Applying the Subprime Collapse to Gold, Silver and Commodities

Includes: LMC, MGN, TRX, WPM
by: Sufiy

Imagine that you have 50 million CAD dollars in cash and the blood bath in junior mining stocks like we had last Thursday. Is it bad for you when "solid names" are selling for 30% off in one day? What has changed since the spring when the same guys were making private placements and YOU could not get it?!

I had firsthand experience when, by the end of the day of the financing announcement, it was already completely sold out to investors. Now the same stocks are selling below PP levels. Almost all juniors completed private placements in record numbers this spring using the opportunity of free flowing money. Now they are busy drilling and news of new discoveries and confirmation of resources are starting to come into the market, and stocks are still going down? So you must be very happy with your 50 million - you can accumulate on fire sale the same stocks you have dreamed about last spring with 40-50% discount.

Now imagine that you have not 50 million, but 1.5 trillion like China . With this amount you will not be able to play in the tiny juniors market but look no further then Lundin Mining (LMC): An emerging mid tier producer with a zinc, copper, lead and nickel portfolio with the majority of its mines in stable Europe. Now add the additional spice of silver, where Lundin has 25% exposure at one of worlds biggest developing copper and cobalt mines in the Congo and another 49% at one of the biggest zinc deposits Ozernoe in Russia. Add to this a basket pf other investments in a few promising juniors and include a record earnings last quarter. Yet, with all this on the table, Lundin can be bought at a P/E=7.9 and a forward P/E=6.82?

I would dare to say that even if tomorrow China ’s stock market closed completely, its economy will still need commodities for its growth. So, the recent situation of sell off in real things, metals, gold and silver, are nothing more than a dream for the newly appointed managers of SAFE investment agencies in China.

With the temporary bounce in USD triggered by margins calls on loans in USD they can start their duty of diversification from USD into gold, silver and commodities needed for their explosive growth. I think that nobody is talking about a FED rate hike any more. The Financial economy, which now constitutes almost all the economy in the USA, is in deep trouble due to sub prime collapse in credit markets, and the recent shake outs in stock markets will deepen consumers wounds already hurt buy the housing melt down and its ability to spend will deteriorate further.

If you look at the history of 1998, with the LTCM bail out as reference, we are now facing not one but several Fed rate cuts in a row just to keep things together in the financial markets. With real inflation still going up, real rates will be deep in negative territory like in 2002 and it will propel prices of metals, gold and silver up into a new bull leg. When the central banks of Spain and Switzerland were busy selling gold it went no further than to the Saudis. India , China and the Middle East’s demand for gold is up in 2nd Q 2007, in Saudi Arabia ’s case it’s as high as 30%.

So if you are not squeezed on margin and have preserved your capital, now is the time to shop for good names with solid management and resources which will be needed always even if the USA enters a recession and China closes its stock market. I must add that insiders are buying and you can get a better deal than their purchase price; it is becoming even more appealing. In August, the Lundin family bought one million more shares in Lundin Mining at CAD 13.2. Sterling Mining (SRLM), Mines Management (NYSEMKT:MGN), Copper Fox Metals (CUU), and Mantle Resources (NYSE:MTS) are all trading below their last private placements. Silver Wheaton (SLW) and Tanzanian Gold Royalty (TRE) have taken a hit as well. They are effectively call options on silver and gold price respectively without time decay.

A new wave of consolidation in the sector will ignite the upside move and these sale prices will not be around for much longer.