Stock / Investment Selection Process Part I

From the suggestion of a blog reader - I will start a series of post covering steps of due dilligence. Let's go over the definition of due dilligence to understand what one should do before plunking down his/her hard-earned cash for the next promising junior.

The process of disclosure to investors of all material information pertinent to an issue.

The careful investigation by the underwriters that is necessary to ensure that all material information pertinent to an issue has been disclosed to prospective investors

The performance of those actions that are generally regarded as prudent, responsible and necessary to conduct a thorough and objective investigation, review and/or analysis. In the thrift industry, the term is used to describe the preacquisition analysis of a savings association by a potential acquirer. The analysis includes a review of the institution's franchise value, an identification of its assets and liabilities, an evaluation of its management, and a determination of its purchase price.

Essentially - you will want to understand all you can about a company, its management, its history, share structures, its projects, pending lawsuits/liabilities, outstanding issues in the geological/political area, and more.

After all, would you want to invest in a company that is mannaged by less-than-reputable people who have blackmarks at TSX and frequently file their financial statements late?

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While everyone has their own standards of how thorough a checklist is - an interesting approach to take would be one from the shoes of an Analyst or Newsletter Analyst such as J.Taylor and Canaccord Senior Mining Analyst Wendell Zerb.

J.Taylor is known to have been a large gold stock following - and rightly so if the returns are as promised. (see below)

On the other side of the fence - the brokerage firm analyst has known to be wrong - as in the case of Aurelian Resources ARU.v - suffered a political strike and the stock plummeted. Mr. Zerb was making comments to withdraw from his pick as I'm sure it has affected many of his client's portfolios. Keep in mind ARU is down to less than $5 today.

Price Targets

Canaccord Adams analyst, Wendell Zerb upped his target from C$11.00/share to C$13.00/share citing “We believe the FDN prospect has the potential to develop into a large high-margin mining operation and, as such, we feel justified in applying a premium in-situ valuation to the FDN resources of US$115/oz. To account for what we view is excellent exploration potential, which we believe remains both at the FDN zone and on additional targets within the Condor Project, we have chosen to apply a 1.1 growth multiple to our in-situ valuation.”

Certainly one has to appreciate the amount of data and unpredictable factors (remember Bear Sterns and various credit rating agencies...?) that goes into a price prediction. No amount of CFA, MBA, or other assorted three letter designations will guarantee a stock analyst's picks are correct - often times - it's common sense that spots the undervalued superstars of tomorrow.

A copy of Jay Taylor's Due Dilligence Summary can be found by emailing his assistant, Mr. Bassi or calling him at 1.718.457.1426. Seeing as how the man has publicly beaten S&P for years! - surely there must be something to his system. Let's get right to it:

Things J. Taylor focus on for his own due dilligence before investing in a company (and telling his readers to as well!):

1) Management, management, & management
- Who are they? Are they industry-recognized professionals or just a bunch of accountants and lawyers thinking of going into mining because gold is at $900/ounce?

What are some of their past accomplishments and successes? Being a successful entrepreneur and explorationist requires a large network of well-informed investors and businesspeople who understands mining exploration is a constant hit/miss. The juniors that DO survive longterm and beat the odds - see huge success. (Lundin buyout of Tenke)

2) Technical Background / Staff
- Mining isn't just about drilling holes and calling it a day! When you have a huge property that's squared kilometers in area... how are you going to angle and place the holes? Who can read the geophysicals and interpret it in accordance to the landscape and obvious mineralization?

Bottomline - Talented geologists mean the difference between wasting $200,000/hole and finding rocks versus striking it rich and hitting a high grade intercept. It takes YEARS of experience in the field and seeing different alteration types to specialize in this field. Professional Geologists (P.Geos) are the designation you would want to see, along with past famous discoveries and involvements in large projects.

Going back to NovaGold from a few days ago - their VP of Exploration - Greg Johnson was credited as part of the original taem that found the huge deposit in Alaska - as well as its recent expansion. Keep in mind Donlin Creek is famed to have close to 30 million ounces of gold... at $900/ounce that's certainly alot of coins! Another great sign of faith and confidence would be to follow what other projects Mr. Greg Johnson also works on (likely as a director).

3. Share Structure
- Going back to a point made earlier in 1. above, the type of investor owning the company is important as well. Sophisticated investors understand speculative plays fluctuate.

ALOT. and OFTEN.

Retail investors (your mom and pops) may not understand that and could sell en mass on the odd occasion and result in even more erratic stock charts.

Thus knowing what your retail versus institutional mix is important. Institutions buy big - which is a great thing not only for your shares - but also for visibility. In this example we see RAB Capital taking down several million shares of a mining explorationist. Keep in mind this is the same RAB that has recorded returns in the 1000%.

Yes, the thousand percentage returns. That's 10X your money in one year.

The FT says that there is no reliable data on how many other funds have made 1,000 per cent, or ten times the investment, in a year. But RAB Capital, London hedge fund manager, shot to prominence in 2003 when it returned 1,475.5 per cent in its Special Situations fund, which now runs $2.4bn and is the biggest shareholder in troubled bank Northern Rock

More on DD tomorrow. Happy investing, comments / feedback welcome!

Geology and Mining 101, RAY.v, NAG.v, SLT.v, potash, coal, and thoughts

When an investor reads a press release from their favorite exploration company - it's often in this format.

ABC-Gold-Company's regional exploration efforts has identified a coincident gold, copper, and moly anomaly that extends for five (5) kilometers.

Surprisingly, you don't need a lengthy Ph.D to figure much of this out. Let's see what anomaly means:

a·nom·a·ly (-nm-l)n. pl. a·nom·a·lies

1. Deviation or departure from the normal or common order, form, or rule.

So basically even in Geological considerations - anomalies refer to something out of the ordinary -such as a break in a typical sediment layer, a concentrated area of magnetism, radioactivity and other geophysical mechanisms.

The anomaly results usually mention size and magnitude of deviation - for example - a typical basalt rock would have only about 1-3 parts per billion (ppb) gold. This traslates to one microgram (ug) of gold per one kilogram (kg)of earth/rock dug up. An anomaly or "alteration zone", so to speak, would stand out with 100 ppb, and in a mineralized zone it could be as high as 5,000 ppb. Typically though, there is alot of "background" value that is not significant enough to be of interest.

A result is called statistically significant if it is unlikely to have occurred by chance. "A statistically significant difference" simply means there is statistical evidence that there is a difference; it does not mean the difference is necessarily large, important, or significant in the common meaning of the word.

So what does it mean when news releases mention things like "presence of pyrite and chalcopyrite"?

Geologists will often get excited at the presence of pyrite and mineralization. Keep in mind most are very conservative! Like Chartered Accountants - using Lower Cost of Market ensures a conservative outlook on Balance Sheet - lowers risk for their P.Geo status! The reason is large deposits have been discovered with only an initial hint of pyrite and chalcopyrite - evidence that plate tectonic may have moved gold mineralization over years ago.

Gold-silver and silver-gold veins, stockworks, lodes, mineralized pipes and irregular silicified bodies in fractures, faults, shear zones, sheeted zones and breccia zones essentially in volcanic terrains

Representatives of this type of deposit are widespread throughout the folded and relatively flat-lying volcanic terrains of the earth. The deposits occur in rocks of all ages, but the largest numbers occur in those of Precambrian and Tertiary age.
The favourable host rocks are commonly basalts, andesites, latites, trachytes, and rhyolites. In Precambrian rocks, such assemblages are usually referred to as greenstones. Many deposits of Precambrian age occur in tuffs, agglomerates, and sediments interbedded with the volcanic flows, particularly in banded ironformations. In the older terrains, the rocks are generally regionally metamorphosed and have the characteristic regional metamorphic facies outward from igneous or granitized centres. The younger rocks generally show the effects of chloritization, carbonatization, hydration, and pyritization (propylitization) over broad zones, but locally some of the andesites and rhyolites may be relatively fresh.

Hope that helps clear up some investor's mind about very technical news releases that no one understands!

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Flavor of the Month - Coal and Potash

By now the intelligent investors have no doubt caught on the potash and coal bandwagon and hopefully have made a quick buck with what essentially is momentum investing.


Raytec Metals (RAY.v) was a mist-spraying system company, turned iron ore, turned potash play. Overnight - the application and contemplation of going "potash" in Saskatchewan has spiked the share price from $0.15 to nearly $2.00 in the last little while.

RAYTEC ACQUIRES NEW POTASH CLAIMS

Raytec Metals Corp., subject to regulatory approval, has signed an agreement to purchase a 100-per-cent interest in exploration permit application area KP452, located in Saskatchewan.

EPAA KP452 covers an area of approximately 92,160 acres in south-central Saskatchewan. The newly acquired EPAA is in the southeastern portion of the evaporite formation, located approximately 380 kilometres southeast of the company's EPAA KP441. The new EPAA lies approximately 42 kilometres southwest of the Mosaic Company-Compass Mineral Group's K-1 and K-2 potash-salt mines, and 53 kilometres west of Potash Corp. of Saskatchewan's Rocanville potash-salt mine.

The company now has a total of 290,880 acres of prospective potash ground under permit application within the extensive Middle Devonian Prairie evaporite formation of south-central Saskatchewan.

Saskatchewan Ministry of Energy and Resources data indicate that EPAA KP452 is underlain by both the Belle plain and the Esterhazy potash members. Exploratory drilling has been conducted on the newly acquired ground in the past. This historic information will be reported once the company has reviewed all pertinent data.

Currently there is no NI 43-101 report on this property, nor are there proven, indicated or inferred resources. Readers are cautioned that the presence of the Belle plain and the Esterhazy potash members does not guarantee the presence of economic quantities of potash.

Compared to a metals mining / exploration company such as Minera Andes or SanGold which trades anywhere from $1.30 to $2.00 - this is the range of stock price at which you expect a mature property with almost resource estimate + production (ie. pouring gold/silver and has profit from selling the precious metals already).

North American Gem (NAG.v) is a coal play near the GXS Gold Source explosion story (from $0.30 to $18). They have been in gold, moly, uranium in Alberta, and latest is coal play with marketing focused towards being close to GoldSource's original find.

Recently GoldSource Mines Inc. (Public, CVE:GXS) stumbled upon coal while drilling for kimberlite in Saskatchewan, Canada. The drill holes were 1.6 Km apart and it appears that the speculators are betting on that the two coal seams are contiguous judging by the stock price performance. GXS was trading around the 20cents range earlier in 2008 and when they hit pay dirt approximately 6 weeks ago, the stock took off like a rocket.

With recent food price spikes coinciding with energy (oil/gas) spike - coal and potash is attracting new investors to the market like never before despite the overall depressed market.

Keep in mind though - these are the companies for daytraders with more tools at their disposals than the averge joe with an E-Trade account. I think the market is starting to get saturated with Potash and Coal plays - next months will see a fallout of the hype plays - when the actual lands are awarded - keep in mind many of these are just permits (not approved by government yet)

As always, buyer beware. Volume for the two above is sometimes nearly 1/4 of their shares outstanding trading per day - big difference from the tiny 10,000 share volume days before.

I hope you will agree with me that Strong management, solid fundamentals, industry experience, and a big portfolio of projects will prevail over time.

GDP, Chinese buyouts, and spiking metal prices - CVRD, Vale, BHP

China and The US Systematic Spiral

With devaluing dollar and lowered interest rates - increased purchases of imported goods with US dollars (hello cheap labor costs) from China can only add to the volume of of US dollars that can potentially be unleashed onto the market - crashing the value of it.

Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.

Shifts in Chinese policy are often announced through key think tanks and academies.

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

It would also cause a spike in US bond yields, hammering the US housing market and perhaps tipping the economy into recession. It is estimated that China holds over $900bn in a mix of US bonds.

Now would be a great time for some solid valuation of your dollars - whether it is real estate, commodities, or gold.

Base metals is starting to show up more in headlines around the world - as hungry industrial expansions from China and India devours up supply for its growing middle class.

In the booming eastern cities there is a confidence and energy in the air - thick as it is with the dust from countless building sites - that suggests plans for a further quadrupling over the next two decades are well on course.

By then - or somewhat later, depending on whose methods of measurement you trust - China will have overtaken the United States to become the world's largest economy, thus regaining a position it held for much of human history.

"Everything is possible these days," said student David Zhang, who has just returned to the mainland after a visit to Hong Kong.

"I used to want to move to the US and have a beautiful house with green grass in front of it. But now I think this kind of thing can be achieved in China, in my own culture."

To give you a sense of the growth rate of China and India, let's consider a basic economic measurement of a country. One would imagine ideally there would be a measure of all the country's productions, expenditures into its own development, physical labour output (manifested in physical goods and service hours), would be exported to the world.

Now - if a country imported goods and services into the country and didn't produce any of it by themselves - you are using your country's currency to buy from the other producing countries. Think about what we talked about a few entries back (Supply and Demand) - As supply of your currency increases in the market, it is worth less (demand drops).

Gross Domestic Product

The gross domestic product (GDP) or gross domestic income (GDI) is one of the measures of national income and output for a given country's economy. GDP is defined as the total market value of all final goods and services produced within the country in a given period of time (usually a calendar year). It is also considered the sum of value added at every stage of production (the intermediate stages) of all final goods and services produced within a country in a given period of time, and it is given a money value.

The most common approach to measuring and understanding GDP is the expenditure method:

GDP = consumption + gross investment + government spending + (exports − imports), or, GDP = C + I + G + (X-M)

US GDP was 2.0% in 2007 whereas China's GDP was 11.4%.

BEIJING, Jan. 24 (Xinhua) -- China's gross domestic product (GDP) grew 11.4 percent year-on-year to 24.6619 trillion yuan (3.43 trillion U.S. dollars) in 2007, but the risks of spiraling inflation and economic overheating were also rising.

The growth rate was 0.3 percentage points higher than the 2006 level revised at 11.1 percent, the National Bureau of Statistics (NBS) said on Thursday.

NBS head Xie Fuzhan told reporters here that 2007 was the fifth year in a row in which GDP had expanded by more than 10 percent. Analysts said the 2007 figure was also the highest of the past 13 years.

Breaking economic growth down by quarter, GDP expanded 11.1 percent in the first quarter, 11.9 percent in the second, 11.5 percent in the third and 11.2 percent in the fourth.

Xie said that the United States and China had been powerful engines for the current cycle of global growth. However, the mounting possibility of the U.S. economy moving into a recession was bound to have a negative effect on the world economy.

However, Xie was confident of China's economic prospects, saying a "steady" growth was likely this year.

Feeding off this explosive growth of 11%+ GDP in the last 2 years and 2008 looks no different, consumers are demanding more higher quality products - and factories are running out of natural resources.

A simple question is presented. You have a nation wealthy in terms of US Dollars (which is devaluing both due to higher volume, dilution, and world prominence) - but it doesn't produce too much precious metals and base metals.

Answer? Should be obvious - it needs to look elsewhere.

Picture above shows the amount of cranes in Shanghai now building high rises, condos, and office towers for the booming economy. Back in 2005 they already employed 25% of the world's cranes - just in one city. Last I checked - towers require large amount of iron, copper, other base metals, and gold

In the past decade alone, a forest of space-age skyscrapers — nearly 3,000 over 18 stories tall — has sprouted along the banks of the Huangpu River in a scene straight out of The Jetsons. They pierce the sky with their globes, rockets, spires, crowns, ziggurats and crescent peaks in a jaw-dropping showcase by the world's top architects. With a staggering 2,000 more in planning or under construction (at one time, the city had one-quarter of all the world's cranes), residents struggle with an ongoing sense of disorientation.

Financial Times tells us that China has been issued warnings from large base metal producers like Vale CVRD, and BHP Billiton, which produces and explores in major production sites (including Argentina) and invests heavily in promising juniors.

Rio Tintoand BHP Billiton (NYSE:BHP) have asked their Chinese steelmaker customers to accept the largest ever increase in iron ore prices or risk the interruption of supplies from Australia.

Traders and industry officials said the mining companies have demanded price increases for their annual iron ore contracts in excess of the record 71.5 per cent rise of 2005 and were fighting for increases of 85-95 per cent.

Rio and BHP have warned their Chinese clients some annual contracts will expire next Monday and they would cease supply under the old terms. They have told them the ore would instead be sold into the spot market, where prices are higher.

85-95%? Yup you are reading that right. No amount of paper cash will convert to physical goods when money is able to be freely created. Can you build a car with pictures of Benjamin Franklin?

Hedge Funds, Investments, and Frauds - BSC, JP

While the focus of the blog is on Mining, Argentina, and Investments - one cannot study investment without keep up to date with Wall Street.

If you recall earlier in 2008 when the house of cards imploded at Bear Sterns, the stock dipped from $60 to $2 nearly overnight. Despite Cramer's vehement push that it was a GREAT BUY literally days before the fateful weekend of Fed bailout.

On March 10, 2008, information leaked into the market about Bear Stearns’ liquidity problems, causing the stock to drop to as low as $60.26 per share before closing at $62.30 per share. On March 13, 2008, news that Bear Stearns was forced to seek emergency financing from the Federal Reserve and J.P. Morgan Chase hit the market and Bear Stearns stock fell to $30 per share. Then, on Sunday, March 16, 2008, it was announced that J.P. Morgan Chase was purchasing Bear Stearns for $2 per share. By midday on Monday, March 17, 2008, Bear Stearns stock had collapsed another 85% to $4.30 per share on volume of 75 million shares.

Yesterday afternoon we witness another chapter in the BSC saga - 2 fund managers arrested on evidence of insider trading, fraud, and essentially misleading investors to not pull money from the hedge fund even as its sliding down.

JP Morgan, one of the largest investment banks in the world, thought to be bulletproof for the problems of 2008 - is showing signs of wear from all this liquidity issue.

Ellman highlighted JPMorgan's consumer credit exposure as a serious threat to profitability. "Consumer finance is a major, major problem potentially for JPMorgan," he said.

JPMorgan is among the biggest U.S. credit card issuers, and it also has growing auto loans and mortgage businesses. For the first quarter of the year, JPMorgan recorded $1.8 billion in income from credit cards. Its auto loan originations totaled $7.2 billion and its mortgage loan originations reached $47.1 billion, up 38 percent and 30 percent, respectively, on the same quarter the previous year.

Funny, the CEO James Dimon (right) leads teams that wrote in a January 2008 report (few months after subprime really hit the fan), that 2008 "will be nothing but net."

Full 312-page report here.

As expected, the market drops today on more negative financial news and a confidence shaking materialization of reality.

Kitco as of noon today Pacific Time - Gold is back at $910.30 while The Dow Industrial drops below 12,000 index.

I think it's fair to say, gold is definitely here to stay. Have a good weekend, see you back here on Monday.

Gold Directions?

As we discussed in previous postings - physical gold and gold producing companies have traditinally been a great way to hedge against inflation.

Today we see on Kitco gold is about $902 (at the time of this post).

From Reuters this morning we find out there's more supply shortage due to power problems in South Africa - the major source of platinum (75%) in the world.

http://africa.reuters.com/wire/news/usnBAN851431.html

The metals had already been firmly underpinned by supply issues linked to South Africa's power problems and the prospect of a miners' strike next month.

"When you have 75 percent of the world's platinum produced in one country and you have power problems there, that is going to be explosive in terms of price action," said BNP Paribas analyst David Thurtell.

Again, the concept of supply and demand kicks in - boosting prices of the two metals up on pending supply shortages.

What does this have to do with gold, you ask. If you remember we covered how inflation essentially means the devaulation of your dollar either through a few ways:

1) Rising cost of goods and services - consumers can now afford less - CPI rises
2) Decreasing wages - slowing economy - means dollar supply in consumer's pocket goes down
3) Trade deficits - country's buying more exports and selling less - results in a weaker currency as the foreigners start collecting a large pool of your currency. If they decided to exchange most of it back in the market all at once (theoretically) - it floods the market and lowers the value of your dollar.
4) Lower interest rates - means less interest in the dollar - lowers demand even further

In this case dollar can no longer afford to go lower - Bernanke has cut rates 7 times since late 2007. More cuts will erode the dollar and banking system which they cannot do. Banks leverage themselves on loans and live on the spread - when variable rates are this low the profit margin shrinks further - and 2008 is a year when profit is hard to come by for most banks.

If the rates go up - an interesting question will be where gold stands (as its commonly accepted that it goes the inverse direction). Reuters offers some guidance below:

The precious metal is struggling to find direction as the market debates the next move for the dollar. Gold typically moves in the opposite direction to the dollar, as it is bought as a hedge against weakness in the currency.

However, demand indicators are positive.

The world's largest gold exchange traded fund, StreetTRACKS Gold Shares, said it saw a 2 percent or 12.27 tonne inflow on Tuesday, bringing its total holdings to 617.48 tonnes, their highest level since April 22.

Gold ETFs issue securities backed by physical stocks of the precious metal which can be traded on exchanges, allowing investors to gain exposure to metals prices without holding the metal itself.

A rise in ETF holdings has represented a key source of demand for gold since the launch of the first precious metals ETF in Australia in 2003.

There are also signs that Middle Eastern jewellery demand may be picking up, with Dubai gold sales for May rising 18 percent from the previous month as easing prices brought buyers back to the market.

Versus other base metals, gold and silver have an unique trait - they can act as an alternative to currency and their intrinsic value is not based on a promise from a government. Mr. Jim Sinclair might be negative at times, but keep in mind he has been right several times in the last few decades!

With notional value of derivatives outstanding plus listed and OTC derivatives now over a QUADRILLION dollars, inflation is unstoppable by any manner of policy. Interest rates are as ineffective on the upside as they were on the downside. This mess is a derivative mess whose growth will never stop as the more problems occur, the more derivatives are written to combat them. Banks with 1% cash have to raise money or die.

What do you want, a piece of paper with a promise to repay in nothing, or gold?

There is no cogent argument that holds water other than a geometric rise in gold.

With low consumer confidence and overall market chaos - I think it's clear that gold and gold stocks still offer a great alternative to holding onto actual currency.

GMF Global Mining Finance Guide, Argentina, TNR Gold Corp TNR.v and Energold EGD.v

Yesterday's entry ran long and I did not get the chance to cover Global Mining Finance.

Rather than re-iterate what they are, here is their bio below:

Global Mining Finance (GMF) is an annual book covering the financial aspects of the world wide mining industry. Written at the beginning of each year, GMF provides mining and finance professionals a look at an overview of the industry for the previous year with an outlook for the upcoming year.

The publication is available at major mining conferences (and the analysts and editor was at the Vancouver show just days ago)

With that said, it's a great comprehensive read for those of you interested in a certain region of the world. It's approach is an free editorial which means even for those who pays to included as an advertiser - it doesn't guarantee a coverage... which really makes the companies covered in each region of interest since the analysts and editor at GMF clearly finds them of interest.

As the blog is named - my interest lies in South America - specifically Argentina. I like the region's relative political risk. The recent worldwide news of Mendoza regarding certain mining process bannings has caused some short-term investors to flee the area in general.

St.LOUIS (ResourceInvestor.com) -- The provincial government of the Mendoza Province in Argentina has passed legislation banning the use of any chemical substance used in mineral processing, mainly in the extraction of gold and other metals. The legislation brings to a head an ongoing battle over mining in the region, immediately impacting at least two advanced projects.

Mining enterprises in the Mendoza Province, famous for its wine making industry and ski resorts, have faced strong environmental opposition by non-government organizations (NGOs) in recent years.

In September 2005, the province passed a law trying to block exploration by Tenke Mining [TSX:TNK] on environmental grounds, and exploration was stopped for 90 days.

On December 13, 2006, Mendoza’s parliament voted to suspend all open-pit mining and halted issuing any new exploration and mining permits until the province passes a new environmental management plan. Then just one week later on December 20, Governor Julio Cobos vetoed the bill.

When one province has a mining halt, clearly there would be concerns amongst investors. (see Aurelian ARU.V from previous post) However seasoned investors would underestand that in Argentina, provinces vary widely from one to the next.

Most notable example is the province of San Juan, Argentina. Famous for its wine and scenic views (check tourism site here for more info). I have heard stories that locals ask every foreigner if they are from a mining company - it's a hugely popular industry there, to say the least.

When you think of the amount of gold and copper produced in Chile and Argentina's proximity to it - versus its output so far, there's no question the tremendous potential yet to be discovered by the world so far.

As always - those who are in the region EARLY, stand to benefit the most.

Under South America, GMF covers a few companies and overview. Let's take a look at Latin America section starting on page 92. I've scanned the pages directly for easier access below:


Your own copy of 2008 Global Mining Finance can be downloaded here.

TNR Gold Corp. ($0.24 today on TSX) is the first company listed under Company Snapshots - keep in mind once again these selections are done on merit - not paid commission reports or advertisements.

As mentioned before the Argentina potential is covered by the company President. rising Canadian dollar versus US and Argentina Peso means more project for each invested dollar - while the discovered commodity is still likely going to worth more going forward given rising inflationary numbers (fastest in sixth months!) and the US situation.

Jun 13, 2008 02:17 PM
MARTIN CRUTSINGER The Associated Press

WASHINGTON – Inflation shot up in the United States in May at the fastest pace in six months, pushed higher by soaring costs for gasoline and other types of energy.

The U.S. Labour Department reported Friday that consumer prices rose by 0.6 per cent last month, the biggest one-month increase since last November, as gasoline costs surged by 5.7 per cent. Food prices, which have also been rising sharply, were up 0.3 per cent as the cost of beef and bakery products showed big gains.

The company has several large properties and several key joint venture partners including NovaGold ($7.74 last on TSX - previously mentioned in Donlin Creek project news few entries ago), Suramina Resources ($1.53 last on TSX), and association with industry majors like Xstrata and VALE.

I will provide more backgroound information on my next posts... as the potential for this company is clearly there with so much industry recognition... these are the signs you look for. Management is another huge piece of the puzzle and I will address it next posts.

I wanted to move on to Energold Drilling which is featured on the same page as TNR Gold as their success story really tells you what a junior can do in a rising commodity market.

The company provides drilling services to mining companies primarily in Mexico. Graph on the right is over 5 years and you can see the initial rise from $1 and under to close to $5 today even given the trending down of the 200 day Moving Average.

Case in point - another solid example of GMF listed companies.

Quality and high potential (some already achieved large degree of success, such as Energold)

There is only a total of 4 selected for 2008 - the other two honorable mentiosn include - Ascendant Copper (ACX) and Malaga (MLG on TSX)

Mining Conferences - Writers and notable stock trends - Raytec RAY.v, Sangold SGR.v, and Global Mining Finance

Every few months there is a conference somewhere in the major cities in Canada or US. This month Cambridge House landed in Vancouver for 2 full days of mining stocks and overrall economic discussions.

World Resource

Investment Conference,

Vancouver, BC June 15 - 16, 2008

Today I'll list off some useful tips about organizing one's time when dropping by the conferences. It's a great way to get in touch with the retail public as to the current market conditions and sentiments.

Keynote speakers and presentations from your favorite newsletter writers (such as Jay Taylor, Greg McCoach, Doug Casey, Rick Rule, just to name a few), also makes these conferences a worthwhile trip.

However always keep in mind each party's interests and incentives.

Newsletter writer, especially the ones that recommend a stock in hopes that it rises up, are generally trying to sell suscription to a certain investor base. Through an exclusive offer with their membership club or suscription, they try to offer their members an investment tip for companies about to make a move.

As such, their tone can certainly be more optimistic. And... in the odd case that they are wrong - there's always an place or clause to backpaddle, or even drop the subject entirely.

There is also an entirely different breed of writers - ones who focus on the macroeconomics of things - people like Al Korelin (who has his own radio show discussing macro econ with popular writers) and Paul Van Eeden (focuses more on commodity prices, general econ, inflation, etc). Naturally in terms of risk-level these writers and commentators tend to be less pressured regarding specific stock picks as they are only hoping to predict the general direction of the economy.

I have always found that the Question and Answer period of these speaker series is a great barometer of retail sentiments. For example, yesterday's crowd primarily focused on:

1. Banking crisis in US - more write-offs and off-balance-sheet surprises?
2. Inflation numbers and lack of monetary supply indicators?
3. Rising food costs?
4. Oil versus gold?
5. Junior explorer's outlook versus commodity prices and the lag

I'll address each of the above one by one.

1. Most writers were primarily bearish on the regional banks as they would not affect consumer confidence nearly as much if they were to go down... whereas the Lehmans and Bear Sterns of the world would shake the very trust foundation of most consumers and send widespread panic through Wall Street - hence the Fed bailout safety net. Thus if investors can understand how off-balance sheet assets are calculated and accrued by the banks (most not published as banks have their own regulations)... and can stomach the risk of FI's wavering in this time of low consumer confidence - then major FI's are the way to go still.

2. Inflation fear is still present but less mentioned now that interest rate cut seems to have reached a limit.

Forbes: "The dollar has slumped since the Fed began cutting interest rates in September. It has cut rates seven times, to 2.0%, aiming to revitalize the economy."

http://www.forbes.com/markets/2008/06/10/briefing-europe-update-markets-equity-cx_je_0610markets20.html

3. Rising food cost is important as it affects the everyday consumer - even if they have no exposure to the volatile stock and capital markets. With biofuel being considered since last year and turning out to be a dud as using corn for biofuel means both further spiking food costs (due to higher corn demands) and rising cost to even transport the corn. (see Time.com article Mar 2008 below)

From his Cessna a mile above the southern Amazon, John Carter looks down on the destruction of the world's greatest ecological jewel. He watches men converting rain forest into cattle pastures and soybean fields with bulldozers and chains. He sees fires wiping out such gigantic swaths of jungle that scientists now debate the "savannization" of the Amazon. Brazil just announced that deforestation is on track to double this year; Carter, a Texas cowboy with all the subtlety of a chainsaw, says it's going to get worse fast. "It gives me goose bumps," says Carter, who founded a nonprofit to promote sustainable ranching on the Amazon frontier. "It's like witnessing a rape."

With the deflating US dollar - holding bullion and gold was mentioned as a defensive tactic against further rising costs as gold is valuable by itself and not a promise to pay (as in US dollar and various other legal tenders).

4. Oil is at an all time high and OPEC has agreed to up the production by 200,000 barrels a day. That will do little to satisfy the ever-rising demand of fuel.

Over the weekend, Saudi Arabia said it will boost its oil output by 200,000 barrels a day. Despite the promise of more supply, the price of oil spiked higher Monday morning.

The main reason: The added supply won't be very great, and demand, especially from China and India, has shown little sign of slowing.

"There is a belief that China and India are going to sop up all the extra supply," said Stephen Schork, publisher of the industry newsletter the Schork Report.

The world uses around 85 million barrels of oil a day, so an extra 200,000 is a mere 0.2% boost.

Last I checked, 0.2% is not even considered a statistically significant amount - especially when majority of the supply will likely go to India and China - simply because with their strengthened currency they are afforded a larger purchasing power.

An interesting article I read a few years back mentions oil/gold ratio. Take a look below:

Today we may very well witness a repeat of history, of oil driven higher by strong global supply and demand forces while the gold price initially languishes. But once investors around the world start to perceive the stunning opportunities for a mean reversion here, capital will flood into gold and blast it higher to catch up with oil. Once this current gold/oil ratio anomaly is resolved, I suspect gold investors will be very happy campers.

Given oil's at an all time high at $140/barrel and gold has certainly withdrew from its $1,000+/ounce mark - does that quote sound familiar at all?

5. Juniors were commented as the lottery ticket of an investor's portfolio. The speakers stressed that even a junior producer cannot be counted on to rise with rising commodity simply because of lack of visiblity.

They stressed that one has to really understand management and know that technical team should always be favored.

Another point is - teams have their specializations - very seldom do explorationists turn out as great mine developers and builders... it's just a far different set of skills.

Overall though, writers and analysts are happy with the potential of juniors. As is with the case of many - it's a matter of time to the market and the majors waking up to their dwindling supply and go looking around with their big wallets.

Any questions and comments always welcomed. Sorry about the lack of update yesterday as I was busy at the show.

Importance of Relatively Stable Government for Mining Companies - ARU.V Bloomberg Equador - Argentina

In any mining project - aside from the abundance of minerals in the ground, several other elements are also necessary.

- Management commitment (successes in the past? Related experience?)
- Technical Abilities (Miners / Engineers / Geologsts?)
- Support from locals? (unless you're planning to fly in geologists and drillers for North American wages... it's gets $$$ REALLY fast)
- Support from locals - also relates to mining permits

And most recently... government!

You see, government in developing countries welcome mining companies to come in and stake out land for potential mines for many reasons (not exhaustive list)

- boost in economy
- job creation
- elevating their country's visbility as a mining capital etc (see Mexico / South America)
- royalties / taxes

And what would government do without taxes?

About a month ago, Aurelian Resources (TSX-V - ARU) had to suspend all their operations and mining activity because the Equadorian government decided they were not getting enough of the pie so to speak.

With large overhead and ongoing worker contracts this is a huge blow not to mention delay for any mining company... this is magnified for a junior mining company with limited capital to sit around on assets for long! (article from Bloomberg below)

Aurelian, Miners Plunge as Ecuador Suspends Mining and issues Moratorium
http://www.bloomberg.com/apps/news?pid=20601082&sid=aB8omBsvC2L4&refer=canada#

Definition of moratorium:
A period of time during which a certain activity is not allowed or required.

As a result of this news, ARU.V droped over 45% within hours. (see right)

Thanksfully there is light at the end of the tunnel... the Ecuadorian government realizes the blow it has dealt to potential business for the area in the future and quickly issues a press release about a clarification on June 27, 2008.

Despite political quagmire, Ecuador may produce a workable mining law

http://ibtimes.com/articles/20080612/despite-political-quagmire-ecuador-may-produce-a.htm

Consultation with mining companies is expected to continue until June 17 with a formal review of the draft mining law to be presented to President Rafael Correa on June 22 and publication of the draft on June 27. "An international road show by senior Ministry officials is expected to follow to sell the merits of investment in Ecuador's mining sector."

I'm sure ARU.v investors are waiting anxiously for this to get resolved and for activities to get back to normal. Chances are there will be heftier taxes imposed on the Gold / Copper ... which for an operating business will mean higher costs and lower revenue.

Large brokerage house analyst at Haywood Securities stated:

"Like everyone, we continue to be in the dark on exactly how the future will unfold in Ecuador," metals analyst Eric Zaunscherb noted, "Overall, we continue to see significant risk to investors exposed to Ecuador."

"But we also sense that the outlook is improving as pieces fall into place," he declared.

Keep in mind, Aurelian rose from pennies of $0.70 to $23 in 2007. Even after dropping to $11, that's still over a 1,000% return since inception for the initial investors!

Of course, things are much easier when you're in a country or province that is known to be mining friendly like Mexico and Argentina.

- Lower cost of employment
- Mining subsidies (lower cost for start-ups and new properties)
- Less taxes / expenses on exporting minerals

I will cover more about Argentina next entry, have a great weekend everyone.

Comments welcomed!

Reuters - Inflation fears may push gold back to $1,000/oz - AUY, KGC, GG, ABX

Reuters mentioned that gold is possibly heading back to $1000/ounce levels (see quoted parts below), which will indeed bode well for producers and industry majors, giving them the much needed capital and confidence in acquiring exploration and early stage projects.

This will certainly be a good thing to Barrick, Kinross, Yamana, and Goldcorp, several industry majors that has lately been acquiring and looking more into juniors. Since the production time frame is 3-4 years before a mine can be constructed from a late stage project, the leadtime is important in news of this longtem expected rise in the gold values.

In the last little while Kinross (KGC) has been buying up stakes in various junior exploration plays including BC Gold (BCG.v on TSX). Ways of buying up shares include directly from the open market under the company's name or more popularly... through a private placement.

Private Placement:
Essentially a separate deal conjured up for a small group of investors for a pre-agreed upon price. Usually private placements would offer additional benefits such as 1/2 share of warrants at a small premium of current price. For example if the PP was set at $0.10, the warrants could be $0.15 with an expiry date of 2 years.

PP can be used in place of a formal perspectus as there are exceptions through the TSX which allows the company to save money in getting their promotional materials up to date / and formally signed off by accountants. Usually these exceptions involve the investors being knowledgable and accredited.

In the case of the Kinross buying 10% stake in BCGold (link to press), the share prices were set in the PP at $0.35.

The subscription price for the common shares is CAD $0.35 per common share for an aggregate purchase price of CAD $1,050,000. The private placement is subject to approval by the TSX Venture Exchange.

The investment in BCGold is part of Kinross' strategy to increase its exposure to quality exploration opportunities by investing in junior resource companies.

As most people would think that having a major believe in your projects that they buy 10% of your outstanding shares is a good thing, no?

Clearly the market does not believe so... as BCG.v is trading at $0.20 today. Strange, no? Unfortunately as it's been mentioned before that is the state of the junior exploration market lagging behind in the commodity rise and not getting their share of appreciation, but all the downsides.

However... that means great deals can be found for sharp investors...what do you think? Comments and emails always appreciated!

By Humeyra Pamuk - Analysis

LONDON (Reuters) - Gold is poised to climb back above $1,000 per ounce this year, as inflationary pressures and financial turmoil prompt investors to seek shelter in the metal used as a store of value.

But the caveat is gold's fortunes are traditionally strongly tied to the movement of the dollar and significant turnaround in the weak U.S. currency could limit its rally.

"There's a good chance that it may go back above $1,000 in the short- to medium-term," said Richard Davis, a London-based fund manager at BlackRock.

Record high oil prices, a soft dollar and turbulence in the banking sector sparked by the credit crunch pushed gold to a record high of $1,030.80 per ounce on March 17.

Since then the metal has lost around 15 percent.

However inflationary pressures highlighted recently by the U.S. Federal Reserve and European Central Bank will aid gold.

"We're headed for inflationary times and gold has always been a safe asset to protect your wealth against inflation."

With oil prices at a record high above $135 per barrel and food prices surging to their peaks, fears of inflation is haunting investors more than ever.

U.S. Federal Reserve Chairman Ben Bernanke said on Monday the latest surge in energy prices is adding to the dangers from inflation but the central bank would strongly resist rising inflationary expectations.

His strong tone convinced more investors that rate hikes could come this year and triggered a rally in the dollar, which took the steam out of gold, as the two tend to move in opposite directions.

Some fund managers still betting on a weak dollar say there could be further fallouts from the credit crisis, which would make investors rush back to gold.

"We might have aftershocks or maybe another major 8.0 Richter scale kind of event lies ahead and that's the sort of thing that tends to make people nervous," said John Hathaway, senior managing director of Tocqueville Asset Management.

Hathaway said gold serves as an alternative financial asset particularly when markets worry about banking issues or currencies. "I think we will see gold going above those record high levels again and that will probably be this year."

MOMENTUM

However, some analysts disagree, citing poor physical demand, weaker gold dehedging and possible strengthening of the dollar in the longer term.

"Anecdotal evidence in the current quarter so far suggests that the decline in demand has continued," said metals analyst Stephen Briggs at Societe Generale.

The Indian market, accounting for 20 percent of world demand, is likely to remain sluggish, Briggs said. "Gold at the moment just doesn't seem to have the momentum to do it."

"I'm sure $1,000 is possible but we need to be getting into new territory on the dollar and we're not," Briggs added. His comments were echoed by fellow analysts.

U.S. investment bank Goldman Sachs economists expect the dollar to remain weak, but they expect that over a 12-month period it will begin to strengthen as the U.S. economy recovers.

On the back of that, Goldman Sachs said it lowered its 3-, 6- and 12-month forward price forecasts for gold to $860, $840 and $800 an ounce respectively.

Record high oil prices, which boosted gold this year, could continue to offer support, as they highlight the dangers of inflation and put pressure on global economies.

"If (high) oil slows the economy to the point where we are in a low interest rate environment for the dollar, that could be good for gold," said Michael Lewis, global head of commodities at Deutsche Bank.

(Additional reporting by Jan Harvey, Editing by Peter Blackburn)

Stages of Discovery : KGC, NG.TO, and ABX on TSX

Yesterday we talked about Mineral Resources of various exploration projects. Today I wanted to cover further aspects of various types of Mineral Resources. Which is better and why? (cost is a factor)

Mineral Resource is defined as :

a concentration or occurrence of natural, solid, inorganic or fossilized organic material in or on the Earth’s crust in such form and quantity and of such a grade or quality that it has reasonable prospects for economic extraction. The location, quantity, grade, geological characteristics and continuity of a mineral resource are known, estimated or interpreted from specific geological evidence and knowledge. Mineral resources are subdivided, in order of increasing geological confidence, into inferred, indicated and measured categories.

Remember stats from school? Degree of confidence once again plays into reserve calculation.

In a perfect world mining exploration companies can drill 1,000 holes to confirm a deposit's existence. But when you calculate how much it costs to drill a hole (usually $400-1000 per meter)... things add up real fast. Think about an average of 300-500 meter per hole. Thats' a potential of $300k -500k per hole when most drill programs will have 5-10 hole each. Even with multi-million budgets per projects for the year, it won't last very long!

So people came up with the next best alternative: different levels of confidence of estimates depending on the available data, proximity of drill holes, depth, and more. Before we go over what each means... let's remind ourselves what drill targets and mineral deposits are like.

So we have a drill set up here:

And the core logs it comes up with looks like this:

At which point the core logs are cut and labelled, and sent to the assay labs for analysis. Essentially what the labs do is to find the percentage % of precious and/or base metal that exist in the drill cores. See the drill hole diagram below from Solitario Resources, a large exploration company operating in Latin American with large venture partners such as Newmont Mining Inc (one of the largest mineral exploration companies in the world).


The red line represent drill holes and the numbers beside it are official assay lab results of the % make up of the drill logs. From these results geologists are able to combine their theoretical models of what the deposits look like with actual results and modify future drill hole locations. Below is a sample of what a projected deposit would look like.Of course, if things were that straight forward, mining companies woulnd't have budget over runs and delays as they usually do! Hope this brief and simple over-view presentation help visualize alot of this mining jargon that new investors run into. In future we'll go over a sample assay result / table and how one would interpret it.

Back to the various levels of confidence now. From the weakest level of confidence to strongest...

An Inferred Resource is that part of a mineral resource for which quantity and grade or quality can be estimated on the basis of geological evidence and limited sampling and reasonably assumed, but not verified, geological and grade continuity. The estimate is based on limited information and sampling gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes.

An Indicated Resource is that part of a mineral resource for which quantity, grade or quality, densities, shape and physical characteristics can be estimated with a level of confidence sufficient to allow the appropriate application of technical and economic parameters to support mine planning and evaluation of the economic viability of the deposit. The estimate is based on detailed and reliable exploration and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes that are spaced closely enough for geologic and grade continuity to be reasonably assumed.

A Measured Resource is that part of a mineral resource for which quantity, grade or quality, densities, shape and physical characteristics are so well established that they can be estimated with confidence sufficient to allow the appropriate application of technical and economic parameters to support production planning and evaluation of the economic viability of the deposit. The estimate is based on detailed and reliable exploration, sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes that are spaced closely enough to confirm both geologic and grade continuity.

Hope that helps! Happy investing.

NovaGold NG.TO says 1.5 million ounces/gold per year from Donlin!

One of the first thing any keen students of the market and investing should do is pick up the financial sections of the paper.

On Financial Post today we see a famous Canadian exploration company turned production - NovaGold (NG.TO on Toronto Stock Exchange TSX)

NovaGold says Donlin could yield 1.5M oz a year

http://www.financialpost.com/trading_desk/mining/story.html?id=577654

Let's take a second and absorb this. What's gold price today (refer to Kitco.com) - $870/ounce. (rounded up to make calculations easier...)


At 1,500,000 ounces that will be = 1,500,000 x 870/ounce =
$1,305,000,000

That's a lot of zeroes, no? What's the market cap of Novagold again? To find out we can check some of the popular sources for financial news and punch in NG.TO in the quote section.

Yahoo Finance
http://finance.yahoo.com/

Stockwatch
http://www.stockwatch.com

So for today NG closed at $7.75 and Yahoo!'s slightly outdated Market Cap provided us with $817 Million market cap.

Resource estimates will also have economic and feasibility studies as part of it - usually done as $/ounce (so to make comparisons easier when given gold prices per ounce).

For example if it costs them $200/ounce in terms of production cost (mine building, labor, transportation, etc) and gold sells for $870/ounce... that's a clean $670/ounce profit! It shouldn't take a rocket scientist to figure out that this is a good investment!

Now that NG has stated it wants to produce 1.5 Million ounces a year... how much gold is in them mines... it doesn't mean much if it only lasts a year right? Now we are asking for reserves numbers (or estimations)

Let's take a look at their recent news further.
http://finance.yahoo.com/marketupdate/inplay#ng

9:16AM NovaGold Resources announces feasibility study in Q1-2009 for Donlin Creek project; estimates 31.7 mln ounces of measured and indicated gold resources (NG) 8.60 : Co announces an update on the Donlin Creek gold project, including initial assay results from 2008 drilling, a resource estimate incorporating the remainder of 2007 drilling, and the decision that a feasibility study will be completed and approved by Q1-2009. The highlights include: Resource update estimates 31.7 mln ounces of measured and indicated gold resources with an additional 4.2 mln ounces of inferred gold resources; Initial drill results at East Acma highlight continued resource expansion; Preferred project design identified - feasibility study to be completed and approved by 1Q09.

Read the part in red carefully. That's 31.7 Million ounces measured Gold.

If you're an industry major (Barrick, Kinross, etc) that has a much larger market cap than NovaGold, this would be a great time to pull out the calculator and see how much premium it will cost you to buy NG out.

Doing the same simple calculation and assuming the measured reserve is correct (confidence level to be discussed later)

31,700,000 ounces gold at $870/ounce = $27,579,000,000
Compared to a market cap of only $817,000,000 Million, one would definitely say NovaGold is undervalued, wouldn't you?

The current market cap is less than 3% of the value of the gold estimated!! Not to mention NovaGold has several other projects like Shotgun near the infamous Pebble deposit! (largest gold-copper-porphyry in world - billions of ounces!!) Keep in mind This is gold that is converted to bullion that keeps the value and doesn't devalue like paper currency!



As you can see, the casefor juniors small-caps and micro-caps is definitely growing stronger by the day. It's this author's honest opinion that this severe lag of spiking commodity prices + declining reserves by the majors will only mean an eventual surge of buyouts (at a healthy premium to investors who took the initial risk)


Comments / criticisms - always welcomed.

Ways of Gold Investing

Today we discuss a bit more about investing in gold. I mentioned before it's a great hedge against inflation and overall market turmoil.

Well, as we can see today from Lehman Brother's unexpected fund raising efforts ($6 billion, anyone?), the US capital market confidence is sinking with every large bank's latest PR statement saying how there isn't a problem at all. Doesn't this sound awfully similar to Bear Sterns?

While it's great to have gold-related stocks, some experts recommending 5% of your porfolio in actual bullions.

Bullions

A metal is deemed to be precious if it is rare. The discovery of new sources of ore or improvements in mining or refining processes may cause the value of a precious metal to diminish, as in the example of aluminium, which was considered a precious metal before the development of the Hall-Héroult process made it possible to extract aluminium on a large scale. The status of a "precious" metal can also be determined by high demand or market value. Precious metals in bulk form are known as bullion, and are traded on commodity markets. Bullion metals may be cast into ingots, or minted into coins. The defining attribute of bullion is that it is valued by its mass and purity rather than by a face value as money.

Many nations mint bullion coins, of which the most famous is probably the gold South African Krugerrand. Although nominally issued as legal tender, these coins' face value as currency is far below that of their value as bullion. For instance, Canada mints a gold bullion coin (the Gold Maple Leaf) at a face value of $50 containing one troy ounce (31.1035 g) of gold — as of September 2007, this coin is worth about $737 as bullion. Bullion coins' minting by national governments gives them some numismatic value in addition to their bullion value, as well as certifying their purity.

The level of purity varies from issue to issue. 99.9% purity is common. The purest mass-produced bullion coins are in the Canadian Gold Maple Leaf series, which go up to 99.999% purity. Note that a 100% pure bullion is not possible, as absolute purity in extracted and refined metals can only be asymptotically approached. Usually a bullion coin contains a stated quantity (such as one troy ounce) of the slightly-impure alloy; the Krugerrand is unusual in containing one troy ounce of actual gold, with the impurity making the coin heavier than one ounce.

One of the largest bullion coins in the world is the 10,000 dollar Australian Gold Nugget coin minted in Australia which consists of a full kilogram of 99.9% pure gold. There have been a small number of larger bullion coins, but they are impractical to handle and not produced in mass quantities. China has produced coins in very limited quantities (less than 20 pieces minted) that exceed 260 troy ounces (8 kg) of gold. Austria has minted a coin containing 31 kg of gold. As a stunt to publicise the 99.999% pure one-ounce Canadian Gold Maple Leaf series, in 2007 the Royal Canadian Mint made a 100 kg 99.999% gold coin, with a face value of $ 1 million, and now manufactures them to order, but at a substantial premium over the market value of the gold.

So now that you know what a bullion is and where you can find it (local exchange shops and bullion place), what other type of gold investments are there?

Below is a primer on Investing in Gold that I dug up from archives. Credit to the original writer from a long-running traders-board I frequent. Some interesting tid-bits I've bolded. One thought especially I thought is worth mentioning...

Bullion and mining stocks parallel each other over time, although it may sometimes lag each other.

This is a great point I will elaborate on in my future posts.

Investing in Precious Metals – a primer

First of all, what’s an investment and what’s speculation. From my perspective, I consider a small holding of gold (more specifically precious metals) as an investment. It’s what I consider a ‘core’ holding. By small, I mean 3-5%. More than this is speculation and while speculation is fine, you need to be certain that is your intent.

I consider a small holding of precious metals as a core investment for several reasons. It serves, in many cases, as a portfolio diversifier; it is well known as a hedge against inflation; and, it’s also the number one investment in case of ‘black swan’ or Y2K type events such as war, terrorist attacks, and in general outsized uncertainty. Lastly, in recent years it’s been moving opposite the U.S. dollar. To the extent you feel the dollar will continue to drop relative to other currencies and ‘real stuff’ largely due to the twin deficits, but also because our trading partners are so $ flush, they’re starting to seek alternative investments, you will want to own some.

As for speculation, that’s a subject of personal taste and investing tactics. Some approach this from a fundamental perspective, while some from a technical perspective. I’m bullish for the longer term on precious metals for both reasons. Fundamentally, most bull markets in the natural resources (including precious metals) last for years. This is because of the nature of the beast. If the price of gold goes up, the lag time before new supplies can come to market is measured in years. It’s not like automobiles, where they can add another shift and produce more next week. With mining, you have to explore, discover, test, build refining plants, obtain all your permits, and then ship the product to market. This is true for all extractive commodities. Add to this the twin deficits and excessive amount of currency being the precursor of inflation. Further add that our trading partners hold so many dollars that they’re starting to look for alternative investments. From a fundamental perspective, these all point towards a long term bull market in the precious metals.

From a technical perspective, the current bull market began in 2002 and since then the gold index has not dipped below its 200 day moving average.

There are many ways to invest in gold – mutual funds, ETF’s, individual mining stocks, futures and the actual bullion itself.

Mutual funds that invest in the precious metals include natural resource funds, precious metals funds and some types of ‘defensive’ funds such as hard currency or Permanent Portfolio (PRPFX) type funds. With each of these funds, you need to do your research and determine exactly what they own. The easiest place is Morningstar using their Portfolio selection and Top 25 Holdings choice. Most mutual funds investing in the precious metals do so by owning shares of mining companies, although some own a little bullion. There are exceptions, such as the defense funds above that invest mostly in bullion.

Probably the least risky way to invest in precious metals is with a good broad based natural resource fund. These funds invest in energy, base metals, timber, and among other things, precious metals. A couple of examples are Price New Era PRNEX and US Global PSPFX.

Then there are precious metals mutual funds. With these there are pure play gold funds and true precious metals funds. The former only invest in gold mining stocks, while the latter also invest in silver, platinum, palladium, copper, etc. In all honesty, the vast majority of funds in this sector invest in all of the precious metals to a greater or lesser degree. First Eagle FEGIX is the only pure play gold fund I found while in the precious metals category, there are dozens. Examples include Vanguard VGPMX, Midas MIDSX, US Global UNWPX, Rydex RYPMX, Tocqueville TGLDX, etc.

In recent years, there has been the onset of ETF’s, or Exchange Traded Funds. These are sort of like mutual funds but trade like stocks. There have been some introduced that invest in bullion. These are primarily gold, but also silver. Gold ETF's include GLD, IAU, GDX, while silver has SLV. Note that there is also a metals and mining ETF XME, which includes base metals.

A word of warning: Bullion ETF's have been determined by the IRS to be ‘collectibles’ and as such their capital gains are taxed at 28%. This is unlike mutual or closed end funds which are taxed at 15% for Long Term Capital Gains. This means you want to own a bullion ETF tax deferred account and NOT in a taxable account.

One last similar category that needs to be mentioned is Closed End Funds. There is a fund, the Central Fund of Canada CEF that invests in gold and silver bullion in about a 60/40 mix. This fund has NOT had an adverse IRS determination to date, so it’s still taxed at 15%.

Mining stocks provide the most leverage but are tied to the overall equity market. Bullion and mining stocks parallel each other over time, but often lag each other, sometimes by a significant amount. In this arena, the most leverage is with the smaller companies, but they also carry the most risk. With individual mining stocks, you can target a specific precious metal such as platinum or palladium and many actually mine more than one precious metal (e.g. Freeport-McMoran FCX is copper and gold).

Lastly, for those that wish to actually own some of the stuff, you can buy bullion. In large amounts, this is normally warehoused and insured and you don’t actually take possession. In smaller amounts, folks buy various bullion types and keep them in a safe deposit box or safe. The cheapest form is with plain vanilla bullion types such as rounds (coin like disks) or ingots. By cheapest, I mean that they sell for closest to the spot price. With gold, platinum and palladium, you can buy 1 ounce ingots or rounds and fractional sizes, such as1/2, 1/4, and 1/10 ounce sizes. With silver you can buy ingots and rounds in 1, 10 and 100 ounce sizes. The one caveat with buying plain bullion ingots or rounds is that they should be stamped and marked as to weight, fineness, etc. Indeed, you’re better off going with one of the major producers such as Engelhard, Johnson-Matthey, or Credit-Suisse as these are easier to sell. Also, as with most things, there are volume discounts meaning the more you buy at one time, the cheaper (closer to spot) they are on a per ounce basis.

You can also buy actual bullion coins issued by many countries. These include the U.S., Canada, Australia, South Africa and many others. Bullion coins will have a greater premium over the spot price, but because they are ‘official’, they can be much easier to sell. Bullion coins come in two basic varieties – Proof and Uncirculated. The former are special coins made for collectors and carry an even higher premium than uncirculated. They make great gifts, but are a terrible way to buy bullion. Bullion coins should be the uncirculated variety. Gold and platinum can be had in 1, 1/2, 1/4, and 1/10 ounce sizes while silver come in the 1 ounce ‘silver dollar’ size. In this category, the American Eagle series is the primary U.S. offering. While these have a higher premium than some of the other national offerings, they’re very easy to buy and sell.

Lastly, you can buy ‘junk’ U.S. silver coins. These are dimes, quarters, and half dollars from 1964 or earlier when they were 90% silver. These are normally sold either circulated or uncirculated and by the ‘face value’ of the coins (e.g. $50, $100, $1000).

As for futures, they’re a subject beyond my understanding, and can be very complicated. I would suggest that this is NOT an arena for the novice.

Web sites of interest are:

www.gold-eagle.com - great commentary

www.kitco.com – current spot prices

www.apmex.com – good source for buying bullion in its various forms

Note that these are all sites that are bullish on gold and the precious metals so their commentary may be biased.


enjoy,

rono