager John Paulson was buying gold, his move made gold “cool” again. Gold was hot and a “this will be the last opportunity to buy gold stocks” mentality was taking hold. As usual, the euphoria didn’t last.

Stage 2: This is the period when commentators start focusing on the long-term case for gold. They start saying things like “gold is going to take a while” and “if you’re going to buy gold, you better be in for the long term.” We looked at gold the same way, but we were doing it throughout the first stage and looked into how Paulson’s trades, although very profitable, usually take a couple of years to play out.

Stage 3: This is when Gold stocks fall out of favor, deflation fears dominate, and Wall Street moves onto another hot sector. And it’s the third stage which is the time to buy.

September 29, 2009:

Stage 1: Earlier this month gold climbed past $1,000 an ounce and kept going. There was a real urgency to buying gold before it runs much, much higher. The herd was chasing after it. Goldseek.com, one of the most popular gold web sites in the world, set a new traffic record.

Stage 2: All signs point to us being in the latter parts of the second stage. Most pundits have calmed down a bit and started focusing on the long-term and the fundamentals for gold (which we always try to do), gold prices have corrected, and there are even a few analysts advising to get out of gold.

For example, the National Bank of Canada, which has been bullish on gold since 2005, has recently changed course on gold earlier this week. The National Bank’s Matthieu Arseneu said, “In our opinion, all the factors that contributed to the recent upswing in the price of gold are set to reverse.”

This type of call (from a major bank no less) does not happen in the euphoric Stage 1.

Stage 3: Gold’s out of favor. There are no more headlines. Wall Street has moved on. Right now, with your editor on Fox Business to talk about gold, we’re not quite in this stage yet. But it’s not far away.

Finding good entry points and tracking sentiment are just part of the equation when investing in gold successfully. An equally big part is what stocks to buy.

Stepping Over Dollars to Pick Up Nickels

Still, despite the recent run-up in gold and lots of big money chasing after the major gold mining stocks, there are still exceptional values in the junior gold stocks.

For instance, the chart below tracks gold, major gold stocks (XAU), the Dow, and the McEwen Junior Gold Index:

Clearly, the “juniors” are still the best value in gold stocks around. Going back to 2007, gold’s up almost 50%, major gold miners are up 10%, and junior gold miners are down 40%.

So whether you’re looking to time your entry points, use market sentiment to your favor, or just get the most bang for your buck in the gold bull market, take a look at what’s actually going on in the market.

The media may be entertaining, interesting (as long as it’s not your editor featured), and somewhat useful if you know why they do what they do, but it’s not going to make you a more successful investor.

That will come from taking a step back, paying attention to market sentiment, and looking for the most undervalued opportunities which offer the best risk/reward propositions.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

One of these days, pent-up demand for new cars and growing concern about the carbon footprint associated with driving vehicles powered by traditional internal combustion engines will fuel tremendous demand for lithium, a development sure to spark greater investor interest, as well. A staple in batteries for hybrids and all-electric vehicles on the road and on the drawing boards, lithium is becoming a darling among hot commodities. As one of the few of his ilk on the planet, Jon Hykawy is also in considerable demand these days. The Gold Report caught up with Jon in Buenos Aires, where he—as Byron Capital Markets’ recently appointed lithium analyst—is checking out facilities in Argentina, the world’s second-largest (behind Chile) lithium-producing country, to talk about his favorite subject.

The Gold Report: You’ve indicated strong demand ahead for lithium ion batteries, anticipating a 40% increase by 2014 and suggesting good return-on-investment opportunities in lithium companies. To what extent does the demand for batteries that underlies those expectations rely on an economic recovery?

Jon Hykawy: Due to the downturn’s global hits on demand for all metals, no question; and that forecast depends on some sort of economic recovery. But the recovery we’ve built into our model is actually fairly—and perhaps somewhat surprisingly—slow. We don’t see the economy getting back to historic levels of growth in consumer electronics or in battery demand, for that matter, for at least two years, probably not until about 2012. Yet lithium demand and lithium battery growth will increase in much the same way as they have since 1999 or 2000. Part of that demand is predicated on continued growth in sectors where the lithium battery has almost fully penetrated, such as cell phones and laptops. Part of it is continuing cost reductions that are driving lithium batteries into new areas.

TGR: What are some of those areas?

JH: Demand for nickel-metal hydride (NiMH) batteries for items such as power tools will disappear as lithium battery prices continue to fall and start to rival prices for smaller NiMH battery packs. Very few analysts have built that into their lithium demand models to date. It’s going to be interesting to see the growth curve over the next two, three to five years.

TGR: Do you see any potential breakthroughs in battery technology that could affect the demand for lithium the same way lithium is affecting NiMH batteries?

JH: Certainly chemistries are under development that could be positive for lithium. Various groups are investigating the use of lithium vanadium phosphate batteries or lithium vanadium fluorophosphate batteries. Their advantages over current chemistries are greater safety and much longer operating lives, which might be very, very interesting for automotive batteries. But these are out a number of years.

On the flip side, things that could damage lithium demand—we know of a couple of companies that are doing a fair bit of research into NiMH batteries, specifically into the powders used in those batteries. They could certainly take a significant chunk out of demand for conventional NiMH powders in NiMH batteries because their chemistries are cheaper to produce and actually slightly more efficient in terms of the battery that they can create. But the companies themselves would by no means claim that they can beat lithium ion at its own game, so lithium ion demand shouldn’t be impacted.

The only other thing I’ve seen that’s credible for automotive use, for instance—certainly not for handhelds—are some of the molten salt batteries or sodium-sulfur type chemistries, or some other similar things that have been proposed. They have a very long operating life, long enough to have the game won over lithium in that regard. Although not nearly as good as lithium, they also have reasonably good energy density and power density. The problem is that they have to run at several hundred degrees, creating both infrastructure and safety issues.

I know people are working on lightweight lead-acid versions and various other chemistries. I wish them all the luck in the world, but I don’t think they’ll be able to do anything to blunt the scale or the pace of lithium battery development. So, no, I don’t see anything in the immediate future with the potential to really push lithium ion out of the game.

TGR: So the battle for batteries in the current marketplace is between lithium ion and nickel-metal hydride?

JH: Yes, and the decision has kind of come out in lithium ion’s favor simply because it can put out so much more energy. Basically you get operating lifetime per charge out of the battery, and now it can also put out the power. The one area in which nicad (nickel-cadmium) or NiMH was once better was an abundance of power; so, in the past, the ability to turn a screw into hardwood with a power drill or accelerate an electric vehicle favored NiMH. But that’s no longer true. Lithium’s development has been so rapid that its specific power—the amount of power that you can draw out of the battery of a given size and weight—has now overtaken NiMH.

TGR: What about the electronics space?

JH: Portable game-playing devices would be a good example. Circa 2000, Nintendo would have shipped the Game Boy Advance without batteries. It would have come with slots where you plugged in either your own rechargeable AA batteries or regular alkaline batteries. The new Nintendo DSi comes with a rechargeable lithium ion battery. Until recently, it would have been too expensive to include it with the device, but it’s dropped to a feasible price point now. And frankly, NiMH was never there in terms of its performance. It simply couldn’t deliver an experience that would make Nintendo happy.

TGR: Is the electronics arena where you see future growth coming from as well?

JH: Since 2000, though we’ve seen about 30,000 or 40,000 tons a year of additional demand arise for lithium, most of it coming out of nowhere in terms of these consumer batteries. And that demand continues to grow, so lithium is in substantial demand. The price has gone up as a result, and we continue to see that kind of growth.

Lithium is also used in glass production, basically to drive down the melting point of glass and keep energy costs low.

We believe future growth will continue to come from a combination of theft of market share from some of the other rechargeable chemistries and encroachment into new areas where the lithium ion battery hasn’t been before. It’s entirely possible that we’ll see lithium ion batteries become the batteries of choice for starting and lighting in the automotive industry, for instance, but price points have to drop considerably before that happens.

TGR: Will lithium-oriented batteries play a role in alternative energy technologies?

JH: Not a huge role. We don’t factor that into our model for lithium growth at all. I am a big believer in the space generally, but existing small-cell battery technologies such as lead-acid have been disproven already and actually have come to be hated in the alternative energy industry. A number of large-scale lead-acid power-storage experiments were economic disasters for the companies that tried them. Lithium is likely to fall in the same camp.

TGR: What’s the problem in those situations?

JH: When you move up to the scale required of large alternative energy projects such as wind farms, when you pile that many of them together, even lithium ion batteries have an unacceptable failure rate on an individual cell basis. After a period of time, you end up with a stream of technicians running in and out of the storage facility just carrying batteries. It’s not a pretty picture.

TGR: And there is a global abundance of lithium on the supply side to meet the demand you foresee?

JH: There absolutely is a huge abundance of lithium. It is about as common in the earth’s crust as nickel or lead. But on a global basis, the question is never whether there is a ready supply or an abundance; it’s whether the supply is economically viable. There are huge quantities of lithium available in the ocean too, but it’s extremely dilute and its chemical similarity to the huge quantity of magnesium that’s also in the water is another issue. Getting to the lithium supply economically at a price point similar to today’s is even trickier. So while lithium may be plentiful, there is not a huge abundance of places on earth where you can get inexpensive lithium. That’s really the question to concentrate on.

TGR: Where would an investor track the price of lithium?

JH: That is a tough one. The market really is dominated today by four very large chemical company players, to which lithium is somewhat an afterthought. They tend to sell to only a few buyers who basically phone them and set up contracts. We track the price of lithium either by calling these companies ourselves and asking about the short-term delivery cost for a ton of lithium carbonate or relying on Industrial Minerals magazine. It has fairly good coverage of the lithium space and puts out reasonable numbers gleaned from those buyers on longer-term contracts.

TGR: So, it’s similar to uranium before uranium started trading on the futures exchange.

JH: It really is. It’s a relatively small market controlled by very few players. You certainly can’t trade contracts or anything like that in lithium, so it’s tougher to watch. Since SQM (NYSE:SQM) drove a lot of the hard rock players out of the market in the 2001–2002 timeframe, the price has marched up steadily. We have seen prices go to the range of $6,500–$6,600 per metric ton of lithium carbonate equivalent. It has plateaued a bit through this downturn, but I fully expect the price to climb again.

TGR: Where can an investor look at the price trends?

JH: The U.S. Geological Survey is actually the easiest place to check. I believe the price was about $3,500 per ton in the late ’90s. When it hit about $4,000, spodumene producers started to make inroads into the market because that price made them economically viable. SQM flooded the market with lithium and drove the price down to about $1,400, taking a lot of the spodumene players out of the game. The only one left standing at the end of the day was Talison Minerals Pty Ltd. in Australia because they had tantalum to tide them over. The price climbed from the 2000–2001 low point at that time to as high as $7,000, and then leveled off to about $6,500 through this downturn. It remains near historical high levels.

TGR: What’s driving the price of lithium up if there’s enough production to match demand?

JH: Good point. The lithium is out there and available. The problem is the big producers today are not producing it as their sole product. For instance, lithium probably drives only 7% or 8% of SQM’s revenues. Their primary product is potash. Secondly, the largest producers in the world—SQM (NYSE:SQM), FMC Lithium, which is part of FMC Lithium Corporation (NYSE:FMC) and Chemetall Lithium, which is part of Rockwood Holdings Inc (NYSE:ROC) —by and large draw from aquifers, from brines, to produce the lithium. If you pull too much water out of the aquifer too fast, you run the risk of depleting it completely or diluting it substantially and damaging not only lithium production, but also potash.

TGR: What’s the investor opportunity in lithium if the majors treat it as an afterthought?

JH: We believe the best way to play the market is to buy a good basket of juniors that are exploring for lithium. It’s traditionally the juniors that go out and find it and either become major players themselves or get acquired by players already in the market.

TGR: Brine extraction is today’s low-cost production technology for lithium, but aren’t these juniors looking at a different type of extraction?

JH: Yes and no. Brine certainly is, by and large, the lowest-cost way to go, though investors have to watch out for some things. The first cut for wheat from chaff is the magnesium-to-lithium ratios in brines. For every integer point increase in that ratio, add $180 to $200 of cost per ton. That puts the economically viable point for brine these days at a ratio of about 11:1 or 12:1. If you see anything much higher than that, run; there’s no point in looking at it. Anything close to that actually gets to be economically scary because certainly we could have downturns in pricing.

A lot of the juniors are looking in places with good magnesium-to-lithium ratios, good concentrations of lithium in the brine, good evaporation rates so that production is relatively quick and good hydrogeology so they can actually pump enough water out of the ground to reach reasonable annual production levels.

TGR: Are there any particular juniors you’re watching in that space?

JH: We’ve generally been counseling investors to look at primarily two things first. We believe the big drivers in this market are going to be cost and time to market. You keep the cost as low as possible because that gives you the best opportunity in any market. The companies that can get into production and be in the marketplace quickly are likely the ones to benefit the most in the lithium space. That tends to point to good companies that are exploring and looking at brines.

There are several good examples of companies doing what I described. You’ve probably seen stories recently about Lithium One Inc. (TSX.V:LI) acquiring good properties on Salar de Hombre Muerto in Argentina. The area has historically good chemistries in terms of that magnesium-lithium ratio. Grab sampling on these sites indicates good lithium concentrations. That’s the kind of property that is available if you look for it.

Amerpro Resources Inc. (TSX.V:AMP.A) and Rodinia Minerals Ltd. (TSX.V:RM) would be two other examples. They’re looking in Nevada near the old Foote Minerals operation, which Chemetall now owns and has been operating for a number of years. Those brines have historically had extremely good chemistries; they’ve produced in the range of 5,000–10,000 tons per year for decades. Interestingly, the brines in Nevada are more suited to producing lithium and not really economically viable potash.

You obviously never know until you drill, but you’d expect them to be of similar quality for lithium for Amerpro and Rodinia. And of course Nevada is politically stable; it’s a good part of the world with a good record with mining and no land claim issues outstanding. You know what you’re getting into.

Similarly, we like stories such as Orocobre Limited (ASX:ORE) and Lithium Americas Corp. that operate in Argentina. Lithium One’s new property on Salar de Hombre Muerto, just down the road from FMC’s great lithium-producing area, isn’t the size of some of the others that are in the media more extensively (such as Salar de Uyun in Bolivia or Salar de Atacama in Chile), but it is regarded as one of the prime properties on earth because of its chemistry, its history and its hydrogeology.

TGR: And Orocobre?

JH: Orocobre has properties on the Salar de Cauchari and Salar de Olaroz in Argentina, and politically Argentina’s stands head and shoulders above some other jurisdictions Again, a good project, a very good area, very accessible. And from what I’ve seen, hands down, Orocobre may have the most knowledgeable management team I’ve run across.

Of the juniors in Argentina that are at the exploration stage, they’re ahead of everyone else. They are test-pulling brine out of their deposit and have evaporation ponds up and running. I’ve seen them in action. They aren’t full-scale yet, but everyone else is just starting to do their drills and their characterization if they’re lucky. Orocobre has done all of that. If everything works out in terms of the chemistry, they could be one of the early players into production.

It’s relatively north of some of the other salars. Good access, probably only an hour or so from major highways, so transport issues are relatively minimal. That’s a huge benefit, because some of the other salars are very remote.

Lithium Americas also is on Cauchari, Olaroz and several other salars. Again, a very good group. All of these companies seem to have very tight, very good management teams, which is also critical because you want to get these projects into production.

TGR: Any others?

JH: A couple of other names I should highlight are New World Resources (TSX.V:NW) and Western Lithium Corp. (TSX.V:WLC). New World has properties in Bolivia. Everybody is excited about Bolivia because it is the Saudi Arabia of lithium with Salar de Uyun. There are issues with de Uyun, chemical as well as political. It has very high levels of magnesium. As I explained, if the magnesium-lithium ratio is sort of 10:1 or better, you still might have something that’s economic—but barely. In large portions of de Uyun, the ratio is 30:1—very difficult to be economical. New World also has property that I believe is south of de Uyun, on Salar de Pastos Grandes. The area they’re in has extremely good magnesium-to-lithium ratios. Again, others have explored the area; the hydrogeology looks right. We won’t know until drill holes and wells are in, but things look good, and the land claim they’re on is private. The government has never stepped on private land claims in Bolivia. The management team there already has a good relationship with COMIBOL, the state-owned mining authority. John Lando, New World’s president, and Joan McCorquodale, its Exploration VP, have worked in Bolivia for extended periods. They know the land, the people and what they need to do to get into production. So that’s another story we like.

TGR: How about Western Lithium?

JH: For scale and political stability, we like the clays and we like Western Lithium. If their process proves out, they should be able to produce a fair amount of potash along with the lithium, which will keep their relative costs down. If they’re lucky and hit an absolute home run, they may even be able to produce hydrofluoric acid, which would be a cash cow for them. That’s a bit "iffier" but they have a huge resource. They can scale up without damaging that reserve because it’s basically open-pit mining. And they’re in the United States (Kings Valley in northern Nevada). Everybody recognizes the value in producing in a politically stable jurisdiction, even if it does cost a little bit more. So, we like WLC; it’s a good story.

TGR: Any other suggestions?

JH: In general, you need to look at the viability of the project, the viability of the management team and diversification. Don’t put all your eggs in one basket, because there’s always a chance that even if it’s on a great property in an area that’s historically been wonderful, a company could be an unlucky one that finds itself drilling into an isolated aquifer with bad chemistry, or that hits a rotten area that isn’t as porous as everywhere else and they can pull only 1,000 tons a year production out of a site. You just don’t know until the holes are in the ground and production begins.

The economics favor even a small company that can produce 10,000 tons of lithium carbonate equivalent a year, because you’re looking at $65 million in revenue. The cash-flow margin for a company with good brine in place is probably at least $4,000 a ton—probably more like $5,000 on a variable cost basis. You’re looking at a complete payback in a year and a half or two years.

TGR: And minimal capex.

JH: The entire operation—to set up the facility, dig and line the ponds, do all the processing, everything—you might be talking about $60 million or $80 million. So for brine, very definitely; for hard rock, not necessarily. A few companies have found pegmatite (the spodumene-type deposits that are near surface) and maybe can establish a shovel-and-blast type operation from surface, but by and large, they have all the costs of setting up a hard rock mine.

When you’re doing this with brine, on the other hand, you dig a few pits; line them with polyethylene; basically start pumping water, and then sit back to let nature do its thing. You’re really moving a fairly concentrated material out with no additional processing required, other than the wind and sun. This is neither the mining nor the capex that most people know.

TGR: Is clay an attractive alternative to brine?

JH: The advantage with the clays, such as the hectorite deposits in Nevada, is a substantially higher lithium concentration than in most of the brines you’ll ever find. They’re open-pit operations and the deposits are close to the surface, so their cost is relatively low. They’ve been proven out to some extent in terms of cost and the flow processes to get the lithium out. Engineering work completed by Chevron Corporation (NYSE:CVX), and later by the U.S. Bureau of Mines in the 1980s, is now being advanced by Western Lithium, the only company I know that’s really actively working in this area today. They have a process that is likely to be more expensive in producing lithium than a good brine deposit, but it also may be substantially cleaner as an end product. With fewer contaminants than you’d derive from a brine, this would potentially mean much lower cost to a manufacturer who would be able to avoid all the secondary refining needed to produce battery-grade lithium extracted from brine. Bulk-grade lithium carbonate equivalent sells for about $6,500 per ton, but battery-grade lithium carbonate equivalent sells for about $45,000–$50,000 a ton. It’s simply more valuable and it has undergone a number of other processes to basically create something that can be used in batteries.

TGR: But won’t prices like that drive the price point up high enough to hamper the growth in lithium demand we’ve been talking about?

JH: Not really. Raw lithium accounts for only about 1% of final battery cost, so even refined lithium doesn’t add a substantial amount to cost. So I stand by what I said. Lithium demand will continue to grow.

DISCLOSURE: Jon Hykawy
I personally and/or my family own the following companies mentioned in this interview: none
I personally and/or my family am paid by the following companies mentioned in this interview: none

Toronto-based Jon Hykawy, who earned his PhD in physics (University of Manitoba, 1991) and an MBA (Queen’s University, 1997), spent four years in capital markets as a clean technologies/alternative energy analyst before being named lithium analyst at Byron Capital Markets in August. Jon began his career in the investment industry in 2000, originally working as a technology analyst concentrating on the lithium space. Jon has become a valuable resource on everything about the light, silver-white metal—from supply and demand to exploration and production. He has extensive experience in the solar, wind and battery industries, conducting significant research in the areas of rechargeable batteries, from alkalines to lithium-ion to flow batteries.