The upcoming year 2011, in the Asian Zodiac, is the year of the "Metal Rabbit," or if you will, the year of the "Golden Bunny", in following the tradition, there is a 60 year Golden Cycle for these zodiac animals. This new Asian lunar year is poised to begin on February 3, 2011. We are looking forward to the "metals" aspect of the Rabbit year to help us obtain a bit of an edge in the equities markets for this upcoming 'Golden Bunny' year.
Fall of the Tiger Year
Looking backwards at the soon passing year of the Tiger, the author is thankful for the numerous messages from the many stoic supporters; never mind the exasperating events and the volatility of the irrational and maddening markets. This year was a much memorable one in that we have seen many and varied changes in the evolving landscapes and horizons of the equities markets. It was breathtaking and challenging to be able to wade in and participate in and possibly profit a little in the market's remarkable bull rise off the summer malaise.
The general North American equities markets have enjoyed an amazing fall run, with a gain of about 17% for the S&P 500 since the FOMC announcement of August 27th, 2010 for equities market support. This run was given a further jolt by the FOMC's injection of treasury support on November 3, 2010. As the year ends, more and more economic and market indicators are turning positive while the myriad voices of the bear detractors are still calling for caution and uncertainty.
In examining the performance this fall, the author has created a comparison chart following for the market items of interest:
Figure 1: Fall 2010 Action in the Markets (the S&P 500 (^GSPC) has gained about 17%)
(Click to enlarge)
The base trace is that of the S&P 500's 17% move, illustrated above in red and green candlesticks. The precious metals have moved forward with gold (using GLD as proxy in green trace) moving upwards about 11% in the same time span. The major gold equities in the HUI index (red trace) of the 14 largest gold companies has moved higher about 15%. Note that beginning in December, the HUI has broken upwards leveraging the price of gold; we shall refer to this later in this posting. The 30 large cap gold equities in the GDX ETF (brown trace) has moved up about 13%.
The price of gold and major gold equities have been moving higher together with the general equities, albeit underperforming the action of the S&P 500. This is a bit unusual for gold to be that closely correlated to the general equities markets, but then this is a year of change. Also, the author was a bit surprised to see the S&P 500 outperform gold and gold equities by up to 4%. Again, this is against my preconceptions; of the precious metals being in a bull run rally mode and yet being outdone by the S&P 500 index.
Now looking at the upper traces on the chart, the GDXJ, consisting of 60 varied gold Junior equities (light green) shows an impressive 35% gain this fall. The gold junior mining equities have roughly doubled the rise of the S&P 500 and have more than doubled the large gold equities and the price of gold, which is as it should be in a precious metal bull run rally. The gold junior equities should be generally the leaders in this rally.
The top two traces on the chart are quite intriguing with the silver (SLV Silver ETF as proxy in yellow trace) price surging forwards over 50% this fall. Again, this is generally accepted wisdom, for the silver price to lead in a precious metal bull market. The ultimate trace on top is the SIL ETF of the 30 silver companies, which sports a spectacular 59% gain for the fall. So, this is a prime example of the silver equities leveraging the gains in the rise of the silver metal. For silver going forward, Mr. Ananthan Thangavel paints a very cohesive story as to why the demand for silver is increasing.
Readers who have been following the authors writings and others that have spotted the rising precious metal trend and who have entered the markets, should now be sitting on some gains for this fall season. Correction, anyone at all, who has been in the equities markets this fall, should all be sitting on some pretty gains this fall. Such is the power of the rising confidence tide in these equities markets; the rising tide should have lifted all equities (boats), to give one a nice year end feeling of success.
Golden Bunny Outlook
The question then is what is the outlook now for next year, the year of the Golden Bunny?
The author found a marvellous quotation as to what is happening in the world equities markets given by an astute Seeking Alpha commentator, "Venerability":
Commodities are a positive GROWTH trade. The Commodities Bull Market is secular. And it is extremely long-term.
We are still in the very early stages of nothing less than the World's Second Industrial Revolution.
It is even bigger than the World's First Industrial Revolution, which brought the U.S., Europe, Japan, and a few other lucky countries and their populations into the modern world.
Yes, the author also believes, we are seeing the rise of the emerging markets, not just of China, India and BRIC, but also of Columbia, Bolivia, Mauritius, Oman, Latvia, Morocco and many other countries that you may not have heard from for years. The whole world is in throes of change, driven by advances in information technology; everyone everywhere is seeking peace, health and the right to a modern fruitful life. We in the modern world truly have a lot to be thankful for.
These small steps taken towards the modern technological world, requires acquisition and consumption of a varied basket of metals and commodities. The author has taken the 2010 fall performance of commodities (using the Jefferies TR/J CRB Global Commodity ETF as a proxy - CRBQ) and compared it to the S&P 500 and gold in the chart following:
Figure 2: Comparison of Commodities to the S&P 500 (note the surprising action of the copper price)
(Click to enlarge)
As stated previously, and shown in the chart above, all the traces show that everything has been uplifted by the rising confidence tide. Again the red and green candlesticks are the motions of the S&P 500. The red trace is the CRBQ commodities ETF and one can see that it has risen together with the S&P 500. Then in November and again in December, the CRBQ starts trying to outpace the S&P 500. The CRBQ has gained about 18% for this fall.
The yellow trace is for OIL, (iPath S&P GSCI Crude Oil TR Index ETN as proxy for oil price) is shown above as following along with the rising S&P 500 index. OIL has gained about 14% for this fall. Note that OIL is more volatile, and the relative performance is vastly affected by the choice of the starting date for the comparison. There is particularly good research supporting $100 oil price by Irfan Chaudhury here.
The green trace the is for the JJC Copper, (iPath DJ-UBS Copper TR Sub-Idx ETN as proxy for copper price) which is the leader in gains for the fall with an exceptional 23% rise. Does it surprise you that copper has gained more than twice as much as the price of gold this fall?
As first postulated by the author, earlier on August 27th, 2010, copper with its industrial dependencies will be leading the markets forward this fall. Then later on November 15th, 2010, the author again establishes a bullish case for mining, commodities and the general markets. Finally, on December 12, 2010, the author forecasts a copper shortage forthcoming in 2011. The industrial and investment demands are driving the copper price, while the production shortfall is resulting in a squeeze higher. Therefore, lead by "Doctor Copper," the author's new year outlook is bullish for the general markets, for the commodities and for the continuation of the precious metals bull.
Positioning for the Golden Bunny
For the general markets going forward, I will make no recommendations as this is not the author's specialty, and besides, there is a plethora of information and opinions available on Seeking Alpha.
For the precious and base metals going forward, this is the author's specialty and following are some possible prospects for positioning. I stay away from the large cap major gold miners such as Barrick (ABX), Goldcorp (GG) and Newmont (NEM) but am invested instead in Junior mining equities. Even though, from the first chart previously, the HUI large cap gold index which the above three top gold miners are part of, has broken upwards in December and is now showing some leverage to the price of gold. This leverage breakout by the HUI is indicating the movement of large investors and institutions into the large cap gold miners and bodes well for the continued advancement of the precious metals bull in the imminent Golden Bunny year.
In the following specific mining equities that I have a position in, I qualify them with two main criteria. First and most importantly is the quality and competence of the company management. Management need to be focused upon creating value for the shareholders. Second, the companies' specific stories of value creation needs to be very compelling and capable of driving and sustaining the share price even if the markets are uncertain and may pull back a little.
So to start off, in the precious metals space, my favorite gold mining junior is:
Great Basin Gold (GBG). Here is an exclusive interview with their CEO Mr. Ferdi Dippenaar. Great Basin is a gold miner that will leap from mine developer to mid-tier gold producer status by 2012, in producing close to 350k ounces of gold per year. Great Basin's Hollister Nevada mine is the highest grade production gold mine in the world, with expected production of about 110k ounces of gold equivalents per year. The company has just recently uncovered super bonanza grades above one of their existing ore veins at Hollister. In addition, Great Basin's Burnstone, South African mine is starting ramping up to full production of 250k ounces of gold per year. This quarter or next, Great Basin will turn the corner to profitability and the markets will re-rate the stock price. I believe out of all my stock selections, Great Basin Gold will give the most payback for the lowest risk.
In the silver space, my favorite silver mining juniors are:
Silvermex (SLVXF.PK). Here is an exclusive interview with the former Genco CEO, Mr. James Anderson, The new Silvermex is formed from the merger of the old Silvermex and Genco Resources (GGCRF.PK). The new management includes former and present executives of Hecla Mining (HL) and Silver Standard Resources (SSRI). Silvermex has over 250 million ounces of Silver resources and the company anticipates increasing its Guitarra Mexican high grade silver/gold mine output by multiples. I believe that this Silvermex stock has the highest growth possibilities of any silver stock in the market.
Canadian Zinc (CZICF.PK). Here is an exclusive interview with their COO, Mr. Alan Taylor. Canadian Zinc owns the previous Hunt Brothers Prairie Creek Silver, Zinc, Lead mine in northern Canada. The mining infrastructure is 90% complete and Canadian Zinc is awaiting environmental approval for water usage which is due in 1st or 2nd quarter of 2011. I believe that with the environmental approval, Canadian Zinc will be re-rated to a multiple of its existing share price.
U.S. Silver (USSIF.PK) is described here in a previous article. U.S. Silver operates the joint Galena, Coeur and Caladay mining areas in the Silver Valley of Idaho. The company is rehabilitating the Coeur mine shaft for increasing its silver production. I believe that U.S. Silver is a much underrated production silver miner and it will be acquired by Hecla Mining (HL) or Coeur d'Alene (CDE), both of which are situated nearby.
In the precious metals exploration space I am interested in the following:
Victoria Gold (VTIFF.PK). The company has shed 30%+ on the back of an error in resource definition for its Cove project. Victoria Gold is busy drilling proving up both its Cove deposit in Nevada and its Dublin's Gulch multi-million ounces gold deposit in the Yukon. I believe that the company will be acquired by Kinross (KGC) or Newmont (NEM) in the Golden Bunny year.
Tarsis Resources (TARSF.PK). The company is drilling its Erika epithermal Gold/Silver deposit in Mexico. Tarsis is also active in many projects in the Yukon. I believe that it will strike gold in its drilling of the Erika project as the property is part of the Mezcala gold skarn district, and it abuts the Torex Gold (TORXF.PK) El Limon gold deposit. Also, its geological expertise is shared with Almaden Resources (AAU), which has already struck gold.
Almaden Resources (AAU). Almaden is drill looking for the deeper high grade core to its Ixtaca epithermal Gold/Silver discovery in Mexico. Almaden has over a score of properties joint ventured out and under exploration. Of course, I believe that it will hit the high grade gold/silver motherlode in its present drilling.
Torex Gold is expanding its reserves and resources (4 million oz.) at its El Limon Gold deposit in Mexico. The company currently has nine drills on site and expects to have 11 drills working in 2011. I believe that Torex will be acquired by Goldcorp (GG) which operates Mexico's largest gold mine, the Nukay/Los Filos in the adjacent property
Atac Resources (ATADF.PK). The company owns the huge RAU project in the Yukon where it has discovered a large Nadaleen Trend which it has compared to the Carlin Trend in Nevada. Early prospecting and drilling has uncovered gold in multiple locations along the Nadaleen Trend. Atac expect to have 8 drills in operation in 2011. I believe in the Atac Resources assessment of its Carlin Trend geologic cousin, as the assessment is backed by the geological expertise of Archer, Cathro & Associates, renown Yukon geologists with many discoveries to their credit.
Caerus Resources (CAEUF.PK) is negotiating for the Antioquia Gold project in Columbia which is adjacent to the Aragua Mine owned by Continental Gold (CGOOF.PK). I believe that Caerus will be successful in acquiring these prospective artisanal mining claims.
In the base metals mining space I am interested in the following:
Norsemont Mining (NOMFF.PK) is proving up its Constancia copper/Gold project in Peru. Norsemont is presently drilling to increase the 43-101 resources in a new report due first quarter of 2011. A 2009 feasibility study indicates a NPV (8%) of $931million, and an IRR of 27%. I believe that Norsemont is an ideal copper/gold takeover candidate.
Belvedere Resources (BLVDF.PK) is a nickel, gold, cobalt miner operating the Hitura nickel mine in Finland. It has an advanced gold property in Kopsa, which is 15 km away. Belvedere's plan is to develop the gold property and run the ore through the Hitura mill. I believe that the management of Belvedere will be able to create value with gold mining, as it has been meeting all targets promised ahead of schedule.
Adex Mining (ADXDF.PK) is re-opening the Mount Pleasant tin, indium, tungsten and molybdenum mine in New Brunswick Canada. Adex is partnered with a Chinese company, Great Harvest of Hong Kong. Adex owns the world's largest and richest Indium resource and North America's largest tin deposit. The company also owns significant resources in tungsten and molybdenum. I believe that the re-start of the Mount Pleasant mine will generate considerable value in the scarce metals that Adex mines.
Zaruma Resources (TSX: ZMR.h) - is owner of the Luz del Cobre copper project with the adjacent San Antonio Gold project in Mexico. The company is focused on the re-start of the Luz del Cobre heap leach mine in 2011 with the financial support of Gravity Ltd. I believe that the timing is right for Zaruma to bring this mine on-stream in 2011, the year of the Golden Bunny.
Finally, for an oil exploration story that I am interested in:
Westernzagros Resources (WZGRF.PK) is drilling in the Kurdistan region of Iraq with partners Talisman and the Kurdistan Regional Government. Its exploration block of 2000 square kilometers is prospective for a super-giant type billion barrel oil field, similar to the Kirkuk field, which is 150 km distant. Its present Kudamir 1 well has proven gas, natural gas liquids and prospective oil resources on the flanks of the anti-cline. The company will be re-entering its Sarqala 1 well which has previously encountered oil. Westernzagros is also proposing to drill a shallower Mil Qasim well. Here is the link to its latest corporate presentation. I believe that further drilling in 2011 will prove the immense quantities of prospective oil on Westernzagros' claim block.
So in examining the progress this fall and the prognosis for the future, we have interpreted the market indicators that are continuing to point towards a bullish outlook for the general markets. The emerging world is ramping up their demands for commodities and this will serve to drive the equities markets. On top of this, we are in the middle stages of a multi-year precious metals bull market. We as investors are truly blessed and have a lot to be thankful for. I am eagerly anticipating the arrival of the sixty year cycle of the Golden Bunny!
Disclosure: Author is long GBG, GGCRF.PK, CZICF.PK, USSIF.PK, AAU and ATADF.PK.
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