George Soros Sells Gold, Should You?

The current gold bull market has lasted a decade – the same length of time that the great 1970s bull market for precious metals lasted. Many industry old-timers seem to have interpreted gold’s race to almost $1600 and silver’s rise to almost $50 as signs of a grand finale. Our perception is that traders and industry insiders who thought $1000 gold was high have been cashing in.

This may be the thinking behind the recent gold selling done by George Soros. Soros’ selling of holdings in two leading gold-backed ETFs put some wind in the sails of the “end of the gold bull” side of the debate. Not just that April 2011 was a top, but that it was the top. With SEC filings showing that other funds cut their ETF holdings as well last quarter, some folks sure seem to think so.

The question is: Are they right? This seems like a good time to update readers on gold’s fundamentals, in the context of Q1 2011.

The recent selling influenced the figures in the latest report from the World Gold Council (WGC). According to the WGC, ETFs and similar vehicles experienced total net outflows of 56 metric tons (about 1.8 million ounces) in the first quarter of 2011. Total amount of gold held by global ETFs by the end of the quarter was 2,100 metric tons (67.5 million ounces).

The outflows, however, didn’t spell an end to the quarter’s gold run, but coincided with (and perhaps helped to shape) short-term weakness. Those who didn’t see a tidal shift toward a gold bear market took advantage of the selling and added to their positions. WGC reports a 26% annual increase in investment demand – 310.5 metric tons (10 million ounces) in Q1 2011 compared to 245.6 metric tons (7.9 million ounces) in Q1 2010. Noteworthy is that a huge part of this growth was attributed to bar and coin purchases: Physical bar demand alone was responsible for 280.4 metric tons (9 million ounces), which is 62% more than during the same period in 2010. That’s actually rather bullish, as it’s the retail precious metals investor we expect to spark the Mania Phase of this gold bull market.

The balance of supply and demand in the gold market also remains bullish. Demand grew in Q1 2011, but total supply was down 4%. Central banks and official sector institutions acquired 129 metric tons of gold (4.1 million ounces), which is more than their combined purchases during first three quarters of 2010.

The factors that have worked so well for gold so far – the weakening dollar and an uncertainty about the U.S. economy; Europe’s problems with sovereign debts in PIIGS; and political turmoil in Africa and the Middle East – are still in force. Gold remains a safe haven in the eyes of investors. And that includes Soros, by the way, who turned his ETF holdings into shares of Goldcorp (T.G) and Freeport-McMoRan Copper and Gold Inc. (NYSE:FCX), adding the leveraged upside exposure to gold that gold stocks offer.

One of the best ways to learn about how to play the leverage offered by the best gold stocks and profit all along the learning curve is to subscribe to the Casey Research metal publications International Speculator and BIG GOLD.

Understanding The Gold Silver Ratio

by Andrey Dashkov, Casey International Speculator

The gold-silver ratio (GSR) measures how many ounces of silver one can purchase for an ounce of gold, on a certain date.

Reference to the ratio has a long history. One of the first mentions was that upon the death of Alexander the Great, the ratio was 12.5 to 1. During the Roman Empire, the ratio was set at 12. By the late 19th century, the ratio had risen to 15.

Interestingly, these historical ratios roughly reflect geologists’ estimates that silver is 17 times more abundant than gold in the earth’s crust. This gives many investors a reason to believe that 17 is the natural balance between these elements, and that eventually the GSR will return to it.

Monitoring the GSR is quite popular among gold and silver investors. It seems that whenever it makes a big move, many start drawing conclusions about the direction of the prices of its underlying metals.

What Does The Gold Silver Ratio Prove?

Here at Casey Research, we stick to the dictum that the GSR “suggests a lot but proves nothing.” Indeed, the GSR is determined by the price action of gold and silver; the price action of gold and silver is not determined by the GSR. Rather, each metal’s price is influenced by various fundamental factors. What complicates any analysis of interactions between gold and silver prices is that the two metals have different markets, each with peculiar supply and demand structures.

Briefly reviewed, the gold market is characterized by a large above-ground supply as the vast majority of gold ever mined still exists in refined form, and annual mine supply represents only a small fraction of that volume. Demand is mostly for jewelry and investment. Gold is not widely used for industrial purposes.

Silver demand, by contrast, is mainly for industrial fabrication of things like electronics and batteries. The metal is consumed during the process and removed from above-ground stocks. The other major areas of demand are jewelry, investment, photography, coins and household silver, in that order. Supply comes mainly from mining and scrap recycling.

From this picture comes one conclusion: over time, supply and demand for the two metals has been fluctuating in response to industrial and technological advancements, shifts in monetary systems and market turbulence. Today, as investment and jewelry are the primary sources of gold demand and most of the silver goes into industrial and related applications, it is no surprise that the gold-silver ratio is different than the historical average of 17. The following chart shows how the ratio has fluctuated since 1968.

gold silver ratio since 1968
The GSR was extremely volatile over the past five decades and averaged 53.5 from 1968 to April 2011; during the last ten years (since April 2, 2001), the ratio averaged 61.8.

The ratio has been falling for several months, however, as shown on the chart above. Counterintuitively, however, rumors that a low GSR signals undervalued silver started spreading. We say counterintuitively here since it is unclear why a falling GSR should signal undervaluation after silver gained over 80% within a year. Appeals to the mega-long-term GSR of 17 alone do not seem to provide enough basis to think that silver will continue to soar indefinitely.

As of April 1, the GSR stands at 37.7. We, however, do not think that it is going to fall to 20 or 15 from this point: history shows that high volatility is the ratio’s essence. After a plunge, there usually follows a rapid surge. That happened in 1980 when gold reached its inflation-adjusted peak, and in 1987 and 1997. We don’t know how steep the current plunge in the ratio will be, of course, but using history as a guide, we do not expect the ratio to continue its decline for much longer.

Uncertainty about the economic recovery in the Western world and the growth of developing countries can result in slowing industrial output and hence falling demand for silver that would hinder the price. These conditions also create a favorable environment for gold driven by safe-haven demand. In such circumstances, the ratio may climb.

History shows that the GSR tends to rise significantly during a recession and create an interim peak on the way. See the chart below.

gold silver ratio and recessions

We believe that the measures taken by the current administration to battle the recession are largely counterproductive, temporary, and will be unable to prevent the onset of another major economic decline. It is difficult to judge when the turmoil might start, but the odds of it happening soon get higher as the levels of government debt increase and the dollar is debased. When push comes to shove, the GSR can react quickly and create a fluctuation of an unpredictable magnitude.

In times of recession, as we discussed above, gold and silver behave in a quite different manner. Have a look at the following charts.

gold silver ration and spot gold since 1968

gold silver ration and spot silver since 1968

Note that it is not quite statistically sound to plot a ratio against one of its components, but for the purpose of illustration we find it quite useful.

As you can see, in 1980 gold and silver both peaked on a historically low GSR. This may imply that a low ratio can take place not only when silver appreciates faster than gold (as it did in 2010 and so far in 2011), but also when fundamental and speculative conditions influence both metals. Of course, the 1980 silver peak happened while the infamous Hunt brothers were massively accumulating the metal.

Conventional opinion attributes silver’s rise to the Hunts, but we are skeptical. It cannot be determined to what degree the metal would have otherwise risen absent the Hunts in the market. In any case, attempts to influence markets are nothing new – today, major investment banks are accused of manipulating the silver market by holding huge short positions that cause artificial price suppression.

Returning to the charts and how gold and silver behaved in the last recession, we can see that silver moved counter to the GSR while gold moved in a mixed, sideways pattern. Because of this, many see a lot of upside potential for silver, but we should not forget that silver is the denominator in the ratio. So absent strong fluctuations in gold – and gold was on an ascent since the beginning of 2009 – the GSR would to some extent simply mirror silver price movements.

The silver price was also influenced by hopes that the global economy is reviving and that industrial demand is going to last. In 2010, silver gained more than 80% while gold added less than 30%. The difference resulted in the GSR falling throughout 2010. Will that performance be repeated? We cannot say. Speculators should remember that the GSR is merely a ratio of two prices often driven by different forces. It has limited, if any, predictive power.

With that in mind, we will finish by juxtaposing the ratio against the Toronto Venture Exchange (TSX-V) index, and it reveals an interesting picture: it seems that the TSX-V has been negatively correlated with the ratio for the last ten years. Again, statistically it’s arguable if a ratio should be compared to an index, but looking at various combinations of time series, and the stunning correlation, we couldn’t help ourselves.

gold silver ratio compared to tsx-v

It would be easy to conclude that there is a strong – and negative – correlation between the index and the ratio. However, this correlation does not provide any sort of guidance on whether the metals themselves look expensive or not, or where mining stocks are headed. An interesting image, that’s all it is.

Conclusion

The gold-silver ratio attracts a lot of attention nowadays, but it is not a reliable tool in an investor’s toolbox, and we don’t think it can predict future price movements. But the reality is that nothing does. Those who look at GSR charts, including ours above, should not forget to analyze all the fundamentals behind the price movements of both gold and silver. We advise you to be extremely cautious and not get caught in the trap of believing that a single number or ratio, or a set of them, can provide you with a crystal ball.

Identifying an opportunity for future profit based on facts and a reasonable amount of risk is another thing. This is what we do day in and day out – just not based on the GSR.

Ed. Note: Since this article was first drafted, there has been a significant correction in gold and silver that has affected the GSR. As of May 12, it stands at 45.8, having increased as predicted in this article.

[Developed by Doug Casey, the “8Ps of Resource Stock Evaluation” – People, Property, Price, Politics, Promotion, Paper, Phinancing, and Push – are the Casey Metals Team’s best tool for discovering small-cap mining companies with outstanding profit potential. And with great success: in 2010, the International Speculator portfolio beat the S&P 500 by an incredible 8.4 times. Read more about the “gold nuggets” Senior Metals Analyst Louis James keeps finding in flyblown corners of the world… and how you can cash in on them.]

Has The Gold Mania Finally Arrived?

Gold Mania: Are We There Yet?

By Louis James, Casey International Speculator

It’s understandable that people want to know where the precious metals market is headed next. And not just because big fluctuations can be nerve-wracking, but because it makes a big difference how you’d invest today if, for instance, you think there’s a big correction ahead (save cash to buy cheaper) or not (load up and ride the wave).

But the reality is that I don’t know. Nobody knows what will happen next.

That’s why it’s called speculation.

Further, you can be right about the trend and still get wiped out if your timing is wrong. That’s why it’s easier to say what is likely to happen than what is likely to happen next.

And that, in turn, is why we at Casey Research still have quite a bit of concern and uncertainty about a possible correction in the near term, even though the Casey Consensus is unanimous in projecting rising prices for precious metals for years to come.

Some investors are tiring of our cautioning of a “possible correction,” “waiting until you see the whites of their eyes,” and so forth. Some wish the market would stop dithering and just head north into mania territory. Or wish Casey Research to stop dithering and just start issuing lots of Buy recommendations. But other, more nervous readers seem to wish we’d just admit that the market has topped and issue a Sell on everything – time to cash in our chips and go home!

I am sympathetic, but Mr. Market doesn’t know our desires and wouldn’t care if he did. We would be doing our subscribers a grave disservice if we pretended to know which way he’ll move next, when we don’t. And anyone who claims they do know is likely a former New York bridge salesman.

This is why we’ve been steering a middle course for some time. We’re not out of the market; many of our recent picks have done spectacularly well on gold’s new nominal high. But we’re also not all in.

Let’s look at a simple snapshot of our most fundamental trend, the price of gold. Compare this chart of spot gold over the last year with the one below it, showing the same thing during the months before and after the 1980 spike. Does it appear to you that we’ve hit the same sort of peak? Me neither.

12 month spot gold price in us dollars

 

spot gold price in 1979 to 1980

Of course, history seldom repeats, although it does rhyme. Here’s a 10-year chart of gold during the current bull market.

gold price adjusted for inflation

This chart looks a lot more like, if not a spike, at least a price peak that could now be set to slide downwards for the next 10 years.

But don’t forget gold’s biggest picture, the inflation-adjusted price since it was set free by Nixon in 1971.

gold price adjusted for inflation 1970 to 1980

In nominal terms, gold certainly seems to have scaled its prior peak; in real terms, it’s still got a long way to go to beat the 1980 spike.

All of the economic and financial factors that have contributed to this precious metals bull market remain in force, and many of them have worsened. And if a big and broad market correction hits us again, the precious metals and related stocks will get squeezed, if only temporarily. The 2008 crash proved that such a squeeze can be very sharp and painful – even for groups like ours that did see it coming.

Assuming you agree with me and the Casey Consensus that this metals bull market is going to produce a gargantuan Mania Phase that lies yet ahead, I’d like you to try a mental exercise:

Ask yourself what would happen if the current sharp rise is actually rhyming with the sharp rise in the early 1970s, not the big run-up to the 1980 peak. If so, and if history continued rhyming, that’d put us before the biggest gold correction ahead of the mania.

History may not rhyme that much at all, of course, but just think about it:

  • If you had bought during the 1974 peak, would you have been able to hang on through the ensuing 50% retreat to profit from the eventual mania? Would you be able to shrug off missing the lower prices available the following years and be content with your future profits based on 1974 buying?

If you answered yes, and you are certain you won’t need the cash invested for a year or two (no margin buying), then life becomes simpler for you. Buy the best of the best companies and forget about them until the Mania Phase arrives. If you are this confident – or disagree with us that another steep correction is likely in the next major economic shock – you might just work on building the best portfolio you can, for profit during the coming mania.

  • Or, if you bought the 1974 top, would you kick yourself – hard – for overpaying and not having the cash to buy during the pullback?

If so, then you should take first tranches of only the best plays and keep plenty of powder dry for the time when the economy exits the eye of this most massive economic storm in modern history. Given the number of agonized vs. serene emails I got during the crash of 2008, I suspect that most investors fall into this group, so this is the context for most of our recommendations. If this rough grouping is yours, admit it, embrace it, and hedge your bets on Mr. Market’s erratic behavior accordingly.

Either way, it’s crucial for speculators to be honest with themselves about their own strengths and weaknesses. Happily, either way you still want to focus on the best of the best. The difference is in what you’re willing to pay for them, and when.

Incidentally, if we get another crash-induced bottom, I believe it will be the last before the Mania Phase kicks in – the next and last best chance to really back up the truck and position yourself for truly spectacular gains.

[Month after month, Louis James provides the market’s best investment advice in the junior mining sector… and his amazing track record has proven him right. The hand-selected, small-cap exploration stocks he recommended in 2010 outpaced the S&P 500 by 8.4 times. Find out more here.]

Strategies to Make Money On Junior Mining Stocks

The Whites of Their Eyes

by Louis James, Senior Editor, Casey’s International Speculator

Don’t fire until you see the whites of their eyes.”

whites-of-their-eyesMost Americans were taught in school that William Prescott, commander of the colonial forces on Bunker Hill, gave this order to his men on the morning of June 17, 1775, just before the British attacked them.

Some may even remember that while the British took the hills, they did so at such great cost, it wasn’t much of a victory. The American forces repelled the British twice and were finally overwhelmed when they ran out of ammunition – an outcome that obviously concerned Prescott and provoked his order to conserve ammunition. It was vital to use each shot as effectively as possible.

I think of this often when contemplating investing, because I sometimes feel an urge to get all of my investment cash deployed NOW. I might miss the next big uptick! And even if not, modest double-digit gains are still better than money sitting in the bank. This urge gets strong when the market gets hot, as it has been over the past months – look at all the gains I missed!

But the best speculations, as Doug Casey likes to remind us, are when the perfect pitch comes sailing across home plate, cheap and with great upside. There are no called strikes, so it only makes sense to wait and swing only when it’d be hard to miss, hard to get hurt, and there’s clear out-of-the-ballpark potential.

    Key Point: Missing out on a winning pick may wound pride, but it doesn’t cost any cash. Placing hasty bets can cost dearly on both accounts.

Or, as Doug also likes to say, you can’t kiss all the girls. Nor should you try; the consequences in real life of attempting to kiss every girl you meet would be… nasty, brutish, and short.

Returning to my original metaphor, I don’t want to pull the trigger on a deal until I see the whites of their eyes – i.e., until everything is lined up for maximum effectiveness.
Or, as I’ve put it before: “Buy Low, Sell High” is a much better strategy than “Buy High, Sell Higher.”

Strategy vs. Tactics for Speculators

Speaking of military metaphors, I frequently refer to strategy and tactics in my writing. Last June, I gave a talk on strategy vs. tactics at the Cambridge House conference in Vancouver, explaining in greater detail how these concepts can be useful to speculators. With gold recently reaching almost $1,400, making the blood pound heavily in so many speculators’ veins, I think it’s a good time to spell those thoughts out, lest any of us get carried away and suffer a lapse of discipline.

First, it helps to understand that these terms are not interchangeable. The U.S. military defines strategy as being:

The art and science of employing the armed forces of a nation to secure the objectives of national policy by the application of force or the threat of force.

Tactics, on the other hand, are defined along these lines:

The military science that deals with securing objectives set by strategy, especially the technique of deploying and directing troops, ships, and aircraft in effective maneuvers against an enemy.

My way of summarizing these ideas:

  • Strategy: What you want to do. This might be “divide and conquer” or “overwhelm with vastly superior force” in a military context. For investors, it might be “preserve wealth” or “raise max cash ASAP.”
  • Tactics: How you do it. This could be something like, “build a giant wooden rabbit and use it to sneak troops inside the castle walls” in a military context. For investors, it could be something like “pick only safe, undervalued investments” or “speculate on the stocks with the highest upside potential available.”

Why you do it, of course, is your goal. That might be conquest or freedom, for armed forces, and financial independence or “drop dead money” for investors.

    Key Point: Know Thyself. This is one of the things I’ve learned through thousands of interactions with investors over the years: your strategy and tactics – the “what” and “how” of your plan – should be based on what you are actually capable of doing.

For example:

  • If you know that you are temperamentally unsuited to speculating on highly volatile stocks that can easily lose 50% before paying you back 500%, that’s not a tactic you should employ. If you just can’t tolerate being in the red for no good reason, admit it, face it, and plan accordingly. Otherwise, nothing is worth the heartache you’ll be stepping into.
  • If you are not a qualified investor, you can’t build a strategy on emphasizing private placements with attractive warrants.
  • If you don’t understand the technicalities of trading in options, don’t even go there.

This may sound like an overly philosophical approach to giving investment advice, but I firmly believe that one size does not fit all. If you’re to have any hope of sticking with your strategy when the tactical realities you face are rough, you’ve got to know that you are capable of executing your plan. “Know thyself.”

Strategies to Consider

What’s the best strategy for you? As above, one size does not fit all, but here are some broad ideas for you to consider:

  • Preserve Wealth: If you are on a fixed income or simply know that you have a very low tolerance for risk, the rather bold tactics the International Speculator specializes in are probably not for you, so I won’t dwell on it. Casey’s BIG GOLD publication, focused on the best of the larger, more stable gold (and silver) producers should be able to offer you plenty of guidance that will work better for you.
  • Hold to the Top: If you want to earn a lot of money but don’t have the time or temperament to trade actively, buying the best of the best and holding them to the top of the market may be your best approach. Don’t worry about when any given pick might take off, or if it seems fully valued at present, or unlikely to exhibit explosive growth going forward. Only make portfolio adjustments when necessary.
  • Play Volatility: Look for stocks that exhibit frequent and large swings in share price, then buy low and sell high, over and over, as opportunity allows. Or look for stocks that have gotten ridiculously cheap (perhaps even for good reason, but have become way oversold) and then buy them to ride the rebound. Or look for stocks that have soared beyond all reason and are likely to correct, and then short them (note that this is a high-risk approach; when shorting, you need to be right about which way a stock is going and when it will move).
  • Build Carefully: This requires a lot of patience. You don’t worry about how long it takes you to deploy your cash, you simply sit and wait for opportunities that look as close to “can’t lose” as you can get. You always recover your initial investment at first opportunity and redeploy as above with extreme caution. No whims or larks allowed.
  • Doug’s Strategy: This is one way Doug likes to play the juniors: deploy your cash into as many stocks as you can, as long as they are really cheap, seem sound (8 Ps), and have a lot of upside. If you can bet with money you can afford to lose, don’t be too picky, but don’t bother if there’s no home-run potential. A single ten-bagger can make up for nine duds, so if you can do any better than that, you come out way ahead.

Some of these ideas can be mixed and matched, some not. There are many more possibilities and variations. The important thing is to sit down with these ideas and a fresh cup of coffee one morning, or do whatever you need to do to carve out some quiet time when your mind is the most creative and energetic.

State your goal to yourself – it’s very important to have a goal you can actually write down in words. Be specific; a financial goal should include a specific money target.

Then decide what strategy among those you are capable of implementing best achieves your goal. Your strategy should evolve with changing market conditions, but only you can determine what the basic approach is that will work for you in achieving your goal.

It’s very important to have a plan to follow – with a strategy you can articulate and tactics you know you can execute. Such clarity is a huge benefit to investors, especially that bold breed that’s willing to call themselves speculators. It’s the backbone that helps us stand firm as contrarians, and buy when everyone else is selling (low) and sell when everyone else is buying (high).

And remember to hold your fire until you see the whites of their eyes!

—-

No one is better than Louis at devising strategies for investing in precious metals juniors – strategies that have enormously benefited the subscribers of Casey’s International Speculator. It’s no coincidence that in 2009 every single stock he picked was a winner… for an average portfolio gain of 75.5%. And just in the first half of 2010, subscribers locked in gains of 110.4%… 128.8%… even 266.1%. You can it now risk-free for 3 full months – or your money back. Details here.

How To Make Money In Junior Exploration Stocks

How to Make, or Lose, a Fortune in Junior Exploration Stocks

By David Galland, Managing Director, Casey Research

The first thing to know about junior resource exploration stocks is that they are volatile. You can make 50% in a day, and you can lose 50% in a day.

This is due largely to the fact that they tend to be thinly traded. Thus, a whiff of good news, or bad, can overwhelm opposing trades. In the absence of a countervailing bid, the stock can move sharply until it reaches the point that someone is willing to step up and take the other side of the trade. If the news is bad and there’s no bid, things get ugly really quickly. Conversely, if the news is good – for example, the recent case of the AuEx buy-out – the volume of buyers rushing to get a hold of stock can blow the proverbial doors off.

The chart from AuEx, just below, makes the point in a way that words just can’t.
junior exploration stock auex ventures
Is volatility bad? Not hardly. If you play these stocks intelligently, that volatility can act like a portfolio rocket booster. The alternative: a widely followed stock has little chance of surprising the market on the upside and so can tie up your capital for a long period of time – plodding along while you remain exposed to general market risk with almost no hope of serious appreciation.

By contrast, a junior exploration company punching holes into interesting geology is all about the potential for surprise. If the surprise is good, your stock is headed for the moon. But a poor drill hole is not necessarily a ticket to the basement – not if the company has not overinflated expectations by aggressive promotion and is following a methodical process in its exploration program.

The topic of aggressive promotion brings me to the second thing to know about junior resource stocks –  namely, that most of them are borderline frauds. That’s right – the vast majority of the companies involved in the junior resource sector are headed up by management teams that have no special expertise in finding or developing economic deposits. Rather, what they’re good at is telling a really good story based on the loosest of “facts” in order to get investors to pay their overhead and, hopefully, allow them to trade out of their free or low-cost shares at a big profit.

While there are a number of signs you can look for that will give you some sense of the management’s abilities and ethics, one is that the bad apples will tend to shift their stated focus between breakfast and dinner, depending on the flavor of the day. One minute, they are a junior gold company, the next they are on to the world’s hottest lithium find – then sometime after lunch, they morph into being a uranium explorer.

That’s not to say that there aren’t times when competent management teams are faced with the reality that their primary resource target is going to draw a blank, and move on – it happens all the time. The trick is to be able to discern the difference between a strategic retreat and an opportunistic bunny hop into another area where the management has no real expertise or value to bring to the game.

To help our subscribers understand the difference between a competent explorer and a paper tiger, years ago we started the Explorers’ League. In order to be inducted into the league, you have to have been responsible for a minimum of three economic mineral discoveries – but most of our honorees have a lot more than that. This is no small feat when you consider that probably 98% of the folks in the mining business will retire without a single economic discovery to their name.

Ron Parratt was among the first of our Explorers’ League Honorees – the subsequent success he had with AuEx has only once again confirmed the importance of backing winners.

The next thing to focus on is the size, and the general set-up, of the targeted resource. I saw an exploration company advertising on a major financial web site that was breathlessly talking about the 30,000 ounces of gold it had discovered.

While I suspect a borderline or even overt fraud, in the best-case scenario, building expensive advertising campaigns around 30,000 ounces of gold – a truly inconsequential amount – would indicate that management is hopelessly ignorant of the realities of the business. And the reality today is that, depending on a number of variables – location, geology, local politics, metallurgy, infrastructure, etc. – the minimum resource required for a company to have any chance at success is in excess of 1 million ounces of gold. But, really, you should only be focusing on companies with the very real potential to prove up 2 million or more ounces.

In exploration plays, size counts.

And don’t confuse gross metal value with anything remotely resembling reality. In fact, any company that would even mention the gross metal value of its resource is sending you a very strong signal that something fishy is afoot. For those of you new to the game, gross metal value is derived by doing the simple math of multiplying the companies’ ounces (or pounds, depending on the metal) in the ground by the current price of the commodity.

Thus, a company with a market cap of, say, $50 million and a resource in the ground of one million ounces of gold might tout a gross metal value, based on today’s price of $1,250 per ounce, of $1.25 billion. The implication being that the market cap of the company will soon rocket in the direction of the gross metal value… wink, wink, get it while it’s hot and all that.

Now, I don’t have time to list all the ways that the gross metal value gets hammered down to a net that is a fraction of the total… and, more likely than not, even to the point where the deposit is uneconomic. But I’ll give it a quick try anyway.

For starters, there’s the cost of the infrastructure required to actually extract the mineral. While even the cost of building an open pit mine is huge, if the deposit is too deep for that, then you’re talking about going underground, which can be much, much more expensive. Depending on where the resource is located – and most new discoveries are very remote (Congo, anyone?) – and the depth and structure of the mineral resource, building out the mine infrastructure can cost in the hundreds of millions of dollars, and even billions.

Then there are local politics. For instance, how much of the mine will the government want to keep for itself? How high will the taxes and royalties be? Is the area secure? There are projects I’m aware of that, in order to be built, will require essentially maintaining a private army to keep local revolutionaries and thugs at bay.

How’s the metallurgy? Extracting metal from close to surface, oxidized deposits can be relatively easy and effective, with recoveries in the 90% area. But if the target mineral is bound up with all sorts of detrimental minerals, the processing costs will soar and recoveries plummet… often to the point where the overall costs, and the challenges of disposing of the toxic waste, can torpedo even a very large project.

Mining requires a huge amount of power… where’s it going to come from? Can you imagine the cost and hassle of having to build, say, 60 miles of power lines? How about if the deposit is located in a remote corner of the Yukon?

I could go on and on… but you get the idea. There’s a reason that well over 90% of even legitimate resource discoveries never become economic mines. That doesn’t mean you can’t make money off a discovery play – but if it has little chance of becoming a mine, then you need to be clear on why you own it and when it’s time to sell.

So, how do you sort out the difference between the good guys and the bad? And the good projects and the doomed?

First and foremost, you have to live and breathe the industry. Then you have to have a deep network to use as a sounding board for your analysis. Our network includes the Explorers’ League Honorees and now the Casey NexTen – up-and-coming young professionals under 40 years old who have already proven their ability to find mines. It also includes leading brokers, financiers, mining executives, field geologists, and numerous others… around the world.

In addition to putting boots on the ground in the typically faraway places where new discoveries are found – so we can fully understand the geology, the local infrastructure, relations with the local community, and the political environment, etc. – our due diligence process invariably requires in-depth discussions with individuals in our network who know the people and the geology involved in the new play.

That allows us to quickly identify the good guys who are known to use good process (and virtually all real discoveries emanate from good process) and are working on targets with the right geological address. It also helps us to do a quick knock-out of something like 90 out of a 100 plays that are brought to our attention… leaving us free to focus on the 10% with a real chance of success.

I know a number of individuals who have made fortunes in the sector by taking the time to do the homework necessary to build a solid understanding of the industry and the key players.

The bottom line on how to make serious money as a speculator in anything – the junior resource exploration business merely provides a convenient example – is to identify a volatile, high-risk/high-return investment sector, and then get to know the sector intimately. By doing so, you can eliminate much of the risk… leaving you mostly with the huge upside. And what risk is left is very manageable.

And don’t forget – I’m talking about investing only a relatively small part of your portfolio… 10% to 20%. You can tuck the balance of your portfolio into assets with a much lower risk profile. These days, that might include gold and, for the time being, cash.

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There is, of course, much more to understand about the junior resource sector, but if you’re interested in the sector – and you should be – then the best way to proceed is take us up on a risk-free trial to the International Speculator. Click here for the simple details.
As you’ll see when you click on that link, at $199 per quarter, we’re not giving the International Speculator service away. That said, given the upside potential of the companies it follows, and the fact that you can try it for three full months and still get 100% of your money back if it doesn’t provide far more value than it costs – you have nothing to lose by giving it a try.

Where Are The Best Speculations Found Today?

Last week, the price of gold again broke below its new base at $1,200, and the U.S. stock market was again under strong pressure, due to a confluence of fears, most of which point to a deflationary double-dip. The fears were fanned by disappointment in the just-released early quarterly results, by the latest CPI reports that show inflation continuing to moderate, and by yet another poll revealing faltering consumer confidence.

Bring Out Your Dead

The price of gold again broke below its new base at $1,200, and the U.S. stock market was again under strong pressure, due to a confluence of fears, most of which point to a deflationary double-dip. The fears were fanned by disappointment in the just-released early quarterly results, by the latest CPI reports that show inflation continuing to moderate, and by yet another poll revealing faltering consumer confidence.

The market is also spooked, no doubt, by notes from the latest Fed Beige Book that make it clear that the Fed is (finally) beginning to understand the entrenched and endemic nature of this crisis. While the notes are written in shamanic double-speak, the point is unambiguous – members of the Fed don’t expect the economy to get back on track until 2015 or 2016.

    “Participants generally anticipated that, in light of the severity of the economic downturn, it would take some time for the economy to converge fully to its longer-run path as characterized by sustainable rates of output growth, unemployment, and inflation consistent with participants’ interpretation of the Federal Reserve’s dual objectives; most expected the convergence process to take no more than five to six years.”

The simple reality the Fed is waking up to is that the structural underpinnings of the economy are damaged beyond any quick or easy fix.

That’s because until the debt is wrung out of the system, either through default or raging inflation – there’s no chance of it actually being paid in anything remotely resembling current dollars – the equivalent of an economic Black Death is going to plague the land.

Each new government initiative, the latest being financial reform, that doesn’t decisively address the debt, but rather tightens the dead hands of politicians around GDP, only serves to spread the wasting disease like so many flea-infested rats running through the economy.

And so, each new day will find the carts freshly laden with failed homeowners, businesses, and banks that have succumbed.

Pundits are fond of saying that things are never really “different this time around”… yet there is something truly unusual now going on. See if you can spot the disconnect in the following descriptions of the current economy.

  • Record total debt.
  • Record government deficits.
  • Record trade deficits.
  • Massive additional government debt financing required to keep the doors open and avoid reneging on social contracts directly affecting the quality of lives of millions of people around the globe – the U.S., Japan, and Europe especially.
  • Near record-low interest rates.

Anything strike you as out of place?

The current setup with massive debts and low, low interest rates is like making an uncollateralized loan to an acquaintance at a very friendly, low interest rate. Then he comes back again for more, and more, and more. Because you live in a small town, you know he’s putting the touch on a bunch of other people too. And because you know his loose-lipped accountant, you also know what his income is, and even what his total debts are – and it is blatantly obvious that he won’t be able to repay his debts in a dozen lifetimes.

So would you keep lending him money? And, if you did, would you do it at the same friendly interest rates?

Not hardly. And therein lies the almost Twilight Zone caliber disconnect in the world as we know it.

In a conversation yesterday, my dear partner and friend of several decades, Doug Casey, made just that point – that the situation today should only exist if the fundamental laws of economics had been suspended. Interest rates should be going up, but they aren’t – rather, they are bumping along at the very bottom of the possible range.

In my view, this is testimony to the truly extraordinary lengths – involving trillions of dollars – that the U.S. Treasury and the Fed have gone to in recent years. But they can only suspend reality for so long before the fundamentals again rule – and when that happens, the entire system could literally collapse. Not to sound dramatic, but it could happen almost overnight.

As frustrating as it may be to all of us, the world is still locked firmly in the jaws of a powerful bear market. While the bear may loosen its bite now and again, it’s really only temporary – to get a better grip.

That being the case, it’s worth remembering the single most important thing about bear market investing – it’s hard. Or, put another way, it’s hard to make a decent return without taking extraordinary risk.

As Doug points out, in the current environment, everything – including commodities – is overvalued. And they are going to remain that way until they aren’t. Maybe the Fed actually has it right this time, and the bottom won’t be reached until 2015 or 2016? I wouldn’t discount it at this point.

But what of the inflation we see as inevitable? And gold, in the interim?

Let me quickly tackle the second question first.

In any debt crisis, the foremost concern of creditors is to get paid back. Compared to that, returns on investment come in a weak second. In a sovereign debt crisis, the question of repayment is complicated by the fact that the debtors control the creation of the currency units that will ultimately be used for payments.

Individual and institutional holders of U.S. Treasuries, along with other assets amounting to trillions of U.S. currency units, can see with their own eyes what’s going on. To continue holding such large quantities of instruments denominated in these unbacked currency units – or those labeled “euros” or “yen” – is to risk being left with a lot of worthless paper as the governments try to repay debtors by creating the stuff, literally, out of thin air.

And so these holders diversify their portfolios into alternative, and far more tangible, assets – gold and silver included. That is the fuel that has sent gold higher over the last ten years and that will keep it high – short-term corrections notwithstanding.

It is, however, when the inflation from all the money creation starts to appear that we’ll begin to see the shift into gold begin in earnest, and the price will really take off. When might that occur? Rather than trying to answer that question myself, I’ll refer you to the latest, excellent edition of, Conversations with Casey, in which Louis James interviews Casey Report co-editor Terry Coxon on the outlook for inflation.

Here’s an excerpt…

    Coxon: …the operations that began in late 2008 have about doubled the monetary base. It was very roughly a trillion dollars. Nothing like that had ever happened before. Most of the new cash went to buy troubled assets from commercial banks. The first goal was to prevent the commercial banks from collapsing. If the Federal Reserve had done nothing else, the result would have been a doubling of the money supply within a few months, and we would have had South American-style price inflation.

    L: So they changed the rules so they could create a huge amount of money to keep the banks open, while trying to avoid hyperinflation.

    Coxon: Yes. The money supply grew by about 20%, which, I suppose, they thought would be enough. To keep it from growing any further, they started paying interest on excess reserves, effectively sequestering those excess reserves.

    L: That’s a lot of sequestered cash. But the U.S. government has done more than directing or allowing the Fed to buy toxic paper. There’s Cash for Clunkers and all sorts of other insane ideas coming out of Washington, with Congress seemingly willing to spend “whatever it takes” to get Boobus americanus to imagine he’s rich enough to start spending again.

    And yet, the average Joe in the street doesn’t see inflation. Life hasn’t really gotten any cheaper, but gas is still way below its previous $5 high-water mark. Joe is worried about losing his job and cutting his expenses, which is price-deflationary. Why isn’t he seeing more inflation?

    Coxon: Joe isn’t seeing inflation because, so far, the Federal Reserve has not allowed the money supply to grow enough to trigger inflation. You’re mixing apples and oranges when you talk about Congress and the Federal Reserve. All of the runaway deficit spending is not, in and of itself, inflationary. The government spending borrowed money does not increase the money supply – it doesn’t change the amount of cash people have.

    L: Ah. You’re saying that out-of-control government spending isn’t inflationary, but sets the stage for future inflation, when money has to be created to pay the government’s debts?

    Coxon: What it does is create a political motive and economic need for inflation. These huge deficits may have slowed the recession that began in 2008, but to keep the recession from worsening, the Federal Reserve will have to prevent interest rates from rising for months or years to come. And to do that, it will have to start printing money to buy up debt instruments whenever the economy starts recovering, to keep interest rates down to levels that will not choke off the recovery.

    L: So more money creation will be necessary to keep interest rates low, but at some point, the foreigners holding dollars, believing it to be a sound currency, will have to get worried about all this dilution of the dollar – and that would tend to force interest rates up, as it will take more and more to convince those people to keep buying T-bills and such.

    Coxon: The world outside the U.S. has become like a giant capacitor for U.S. inflation. The charge that’s building up is the accumulation of dollars and dollar-denominated assets in the hands of foreigners. When the outside world wakes up to the threat of inflation in the U.S., they will start unloading U.S. dollars, which will suppress the dollar’s value in foreign exchange markets, which will make prices of imports (including oil) go up, and that will be a separate vector feeding price inflation in the U.S.

For now, the key is to get through this period in the best possible shape. That means watching your debt, keeping well cashed up, buying gold on dips, and, when you venture into investment markets, it’s never been more important to understand what you are investing in and why.

There’s no need to chase anything – which means you have the luxury of building your portfolio over time, on exactly the terms you want.

While it may sound contradictory, I think this is also a good time to learn more about speculating. In the simplest terms, a speculator risks just 10% of their portfolio in the hopes of receiving a 100% return. By comparison, most investors put 100% of their portfolio at risk in the hopes of getting a 10% return (actually, these days, most people would be happy with just 5%).

In the case of the speculator, 90% of their portfolio can be largely kept in cash and gold. So, who’s more at risk – the investor or the speculator?

And where are the best speculations found today? Personally, I like energy, and I very much like bottom fishing in the junior gold sector. That’s because there are some terrific micro-cap Canadian junior exploration and mining companies (which you can buy using your U.S. discount broker) sitting on large known deposits – but their share prices periodically fall back based on nothing more than investor emotion. That’s called a buying opportunity.

(For our best bets in this sector, check out a risk-free 3-month trial to the International Speculator – it’s no coincidence that every single stock Senior Editor Louis James picked in 2009 has turned out to be a winner. Details here.)

Three Bagger On A Resource Stock

I don’t know if someone else coined the term, but I first heard the term two-bagger, three-bagger, ten-bagger from Peter Lynch in his famous book One Up On Wall Street
that I read a LONG time ago when Peter was still in charge of the Fidelity Magellan fund.

We made some good money with Peter and other Fidelity funds back then. Once a fund becomes huge, though, they have a hard time finding enough “bagger’s” to multiply large multi-billion dollar mutual funds.

Here’s the story of a “three-bagger” that I participated in with the help of Casey Research’s International Speculator:

Anatomy of a Three-Bagger: The Brett Resources Story

Jeff Clark, Casey’s International Speculator
Shareholders were treated to a big win last month when Brett Resources (V.BBR) was bought out by Osisko Mining (T.OSK), giving investors a triple from our initial recommendation. We talked with Brett Chairman Ron Netolitzky to get the story behind how he and his team made Brett a success, along with his thoughts on the junior market and gold. We think so highly of Ron that we’ve inducted him into our Explorers’ League program…
Jeff Clark: Ron, as happy shareholders we thought this was a good time to hear the success story behind the company. Tell us about finding the property and how you and your team were able to develop it into an attractive buyout target.
Ron Netolitzky: As you know, Jeff, it’s just another example of instant success for a company that’s tried for probably 20 years to be successful. Patience is what we need in this business.
Brett Resources got cobbled together from a company that left Indonesia after the Bre-X fiasco, and joined up with a group that had explored and spent a lot of money on Latin America with some pretty good exploration guys, but hadn’t had success. It was about 2005-2006, and we were actually going to become a tin-tungsten focused company. Through our former president and current Director, Carl Hering, and his association with the Kinross people, the project opportunity came over our desk – and I have to thank Ron Stewart, now an analyst with Ned Goodman’s group, because he was Sr. VP Exploration at Kinross at the time – and I remembered that I had gone after this property at least 4 or 5 years before with David Bell of Hemlo fame. We basically got turned down by Kinross and Bob Buchan at the time, even though we got right to the point of obtaining the property.
Luckily we didn’t get it; it was a little too early for a low-grade bulk mineable deposit in Canada. But when the opportunity hit us in 2006, I looked at it and said, “I liked it before, but I didn’t do much due diligence on it.” So we jumped at the opportunity. The property had been around since probably the 1930s, and had been in the Falconbridge Gold Group. Kinross got it when they acquired Falconbridge Gold, which they wanted primarily for their Zimbabwe assets, and they got this as a freebee.
Jeff: You’re talking, of course, about Hammond Reef.
Ron: Yes. It came from Thayer Lindsley, a famous geologist and founder of what became Falconbridge Gold, Falconbridge Nickel – that whole group. In the ‘30s these guys recognized there was a trend going through Hammond Reef that looked like a bulk mineable target – low grade, but it had some dimensions to it. They actually identified, in the 1980’s and 1990’s, between Falconbridge Gold and a junior called Pentland Firth, up to about a 1.8 million ounce resource of not very high grade, like in the gram per tonne range. But there was evidence of widespread gold, and it was open.
Jeff: So what made you feel like, “Hey, this is a property I want to pick up and explore and develop.”
Ron: I guess it was because we had looked at it before. Plus, if you get that much gold in an area with a lot of low-grade mineralization around it, it is a very interesting target. It wasn’t a classic target because it was hosted in granitic rock, essentially what you call tombstone-type granites. There were other examples of smaller targets like that, that had been successful in Canada and globally. So it was a little different setting, and any time you can get gold in a setting you’re not used to, you probably should take a shot at it.
So we had an opportunity with Kinross to essentially spend $5 million over a 4-year period to earn 60%. We ended up spending that money in the first 18 months. They had a back-end right to spend the next $5 million and take their position back to 60%. Immediately after we earned in, we started negotiating to acquire 100% of the property, because being a minority partner in a project where the timetable was not essential for the major was a very unattractive scenario for the future.
Jeff: This was about 2008?
Ron: Yes, I think so. We basically negotiated for about 6 months to acquire 100% of the asset, subject to a 2% net smelter royalty to Kinross. And Kinross accepted a fairly significant position in our stock. They already held some, so after the deal was closed they had about 26% of our stock. Subsequent financings diluted their position to around 16%. So they are a very significant shareholder on this. If you look at it from their perspective, they had an asset on their books valued at zero. So, if you take 16% of our stock and put a value of over $3 a share on it, well, that’s not a bad return.
Well, then we had that market meltdown, which made it pretty uncomfortable. So we had one slow year where we were saving our treasury just to stay alive. We told president Patrick Soares, “You don’t spend the last 3 or 4 million dollars until the times turn.” And when they did turn, we were able to accelerate the programs. This is one of those deposits where the deeper we drilled the bigger it got as the grade and thickness significantly improved.
A couple of other things happened in our industry that had an important effect on the value of the asset. The Osisko people had a pretty interesting success rate in their Malartic project, and I think they gave credibility to this type of low-grade bulk mineable gold deposit in Canada. Prior to that we probably would have had a much harder sell to convince people this was potentially economic. So we started watching what Osisko was doing because they gave us a pretty good target to go after. You know, well over a year ago, they signed a CA [Confidentiality Agreement] with us, and in fact a number of companies have CAs in place.
Jeff: And CAs usually precede takeovers. Obviously you like Osisko.
Ron: One of the things that attracted me to their group was their success at raising money. I think they were one of the first juniors in Canada in a long time that’s been able to fund a billion dollars worth of a project without having to lose the project. They were actually very good at acquiring a team of operating people – developers, explorers, producers – with a track record, primarily ex-Cambior people.
Meanwhile, we were very pleased with the progress we were making, especially with the First Nations and the way the project was opening up and the quality of the metallurgy. But early on we got hit with the idea that we had a water problem and would never be able to mine this. It hurt us for quite a while. We have a small lake that will have to be drained, but it has no real viable fish habitat. It’s an environmental issue but pretty straight forward. The second part is that the deposit remains open into a manmade reservoir that quite frankly is not a pristine water source.
So we feel that in time we will get all the permits. We are very close to infrastructure and 45 minutes from a very good town called Atikokan, and they need jobs, so it’s a very supportive place to work. And the metallurgy was good – no deleterious metals, no fundamental issues that we could not see solutions to.
One of the key things Osisko brings to the picture, which many companies don’t have, is that they’re going to be in production, at a significant rate, in probably a year. The scoping study on our project showed we were still 4 or 5 years away from production. So this gets us a lot shorter timeframe before we could potentially see benefits from gold. So there are advantages. They already had the permitting team in place, and the development team has been very good at getting their job done.
Jeff: You’ve got 5.1 million ounces at Hammond Reef. Do you think there’s more?
Ron: I think the potential is significant. The deposit is still open and we have a large land package and quite a few other exploration targets, and we’re still drilling away. Since the last resource we’ve done a lot of drilling and it should be upgraded by this summer/fall. I’d be surprised if it doesn’t significantly increase.
Jeff: The combined company could be a pretty big producer.
Ron: Yes. When you look at Osisko’s reserve base, plus their resources, plus their exploration targets, plus what we have, you could have the next intermediate gold producer with million-ounce production out of a joint operation.
Jeff: That’s impressive. And exciting.
Ron: That’s the way we look at it. I’m going to be a happy shareholder to have them working for me.
Jeff: You must feel some satisfaction from this, Ron. However you measure it, this is a success story.
Ron: Yes, I think it is. I think it would have been a success story if we continued on our own, but this is another way of getting your success story. Plus Osisko is extremely liquid and trades very well.
Jeff: It must be especially satisfying with the stock doing so well now. However, I remember as a Brett shareholder how it languished; a lot of stocks were recovering from the meltdown last year, but Brett wasn’t. Were you ever puzzled or frustrated at the time by the lack of stock movement?
Ron: Yes, I thought we were lagging and part of that I think was due to blogs and rumors, things you cannot stop. I think there was a concept out there that we had issues with permitting in water. I was astounded with the rumors out there. Patrick Soares and I started seriously marketing the company about a year ago, visiting New York, Toronto, Boston, Montreal, Europe. And slowly we were making in-roads and getting people to recognize this was a serious project. But when we came out with a resource, the market just ignored it. But when we announced our scoping study numbers and the economics on it, they finally got it. That got the message across, even though we thought it should have been recognized earlier.
Jeff: Very good. A lot of investors that follow the Explorer’s League want to know what Ron Netolitzky is going to do next.
Ron: Well, Ron’s got a few projects that have been around almost as long as Brett – some of them maybe a little longer. The other project I’m now fully focused on and spending a lot more time with is Golden Band. It’s a different style of story, but it’s a story where we think it should be in production this year. We have one last little piece left to do, which is complete a small portion of debt financing and I think that is going reasonably well. I anticipate having that closed shortly, and we’ve got all the permits in place. I’ve got the core people in place, we have contractors in place, and I think we will be in production on a small basis by the fourth quarter. It’s a Northern Saskatchewan gold play that I’ve been working on for a long time.
Jeff: I know it’s kind of small, but do you have any sense for the production numbers yet?
Ron: Yes. The initial production target is from just one small deposit, because I’m tired of getting diluted by raising money, so we’re trying to get it into a cash flow position. We’re basically planning to start off with about 45,000 ounces production per year. We’re very comfortable with what we’ve already identified in the belt; we should be able to ramp that up to 70,000 ounces within a couple of years and maybe 100,000 ounces. I think we can support a long mine life at about 100,000 ounces with the resources we have – but we have a lot more work to do on some of these resources.
We’re kind of going at it a little backwards, treating this belt like you used to treat traditional gold belts in the ‘30s. A lot of the deposits we have are narrow high-grade vein systems and they’re steeply dipping.  It’s very hard to get 5 or 6 years reserve or resource ahead of you on any one of these deposits, but if you look at those kind of deposits in the Precambrian Shield a lot of them last up to 50 years plus – but they quite often don’t have more than 2 or 3 years of resources ahead of them. So that’s the way we’re starting it. We’re saying “Okay, we’re going to keep chasing this… we have numerous exploration targets in the belt and I want to explore them without any further dilution to the shareholders, because I’m a large one and I’m getting tired of being diluted!”
The other route and why I want to continue exploring in Saskatchewan on this belt is it’s got a lot of gold in it. We have continually found more small deposits. Now if you look at statistics of some of these mineral deposit belts, it says that you’ve got a whole bunch of small deposits, and you’ve got less intermediate deposits, and then you have a few large deposits. Well, so far we’ve found all the small ones. On a normal statistical basis, there should be a bigger one around there somewhere, but we haven’t found it, and after working there since the late 70s, there’s a possibility that hidden in that pile of small deposits there’s going to be a big one that we just haven’t found yet.
I think what a lot of the big companies keep forgetting or keep missing is they always have a target of 2 or even 5 million ounce deposits.  Well, sometimes you can recognize a deposit has that potential but a lot of the time you’ve got to go through a lot of smaller targets before one of them shows up to be that big, and you know that’s the part where you depend on luck or the geologist’s skills to find that.
Jeff: Any other projects you might be looking at?
Ron: Well, I’ve played in Africa quite a few different times with a gentleman called Jens Hansen. He runs Melkior and some other companies and he’s got a pretty interesting project in Timmins. I’m just a shareholder, but we’ve worked the Ivory Coast a number of different times, and between him and I we’ve put together an interesting nickel sulfide target, which has gone into a new capital pool company called Landen (V.LAN). I’m a shareholder and advisor, so sometimes I’m the kind of guy that wants to be an investor and not have to run these things on a day-to-day, and maybe be the guy that helps behind the scenes with putting projects together. You know, I think there is lots of fun in that part of it.
Jeff: Very good. Before I let you go, Ron, how would you assess the junior market right now?
Ron: It’s a different market than we’ve had before. You know the problem seems to be that above a certain level, unless you’re working in one of the few areas that becomes hot – like the Yukon – getting a junior exploration company financed so you can actually go and explore I think is extremely tough these days. Maybe we have too many. You go to the big shows…
Jeff: You’re saying there’s still too many juniors?
Ron: I’m saying I don’t know how you could walk into one of these shows and pick good stories out of that. Some of the guys have the patience and they can go up and down those aisles and figure out some of the things and they find some good winners. But everybody is pretty good at advertising and have fancy websites and nice colorful maps. It’s tough to find the funds to explore. In Canada because of flow-through funds, you can find those, but hard dollars? You need both.
Jeff: There have been a lot of financings.
Ron: Yes, there has been. But as I’ve said there are isolated pockets that seem to do very well and there are geographic areas that get popular, but aside from that it’s been a tough one.
Jeff: What about gold itself. Do you have any feelings on gold and what it’s going to do over the next few years?
Ron: Well, I continue to think it’s going to keep going up. It’s basically a devaluation of the U.S. Dollar to my way of thinking, the same logic we’ve been looking at for quite a while.
Jeff: It’s not done playing out yet, then, in your view.
Ron: I don’t think so. I think we have got more pain to come on the devaluation of the U.S. dollar. You know, somebody’s got to pay the piper for all the money that’s been borrowed. And I think the easy way that it is being handled is they devalue the currency.
Jeff:  And you’re still bullish on precious metal stocks?
Ron: Yes, I think so. I know I still like them.
Osisko is a great company – but do we recommend it? Get the answer and all our top speculations in Casey’s International Speculator with a risk-free 3-month trial. Learn More.

The Folly Of A War On Terrorism

L: You don’t think America can win the War on Terror?
Doug: [Sighs deeply] No. Not only is that impossible, the very idea is meaningless. Terrorism is not an enemy – it’s a tactic. You can’t have a war on terrorism any more than you can have a war on artillery barrages, cavalry charges – or a war on war, for that matter. The first step in winning a conflict is to identify the actual enemy. And the fools in DC can’t even do that.
But before we look at the future, it’s worth noting that terrorism has long been a favored tool of those in power, going all the way back to ancient times.

For whatever reason, the powers that be seem intent on destroying our Republic if through no other way than continual war against undefined enemies and with vague objectives at astronomical costs.

Some of the best wisdom I have heard on this is from investment guru and newsletter publisher Doug Casey.

Doug Casey: Making Terrorism Your Friend

(Interviewed by Louis James, Editor, International Speculator)

Almost exactly three years before the 9/11 attacks, Doug Casey had one of his famous Guru Moments, writing in the September 1998 edition of the International Speculator:

Terrorism is becoming a major force in the world, as evidenced by Clinton actually referring to the use of nuclear, biological, and chemical devices in the U.S. I’ve thought their use against U.S. targets was an inevitability for years. But with the U.S. government launching its own terror strikes against Third World targets, the inevitable is starting to look imminent. Let’s put it this way: Living in Washington, New York or other population centers is not terribly prudent.

And again, the International Speculator that arrived in mailboxes mid-July, 2001 – rather good timing – had a feature article entitled “Waiting for World War III,” which discussed, at great length, terrorism and Islam – and even mentioned Osama Bin Laden.

L: Tatich, we’ve touched on terrorism a number of times in our conversations, particularly when we discussed the military and in our conversation on the implications of the attack on the IRS building a few weeks ago. Let’s stop beating around the bush and talk about terrorism.

Editor’s Note: “Tatich” means “Big Chief” in the Mayan language.

Doug: Okay, but as with most areas where there’s a lot of sloppy thinking, we should first start with a definition. If words are used too loosely, or inaccurately, then it’s really impossible to know what is actually under discussion. “Terrorism” is a concept that everybody talks about, but almost nobody bothers to define. According to Webster’s New World Dictionary, terrorism is “the use of force or threats to intimidate, especially as a political policy.” This implies that all governments engage in terrorism daily against their own citizens – which is actually true, as anyone who’s been audited by the IRS can tell you. A somewhat narrower definition of terrorism is: “an act of wholesale violence, for political ends, that deliberately targets civilians.”

As we discussed in our conversation on the IRS attack and unintended consequences, the government’s definition of terrorism is “the unlawful use of force or violence against persons or property, meant to intimidate or coerce a government or the civilian population as a means for achieving political or social goals.”

L: What a great self-serving definition.

Doug: [Laughs] It really is funny. And more than a little Orwellian in the way the meaning is twisted. By the government’s definition, it’s perfectly all right to do these things – as long as it’s legal.

L: Not even that – hence the dodge of sending prisoners accused of no crime in any court of law to Guantanamo, to get around the illegality of indefinite detention. The message is that terrorism, even torture – “waterboarding” – is just peachy, as long as it’s the “authorities” doing it. Did you hear Karl Rove defending torture of the Guantanamo prisoners? He said he was proud of it, and that the intelligence gathered was invaluable. Apparently rights, and even right itself, is of no concern.

Doug: Last year, I debated Rove in New Orleans – you’d never know what a moral cripple he is from the pleasant and personable exterior. We should discuss the banality of evil at some point.

L: I heard that debate and was proud of you for telling him to his face that he ought to be ashamed for Guantanamo and other crimes committed by the administration he was part of. But back to terrorism. Given your definition of “an act of wholesale violence, for political ends, that deliberately targets civilians,” why is this important to us in particular – other than as something to be avoided?

Doug: Because terrorism is the future of warfare. Far from going away, it’s going to become the most common form of military conflict.

L: You don’t think America can win the War on Terror?

Doug: [Sighs deeply] No. Not only is that impossible, the very idea is meaningless. Terrorism is not an enemy – it’s a tactic. You can’t have a war on terrorism any more than you can have a war on artillery barrages, cavalry charges – or a war on war, for that matter. The first step in winning a conflict is to identify the actual enemy. And the fools in DC can’t even do that.

But before we look at the future, it’s worth noting that terrorism has long been a favored tool of those in power, going all the way back to ancient times.

L: Sure. As with your IRS example; that’s why they periodically crucify ordinary Joes – it keeps the rest in fear and hence quiescent. People don’t pay taxes out of pure love for the homeland – it’s plain terrorism that keeps them in line.

Doug: Of course. It’s just not on the scale of Genghis Khan or Tamerlane, who used to stack skulls into pyramids. Or the Romans, who literally did crucify people to show what happens to those who go up against the state.

L: Agreed, but on a moral plane, it’s equivalent; it’s not about what’s right, it’s about enforcing submission.

Doug: Sure, you could say that “the state” is actually terrorism on a grand scale. It’s bizarre how most people view the state as necessary or even benign. It may offend some of our readers who have been programmed into believing the military can do no wrong and that the U.S. always has God on its side, but logically, the bombings of Hamburg, Dresden, and Tokyo are prime examples of state-sponsored terrorism.

World War II, in effect, legitimized the concept of mass murder of civilians. As late as World War I, the concept of incinerating whole cities would have been totally beyond the pale; WWII turned the moral clock back to the Middle Ages, when the wholesale slaughter of civilians was considered acceptable.

I suspect the “Long 19th Century,” from about 1776-1914, will be looked back on as a golden age, a peak of civilization, when the individual was ascendant, the state was under control, free-market capitalism was lauded, and progress seemed natural and inevitable. Technology has improved since then, but it’s a mistake to conflate technological progress with moral progress.

[To read Doug’s assessment why the U.S. can never win the “War on Terrorism” and the investment implications, click here.]

Last Chance Before Casey Research Raises Prices

I have been profiting from Casey Research investment newsletters for about 10 years now and I always thought their newsletter prices were cheap.

Well, that’s about to change.

Some of the prices will go up about 300%!

But the good news is that if you subscribe now you lock in the old low rates for the duration of your subscription (which should be for a LONG time).

The International Speculator is a flagship product that seeks higher returns on more speculative investments.

Casey’s Gold and Resource Report is what you want to get for the coming (very soon, I suspect) big bull market in gold and silver.

Casey Energy Report is right on top of the ways to profit from the government funded green revolution. (We don’t need to agree with the global warming nonsense to profit from the politicos religious belief in it.)

Casey Trend Trader is there to help you profit from long term trends, which, quite frankly, is where the big money is and sometimes with the least risk – the trend is your friend!

And since Casey Research is good at spotting trends, they feel technology’s day may be here again and have launched Casey’s Extraordinary Technology to help us profit by it. The first recommendation last month was up over 35% in about 2 weeks. Those who didn’t move on it quickly missed it and have to hope for a pullback.

Like I said, lock in the low prices now, before they go up forever.

Don’t forget the “macro picture” newsletter, very reasonably priced, the Casey Report.

Geologix Conference Call Today

Geologix Exploration, a favorite company of Peter Grandich, held a conference call today that I participated in and wanted to report the highlights.

For those who know about resource calculations, Geologix changed the method of calculating the resource in October than they did in June. Full explanation was given as to how and why this was done. Sounded Ok to me..

One very important point was that at year end Geologix expects to have C$7 million cash on hand, which is estimated to be adequate for 2009 operating needs. In the current (horrible) financing environment, that is excellent news. They can continue operating.

They would like to own 100% of the mine with Silver Standard and realize that the 1st choice for doing that is an equity financing that just isn’t favorable to shareholders at this time. They are therefore looking at other options that can be good for everyone, including current shareholders.

My personal opinion is that Geologix is not only a keeper, but an accumulator. Management feels that, if – a big if, markets return to normal in the next year or so, mine resource increases could justify a share price of anywhere from $4 per share to $8 or so. They have doubled the resource in 5 months. Impressive.

If you have interest in these kinds of mining and exporation stocks, I highly recommend that you try a Risk Free Trial Subscription in International Speculator from Casey Research.