Gold Market Update - January 30, 2009
The world has just experienced the greatest destruction of wealth ever. Share prices around the world are down 50% on average. Many stocks are down a great deal more than that. For example, General Motors, long the backbone of American industry, has lost 90% of its value from a year ago. Some of the big American banks are gone completely, with shareholders losing everything.

After an experience like that, many people will be tempted to give up on investing. Or worse yet, they will wait on the sidelines until the popular media tells them how great things are in the investing world. Normally, the popular press being positive on any investment topic signals the top of the market.

But, the top of the market is precisely when many people come back into the markets.

It takes a great deal of courage to invest contrary to popular wisdom. Legendary investor Warren Buffet said, "Be fearful when others are greedy and be greedy when others are fearful". This is exactly how Buffet amassed his fortune. You buy when others are afraid, and you sell when others are greedy.

There are signs now that the financial markets have stabilized, that share prices are no longer going down. In fact, there has already been substantial recovery in some investments.

Of course, there is no assurance that this is the bottom of the market. However, it is clear that there is a great deal less risk today than there was a year ago. People are still frightened; resources are seen as the last place one would want to invest, especially the small companies.

That thinking makes this an ideal time to invest. It's like 2001, when nobody wanted anything to do with resources. Investor who came into the market at that time made fortunes. Prices now are as cheap as they were at the bottom of the last cycle, with many companies in a much stronger position.

Right now, many of the small exploration and development companies have piles of cash. Some of those companies are trading at prices that are less than the value of the cash. That means that in some cases, you can effectively buy cash at a discount, AND get a gold deposit for free.

I'm not going to add another long-winded explanation of what caused the financial crisis. However, it is very useful to understand in general terms what happened in order to be able to anticipate what is coming next.

Once the crisis set in, and stock prices started to fall, investors panicked and dumped stock on the markets, pushing prices down even faster. Forced selling of shares, for example, from margin calls, added further downward pressure. The final and most destructive stage in the selloff came as trillions of dollars worth of mutual funds and hedge funds faced calls for redemptions from their investors. To satisfy the redemptions, fund managers were forced to dump stock onto the markets at a time when there were few buyers.

Investors were cashing out of all classes of investments. The flight to safety saw an enormous shift of wealth into cash, with the US dollar being the most favored safe haven. US government treasury bills have become so popular that the interest rate now is effectively zero. For now, investors just want a safe place to park their wealth.

At this time there is an estimated $9 trillion around the world in cash (that is, T-bills, money market funds, bank deposits and the like). To put that into perspective, that value is equivalent to about three quarters of the total value of all American publicly traded companies.

As soon as there is a sense of stability coming back into the financial world, a great deal of that $9 trillion of cash will be looking for a return. Money will exit T-bills and go back to equities and it will go back to other countries and it will go back to commodities.

One of the first places that many investors will think of as they recover from the financial crisis will be the safe haven of gold.

Gold did a fine job of preserving wealth during the financial crisis. The gold price is actually higher now than it was at the start of last year.

Sure, gold took a hit at the height of the crisis. But, it was nowhere near as bad as nearly every other investment class. It then recovered quickly. Gold equities of course were also hit hard by the financial crisis and are just now beginning to recover.

We have seen this pattern twice in the past dozen years. After the Asian economic crisis in 1997, gold and the gold equities fell hard, along with other investments, but then rebounded well before other investments began to recover. (See the graph below)

Market Reaction to Asian Financial Crisis


Market Reaction to Tech Crash



The same thing happened following the market turmoil from the bursting of the tech bubble. (See the above graph)

August 2008-Present



That pattern appears to be repeating now: Bullion has come back from its lows of late last year. See the previous graph. The senior gold equities have also begun to recover. At present prices, the major and the mid-tier gold producers are trading at around 2-times net asset value (NAV), based on a $900 gold price. That means investors are valuing those companies at a huge premium to the value that the companies are expected to generate based on the current gold price. The premium reflects the belief that investors expect the gold price to rise.

So, investing in the large gold companies provides some leverage to moves in the gold price, but that leverage is largely offset by the premiums that one pays.

The small companies are riskier, but they provide much greater leverage to moves in the gold price, and for the most part trade at discounts to NAV (not premiums). So far, the values of the smaller companies have not followed the larger companies upwards. If the pattern from previous market cycles holds, then the gains will ultimately trickle down to the smaller companies in the gold sector.

Before we talk further about gold companies, let's look more closely at the gold market.

So much attention in the gold market is misdirected. Most people simply position themselves for a risein the gold market and then wait. People are disappointed that gold is down from the $1,000 level oflast March. However, gold was fulfilling the very purpose for which many investors held it. It provided a stable and liquid form of wealth in a time of crisis.

You can own gold as bullion or coins, or by way of exchange traded funds. In that way, you wouldbenefit from moves in the gold price. If you are waiting for a big move in gold, just remember, it was 1980, 29 years ago, when we last had a big run. There is no assurance that it will have another big move any time soon.

Some day, gold will have a big move and you want to be positioned. But, it would be great if your investments were doing something in the meantime. Therefore, you may want to consider investing in gold companies, especially companies that are growing and adding value independent of moves in the gold price.

First, let's look at why you want to own gold, and then we will look at the companies that offer the greatest potential for gains.

The gold price is likely to continue higher. But, on a similar path to the past 8 years: Trending higher, with spikes and pullbacks.

So many people look at one or maybe two aspects of the gold market. There are a great many factors operating on gold. We can see the cumulative effect of all of the variables by looking at the following gold price chart.

Gold Price



All of the factors that pushed gold higher for the past 8 years are still very much in place. In addition, the financial crisis has added to that upward momentum.

Here's why:

The meltdown in the financial markets scared the hell out of people. This crisis was particularly scary, because banks, which are supposed to be solid and reliable, were the most vulnerable.

Once again, investors saw gold hold its value in a time of crisis. As a result, there has been a huge inflow of wealth into the gold market. Exchange traded funds and similar investment vehicles are becoming increasingly popular as they make it easier for investors to own gold.

There has also been overwhelming demand for gold coins and bars, to the extent that a shortage of physical product has developed.

Investor demand for gold is likely to intensify. Think of all that cash now sitting in T-bills, earning no return. The investing world is aware that the dollar is likely to decline from the recent highs.

As investors gain comfort that the financial crisis is over, money will flow out of T-bills as quickly as it flowed in, and that will set the dollar once more on a downward path. Since the gold price is nominally set in dollar terms, a declining dollar will automatically see the gold price rise in dollar terms. The following graph depicts the trade weighted average of the US dollar against other major currencies.

Trade Weighted Average of USD

1973=100**


The downward path for the dollar will be even steeper than it was over the past few years. The financial crisis has further intensified the factors that were pushing the dollar down: Look at the enormous cost of the bailout of the financial industry.

That money is effectively coming from the printing presses without adding a lot to the economy. Worldwide confidence in the American financial system has also been hurt, and that will keep many foreign investors away from investing in the US.
For some investors, gold will replace the dollar as a safe haven.

In short, the gold price will benefit from a falling dollar and from rising demand from investors.

Some people are puzzled as to why this intense level of buying by investors in the gold market has not resulted in larger gains in the gold price. The reason is that investor demand is only part of the picture for the gold market.

Physical demand for gold is dominated by the jewellery market. Jewellery demand in the developed world, especially in the United States, has fallen sharply with the recession, offsetting growth in jewellery demand in the emerging economies. As a result, physical demand has not grown nearly as strongly as it has in the past. Demand for gold jewellery is still strong in many parts of the world, and will rebound in the west as the recession passes.

The European Central Banks have agreed to not sell more than 500 tonnes (or, about 16 million ounces) of gold a year. For the past three years, they have sold less than the quota. Other Central Banks are buying, offsetting part of that selling. The Asian nations hold a very small portion of their reserves in gold. China, with $2 trillion, the largest foreign currency reserves of any nation, holds less than 1% in gold. There is speculation that China and other nations might increase their gold holdings.

A very important factor is the see-saw between the investor demand and the jewellery demand. Investors tend to buy as the price rises and sell as the price falls. Jewellery makers do the opposite.

World Gold Mine Production 1980-2014



Another important variable is mine production, which has been falling for several years now. Offsetting that decline in mine output, dehedging is slowing. That is, mining companies have sold forward some of their production, so a portion of the gold being mined is going to satisfy the forward sales rather than being sold into the market.

Thinking back to the charts showing the market reactions to two previous financial crises, we can see that bullion is now back above where it was a year ago. The major gold producers have begun to recover, but are still well behind where they were before the crisis, and well behind the level they climbed to after the previous crises.

Of even greater significance, the smaller gold companies were beaten down far more than gold and the larger companies, yet they have barely begun to recover.

The chart below shows the ratio of share prices of the juniors versus the majors. The junior companies rose faster than the majors for a couple of years, but then fell much harder than the larger companies last fall.

Junior Vs Senior Gold Stocks

2001-2009



Why do we care about the smaller gold companies: the explorers and developers?

Quite simply, they represent the future of the gold industry.

Economists would tell you that when the price of a commodity increases, demand falls and production increases. That doesn't necessarily apply in the mining world. The gold price has more than tripled in the past 8 years, yet demand continues to rise. Supply, contrary to economic theory, is falling.

Gold production if declining even though mining companies are producing all they can. Simply put, economic theory does not stand up to geologic reality. New gold mines are not easy to come by.

For years, gold companies have grown through acquisitions. While Barrick and Newmont are each bigger than they were a few years ago, the industry is shrinking. Gold production is falling. Equally importantly, the overall reserves in the gold industry are declining.

The larger gold companies have grown through mergers, but those mergers have been dilutive: the amount of gold reserves per share has declined substantially over the past few years.

Global Gold Exploration Expenditures



In spite of a five-times increase in spending on exploration by the gold industry, the rate of finding gold deposits has fallen far below the rate of mining gold. See the accompanying graph that depicts this increase.

Most gold production is now coming from mines that are more than 15 years old. The pace of mine closures will accelerate, putting further downward pressure on the level of gold production.

Global Average Mine Grades

Q1 2005-Q3-2008



The chart above is quite interesting. It shows the trend in average gold grades for the whole industry. You can see the grade is falling steeply. The average gold grade is now barely above a level that would have been considered a geochemical anomaly, nowhere near being a mine, when I started my career in the mining industry.

Geologists have spent decades scouring the earth. The big, high grade gold deposits that are sticking out of the ground have been found and developed and largely mined out. New discoveries will be smaller, lower grade, more remote and deeper.

That is good news for the gold price. In the 1980's, for example, when the gold price increased, production ramped up. That new supply contributed to a decline in the gold price.

We have had a rising gold price for 8 years now. The industry has increased spending on finding new gold deposits by 5-fold, to the highest level ever. Yet, the industry can not find enough new deposits to even replace the gold being mined each year.

So what does this mean to an investor?

First, it is supportive of a further rise in the gold price.

Secondly, it means that the gold mining industry desperately needs new deposits. Shareholders of companies that find new deposits will be richly rewarded. And, since it is getting harder to find new deposits, those companies that have gold deposits hold extremely valuable assets. The value in those deposits is not being recognized now, but in due course, investors will realize that existing gold deposits are extremely valuable.

In summary:

The Gold price is likely to continue to trend higher. At some time in the future, it will have a big move.

The gold industry needs new deposits.

That leads us to consider the gold exploration and development companies. Those companies offer big upside potential from:

    * A recovery from being oversold in the aftermath of the financial crisis.

    * Developments that will add value to their gold deposits.

    * Takeovers by larger companies.

    * Exposure to a rising gold market.

Just remember that not all small gold companies are created equal. Be selective.

Looking Forward

After the worst year on record for the resource industry, there are some bright spots in 2009 and beyond

The following is extracted from the December 2008-3 Issue

Forced liquidations of investments around the world met a market wherein few investors wanted to invest. That situation pushed prices to unrealistically low levels. With prices of many junior resource companies now well below the value of their cash, investors are beginning to nibble. For the better companies, there is now evidence that prices have bottomed and in some cases are turning up.

The recovery will not be even across the sector. Those companies that need to raise cash will continue to struggle. Money is available. However, to raise new financing at present prices will cause enormous dilution. Only spectacular success can provide hope that investors will ever see a gain. Companies that do not already have a high quality asset upon which they can build value will face particular challenges.

In light of the market, the TSX Venture Exchange has issued temporary relief measures that include new price limits for financings. The amended terms state that, "listed issuers may apply to the Exchange to issue shares under Private Placements for less than $0.05 per share provided the minimum price is no less than the last closing price of those shares." In short, the new terms will enable companies to raise money at even more dilutive levels.

Gold is the first sector that is beginning to recover. The flight to safety over the past few months saw enormous amounts of wealth from around the world going into U.S. Treasury bills. So popular are T-bills that the interest rate has now fallen to near zero. Factor in inflation and investors are effectively paying the US government to hold onto their wealth. That situation is not sustainable. The dollar will inevitably soften. The gold price already reflects that reality, having gained $157.50 from the low point it reached as the financial crisis unfolded.

Demand for physical gold has been very strong. Over recent weeks, redemptions by gold ETF holders forced liquidations by the funds, largely offsetting demand from other bullion investors.

The pain of the recent financial turmoil will see more investors purchase gold to protect their wealth. That increase in real demand comes as mine production of the metal is in decline. Central Bank sales, on a net basis, could easily tip to net purchases. Concern over the outlook for the dollar is leading several governments to seek to diversify their foreign currency holdings. Those holdings are now overwhelmingly held in U.S. dollars. China, by far the world's largest holder of foreign currency reserves, seems set to increase its holdings of gold, which now represents only a fraction of a percent of its $2 trillion holdings.

A declining US dollar will have a double impact on gold. Being priced in US dollars, a decline in the value of the dollar will automatically show up as gains in the nominal gold price. Secondly, the knowledge that the dollar will soften is increasing real demand for gold, thereby pushing up its value in real terms.

The silver price was also pounded down. Some silver holders, such as ETFs, were forced to sell as a result of redemptions. The large industrial component in the silver market was a further impetus to sell, as investors fear the impacts of recession. There will be a rebound from the current oversold position in the silver market. Investor demand will begin the upward move, but the big gains will come with economic recovery.

The platinum group metals represent a particularly interesting situation. Rhodium reached an astounding $10,000 an ounce before crashing to the current $1,000. The biggest use for the platinum group metals is in catalytic converters for automobiles.

Platinum reached $2,300 an ounce, propelled by speculative demand for the metal. With the biggest component of the platinum market in industrial applications, and with platinum ETFs forced into liquidation, the price has fallen to an unrealistically low level. At the current price of $848, production is being cut back and expansion plans are being put on hold, setting up a tight supply situation once the liquidation dries up.

Base metal producers have reacted swiftly to the collapse in prices, shutting down production and deferring expansion and development of plans. In the last downturn, base metals kept flowing at high levels well after demand dropped off, resulting in inventory build ups and extremely low prices. That is clearly not the case now. Prices are set to rebound, once the economic outlook picks up.
Uranium has already bounced off the bottom. The energy metal soared from $10 a pound at the start of the decade to reach $140 this year. Unwinding of speculative positions contributed to the price plummeting to $40 in October. The spot market price has now rebounded to $53.

There is a looming shortage of uranium over the next few years: Mines produce only about 60% of the amount consumed by power companies. The biggest component in the supply gap over the past couple of decades has been Soviet era warheads being converted to reactor fuel. That material will be off world markets within a couple of years, setting up a supply shortage as new mines may not come on stream fast enough to offset the supply of above ground material.

The recent takeover offer for Forsys values the company's low grade Namibian deposit at $6 per pound, providing an indication of value for other companies that have deposits near the feasibility study stage.

The mining industry will recognize the values in the current situation more quickly than will most investors. For example, Fresnillo, a Mexican company that operates the world's largest silver mine, recently made an opportunistic bid to take over its Canadian junior company joint venture partner MAG Silver.

The majors are watching carefully for opportunities. However, they know that they cannot buy all of the shares of a high quality company at the prices suggested by the last trade in that company's shares. Those prices result from a few investors being forced to sell with fewer investors stepping up to buy shares in this market. It is highly unlikely that the majority of shareholders in the good companies with sell at anything like the current prices.

The majors are aware of that, and are sitting by waiting for the appropriate time to make offers. The offers will come, but at prices above the current over-sold levels.

Investors, especially those closest to the resource industry, are beginning to recognize that share prices have swung too far to the downside.

This issue includes reviews of several of the companies that we believe offer prospects for near-term gains in price.


Riding Out the Storm -- Lawrence Roulston, September 23, 2008 Investments are down across the board and around the world, but the worst damage was inflicted on commodities.

The demise of two more of Wall Street's most venerable firms highlights the fragile nature of the U.S. financial system and further intensifies investor insecurity. Comments from Henry Paulsen, U.S. Treasury Secretary, link the latest troubles to the on-going problems in the housing market.

The takeover of Merrill Lynch by Bank of America provides value for shareholders of Merrill and makes sense from a business perspective. The combination will seemingly create a stronger firm in the long term.
Shareholders of Lehman Brothers were not as fortunate, as the firm was forced into bankruptcy. After intensive efforts to find a buyer, no company could be found to take on their massive liabilities. The fact that no buyer was willing to take over a firm that was once respected as a top investment bank leads investors to wonder how bad the situation in the financial markets really is.

The intense volatility and uncertainty over the past year has led many investors to simply run for cover. Investments are being dumped on the market with no thought as to the underlying value. Speculators have fled the commodities markets, pushing most of the prices sharply lower from their recent highs.

It is not a complete surprise that commodity prices corrected. Oil had soared to a level that even the most bullish forecasters could not have imagined. Wheat, rice, fertilizers and virtually every other commodity had spiked in value.

That speculators were hard at work was evident. Even stodgy pension funds were playing the commodities markets. Investors were putting money into oil, potash, soybeans, platinum and other materials that they knew little about.
For many commodity investors, it was beyond hoping for further rises in prices. Fears of a collapse of the American financial system and further deterioration in the value of the dollar led a large number of investors into the commodities markets as a place to park some wealth until the dust settled.

Since August 2007, when the extent of the idiocy in the banking industry became evident, a favorite play among hedge funds was to short the American financials and go long on commodities. Hard assets, especially commodities with their world-wide appeal, were seen as a safe place to have your money as the financial sector was sinking and taking down the dollar.

The shorts in the financial sector were putting intense downward pressure on the banks at a time when they desperately needed to raise new equity to offset the massive losses from their over-indulgence in the mortgage market. The American financial sector was literally on the verge of collapse.

The enormous influx of capital into commodities propelled some of the prices well beyond levels that could be supported by even the strongest fundamentals. The soaring oil and food prices were becoming a political hot potato in an election year.

The griping from voters about gasoline prices was bad enough. A far greater concern to government officials was the growing sense throughout the economy that inflation was inevitable. The policymakers are keenly aware that the most significant contributor to inflation is the belief that there will be inflation. As rising fuel and food prices were working their way through to consumers, the expectation of ever higher prices was taking hold on Wall Street and on Main Street. Clearly, the notion of rising prices had to be doused before there was a widespread move into inflation mode.

Donald Coxe, chairman and chief strategist of Harris Investment Management in Chicago, is one of the most respected investment authorities in North America. His September Basic Points provides a well-written and insightful account of the steps taken by the U.S. government to head off disaster.

The Treasury Secretary and the Chairman of the Federal Reserve were facing the biggest potential crisis since 1929. They had to move fast to avert a catastrophe. They knew that hedge funds and other speculators held large and highly leveraged commodity contract positions. They were also aware that there were large short positions against the banks and other financial firms such as Fannie Mae and Freddie Mac.

Strong and decisive action was taken on Sunday, July 13 when the government expressed their intent to prop up the financial sector and to put a halt to soaring commodity prices. Their announcement was timed to hit the open of the Asian markets.

The promise of strong government support for the financial sector made it clear to Asian traders that the long commodity/short banks trade had run its course. Investors moved quickly to unwind their positions. In the thinly traded Asian markets, the prices of the banks moved sharply higher. Commodities headed in the opposite direction.
When the markets opened in Europe, the momentum continued to build. By the time traders got to work in New York on Monday morning, it had evolved to a classic short-covering rally for the banks. Traders scrambled to lock in whatever profit remained in their trades... or to cut their losses.

The Securities and Exchange Commission joined that concerted government effort to right the wrongs of the market place. Their first move was to impose new rules that restricted short selling of American financial firms. They supported the other side of the government mandate by announcing that they were planning to impose restrictions that would limit pension funds and other institutions from participation in the commodities markets.
Fund managers didn't stop to think about the legal or practical implications of the government telling investors what they could or could not invest in. With commodity prices already in a free fall, they couldn't get sell fast enough.
Perceptions among some American investors that the slowing US economy would plunge the rest of the world into recession contributed to further downward pressure on the commodities markets.

As always, the pendulum swings too far to either side. From a position of overbought, commodity prices moved decidedly into oversold territory.

Now that the speculators have been largely flushed out of the system, what's next for commodities?
Donald Coxe, in his latest Basic Points, notes: "the next phase of history's greatest commodity boom will have some new characteristics that should make commodity stocks even greater out-performers once the world emerges from the current economic downturn."

Coxe, who has been in the forefront of commodities investment since the beginning of the bull market stated: "We are leaving our Recommended Asset Mix Unchanged---as are the long term fundamentals of commodity investing." (his highlight)

He further comments: "We have no clear idea how long it will be before we can look back to today's prices for commodity stocks and say, "Wow! I wish I'd loaded up then!" We remain certain that day is coming." (his highlight)

He added: "When the financials do roll over, gold and gold mining stocks should move swiftly back into favor. Inflation remains above central bank target levels in the US---and in many other countries across the world. And any return to pronounced weakness among the bank stocks will be strongly bullish for gold."

Frank Holmes, CEO and Chief Investment Officer of the hugely successful U.S. Global Investors, which has consistently scored among the top performing mutual funds, said the following on Sept 10, 2008 in response to our query as to his current outlook for commodities: "Global infrastructure spending is the key demand driver for commodities. With Morgan Stanley estimating over $20 trillion to be spent over the next 10 years and commodity supplies constrained, the long-term fundamentals for the commodities sector stocks look healthy. These stocks are trading at very low price-to-earnings ratios and at large discounts to cash flow."

At Resource Opportunities, we monitor a great many publications, covering a range of outlooks. The following are some of the other opinions from experts in this area, all people with long and successful track records.

David Morgan, who writes the The Morgan Report , a highly acclaimed publication that which is available at www.Silver-Investor.com, has said: "Coming back to the precious metals, it is difficult to gather enthusiasm when each passing day seems to bring lower prices, but this is exactly the type of sentiment that signifies bottoms."

Al Korelin, whose popular radio program The Korelin Economics Report is broadcast nationally in the U.S. and available online at http://www.kereport.com, noted on September 5, 2008: "Most of the current activity in this market is propelled by short-term investors who have a real need for liquidity. They are experiencing an increase in their cost of living, they are unable to generate cash from their homes, some of them are losing their jobs and, as a group, they are selling whatever stocks they can regardless of their respective prices."

Scott Hunter, a broker at Haywood Securities, who has worked in this industry his entire career commented: "We are seeing frustration selling into a market with no bids. Patient investors will be well rewarded if they take advantage of this weakness in the market. They should have a short list of good companies with underlying value and wait for the right price." Scott warns of the potential for further weakness from tax-loss selling, but also notes that a lot of the tax-loss selling that would normally occur closer to year-end has already taken place.

In a recent interview, Doug Casey, editor of the widely read Casey Report, said: "I think it is very much like what happened from 1974-1976 during the last great bull market when these stocks melted down 50, 60, 70%, but that was just a prelude to the explosion that happened from '76 to 80 when they subsequently went 10, 20, 30 times in price. I think that's what is going to happen now." In Casey's September newsletter, he went on to say, "If your cash for speculative investments is not fully committed, back up the truck for the spectacular deals available right now. Don't worry about whether or not the market has bottomed (though we suspect it has).There are some screaming Best Buys out there."

Jim Dines, of the well-known Dines Letter, has said: "How low will these stocks go? Until all those who are frightened complete their selling and are afraid to repurchase."

Eric and David Coffin, authors of the acclaimed Hard Rock Analyst publication , at the end of August said: "The big issue now is that assets are not being valued by the markets... we suspect the 'sudden oversupply' of metal people are worried about, especially on the base metal side, will disappear quicker than the pessimists expect... Right now the market focus is on cash flow and near cash flow companies, and even these are weakly priced to potential. ... this is not the time to be selling in frustration and fear. Fall is, on average, the best season for resource stocks. Fall is near so we will wait this out and try to be ready to be able to bargain hunt with confidence at a bottom that we hope will not be long in arriving."

Jay Taylor, publisher of the highly regarded Gold, Energy & Tech Stocks newsletter said on September 4, 2008: "It is when others don't want to buy that you can make the most money by stepping into a market... Right now, I think we have some fantastic opportunities to buy stocks that are selling below their cash value and also have ounces of gold in the ground."

Mary Anne and Pamela Aden, two influential and highly regarded investment analysts, said in late August in their publication The Aden Forecast: "Even though there have been some wild swings, the major trend is still up and as long as that's the case, we recommend holding your positions... Gold is extremely oversold. This means it's fallen too far, too fast and it's poised to rise in the weeks and months ahead. The same is true of silver, and gold and silver shares... Even though it's still early, we're starting to see some signs that the worst is probably over, or nearly over. For example, gold, silver, oil, the base metals, and some of the soft commodities and currencies are either stabilizing or beginning to bottom at extreme lows. The same is true of some of the gold and silver shares, natural resource and energy stocks. They are all bottoming at extremely oversold levels."

The popular media is still extremely negative. That is to be expected, as their focus is backward looking, reporting on what has been. And, in case you haven't noticed, there is a strong bias in the popular media to report on disasters, pending disasters and disasters that might be there if we look hard enough. Things always look bleakest at the bottom of the market.

Those who evaluate the past and present and use that knowledge as a basis to look into the future see that there will be a return to normalcy. The fundamentals have not changed in spite of government actions to rein in the over-exuberance that was beginning to show up in some of the commodities markets. In the longer term, the efforts to prop up the financial sector will contribute further weakness to the dollar and that will translate into gains for gold and other hard assets.

Commodity prices, measured in dollar terms, will naturally rise as the dollar shrinks. Furthermore, renewed downward pressure on the dollar will lead some investors back to gold and other hard assets to protect them from the falling dollar.

Looking quickly at fundamentals for the metals: Debate still continues about whether the U.S. is or is not in a recession. Whichever side of that line the economy eventually falls on, the net result is that the country will use roughly the same amount of metals this year as was used last year.

Headlines scream out that growth in China has slowed. Reading beyond the deadlines: Growth in China in the latest quarter slowed to 10.1%, down from a level of 11.4%. That pace of expansion, and growth in many other parts of the world will see demand for metals continue to grow.

Supply disruptions continue to plague the mining industry, highlighting the tight supply/demand balance for many of the metals.

The August 23, 2008 issue of the venerable Economist magazine explains that future metal supplies will likely decline. "Kona Haque of Macquarie Bank points out that copper mines have produced 1m tonnes or so less than planned in each of the past three years (over 5% of global output), and are likely to do so again this year." The article goes on to note that, for mines in general: "the quality of the ore is falling as the richest seams are exhausted" and noting that shortages of people and key components are creating bottlenecks. "Such bottlenecks have been hampering the opening of new mines and the expansion of existing ones."

When you add it all up, demand for metals continues to grow, supply is constrained and mines are being depleted. Nothing has changed the basic premise that new metal deposits are needed by the mining industry.

With share prices of the exploration and development companies having been beaten down to absurdly low levels, we can look forward to a flurry of take-over bids as the larger companies take advantage of the low prices to secure quality metal deposits.

Clearly, it will take some time for investors to get over the shock of the past few weeks. Many individual investors will never come back to the equities markets. Some of the institutional investors who were hurt will steer clear of commodities. Yet, there are many others -- both individual and institutional -- who will have the wisdom to understand the fundamentals and see the profit potential in this sector -- especially from the current oversold positions.

Over the coming weeks, as a market bottom becomes apparent, bargain hunters will turn more aggressive. Once upward momentum has been established, other investors will come back into the market.


2nd Year HALF Price!



"Thanks again for your help. You are a straight shooter and by far the best gold stock analyst around".
- M.S., New York
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