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Yes, kind of, says one analyst. The seasonality of gold has broken down…

DON’T COUNT out the US Dollar just yet, not as the Euro waivers.

So says Louis Paquette, who launched Emerging Growth Stocks in 1995 to provide investors and speculators with a unique alternative to what he saw was a growing problem with corporate governance and conflict of interest on Wall Street.

Here he speaks to The Gold Report about the outlook for the US currency, plus the fact that the "seasonality" of Gold Prices and gold-mining stocks has broken down…

The Gold Report: In your February newsletter, you noted the negative sentiment towards the Euro driven by fears of the PIIGS’s defaults. But you pointed out that states such as California are fairing far worse potentially than Greece, Italy, Spain or Portugal. So why is this boosting the Dollar and depressing Gold Prices?

Louis Paquette: For a while now, the Euro has been the currency that’s weak. The attention has gone to Greece and people are thinking, well what’s going to happen if this contagion spreads to Spain and other countries that are looking bad over there? We’ve just seen this shift after a whole year of the US Dollar falling. It got really overdone. It got to be a really crowded trade and now sentiment has shifted negative against the Euro, which has allowed the US Dollar to recover.

Interesting note on a technical basis, the US Dollar Index has now had a 50% retracement of the negative down move that took place in 2009. So who knows? Maybe we’ve seen enough of a rebound now of the US Dollar, and the Euro has come down enough that we’re going to see a reversal now. Maybe the US Dollar will have a downturn now but, at the moment, all the attention – the negative attention – is towards the Euro.

TGR: Well factoring into the US Dollar I’m sure, California’s population is well over three times the population of Greece. It’s the largest US state and it’s in serious trouble financially, many say much more than Greece. Are the eyes of the world investment/finance community just in the wrong place right now?

Louis Paquette: I don’t know if it’s the wrong place because the Euro has a really serious problem. The ratios – the debt per gross national product and the debt ratios – in many countries in Europe and England are terrible. I don’t know if the investment community is looking at the wrong place. These things ebb and flow. For a while, the negative sentiment and the selling has been on the Euro; and that’ll continue until it gets to be too much, and then something will happen. Some news event will take place regarding the US Dollar, and then it will have a decline. That’s just the nature of markets. They move back and forth.

TGR: When the US Dollar declines, are we expecting to see a focus back onto the Euro, or would we start seeing focus on other currencies such as the Yuan or Rupee?

Louis Paquette: I think the focus will go back on the US Dollar because it will have had a pretty darn good move up and the short sellers will probably swoop down on the Dollar again. In terms of other currencies, we just keep hearing good things about the Canadian, Australian and Indian currencies. So I think the bears will circle the US Dollar again sometime later this year.

TGR: How do you think the Chinese Yuan factors into the equation right now?

Louis Paquette: Well you can’t pressure the Chinese to do anything. Telling them to let their Yuan rise is almost counterproductive. They may not let it happen just because you want it to. They’re going to do whatever they want no matter what.

TGR: As we move into this bear focus on the US Dollar, and we know there are issues with the Euro, are we going to see a decoupling from the Euro-goes-up-Dollar-goes-down (or vice-versa) mindset, to Euro-and-Dollar-go-down, and Canadian, Australian Dollars go up?

Louis Paquette: That’s what I think is going to happen.

TGR: How does an investor play that?

Louis Paquette: It’s kind of a race to the bottom with most of these currencies, even with Canada’s. I hear the big, big investors saying, Canada’s such a great place, and we’re supposed to have a conservative government, yet they’re going to have a huge massive deficit this year. Even the most favorable countries are now spending beyond their means and I guess the only way to play this is to have some gold in your portfolio. Have some raw gold, have some bullion and have some shares of good mining companies. If you’re really aggressive, talented and you know how to short and play the futures markets, then you can try and time these, the bigger declines. Sooner or later the US Dollar will top out again. If you’re really comfortable with doing that you could do a short sell on the Dollar with the futures markets but I’m not that comfortable doing that kind of thing. So I just hold gold.

TGR: Do you feel confident that the Canadian banking system is going to remain strong given what you’ve just said, or do you just see that waning a bit too?

Louis Paquette: Well the corporations themselves have run themselves fairly well. But sadly with – it seems like anytime the population figures out it can vote someone in who spends more, that’s when you run into trouble. It seems like every country is doing that. Perhaps China and India aren’t, but here in the West that’s happening. I’m not comfortable with the government, but the Canadian banking sector is still being run fairly prudently.

TGR: There’s a growing belief of a double dip recession for the second half of 2010. You refer to Dan Arnold’s work, The Great Bust Ahead, predicting the bust will begin in 2013. If there is a bust ahead, how should the typical investor play a busting market? Some feel the prudent strategy is to go long in cash/gold avoiding equities whose value will fall during a bust. Is this your opinion?

Louis Paquette: I would stick with holding some gold equities of really good companies. If we do get a real meltdown in the currencies, it’s going to impact the price of gold – and the companies should make terrific profits. But will they melt down, too, in a big meltdown? I really don’t know, but I would just hold some. The one thing I would be confident in doing is saving a lot of cash. I would short stuff and own more cash. I would not buy luxury items and I would save cash.

TGR: In our last interview with you, we discussed the Typical Seasonality in Gold, especially gold stocks, both of which have a fall and a spring rally, followed by a typically quiet summer. At that time, you were uncertain if the climate had truly shifted for gold, and were unsure whether or not that seasonality was breaking down. A year later, do you think it has? Also, has the psyche for accumulation of the metal itself moved into the acquisition of promising junior or mid-tier Gold Mining company stocks?

Louis Paquette: Let me answer the second question first. For the last year, the emphasis has moved toward the metal. The Gold Mining shares? I’m looking at a chart right now of appreciation of gold and gold shares, and the gold shares have gone sideways for the past two years and gold has gone up. So for the moment, there’s better value in the gold producers, in the shares of the companies, and people have been buying the bullion price.

The first question, has Gold Seasonality broken down? I think the answer is yes, kind of. The last buy time for seasonality was last August. That did work. The price of gold started to take off after that. But now when it comes to the high point, gold peaked on December 3rd; it hit a parabolic high at that point – and looks like a cyclical high now – and it’s not strong. It’s supposed to be peaking around now, and we’re $100 or so below the peak. I would say the seasonality is breaking down because the price is now being driven by Gold Investment demand as opposed to physical demand for jewelry. So the answer is yes. The seasonality is breaking down and you have to revert to other methods to pick your highs and lows now.

TGR: To what extent do you believe news and the news media can make a market? And has the gold market yet to be made?

Louis Paquette: I think it has a lot to do with it. And I don’t think we’ve seen the full extent of it yet. We haven’t seen a media-driven parabolic rise yet. You don’t see the average person lining up to Buy Gold coins at this point. I think that day is going to come, but I don’t believe we’ve seen it yet.

TGR: What are you recommending for portfolio diversification with regard to gold stocks, Gold ETFs, and the physical metal?

Louis Paquette: The leveraged two-times ETFs were really popular here in Canada, and I’m completely avoiding them. They experienced time decay. So zero for the leveraged ETFs. And the main focus is on junior mining companies, exploration situations and near producers with growing reserves. I’m not Buying Gold anymore. I used to buy it years ago in the beginning first few years of the bull market, but I just sit on that. That’s 5%, 10% of one’s portfolio in the metal, in the Gold Bullion, and for me a lot larger than that with the gold share (but I specialize in that). So I don’t know what the good number is for the average investor, but I’d say maybe 5-10% of the gold shares of selected junior mining companies.

TGR: Earlier on we were talking about a double dip recession. You said people should short stop and go long on cash. So the suggestion is to hold cash; but really early on we were talking about the devaluation of the Dollar and the Euro. How is this a good strategy?

Louis Paquette: Well, all I can tell you is what I’m also doing – taking a fair number of those Dollars and owning stocks that pay good dividends. At least I’m making an income with that money. I guess that’s where you have a portion in the gold sector too, if the currencies are going to devaluate. Consumer goods are going to fall in value even faster than everything else.

TGR: Value declines as soon as you take it out of the store.

Louis Paquette: Exactly. So I’m not in a big hurry to buy brand new cars. They’re going to be cheaper in the future.

TGR: So you were talking also a bit about having 5-10% of your portfolio in metals, which leaves another 90% of your portfolio in other types of things. Given that there are significant reports of green shoots and some positive economic news, at least coming out of the US, what other sectors would recommend our subscribers invest in so they have a balanced portfolio?

Louis Paquette: The areas I like are gold and energy. On weakness, I have been purchasing shares of these income trusts that pay 5-10% yields. So I’m about 50% cash and about 5-10% in the metal, say 20% in Gold Mining shares and the balance in energy shares. Also in special little situations, I’ve got the odd investments – biotech and even a social media company. Some very small micro cap situations are also in there, not specific to any sector, but "bottom up" selections based on the merits of the company.

TGR: In terms of energy, are there specific subsectors of energy that you’re focusing in on?

Louis Paquette: Yes. I’ve got a love/hate relationship with natural gas right now. The production community seems to be determined to drive the price to zero. But sooner or later, this natural gas situation is going to turn around. They’re going to deplete all these new reserves they’ve found and there’s going to be a shortage of it. I’m not saying in the next month or so, but in the coming years there may be a great opportunity in natural gas.

TGR: Lou, thank you so much for joining us.

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Source:Gold Cycle Broken?

Five per cent…? Ten per cent…? Try nearer 20% says this four decades’ veteran…

The GOLD REPORT recently caught up with John Embry, chief investment strategist at Sprott Asset Management, to get his thoughts on gold and Gold Mining stocks.

An industry expert in precious metals, John Embry has worked as portfolio management specialist for  more than 45 years; he’s simultaneously researched the gold sector for 30-plus of those years. He joined Sprott in 2003, after 15 years as Vice-President Equities at RBC Global Investment.

Here he tells the Gold Report about his outlook for strong Gold Price gains in 2010…

The Gold Report: John, in Investors Digest of Canada you recently said you’re expecting gold to gain another 30% this year…

John Embry: I would say at least 30%. I said that I thought it would be the best year to date. We’ve had nine years consecutive higher year-end prices and the best year in that span for a year’s return was 31%. I think this will be the year that we exceed it in this, the 10th year of the bull market.

TGR: Why is this year going to be the best year?

John Embry: I think we’re getting very close to the point when a greater proportion of the public realizes the degree of difficulty that sovereign debt is in. And at that point, when you can’t depend on your government paper as a safe haven, I think that fact puts gold in a much better light in more people’s eyes.

TGR: You might say the first leg down were the individuals who couldn’t pay their mortgages and that caused part of the ‘08 collapse. And now it looks like it’s the government…

John Embry: It’s very simple, actually. Private demand, as you know, was so weak that governments had to step in to maintain order in the economy and in so doing, they spent an enormous amount of money, at the same time that revenue streams fell because of the weakness in the private sector. Governments spent dramatically more money and the results are a budget deficit I never thought I’d see in my life. I’m shocked at the numbers in many places.

TGR: When you talk about gold, you’re talking about Gold Bullion. But how do you see the gold stocks? Do you think we’re going to have a pullback? Ian Gordon of Longwave Analytics and Richard Russell (Dow Theory) predict the Dow will go to 1000.

John Embry: I don’t agree with them. As much as I love Richard Russell – he’s probably been as big an influence in my career as anyone – I don’t think that deflation is necessarily the outcome when you have a pure fiat currency system. I think the far greater risk is hyperinflation because I believe that these guys that are in control today have seen the depressionary ’30s, and they will move heaven and earth to prevent that outcome. And when you’ve got the capacity to create unlimited money, I believe you can do it. So I hear Gordon and Russell and I respect them, but I’m in the camp that thinks we’ll get hyperinflation first. We’ll eventually have to clean out the debt, but I think we go hyper before that.

TGR: So hyperinflation. Would that include stocks as well?

John Embry: I think stocks will do fine. They may have a violent correction first because a lot of people don’t know what the heck we’re talking about here. And when they see inflation mounting and economic conditions being less than ideal, they’ll sell their stocks. But the fact is that if you go back and look at any hyperinflationary environment anywhere, stocks did infinitely better than paper instruments. So precious metals first, stocks second.

TGR: When you’re talking about stocks, you’re not talking just about Gold Mining stocks…?

John Embry: No, I’m talking about good businesses. I’m not talking necessarily about banks and other stuff that’s more dubious, based all on paper, but businesses like breweries, for example. People are always going to drink beer and a good brewing company will do exceptionally well in the debased currency of whatever country it’s in.

TGR: So you think that we might have a sell-off and in that sell-off all equities, including gold stocks, would go down.

John Embry: Gold stocks, maybe. I believe the next time everything goes down, gold isn’t going down. And if that were to be the case, I think gold stocks might surprise. They’ve been awful. Given what the Gold Price has done, gold stocks, by and large, have been awful.

Well, the well-promoted ones and the odd good one have done okay, but across the whole list, it’s been pretty hard slog over the last three or four years, particularly 16 to 17 months ago when it we hit bottom. I thought they were going to zero.

So many of them are trading at less than they were back in November 2003, which was the real peak of the excitement in gold stocks, if you can imagine. Six and half years ago. The Gold Price has done nothing but go up in that time.

TGR: In this next cycle are you seeing better returns for producers or the juniors that have pounds in the ground?

John Embry: Oh, I think the juniors. The whole thing is a matter of confidence. They’ve got so much volatility in the Gold Price. You get a good thrust up and you got a violent correction and I think they’ve got so many people discouraged and going the wrong way on these gold stocks that right now the degree of confidence is very low. If I’m right and the Gold Price stages a dramatic breakout in the next 12 months – and I’m talking hundreds and hundreds of Dollars on the upside – then I think the confidence will return and people will seek an outlet in gold stocks because so many of them have been beaten up. More importantly, the overall market cap of all the gold stocks is really small in the context of all the money around.

TGR: What’s the seasonality of this year?

John Embry: I think that probably we may continue to wallow around here for maybe the better part of another month. Maybe not quite that long. But, historically, mid-March to mid-May has been a really good period. When I look at the fundamentals and everything that’s going on, I see no reason why it shouldn’t be a very good period this time. And there’s one other development. I don’t know whether it will come to fruition, but on March 25th the CFTC is going to be investigating position limits in gold and silver on the Comex futures market. And if they ever put any teeth into those things and kept these bullion banks from what they’re doing on the short side with their large positions, I think that could have a salutary impact on gold and silver prices.

They’re finally going to have to address this because there’s been so many complaints about the bizarre price action on the Comex in both gold and silver.

TGR: The International Monetary Fund is going to be selling some gold, and India stepped up earlier. What are your thoughts on that?

John Embry: The whole thing irritates me. The IMF has announced the sale of this gold 500 times and every time with the express purpose of knocking the price of gold down. It was interesting the last time when the Indians actually relieved them of over 200 tons because that was what basically vaulted the market from about $1,045, which the Indians paid, up to $1,225 in the space of less than a month. That has been followed by the third significant correction in the last three or four years.

I think we’ve seen the vast proportion of the correction and I think what may be one of the factors that could get this thing going again is when somebody does relieve the IMF of the gold, the 191 tonnes still to be sold.

There’s speculation that India might be prepared to go to the plate again because the Chinese have been reluctant to step up. Number one, I don’t think they want to be seen publicly doing it. They’d probably rather do it more clandestinely because they’ve got so much money to convert into hard assets. And, secondly, as somebody pointed out, the Chinese at least have a domestic supply of gold. They can buy all their domestic output to augment their reserves, where the Indians really don’t have that.

So I think the Indians conceivably have a bigger vested interest here in taking that IMF gold. And there’s also sort of the suggestion that the Chinese wouldn’t want to be seen to be paying more than the Indians did. So they’re reluctant to step up with the Gold Price some $50 higher currently than the Indians paid.

If gold really was a free market, if they were really prepared to sell it to anybody, I think I could name any number of institutions, organizations, individuals that would be more than glad to relieve them of it. It’s not much money. It’s $6 billion. They throw it around as if it’s a big deal. Heck, given the budget deficits in some of these countries, $6 billion is literally a piss in the ocean.

TGR: What did you think when George Soros came out and said that gold was a bubble?

John Embry: I wrote about that and I got it right. I was very pleased about that because some people got all upset. The people that were negative on gold thought this was great, brilliant George Soros doesn’t like gold. But if you read between the lines, if you read really what he said, he said gold is the ultimate bubble, but he didn’t say gold is currently the ultimate bubble. I believe that it will be the ultimate bubble. I think the Gold Price is going to go crazy and at that point I’d be worried. And then it came out after the fact that Soros had been a major buyer of gold for his funds in the fourth quarter. So who knows what he was doing? The fact is, depending how you interpreted his remark, he was speaking at Davos, which is a very mainstream event, and he said something that can be interpreted any number of ways.

TGR: And, again, I think the financial talking heads used it as the negative.

John Embry: Absolutely. The mainstream guys were all over it. The guys who have never like gold have been wrong all the way up and said, oh, my god, George Soros doesn’t like gold. But I think George Soros’ remarks were misinterpreted and if you saw what he was doing, not what he was saying, he was Buying Gold…

TGR: Any last comments?

John Embry: The only comment I’d make is I really think things are sufficiently serious here in a financial or monetary debasement sense that everybody – and I have never been a table pounder – but I think every single person with a serious portfolio has got to have a reasonably significant exposure to precious metals. This isn’t something that’s just insurance for those who’ve got cold feet. This is something I think is a mainstream thing that people must have.

TGR: When you say a significant portion, what percentages are you thinking?

John Embry: I used to say 5% to 10% when it was just an insurance thing and the market was pretty sanguine. I say at least 20% now. I see the other assets as being less attractive. I wouldn’t buy a bond if you gifted me with the money to do it.

TGR: John, once again, I appreciate it.

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Source:Gold: How Much is Enough?

A clear response to detractors of Gold Bullion over the last 10 years…

PUBLISHER of the Midas Letter, James West believes gold is the store of value everybody resorts to when times are rough.

Devoting the past 20 years to helping small companies in the resource sector raise money, further their projects, build their identities and get their stories in front of investors, James West here tells the Gold Report about how important he feels a strong position in Gold Bullion is for investors today…

The Gold Report: James, your work is based upon macroeconomic views. Can you give us some insights into how this plays into your thinking?

James West: Our viewpoint at MidasLetter, from a macroeconomic scheme on a global basis, first and foremost, is that gold is the standard by which all currency and all things of value are measured ultimately.

Gold is the only thing on earth that has for 5,000 years maintained some kind of value whereby it can be traded in exchange for materials and for services, labor and real estate. So there’s really not been one currency in the form of paper or coin that hasn’t actually been made of gold or represented a deposit of gold that has lasted more than 100 years as a global standard.

We’re seeing the US Dollar deteriorate in value over time. On a daily basis it’s like what Brien Lundin says about watching the fluctuations in prices of currencies in gold – "Don’t focus on the bobbing cork because you will lose sight of the rising tide." He’s the first guy who I heard say that so I will have to give him credit for that. And that is really a great statement; for example, they raised interest rates by a quarter of 1%, and of course, gold takes a dive on that news, and the Dollar bumps upwards, and everybody goes, "Ah, the Dollar is saved, everything is back on track, the economy is good, America will rescue itself." And, all it’s going to take is another job report – we have lost another 400,000 jobs – and the markets are going to go in the other direction.

Yet, in the macro sense of time, if you look at how gold has performed against other currencies, it has risen in value on average somewhere in the range of $87 each and every year since 2002; so in that sense, you could say the value of the currency against which it’s measured has deteriorated to an equal degree over the last 10 years or so.

To me, and to a lot of other people, gold is the store of value everybody resorts to when times are rough and when currencies become untrustworthy. We see that in times of national disaster, political upheaval, war and pestilence, the price of gold goes up because demand goes through the roof. People get a little bit scared and they know that whereas currencies can ultimately be inflated to the point of worthlessness, with gold there’s always a finite quantity that can never really be added to – without great effort and great expansion of collective effort worldwide. And so all the gold that’s been mined is more or less still around and very little has been lost through deterioration. The one thing that maintains its appeal in terms of something representative of value no matter what happens is gold.

Adopt that attitude, and then form your strategy in terms of wealth preservation and investment. Evaluate the performance of world currencies and world markets in terms of the Gold Price, and you start to see all kinds of other truths emerge. That helps you have a much clearer picture, a much more realistic picture of how the world actually works.

So we can’t really talk about gold without referencing the work of GATA, the Gold Anti-Trust Action Committee and Bill Murphy. They have single-handedly – very stridently, energetically and enthusiastically – pointed out the fact that the United States Federal Reserve and the Bank of England have arguably, over the last 100 years at differing times and in different degrees of manipulation, used various devices to manipulate the precise price of gold to the system to preserve the illusion that currencies are in good shape and that interest rates are justified in either being very high or very low. From that standpoint you see how the bond markets work and how governments finance their own debt. It’s very important to them how the shape of their currencies look to the rest of the world and one way to create that perception is to manipulate the price of Gold Bullion.

There are a lot of guys out there that say, "Well, the price of gold is manipulated; who cares?" Or, "the price of gold has not been manipulated; that’s all conspiracy theory, and that’s just complete bull."

But no matter what your thinking is, you come back to the realization that if you throw out the idea that the statistics put forth by governments and the value of currencies issued by various tracking outlets – Standard & Poor’s, Bloomberg’s – are easily manipulated when the price of gold is manipulated. And so, when these massive short positions in the derivatives market – either short against or long for gold – materialize by these big banks that are essentially both the originating party and the counter-party in these transactions, these massive transactions in the futures market form the price for the spot price of gold.

You can see how the price of gold can easily be manipulated because the Spot Gold price is influenced by the growing demand, which is influenced by what the futures markets are doing. So the mainstream news says, "Oh, the futures are down 15% this week; well, gold futures are up 20% over this period of time" and that forms the impression in the minds of investors that gold is desirable and currencies are not or vice versa.

TGR: Obviously, you’re a bull on gold; are you recommending buying bullion, or are you recommending Buying Gold producing stocks or juniors?

James West: Well, I always refrain from giving a blanket recommendation. Different portfolios obviously have different levels of risk tolerance, depending on your age and income, what your ambitions and goals are for yourself financially. I can give you a risk profile that determines whether bullion, producing stocks or junior exploration stocks is appropriate.

It is my view that Gold Bullion is preferable at all times only in terms of your liquid portfolio because you don’t have currency risks with gold. You’ve got the risk of fluctuations in small bite-sized periods of time like on a daily basis or on a monthly basis. But if you look at a chart of gold on any given year, for the last 10 years, the price has risen steadily in the one-year period. So those price fluctuations, up and down, that run the gamut from $50 to $200 over the 35- to 45-day window really don’t add up to much when you’re talking strictly about owning Gold Bullion for capital preservation.

And the detractors of owning Gold Bullion like to say, "Hey, this stuff never pays a dividend and has no cash flow; you shouldn’t own gold for investment." To which, I say, "Well, no, you don’t own gold for investment, even though, arguably, it does pay a dividend in that it has risen in value $87 per year for the past eight years, and so you can take that value out of your gold holdings, and there you would have your dividend. But gold itself does not function that way; it doesn’t function like a public company. It doesn’t decide when to issue stock or when to issue dividends. And so it’s really disingenuous to compare gold to investment that way – the bullion I’m talking about now – because that’s irrelevant.

I think people should own gold for the capital preservation, ultra-conservative side of their portfolio, much better than owning bonds or some fixed incomes where even fixed incomes are running the risk of blowing up in your face at some point in their evolution and wiping out all the capital they were supposed to preserve.

In terms of conservative investment, I think that senior Gold Mining producers are a good bet because in periods of history like this they tend to have a general increase in price. Ours is a conservative investment portfolio where the risk of the company evaporating from the face of the planet is minimal, considering the business they’re in. If you look at new municipal bonds or all of the things that have blown up in everybody’s face in the last two years – real estate, other commodities, etc. – the gold producers represent a very well-performing, blue-chip investment.

Now, in terms of higher risk capital – the Midas Letter itself focuses on capital sufficiency where we view our entire portfolio as a risk portfolio. That’s our tolerance because I am a young man; I don’t have to worry about retiring any time soon. I don’t have a large family to support; I don’t have kids going to a university. I don’t have a mortgage because I don’t believe in credit. And so my portfolio is all about looking for a company based on continuous monitoring of what’s happening in the juniors space where capital appreciation happens on the scale of hundreds of a percent almost overnight.

I am going to look for stocks sub-one Dollar in hopes that the bulk of the ones I recommend are going to go up by 1%, 2%, 3%, 400% within 6 to 12 months, and we’re going to be able to exit that investment. For our part, we don’t care whether a company puts the mine into production or not. We don’t care whether they find any gold or not; all we’re interested in is buying the stock that is going to appreciate within that timeframe.

And so that’s really contrary to industry where everybody says, "Oh, you got to look at the people; you’ve got to look at the project." Well, that’s all true, but really, what you’ve got to look for is the stock going to go up 1%, 2%, 3%, 4%, 5%, 600% in 6 to 12 months and the factors that make that determination.

I’ve got the other portfolio, which we call our "Top 10 for 2009," and we’ve got a couple of open positions in this one, but the average performance with a basket of 10 stocks is up 157.7%, and within that portfolio, the average is low by our estimation.

TGR: Great – quite an interview today! I appreciate your giving us the time.

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Source:Gold's $87 Annual Dividend

The end-game for most Gold Mining juniors is to get taken over by a major…

TWO OF THE FIRST ANALYSTS to point out the disastrous effects of gold hedging and gold loan capital financing on Gold Mining balancesheets back in 1997, Eric Coffin and his brother David have been active in mining exploration for over 30 years in roles spanning prospecting through feasibility studies.

Now co-editors of the Hard Rock Analyst family of publications, David is the "rocks side" – literally logging hundreds of thousands of miles every year visiting exploration sites on six continents – while Eric, with a degree in Corporate and Investment Finance, runs the "financial analysis".

Here Eric Coffin speaks to the Gold Report about the outlook for gold vs. Gold Mining stocks, and the very mixed signals coming out of the copper market…

The Gold Report: Eric, in a recent HRA Journal you wrote that you’re not expecting a big gain in the market for 2010. However, you also indicated that it’s not required to have big gains in the market to have the mining sector do well. Can you expand on that for us?

Eric Coffin: Well, there are indices and there are indices. We have pointed out several times in the last year that if you look at what we call the "creditor countries" – China, India, Brazil – as well as the "resource supplier" countries such as Australia and Canada, none of those country’s bourses are technically in secular bear markets, although plenty of people assume they are.

On long-term charts those markets didn’t break their 2000-2001 lows which New York and most European bourses did. And we don’t think that is a minor point. It basically reinforces the story about the separation that has been going on in the world economy over the last decade, with developing high growth countries increasingly being the price setters for resources.

Metals prices, in general, are strong enough that companies making and growing real discoveries are going to get rewarded by the market, and we’ve seen that on our own HRA lists. Some of the companies aren’t getting beaten back the way people thought they would. The companies that have succeeded are making discoveries and rapidly increasing their asset values, which the market has been paying up for. We’re actually pretty pleased, for instance, with Toronto’s Venture Exchange Index. It’s got its issues like a lack of large profitable companies to underpin it, but it’s the closest thing to a proxy for exploration stocks we can come up with. You would expect the Venture Index to be the worst performing index in a bear market but it was actually one of the best gainers in the world in 2009 in percentage terms.

Granted, the Venture Index got slaughtered in 2008. At the start of 2009 we said, "Strange as it may seem, we expect the junior market to outperform the senior ones, at least in percentage terms," which it did to the tune of about 60%. People thought we were nuts, but if you start with the assumption that we are still in a secular commodity bull market, it makes sense that a resource stock index would have a big bounce, especially after being pummeled so badly. If you go back 10, 15 or 20 years, you could expect the Venture Index to drop by two or three times the percentage amount of the senior indices and to take much, much longer to come back.

One of the most interesting aspects of last year’s resource sector performance was that trading volumes remained strong through the year and the overall amount of financings were high. That was surprising and quite encouraging. New money was scarcer in other sectors and most major indices were plagued by light volume, even the ones with good gains themselves. Exploration is a negative cash flow business so it’s imperative that companies are able to raise money.

TGR: Let’s talk base metals. What’s your outlook on copper?

Eric Coffin: Dave and I were more bullish about copper than just about anybody a year ago, but we weren’t expecting to see the price go up to $3.50 so rapidly. That was a little bit shocking. That’s a measure of demand, but it almost seems like it’s a "copper-as-money" story too. Dave has said that for years, and he’s only half joking. His point is that everybody thinks of gold as the obvious contender as a currency, but you can make a similar argument for a lot of hard asset commodities and it certainly looks like money is being parked in many metals, not just gold. Copper is an obvious choice for traders because it does high volume.

A lot of the metals are not a bad place to hide and hedge against US Dollar weakness, but we’ve gotten a bit cautious about base metals again partially because the relationship you’re seeing right now between pricing and inventory levels doesn’t seem to make a lot of sense. It defies logic.

TGR: Isn’t copper sending out a lot of mixed signals out there?

Eric Coffin: It’s very mixed; if you look at three, or five, or ten-year copper charts, there’s a very strong inverse correlation between the copper price and warehouse inventories for copper. When copper warehouse inventories go up to a certain level, the price will start to drop and vice versa.

That relationship reversed itself about the middle of last year. Copper inventories were drawn down fairly significantly from the middle of 2008 to the middle of 2009. It was part of the reason we weren’t bearish. Everybody else was on base metals. We did point out – given the depth of this recession – that a 500,000 tonne inventory in early 2009 was not extreme; it was well over a million tonnes at the start of the decade. The inventory fell rapidly for several months, getting down to 250,000 tonnes, but then reversed again and climbed back to the 550,000 tonne level.

The copper price continued to climb right along with inventory levels and has only backed off about 10% in the past couple of months. Dave and I are sitting there scratching our heads, thinking this is bizarre; the price is awfully strong given the fact that the inventories seem to be climbing fairly quickly again. Because of that we got cautious, though we are still bullish long term.

TGR: So, how do you play the copper market now given that we have all these mixed signals?

Eric Coffin: We stepped back a little bit. We haven’t added any copper deals; we are looking at a few of them, and we’re hoping to add a couple more to the HRA list. But we want to see if there’s going to be more of a pullback. We were really expecting the price to come back to $2.50; it hasn’t done that and may not. Shy of that, we may add a couple of copper deals, but I think if we do, it will be deals where we see big exploration upside and we’re comfortable the market can give the company some mark-up based on discovery, not just market based on the copper price moving up and down. We tend to stick a little bit more to the exploration end, anyway. We’re recommending people just let that stuff sit for now, and if there’s really a big dump, then yes, maybe we can accumulate some. But we’re not comfortable telling people to buy producers right now. We want to see if there’s more of a drop, because although we’re not seeing inventory climb any more, we’re not seeing it come down either.

TGR: Let’s talk gold. What’s your latest take on that?

Eric Coffin: In the ’90s, when we were first doing the newsletter, we were only lukewarm to gold, partially because of the amount of forward hedging and gold forward sales being used as a financing vehicle by the Gold Mining sector. In the ’90s, major mining producers were moaning about how much selling there was in the gold market. Dave and I were responding with "What the hell are you talking about? You’re the sells. You’re forward selling gold left, right and center to finance mine construction."

That came to an end when Gold Prices got so low that it simply made no sense to start production on many projects and the low interest rate regime last decade made the forward sales less attractive relative to straight debt deals. That and the fact that gold miner’s shareholders were telling them in no uncertain terms that the idea of effectively shorting gold to finance gold production was crazy.

The combination of industry de-hedging, an end to central bank sales and secular equities bear market after the Internet bubble turned things around. We thought when Nasdaq tech-stock index collapsed, the US Dollar had probably topped out for all time, and that got us a lot more bullish about Gold.

It’s had a great run, and we’ve gotten a little bit more neutral about it in the last little while, but only neutral. You’re seeing a run in the Dollar right now, but I think the jury is still out as to whether the Dollar has actually turned around or we’re just looking at a bear market rally.

There is no such thing as trading a single currency really; you always trade pairs. So if you sell the Dollar what do you buy? The saving grace for the Dollar is that the other high volume trading currencies (the Euro and the Yen) have their own issues. It’s a question of how relatively bad a particular currency is at a given time.

Politically, I don’t see any way out for most of the G-7 frankly, other than printing their way out of this problem, which implies a continued race to the bottom for fiat currencies. And as long as you get a bunch of governments trying to print their way out of the problem I think that there’s going to be a place for Gold in people’s portfolios.

I sense that there are many, many people who are not gold bugs but who saw that gold performed very well as a safe haven. Nothing succeeds like success in the investment business and gold has been about the best investment around for the past decade. That gets noticed. Gold Prices are going to be strong enough where discovery is going to get rewarded, and that is the important thing for Dave and me. I won’t be at all surprised if gold sees new highs this year – $1350 or $1250 or whatever. The main question we ask ourselves is whether the price will be strong enough so that companies that make discoveries will get rewarded. As long as the price is good enough for that, we’re happy campers.

TGR: When you look at companies making a discovery, what price of Gold do you use to see if it’s going to be economically viable?

Eric Coffin: We tend to be a bit conservative about it. We view a mining scenario as one where you’ve got to look out 10 or 15 years, and especially when you’re looking at juniors. Let’s face it, for most of these companies, the end game is – and should be – getting taken out by a major. Finding deposits is what the juniors are good at and the best exit is often selling the discovery for a good price then moving on to try and find the next one. When you’re trying to wrap your head around the value for these companies, you’ve got to look at those companies’ potential acquirers. What are they thinking and what are they using as a base price.

I think you’re going to see M&A activity increasing because companies that have sat on the sidelines waiting for the perfect number before they bid on a company are finding out that they’re just not going to get it, and the company they’ve got their sights on, somebody else gets there first. So, I think you’re going to see improving takeover prices, and in some cases I think these majors are probably gritting their teeth and using a $900 or $950 long-term Gold Price to value things. A lot of them must be using that high a price at least to explain some of the recent bids.

TGR: Right. So, you’re looking for juniors who have some type of scale potential with an end-game of selling to majors.

Eric Coffin: Right.

TGR: Great, thanks Eric. Lastly, we understand that you have a new free report to offer our Gold Report subscribers, as well as an HRA subscription deal. Can you please let us know the details?

Eric Coffin: Yes, we have just put together an extensive report for Gold Report readers, which highlight some of the companies that I mentioned above, plus a few others that we think have significant potential for 2010. It also showcases the power of the Alert service, which we think has been particularly valuable for subscribers since it allows them to quickly get our input and opinion when important, trend-changing results are released.

Simply go to www.hraadvisory.com/aureport.html for all the details on this offer. To receive the special discount, use the ’subscribe’ links. The 20% off pricing cannot be accessed via our homepage.

TGR: Eric, we appreciate your time.

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Source:Gold Mining's Viable Price

Unlike Gold ETFs, the largest silver ETF shows continued money inflows…

EXCHANGE-TRADED FUND investors are showing a preference for silver over gold lately, writes Gene Arensberg from Houston, Texas in his Got Gold Report for the Gold Newsletter.

At least, we are seeing more buying than selling pressure in the silver ETFs while Gold ETF money flow is flat – and has been for a year.

We think it could be pointing to an opportunity looking ahead. Bottom line? We remain long gold and silver here at the Got Gold Report, after re-entering the gold market two weeks ago.

Once again we reiterate our longer-term view that the world will most likely continue down a path of fiat currency debasement, weakening confidence in all fiat currencies. We see the setup as long-term very bullish for gold metal and extraordinarily bullish for silver looking well ahead – if the world "holds it more or less together."

Please Note: This offering of the Got Gold Report was originally filed Sunday, February 28, and delivered to Gold Newsletter subscribers shortly afterwards. For more information or to subscribe visit the Gold Newsletter home page.

Meantime, the SPDR Gold Shares Trust (GLD), by far the largest gold exchange traded fund, reported a very small reduction of 0.61 tonnes to 1,106.99 tonnes of gold bars held by a custodian in London for last week. As of the Friday, February 26 close, GLD’s metal holdings were worth $39.4 billion. 

The chart just below shows GLD’s metal holdings relative to the price of gold for about the last year.

To a technical analyst, it resembles a triangular consolidation. Putting the last year of GLD metal holdings in context, the next chart goes back four years to February of 2006.

It’s interesting to see the latest consolidation in context over that 4-year period, isn’t it? As Gold Prices increased from roughly the $560s as high as the $1200s or roughly 114%, GLD’s allocated gold metal holdings increased from roughly 330 tonnes to about 1,100 tonnes, an increase of roughly 233%.

Notice, however, that all or most all of the increases in metal holdings for GLD occurred by March of 2009 with gold at or below the $950s. (For reference, GLD first reported holding more than 1,100 tonnes on March 19, 2009 when it reported 1,103.29 tonnes with gold then trading at $956.50). Since then, and taking a rather broad view, buying and selling pressure for shares of the Gold ETF have been more or less balanced as reflected in a much narrower range of metal additions and reductions.

We want to call attention to the very substantial difference in recent metal holdings level for the largest Gold ETF and the largest silver ETF. It may be pointing to an opportunity as investors are converting Gold ETFs into silver ETFs at the margin, perhaps taking advantage of higher gold/silver price ratios.

The iShares COMEX Gold Trust (IAU), reported a reduction of 0.76 tonnes to show 76.68 tonnes of gold held in Comex warehouses. And all five of the Gold ETFs sponsored by the World Gold Council collectively recorded a very small decline of 1.68 tonnes of gold metal, to a combined 1,293.44 tonnes (41,585,270 ounces) worth about $46.1 billion as of Friday’s close.

The authorized market participants for Gold ETFs add gold (and increase the number of shares in the trading float) in response to more buying pressure than selling pressure and vice versa. And although we continue to see very marginal negative money flow for Gold ETFs, it is neither material nor volatile, suggesting that investors are holding their Gold ETFs through Gold Price volatility. Moreover, the recent minor negative money flow for Gold ETFs is somewhat offset by continued positive money flow into silver ETFs.

Metal holdings for BlackRock’s iShares Silver Trust (SLV) increased last week by 30.51 tonnes to a reported 9,476.91 tonnes of 1,000-ounce allocated silver bar inventory. As of the Friday close, the largest ETF silver hoard in the world was worth $4.9 billion or about 10.7% of the value of the largest Gold ETF.

The chart just below shows the changes in allocated silver metal holdings for SLV over about the last year. Please compare this graph to the one-year version for GLD above.

Like GLD, the authorized market participants for SLV add silver (and increase the number of shares in the trading float) in response to more buying pressure than selling pressure and vice versa.

In contrast to GLD, we note consistently more buying than selling pressure for the largest silver ETF over the past year, even as silver prices trended higher on balance. 

Below is a graph showing the additions of metal held for SLV since its April, 2006 inception – roughly the same period as the longer-term chart of GLD above for comparison.

Believe it or not, silver prices are not far from unchanged since SLV got underway in 2006. What HAS changed is that over 9,000 tonnes of the world’s available bar silver in London has been removed from the market over the period.

We are of the firm opinion that silver ETFs are closing in on a supply inflection point, but that’s a subject for a future report. Clearly, for now, there has been consistently more buying than selling pressure for the world’s largest silver ETF, with only minor pauses in investor accumulation since SLV first began trading four years ago.

That continued popularity comes despite the brutal, panic-rush to liquidity in Q3 of 2008 which is the dominant feature of the SLV trading record above.

To repeat: There has not been material positive money flow for the largest Gold ETF for about a year now. We expect that to change in the near future as this higher price region for gold is further digested and accepted by the collective global market. Although anything is possible over the short term, we seriously doubt that investors will gain substantially more confidence in the world’s ailing, debt-strangled, policy abused and overly inflated fiat paper promises – or that investors will suddenly lose confidence in the only universally accepted store of wealth and value for over four millennia.

We also note that the Gold/Silver Ratio is still quite high historically speaking, and some investors may be taking advantage of the higher gold price to convert some Gold ETF holdings into silver ETFs.

If we stand back from the day-to-day metals price battlefield for a minute and take a wide-angled view, so to speak, what might this divergence be hinting to us? Well…

• If we accept the theory that Gold ETFs have become a substitute for and a haven from under-backed and brittle government fiat paper currencies (for at least some investors);
• If we subscribe to the notion that wealth is and will be seeking similar vehicles to securely ride out the contemporary tempest raging in the global forex markets;
• When we consider that both silver and gold have historically been used and universally accepted in their absolute forms as a storehouse of wealth (money) since right after Day One;
• And then we add in what more and more people believe is the potential for scarcity in the amount of available physical silver looming just over the investing horizon…

Then it makes perfect sense that we have seen consistently more buying than selling pressure for the largest silver ETF even as Gold ETFs have treaded water relatively speaking.

In the simplest terms, investors want somewhere to park some of their wealth in something that is backed by something tangible and out of their country’s debased fiat paper unit of exchange. The obvious conclusion is that investors see silver as a relative value compared to gold presently and it wouldn’t surprise us in the least if that were to continue over time – if the world more or less holds it together.

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Source:Silver ETF Flows Beating Gold