Tom Szabo

Larkin: Gold's Stealth Bull Market

Kingsgate is pretty solid as are some other ASX listed mid-tier golds. If you are looking for maximum leverage and high risk/high reward, I'd pick Oceana -- our model gives it significantly more upside potential.

Larkin: Gold's Stealth Bull Market

He mentions Yamana and Agnico-Eagle, soon-to-be-million-ounce gold producers with 1/3rd the market cap of already-over-5-million... gold producers like Barrick and Newmont. Where is the leverage in that? What you have to find in this market are comparatively undervalued producers like New Gold and Great Basin Gold as indicated by our valuation model. If you don't mind a current copper producer that is a gold developer as well then you might look at Taseko. There are also a number of TSX-traded up and comers that have some good leverage.

As for Mr. Larkin's statements about gold market fundamentals, they are very safe and pedestrian. He makes it sound like the gold price is going to slowly drift from $1050 to $1200. Moreover, he repeats the canard that gold will really soar when the public starts to participate in earnest. Whereabouts has Mr. Larkin been sticking his head in the sand? Did he not notice Jim Cramer, hedge fund advisor to the unwashed masses, already extoll the virtues of gold? And does he not realize there is already widespread participation by the public in the gold market --- as demonstrated by all those Cash4Gold commercials. Granted, the participation isn't a widespread buying frenzy but does he really believe this bull market will look EXACTLY like the one that ended in 1980?

Leveraging Up on Precious Metals Ahead of Fed Meeting

If the market does not expect the Fed to do anything at Tuesday's meeting, why would confirmation of that put any sort of fire under gold and silver prices, which are at the moment in free fall mode?

The example of copper mining is not quite correct. At 80 cents copper the miners were basically breaking even. Now at $3.00 plus copper they make a margin around $1.50 to $2.00 or more per pound. That is huge and has already propelled many copper miners to multi-bagger gains. It could be the same in reverse on the way down, assuming copper prices collapse as have already lead, zinc, nickel, etc.

We don't see this as much in gold and silver mining because the mentality is somewhat different--the gold miner wants to extend the life of his/her mine as long as possible and therefore will go after lower, previously uneconomic, grades that are now profitable to extract thanks to the higher gold price. This, too, works in reverse, allowing the gold miner to somewhat cushion profit margins. The problem here is not with the gold mine manager's attitude but rather with the gold mine investor's attitude.

Silver Wheaton is a fine company with a great business model but it has risks as well and there are also limits to its leverage to silver prices. With respect to risks, consider that the mines contracted to deliver silver streams are primarily base metal operations (with the exception of Penasquito). If base metal prices fall far enough while silver prices remain high or even rise, these mines may not be profitable and could face shutdown or decreasing production (to conserve cash), thus depriving SLW of silver production. As far as leverage, I recently wrote a comment on a Seeking Alpha piece and don't wish to repeat it here, but suffice it to say that the leverage is something like 70% (ie., if silver prices go up 100%, SLW should go up 170%). Good but certainly not legendary.

Junior Mining Companies Primed for Big Gains

I see no sign that majors are particularly desperate to replace reserves at this point. Before going on a buying spree, they would first start lining up to do JV deals on the best projects, resulting in terms that are very favorable to the junior partners. I'm not seeing that yet. Quite the opposite, the majors are acquiring 50% equity interest in world-class properties by merely providing a portion of the financing and development expertise (think Novagold, Northern Dynasty).

One of the problems is that there aren't that many great projects out there. Juniors put mines into production not by choice but because it is their only choice. Most majors think forward to the next cyclical downturn and wouldn't dare touch some of the "mines" being launched by the juniors these days. If you can tell the difference, you can probably do well buying specific juniors and then waiting for the big fish to bite but otherwise it might make more sense to buy just the majors or at least juniors that are partnered with majors.

If you are buying stocks that appear undervalued to you based solely on "proven ounces in the ground", good luck to you (it will be needed).