Global Resource Alert

September 2011 • Vol 3 Issue 9
105 West Monument Street • Baltimore, Maryland 21201
  • Operation Twist and Overreactions
  • Where Our Indicators Have Been Moving
  • What Makes Me So Sure Gold (and Silver)
    Will Climb
  • Portfolio Review

Global Resource Forecast

September 30, 2011

Dear Global Resource Trader,

The last couple of months have been a roller coaster. The last week in particular has been especially wild.

And as investors, we don’t need to look very far to understand why…

Markets hate uncertainty. Yet there’s plenty of it to contend with each and every day. Here are but a few headlines from recent weeks:

  • “S&P cuts Italy’s Sovereign-Debt Rating,” Wall Street Journal, Sept. 20, 2011

  • “Five central banks plan to pump U.S. dollars into European banks,” Los Angeles Times, Sept. 15, 2011

  • “China Bank stops FX swaps, forwards with some European banks,” Reuters, Sept. 19, 2011

  • “Swiss first to use gold in securities payments,”, Sept. 19, 2011

  • “Why the Fed’s Operation Twist will hurt banks,” International Business Times, Sept. 21, 2011

Operation Twist, by the way, was announced at the Fed’s latest meeting. It’s their plan to buy $400 billion of longer-term Treasuries that will be offset by selling a comparable amount of short-term Treasuries.

And as the International Business Times pointed out, that hurts the banks.

They’ve been earning profits, not from regular lending, but by borrowing short term on the cheap, leveraging up, and investing in long-dated Treasuries that pay a higher return.

But the Fed’s recent move makes that trade much less attractive.

Lowering long-term interest rates won’t help stimulate the economy, either. Continued high unemployment means businesses have little reason to expand. The average American’s mortgage is nearly impossible to service, even at low rates.

So don’t expect Operation Twist to do anything more than QE1 or QE2 – except guarantee higher inflation in the future. It’s really just a “twisted” QE3 in disguise (much like Bernanke’s recent commitment to keep rates low until mid-2013).

I’m no fan of the International Monetary Fund (IMF), but I agree with a recent statement by its new managing director, Christine Lagarde. She claimed that fears in the financial markets over Europe’s debt are exaggerated.

While I do think things are very serious, I also think we’ve seen an overreaction.

Yes, it’s possible we’ll eventually see Greece exit the euro.

But is that a reason to panic now? Would that mean the world economy will come to a standstill? Should commodities and precious metals sell off?

I don’t think so.

Still, all this has had some major – very conspicuous – effects…

Our Indicators Have Been Moving

First, of course, is the euro. Just look at the chart. It has lost nearly 8% in just the past month.

So what’s likely to come next for the currency?

I suspect we may see an announcement by the IMF and the European Central Bank (ECB) that they are coming to Greece’s rescue. That would certainly mean printing more euros and, therefore, higher inflation. Increasingly, too, more Europeans will want to own gold.

Meanwhile, we are hearing claims that global growth is slowing, and that’s putting pressure on commodities.

If you look at the Continuous Commodity Index (CCI), you’ll see that the recent sell-off has entirely erased this year’s gains.

But despite recent weakness, the CCI is still up more than 7% over the same time last year. That’s a testament to its strength compared to the broader markets, which are below the level of 12 months earlier.

Yet despite this, we’ve racked up – and locked in – substantial gains in a number of our positions since the beginning of this year. Just goes to show you that good research and some discipline investing in commodities producers/explorers is still the best approach.

Next let’s look at copper – the base metal bellwether for the economy.

It has recently sold off pretty hard on lousy sentiment. But copper, too, is still 18% higher than where it was just 24 months ago. To me this looks like a capitulation sell-off, meaning the bottom should be close (if this isn’t it already).

Why the recent weakness in commodities, as well as precious metals?

Fears of a new global recession have got investors flocking to the U.S. dollar and short-term Treasuries. The dollar is now roughly 5% higher than where it’s been trading all summer.

And while some will point to gold and silver’s recent weakness, and proclaim them bubbles waiting to pop, you need to look at the big picture for context.

Gold is only off about 15% from its recent highs, and it’s still 23% higher than it was a year ago.

Silver has been good to us, too. It’s down about 30% from recent highs near $44, yet it is still up a magnificent 55% from a year ago.

Despite their volatility, these returns are far better than what the broader markets (represented by the S&P 500) have managed to muster.

Why I’m So Sure About Gold (and Silver)

Clearly, a strengthening U.S. dollar hurts gold, silver, and commodities, since they’re all priced in dollars.

But we need to ask ourselves some important questions.

Are the problems of sovereign debt and weak banks resolved – or are they worsening? Is there less or more fiat money circulating than there was 12 months ago? Is there likely to be less or more fiat money in our system, say, a year from now?

While no one can know the future, I’d say the probabilities are high for ongoing debt problems and more money-printing. And that will lead to higher prices for commodities and precious metals.

Why am I so sure gold (and by extension silver) will continue to climb?

There are two fundamental reasons…

The first has to do with discovery.

During our recent conference call with Brent Cook of Exploration Insights, Brent pointed out how discoveries of new gold are declining rapidly, despite record amounts of money being spent on exploration. See the chart below (and click here if you missed our call).

The second reason has to do with sustained long-term buying.

You see, large institutional buyers, like central banks, which typically do not move quickly (except maybe to print money), have undergone a massive shift.

Until 2009, central banks as a whole were net sellers of gold. In the last two years, that’s reversed. They are now a source of demand, as net buyers.

Of course, it’s not the traditional Western central banks that are the buyers. They already own some gold, and their social program commitments leave no room to spend on more.

Instead, it’s the developing nations that are adding to official reserves: places like China, India, Korea, Russia, Brazil, Mexico, and even Thailand, Bangladesh, Sri Lanka, and Vietnam.

That’s a trend I expect will continue, as they increasingly realize the problems of the West, and how those problems will be addressed.

An intriguing fact of history on gold as money relates back to the Byzantine Empire (which ran from the year 395 until 1453).

In the very early years of the 4th century, Emperor Constantine built upon Greece’s sound money tradition – pretty ironic, considering Greece’s problems today – and ordered a new gold coin be created, called the solidus. Its weight was minted at a standard 65 grains for the next 800 years. Thanks to strict money laws, it was so dependable that it was readily accepted from Asia to Europe, and from the Baltics to Africa. (Constantine also created a silver coin called the miliarense.)

During that time, the Byzantine Empire remained the center of global commerce. It never went into bankruptcy or even into debt. Its money was never debased, and yet the Empire flourished for more than eight centuries.

Of course, that gold-based system would not allow bankers to get insanely rich as they can with a system of debt-based fiat money.

Back to today.

With the recent weakness in gold and silver, this looks like a good time for anyone who doesn’t already own these metals, or who feels they’re underinvested in them. This may not be the bottom in their prices yet. So if you buy, consider doing so in tranches.

However, I do think we’ll end the year at considerably higher prices in both metals, as well as commodities in general.

So I’ll continue uncovering ways to profit from producers and explorers that can leverage those gains for us and help us profit in the process.

Portfolio Review

Arch Coal Inc. (NYSE:ACI) is the No. 2 coal producer in the United States. Some industry experts are forecasting lower output of coal from Mongolia over the next few years, and China depends on them for supply. That’s supportive of higher prices. BUY

Alderon Resource Corp. (TSXV:ADV): Our developing iron ore company is back down near our original acquisition price. However, management’s been de-risking the main Kami project and just released a positive Preliminary Economic Assessment (PEA) that values the project at $3 billion. Yet its market cap is currently not even 10% of that. BUY

AEM January 2012 $60 calls (AEM120121C00060000): We’re still nicely in the black after taking a 123.43% gain on a portion of our holdings. HOLD (*Speculative Trade*)

Aurizon Mines Ltd. (NYSE:AZK): Before the recent sell-off, Aurizon was finally starting to get the market recognition it deserves. Drilling is outlining more ounces at the producing Casa Berardi mine in Québec, and new high-grade zones were discovered at the nearby Marban exploration property.  BUY

Birchcliff Energy Ltd. (TSX:BIR): Our Albertan oil and gas producer has given back gains along with the market. It has moved into my buy range again. BUY up to $12.50.

Encana Corp. (NYSE:ECA) is our Canadian producer/explorer of and natural gas and natural gas liquids (NGLs). And it’s still way too cheap. BUY

Energold Drilling Corp. (TSXV:EGD): Our “picks and shovels” drilling company set record revenues in Q2; they’re up 120% over Q2/2010, and up 25% from Q1/2011. Net earnings, too, were up 3.7 times over Q2 of last year. EGD is a BUY up to $4.00.

Freeport McMoRan Copper & Gold Inc. (NYSE:FCX): Our copper-gold-molybdenum producer has been oversold by the market. It now trades at a ridiculous P/E of under 5.5.  Some analysts have lowered their price targets due to strikes at their Indonesian and Peruvian project. HOLD

FCX February 2012 $45 calls (FCX120218C00045000) are way down from our entry point. But I still expect a recovery this fall and into year end. HOLD (*Speculative Trade*)

Fortune Minerals Ltd. (TSX:FT): Management is doing a solid job of advancing both the Mount Klappan and NICO projects. The stock’s simply been dragged down with everything else. Fortune remains a BUY.

Fortuna Silver Mines Inc. (TSX:FVI): This is a solid silver producer that has seen strong gains, but it is subject to the vagaries of the markets, especially the silver price that’s off considerably. (For those who are interested, the company now trades on the New York Stock Exchange under the symbol FSM.) BUY

Market Vectors Junior Gold Miners ETF (NYSEArca:GDXJ): Our junior gold miners/explorers have backed off to the point that they are below their levels of a year ago. Yet gold is 27% higher, and we’ve already booked 64% gains on a portion of the shares. This is totally irrational. BUY

Lynas Corp. (OTC:LYSCF.PK): Hit trailing stop on September 22. SOLD

MAG Silver Corp. (TSX:MAG) confirmed a new mineralized structure through drilling at the Juanicipio property in Mexico, with one intercept up to 965 g/t silver and 6.39 g/t gold over 1.52 meters. BUY up to $10.00.

Molycorp Inc. (NYSE:MCP): Hit trailing stop on September 26. SOLD

MineFinders Corp. (AMEX:MFN) announced Q2 results that show great progress as they’ve taken steps to deal with the technical challenges of a problematic heap leach pad. And the market’s been rewarding them and us as the stock price has powered higher. HOLD for now.

Potash Corp. (NYSE:POT): Hit trailing stop on September 26. SOLD

POT March 2012 $52.50 calls (POT120317C00052500): We have not hit our trailing stop on this position. These calls have plenty of time to regain value, and we’ve already booked 56% gains on a portion of our holding. HOLD (*Speculative Trade*)

Romarco Minerals Inc. (TSX:R): Hit trailing stop on August 24. SOLD

Royal Gold Inc. (NasdaqGS:RGLD): No specific news here, but it’s worth noting how the stock price has had a strong advance. It has held up much better than most gold equities. BUY

ProFunds Rising Rates Opportunity Fund (RRPIX): Hit trailing stop on September 7. SOLD

ETFS Physical Swiss Gold Shares (NYSEArca:SGOL): As I’ve said in recent alerts: If you don’t yet own any of either gold or silver, or if you feel you don’t own enough, I’d suggest adding at these levels. It’s possible both could go lower still. So buy in tranches, with an eye to add over the next weeks and months. BUY

Global X Silver Miners ETF (NYSEArca:SIL): If you don’t own any of this diversified silver miners ETF, start building a position. If you do own some and want to add, now looks like a good time. BUY

ETFS Silver Trust ETF (NYSEArca:SIVR): Same as for SGOL above. BUY

Sandstorm Gold Ltd. (TSXV:SSL): Here, too, we’ve given up the gains we had since adding SSL. But I still expect this gold streamer to do very well in the short, medium, and long term. It recently made a $6 million payment to Metanor Resources for 20% of gold produced from its Bachelor Lake project, and production from Luna Gold’s Aurizona mine has reached projected feasibility levels. STRONG BUY

Uranium Energy Corp. (AMEX:UEC): Despite the weakness in commodities, UEC has held up pretty well. Fund Manager Malcom Gissen of Encompass Funds expects UEC to do well because uranium demand is outpacing supply. The company is progressing well on its permitting for the Goliad project and has acquired a major south Texas uranium exploration database. BUY

Whiting Petroleum Corp. (NYSE:WLL): Hit trailing stop on September 26. SOLD

Exxon Mobil Corp. (NYSE:XOM): This behemoth oil and gas producer has landed a major coup with its recent agreement to join with Russia’s Rosneft to develop Arctic and Black Sea resources, share technology, and forge ahead with further international projects. XOM is a BUY.

Remember, we could be hitting some more trailing stops in the weeks ahead. Don’t panic… just respect our discipline.

There are lots of opportunities setting up, too. And we’ll keep taking advantage of them.

Your resource guide,

Peter Krauth

Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most widely read and highly regarded investing articles on Money Morning. A former portfolio adviser and 20-year veteran of the resource market – with special expertise in energy, metals, and mining stocks – he now uses the close contacts and connections he amassed over the years to deliver moneymaking potential with every kind of commodity. Peter is headquartered in resource-rich Canada, but, as editor of the Global Resource Alert, he travels around the world to dig up the latest and greatest profit opportunity, whether it’s in gold, silver, oil, coal, or even potash. For more information, call our VIP Services group at 888.570.9830 or 410.454.0498.

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