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  • The Gold Hero
    It's no surprise that we're seeing more sell-offs.

    Last week, I ended my letter telling readers to "Protect (themselves) from inflating currencies: Buy gold."

     
    Without a doubt, the biggest headline in the investment world this past week was the big gold and silver selloff. So was I wrong? Was telling my readers to buy gold the wrong thing to do?
     
    Not even close.
     
    The market, and that includes gold and silver, has been volatile this year. The year is coming to an end and that means the last chance for anyone to sell what they can to buy presents or save taxes.
     
    The dollar has been strong against other world currencies recently and that generally means a short term break in gold. But as we have seen throughout the last few years, this correlation no longer applies over the longer term.
     
    So while sceptics of gold cheered the recent pullback, smart investors are loading up. Does that mean we have seen the bottom for gold? Does it mean we have seen the bottom for gold stocks?
     
    The price of gold is made on a daily basis by funds and institutions reacting on what I believe to be political fundamentals - these are the guys that set the price of gold in the short term. Those that own gold for insurance and investment purposes, such as myself and the central banks of the world, are spectators to the market but not the price makers.

    So while gold and gold stocks may trend lower in the short term, I am confident that prices will continue its longer term rise. This may not be the exact bottom in gold and gold stocks, but I am continuing to look at buying big producers and juniors that I think will be taken over within the next few years. Don't let short term volatility scare you away from the fundamentals that clearly show strong under valuations in great companies.

    Over the next few weeks, look out for more fire sales in the junior precious metals sector. The rewards may not come tomorrow, but they will come. Don't look at daily volatility. Instead, look at what makes sense. I expect the recent cycle lows for gold to occur within a month or so, so expect gold to remain volatile in the meantime. Use this volatility to accumulate.

    The Gold Superhero

    Every year before the holidays, I like to republish a story that our long time Equedia Letter subscribers have heard before. It has become so popular amongst our readers that it is now a tradition here at Equedia for us to publish this story every year before the new year begins.
     
    With our strong focus on the junior resource sector, in particular precious metal stocks, it's only fitting that we revisit this incredible story.

    It's a story about a real life gold super hero whose deviance of conventional wisdom turned a failing corporation into one of the world's largest gold producers.
     
    Rob McEwen wasn't a miner. He was a young man following his father's footsteps into the business world. Like his dad, he had a fascination for gold.

    After years of growing up hearing stories around the dinner table of miners and prospectors, he finally got his shot.

    One day, he stepped into a takeover battle as a white knight and emerged triumphantly as majority owner of a mine in Red Lake, Ontario. Here he stood at the head of the boardroom table filled with a room full of experienced senior geologists, all of whom doubted his ability to lead this company. Who could blame them? He was a mutual fund manager turned CEO of a gold corporation overnight.

    But it was hardly a dream come true. The company he had taken over was plagued with negative news and on the brink of failure. The miners were on strike and they were overwhelmed by lingering debts. The gold market was contracting and the mine's operating costs were exceedingly high, forcing them to cease mining operations. Unless they found evidence of new gold deposits, the fifty-year old mine was about to be shut down along with the company.

    McEwen knew that the mine had potential. "The Red Lake gold district had 2 operating gold mines and 13 former mines that had produced more than 18 million ounces combined," he says. "The mine next door had produced about 10 million ounces. Ours had produced only 3 million." So he sent his geologists packing with $10 million dollars and a plan to drill in the most remote and deepest parts of the mine.

    A few weeks later the geologists returned. With smiles on their faces, they broke the news to McEwen that would save the failing company - at least for another few years. They had found results signalling new deposits of gold as much as thirty times the amount they had been mining at the company. But that wasn't enough.

    The senior staff continued years of further exploration in attempts to find a more accurate depiction of the gold's value and location. Despite the expertise and experience among the staff of senior geologists, their efforts proved stagnant. It had become obvious that something critical needed to change if they were to secure a future for their company. They needed to act faster.

    Exhausted and uncertain about his company's future, McEwen decided to take a break for some personal development. He attended a MIT conference in 1999, where corporate presidents from around the world had come to learn about advances in information technology. Perched up in his chair, he listened as the lecturer talked about how Linus Torvalds built a masterpiece computer operating system by revealing his code to anonymous programmers all around the world on the internet.

    Without the help of thousands of anonymous participants, the Linux system would have cost millions of dollars to produce and would have taken years. But it didn't.

    Then it hit him. If his senior geologists couldn't find the gold in Red Lake, maybe someone else could.

    McEwen wasn't a miner. He didn't think like one either. But that was his strength. So he rushed back to his corporate head office in Toronto to share his idea of "open sourced" mining.

    McEwen wanted to take all of the data the company has spent creating in the last fifty years and he wanted to share it openly with the world by posting it on the internet: "Then we'll ask the world to tell us where we're going to find the next six million ounces of gold."

    At first, the Company's geologists were appalled at the idea of exposing their fifty years of secret data to the world. And they had good reasons to be. The mining industry is an intensely guarded business and geological data is to miners what treasure is to pirates. Giving this sort of data away could not only subject you to takeover risks, but can also imply that your company no longer has the ability to move forward on its own.

    Despite the inherent risks, McEwen decided to push forward and in March 2000, he launched a new "Challenge." They posted every bit of information they could on their 55,000-acre property through their website and setup a contest offering $575,000 worth of prize money to the participants that could show his Company the best methods and estimates on their property.

    McEwen knew this strategy entailed big risks. But the risks of continuing to do things the old way were even greater.

    "Mining is one of humanity's oldest industrial pursuits," McEwen says. "This is old economy. But a mineral discovery is like a technological discovery. There's the same rapid creation of wealth as rising expectations improve profitability. If we could find gold faster, we could really improve the value of the company."

    And improve the value they did. Within weeks, submissions from over one thousand virtual prospectors in over fifty countries crunched the data. But geologists weren't the only participants.

    Mathematicians, graduate students, consultants, and military officers all submitted entries. They had, "applied math, advanced physics, intelligent systems, computer graphics, and organic solutions to inorganic problems."

    Not only had the contestants identified new targets on the Red Lake property, they introduced the Company to state-of-the-art technologies and exploration methodologies, including new drilling techniques and data-collection procedures, and more advance approaches to geological modeling.

    McEwen had harnessed a technological trend that most in the industry would have shunned. As a result, he turned his destined-for-failure $100 million company into Goldcorp - one of the world's largest gold producers and a company today worth close to $34 billion.  

    McEwen's courage to challenge the mining industry's safe-keeping of geological data reveals to us that change can lead to astonishing results.
     
    The junior resource stocks give us ample opportunity to beat both the markets and the returns that mutual funds and bonds can offer. We have already seen a major run in many of the mid-tier and junior precious metals stocks over the last few years.
     Despite the sell-off, commodities and precious metals prices remain high. Eventually, fundamentals will overcome fear. It may take a few months, or even a few years, but these low valuations will eventually be reversed.

    The Equedia Letter will be taking a few weeks off for the holidays. I hope everyone enjoys the remainder of the year and I am looking forward to 2012 as a year for great opportunity.

    Happy holidays!

    Disclosure: I am long gold and silver through ETF's and bullion, as well as long both major and junior gold and silver companies.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: GOLD, GDX, GDXJ, GLD, GG, gold, stocks, mining
    Dec 20 2:25 PM | Link | 1 Comment
  • The Future of the TSX Venture and Junior Miners

    If you are investing in precious metals juniors, either through the Market Vectors Gold Junior Miners ETF (NYSEARCA:GDXJ) or through individual stocks, then undoubtedly you are investing in juniors listed on the TSX Venture.

    The high risk, high reward profile in Canada is dominated by companies listed in the TSX Venture exchange - in particular, the junior mining sector with its higher-risk, less liquid, and more speculative member companies.

     

    Under the current global economic and political environment, there will undoubtedly be periods of volatility leading to downside pressures.  

     

    While the first few months of 2011 were strong, the performance of the TSX Venture has been under extreme pressure since early March. It has been severely battered as risk aversion has strangled the equity markets. When flight to safety is the number one priority, the Venture is always going to get hit the hardest. In a market where liquidity has always been a concern, things can go real bad when money is pulled out. 

     

    But does that mean you should stay away?  

     

    Gauging the TSX Venture 

     

    Generally, the gauge for investor sentiment is the strength of an exchanges' daily trading volumes; in other words, liquidity. In the case of the junior mining sector, the strength of the TSX Venture volumes have been dwindling at an extreme pace.

     

    In January 2011, the S&P/TSX Venture set a new record for daily-traded volumes - reaching a yearly and all-time high of over 600 million shares traded per day. Since then, volume has tumbled averaging below 200 million shares per day in the last few months. I consider this number to be the absolute minimum level of liquidity support for the TSX Venture. If the average traded volumes continue to dip below this number, we are going to see some rock bottom prices soon.

     

    To get a better grasp of what's going on, let's look back at the Venture's history.    

     

    Predicting the Future by Looking at the Past 

     

    Over the last 10 years - but excluding the 2008 crash - typical corrections on the TSX Venture have ranged from 17-31%, with the longest correction lasting over a 19-week period. Based on rolling 52-week highs and lows, the Venture has seen a decline of 47% from March 7, 2011 to October 4, 2011 - a range of 28 weeks. This clearly shows us that this is not a typical correction.   

     

    The TSX Venture in its current state is now back to levels not seen for 8 years, when gold was trading just over $400/oz and the TSX Venture exchange was barely nearing its second anniversary.

     

    To put the crash of 2008 into perspective, let's look at the previous bear runs of other junior exchanges in Canada, including the Vancouver Stock Exchange (VSE), the Canadian Venture Exchange (CDNX), and the TSX-Venture (TSX-V) since 1983.  

     

    The Venture's 80% drop in 2008 is the single largest decline ever in the 25 year history of any of the past Canadian junior exchanges. The biggest drop in the junior exchanges aside from 2008 was during the crash of 1987 when the junior market in Canada dropped 54% over a one-year period. So far this year, we have declined 47% over a 7-month period.

     

    What's Next?

     

    In 1987, the market was under pressure for nearly four years before a new upward trend was established. In 1996, following the Bre-X scandal, the market was under pressure for three and a half years. Luckily, in most other cycles of corrections, the markets recovered in just over one year.

     

    Regardless, those numbers can be daunting. However, there is a bright side.

     

    While additional market pressures are still on the table and Europe remains a mystery, there is a strong possibility that we could have a recovery in the junior sector despite the negative sentiment.

     

    First of all, current low interest rates offer very few alternatives for deployment of capital. Just last week, I talked about how badly the world's largest bond fund has performed in this low interest rate environment (see Prepare for Upside).

     

    Second, metal prices remain significantly above average historical prices. That means many mineral projects can be developed into high margin operations. As such, many of the juniors remain well funded, opening the potential for exploration spending to create speculative interest in new discoveries.

     

    Third, balance sheets of the majors continue to strengthen and that means more potential for M&A activity, including takeovers of exploration and development companies. We have already seen it over this past year including last week's takeover announcement of Hathor by Rio Tinto - just one of many takeovers and consolidation attempts this year. I fully expect this trend to continue - especially given the current major decline in share prices for many of the juniors.

     

    Last, but certainly not least, exploration capital continues to flow - unlike the climate in 2008 when a junior explorer couldn't even raise a few pennies to put something into production.

     

    Big Money 

     

    Last month, Metals Economics Group indicated that 2011 non-ferrous exploration budgets would exceed US$17 billion on expenditures related to precious and base metals, diamonds, uranium, and some industrial minerals; the focus of these expenditures on gold exploration with copper being second. According to MEG, this represents an increase of about 50% from the 2010 - setting a new all-time high. That means there is a lot of smart money being risked. 

     

    Record levels of exploration spending should drive new discoveries and strong reserve/resource growth over the next year, which should improve the equity valuations in the junior sector. This, along with high metal prices, should lead to a rebound in mining equities in the coming months if the overall equities market turns around. 
     

    What to Expect 

     

    For the rest of 2011, I will be adding my exposure to juniors that are associated with strong management and that have active exploration and development programs on top-quality targets/assets over the next 6-12 months.

     

    Risk tolerance will continue to be a major factor in determining the junior mining sector market valuations. That means we should be aware of the potential macroeconomic factors (Europe, politics, China etc.) that help to shape broad investor risk tolerance.

     

    That being said, I still believe that strong overall fundamentals (metal prices, low interest rate) underline the junior mining sector. If you have an iron-clad stomach, accumulating positions during corrective market phases could prove very rewarding.

     

    Many of the stocks listed on the Venture have lost bid support. In cases and scenarios such as this, strong companies have been hit based purely on liquidity of the markets, as opposed to the business itself. When people pull their bids, stocks can drop really fast - but that also means that stocks can bounce back just as fast.

     

    Patience.


    Until next week,

    Ivan Lo

    Equedia Weekly 



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: I own stocks listed on the TSX Venture
    Dec 04 5:23 PM | Link | Comment!
  • Why the World Will Work Together and Why Gold and Gold Juniors Will Shine

    This article was originally published September 25, 2011: http://equedia.com/blog/view.php/Preventing-the-Collapse

    There's an old adage that "haste makes waste."  

     

    In a world dictated by politicians and bankers looking for a quick solution to solve decades of greed, we are now left with nothing more than a world full of debt - a growing debt that will remain beyond the lives of our children's children.

     

    It is a zero sums game. Only the other end of the profit side will always remain with the bankers and those who can print a limitless supply of money. That is the trap that we have fallen into and it is a trap where we will remain. And they'll keep doing it because we'll keep taking their money.

     

    As much as we can blame the bankers and politicians, we have to blame ourselves.

     

    There is a reason why my grandparents have no debt and why my mom still tells me to save my money. There is a reason why she cooks at home and I eat out practically every meal. That is the world that they once lived in: a world where you make before you spend.

     

    If you wanted that new baseball bat, you had to work and save up for it. It may have taken a year to save, but when you finally had enough money to buy that bat, you appreciated it. You wiped it down every time you finished using it. You put it away in a safe spot when you weren't. And every hit you made with that bat felt like a homerun.

     

    But times have obviously changed. You want a bat? No problem. Fill out this piece of paper, sign your name on the dotted line, mail in an application, and within a few weeks you'll have your money to buy your bat - and then some. If you broke your bat, don't worry - you can always fill in another piece of paper.

     

    When the time comes and the pieces of paper are running out, you can just throw some borrowed money into the stock market and make it all back. Heck, everyone else is buying stocks in hopes of paying their debt. The more stocks they buy, the higher the stock prices will go.

     

    Now we're gambling with borrowed money in a system that favours the house, or should I say, the bankers. Now we're signing pieces of paper for borrowed money, then using those pieces of paper to buy more pieces of paper on the stock market. At the end of the day, the profits will go back to the bankers and our world is left sitting on a mound of debt that will be recycled, but not erased.

     

    For years we have been living on the premise that we could do whatever we wanted. If we couldn't pay the tab ourselves, others would be willing to lend us the balance.

     

    It's not just here in N. America. The crisis in Greece and the financial difficulties in other European nations are proving the world is greedy. Even China, whose mentality is to save first and buy later, are beginning to use credit to buy TV's and Microwaves (see Actions Speak Louder Than Words.) There is no easy fix. The damage from past decades will not be undone in a few years.

     

    So where am I going with this?  

     

    With the uncertainties of our current fiscal mess, there is only one thing I can be sure of: The preservation of wealth through hard assets such as gold.

     

    I know gold has little uses (see Smaller Than You Think). But for over 5000 years, gold has been a sign of wealth. That won't change - regardless of what Ben Bernanke tells you.

     

     

    In a past video, Bernanke was asked by Ron Paul if gold was money:

     

    Ron Paul: The price of gold today is $1580, whereas the dollar during the last three years was almost devalued nearly 50%. When you wake up in the morning, do you care about the price of gold?

     

    Bernanke: Well, I pay attention to the price of gold, but I think it reflects a lot of things: It reflects global uncertainties. I think people are, the reason people hold gold is a protection against what we call tail risk, really bad outcomes. And to the extent that the last few years have made people more worried about the potential of a major crisis, then they have gold as a protection.

     

    Ron Paul: Do you think gold is money?

     

    Bernanke: (pauses)...No, it's a precious metal...

     

    Ron Paul: Even if it's been money for 6000 years and somebody reversed that and eliminated that economic law?

     

    Bernanke: Well, it's a..it's an asset. I mean, would you say treasury bills are money? I don't think they're money either, but they're a financial asset.

     

    Ron Paul: Why do central banks hold it (gold)?

     

    Bernanke: Well, it's a form of reserves.

     

    Ron Paul: Why don't they hold diamonds?

     

    Bernanke: Well, its tradition. Long term tradition

     

    Ron Paul: (Chuckles) Some people still think its money.

     

    click to play Ron Paul vs Bernanke
    click to play

     

    It's funny how a man that scored near-perfect on his SAT, and a man that is in charge of running the world's reserve currency, doesn't know the definition of money. 

     

    Here are some dictionary definitions of the word money. You be the judge:

     

    1. any circulating medium of exchange, including coins, paper money, and demand deposits. 2. paper money. 3. gold, silver, or other metal in pieces of convenient form stamped by public authority and issued as a medium of exchange and measure of value. 4. any article or substance used as a medium of exchange, measure of wealth, or means of payment, as checks on demand deposit 5. a particular form or denomination of currency.

     

    Gold may not be money in Bernanke's eyes, but to the rest of the world...it's better.  

      

    The Rising Tide 

     

    While the price of gold is rising, its merely rising against the dollar. Don't forget that the price of gold is still denominated in - you guessed it - the world's reserve currency, the dollar.

     

    While the dollar may look to strengthen amongst other world currencies such as the Euro, it is highly unlikely that the trend will continue. A strong dollar is great for standard of living, but a weak dollar is better for aggregate demand and digging yourself out of a deep hole. For the US, that hole leads to the centre of the earth.

     

    I am not saying that the US dollar is doomed, as many would have you believe - at least not in the short term. It remains the world's reserve currency.  In addition to that, the alternatives don't look very promising: the euro has obvious problems of its own, the renminbi is not convertible (yet), the Swiss franc is backed by too small an economy, the Indian and Brazilian currencies might in the future qualify for limited diversification but are no match to the dollar, and so on. International trade is still largely invoiced in dollars and this is a powerful incentive for central banks to hold dollar reserves...for now.

     

    All of these conditions may, and probably will, change. China has already been making moves to trade with surrounding nations in their own currencies, skipping the US dollar. (see The Biggest Buyers of Garbage)

     

    While the citizens of America have enjoyed a high standard of living based on the power of their currency, that has now changed.  

     

    In order for the US to become the super nation it once was, it will need to rebuild its economy from the ground up through job creation. The only way new jobs will be created is with stronger aggregate demand, which I just mentioned will require a weaker dollar.  

     

    The dollar, which was once the economic strength of the US, remained that way because of the belief that the US economy was strong and had enough wealth to control its spending. Given the recent events, nothing could be further from the truth now. GDP to debt is now 100%. The nation's debt is now $14.7 trillion, or $131,596 per citizen and growing. 

     

    As such, many nations are moving away from the pieces of paper that we call Federal Reserve Notes (dollars) and turning to gold as the preserver of their sovereign wealth. Practically every one of top and rising nations have been buying and hoarding gold: China, India, Russia...(see The Russian Secret)

     

    What to Do

     

    I am confident gold will go higher. That means that with the big drop last week in precious metal prices, I am looking to buy on weakness.

     

    I am also confident that gold stocks, including the more speculative plays, will eventually go much higher.

     

    I know history does not always repeat itself, but human nature forces ourselves to learn from it. So while what happens today may not exactly happen as it did in the past, there are strong similarities.

     

    Back when gold began its major climb, gold stocks also lagged behind...by nearly two full years. In the last Equedia Letter, I talked about why gold stocks lagged gold prices and why the imbalance will eventually lead gold stocks to outperform gold itself - as it did between the 70's and 80's. This week, our friends over at Casey Research published an article regarding the lag in prices titled, "How Long Might It Take to Get Rich from Gold Stocks?". I think it's well worth the quick read and its included in this letter below.

      

    Last Week

     

    As I mentioned last week, we would see a major selloff if Bernanke did not make a mention or hint of QE3. As predicted, the markets took the biggest two day fall this past week since 2008 after the Fed meeting. 

     

    Volatility did not calm down in Q3. I had told readers to look at the VIX last quarter (see Beware the April Fool). If you had dived into the VIX, you would be up over 130% - with 30% gains in the last week alone. Despite being right, these are the types of calls I hardly like to make. Volatility implies uncertainty. Uncertainty generally leads to a bearish market - especially after 2008.

     

    Despite the setback, I think the world will work together to prevent the next major financial world crisis. Whether their solution works for the long term or not, I really only care about the short right now. The economy will take a long time to experience any true growth - growth not infused by debt. 

     

    Investors are now looking for value and stability. In these market conditions, these attributes can be found in very few companies. Historically, stocks within an outperforming sector generally move higher than stocks that are climbing in an underperforming sector. If you're looking for value, there's no other overall sector that beats gold.

     

    When the major gold producers come out with their earnings and forecasts over the next year, investors will realise that these are the companies that are stable and growing. These are the companies that will be making money regardless of consumer demand.

     

    Gold stocks took a beating last week. I think this is temporary. I took some profits early in the week, but I will be using these profits to buy on dips. The harder they get hit, the more I will be looking to buy.  

     

    The juniors have also been beat up pretty bad. As such, I will be looking at even more buying opportunities and using vehicles such as the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ).

      

    While we are now in bear market territory, there are still profits to be made. Don't let the recent drop in gold and silver prices fool you.

    Disclosure: I am long GDXJ.

    Additional disclosure: I am also long Gold and Silver, plus other large and small cap gold stocks not mentioned in this article
    Sep 27 4:15 PM | Link | Comment!
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