End Game industrial Silver supply panic may have just begun…

Major Japanese Electronics Firm Approaches First Majestic to Lock in Silver Supply

As regular readers know, we have long warned that the End Game for the banksters manipulation of the bond markets & interest rates via gold and silver manipulation will occur when industrial users of physical silver, namely the colossal electronics industry- sniff the first signs of a wholesale shortage of physical silver, and begin panic hoarding of silver to ensure continued production of their tech gadgets. 
As First Majestic CEO Keith Neumeyer reveals in this stunning Bloomberg interview, that End Game industrial supply panic may have just begun…

Neumeyer reveals a major Japanese electronics firm has approached First Majestic to lock in physical silver, citing supply concerns: 

A major Japanese electronics maker approached First Majestic Silver Corp. for the first time last month seeking to lock in future stock, a sign of supply concerns that could boost the metal’s price ninefold, according to the best-performing producer of the metal.

“For an electronics manufacturer to come directly to us — that tells me something is changing in the market,” said Keith Neumeyer, chief executive officer of First Majestic, the top stock in Canada and among its global peers this year. “I think we’ll see three-digit silver,” he said, predicting the metal could surge to $140 an ounce by as early as 2019.

 A reminder as to how critical the industrial side of the silver equation is:

‘Strategic Metal’

While long coveted for use in jewelry, coins and utensils, silver is increasingly in demand for its industrial applications. Last year, about half of global silver consumption came from such use, including mobile phones, flat-panel TVs, solar panels and alloys and solders, according to data compiled by GFMS for the Washington-based Silver Institute.

“Silver is not a precious metal, it’s a strategic metal,” Neumeyer said in an interview in Vancouver, where the company is based. “Silver is the most electrically conductive material on the planet other than gold, and gold is too expensive to use in circuit boards, solar panels, electric cars. As we electrify the planet, we require more and more silver. There’s no substitute for it.”

Daniel Gschwend: Time running out for gold manipulation

In commentary posted today at Seeking Alpha, Daniel Gschwend, who manages a mining and metals fund, examines the manipulation of the gold price by central banks that are leasing gold as part of their scheme to rig the currency markets. Gschwend's commentary is headlined:
"The Countdown of a Manipulated Gold Price is Running Out" and you can find it HERE

Ken Gerbino:The World Gone Crazy and Your Gold Stocks

Some crystal-clear thoughts on the continuous global economic seismic shake-up from Ken Gerbino's latest missive: "The World Gone Crazy and Your Gold Stocks"


".... The Inflation vs. Deflation debate is a debate between Knowledge and Stupidity. History and Fantasy. Understanding and Confusion. When a stock portfolio goes from $2 million to $1 million this is in fact a "deflated" value but this does not cause a deflation in the economy. Even with $10 trillion of stock market losses it has little effect on the general price level of goods and services in an economy. The crash of 1987 saw $15 trillion of stock and bond losses in the U.S. An historic loss of asset values at the time. Yet inflation in 1988 and 1989 averaged 3.2% and 4.3% respectively. There was no deflation. The same concept is true for real estate. Real Estate losses in 1990-91 were in the trillions and the inflation rates in 1990, 91, 92 averaged 4% annually. There was no deflation. There never is with paper money."

"... There will be no deflation. If your adviser or broker or newsletter writer ever mentions this word send him this article and wise him/her up. Inflation is here to stay as prices have not gone down in this country in any year for the last 60 years despite the calls of the deflationists. During this time, despite market crashes, horrible recessions, and numerous real estate busts we have had no deflations. Paper money is inflationary and we are going to be flooded with more of it before the bailout of the global financial system is completed."

"...The Great Lie: For almost 75 years the Fed and the Treasury have promoted the following concept. Inflation is caused by a strong economy. This, of course, is a smokescreen for the truth that all inflations are caused by an increase in money supply. But with this stable datum that a strong economy causes inflation, the powers that be always had something else to blame for inflation. Money managers therefore thinking that if a strong economy causes inflation then a slow economy or a recession will cause less inflation. Therefore they reason "why own gold or the gold stocks". These were some of the guys selling the gold shares the last 3-4 months. They are so wrong."

"...Current gold buyers are most likely split between investors that believe a horrible deflation is coming and money will be wiped out so gold should be a good substitute and other investors who correctly understand that trillions of new dollars and foreign currencies are going to flood world economies to bail out the institutions and this will be very inflationary.

Both sides will have great conviction and this $90 move underlines those thoughts. Therefore, with the financial turmoil of this week gold and the quality mining stocks should move much higher with or without the stock market."

To entirely read this sobering article in its entirety, please click HERE

Bugs were right about derivatives disaster, Citigroup analysts say

MineWeb's Dorothy Kosich writes about a new report from Citigroup analysts John H. Hill and Graham Wark, who last year wrote a report acknowledging that central banks were strategically intervening in the gold market to suppress gold's price. You can find their report from last year here:

http://www.gata.org/files/CitigroupGoldReport092107.pdf

Now, Hill and Wark write, they're surprised that gold isn't already at $2,000 per ounce. Of course having already conceded central bank intervention, maybe they shouldn't be so surprised. But maybe it would be impossibly impolitic for them to write openly about intervention again now, especially since, as Kitco's Jon Nadler and Resource Investor's Tim Wood might assure us, the precious metals markets are the only markets in which central banks have NOT been intervening lately.

But the new report from Hill and Wark may be most satisfying to our side for another acknowledgement. As reported by Kosich, Hill and Wark write:

"It is notable that hard-core goldbugs have been proven correct in the decade-long contention that an overwhelmingly vast and complex pool of nested financial derivatives would ultimately result in cascading defaults and ruin for major portions of the banking system."

You can find the MineWeb account of the Citigroup report HERE

From RBC Capital Markets' report and outlook on gold

"The numbers in the markets indicate that gold exchange traded funds (ETFs), along with gold royalty companies such as Franco-Nevada, have outperformed practically all listed gold - and other resources - stocks over the past two months, a time when global resources stocks have been mercilessly hammered. Gold ETFs, representing a proxy investment in gold bullion itself, have been outperformed over the period by silver ETFs, which traditionally display a higher "beta" than gold bullion prices during times of crisis or stress, currently seen in global investment markets.

Specialist analysts at RBC Capital Markets have sought to look forward, and in a report out to clients this week, recommend that it's time to buy listed gold stocks, not least on seasonal factors. RBCCM analysts argue that the macro outlook remains constructive, on a combination of a US dollar "that shows no clear leadership as a global reserve currency", and, second, that "central banks continuing to aggressively reflate the economy will likely maintain pressure on currencies relative to gold and other hard assets. This backdrop is complemented by emerging market countries that are facing energy and agriculture inflation which is expected to be positive for gold". RBCCM's analysts see a positive outlook for the back half of 2008: "the seasonal slowdown for physical gold demand is nearly behind us, and we expect increased demand looking ahead to August, September, and October. With the US Federal Reserve rate cycle on hold for the time being, the US dollar drifting and inflation pressures growing around the world, particularly in the emerging market economies, we believe the timing is right for investors to be buying gold and gold equities".

As observed over the past 12 months, the RBCCM analysts anticipate that larger capitalisation listed gold stocks "with established production bases and higher share liquidity" will continue to outperform smaller capitalisation names. From a fundamental perspective, the analysts continue to favour gold companies with improving production and cost profiles, gold reserve upside, active exploration programs and strong management teams.

RBCCM analysts identify several positive factors for gold bullion prices:

• Non-European Central Bank announcements regarding gold purchases (Russia, UAE, Qatar)
• Chinese foreign exchange reserves topping $1.4 trillion, dominated by holdings of US treasury securities. The Chinese central bank continues to comment on the need to diversify foreign exchange reserves
• Firm demand for gold ETFs, near an all-time high of 29.8m ounces
• Gold equities pricing in gold bullion at $850-$875/oz long-term
• Expectations of a US Federal Reserve rate pause, and no rate hike expected, and
• Mine supply flat in 2008, with a decline expected in 2010.
• Potentially negative factors affecting gold bullion prices are identified as:
• Jewellery demand showing strong elasticity in India and the Far East
• Switzerland deciding to sell 200 tonnes over two years, replacing Germany in the ECB gold sales agreement, and
• The potential for IMF gold sales as part of the ECB gold sales agreement.
  

RBCCM analysts point also to the ratio of the spot dollar gold price to the Philadelphia Gold & Silver Index (XAU), given that the analysts believe that the ratio is an important indicator for identifying periods when gold stocks are relatively cheap or expensive, compared to gold bullion. The current ratio is around 5.4 times, and has averaged five times over the past few months. According to the RBCCM analysts, when the ratio is above five times, the average one-year holding period return for the XAU has historically been 40%; when the ratio is between 4.5 and 4.75 times, the average return has been 27%.

The RBCCM analysts also note that the net speculative long gold futures position on COMEX has coincided with the run in the price of gold. On 19 February 2008, the net long position in futures reached an all-time high of 25.3m ounces; with the recent selloff in gold, the RBCCM analysts expect a further decline from the 25 July level of 23.7m ounces. The analysts look for the "positive correlation between gold and the speculative futures position to continue, and look for the long position to remain strong as gold consolidates and makes another run at $1,000 an ounce in September-October 2008".

The RBCCM analysts also argue that seasonality provides a compelling argument for investment: "Over the past 28 years, gold has typically outperformed on a monthly basis in the months of April and May. This is usually followed by a seasonal slowdown in the [Northern Hemisphere] summer months, and an upsurge in the early fall. With this in mind, investors may be able to exploit near-term weakness in gold and gold equities before a positive run in the late summer, early fall period".

Finally, the analysts note that over the past couple of years, ETF gold products "have emerged as a meaningful component of gold demand, accounting for 7% of total demand in 2007. Following a slowdown in mid-2007, the five primary ETFs have added almost nine million ounces, coincident with the gold price rally". During the recent rally in the gold price from its low of around $850 an ounce in early May to around the $970 an ounce level in early July, ETF ounces under management bounced back from 25.9m to a record 29.8m ounces (and are currently 28.8m as of July 25). This overhauls the previous all time high set in March when gold bullion hit its record of $1,033 an ounce. "We believe", conclude the analyst, "that investors continue to use this product not only for short-term trading opportunities but also for long-term or strategic investment purposes".

Time is running out to buy junior exploration stocks

Peter J. Cooper, a Dubai based economic journalist, has recently posted an excellent analysis of why and how to make the best of the coming (and rather overdue) junior mining shares price explosion.

Here's some appetising excerpts.

"The big gold and silver producers are preparing to unleash a round of bidding for junior exploration companies that will bid up the value of the whole sector, and stocks that are good, bad and indifferent will jump in value. You have been warned. Now is the time to buy. It is so obvious with gold and silver prices on the march…"

"Gold and silver equities have been disappointing performers over the past couple of years. Cost inflation has dented profit margins for the big producers, and capacity expansion has been subject to delays. But these fears may have been overdone, and rising precious metal prices will now begin to feed straight through to the bottom line."

"Market anomalies are how investors make big profits. The price of silver is another example of a market anomaly, as this column argued last week. Silver has underperformed every other metal, except gold in this commodity price boom and yet its supply and demand situation is arguably the weakest of all.

So if you want to hedge your position in the junior explorers with a second opportunity to achieve leveraged performance to the rise in price of the underlying metals, then again silver stocks are to be recommended. The smaller companies might well deliver the best performance but unless you want to deeply diversify you could stick to the bigger names."

Please click HERE to read P.J. Cooper's analysis titled "Time is running out to buy junior exploration stocks" while the junior shopping season still lasts...

Gold: the precious laggard that will hit $2,000

Gold: the precious laggard that will hit $2,000

By Ian Williams, Charteris Treasury Portfolio Managers
Last Updated: 4:25pm BST 04/07/2008

In 1999 when oil was $10 a barrel, I suggested that the price would ride fivefold to $50 a barrel in real terms over the next few years. This forecast was dismissed with incredulity at the time. Almost 10 years later with the price over $130 a barrel, my original forecast turned out to be rather timid - with mainstream commentators now forecasting $200 a barrel.

My forecast was based on an analysis of long term future supply-demand trends, combined with a study of ultra-long term commodity cycles.

What is striking about ultra-long term commodity cycles is how seemingly unrelated commodities appear to rise and fall together.

Price data shows that around 1999-2000, virtually every single commodity hit a significant low before turning up sharply. Nickel hit a low before proceeding to rise ten-fold in the period up to April 2007. Similarly copper also bottomed around this time before an eight-fold rise up to May 2006. Copper is once again challenging its all-time high and looks set to move into new high ground.

The reasons for this stellar performance are now well-trodden - the emergence of China, India and Russia - as major consumers of scarce and in some cases increasingly finite resources.

This commodity super-cycle phenomenon shows no signs of abating. But to profit from it, investors need an understanding of the leads and lags within the commodity family to avoid being caught buying a particular commodity at a short-term peak in its price. I would be very wary about buying oil assets at present - simply because the price of oil in relationship to other raw materials is becoming very stretched....CLICK FOR MORE

Jim Sinclair: The Day The Juniors Fight Back

Dear CIGAs,

I respectfully request that each member of the JSMineset community send this missive to the management of their precious and base metals junior investment company. Please follow up on it to be sure it has been reviewed.

Strength In Numbers

The junior producer and exploration and development companies need to consider the formation of a Chamber of Mines for this section of the industry.

This Chamber should be free of any individual company agenda, free of fees and other interferences with the singular intention of protecting our shareholders from being attacked by those in the shadowy part of finance.

There are close to 2000 companies in this part of the industry, many of which are experiencing the same extreme nuisances.

The naked gold short seller is an entity engaged in a criminal act with a goal of doing serious injury for the purpose of profit and is therefore a major target in terms of civil liability. The short and naked short pool operations are exactly the same but more apt to be a conspiracy to injure slightly then become subject to RICO statutes.

The job of this working Chamber of Mines as a singular unit is to pull these criminals out of the shadows into the light of day.

No matter how well they feel they are hidden there is always a paper trail going back to the perpetrator in this financial world.

Certain financial areas of secrecy in many cases do not protect the spoils of criminal activities. This may be proven soon at UBS where an officer is under arrest in the USA and is due to go to court shortly.

It does not mean anything that neither regulators nor exchanges care about the naked short or short selling pools, regardless of whether they are naked or not. If the stockholders and the company who’s values have been injured initiate civil proceedings, discovery will be full of legal opportunity. You cannot erase the paper trail that exists to every transaction.

My request is simple:

Contact the management of every junior precious metals producer, exploration and developer, asking them to contact Editor Dan at information@jsmineset.com so that the Chamber can take form.

There is no hidden agenda, no money to be collected, and no desire to stroke egos and no desire for private corporate information. I do not wish to be anything but a member. Let the organization elect its officers so we can act as one. We can speak as one. We can win as one, but we are weak when scattered as the industry is now. Organize and we are a legion. Expose the perpetrators and then it is all over. The data is there. It can be organized and it can be dissected, yielding the evidence trail of those who wish to hurt, sometime simply because they are mean, sometimes for illicit profits.

Add to that that sociopaths mistreat their associates and employees by nature. No looking may be required. It might just happen to come over the transom, even though we do not invite that.

You stockholders must push your management hard. Personally there is nothing that I will NOT do in order to protect both my and my investors’ interests.

I herewith dedicate my life, my fortune and all that I am to the identification of the perpetrators and their conduits used. Those sociopaths that take joy by inflicting severe injury for profit by conspiracy and the use of dirty tricks must be the hunted of nearly 2000 company’s determined managements and their more than 500,000 very angry stockholders.

There is only one way to defend stockholders, which is through the organization and strategy of a major offensive. Forget attorneys at this point. Regulators are of no help. A Chamber of Mines acting together can prevail.

I will even if I must go it alone.

Together we are legion. Alone and looking the other way you are a victim. I have never been a victim. No one depending on me will be a victim.

There is NOTHING I will not do to protect those that depend on me. I am livid. Enough is enough.

We will add risk to the bad guys. That proposition you and they can depend on.

Your friend,
Jim Sinclair

Junior Mining summer shopping spree?

According to Financial Journalist Peter J. Cooper writing from Dubai, this coming summer may be just hot enough to ignite an aquisitions rush for promising and undervalued junior miners.

You can read P.J. Cooper's post called "Stalking the best gold and silver juniors a profitable summer sport" at his blog HERE

Newmont Mining: Gold Getting Scarce

Gold Getting Scarce

MoneyNews
Wednesday, April 2, 2008

PERTH -- Discovering the next mother lode is not as easy as it used to be, the world's second-largest gold producer, Newmont Mining Corp (NEM.N: Quote, Profile, Research) said on Wednesday, as it plans to spend nearly a quarter of a billion dollars on exploration this year.

There has been shrinking number of gold finds above five million ounces, Newmont's general manager for Australia Adriaan van Kersen told a gold mining conference in Perth.

"Newmont depletes its reserves at 10 ounces a minute and needs a replacement discovery rate of near 14 ounces a minute," van Kersen said.

Newmont counts about 86 million ounces of gold in reserves at its mines worldwide and has earmarked between $220-230 million for exploration in 2008, he said.

"Exploration is not only becoming tougher and riskier but more expensive and it is becoming more and more difficult to find gold in any surface quantity," van Kersen said.

Van Kersen, cited Newmont's lack of a big discovery recently as indicative of the plight of the gold industry as the whole.

Only 4 percent of gold deposits in the world hold more than five million ounces in reserves, he said.

"As an industry, we are spending more and more on exploration but even in a high demand and high price environment, and more drilling happening, the gold sector is not discovering the same ounces as it used to," van Kersen said.

At the same time, costs for everything from buying trucks and fuel to hiring workers, up 24 percent in the last year, are biting into operations, he said.

Newmont plans to mine between 5.1 million and 5.4 million ounces of gold this year, he said.

World No. 1 gold miner Barrick Gold Corp said recently it held 124.6 million ounces in reserve as of December 31, 2007 and would spend $200 million exploration in 2008.

John Embry: Don't let gold's volatility bother you

In new commentary for Investor's Digest of Canada, Sprott Asset Management's chief investment strategist, John Embry, takes note of GATA's full-page advertisement in The Wall Street Journal and urges precious metals investors to ride out the market's short-term hairpin reversals. Embry's commentary is headlined "Sit Tight -- Don't Let Gold's Volatility Bother You" and you can find it at the Sprott site HERE

Gold Digger

from Fund Strategy
by Vanessa Drucker

Where were the gold bugs in 2001, when the metal touched a low of $255 an ounce? Long snuggled deep in the mattress, they began to creep out as the metal price rose. It reached a plateau in 2004 in the $400 range, and then took off in earnest after July 2005.

The gold bugs refuse to concede that we could be in a speculative blow-off phase of frothy glitter. They point to the 1980 high watermark at $877 an ounce, and claim that price would convert to more than $2,000 (£1,000) today.

Notwithstanding, there are plenty of reasons to be cautious, or even downright bearish, at today's lofty levels. A host of factors already signal a potential turn in the multiyear uptrend.

A confluence of disparate drivers has always buoyed or buffeted gold. Since about 2004, the mix of these drivers has shifted, with implications for the price action. Today, the critical factors are: the dollar; economic uncertainty; supply/demand forces; and the new-found popularity of the exchange traded funds. A look at how these factors are evolving may shed some light on where the gold price is heading next.

"We remain wedded to the view that the US dollar is the principal, longer-term driver of the gold price," says James Steele, chief commodities analyst at HSBC. He expects the relationship to continue as long as the dollar remains the world's reserve currency.

Gold, widely regarded as a hedge against a falling greenback, has performed an intimate inverse dance with the dollar over the past 40 years. Turning points coincided in 1976, 1982, 1988, 1994 and 2000. While the correlation remains high at 0.91, the two asset classes do not move exactly in lockstep. "If they did, we could do without precious metals traders," Steele says. "We could just trade foreign exchange."

Dan Smith, gold analyst at Standard Chartered, notes that a less linear relationship has developed over the past six months. Incremental dollar weakening keeps boosting the gold price, while dollar rallies barely affect the metal.

"It may show that people are steadily building long-term gold positions as they piggyback on dollar weakness," suggests Smith.

Interest rate cuts by America's Federal Reserve, instituted to boost a sagging economy, highlight the gold/dollar linkage. For example, on January 22, 2008, the Fed surprised markets with its announcement of a dramatic three-quarter point cut. That news rapidly depressed the dollar, as gold soared through $900.

"Real interest rates and the dollar are two sides of the same story. When people refer to inflation shocks, they are also describing a drop in real interest rate environments," says Michael Lewis, global head of commodities research at Deutsche Bank. He points out that as long as real rates run 2.5% or lower, as they did in the 1970s, gold performs well. At the moment, inflation appears poised to climb, while the dollar loses real interest rate support.

Yet the role of inflation is not straightforward. To the extent that gold remains denominated in dollars, yes, it embodies an inflation hedge. At the same time, the perceived correlation between gold and inflation is probably a carryover from memories of the 1970s and 1980s. When we examine more recent patterns of American inflation, we observe that core inflation fell from 3.38% in 2000 to 2.83% in 2001, and then down to 1.59% in 2002, according to monthly rates published by the Bureau of Labor Statistics.

Gold barrelled up and up during those years. From 2005 to 2007, inflation skidded from 3.3% to 2.85%. Gold kept ascending, at an even more feverish pace.

Political and economic risk and instability of all stripes is another prime driver. In its long-standing role as a safe haven asset, gold can react to any type of turmoil that strikes on the world stage. "It is not even the type of risk that matters, but rather the severity," Steele comments. When the credit markets seized up last August, why should gold then have fallen initially? The reason, it transpired, was that many investors, who needed liquidity, were selling their gold. Once again, the metal was duly performing its function.

Looking back, from 2001 through 2005, financial and political deterioration was building on all sides. At the same time, many investors still regarded the environment as a temporary blip that would soon readjust. It did not. By 2007, the economic uncertainty dwarfed that of the previous six years, as the subprime crisis, real estate weakness and financial illiquidity came together in a perfect storm.

Compared with economic dramas, reverberations from geopolitical incidents barely qualify as second order events.

"The idea that events such as terrorist attacks provide much catalyst has largely been discredited," says Andrea Hotter at Dow Jones Newswires. She points to the London underground bombings, and even the 9/11 terrorist attacks, as examples of incidents that produced fleeting reactions in the gold price.

Other fears prompt hoarding. It is worth noting that certain Middle Eastern investors, as well as central banks of countries that may be suspicious of American policies, have also been storing gold. "In the post 9/11 environment, some of them fear having their US accounts frozen, if there is a link to terrorist activity. So they invest in gold and other alternative assets," says David Thurtell, metals analyst at BNP Paribas. Similar behaviour occurred in the aftermath of the American hostage drama in Tehran in 1979.

Like all commodities, supply and demand must balance to clear the gold price. From the supply side, consider the case for "peak gold". Until it was overtaken by China, South Africa was the world's largest producer, providing more than 1,000 tonnes a year in the 1970s. Its output has contracted to 248 tonnes a year because of ageing mines, which are deeper and harder to access, and new legislation.

"Before, mine owners had the right to exploit their holdings easily, but now they need to obtain licences and agree to create jobs, undergo environmental audits and build schools and hospitals," says Ross Norman, director of TheBullionDesk.com.

Supply constraints got worse this January, when Eskom, a South African state utility, declared wide-ranging power cuts, forcing mines to close their operations for safety reasons. Many of the mines extend five kilometres below ground and rely on lifts and electricity. If Eskom cannot ensure uninterrupted power supplies, the mines cannot take the chance their workers might be trapped underground.

Mark Bristow, president of Randgold Resources, focuses on attracting first world capital to reinvest in African mining projects in Ivory Coast, Mali and Tanzania. He describes how cost and risk profiles have changed as "across the board, miners constantly run into first world intervention". Resistance from green movements has made mining more challenging in places such as Canada, America and Australia, and shifted the focus to emerging markets.

Production is also falling in Australia and Canada. "Even in China," says Norman, "where they are going for the richer grades, they may have exhausted their mines by about 2014."

Also affecting production are a dire shortage of mining equipment, inadequate infrastructure and a dearth of professional skilled labour at all stages of the production process. Steele says the global commodities boom has strained the supply chain and compelled the gold industry to compete with coal, base metals and other precious metals for "scarce human and material resources".

In another ongoing trend, the larger gold miners have been buying back their hedge books. Smaller operations may still be hedging to obtain finance, since banks are not necessarily willing to lend if they fear the commodity's price might collapse.

The miners have undergone a massive mindset change since the late 1990s. "In the past, they used to sell forward into every rally and kill it, and the price would sink. Now they let the price levitate higher as it goes from elastic to inelastic," says Norman.

The real sea change is the conduit forged between the gold markets and the investment world. The physical gold market itself is small, "but the derivatives traded on its back are huge", Bristow points out.

"Despite the dehedging programmes, about 39m ounces of gold are still hedged in paper, and that must be delivered."

Hitherto, trading had been focused on the Comex in New York, the Tocom in Tokyo and the London spot interbank market. Now, exchanges are racing to open their doors to gold trading across a much broader jurisdiction. In January 2008, a new futures market was added to the two spot exchanges in China, along with new platforms in Dubai, India, Singapore and Vietnam.

The chief catalyst of demand is the development of the various new exchange traded gold funds, beginning in March 2003. ETFs, which must back the shares they issue with bullion, now command at least 10% of world demand, which is a quite a sprint from nothing, in five short years. Hotter explains that they are attractive to both institutions and individuals because they are so easy to invest in, with "no storage to arrange and no punt on the futures market."

Lyxor Gold Bullion Securities, Europe's largest gold exchange traded commodity, now holds 108 tonnes, with a value of about $3,186m. Overall holdings from all the gold ETFs constitute about 630 tonnes, which ranks them up there among the top 10 central bank holders, according to Jon Nadler, senior analyst at Kitco Bullion Dealers in Montreal.

In January 2006, David Davis, an analyst at Andisa Securities, famously described ETFs as the new "people's central bank - a force to be reckoned with". So far, the ETF money has tended to be sticky, apportioned 70% among individuals and 30% among institutions. "While central banks have been dumping gold, individuals have been quietly buying it and, even more amazingly, holding on to it," comments Owen Rees, head of business development, Europe, at Exchange Traded Gold, the World Gold Council's marketing arm for various ETFs.

Rees points out that the ETFs exhibit a volatility pattern similar to the S&Ps, compared with open interest on Comex, which "swings wildly". In mid-2006, when the gold sector corrected, the entire ETF franchise only lost about 3% of its assets, and then regained that value in about a month.

Those are the elements of the brew that has been simmering to keep the gold price soaring.

Is it ready to bubble over any time soon? That is the actionable question investors need to know. A quick survey of the drivers themselves - the dollar, the economic instability and supply and demand, especially investment demand - may reveal some clues as to why the price could head south.

If the fate of the dollar is the key determinant, much depends on its direction. While it has been in a long term downtrend, it is worth remembering that most dollar cycles last about seven years and this one is getting long in the tooth. "The dollar may continue to weaken against the euro to $1.60," suggests Lewis, "which could provide a last boost with overshooting and extreme misalignment." Every past cycle has ended with central banks coming to the rescue.

The currency team at HSBC holds a similar view. Based on purchasing power parity (how much it costs to buy the same items in different countries), it regards the euro as overbought already. It attributes much of the recent rally to capital inflows for the purchase of European equities, which are now quite expensive. Dollar bulls are beginning to emerge from the woodwork, though most agree that the Asian currencies will continue to pose formidable competition.

Next, look beyond the storm clouds gathered on the horizon. Imagine if the economic malaise began to clear up. At some point, the banks will finally write down the bulk of the subprime mortgages and leveraged loans that have triggered the credit contraction. Suppose that liquidity flows again in normalised patterns.

"When the credit markets settle, they will remove a supporting plank from gold," Steele predicts.

Even on the geopolitical front, there is some hope that military operations will wind down. Nadler believes we are now well into a speculative stage for gold - a last hurrah built on the post 9/11 anxiety premium. He says: "It began when the US invaded countries in the name of the war on terror, setting up an epic battle of religions, of good and evil. It snowballed over the past two years. Deficits mounted, with the haemorrhage of war expenditures. The panic may have peaked about the time Benazir Bhutto was shot."

Alternative asset classes have been commanding an increasing share of investors' portfolios as a method to boost risk-adjusted returns. At the same time, emerging markets, supported by the decoupling thesis, have been gaining popularity.

Part of the reason is that success breeds success, and those classes have generally outperformed. Yet commodities are no one-way street. Despite the ravenous appetite of emerging markets across the gamut, commodities remain volatile by nature. Nickel and zinc have fallen 50% from their 2007 highs. Copper has tumbled sharply and white sugar has declined from about 22 cents a pound in early 2006 to 14 cents this year.

How will the supply equation weigh up against the demand for gold? In a nutshell, jewellery fabrication demand is down, scrap sales are up, overall central bank sales are flat to sideways and investment demand is up - hugely so.

According to World Gold Council statistics, in the fourth quarter of 2007 the high price had a major impact on fabrication demand - most significantly in India, where identifiable tonnage demand fell by 17% from the year before.

Steele, who sailed with the Merchant Marines, uses a nautical metaphor. At sea, the first visible current is only 100 feet deep, moving on top of a massive subcurrent below. The shallow current is like investment demand - a driver for the gold price on any given day. The fabrication demand - the real bedrock - is like the current that flows beneath.

The supply story could also be ready to turn around. The mining community has spent more than $24 billion on exploration during the bull cycle, according to Nadler, and is now in a position to launch significant output. Between now and 2012, he foresees an increase of 25% a year. Whereas we are already seeing 2,200 tonnes of fresh mining output each year, by the end of that time-frame, expect a further 450 tonnes of additional supply. "Investors had better be willing to buy," Nadler warns.

Prospective buyers are not hailing from the central banks. Since the Washington Agreement established in 1999 that central banks could each sell 500 tonnes a year, many of the European institutions have been divesting their holdings. Many central bankers, newly minted MBAs, are keen to improve their investment returns, relying on equities and bonds instead. Their lending lease rates for gold are so low (about 0.35 for 12 months) that they have stopped lending it out altogether.

Only Russia, South Africa and Argentina are increasing reserves. The International Monetary Fund, whose 103m ounces of gold is second in quantity only to that of America and Germany, has announced plans to divest some of it soon.

Even the valiant ETFs may not be able to keep the party alive, but they helped to goose the price on the way up. They could add to selling pressure just as easily in the other direction. On January 16, the StreetTracks gold ETF dropped 21.5 tonnes in a record swoon.

Rees is not rattled. "It is the wrong question to ask, whether or not gold has gone too high," he insists. One should, of course, not always expect the price to go up, but should instead focus on assembling the right assets for protection, regardless of the economic environment. Studies from the World Gold Council demonstrate that gold is a more reliable diversifier than other commodities, and together with platinum exhibits the least volatility.

Rees adds: "We want people to invest responsibly, and we believe we can offer a sensible way to use a low-cost product."

Why gold?

King Midas learned the hard way. In India, people still eat it as a blood cleanser and use it as an aphrodisiac. John Maynard Keynes dismissed it as a barbaric relic. Many are curious as to how gold maintains its significance in a world driven by fiat currencies. Whatever the reasons, Joseph Schumpeter, the economist, acknowledged its predictive function as a barometer: "The modern mind dislikes gold because it blurts out unpleasant truths."

Jon Nadler, senior analyst at Kitco Bullion Dealers in Montreal: "It is portable money and universally acceptable. At the end of the day, it is a liability-free asset. No-one can print it at will so it is limited in quantity - unlike paper money." Dan Smith, gold analyst at Standard Chartered: "Across the metals complex, some - like zinc and copper - are leveraged to construction. But gold is not driven by fundamentals." Ross Norman, director of TheBullionDesk.com: "Gold is a bellwether of economic activity and goes both ways. It can tell you that things are very good or very bad." Axel Merk, manager of Hard Currency fund, California: "It's so dense, you can store a lot in a small space - unlike, say, silver. Another feature of gold is its lack of industrial applications. That makes it far less subject to the business cycle and a pure reference point for money. Gold cannot go to zero, but fiat money can." Michael Lewis, head of commodities research at Deutsche Bank: "It's indestructible, imperishable and can be stored. It is driven more by financial than by physical supply and demand. If you closed all the gold mines, you would run out in 45 years. If you closed every oil well, you would see power cuts in a couple of weeks." James Steele, chief commodities analyst at HSBC: "Other hard assets, like timber or property, can't be sold in such a hurry. And they are not fungible. Every parcel of land is different from every other one. The same goes for diamonds or rare coins."

Gold probing towards the $1000 mark

Peter Brimelow from MarketWatch.com sniffs the precious metals air and finds it charged with anticipation from gold bugs everywhere....

"NEW YORK -- Gold finishes a fabulous February, and the gold bugs' attention is turning to gold shares, and silver.

When I last wrote about gold, with the pleasingly prescient headline "Gold's path to $1,000 now clear?," bullion had just staged a three day-bounce back after a terrible beating received on Feb 1st.

Since then, as Australia's The Privateer put it recently: "The last two weeks have been absolutely stellar for gold, as it has moved three-quarters of the way between $U.S. 900 and the big $U.S. 1,000 over that period."

The Privateer's $U.S. 5x3 point-and-figure gold chart is designed to respond glacially to gold price changes. Now it has been struck with scalding global warming: It has changed 18 times in February and now looks spectacular:

http://www.the-privateer.com/chart/gold-pf.html

The questions now interesting the gold bug investment letters are:

-- Can gold go much further, percentage-wise?

-- What does this mean for silver?

-- Why aren't the wretched gold shares moving?

Silver leaped a stunning 9.7% in the past week, with Comex May silver closing up $1.767 at $19.915. The Privateer was a little dismissive: "For many of those who are dipping their toes into the precious metals markets, gold is simply seen as being too expensive. That is why silver ('the poor man's gold') has outperformed gold so far this year."

But other observers were more excited. At Le Metropole Cafe, Bill Murphy, who has followed gold closely for years, was motivated to put out a special Sunday alert: "To say that silver has been trading differently the past couple of months is an understatement. ... As a veteran commodities trader, I could see, on a daily basis, somebody quietly accumulating silver on price dips ... never pushing the envelope, but buying silver at times when it normally would get trashed."

At Jim Sinclair's MineSet, Dan Norcini plunged into the technical entrails of silver futures trading -- the "commitments of traders" supplied by the Commodity Futures Trading Commission -- and pulled out an unusual augury: "The funds have not been reducing their net long position. ... The funds continue to buy. Guess who is doing the selling -- the small specs! Apparently, some of the public is trying to pick a top in the silver market. They have built up the largest outright short position in two years. Talk about a bullish signal. The most undercapitalized traders on the planet are adding new silver shorts as the market breaks into a 28-year high."

Norcini adds: "Remember, it is a new calendar month on Monday and that often means new allocations of fund money to the markets. If that occurs, the silver shorts are in serious, serious trouble as the longs will show them not one ounce of mercy. Blood in the water draws sharks and the silver shorts are not only bleeding, they are hemorrhaging massively."

But gold shares, of course, continue to break their owners' hearts. GoldMoney's James Turk, in this weekend's FreeMarket Gold & Money Report, shows with a 20-year chart that the ratio of gold to the Philadelphia Gold and Silver Index has only been meaningfully lower briefly once -- right before the gold upswing began in 2001.

Perhaps the answer to the question if the shares will notice $975 gold is the same as that provided by The Privateer, discussing the general lack of attention paid by the public to the gold surge: In "the early 1980s, when the Dow Jones Industrial Average was challenging the all-time highs it had set in 1969 and slightly exceeded in 1972-73. ... It took quite a while, until mid-late 1985, in fact, for the majority of people to finally be satisfied that the Dow wasn't going to fail at the 1,000-1,100 level as it had done for the previous 15 years. Once that happened, the markets took off. ..."

Privateer's prediction: "That is what is in store for gold, as and when it exceeds $1,000 for the first time."

* * *

The new global gold rush

by ANDY HOFFMAN
From Saturday's Globe and Mail
February 29, 2008 at 8:54 PM EST


Tye Burt has always been able to get the most out of the unwanted, the discarded and the overlooked.

As a young boy growing up in Green River, Ont., he would vigorously polish bruised apples from his family's orchard and then sell them to motorists on the side of the highway at full price.

It was a trait that he carried with him. Four years ago, on a trip to Nova Scotia, Mr. Burt purchased a decrepit wooden schooner, a vessel that had been a star exhibit at Expo 67 but had been so neglected it was barely seaworthy.

The mining executive oversaw painstaking work that restored the schooner's former grandeur to the point when last fall the Atlantica was suitable for the Duke of Edinburgh to enjoy as part of a Canadian charity tour.

Those were mere fix-up jobs, however, compared to what Mr. Burt has done since taking on the top job at Kinross Gold Corp. in 2005. He gutted the management team and orchestrated a corporate restructuring, and is now taking the Toronto-based miner into places many once feared to tread. His favourite destination? Russia.

"As we see the traditional sources of gold production, like South Africa, like the United States, like Canada in decline, Russia is growing in prominence and in prospect," Mr. Burt says. He suggests there are 300 million to 400 million ounces of untapped gold in Russia.

Kinross is by no means the only gold miner jetting off to wild and wooly regions. Amid record gold prices — bullion settled at $975 (U.S.) an ounce in New York after surging to a record $978.50 yesterday — the entire industry has had to look beyond its comfort zone. Way beyond.

"The places you can go to find and develop new deposits in a friendly way are shrinking," Mr. Burt says.

In what could be a new gilded age, countries like China, Russia and some developing parts of Africa are poised to become the new bullion-producing juggernauts, despite the fact that foreign miners have had trouble securing certainty of their land titles in these areas. Those willing to take on the risk of trying to build mines in these countries could be in for huge rewards — or humongous heartbreak.

"Regions that a few years ago the majors wouldn't look at are becoming increasingly attractive," said William Tankard, a senior analyst at GFMS Ltd., a London-based consulting firm to the precious metals mining industry.

China, with a hundreds of small gold mines operated by a seemingly inexhaustible labour force, recently ended South Africa's century-long reign as the world's top-producing gold nation, according to GFMS.

China produced 276 tonnes of gold in 2007, or roughly 9.7 million ounces. That was a 12-per-cent jump from 2006, GFMS said. By contrast, South Africa — the world's largest gold producer since 1905 — produced 272 tonnes, an 8-per-cent decline from the year before.

Faced with the rising technical and safety challenges to mine ever-deeper deposits, as well as production cuts due to electricity shortages, South Africa is unlikely to ever regain its title as the planet's best place to mine gold.

In South Africa's wake, the smart money is all over the map.

Just last month, Richard O'Brien, the head of Newmont Mining Corp., conceded that the world's second-largest gold company will have to travel to places it had once considered off limits in its quest for rich sources of the precious yellow metal.

"We enjoy staying in regions with a more stable environment like Canada," Mr. O'Brien told analysts. "[But] people ask when we will go to China, Russia or the Democratic Republic of Congo. I can't say when, but at some point, I anticipate we will be in all of those."

Gold miners have always had to go where the gold is but the current dearth of large-scale deposits in mining-friendly countries has created unprecedented challenges. The sands of the gold mining industry are shifting and they are headed toward places mired in alarming uncertainty.

"I'm going to predict that other major mining companies are going to go to Russia in some size in the future," Mr. Burt says. "There will be partnerships in multiple metals. So yes, we're well positioned."

KINROSS REBORN

That wasn't a claim Mr. Burt would have made when Kinross lured him from a senior management position at Barrick Gold Corp.

At the time, Kinross was a basket case of a gold company, burdened with a scattered portfolio of high-cost and mostly low-grade assets, largely controlled by the company's joint venture partners. Its prospects for growth were dismal.

Kinross looked destined to be stuck with shrinking reserves and flat production hovering around 1.5 million ounces of gold per year. The situation was so bleak that, in the midst of an investigation by the U.S. Securities and Exchange Commission into the way the company had accounted for a three-way merger with a pair of Canadian rivals, Kinross didn't published financial results for a year.

"Nobody was considering Kinross as a serious investment or a serious player," said Catherine Gignac, an analyst at Wellington West Capital.

Many investors thought its best hope was as a takeover candidate.

Less than three years later, Mr. Burt has orchestrated a stunning turnaround, positioning the company as a growth leader rather than suffering prey.

The company's gold mine portfolio has been transformed to focus on better-quality mines in fewer regions, including Chile and Brazil, where Kinross has full control of operations, cost expenditures and exploration spending.

A $3.5-billion takeover of Bema Gold that closed early last year helped give Kinross bragging rights to the best near-term growth prospects among major gold producers.

Annual production is forecast to rise 60 per cent over the next two years to 2.5 million ounces as a massive expansion of its low-grade but long-life Paracatu mine in Brazil comes to fruition, along with a new mine in Washington state.

Yet with the price of gold charging toward $1,000 an ounce, Kinross's most promising asset in the short term is also its most contentious.

Less than three months from now, Kinross will begin commercial production at its $705-million (U.S.) Kupol project in Russia, well north of the Arctic Circle.

The mine is endowed with an exceedingly high grade of roughly 19.5 grams of gold per tonne of ore. That will make it one of the lowest-cost gold mines in the world at a time when bullion producers are grappling with soaring costs.

In gold mining, however, a mine's location can be just as important as its economics. And with Kupol, more daunting than its remoteness is Moscow, nine time zones to the east.

'THE NEXT BIG PLACE'

Few dispute Russia's promising mineral potential. Currently the world's fifth-largest producer of gold, it has 9 per cent of the world's gold reserves.

Mr. Burt believes his company is blazing a trail that will soon be crowded with larger competitors looking to partner with Russia's domestic producers. "From a resource perspective, I think Russia is the next big place," he said.

Seventy-five per cent owned by Kinross, Kupol will be the largest foreign-controlled mining operation ever in Russia. (The minority is held by the local state government of Chukotka.) Kinross, of course, is no stranger to the country. The company has been mining gold in the far east of Russia for 12 years, first with its now mothballed Kubaka mine, which it sold to Russian producer Polymetal last year for $15-million, and currently with its Julietta mine, which it acquired as part of the Bema takeover along with Kupol.

Key to the company's success in Russia, according to Mr. Burt, has been keeping strong ties with Moscow, vigorously avoiding corruption and being a "good corporate citizen" by funding social programs and infrastructure development in the local areas where it operates. "You have to put in the time," he said.

Russia, he says, has proven to be a far more stable mining jurisdiction than countries such as Venezuela, Ecuador and Bolivia that have seized resource assets from foreign companies, or even Argentina, which recently imposed unexpected export duties on gold and base metals production.

"There has not been any history of government interference in the mining sector. Nobody has been expropriated. There have not been radical changes to the tax regime. That behaviour has been seen in many other jurisdictions. It has not been seen in Russia," he said.

THE MOSCOW FACTOR

Kupol is, however, a far more valuable deposit than either Kubaka or Julietta, particularly as gold prices hit new records. While Kupol has only 3.2 million ounces of proven and probable gold reserves, its high grade is expected to make it one of the world's highest-margin gold mines, with production costs averaging between $210 and $220 an ounce — more than $100 below the industry average.

Russia accounts for just 8 per cent of Kinross's 47 million ounces of gold reserves but TD Securities analyst Greg Barnes recently told clients that Kupol is the second-largest contributor to his calculation of Kinross's net asset value behind Paracatu.

"The company's significant exposure to Russia provides some cause for concern … any political interference in the mine would, in our view, have a materially negative impact on Kinross's valuation," Mr. Barnes wrote in a report.

Kinross maintains that the mine's ownership structure will be a crucial element to success. The mine is expected to create 1,200 local jobs and spinoff employment for local businesses. As well, Kinross will pay a corporate tax rate of 24 per cent and an off-the-top royalty of 6 per cent.

As for possible legislation that would deem major deposits "strategic assets," Kinross said Kupol will be grandfathered under any new law.

"As a currently permitted and already-built project, we are exempted from that. We have had assurances in writing and in the legislation," Mr. Burt said.

Canadian gold guru Pierre Lassonde thinks otherwise, saying in an interview: "I wouldn't put a dime in Russia."

Mr. Lassonde — the former president of Newmont Mining Corp. and current chairman of relaunched mining and energy royalty company Franco-Nevada Corp. — believes the rule of law in Russia is far too murky for a Western mining company to invest the hundreds of millions of dollars needed to build a mine.

"It's bandit capitalism. Every time a foreign company has success in Russia, they find a way to legally take it away from them," he said.

Well-regarded gold investor Charles Oliver of Sprott Asset Management said he is "cautiously optimistic" about Russia as a destination for mining firms, but he is not as enthusiastic as he once was.

"There are concerns on [mining] title. We haven't seen anybody had their mine taken away, but it is the kind of thing where you want to tread carefully," Mr. Oliver said.

Despite the political noise, Mr. Burt maintains that Russia, with its massive store of gold reserves, is simply too big to ignore and even his old employer Barrick will be lured back to country.

"The supermajors have no choice. That's why you see Barrick in Pakistan and that's why you hear [Newmont's] Richard O'Brien saying those things. They have a big tiger to feed and they are going to have to go to those places. Do we have a head start? I firmly believe we do. Are we going to be unique in five years? No. These big companies have lots of resources and they'll be coming, too. I think we have an edge. Part of the edge is our size, part is our experience and part is our relationships. We are there."

ADVANTAGE CANADA

Canada has seen its share of global gold production cut by nearly half over the past 13 years. In 1995, Canada accounted for 6.8 per cent of world gold production, but by last year, it had fallen to just 3.8 per cent, good enough for eighth place among gold producing nations, GFMS said.

Between 1995 and 2005 Canada's gold reserves plunged 40 per cent, according to the Mining Association of Canada, falling to 971 tonnes from 1,540 tonnes.

Yet with the largest concentration of junior mining firms, Canada as a country still ranks No. 1 in mineral exploration spending, accounting for 19 per cent of the $7-billion (U.S.) spent on exploration in 2006 according to Halifax-based Metals Economics Group.

Despite the current disconnect between exploration spending in Canada and gold production, Mr. Lassonde thinks the money is going to the right place. He believes more Canadian exploration success is certain because of improvements in geological technology.

"We are the second-largest land mass in the world, [behind Russia] and that gives us a huge advantage. Do you really believe that everything has been found in Canada? Absolutely not," he said.

OVER THE HORIZON

While Canada as a country is no longer a leader in gold production, Canadian gold miners still dominate the top of the bullion mining ranks. A willingness to operate in far-flung jurisdictions beyond their own borders has kept Barrick, Kinross and Goldcorp Inc. among the sector's heavyweights.

Producing roughly eight million ounces of gold a year, Toronto-based Barrick remains the world's largest gold miner but has just two small in mines Canada among its stable of 27 worldwide. It has been a prolific acquirer of foreign companies and assets and has major operations in Nevada, South America, Papua New Guinea, Australia and Tanzania.

Vancouver-based Goldcorp's Red Lake operations in Ontario were the largest single contributor to the company's overall production of 2.3 million gold ounces last year. Red Lake produced more than 700,000 ounces while two other Ontario mines brought the Canadian total to over one million ounces.

Yet like Barrick, Goldcorp has also been an aggressive buyer of foreign assets, avoiding the fate of Canadian nickel stalwarts Inco and Falconbridge, as well as aluminum major Alcan, which each had their flagship operations in Canada and were all snapped up by opportunistic foreign mining giants.

While the record gold price has given producers the financial incentive and wherewithal to look further afield for new gold deposits, China, the new world leader in gold production, has proven an elusive place for most. There are a few foreign companies operating relatively small deposits, including Australia's Sino Gold Mining Ltd. as well as Canada's Jinshan Gold Mines Inc. and Eldorado Gold Corp., but major Western gold producers have had little success in the country.

Barrick has had an office in Beijing since 1993 but has no mines in China.

"We have been there 15 years and we haven't found anything big enough geologically that makes sense," Alex Davidson, Barrick's executive vice-president in charge of exploration and corporate development, said in a phone interview from Tanzania.

Barrick has turned to places like Tanzania to replenish reserves, but has wrestled with labour problems that hampered production last year at one of its mines in the east African country. (Barrick fired the mine's entire work force but has since hired back more than half the workers.) Among a slew of development projects is a massive gold and copper project in Pakistan, where violence and political unrest marred recent elections.

THE LONG-TERM VIEW

In Russia, a lack of large-scale deposits has not been the problem. A survey of mining companies conducted by the Fraser Institute found that Russia ranked No. 1 out of 68 countries in terms of mineral potential.

However, it came second-to-last when it comes to regulatory duplication and inconsistencies and ranked 62nd in terms of stability of policies, narrowly besting the Congo and Mongolia but trailing behind nations like Honduras, Ecuador, Bolivia, Indonesia and China.

Russia, where an election tomorrow is expected to see Vladimir Putin's handpicked successor Dmitry Medvedev anointed president, is considering legislation that would deem all large-scale gold deposits "strategic assets." The law would prohibit foreign companies from controlling major mining operations. There have also been concerns that Russia's nationalization of oil and gas assets, in which major Western energy firms transferred ownership of assets to state-controlled Gazprom, could be repeated in the mining sector.

Political issues left Barrick so frustrated that it largely abandoned the former Soviet Union in 2006, shuffling its Russian exploration assets into producer Highland Gold Mining Ltd. for a minority stake in the company.

"I don't think it's possible for a company the size of Barrick to go into Russia and find a big deposit," Mr. Davidson said.

Turning 51 this month, Mr. Burt takes a longer view. He has been a part of the mining business for more than 20 years, first as an investment banker and as an industry executive for the past six. In 1985, he joined the former brokerage house Burns Fry, specializing in mining sector deals. In 1998, Deutsche Bank tapped him to create a global mining team — until low commodity prices led the brokerage giant to abandon the effort two years later.

In 2002, he came out of "retirement" to join Barrick. He spent much of his time in Russia and led the gold giant's foray into the country. Given the chance to skipper the Kinross ship instead of "being an admiral on an aircraft carrier" at Barrick, he made the switch.

Now Mr. Burt is heading a company with a stable of mines centred in what he believes are some of the world's most promising gold mining regions. He won't say where Kinross will look to expand next, but he certainly isn't ruling out a deal in Russia with a local partner.

"Russia, if you know your way around, is a global mining power that is on the come," he says.

***

Jason Hommel documents Barrick's continuing huge gold short

Silver Stock Report editor Jason Hommel has dug through the financial reports of Barrick Gold to verify the huge continuing short position in gold the company seems to be trying hard to conceal. Hommel's analysis is headlined "Sell Barrick, A Sneaky Hedger" and you can find it at the Silver Stock Report site HERE

K.J. Gerbino: "Gold Mining Stocks - What's Wrong With The Juniors"

Gold Mining Stocks - What's Wrong With The Juniors

Kenneth J. Gerbino

The reasons Junior mining stocks are underperforming are as follows:

• The larger companies are getting all the action from newly converted gold enthusiasts and interested investors.
• The junior market is still being weakened by insiders and promoters who are always sellers.
• There are hundreds if not thousands of new promotional mining stocks being foisted on the readers of gold pages in the last three years and there is just so much money to invest in this sector. Therefore premium prices are diluted.
• The invasion into the Hard Money camp by the Uranium companies. Every investor I know who owns gold and precious metal stocks but never owned a uranium stock now owns some. This diversion of capital to uranium diluted some funds that would have entered the Junior market.
• Gold ETFs. Investor money can now go into an easy way to invest in bullion. This also could be argued that it helps the miners as it creates demand for gold.
• Delays in drilling, engineering reports, permits.

A Big Rally Soon?

We are very near a major turning point in the mid tier and junior mining sector. The chart below shows the lowest junior mining valuation ratios in the last six years. We are using the TSX S&P Venture Index which is mostly mining stocks. The current ratios are at levels that in the past have signaled a major and substantial rise in the smaller gold and silver mining stocks.

As a reality check we can look at the ratio of the XAU to the Gold Price to see if this ratio is at a speculative level that may be signaling a major top in the making for all the gold stocks, which would of course include the juniors. During the above mentioned time period (September-November 2002) the Gold/XAU ratio was 4.8 (not shown). Today it is 4.8. This means the XAU gold stocks are tracking the gold rise at the same ratio when gold was $320, signifying a stable relationship. It confirms that the juniors on a relative basis are extremely undervalued and that a substantial rally should be starting soon.

New money into the gold arena is going into the big names. These managers and investors have not started to look at Canada and the junior sector yet. But as they eventually get more familiar and comfortable with the industry they start looking for smaller growth and value situations and that leads them into the junior sector. Quality juniors will eventually have a substantial move up from these levels but most others with speculative exploration programs will be left behind because of the stark reality that only one exploration stock out of a few thousand ever produces an ounce of minerals. This old ratio should change for the better as high metal prices, technology, more sophisticated exploration groups and increasing demand for resources increase their chances but it is still long shot investing.

The Three Amigos

Gold has many developments impacting it's price and we have mentioned them many times. But currently we see three drivers at work that spell out a higher gold price: 1) The dollar has no where to go but down since interest rates are being sent lower and lower by the Fed to bail out the banks and our friends on Wall Street. 2) The credit/mortgage/real estate bubble dictates inflating the money supply or face possible immense institutional disasters. 3) Global money supply increases are continuing at a torrid rate especially in India and China.

Mining Analysis

The mining sector despite the volatility allows one to have a very clear idea of value. This intrinsic value is an inventory of basically rocks. These rocks contain a certain known percent of minerals. When companies spend $20-50 million with hundreds of drill holes and thousands of man hours on an area the size of 3-4 city blocks (maybe 400 feet thick, and underground) you have a pretty good idea what is in that mass of rock and what it is worth at various metal prices. When they do sophisticated testing on sometimes 5-10 miles of drill core, one can evaluate how easy or hard and costly it might be to extract the minerals.

Basic mining costs are known from hundreds of other mining projects: the cost to build the roads, buy crushers, build small towns for the workers, power and food costs etc. These are known factors and estimates can be made. Then it's a matter of math and know how. That's how you find winners. That is how you know if you have a good project. That is all we care about at my company on hundreds of projects and mining companies. You should try and do the same if you want to get serious about investing in this sector.

The key to making an above average return is competent evaluations and patience. This sometimes takes many years. Patience will outweigh the volatility of the gold and silver mining sector as intrinsic value eventually gets recognized. The laws of supply and demand let you sleep comfortably.

Inflationary Future

With all the money, people, and industrial progress globally we are confident that minerals (especially the precious ones) will be well above average investments for the next decade.

We are at a time when the central banks should be at least attempting to control inflation but instead most are printing more money. As the future unfolds and inflation accelerates, tangible assets especially mining companies with known resources of valuable minerals should be a top priority for investors.

For more articles on Gold, the Economy and the Stock Market visit our website: www.kengerbino.com

Kenneth J. Gerbino
1 February 2008

Louis James: Why the Big Gold and Silver Spike Will Be Even Bigger This Time

This interview from Seeking Alpha
Part I of a two-part interview with Louis James, Senior Editor with Casey Research. James talks about the gold and silver markets, and shares his views on several interesting companies. In Part II, to be published next week, Louis discusses five more gold and silver companies he likes and why.

TGR: Where do you think gold is headed over the next 12 months?

JAMES: There are two different ways of looking at the gold market. One has to do with the fundamentals of supply and demand. The other has to do with the speculative value of gold. Regarding the first view, the supply side is easier to grasp. And right now, there are very clear signs of difficulties ahead on the supply side. Newmont Mining Corp. (NYSE: NEM) has already announced that production is going to decline by many millions of ounces. Demand is a little trickier to forecast. Silver and the base metals have industrial uses, so industry drives demand. However, the value of gold is based largely on perception — what people feel and what they fear, as opposed to what manufacturers need.

The turmoil of the last year has made it very clear that there are good reasons to hold onto gold because it has a long and established history of solid value. While weak supply and recent market turmoil may not justify the current price of gold, they certainly explain it. And those factors were not assuaged by the Fed's little rate tweak last week. I have to believe that despite some short-term fluctuations, the fundamentals of supply and demand — such as they are — are very bullish for gold, at least over the next year or two.

So that’s one side of the story. The other side has to do with the speculative value of gold. What happens when people start fearing for the value of their paper assets and their fiat currencies? It’s a totally different question than which way is gold heading, and what happens if this project or that project is successful. At Casey Research, we think that the conditions are almost, but not quite, approaching those of the late 1970’s. We think the government vastly understates inflation, and we see the kind of economic forces that drove gold prices to record highs in the 1980s converging again. They’re not obvious yet — average people on the street are not worrying too much about the value of the dollar yet, but we think it won’t be long before they start.

The average man in the street is not yet worrying about the US dollar and the economy as much as he perhaps should be. But when that happens, as it did in the late '70s, when everybody and their cousin was worried about hyperinflation, when your bartender was telling you about the gold coins he just bought, and so on—when the average person was getting into the picture— that’s when we had the real mania stage. That’s when you have a spike in gold. So far, we haven’t seen anything like this. It’s just the basics of supply and demand for gold in the current context. But the second part of the story is that we believe that big spike is still ahead, and it will be even bigger than the last time because the stakes are even higher now.

TGR: Do you want to venture a guess what that spike will be? I understand $850 price spike in 1980, adjusted for inflation, would be about $2,200 now.

JAMES: That’s about right.

TGR: Do we see a spike going beyond that?

JAMES: Actually, I am not sure we will see quite the spike we saw in 1980. It’s interesting that back then gold held over $800 for only four days, and two of those days were weekend days. I don’t actually see a spike quite like that. Things will fall apart more gradually this time. I think this time we will see more of a gathering surge that will take the price quite high. There will be a spike somewhere—who knows where? But that spike won’t be as important as the tidal surge that will easily take gold over $2,000. And if you use the shadow government’s inflation figures for what that $850 would be worth in 2007 dollars, it’s over $4,000 to even match that 1980 spike.

When will that happen? I think it’s a fool’s errand to try to call that exactly. I’m confident enough that it will be within a year or two, max three, that it makes sense to me to buy gold now. I am not at all worried about gold being close to record highs now. Not just because in inflation terms, it’s cheap, but because of where I think that surge will take the gold price. I think gold is still cheap, even in the $800 range.

TGR: Let’s talk about some companies, starting with Bravo Venture Group Inc. [TSX.V: BVG].

JAMES: One of the things to remember about Bravo it that has a management team that has done it all before. From the boardroom to the people in the field, the people are experienced. And Bravo has multiple kicks in the can. The company generated a lot of excitement over a project in Nevada that ultimately didn’t work out, which sometimes happens. Exploration is never a sure thing. But the company is pursuing the generative model very well. It has projects in different jurisdictions, different metals even, but it’s mostly focused on gold.

TGR: What do you mean by a generative model?

JAMES: It means the company generates projects that it either advances or sells. Bravo identifies a project in its early stages, then maybe polishes it up, or develops it a little before handing it off to another mining company. And the classic structure for this model is the joint venture [JV] —using other people’s money to take on the high-risk, exploration stage, which makes a lot of sense to us.

If you look at the simple odds of finding an economic gold deposit out of a prospect— I believe these are on the order of 1 in 300— it just makes sense to shift that risk onto someone else. When it comes to the big finds, I can’t think of many instances where the first company that stumbled on the scene hit it big. Most of the big projects have been owned by several companies before the big discovery was made. Even the current darling of the market, Aurelian Resources Inc. [TSX: ARU], with its big find at Fruta del Norte, didn’t know what it was looking for. That was a blind find that occurred while the company was exploring off the edges of another deposit.

Frankly, for a small company, even if the interest in the project were diluted down to 30 percent, or a major took the project all the way into production, leaving the smaller company with only 10 or 20 percent— that 10 or 20 percent of a project that is big enough to interest a major is a lot of value for a junior. The cash flow generated by that project will pay for the junior to produce all sorts of shareholder value in the future.

TGR: Does Bravo have any interesting projects right now?

JAMES: I really like the company’s Homestake Ridge project in British Columbia. It’s a very interesting project with high-grade results—the better part of a million ounces now. We also like the Woewodski Island project in Alaska, which involves a lot of very high-grade surface work. There’s no tonnage yet; there’s no ore deposit until you actually have drill holes outlining volume of rock, and that’s what’s happening now. Sure, it's speculation but it’s in a company that already has some successful projects and plenty of blue sky in other areas.

TGR: What about Eaglecrest Explorations Ltd. [EEL-TSX Venture]?

JAMES: We are not formally recommending Eaglecrest; however, I’m comfortable talking about it. I’ve visited the site, I know the people and I have gone over the technical details with them. The main concern with Eaglecrest is, of course, the politics in Bolivia. The government just formally passed, and the judiciary just put the kiss of approval upon, a new tax measure. On the one hand, it’s positive because it puts an end to all of the questions about whether Bolivia is going to be anti-mining or not. The fact that they’re putting in this tax regime shows that they do want the mining revenue. On the other hand, it's a tax increase. Although the government gives tax credits on royalties, the net result is that mining is now more expensive in Bolivia. If I were a mining company or an exploration company looking for more minerals right now, I would probably not choose Bolivia. That’s why I’m hesitant to recommend Eaglecrest right now.

That said, Eaglecrest has title to a very interesting prospect. . .I also like Eaglecrest's technical people. And that’s paramount to me. The rocks don’t excite me if I don’t think good people are working on them. Eaglecrest’s new team has persuaded me that their interpretation of the geology of this project is perhaps better than the previous interpretation. And that lends new life to the deposit.

TGR: What about the recent no-confidence vote in Venezuela?

JAMES: I like Venezuela, which like Bolivia, is very interesting geologically. But Chavez is still president and he can still rock the boat. Just look at the deal he did with the petroleum companies—50 percent, take it or leave it. And of course, the oil companies have all that infrastructure in place. If they have a choice between 50 percent and zero, they’ll take the 50 percent naturally. But a guy who can do that is not really a guy who inspires a lot of confidence. So, we’re still leery of Venezuela, but, boy, there’s a lot of geologically interesting terrain there. And it sure would be nice to see that open up more.

TGR: In some ways, Venezuela under Chavez and Bolivia under Morales are alike, aren’t they?

JAMES: That’s true. When we were in Bolivia, we spoke with people in the opposition, which controls the Senate. We spoke with people from industrial concerns, and they control the four major provinces that produce most of the revenue in the country. And, of course, Morales ticked off the judiciary, too. So, there is significant opposition; it is quite possible that the guy could be out soon. If you just look at the history of Bolivia, the average term of a president lasts only a year or two. So odds are that Morales will be out soon. But as an investor, a speculator, I am not looking for change. I’m not looking for turmoil; I’m looking for stability. I want to know there’s a working mining environment and that it’s going to stay that way. The fact that there may be a change for the better is potentially good, but it tells me I don’t want to invest now. I want to wait and see if the change is good, and then see if it’s stable, and then maybe that’s the time to start taking a financial risk.

TGR: Any thoughts on Exeter Resource Corp.(AMEX:XRA)?

JAMES: I like Exeter a lot. We’ve had an interesting history with the company. We sold it when their former flagship project, Don Sixto, in Mendoza province, ran into political trouble there. We did it a bit early, when rumors about potential trouble were just starting. The rumors proved true and we were happy to be out. However, ultimately the company did an absolutely remarkable job of recovering and bringing forward its Plan B and Plan C projects, and D, E, and F, actually.

What I really like about Exeter is it has two very highly prospective projects right now. One is the super high grade Cerro Moro project in mine-friendly Santa Cruz province, southern Patagonia. The company was very focused on a small area of that project, but there are a lot more of those high-grade showings in the area. In a recent press release, Exeter announced fresh results from a new target area at Cerro Moro that appears to be just as high grade, just as exciting. So, the hypothesis is that this one area that the company has concentrated on is just the beginning.

Then there’s Caspiche, a project in Chile. In preliminary drilling, Exeter punched a 300-meter hole with 0.9 g/t gold. All of a sudden, there’s more potential. There are a few holes in this area that were all shallow. Several of them hit good bulk tonnage grades, maybe 0.7 g/t gold or so, over a very large width. Pretty good. It isn’t a slam-dunk, but it has the hallmarks. It has the alteration area; it has a few holes; and it has one really good hole that suggests that this could be one of those really big gold targets.

Exeter is not particularly cheap right now, but if either of these two speculations works out, it will be really, really good for the company. Plus, the company has a pipeline full of other projects. And who knows? The company may even get Don Sixto, its former flagship project, back. Mendoza has a new pro-mining governor.

So, I like Exeter a lot, but I have to stress that it is highly speculative; it doesn’t have a 43-101-compliant resource right now. It will have resources soon, but the market has already given the company a lot of credit for that. If either of those two exciting projects disappoints, it would be easy to get hurt on that stock. That said, the upside potential is very good based on outstanding results so far.

TGR: Let’s move on to First Majestic Silver Corp.(FRMSF.PK).

JAMES: I like this company also. I like the people involved — the technical people on the ground in Mexico are very experienced. Keith Neumeyer, the CEO, made his name with First Quantum Minerals (FM.TO), so he has a bit of a pedigree. Of course, he wasn’t the only one behind First Quantum’s huge success. But he was part of the management team, so he’s worth risking a bet on.

First Majestic raised high expectations from the get-go about how quickly it would be able to outline a lot of ounces of silver, and how quickly it would be profitable. The company didn’t deliver as quickly as it had intended to, but it is doing what it promised, and that’s important. It’s taken them longer than we hoped on many fronts, and it hasn’t done a great job of letting the public know when it’s reached milestones. One of those milestones was the addition of a zinc circuit to its flagship mine, La Parrilla. It’s taken a while, but the company is getting the costs down to where they need to be so that hopefully this coming quarter the numbers will be quite a bit improved.

So, that base of value is starting to solidify, and First Majestic Silver does have plenty of exploration potential. The stock got whacked pretty hard a couple of years ago, when one of the company’s major exploration projects delivered some really disappointing drill results. The market gave them a 50 percent haircut.

TGR: Wasn’t that a little severe?

JAMES: Exactly. We started buying the stock with both hands because it was clear that even though this was a serious and material disappointment, it was not worth 50 percent of the company. We issued a strong buy on that low, and within two months our subscribers who followed our advice had a 100 percent return on their investment.

TGR: What about going forward?

JAMES: First Majestic has a solid base of production now that finally seems to be coming into its own. There’s still plenty of blue sky, lots of projects still to explore. I think the company has prospects for reaching its 200 million ounces of silver equivalent potential this coming year.

TGR: In general terms, how would you characterize the silver market in Mexico?

JAMES: I think the whole subsector is ripe for consolidation. And First Majestic is well positioned. It has the resources, the connections in Toronto and elsewhere to raise the funds to be a consolidator. However, if the company gets gobbled up instead, it will be at a premium for existing shareholders. So either way, there’s also an M&A

TGR: What are your thoughts on Goldcorp Inc. (GG:NYSE)?

JAMES: That’s an interesting question. For a while, Goldcorp was regarded as not the best among the majors because it was doing such a good job. It was so profitable that it didn’t have much leverage to the rising gold price. However, with recent changes in costs for major projects and the perception of profitability after the great Galore Creek fiasco (Barrick/NovaGold), a lot of people are thinking that maybe a more profitable company like Goldcorp isn’t such a bad idea after all.

TGR: So you have a favorable opinion on Goldcorp?

JAMES: Absolutely.