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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

New Orleans’ host Brien Lundin’s short-term take on silver and Gold Prices…

The GOLD RALLY that began last fall and drove Gold Prices through $1200 in late November doesn’t seem to be panning out the way the rallies of 2005 and 2007 did, says the Gold Report.

In this Gold Report interview, Gold Newsletter editor and publisher Brien Lundin admits he’s a bit worried about this run’s breakout, but expects gold to remain strong – and Gold Mining stocks, particularly juniors.

With a career spanning three decades in the investment markets, and annual host of the New Orleans Investment Conference, Brien is stoked on silver too, as he explains here…

The Gold Report: It’s been a fun quick ride up to $1200 gold and another little correction. Where do you see us going from here?

Brien Lundin: Quite honestly, I’m still trying to figure out that myself. I rarely make specific price predictions, but let myself be goaded into it by the power of the rally that began last fall, when we burst through $1000 and just kept going up. It was a very close analog to the two previous breakouts that the metal had exhibited in 2005 and 2007, each of which followed nearly a year-long price consolidation. I believe those rallies took the price up 75% and 56%, respectively.

Based on those performances, I projected that the rally that began in the fall would take gold up to between $1350 to $1500 by sometime this spring. We traced those three rallies, the first two plus this one, in an analog chart that we published a couple of times in Gold Newsletter. It’s in the current issue, in fact.

That chart shows the correction that gold underwent this January-February kind of broke the trend that the two prior rallies exhibited. So this is a crucial time.

It’s not that hope is lost, because the recent recovery in Gold Prices has me heartened a bit. But this rally is in danger of failing unless the metal really continues upward now and in the near future. I think we really need to clear $1250 over the next six to eight weeks to validate the continuance of this as another one of these major gold rallies. If that happens, I’ll put that $1350-to-$1500 target back in place for this run.

TGR: Ian Gordon, who founded the Longwave Group, is looking at the Dow getting down to 5250 this year, having a correction and then starting to move down toward 1000. He sees gold as the ultimate safe haven and, of course, moving the opposite direction. What’s the possibility that could be the catalyst to gold’s move up to $1250?

Brien Lundin: I can see just about anything working in gold’s favor right now. Very roughly, very generally, if you look at the two possible scenarios facing the US and the world economies right now, you essentially have two options. One would be recovery; the second would be relapse. Under either scenario, although there would be some extreme – and I stress the word "extreme" – volatility involved, gold would end up the winner in either case.

If we had an economic recovery, the Federal Reserve in the US, for example, would be reticent to raise rates to strangle that nascent recovery. So we’d still have a very easy-money environment, despite what the Fed may say now. That recovery would prompt bank lending again and there’s about a trillion dollars of excess bank reserves just hovering over the US economy, like an ocean in a water balloon. Just the start of bank lending would turn those excess bank reserves into new currency, into liquidity overflowing the economy. That would be highly inflationary and bullish for gold. In addition, any type of economic recovery would be bullish for commodities in general and gold would benefit from that, as well.

The other scenario, where you would have an economic relapse, a double-dip recession, or worse, would prompt more government spending, more government debt, more government currency creation. Gold would ultimately benefit from that scenario as well.

So either path would end up, over the long term, being bullish for gold. However, again, that would be a very bumpy road, especially if we went into an economic relapse, because there would be liquidity crunches. As you know, those have not been very good for gold or gold investors in recent history.

TGR: So it’s that liquidity need again.

Brien Lundin: Yes, absolutely. If you remember back in September of ‘08 we were really just a hair’s-breadth away from global bank runs. People were rushing for the safety of gold bullion and cash and were shying away – running away, in fact – from equities or any other type of paper investment.

TGR: And, of course, the next black swan could arise from what’s going on in the European Union with Greece and Ireland and Spain, some of these other countries.

Brien Lundin: Absolutely. You won’t see this angle really reported much in the mainstream media, but it reflects on fiat currencies in general. In the current environment, where many if not most of the world’s currencies are being looked at askew, the dollar is the healthiest one standing and it’s not looking so good itself. It’s only a matter of time before the world’s investors and savers, to an even greater extent, look at the dollar and say it’s no great shakes either. What’s left? Gold.

TGR: Right.

Brien Lundin: That’s already happening to a growing extent, especially outside the borders of the US And it’s not just in Asia, but also in Europe.

TGR: So you obviously believe that investors should Buy Gold, but I’m assuming also you believe there are some opportunities in Gold Mining stocks.

Brien Lundin: I do, and partly that’s because I don’t really forecast the type of equities crash that Ian anticipates, although we think very much alike in the terms of the value of gold and the future of gold-oriented stocks. In particular, I focus a lot on the special situation stocks, the juniors that are actually exploring and finding gold, or are on the verge of major discoveries.

TGR: Going back to what you said earlier about see gold up to $1250 in the next six to eight weeks, if that’s the case could silver could have a run to, say, $20?

Brien Lundin: Oh, absolutely, to $19 at least. The gold-silver ratio has gotten out of whack once again and silver’s just due for a bounce. I may have seemed a bit pessimistic on gold. I am worried about it, but over the last couple of weeks it seems to me that gold has exhibited a real desire to take off. All that’s really kept it back have been headlines here and there about tightening in China, etc. That’s exacerbating the volatility in speculative, derivative gold – speculators going in and out of the Gold Futures markets. Overseas and worldwide outside the US, we’ve seen very strong physical demand and some of the commercials have begun rolling back their short positions. So from a technical standpoint, gold looks fairly positive in the short term.

TGR: But you’re even more positive on silver.

Brien Lundin: Oh, yes.

TGR: All right. Finally, Brien, what’s your take on the rare elements story? Is it a bubble or is it just the beginning?

Brien Lundin: I think it’s very similar to the uranium story of a few years ago, where the logic is inescapable, but the timing is indeterminate. It obviously got ahead of itself last year, and I think our good friend, Jim Dines, had a good bit to do with that. It was kind of a self-fulfilling prophecy, but as usual, he was very smart in pinpointing an area that deserved attention. So I think it’s going to be here for a while, but be cautious and play it correctly.

TGR: As usual, you’ve been very enlightening and full of lots of ideas for our readers to digest. We appreciate it.

Brien Lundin: It’s always a pleasure.

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Source:Good for Gold, Better for Silver

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.

To Buy Gold today, avoiding wide spreads and storage costs – but still owning your physical Gold Bullion Investment outright with full legal title – be sure to visit BullionVault and claim a free gram of gold now…

Source:Gold Mining's Viable Price

How to defend yourself against a crisis in the value of money worldwide…

A PRECIOUS METALS aficionado armed with degrees in finance and economics as well as engineering, David Morgan created (and recently revamped) the Silver-Investor.com website and originated The Morgan Report, a monthly newsletter that covers – very broadly speaking – money, mining and metals.

A dynamic, much-in-demand speaker all over the globe, published in the Herald Tribune, Futures Magazine, Barron’s and the Wall Street Journal amongst other, he considers himself a big-picture macroeconomist whose main job is education – including helping people understand money, the benefits of a sound financial system, and the importance of research and patience in investments.

Here David Morgan speaks to the Gold Report that "There’s no asset better than gold if you’re worried about a crisis hedge…"

The Gold Report: Your investment strategy has long involved finding undervalued or overlooked opportunities. What metals does that umbrella cover these days?

David Morgan: The byline of The Morgan Report is "Money, Metals and Mining" and I approach the market in that fashion and in that order. Mining – that’s where you get the greatest leverage. And metals – are the best asset class, particularly the precious metals, during these uncertain times. From the metals-only perspective, I’m a top-down analyst. We determine supply-demand fundamentals, what would cause a price to be higher or lower or stagnant. With the precious metals, we look at some timing cues as well. And then we look for resource opportunities, not just in the precious metals or base metals, but throughout the sector, and we do a fair amount of work in the REE, the rare earth elements side. But overall we look for undervalued situations.

TGR: What looks undervalued these days?

David Morgan: Nickel is probably one that’s pretty undervalued, although it looks to be breaking out now. If you study the London Metals Exchange (LME), you’ll find pretty good inventory buildup in some of the base metals at this time – high enough to cause some concern on a short- or intermediate-term basis. Unlike wheat, corn, oats, cocoa or sugar, metals don’t deteriorate. From an economic point of view, if you can buy any of the metals under or near the cost of production and store them, you’ll make money in the long run. You might have to wait longer than you think because markets "can be irrational longer than you can stay solvent." But all that aside, I do see opportunities. If you want me to pick one, I’ll pick nickel.

TGR: All the metals or nickel?

David Morgan: All the metals should go higher relative to the US Dollar, but I think 2010 will be very back-and-forth. Stress levels are high on both sides – the inflationary pressures for governments trying to print their way out of this mess and the deflationary side of the equation because so many countries are on the edge of default.

TGR: What key economic factors are you watching to decide which side of the fence you’ll go to?

David Morgan: The velocity of money. Enough money has been printed to have a hyperinflation in milliseconds, so obviously it’s not a function of the size of the money supply. It’s a function of the velocity of money or how quickly some of it – we don’t know how much – starts moving out of a currency. We’ve already seen it, with India moving into 200 tons of gold, for example. That’s very small relative to the amount of debt out there, but still it’s a very strong signal to the markets about the fact that India values gold over US Dollars at this time, and believe me, they are not the only nation that thinks this way.

We could come to a situation of the straw that breaks the camel’s back, some subtle tipping point that the market may not recognize initially. When the Creditanstalt bank went bankrupt, nobody said, "Oh, my goodness, that’s going to take us down and cause a global depression." Yet most of us who study such things can point to that as a contributing factor to the Great Depression in the ’30s.

You have to think of it in broader terms than inflation or deflation: are we in the grips of a currency crisis? That’s when you don’t trust the underlying currency. Judging from what we see in the mainstream press, it’s pretty evident that other nations are questioning their trust of the US Dollar.

In economic situations such as this, history shows that there’s a price to be paid by everyone. It’s an issue of productive capacity. True wealth isn’t money. Real money is a store of value component. To produce wealth, you have to produce something of value to the marketplace. The productive capacity of the United States has been in decline since 1974. The productive capacity of China has increased substantially from that timeframe to the present day. Today the problem is that the means of exchange is not trusted (longer term) on part of the producer – China in this example. That portends some very serious issues ahead.

TGR: Going back to the undervalued or overlooked resources, in this environment where we don’t know whether to expect inflation or deflation, what sorts of investment opportunities are presenting themselves?

David Morgan: As far as I’m concerned, there’s none better than gold if you’re worried about a crisis hedge however it unravels eventually, either total deflation – a debt-liquidating depression or a hyperinflationary blow-off. Silver has done best in periods of high inflation.

People really get hung up on the inflation-deflation debate, but let’s face it, in both cases there are so many similarities. High unemployment, declining productive capacity, distrust of government, more government interference, general malaise throughout the economy – a great deal of uncertainty.

I would ask anyone who’s worried about this debate to put a silver coin or a gold coin in their right hand and their currency of choice in the left hand and ask themselves, which one has retained purchasing power over time? If you’re going to have savings, do you want the kind that has stood the test of time for thousands of years? Or the type of savings that has always failed throughout recorded history? If you’re not sure, divide it in half. Keep 50% of your savings in your currency of choice and the other 50% in the precious metals.

TGR: If people have cash ready to invest in equities or precious metals, would you say put all of your cash into precious metals now, and then liquidate as you want to invest in various equities? Or keep cash on hand just for equity opportunities?

David Morgan: You can buy the precious metals themselves at almost any time. That’s a different asset class than the mining equities. The mining equities generally follow the stock market to a certain point. Then comes a point – which we haven’t reached yet – when the mining equities start to take on a life of their own. In other words, you’ll see Gold Mining and silver equities generally going opposite the general stock market. At this time I think mining equities will follow the stock market down. A week or so ago I posted an article on my website about Harry Dent seeing the stock market debacle starting at the end of February. I would not be real quick to jump into the mining equities right now. But if you’re not invested in the physical metal itself, I would definitely buy some. I prefer a Dollar-cost-averaging approach to accumulating the precious metals.

And as far as selling the metal to buy equities goes, I would never do that. I’d do the opposite. If I have a big gain on a mining equity – say I made a three, four, five, 10-bagger – I usually turn that in precious metals. I’d rather turn paper into gold than gold into paper.

TGR: You were talking about currency of choice and in this case, gold. A lot of people now making a Gold Investment expect that at some point silver will stop trading as an industrial metal and start trading as a precious metal. A lot of people use the gold-silver ratio as an indicator of how rapidly silver can move up. Do you believe in that ratio and what it portends for silver?

David Morgan: There is a lot made of the silver-gold ratio. Silver probably will reach what I call the classic, or the monetary ratio, which is 16:1. It could even get down to the natural ratio, which at this time is about 10:1, but I don’t see it getting to any better ratio than that. Of course, this implies that silver is undervalued relative to gold.

When will silver take on this monetary aspect alone? That’s part of what I’m writing for the March issue of The Morgan Report. It’s basically looking at the silver market over the next 10 years. We have a 10-year bull market behind us and in my view we have several more years to go.

What happens is at the end of these great bull markets is you get into the euphoric or manic stage and this happens in almost all markets. You’ve seen it in the technology sector, when people were buying dot-com stocks that had no business plan and no equity, just an idea.

TGR: It was the new economy.

David Morgan: Yes. So that will take place. I think we’ll see the biggest run up of all time in gold and silver, especially the equities, a euphoric state of panic buying driven by fear and greed. I’ll probably face a lynch mob me when I say "sell," because no one will want to trade physical metal for paper currency and I don’t blame them. Anticipating this, I’ve already planned some techniques to use to preserve our physical metal and still allow us to sell to a strong market, but those are days ahead.

When the panic hits, gold probably will go up to $2,000 and beyond – the average person will wake up thinking, "Oh, I’ve got to get gold equities; I listened to my friends and I thought they were idiots and now I see the light." Many will turn to silver because it’ll still affordable relative to gold.

Significant money will move in to the metals. And because silver is cheaper than gold, a lot of it will go silver, which will cause the ratio to spike relative to gold. You’ll see the ratio drop from 60:1 to 50:1 to 40:1 to 35:1 to 20:1, maybe to 16:1 or 10:1 because there’ll be more money, relatively speaking, moving into silver than in the past. And since silver is such a small market, any small increase in buying power will send the price far higher.

TGR: The way you explain this, these ratios are really only short term.

David Morgan: It depends on where you start the line. One of my earliest lectures, which I still do from time to time, is about the gold-silver ratio. If you go from the 12th century, it’s a 12:1 ratio, which was exactly the natural ratio at that time. In other words, 12 ounces of silver in the ground for every ounce of gold, and that’s basically how it was mined up to about the 17th century.

So the market figured out that 12:1 ratio, and it held up for centuries. We got to the monetary ratio when England was having a problem similar to what the world economy is having today, and during the turmoil of a currency crisis Sir Isaac Newton told the Bank of England to go on a gold standard and they did. He said the correct silver to gold ratio in the new monetary regime was 15.5:1 – where the market was at that point. This ratio, roughly 16:1, remained static for hundreds of years.

So does it matter? Yes and no. Once silver was demonetized and deemed an industrial metal, there was no longer a tie to silver as money per se and so it was revalued. The important point is if silver is undervalued or not and if you think it is then obviously it represents opportunity.

TGR: The interesting thing when you bring up the histories of ratios is that silver gets consumed and gold doesn’t. It’s back to the silver as an industrial metal. Silver is also the by-product of mining for other base metals. You’re projecting the economies are not growing over the short term. If silver is a by-product of base metals, should silver production decrease and would that have an impact on silver prices?

David Morgan: Yes, it should decrease and it could affect prices short term. The industrial demand on silver was roughly 35% of the total market in 2000. In 2010, industrial demand now is 54% of the market. The industrial demand for silver is not only the largest demand, but it’s the fastest-growing. But that’s really not totally true because since 2006 you’ve had a huge increase of commercial buying of silver because its investment demand has increased extremely quickly. Since the advent of the SLV, the silver ETF, and other silver ETFs, there’s been a huge amount of money, relatively speaking, moving into the silver market as investment!

So you’ve got the industrial side. Regardless of mining activity being up or down, industrial demand is always off-taking silver and a lot of that off-take never comes back into the market. Recycling is significant, but it’s not total. In some cases, it gets used and it’s gone.

So that is an underlying eating away at the above-ground stockpile. When you throw an increased investment demand on top of that, especially in a small market, you can see an explosive situation approaching. Everybody wants to know when it will take place. I’ve said that the earliest it would take off in that manner is probably 2012 and I may be wrong. Markets do what markets do, but such explosive moves go in phases and we’re still somewhat in the skeptical phase.

For example, some of the people who bought gold above $1,000 are skeptical right now. They’re not sure it’s going to go to $1,200 ever again. I believe it will go far higher, but the longer it wallows between $1,200 and $1,000, the more likely these people are to listen to their friends, neighbors and brokers and say, "Gee, you know, gold isn’t a good investment. I’ve held it for a year and it’s gone nowhere. Put me back in the Dow or something." Even worse, if we do break the Dollar1,000 level, which I doubt but it could happen, they’ll be very unsure and probably will sell back into the market, causing it to depress in price further for a short time.

TGR: How do you see nickel, which you brought up early on, play out in scenarios you’ve been talking about?

David Morgan: I believe all commodities are in longer-term trend upward. If you dig into the archives, I made a good call in the early 2000s on the Financial Sense Newshour with Jim Puplava. I said the new era is here. We’re going from an era of having things we want to an era of having things that we need. Of course, we need food and shelter and raw materials. Those needs will continue. So do we need nickel in the future? You bet. It’s used primarily in stainless steel. If you’re going to build any food processing plant – and there are always more mouths to feed – you’ll use a great deal of stainless steel. And that’s not the only application.

You can play nickel, other metals or any commodity or stock short term if you wish, but I like to take the major trend and stick with it because that’s where you could make substantial money. Certainly some traders can do extremely well. But really successful traders are very rare and most people don’t have nearly enough discipline, because you have to be willing to take loss after loss after loss after loss. Even if they are small losses, psychologically that’s very difficult. Most people are not suited for it. They can’t handle the stress that comes with a trading strategy.

TGR: Some people suggest the equities because there’s substantially more leverage, thus more upside than with the metals themselves. What’s your feeling about equities?

David Morgan: We put out something in the rare earth elements (REE) area recently and it’s a speculation, so it falls in the class of fun money or money you can afford to lose. It’s a very hot sector right now. I believe it’s fairly safe to invest in, as safe as you can be in a speculation. But overall, right now I think it’s a good time to build cash. The next couple of months bear watching. I like the old adage: when in doubt, stay out. There’s nothing wrong with staying out of this market right now and if the market tells us something we have techniques for getting in quickly.

TGR: But when you buy, you like the undervalued stocks.

David Morgan: We always like to buy bargains. I like to invest for value. If I find something worth $10 and can buy it on sale for $5, that’s when I’m more interested in making the purchase. My timing is more of an intermediate-term basis. I cannot day trade; it just doesn’t interest me. But longer term, yes, timing can definitely help you, but you have to really know what you’re doing and no one can get it right all the time.

So for the average investor a Dollar-cost-averaging approach makes the most sense. Technical analysis is a very useful tool, but you can’t rely on it 100% and I’ll give you a quick example. There is no charting service or no human being that can make a 100% accurate case because you can’t chart, for example, where a 9/11 event is going to take place. My approach is to hold about 75% of the total precious metals stocks through thick and thin. And the other 25% can be traded in and out of the market.

TGR: You suggested that you like to find $10 stocks that are on sale for $5. Do you have any companies that fit those criteria now that you’re watching?

David Morgan: Not at this time, at least not at that big a discount.

TGR: Very good. David, I really appreciate your time. Once again, you’ve been a wealth of knowledge and insight.

How best to Buy Gold or silver today? "If there’s an easier way, I’ve yet to find it," says one BullionVault user…

Source:Gold, Silver & the Currency Crisis