While it is true, a major correction in the Dow or S&P may cause a drop in the underlying commodity prices, it is very unlikely it will come close to that seen a year ago. This is because the relative price strength in gold and silver isn't being driven primarily by a weakening USD, but rather by both a weakening USD and increasing investment demand around the world from the likes of China and most recently India (as they scooped up the entirety of the 200 metric tonnes of gold sold by the IMF). This speaks volumes to the mindset foreigners are adopting regarding the yellow metal, purchasing a vast quantity when prices are at record high. One would expect gold to have had a precipitous decline with that amount of supply being put out on the market, instead of what really happened (gold rallying $25/oz that very same day). In short, the dynamics for precious metals are changing as their in an increasing amount of worldwide investment demand, that will only gain momentum as inflationary pressures start to plague many industrialized nations over the coming years.

• March 2009 – Increased proven reserves 39% following a 119% increase over the previous 18 months.
• March 2009 – Steady ramp up at Akwaaba Deep
• April 7 2009 – Initial reserve/resource update at Paboase South, with potential for a second underground operation at Chirano
• April 21 2009 – Announced a new zone discovery at Tasiast
• June 27 – Discovery of a high grade extension to the Paboase deposit at Chirano
• October 26 – 33% increase in reserves at Tasiast (generally considered world class deposit at this point) and 22% increase in M&I resources.
• November 16 – 20% Increase in M&I resources at Tasiast

Disclosure: Long RBIFF.PK

Newmont (NEM) mining did investors a huge favor by spinning off what is now Franco-Nevada (FNNVF.PK), a royalty company focused mainly on gold, with additional interests in Oil & Gas, Platinum, and Base metals. While Royal Gold (RGLD) garners more investor and media attention, Franco-Nevada has more upside potential, especially given the current valuations. Franco failed to take part (at least to a meaningful degree) in the $150 rally in gold over the past two months, while Royal Gold is sitting close to its 52-week high, sporting a rather rich valuation. Part of the reason may be due to the fact it only trades on the TSX or Pink Sheets, but Franco-Nevada is and looks like it will continue to be a superior free cash flow machine.

Don't get me wrong, Royal Gold is a great company as well, but it lacks depth in its royalty portfolio as well as depth in its soon-to-come online, medium and long term royalty pipeline (relatively speaking). Franco made a gutsy, albeit brilliant, investment in Coeur d’Alene’s (CDE) Palmarejo mine (as Coeur d’Alene was flirting with bankruptcy not that long ago, going on to be an amazing turnaround story for 2009).

RISK: Precious metal royalty companies by their very nature have a more favorable risk profile, as they can diversify some of the risk away through a large portfolio (opposed to most miners, who rely on one or two flagship operations).

The aforementioned companies had one thing in common - a great grasp of the future of the precious metals and the foresight to purchase the majority of their royalties at a deep discount at a time when credit was very easy to come by. These acquisitions look like a stroked of genius in hindsight because they were. Royal Gold took advantage of easy money to purchase real assets. This has made it much more difficult for those who lacked this foresight to enter the market, as the financial crisis made it extremely difficult for smaller companies to access financing (both debt and equity). A great example of this is Gold Wheaton, which can't compete with the likes of a Silver Wheaton or Franco Nevada (FNNVF.PK).

In my opinion the window of opportunity has closed temporarily (at least with regard to high quality equities trading at enormous discounts), altering my strategy at least until a meaningful correction has taken place. The rationale behind a more than likely correction can be found in previous articles

1. The interest rate signals societies' time preference for capital goods, intermediate and end stage goods. In other words, it is a signaling mechanism relayed to the entrepreneur regarding the amount to invest and in what area in the structure of production to allocate capital. Distortions in the interest rate causes even great entrepreneurs to missallocate capital, which would have been allocated efficiently otherwise, preventing productive jobs from being created, among other things.
2. Market determination of interest rates would prevent asset bubbles due to the fact that when abnormal profits are recognized by potential investors they try to exploit these profits, which causes the demand for money to rise as more and more entrepreneurs seek out these abnormal profits. But as the demand for money rises, interest rates in a free market will necessarily rise. In other words, the abnormal profits have a decreasing net present value as interest rates rise. This rate also has implications regarding consumption and savings.
3. The natural market mechanism is to save your way out of recessions, promoted by the high cost of money. In a recession, the demand for money increases as well (people tend to be cautious when they are uncertain about their financial future, thus driving up the demand for money). So in recessions/depressions, interest rates should be higher than normal, not lower than normal. This is basic economics as savings generates investment or "capital formation" which is what creates viable and productive jobs.
4. As high interest rates drive down peoples' time preference, the process of capital formation begins immediately.

Interest Rates In a Centrally Planned Economy: What The Fed Is Doing

As we get closer to the day inflation kicks into full force, it is worth noting some common gold:silver ratios. History has more or less showed us that the historical ratio has averaged between 20:1 - 25:1 (depending on the measured time horizon). I personally like to break it down using different ratios for periods of low to moderate inflation and high and double digit rates of inflation. As a rule of thumb for times of low to moderate rates of inflation (below 5 or 6%), I use a ratio between 45:1- 55:1. During times of high to double digit inflation (late 70's style) I revert back to the historical ratios between 15:1-30:1. Given the current low level of "headline inflation" (which is nonsense anyway), which has to inevitably rise over the coming decade, silver is very attractive on the gold:silver ratio, currently at 64.36. Though inflation is said to be "very low" (according to the governments convoluted measure), my expectation for it rise sharply over the coming years, makes silver an absolute bargain.

Silver is often thought to be a metal and little else. It is often assumed that silver is rather cheap due to the lack of scarcity. But both of these assumptions don't reflect the true underlying dynamics.

1) The Navidad project (Argentina), currently under construction by Aquiline Resources, is among the top 5 undeveloped silver mines in the world. It is comprised of seven zones, one of which Silver Wheaton (SLW) has the right to purchase 12.5% of the silver produced over the life of the mine. This may not sound all that big, but this zone is expected to produce 16 million ounces of silver per annum, with a potential expansion project that will increase this to between 20-22m oz. Though this will likely only add about 3m oz to Silver Wheaton, it has already been paid for (less the $3.90 cost of purchasing the silver. This may prove to have substantial upside as the seven zones already have a resource base exceeding 750 million ounces and operations have yet to commence.

1) Silver Wheaton (SLW) - I have talked multiple times about this extremely dynamic business model and the transformational year 2009 has been for the future of this company. Management continues to execute deals and acquire a diversified group of royalty streams at bargain basement prices. Not only will they be the lowest cost producer (under $4.00/oz) but they will also become one of the world's largest producers (peak production of 50m oz per annum assuming 2 development projects come online within the next 5 years or another acquisition which they have made crystal clear in the most recent conference call). This is the best inflationary hedge in my opinion as they pay no income tax (has made arrangements with the Canadian government to either reinvest all excess profits or pay them out as dividends). That being said in one or two more years, these royalty streams will sell for a much bigger premium relative to today. This means a payout ratio of 75-85% will likely be in place by 2015 or so.

1) the most damage inflicted on any fiat money currency has historically (at least in the modern era i.e. Argentina) via reckless credit expansion not backed by voluntary savings. The reasoning is twofold: real credit in a market economy would only be a small fraction of that outstanding today. This is because of the moral hazard fractional reserve banking has created. FRB punishes those banks who don't originate loans at a torrid pace, making them unable to compete with other member banks. Loans backed by voluntary savings keep a check on the lending practices of every bank, in addition to having no inflationary consequences should the loan default and the bank lacks the capital to cover these losses (The bank would simply go under). In a free market, reckless lending would be nearly impossible as individuals would actually do there due diligence regarding the health of their banking institution. In the current centrally planned economy, depositors have no incentive to do so as it is backed by the government. Though loan losses by their very nature are inflationary if both not backed by voluntary savings and repatriated for these losses by the central bank, there are consequences to credit expansion as well as inflationary pressures being created in several other places. The potential inflation that can result from enormous credit expansion in the economy will come home to roost as it is obvious these banks still aren't well capitalized and are sitting on large amounts of reserves in anticipation of coming loan losses. Other consequence of credit expansion unbaked by voluntary savings is as such

This has been more noticeable in much more popular industries, such as financial services, oil service, etc. as much of the money that flew the market during the most recent crash was mainly a combination of forced liquidation by hedge funds and other various investment institutions. The selling of individual equity ETF positions in turn caused a lot of selling or downward price pressure.

Up until the Clinton Era (approx. 1992), the unemployment rate was calculated with many more components than what is used today. As most people know, Jobless claims in the standard measure for determining increases in unemployment. As this number has drastically spiked over the last year, this method of measuring unemployment has grossly distorted reality. According to the BLS (Bureau Of Labor Stastics), increases in the rate of unemployment has pretty much stagnated, hovering now at 9.8%. I think most people can agree this number could have only been arrived at via doctoring of the statistics (which the government has become very efficient in doing). Perhaps doctoring is not the correct description of what the government is doing. Instead they choose to omit some very telling statistics that used to be a component of measuring unemployment as previously mentioned.

This was all augmented by the current press release regarding consumer spending, which saw a dramatic spike (remember we already have an unsustainable savings rate in the low single digits). This will ultimately be to the detriment of the economy as real economic growth (capital formation is a function of savings and investment) will prove impossible without the necessary investment into the various parts of the structure of production.

Without this, it will prove inevitable for continued rising unemployment to be present as well as the conveniently overlooked percentage of discouraged workers. It is amazing how people can overlook the fact that this is the worst recession/depression since 1929 even with doctored government statistics such as the unemployment rate.

• 1.1m ounces of silver production or a 30% year over year growth rate.
• Higher ore grades of 205 grams per tonne as opposed to 196 grams last quarter.
• This is spite of the fact the large La Encantada expansion project will not show revenue until the fourth quarter.

The Core Assets: