Bob Moriarty: Laying Out a Feast for Bears and Gold Bugs-Gold Report

07 Friday Nov 2008

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Bob Moriarty: Laying Out a Feast for Bears and Gold Bugs
Source: The Gold Report 11/07/2008

In this exclusive interview with The Gold Report, 321gold.com founder Bob Moriarty provides abundant food for thought about the continuing U.S. financial debacle. Unlike many other observers, he foresees a short-term rally in the stock market but paints a bleak longer-term picture. He expects the ship of state to sink like the Titanic, with precious metals holdings and other “things” the only safety nets on board. Not one to whitewash his opinions, Bob seems to be right more often than not but also freely admits it when he makes mistakes. As he puts it, “When my theories don’t match the facts, I revise my theories.” We conducted the interview over a week ago and all of his predictions seem to be coming true. So far.

The Gold Report: When you talked to us in early August, you correctly predicted the market crashing in October. But we’ve also seen gold go since then. When do you think gold and the market will turn around?

Bob Moriarty: In terms of the Australian dollar, the British pound and the Canadian dollar, gold has been hitting new record highs, so gold still has its function as the security of last resort. We’ve had so much deleveraging, with giant hedge funds selling everything they could sell and the only thing left was gold. But the next move in gold is going to be a major move and it’s going to be up.

TGR: When do you see that happening?

BM: October is always a really disastrous month for the market, but I think we’ve seen the bottom in the general stock market, in gold and in gold shares.

TGR: Are you saying that we’re going to see physical gold, gold shares and the market all increase simultaneously?

BM: Correct.

TGR: Wow. At the same rate?

BM: I don’t think so. There’s been something like $3.2 trillion poured into the system. When people think back—I mean, this is an absolute disaster. We have taken the entire banking system, Fannie Mae and Freddie Mac and AIG, out of the hands of the fools on Wall Street who were running them and handed control over to the fools in Washington. That’s the scariest thing I’ve ever heard. If Wall Street couldn’t run Fannie Mae, why does Washington, DC think it can?

TGR: Given that sentiment, why would you expect the stock market to increase?

BM: You constantly run from one extreme to another. You have extremes of emotion on both the bull side and the bear side. If you look back to 1929, there was a giant crash the end of October. The market recovered 50% of what it lost and then continued down through 1932. The market goes up and it goes down. From the gold and gold shares point of view, the decline is entirely artificial. There are probably 100 gold juniors selling for less than the cash they have on hand. They could close the doors and you’d make a profit.

TGR: One of the things we’re reading as part of the reason gold has fallen is that, amazingly enough, the U.S. dollar has actually been the currency of choice.

BM: It has been, but you have to understand why the dollar is going up. I’ll go back to my favorite figure—$596 trillion in derivatives. Maybe 9,000 hedge funds were operating in derivatives as if it was a giant casino and they were using Monopoly money. Once things turned south and interest rates started going up and mortgages started defaulting, they had to deleverage. This meant selling all of the positions they could and paying off the loans. But to do that, they need dollars.

So it’s entirely artificial. If you look at the rise in the dollar since September 27, it increased 12% or 13% in one month. Nobody can conduct business when the currency you use goes either up or down that much in a month’s time. That’s disastrous to business.

TGR: But it made a fairly rapid downturn earlier in the year. Is going back up now a correction?

BM: The correction is going to be that it will go back down, and I think it’s going to be a catastrophic decline. Barron’s had a piece recently talking about Taiwan now selling Fannie Mae and Freddie Mac bonds and Treasury bonds. If that continues or if other countries start doing it, it will be catastrophic for the dollar. I think the U.S. is going to default entirely within the next nine to 10 months. Here’s the situation. The U.S. is bankrupt. As anybody who looks at our debts and obligations should be aware, sooner or later we’re going to have to declare bankruptcy.

TGR: Why wouldn’t we just print more money to pay our way out of it?

BM: If you go into a store and put down $100 bill and the guy says, “We don’t take $100 bills,” what do you do?

TGR: You pull out your credit card.

BM: What if he doesn’t take your credit card? Here’s the flaw and there’s some really scary things going on that nobody thinks about. The U.S. government incurred about $3.2 trillion worth of obligations in the last month and to my knowledge, not a single person asked the really simple question: “Where’s the money going to come from?” There are only three choices. You take it from the taxpayer in taxes and that’s not an alternative. Or you borrow it from the Chinese and that’s not an alternative. Or you print it—but you can only print it as long as people are willing to accept it. The Middle East has already started to talk about not wanting to use the U.S. dollar anymore in currency transactions. It’s too dangerous. So we’re a lot closer to a default than anybody in government wants to admit.

TGR: If we default, what’s the impact on the worldwide market?

BM: Strangely enough, the worldwide market’s going to be fine. The U.S. can become a third-world nation. Everybody acts as if U.S. consumers are the only consumers in the world. Well, the Chinese can consume and the Japanese can consume and the Europeans can consume. For the last 60 years, since Bretton Woods, we in the U.S. have been able to consume by writing checks that we had no intention whatsoever of paying and the rest of the world has woken up to the fact that they’re paying for our excess. We’re waging a $3 trillion war in Iraq; we don’t pay for it; the rest of the world does. We borrowed every cent. And will never pay it back.

TGR: If the U.S. defaults, though, and so many of our bonds are held offshore, those then become illiquid or worth nothing. Wouldn’t that have an impact on the worldwide economy?

BM: Yes, but it will be a temporary thing. If your brother-in-law is a crack addict, doesn’t have a job and his home goes into foreclosure, it’s bad. But it happens. Businesses go bankrupt and countries go bankrupt. Essentially, Iceland went bankrupt a few weeks ago.

TGR: And some of the South American countries have waived their debt entirely.

BM: Argentina did it in 2002. They’re on the verge of doing it again. Believe it or not, Switzerland and Kuwait are on the verge of going bankrupt. It is really bizarre. And it all goes back to derivatives being totally out of control and everyone believing that it was $596 trillion worth of value when, in fact, it was a giant shell game.

TGR: Given your prediction, how does that jibe with the stock market increasing? Are we going to rise through the next nine months until we go bankrupt or what?

BM: Yes. Bonds are paper assets, nothing but a promise of payment. Stocks are not paper assets; when you own a stock, you own a real percentage of a company that hopefully is doing something productive. Inflation is not prices increasing, which is what we’ve been led to believe for many years. Inflation is actually an increase in the money supply. When you start increasing money supply the way the U.S. government has over the last month, it results in higher prices for real goods. So you can have this situation where the stock market is increasing in nominal terms but could actually be losing in real terms. Governments always have two different ways to destroy their currency. They can do it through deflation, which is what we’re going through right now, or they can do it through inflation. The government’s doing their best to inflate the dollar and it will go into hyper-inflation. That is just bizarre to me. A $3.2 trillion increase in money supply in a month. That’s a lot.

You have to deal with a real currency under real rules and real management and provide real products to people who really intend to pay for them. When you get away from that, you create maladjustments or “mal-investments.” There was an enormous investment in U.S. real estate because real interest rates were actually negative. You could borrow 100% of the value of a home. Everybody in the system encouraged people to do this, so they did it. Then instead of getting rid of some of that mal-investment, the U.S. government comes in and says, “We’ll take the very worst cases of management, like Fannie Mae and Freddie Mac and AIG, and reward them for doing stupid things.” Well, that doesn’t make any sense; it just makes it worse. Everybody on Wall Street’s still going to be getting their Christmas bonus this year, but now it’s courtesy of the American taxpayer.

TGR: If you have anything left in your portfolio, how do you begin to prepare for the scenario you’re laying out, a potential default by the U.S. government?

BM: You stay away from U.S. obligations entirely. A lot of people like Richard Russell (Dow Theory Letters) have recommended for years that in times of calamity you go for T-bills and gold. T-bills will be totally worthless someday. No fiat currency lasts forever. They’re not real. I’m suggesting that the financial chaos we’re in now is far worse than anybody can anticipate, even me. And a default by the U.S. government actually would be a good thing because then we could and sit down and say, “Okay, 1) what caused this in the first place? And 2) what do we need to prevent it from happening again?” The solution is quite simple. That’s to go back to a gold standard. But if you go back to a gold standard, you have to have much less government. That would be a really good thing.

TGR: Given that we’re already on a fiat currency and can print more, will our ship just go down with the presses rolling or will it extend itself longer—a slow sinking as opposed to diving straight to the bottom?

BM: There’s a really good chance of a catastrophic failure with some of the things that are happening in the Middle East now. There could be a catastrophic freeze-up of the banking system and they could just close the banks worldwide and say, “Okay, we’ll shut everything down for two weeks and sort it out.” There’s a lot of pressure from France and China to fix the problem. I find it very encouraging that people are calling for a new Bretton Woods because that is the solution, to go back and fix what Bretton Woods didn’t do correctly in the first place—and that was to provide an honest gold system.

TGR: Refresh us a bit on Bretton Woods.

BM: In 1944 representatives of the 44 free countries in the Allies sat down to establish some financial system for economic post-war rebuilding. They met in Bretton Woods, New Hampshire. Their agreement tied the U.S. dollar to gold and all of their currencies to the dollar in fixed exchange rates. It made the dollar literally as good as gold, so all of the other currencies were as good as gold as long as the dollar was good. But then we started inflating the currency because we could. We also exported our inflation to other countries. And then the Vietnam War came along and in 1971 Richard Nixon told foreign governments they could no longer exchange dollars for gold. What they should have done at Bretton Woods was have everybody go to a gold currency and instead of issuing pesos or francs or reals or dollars, issue units in terms of grams of gold. That way, everybody’s one gram note would be a gram of gold and you would have had total interchangeability among currencies.

TGR: If we could have a do-over of Bretton Woods, is there currently even enough gold anywhere to be able to tie it the world’s currencies?

BM: Everybody makes the mistake of thinking that you need a lot of gold for a gold standard. The only thing gold does in a gold standard is give the currency discipline, but that’s why it’s so valuable. If you have discipline with the currency, you don’t have the kind of chaos we have today. Without discipline, you end up with $596 trillion worth of derivatives and nobody in either finance or government saying, “Hey, by the way, that’s a really bad idea.”

TGR: If it’s not tied to physical gold and we rely on people to show discipline, aren’t we setting ourselves up for the same thing happening again?

BM: No. I’m not saying you wouldn’t use gold. To restore confidence in the system, you have to use gold. But let me give you an idea of how out-of-control the system is today. If you took the 80 tons of gold that the U.S. supposedly has on deposit in Fort Knox and West Point, that would be $200 billion worth. We have created $3.2 trillion in paper money, 16 times as much, in just the last month. That means it might take a gold price of $50,000 to $250,000 an ounce to actually clear the system, but we do have to clear the system. We have to go back to honest money. If you’ve ever played poker, and somebody sits down and pulls out a Sears credit card, he’ll bet on every card because he isn’t playing with real money.

TGR: And that’s effectively what’s been going on. So you’re saying you see a rally coming in the Dow, which strangely enough we’re hearing from other people, too, but it’s a short-term rally.

BM: We’re not going to go to new highs. The problem with variable-value currencies is the value of the currency changes every day. The Dow won’t go to new highs in real dollar terms. It will go higher just because it’s way oversold right now in terms of gold and gold stocks. Historically they are the cheapest they’ve ever been. Gold stocks are trading at the same value that they would trade if gold was $200 today. There’s one particular silver stock I know that’s selling for 20 cents on the dollar.

TGR: Who’s that?

BM: Silver Bear Resources Inc. (SBR:TSX). It closed at 20 cents today. It has a market cap of $7.6 million and $32.6 million in the bank. It’s selling at 430% over market cap. I’ve got Triex Minerals at 338% of market cap, International Nickel at 331% of and Uravan Minerals, 300%. These are just unbelievable. Back in 2001, a few stocks—maybe 10 or 20 stocks—sold for less than the cash they had on hand, but now 100 of them selling for less than cash on hand. The value of these stocks is not based on their economic value, but on the fact that everybody’s dumping them like crazy. Look at ATW Gold Corp. (TSX.V:ATW). They have two mines and two mills in Australia, are going into production in March and will produce 50,000 to 100,000 ounces a year and you can buy the gold for about $3 an ounce. That’s nuts.

TGR: So you recommend investors get real gold. Do you like ETFs at this point?

BM: Actually, I’m anti-ETF, whether gold or silver. The financial situation is so dangerous that it’s no longer an issue of market risk, nor of whether they have the physical metal. It’s an issue of counterparty risk; that’s the danger today. Is the institution issuing the ETF going to exist if gold goes up $100 a day? Physical gold in hand, not in the safety deposit box, not where governments can get their hands on it, is an insurance policy. It’s still working today even though gold is cheap. Resource stocks and physical holdings are what you want as we head into hyper-inflation.

TGR: Would you avoid even the Central Fund of Canada (CEF:AMEX)?

BM: No, the CEF is brilliant. I do like that and that is not an ETF. There’s no counterparty risk there that doesn’t exist with any stock. I would even recommend investors have shares in multiple brokerage companies because it’s entirely possible for one of them (like Lehman Brothers) to go bankrupt. You might still have the assets; you just can’t touch them for six months or a year.

TGR: When do you see gold climbing? You say it’s at the bottom now, so it could go any day.

BM: I believe so. It’s going to surprise everybody because it’s been hammered so much, but it’s totally artificial. The price of gold has nothing to do with supply and demand. It’s been hammered by the hedge funds closing their positions and buying dollars to pay off their loans. As soon as the hedge funds let up in their buying, the dollar will tank and gold will go up. A lot of money sitting on the sidelines is looking for a safe place to go. When people start understanding you can buy $100 million worth of mining company for $50 million, they will start doing that.

TGR: So that’s the specific catalyst. It’s not that the hedge funds will stop buying, but will stop selling.

BM: Correct. I think they will do that. The last couple of trading days in October tend to be very positive, so it looks as if we sneaked through the worst of it. If we’re not at the bottom yet, we’re very close to it.

TGR: Some are speculating that the downtrend will continue through the fourth quarter as people readjust for 2008 results.

BM: The reason there are horse races is everybody has opinions. I’m not giving you fact. I didn’t walk down a mountain with it. It isn’t carved on tablets. It’s my opinion and I could be wrong and I’ve been wrong in the past. Just not very wrong. And not very often.

TGR: Would you care to comment on a few of our sponsors? How about Animas Resources (TSX.V:ANI)?

BM: Animas has an entire mining district in Mexico, a very important mining district, and will be releasing assay results any day now. The stock is a third of what it was a month ago and the company’s twice as good as it was a month ago. They will recover. I was encouraging them a year ago was to accelerate plans for getting into production and given today’s environment, I’m sure they’re thinking about that.

TGR: How about Miranda Gold Corp. (TSX.V:MAD)?

BM: I was out there two weeks ago. Miranda Gold is in a very big district in the Cortez Trend in Nevada. If they were a pure exploration company, I would be leery, but they’re not. They use the JV model, so they don’t spend their own money. They have JVs with five or six different major companies who spend the money, so Miranda has the ability to have a piece of the big find, but they’re not spending their money. And they have $9 million in cash and a market cap of $6 million. I told them, “Look, guys, you actually are not using your money wisely. Sitting in Canadian dollar T-bills is dangerous. You need to start buying up some of the juniors that are good plays and you need to start buying your own stock.” But you can buy dollar bills from Miranda for 66 cents.

TGR: How about Rare Element Resources (TSX.V:RES)?

BM: Rare Element’s an interesting situation. Somebody I know who is the expert in rare elements says there are two plays there. An alkaline gold deposit is being drilled by Newmont, who’s the major partner—and again, Rare Element is not spending its own money; Newmont is spending the money. And Rare Element is drilling a rare element deposit that could be economic, with the emphasis on the “could be.”

TGR: When will they know?

BM: Soon, very soon. Rare elements is really a spooky area; the chemistry, the mineralogy—just all kinds of issues. It’s a very difficult field. Even though the demand for rare earths is going through the roof, just because you’ve got a deposit doesn’t mean you have an economic deposit. I can’t say it’s economic, but they’re bringing in the guy I think knows more about rare elements than anyone else in the world, and he will be able to say whether it’s economic. Rare Element is another company that’s real good, well cashed up, and has Newmont spending the money.

TGR: How about Pediment Exploration Ltd. (TSX.V:PEZ) (PEZFF:OTCBB)?

BM: Pediment has three or four really good projects. They’ve got a deposit in the Baja that is absolutely a production story and I’ve been beating on Gary (Freeman) to get this damn thing in production. I think they have about $18 or $20 million in cash, so they’re very well cashed-up. They have another deposit up in the Sonora district, a mine and a mill that I think will be getting into production, too.

TGR: Do they also use the JV model?

BM: They do on some of the projects. They have JVs on two or three deposits that we don’t hear that much about but that have significant potential The project down in the Baja they’re doing strictly themselves, and also the project at La Colorada, although they might use contract miners to put it into production.

TGR: Any comments on First Majestic Silver Corp. (TSX:FR) (PK SHEET:FRMSF)?

BM: One of the best-run, soon-to-be mid-tier silver companies in Mexico and I happen to really like silver and I happen to really like Mexico. First Majestic is a great company.

TGR: One of the companies coming across our radar screen a lot just because people are following it is Great Panther Resources (TSX.V:GPR).

BM: Great Panther. I love them. I was the first newsletter writer to visit the project; I saw it literally as Bob Archer was negotiating for it. They are another good, soon-to-be mid-tier silver producer. They have two or three producing projects there now. They’re increasing their resources, well cashed-up, excellent management, and the same thing’s true of Endeavor Silver.

TGR: What about Evolving Gold Corp. (TSX.V:EVG) (OTCBB:EVOGF)?

BM: Interesting situation. They will be coming out with assays in the next week or two on an alkaline deposit up in Wyoming. It’s a diatreme, which is a fairly predictable volcanic structure and they’ve already had some excellent drill results. If the new drill results confirm the old drill results, they probably have a pretty good size deposit. Alkaline systems like Cripple Creek in Colorado tend to be very big.

Evolving Gold went out and got financed a year ago based on a theory that they had an extension of the Getchell Trend and the Carlin Trend in Nevada. They really over-promoted it, but they did get cashed-up and they brought some new management in. The new management said the problem there in Nevada is that they are very deep and expensive holes. One hole out of 20 actually hits something, but when it hits something, it’s a monster deposit. They decided they would be better off with a JV model on that.

TGR: Do they have a joint venture partner in mind?

BM: Actually, they put the Nevada project on the back burner. They’re doing some drilling, but the deep drilling—sometimes 3,000 or 4,000 feet—is very difficult from a technical point of view and very expensive. They have drilled some holes this year and are still waiting for results, but I would far rather see that as part of a JV.

TGR: When we talked a few months ago, looking forward to see what sectors would emerge or survive, you indicated energy and focused specifically on oil. What do you think today, and where do renewables and alternative energy fit in?

BM: Alternative energy is viable. I had mentioned oil only because our entire system is based around oil. Like natural resources or gold or silver or metals, any energy investment should be safe for the future. Peak oil is very real and the Chinese are expanding like crazy and using more energy all the time. Natural gas is good, coal is good, nuclear is good. Renewables, unfortunately, are a 3% solution. Wind power’s another 3% solution. It’s never going to be anything but a 3% solution. Guys like Boone Pickens can spend millions encouraging people to invest in wind power, but our current infrastructure will not support it. It’s not just a question of investing in the wind power; you have to invest in the infrastructure as well and nobody ever wants to talk about that.

TGR: Where’s a comfortable range for oil?

BM: Somewhere in the $80 to $110 range. But that will be increasing because peak oil, in fact, is real. Oil production peaked in May of 2005 and peak oil also means peak food.

TGR: So you’d say this is a time to hunker down.

BM: It is time to hunker down, but I would like to say there are some very encouraging things. The Fourth Turning, written about 10 years ago, actually forecast this chaos that’s coming. And the fellow’s point of the book was that better times are coming. You go to absolutely insane extremes—which I think everybody can agree we have—and then you go back to sanity. Even during the depression, families came closer together because they had time for each other. They may have not had money to do things they were doing before, but it did bring the families closer together. Money is the journey; not the destination.

Bob Moriarty and his wife, Barb, launched 321gold.com as a private website seven years ago, when they were convinced gold and silver were at a bottom and wanted to help others understand what they needed to know about investing in resource stocks. Since then, they’ve introduced a second resource site, 321energy.com. Bob travels to dozens of mining projects a year. He was one of the first analysts to write about NovaGold, Northern Dynasty, Silver Standard, Running Fox and YGC Resources, among others. Prior to his Internet career, Bob was a Marine F-4B pilot at the age of 20 and a veteran of over 820 missions in Viet Nam. Becoming a Captain in the Marines at 22, he was one of the most highly decorated pilots in the war.

Emerging Metal Miners Attractive to Value Investors – Seeking Alpha

07 Friday Nov 2008

Posted by jschulmansr in commodities, Copper, deflation, diamonds, Finance, gold, hard assets, inflation, Investing, investments, Latest News, Markets, mining stocks, precious metals, silver, Uncategorized

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Emerging Metal Miners Attractive to Value Investors – Seeking Alpha

By: Mike Niehuser of Beacon Rock Research

There appears to be an enhanced investment opportunity for long-term value investors in emerging producers selling near cost of investment or book value. We see the mining sector gaining in interest for value investors as they screen for companies selling at 52-week lows, below book value, and with potential to expand margins and earnings. Wholesale redemptions by investors, along with tax loss selling in both the U.S. and Canada, are creating opportunities for value investors looking to acquire companies with both real assets and the potential for increasing production.

Reduced global lending and investment, which caused a shortage of liquidity, has resulted in a deflationary environment unfavorable to commodities, including precious and base metal prices. Recent actions by governments and central banks are largely inflationary, which should lead to higher gold and silver prices as banks begin to lend and invest. A reduction in credit risk should spur a resumption of global growth, increasing demand for commodities and leading to higher base metal prices. While this cycle appears inevitable to long-term investors, this scenario may be delayed by credit markets or anti-growth policies including protectionism, higher taxes, and increased regulation.

It follows that deflation in the near term should be favorable for companies that have cash or the ability to operate profitably at current metal prices. Clearly, the inflationary environment in the mining industry in 2007 has reversed and costs of labor, materials and supplies are moderating or declining. Recent declines in the price of fuel lifts a burden on both operating profits and the barrier to resumption of economic growth. As this situation persists, should metal prices rebound, margins will also expand, leading to potentially significant appreciation for emerging producers above current levels.

China continues to be important for sustained economic growth through wealth accumulation and investment in infrastructure. Despite concerns over declining rates of growth, China still maintains near double-digit annual growth rates. The ongoing demand for precious metals as a store of value, and base metals for the production of goods and infrastructure, remains immense. China’s 1.3 billion people consumed $1.2 trillion last year, while America’s 300 million consumed $9.7 trillion. While China is criticized for a lack of domestic markets, this situation may be revered as financed by its central bank’s reserves, largely composed of U.S. treasuries.

NovaGold’s market cap is significantly less than the sum of the book value of its three major projects:

NovaGold Resources Inc.’s (NG) market cap is currently about $317 million, which is only slightly higher than the book value of its Rock Creek gold mine including property, plant, and equipment, plus development costs. This would imply that the market is currently attributing no value for NovaGold’s share of its 50% ownership in its two world-class projects, the partnership with Barrick Gold Corporation (ABX) on the Donlin Creek gold project and with Teck Cominco Ltd. (TCK) on the Galore Creek copper-gold project. NovaGold’s share of the total investment in property, plant, and equipment plus development costs at Donlin Creek is $238 million, with $360 million on the Galore Creek project, for a total of $868 million on these three main assets. NovaGold’s market capitalization is about one third of its share of the capitalized investment in these projects.

NovaGold Gold Pour, Rock Creek Mine, Nome, Alaska

Source: NovaGold

We understand that Barrick is working toward completion of a Feasibility Study on Donlin Creek by 1Q09. This would mean that a majority of NovaGold’s 50% ownership of this gold resource of 31.7 million Measured and Indicated ounces should move into the reserve category and allow for the start of the permit process. In addition, Teck Cominco is anticipated to provide an update on a new design plan for the Galore Creek project, which would be the basis for an updated Feasibility Study and initiation of permitting. Continued development by Barrick and Teck Cominco should assure markets, leading to NovaGold’s market cap appreciating toward total book value.

NovaGold is in the process of commissioning its Rock Creek gold mine in Nome, Alaska, and has recently completed its first gold pour. NovaGold is scheduled to produce 100,000 ounces annually, generating an estimated $25-$35 million in 2009, at an average cash cost of $500 per ounce. NovaGold is working to increase the resource to extend the mine life to ten years. Management estimates that production from the Rock Creek mine, plus cash on hand and proceeds of other non-core assets, should provide funds for planned activities for the next twelve months. NovaGold remains a viable company with significantly undervalued and unrecognized assets.

Etruscan’s market cap is less than the book value of its Youga gold mine which does not include the development potential of projects in West Africa:

Etruscan Resources Inc.’s (ETRUF.PK) market cap is currently about $73 million, which is less than its investment in property, plant, and equipment, plus development costs for the Youga Gold project of about $109 million. The Youga Gold Mine produced 7,450 ounces of gold in October; this was about 14% above September production of 6,572 ounces of gold, and 11% above estimated average monthly production. We suspect that with further optimization, production may continue to exceed published scheduled production, important to build its treasury to fund further development. Cash costs should improve through project stabilization to an estimated $450 per ounce for the life of the mine. The project includes a program to limit price exposure of the gold price on the downside to $629 per ounce.

The current market cap does not appear to reflect Etruscan’s other assets. Etruscan may have the largest land position of any mining company in West Africa. We are looking for additional reports on their Bitou project about 35 kilometers from the Youga Gold Mine and new discoveries in southwest Ghana. We are also quite keen on further developments on its recently announced rare earth deposit in Namibia. As the market cap of the company is now less than the construction cost or book value of the Youga Gold Mine, value investors have the upside to increasing gold prices, as well as exploration in West Africa, Namibia, and its diamond assets in South Africa.

Minefinders’ market cap is close to book value and half base case economic study of Dolores mine:

Minefinders Corporation Ltd. (MFN) has a market cap of about $250 million, slightly above the book value of its Dolores gold-silver mine in Chihuahua, Mexico. Current book value of the Dolores mine, including property, plant, and equipment plus development costs, totaled $203 million as of the end of June 2008. The total budget for the project is $191 million, which includes about $10 million for contingency, with available cash and credit to complete construction. Incidentally, Minefinders recently negotiated an additional $10 million in credit for additional working capital.

Minefinders recently began leaching ore, a major milestone, and anticipates its first gold and silver production in the next few weeks. Previously they had targeted producing 10,000 ounces of gold and 350,000 ounces of silver in the remainder of 2008. They report crushing at a rate of 15,000 tpd, close to the design capacity of 18,000 tpd. Estimated operating cost for gold equivalent during ramp up may range from $400 to $450 per gold equivalent ounce, declining to $297 per gold equivalent ounce over the average life of the mine, scheduled for 15 years.

The Dolores open pit mine currently has 99.3 million tonnes of Proven and Probable reserves, containing 2.44 million ounces gold and 126.6 million ounces of silver. The most recent economic study estimated an NPV at a discount rate of 3% to be $563 million (metal assumptions of $675 gold and $13 silver). The study did not include the potential benefit of adding a 3,000 tpd flotation circuit to increase recoveries of gold and silver in the pit, or located in a high-grade gold-silver resource below and parallel to the identified reserve. As Minefinder’s market capitalization is close to the book value of its investment, and less than one half of its base case economic study, we also consider the company to be significantly undervalued and of interest to value investors.

Mercator’s market cap is less than almost half book value and profitable at significantly lower metal prices:

Mercator Minerals Ltd.’s (MLKKF.PK) market cap is currently about $72 million. As of June 30, 2008 the book value of its Mineral Park mine near Kingman, Arizona, including property, plant, and equipment and development costs was over $141 million. The original budget for both phases of the 50,000 tpd facility ($128 million for stage one and $62 million for stage two) is about $200 million. Mercator is completing commissioning and anticipates production in the near term and has completed and paid for about 40% of stage two.

The first stage of the Mineral Park mine was financed by debt. The balance of the second phase will be paid out of cash flow from the first phase, remaining cathode copper production, and cash from the sale of its silver stream to Silver Wheaton Corp. (SLW). The mine has an estimated life of 25 years, and with a strip ratio of only 0.18, the project has good economics. Cost of production, assuming a 50-50 split for production of copper and molybdenum (net silver credits from Silver Wheaton), is estimated at $1.28 per pound and $6.49 per pound, respectively.

Their pre-feasibility study, assuming metal prices of $1.53 copper, $10.16 molybdenum, and $7.50 silver (prior to the sale to Silver Wheaton), estimated an after-tax IRR of 51% and NPV of $426 million with a 1.8 year payback of capital. As Mercator’s market capitalization is about one-quarter the estimated value of the pre-feasibility study and one-half the book value of the Mineral Park mine, the company should be of interest to risk averse value investors.

Acadian’s market cap is less than Scotia mine book value and replacement value not including significant gold assets:

Acadian Mining Corporation’s (ADGLF.PK) market cap is about $14 million. This is less than one-half book value of their Scotia Mine operation in Nova Scotia, including property, plant, and equipment plus development costs of approximately C$30 million. This includes the cost to acquire the mothballed Scotia Mine and bring it into production. Management estimates the replacement cost of the Scotia Mine to be about C$100 million.

Acadian brought the operation into production in 2007 on time but faced challenges in early 2008 due to difficult weather conditions. This was followed by declining zinc and lead prices. Management estimates an operating breakeven rate of $0.55 per pound zinc-lead, and overall company breakeven of $0.59 per pound zinc-lead. This was prior to the decline in the Canadian Dollar to the U.S. Dollar, which benefited Acadian, as their costs are in Canadian Dollars. Prior to declining metal prices, management implemented an aggressive cost reduction program, with plans to resume development of its gold assets in 2009.

Acadian has a gold resource in Nova Scotia of about 1.6 million ounces. When Acadian acquired the Scotia Mine it was expected to centrally process gold resources. Record zinc and lead prices accommodated restart of the mine as previously designed. Should base metals stabilize at lower levels, we expect management to revisit the original concept of processing gold ore. We estimate this could be accomplished in six to eight months at a cost of C$5 to C$10 million.

Disclosure: The author is long NG, ETRUF.PK, MFN, and ADAIF.PK. An affiliate of the author’s employer provides corporate advisory services to NG, ETRUF.PK, MFN, MLKKF.PK and ADAIF.PK.

My Note: I am also long NG and am looking at the others-jschulmansr

Junior Gold Miners Are Dirt Cheap – Seeking Alpha

06 Thursday Nov 2008

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Junior Gold Miners Are Dirt Cheap- Seeking Alpha

By: Graham Summers of GPS Capital Research

Wrong again!

Numerous pundits have made a big deal of stocks’ recent rally and gold’s plunge. Some even went so far as to claim that gold has lost its “safe haven” status. They’re horribly mistaken.

For one thing, gold has held up incredibly well compared to both stocks AND commodities this year. Stocks have fallen 32% in 2008 thus far. Oil is down 26%. Zinc is down 58%. Gold is only down 16%.

In simple terms: Had you put all of your money in gold at the beginning of 2008, you would have outperformed virtually every asset class in existence. It’s also worth considering that much of the downward pressure in gold has come predominantly from the “paper” market.

As I’ve written on these pages before, the physical or bullion market in gold is extremely tight due to unprecedented demand. The US Mint has stopped producing several coins because it cannot keep up with investors’ appetite for bullion. Indeed, most bullion dealers are now charging premiums of 8-9%. This time last year premiums were only 2-3%.

However, due to institutional liquidations and outright manipulation in the paper market, gold struggles to clear even $800 an ounce. And while the paper market for gold has been hit pretty hard, gold mining stocks, particularly the juniors, have been absolutely creamed.

It’s not hard to see why.

An individual gold mining junior might have a daily dollar volume of $5-$10 million. Even smaller hedge funds ($50 million in assets) could crush one of these with a $1-2 million sale (never mind intentional crushing from shorts).

The result is that gold mining stocks are at historic lows relative to the price of gold. If you go back to 1984, mining stocks have only been this cheap relative to the price of gold two other times: 1986 and 2001, both of which were around the END of BEAR markets.

In fact, today, numerous gold juniors are so cheap that they’re trading below book value. Let me put this in perspective: at these levels these companies are cheaper than their mining assets alone. By buying today you are essentially getting the gold reserves for FREE. Below is a screen I ran last week. The data comes from Yahoo! Finance.

Company Name	Symbol	Market Cap	Total Cash	Total Debt	Price/ Book
NEVSUN RESOURCES	NSU	41.0M	59.9M	0	0.966
RICHMONT MINES	RIC	37.2M	25.2M	0	0.801
KIMBER RESOURCES	KBX	27.2M	5.5M	0	0.799
ALLIED NEVADA GOLD	ANV	107.2M	51.6M	2.2M	0.709
ENTREE GOLD	EGI	47.0M	61.9M	0	0.698
VISTA GOLD NEW	VGZ	32.0M	33.4M	22.4M	0.601
KEEGAN RES	KGN	13.1M	10.2M	0	0.547
CENTRAL SUN MINING	SMC	7.2M	4.7M	0	0.177
OREZONE RES	OZN	57.1M	13.2M	0	0.165

The most common accusation leveled against gold juniors is that the credit crisis will stop them from receiving the credit necessary to fund their operations. However, as the above table shows, many of these companies are already sitting on substantial cash hoards. In addition, some that are already producing gold throw off enough cash to fund their operations without additional loans or credit.

I can’t tell you when gold will finally break to new highs again. And I certainly cannot vouch for the above companies as being great investments (I haven’t done nearly enough research to formally recommend any of them). But one thing I can tell you is that taken as a whole, gold mining stocks are at extremely cheap levels relative to the price of gold. If you’re looking for value in today’s market, this is a great place to start.

My Note: I have a long position in all of these stocks and am adding to them-jschulmansr

What’s happening with Gold? « The Economics Journal

06 Thursday Nov 2008

Posted by jschulmansr in capitalism, commodities, deflation, Finance, gold, hard assets, inflation, Investing, investments, Latest News, Markets, mining stocks, precious metals, silver, U.S. Dollar, Uncategorized

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What’s happening with Gold? « The Economics Journal

By: Balaji Viswanathan of The Economics Journal

Gold had the biggest monthly drop since 1983, last month. It dropped 18% in that month to about $700/ounce (1 troy ounce approximately equals 31 grams). It seems counterintuitive given the fact that crisis generally increases the price of gold, and October is the month of peak credit crisis.

One of the biggest factors causing this is the fading of inflation fears from the mind of investors. Inflation always pushes people to look for hard assets and after a year of inflation worries, the central banks are breathing easy that the oil drop has taken at least one of the worries from their backs.

Performance of GLD – one of the main ETF’s for gold, in October.

Another factor is because of the drop in interest from speculators who have been selling all profitable assets to make good for their losses elsewhere. Suppose you are an institutional investor who wants to maintain a constant allocation of 80% in stocks, 20% in gold, you would have lost 40% of the value in stocks since the start of the year, while your gold worth would have increased, skewing your portfolio heavily towards gold in the process. This will force you to sell gold at this time and re-balance your portfolio. Marketwatch writes that:

Speculators reduced their buy positions by 8,313 contracts on the Comex while increasing their sell positions by 12,574 in the week ended Oct. 28, according to latest data from the Commodity Futures Trading Commission. One contract represents 100 ounces of gold.

The Gold report gives another reason for this drop:

It has been central bank gold loans, even more so than official gold sales, that have really pulled the rug out from under gold. Gold loans by central banks are an alternative, and invisible, means of injecting liquidity into the banking system. These gold loans to banks and bullion dealers by the leading central banks are probably a significant multiple of outright official sales.

In simple terms, a central bank may lend or deposit gold with a banker or bullion dealer who simultaneously sells forward. Even with the recent substantial increase in gold-lending rates, at the end of the day the dealer receives cash in the transaction at a cost that may be advantageous to short-term money-market borrowing costs. Central banks have great freedom to lend gold outside their government-mandated rescue programs and these lending activities are typically hidden by their accounting practices…

Why is gold a good buy right now?

Gold is very good hedge given its low/negative correlation with stocks and bonds as you can see from the chart below from World Gold Council. More likely, gold will stay neutral or move slightly opposite to your rest of the portfolio giving you a good risk balance.
Gold is a bet against all currencies – and a good inflation hedge. As nations the world over keep turning on their money spigots, all the currencies get weaker. By the end of this crisis, there is a good probability that the central banks would have pumped in far more money than the money supply contraction caused by deleveraging, and that could cause a severe inflation. Gold is historically good with inflation.
People in developing nations like India and China traditionally turn over to gold in times of trouble – as they don’t have too much trust in their equivalent of Treasury bills. Given the performance of their stock markets (loss > 50-60%) and asset classes, it is expected that they might turn toward the asset class known to them for 1000s of years instead of the stock or bond markets that are still nascent by Western standards.
The thawing of credit markets is pretty superficial. There are still deep problems down there and they will take years to solve. So, even if the current situation looks calm and serene, turmoil and volatility might turn any time. Whenever people lose trust in banking system they tend to fall back towards gold.

However, take note that gold over the long term under performs other asset classes like equities and bonds and you should not weigh too much of your assets in gold. If you are a long term investor think gold more like an insurance, and you could keep a small amount of it to give better risk tolerance to your portfolio and don’t assume it to take care of your retirement. The best gold investments come over the short term to medium term, in times like these. Here is the 15 year gold price chart from the WGC. Gold has significantly outperformed most other asset classes in the last 6 years.

Gold Council report for Quarter 2, 2008

Disclosure: Long position in GLD.

My Note and Disclosure, I am Long GLD – jschulmansr

What Obama’s Presidency Could Do for Gold

05 Wednesday Nov 2008

Posted by jschulmansr in 2008 Election, Barack Obama, commodities, deflation, Finance, gold, hard assets, inflation, Investing, investments, Latest News, Markets, precious metals, Uncategorized

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What Obama’s Presidency Could Do for Gold

By Gold World Staff | Wednesday, November 5th, 2008

Democrat Barack Hussein Obama II has been elected to become the forty-fourth President of the United States of America.

And some gold bugs couldn’t be happier.

Why?

Because the biggest gold bull market in modern history peaked amid a political landscape that is now similar to today’s.

Gold and Politics

The political balance of power in the United States has regularly tilted back-and-forth since the country was first founded 232 years ago. This state of constant change can not be said about! gold prices.

Between 1792 and 1971, gold prices were set in the U.S. by the federal government at a fixed price. This fixed priced was changed three only times in the 179-year history of federal gold price fixing.

On August 15, 1971, Richard Nixon unilaterally canceled the Bretton Woods system and stopped the direct convertibility of the United States dollar to gold. As a result, the U.S. dollar was decoupled from gold, and gold prices could fluctuate like any other commodity.

So the data is very limited when comparing the performance of gold prices as they relate to the political affiliation of the President of the United States. However, there are some striking similarities between the performance of gold prices during the great gold bull market of the 1970s and today’s gold bull market and how the Presidential political affiliation was and is tilted.

Take a look at the chart below. It shows the inflation-adjusted average annual price of gold as they relate to presidential political affiliations.

Buy Gold Now

Just like we told you back in 2001… buy gold! Since the Fed and government has intervened on the economic situation and made matters worse, this is the exact time to own gold.

A rise in junior gold stocks is just around the corner.

Gold, silver, and many other commodities are getting ready to skyrocket. It’s gearing up to what could be the biggest buying opportunity for junior gold and silver stocks ever and Greg McCoach’s service, the Mining Speculator can help you.

Click here for more information.

Republicans Richard Nixon and Gerald Ford controlled the US Presidential office during the first half of the great gold bull market of the 1970s. During this time gold prices increased a modest 217% as the value of the US dollar dropped and gold’s investment appeal heightened under their administrations.

During the first half of today’s gold bull market, Republican President George Bush has controlled the Oval Office. During this time gold prices have increased approximately 204% (to date) for the exact same reasons.

The similarities here are extraordinary to say the least.

The Final Peak of the Great Gold Bull Market of the 1970s

In the 1976 presidential election, Democratic Governor Jimmy Carter defeated Republican incumbent Gerald Ford with a campaign promising comprehensive government reorganization.

During Carter’s tenure as President, the great gold bull market of the 1970s peaked. Gold prices climbed as much as 526% in Carter’s first three years in office.

So, with a new democratic President will today’s gold bull market peak while Obama is in office?

Unfortunately, there’s no surefire way to tell. But if prices were to increase as much as they did while Carter was in office, gold could almost reach a whopping $5,000 an ounce.

Good Investing,

Gold World Staff

Gold and The Lessons of History

05 Wednesday Nov 2008

Posted by jschulmansr in commodities, Copper, deflation, Finance, gold, hard assets, inflation, Investing, investments, Latest News, Markets, mining stocks, precious metals, silver, Uncategorized

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Gold and The Lessons of History

Today’s comment is by John Pugsley, Chairman and Co-Founder of The Sovereign Society

“Lenin said the day would come when gold would serve to coat the walls and floors of public toilets.” -Premier Nikita S. Khrushchev

Ancient, mysterious gold is being pushed to the forefront of investors’ minds these days, as the inflationary policies of the worlds’ central banks meet uneasily with the deflationary pressures of the housing industry’s collapse. Most expected this year’s air of uncertainty to push gold prices into the stratosphere, and all seem to be relatively shocked by the yellow metal’s lackluster performance thus far.

But for me it’s all just déjà vu…perhaps for you too. We’ve been here before. Not just during the great gold bull market of the 1970s, but way back in the 1920s, and the 1860s, and the…well, let’s not go back to Ancient Rome.

Since gold and freedom have had a long, torrid, and often clandestine affair, the market’s current attraction to the yellow metal makes it apropos that gold looms large in our discussions here at The Sovereign Society.

We hear predictions of US$1,000 or even US$2,000 an ounce. Well…before you or I are swept along in the excitement, let us analyze this euphoria through the lens of economic principles, and ponder the lessons of history.

You may have profited, as I did, in the tumultuous gold bull market of the 1970s. It was heralded in advance by my late friend Harry Browne, who saw it coming and showed investors how to get rich in his prophetic best-seller, How to Profit From the Coming Devaluation. I, too, joined the ranks of “gold-bugs,” writing enthusiastically about the metal’s glory…along with Jim Dines, Doug Casey, Howard Ruff, and many others.

With hindsight, and with gold prices currently stagnating, can we learn anything from history? Tracking the ‘real’ price of gold offers some clues.

In 1915, the dollar was defined as one-twentieth of an ounce of gold. Paper currency consisted of gold certificates that could be exchanged for gold on demand. The ‘double eagle,’ the US$20 gold piece, was one ounce of gold.

In 1915, US$20 would buy a lot. Wages were 35 to 75 cents an hour, or US$500 to US$1,000 per year. A man’s tailor-made suit cost US$25-$30 (with two pairs of trousers), while a Sears & Roebuck ready-made, but stylish pure-wool worsted suit sold for US$16.50. A movie ticket cost 15 cents (10 cents for kids).

Adjusted by the CPI, what cost US$20 in 1915 would hypothetically cost over US$450 today. Meanwhile, an ounce of gold that equaled US$20 in 1915 would cost US$726 as of this writing.

What happened? It’s known as fiat money creation.

What Happens When Paper IOUs Replace Solid Metal Currency

The prices of goods and gold diverged because the newly created Federal Reserve gave banks free reign to expand loans, massively inflating the quantities of gold certificates in circulation, with no increase in the banks’ gold reserves. As the gold IOUs flowed into the economy, boom times arrived. Prices rose and stocks and real estate soared.

Sadly, as the masses discovered, the “roaring twenties” were fueled by paper promises. In 1929, the stock market crashed, unemployment rose, people became fearful of banks, and the public began turning in their bank notes for the gold they had deposited. Of course, most banks didn’t have enough gold to cover the outstanding notes, one by one they failed, and the economy plunged into the Great Depression.

The bankers and politicians were quick to blame the free market, greed, and gold itself. Roosevelt, elected in 1933, closed the banks to stem a rising wave of bank failures, abruptly revalued gold to US$35 ounce (depreciating everyone’s dollars by 75%), and outlawed ownership of gold by U.S. citizens.

It was easy to rob American citizens at gunpoint by confiscating their gold, but what about foreigners? They could still choose between U.S. dollars and gold. The answer was to play the same game the Fed had played 30 years earlier: promise to redeem dollars in gold. In 1944, at the historic United Nations Monetary and Financial Conference at Bretton Woods, New Hampshire, every participating country pledged to keep its currency within a percentage point or two of an agreed dollar value providing the U.S. indemnified foreign central banks against a depreciating U.S. dollar by backing the dollar with Treasury gold. The dollar became the world’s reserve currency.

Credit Swells and Gold Freezes

The credit expansion began again, and the price of gold remained frozen at US$35 an ounce for another 27 years. Again, as happened in the 1920s, consumer prices began to rise. But just as worried Americans had begun to run to the banks in the 1930s, the rest of the world began a run on U.S. Treasury gold. In 1971, with Treasury holdings perilously low, Nixon abrogated the Bretton Woods agreement and gold, free of government chains at last, soared to US$800 an ounce in 1980.

At that price, it was wildly above its historic exchange value with other goods, so it was inevitable that the lines would converge again, and they did.

Politicians depend on fiat currency to fund wars and giveaway programs, and therefore always disparage gold. In 1924, in the euphoria of the Federal Reserve money bubble, John Maynard Keyes denigrated sound-money advocates by calling the gold standard a “barbaric relic.” Even after a half century of turmoil caused by fiat money, in 1975, Secretary of the Treasury William Simon continued to argue against gold due to its “destabilizing effects” on the world monetary system. The IMF formally sought ways to “insure that the role of gold in the international monetary system is gradually reduced.” Gold sales by both the IMF and the Treasury were undertaken to suppress the price and discourage investors.

Gold is a commodity…a tangible, useful mineral extracted from ore and refined for use. The very fact of its unique properties (divisibility, durability, scarcity, and its recognizable luster) make it an unmatched medium of exchange, and also a safe haven for citizens. Thus, it will always be a threat to the creators of fiat money.

What’s Next for Gold?

History teaches that gold will hold its value relative to other goods. In terms of inflating currencies, all goods, including gold, will hold their relative value to each other, and rise relative to currency. Right now, for the last 6 years the price of gold has risen more rapidly than other prices, and is now higher than the norm.

Since 1980, consumer prices have risen by almost 150%. Many analysts today assume that gold will repeat the price pattern that occurred in the decade of the 1970s, and argue that gold could go as high as US$2,000…or higher.

Warren Buffett once said that what we learn from history is that people don’t learn from history. Thus, it’s probable that the current bull market in gold is not over in spite of the fact that gold’s dollar price relative to goods is higher than the historical norm. The public has yet to discover just how much world currencies, and particularly the U.S. dollar, have been inflated in recent months and years. As this becomes apparent, dollar holders will, as they did in the 1930s, and again in the 1970s, try to redeem those dollars for tangible goods. Price inflation will return with a vengeance, and probably soon.

What are the best ways to own gold?

For myself, owning physical gold in the form of coins and bullion for conservation of purchasing power, and seeking out the shares of undervalued and overlooked gold mining companies for investment and speculative growth are the best choices.

In addition, to promote a return to sound money and to enjoy its benefits to every extent possible in the meanwhile, you should begin using “electronic” gold. The most reliable and safest purveyor of this new technology is Goldmoney. Check them out at www.goldmoney.com/?gmrefcode=sovsoc.

I opened this essay with a quote by Lenin, who argued that gold should be assigned to the toilet. Not only was Lenin an economic ignoramus, he was the ultimate enemy of individual sovereignty. Ancient, mysterious gold is the ultimate antidote to fiat money, and we can be certain that mankind’s love affair with this lustrous commodity will never end.

JOHN PUGSLEY,
Chairman of The Sovereign Society

The Perversion of American Capitalism

05 Wednesday Nov 2008

Posted by jschulmansr in capitalism, commodities, Copper, deflation, Finance, gold, hard assets, inflation, Investing, investments, Latest News, Markets, precious metals, silver, socialism, Uncategorized

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The Perversion of American Capitalism

By: Naufal Sanaullah of Dorm Room Derivatives

The United States does not rely on industry for growth. Its economic backbone is money. America finances the globe’s corporations and emerging markets, its dollar is the world’s preeminent reserve currency, and its citizens’ puchasing power allows for the monstrous consumption that accounts for over 60% of the world’s largest GDP.

It is sad, then, that this nation faces a liquidity crisis out of all possible economic scenarios. The United States economy is based on international reliance for its financing, and a global credit crunch greatly diminishes that leverage.

Since the 1970s, America has gradually shifted from being an industrial production superpower to a consumption-based financial center, concurrently going from a significant creditor nation to debtor nation. It was able to do this because of the leverage it had on the rest of the world’s economies. Trade deficits were allowed and even encouraged because of the supreme strength of the US Dollar, being the world’s most important reserve currency. Newly capitalist post-Cold War economies stemming from the Soviet Union’s collapse offered huge new markets that America financed and invested in, again providing leverage for debt. The United States was the safest investment in the world, with its strong currency, economy, and liquidity.

Then came Greenspan.

As Federal Reserve Chairman, Alan Greenspan manufactured a credit bubble in the 1990s through a series of interest rate cuts. Because of an extremely inaccurate new methodology of inflation calculation introduced by Bill Clinton, interest rates were manipulated to aritifically ease credit, which grossly misdirected capital and created a series of bubbles, in information technology, dot-coms, equity markets, real estate, and credit in general. The 90s were a period of ridiculous economic growth in America, but it was substantially artificial, as overconsumption pervaded the perceived growth. This overconsumption was financed by borrowing using artificially free credit. True purchasing power was significantly below perceived wealth, and thus asset values shot up and, now, are shooting back down twice as hard and twice as quick.

Now that the credit market has collapsed (as well as credit-dependent markets, namely housing and automobile), purchasing power is going to begin a quick descent to real terms. Americans are going to lose wealth quickly, especially through their invested capital in mutual funds and pensions funds, as well as their homes. To ease the flow of credit to get Americans borrowing again and consequently consuming, propping back up the American economy, the Fed has been lowering interest rates again, but this time there is an added problem– inflation.

The recalculation of inflation is now manifesting itself in a weakening dollar, and eventually valuations will finally come to represent true inflationary levels, most likely around 8% already. The problem is the American government is trying to stimulate consumption once more by re-liquifying banks by buying out bad mortgage-related assets, especially derivatives. Consumption does not drive economic growth on the long term, capital investment does. Capital spurs technology, adds liquidity, and increases output, something America has not experienced since its back on industry. America has enjoyed strong inflows of foreign capital because of its equity markets and strong currency, but neither of those are incentives for investment any longer. The government’s plan to buy defaulted credit assets to bailout big banks is in fact worse for its long-run economic growth, because it weakens the dollar even further. The US dollar is now essentially backed by bad mortgage debt, and the only thing propping it up right now is temporary relative strength as the rest of the world experiences its own credit crises and the dollar remains the fundamental reserve currency. But for how long?

American national debt is the last bubble to collapse, and in fact it is still inflating and will continue to until a weakened global economy will force nations to call in their debts outstanding from the United States. This will be the coming of age for the next wave of economic titans: Singapore, Hong Kong, India, China, Australia, and Russia. This will be the downfall of the American Dollar and its replacement as the world’s pervasive reserve currency. This will be the true liquidity crisis, as the United States will essentially be forced into bankruptcy with no surplus to pay off debts and no way of financing through an illiquid banking structure.

This will be the end of capitalism in America. Socialist programs of the ’60s and ’70s foreshadowed the economic collapse, Alan Greenspan ushered it in, George Bush and his debt-financed wars worsened it, and Barack Obama and his socialist taxpayer-funded big government programs and bailouts will make it a perfect storm. I see in the future the possibility of an economy characterized by free credit but no demand and no purchasing power based on ridiculous inflation. Sounds eerily similar to 1930s Germany. Who will be America’s demagogue?

Buy precious metals now to save yourself. Venture capitalists are gone, there are no new IPOs, there is no industry, the currency is going to be worthless, hyperinflation may kick in, and there is no demand curve growth in sight. Buy precious metals.

America’s only hope? After four years of Obama, Barry Goldwater is resurrected from the dead to preach Austrian School capitalism and libertarian social policy.

Long recommendations: GLD, SDS, SKF, QID

Author’s Disclosure: I am long none of these ETFs, but will be after the current countertrend bear rally finishes (expecting around February-March).

Gold Report: Brien Lundin: Is Gold Holding a Wild Card?

05 Wednesday Nov 2008

Posted by jschulmansr in Alternate Fuel Sources, commodities, Copper, deflation, Finance, gold, hard assets, inflation, Investing, investments, Latest News, Markets, mining stocks, Nuclear Energy, oil, precious metals, silver, U.S. Dollar, Uncategorized

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Brien Lundin: Is Gold Holding a Wild Card?
Source: The Gold Report 11/04/2008

As difficult as it may be for precious metals investors to sit on their hands, that may be the best “action” for surviving this hazardous transition from deflationary to inflationary times. In this exclusive interview with The Gold Report, Gold Newsletter Editor Brien Lundin explains why it is absolutely inevitable that inflation will trigger a rise in gold and hints that a December “surprise” could end the waiting game. While his advice is to let this round of deleveraging and deflation end before making any serious plays, he names a few bargains that stand out even in a downturn.

The Gold Report: Gold and the Dow are both going down. Shouldn’t they be decoupling and if they do, what would it take to make that happen?

Brien Lundin: There’s a fancy word out there – deleveraging – that’s being bandied about almost as much as the word depression. All the pundits and the analysts are talking about deleveraging. What that really means is that market participants are selling hand over fist because they have to. The prices we’re seeing for assets now, whether it’s stocks, commodities, or gold, do not reflect the underlying value of those assets. People are selling them simply because they have to—whether because of margin calls or redemptions from hedge funds or what have you, the assets have to be sold. That’s why anything with a bid, anything that can be sold in volume is being sold. Underlying trends have nothing to do with it.

I do think we’ll see stocks and gold decoupling. We’ll see all of these asset classes start to establish their own trends based on economic fundamentals, once some stability returns to the market. First we have to get past these great down drafts driven by the need for liquidity.

TGR: When do you see that happening?

BL: That’s a difficult call. Some predict the bailout plan will have an impact soon—over the coming few weeks. I think that enough damage has been done to last for the rest of this year. Simply having gotten through October will bring a big psychological boost. It was such a hazardous month and had earned such a well-deserved reputation for being treacherous for equity investors.

At this point, everyone who doesn’t have to sell, who isn’t on margin, or doesn’t need the liquidity, should just sit back, keep their heads low and wait until the New Year.

TGR: But when do you expect some stability?

BL: It’s hard to say how much more selling will occur. A lot of money has certainly flown out of the commodities sector and the stock market. We’ve lost $3 trillion in wealth in the stock market alone since the bailout. And yet, while there’s already been a tremendous amount of selling, there is still some money on the sidelines. It’s just impossible to predict when stable markets, much less an uptrend, will come.

TGR: What do you think of the fact that the value of the U.S. dollar has increased against most other currencies? What’s causing that given all this financial turmoil?

BL: A couple of things. First off, assets are being sold to raise dollars to meet margin calls and redemptions. Until the margin clerks and fund investors start accepting gold in payment, then we’re not going to see gold rising in such an environment.

Secondly, the dollar has been in a bit of a short squeeze. A number of European banks have had to buy dollars to fund redemptions from clients with accounts based in U.S. dollars. The pressure resulting from redemptions and withdrawals forced them to buy dollars at virtually any cost to redeem these calls. That short squeeze has elevated the relative value of the dollar over the near term. This situation won’t last. But typically, when a rebound from a short squeeze occurs, there will be a dramatic move in the opposite direction.

TGR: By dramatic, do you mean fast?

BL: A lower dollar, a weaker dollar. And yes, in fairly quick fashion.

TGR: A weaker dollar would push up the value of physical gold.

BL: Absolutely. And over the longer term, that will happen eventually. Trillions of dollars of are being created to bail out financial institutions and local economies. This will have a dramatic effect on inflation. But for now, this deleveraging process is highly deflationary. We’re getting a stronger dollar and relatively lower values for anything the dollar will buy. But ultimately, all these newly created dollars and all of this new fiat currency worldwide will result in much higher inflation.

TGR: You are predicting we are headed for an inflationary environment?

BL: Oh, absolutely. Even if the currency that has been created or promised thus far proves insufficient to engender an inflationary environment, the financial authorities will create whatever amount it takes to bring about inflation. That’s only way to stop deflation. They cannot transition gradually from a deflationary environment to one with low inflation. The pendulum will have to swing hard in the other direction.

TGR: Will the pendulum swinging bring the end of deleveraging? You said earlier that as the deleveraging process completes itself, that the asset classes will now reestablish themselves on their own merits.

BL: Yes.

TGR: Once this deleveraging ends, inflation begins?

BL: Yes, but once we pass through a difficult transition period from a deflationary environment into an inflationary one. We’re probably living through it right now. There’s no telling when the pendulum has reached bottom, and when it’s going to start swinging the other way. Every time we think we’ve hit a bottom in the stock market, we test a new one. Every time we think the last shoe has dropped, another one falls. This uncertainty and fear of what lies ahead really bothers the market.

For so long we didn’t realize that the market was barreling along with blindfolds on. Suddenly these obstacles are hitting us with great force and we don’t know what or where the next stumbling block will be. And that’s scary.

TGR: But in that uncertainty lies opportunity.

BL: Absolutely, but it takes more than insight to see opportunity. It also takes guts to act on it. We all recognize that this is opportunity, but it’s the proverbial falling knife syndrome. When do you step in? I’ve pecked away at a few irresistible bargains myself and in some cases those irresistible bargains are now trading for half of what I paid for them.

So it’s hard to find the bottom, but there is value here. I’m advising my readers not to over-extend themselves. Wait for a trend to establish itself, give up some of these early gains before you jump in wholeheartedly. With that said, it’s not a bad time to peck away at some bargains here and there.

TGR: Do you have some bargains you can share with us?

BL: Yes, I do. All are extremely undervalued and selling for small fractions of their peak prices. The key is to find companies with real assets and the financial wherewithal to survive this down market.

NovaGold Resources (NG:AMEX)(NG:TSX), at these levels, is a tremendous bargain. There’s been a lot of concern about NovaGold and what’s going to happen at Galore Creek, but I think that’s going to end up being a bigger, more profitable project than anyone is currently imagining. Inter-Citic Minerals (ICI.TO) is another great company with a tremendous gold project in China. It’s trading for around 30 cents—a fraction of what this project is worth even at today’s prices. It’s a multi-million ounce project with considerable growth potential. Keegan Resources Inc. (AMEX.KGN) is another one. I think they’ll end up with close to 3 million ounces in their West African projects. Keegan sells for 75 cents with about a $22 million market cap.

On the uranium front, I like Hathor Exploration (HAT: TSX.V). This company is one of the only bright spots in today’s junior stock market. They have a tremendous high-grade uranium discovery in the Athabasca Basin and have only explored about a third of the structure that hosts the uranium mineralization. Roughly outlined, they’ve probably got close to 40 million pounds—once that’s drilled out to a compliant resource, it’s probably worth about $300 million even in today’s market. But Hathor’s trading for well under half that value right now, and the deposit should grow much larger. So I really like Hathor as a stock that almost assuredly will trade for considerably higher prices down the road.

TGR: You follow uranium quite closely. Can you just give us an overview? What’s the outlook for uranium juniors?

BL: Uranium is a great long-term story, but when prices reached $110 to $120 a pound, it did get very much ahead of itself. Since then, we’ve come back to earth, and hard. A lot of that drop in price can be attributed to the diminishing outlook for the global economy. But a significant part of the decline has to do with the fact that hedge funds were speculating in uranium on the long side and they have obviously deleveraged. Some of them no longer exist.

The bottom line is that a lot of the uranium positions—not just the companies, but actually the metal itself—have been sold down. Uranium’s long-term story remains bullish, but it’s not going to develop as quickly as everyone had hoped during the ‘urani-mania’ a couple of years ago. We’re going to have to see China grow considerably, for example. A lot of the uranium forecasts were based on the number of nuclear reactors that China was going to build as well as the rest of the world. But it takes a long time to build a nuclear power plant, even in China. The long-term trend is up, but along the way there will be bumps and corrections like those we’re experiencing right now.

TGR: So even a recommendation like Hathor, which has been pounded down by the market in general along with the drop in the price of uranium, would take awhile to bounce up?

BL: Hathor is such an exciting, high-grade story that its prices are being driven by its exploration success, making it largely independent of the short-term uranium price. Granted, some analysts have made rough calculations of its net asset value and then, rather than assign a price target that’s a multiple of its NAV, end up with a target that’s just half of its NAV. Unfortunately, that’s a function of today’s uranium market. But Hathor will be driven by drill results over the next three to six months, while the rest of the sector will remain pretty moribund. Most uranium explorers need a price over $80, because a lot of uranium in the ground becomes economic around that level. And we’ll need sustained prices around $100 before lower-grade uranium projects become viable and lead the representative stocks to rise.

TGR: At what point will existing nuclear facilities begin to consume enough to push the price up?

BL: When uranium was trading for over $100, everyone agreed that was the time. Now that uranium is in the mid-$40s, I just don’t think that anyone can predict when we’re going to sustain those higher prices again. The decline in the broader commodities market and the corresponding strength in the dollar are having an effect here. Again, I think we need to get through this temporary deflationary phase and the stronger dollar. A weakening dollar will start to bring up commodity prices. That’s when uranium will creep back. But it could be late 2009 before we can see that happen.

TGR: Do you cover any of the rare minerals in the Gold Newsletter?

BL: Not too closely. It’s difficult for those rare mineral projects to get much attention in this market. Gold is what really drives a bullish environment for resource stocks. You really need a very broad commodity bull market before those more obscure metals and elements get noticed. One exception is Rare Element Resources Ltd. (RES:TSX.V). It’s the best of the rare earth plays, ironically, because of its gold project, Sundance, joint ventured with Newmont. Sundance will drive RES, while the rare earth component is more of a backdrop to the gold story.

TGR: Interesting. So even though there’s demand for rare earth minerals from many different areas, that won’t be enough to move Rare Element Resources forward?

BL: No, I don’t think so. I think that’s a gold story.

TGR: You have a conference coming up in New Orleans, from November 13-17. How would investors interested precious metals and/or uranium benefit from your conference?

BL: Investors will get the latest thinking from leading experts in mining and resource stocks—from some of the very people who predicted this downturn. I am referring to Rick Rule, Dave Coffin, Lawrence Roulston, Brent Cook, Greg McCoach and others, who do very well finding the bargains that will survive. Investors will also hear from some of the biggest names and the most respected experts in geopolitics and economics. We take great pride in presenting the most celebrated leaders in the world, who not only take a look at the big picture but also drill down to the details.

TGR: Steve Forbes will be there.

BL: Yes, and Fred Thompson will give us look at the geopolitical angle. Our conference takes place right after the U.S. presidential and congressional elections, and investors need to gain a clear understanding of how the elections will impact the economy, investments and tax strategy. So in addition to Thompson and Forbes, we’ll also hear from Stephen Moore, a noted economist affiliated with the Cato Institute and the Wall Street Journal. James Carville, a well known political operative, will tell us what the fallout of this election will be for the American investor.

And Doug Casey, representing libertarians, will have his annual debate with a conservative and a liberal, i.e., with Thompson and Carville. That’s a real crowd pleaser with a lot of fireworks.

TGR: That’s got to be lively.

BL: People always pack the halls for that one.

TGR: Any last thoughts on where gold will be by the end of the year?

BL: I think I will beg off on that one. Frankly, I don’t want to jinx it, but I think we could see a December surprise. One of the potential wild cards is the emergence of an effort to get people take delivery on December gold and silver contracts, which may or may not end up depleting the warehouse stocks to any significant degree. Just the possibility of that happening could be enough to trigger some short-term upward movement in the gold and silver price.

Brien Lundin, with over 20 years of experience in investment analysis and publishing, serves as president of Jefferson Financial and editor of Gold Newsletter . In Gold Newsletter, he covers not only resource stocks, but also the world of investing, from small-caps of every type to macroeconomics and geopolitical issues.

My Note: This article is good enough for a repeat especially now that Barak Obama is our newly elected President. – jschulmansr

Rare Earth Metals: Not So Rare, But Still Valuable – Features and Interviews – Hard Assets Investor

04 Tuesday Nov 2008

Posted by jschulmansr in commodities, Copper, deflation, Finance, gold, inflation, Investing, investments, Latest News, Markets, mining stocks, precious metals, silver, U.S. Dollar, Uncategorized

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Rare Earth Metals: Not So Rare, But Still Valuable – Features and Interviews – Hard Assets Investor

Rare Earth Metals: Not So Rare, But Still Valuable

Written by Tom Vulcan

Tuesday, 04 November 2008 12:47

Page 1 of 4

The rare earth metals are, in fact, not that rare!

The most commonly occurring rare earth metals – cerium, lanthanum, neodymium and yttrium – are actually more common in the Earth’s crust than lead. And even silver.

While cerium, the most abundant rare earth metal, is more prevalent (60 parts per million (ppm)) than copper, even lutetium (0.5 ppm) and thulium (0.5 ppm), the least abundant, are to be found in the Earth’s crust in greater quantities than antimony, bismuth, cadmium and thallium. (The outlier is promethium, which, it appears, is not to be found in the Earth’s crust, and which is only used in compound form, of which, to date, some 30 have been prepared.)

Abundance of Elements In The Earth’s Crust

Note: Abundance (atom fraction) of the chemical elements in Earth’s upper continental crust as a function of atomic number.

Many of the elements are classified into (partially overlapping) categories: (1) rock-forming elements (major elements in green field and minor elements in light green field); (2) rare earth elements (lanthanides, La-Lu, and Y; labeled in blue); (3) major industrial metals (global production > ~3×107 kg/year; labeled in bold); (4) precious metals (italic); and (5) the nine rarest “metals” – the six platinum group elements plus Au, Re, and Te (a metalloid).

Source: USGS

So, why are they called the “rare earth” metals? Probably from the uncommon oxide-type minerals, or earths, from which they were originally extracted. The corollary to their abundance is, however, the fact that, to date, their “discovered minable concentrations are less common than for most other ores.”

What Are The Rare Earth Metals?

The rare earth metals (aka, REM, rare earth elements (REE) or, sometimes, just rare earths) are a group of 15 chemically similar elements (grouped separately in the periodic table) known as lanthanides. Commercially, the rare earth grouping usually also includes scandium and yttrium, both of which are actually elements above lanthanum in the periodic table.

In more physical terms, these metals range in color from shiny silver to iron gray. As the USGS describes them, they “are typically soft, malleable, ductile and usually reactive, especially at elevated temperatures or when finely divided.” At the lower end, cerium has a melting point of 798° C and, at the upper, lutetium has a melting point of 1,663° C.

It will come as no surprise that the unique properties (catalytic, chemical, electrical, metallurgical, nuclear, magnetic and optical) of the REM, and, in particular, both their specificity and versatility, have led to their being used for a wide variety of purposes.

From relative obscurity, they are now important economically, environmentally and technologically.

What Are They Used for?

The range of applications in which they are used is extraordinarily wide, from the everyday (automotive catalysts and petroleum cracking catalysts, flints for lighters, pigments for glass and ceramics and compounds for polishing glass) to the highly specialized (miniature nuclear batteries, lasers repeaters, superconductors and miniature magnets).

The Rare Earths And Some Of Their End Uses

*Name*	*Symbol*	*Some End Uses*
Cerium	Ce	Catalysts, Ceramics, Glasses, Misch Metal*, Phosphors and Polishing Powders
Dysprosium^‡	Dy	Ceramics, Phosphors and Nuclear Applications
Erbium^‡	Er	Ceramics, Glass Dyes, Optical Fibers, Lasers and Nuclear Applications
Europium^‡	Eu	Phosphors
Gadolinium^‡	Gd	Ceramics, Glasses, Optical and Magnetic Detection and Medical Image Visualization
Holmium^‡	Ho	Ceramics, Lasers and Nuclear Applications
Lanthanum	La	Automotive Catalysts, Ceramics, Glasses, Phosphors and Pigments
Lutetium^‡	Lu	Single Crystal Scintillators
Neodymium	Nd	Catalysts, IR Filters, Lasers, Permanent Magnets and Pigments
Praseodymium	Pr	Ceramics, Glasses and Pigments
Promethium	Pm	Phosphors and Miniature Nuclear Batteries and Measuring Devices
Samarium	Sm	Microwave Filters, Nuclear Applications and Permanent Magnets
Scandium	Sc	Aerospace, Baseball Bats, Nuclear Applications, Lighting and Semiconductors
Terbium^‡	Tb	Phosphors
Thulium^‡	Tm	Electron Beam Tubes and Medical Image Visualization
Ytterbium^‡	Yb	Chemical Industry and Metallurgy
Yttrium^‡	Y	Capacitors, Phosphors (CRT and Lamp), Radars and Superconductors

Groups: yttrium and lanthanide (Scandium falls into neither category)^‡ Heavy REM

* Misch Metal is an alloy of rare earth metals used not only for lighter flints, but also, probably more importantly, in purifying steel by removing oxygen and sulfur.

Separately, or as compounds, various rare earth metals are used also in the production of superalloys

REM are now especially important, and used extensively, in the defense industry. Some of their specific defense applications include: anti-missile defense, aircraft parts, communications systems, electronic countermeasures, jet engines, rockets, underwater mine detection, missile guidance systems and space-based satellite power.

USGS figures for 2006 indicate that the three main uses of REM in the U.S. were: automotive catalytic converters (25%), petroleum refining catalysts (22%) and metallurgical additives and alloys (20%).

Source: USGS

In many of these applications, the REM are used in the form of low-cost compounds. As oxides, they are used extensively in the ceramics and glass industries and, in addition, for various metallurgical uses. Indeed, it has been estimated that only 25% of mined REM-bearing materials are actually processed to extract individual metals.

The REM most commonly used as separated metals are: cerium, europium, gadolinium, neodymium, samarium and terbium.

Rare Earth Metals Supply

From having been a major producer (and consumer) of REM (from the Mountain Pass mine in the Mojave Desert, Calif.) until the mid-80s, the U.S. now no longer mines any REM. The world’s major producer is China (particularly from its Bayan Obo mining operation in Inner Mongolia), with considerably lesser amounts coming from Brazil, India and Russia. Since 2000, domestic REM consumption in China (which now accounts for over half of the country’s overall REM products) has exceeded that of the U.S.

Global Rare Earth Metal Oxide Production – 1950-2006 (‘000s Tonnes)

Source: Russian Journal of Non-Ferrous Metals (from USGS)

While REM deposits in China and the U.S. are primarily to be found in the mineral bastnäsite (80-90% of all raw materials produced), elsewhere – and in particular in Australia, Brazil, India, Malaysia, South Africa, Sri Lanka and Thailand – they are usually to be found in the mineral monazite. (There are also monazite resources both in China and the U.S.) Mining monazite can, however, be a little tricky, as the ore tends to contain the radioactive elements thorium (see Cobalt: More Than Just Blue) and radium.

In addition, there are also REM-containing ion-absorption ores in the south of China. Importantly, these last contain around 80% of the world’s known resources of the less-widespread heavy, yttrium group, metals.

World Mine Production (Tonnes)

*Country*	*2006*	*2007*
China	119,000	120,000
India	2,700	2,700
Brazil	730	730
Malaysia	200	200
Thailand	–	–
Australia	–	–
U.S.	–	–
Other Countries	NA	NA
*Total (rounded)*	*123,000*	*124,000*

Source: USGS

Although it mines no REM of its own, in 2007, the U.S. remained a major importer, exporter and consumer. From 2003-2006, China accounted for some 94% of its REM-related imports.

While not yet actually recommencing mining operations (for environmental, regulatory and market reasons), toward the end of 2007, Molycorp Inc. (wholly-owned by Chevron) resumed operating its rare earth separation plant at Mountain Pass. The company continues to sell bastnäsite concentrates and REM intermediaries, together with refined products, from its existing mine stocks. Permits to recommence mining are still pending.

Rare Earth Metals Demand

Domestic demand in the U.S., as well as the demand for REM globally, remained strong in 2007, and have continued so in 2008. This has been true both for mixed rare earth compounds and the metals and their alloys. According to the USGS: “The trend is for a continued increase in the use of rare earths in many applications, especially automotive catalytic converters, permanent magnets, and rechargeable batteries.”

Forecast Growth Of Rare Earth Metals Usage

*Element*	*Application*	*Consumption* *(Tonnes p.a. of REO)*		*Growth Rate* *(% p.a)*
		*2006*	*2012*
Ce, La, Nd, Pr	Battery Alloy	17,000	43,000	17
Dy, Nd, Pr, Sm, Tb	Magnets	20,500	42,000	13
Eu, Tb, Y	Phosphors	8,500	14,000	9
	Ceramics	5,500	9,000	9
	Others	8,000	13,000	8
Ce, Nd, La	Catalysts	21,500	32,000	7
Ce, La, Pr	Polishing Powder	14,000	21,000	7
Ce, Er, Gd, La, Nd, Yb	Glass Additives	13,000	14,000	1
	Total	108,000	188,000	10

REO = rare earth oxide

Source: Roskill HK Rare Earth Conference, November 2007

The prices of most REM rose in 2007, and with the exception of neodymium and praseodymium (both metal and oxides) and terbium (oxide), the prices of most REM (metals and oxides) have either remained the same, or continued to rise in 2008.

	Price – US$/Kg
*Name*	*Oxide*		*Metal*
	End-2007	End-Oct 2008	End-2007	End-Oct 2008
Cerium	3.60	3.80	7.10	10.50
Dysprosium	94.00	118.00	125.00	153.00
Erbium	35.00	35.00	N/A	N/A
Europium	368.00	525.00	560.00	700.00
Gadolinium	N/A	N/A	25.00	28.00
Lanthanum	4.60	8.00	6.00	13.00
Lutetium	550.00	550.00	N/A	N/A
Neodymium	30.00	20.00	40.00	29.00
Praseodymium	28.00	20.00	37.00	29.00
Samarium	4.40	4.40	14.00	26.00
Terbium	633.00	621.00	750.00	793.00
Ytterbium	55.00	55.00	N/A	N/A
Yttrium	12.00	12.00	29.00	42.00
Misch Metal (48% Ce)			6.00	8.00
Misch Metal (25% La)			12.00	14.00

Source: Tianjiao International

With such strong domestic demand for REM in China, there are now controls on production and exports (tariffs and quotas). And in some places, because of environmental concerns, among other things, there are both mining restrictions and mining quotas.

According to Roskill‘s 2007 report on the economics of rare earths and yttrium, this has “brought fundamental change to the global industry, taking it from oversupply to demand shortages.”

Indeed, in its report, Roskill envisaged that, with demand growth for rare earths forecast at 8-11% per annum, and should China’s strict control persist, there will be a significant need for “new non-Chinese capacity in the next 3 to 4 years.”

2007 – Supply/Demand Forecast

Source: Roskill

Opportunities In Rare Earths

As with the minor metals, there are no exchanges on which REM are traded. Both the physical metals and their different oxides can, however, be bought from various specialist rare earth companies.

It seems reasonable to assume that there will always be demand for rare earths metals. While there are substitutes, these are usually not as effective. Since no REM are currently mined in the U.S., and Molycorp is a wholly-owned subsidiary of Chevron, no direct investment in any significant U.S. mining operations for these metals is possible. Looking overseas, there are, however, some opportunities for exposure.

India, unfortunately, is out, as all three rare earth production companies are government-owned.

A recent news snippet about the Japanese chemical group Showa Denko (Bloomberg Ticker – SHWDF:US) was of particular interest on two counts. Not only did it state that the company had set up a joint venture to extract dysprosium in Vietnam, but also that it was doing so because it wanted to secure a “stable supply” of rare earth magnetic materials as, currently, it relies on China – where, indeed, it currently has two subsidiaries (Baotou and Ganzhou).

China

If, however, the world’s largest REM producer is of interest, then, among the Chinese companies mining REM in Bayan Obo, is the quoted Inner Mongolia Baotou Steel Rare-Earth Hi-Tech Co Ltd (Baogang) (Bloomberg Ticker – 600111:CH).

Quoted companies mining REM elsewhere in China include: China Rare Earth Holdings Ltd (Bloomberg Ticker – CREQF:US), Aluminum Corporation of China (aka Chinalco) (Bloomberg Ticker – ACH:US), Neo Material Technologies (Bloomberg Ticker – NEM:CN).

Recently, however, the mines in Sichuan were shut down, and there are strict quotas in places in Fujian, Guangdong, Hunan and Jiangxi, where there has been severe environmental damage.

Australia

In Australia, there are currently a number of rare earth mining projects at various stages of development.

According to an ASX announcement at the beginning of July this year, the “Demonstration Pilot Plant” at Alkane Resources‘ (Bloomberg Ticker – ALK:AU) Dubbo Zirconia project was set to go 24/7 in late July, and it stated that “(l)aboratory scale testing for recovery of the rare earth elements is scheduled to commence in July.”

Arafura Resources (Bloomberg Ticker – AFAFF:US) expects the rare earths processing plant at its Nolans Project in the country’s Northern Territory to be in production in 2011.

Based on November 2005 figures, the company compared its Nolans resource with some others around the world.

Source: Arafura Resources Limited

At its Mount Weld project in Western Australia, Lynas Corporation (Bloomberg Ticker – LYSCF:US) completed its first mining “campaign” in May. Based on figures updated in March this year, the company believes its resources at the project now amount to some 12.24 million tonnes at 9.7% rare earth oxide, which will produce some 1,124,000 tonnes of REO.

Canada

In addition to Neo Material Technologies out of Toronto, with its operation in China, there are three other Canadian companies involved, to a greater or lesser extent, in REM in Canada itself.

Avalon Ventures Ltd (Bloomberg Ticker – AVL:CN) has its Thor Lake Project near Yellowknife in Canada’s Northwest Territories with, according to the company, “[e]xceptional enrichment in Neodymium & Heavy REE.”

VMS Ventures (Bloomberg Ticker – VMS:CN), out of Vancouver, has its Eden Lake Carbonatite Complex in Manitoba, where REM were discovered in 2003.

Great Western Minerals Group (Bloomberg Ticker – GWG:CN), out of Saskatoon in Saskatchewan, has its Hoidas Lake Rare Earth Project which, in the words of the company, “…is North America’s most advanced Rare Earth Element (REE) property in development…” and “…has the potential to supply at least 10% of North America’s consumption of REE for many years.”

Finally, Canada’s Rare Element Resources (Bloomberg Ticker – RES:CN), has not only gold on its Bear Lodge, Wyo., property, but also, in its words, “significant high-grade rare-earth elements.”

For those interested in looking “downstream,” there are a number of REM producers internationally, especially in Japan. In the U.S., however, apart from Chevron’s Molycorp, both France’s chemical company Rhodia (Bloomberg Ticker – RHA:FP), and WR Grace‘s (Bloomberg Ticker – GRA:US) Grace Davison division are actively involved in processing rare earths.

Afterwords

First, it has been estimated that current global consumption of REM now accounts for around 70-75% of their total production. This leads one to believe that considerable quantities of mined REO remain, as yet to be processed.

Second, the mineral ore resources currently mined to produce REM contain different groups of metals, not just particular, individual, metals in isolation. So, instead of some of these metals being by-products of other metals, as, say, rhenium is of moly, and moly is of copper, they are essentially “co-products” – mine for one and the others come free!

The corollary to this, however, is that the economics of mining on such a “volume” basis could lead to it just not being viable to mine such ore resources for one or two REM alone, especially if the other metals contained in the REO do not “pay their way.” In future, therefore, the composition of a mine’s REO resources – as opposed just to the volume of ore it can produce – may well become critical to that mine’s economic viability.

Third, even though rare earth metals are classified as critical minerals in the U.S. National Academies’ “criticality matrix,” the U.S. National Defense Stockpile at present contains none.

Resources

The National Academies

Roskill

Russian Journal of Non-Ferrous Metals

Tienjiao International

U.S. Geological Survey (USGS)

jschulmansr: My Note I currently have a long position in Lynas Corp.

The Gold Report- Brien Lundin: Is Gold Holding a Wild Card?

04 Tuesday Nov 2008

Posted by jschulmansr in commodities, Copper, deflation, Finance, gold, hard assets, inflation, Investing, investments, Latest News, Markets, mining stocks, precious metals, silver, Uncategorized

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The Gold Repport

Brien Lundin: Is Gold Holding a Wild Card?

Source: The Gold Report 11/04/2008

The Gold Report: Gold and the Dow are both going down. Shouldn’t they be decoupling and if they do, what would it take to make that happen?

TGR: When do you see that happening?

At this point, everyone who doesn’t have to sell, who isn’t on margin, or doesn’t need the liquidity, should just sit back, keep their heads low and wait until the New Year.

TGR: But when do you expect some stability?

TGR: What do you think of the fact that the value of the U.S. dollar has increased against most other currencies? What’s causing that given all this financial turmoil?

TGR: By dramatic, do you mean fast?

BL: A lower dollar, a weaker dollar. And yes, in fairly quick fashion.

TGR: A weaker dollar would push up the value of physical gold.

TGR: You are predicting we are headed for an inflationary environment?

BL: Yes.

TGR: Once this deleveraging ends, inflation begins?

TGR: But in that uncertainty lies opportunity.

TGR: Do you have some bargains you can share with us?

TGR: You follow uranium quite closely. Can you just give us an overview? What’s the outlook for uranium juniors?

TGR: So even a recommendation like Hathor, which has been pounded down by the market in general along with the drop in the price of uranium, would take awhile to bounce up?

TGR: At what point will existing nuclear facilities begin to consume enough to push the price up?

TGR: Do you cover any of the rare minerals in the Gold Newsletter?

TGR: Interesting. So even though there’s demand for rare earth minerals from many different areas, that won’t be enough to move Rare Element Resources forward?

BL: No, I don’t think so. I think that’s a gold story.

TGR: You have a conference coming up in New Orleans, from November 13-17. How would investors interested precious metals and/or uranium benefit from your conference?

TGR: Steve Forbes will be there.

And Doug Casey, representing libertarians, will have his annual debate with a conservative and a liberal, i.e., with Thompson and Carville. That’s a real crowd pleaser with a lot of fireworks.

TGR: That’s got to be lively.

BL: People always pack the halls for that one.

TGR: Any last thoughts on where gold will be by the end of the year?

Golden Opportunities? – Hard Assets Investor

03 Monday Nov 2008

Posted by jschulmansr in commodities, Copper, deflation, Finance, gold, hard assets, inflation, Investing, investments, Latest News, Markets, mining stocks, oil, precious metals, silver, U.S. Dollar, Uncategorized

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Golden Opportunities? – Brad’s Desktop – Hard Assets Investor

Written by Brad Zigler

Brad’s moderating a panel discussion at today’s Inside Commodities Conference. Technical problems prevented the production of this week’s market recap podcast. Following is a transcript of the audio file.

You’ll be forgiven if all the recent selling has you exhausted. Perhaps you’ll be comforted to know that the selling itself may be exhausted, at least for some commodities.Let’s not get ahead of ourselves, though. First, let’s look at last week’s key markets.

COMEX spot gold finished 2% lower at just under $717 an ounce and near the week’s lows. The deeply oversold market tipped some technical indicators toward the bullish side, but a close above $796 would still be needed to establish the presence of a short-term low. For the active December contract, add a couple of dollars to that price threshold.

The gold market’s been liquidating at an increasingly torrid pace over the past month. As the per-ounce cost of gold shed nearly $150, net long interest in COMEX futures held by hedge funds and other large speculators was pared by more than a third. That bearishness, however, shows some signs of exhaustion. Commercial net short positions have been whittled by more than 41% as hedging interest seemed to dry up like water droplets in a hot skillet in the past two reporting weeks.

The interest picture, in fact, looks a lot like August 2007, and we all know what happened to gold prices then. That said, follow-through this week will be pivotal for gold bulls.

While bullion price action was lackluster last week, gold mining stocks, tracked by the Market Vectors Gold Miners exchange-traded fund, sparkled. The stocks in the ETF’s underlying index have been battered for months, but they reversed course and rose an impressive 18% last week, forcing the bullion-to-mining stock ratio below its 20-day moving average for the first time since September. That’s another reason this week should be decisive. Are miners finally cheap enough to attract sustainable buying interest? We’ll see. And we’ll touch on this subject again a little later.

SPDR Gold Shares (GLD)/Market Vectors Gold Miners ETF (GDX) Ratio

SPDR Gold Shares (GLD)/Market Vectors Gold Miners ETF (GDX) Ratio

Another ratio that was closely watched last week was the gold/silver ratio. The white metal probed the market – the London morning fixing, that is – under the $9 level, and found reactive buying interest which pushed the white metal to taste the air briefly just above $10. In the end, though, the gold/silver ratio returned to its starting point for the week at 78-to-1. The ratio topped out at 84-to-1 in mid-October.

Gold/Silver Ratio

Gold/Silver Ratio

Enough about yellow gold. What about black gold? What about crude oil?

Well, after starting weakly, spot crude ended the week about 6% higher. Commercial hedging interest, though, picked up, indicating growing concerns about future price weakness. At the same time, there was a substantial build in futures’ open interest to levels not seen since mid-September, signaling a respite in liquidations.

Early in the week, as crude oil prices ratcheted lower, refining margins were at the 8% level, but by week’s end, dipped back below 6%. Friday was Hallowe’en, a day that last year marked a seasonal bottom in the crack spread. A crack spread, if you’re not familiar with the term, refers to the potential profit that can be earned by selling refined products such as gasoline and heating oil after paying for crude oil feedstocks. The spread typically improves over winter. After all the tricks and treats last year, refining margins doubled to over 13% by mid-December as crude prices eased and product prices firmed. There may soon be treats for this year’s crop of spreaders. If you want to learn more about the spread and how to use it as an investment barometer, read the Hard Assets Investor article titled “Time For Crack Spreads?“.

NYMEX Spot Crude Vs. Refining Margins

NYMEX Spot Crude Vs. Refining Margins

Last week’s uptick in oil prices was accompanied by an even bigger gain in natural gas prices. Nearby Henry Hub futures rose nearly 9% for the week as the crude oil energy premium weakened to new seasonal lows – less than half its pre-Labor Day level. There’s another very reliable spread opportunity you can learn about in a Hard Assets Investor article named “Spreading Oil And Natural Gas“.

All this action took place as the dollar took a deflationary breather. At Hard Assets Investor, we’ve got a real-time gauge of monetary inflation that ticked back up to a 9% annual rate, nearly a half-percentage point higher than the previous week’s reading. It may be a little early to call for a reflation, but that’s the biggest break in the deflationary trend we’ve seen since mid-September.

U.S. Monetary Inflation Vs. Gold

U.S. Monetary Inflation Vs. Gold

By week’s end, the dollar cheapened against the euro by 2 cents, but only after reaching a new high for the year on Wednesday. Banks traded euros at an average price between $1.30 and $1.31 on Friday. Back on Independence Day – just four months ago – the euro was worth more than $1.58.

Now back to gold; something that’s constantly on the mind of Van Eck portfolio manager Joe Foster. Last week, we recapped a talk we had with him about the yellow metal’s prospects. Foster believes gold fundamentals will reassert themselves as soon as the current crisis phase runs its course. Then, he figures, the market’s love affair with the greenback will grow cold. The protracted nature of the banking and housing crisis is ultimately bullish for gold, he says, since it will prompt the Fed to maintain an easy money policy to prop up the economy. The government’s on a debt binge that’ll eventually be monetized, says Foster.

Foster’s taking a long-range view, though, by looking at the gold market as a sequence of phases: first, a crisis mode and a deflationary scare for a year or two, then, as the economy starts to recover, an inflationary period that could rival that of the 1970s.

Gold’s prospects during the crisis phase are murky. We’re clearly in new territory here. Remember, the last time we had a chance to gauge gold’s performance in a deflationary environment was during the Great Depression, and back then, the price was artificially fixed.

It’s in the inflationary phase that gold’s performance seems more predictable. Foster’s not putting a price target out, but he does feel the inflationary period will be long-lived.

As for when we move out of the deflationary scare into inflation mode, our real-time indicator can help us. According to the indicator, dollar deflation looks like it actually started in March. If Foster’s right, we could see reflation begin as soon as 2009’s second quarter.

So somewhere in here, says Foster, is a buying opportunity for gold bullion or, most especially, gold mining stocks. He’s particularly keen on well-managed producers with good cash flow such as Kinross Gold Corp. (NYSE: KGC), now about 40% below its 200-day moving average price.

The Gold Report | Lemieux: Gold’s Behavior Flies In The Face Of Every Theory

31 Friday Oct 2008

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Eric Lemieux: Gold’s Behavior Flies in the Face of Every Theory

Streetwise’s The Gold Report

Eric Lemieux: Gold’s Behavior Flies in the Face of Every Theory
Source: The Gold Report 10/31/2008

In an exclusive interview with The Gold Report, Eric Lemieux, metals and mining analyst with Laurentian Bank Securities, describes gold’s inexplicable descent as a violation of market fundamentals. Eventually the worsening supply deficit will energize the precious metals sector and when it does, he believes the junior explorers will be well positioned to benefit. He focuses on the emerging mineral wealth of the James Bay area of Quebec and discusses his favorite explorers.

TGR: You cover 25 to 30 mineral exploration properties, primarily in the James Bay area, owned by four exploration companies. Although there are 20 to 30 exploration and mining companies are in the area, you focus on only a few of those companies. Why the James Bay area, and why these companies: Midland Exploration Inc. (TSX.V:MD), Virginia Mines Inc. (TSX:VGQ), Eastmain Resources Inc. (TSX:ER) and Sirios Resources Inc. (SOI) (TSX.V:SOI)?

EL: Let’s start with “Why James Bay?” In the 1970s, Hydro Québec wanted to harness the rivers to build hydroelectric power stations in the James Bay area. As part of its due diligence, the company hired consultants to assess the geological potential of the area. The report came back stating that there was very little potential. This proved not to be the case, but by then the perception had already been created that the area had low mineral potential. James Bay was considered the little brother of Abitibi—the poor little brother. Then in 2004 Virginia Mines made a major discovery, the Éléonore deposit. This is a world-class, perhaps 6-million-ounce plus deposit currently being developed by Goldcorp Inc. (TSX:G) (NYSE:GG) —and it wasn’t supposed to be there.

TGR: And it’s in an area where, thanks to Hydro Québec, there’s good infrastructure.

EL: That’s right. Hydro Québec built roads and airports providing access in the James Bay area. When you consider the infrastructure, plus the discovery of the Éléonore deposit, the area becomes very interesting. In addition, the Québec government is favorable to the mining industry. Also, James Bay is located in the Cree First Nations area and, unlike the situation in other jurisdictions in Canada, there is a 40-year history of partnerships between Hydro-Québec and the Cree as well as other participants. And then, of course, there’s the question of electrical power. The hydroelectric dams and power stations are already there. Any company that requires electricity for a long period of time can negotiate with Hydro Québec, which has a reputation for providing cheap electricity for sound industrial development. When you add it all up, the area has promising mineral potential, a good social framework, existing infrastructure, and a favorable permitting environment.

TGR: There’s also access to a skilled work force because Abitibi is just south of there.

EL: Exactly. The Abitibi has a rich mining heritage. So the proximity means you have access to that work force as well as a depth of knowledge. That’s a tremendous advantage.

TGR: What do you think are the prospects for another discovery the size of the Éléonore deposit?

EL: This is an underexplored area, so I think it’s just a matter of time. It’s been four years since the discovery of the Éléonore deposit. We’re just starting to scratch the surface and there could be some surprises in the years ahead.

TGR: Does the fact that existing infrastructure makes exploration in the James Bay area less costly give mining companies operating there an edge in today’s market?

EL: I think so, depending of course on how far commodities drop. If you can find high-grade deposits in this area, all of the advantages we discussed help offset lower commodity prices. In the current financial crisis, projects that require huge capital investments will be almost impossible to finance. That’s a huge handicap compared with smaller, high-grade projects that require less capital, and have a high payback or a quick payback time. So I think projects in the James Bay area are well positioned in today’s economic climate. Equally, exploration costs are less as road and dam infrastructure provides access and adds to beneficial logistics.

TGR: That explains why you like the geography. Let’s return to the second part of the question—why just these few companies out of the 30 or so that have property in this area?

EL: Based on the criteria I use, these companies are the best. The first criterion is the quality of the management team. If you have solid management, everything else falls into place. Then I assess the quality of the projects, the geological potential, and the share price.

TGR: Given the financial turmoil, do you think the junior companies you’re focusing on can withstand this downturn?

EL: The companies I’ve selected have what I call a partnership approach. They farm out part of their property to a JV partner who finances the exploration. Midland Exploration uses this model. Of course, the financial health of the partners is also important, because if the partners are not healthy, the work will not get done. Three of my four companies have great financial health, so they’ll be able to continue through the downturn. Some of them were able to finance last spring when the market was rather favorable. For example, Eastmain Resources did a $16 million financing that puts them in a strong financial position. And Virginia’s business model has always included a very large treasury, which stands at about $45 million. Plus the company has structured its agreement with Goldcorp to include an advanced royalty on the Éléonore deposit that will start bringing in US$100,000 per month in April 2009.

TGR: Who is Midland’s JV partner?

EL: Midland has several partners. One of them is Agnico-Eagle Mines (TSX:AEM), a major Canadian gold producing company. It’s in a good financial position and has a good asset base. Another is Breakwater Resources Ltd. (TSX:BWR), which was struggling a little even before the recent financial crisis, so that’s a bit of an unknown. My understanding is that Breakwater is still living up to its commitments. Midland has more than $4 million in its treasury, so it will be able to weather the storm. Keep in mind that in addition to looking at a company’s financial strength, you also have to review its obligations. A company may have cash, but if it has entered into agreements that require it to do work and spend money, it doesn’t have the freedom to just sit on its money in a downturn. In evaluating these companies, it’s important to examine how their agreements are structured.

TGR: Is Eastmain also following the JV concept?

EL: Eastmain, which has a sizeable portfolio of properties, has a few agreements with partners, including Barrick Gold Corp. (ABX). But for the most part, Eastmain owns 100 percent of its properties, which gives it the advantage of being able to step back and preserve cash. So I think both Eastmain and Midland are in very good positions. Virginia is probably the best one as a junior mining exploration companies because it has a great financial position, has strong management and has developed the expertise required to be successful in any economic environment.

TGR: Do Virginia, Midland, Sirios and Eastmain have contiguous properties? So if one of them makes a substantial discovery, we could expect the others to follow suit?

EL: That’s only partially true. They have a few contiguous properties, but also some that are very separate. I think each one possesses a different expertise, and is focused on a different area. That said, if there were another major discovery, it would put benefit the whole area and any property there will gain some indirect value.

TGR: When do you think the market will return to a supply-and-demand dynamic and what will it take to get the prices of well-positioned juniors back up?

EL: At the first sign of an economic downturn, investors pull their money out of the most speculative stocks. That’s why the junior explorers started to decline at the end of 2007, before the rest of the market. It’s a bit like the canary in the coal mine. The downfall started much earlier than September of this year and I think that’s unfortunate because it’s been a slow, agonizing downward process. The situation has been compounded by the fact that we’re having this huge financial economic crisis that appears to be spiraling out of control. I think we’ll eventually hit bottom, and then the markets will stabilize and start picking up again. When it does, I think the junior exploration industry will be well positioned. Why? The supply imbalance existed before the downturn and this deficit can only get worse. At some point, people will realize that we have to invest in the commodities and that will energize the industry.

TGR: It’s difficult for most of us to understand why, given the supply imbalance, commodity prices—especially gold—have declined so much recently. What’s your take on this?

EL: The decline in gold prices flies in the face of every theory. The U.S. dollar has been appreciating and the U.S. economy is going through a recession. Gold should be increasing in value in the face of all this uncertainty. To see the price of gold going down right now is almost unexplainable in my opinion. It begs the question, is this due to some type of manipulation, either directly or indirectly?

Eventually people will realize that you can’t sustain both very low commodity prices and a very high U.S. dollar because it violates certain fundamentals. Back in February 2002, an article in The Economist talked about a potential crisis resulting from businesses using financial instruments that they didn’t understand (credit risks). But everyone just turned their backs and carried on. I think it’s a matter of restoring common sense to the market. I am, in particular, in agreement with a written statement made by the general manager of the Québec Mineral Exploration Association, that says that markets must return to their original mission—to finance economic development and not speculation.

TGR: Hedge funds and money markets have had to liquidate, which is causing a lot of turmoil. Once that settles out, won’t supply and demand start to play a stronger role again?

EL: Agreed. And when that happens, I think the metals commodities industry will be in a strong position to benefit.

TGR: When do you think this might happen? Three months? Six months? A year?

EL: I estimate six months.

TGR: When we get back to supply and demand as the market drivers, and the commodities come back, what range do you think gold and copper will trade in?

EL: I think they’ll return to the levels we saw at the beginning of 2008, and I think these were fair prices. I don’t like skyrocketing prices because that’s not good for the long-term viability of the industry. I think gold was trading around $850-$920 in January. It may have touched $1,000 later in March. Good companies are able to make money when gold is in that $850 range. Copper was trading around $3.50, a price that made sense in terms of the supply and demand. These are viable long-term prices. There will be fluctuations and I wouldn’t be surprised if we see a huge spike when the markets initially rebound. But for the overall health of the industry, as long as it is a normal price, everyone comes out a winner.

TGR: To what extent do speculators play a role in these huge spikes?

EL: I think much of it is due to speculators. Having said that, I think speculators have their right to be there. I think it makes the market more fluid. Unfortunately, as we’ve seen with the financial crisis, when there’s excessive abuse, it’s unhealthy. I think we’re in the mess we’re in now because Wall Street really went to an extreme, to total deregulation.

TGR: So you think the market will regain equilibrium over time.

EL: Yes. I believe we’re experiencing the results of probable financial industry fraud. Time will tell who was responsible. I hope we will hold the perpetrators accountable. Unfortunately, I think certain elements are trying to sweep all this under the rug.

When I was young, banks were always viewed as being very conservative. They were the blue chips. Now that we’ve witnessed fraud and abuse in the banking and insurance industry, I hope people will see that banks are not necessarily the best, safest investment. And perhaps this will change their perception of a speculative market or industry, like mining, and they will be able to invest in these markets knowing that a dollar spent there will be a dollar well spent.

I hope the perception of the mineral exploration industry will change because I think there are a lot of good players and, fundamentally, people are trying to discover, develop, or produce a tangible asset. In this day and age, I think something that is tangible has its worth. Once people get to know the industry they will realize that it does have value and maybe has been undervalued for many years. At the very least, I hope that people will be more diligent in regards to what was regarded as a conservative industry (financial) and realize that the mining and mineral exploration industries have made much progress and deserve a better appreciation.

Éric Lemieux, MSc, P. Geo., is a Mining Analyst who joined Laurentian Bank Securities (“LBS”) in January 2008. Prior to joining LBS, Eric worked for nine years as a consultant responsible for applying Regulation NI 43-101- for the Autorité des marches financiers (“AMF”) as well for the New Brunswick Securities Commission. Eric had previously worked at the Montreal Exchange and prior to that had managed exploration projects for Cambior, Noranda and Soquem. Eric holds two master’s degrees, one in Mineral Economics from the Colorado School of Mines (1997) and in another in Metamorphic-Structural Geology from Laval University in Quebec City (1992). Eric hold a B. Sc. in Geology from Laval University (1989).

Gold Fundamentals Are ‘Extremely Appealing’ – Hard Assets Investor

31 Friday Oct 2008

Posted by jschulmansr in deflation, Finance, gold, inflation, Investing, investments, Latest News, Markets, precious metals, Uncategorized

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Gold Fundamentals Are ‘Extremely Appealing’ – Features and Interviews – Hard Assets Investor

Written by HardAssetsInvestor.com

Joe Foster, portfolio manager of the Van Eck International Investors Gold Fund, is one of the world’s leading authorities on gold bullion and gold shares. He spoke recently with the editors of HardAssetsInvestor.com to explain why gold has traded the way it has over the past five months … and where it’s going over the next five years.

HardAssetsInvestor.com (HAI): The gold market has been very volatile over the past six months, and the market’s been behaving oddly. What’s driving the price of gold recently?

Joe Foster, portfolio manager of the Van Eck International Investors Gold Fund (Foster): The fundamentals have not been driving it; that’s clear. Ever since mid-July, when Fannie Mae and Freddie Mac started to collapse, the markets have really started to go haywire … all the markets, gold included.

We are going through a period right now that we have never experienced in history. What we thought would be a normal reaction in these circumstances just doesn’t hold right now. We’re getting massive liquidation across all asset classes, with a huge deleveraging going on among institutions, hedge funds, etc. People are selling everything regardless of fundamentals, and gold is caught up in that. It’s dropped lower than you ever thought it would.

HAI: Where did you expect to see the bottom?

Foster: In a crisis like this, you would expect gold would perform well. It hasn’t done that. It’s dropped lower than I ever thought was possible at this stage of the cycle. We’re still at a period of time when you can’t rely on fundamentals. This panic will run its course before we can get back to fundamentals.

We’ll have to talk in stages. The first stage is the current stage, the crisis stage. I don’t think it’s over yet, but no one knows when it will be over. Then we can talk about the post-crisis stage, when fundamentals will reassert themselves and we can consider what the environment will look like at that point.

HAI: How far along are we in the crisis? Do we have any visibility on how much de-leveraging we have already seen in the commodities space?

Foster: The sellers of gold throughout this have been mainly institutions, hedge funds, pension funds and other institutions invested in the commodity indexes. When they sell off a basket of commodities, gold is a component of that and so it gets sold off as well. We’ve been hearing that the de-leveraging and forced selling could go on through the end of the year, but it is an opaque situation. Nobody knows.

HAI: Once we do get past the crisis, what are the long-term fundamentals? What should investors do right now with gold? Is now a good time to buy, or should they wait?

Foster: Somewhere in here is a great buying opportunity. We might be there today. Given the dramatic fall in the price of gold, and specifically if you look at gold stocks, which have fallen even harder than gold has, it gets interesting. If you want to take a long-term view, now is a great time to get into the gold game. When we get out of this crisis mode, the fundamentals will be and are extremely appealing for gold and gold shares.

I think several things will go in gold’s favor in the future. We’re seeing this tremendous strength in the dollar right now. That is what is different in this current crisis: The dollar has become the safe haven asset, instead of gold. I think that will unwind eventually. And that’s one of the key reasons that gold is doing so poorly right now: We’re seeing this incredible increase in the dollar.

The second thing is that we are going into an economic scenario that is fraught with risk. The level of risk has risen to new highs and I think it will be with us for a long time. I believe we are going into a tough recession. I think we’ll see continued banking problems, even after we get out of the crisis mode. It will take a long time for the housing market to turn around. These kinds of things create a good environment for gold

HAI: One of the things we’ve been monitoring is the battle between the forces of inflation, such as the massive injections of liquidity by the Fed, and the forces of deflation, such as the massive de-leveraging by the banks. How do those two combine, and what is the outcome for gold?

Foster: I see both of those forces playing a role right now. The way I think it will play out is that we’ll go through a disinflationary period, and I think the Fed will be very worried about deflation as they were in 2001 and 2002. I think we’ll see very easy Fed monetary policies, and have negative real interest rates because of those policies. That’s an environment gold thrives in. Look at what the Fed was doing in 2001-2002: The market was heading lower, gold was heading higher and the Fed was trying to pump up the economy. I think we’re back into that mode.

First we’ll go through a weak economy and deflationary scare, which will be favorable for gold. How long will that last? Probably a year or two. Following that, once the economy starts to recover, we could be facing an inflationary episode that could rival the 1970s. We’re going to see these extremely easy borrowing policies, and a tremendous amount of government borrowing. The federal government is taking on a tremendous amount of risk by taking stakes in insurance companies and banks, and its balance sheet is exploding. Eventually, they’ll have to monetize those liabilities, and the way they do that at the end of the day is by printing money. That’s hugely inflationary.

If the economy gets back on track, we’ll see the same supply issues we were facing a year ago in all the commodities – Metals, Ags, etc. That will feed into an inflationary cycle on top of the Fed monetizing their debt. I see this morphing into an inflationary episode several years out that could be very painful.

HAI: That’s an ugly picture of the economy, but a pretty picture for gold. How could it turn out differently?

Foster: One of my jobs as a gold fund manager is to point out the risks in the economy and the way investors can protect themselves. It may not play out exactly as I’m describing, but it may be something similar to that, which means your portfolio will really benefit if it has some gold in there.

HAI: Do you favor gold or gold shares here?

Foster: Gold shares have never been this cheap relative to the gold price. They have been indiscriminately sold over the past several months. If you wanted to go with gold companies, I would look at the producing companies with good cash flow. We could enter a period of very tight capital markets for a couple of years, which will make it very tough on the smaller companies developing projects with no cash flow. The companies that are producing gold right now … for those companies, with prices at $700/ounce, they are making good cash flow and will get through this crisis well.

Beyond that, we like companies that have growth. Global gold production is in decline right now, so we look for companies that are well-managed and have growth and can fund that growth. Kinross Gold is one example.

HAI: Any other words of advice for investors?

Foster: If it’s any consolation, if you look at the performance of gold versus other metals or oil, gold has outperformed just about everything else, I think. It’s down, but I think it’s still performed better than other asset classes.

And if you look at gold in other currencies, gold actually reached all-time highs recently in euros, British pounds, Australian dollars, Swiss francs. It hasn’t been that bad of an investment, relative to everything else. It speaks to gold as a unique asset class, and I think that might be missed in all this selling. Relative to other things, especially in local currencies, it has actually done OK.

HAI: One last question: How big a portion of a portfolio should be in gold?

Foster: I use this myself, and also recommend it to clients: 10% of your portfolio diversified in gold and gold shares is appropriate.

Premiums Paid for 100 Ounce Silver Bars – Seeking Alpha

30 Thursday Oct 2008

Posted by jschulmansr in commodities, Copper, deflation, Finance, gold, hard assets, inflation, Investing, investments, Latest News, Markets, precious metals, silver, Uncategorized

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Premiums Paid for 100 Ounce Silver Bars – Seeking Alpha

By: Michael Zielinski 8 Stock Portfolio.com

There has been much recent coverage of the rising premiums being paid to purchase physical gold and silver bullion. This has been cited as a consequence of the extreme demand for precious metals and evidence of the growing disconnect between market prices and physical prices.

I decided to look at some data to calculate exactly what kind of premiums are being paid and see if any trend or patterns in the data could be determined.

Specifically, I looked at selling prices for 100 ounce silver bars on eBay (EBAY). I decided to use this as a source of data since 100 ounce silver bars have historically been a low premium method to acquire silver. Also, bars of silver are relatively undifferentiated. Bullion coins from different countries or with different dates often carry premiums based on those differences.

I used eBay data because it was accessible. Completed auction records can be obtained for the prior two weeks or more. Also, I believe that eBay represents a real time, liquid market of buyers and sellers who discover prices through a bidding process. Quoted dealer prices may be for delivery at a later date and may not represent actual available supplies.

There are some possible flaws with this method. It does not take into account potential premiums for different manufacturers. I don’t know if people pay more for different makes of bars. Also, shipping costs are not included in the price data used. Some auctions may carry higher shipping charges which would impact the final selling prices. And lastly, some auctions were “true auctions” which start at a minimal opening bid while others were fixed price listings.

Data was available from October 13 to yesterday’s date. I did not include data for yesterday or October 13, since it may represent partial data. I determined the average price for each day’s auctions which closed with a sale. I compared this to the closing market price of silver for each day.

Here is a summary of the data:

Average Price for 100 Ounce Silver Bars on eBay Compared to Market Price of Silver

Date	Bars Sold	Ave Price	Market Price	Premium	Premium %
14-Oct	12	$1,557.17	$10.89	$468.17	42.99%
15-Oct	10	$1,524.70	$10.92	$432.70	39.62%
16-Oct	29	$1,465.07	$9.99	$466.07	46.65%
17-Oct	19	$1,427.68	$9.56	$471.68	49.34%
18-Oct	28	$1,422.00	$9.56	$466.00	48.74%
19-Oct	46	$1,419.04	$9.56	$463.04	48.44%
20-Oct	21	$1,431.76	$9.79	$452.76	46.25%
21-Oct	17	$1,391.94	$9.86	$405.94	41.17%
22-Oct	19	$1,428.11	$9.84	$444.11	45.13%
23-Oct	25	$1,382.84	$9.34	$448.84	48.06%
24-Oct	37	$1,367.78	$8.88	$479.78	54.03%
25-Oct	13	$1,389.31	$8.88	$501.31	56.45%
26-Oct	33	$1,329.91	$8.88	$441.91	49.76%
27-Oct	15	$1,337.33	$9.01	$436.33	48.43%

Some charts based on this data appear below. The data is only for a limited time frame, but it does spur some interesting observations (click to enlarge images).

The premium paid for a 100 ounce silver bar has ranged from 39.62% to 56.45%. The premium represents the amount paid in excess of the so-called “market price” of silver. People are clearly paying astounding premiums to acquire physical silver.

On October 15 and 22, the market price of silver dropped. In each instance this caused the percentage premium to rise. This lends some evidence to the anecdotal observation that a decline in market price only spurs greater demand for the physical metal.

Two distinct prices for silver seem to exist. The paper price for the contractual right to acquire future silver, and the physical price to acquire real silver, in hand. How and when will this situation resolve itself?

There have been several recent reports of bullion buyers seeking to take physical delivery of silver and gold from the COMEX. This would allow buyers to purchase real silver at the heretofore “fictional” paper price. If these deliveries take place and become a dependable source of purchasing physical silver, premiums for 100 ounce bars and other physical silver would likely begin to subside.

On the other hand, some are voicing the possibility that since the COMEX only has small coverage of physical metal for outstanding contacts, if enough contact holders demand delivery they will be forced to default and settle in cash. If this occurs, the likely result would be soaring market prices for silver and potentially greater premiums as the argument for physical scarcity gains another leg of support.

Disclosure: Author owns physical gold and silver.

China’s Greatest Trade Ever Oct 30, 2008
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Lubricated Global Banking Machine Still Sputters Oct 30, 2008
Premiums Paid for 100 Ounce Silver Bars Oct 30, 2008
Newmont Mining Corp. Q3 2008 Earnings Conference Call Transcript Oct 29, 2008

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This article has 9 comments:

Oct 30 07:52 AM

That was a very nice, simple, understandable analysis. I’m a little curious as to whether this is actually becoming the same problem as naked shorting. Basically for the market prices, it includes a significant amount of repeated selling of product that the seller doesn’t own.

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Oct 30 07:57 AM

Premiums have been steadily rising all summer on all forms of silver. For silver eagles is it now around 80-90%. However, some dealers do occasionally have silver available for immediate delivery and it is still possible to buy it at a lower premium from them.

All manufacturers are not equal. Bulliondirect’s nucleo auction site has Engelhard and JM bars for about a 50% premium but other brands at 36% premium. Last week there were 200 bars auctioned at seekbullion.com. Historical data is not available but I seem to remember a premium of about 30-35% for Engelhard bars. This morning Apmex has them for about a 30% premium for delivery in 4 weeks. That is not immediate, but they are reputable and I have bought from them frequently.

Ebay may be an easy place to check the prices but it is not the only place to look and it is not the first place I look when trying to buy. Plus, their fees are ridiculous (up to 15%) so it is not a good place to judge what you could sell your silver for. Other sites produce more reliable data.

I do agree with you about the high premiums, but don’t think they are uniformly as high as you claim.

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Oct 30 08:02 AM

Nice piece, though the “fictional” Silver or Gold price is available to who have the sufficient capital to take delivery from the Comex. So not really fictional just limited access. The more people who take advantage of this price decrepancy the less supply will be available and the faster our profits will rise

Also various Precious Metal PM dealers are buying 1000 oz silver bars from the comex and selling them individually. Tulving.com is selling 1000 oz Silver bars at a 7% premium or .69 over spot. Although the US Silver Eagles are going for 6.99 over spot about 70% premium with other silver items having premiums from 25% on up. The Smart money is selling Gold and Buying Silver as you can get almost 80 oz Silver for 1 oz Gold. Trade back when the ratio reaches 40 or 20. At 20 Gold to Silver ratio you would then receive 4 oz Gold for your 80 oz Silver. A nice 400% gain and you got to keep your PM’s the whole time.

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Oct 30 08:21 AM

I don’t think we will see a ratio of 20 again in our lifetime. But I agree with the principal. I plan on trading some of my silver for gold when it gets back back below 50. Until them I am holding about 3 times as much silver as gold.

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Oct 30 09:06 AM

Nice article Mike. Thank you!

I’m continuing to buy silver and gold as I find it.

Hey, sakata, WHERE do you look FIRST when you are buying? Thanks.

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Oct 30 09:12 AM

Bulion Direct is my favorite but they rarely have anything any more. Apmex is my second choice but they also rarely have much. Bullion is just getting hard to find anymore. Seekbullion is a new auction site which is much better than Ebay but it is just getting started and you have to be a dealer to sell there right now.

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Oct 30 09:12 AM

I have the JM 100 ozt silver bars. I had about 200 of them & put them up for sale on Creags list here in NY. I put them up about 5 weeks ago for $4.00
above spot. I only sold about 20 of them. So I’m not so sure if this shortage is really real. E-bay is just way to expansive.
If anyone is intersted you can e-mail me. I have an office in midtown NY
kahanj at optonline.net

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Oct 30 09:16 AM

Selling 20 of them in Craigslist is pretty good. People just don’t go there looking for bullion. I have heard of people who listed it there and got no response.

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Oct 30 10:27 AM

The premiums on 100 oz bars frankly make no sense to me. 100 oz bars are not particularly convenient either for storing wealth or for use as a medium of exchange. One ounce gold coins and bars have comparable purchasing power but are much more convenient. 1000 oz silver bars trade at much lower prices. I can only assume that the people buying the 10 and 100 oz products are simply looking for whatever’s available.

There’s another very important factor at work here, however. Because you are looking at eBay, you must extract the live.com 25% discount. When Microsoft began offering cash back on purchases at certain merchants to boost their search engine’s market share, eBay was, and remains as far as I can tell, part of the program. At that time, canny sellers of metals products immediately added a similar amount to their prices. In effect, 2500bp of that premium is being paid by Microsoft. But this still does not explain the 20-25% premiums on 100 oz silver products.

The real reason to buy silver is to have a convenient medium of exchange for ordinary goods in a scenario in which the dollar or other fiat money is no longer valued or accepted at anything like its current price. Gold has too much purchasing power for this purpose, so one needs somewhere between a few dozen and a few hundred one ounce silver coins, or perhaps a similar amount of old coin of the realm containing silver. 100 ounce bars do not serve this purpose at all, so the premium is inexplicable

Safe Haven Investments: Imminent Danger and Opportunities – Seeking Alpha

29 Wednesday Oct 2008

Posted by jschulmansr in commodities, Copper, deflation, Finance, gold, hard assets, inflation, Investing, investments, Latest News, Markets, mining stocks, precious metals, silver, U.S. Dollar, Uncategorized

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Safe Haven Investments: Imminent Danger and Opportunities – Seeking Alpha

By Marc Anthony

When people see danger in the market, their natural response is to liquidate everything and move everything into cash in order to ride out the storms. The conventional wisdom is “Cash is King.” However, conventional wisdom doesn’t work anymore, as this is unconventional time. If you are fully loaded in cash or U.S. Treasury Bonds, this news, first noted by Karl Denninger, should completely shock you out of your shell:

According to an October 19 article in Investment News, $2.29 Trillion Dollars US Treasury Bonds Failed To Deliver.

Note that it is $2.29 TRILLION, with a T for Trillion! I never heard that one could short U.S. Treasury Bonds, let alone naked shorting of U.S. T-Bonds! The T-Bonds are considered some of the safest investments, with the full faith and credit of the U.S. government guaranteeing the principal, and you get an interest payment. So shorting U.S. T-Bonds is virtually guaranteed to lose money, as you will have to pay back the principal plus the interest. You do NOT short U.S. T-Bonds, let alone naked shorting, let alone as much as $2.29 Trillion.

That is UNLESS you are a really BIG player and you clearly see imminent danger of the collapse of the U.S. T-Bonds, and of the U.S. dollar, itself. I have previously written that Warren Buffet saw extreme danger in U.S. Treasury Bonds, and as a result, was completely out of the bonds and fully into the equities market. Of course, people should respect and follow this person’s wisdom. However, small potatoes like Warren Buffet could not have naked shorted $2.3 Trillion U.S. T-Bonds. Someone much bigger, and who knows this market better, did it. I will not speculate, but read Karl Benninger’s comment, in order to gain some insight into the matter.

Money created out of thin air is NOT King! The current Kings are precious metals. Never mind the fact that the dollar staged a shocking rally and precious metals plummeted. The dollar rally is nothing but a bubble, while current precious metal prices, especially platinum and palladium, is nothing but absurdity. Physical commodities MUST be priced above their production cost, or the supply will simply dry out, as no one can continue produce metals at a loss. So, if I am sitting on my precious metals, I am pretty much guaranteed that they will soon appreciate in terms of real purchasing power. On the other hand, if you are sitting on trillion of dollars of the fiat currency, and the currency falls, the only guarantee you will have is they will continue to fall further down, until eventually, they reach zero.

The general market always manages to fool most people most of time, and causes more people to lose more money in unexpected way. It only rewards the select few who have the wisdom and the determination to stick to their wisdom. The current global crisis necessarily means an astronomical amount of fortune must be totally wiped out. What could be a better, cleaner and quicker way of wiping out trillions of dollars of fortune instantly, then to first herd the sheep into holding nothing but cash, and then having the currency suddenly collapse? Of course, the U.S. dollar rallies big time if every one is herded into buying dollars. A bubble is something pumped up to a valuation much higher than where it should be.

Fiat money is completely at odds with the economy basics of supply and demand. For anything physical, equilibrium can be reached as the price impact positively on supply and negatively on demand. Higher price encourages more production while low price suppresses the supply. When the price falls below cost, supply dries up as no one can continue to produce and sell something at loss. On the demand side, the price has exactly the opposite effect. High price suppresses demand while low price encourages consumption.

Fiat money acts in exactly the opposite way. The less valuable a currency becomes, the more is being produced out of thin air. The cheaper the currency becomes, the less people desire to own and keep them, and the faster people want to get rid of them. When people want to get rid of their paper money as fast as possible, it speed up the velocity of money, and cause the value of the currency to plummet even more, forcing the government to print more money. The vicious cycle continues until the currency is totally destroyed. Throughout civilized history of mankind, every single experiment of fiat currency has failed. There are no exceptions.

In Chinese, the word CRISIS contains two characters, DANGER and OPPORTUNITY. We are in extreme danger but also with extremely good investment opportunities. The opportunities are made even better because every one runs away from them and run towards a gigantic death trap with a sign “Cash Is King.” Remember one thing; safe havens must be small, with narrow spaces that accommodate only a few refugees.

It reminds me of the Bible story of Noah’s Ark. People ridiculed Noah as he was building his ark, thought it had never rained a single drop for a year, how could the flood come? The flood did come as Noah expected. Had these people listened to Noah and seek refuge in his Ark, would it make a difference? No! The Noah’s Ark was still only big enough to contain just one pair of each kind of animals. It wouldn’t be a Noah’s Ark if it was made any bigger. Likewise, today’s financial safe haven wouldn’t be a safe haven, but a death trap if it was big enough to allow every one in!

Although we do not see a drop of rain yet, trillion dollars of wealth will soon be flushed away by the coming financial flood of hyperinflation. Have you built your Noah’s Ark yet? There is definitely NOT enough material to build a big enough Noah’s Ark to save every one.

I can’t understand it! There are tons of investment opportunities in commodities right now. You can buy a few metric tons of nickel or copper or cobalt or a number of other things. You know they are priced far below their production cost right now. Therefore, it is absolutely a guarantee they must appreciate to at least the fair price of their cost. Can you find any better investment, with such absolute certainty of making double, triple and quadruple the money in the next few months, regardless of the demand? How could people be so blind and not see the opportunities? They all rush to cash and T-Bonds waiting to be slaughtered, and they actually thought it was safe to be with the biggest group of mobs?

Nickel is now less than 1/6 its May 2007 price. Hello?

ENOUGH IS ENOUGH! When enough is enough, the eruption is fierce!

On Monday, the third largest nickel producer in Russia, Ufaleynickel, which is responsible for slightly less than 1% of global supply, announced that it was shutting down production, because the price of nickel is just too low. The company needs to see at least $26,000 per metric ton in order to break even.

Instantly nickel shot up to touch $5.00 a pound, from Friday’s $4.00. That’s a 25% rally in just one day, and probably the biggest one-day rally of any commodity in history. Removing 1% of the global supply doesn’t really change supply/demand that much. However, the price was suppressed too much so the bounce had to be fierce. Had you bought nickel at $4, you have made 25% profit in just a day. People are still rushing to buy U.S. T-Bonds to earn 3% annual interest while waiting to be slaughtered in the looming implosion of the bonds market.

Do you want to make a 10-fold return in two months, and maybe two weeks? Then, buy some palladium metal – any palladium metal you can find. Once the Russian Checkmate plays out, the price of Palladium could go from $170 per ounce to $1700 per ounce in no time,

The Russian Checkmate event will be if Norilsk Nickel (NILSY.PK) shuts down production. It is the No. 1 nickel producer in Russia. The number 3 producer has already shut down production. Would No. 1 be far away? If Norilsk shuts down, and 45% of global palladium supply is gone, I can’t even start to predict where palladium price could go up to, with 45% of supply removed instantly. In 2000/2001, one false rumor from Russia was enough to send palladium up to $1100. It would be fun to watch the effect of 45% of palladium supply removed.

Of course, you can get better leveraged gain investing in the palladium stock Stillwater Mining (SWC) and North American Palladium (PAL).

Will Norilsk shut down? It is facing a severe liquidity squeeze. In first half of 2008, Norilsk group reported a profit of $2.682B, at 32% profit margin. If you look up metal prices as of Oct. 24, 2008, and re-run the numbers, the company would have to write down -$4.594B of sales revenue for the whole group, or $3.634B for the main Norilsk Mine, resulting in heavy losses. The cash drain will be nearly $2B per half year.

The Norilsk group had $4.8B cash as of end of June 2008. The main Norilsk mine probably had $4B in cash. The company spent $2B in a recent stock buyback, a senseless decision that Mr. Mikhail Prokhorov denounced as “capable of putting the company on the verge of bankruptcy.” Operation loss since June probably costs them another $1B. The company has a debt payment of $400M due in November. Does it have any cash left? Can it continue to operate the mine at heavy loss? Why would the company continue to operate with heavy losses until bankruptcy?

The bullish case for palladium cannot be disputed if you understand just how bad Norilsk Nickel‘s shape is today.

Monday’s news of Ufaleynickel shut down mentioned OM Group ( and reminded me that OMG is the best cobalt play, because it dominates the chemical sector involving cobalt. I consider cobalt as a better metal to buy than silver, with the potential of 10-fold appreciation in a short period of time. Check out news on Minor Metals. If the speculation of Katanga Mining shut down plays out, cobalt price should fly soon. You can buy cobalt from BHP Billiton (BHP)..

There are so many beaten down silver and gold mining shares now. All are very good buys: Pan American Silver Corp. (PAAS), Silver Standard Resources Inc. (SSRI), Apex Silver Mines Inc. (SIL), Hecla Mining Co. (HL), Newmont Mining Corp. (NEM), Yamana Gold Inc. (AUY), Northern Dynasty Minerals (NAK), Ivanhoe Mines (IVN), and NovaGold Resources Inc. (NG). There are so many to name. Even Southern Copper (PCU), my very first commodity play, is now back below where I first bought in late 2005. These days, anything in mining is good. I would not touch Silver Wheaton (SLW) though, because of counter party risks. Also, forget about any coal player now. I continue to call for selling James River Coal Company (JRCC), Arch Coal Inc. (ACI), Alpha Natural Resources Inc. (ANR), Peabody Energy Corp. (BTU), or CONSOL Energy Inc. (CNX), at any rally.OMG)

The U.S. coal market is a local market and is now bearish. Watch Dry Ships’ (DRYS) share movement, as it is an important indicator of the health of the global economy. I might even consider buying some DRYS stock as the valuation has become so attractive. However, I first need to get a conformation that cross-ocean shipping activity is recovering.

I will keep a portion of my portfolio in iShares Silver Trust (SLV). I will not buy gold or SPDR Gold Shares (GLD). I believe gold is adequately priced at current level. The money spent on gold is better spent on something else. Even buying a ton of nickel or copper is better than gold.

However, the best of all is still palladium, and the only two pure palladium plays, SWC and PAL. We are witnessing a singularity event unfolding in the palladium market, as Norilsk Nickel will inevitably shut down, to protect its own best interest. What is singularity? A singularity is the kind of extremes like what you get when you try to divide a number by zero!

Full Disclosures: The author is heavily invested in SWC, PAL, has considerable stake in OMG and SLV, and will continue to buy some select silver shares including SSRI, HL, PAAS and SIL. I am also looking for opportunity to buy DRYS soon.

Obama Economics: The Future of Investments & The Economy Under a President Obama

28 Tuesday Oct 2008

Posted by jschulmansr in 2008 Election, Barack Obama, commodities, Copper, deflation, Finance, gold, hard assets, inflation, Investing, investments, Joe Biden, John McCain, Latest News, Markets, mining stocks, oil, Politics, precious metals, Presidential Election, Sarah Palin, silver, Today, U.S. Dollar, Uncategorized

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Obama Economics: The Future of Investments & The Economy under a President Obama

By: Robert Nabloid of Nabloid.com

At the time of writing this, Obama has not yet been elected, but that is only because the vote has yet to take place. In just a few weeks (on Tuesday November 4, 2008), Obama will become the first half-minority man to be President of the United States of America. The US, and the World, will cheer and it will all happen under much fanfare. We all know of Obama by now. We know he makes great speeches and talks a whole lot about change. But what change does he have in mind? The problem I have noticed is that not many of his supporters seem to understand all the changes he intends to make. Obama often speaks about a world that almost sounds utopian… but how does he intend to build this utopia? How does he intend to pay for this utopia? The devil is often in the details.

The changes Obama implements will have an affect on both the economy (your jobs) and your investments (your retirement). I believe many of the changes he implements will also change American society forever (long after he is gone) by creating a society that believes it deserves a good living by default, instead of a society that works hard to earn a good living. So pay attention to Obamanomics. The most important changes Obama will implement deal with the economy; without a strong economy, Obama will not have the finances in place to afford many of his other social programs. So, I will focus this article on his economic and tax policies which will have an enormous affect on the economy and your investments, as well as the government coffers.

Before I start, remember why the USA became a free nation to begin with… due to the taxes imposed on Americans by the British Throne, which became excessive and caused a revolt. In the last century, the USA became the greatest nation on Earth. It has its share of problems, but it still became #1 on the planet! A commoner could become its wealthiest and most successful with enough hard work, determination and a little bit of luck. This ability to transcend social classes from being poor to being rich, has made America ripe with opportunities. Millions of immigrants, often highly educated and motivated, come from around the world to the USA in order to make a better life for themselves. Many come from 3rd world nations, dictatorships and socialist/communist countries, so they can live in a free market country that affords them many opportunities for a better life. This freedom is precious and critical in creating a healthy environment for economic development and prosperity.

I must ask you a few questions now: If you lived in a country where more than half of your earnings go to the government automatically or you’re jailed, would you consider yourself free? If you lived in a country where you are unable to protect yourself, are you free? If you won the lottery and you’re government automatically took MORE THAN HALF, would you consider yourself free?

Okay, so by now you’re just itching for me to get down to it. I think the American work ethic and creativity helped create one of the finest societies on the planet. I also think Obama will wage a war on the American work ethic and a war on successful people. Please read “The Audacity of Deceit: Barrack Obama’s War on American Values”. It’s funny that many parents want their kids to go to medical school or law school, to get good jobs. Why bother? Under Obama these professionals will suffer and be discouraged with tax rates above 50%! Why go through all the extra effort (and debt for schooling), only to be punished by your hard work and success with punitive taxes that leave you with less than half of what you actually earned?

Below is a great list of ten tax changes Obama wishes to implement, quoted from “The Audacity of Deceit: Barrack Obama’s War on American Values”. Below each change, I have left my comment.

1) Increase the top individual tax rate from 35 percent to 39.6 percent.

It could cost the economy billions! This still takes money out of the pockets of successful people and puts it into Obama’s hand so he can spend it, because government doesn’t spend enough money? I think people should be entitled to keep their hard earned dollars and 35% is more than enough for the government to take. Remember, that money would be spent on assets of one type or another (like investments in the economy or houses/boats/consumer goods/etc) and it DOES get circulated back into the economy in an efficient manner by consumers! This is why capitalism has worked so well! The government often waists money in poorly run social programs and money grabs for special interest groups. This will decrease efficiency in the economy and is nothing more than a government transfer of wealth. Let’s create more inefficiencies?!? C’mon… but it gets much worse.

2) Raise the capital gains tax rate from 15 percent to 28 percent.

This is an absolutely horrible idea! Capital gains taxes are incurred on investments! Many millions of Americans have a plan to retire. They have put money into investments so the investments could go up in value enough to afford the luxuries of retirement, without depending on social security. Now only 72% of your profits are actually profits. If you needed $1 million to retire, you will now need your investment returns to be even higher to afford retirement! Do we not want people to be successful and self-sufficient? This is impeding the ability of many to be self-sufficient.

Many companies may not invest in the USA as much because of the inherent capital gains. This will also hurt the stock market. We should be encouraging people to save money and invest, not discourage them! I believe a 0% tax rate on capital gains would spur a LOT of investment in the USA, and a lot of jobs!

3) Increase the stock dividends rate from 15 percent to 39.6 percent.

This is just plain dumb! Stock dividends are one of the primary ways retiree’s earn money! If a retiree was able to find investments yielding 10% per year in dividends, than the retiree would only need a portfolio of $250,000 to earn $25,000 in dividends. Of that amount the retiree would get to keep $21,250 after taxes. Under Obama, that same retiree is all of a sudden forced to take a massive pay cut and live off of $15,100! This hurts the stock market, retirees, and the economy in general. This is really stupid. We should encourage people to invest in companies, not discourage them! This is only discouraging investment in America, once again.

4) Raise the percentage of Americans who pay no federal income tax from 40 percent to 50 percent.

Why, in a time with massive deficits, should more burden be placed on fewer Americans? The social programs are not free! Someone must work for, earn, and pay for these social programs. The same low and lower-middle class families that are voting FOR these programs should bear some of costs! If they believe so highly in the programs, they should be willing to put their money where their mouth is and take it on the chin, especially if its such a good idea and helps people out!

5) Impose a 10 percent surtax on all incomes above $250,000 per year.

Surtaxes on success? My, oh my. Shit, I think we should impose a heavy surtax on anyone who earns less than $15,000… pretty quickly I bet you would see a whole lot of people earning more than $15,000 that didn’t use to… that might actually help more people than it hurts! Want an efficient economy? Placing surtax on success is stupid.

6) Raise the death tax rate to 55 percent for any income past the first $1 million exemption.

With many homes being worth over a million (at least by the time many of us die they probably will be if you think about inflation!), a 55% tax rate is almost abusive. Once again, why save money if it’s going to be heavily taxed when you die? This is one of the worst, as it will cause many successful families to move A LOT of assets OFFSHORE to avoid taxes altogether. Why invest in the USA when it looks like it’s going in the wrong direction? Before there was a little bit of stigma attached to rich people moving assets offshore to avoid taxes. Under a heavy taxes (above 50%!) it would only be smart to move all assets offshore, and there might be a stigma for those that don’t! (Why wouldn’t they, do you think they are stupid? If they want to give money to charity, I’m sure many of them worked their entire lives for that money, and would like the ability to choose (democracy!) where there money goes). I assure you, many families will move assets off shore to avoid the wacky Obama taxes altogether.

Many other nations will now try and lure these wealthy families to come to (and invest in) their nations. If America doesn’t appreciate the middle class, middle-upper class, and upper class, I assure you, another nation will!

7) Raise the minimum wage from $6.55 to $9.50.

Inflation anyone? The cost of everything will rise to pay for this increase. It’s almost a zero sum game for the minimum wage earners and it can only hurt the rest of society with inflation. We don’t need this because American workers aren’t competitive enough on the world stage as it is. LOL, So let’s raise the minimum wage even more, so we can’t compete on ANYTHING. Hopefully all businesses and capital (money) will move elsewhere.

8 ) Raise social security payments by 4 percent for individuals, businesses, or anyone who makes $250,000 per year.

Why even comment on this? More social security? If people don’t earn it, they shouldn’t get it. I agree with having social security for those tough times when people lose jobs/get sick, etc. But should we allocate even more money to social security? We should want social security to help put food on the table, but not give each person a life so comfortable they don’t attempt to go out and get a job if they are able to do so! It should be an uncomfortable time when a person is not productive, and the discomfort should be great enough that the person strives to do all he/she can do to become productive to society once again!

9) Increase the top tax rate from 37.9 percent to 54.9 percent for self-employed taxpayers (who already pay ordinary income taxes as well as self-employment taxes).

Why be self-employed or go out and create a business? There’s just no point to risking your money to start a business. Not only are you hit with massive taxes on earnings, but if you do happen to create a business and eventually decide to sell, the capital gains taxes take a large chunk of the value of the business you created. It’s a massive disincentive to create businesses based in the USA. Now how are American businesses supposed to effectively compete with foreign competitors (with wage slaves) when much of the profit is sucked away to government coffers instead of re-invested into the business? Businesses normally either re-invest the profits into the business or give the dividends to shareholders, but with less actual profits… less spending on new technologies, expansion, job creation, etc.

10) Increase the tax rate on Sub-chapter S corporations (small businesses) by up to 15.3 percent (from a top rate of 35 percent to 50.3 percent).

Another tax rate above 50%. Instantly, almost overnight, many corporations will have to reduce any expansion plans they did have, as much of the profit they were going to re-invest is now in the government coffers instead of the corporations bank accounts. All this WHILE there is a credit crunch? C’mon, I thought Obama would want MORE jobs, not less. Why should companies even put a head office in the USA anymore? It doesn’t make sense anymore with disincentives like this.

How can the USA consider itself a free country when it has lost so many of its constitutional rights? Now the right for a person to work hard and enjoy the fruits of his/her labour may disappear under heavy taxes. When more than 50% of your hard earned dollars go to the government, it is NOT a free country! I contend that in a free nation, a government does not take MORE THAN HALF of your earned dollars.

I thought this was interesting: Even Russia is doing a better job at some things than the US. If I didn’t tell you what country it is that is doing the below tax rates, you would never guess:

The tax system in Russia underwent a comprehensive reform in the year 2001. This reform is designed, in principle, to ease the tax burden on individuals and companies and to simplify the classes of payments for national insurance.

Russia has a uniform rate of tax on the income of individuals. As of 2008 tax in Russia is payable at the rate of 13% for an individual on most income. (non-residents 30%). Russian residents pay 9% on dividend income. (Deduction at source). Non-residents pay 15% on dividend income.

Exemptions are granted to certain income earners.

The standard rate of Russia corporate tax in 2008 is 24%.

http://www.worldwide-tax.com/russia/russia_tax.asp

If American’s don’t appreciate their successful citizens and the government’s real role in society, there will be consequences. The government has made most of the major problems, including the legislation that ultimately created the housing bubble. Governments can seldom manage their own finances, and yet they want to take MORE of your money out of your hands and “efficiently” transfer the wealth around? It doesn’t work that way, especially when they plan on transferring wealth from productive peoples to unproductive ones… that in and of itself creates inefficiencies.

Here’s what I think will happen. Obama will introduce all his new taxes during a recession. He will make things worse, but will get no blame for it, as most people will blame the previous government for the entire recession. Businesses will get hurt by higher minimum wages (and HIGH inflation!!) which make them even less competitive with other nations around the world, further increasing the need for outsourcing. The businesses that do manage to remain profitable will get slammed by higher taxes, which means less profit to re-invest in the business, the economy, and the owners pockets (shareholder’s often include pension funds, and individual investors retirement accounts!). A lot of baby boomer’s that wanted to retire will no longer be able to do so, due to higher taxes on their investments, income and combined with lower stock prices thanks to both the tax policies and the recession.

Obama will then go on to introduce many of his social programs that will create an entire generation of Americans who expect the government to take care of them. So as government is bringing in less money due to a recession and stupid tax policies, it will begin to spend more. The dollar will suffer. National debt will continue to sky rocket into the stratosphere. America will be less competitive.

Meanwhile, the rest of the world will be split. Some nations will follow the lead of the Americans and create very socialist societies, while the other nations that see the errors, will capitalize (pun intended) on America’s mistakes and try and lure the capital, head offices, and assets of American families and corporations. If America doesn’t want the corporations and wealthy families, another nation will. All this will occur, because as many people forget, government did not make the USA powerful and successful, it merely laid the foundation for the PEOPLE to make it successful. Other nations can lay that same foundation and corporations and people will move!

I love America, but I hate the road its going down and can no longer invest my money in America until this socialist agenda is stopped. That’s right. I will NO LONGER invest in America as long as things are headed down such a bumpy road. I hope to one day be able to begin investing in America again, but that won’t happen until America goes back to the constitution and realizes what governments role should be.

Take the Obama Test and see if you agree or disagree with Obama’s policies. He does great speeches on change, and change can be good (or bad)… but change has to be defined!! Right now most American’s badly want change, but I fear they will vote for a change they do not fully understand. At least take a look at the specific changes he will implement before voting, then make an informed decision about whether he is going to implement the changes you want or not. Oh, what’s the use… we already know he won the second he showed his face, regardless of his policies. At least this article might show some of the consequences to his economic policies. Obama is a socialist, bad for business, investments and the middle class.

Don’t Be Fooled – Inflation is Coming – Seeking Alpha

28 Tuesday Oct 2008

Posted by jschulmansr in Copper, deflation, Finance, gold, hard assets, inflation, Investing, investments, Latest News, Markets, mining stocks, precious metals, silver, U.S. Dollar, Uncategorized

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Don’t Be Fooled – Inflation is Coming – Seeking Alpha

By: Robert Nabloid of Nabloid.Com

Many people are using this latest weakness in the price of various resources (gold, silver, oil, and other commodities) to claim that the commodity boom is over. They’re wrong. Resource prices have been declining for a variety of reasons, but all of them appear to be temporary. These same people then point to the recent strength in the USD. I contend that the strength is temporary. How often in history does an economy that’s going into recession, with a policy of lowering interest rates, undergo massive increases in the value of its underlying currency? Only time will tell, but I’m willing to bet my money that this isn’t the last of the commodity boom. I’ll put my money where my mouth is and continue to buy undervalued resource companies at extremely attractive levels as I’m expecting inflation in the long-term. Short-term I do see strength in the USD, but not because it’s fundamentally strong. I could never see any long-term strength in any fiat currency due to inflation.

In regards to recent USD strength (and gold weakness), we’ve been witnessing the de-leveraging and unwinding of many hedge funds. Many of these hedge funds were invested in anything but the USD, and as such, when they are required to sell their assets, they are repatriating them into USD’s to give money back to investors and pay off debt. This buying of USD’s in mass is creating extreme strength when the dollar should be showing signs of weakness.

There also seems to be something fishy going on with the gold price on the Comex. Is it manipulation? Yes! On paper you can buy gold in abundance and relatively cheaply. In real life it is actually hard to find a gold/silver dealer that will sell you gold or silver for anywhere near the Comex spot price. The Fed doesn’t want gold to be too strong or they run the risk of losing people’s trust in the fiat currency, and trust is the only way a currency works. So could governments be manipulating the paper prices of gold? Of course, but we all know it isn’t the price or value of gold going up, but the debasement of fiat currencies, that they are attempting to mask by putting a lid on gold.

One of the primary reasons oil is headed lower right now seems to be driven by fear of a deep recession. This fear has merit. An economy financed completely on debt is not a stable or sustainable one. As U.S. consumers are finding out, you must actually pay back debts by cutting discretionary spending, and if you’ve gone too far, declare bankruptcy. With consumers tightening their purse strings, a recession was bound to happen. Now consumers aren’t all rushing to buy half million dollar homes at the same time and the economy is beginning to feel it. Even with a recession, oil is still being used at an alarming rate and drilling is actually down quite a bit! This might catch up with the oil price increasing during a recession! A large number of additional vehicles are being added to the world’s roads each year. Yes, the days of oil energy reliance are limited, but for now it’s still an essential resource.

Regardless of what you believe in politics, I don’t think any independent economist actually believes dramatically raising taxes on corporations will help the recession or the standard of living for those down the line. It probably won’t help the USD either. But for a variety of reasons, tax rates on corporations will undergo extreme changes upwards in the coming years. Combine that with the dramatic rise in minimum wages, and inflation is bound to happen even at a time when the economy may not be running on all cylinders. Outsourcing may continue to make the situation worse. These factors may only further impair the value of the USD.

The government shows no signs of cutting back on spending anytime soon. Massive deficits are forecast for years and years to come, with no signs of slowing or stopping! This is dangerous. An individual, corporation and country can only handle so much debt. If the country does intend to ever pay back these insanely high and still growing debts, there is only one way out; it’s called inflation. Inflation in the future will cause all of these debts to be much easier to pay down, but inflation doesn’t come without a price to the Middle Class.

There isn’t just fear of a recession, but also of deflation, which is affecting the price of commodities. The Fed has said they will do everything they can to avoid deflation, and they will, but at the cost of causing inflation. Flooding the system with capital will cause inflation, eventually.

Regardless of what people think, BRIC countries will slow down and they will feel the recession, but even with BRIC countries slowing, there are millions of additional people being added to the world economy and these people will increase the demand on the world’s resources. This will occur at the same time that fiat currencies are pumping money into the system. The result is an increase in a seemingly infinite resource (the ability to print unlimited amounts of money) to buy things that are finite (like resources).

Traditionally, when the resource sector booms, capital is supposed to flow into the system and many new mines are built. The supply eventually catches up with the demand and the prices fall back and level out. That isn’t happening this time. Resource prices have slipped before many mines were constructed, and now with the big credit crunch, many mines are being put on hold and many exploration companies are cutting back on drilling. This deficit of new mines and resource supplies will be felt, eventually. I’m preparing for a deep recession (not depression) and EXTREME inflation. Inflation will be a bigger issue than the recession. Inflation may well be the big story for the next century. There’s going to be a lot of people running around with an abundance of fake dollars (fiat currency) trying to buy up finite resources

Share the Wealth / Wealth Redistibution – A New Definition!

27 Monday Oct 2008

Posted by jschulmansr in 2008 Election, Barack Obama, commodities, deflation, Finance, gold, hard assets, inflation, Investing, investments, Joe Biden, John McCain, Jschulmansr, Markets, mining stocks, oil, Politics, precious metals, Presidential Election, psychology, Sarah Palin, silver, U.S. Dollar, Uncategorized

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Subject: Redistribution of Wealth

Today on my way to lunch I passed a homeless guy with a sign that read

“Vote Obama, I need the money.”… I laughed.

Once in the restaurant my server had on a “Obama 08” tie, again I laughed

as he had given away his political preference… just imagine the coincidence.

When the bill came I paid cash but decided not to tip the server and explained

to him that I was exploring the Obama redistribution of wealth concept. He stood

there in disbelief while I told him that I was going to redistribute his tip to someone

who I deemed more in need (the homeless guy outside).

The server angrily stormed from my sight.

I went outside, gave the homeless guy $10 and told him to thank the server inside

as I decided you could use the money more than him. The homeless guy was happy…

and I felt like a successful politician.

At the end of my rather unscientific redistribution experiment I realized

the homeless guy was grateful for the money he did not earn,

but the waiter was pretty angry that I gave away the money he did earn

even though the recipient clearly needed money more than him.

I guess redistribution of wealth is easier to swallow in concept than in

practical application!

LOL TOO FUNNY! – jschulmansr

Ten Reasons Why Gold Isn’t Above $1,000 – Seeking Alpha

27 Monday Oct 2008

Posted by jschulmansr in commodities, Copper, deflation, Finance, gold, hard assets, inflation, Investing, investments, Latest News, Markets, mining stocks, oil, precious metals, silver, U.S. Dollar

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Ten Reasons Why Gold Isn’t Above $1,000 – Seeking Alpha

By Michael Zielinski, 8 Stock Portfolio

Gold reached its all time high price above $1,000 per ounce a few days after the shocking Bear Stearns bailout. In the following months, gold often experienced sharp declines and has stubbornly refused to reattain the key $1,000 level despite more shocking bailouts, bank failures, and bankruptcies.

Reporters, analysts, and bloggers have cited a variety of reasons why gold has not exploded higher amidst the ongoing turmoil. Some of the reasons are more valid than others, but all are worth examining. Without further ado, the Gold and Silver Blog brings you the Top Ten Reasons Gold Is Not Above $1,000:

1) Dollar Strength

Against nearly every world currency, the US dollar has been strengthening. The dollar’s path higher has accelerated in recent weeks. Gold is thought of as a weak dollar play. With the dollar strengthening, selling gold is simply the other side of the trade.

2) Commodity Collapse

Since the summer months, commodities have been on the rapid decline. Oil has fallen by more than half from its peak price of $147. Base metals and precious metals have experienced similar if not more drastic declines. While gold has been holding up well on a relative basis, the weakness in commodities may be keeping any price appreciation at bay.

3) Deleveraging

After years of using excessive leverage in an attempt to maximize returns, firms are rediscovering the notion of risk. Massive deleveraging is taking place as firms sell any asset available to pay down debt. As an asset class, gold is not immune to such sales.

4) Speculative Selling

With the dollar rallying and gold breaching key technical levels, traders may be taking speculative short positions in gold, anticipating that prices will continue to move lower. This speculative selling compounds the impact of selling taking place for other reasons.

5) Recession

Fears of a worldwide economic slowdown and deep domestic recession will have a big impact on consumer discretionary purchases. This would likely hold especially true for luxury items such as jewelry. Since jewelry production is the largest non-investment use for gold, any slowdown would put a drag on demand.

6) Deflation

While some fear inflation, others fear deflation. If prices decline across the board, some believe that all asset classes will be dragged down, including gold. Notably some people take the exact opposite position about gold and deflation.

7) Hedge Funds and Mutual Funds

Some people feel that hedge funds had a hand in driving the price of gold from below $300 to above $1,000. Now that fortunes have turned for their other investments, hedge funds are being forced to unmercifully liquidate large positions in gold. Mutual funds are also being forced to liquidate positions in gold to meet redemptions.

8) “George Costanza Trade”

On Seinfeld, George Costanza realized that every decision he ever made has been wrong. He discovered if he did the exact opposite of what his instincts told him to do, he would be successful. In relation to investing, when everyone believes that a certain trade or investment philosophy is certain to work, oftentimes with uncanny precision the exact opposite happens. This year, a growing number of people began to believe with absolute certainty that gold would move higher. While the opinion was far from universal, was the opinion widespread enough to invoke George Costanza?

9) Government Manipulation

There is a growing camp which believes that the primary reason that gold has not moved higher in a big way is due to government manipulation. If gold prices skyrocketed, the public at large would lose faith in fiat currencies and start to panic. It would be in the government’s best interests if this did not happen.

10) These Things Take Time

Some of the forces mentioned above are going head to head with the economic realities that should be driving the price of gold higher. Eventually we will reach a tipping point when demand for physical gold is enough to overwhelm all other factors. Once we reach that point, the price of gold will rise in leaps and bounds.

Goldcorp: Implosion Offers Shiny Opportunity – Seeking Alpha

27 Monday Oct 2008

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Goldcorp: Implosion Offers Shiny Opportunity – Seeking Alpha

By: Mark Krieger

Goldcorp (GG) has been heading one way lately: down.

Since its August high of $52, the shares have lost more than 70% of their value. Gold’s early Friday drop below $700 prompted a potential GG capitulation, as the shares fell below $14, only to put on an impressive intraday reversal that not only erased the day’s losses, but tacked on a 10% gain, closing at $17. The stock recorded a $3 positive swing as gold rallied 8% off its lows to close near the $734 mark.

Disconnect between gold and GG: The last time the shares were this low, nearly five years ago, gold was trading at about $400 ounce. Even though gold is 30% off its highs, it is still 75% higher than 2004 levels. It is perplexing why GG’s shares are now priced at the very same levels, as they were when gold was trading at $400. The stock is extremely oversold and has dropped too much in too short of a time. This is a classic case of the, “baby being thrown out with the bath water”.

Panic selling is the culprit: This stock has been crushed by a “sell first and ask questions later” mentality, but it’s not alone, as the entire mining sector has also been decimated. It is obvious that selling pressure has intensified as hedge and mutual funds are forced to liquidate their holdings to satisfy redemption requests. Their relentless selling along with excessive short selling, margin calls and overall economic paranoia have created a recipe of disaster for the share price. Most investors are looking to buy wholesale and sell retail, but this massive overreaction offers investors the opportunity to acquire shares actually below cost.

All is not lost: The sudden collapse in the stock price creates an attractive buying opportunity for bargain hunters. The stock is dirt cheap at only 17 times 2009 earnings estimates of $1.00, and the balance sheet is squeaky clean, featuring a $1.2 billion stockpile of cash and no debt. The shares are trading 10% below the company’s book value of $18.50. The company pays an annual 18 cent cash dividend, yielding a nonimpressive 1.2%, but it’s certainly better than nothing. GG’s short position of 10 million shares is relatively small in comparison with its 700 million shares outstanding, however it could potentially be beneficial, as a short covering squeeze might come into play at the development of any favorable news.

Analyst take: The last three analyst actions all have been positive as HSBC Securities, RBC Capital Markets and Davenport have all upgraded their opinions and still maintain a average $40 one year price target.

Bottom line: This stock could run back up just as fast as it fell, but logic would dictate not opening a position until the shares show signs of stabilization. They say to buy when there is “blood in the streets”, and no doubt we have seen plenty of carnage, but picking a bottom is difficult. It would be more advantageous, before buying, to wait for validation of a positive trend in the share price, such as the stock closing above $20 for five consecutive sessions. You certainly don’t want to fall into the trap of “throwing good money after bad”.

Disclosure: Author holds a long position in GG

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