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Andrew Mickey: Are We Headed for a 25% Market Drop?
Source: The Gold Report 11/10/2009

http://www.theaureport.com/pub/na/3261

With anticipated GDP growth insufficient to sustain current market levels, Q1 Publishing's Founder and Chief Investment Strategist Andrew Mickey asserts that great expectations tend to lead to great disappointments. Although he's not foretelling a big crash, he tells Gold Report readers why it makes sense to expect the market to fall back to a fair-value level over the next six months to a year and there will still be plenty of opportunities for those in the right spot.

The Gold Report: In one of your recent articles, you suggest that even if good economic news continues coming out next year, the market is likely to drop 20% to 25%. Would you go through the logic that leads you to that conclusion?

Andrew Mickey: If we look back to the way the stock market has moved over the past 20 to 30 years, it has always been valued relative to earnings. The most common valuation for the market has 15 to 20 times the 10-year average annual earnings. That smoothes out the up-and-down years and brings you to a fair valuation—with the S&P 500 between 800 and 1000.

Granted the stock market goes much higher and much lower than that—and can stay at an extreme for longer than most investors expect—but it always returns to its fair value.

Now that so many stocks have had a great run, the S&P is up to around 1050, which means it is overvalued. The market basically has a lot of positive expectations built in. Earnings estimates are starting to rise, although all CEOs are still trying to keep expectations low. Economic expectations are rising. Expectations for everything are rising and we've learned consistently throughout the years—great expectations usually lead to great disappointments.

So as long as GDP growth is low the market will fall right back to fair value. That's why, even with the big picture news getting better, the very real risk is that it's still insufficient to hold the S&P up at 1050, 1100, or wherever it does eventually top out at.

We may not have an outright crash because everyone is still on watch, but probably a slow, steady fall over maybe six months to a year.

TGR: Are all sectors currently overpriced, or will some continue to appreciate?

AM: There will be some that will appreciate. But it won't be a case of great and greater returns like we've had. There is some great historical research done on the way stocks move. One important factor is the factors of market, sector, and stock. If you break it down, basically 50% of a stock's movement is usually tied the overall market. There's nothing you can do about that; it depends on the market. Another 30% of that stock's move depends on the sector. And the remaining 20% can be attributed to the individual company.

In other words, you can expect the initial impact across all sectors. We see it all the time when the markets go down. Just look at what happened last fall. Everything is very closely tied together. Over time though, there will be the divergence between the quality and value and all the speculative stuff.

TGR: How much focus should individual investors put on international investments versus North American-based investments in this environment?

AM: A lot of it depends on your time horizon. If you have five years or more, you can build a reasonable case for focusing 30% to 50% of your money in international stocks.

That's a very high concentration for any portfolio in any particular sector. If you're looking out that far, you definitely want to be in the emerging markets. In the short term, the falling dollar has been very helpful to some of the really large, high-quality U.S. companies.

But if we look at the massive U.S. dollar carry trade right now, we can see that is going to be driving everything. We watched the Yen carry trade last for about four years and then the credit crunch forcing the sudden unwinding of it. With the U.S. dollar carry trade, it is going be even bigger, could last even longer, and the when it is unwound, the volatility and fear even bigger.

TGR: In another of your recent articles, you said that junior gold stocks offer exceptional value because they're still in the relatively early stages of recovery. With gold up 30%, major gold stocks down 15%, and junior gold stocks down 60%, you asked, "Which one would you like to buy now?"

But with the greatest opportunities for appreciation, don't those juniors also present a correspondingly greater risk? If so, how do you minimize the risks of investing in juniors?

AM: There are two ways. The first is timing and picking the bottom, which is a very tough thing to do. The other is diversification; I'd recommend owning at least five to 10 across the board. In addition, you'd want to buy consistently. The way we see it, we'll be buying gold juniors for the next two years.

We don't want to exhaust all of our capital right away. It's a lot less stressful and you don't have to be exactly right to make a fortune.

Also, when they're still deeply undervalued on a relative basis, you don't have to risk nearly as much capital. So you could make 20% in big gold stocks, but you may have missed 50% to 100% in juniors. The juniors are riskier, but the amount of capital required to earn the equivalent nominal gains is less. Risk is always relative to a lot more factors than simple percentage moves, positions sizes are as equally important.

TGR: When you're looking at juniors, do you differentiate between current producers and near-term producers? Or JV models versus royalty companies?

AM: Most of our valuations are based on traditional metrics such as net present value of future cash flows for producers. Of course, once a company is producing and we know much gold it is producing, there's a clear way to value it through the cash flow model. That's how the big money values things, so that's how you have to do it.

If you really want to swing for something with just a little bit more upside potential, maybe you select a near-term producer. There's a lot more room to value them differently because as the big money managers continue to look at gold, they're going to have to come up with ways to value those stocks.

Think of it like the dot-com days. If a company had earnings, there was a way to value it traditionally. But if a company didn't even have a chance of being profitable, traders and investors would come up with all kinds of ridiculous ways to justify lofty prices and bid them up even more. That's why the worse a company was fundamentally, the better it actually did.

That happens in all euphoric bubbles. And when it does, it will feel great, but that's also the time to start taking money off the table.

TGR: Are any of those on your radar?

AM: One junior gold company I really like right now is in that larger junior tier, and that's Nevsun (TSX:NSU; NYSE.A: NSU). The first two years it produces it will produce mostly gold, and then it becomes basically a copper-zinc mine in the out years. It's fully financed now with debt from European and South African lenders, and Nevsun is comfortable with building a mine in Eritrea, Africa.

So, that one really makes sense to me, and it's really doing well. The stock is $3 now, and the biggest risk I see to it, aside from commodity price risk, is that it gets taken out at around $5 or $6 before it realizes its full potential. In a market like this, that's a risk worth taking.

TGR: Most of those you follow are really exploration companies. Would you share some of those with us?

AM: One that has me really interested is Otis Gold Corp. (TSX:OOO). It has a unique kind of deposit at its Kilgore Gold Project in Idaho. The early exploration results have been good mixed in with the occasional high-grade greatness, but I don't think the market completely understands what it may have at this point.

It's similar to past discoveries in Nevada in that it has small pockets of high-grade gold. Otis has discovered just one of those pockets so far, but that pocket has maybe 500,000 to 750,000 ounces of gold—and that justifies the current market cap of around $15 million excluding everything else.

It's fairly valued at that point if the company stopped all exploration right now and did nothing else. But if this is like the Round Mountain mine in Nevada, which also has pockets of very high grade gold in a large low-grade deposit, has already produced 10 million ounces and with almost 2 million ounces of reserves left.

You never know, of course, but at this point, the company is really cheap based on what is known and there's all kinds of potential. Since we start looking at things with a risk-first approach, we like the low downside mixed with the truly unlimited upside. The company's drilling. The results will be coming out over the next few months. And we'll soon have a better picture, which, at this point, can only add value to the company. It just seems like the right time.

TGR: So the market's basically only valuing the current pocket and there may be several more?

AM: That's what it seems like. There's no premium at all built into the exploration upside at this point.

TGR: You mentioned copper a bit earlier. We always hear about copper as the leading indicator of the market expansion, because building, construction, housing, electricity and durable goods are all very copper-intensive. Timber is apparently emerging as another such indicator, and not long ago, you referred to timber as "the next silver" in terms of its appreciation potential. Do you see timber's prospects greater than copper's?

AM: Copper demand and timber demand are both driven fundamentally by population growth, plain and simple. Where there are more people, they want more things—more copper demand. More people need more houses—more timber demand.

Over the long run, it really is that basic. During the housing bubble, timber shot up to $450 per 1000 board feet, and when the bubble burst, it fell two-thirds to about $150 just like almost every other commodity.

Now it's back up to the $180-$190 level now and still I can't find too many people remotely interested in timber.

It's not that I expect a housing bubble to return. I don't. But 660,000 houses are currently under construction in the United States. But just to keep up with average population growth, housing growth is pegged at 1.2% per year over the next 40 years. That means we need about 1.3 million more houses per year just to meet basic demand for new houses and replacement of old ones. That rebound would justify a lumber price of $250 to $300 per 1000 board feet. That's kind of the long-run average for timber and it'll rebound there over time.

But what timber has over copper is a supply problem that's potentially much more severe. This is caused in large part by the pine beetle infestation in North America. Over the last decade, the pine beetle has decimated the forests in British Columbia, and is now hitting the U.S., as far down as Colorado. Basically, the pine beetle has taken 20% of the future world timber supply off the market. Think about that in terms of other commodities such as copper or oil. If one-fifth of the supply went away, you know we'd see a big surge of demand. Once people start to figure that out, timber assets will really be worth something again.

TGR: Any other areas that interest you at the moment?

AM: As you may know, about 80% of manganese is used in steel production, but there's a new demand for it now in hybrid car batteries. If you like lithium and rare earths, you should look into manganese could be a big opportunity in manganese as well.

In that space, your readers may be interested in a company called Wildcat Silver Corporation (TSX-V: WS). Some of the same people are behind one of our top-performing picks we found February, Ventana Gold Corp. (TSX:VEN). Ventana was actually spun out of Wildcat, which owns 80% of what is basically a silver/manganese deposit in Arizona.

There's plenty of exploration upside there, and Wildcat's net present value is about four to five times higher than its market cap. It's something with the right mix to do well, but it's not going to be one the biggest gold discoveries of the decade, so it will take a little bit of time.

DISCLOSURE: Andrew Mickey
I personally and/or my family own the following companies mentioned in this interview: Nevsun Resources, Otis Gold, and Wildcat Silver. I personally own shares in all of the mentioned companies. You've got to eat your own cooking.

I personally and/or my family am paid by the following companies mentioned in this interview: None.

Andrew Mickey is Q1 Publishing's Chief Investment Strategist. Q1 Publishing provides investors with "well-researched, level-headed, no-nonsense" business analysis and advice that claims to filter out 99.9% of the noise in the financial world to help investors "secure enduring wealth and independence in today's turbulent financial markets." Its products include subscription-only communications such as Andrew Mickey's Prudent Investing and the President's List as well as a free e-letter called Prosperity Dispatch.

Andrew's investment philosophy is based on being prudent (limiting risk without surrendering upside potential), paying close attention to risk-reward relationships and evaluating a variety of asset classes. He searches relentlessly for explosive assets and businesses off the beaten track, traveling often to unearth hidden gems. Over the past few years he has visited Indonesia, the Ukraine, Papua New Guinea, Russia, Mexico, Australia, China, Thailand, Albania, Croatia, Norway and many other places. His research has been featured on CNBC, BNN, BusinessWeek and other media outlets.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

Victor Gonçalves Favors Juniors to Win the 2009 Gold Series
Source: The Gold Report 11/06/2009

http://www.theaureport.com/pub/na/3240

An avowed Keynesian, Equities and Economics Report writer Victor Gonçalves braces against the economic gale-force headwinds that threaten to whip gold's stellar run into seasonal weakness. But, before the new year, the yellow metal will generally see more strength than weakness, according to Victor, after which "things really get sour." In this exclusive interview with The Gold Report, Victor says he's rooting for the juniors in the homestretch, affirming: "This is the best part about juniors—we're in results season."

The Gold Report: Victor, you and many others were expecting a major pullback in the market and we had some pullback in late October. Is that what you anticipated?

Victor Gonçalves: It's roughly what I expected. It could have gone one of two ways, but technical indicators have been showing that we have one of those triple-top occurrences that cascade on the way down. Preceding that pullback was a broad based rally but it gave a false sense of hope, if you will, in the sense that it wasn't going to go any higher. The TSX, for example, which is mostly what I follow, hit about 11,700 several times and then went down. That's telling me is that we're looking at an interim market top, at least. Whether we're going to have another major crash again now is still in the air. I don't think we're going to have a major, let's say, 50% correction on this dip. I think we might have another shot at a rally before a major correction. And although I do think one is imminent and investors are taking some profits off the table, I haven't seen all the signs a full-up crash this time, and fall-to-winter typically sees seasonal strength. The economic gale-force headwind will be bit of a problem when we get into the seasonal weakness.

TGR: When does the typical seasonal weakness begin?

VG: We see some tax loss selling toward the end of December, and then the Santa Claus rally coming out of that. It's a bit of a whipsaw, but generally more strength than weakness until the early new year, when it won't be so nice. That's when I expect things to really get sour. But I want to emphasize this could happen now.

TGR: When we get to the major downturn, will we retest the 2009 March lows?

VG: The short answer is yes. Based on my model, I don't think we'll break through them. If we do, it won't be by much. This is healthy. It tends to happen. With every major crash we've had, we've had a nice euphoric run after the first major cascading, which happened at the end of last year and the beginning of this year. It depends on which exchange you're looking at, but up until the top of the market we've had, effectively, between a 70% and 90% run. We could see the market correct now in a major way or just a 10%–15% pullback, which we're in the middle of right now.

TGR: How are you playing this market?

VG: I've been really aggressive this year. Right now I'm taking some profits, but I'm not selling everything. I'm keeping strong companies because they will still rally. A lot of companies have stopped or are winding down this year's drilling, and more results will be coming. The strong companies are likely to have better results and are likely to be able to capitalize on them, especially with the capital markets as strong as they have been. I've certainly kept a large enough position on a lot of these strong companies to feel the appreciation of these potential good results coming down the pipe.

TGR: You're a big believer in gold. It's had a pretty good rally this year, starting at about $850 and now about $1,030. Do you still see that going close to $1,200 or $1,300 by year end?

VG: I generally don't want to put an exact timeline because these things never work out as you plan them. Gold is going to have to get comfortable at $1,000. That's what it's been doing. We're going to have to get this comfort level really established and some more economic data before gold can really start taking off.

The price of gold has rallied strongly this year, but really not until the latter half of the year and not until the China effect kicked in. The Chinese government now wants the Chinese people to own physical gold. They're flat-out promoting it. If any one society acts as a collective, it's the Chinese—and when the world's largest population is acting as a collective, even if a small fraction buys gold, that can make a huge difference. This fresh demand is the reason why we have sustainably higher gold prices now. Once that buying really kicks in and has filtered into the full supply-demand equation, we'll get to that $1,200 or $1,300 price point or more.

TGR: Considering the great appreciation we've seen in the junior equities, do you think there's much more upside potential?

VG: Every commodity has a base of equity that trades around it. You've got the copper, silver and zinc stocks that tend to trade reasonably 1:1 with the commodities, depending on whether it's a junior, a mid-tier or a senior company. With gold it acts a little different. The majors trade about 1:1 with gold in terms of price increases and decreases. That makes sense because when you're buying a major, you're basically buying a produced ounce.

However, when you're buying a mid-tier, you're buying a near-term produced ounce, so mid-tiers normally trade at about 0.7:1. Over the past couple of years, the juniors have been moving only about 0.2:1 at best. So, really, zero correlation. Junior equities wouldn't really respond to the gold price, up or down, because junior gold companies don't represent gold, they represent management, land, cash and so on. In other words, they represent a venture that is trying to find economic gold and therefore will trade like a stock and not like gold. So when gold prices are consistently rising, stocks generally don't do well and gold juniors, because they don't represent gold, are no exception unless they actually made a discovery. Now people want to get in on the action of gold, and the best way to is not in the majors; you might as well buy physical gold. The mid-tiers and juniors will see the true appreciation because we have had the equity markets and the gold markets going up at the same time, which doesn't normally happen.

With gold where it is, juniors are more likely to retain equity prices when investors are taking profits. So while the market is treading water or getting these initial stages of a downturn, funds are going to flow somewhere. People are going into something that still has some sizzle and that's the junior golds and some other categories as well. So I still think there's appreciation in the gold juniors as a basket. That said, if the market corrects 50%–70%, everything goes down. When the tide goes out, all the boats come down.

TGR: If an investor's money is in the juniors, isn't it at greater risk in the event of a major market pullback, because these equities aren't as liquid as in the seniors?

VG: Absolutely. Once the market really starts pulling back, the best thing to do is just to go flat out in cash. That's what I will be recommending once I see that market really, truly turning south. There's no point in being in equities when people are selling them. At the moment, there's still money on the sidelines, there's still some money out there for juniors particularly because of the discovery factor that's going on. So as it stands now, juniors are still good to be in.

TGR: And when the market turns up again, investors can be ready and knowledgeable about which juniors are likely to bounce back first. So what are some of the companies that should be coming out with some good news and perhaps some stock appreciation?

VG: My poster boy is Richfield Ventures Corp. (TSX-V: RVC). Anyone who took my recommendation certainly did well because the company not only put out some stellar results, but went from 12 cents to $1.88 in a matter of maybe two-and-a-half months. When I first recommended the company, I think the market cap wasn't even $1 million, so they were certainly a junior at the time. Not every company's going to behave this way, but out of the 15 holes Richfield Ventures drilled, 14 holes had mineralization. That's a success rate of 97%. Very, very good. And half to two-thirds of those were slamming out-of-the-ballpark type results—huge results. Their footprint could host easily 2 million ounces of gold. That is fantastic for a company with all of 14 million shares out. That's a company that still has a lot of legs to it. Next year they're thinking about definition drilling and doing some more exploratory work to the south because they haven't really touched the south part of the property yet. The beauty about this project is that it's road accessible; you can get on there in your car.

TGR: Who else are you watching?

VG: A company we talked about in August was Kent Exploration Inc. (TSX.V:KEX). At that time, I think it was at 7 or 8 cents, and now it's pushing close to 25 cents. It's done quite well, and for good reasons. They've acquired some New Zealand and Australian properties with almost 700,000 ounces of gold on them. They have near-term cash flow of barite, anywhere from $1.2 million to $1.5 million a year. They've drilled their Flagstaff property in Washington State, where they have very high-grade holes that they're trying to prove because these are historical holes drilled in the early '80s. And it's in a safe jurisdiction and all those good things we need in a company. It's well run. Graeme O'Neill (the CEO) is one to spend money where it's required and not do it frivolously, so that's one thing I like about him. His management team is the type to make sure things get done from A to Z. That's what they're doing now. Based on the fact that the company has approximately 28 million shares, it's only a $7 million company with some very nice results coming out. They've done well so far, and still have room to grow. I'm quite eager to see what happens.

TGR: Any others you could share with us?

VG: There are a few other companies that I've looked at that are, again, in positions to do well. We can look at a company called NioGold Mining Corporation (TSX-V: NOX) (OTC: NOXGF.pk) and that's one that I've been following for quite some time. NioGold already has a resource of around 600,000 ounces. They've drilled off a bunch more holes to increase that resource. At that point they've got the ability and the network, if you will, to go to a mining decision if they want to, or there are enough others in the area, such as Osisko Mining Corporation (TSX:OSK) that could very well just buy it out. NioGold is in a good position here at about 24 cents, because they're due to have a resource calculation reasonably soon—sometime in November, I would hope—and that should appreciate the stock notably if they come out between 1 million and 1.5 million ounces.

What else do we have? I was on Otis Gold Corp.’s (TSX:OOO) property in August down in Idaho and that's a company that has 706,000 ounces of gold already at 1.15 grams per ton. This is a historic resource, so it's not 43-101 compliant, but it was drilled off by some very reputable companies so I'm pretty confident in the data. And I've talked to the people at Otis, Craig Lindsay and so on. They're looking to build out a high-grade core, a nice sweet spot and then see if there's more to the low-grade halo. As with NioGold, Otis has a lot of risk that has been removed because they have a resource already and they know where they're going. The geologists who are working on this property are the ones who originally discovered it 20 years ago now they're back on the project as managers. This is a fairly new company, very low float. They've got a lot of their market sizzle still because no one's heard much about it; Otis has that ability to really appreciate in value if and when good results come out.

This has to go back to the thesis that we still have some more time for these juniors to appreciate before the market truly does crash. This is the best part about juniors—we're in results season. A lot of these companies are going to have results coming out over the next month, month and a half and that's really going to make sure that the juniors in the gold space do well as opposed to juniors in spaces where the commodity may not be as much in favor.

TGR: You also mentioned Midland Exploration Inc. (TSX.V:MD) in our last conversation. What's going on with them?

VG: Midland's president and CEO, Gino Roger, is a very good guy. I've run into him a number of times and have had a lot of good conversations with him. That is a company that ought to be on the Discovery Channel, How Did They Do That? This company has very few shares outstanding—23 million fully diluted—is three or four years old and still has $3.2 million in the bank. That, in my mind, is very impressive. By that stage of the game, a lot of companies would have up to 60 million shares out and probably a little bit less money. So Midland's done a very good job of managing their float, managing their money, and it shows in the stock.

It also impressed me in the sense that Midland lost less than 50% of its stock value in the market crash and downturn last year and early this year, when most of their peers lost 80 to 90%. Most of their shares are in hands that they know, too, so the stock doesn't normally have a lot of downside risk, which is kind of built into their share structure. So that's the first thing I think was brilliantly done. Secondly, as a project generator they rarely spend the big money. They spend enough to get the project drill-ready or drill a couple of holes themselves and pass it on to a company with deeper pockets and a mandate to drill off a resource or develop the project. They carry an interest and their shareholders benefit from that.

This isn't a new concept. Quite a few companies do this. Midland just manages to do it well. In addition, they recently made a strategic, very well-placed acquisition of a rare earth element property not far from the Strange Lake area. It's very good because it's right beside Quest Uranium Corporation (TSX-V:QUC), which has a resource on one of their projects. This will be attractive to somebody and that's what joint venturing is all about. I suspect they'll do some work on it, get it ready to drill, pass it off to somebody who will do bigger things with it and the shareholders of Midland will benefit. We can see this in the share price; it's a very beautiful chart.

It is constantly moving up slowly. It's not one of those companies that does a 10- or 15-bagger in a year. But it is a company that's a little more consistent. You can sleep a little easier at night.

All these juniors have risk and to think otherwise is deluding yourself. But this company has a lot of risk taken out just by virtue of their model, by virtue of the way their shares are positioned and the size of their float.

So they've done pretty well since the last time we talked. They made a rare earth acquisition, their gold projects are moving along quite nicely, and this is a company I think everybody should look at.

TGR: Any other juniors that pique your interest?

VG: Sure. Eastmain Resources Inc. (TSX:ER). All I really tell anybody who asks me about Eastmain is, "Buy it and put it away." I talk about very few companies that way, and rarely would that apply to a company that is not a major. Eastmain is nowhere near a major, but they're in great shape. They have a beautiful deposit, over a million ounces of high-grade material at Clearwater. They've had results as high as 75 ounces per ton gold, but the lower grade 1 ounce per ton material is consistent throughout the property. The beauty is it's not just some little core area with these nice newsworthy grades. It's everywhere.

This is very attractive to a major, and Goldcorp (TSX:G) (NYSE:GG) just so happens to be very nearby. So as far as I know, Eastmain will continue to develop their project until it's time for Goldcorp to buy them out. Goldcorp already owns 9.9%. But Eastmain is in a perfectly good position. They've got all weather roads, they've got power lines going to the property, James Bay is right there. So they have all the ingredients and if they wanted to go after this on their own, they could. But they've also got the luxury of being right beside a very interested major. On top of all of this, Eastmain has $17 million in the bank, which is really like having $25 million because for every dollar you put in the ground, you get 50 cents back from the government in Quebec. Very few jurisdictions do that.

TGR: You can't beat that.

VG: Another one worth looking at Mexoro (OTCBB:MXOM). I went to visit their property just an hour outside of Chihuahua Mexico in mid October and was very impressed. This project is really nice, and from what I understand, they've applied to trade on the TSX, which would give it a fair bit more liquidity, a lot more transparency, and a lot more access by the major funds. The company right now has about 1.2 million ounces of gold on the property, grading around 3 grams a ton. That's based on 50 drill holes. They drilled 103, so they're going to update their resource calculation with the balance of the holes plus some more drilling, so we can expect that the resource is going to increase reasonably significantly, I would say, just by adding the rest of the holes they've drilled already. Sometime in early November the mill should be completed and they should be getting into production. Once it's up in full production and ramped up, this company should be producing about 30,000 ounces of gold at a cash cost of around $300. That's very cheap gold, and cash flow is good. I personally like to see a company with a) cash flow and b) exploration upside—and Mexoro has both. The exploration team is one of the best I've seen.

The company is trading at about 40 cents with 50 million shares out. So, really, it's a $20 million company with a mill that is basically complete, a resource of 1.2 million ounces of gold as it stands now, and production once it's ramped up at roughly 30,000 ounces per year. That's all worth more than $20 million, which is why I'm intrigued with this company.

TGR: Any parting thoughts today, Victor?

VG: I'll reiterate that the junior space is a very good place to be because it certainly has the most upside potential. This is particularly the case with the right companies and some of the risk mitigated (i.e., a resource with some production or an acquisition that was done or something else where you don't have to do everything from the ground up). Mind you, if you do get something from the ground up, such as Richfield, you get a big, big return. I would also repeat a caution: We hope we'll see only a small pullback here, and then a continued rally. But it is quite possible that this pullback will be protracted, or will lead into a bit of a crash. It's important to really be on top of the markets to see what they do.

TGR: With those words of caution and optimism, we thank you once again.

DISCLOSURE: Victor Gonçalves
I personally and/or my family own the following companies mentioned in this interview: Kent, Richfield Ventures, NioGold, Mexoro and Midland.

My family has been paid by the following companies mentioned in this interview: Kent.

A proud and avowed Keynesian, Victor Gonçalves developed a strong background in economics at the University of Winnipeg, where he served as a Professor's Assistant as well as earning his degree. His Equities and Economics Report has been accurately picking winners and calling market direction. In 2007, for instance, he correctly predicted the Dow Jones topping 14,000 points and pegged uranium reaching $136 per pound and many more. In addition to EER, Victor also produces the Green Dollar Report , as well as writes for a number of print and electronic publications including CIM Magazine (Canadian Institute of Mining), Western Standard, Barron's and Kitco. He also has been featured on BNN, Mining Industry TV and at numerous industry events and conferences.

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Jay Taylor Envisions Scary Specter of '30s-Style Depression
Source: The Gold Report 11/03/2009

http://www.theaureport.com/pub/na/3233

Jay Taylor, who publishes Gold, Energy & Technology Stocks and hosts his "Turning Hard Times into Good Times" radio program each week, is hoping and praying for deflation to help the U.S. heal its wounds and find its way back to prosperity. He has reasons to think the dollar might bounce back, too. Nevertheless, Jay reminds The Gold Report readers about frightening parallels to the 1930s and doesn't dismiss the possibility of a hyperinflation that renders the U.S. dollar about as valuable as toilet paper. Although bulls have been charging around Wall Street the past few months, he expects fearsome bears to reemerge soon and feast on equities almost like they did last year. If he's right, he also foresees a "grand buying opportunity" and the potential for "huge upside gains" for savvy investors in some gold mining stocks.

The Gold Report: The last time we spoke, in July, you expected a market downturn this fall. Is that correction yet to come?

JT: I think we're on the verge of that correction, but I'm not so sure it's so much a correction as a resumption of the secular bear market that started with the Lehman Brothers collapse last fall. We saw the first leg down in the market, a bottoming out in equities, in March; then a very strong rally with the Dow going back up past 10,000. And now we're most likely to see a major decline in equity prices. We can only hope and pray that the March lows hold because if they don't, we could be looking at something very, very frightening on the downside.

TGR: So are you thinking we are not out of our recession?

JT: I don't believe we're out of the recession at all. Not if you use numbers that I think are more valid—and those would be numbers from the likes of the independent economist, John Williams, who's been on my radio show. According to his ShadowStats, inflation is grossly understated and hence our GDP is overstated, that, in fact, we've never come out of recession. If you just look around and see what's going on in the U.S. economy—except for Wall Street, which is really more of a gaming industry than anything else—it's hard to make the case that we're back on a growth track.

We've been in trouble for a long time. I would argue that we've been in trouble since 2000 or even before. Greenspan kept the illusion of prosperity going by digging us into debt and creating the housing bubble. Before that we had the dot-com bubble, the telecom bubble. Every time there was a crisis of one kind or another—the Asian crisis, the Mexican crisis, the Russian crisis the perceived Y2K crisis—huge amounts of money were pumped into the system. That all fueled a stock market bubble and malinvestment in companies that had no commercial viability.

If the banks were not borrowing money through the Fed, their reserves would be hugely negative. Their net worth would be negative; they would be broke. They stopped reporting on a mark-to-market basis, so we're not seeing all of the junk in these banks' portfolios now. That doesn't mean it's gone away. So sooner or later, Pinocchio's nose gets longer and longer and you can't hide it anymore. I don't see how you can make a strong case for growth and a continuation of an equity market boom.

There's just no rational reason to be optimistic about the U.S. economy and I think that holds true to a certain extent with the European economy too. I just came back from Singapore and I can tell you, there's a different attitude in Hong Kong and Singapore, where there's lots of action, lots of economic growth and activity.

TGR: How can we be in recession and have inflation at the same time?

JT: We certainly experienced that in the 1970s. In fact, John Williams suggests we're going to have a hyperinflationary depression. In other words, prices will rise like mad, but unemployment will be extremely high. How could that be? Because the United States doesn't produce anything and we have to import everything. Now if you buy the idea of a continued weak dollar, you could see prices going up, up and up. Most people say a good part of the oil story, for example—oil's rise from $35 or so to $80—is the weak dollar. It's counter intuitive, because in the past we've always thought prices should fall in an economic downturn. Normally that's the case. But we have some major shifts going on in the global economy right now because the dollar is losing its value, and that's inflationary.

Another side of me says I'm not sure that that's going to continue and that the dollar could bounce back, but that's another story.

TGR: If the dollar continues to lose value and prices rise because we're importing, wouldn't the law of free markets say we'll start producing things in the U.S. and begin to export?

JT: In time that would happen, but we're seeing more government intervention all of the time and in some ways capital controls are already secretly being employed. We could well see more and more trade controls put into place. But you're right. If prices go up in terms of our currency, assuming that the cost doesn't go up faster, we could start producing things.

By the way, that's what I think we've seen in the last year with the gold mining industry. The price of the metal has risen more than the costs since the Lehman Brothers collapse. That said, it's a lot easier to mine—a lot less regulation, a lot less political interference—in some parts of the world than in the United States. So it's harder to provide that supply to our industry in the U.S. and it's harder for companies to produce those metals in the U.S. than it might be in other jurisdictions. There are all kinds of nuances in different economies that don't allow free markets to work.

TGR: You mentioned that part of you believes the dollar might bounce back. What's your reasoning there?

JT: Just from a contrarian point of view, when up to 94% of everybody in the market thinks it's heading one way, usually you're getting a little heavy in that direction. Robert Prechter talked about that on my radio show. By the way, he is very bullish on the dollar and I think for some of the same reasons that I am. For one thing, as I said at the outset, I think we're going to see another equity market decline. People are getting rid of dollars, trading their dollars for stuff again, and investing more recklessly again.

But I don't see the justification for the price-earnings ratios we're seeing in equities. I think we're going to see another decline in the equity market and in the commodities market as a result, much the same as we saw last fall. If you think back what happened then, the dollar got stronger as the price of commodities weakened, as the equities market weakened. When you borrow dollars and spend them on a stock or a house or a business overseas or what-have-you, you're basically taking a short position on the currency. When you unwind that trade and go back in the other direction, you're covering your short position. You're buying dollars off the market to repay your loans. That's what happened last fall and it could happen again.

TGR: That's not a very pretty picture.

JT: No. That's a very scary reason for the dollar to rise. A better reason would be vibrant growth in the U.S. economy and producing things efficiently. But I think it's this unwinding of the dollar short trade that could really cause the dollar to get stronger.

TGR: Wouldn't we see a corresponding decrease in the price of gold and oil if the dollar gets stronger?

JT: I don't know about a corresponding decrease. If you go back to last fall again, the price of gold did come down in nominal terms, meaning that the value of the dollar went up versus gold. However, the value of the dollar went up an awful lot more versus oil and everything else.

If you look at the relationship between gold and oil from the Lehman Brothers collapse until oil hit its bottom, at one point an ounce of gold would have bought six times more oil than it bought right before the collapse. The point I'm making is that these things don't necessarily go down in the same proportion.

So I believe that this kind of event would be extremely bullish for gold mining companies and for gold itself in terms of its purchasing power. The question is whether paper gains even more than gold. Again, harkening back to my discussion with Robert Prechter, he thinks that paper will be a better investment than gold. But he is also quick to say that gold will buy more than almost everything else.

TGR: What do you foresee in terms of inflation and its effect on gold mining costs?

JT: If we get this pullback in the equity markets, we'll also possibly see a decline in the price of gold in nominal terms. But I think we're going to see a bigger decline in the cost of the inputs of producing gold. Energy can be a very, very big cost factor in certain mining projects. Materials costs went down dramatically last year, as well as energy costs. And labor became much more plentiful when the base metal mines shut down after the copper and zinc and other base metal prices went down; so gold mining costs have come down. They've come up some since the bottom, but of course the price of gold has come up a lot more too since then.

So if the inflationists are right, if we're going to see hyperinflation as John Williams thinks and some of the other people on my radio show have suggested, then gold mining is not the greatest place to be, honestly. But throughout history, the best place to be in a serious deflationary depression is in gold mining. That was true in the 1930s. Bob Hoy, an analyst out of Vancouver who's also been on my show in the past, has provided great insights into this. He's looked into the last six major credit expansion/contraction events, going back 300 years. The first four of those were UK-centric. This one is U.S.-centric and, of course, the 1930s was, too, because the United States has had the world's reserve currency since then.

In each of those environments we've seen the real price of gold surge—the real price meaning the price of gold relative to other commodities, relative to other costs. I've done some number-crunching and if you had only 15% of your portfolio on Homestake Mining in the 1930s, you could have had the rest of it in the Dow (which at one point lost nearly 90% of its value) and basically avoided losing money in the stock market. Homestake was one of the premier gold mining companies from the 19th century until its 2002 merger with Barrick Gold Corp. (NYSE:ABX). So I'm extremely bullish about gold mining given my still deflationary views.

So the good news is that if the economics improve for gold mining, as I suggest they will in a deflationary environment, we will start to produce real wealth again. We'll have real money that has real, intrinsic value. When we do that, those gold miners will make lots of profits. Assuming the government doesn't tax all those profits away, we can rebuild this country on the basis of real money again. That's an optimistic tone from someone who believes deflation is a possibility. But people who think we can keep going along as we have been with fiat money, living beyond our means and thinking we can get rich by printing money and not working hard, must be smoking something funny. Wouldn't it be nice if we could just put on our rose-colored glasses and see the world that way?

But there are lots of good mining companies out there—good companies that are starting to produce gold in many cases, others that are developing viable projects. We've had a bull market in gold for a number of years now, a long enough period of time to allow a lot of money to be put into the ground in exploration and proving out deposits. So I think we're on the verge of seeing a lot of new companies emerge as producers. They will be household names in this bull market in gold—which I think will continue for quite a few years yet.

TGR: Can you share with us some of the companies that you think are particularly good?

JT: One of my favorites is Apollo Gold Corp. (TSX:APG), operating in Ontario. It has a project and is producing at the rate of around 125,000 ounces of gold a year now. The costs are below $400. What's really exciting is that Apollo has staked out a lot more ground in that same area, which suggests they can increase their resource and reserves by many, many fold over the years. That's a stock that's selling at 50 cents or thereabouts. I think it has huge upside potential.

TGR: Any other favorites?

JT: There are quite a few of these emerging companies. Another gold producer I like an awful lot is Hawthorne Gold Corp. (TSX.V:HGC). Always, you know, you go with the people. Hawthorne's management team is headed up by two individuals who were involved with the development of Eldorado Gold Corporation (NYSE:EGO; TSX-ELD) and Bema Gold Corporation, two well-known and successful gold mining companies. (Kinross Gold Corp. [K.TO; NYSE:KGC] acquired Bema in 2007.) I think they're going to have their third success story in Hawthorne.

They should be producing gold on a small scale at Table Mountain in British Columbia, where they have a fully permitted mine and mill. They also are finding some lower grade open pit gold, with pockets of very high grade, which they probably can combine with very high grade underground material from Table Mountain along with the resource from the Taurus deposit, which is next door, to feed the mill. So Hawthorne is another favorite, another penny stock that could evolve into a big growth story.

TGR: Any others?

JT: San Gold Corporation (TSX-V:SGR) is another favorite of mine. Stock's come off its highs here. We could see some more weakness in all gold shares in the near term, but that's going to pave a fantastic buying opportunity. San Gold is producing in Manitoba from the Rice Lake property. Right next to it they've got the Hinge deposit and assays from parallel zones there are looking like extremely high grade material. They should be feeding in this higher grade material, blending it with the lower grade deposit from Rice Lake. Underground in the Rice Lake Mine they've recently come up with some very high grades, too, so that's the story I think is going to be very, very much in the market. People are going to start paying more and more attention to San Gold.

Another one I like enormously is Allied Nevada Gold Corp. (TSX:ANV) (ANV). It has a large scale open pit resource, but huge underground potential. Many, many millions of ounces of gold and huge exploration potential. There's a metallurgical issue in terms of how much silver is in that property, but if they're able to extract more than 10% or 20% silver recoveries, their costs go way down and this becomes hugely profitable. But enormously prospective, huge exploration potential. Another company that should be producing north of 100,000 ounces a year. So those are some ideas.

TGR: Great list. Any more?

JT: Romarco Minerals (TSX.V:R), which is based in South Carolina, has just come out with a new resource. I think they're above 4 million ounces among the various categories of resources. Romarco's open pit deposit in the Haile Gold Mine is probably at least a couple of years away from production, but it's a world-class deposit. The company's stock has risen very dramatically, and I think it has a long way to go on the upside.

If we see a general equity market pullback, I think you're going to have a grand buying opportunity with these companies. I'm watching them very carefully, watching the fundamentals. Companies like this—developing viable deposits in the ground—are in a position to provide huge upside gains for savvy investors.

TGR: Terrific.

JT: AuEx Ventures Inc. (TSX:XAU) in Nevada is another one I like a lot. AuEx is what you call a prospect or a project generator. It has some really smart geologists, has staked some highly prospective claims, did some initial work on those claims, and now has other companies spending their money to drill in and gain a percentage of the deposits and of the joint venture projects. AuEx is on to at least one, possibly two, very major discoveries in Nevada and also has a host of other properties, mostly in Nevada, with good longer-term prospects.

In a way, AuEx is sort of the lowest-risk way for individuals to play the gold shares. The risks are lower because AuEx is not spending huge amounts to explore and develop, so they don't have to dilute shareholders' interests by going out to raise huge amounts of capital. I like the management, too. It's an extremely strong management team there, headed by Ron Parratt.

TGR: Are you scoping any silver plays in particular?

JT: I'm not as bullish on silver, generally speaking. I just think it's harder for silver companies to make money, in part because silver has not kept up with gold. If we go into an inflationary environment and this deflationary notion is wrong, then you could see silver outperforming gold. In that case, there is one company on my list that I like quite a bit. It's Great Panther Resources (TSX:GPR) and it's in production in an old historical mine in Mexico—the Guanajuato Mine—which has huge amounts of silver left to be mined. I visited the property, was in the mine, saw the community a couple of years back. Bob Archer, who heads up Great Panther, is doing a remarkable job of cutting costs and lowering the cost of production. If you're going to buy a silver stock, that one is worth a serious look.

TGR: Any last thoughts you'd like to share with our readers?

JT: Just that I think we're approaching some very difficult times in the equity markets now. I could be wrong, but I just sense that we could have a severe pullback. The bear market for stocks began last fall and it is not over. Maybe you can make a case using government numbers that we're technically out of the recession, but I don't buy it. In reality, unfortunately. I wish that weren't the case.

I really look back at the 1930s—the first leg down in 1929, when the equity market was the one getting all the media attention. After a big wave up, everybody thought it was all over, the worst was past. People got suckered back into the stock market and there was lots of optimism, just as we're seeing now in this equity market. Then the big one came. Why did it come? Because there was no growth in the economy. There was nothing to support the equity prices and there was lots and lots of debt that could not be repaid. I see a replay of that in many ways.

There is increasing tension among trading partners now, but a lot of it is more subtle through this beggar-thy-neighbor currency devaluation. Countries cheapen their currency, hoping to be able to export more and get an advantage over their trading partners. When everybody starts playing that game, you have a real problem and prices keep falling.

I think today's parallels with the 1930s are much closer than people recognize and that's partly by design. Policymakers don't want people to think in those terms because if they do, it becomes a self-fulfilling prophecy. If people think we're heading into a deflationary depression, why would they buy anything today? They want people buying things. But consumers can't buy because they're broke. The government can buy because it can print money, but how long can that continue if the rest of the world doesn't want your money anymore?

These are questions that are in my mind. But I do think we have some very turbulent times in store and this debt is really strangling the American economy. I remain tipped toward the deflationary side, but I want to be nimble and ready to change my thinking. For that reason, I put out my Inflation/Deflation Watch (IDW) and look at it every day to try to get a sense of it. We shall see.

DISCLOSURE: Jay Taylor
I personally and/or my family own the following companies mentioned in this interview: Apollo Gold Corporation, Hawthorne Gold Corp., San Gold Corporation, Allied Nevada Gold Corp, Romarco Minerals Inc, and AuEx Ventures.

I personally and/or my family am paid by the following companies mentioned in this interview: None of the companies mentioned herein pay either myself or my family. However, the following companies are sponsors on my radio show, Turning Hard Times Into Good Times: Apollo Gold, Hawthorne Gold, and San Gold. As such they pay a sponsorship fee to Taylor Hard Money Advisors, Inc. of Turning Hard Times Into Good Times.

As he followed the demolition of the U.S. gold standard and the rapid rise in the national debt, Jay Taylor's interest in U.S. monetary and fiscal policy grew, particularly as it related to gold. He began publishing North American Gold Mining Stocks in 1981. To better understand the potential of the mining stocks he researched, Jay added a BA in geology to his CV in 1988. He already had a master's in finance. A native of Ohio, he migrated to Wall Street in 1973, working first at Barclay's Bank International. He was with the ING Barings mining and metals group when, in 1997, he decided to pursue his avocation as a new full-time career—including publication of his weekly Gold, Energy & Technology Stocks newsletter. This year, he debuted a new radio program, "Turning Hard Times Into Good Times."

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

Richard Gray: The Fear Trade
Source: The Gold Report 10/30/2009

http://www.theaureport.com/pub/na/3216

It's been a dollar vs. gold story ever since the economy ran into trouble last fall, according to Blackmont Metals and Mining Analyst Richard Gray, who sees inevitable inflation down the road. "The trouble is there are no real applicable precedents we can use," he explains, noting the prodigious amount of stimulus money flooding the economy. In this exclusive interview with The Gold Report, Richard discusses major drivers behind gold's price rise, attributes of successful juniors and why he thinks gold's upside scenario is "maybe $1,100 or $1,200."

The Gold Report: Gold's on a roll. What's your take on what's driving the gold and precious metals sector right now?

Richard Gray: I believe there are two real drivers behind the gold price: the fear trade vs. the U.S. dollar, and the potential for inflation. I tend to minimize the overall impact of supply and demand. Given what we've seen over the course of 2009, investors are looking for an alternative investment to the dollar. If you go back to when the overall economy ran into trouble last fall, ever since then it's been more of a dollar vs. gold story and that's still true today.

As the economy recovers and there's a scenario where inflation is an issue, then there's a case to be made that gold will do well then, as well. But for the time being, it's just people worried about where their money is today and using gold as a safe haven vs. where it could go with their other investments. What we've seen in the last six weeks is that gold has broken through some historic levels because there's increased worry that maybe the U.S. dollar isn't the world currency anymore and the U.S. economy is really not as stable as we've been led to believe.

Investment demand, whether from funds or individuals, has been a major, major driver, taking gold from $700/oz through to where we are today. And this investment demand is simply investors just looking for a safe place to put their money.

TGR: Do you think there's a high probability that once we start to recover we will hit inflation?

RG: The trouble is there are no real applicable precedents we can use. With all the stimulus money that's been injected into the system, it would seem inevitable that inflation will be an issue down the road.

On the other hand, you could also argue that all the value that was destroyed (particularly in the last 12 months), won't be regained by all the stimulus money in the world. That's the argument for people who say inflation's never going to be an issue because the stimulus money isn't anywhere near what was lost in the last 12 months.

Personally, what I've been telling clients is that gold around $1,000 is probably a reasonable place to be looking long term. I don't think gold's going to take off and go to $1,500 or $2,000. I think the upside scenario is maybe $1,100 or $1,200 and then somewhere in a range between $900 and $1,100 is probably where the gold market is healthy and where the economy, as it compares to the gold market, is also reasonably stable. The fear trade is going to be here for a while and inflation might have an impact later on. But in the meantime we are not calling for a dramatic move up or down.

TGR: Gold has gone up about 21% this year. Silver has gone up 61%. Is silver being driven by other elements?

RG: Yes. Silver is somewhat of a unique metal. The simplest way to put it is when the economy is good, it trades closely with the gold price—usually on a 50:1 ratio. During these times it is treated more like a precious metal, a metal you invest in to protect your money. When the economy is weak, like the second half of 2008, it trades more like a base metal, where supply and demand has more of an impact. We saw the ratio rocket up to 80:1 last fall. Right now we're at 65:1, which is right in the middle of the bull market and bear market scenario here and that probably fits as well.

On the supply-demand aspect of silver; it is consumed (whereas gold is typically not) and it is usually mined in deposits that are primarily lead, zinc and copper. So it's got a bit of a two-headed look to it. While the increases of 61% this year for silver and 21% on gold are true from January 1st, if you go back to July 31, 2008, that's when things really just fell off a cliff. From July 31, 2008 to today, gold is up 20% and silver is basically flat. So picking a time horizon, silver has outperformed, but also if you go back to where things were fairly stable and normal, the last time gold-silver traded at around a 50:1 or 55:1 ratio, if we ever get back to that, silver hasn't really done much since then. For all the same reasons you can say gold could go to $1,500 or $2,000, you could also say silver could go to $30 or $40; but I just don't see it because silver mines will start popping up all over the world if silver goes through $20, and you're going to get an increased amount of supply—more so than gold. A lot of silver is going to hit the market, and I don't think the demand side can really take it all up and keep that price high.

As with the current price of gold, I think the silver market at $17 or $18 an ounce is quite healthy. I just don't see these kinds of runs because there are a lot of silver deposits out there, whether they're part gold-silver, part silver-lead-zinc. They get built or they get turned back on, and it becomes more of a supply-demand issue for silver anyway. So, you're right—silver has outperformed. Is it overbought here? I don't think so. I think it's probably right where it should be given the uncertainty of the overall market.

TGR: If we're looking at a relatively flat market for silver and gold in the same timeframe—and I'm referring to gold stocks here (as the gold equities have, in many cases, doubled, tripled, quadrupled)—did we miss the boat on these or is there more upside to be gained?

RG: On the big cap gold and silver stocks—there are probably 10 to 15 of them in North America—they've generally traded on about a 2.5:1 beta to the underlying metal, which is typically where it should be in a good, upward market on gold and silver equities.

Where we haven't seen that performance and where we're starting to now is with the smaller cap companies, the more speculative gold and silver companies. I think there's more money to be made in the smaller caps junior companies right now because we're seeing a movement of capital from these big, solid companies down to the more speculative names. I think as gold's gone through $1,000/oz there's a new level of interest in the smaller cap companies. Having said that, if gold has a correction and goes back below $1,000 even for a week or two, there will be a lot more downside on these junior companies because they're the ones that will trade on much higher beta to the gold price than the seniors.

A ratio I look at is the HUI Gold Index divided by the gold price. The HUI Gold Index is really one of the best proxies for gold stocks in North America. Right now this ratio is around 0.42 and what does that mean? It got as low as 0.20 last fall. That's as bad as it got. So since then they have kept pace and outperformed to a certain degree over the last nine months. However, we're still far below the 0.50 to .55 range we saw in 2007 and early 2008. So that's a pretty far way to go for the equities to outperform the gold price to get back to that level. I don't think we're going to get back there because there's still that fear element in equities. The 0.42 level is close to the high we've seen so far this year of 0.44. I don't think the equities are fully valued. But they're close to being fairly valued, and you're going to get more uptick on the smaller cap companies—but you're also taking on more risk. The stocks have done very well and I would just say that, on a one-off basis, they can outperform; but general speaking I think they'll trade in tandem or at least maintain that similar kind of ratio with the gold price.

TGR: Going back to the seniors, are they rebounding because the overall market has rebounded or is there some specific correlation with the price of gold?

RG: Yes. These senior companies are the ones producing gold, and actually have production and cost and revenue and profit. Last year, Q3 of 2008 was really the high watermark for costs. That was the highest costs have ever been and that's because oil increased significantly and because labor and all the inputs to mining were at all-time highs. At the same time, gold was coming off from its highs. The margins hit their peak, and then started to compress from Q3 '08 right through Q1 '09.

In addition to all the other risks that come with equities, the companies' margins were being squeezed enough that they were making less money, so they underperformed the gold price. Since Q1 '09, we've seen a gradual increase in margins as costs have stabilized and gold has continued to trade higher. Gold was $910 in Q1, $920 in Q2 and it averaged $960 in Q3.

So that's the general trend of the gold price, and costs on average for the industry have been fairly flat over the last three quarters. So you could see that delta on the gold price is really providing the expanded margins. That's why people are moving into these equities more so—they're making more money and they're healthier companies and, thus, they deserve higher multiples than they did a year ago. It's not across the board, but generally speaking, the big companies—which constitute a big chunk of the annual global production for gold—their margins are improving every quarter, and that really hasn't happened for a long time. People are finally realizing that these gold companies are healthy and viable investments. Not just gold investors, but generalists in the stock market are looking at gold companies for the momentum and returns over the last little while.

TGR: What about the juniors? They've seen some spectacular gains.

RG: The beauty of it, looking at the juniors, is that most people look at year-to-date performance and it's off the charts because the junior market was essentially dead last December. The juniors that survived through November-December of 2008 just barely did so, thus the January returns on these things have been spectacular simply because they survived long enough to get financing from the equity markets. The junior market has really just been rejuvenated in the last four to five months.

I think there's still more upside because now these companies won't just batten down the hatches and shut down all their drilling. They don't have to go to the banks for loans. They can go to the equity market, which is traditionally where the money does come from. They can expand their drilling. They can do all the speculative things that they're supposed to do—discover deposits and build new mines—which is why investors like them, because that's where you get more of the return. So these companies doing well is really just a function of the overall health of the markets funding them. They have money to do what they're supposed to do, which is find and develop new deposits.

TGR: When you're looking at juniors in your role as an analyst, what are the key elements that you're looking for now?

RG: Whether it's a good market or bad market, I think the two big things for juniors are location and management. You've got to be sure a project is in a place in the world where you're going to get rewarded for success. Canada, U.S., Mexico, most of the Americas are all pretty good.

Once you get over to Africa, parts of Asia or Eastern Europe, there's more risk with finding deposits because there's NGO involvement, there's nationalization risk from the government and things that just happen in those countries that you don't usually see in safer parts of the world

The second thing is a capable management team, especially on the operating side of things. If there's a track record there, all the better. If they have the ability to not only find and develop deposits but also fund them, those are the two most important things. And usually those two things will bring in decent deposits that can get built.

TGR: Do you have some companies you can share with us that have both the location and management you look for?

RG: Yes, one at the top of my list is Jaguar Mining Inc. (TSX:JAG) (NYSE:JAG). I think Brazil is one of the best places in the world to be gold mining. It's got a very stable framework for finding and developing gold deposits. The tax code is very straightforward; the permitting process is extremely black and white. If they tell you it's going to take six months to get a permit; you get your permit in six months. It's somewhat undercapitalized in terms of money being spent in the country if you're looking for gold deposits. It's just traditionally been a tricky place to set up shop for whatever reason. So there aren't a lot of companies down there exploring for gold vs., say, those in Nevada, Northern Ontario or Quebec.

Jaguar's also good because they have a management team in the U.S. that runs things corporately—but it's the management team down at the mine sites that is very impressive. They're guys who have been mining down there for 30 or 40 years and they get it. They know how to do it. Those are the things that attracted me to Jaguar, initially. Since then good things have happened; they now have three producing mines, a fourth on the way and the valuation has followed such that it's poised to be the next mid-tier producer, in my mind. So that's a good example of decent management, good country, good assets and it's worked so far.

First Majestic Silver Corp. (TSX:FR; OTCQX:FRMSF), a silver company in Mexico, is very similar to Jaguar in that they have a specific focus. They have several mines. They built them, they delivered. They've been able to build mines and grow them. First Majestic is an attractive silver producer poised to make the jump up to the bigger peer group.

TGR: And they're currently producing?

RG: Yes, First Majestic has three mines in operation and a couple of other projects that will be brought in to production in the next couple of years. They're not going to stray away from Mexico because that's where their expertise lies. And, like Jaguar, they have management that gets them the money—but it's really the guys in Mexico that build and operate the mines that are key. Once you trust that they're going to be able to do it, that's the biggest hurdle you can overcome. Then you know the guys doing the actual work are good.

Also, on the list of ones I cover, New Gold Inc. (TSX:NGD; NYSE Alternext: NGD) is a fairly new company in the mix. New Gold management is really a "who's who" in the Canadian mining market—the executive chairman is Randall Oliphant, a former CEO of Barrick, and the board includes several of the big names in Canadian mining like Ian Telfer and Pierre Lassonde. These are guys that have had success in the past and they know how to build a company. New Gold has focused on acquiring mines in safe parts of the world such as Canada, the U.S., Mexico, Brazil and Australia.

They started the company by merging three companies a couple of years ago and then they made another acquisition this year. It's likely they're going to continue to make more acquisitions because they want to be a million-ounce producer in the safe parts of the world within the next three years. Given what that management team has done already and can do, I think it's a pretty safe bet that they're going to be able to deliver on that target. They make you want to buy the company just on what they've been able to do and the people behind it. It's an easy one to feel comfortable about.

TGR: Do you have any that are emerging that we can discuss?

RG: Two that I cover that are small, but could become something bigger. The first one is Apollo Gold Corp. (TSX:APG). Their main focus is the Black Fox mine in Northern Ontario in the Timmins District, which is one of the world's most prolific gold mining regions over the last 100 years. They've built the mine and it's producing; it's going to produce over 100,000 ounces next year. And the beauty of Black Fox and Apollo is that it's not well followed. It doesn't have a lot of coverage from the investment community. As they show that they can run Black Fox at the rates that they've indicated they can, it's going to be one of the better gold investments out there in terms of return on your money. I think it's very, very cheap now and as they deliver on what they can do, that's the upside for investors. So Apollo is one of my favorite juniors. They have some obstacles to overcome, of course. The balance sheet's fairly weak right now. They had some startup difficulties with the mine, but nothing that's really that significant. So I think within the next three or four months they'll be well on their way to showing that they're an attractive new Canadian junior producer.

TGR: When they get their production ramped up, will that also offset their slightly weak balance sheet?

RG: Absolutely. It all works together. The more gold they get out of their pits, the more money they make, the easier it is to pay off their debt simply is the way it works.

TGR: You mentioned there were two smaller ones that you are following.

RG: The other one is Nevsun (TSX:NSU; NYSE.A: NSU). I'll be the first to admit it doesn't really fit with the low political risk criteria, but it's a name I've covered for quite a while. The reason I covered it initially was the world-class discovery —the Bisha Project—they made about six years ago in Eritrea in Africa. They are now building the mine, which has gold, silver, copper, and zinc. The first couple of years of production are gold and there's three years of primarily copper production and then five years of zinc production. It's not a pure play gold company, but it's going to be gold to start. Quite frankly, it's one of the simplest and most attractive ore deposits in the world.

The risk with Nevsun and the reason the price is probably half of what it should be is Eritrea, which is a very young country with an uncertain risk profile. Over the last five years, Nevsun and the government have established a very good partnership where now the government is essentially a 40% partner in the mine. They have a vested interest to make the mine survive and be a successful operation because they're going to make money off it, too.

It's an extremely robust project and I think the country risk is overdone right now. They are building this mine, they have a $235 million project loan from several European and South African banks, and it's a great time to be buying Nevsun because you can buy it now for something that'll be a lot higher a year from now when they start producing.

TGR: How interesting. Are there any other companies that you can share with us?

RG: One other junior that I think merits attention right now is a company called B2Gold (TSX:BTO). The management team behind B2Gold is from Bema Gold, which was taken over by Kinross Gold Corp. (K.TO; NYSE:KGC) four years ago. They basically started a new company that has a focus in several parts of the world that aren't really high profile yet. They have projects in Colombia that are joint ventures with Anglo Gold (NYSE:AU, JSE:ANG, ASX:AGG, LSE:AGD) that are in the exploration development stage. They also have a joint venture in Russia with Kinross that is right beside the high grade Kupol Mine, which is what they found originally and sold to Kinross four years ago. So those are the two large scale exploration focuses. But their production focus, where they're producing gold right now, is in Latin America, mostly Nicaragua. And they did an acquisition last year of Central Sun Mining. So in Nicaragua they have a small mine that's producing now and they have a second project that will be producing within the next two months.

B2Gold has been under the radar. They're at that awkward stage where they're not able to report on or release any details yet on what they're doing. They're still doing the work. So I think B2Gold over the next six months as they get this mine in Nicaragua built and as they have some results out of Colombia and Russia is really one of the most intriguing juniors out there. Management's done it before and it's an asset base that could be quite spectacular if things work out the way they could.

IAMGOLD (TSX:IMG) is another one I follow. It's one of the best performing stocks this year—it's had a very good run and I'll be the first to admit I didn't see it coming. I was fairly neutral to negative on the stock up until a couple of months ago, quite frankly. My concern originally on IAMGOLD was they had assets scattered over West Africa, Suriname, Guyana and Quebec—a mish mash of assets that didn't look like they were going to grow. Then they bought a company called Orezone right off the scrap heap and with them got this asset called Essakane, which is a large project in Burkina Faso, West Africa. IAMGOLD was able to use cash and its operating team to build Essakane, which will be producing August 2010. It's going very well for the company and that really kick-started the interest in IAMGOLD in terms of it ended up being quite a good acquisition. In the meantime they've also developed and discovered a lot of ounces at Westwood, which is a project in Quebec, which is a great place to be mining or exploring. Interestingly, the other asset that has really emerged as one of their best is a niobium mine. Niobium is a real specialty metal. There are not many niobium deposits in the world, but they have one. It's not gold, obviously, but it is a money making operation for them such that it is important to them now because it's one of their best cash flow producers. And the niobium market has improved over the last year as well. IAMGOLD was a bit of an ugly duckling about a year ago. No one really thought much of it and now it's one of the better followed, well owned companies in the gold space in that kind of peer group in Canada. Credit the management team.

In terms of the seniors, Goldcorp (TSX:G) (NYSE:GG) and Agnico-Eagle (TSX:AEM) are two of my favorites in that space. Those are just extremely well run companies, with high quality assets in the safest parts of the world—basically, Canada, U.S., Mexico. They're not cheap, but they are also the highest quality of the senior stocks in North America.

TGR: Are there any additional thoughts you'd like to share with our readers?

RG: It's easy to get carried away when you're looking at the gold prices. A rise is ahead. I think it's definitely a very fun market, but you've got to look at where you've come from, too. If you're up 50% or 60% on a good investment, it's never a bad idea to lock in those profits because it's been a very unpredictable market the last 12 months. I don't think you'll ever get fired for doing that and that's what I tell clients. You're never going to get fired for taking money off the table and locking it in on returns.

DISCLOSURE: Richard Gray
I personally and/or my family own the following companies mentioned in this interview: None

I personally and/or my family am paid by the following companies mentioned in this interview: None

Metals and Mining Research Analyst Richard Gray, joined First Associates (now Blackmont in September 2004. He has 12 years of investment research experience in the Precious Minerals sector, seven of them as an analyst. He was previously employed as an analyst at Westwind Partners, where he provided coverage on junior and emerging gold producers. Richard provides research coverage on the gold sector, including senior, intermediate and junior producers, as well as the silver sector.

Richard became a CFA in 2005 and earned his Bachelor of Applied Science (Geological and Mineral Engineering, 1997) from the University of Toronto.

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Pig Farmers Are Making Brent Nervous
Source: Brent Cook, Exploration Insights/The Gold Report 10/23/2009

http://www.theaureport.com/pub/na/3195

Before getting into to the relationship between copper and pork products, I want to draw your attention to one paragraph from a commentary by Paul van Eeden that offers a contrarian, and undoubtedly unpopular view amongst the Kitco readership, of the gold market:

Steve Palmer: Timing the Market
Source: The Gold Report 10/27/2009

http://www.theaureport.com/pub/na/3208

The dollar's not going to go straight down, according to Steve Palmer, president and CEO of AlphaNorth Asset Management:"I'm expecting the U.S. dollar to rally in the short term and gold to sell off." Forecasting a bit of a pullback in the next month or so followed by another rally before year's end, Steve also explains his 'bigger bang for your buck' penchant for exploration stories in this exclusive interview with The Gold Report.

The Gold Report: Since the last time we spoke, in February, your performance in your fund year-to-date is up, I believe, 138%. Can you tell us what sectors you focused your fund on during this year to produce that type of return?

Steve Palmer: Well, there's no particular sector focus. The fund is very diversified. It's about half resource and half technology, special situations and biotech. But we did have a few big winners that really helped. Bio-Extraction (BXI:TSX.V) is one, and another one I mentioned in our previous interview, Colossus Minerals Inc. (TSX:CSI), was a big winner as well.

TGR: Your fund, as well as the market, has had pretty amazing returns this year. In your August monthly commentary you said you're getting cautious on equities, given the strong rally. What are you feeling now that we're in late October? Is there a pullback, or will we continue to move forward?

SP: I don't think the market can go that much higher in the short term. I think it needs to consolidate and pull back a little bit, so we have added some short positions in anticipation of this.

TGR: Many people have said they're expecting a pullback in the markets, but it never seems to happen. In what timeframe are you expecting this to occur?

SP: The next month or two. It's hard to get the timing perfect, but I think maybe a short-term pullback. Not a major correction or anything, but just a breather and then the markets could likely be strong into year end.

TGR: Oh, so it's going to have a slight pullback, and then rally again before the end of the year?

SP: Yes, that is my prediction. We will see if that pans out.

TGR: So you're a small cap long biased fund. What are you doing to your fund to maximize this potential pullback and the resulting rally?

SP: We've taken some profits in some of our big winners and we've purchased some ETFs that have an inverse correlation with the market, like the bear units and the double bear units. We are hedging some of the systematic risk.

TGR: You indicated that you trade gold on the technicals and there's clearly an inverse correlation with the U.S. dollar. Where do you think the U.S. dollar is going? Have we hit bottom on the dollar, or what do you expect to see in the remainder of '09 and through 2010?

SP: The U.S. dollar in the short term, I think, is going to appreciate from here. Almost everybody believes the U.S. dollar is going lower longer term; and I don't disagree with that, but it's not going to go straight down. So I'm expecting the U.S. dollar to rally in the short term and gold to sell off.

TGR: Would you see that short-term similar to what you're looking at in the general market in the next month or two?

SP: Yes. Gold is probably peaking this week if I were to stick my neck out.

TGR: But longer term we're expecting the U.S. dollar to go lower than where it is today.

SP: Yes. That's over years—like several years from now.

TGR: So are you anticipating it's basically going to bump along at the current level it's at, in a small trading range?

SP: I expect it to rally a little bit then take another leg down, but it's not going to happen overnight.

TGR: And, as a result, what would you see gold doing for the remainder of this year and into 2010?

SP: Gold will just follow the U.S. dollar. There is currently a lot of speculation in the gold market, as well. There are all these ETFs that have purchased a lot of gold—all the dehedging by the producers that has created a lot of demand that's not going to be there in future years; so I'm not a super bull on gold. I do have several junior gold investments, but the expectation is that they will do well regardless of whether gold is $1,100 or $850. The share prices of these companies will be driven by company-specific catalysts.

TGR: So you're looking at the juniors rather than the metals as an investment.

SP: I like to look at the exploration stories, where you get a bigger bang for your buck rather than just buying a producer.

TGR: You mentioned earlier you have a few companies that you're looking at. Can you share any of those companies with our readers?

SP: Pelangio Exploration Inc. (PX: TSX-V) I like a lot. They recently raised $7 million to drill a property they have in Ghana, which is right beside a large producing mine of AngloGold (NYSE:AU, JSE:ANG, ASX:AGG, LSE:AGD), which has 60 million ounces on the property, and Pelangio is adjacent to that property. On AngloGold's property the gold is contained in pods of 3–5 million oz each. Pelangio has 15 drill targets, and they're going to be drilling out over the next few months, and hopefully releasing their results early next year. I like situations like that where it's in a proven gold district with high odds of success. So I think that could have some significant gains if they can show that there are similar pods containing gold which extend onto their property. If Pelangio can demonstrate this, it should be a multi-dollar stock.

TGR: Any other exploration stories that you're intrigued with that you can share?

SP: I still like the Colossus Minerals story. I think there's more upside to come. They just raised money as well, so now they're fully financed into production and they've applied for a mine permit, which they're hoping to get early next year. That could also be a catalyst for a takeout once they get their permit. They've had some fantastic results and they're continuing to drill on that property.

TGR: They've had an incredible increase in their stock price this year. Earlier, you mentioned they were a big winner. How much more upside can they have?

SP: I think that if the drill results keep coming in as they have been and they progress towards producer status by obtaining the permits it will trade over $10.

TGR: Will they be reliant on the price of gold staying above $900?

SP: Not particularly, because it's more of a building resource type of story; the grade is very high and they don't just have gold. They have very high grades of platinum, palladium and some other minerals like rhenium as well, so their operation would be highly profitable regardless of whether gold is above $1,000 or not.

It's still a developing story. Further catalysts could come from proving up other zones on the property, which they're doing some work on, or if they were to acquire additional land in the area.

TGR: Any other companies that you're following in exploration or near production?

SP: Another company I like that's not in the gold space is Puget Ventures Inc. (TSXV:PVS).. It has quite a small market cap. The company has a cobalt property that produced in the 1940s, and they still have infrastructure on site. Recently, they've raised money to go back and do some further drilling to increase their reserves and mine life. They could be back in production in a relatively short time frame. One of the reasons I like it is that recently investors have been very interested in lithium companies and have bid up share prices of many lithium companies dramatically this year. I think Puget is another play on the same thing, Cobalt will be in increased demand for batteries as a result of the electrification of vehicles. There is actually twice as much cobalt in a lithium battery as there is lithium; and cobalt sells for roughly four times the price of lithium, so it's a similar play on the whole electric vehicle market.

TGR: Back on to energy, as we also have a sister report called The Energy Report. What trends are you looking at in energy that you feel look like good investment opportunities?

SP: Colombia's attracted a lot of interest recently; several companies have had a great success in there. The government has moved the army into certain areas to make it safe for foreign companies to operate, so that's opened up a huge opportunity for many companies. One of the ones I have been buying is a company called Quetzal Energy Ltd. (QEI-TSXV). They recently announced that they acquired a property in Colombia which is highly prospective for oil. They are in the process of raising some money now to fund some work on that. That property is of particular interest because, first of all, a lot of the other companies in Colombia have had great success—but all the properties surrounding this property are producing oil properties, so it's highly prospective.

TGR: Where do you see oil going compared to some of these alternative energies, which are getting a lot more press?

SP: A lot of the alternative energy initiatives are highly dependent on government programs and grants. Obama and other politicians remain highly supportive of these initiatives so alternative energy companies should do well. Natural gas inventories are very high right now relative to the past several years thus the price of natural gas has been trending lower in North America, while oil has rebounded strongly from the $30s where it bottomed. It is probably unlikely that oil goes much higher in the short term. It's probably at a reasonable level right now.

TGR: It sounds like you have a similar focus in terms of looking at gold. You're looking for exploration plays that will have appreciation regardless of the price of the underlying commodity.

SP: Yes. If you can eliminate some of the variables that are not easy to predict like the direction of commodity prices or currencies and just focus on the company specific catalysts, it lowers your risk.

TGR: So Quetzal is an exploration story at this point? Are they producing anything?

SP: They have some small production—very small—in Guatemala. They had some technical issues drilling a well there and I now they've acquired an additional avenue for growth in Colombia.

TGR: And is the oil play here more interesting because it's in Colombia, or do you like the oil sector in general?

SP: I am somewhat indifferent to overweighting the oil sector. I like Colombia because of the recent changes there and the huge drilling success several companies have had there recently. Obviously, areas of the country are highly prospective for oil. Companies I mentioned like Pelangio and Quetzal are ground-floor type situations where there are very good odds of success. And if they have success, the shares would be revalued upwards by multiples. These are the type of situations I like.

TGR: Thank you for your time.

DISCLOSURE: Steve Palmer
I personally and/or my family own shares in the following companies mentioned in this interview: AlphaNorth owns shares of all companies mentioned.

I personally and/or my family am paid by the following companies mentioned in this interview: None.

Steve Palmer and Joey Javier, an investment team since 1998, took three key assets—their excellent track record, their experience and their belief that exploiting inefficiencies in the Canadian small-cap universe would produce superior long-term equity returns—to AlphaNorth Asset Management, launching the Toronto-based investment management firm in August 2007. By year-end 2007, the long biased small-cap hedge fund they built made its debut. Until Lehman Brothers' liquidated, credit markets froze, massive investor requests for redemptions forced hedge funds to sell out of their positions and "volatility" no longer came close to describing the frenzy in financial centers, the fund was flush and its investors were as happy as clams. Its first seven months netted a return of 35.6%, significantly outperforming the major Canadian indices. During that period, the TSX Venture Index declined by 3.7% and the TSX Composite Index rose by 7.4%.

Steve, who is a Chartered Financial Analyst, earned his BA in Economics at the University of Western Ontario. After starting in the investment community as a research associate, he moved to a major financial institution in mid-1998, where he met Joey and built his career. As Vice President of Canadian Equities, he managed assets of approximately $350 million, including a pooled fund that focused on small-cap companies.

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