Gold & Commodities Plummet, new-found confidence in USD$, What's going on? LUN, ABX, AUY, TNR

The last few days the price of gold has seen a dramatic drop of the $950+ days months ago.

After July 28, when interest rate is expected to be increased for $USD, the dollar has been gaining on nearly all currency and commodity. It certainly doesn't help that Europe is seeing its first economic decline since the unifying currency came into play.

Gold chart notes that we are still above the 1-year low of $650 but at the current rate, it only takes few more days of panic selling from the commodities traders to declare "the Golden Bullrun is over"!!

Is it?

Analysts say a good chunk of the story is the rebound in the U.S. dollar, which always moves in the opposite direction to gold. The greenback has soared versus the euro in recent weeks. Meanwhile, U.S. consumer prices jumped to a 17-year high in July.

The consumer price index climbed 0.8 per cent, twice as much as anticipated, the U.S. labour department announced yesterday in Washington.

The cost of living was up 5.6 per cent in the year ended in July – the biggest surge since recessionary times in January 1991.

Merrill Lynch economist David Rosenberg argues that declining inflation expectations could be the reason why people aren't clinging to their gold bars just yet, and that it's a big underpinning for the equities too.

"August is typically a period of doldrums for the industry, but it's weaker than what we had initially anticipated," noted Barry Allan of Research Capital Corp.

Funny enough, last time the US Federal Reserve Board met up on August 5, 2008, 10 out of 11 members of the committee voted in favor to keep interest rate at the current level. Only Mr. Richard Fisher, well known interest rate hiker, voted against.

Keep in mind, higher interest rate curb economic activity (more expensive for entrepreneurs to borrow funds) and inflation (stronger dollar = can purchase more goods... stronger savings interest will mean foreigners will invest more in USD$).

Rate cuts on the other hand, boosts borrowing (cheaper interest expenses) and spending in the area (encourages new businesses / economic stimulus).

Factoring in dropping price of oil per barrell to a still-high $112/barrell from its highs of $140 earlier in July, all of a sudden things are looking rosy again?

I would caution against believing popular media too much. After all, media is after sensational news and are by nature reactionary.

Clear minds would prevail with physical gold and right mix of risk of exploration company in their portfolio.

Few great companies to mention that's spectacular value before the hopeful rally in Oct-Jan 2009.

Lundin Mining ( LUN.to , LUN )
Properties all over the world - exposre to Gold, Copper, Nickel, and Zinc

Down to $4.73 earlier on high volumes - construction of a large mine. Great speculator of smaller firms like Mantle Resources (zinc - MTS.v, MTS) and previously buyer of $1.4 billion offer for Tenke in South America & Argentina (ore, copper, cobalt).

Yamana Gold (AUY on NYSE)
With proven reserves and positive cashflow even in falling commodity prices - Yamana has grown from an explorer to marking its fifth anniversary this year in operation / production.

Most recent Earnings Per Share (EPS) was $0.15, not bad for a stock trading at $8 today. They are present in Argentina as well always looking for the next favorable property to acquire.

Although it would continue to evaluate noncore assets for possible disposal, Yamana would take a longer-term “portfolio approach”, Marrone said.

The Chapada, El Penon, Gualcamayo and Jacobina mines were viewed as the group's core assets going into 2009 and, as far as the rest were concerned, cash costs would be a key criterion by which operations would be judged.

Yamana has so far been able to keep costs well below the industry industry average, and any assets that did not meet this profile in the longer term could be considered noncore.

“It's not necessarily about size, it's about performance,” Marrone said.

The company was also still looking for a strategic partner to take a stake in its Agua Rica deposit, in Argentina.

Marrone conceded that the capital cost of a mine at Agua Rica, which contains copper, gold and molybdenum, would "clearly" contain cost escalations from the figures estimated in the 2006 feasibility study on the project.

However, he added that the company has received interest from parties would could take a stake in project, and pointed out that any potential investors would be more than well aware of the current inflationary environment in the mining sector.

Next we come to Barrick ( ABX ), the mining world's giant.
At $32+ a share it may not appear to be a bargain, but with proven reserves waiting to be mined at Argentina's Pascua Lama and production expectations like this:
ABX projects an annual output of 750,000 ounces of gold and 30 million ounces of silver in the first five years

At a conservative price of $700/ounce of Gold and $12/ounce Silver, that still comes to $525,000,000 of revenue per year from Gold alone and $360,000,000 of Silver sales... over first five years!!

Lastly we have a small explorer TNR Gold Corp, owned partially by Barrick (10%) that has historic reserves of 60 million tons of 1% Copper and 1 gram/ton Gold, several promising projects, and ability to revert back to project-generating company that can produce positive cashflow if needed.

If anything the company offers great solid financial backings from major funds and surpringly at this price level of $0.225 today, a cut into profits and ownership of what looks to be an interesting late exploration project at Los Azules - inferred resource by late 2008 - big milestone in terms of valuation.

A great pick up at this price with solid trading volume daily and strong longterm shareholders and proven management.