Archive for January, 2012

Is It Time to Get into Gold Junior Mining Plays?

Philip Ker, a mining analyst for Canada-based Union Securities Ltd., says while current market conditions are affecting the junior mining space, they are also helping investors to identify low-risk opportunities and projects that may provide future value growth. In this exclusive interview for The Gold Report, Ker discusses how the industry will need to continue to see positive news, especially from senior and midtier producers, which should trickle down to the juniors.

The Gold Report: Philip, welcome. In a recent Union Securities research report, you wrote, “Despite global market volatility and foreign debt issues, we believe market valuations for mining companies, particularly in the precious metals sector, appear to be at incredibly low prices, on level with values seen prior to Q310′s commodity bull run. This is regardless of gold and silver being approximately 30% and 50% higher, respectively.” I agree that current share prices in the junior precious metals space are comparative to that timeframe, but we have been in a risk-off sector investing environment since last July, and you are operating in a high-risk sector. Share prices are low but without investors bidding up prices, how are we going to see a rebound in junior precious metals equities?

Philip Ker: We are seeing current market conditions affect the junior mining space, but also educating investors and helping them identify lower-risk opportunities in projects that are backed by strong management, and ones that can provide value growth in the future. We will need to see continuous positive news, particularly from the senior and midtier producers, at which point it should give more traction toward junior equities. I also expect mergers and acquisitions) activity to be a key factor for the juniors as a result of the strong balance sheets senior producers continue to build; as they look to replenish diminishing production portfolios they will target junior developers coming online.

TGR: Are you saying to stay on the sidelines at your peril?

PK: Not necessarily. It is more or less identifying the correct opportunity and the projects that are most targeted for growth that would be a good fit for a senior producer in its portfolio.

TGR: You recently made some changes to your outlook for metals within foreign exchange numbers.

PK: For my gold forecast, my long-term price remains the same at $1,000/ounce (oz). The main change has been in the short term where we see average prices being sustained slightly higher over the next one to five years. With respect to gold, we just slightly increased it over the next few years, as we see a higher average price to come. For silver, we were previously using a gold:silver ratio of 42:1. I felt that was a little high, so we are now using a 50:1 ratio going forward. For copper, our long-term price didn’t change. The slight decrease for 2012 was to reflect a pretty strong pullback in prices, but we remain quite bullish, as India and China continue to grow and develop their rapidly expanding economies.

TGR: Can we also have a specific 2012 price for gold, silver and the U.S. dollar?

PK: Sure. 2012 gold: $1,725/oz, silver: $34.50/oz, copper: around $4/pound (lb). Keep in mind that these are average prices over the year. For the U.S. dollar, over most of 2011 it was at par with, or subpar to, the Canadian dollar. What we have seen in the last quarter was the strengthening of the U.S. dollar, so we made adjustments to compensate for these changes within our models and in our target prices.

TGR: Any parting thoughts?

PK: I am pretty optimistic that we will see a strong market for 2012 and, particularly, I favor junior advanced exploration and development stories that can either be developed by the existing management groups or ones that would be targeted by a senior midtier company to fit its project portfolio for future production.

Philip Ker is a mining analyst for Union Securities Ltd., a company formed in 1963 that is now one of the largest independent brokerage firms in Canada. The company has offices all across Canada as well as one in London, England. He has field experience as an exploration geologist working across Canada on gold, diamond and base metal projects. He joined Union Securities in June 2011 after completing his Master of Business Administration degree in finance at the University of Alberta. He holds a Bachelor of Science degree in geology.

Streetwise – The Gold Report is Copyright © 2011 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

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  • Published On Jan. 29, 2012
  • ‘Mania’ in Junior Mining Stocks Predicted


    Fayyaz Alimohamed, CEO of Altair Ventures Inc. and publisher of the Acamar Journal, offers historical perspective and predictions on the global economic crisis. In this exclusive Gold Report interview, he foresees a “mania” in junior mining stocks and recommends holding physical gold outside the banking system as a safety net.

    The Gold Report: Fayyaz, in June 2008, using readily available economic data, you wrote that the global economy was on the verge of financial collapse. What do those sources tell you about where the global economy is headed today?

    Fayyaz Alimohamed: In November 2006, I predicted that the U.S. was headed into a recession. Seven months later, the Bear Stearns funds cracked, beginning the crisis. By June 2008 it was obvious to me that the crisis would escalate into a crash.

    Today, the U.S. cannot meet its gargantuan future unfunded liabilities. Europe and Japan face debt levels that ensure eventual sovereign debt defaults and declining standards of living. There is potential for all of this unwinding to seriously affect an entire generation.

    These economies cannot grow their way out of their problems and the cuts needed to balance budgets would create massive social turmoil because the cuts themselves would lead to sharp drops in gross domestic product, creating vicious negative spirals. The current solution being utilized is more debt and quantitative easing. That can only keep things afloat until it can’t anymore. I would say that we will have the next major crisis within the next two years.

    TGR: I would like to flesh that out a bit. What do you believe will trigger the next crisis?

    FA: Genuine reform has not been implemented. This crisis was caused by unprecedented levels of consumer and corporate debt and Wall Street greed. When the crisis happened, government rescued distressed debt by massively increasing its own debt. For example, the Federal Reserve and the European Central Bank are using their balance sheets at about a 30:1 leverage. This is the same sort of leverage that Wall Street banks had recklessly indulged in. When government debt was substituted for corporate and consumer debt, the whole system rolled over into a much more dangerous phase.

    TGR: Do you think the European debt crisis will remain the dominant theme in 2012 or will other themes take center stage?

    FA: The European crisis is simply a proxy for a global debt crisis. It happens to be focused on Europe because Germany has not been as eager as the Federal Reserve to print money. Germany remembers the hyperinflation of 1924, when unbridled money creation led to prices doubling every two days.

    Today, governments have a preponderant influence on the economy, while large corporations, through lobbying, have inordinate influence over the government, to the detriment of other stakeholders. As the danger of a deflationary depression increases, governments are attempting to reinflate the economy; they may well overreach and create hyperinflation.

    Thus, the broadest theme by far is debt and the reaction to debt. We just saw France’s debt downgraded and a negative watch put on the European Financial Stability Facility. This negative spiral will continue. Even though the U.S. has tepid signs of economic growth, it is at the cost of enormous amounts of stimulus being put into the economy.

    Given that the U.S. and Europe are its two largest export markets, China also is headed for a hard landing unless it can increase internal consumption substantially.

    TGR: Much of the discussion of the European crisis has centered on Greece. But a recent auction of six-month Italian bonds was priced at an interest rate of 6.5%—the highest rate of a bond auction since Italy joined the Eurozone 13 years ago. What do you make of that?

    FA: In literature, readers are invited to enter into a “suspension of disbelief” to go along with the story, even if implausible. Before the 2008 crisis, that was the mindset of investors. Now they want to believe that governments can solve these problems.

    Greece was not the primary cause of the European crisis. It was caused by German, French and U.S. banks. These banks are all insolvent if they were to mark their assets to market and not to theoretical models. But, we are suspending disbelief because we all have skin in the game and need things to work out.

    The drive for austerity ensures that Portugal, Ireland, Italy, Greece and Spain (PIIGS) will continue to see their economies shrink, leading to lower tax revenues and the continued inability to meet budget targets, which will require larger debt relief. It is a vicious downward spiral that will lead to declining standards of living.

    Greece, Portugal and Ireland would be much better off leaving the EU, defaulting on their debts and devaluing their currencies. That is a time-honored tradition. After some pain things will work out, as they did in Argentina and Russia in the 1990s.

    Investors want to believe that heavily indebted countries can solve the problems of other heavily indebted countries; that an insolvent banking system can be rescued by governments through more debt issuance and debt monetization.

    TGR: The European Central Bank has floated the idea of euro bonds, backed by all 17 members of the Eurozone, as a solution to this problem. But Germany does not want to go down that path unless the indebted countries adopt more severe austerity measures. Do you think we’ll ever see euro bonds?

    FA: We are really into the realm of absurdity. For example, the European Financial Stability Facility is a private company authorized to borrow €450 billion (B) from the private sector backed by a guarantee from all the EU members who are already heavily in debt and being downgraded periodically. One proposal I saw was that it would use the €440B of debt as collateral to borrow another €1–2 trillion of debt to lend to the PIIGS!

    Can this type of thinking ever end well?

    As Europe enters a recession, the problems will only get worse. Euro bonds issued by indebted countries just mean France and Germany are putting their own balance sheets at risk. It may provide time, but it does not solve the problem. The question is, should they bailout the PIIGS or take the same money and bailout their own banks? There are no good solutions.

    A final thought on yields: when I studied economics we were taught that U.S. Treasuries were the risk-free asset to be used as an absolute benchmark. Given the recent downgrade and outlook, perhaps the economics profession should start looking for another risk-free benchmark, just as the U.S. dollar replaced the pound sterling.

    TGR: Given all of this, how are you protecting yourself?

    FA: One of the primary measures of protection is a healthy cash balance. You have to be in a position where you are able to ride out any crisis and also to take advantage of valuations in case of a crisis. If the crisis is as bad as I think it will be, you will be able to find and acquire assets at generationally low prices.

    The other way to protect yourself is to invest in precious metals. I believe precious metals will do well whether we continue to stagnate or actually see another crisis. I think silver and gold equities will do very well in the long run.

    TGR: Investors have been seeking greater security for at least seven months. How long do you think that risk-off sentiment will last?

    FA: Brian, U.S. domestic stock funds have seen net redemptions for five straight years. Due to negative real interest rates, equities are undervalued in historical terms. This is tempered by the dangerous, rising systematic risk. Fund managers are paid to perform or else they face redemptions. So, the bias is for stocks to rally as we are seeing now, unless the second phase of the crisis clearly emerges, which in my opinion is inevitable.

    Ironically, in another crisis, governments will likely turn to quantitative easing with a vengeance, which means that, despite a crisis in sovereign debt, we will see a substantial rally in commodities, particularly gold and equities, as substantial sums of newly created money finds its way into the system and money leaves the bond markets. You may find prices rising while the economy is being undermined.

    TGR: Fayyaz, your background is in insurance and finance, how did you find your way into the gold and silver space?

    FA: From 2001 onward, I realized that the U.S. seemed to lack the political will to deal with its increasing levels of budget and trade deficits. In fact, the Fed was creating asset bubbles that were bound to end badly. At the same time, I knew from history that fiat money generally ends badly, starting with Kublai Khan. I came to anticipate the decline of the U.S. dollar and the rise of gold. I believe that the price of gold will be much higher in the coming years and that gold will become part of the monetary system in some capacity.

    Gold is interesting in another way. Throughout history booms have been localized geographically. As an example, the average Canadian investor is unlikely to invest in, say, Argentinian real estate or in its stock market even if they are booming. The Internet bubble was the first time that a global audience became aware of an asset category that was rising dramatically, ironically thanks to the Internet itself. But you could not participate unless you had a U.S. brokerage account. Gold is the first truly global asset boom that investors at all levels can participate in. Today investors are more savvy and more heavily invested across markets and categories but gold is fundamentally money and all investors and savers can buy it. Local yet global.

    TGR: Investors also have different tools.

    FA: That’s right. They can do a lot of research. They have a lot more liquidity. The potential impact on the market for gold as an asset class is phenomenal. It appeals to all levels of investors. Someone buying a few grams of gold in China creates demand that directly helps the value of your gold holdings. I mean, how many people sleep with a barrel of oil tucked under their mattress?

    TGR: Not if you could help it.

    FA: Historically, gold and silver equities leveraged the returns on gold. In 2011, mining companies were producing gold at an average cash cost just under $600/ounce (oz) and were getting about $1,600/oz in revenue. Cash flows are very impressive and price earnings are healthy. Mining companies continue to buy juniors with good assets, especially at these low share-price values. I moved into the sector to take advantage of this bull market in gold. And, I believe we will see a mania in junior mining stocks before this is over.

    TGR: And, when will that be?

    FA: I think we will see this happen within the next two years as people begin to realize that solutions to the global economic situation are not forthcoming. There will be more and more nervousness and gold will find a larger and larger audience.

    We now have a situation where central banks, which were net sellers of gold for 20 years, became net buyers in 2009 and are accelerating their buying programs. We are seeing tremendous support for gold from central banks, institutional and retail investors across the world.

    TGR: In your time in this space, what have you learned that the average retail investor ought to know?

    FA: This is a very volatile sector, subject to investors jumping in when there is a bullish trend and a lot of enthusiasm, and those same investors not wanting any part of equities when there’s a pullback in prices.

    Given the overall increase in volatility in the markets, investors really should take a look at gold and silver. If they are bullish, any pullbacks in the commodity prices or in the associated equities should be seen as buying opportunities. When there is a lot of enthusiasm, it should be seen as creating selling opportunities.

    You also have to have physical gold and silver in your possession. We learned a lesson with MF Global. We saw $1B of segregated funds in clients’ accounts vanish. My understanding is that some of those funds were comingled and used to settle MF Global’s liabilities to other financial institutions. There is this whole issue of counter-party risk, which gold does not have. That should be a cautionary reminder to people. You need to have physical cash balances. You need to have physical gold and silver outside of the banking system as a safety net because, as Warren Buffet said, we are in uncharted waters now.

    TGR: You grew up in Pakistan, where gold is part of the culture, given as gifts at weddings and such. Do you think you would have that same opinion about physical gold as a personal asset if you had grown up somewhere else?

    FA: Not in my case. I had no involvement or affinity with gold. I was a finance professional. My involvement with the gold sector is purely intellectually driven, from looking at trends within the macro economy and realizing that gold and silver really are hedges against turmoil and currency debasement.

    But that is a very good question and it points up the importance of watching out for biases in the commentaries that you read. People have vested interests and they do tend to have agendas, both in the mainstream media and elsewhere. For your own protection, you need to be sensitive to those influences and to study track records at key inflection points before relying on other people’s judgment.

    TGR: Fayyaz, thank you for your time and your insights.

    Fayyaz Alimohamed is president, CEO and director of Altair Ventures Inc. and publisher of the Acamar Journal. He has over 20 years of experience in investment management, finance and consultancy. He previously worked at the Aga Khan University Hospital, Financial and Management Services Ltd. (a management consultancy set up by Morgan Grenfell & Co. Ltd. and Booz Allen Hamilton Inc.) and as the chief financial officer of the Key Capital Group before becoming director of investments for the Cupola Group, a large operating and investment conglomerate based in Dubai. He holds a Bachelor of Science (Honors) degree in economics from the London School of Economics, University of London, and is a Certified General Accountant (CGA).

    Streetwise – The Gold Report is Copyright © 2011 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

    The Gold Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report.

    From time to time, Streetwise Reports LLC and its  directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

    Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

    Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

    Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.


  • Published On Jan. 29, 2012
  • Investing in the Gold Bull Market Like Jesse Livermore

    Some ignorant and skittish commentators have been making outrageous claims about the gold “bubble” popping. But here at TDV Golden Trader, we are students of the Austrian Business Cycle Theory (ABCT) and have a deeper understanding of the real reason for the 10+ year bull market in gold – the radical devaluation of the worlds reserve currency – the pure fiat Federal Reserve Note (FRN).

    Putting the last twelve months in perspective, we can clearly see the bullish move up from February to September. Since then, gold has been in a correction phase which may have ended in the last week of December when it tested $1550. From May through July, gold tested a price ceiling of $1550 three times before finally breaking through to make a strong advance to $1900. For the last four months, gold has corrected in a down channel back to the breakout price of $1550. This could very well be the support for a new run-up. During thinly traded markets, metal and stock prices are easily manipulated up or down, so it wasn’t surprising to see both correcting hard to the downside, especially during the last two weeks of December.

    Since the last week of December, gold has made a strong move higher. It is now trading above the 200 Day Moving Average (DMA) of $1630. Last week we advised subscribers that when gold goes back up above $1600 and holds, we could see it continuing to trend higher. Gold is now looking to test the 50 DMA around $1675. The chances are that gold will be trading between $1675 and $1700 within the next two weeks before taking a break. This is where we expect to see some resistance and a round of selling from short term traders.

    A strong advance past $1700 is certainly possible based on the fundamentals. On the other hand, we could be testing the top of a sideways trading range. In this case, gold would correct back to the lower end of the range and test the $1600 mark. One more corrective wave down is possible, but the longer that gold prices consolidate above support, the downside should be limited and short lived.

    Looking at the price action of the mining stocks and silver since the start of the year, the HUI index is back above 500 and silver is trading between $28 – $30.

    If you have traded gold and the mining companies long enough, you come to expect these kinds of selloffs. But once the corrections are finished, the rise in price that follows can be spectacular; it just takes a while to get going. A six to nine month corrective period is not uncommon, but it provides us time to search out the companies that performed well during the selloff, have strong fundamentals and are well capitalized. These are the ones we want to be focusing on for the next wave up in precious metals and mining stocks.

    UNDERVALUATION IN THE JUNIOR, MID AND SENIOR PRODUCERS

    While we are looking for junior gold companies that are undervalued, many of the midsize and senior producers also remain undervalued based on today’s metal prices. The senior and midsized producers will continue to fluctuate with the metal prices but remember that the good juniors can provide exceptional returns.

    For example, a junior explorer that we suggested owning since 2005 at $1.00 was trading around $4.50+ at the beginning of 2008. After the meltdown there was a significant selloff and by January, 2009, the company was trading around $0.60. That’s a significant drop, but only if you sold your shares. If you followed our advice to buy and hold onto quality juniors, the same company came roaring back and by September 2011 was trading as high as $9.00. That’s almost a 1400% return in less than three years from the low to the high.

    We mention this because this correction will eventually end and we must be prepared if we want to capture similar types of returns in the next three to five years. All we have to do is find the right companies and stick with them for the duration of this bull market.

    REGISTER YOUR SHARES

    However, there is one very important thing to keep in mind. We are expecting massive financial chaos over the coming years, so for the stocks that you own for longer term holds (ie. not trading regularly), make sure you register your shares to protect them from being confiscated if/when your broker goes bankrupt or steals the funds, like what happened to tens of thousands of investors at MF Global. We recommend looking at the Special Report published by The Dollar Vigilante, called BulletProof Shares for anyone who owns stocks. To do otherwise is risking your entire portfolio. And I can imagine no worse fate than having an investor make 1,000%+ returns over the next few years, only to have it all disappear if his broker makes a bad bet on European sovereign debt. If you invest in stocks you absolutely must read the information contained at BulletProof Shares.

    POSITIONING FOR THE YEARS AHEAD

    Because, over the next few years, we will be provided with many good trading opportunities where we can easily make 20-50% on some of the stocks we follow and trade. However, the biggest gains will be made by holding on to the quality juniors for the duration of the bull market. If you “sit tight and be right” you can easily make 200% to 1000% returns.

    The junior mining sector is probably the most volatile sector/industry to be speculating in, especially when hot money comes in and out of the sector. This is where you can literally make 1000% returns in a matter of a few years only to have the market take it all back during a correction. Not all juniors are equal, only the strong survive and with several thousand companies looking for minerals, you must find and stick with the winners to earn those kinds of returns. When it comes to investing in exploration companies, you cut your losers early and let your winners run. It’s the same general strategy that Jesse Livermore, the world’s most famous trader utilizes, when he said:

    “It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine–that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.”

    Jesse, of course, was always hopping in and out for trades along the way, but he was always long the core part of his position for the full extent of a bull market, as best as he could approximate it. That’s exactly what we try to do here at TDV Golden Trader.

    We hold a core position in gold bullion and a certain select gold stocks (that we register directly to reduce brokerage default risk). Barring any major changes in the outlook for these stocks, we intend to hold them for the duration of this bull market. And then we find trading opportunities to make quick gains buying and selling along the way.

    If we do our jobs right, we’ll make Jesse proud.

    Vin Maru

    http://www.tdvgoldentrader.com/


  • Published On Jan. 15, 2012

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