Tag - Gold

Before I get in trouble - I want to make it crystal clear that I don't have a letter from Federal Reserve Chairman Ben Bernanke.

What I do have is the letter that I would need to see him write in order to convince me to sell my gold and silver and hold dollars instead.

Seeing this letter is not the only condition under which I would sell my precious metals, of course, but since Bernanke is the dollar's Commander in Chief, he certainly has the sway to pursue the types of policies that would turn me dollar bullish.

Without further ado, here's the letter I'm waiting for:

"Dear America,

I'm sorry. I was wrong.

In an effort to simultaneously spur growth, while avoiding recession and deflation, my predecessors and I have all but destroyed the currency of the United States.

These policies have disproportionately hurt poor people, and it's punished those who work hard to save their money. Inflation has been a hidden tax that allows the Federal Government to spend more than it takes in. Such spending has increasingly been used to fund wars both foreign and domestic. It's been used to imprison more people in this country than in any other. It's destroyed wealth by transferring it from the productive to the unproductive without a single vote from Congress or dictum from the Chief Executive.

The wages of currency debasement have been war, death, imprisonment and increased poverty.

Being that I work for an independent Central Bank, I've had little oversight from elected officials - and let's be honest: there might be one or two people in all of the Legislative, Judicial and Executive Branches that have the slightest idea what it is that I do, how I do it or what it means for the economy.

No offense, but you have elected some of the most dangerously ignorant people in the world. I can't emphasize this point enough; your elected officials could not be more asleep at the wheel. That doesn't absolve me of my malfeasance, but it made it a lot easier to pull it off.

But I should have known better. I've been very proud of my famous Doctoral Thesis on the Great Depression. I thought that my years of study, my PhD, and my time working at the Fed would have inoculated me with the wisdom to effectively carry out the duties of central planning.

I thought that with enough jiggering, the natural cycle of boom and bust could be transformed into a never-ending cycle of boom and boom. Like Prometheus, I sought to steal the power of creation from the market, to turn debt into wealth, and subvert the natural inclinations of man through artificial creation of demand.

And for a while, such central planning measures worked!

But after destroying 95% of the dollar's worth over the past 90 years, it's time to admit that the policies of deficit spending, inflation and Keynesianism have failed.

Today, I am tendering my resignation, and putting forth a call for fiscal and monetary austerity. I'm proposing a new constitutional amendment to return the power to coin and manage currency to the Congress. I'm strongly suggesting that the dollar be linked with a basket of commodities, and I'm disbanding the Federal Reserve.

I will no longer be a willing participant in the debasement of currency.

Sincerely,

Ben Bernanke"

Until the day that Ben Bernanke writes this letter, and changes his tune on the deflation vs. inflation debate, I will be a net buyer of gold and silver metal and securities.

If you're interested in finding out the name of my favorite gold stock, you can read the full details by clicking here.

Otherwise, I recommend buying gold and silver precious metals on dips.

Buy from a reputable dealer with a buy-back guarantee, and store it in a secure place that no one else knows about.

Have a great weekend,

Kevin McElroy

Editor

Resource Prospector

• A company for boom or bust
• They sell copper AND gold
• Strong profits during the worst market in five years

If you were in Las Vegas, it would be cheating to bet one chip on two numbers of the roulette wheel.

They'd kick you out of the casino after taking your money and maybe roughing you up a little.

But today I'm going to reveal to you a publicly traded company that should benefit from boom times as well as bust. It's a way to put one poker chip on two numbers of the roulette wheel at the same time. And it won't get you kicked in the ribs.

My prediction is that we're headed (or already in the midst of) a severe recession or depression. But I've been wrong before - and even if I'm right on the trend, I could be wrong on the timing or the scope - or any number of other factors that might derail my investment thesis.

I'm okay with being wrong, especially because I'm prepared for the eventuality.

If you're not prepared for the eventuality of a market that runs counter to your expectation, then you're simply not prepared.

As you know, I'm somewhat partial to commodities, so if I were to design a company that would profit during good times and bad, I would look for a firm that was more or less equally hedged between two commodities: copper and gold (and silver).

To gloss over the obvious:

Copper is the boom-time commodity. When things go well in the economy, businesses need more copper to build homes, cars, electronics, and infrastructure.

Gold is the bust-time commodity. Recessions, depressions, currency crises, and general malaise raises the public's desire to own the safety and reliability of the yellow metal.

And lucky for us, such a company exists.

This company has estimated copper reserves worth over $300 billion.

It has gold and silver reserves worth over $55 billion.

It also has molybdenum (a metal used in making steel and other heat-intensive alloys) reserves worth over $30 billion.

Today, this company has a market cap of just $33 billion. Each share costs $72, which gets you about $70 worth of molybdenum, with $100 worth of gold and silver, and $600 worth of copper thrown in for free.

If you're bullish, this company is one of the largest copper miners in the world. If you're bearish, they have healthy precious metal reserves.

If you want a two-for-one hedge, they have both.

I'm talking about Freeport-McMoRan Copper and Gold Inc. (NYSE: FCX).

The best part is that this company has extremely robust profit margins. Their net profit margin for 2009 was 18%. That was during a period of time that copper prices plunged through their five year lows, and stayed there for most of the year.

They still managed a substantial profit margin - thanks in part to their ability to bring gold, silver and molybdenum to market.

That's the kind of company I want to own. It provides a level of certainty rarely found in any market, bull or bear.

Today, Freeport McMoRan sells for less than 10 times trailing earnings. I'd recommend buying this company under $80 a share. Understand though, this company is a hedge. It's not going to double or triple your money anytime soon, but it will protect your capital in the event of boom times or bust.

Good investing,

Kevin McElroy

Editor

Resource Prospector

disclosure: no positions in Freeport McMoRan as of this publication

• Deutsche Bank analyst predicts $1,550 gold for 2011
• We're in the early stage of a huge uptrend
• My strongest recommendation yet

Gold is entering a tenth straight year of gains, and if we're going to be honest with ourselves, that trend should give us pause before we add to a position in gold.

But don't sell your gold just yet. According to recent article from Bloomberg, there's still plenty of upside.

From the article:

"Dan Brebner, an analyst at Deutsche Bank in London who is the most accurate forecaster so far this year, says the metal may reach $1,550."

Listen, I just bought some gold a couple weeks ago, and I'll likely buy some more over the coming weeks and months, but I'm looking out over the horizon for the asset to buy today, to benefit from the next decade long uptrend.

I think I've found what I'm looking for.

And though I've written about this commodity before over the past six months, I'd be surprised if more than one or two of my readers have followed my recommendation to buy shares of companies that produce it.

Almost no one buys during the early stages of an uptrend - by definition. If everyone was buying, prices would not be low, and the upside would be very limited.

But right now, this other yellow metal is selling near its five year lows. This industrial metal is in a sector that's expected to have huge amounts of new demand from China and India. There's already steady demand from Europe and the United States that currently outstrips production.

The last time the market saw a supply crunch in this commodity, you could have made 500% gains in less than four years by buying one simple investment. I'll reveal the name of this stock in a minute.

The commodity I'm talking about is uranium.

You can see that uranium is selling near its five year lows. I think we're in the beginning of a long, steady uptrend for uranium prices.

And I fully realize that a thousand readers just clicked away from this page at the mere mention of the radioactive metal.

Even though Iran has been in the news nearly every day for the past few months with headlines about its nuclear power facilities, uranium is nowhere to be found in the mainstream investment media. No one cares - yet.

I'm sure we'll see lots of coverage on uranium prices after they begin to spike, but that's why I want to alert you to the trend today, so you can get in early.

So why is the price of uranium going to spike? Take a look at this chart:

For the past 20 years, demand has outstripped production. I've talked about this discrepancy in past issues of the Resource Prospector. On April 13, 2010, I wrote:

"Where is the supply coming from to meet current demand? The answer is: nuclear bombs. A New York Times article from November 11, 2009, revealed that nuclear power plants in the United States get a large amount of their fuel from dismantled Russian and U.S. bombs.

From the article:

"Salvaged bomb material now generates about 10 percent of electricity in the United States...

Today, former bomb material from Russia accounts for 45 percent of the fuel in American nuclear reactors, while another 5 percent comes from American bombs, according to the Nuclear Energy Institute, an industry trade association in Washington."

That's a situation that can't last forever. The program to dismantle bombs for nuclear fuel (called Megatons for Megawatts) has so far claimed to have produced 11,047 tonnes of uranium - or about 25% of the supply needed for one year. But even if demand stays the same, there is a very finite amount of de-weaponized uranium left in government stockpiles."

It's a matter of when, not if, uranium prices will spike. And an August 30th Reuter's story just might mark the beginning of the trend:

"The nuclear renaissance is centered in Asia, where China plans to more than double nuclear power capacity by 2020.

At the same time, Russia says it will stop downblending weapons grade uranium from 2013, creating what some expect will be a 20 million pound hole in an already tightening world supply."

My recommendation is simple. One company currently produces the lion's share of uranium: Cameco Corp. (NYSE: CCJ). They own the world's largest uranium mine which provides about 17% of the world's uranium every year. No other mine even comes close.

I fully expect this company to multiply gains made in the price of uranium. I'd suggest buying this company now, today, and holding it for at least ten years. I firmly believe that there isn't a safer way to get rich from commodities today than to buy this company.

Good investing,

Kevin McElroy

Editor

Resource Prospector

disclosure: no position in Cameco as of this publication

• Taxes ARE going to rise
• Your dividends could be taxed at 39.6 percent
• Will you buy Treasuries, Munis or...this investment?

I firmly believe that Ben Bernanke and I share a common viewpoint. We both have no idea what he's going to do four months from now.

There's simply too much uncertainty. We don't know what's going to happen with the multitude of economic indicators and whether they'll spell success or failure for his policies.

So let's back up and look elsewhere for certainties. I think I've found some bullish news for commodity investments.

Why?

As of this writing, there seems to be little chance that President Obama and his colleagues in the Senate and Congress will extend the Bush Administration's tax cuts.

Personally I think taxes as well as government, both state and Federal, should be cut to the bone.

But my personal opinions have little to do with the truth of the matter. I can only look at the world as it is and make recommendations. The world as it should be is a matter for discussion over coffee or cocktails.

And right now, we're about to enter a 120-day countdown for much, much higher taxes on investment income.

Long term capital gains will rise from 15% up to 20% for all but the lowest income tax bracket. Let's face it - most low income people don't invest anyway, so it's essentially a 33% increase for all investors.

The tax on dividend income is going to be even higher - whereas today it's taxed at the 15% capital gains level, it's going to be taxed as regular income, meaning you can expect to pay up to 39.6%, depending on your income level.

So what are the implications?

My main concern is that institutional investors and individual investors alike will begin to take a good chunk of capital gains, if any, off the table over the next four months to lock in the lower rate. They also might be somewhat inclined to reduce their dividend income and look for alternate investments.

It's almost a foregone conclusion that these higher taxes will have a chilling effect on the broad stock market in the United States.

If you have a significant portion of your net worth in the broad market, it might be time to look for an exit for at least some of that money - especially if you're sitting on significant paper gains.

All of that profit-taking is going to go somewhere. Some of it, I'm sure, will stay in cash. But much of it will get re-invested.

The trick is to figure out where it will get reinvested, and I have to think that a significant portion of it will go into the commodity sector.

Normally, it might get reinvested in Treasury bonds and/or municipal bonds, but I simply can't wrap my head around the idea of buying a long-term government bond when they're yielding so little. I know that some of it will end up in Treasuries and Munis, but I'm going to go out on a limb and say that more people will look towards hard assets to anchor their wealth, as opposed to government IOUs.

While I'm still long-term bullish on gold, I think silver and silver miners are a much more attractive buy right now.

Silver recently broke out into a strong uptrend:

The good news is, silver is still inexpensive compared to gold. I mean that on a nominal basis, of course, but also in terms of a historical ratio.

Gold typically sells for about 55 times the price of silver. But today, silver is selling at a substantial discount to gold.

The ratio is at about 65 - so if silver catches up to gold, it will sell for closer to $22.50 an ounce.

The uptrend is in place, and with investors of every stripe looking for a new place for their money, I think we can expect to see some nice gains for silver.

I advise everyone I know to buy physical silver, as an insurance policy protecting you from currency collapse. I own some physical silver myself, but as an alternative there are a multitude of silver ETFs to choose from. I normally tell my readers to steer clear of ETFs, but I recently worked with my boss Ian Wyatt to put together a detailed report on our favorite commodity ETFs, including an ETF that has actually outpaced gains made in silver.

You can access the full write-up on these ETFs for free by clicking here now.

Good investing,

Kevin McElroy

Editor

Resource Prospector

• Unfortunately, I still hold cash
• Why inflation is the end-game
• I don't worry about deflation

I remain super bullish on gold - I just bought some more last week. Yesterday I talked about how to buy gold and silver, and how to make sure you don't get ripped off.

I also remain totally engrossed with the price movement of several major commodities, the most important being oil. I've talked recently about the all-encompassing importance of oil with regard to every single investment and asset class. If you don't know how oil supply and price affects every single one of your investments, then you might not be in a good position.

Unfortunately, I also have a good amount of cash on hand. I say 'unfortunately' because like many investors, I feel like I've fallen into the trap of being fearfully inactive. I have little faith in the broad stock market, but I do like some companies in the commodity sector. I've talked at length about owning Exxon (NYSE: XOM), Archer Daniels Midland (NYSE: ADM), and a handful of others. I like companies like Exxon and ADM because they will survive a currency crisis. They have pricing power, they have international reach, and they have products that everyone needs.

In the meantime I want to have cash on hand for opportunities in the stock market, but I've been gradually exchanging more and more of that cash for gold and silver.

Owning dollars at this point is putting myself and my wife in the direct path of an unstoppable government spending machine that would sooner make the paper worthless than do otherwise. I'm not so much worried about daily dollar fluctuations or Treasury movements; I'm more interested in the end-game for the currency.

The end-game, as we know it, that's been talked about at length by Ben Bernanke, Tim Geithner and now President Obama, is that they have no plans to slow the printing press, and that they want to avoid deflation at any cost. That's not a good partnership. I can end this partnership, or at least lessen it, by exchanging dollars for precious metals.

If you see the end-game any differently, I'd like to hear your reasoning. Write to me at editorial@resourceprospector. com to tell me why Bernanke et al will abandon their Keynesian policies and why you think they'll let deflation reign.

I actually don't really think that deflation is an end-game concern, but I could be wrong. Either way, I legitimately believe in the strong possibility of a currency crisis. That crisis could be a deflationary, hyperinflationary, or just plain old inflationary - but the common denominator in a currency crisis is that people buy gold and silver.

In the event of a currency crisis, you'd want to be holding very little cash, and have most of your net worth in gold, silver, fossil fuels, and agriculture. If the currency crisis got serious, it wouldn't do you much good to have a significant portion of your net worth in stocks. Paper money, including paper assets like a stock certificate, or a brokerage account on a computer screen won't do you much good when they're denominated in dollars.

I fully acknowledge the possibility that I could be completely wrong. Maybe everything turns out for the best. If that's the case, I will get burned on my gold and silver purchases, and I'll probably take a 50%-75% loss on those positions.

But if I'm right, then everyone currently holding Treasuries, stocks, bonds, and currency will take a near 100% loss. So the choice is clear for me: I'd rather lose half my net worth than all of it, so I'm buying a small amount of specific commodity companies and I'm bolstering it with physical precious metal.

That's what I'm doing with my money - if you're doing something substantially different, please drop me a line at editorial@resourceprospector. com to tell me why.

Good investing,

Kevin McElroy

Editor

Resource Prospector

disclosure: Long gold, silver, and I own Exxon in a mutual fund

• Questions about gold
• Why buy physical bullion?
• Gold and silver are not an investment
• The coins I buy

I've been receiving a steady barrage of questions from readers wanting to know about buying gold and silver.

While I've been answering many of these questions in a piecemeal fashion throughout issues of the Resource Prospector, I thought I'd once and for all cobble the information together in one place.

Like anything, if you're just getting started in buying gold and silver it can be a somewhat daunting process.

That's because there are about as many different precious metal vendors as there are types of coins, and it can be a bit of a minefield if you don't know EXACTLY what you're looking for, how much you should be paying, and perhaps most importantly, why you're buying precious metals in the first place.

I recently received a question from reader David W. which seems to encapsulate just about every possible angle of this topic:

"I have not bought gold yet because I haven't decided exactly how to go about buying it, what type of gold to buy, should I buy U.S. mint gold coins (or Canadian mint) or foreign gold coins, how do you buy just gold bullion and how do you get a small quantity of gold bullion, and what about old gold coins that were minted by the U.S. government and lastly I have seen these independent minting companies have gold coins also?

So what I discovered that to say I am going to buy some gold and going about getting it without being ripped off (getting quality gold at a fair market price) are two different things. I am examining different options but have not decided which way would be the best for say buying some quantity of gold (say $1000-$2000) that I could hold in my hand and lock up in a safe or safety deposit box."

First and foremost, you need to understand exactly what you want from your precious metal purchase. If you're a short-term trader, then taking physical delivery of bullion makes little sense. I can only tell you why I buy physical gold: I buy it as an insurance policy protecting my wealth in the event of a currency crisis.

If you have the goal of getting rich from physical gold or silver, then you're probably not going to achieve that goal. Sure, assets can skyrocket in price, but that's a speculation, not an investment.

If you want to speculate, then I'd recommend trading options on an ETF like the SPDR Gold Trust (NYSE: GLD).

You can buy out-of-the-money calls if you're bullish, or out-of-the-money puts if you're bearish. That's the simplest trade, and if you've traded options at all you know that you can do some pretty fancy stuff into the homestretch of expiration. But trading options on gold or silver ETFs is pretty much the opposite of loading your home safe with physical metal.

I want to remind everyone that gold and silver are not an investment by any classic definition of the word. They produce no cash, or rent like a business, and they don't grow in size or value like a plot of timberland. It certainly experiences price fluctuations, but so does every other asset.

Precious metal is a store of value as well as a medium of exchange, to a lesser degree. In the event of a currency crisis, it will revert to its use as a medium of exchange.

So that's why I buy physical gold and silver. Your reasons might be different, and you need to think about your specific situation, as well as how you might store the metal once it arrives.

In any event, if you do decide to take physical delivery and storing it in your home, I'd recommend only telling one other person.

To get back to David's other questions, about specific coins, it's vital to research any purchase ahead of time. You don't want to get on the phone with a bullion dealer and not know what you want.

I recommend buying coins from reputable dealers like Kitco.com and blanchardonline.com - and while I've bought bullion from both vendors, and I consider the representatives from these companies to be knowledgeable, fair and generous, they also happen to be salesmen. If you call to buy gold and silver bullion from these salesmen and you don't know what you want, you probably won't get the coins that are right for you.

And again, I don't know what's right for your situation, I can only tell you the kinds of coins that I buy, and why.

As I said, I buy coins as insurance against currency calamity. In such an environment, it would be advisable to own a variety of coins in a variety of denominations. Silver one ounce coins sell for about $20 today - which is the kind of walking-around denomination that will be in high demand. $20 will get you a sack of flour, a few gallons of gasoline, eggs, milk, bread, etc.

I purchase American Eagle one ounce silver coins, because these coins are among the most recognizable. Any US minted, pure silver coin will suffice, but again, I recommend doing your research, and knowing everything you can about any coins you buy. In general, I don't buy many foreign minted coins, for the simple reason that I don't know much about them, and they're much rarer than US minted coins.

If you're buying coins with the understanding that you might have to use them as money, then you shouldn't be looking for rare or collector coins. Regular gold and silver coins are known as bullion, and barring major damage or abuse, these coins will hold their value, which is what you want from your money. Rare coins are valued primarily by their rarity and condition, and their metal content as a secondary consideration.

Most people know nothing about rare or collector coins, so the value of these coins is, by definition, understood and appreciated only by rare coin collectors.

You want to buy coins that everyone knows and are familiar with. That goes for every denomination, in every type of metal.

I also own some mid-value denomination gold coins. The most common denomination of gold coin is the one ounce coin - which currently sells for a little over $1,200. That's not walking around money, but these coins certainly have their use.

So besides buying US minted gold one ounce Eagles, I also like to have smaller denominated gold coins on hand.

These smaller coins are among the most expensive in terms of cost over spot price, so you really have to do your research. Shop around. Know the metal content, know the spot price, do the math on delivery costs as well as spot price premiums, and just make sure you get the best deal you can.

My personal favorite small-denomination gold coin is the British Sovereign. It's arguably the most recognized gold coin in world history, having been first minted in the 15^th Century, and it's still minted today - though you'll pay a premium for newly minted "proof" coins from the Royal Mint.

Each Sovereign contains a little under ¼ ounce of gold, so if you're just getting started and you don't have a lot of money set aside for bullion purchases, you can probably afford to buy a few of these without breaking the bank.

As with any purchase, I wouldn't advise timing the market. Just try to buy in dips, and average into any position over a period of months and years.

One final caveat: I would steer clear of any gold vendors that have significant radio and TV ads. I have yet to see a good price from any of these companies - most of them have spot premiums of 20-100%. You shouldn't be paying more than 10% over spot, unless you're buying extremely small gold coins - and even then, you're probably paying too much.

If you have any questions, please send them to me at editorial@resourceprospector.com.

Good investing,

Kevin McElroy

Editor

Resource Prospector

• Why I'm still long gold
• Only 27 years left for Social Security
• The ugliest flow chart
• Two questions you must answer

There are literally trillions of reasons to be bullish on gold - but I recently received a letter from the Social Security Administration (SSA) that further cemented my belief in the uptrend for gold (and silver).

In a letter titled "Your Social Security Statement" the Commissioner of Social Security Michael J. Astrue wrote:

"...by 2037, the Social Security Trust Fund will be exhausted and there will be enough money to pay only about 76 cents for each dollar of scheduled benefits. We need to resolve these issues soon to make sure Social Security continues to provide a foundation of protection for future generations."

I've done the calculations, and I now pay about 7% of my income in FICA taxes, an amount I realize also includes Medicare - which is of course, matched by my employer. So, that's 14% of my potential income gone. It's more than I currently save for my own retirement.

I'm outing myself here, but everyone pays about 7% of their income into FICA, unless they make over $106,800 a year.

My point is this: the program isn't going anywhere because almost everyone pays out a big chunk of their paycheck every year, and they're banking on getting their "entitled benefits" upon retirement. That's how FDR set it up 75 years ago. He knew that once people had the money forcibly taken from them, they'd expect to get something back.

But even by the rosy estimates of the SSA, they'll only be able to pay these benefits in full for the next 27 years. I'm guessing that Mr. Astrue thinks that people my age will look at this information and come to the conclusion that we have to put more of our money into the SSA fund, to make sure there's enough for us when we retire.

So, we're going to find out what happens when an irresistible force (raising taxes) meets an immovable object (cutting Social Security). One or both of these scenarios has to happen (and soon!) in order for the SSA to continue to pay regularly scheduled benefits for the foreseeable future.

I don't foresee anyone in Congress putting forth a bill that will raise FICA taxes OR cut Social Security. Either one of these proposals would be election suicide.

My estimates for Social Security benefits are somewhat less rosy - if the fund makes it to 2037 I'll eat my hat. This year, for the first time since the recession of the early 1980s, the SSA paid out more than it took in.

But the situation has very little in common with the 1980s. We have much higher government debt, less personal savings, more unemployment (in real terms) and less control over the world's resources than we did back then.

Okay, so if Congress is too cowardly to raise taxes OR cut Social Security, what will have to happen?

Simple. The Federal Reserve will print the difference, and deposit it with the Treasury. In fact, it's already happened, basically. You might not realize it, but much of the Social Security Trust Fund is already invested in US Treasuries. It's a roundabout way for the government to tap into this "separate account" and move it to the Treasury's balance sheet.

Sure, they have to pay the Fund back with interest, but that interest comes from the Treasury via new purchasers of US Treasury debt.

One of the biggest holders of US Treasury debt today is the Federal Reserve. Last year, the Fed bought 80% of the Treasury's $1.5 trillion in issued debt.

So - I've constructed a rudimentary flow chart:

It's a little confusing, but in essence, the Federal Government is borrowing money from the Social Security Fund, and paying it back with dollars from the Fed. Where does the Fed get those dollars? I'll give you a hint: they didn't exist until the Fed gave them to the Treasury - so they created them out of thin air.

Of course, Social Security is just one substantial tip of the iceberg. There are plenty of other "entitlements" and government programs that require the assistance of the Fed's printing presses for their funds. There's some we don't even know about.

So you have to ask yourself two questions:

1. Is it likely that the Government will slash these programs or substantially raise taxes in order to keep the gravy train rolling?

AND

2. What will happen to the dollar as these obligations are increasingly met by funding from the Fed?

To me, the answers are painfully obvious. And I'm buying gold and silver.

Good investing,

Kevin McElroy

Editor

Resource Prospector

• Is time travel possible?
• Gold wipes the slate clean
• Exxon, selling at 15 year lows

Do you own the world's biggest oil company? Of course I'm talking about Exxon (NYSE: XOM) - and odds are if you've invested in a mutual fund or broad index, you do own Exxon.

But what if you could go back in time and buy Exxon in 1996, at under $20 a share?

Nearly 15 years ago, Exxon had yet to merge with Mobil, the largest industrial merger ever.

But they were still a huge company with a long track record of profits.

Buying Exxon Mobil at $20 a share would let you lock in a near-triple at the company's current share price of nearly $60. Okay, so a triple over 15 years isn't going to sail any ships.

In any event, time travel isn't possible - at least backwards time travel. Unless...

Take a look at this 20 year chart below, which plots the price of one share of Exxon divided by the price of one ounce of gold.

You can see that relative to the price of gold, shares of Exxon are as cheap as they were in mid-1996. I like to use the price of gold as kind of an x-factor to scrub out asset price inflation, dollar inflation and even stock market inflation. Does doing so give us a perfectly re-calibrated valuation picture? Of course not, but it's more than just an interesting exercise - comparing stock prices relative to the value of gold eliminates the effects of monetary policies. That's important when we consider all the 'noise' that affects the dollar (the world's reserve currency).

That'sbecause gold tends to hold its relative value over long periods of time better than almost any other asset. So comparing gold to any other asset over a given period of time gives you a relatively stable yardstick. Using gold as a denominator scrubs out much of the inflationary noise in the markets, and lets you compare asset-to-asset without having to worry about the abstraction of currency movements.

So back to the chart: if you believe as I do that gold is a stable store of value, then it's much more useful to look at the above chart as a tool to decide the relative value of Exxon than the 20 year stock chart below:

If you look at this chart alone, you might come to the conclusion that Exxon is currently selling near its 5 year average, which isn't necessarily a bargain.

But my first chart tells a slightly different story- that the world's largest oil company is selling at its 15 year lows, even though they've done nothing but grow profits and market share in that time.

Oh, and they've grown their dividend payments as well:

This chart only includes up to 2008, but the dividend has since increased another 20 cents a share, up to $1.76, with a yield of 2.9%.

That's almost as good as the current 10-year Treasury, but Treasuries prices are currently near their all time highs- well off their 15 year lows.

With a trailing PE under 14 and a forward PE under 9, you're not likely to see Exxon sell this cheaply for much longer. I certainly don't expect this company to be this cheap - valued in gold or not- in another 15 years.

If you don't own any shares of Exxon, you should, and now is the perfect time to start building a position.

Good investing,

Kevin McElroy

Editor

Resource Prospector

P.S. I don't pay a ton of attention to IPOs, but my boss Ian Wyatt just put together a free report about how to successfully invest in IPOs. I've arranged for you to access this free report called "The Dos and Don'ts of IPO Investing." All you have to do is CLICK HERE to get your copy.

And there's reason to be excited about IPOs...

The IPO market has been heating up this year. During the first two quarters of 2010 already 66 companies have gone public compared to only 14 in the first two quarters of 2009. Taking a good look at the graphic below it becomes apparent that the IPO market in late 2008 and early 2009 was dismal. Little surprise there; but notice the nice uptick since then.

• Deflation or inflation?
• Are precious metals good deflationary investments?
• It's counter intuitive, but...

I've flirted with the idea of dedicating each Friday's edition of the Resource Prospector to more humorous topics. But it's tough to be appropriately reverent about something as serious as our money while at the same time being humorous.

And to be honest, not many of the current topics in the resource sector are especially hilarious.

For instance: there's currently some degree of argument over whether we're currently experiencing inflation or deflation. I can't think of a more non-funny topic. If they say that comedy = tragedy + time, or that comedy is tragedy that happens to someone else, then it doesn't seem like there's much opportunity for jokes. After all, deflation or inflation is happening to all of us all of the time, so no matter how tragic it is now, it's likely to be at least as tragic later.

Oh well, maybe I'll find something appropriately funny for next week. In the meantime, if you have any good jokes based on economics, investing or politics, feel free to send them my way: editorial@resourceprospector.com

On the topic of inflation vs. deflation:

I haven't seen prices drop - and according to the Bureau of Labor and Statistics' own Consumer Price Index, prices across the board for 2010 have been flat to slightly higher through June 30^th.

Another measure of inflation/deflation is the velocity of money - measured most broadly as the Federal Reserve's M1 Money multiplier:

This chart shows the speed at which money flows through the economy - and right now, money simply isn't flowing from the Fed through banks and into the marketplace. That's a deflationary signal.

I firmly believe that the Fed is in a suicide pact to prevent deflation which will eventually result in epic inflation - but until then, we'll likely see some mild deflation.

But let's assume the worst case scenario - that I'm completely wrong, and that we're in for many long years of deflation, not inflation, and prices will fall, not rise. Maybe Ben Bernanke re-writes his dissertation on the topic and does a 180. Maybe he lands the helicopter and starts sweeping dollars back into the Fed's coffers.

How will silver and gold hold up? If these two precious metals skyrocket during periods of high inflation - it would simply stand to reason that they might catastrophically plummet during periods of deflation. Right?

Well, fortunately for gold and silver investors, economics is not a simple if-then Boolean logic problem.

According to a recent study from JP Morgan (NYSE: JPM) gold and silver both outperformed the broad market during the Great Depression, one of the worst deflationary periods in US history:

Here's the relevant quote from the JP Morgan report:

"The performance of silver gives us confidence that precious metals are likely to outperform the general markets in a downturn. In a really tough deflation, the absolute price levels of the metals could weaken, even as they outperform most other sectors."

I found another, older paper written by Sam Hewitt, a Ph.D and Certified Financial Advisor. He wrote the paper in 1996 for a firm called Sun Valley Gold Company - so it's best to take his findings with a grain of salt, but I found the paper to be useful in answering why gold and silver might outperform during a period of deflation, when you'd expect the opposite.

He says,

"In historic US deflations, individuals had the choice between paper currency or gold as hoarding vehicles. The historical record demonstrates that loss of confidence in the issuer of paper currency is often a sufficient reason for individuals to choose gold over paper currency."

So, it's precisely because people lose faith in currency during deflation that gold and silver rise - or at least don't fall as much as other assets.

The problem with deflation, I'm sure Ben Bernanke would tell you, is that people hoard capital, which has a chilling effect on growth, wages and eventually prices. And when people think of hoarding, they tend to think of gold and silver as good places to hoard capital.

It's counter-intuitive. You'd expect prices of gold and silver to fall, just like prices of every other asset. But it's not the case.

So, even though I'm "hoarding" gold and silver anyway because I fear inflation, it's good to know it will hold up even if I'm completely wrong and that deflation is coming down the pike.

Have a great weekend,

Kevin McElroy

Editor

Resource Prospector

• How to 'paperweight' your bottom dollar
• Buying the Dow at a PE under 7
• Gold $5000?

Gold and I are close - but I have no illusions about its usefulness or role in my portfolio. It's a store of value and a medium of exchange - though admittedly more the former than the latter at present.

Its ability to preserve wealth is unparalleled while the broad market remains bearish. I'll never sell all of my gold or silver, because as my younger sister Beth says, they're very effective paperweights.

She meant the remark as a slight against my 'foolish' choice to buy physical gold and silver - but I agree with her in one respect: gold and silver do an excellent job of paperweighting your last bottom dollar no matter how windy the markets get...

That being said, I am peeking over the horizon for a time when I will gladly sell most of my gold and silver to load up on an investment that's historically been the greatest generator of wealth and profits in world history: the broad stock market. More specifically, I want to buy the 30 companies in the Dow Jones Industrial Average index.

But I don't want to buy today, with a trailing average PE of 14.34. I'm more interested in buying the Dow near all time lows - like when it sold for between 6.88 and 7.59 in 1980-1982. Of course valuations can be tricky, so I'll use the relative value of gold during that time as a more effective goalpost.

That time period coincided with record inflation adjusted highs for gold - and for a moment in January of 1980, the Dow and gold traded very close to nominal parity. In the third week of January, gold briefly sold for $850 an ounce, and the Dow index was at about 870:

Today, there's a variety of analysts and prognosticators predicting just about every possible dollar value for gold and index number for the Dow.

One of the most respected (and accurate) is Charles Nenner. Mr. Nenner looks at huge macro trends in the broad stock market. He accurately predicted the 14,300 point high for the Dow back in 2006. Then in December of 2007 he predicted the market would crash.

Today, Mr. Nenner is looking for the Dow to dip close to 5,000 sometime in the next few years.

Will this be another chance for gold to come close to parity with the Dow? Maybe, but it would mean that gold will be selling for close to $5,000 an ounce.

And if so, I'll look at this crossing of these stars as a time to ditch gold and silver and move into the Dow. The last time it happened (in 1980), every dollar invested in the Dow was returned 12-fold over the following two decades. That presents another problem; when to sell the Dow. But I'll cross that bridge when I get to it.

In the meantime, I'm still buying gold and silver. Right now I'm starting to put together a comprehensive report on exactly how to buy AND sell precious metals. My report should be done in the next month or so - but if you have any specific questions or comments on the process, please send them my way at editorial@resourceprospector.com.

Good investing,

Kevin McElroy

Editor

Resource Prospector

• Silver outpaces the stock market by a huge margin
• America gets downgraded!
• What a downgraded dollar could mean for silver

Ireland recently joined Greece, Portugal and Spain to round out the PIGS acronym of debt-downgraded European nations.

It's a legacy Europe won't soon escape for a variety of reasons. But I'm not going to talk about the largely boring reasons why Europe has no chance of escaping massive debt obligations - I'm more concerned with the immediate investment implications of such a downgrade.

To help predict what might come next, it's sometimes helpful to look back. Over the last eight months, buying silver after a Euro nation had its debt downgraded gave you an average one month gain of 2.6%.

It all started with Greece being downgraded by Moody's on December 9, 2009.

Then on April 27, Standard and Poor's downgraded Greece, Spain and Portugal.

On May 29, they downgraded Spain again.

Okay so 2.6% is nothing special, admittedly. But look at the competition - the stock market is down an average of .9% over those same one month periods.

Perhaps I should be comparing silver to US Treasuries, as these securities are the other side of the "flight to safety" coin. And over the past eight months, short term Treasuries are basically unchanged - still paying a miniscule 0.16% for one month bills.

Even the one year Treasury bills only yield about 0.3%.

But now that I'm talking about Treasuries, you have to wonder what would happen to yields if the United States had its debt downgraded...

Sound preposterous?

It shouldn't. A credit rating agency downgraded U.S. debt from AAA to AA on July 13th.

That's a huge drop. The only problem is...this rating is from a new Chinese credit rating agency - not exactly the most respected opinion out there.

As it turns out, no one in the West is paying much attention to this new credit agency - but there's no reason why this firm isn't right in its assessment. The United States has trillions of dollars in unfunded liabilities coming down the pike, and that's not to mention the trillions in U.S. Treasuries they have to roll over in the coming months...

This agency is not yet approved by the SEC as a Nationally Recognized Statistical Rating Organization. I don't know about you, but I'm not going to hold my breath for the SEC to make the right decision about anything that's national, recognized, statistical, rated or organized anytime soon. Dagong has a fairly transparent ratings mission. You can read their entire Credit Rating Report for free by clicking here.

Is China in the business of trying to usurp power and authority from the West? Absolutely, but that doesn't mean this agency is wrong. I urge you to read the full report - if only because Dagong is the ONLY ratings agency that isn't under the umbrella of the SEC. Their independence from the SEC is a good thing if you ask me.

So Dagong has basically the same rating for Greece, Portugal and Spain as Moody's S&P and Fitch. But to be perfectly honest, all of the PIGS don't amount to very much - but they still caused ripples in the price of silver.

Greece, Ireland, Portugal and Spain only account for about 3.8% of world GDP.

So 3.8% of the world's GDP moved the price of silver an average of 2.6% on a monthly basis - that's close enough for me to call it a wash. I could have cherry-picked some more relevant sovereign debt time-tables and silver's gains would have been more impressive.

Butimagine what will happen to silver (and gold) prices if the United States gets downgraded. The U.S. accounts for about 25% of world GDP.

The flight to safety of U.S. Treasuries might start to waver...but I'm guessing that silver (which is currently selling at a ratio-adjusted 20% discount to gold) would see a commensurate boost.

If you're interested in getting started investing in silver stocks, I recommend taking a look at a new product we just started in June called the $100k Portfolio. It's a monthly letter written by Chief Analyst Ian Wyatt, and it's filled with investments designed to turn $100,000 into $1 million over the next 10 years. Ian just added three silver stocks to the portfolio. Click here to get the full details on this new service.

Good Investing,

Kevin McElroy

Editor

Resource Prospector

• Three assumptions about money
• Gold vs. Treasures - what's more overbought?
• A Ten-Fold difference

There's been lots of chatter about a gold bubble. But I think you can make a much stronger argument that Treasuries are in the midst of history's biggest bubble right now.

Let me back up, because I know I'm making some short-cut assumptions that you might not make for yourself.

1) I'm assuming that gold IS money. That is, it's a store of value and a medium of exchange.

2) I'm assuming that the definition of a bubble describes when an asset is overbought to the point that its price is much, much higher than it should be.

3) If I can safely make these assumptions, then I think it's fair to compare gold to another form of money: the dollar, and by proxy U.S. Treasuries.

If we can agree that U.S. Treasuries are a fair proxy for the dollar, and that gold is money - then I truly struggle to see how ANYONE can come to the conclusion that gold is in a bubble, while simultaneously seeing Treasuries as not being in a bubble.

Here's why:

In 2009 the total amount of gold mined, from every mine, in every country for the whole year amounted to $90.6 billion. That was about 90 metric tons more - or a little under $3.5 billion - than the amount mined in 2008. If you're keeping score, I'm using gold at $1,200 an ounce as my price point.

That $90.6 billion includes all gold for electronics, jewelry and bullion.

According to the 2008 US Geological Survey, less than 10% of all gold is turned into bullion - most of it becomes jewelry, or is used in dental or medical services.

So it's safe to say that only about $9 billion worth of gold was turned into bullion last year - maybe a little more, but not much. The U.S. mint only minted about $1.7 billion worth of gold into gold eagles, buffaloes, etc.

So, let's round it up to an even $10 billion worth of gold bullion sold last year. That's small potatoes, really. Forbes magazine publishes an annual list of a few dozen billionaires who could each buy all of the world's annual bullion production. Our Federal government actually loses more than twice that every year.

So $10 billion seems like a drip in the ocean.

In any event, that $90.6 billion of new gold in world circulation is still a tiny number, especially when you compare it to the amount of money going into US Treasuries today.

A recent article in Business Week reminded me of the size of the Treasury market:

"The government will auction $69 billion of the maturities next week, according to the median forecast in the survey, compared with $70 billion last month and a record-tying $81 billion in February."

So at the current sales pace, the U.S. Treasury will sell at least 10 times more Treasury notes than the total amount of gold produced this year. But that's just U.S. bonds - it doesn't account for any debt sold out of the Euro-zone, or Asia, South America, Africa, or Australia - which is nothing to sneeze at.

Click on this chart below for the full-size version, to see how US Treasury sales have ballooned over the past 10 years:

Meanwhile, gold production (and sales) has stayed relatively flat:

Total Gold Production In Metric Tons (2003-2009)

Right now, Treasuries are still selling near their record high prices. The yields are near all time lows. There's huge demand for Treasuries, and both in volume of sales as well as growth of sales, Treasuries dwarf gold.

If you're eschewing gold, but buying Treasuries (especially long-term Treasuries) I've got to wonder about the thought process - especially as more and more sovereign debt issues spring up across the pond. Today Portugal's debt just got downgraded, and if you think the Atlantic ocean will protect us from the same exact problems, then I guess you should keep buying Treasuries.

It's worked so far.

Drop me a line if you feel inclined to set me straight: editorial@resourceprospector.com.

Good Investing,

Kevin McElroy

Editor

Resource Prospector

After last week's strong recovery rally, we will find out soon if the fundamentals will support higher prices. Yes, after I've discussed it for the last three weeks, 2Q earnings season is finally here.

Today, we hear from Alcoa (NYSE:AA), chipmaker Novellus and railroad company CSX (NYSE:CSX). Tomorrow, Intel (Nasdaq:INTC) is up. Thursday brings us Google (Nasdaq:GOOG) and JP Morgan (NYSE:JPM). And then we'll wrap up the week with Citigroup (NYSE:C) and GE (NYSE:GE) on Friday.

We should get a pretty good feel for how earnings will be after this week.

Bank earnings will be particularly interesting. Analysts have lowered earnings estimates significantly. But changes in accounting rules may help banks beat those estimates.

It's called Statement 159, and it allows banks to record a profit when their bonds fall in value, based on the assumption that the banks could buy the bonds back at a lower price and, hence, make money.

Of course, no banks are actually doing this. Despite huge amounts of cash on hand, there is no incentive for banks to actually buy back their debt when they are allowed to book a profit without doing so.

One analyst believes that Bank of America (NYSE:BAC) may gain $1 billion in earning by employing this rule. In all, 20% of banks' pretax earnings may come from Statement 159.

Now, this accounting rule was implemented to help banks fix their balance sheets in the wake of the financial crisis. I guess Geithner and Co. assumed that once the banks got on better footing, lending would resume. But that hasn't happened.

In fact, the number of loans held by banks has shrunk for 6 consecutive quarters. Delinquencies for commercial real estate loans are still on the rise. And credit scores for potential borrowers have also been getting consistently worse.

It's a sticky situation. Loan demand is down, creditworthy borrowers are more scarce, and banks are still saddled with potentially problematic loans.

So as much as accounting rules like Statement 159 seem like complete, um, nonsense, just imagine what the lending environment would look like if banks' hadn't been thrown an accounting bone.

UBS (NYSE:UBS) is reporting that software and computer stocks are at their lowest valuations in 20 years, trading at 15 times trailing earnings. Cash on corporate balance sheets is near record highs, which leads UBS to believe that technology is due for a healthy revenue rebound.

Intel is expected to report its largest jump in net income since 1990. And yet the company trades at 10.4 times forward earnings. IBM (NYSE:IBM), which announced its plans to double earnings per share by 2015, is in the same situation, trading for 10.4 times forward earnings.

This is a good time to buy large cap tech stocks.

Oil prices have dropped back below support/resistance at $76. Gold and copper are down as well. Treasury prices are higher, along with the U.S. dollar.

Finally, here's a quick reminder that you can still sign up Jason Cimpl's TradeMaster Boot Camp and discover his secrets for consistent, reliable short-term profits. TradeMaster Boot Camp is a 5-part video instructional series and it's free for Daily Profit readers.

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• Why technical analysis is dust in the wind
• Why Bernanke trumps TA
• Benefit from the dips with this gold stock

It's always an education to look at the other side of the argument.

In a July 10^th article on Seeking Alpha, I found what can only be called a complicated chart which is supposed to illuminate the technical reasons why silver is due for a fall in the near-term.

Here's the chart, for the masochists in my readership:

Even after reading (and re-reading) the accompanied explanatory paragraph for this chart, I still have no idea what I'm supposed to be seeing. Will silver prices break down for technical reasons? The author seems pretty certain. But I'm hesitant to rely on technical indicators as a reason to modify my precious metals investment thesis.

My advice: forget technicals for precious metals, because technicals are always right until they're astoundingly wrong - and they're brainless when it comes to big events - which can render irrelevant even the strongest candle-technique, monkey-style, volume-judo that Techie T Techerson can unearth.

Chartists focus on patterns in the tea leaves, and admittedly, they can do some very fancy analysis with those tea leaves in the short term. I've seen our own Jason Cimpl make regular, solid gains in one week to one month holding periods with stocks. (to the right you can see a list of Jason's recently closed positions from his paid service Trademaster Daily Stock Alerts)

But for precious metal investors who are in it for the long term, it doesn't make much sense to pay attention to tea leaves when any gust of wind (big event) can blow those tea leaves clear out of the cup.

What's the big event that will derail any technical chartist's master-level thesis on silver?

It's sewn into Ben Bernanke's underpants: "Thou Shall not Allow Deflation."

The Federal Reserve and our Federal Government itself are kabuki players in a Keynesian drama. Standard bearer and Nobel-Laureate economist Paul Krugman is still urging lawmakers to spend yet more - because, as he says, the only problem with the economy right now is that the Feds aren't spending enough! At this point, the Fed, the Congress and the President have entered into a Keynesian suicide pact and Krugman is loading the gun.

Do you think they'll all of a sudden switch horses and pursue fiscal and monetary austerity - or do you think they'll print $trillions more in order to "solve all our problems"?

If the technicals on silver (or gold, oil, natural gas, coal, sugar, wheat, rice, etc. etc.) breakdown and give us another chance to load up on all of them at a discount to today's prices... that's good news - but it doesn't change the fact that our Fed Chairman says that he will avoid deflation at every cost, and that silver and gold (et al) are due for much higher dollar denominations.

I've been recommending that you buy these commodities on any price weakness, with the understanding that these dips are times to gobble up more of the pie - and to further hedge yourself AWAY from holding cash, which is now a political tool just as much as a currency, and INTO real assets and the appropriate securities.

To back up for one second, I should note that even the temporarily bearish author of the aforementioned seeking alpha article ends it with this sentence:

"Please note that this is not the end of the bull market for silver."

Okay. So it would seem that my recommendation would be to continue to look for weakness in commodity prices as an opportunity to buy more.

If I sound like a broken-record it's because the situation for the dollar is only getting worse. The only people minding the store are steadfastly in the "dollar devaluation" camp - so there's little alternative but to protect your wealth with precious metals.

My favorite way to profit from rising gold prices is a small-cap gold producer, hauling thousands of ounces of gold out of the ground in North America. They're one of the lowest-cost producers in the market, and every increase in gold's price hits their bottom line. You can still buy this company for around $4 a share, but I expect that number to double in the next year or so if not sooner.

Click here for the full write-up on this company.

Good investing,

Kevin McElroy

Editor

Resource Prospector

p.s. I mentioned Jason Cimpl's paid product Trademaster Daily Stock Alerts - (which is worth every penny) but if you just want to test-drive Jason's research, he recently launched a new free daily letter which comes out every weekday after the market close. He calls this service Trademaster Market Forecast, and you can sign up by clicking here now.

• Two Reasons to Ignore Sentiment

Market sentiment doesn't matter for gold.

That statement flies in the face of commonly held wisdom repeated ad nauseum by investment experts and the investing public alike.

I fully expect to be "taken to school" by any number of readers for this statement, but hear me out...

There are two basic reasons why sentiment doesn't matter for gold, or at least not yet.

The first is that gold's price has very little in common with broad market investor sentiment.

If you look at any number of "sentiment" metrics, you can put together a pretty tight little theory that betting against sentiment is almost always profitable.

Take a look at this chart I cribbed from Pragmatic Capitalist which shows consumer sentiment. I've taken the liberty of plotting the S&P 500 index (in red) directly over the sentiment index (in dark blue):

You can see how buying the S&P 500 when sentiment wasextremely bearish and selling when it was extremely bullish would have let you avoid almost all of the market downturn, and let you enjoy nearly all of its uptrend.

But gold behaves differently. Sometimes it rises or falls in tandem with the broad market. Sometimes it moves opposite the market.

Here again, I've plotted the S&P 500 in black, but I've plotted it against gold in gold, for the same time period as above:

You can see that gold is all over the place with respect to the broad market. There are times when gold is a mirror image and times when it's in lock-step.

Even if you back this chart out to 20 years, gold and the S&P 500 have very little in common:

If there's little correlation between the broad market and gold, then it makes little sense to look to broad market sentiment as a primary reason to be long or short gold.

Okay, so my second reason for ignoring sentiment when it comes to gold, is that gold's "rise" in price is due largely to a lack of confidence in paper currency. Fair or not, I'll use the dollar as a stand-in for all paper currencies.

Normally when people talk about the dollar, they'll reference the U.S. dollar index (NYBOT: DX-Y.NYB) - but I find that index to be largely irrelevant to gold. That's because the index trades against other paper currencies in Europe and Asia.

This index can go sky-high, and all it means is that the dollar can buy more Euros/Yen, etc. At the same time, gold can still move much higher.

Over the past three years, gold has doubled, while the dollar index was in a range between 72 and 88 - with seemingly very little correlation between the two.

So it's much more useful to look at gold as a metric for the health of the dollar than it is to look at the dollar index. The world's sentiment for the dollar doesn't matter to gold's price - it's much more like the exact opposite -

The end-game scenario for all paper currency (and all assets, ever) is to return to intrinsic value. How many reams of paper does it take to buy one ounce of gold? Even high quality cotton paper is about $50 for a ream of 500 sheets. At that price it currently takes 24 reams or 12,000 sheets of paper to buy one ounce of gold.

If you think about it long enough, you start to realize that gold isn't valued in dollars. Dollars are measured in how much gold they buy. Over the long-term, sentiment has nothing to do with gold's ability to store value and act as a medium of exchange.

Right now, gold is about $50 off its highs - hovering just above the $1,200 mark.

I don't know how much longer gold will stay at these levels, but it's my belief that this dip is a good opportunity to buy more gold.

And of course, you should consider buying gold stocks as well.

Right now my favorite junior gold company is still selling for under $4 a share. This company mines gold in North America, they trade on the AMEX and they have gold in the ground worth many times their market cap. This company will eventually sell for its intrinsic value - and when it does, today's shareholders will easily see five to ten times their money returned to them.

I strongly advise reading all about this company to see if it's right for your portfolio. Click here for the full story.

Good investing,

Kevin McElroy
Editor
Resource Prospector

• Only you are responsible
• Why do they spend?
• The only question that matters

If you own gold and gold stocks, I say good for you. Gold is up about 10% year to date, and gold stocks seem to be the only bright light in an otherwise dim stock market.

And as much as I'd like to take credit for urging you to buy gold and gold stocks - it's ultimately your choice, your responsibility and your glory for your investment success.

But today I want to discuss the arguments surrounding the very fiscal policy that has so far allowed gold to make strides higher as world currencies continue to fall.

As I type, the Federal Government is no doubt pondering another massive stimulus package. Whenever the government asks the question "To spend or not to spend" the answer is almost always "spend, and if that doesn't work, spend some more."

It's an answer that comes easily, and not just because the Fed is run by unelected officials -or because spending is easier than listening to constituent groups complain that you're not spending - the simple truth is that the spenders have a cut-and-dried theory of economics on their side: Keynesianism.

Keynesianism is the answer to: how can we spend much more than we earn?

And since this fiscal experiment is absolutely of the Keynesian variety, it's tough to imagine that it won't continue playing out to script. That is, I'm waiting for President Obama to announce another leg of "stimulus spending" any day, week or month now.

At the risk of repeating the obvious mantra that I've been chanting with monk-like regularity, inflationary policy is good news for people who own gold (and silver, and practically every other commodity).

To see the current debate about whether to spend, or not, I recommend taking a look at this youtube video, and the two others in the series: http://www.youtube.com/watch?v=7-pndXGafUg

Not to spoil the ending, but the videos feature Paul Krugman waving the Keynesian banner for more spending, today, tomorrow and possibly yesterday if we ever invent time travel.

On the other side is Niall Ferguson, a Harvard business school professor who suggests that instead of spending more, maybe we should spend less, rein in our debt, pursue tax reform and generally balance the Federal Government's checkbook before the whole system goes up in inflationary smoke.

You know who I agree with - but I urge you to watch the videos and make up your own mind. If you're convinced by Krugman's arguments, please do me a favor and send me a note explaining why at editorial@resourceprospector.com.

In any event, new spending measures will only cause gold to go up in price, and gold stocks to continue skyrocketing.

The question you have to ask yourself isn't who is right or who is wrong, necessarily. The question is: how can you best position yourself to benefit, or at least not suffer the consequences of Keynesian policy?

The answer is to buy more gold, silver and relevant securities.

For those of you looking for an alternative to the SPDR Gold ETF (NYSE: GLD) I'd recommend looking into Perth Mint Certificates through Kitco.com.

These certificates allow you have ownership of real gold, stores in Australian vaults. It's a little pricey to open an account ($10,000) but it's a relatively inexpensive way to own physical gold without taking delivery.

Another (cheaper) way to do so is to open up an account on goldmoney.com. This site allows you to buy gold by the gram with no minimum or maximum purchase.

The gold is allocated in insured vaults in Zurich, Hong Kong and London, and is subjected to regular external audits - unlike GLD.

You can buy and sell your gold through their site or even take delivery for a small fee.

Buying gold and other precious metals through these firms gives you the protection of world-class vaults as well as keeping your wealth far away from the Federal Government.

Good investing,

Kevin McElroy

Editor

Resource Prospector

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• I'm calling it: we're in a double-dip recession
• Gold stocks up 400% during this recession
• My favorite low-cost gold producer

I'm going to write today's issue under the rash assumption that we're already experiencing a double dip recession. I think such a recession has important implications for gold and gold investments, for the simple fact that severe downward trends in the broad market usually have deleterious effects on every asset class - at least for the short term.

If it happens again, we'll get another great opportunity to load up on gold stocks as they get temporarily dragged to hell by the broad market.

So, before I tell you what to look for, here's my brief reasoning for why I think we're in a double-dip recession.

Q2 of 2010 is in the books, and the broad market is down nearly 12% over that 3 month period. I'm using the S&P 500 as a proxy for GDP. Typically, stocks in the S&P 500 are a leading indicator for GDP, so it's not a perfect system, but it's good enough for today's discussion.

I know - the usual definition of a recession is: "a decline in GDP for two consecutive quarters" - but if you look at a chart of the S&P 500 over the past two quarters, that definition is small consolation:

The criticism of that definition is that it's backward looking. "We won't know we were in a recession today until we can look at the numbers 6 months later" just seems like a lazy, Pollyanna excuse.

I'm not a market cheerleader, nor am I a doomsayer - but there are few bright lights in the market today, save one - gold. A significant part of my larger investment thesis, is that gold is a safe investment vehicle when every other vehicle has crashed and is burning.

Check out the chart below to see how gold investments have lived up to my thesis recently:

This chart plots the performance of the Market Vectors Gold Miners ETF (NYSE: GDX) which holds the biggest publicly traded gold stocks in the market (in red) against the S&P 500 (in blue) for Q2 2010.

The outperformance of GDX is pretty impressive - but look at the long-term effects of a secular bear market on gold stocks; here is a performance chart showing the same thing - GDX vs. the S&P 500 since January 1999.

You'll note the huge dip in GDX at the end of 2008. That was the beginning of the recession in the broad market, and it represented a great opportunity to buy gold stocks.

For months I've urged you to buy gold stocks - and I certainly haven't changed my opinion. But if I'm right, and we're in the midst of the double-dip, then you should look for any weakness in your favorite gold stocks as a time to buy.

Now, I don't know for sure if gold stocks will get slaughtered along with the broad market like they were in late 2008/early 2009 - but it's something to look for.

In the meantime, you should be averaging into these gold stocks - and the GDX ETF is one great way to do so.

That's because while gold sells near its all time highs, gold stocks are still playing catch-up. That increased profit capacity from higher priced gold hasn't hit their bottom lines - yet.

Gold mining stocks typically magnify gains made in gold's price, and right now they're still cheap on that basis. Even if we don't get another great buying opportunity, I still expect many gold stocks to double in the next 12-18 months. Buying these companies today gives you exposure to the increased earnings power of companies that can mine gold for much less than the spot price.

My favorite low cost gold producer currently sells at a huge discount to its gold reserves. Every ounce they mine gives them nearly $800 in pure profit. They're expected to mine more than 70,000 ounces this year - which means $56 million in profits for this $200 million market cap gold miner. That's huge. You can click here to read the full write-up on this company and find out the rest of the story.

Good Investing,

Kevin McElroy

Editor

Resource Prospector

• Better than silver and natural gas?
• America's favorite white powder
• A company selling for LESS than earnings

For months, former George Soros partner and famed resource investor Jim Rogers has been trumpeting natural gas and silver investments. I've been doing the same in the Resource Prospector newsletter since launching back in March. If you've been sitting on the sidelines, there is still time to take action before these investments run away from you.

Jim Rogerswrote the book on resource investing: Hot Commodities. I urge anyone interested in the topic to go out and get yourself a copy. Right now there are 29 new and 17 used copies of this book on Amazon.

When Jim Rogers said to buy natural gas and silver three months ago, I was already urging you to do the same. Natural gas prices have since risen by more than 25% - and some of the stocks in that sector have done far better.

I've also been pounding the silver drum. Silver is now up almost 10%, but I still think there's much more upside. You can read more about silver's potential in this past issue of the Resource Prospector by clicking here.

Rogers is still bullish on silver, but he recently mentioned another cheap commodity. It's something that Americans use everyday in great quantities - over 160 pounds per person every year.

I'mtalking about sugar. Prices for the white powder fell 40% between April and the first week in June - but they're on the rebound.

It's the perfect time to build a position in this commodity, and there are so few publicly traded companies that focus entirely on sugar, that it's an easy choice.

The set-it and forget-it sugar investment is the iPath DJ-UBS Sugar TR Sub-Index Exchange Traded Note (NYSE: SGG). According to their prospectus, this investment is "intended to reflect the returns that are potentially available through an unleveraged investment in sugar futures contracts."

As you might be aware, I am leery of exchange traded securities that seek to track prices of futures contracts. As I noted in my article about the United States Natural Gas ETF (NYSE: UNG), these funds can serve up losses to their investors even if the underlying commodity is making gains.

But this fund hasn't performed all that badly - probably because the storage costs for sugar are much lower than the storage costs for natural gas. High storage costs make it difficult if not impossible to make money by continually rolling over new futures contracts - which lose value as they approach their delivery date.

In any event, this fund appears to do a fine job of tracking the underlying price of the commodity.

I've plotted SGG against the sub-index it tracks, and you can see how they're in nearly perfect lockstep:

I'd look to pick up some units of this fund under $50 - but I don't think it's the best way to play the trend.

My favorite way to play rising sugar prices is to buy the one of the oldest sugar refiners and producers in the stock market: Imperial Sugar (Nasdaq: IPSU).

Thiscompany currently sells for less than earnings - with a PE of 0.99. I'll say it again: they earn over $11 per share, and they're selling for under $11 a share.

That's not a situation that comes around very often. Sugar companies typically sell for more than 17 times earnings, so it's truly in bargain territory. This company also pays a small dividend.

Okay, so the company is selling for less than earnings for a reason. They had an explosion at one of their refineries, and they still haven't been able to get back to normal levels of production. They also took a loss on some hedging activity.

That isn't good news for people who bought this company last year - but it's great news for people buying today. There's lots of negative sentiment about this company. Analysts expect IPSU to lose money next year. If prices stay the same, I'd probably agree with them. A big reason for the precipitous price drop is due to Brazilian sugar output, which for 2010-2011 is expected to be 20% higher than last year.

On the face of it, that's bad news for IPSU. It means sustained lower sugar prices. But I believe that analysts are overlooking how oil factors into the equation.

Brazil currently produces more ethanol than any other country besides the United States, and they're the world's biggest ethanol exporter.

I'm bullish on oil over the next 18 months, which means I believe that Brazil will increase ethanol production, which puts pressure on sugar supply. The more expensive oil gets, the more profitable it becomes to turn sugar into ethanol, rather than loose it into the world sugar supply.

We saw this scenario play out three years ago, when oil prices surged in the summer of 2007. Sugar prices skyrocketed from just over $8 per unit to over $29 a unit less than 18 months later. Sustained oil prices under $100 a barrel has made it less lucrative to produce ethanol - but $100 oil is just around the corner - so I believe sugar prices will follow in those footsteps again.

Over the past two months, IPSU has bounced off of lows of $9.50 as a point of support - that's during a time when prices were dropping like crazy, and the company released bad news about their refinery. The company shows real strength at the $9.50 price.

Shares currently sell for just under $11, but with a continued rise in sugar prices, I expect this company to sell closer to the $15 range. The market doesn't seem like it will let this company dip below $9.50 - even with bad news and falling sugar prices.

I don't think we'll see $9.50 shares anytime soon, but if we do, that would be a great entry point. My recommendation would be to nibble at shares under $12, and to take bigger bites under $10.50.

If you think, as Jim Rogers and I do, that sugar prices are only going higher, then you should think about buying some shares of IPSU.

Good investing,

Kevin McElroy

Editor

Resource Prospector

• A tough question for your mutual fund manager
• Three Charts You Shouldn't Miss
• The best potential in the market today

If you were wise enough to buy stocks during the lows of 2009, you're probably feeling pretty good about your decision. Even if you just bought the S&P 500 SPDR (NYSE: SPY), which precisely tracks the total return of the S&P 500 index, you're up over 20% over the past year. That's huge.

Ask any mutual fund manager if they can replicate 20% annual gains in their fund and they might have you forcibly removed from their office. And we've all been told by the folks in the mainstream media that you can expect between 5% and 9% average gains just by being a diligent long-term buy and hold investor.

It's a nice sentiment - but it also assumes that stocks always go up over a long period of time, and that's just not a certainty. Putting all of your eggs into one asset class - even one with a good track record - is not an advisable move.

I'm going to recycle a chart I've shown several times now - for the simple reason that it details the exact reasons why you should not throw all of your net worth in one asset class. This chart is courtesy of Barry Bannister, Strategist for Stifel Nicolaus & Co.

Right now, we're clearly in the midst of a long-term secular bear market in stocks. That doesn't necessarily mean it's time to abandon stocks altogether, but it does mean that you should look for opportunities that are likely to succeed in such an investing climate. Commodity investments tend to do well during a bear market in stocks.

Resource investors have done well since 2000, but if this is an average bull run, we have at least eight years left.

Again, if you've been able to take advantage of this bear rally in stocks for a 20% gain, congratulations - but even during this rally, you could have done much, much better just buying gold or gold securities.

Below, I've attached a one year chart of the S&P 500 SPDR (in red) vs. gold's spot price (in blue) and the Gold Bugs index (in green) (AMEX: HUI).

Gold outperformed the broad stock market two-fold over the past year, and gold stocks outperformed three-fold.

But the past three months are even more telling. While the market traded mostly sideways, both gold and gold stocks continued their gains:

If you're not invested in gold stocks these days, you're missing out not just on the biggest gains - you're missing out on some of the only gains in the stock market.

Okay, so I'm not telling the whole story here - let's drill down a little further (pardon the pun).There's one small sector of the stock market that's beating out gold stocks. It's a sector I've been talking about for months now, and I hope that some of you have been able to take advantage of the opportunity.

I'm talking about junior and mid-tier gold stocks. These are the riskier companies that do a lot of the exploration and initial drilling tests for gold reserves. Most of the time these companies go belly up without ever finding gold let alone mining a single ounce.

Sometimes these companies find gold, and then simply hope to get bought out by a larger gold company.

But every now and then, a small mining company literally strikes gold and has the cash and the ability to actually mine the stuff and bring it to market.

These companies typically return your investment 10-100 times over - sometimes more.

The other good news is that junior gold miners also tend to lag increases made in the price of gold. Here's a chart plotting 8 month gold price vs. a junior gold miner ETF:

What this chart shows is that junior gold companies are still playing catch-up with gold. I'm currently working on a full report about commodity ETFs, and I will be releasing this ETF's name, but the report is not quite ready.

In the mean time, Ian Wyatt has already put together a full report on his favorite junior gold miner. I like this company because it has one of the lowest costs to get gold out of the ground of anyone in the business, big or small. I've said it before, but buying this company at today's stock price under $4 is like buying the company's gold in the ground for $120 an ounce.

But right now there's an additional upside for this company. They're on the verge of getting listed on a new exchange, which will bring a lot more attention from mutual funds, hedge funds and other institutional investors. Today is the day that we find out. If you buy ahead of the announcement, I expect this company to get a one day gain of at least 10%.

I've been working with Ian Wyatt all week on getting a full write-up on this opportunity completed. You can read the full story by clicking here now.

Kevin McElroy

Editor

Resource Prospector

• A Zero-Emissions Vehicle Faster than a Porsche
• Tesla Motors IPO Next Week
• Lithium: The best new cool thing you must own now
• This metal floats on water - but can it help you get rich?

Lithium! As a newsletter editor, I'm bound by law to type an exclamation point after lithium at least once anytime I talk about the topic.

That's because people are rabid about lithium and lithium stocks - and for very (seemingly) good reasons. With hybrid and zero emission vehicles in the news every day, it's hard to imagine that lithium stocks won't continue to experience fantastic growth forever and ever. Just take a look at this gorgeous new lithium powered car that hybrid car manufacturer Tesla motors is selling for $109,000.

I've seen one of these cars driving through Stowe, Vermont a few times, and when you see one zip by it's hard to argue against the idea that lithium is awesome.

Incidentally, Tesla is going public next Tuesday. It could be a huge sentiment-driven profit opportunity. I haven't done too much digging into the fundamentals of Tesla, but if you have any insight into this company, please send me an email at editorial@resourceprospector.com.

There's also big news about the iPhone - a device powered by lithium batteries.

The Wall Street Journal has had a story above the fold (or where the fold would be if it were a paper edition) for the past few days about Asian teenagers waiting in line for the new iPhone.

If you've bought a new cordless drill or even a fancy flashlight lately, you've probably seen the flashy new batteries that accompany them.

All of these items have the words "lithium ion" plastered all over them. Lithium isn't just some magical battery metal; it's practically a brand unto itself. And like any good brand, lithium is synonymous with a whole slew of positive feelings and ideas and newness. Lithium is independence from foreign oil. It's green technology. It's futuristic. It's smart. If you take another look at the Tesla Roadster, I think you'll agree it's also good-looking. It's a quality, high-tech battery material that somehow holds a charge better and longer than the lousy old varieties.

They say that oldest advertising hook in the world is: NEW! And lithium has NEW! in spades.

For many environmentally minded investors, it's a win-win situation to buy lithium stocks. You support lithium production which helps the environment, and you can make money while mother earth looks gladly upon you.

I've done lots of research on lithium, and as my wife can attest I'm something of an irritation at cocktail parties whenever the topic comes up. Get a few drinks in me and I'm apt to rattle off what I believe to be very interesting facts about lithium. For instance:

• Lithium is the lightest metal. It's so light that it floats on water. That's why it's the best metal to use for making a battery. Because when it comes to batteries, weight is a primary concern. Lead makes great batteries, but if you've ever picked up a lead pipe or changed the lead-acid battery in your car, you know that it's very heavy.
• In fact, a cubic foot (about the size of a cinder block) of lead weighs an astounding 708 pounds.
• Nickel makes even better batteries, but it weighs 541 pounds per cubic foot.
• But lithium is even lighter than aluminum, which is usually perceived as a super-light metal. Aluminum weighs 169 pounds per cubic foot.
• A cubic foot of lithium weighs just 33 pounds.
• But the real magic is that a cubic foot of lithium has more energy potential than 6 cubic feet of lead and 2 cubic feet of nickel.

Okay - without my wife here I'll have to restrain myself. You get the point: lithium is a pretty great battery material. Until they invent a new highly reactive metal that's lighter than lithium, I'm pretty sure it will be the material of choice for batteries for a long, long time.

So what's the catch?

Like any commodity story, this one comes down to supply and demand

The good and bad news is that there are billions of tons of lithium locked up in our oceans. Until someone finds an economical way of extracting minerals from the ocean, it will stay there.

The easily extracted lithium is found in only a handful of places - mostly in the central region of South America in countries like Argentina, Bolivia and Chile.

Bolivia is believed to have the best reserves, and unfortunately for foreign investors, Bolivia is a heavily nationalized country.

The lithium in this region is so easily extracted because it's highly concentrated already in a salt form that requires the least amount of processing. The mining process is to just scoop the stuff into trucks. They have thousands of square miles of salt flat deserts, and the lithium is just sitting on the surface.

So if prices spike, Bolivia will simply scoop more of it into trucks. They can ramp up production cheaply and without any delay.

If you're investing in a company that's NOT in this region, with harder to mine lithium reserves in an area with worse mineralization - then you really almost can't win.

This hearkens back to an issue of the Resource Prospector I wrote earlier this week about the importance of location for junior mining stocks. The issue was about gold stocks, but it's relevant to any commodity.

When it comes to small companies, you have to buy the ones in the best possible locations. I'd rather avoid putting my money into a company that has to compete with a nationalized operation that's able to get the highest-grade lithium out of the ground cheaply and quickly.

I've been doing some research on an undervalued commodity that should benefit from continued strides made in green automobile technology - but it will have to wait for another issue.

Good investing,

Kevin McElroy

Editor

Resource Prospector

p.s. My colleague, Ian Wyatt, the Chief Investment Strategist and editor of SmallCap Investor Pro, recently told his readers about a North American gold miner with the ability to get gold out of the ground for $450 an ounce. It's located in arguably the most advantageous place in the world when it comes to gold miners. That's a fixed cost that won't change much - so as long as gold stays above that price, they'll continue to reap profits. And if gold continues going up in price, this company stands to make even better profits. If you'd like to read more about this low-cost gold producer, I invite you to click here now.

• Mark Twain on Gold Miners
• Where the gold is at
• A gold discovery... in Laos?

Today, I want to focus on one important factor that can help you avoid a major pitfall in gold stock investing: location.

I frequently get asked by readers to look at specific companies in the gold sector.

It’s a tricky business because there are thousands of junior gold mining companies, and well over 90% of them will never mine a single ounce of gold. So for regular investors, the gold sector is a minefield of unknowns.

They say that man has an instinctive fear of the unknown. And for good reason - if you have no conception of the dangers you face, or no information about the risks you endure, then the imagination takes over. An unknown scenario has the potential to be a worst case scenario.

As a resource investor especially, you shouldn’t just fear the unknown, you should avoid it. It’s vital to do your due-diligence when it comes to gold miners, especially. You’ve heard me say it before, and Mark Twain says it best: a gold mine is “a hole in the ground owned by a liar."

So if you can’t find easily verifiable information about a gold company’s deposit location, or if you find information that gives you pause, then you have the easy decision to keep your powder dry for another day.

As a gold investor in particular, you have to be skeptical. You should be looking for reasons NOT to own a company, rather than clinging to reasons for owning it. It’s easy to get wrapped up in fancy graphics and exciting press releases from gold companies that appear to be on the up-and-up. But that’s the whole point of those graphics and press releases - to build excitement about the company. Most gold mining executives make their bread and butter from stock options and share appreciation, not gold mining.

Location - which includes a company’s headquarters as well as their mineral deposits, is at least as important as the size and quality of the company’s deposits, the intelligence and luck of the geologists, the money it has in the bank to fund exploration and drilling, etc.

That’s because an unfavorable government or political atmosphere hostile to mining can derail even the best gold deposits, stymie even the most brilliant geologists, and suck up all the money in the world, making it effectively impossible to get a single ounce of gold out of the ground.

To assist me with today’s topic is reader Eddie B, who asks:

“Can you please check out PNA.AX who are primarily a copper miner with gold as a credit to their mining activities in Laos?”

Depending on your brokerage service, it might be impossible or difficult to buy this company in any event, because it’s listed on the Australian Stock Exchange.

But I’m leery of this company because of its location - no matter how good its reserve numbers might be. According to the U.S. State Department, Laos is:

“...an authoritarian one party state ruled by the Lao People's Revolutionary Party. The central government continues to deny citizens the right to change their government. The government infringes on citizens' right to privacy and does not respect the freedoms of speech, the press, assembly, or association. Corruption in the police and judiciary persists.”

Okay... so that doesn’t sound like a place I want to send my money - but maybe the government is corrupt enough to be supportive of foreign investment, but not so corrupt that they’ll usurp that investment. Maybe not; according to a report from the United States Laotian Embassy:

“The overall investment climate is poor, and rates very low in international indices of transparency and ease of doing business.”

That doesn’t sound good at all. With gold increasingly in the headlines, it would not be surprising in the least to see the authoritarian Laotian government look at gold mines within their borders as literal gold mines for their bottom line.

My personal opinion would be to avoid this stock until and unless there is some substantial regime change in Laos that was more favorable to personal freedom in general, and foreign investment in specific.

With thousands of gold mining stocks vying for your investment capital, you have the benefit and the challenge to be particular about who gets it.

If you’re looking for a safer gold company location, I recommend taking a look at a company Ian Wyatt, Chief Investment Strategist and Editor of Small Cap Investor Pro recently recommended to his subscribers.

This North American company has over $20 billion in reserves, and they’ve already begun profitable gold production, so you know they’re capable of getting those reserves to market. Over the past 8 years, they’ve more than doubled gains made in gold’s price. While gold made 318% gains since 2002, this company gained more than 700%.

If you’d like to read more about this company, you can click here for Ian’s full write up.

Good investing,

Kevin McElroy

Editor

Resource Prospector

• My two favorite ways to buy silver
• One good reason to buy silver now
• Why the price of gold won’t matter
• An insurance policy you can sell if you don’t use it

It’s full disclosure time! As you might have realized, I’m long term bullish on gold and silver as well as most other commodities. But over the past 6 months I’ve mostly been loading up on silver.

As I’ve said many times in past issues of the Resource Prospector I buy my gold and silver from one of two online dealers: kitco.com and Blanchard online. I have no professional relationship and I don’t get any kickbacks from either of these two companies - I’m paying full-board just like any other regular investor. I can recommend them because I’ve had good, responsive and professional experiences with both - AND they both have buy-back guarantees.

The only reason I’ll buy from one dealer over another is when they’re running special deals or they have a specific denomination of bullion that I’ve been looking for.

For instance, there’s a coin that Blanchard currently sells that was minted by the Swiss government between 1897 and 1949 called the Switzerland Helvetia 20 Franc coin. For many years this coin was traditionally gifted to newly married couples. At about 0.19 ounces (or just under 1/5 of an ounce) it’s an affordable, yet generous denomination of coin. It just so happens that my friend and co-worker Steve just got married to his long-time girlfriend and high school sweetheart Mallory. I’ve been looking for one of these coins (pictured below) to give as a wedding present.

But - I’m hesitant to buy anymore gold, even as a gift, while it’s selling near all-time highs.

That’s one reason I’m buying silver: it’s still cheap. Today, silver sells for under $19 an ounce.

In 1981, silver briefly sold for over $50 an ounce. So if silver catches up to its historic, inflation adjusted highs, it would sell for over $300 an ounce.

If you look at the modern gold-silver ratio of 55:1 you can see that silver is currently about 20% too cheap in comparison to gold:

Gold is much closer to its inflation adjusted highs of about $2,300 an ounce. I don’t think gold will stop at $2,300 - and I believe that its long term dollar valuation is somewhat irrelevant. The long term trend is for gold to be worth near-infinite amounts of paper dollars.

If hyper-inflation is in the cards, the question of how many dollars can I get for an ounce of gold just won’t matter. The better question will be: how many gallons of gasoline can I get, or how many pounds of rice, or how many cartridges of .357 ammunition? I mean, did anyone in Weimar Germany really care about how many Deutsche Marks they could get for an ounce of gold? No.

That’s somewhat off topic.

Right now, I’m buying silver because it’s undervalued relative to gold, and it’s nowhere near its nominal highs, let alone inflation adjusted highs.

One of the primary reasons I own silver has almost nothing to do with its current valuation.

Silver has some more tangible benefits in the event of a total currency meltdown. That’s because it has a much lower value-per-unit than gold.

I’ll tell you now what I’ve told my immediate family members. Tally up your living expenses (food, water, gasoline, etc.) for three months, and buy the commensurate amount of gold and silver.

I consider physical gold and silver to be an insurance policy that you can cash in if and when the dollar implodes. In that event, your daily expenses will likely be more easily met by silver bullion than gold. A one ounce gold coin is a large amount of money, so unless you’re buying food for a dozen people, it would be tough to find daily living expenses that would require gold bullion.

Silver coins are much better suited to daily expenses like food and gasoline.

I realize that this type of discussion borders on the insane - but don’t think of it that way. Think of your physical gold and silver as an insurance policy. You probably already have fire insurance - though you don’t believe your house will burn down. If you’re like most people, you have a life insurance policy that you’ve paid into forever - though you’re hopefully not planning on dying in the near future.

So, I’m buying silver for the same reason. In the event that the dollars in my bank account become worthless, or near-worthless, I want to have something that I can fall back on - as an insurance policy. Even if I’m wrong, and the dollar isn’t due for Zimbabwe or Weimar style inflation, I can always sell back my silver and gold and recoup some of that insurance premium.

Try doing that with your life insurance.

Have a good weekend,

Kevin McElroy

Editor

Resource Prospector

p.s. I’d be remiss if I didn’t mention a low-cost American silver producer that my boss Ian Wyatt recently added to the Small Cap Investor Pro portfolio. This company JUST turned profitable at $16.75 silver, and prices have been steadily rising since it last reported - so any further upside in silver’s price will be a boon for shareholders. I’ll be discussing exactly how you can buy this company early next week, so look for my update in your inbox. You can take a test drive of Ian’s portfolio by clicking here.

• How to bet against politicians
• My father-in-law’s favorite investment
• Profits from coal

While I would love to tell you that I’m bullish on stocks, the fact is that we remain in a secular bear market. For this reason, investors should heed caution, avoid speculation, and focus their investments on great companies in the commodity sector at cheap valuations.

Why? It’s very simple: commodities tend to do well during a bear market for stocks.

So what are the big certainties as far as I can tell? Sovereign debt problems aren’t going away, and the world’s politicians and central bankers are dedicated to the idea that they’d rather inflate their currency than default on that debt. They’re staking their currencies on the reputation that their currencies are still sound money. It’s a losing bet for central bankers and a boon for folks who trade in paper currency for real money: gold and silver.

But I’ve talked about gold and silver plenty over the past few weeks, and I’ve been neglecting a commodity that my father-in-law Ron Blackwell calls “the king of all resources.”

He’s talking about coal, and he’s absolutely right. It’s the king of all resources, because it’s responsible for close to 50% of all electricity generation in the United States. You can click here to view a pie chart showing recent electricity generation data from the Department of Energy.

But it’s not just the United States that uses lots of coal. The Energy Information Administration estimates that:

“Coal consists of roughly three-quarters of [China’s] power generation feedstock and the EIA forecasts they will maintain this market share through 2030.”

So if you’re not invested in coal, you’re missing out on some of the biggest and most certain profits in world history. While I’m bullish on precious metals, and I believe in the certainty that central bankers will continue to destroy paper currencies to avoid default, there’s an even bigger likelihood that the world will continue to use electricity - and that the lion’s share of electricity generation will come from burning coal.

If you like that kind of certainty, I’ve got good news. I know I’m guilty of teasing investments in this letter, and not always providing solid, actionable advice - but this trend is just too big and too obvious for subtlety.

So today I’m going to talk about one of my favorite ways to play the coal trend - no hype, no teases.

As I said at the beginning of this issue, I look for certainty, not speculation. That goes for macro trends as well as company specific details. There are plenty of micro-cap coal miners you can speculate on, but I’m more interested in companies that aren’t going anywhere, that are in politically safe regions that I know and understand.

That’s why I’m excited about CONSOL Energy Inc. (NYSE: CNX), a $9 billion coal company.

This company mines steam coal in the Appalachian region of Pennsylvania - and they have lots of proven coal reserves: nearly four billion tons to be exact. That’s enough coal to satisfy all coal demand in the United States for almost four years.

CONSOL mines more bituminous coal (the kind most often used in power plants) than any other U.S. producer.

So they’re one of the biggest coal companies in the United States, and they have extensive reserves. That’s a certainty I’d like to own in my investment portfolio. The company also happens to be one of the most inexpensive coal stocks in the market today, with a trailing PE under 17, and a forward PE of about 9.

To put this number in perspective, most of this company’s peers in the coal mining sector trade at valuations closer to 20-30 times earnings. So today, CONSOL is a true bargain

If you buy this company today, you’re getting your portfolio in front of a long-term trend that shows no signs of stopping. And it’s a contrarian play! While President Obama lectures us on the hazards of oil and touts alternative energy, the crowd will pursue pie-in-the-sky investments in unproven, unlikely technologies and fuels. In the meantime, your money will be safely nestled in the warm certainty of coal’s dominance in the energy market.

Coal’s not going anywhere, and neither is CONSOL Energy - so putting your money with this trend and this company makes good sense.

Today, CONSOL is selling for just a hair under $40. I think this company is a fair deal under $44, and a screaming steal under $36. I’d recommend buying this company in tranches, and holding it until we stop using coal. It pays a modest one percent dividend that I’d expect to rise along with coal prices.

If this type of coal investment seems too boring for you, I recommend checking out a smaller, more growth oriented coal company that sells coal in the Chinese market. So far, our readers are up 30% on this stock, and we think there’s plenty more upside in this stock, as China continues to use more and more coal to feed its growth.

If you’re interested, I invite you to click here now to read more details about this company from Chief Investment Strategist Ian Wyatt.

Good Investing,

Kevin McElroy

Editor

Resource Prospector

• The Investors Triangle
• What are the hidden costs of ETFs?
• Exceptional ETFs

Today I’m going to blow the lid clean off of what I consider to be the biggest tar-pit for individual investors in the market today.

Exchanged Traded Funds – (ETFs) have been sold to the public as easy ways to buy into specific sectors in the stock market. They’re billed with attractive descriptors like “low-load mutual funds” or “poor man’s hedge funds” - or any of a variety of warm, fluffy names depicting them as “easy” ways to capture huge profits.

I’m reminded of an axiom known as the Designers Triangle, which states: a project can be done fast, cheap or good. Pick two.

I’ll amend this axiom for investors. The Investors Triangle states: an investment can be profitable, easy, or fast. Pick one. The obvious choice you’ll make is “profitable” – and these types of investments are rarely easy or fast.

Remind yourself of this axiom the next time someone tells you that a prospective investment has all three characteristics. Most of the best investors in the world made lots of money over a long period of time, and I don’t think any of them would tell you it was especially easy.

So when I see ETFs touted as “easy” ways to bank profits in specific sectors, I know I’m being sold something. What’s being sold is usually around .5% in fees. That’s cheap compared to most mutual funds. According to investopedia, the average stock mutual fund charges 1.3%-1.5% in total fees. ETFs are a steal if you compare their fees to what you’d pay a hedge fund manager: 2% of principle and 20% of profits.

But whereas a mutual or hedge fund manager has some kind of interest and ostensibly puts an effort into making sure the investments in his fund actually make money for his clients, an ETF manager has no such interest and puts forth no such effort.

So what are you paying an ETF manager for? Most of the time you’re just paying them .5% for their brilliant idea to bundle a group of securities together to sell to you.

And how fortuitous for them that you have such an interest! Time and time again, I’ve seen ETFs get launched at the peak of the popularity of their underlying security, only to watch the fund get slaughtered in the weeks and months afterwards as the sentiment and fundamentals for the underlying security begins to wane.

For unscrupulous fund managers, it couldn’t be easier than to do a little market research to find out the investment du jour, and launch a fund based on it. They don’t care if it goes up down or sideways, they only care that the idea is popular enough to sell the fund to a lot of investors for .5% of commission. The more popular, the better. And if you’ve been an investor for more than 5 minutes, you know that what’s popular is almost always not a great investment for very long.

In previous issues of the Resource Prospector I've discussed one of the most poorly performing ETFs – the United States Natural Gas Fund (NYSE: UNG). You can read this past issue (for free!) by clicking here. In short, and with the help of Eric Adamowsky, one of the top researchers here at Wyatt Investment Research, I’ve come to the conclusion that the managers who designed and launched this fund gave little heed to the idea that it might make money for people who bought it.

And unfortunately, I’ve found very few exceptions to this tendency for ETFs to underperform their own objectives – or to otherwise perform in a way that runs counter to what investors might think they should achieve.

(If you have any suggestions or questions about specific ETFs, please send me an email at editorial@resourceprospector.com)

So, it’s not enough for investors to be right on the trend. They also have to be right on the specific way to play the trend. And I wouldn’t be doing my job if I didn’t point out the booby traps on the road to profits.

As I said, there are exceptions to the rule. There are good ETFs to be found. My criticism of SPDR Gold Trust Shares (NYSE: GLD), the gold ETF has been constant and fair. I think gold investors can do a lot better than simply match gains made in gold’s price, but that’s the only thing this ETF is supposed to do. And it’s lived up to its goal:

In this chart, I divided the price of GLD by the price of one ounce of gold. Each GLD unit (or share) is supposed to track the price of 1/10 of an ounce of gold. You can see that since the fund launched in late 2004, it’s stayed within 5% of its goal most of the time.

As I’ve said, buying this ETF doesn’t give you the protection of owning actual physical gold, and it doesn’t provide the upside of profitable gold mining companies, so if you’re bullish on gold I think you can do much better.

As far as ETFs go, it’s not the worst. It lives up to its goals, and that’s all you can really ask.

I’ve been doing some research in collaboration with Ian Wyatt, our Chief Investment Strategist, as well as Jason Cimpl, our resident swing trader and Editor of Trademaster Daily Stock Alerts. Our goal is to find the three best commodity ETFs in the market today. We already have a couple picked out, and I anticipate completing the full report in the next couple weeks. Keep a close watch on your inbox, as I’ll be sending instructions on how to receive this report soon.

Good Investing,

Kevin McElroy

Editor

Resource Prospector

• A reader’s concern
• My must-read thesis on gold investing
• The gold investment with 1,000% upside

Yesterday I wrote about the prospect of the U.S. Federal Government seizing or outlawing the private ownership of gold bullion.

In short, my conclusion was that it would be too difficult and unconstructive for the government to seize or outlaw gold.

And perhaps I simply don’t have the remarkably creative mind of a revenue-strapped politician - but some readers wrote in with some other scenarios that I hadn’t considered.

Assaf K. wrote:

“Governments don't have to seize gold to make it an unpalatable investment. They can increase taxes on gains from precious metals transactions. Alternatively, they can impose various fees and commissions on any such transactions. I wouldn't disparage the creativity of Obama et al. when it comes to capital controls.”

That’s definitely a realistic scenario. Already, capital gains from gold and silver are taxed at an individual’s personal income tax rate, rather than at the lower capital gains tax rate. With income taxes due to rise next year, it wouldn’t surprise me if President Obama and his Democrat led Congress saw fit to raise taxes on gains made in gold and silver, and otherwise introduce a variety of Orwellian measures to stymie the lure of investing in precious metals.

From a strictly utilitarian perspective, a revenue grab from gold’s “increase” in price makes total sense. But I want to remind Assaf and other readers of my own humble thesis about gold. I don’t buy gold (and silver) to “make” money. Economists on both sides of the gold argument are quick to point out that gold does not bear interest, nor does it produce income or cash flow or truly appreciate in value. Warren Buffett reminds us that “Price is what you pay; value is what you get.”

The price of gold changes with regard to currency fluctuations, but the value stays about the same.

Of course, there are situations that cause the price of gold to increase more than inflation in the currencies it’s priced in. But I’m not trying to speculate on the price of gold.

I buy gold and silver because it’s a store of value that stays relatively the same no matter what happens to dollars, euros, yen or any other currency. From a fundamental perspective, owning gold and silver is a way to preserve wealth, not grow it.

So investing in physical gold and silver for the gains doesn’t make much sense. And if the government wants to impose fees and commissions on such transactions, I see that as bullish for precious metals. Right now, there are so many ways to get exposure to physical gold and silver, that it would be difficult if not impossible to close all of the loopholes.

I buy gold and silver stocks for the exact opposite reason that I buy the physical metals. Whereas I buy bullion and keep it safe at hand for safety and reliability, I buy gold stocks as a speculation that they will skyrocket.

Junior precious metals companies are notoriously risky investments. But if you catch a rising star in this sector, you can multiply your initial investment by ten or even a hundred-fold. It’s not the type of investment you want to back up the truck on - but at the same time, even a small stake gives you a chance to significantly impact your net-worth.

Whereas gold bullion is fungible and widely accepted across the borders of countries, and throughout the history of mankind, junior gold stocks, again - are the complete opposite.

Most junior gold stocks are complete garbage. It’s vital to buy the best companies, with the best management, with the most cash and the best resources. Only these companies have the ability and likelihood to multiply your investment many times over.

Let me give you one quick example of a company that I think could return 1,000%-10,000% gains.

It’s a small North American company located in a remote mountain region. It has a market capitalization of about $200 million - but it has the mining rights to over $20 billion worth of proven gold reserves. If they mine just 5% of that gold, it will yield them $1 billion at current gold prices. Those sales would be quadruple their current market cap.

So if you’re wondering how a junior gold mining company can return between ten and 100 times your investment, imagine if they mine 50% of that gold at the same time gold prices rise another 50%. Their fair market value alone would go up 50-fold.

The best part about this company is that they’ve already proven their profitability. Their mines are currently in production, and last year they produced 70,000 ounces of gold - that’s $84 million worth of the yellow metal. This year they expect to produce even more.

This company is my favorite in the sector, by far. At less than $4 a share, you can buy a significant number of shares for just a few thousand dollars - and if they get even a fraction of their proven reserves out of the ground, you could make some serious gains.

If you’d like to hear more about this company, I strongly encourage you to read the full write-up by clicking here now.

Have a good weekend,

Kevin McElroy

Editor

Resource Prospector

• The Obama-FDR connection
• An unlikely scenario for gold
• My favorite gold investment today

Today’s topic might seem somewhat oblique to general investment strategy, but I think the ramifications of this issue are kind of an 800 pound gorilla in the room.

Some very intelligent, highly successful, amazingly talented gold investors routinely suggest that the end-game for the dollar will be preceded by the seizure of gold assets by the Federal Government.

If there’s a significant likelihood that gold will actually become illegal, then all my suggestions and research intended to help you find compelling gold investments are completely off course. It won’t matter if I help you find your next 10-bagger gold stock if the government seizes gold assets and halts trading on such companies.

So I want to tackle this issue head on.

This undercurrent of worry in the gold investment community may be born from the fear that history sometimes tends to repeat itself. Gold investor’s prudence in holding gold may be punished by President Obama’s administration, should he choose to replicate the policy of President Franklin Roosevelt and outlaw the ownership of gold. There’s no doubt that as the 'Godfather of liberal thought' that Obama looks up to FDR, and certainly wishes to follow in the footsteps of one of America’s most popular presidents.

You can read FDR’s entire Executive Order outlawing gold by clicking here. Pay special attention to Section 2.

It seems like a strange Orwellian dream that in this country between 1933 and 1971 owning gold bullion was illegal. The move was entirely evil, but I completely understand why it was confiscated - the Federal Government couldn’t inflate its currency to pay for war, public works and social programs without first confiscating gold.

That was because all dollars up until that point were convertible to gold - so if the Government simply printed excess dollars, it would soon find itself running out of gold, which could cause another run on banks, and might result in the complete destruction of the currency.

It’s the very idea of outlawing the ownership of something so innocuous and mainstream that I can’t wrap my head around. For instance, if tomorrow the government outlawed aluminum foil or sacks of barley under penalty of fines and imprisonment, it would be just as strange.

To outlaw gold today doesn’t seem to make much sense to me, especially since it wouldn’t directly enable the government to pursue some other monetary policy. Outlawing gold would be strictly punitive, and not very constructive. I suppose you could make the same case that the War on Drugs isn’t very constructive and is only punitive, but there’s no public perception that buying gold destroys lives, so I don’t see the political upside for taking gold down the same road.

In the same way that legislators in Congress are currently working on the final version of a massive new bill to further regulate the derivatives markets, I can imagine a time when it might be politically expedient to pass a bill further regulating foreign exchange (ForeEx) traders, and maybe such a bill would include language outlawing the exchange of Federal Reserve notes for speculative assets such as gold?

I’m grasping at straws here because I just don’t see how a 'gold ban' would work. The only thing a ban on gold would accomplish at this point would be to make gold skyrocket in price. It wouldn’t strengthen the dollar unless the Federal Government then turned around and sold all of its seized gold to foreign banks - but at that point the dollar would be so worthless I don’t see how it would really help all that much.

And logistically, I don’t know how the Government could do it. The kind of person who bought gold as a way to hedge against inflation and dollar insolvency isn’t very likely to render their gold back to Caesar very willingly, I imagine.

If you have any thoughts on this topic, please share them by writing to me at editorial@resourceprospector.com.

I think all gold investors view their gold purchases, at the very least, as a type of hyperinflation insurance. Hyperinflation is clearly the worst case scenario for the dollar, and there are plenty of historical examples of what happens in countries that experience such inflation.

The history of currency destruction and the government response to it is surprisingly unmarred by violence, coercion and marshal law. From Zimbabwe, Hungary, Austria, Germany, Argentina - history is replete with countries that printed their currencies into oblivion. All of these countries attempted currency controls, but these types of policies really don’t hold much water with a populace that needs to eat. And typically, regimes in power during hyperinflation don’t stay in power very long.

So to answer the question - even in the worst case scenario, I think it’s highly unlikely that the Federal Government would or could outlaw and seize private gold holdings.

As I said earlier this week, gold and productive gold companies are a great long term hedge against inflation. I’m careful to make the distinction between gold companies, and gold companies that are actually able to get gold out of the ground. Most junior gold companies do not produce any gold. That’s why it’s important to buy the best companies, with solid balance sheets that have proved an ability to actually bring gold to market.

Ian Wyatt, my boss and Chief Investment Strategist here at Wyatt Investment Research, recently put together a report all about a small North American gold miner that’s currently selling for less than $4 a share. They’re already producing gold. Last year they produced over 70,000 ounces of gold, and they have over 20 million proven ounces. At today’s prices, that’s $25 billion worth of gold. But they’re only a $200 million company – so as they continue to bring that gold to market, I expect shares to soar.

They really are the best junior gold miner in the market today.

Buying this company today is the equivalent of buying their gold reserves for $120 an ounce.

You can read more about this company by clicking here.

Good investing,

Kevin McElroy

Editor

Resource Prospector

• U.S. Dollar could fall 17%
• Gold: next stop $1,650 / oz
• Junior gold miner lets you buy gold for $120 / oz

I hesitate to mention this ‘commodity’, just because it’s not a commodity in the strictest sense of the word. But in many ways, it is the most influential commodity in the world. No, I’m not talking about oil, or gold or even water.

This commodity trades hundreds of billions of dollars in volume every day, and its price swings effect everything from your heating bill to your food costs, gas, gold, silver – everything.

This über-commodity, ironically, has practically limitless supply, and what’s more, the entire world reserves are managed by a cartel of producers who can increase or decrease supply at any moment.

Pretty sweet gig if you can get it.

Right now, this commodity is trading near its 4 year highs. The last time it was this expensive, it dropped about 17% in 9 months.

Sometimes it’s easy to get caught up in the particular supply/demand trends of whatever commodity you’re interested in, and to ignore this macro-macro force that frequently overwhelms even seasoned investors.

What am I talking about? It’s called the dollar. As the world’s reserve currency, everything is priced in dollars, so dollar fluctuations are an important function of any commodity play.

To illustrate my point, I’ve posted two charts below. The first is a chart of the U.S. dollar, and the second is a chart of the price of gold.

Here’s a chart showing the dollar’s roller coaster ride over the past 4 years:

You can see how every time the dollar index broke through 86, it corrected nearly 17% (from October 2007 to April 2008, and again between March 2009 and December 2009).

During those same periods, gold skyrocketed as the dollar fell:

From October 2007 to April 2008 gold saw its price rise 33% from $750 up to $1,000 an ounce. From March 2009 to December 2009, it rose 33% (again!) from $900 up to over $1,200.

If gold gains another 33%, it would be close to $1,650 an ounce. Eerily, gold seems to be acting as a double inverse dollar play. Every percentage decrease in the dollar index is reflected as a two-fold increase in gold’s price. Pretty neat.

As I’ve said before, I don’t like the idea of telling anyone to buy something when it’s near its all time dollar-denominated highs. But when the dollar appears to be due for a fall, and there’s no other currency that’s showing any kind of strength, it’s tough not to be bullish on gold.

While I’m on the topic of making precarious remarks, I need to print a correction to my statements in yesterday’s issue of the Resource Prospector, as well as an apology to my colleague Jason Cimpl, editor of Trademaster Daily Stock Alerts.

It’s almost splitting hairs, but I somewhat mischaracterized Jason’s time horizon for his bearishness on gold. To be clear, Jason is currently ‘long’ gold in his Trademaster portfolio. If you’d like to see how he’s playing the trend, you can click here to see what his great trading alert service is all about.

My mistake was a matter of terminology. For an active trader like Jason, his holding period for any ‘long’ position might be a few weeks or a couple months at the most. So he’s ‘long’ gold – but not over the next 18 months.

As a long-term investor, I’m not a big fan of transaction costs and short term capital gains, so when I buy a position I like to be in it for the long haul.

I’ll quote Jason from a conversation we had yesterday, which seemed to clear up my misunderstanding:

“Short term, gold is influenced by velocity. Over long term it is impacted only by [money] supply.”

So, apologies to Jason for my mistake.

I don’t necessarily agree with Jason’s assessment that gold will move lower over the next 18 months. But if I’m wrong, and prices do fall, it will be a great opportunity to buy more gold and gold stocks. I’m not ‘long’ gold for 18 month gains. I’m buying gold for long term inflation protection, and gold stocks for long term capital gains. I won’t liquidate positions due to short term price fluctuations – I’ll use those fluctuations as opportunities to add to my position.

I found a great quote that sums up why I’m long term bullish on gold:

"You have a choice between the natural stability of gold and the honesty and intelligence of the members of government. And with all due respect for those gentlemen, I advise you, as long as the capitalist system lasts, vote for gold." - George Bernard Shaw

Gold, and the companies that can successfully get it out of the ground, are a long term play precisely because there is literally no problem that world governments will not print money to solve.

I’m careful to make the distinction between gold companies, and gold companies that are actually able to get gold out of the ground. Most junior gold companies do not produce any gold. That’s why it’s important to buy the best companies, with solid balance sheets that have proved an ability to actually bring gold to market.

Ian Wyatt, my boss and Chief Investment Strategist here at Wyatt Investment Research, recently put together a report all about a small North American gold miner that’s currently selling for less than $4 a share. They’re already producing gold. Last year they produced over 70,000 grams of gold, and they have over 20 million proven ounces. At today’s prices, that’s $25 billion worth of gold. But they’re only a $200 million company – so as they continue to bring that gold to market, I expect them to soar.

They really are the best junior gold miner in the market today.

Buying this company today is the equivalent of buying their gold reserves for $120 an ounce.

You can read more about this company by clicking here.

Good Investing,

Kevin McElroy

Editor

Resource Prospector

• Gold Holds Steady as the Market Falls
• Who Else Owns Munis?
• The Most Important Question Investors Must Ask

Some of the best investors I know today have big positions in what’s typically viewed as a “safe” investment.

I’m talking about municipal bonds. And for reasons I’ll discuss in this issue, I believe they’re not as safe as many investors believe. What’s my recommendation?

Sell munis, and buy precious metals and precious metal stocks.

But hey, you’ve heard this all before from me. If you haven’t bought gold, silver and the appropriate securities, you’ve already missed out on some big gains. However, I believe there’s still plenty of upside. Part of the reason for that upside is that investors will be flocking away from traditionally safe investments like muni bonds, and into precious metals.

My proof? Even as the broad market fell over the past month, the prices of physical precious metals AND shares of companies that mine and produce them all held steady. Take a look at this chart of the Goldbugs index (AMEX: HUI) – an index filled with the 16 largest publicly traded gold and silver companies:

As the broad market dropped more than 10%, this index ended only a few points lower than it started.

Physical gold prices moved much higher over the month of May…

…and silver held about steady.

If you own muni bonds today, you’re in good company. Researcher Eric Adamowsky, one of the best traders I’ve ever seen, and one of our own here at Wyatt Investment Research owns a few tax free muni bonds. Even Warren Buffett’s holding company Berkshire Hathaway (NYSE: BRK) has a few billion dollars worth in their portfolio.

I can't blame them: munis sound almost too good to be true – most pay a much higher yield than similarly termed Treasuries. Very few munis have ever defaulted, and if you buy the right ones, they’re completely tax free.

And what better place to write about muni bonds than here in Boston – the home of the Big Dig, Boston’s 3.5 mile tunnel under the city. My wife and I are spending a week here in Boston for our first anniversary, so we’ve seen the amazing results of the Big Dig.

It’s one of those massive urban building projects that is difficult to wrap your head around – but on Sunday we had the pleasure of visiting Spectacle Island in Boston Harbor – an old landfill that was the proud depository for thousands of tankers full of dirt and rock from the Big Dig.

The island increased in size by over 35 acres thanks to that added landmass. It’s truly an incomprehensible construction project.

What does the Big Dig have to do with municipal bonds? Well, part of its sticker price, an estimated $15 billion, was raised through the sale of munis. And until recently, those bond-holders were in trouble as the State of Massachusetts froze all bond interest payments after the credit crisis unfolded in 2008.

That changed a few weeks ago on May 18^th, when the newly created Massachusetts Department of Transportation announced that it would sell $1.1 billion in bonds to refinance the previously frozen Big Dig bonds.

I don’t know about you, but issuing more debt to refinance old debt doesn’t fill me with confidence. I realize that the Federal Government does this exact thing all the time, but they have the benefit of printing money when they need to pay the bills.

What happens if there’s another credit crisis, and the MDOT can’t afford to pay the interest on this new debt? What happens if tax receipts fall? The State Treasurer has already shown a willingness to put the brakes on muni bonds if things go against him. Why should investors expect anything different the next time the State screws up its finances?

This is yet another example of why it’s imperative to get some of your net worth into precious metals, and the appropriate gold and silver stocks. Physical metal is no one else’s liability.

When you buy gold and silver companies with a good track record of profitability, you’re aligning your interests with those of the company. The CEO wants the company to earn money, and in turn the stock price goes up and you win.

When you buy a muni bond, your interests run counter to those of your debtor. They want your money, but they don’t want to pay you back if it becomes inconvenient to do so. That’s not an issue when tax receipts are increasing, and when the market is creating new jobs and new businesses for the municipality to fill its coffers from.

But in a bear market, when State Treasurers have to continually issue new debt to pay for old debt, every muni bond becomes a hot potato.

If you’d like the immediate protection of gold and silver, as always, I recommend buying from a reputable dealer. I can personally speak for kitco and Blanchard’s.

If you’re looking for a good gold stock, I don’t think you can do any better than to buy a company that Ian Wyatt, Chief Investment Strategist recently added to his SmallCap Investor Pro portfolio. This company currently sells for under $4 a share, so you can buy a whole bunch of shares for a few hundred dollars. They also already have producing mines, and they get gold out of the ground for less than $430 an ounce. Every gain in gold’s price should have a huge impact on this stock.

To find out more about this company, click here for the full write-up.

Good Investing,

Kevin McElroy

Editor

Resource Prospector

• .357 magnum
• Silver in the mail
• An ETF that isn’t completely horrible

It’s been really hot in Vermont this week. It scratched into the 90s yesterday, and it looks like it’ll do it again today. I usually try to get outside for some exercise, either some bike riding, tennis or golf, but at this point I’m just not acclimated to summer weather.

You might remember just a couple weeks ago when I talked about the snow we were getting. There’s a saying in Vermont that goes something like, “if you don’t like the weather, wait 10 minutes.”

So yesterday I took it easy and just decided to shoot some empty beer cans with my Ruger .357 magnum single action revolver. While not as strenuous as a few sets of tennis or a 10 mile bike ride, throwing some lead down range is at least as therapeutic, even if I only managed to hit two of the four cans with a full box of ammo at 50 yards.

In the meantime, some of you sent in some great commentary about silver stocks for me to peruse. And, not surprisingly, many of you hit the nail on the head.

George C. wrote in asking about Silver Wheaton (NYSE: SLW).

George writes,

“You asked for any questions about silver investments; so, here's one:  What is your opinion of Silver Wheaton (SLW)?”

Thanks for writing in George.  

SLW comes up frequently in discussions about silver stocks. That’s mostly because it’s the biggest company that focuses entirely on silver, and it's done a good job of multiplying gains made in silver's price over the long run. 

The stock sold off massively at the end of 2009, but it bounced back immediately, and over the long haul, it’s magnified gains made in silver’s price by three-fold. That’s what you should expect from a good precious metal stock.

 The downside is that like many precious metal stocks, it's richly valued.  It's not as richly valued as a similar company in the gold industry - Royal Gold (Nasdaq: RGLD), and it's not extremely overvalued with regard to industry peers (of which there are few) - but it's richly valued in comparison to what I would call a typically "safe" investment.

Charles S. also wrote in with some good tickers for silver investors:

“Here are my three recommended silver stocks:

SLW – one of the largest silver miners with a significant anticipated productivity increase for 2010. Expect this to hit $25 before year end

SVM – Lowest cost producer of silver. Currently at around $7 but will go to above the recent high of $9 in the next 3-6 months

CDE – With their Kensington mine ramping up production by mid-2010, silver production will reach record highs. Expect this to reach $22-23 in 3-6 months

A good silver ETF I like is AGQ which tracks silver price movement X 2 hence you get double the benefit of iShares when silver moves up. Expect this to be in the $70-75 range when silver makes the next good run which based on my estimates should be between 3-6months from now.”

Thanks Charles – you’ve definitely got your bases covered. I haven’t done too much analysis on Silvercorp Metals (NYSE: SVM) or Coeur D’Alene Mines Corp. (NYSE: CDE) – but these look like some good starting points.

I am intrigued by this Proshares Ulra Silver ETF (NYSE: AGQ) for the very reason that it seems to be designed to actually make money. I’ve talked frequently and at length about how I despise most ETFs because they seem designed to lose money, or at the very least, to do nothing but generate “small” fees for their managers.

But I’m concerned that this ETF, just like many others, has been unable to “live-up” to its proposed goals of doubling the performance of spot price increases in silver.

I have to express this concern because when this ETF was launched, it sold for $22.74 a unit. At the time, silver sold for about $9.50 an ounce.

Since then, silver has nearly doubled to $18.40 an ounce, but AGQ now sells for $58.91, or only a 159% gain. That’s great, but it’s not living up to what it’s supposed to do. It’s not terribly far off from the 186% gain that it would need to be on target, but it’s disappointing nevertheless.

At the end of the day it’s certainly better than most other ETFs I’ve seen, and it’s definitely better than the Ishares Silver Trust ETF (NYSE: SLV) that barely keeps pace with silver. So, if you’re looking for upside in the price of silver, you could do a lot worse. I would caution everyone to remember that these leveraged ETFs, and leveraged investments in general, can fall at least as quickly as they rise.

This ETF kicks the crap out of my least favorite – the United States Natural Gas Fund (NYSE: UNG).

Of course, I advise everyone to do their own research when it comes to any investment. But to get the ball rolling, I’m excited to announce that I will be sending my full report about UNG, to all Resource Prospector subscribers tomorrow morning, free of charge. If you want to find out why this dog has done nothing but lose money, look for my report in your inbox tomorrow.

Good investing,

Kevin McElroy

Editor

Resource Prospector

• A birthday wish
• 12 years of nothing – or worse
• Tunnel vision for this investment

It’s my birthday today, so I apologize if this article is somewhat harried, short, or discombobulated.

I’m one year older, there’s one more grain of sand gone from the hourglass, but I have no reason to complain. The weather is nice, I’m healthy and there are opportunities to grow richer.

If I could have just one birthday wish granted, it would be for every one my readers to protect their bottom dollar by buying one investment today, this very moment. I don’t know what will happen to stocks, the dollar, the euro, but I do believe that there are steps we can all take to protect ourselves from calamity in all three. More on this investment in a minute.

But for right this very second, it’s hard to be bullish on the broad market – as I’ve pointed out many times in this letter; we’re in the middle, and perhaps nearing the end of a long-term secular bear market.

Don’t believe me? Take a look at this 12 year chart of the S&P 500:

So the broad market is about where it was 12 years ago. If you include inflation, that's more like a 20% loss.

But like I said yesterday, there are some core companies that I think everyone should own – companies with what I call “The Inevitability Factor.” You can read yesterday’s issue by clicking here.

Besides those companies, I’m not terribly excited about owning huge chunks of the broad market right now. When we start seeing some “slap-me-across-the-face-with-a-bullwhip-obvious” signals that stocks are super cheap, and in a sustained, fundamentally sound uptrend, only then will I start eyeing the broad market.

For now, I’ve got tunnel vision for an entirely different asset class.

I’m talking about silver. I still like gold, of course, but silver in particular has been beaten down into the dirt.

Right now, silver prices are a full 10% lower than their recent highs. But unlike gold, silver is much, much lower than its historic highs from the early 1980s. That’s when silver briefly topped $48 an ounce. Those are nominal highs. Silver’s inflation adjusted highs would be closer to $130 an ounce.

That’s a lot of built in potential upside, and for that reason, along with some jitters in the broad market, and a lot of fear about currencies in general, I’m very excited to be buying silver today.

I’m also currently working with my boss and Chief Investment Strategist Ian Wyatt, along with analyst Jason Cimpl of Trademaster on a full report about the single best silver company to buy today. I expect to have this report finished sometime in the next few weeks, and it will be available to Global Commodity Investing subscribers. You can click here to take a trial subscription to Global Commodity Investing which will ensure you’re among the first to get all the details about this company. This service is not cheap, but that’s why we offer a strong 60-day money back guarantee.

In the meantime, I suggest, as always, to get your hands on some physical silver, and to buy the best silver companies you can find. Use dips like the current one as opportunities to nibble, not gobble.

I’d also caution against buying the Ishares silver ETF (NYSE: SLV) because it provides neither the protection of the physical asset, nor the upside of silver stocks. It’s also taxed as a collectible, not a security. Collectibles are typically taxed at 28% vs. the 15% capital gains rate.

If you have a favorite silver stock you’d like me to discuss in an upcoming issue of the Resource Prospector, please drop me a line at editorial@resourceprospector.com.

And feel free to wish me a happy birthday, as well!

Good investing,

Kevin McElroy

Editor

Resource Prospector

• BBQ Corn Recipes
• 60% Gains from Agriculture
• How to get rich…from corn?

I hope you had a pleasant weekend and were able to get outside and enjoy the weather if it was amenable in your locale. We experienced some unseasonably warm weather here in Vermont, and I tried to stay outside as long as possible. I even fired up my new Weber charcoal grill, a birthday present from my wife. I grilled some sirloin steak, some mushrooms on a kebab and even some corn.

I’ve heard conflicting views on whether to grill the corn in its husk, or to grill it “naked.” This time I opted for naked, grilling it on the cob over indirect heat for about 10 minutes, and the corn had some nice caramelized flavors. I seasoned it ahead of time with salt, pepper and a little olive oil. If you have a bbq corn recipe (or any bbq recipe for that matter) please send it my way at editorial@resourceprospector.com.

Today’s article isn’t all grill recipes, though. I’ve wanted to write about corn, the commodity, for quite some time. It’s just tough to pull myself away from alluring topics like gold and energy. And I should apologize, because agriculture isn’t something that’s very exciting to read about – not like precious metals or oil. But commodities like corn, soybeans, wheat, pork bellies, cattle, sugar and coffee all fall into the realm of my purview.

Admittedly I haven’t written about corn or agriculture in general very much. I may have been neglecting this topic somewhat for the simple reason that there’s just not the perception of the immediacy of riches that you can get by investing in gold miners or oil prospectors. No one yells “Eureka!” when a farm gets built or a new fertilizer plant produces its first ton of nitrogen. Archer Daniels Midland (NYSE: AMD) doesn’t ever “strike” corn.

But that doesn’t mean there are no riches to be made investing in agriculture.

For instance, one of the top performing stocks in the Small Cap Investor Pro portfolio is an agriculture company that’s returned nearly 60% in the past year.

And speaking of Archer Daniels Midland, the company has been very good to shareholders over the past 10 years, when it made nearly 200% gains while the broad market traded flat. They also pay a 2.4% dividend. They’re the kind of company everyone should own. Archer Daniels Midland, like Exxon (NYSE: XOM) and Wal-Mart (NYSE: WMT) benefit from what I call “The Inevitability Factor.”

These types of big blue chip companies with strong earnings and international exposure are so big and so ubiquitous, that they’ll be around no matter what happens to the broad market, world governments, currencies; indeed, it’s almost impossible to think of a likely scenario where these companies won’t thrive and survive.

Their future is inevitable. We’re going to keep using ADM corn, just like we’ll keep fueling our cars with Exxon gasoline and being consumers of Wal-Mart goods.

And there’s definitely some potential upside in corn prices, especially considering that corn prices have moved sideways for the past 18 months.

This chart plots the average weekly cost of a bushel of corn, in cents. You can see how corn skyrocketed in price to over $7.50 a bushel back in the summer of 2008. That’s because, in part, corn prices are tied to oil prices. In the United States, most gasoline is blended with 10% ethanol. And most of that ethanol comes from corn. According to a paper published by Schnitkey, Good and Ellinger from the Department of Agricultural and Consumer Economics at the University of Illinois, 11 percent of total U.S. corn consumption was used to make ethanol in 2006-2007.

Right now, it’s easy to see that corn has been beaten down in a sustained correction from its highs in 2008.

With oil prices near their one year lows, it could be a great opportunity to buy companies that will benefit from rising corn prices.

And right now, there’s some speculation that corn prices will rise thanks to increased demand from China.

According to an article in Bloomberg today, “Twenty-five of 35 traders and analysts surveyed from Chicago to Tokyo on May 21 said corn will gain because of rising purchases by China.”

If you want to give your portfolio exposure to the likelihood of higher corn prices, the safest bet would be to buy shares of Archer Daniels Midland. This $16 billion company seems to track pretty closely with the price of corn.

For a more speculative play with better upside, I’d recommend checking out the agriculture company in the Small Cap Investor Pro portfolio. They’re not a pure play on corn prices, but they do have exposure to China, and they’re already benefitting from greater demand in the agriculture sector. Unfortunately I can’t publicize this company’s name here: it wouldn’t be fair to paid subscribers to the service. But I encourage you to take a 30-day trial subscription by clicking here now.

Good investing,

Kevin McElroy

Editor

Resource Prospector

• Seedlings Destroyed by Rogue Frost
• Relying on real stuff
• Have I done my job?

It’s time to start over. Every year after St. Patrick’s Day I plant some snap peas, beans and a few other easy-to-manage vegetables from seed. But this year, we’ve had more than a couple rogue snow storms, frosts and other non-seedling friendly weather events in the past month alone. So, I’m starting over. It’s not a big deal. Seeds are relatively cheap, and I have plenty.

But it does mean I’ll have to wait a bit longer to enjoy fresh vegetables. In the meantime, I still have a huge stockpile of frozen and canned vegetables as well as a store of dry food goods like rice, beans and pasta.

If you have any tips on window-box vegetable gardening PLEASE send me a note at editorial@resourceprospector.com.

I hope you can see the analogy for the markets. You might call the May 7^th flash crash a “rogue frost” for the seedling-like bullish trend in the broad market. And like every investor should be, I am diversified in a variety of stocks that would stand to benefit from continued strength in the broad market.

I’m a commodity investor first and foremost – but I’m no oracle. My wife and I have investments in plain-Jane mutual funds that have been pretty mediocre. And if the broad market claws its way back into a sustained, legitimate bullish trend, we don’t want to miss out.

Those seedlings might bear fruit. But in the event that they don’t, we still have our reliable dry goods and preserves: hard commodities like gold and silver, as well as appropriate commodity securities in energy, precious metals and agriculture. If you’ve been buying these stocks and you own some physical gold and silver, then you’re already prepared for rogue frosts and sustained freezes alike.

That’s because we can rely on this “real stuff” in the event that the markets continue their bearish trend. And today, it’s tough to be optimistic about the broad market.

The Dow Jones Industrial Average index is already below its May 7^th sustained lows, and is on pace to test its May 6^th “Flash Crash” lows of sub-10,000.

Many traders and analysts view these recent lows as important psychological floors for the broad market. Their reasoning being that if the market can’t hold these lows, there is nothing preventing the market from dropping even further - like testing October, 2009 lows of 9,500, or July lows of just over 8,000.

If no one can be sure where the next bottom is, then everyone holding stocks will look for an exit, any exit to try to lock in some gains or to at least avoid losing big.

We know that when people exit the stock market, they look for safe haven in US Treasury Bonds, as well as precious metals like gold and silver. Any upside for gold and silver typically precedes big upside in precious metal stocks. I know I’m in broken record territory, but there’s just no other way to dice it at this point.

If you’re not at least somewhat hedged by owning commodities and commodity stocks, then I haven’t done a good job as an editor of this letter.

But it’s not too late to protect yourself from market and currency calamity. If you don’t own physical gold and silver, go over to kitco.com or blanchardsonline.com and take a look at their offerings. They both have fairly priced gold and silver products for someone with as little as a few hundred dollars or as much as a few hundred thousand dollars. I have no financial incentive to recommend either vendor, but I’ve had very positive buying experiences with both.

As far as precious metal stocks, I recently had Chief Investment Strategist Ian Wyatt put together a comprehensive report on the best small cap gold company in the stock market today. You can read all about this company by clicking here now. Gold is currently selling for around $1,193 an ounce, but if you buy shares of this company today, it’s like buying gold for $120 an ounce. That’s because they have verified reserves of 1.5 million ounces, or about $1 billion worth. But the company’s market cap is just $170 million. So becoming a shareholder today gives you the potential to enjoy capital gains of 100%-1000% as this company brings their gold to market.

Check out the full story here.

Good investing,

Kevin McElroy

Editor

Resource Prospector

• I’m deeply troubled…
• All the wrong reasons
• Why you should own gold

I hate to pick on Jim Cramer. He seems like a nice guy, and his show is nothing if not entertaining. After all, he literally has bells and whistles on his show, so there’s little argument that he’s an entertainer.

But yesterday, Mr. Cramer did something that bothers me deep down in the most contrarian cockles of my heart: he told his viewers to buy gold. Even worse, he parroted some half-assed gold-bug tenets as reasons to buy gold right now.

Why am I so uncomfortable seeing Mr. Cramer pound his noise-buttons for gold? Well, the best reason to ignore him is the one I’ve already mentioned. Jim Cramer is an entertainer. I don’t get investment advice from Jay Leno, so why would I get it from Cramer?

The second reason, as I’m sure you’re familiar with, is that Cramer isn’t especially good at picking individual investments on his TV show. I know he’s worked for hedge funds and he’s a big “Street” hotshot, but as far as I can tell, he’s wrong at least as often as he’s right.

According to a 2009 article from Barron’s,

Cramer's recommendations underperform the market by most measures. From May to December of last year, for example, the market lost about 30%. Heeding Cramer's Buys and Sells would have added another five percentage points to that loss, according to our latest tally.”

A Google search reveals just as many strategies that suggest shorting Cramer’s picks as buying them.

The third reason I feel uncomfortable about his recommendation is that he gives some questionable reasons for buying gold. Specifically, he gives us 6 reasons, none of which make total sense. I won’t list them all here, but I will poke holes in just one of them…

His number one reason to buy gold today is that it’s dependable. His proof? He thinks gold will go to $2,000 an ounce. That’s circular logic at best. It’s also dependable because it “tends to rise when other currencies fall.”

That’s exactly the kind of misstatement that irks me. Gold doesn’t rise when other currencies fall. Gold isn’t a double inverse currency trade. It’s a store of value. It stays roughly the same. If you’re hoping to make “profits” by owning gold, then you are buying for the wrong reasons. And when large swaths of people buy something for the wrong reasons, it creates an unsustainable trend. You wouldn’t buy any other money or currency with the hopes to make profits. You hope that money keeps its value.

You can read the rest of Cramer’s “reasons” by clicking here, though I wouldn’t advise it.

So when someone like Jim Cramer starts yelling at me to buy gold, it gives me pause.

Is he wrong to tell his viewers to buy gold? Not necessarily. I’m still long-term bullish on gold as a way to protect wealth against inflationary policies of the world’s central bankers and spendthrift politicians.

But his timing couldn’t be much worse. Gold is trading near its all time highs. I don’t watch his show, but I’m wondering if he has a tendency just to tell people to buy investments when they’re at their highest, simply because he knows people are probably already excited about the idea.

He also recommends buying the gold ETF (NYSE: GLD) – which is another classic blunder. I’ve given my reasons against owning this ETF before, and they’re still the same. Buying the ETF gives you neither the security of owning the physical metal, nor the upside potential of owning a gold stock. The only benefit to owning GLD over the metal, or individual stocks, is that it’s more convenient than physical gold, and not as volatile as stocks.

I’ve been an advocate of buying gold and gold securities during their dips. And I’m crystal clear about my reasons for owning both. As I just noted, gold protects wealth. It’s an insurance policy against currency devaluation. Gold stocks offer the potential to multiply gains made in gold. If you believe in the trend then you’re advised to own both.

Right now, gold is about $20 off its highs of $1,239 from a week ago. It’s definitely in a dip:

I’d look for any further downside in gold as a time to add to positions in the physical metal and/or gold stocks.

If you’re interested in finding out the name of my favorite gold stock right now, you can click here to read a full report. The company is in the junior mining sector, is located in North America, and buying this stock today is like buying gold for $120 an ounce.

If you have any questions, comments or you want to defend Jim Cramer, send me a message at editorial@resourceprospector.com

Good Investing,

Kevin McElroy

Editor

Resource Prospector

It’s often said that the stock market doesn’t like uncertainty. When uncertainty rises, stock prices tend to fall.  

 

When Lehman Brothers filed for bankruptcy protection on September 15, 2008, it started a landslide for the S&P 500. Investors didn’t know what toxic assets other banks were holding, so they sold. Banks became suspicious of what other banks might be holding, so they stopped lending.    

 

It may seem incredible that we’re still talking about Greece’s debt problems, but the reason we are is due to the amount of uncertainty that is dredged up by the Greek situation.   

 

Late in 2009, Greece announced that its budget deficit would be triple previous estimates. That set off a chain of uncertainty that’s put the very existence of the European Union and the euro in question.   

 

And when we hear that French President Sarkozy threatened to pull France out of the EU less than 2 weeks ago, it’s pretty clear why investors may still be a little uncertain.  

 

It may well be that the European Union’s days are numbered. And it’s hard to argue that it would be a bad thing. The economies in the EU are very different. If all Germany and France have to look forward to is more bailouts, well, that’s a problem.   

 

Gold prices were getting a beat down earlier today as oil prices and the euro bounced off of some support levels. If I had to choose between owning gold, oil or the euro, I’d choose oil. I’d add gold if that were an option. I can’t imagine why I would want to own euros. 

 

I’d like to hear which you prefer.

 

Getting back to the theme of uncertainty, I think it’s important that we don’t become “certain” about the outcome of the EU situation and the current correction in the stock market too soon.   

 

The $1 trillion bailout pledge from the EU hasn’t restored much confidence. I can’t help but think back to when Congress passed out own bailout plan. That helped stem the tide of the market’s sell off, but it didn’t prevent the ultimate lows that came months later. 

 

Right now, the stock market seems to be waiting for the next shoe to drop.   

 

Uncertain markets have the potential to sell-off sharply. And we’ve already seen one such drop, the now famous “flash-crash” from May 6. All we would need is some negative news about the U.S. economy and we could easily see another leg down.   

 

Of course, uncertain markets also yield the best opportunities to buy quality stocks at attractive prices. The key lies in knowing when to buy them.

• A compelling offer
• Who is the golden godfather?
• A less risky way to play it

Like every human being with a pulse and half a brain, I’m a huge fan of the first two Godfather movies. There are so many relevant quotes and situations from these movies that speak to just about every aspect of life.

Perhaps the best and most quoted line is Michael Corleone’s explanation of how his father Vito, the Godfather, was able to help with Johnny Fontane’s career. To refresh your memory, Johnny Fontane was a Frank Sinatra archetype locked into a contract with a band leader. Johnny asked Vito to help him get out of the contract.

Long story short, the band leader released Johnny only after Vito “made him an offer he couldn’t refuse.”

The offer, of course, was that Vito’s henchman Luca Brasi would kill the bandleader if he didn’t release Johnny from the contract.

Now, the gold company I’m going to talk about today has never threatened to kill someone - as far as I know. But they’re known for making offers that while not impossible to refuse, are quite difficult at least.

The almost-impossible-offer, in this case is money. More specifically, it’s investment capital. Now, if you’re like most people, you’ve probably never tried to get financing for a new gold mine. To put it mildly, it’s extremely difficult. Most gold mining ventures never get an ounce of gold out of the ground. So, banks typically won’t loan money to such risky companies. To add to the problem, gold miners, fair or not, are perceived as untrustworthy individuals. That characterization might have something to do with their ability to take large piles of startup capital and make it disappear into a literal hole in the ground, all the while paying themselves a handsome salary on someone else’s dime.

But let’s assume that there’s a gold miner who is actually honest, and he has the expertise to bring his deposit to fruition, and actually get the yellow stuff out of the hole in the ground. It will still take upwards of 10 years to bring one single ounce to market.

So whoever loans money to this miner has to know a lot about gold mining, to make sure they’re not funding another money pit, AND they have to be ready for a long and winding road towards getting paid back.

Enter: the Godfather of gold companies.

Picture a rosy-cheeked gold miner walking into the dark office of this golden godfather, hat in hand. He’s got charts and maybe some initial drilling surveys, maybe some pretty pictures of the property he already owns, and some shiny equipment he needs.

He’s already been turned down for loans from banks, hedge funds, venture capital investors and his brother in law.

In short, he’ll take investment capital, and give up pretty much anything – the prospect of mining his gold makes him susceptible to offers he simply can’t refuse.

This godfather of gold companies is called Royal Gold (Nasdaq: RGLD). They loan money to startup gold miners years and years before the gold gets out of the ground. Their offer? They’ll give lots of up-front investment capital in exchange for a certain percentage of mined gold, or revenue from the mined gold. These payments, whether in gold or in revenue are called royalties – and they usually work on a sliding scale. The higher the price of gold, the more of the gold and/or revenues Royal Gold receives.

The most exciting part about this company is that they don’t ever mine, explore, refine or smelt a single ounce of gold. They have a dozen or so employees, and they basically do nothing but lend money to gold miners, and then collect royalties. Like the Godfather, they just sit in their office and wait for desperate lackeys to come in and accept un-refusable offers.

There are other godfathers, but Royal Gold is the biggest, and it’s also the only one that focuses entirely on gold.

The company pays a small dividend, currently less than 1%, but they have a long history of raising their dividend – something I think shareholders can expect more of as the price of gold rises.

Right now, the stock is trading at a pretty rich valuation of 71 times earnings. It’s tough to convince yourself to buy a stock with such a high PE, but if you wait for earnings to kick in, you could miss some of the upside.

If this stock interests you, I’d advise averaging in slowly as gold prices increase.

If you’re looking for a company that’s a little bit cheaper, I’d recommend taking a look at a junior gold miner in the Small Cap Investor Pro portfolio.

In the last quarter this company received an average price of $1,119 per ounce of gold, and total cost per ounce was only $425. That’s a $694 profit per ounce! These junior gold miners have the tendency to skyrocket much faster than gold prices – AFTER gold prices rise. Click here for the full story.

Good Investing,

Kevin McElroy

Editor

Resource Prospector

• Great Questions in the Mailbag
• When an ETF folds
• How far will gold rise?

I received some great emails from readers yesterday – notably a message from Mark I. who suggested buying puts as a way to profit from the tendency for the United States Natural Gas Fund (NYSE: UNG) to do nothing but lose money.

(For those readers unfamiliar with options, a put is a type of option that, to put it simply, goes up in value as the underlying asset decreases in value.)

It’s hard to argue with a strategy that could have yielded greater than 100% percent gains, month after month for the past year. I’m not exaggerating either. Options prices can surge by multiples as they approach the strike price.

Take a look at this table showing put prices for July expiration on UNG.

The bottom four prices are “in the money.” You can see how the $7 put costs 39 cents right now. But if it moved into the money, or even just got a bit closer to the money, it could double or triple in short order. That’s the strategy Mark uses – buying puts on UNG that are just out of the money. If the ETF share price goes down, his put option goes up in price and he can sell it back for a profit.

It’s not a bad strategy, and I want to thank Mark for sending it in. My only problem with the strategy at this point, is that I’m not sure how much farther UNG can fall. I doubt it would go to zero, or like other ETFs, they would just fold it if it dropped below a certain dollar per share mark. It happens more often than you’d think.

The firm Rydex just folded 12 of its ETFs a few weeks ago. Funds fold all the time, and I don’t want to be long or short a fund that might fold soon.

Like I said yesterday, I’m morbidly intrigued by UNG, and I will be releasing a full report – free to Resource Prospector subscribers – in the next couple weeks.

If you have any unique ways to profit from commodities in a market that goes up, down or sideways, please send them to me at editorial@resourceprospector.com.

I also received a very tough question about gold from reader Pierre C.

Pierre writes,

“I receive your research and see that you have been rightly positive on gold. Is there any kind of way or methodology to estimate a medium term target for gold? I saw some estimates talking about gold price of $6000 or even $160,000 per ounce.

What do you think of these (it seems they look at a peg for gold versus dollar, 1 for one)? Have you seen interesting research you can send me? My feeling: I bought gold last year. I think it should go to $1800, medium term. After, I do not know....”

Pierre asks a good, but difficult question about gold prices. Predicting future prices at all is something of a foolhardy venture. He also notes some methods for estimating gold prices. One method is the idea of putting the dollar back on the gold standard.

If you traded all of today’s gold for all of today’s dollars, there wouldn’t be enough gold at current prices. You can arrive at the same conclusion by dividing known supplies of gold by the current supply of dollars.

According to the World Gold Council, the known supply of gold above ground is currently about 5.32 billion ounces. The broadest supply of dollars (m3) currently sits at somewhere north of $13 trillion. So if we divide $13 trillion by 5.32 billion, we arrive at what gold would cost if it backed every single dollar: $2,443 and change per ounce.

Of course that number doesn’t account for any other world currencies, and how they might fit into the mix. According to goldseek.com, as of October, 2008, the world money supply was the equivalent of $58.9 trillion. That number has since ballooned, but even at that number, if world currencies moved to a gold standard, gold would surge to $11,071 an ounce.

For a medium term outlook, I think we can expect prices to be somewhat lower than $11,000 – but $2,443 isn’t out of the question.

According the Government’s inflation numbers, the inflation adjusted high for gold is just shy of the $2,443 mark at about $2,300.

Some economists like John Williams at www.shadowstats.com have poked holes in the Government’s inflation numbers, saying that they underestimate inflation.

And according to estimates from Bloomberg.com, the real inflation adjusted high for gold would be close to $7,000. You can read about these estimates at goldcore.com.

One of my favorite gold analysts, Jim Sinclair, famously made a standing bet of $1 million that gold will reach $1,650 an ounce by the second week of January 2011.

He made this bet in April of 2008, when gold sold for around $900 an ounce – so he certainly went out on a limb a bit.

To answer Pierre’s question – my long term predictions for gold are the same as many gold analysts: it will absolutely soar. The long term trend for the dollar is not good, because it’s used as a political tool first, and as a medium of exchange (or store of value) only as a secondary consideration. Politicians and central bankers will raid the dollar for every bit of its worth.

But in the medium term, I think we’d be wise to listen to Jim Sinclair. I’m guessing gold will hit $1,500 by the end of 2010 – but, I want to emphasize that it’s an educated guess – but still a guess.

If you’d like to hear about a way to prosper from the likelihood that gold will continue rising, I should caution you not to buy the asset at all-time highs. BUT there are opportunities to invest in gold in the junior mining sector. These companies typically lag increases in gold, so buying them after gold rises is probably the safest way to build a position. You can read all about my favorite small cap gold miner by clicking here.

Good Investing,

Kevin McElroy

Editor

Resource Prospector

On Monday, when it was apparent that we were in for a big day as futures went limit up in pre-market, I said I wanted to see a candlestick pattern called “three white soldiers.”  

 

Three white soldiers basically means three pretty good sized up days in a row. This pattern is considered very bullish, especially after a period of consolidation. And the reason it’s bullish is fairly easy to deduce. 

 

A period of consolidation for a stock means that not much is changing. The buyers and sellers are pretty much in agreement as to what it’s worth. And so the price doesn’t change much. 

 

When the stock price suddenly makes a strong, three-day advance, it means something significant has changed.   

 

(I want to mention here that I’m not really a technical analyst, but I do enjoy the Japanese art of candlestick reading because it uses simple price action to describe investor sentiment. I would recommend a little familiarity with candlestick patterns.)  

 

Anyway, I was hoping that investors would respond strongly to the EU’s trillion dollar action. And like I said, if the market is going to shake off the negative sentiment and get back to rally-mode, it needs to do so quickly. And it needs to take out some resistance points, too.   

 

Why? Well, because it was pretty clear that Monday was a short-covering rally. The bears were emboldened after the declines of last week. And actions of the EU pretty much mowed them over for one day.   

 

But without a statement that something significant had changed, investors would have no incentive to hold their positions, and the bears would become more aggressive sellers once again.   

 

So we didn’t get the three white soldiers. And I’ll admit I was a bit concerned that the selling would resume when the S&P 500 traded briefly above resistance at 1,165 intra-day, but then closed below that level. 

 

However, yesterday’s close firmly above 1,165 on the S&P 500 looks pretty good. I don’t know the candlestick name for the pattern traced out over the last couple of days. But like I said yesterday, I get the feeling investors are eager to put the Greek drama behind them.   

 

The next resistance level to watch on the S&P 500 is 1,188. And we will also want to see 1,165 hold.   

 

Cisco’s (Nasdaq:CSCO) John Chambers is one of my favorite CEOs. The man is a straight shooter. He manages expectations well and always seems to keep his company in position to beat expectations.   

 

Last night, Cisco reported its Q3 earnings. The company beat by $0.03. Revenues also beat expectations. Cisco raised current quarter revenues by a few hundred million, and said the recovery in tech spending should last through the third quarter.  

 

And then Chambers said, "Given all the uncertainties regarding the strength and shape of the recovery, concerns about the recovery possibly slowing and the unknown extent of job creation, we encourage you to wait for additional economic data before becoming too optimistic…" 

 

And the stock was off $1 or so afterwards in after-hours trading. That’s brilliant.   

 

Cisco trades with a tailing P/E of 25 and a forward P/E of 15. With revenues and earnings still growing, the stock should have some upside. Because we know that even though Chambers raised expectations, he’ll still manage to position Cisco to beat them. And all the while telling investors not to get carried away.   

 

IBM (NYSE:IBM) made an incredibly bold forecast yesterday. The company said it will earn $20 a share…in 2015! How’s that for a counterpoint to Chambers’ warning about irrational exuberance?  

 

IBM is slated to make $11.27 a share this year. So that’s some pretty good growth.   

 

Not that I’m surprised. I’ve had IBM in the Top Stock Insights portfolio since August of 2009. Looks like I’ll have to keep it until 2015. But with a forward P/E of 10, I guess I don’t mind holding it.  

 

I’m a little surprised that we haven’t seen any strength from the euro yet this week. But checking the U.S. Dollar Index chart, it would seem that a move lower for the dollar, and a consequent move higher for the euro, is coming…   

 

Honestly, it’s a bit surprising that stocks have recovered as well as they have in light of the persistent dollar strength. We could throw gold in there, too.  

 

The U.S. Dollar’s action is certainly not forecasting inflation. And yet gold has hit all time highs while the dollar has hit a 52-week high. It’s always important to remember that causal relationships in the financial markets are always “subject to change.” A falling dollar will be a catalyst for gold prices, until it isn’t. A strong dollar will hurt stock prices, until it doesn’t.   

 

We can trade according to the “rules”, but never forget the rule that states “all rules are subject to change without notice.”   

 

And besides, I don’t mind if the catalysts are parsed out on an “as needed basis.” We’ve gotten a liquidity boost from the EU. And stocks have taken out an important resistance level. Next up, gold sells off a bit, suggesting that investors are not clamoring for a “safe-haven”. Then, we get a sell-off in U.S. dollars and a rise for oil prices. Perfect!  

 

I just recommended a stock to Energy World Profits that’s moving from a $0.03 loss in 2009 to a $0.14 a share profit in 2010 and $0.38 a share in 2011 – all because of its Bakken oil pool operations.   

 

The stock is moving higher, despite weaker oil prices. That’s a pretty clear indication that this company will grow earnings dramatically, regardless of temporary swings in oil prices. And when oil prices do move higher, this stock will get an even bigger boost   

 

You can learn more about this $4 Bakken producer and Energy World Profits HERE. You won’t be disappointed. 

Investing in gold is often called a “fear trade.” In times of crisis, it’s believed that gold will hold its value, and even rise, while the value of paper currencies and other assets fall.  

 

If you bought SPDR Gold ETF (NYSE:GLD), which seeks to track the price of physical gold, 2 years ago, you’d be up around 36%.   

 

The S&P 500 is down around 15% during that time.   

 

You probably already know that gold hit a new all-time high yesterday at $1,200 an ounce. And even though other traditional measures of fear – like the volatility index (VIX), bonds and even stocks – didn’t move much today, the move in gold can’t be ignored.   

 

So what are investors afraid of?

 

The financial media is reporting that investors are skeptical that the EU’s trillion dollar debt backstop won’t work. It’s not really that anyone doubts that $1 trillion can keep any of the indebted euro countries from defaulting. Clearly, that much loot is enough to keep the payments from Greece, Spain and Portugal coming.  

 

The fear is that the EU’s bold show of monetary force is just that – a show.   

 

Will that trillion get put into action of the stuff really starts to hit the fan? I think there’s been enough waffling by the European Central Bank and member nations during the Greek debt crisis to make us wonder if the resolve is truly there now.  

 

But perhaps even scarier than the measure of Europe’s resolve is the perception that both corporate and sovereign debt is ending up being a central bank problem.   

 

Eventually, there will be no source for new bailout funds. It’s important that indebted individuals, companies and countries get their acts together.   

 

When companies need to raise cash, they sometimes sell stock in secondary offerings. Maybe it’s time for indebted nations to consider something similar. I mean, Greece has something like 1,400 islands in the Aegean Sea. And apparently only a few hundred of them are inhabited.    

 

Maybe Greece should consider selling off a few islands to raise a few bucks.   

 

Anyway, I was getting tired of writing about the Greek debt situation a month ago. And I get the feeling I’m not the only one who is ready to put Greece in the rearview mirror. Perhaps, investors will be ready to move on sooner than we expect.  

 

Again, keep an eye on gold prices. They will likely be the “tell.” $1,200 is an important level for gold. That level was touched back in December of 2009. And it seems likely that gold prices will move back to test $1,200 again.   

 

So while physical gold prices may be ready to take a breather, gold mining stocks should be the place to be. And that’s because incremental moves for gold prices can have an exponential impact in earnings for gold mining companies.   

 

The cost to pull gold out of the ground is a fixed cost. But the sale price for that gold is not fixed. And given the recent move higher for gold prices, earnings and profit margins for the miners are increasing.   

 

My favorite gold miner right now is a small $180 million company with operations in Latin America. It currently trades with a forward P/E of 6. And earnings estimates have not been adjusted to account for higher gold prices.

 

But that’s not going to last.  

 

The stock is up 8% today, after a nice move yesterday. It is being re-priced for higher gold prices right now. It currently trades below $4 a share.      

 

Now, other gold miners trade with a forward P/Es in the 15-30 range. I’m talking about miners like Aurizon (AMEX:AZK), Agnico-Eagle (NYSE:AEM) and Barrick Gold (NYSE:ABX). 

 

Clearly, my little sub-$4 could double in price and still be cheap compared to other miners. You can access my Special Report on this stock HERE. 

China's stock market has fallen on hard times in 2010. The Shanghai index is trading at levels last seen in September of 2009, and year to date is down nearly 20%.

 

Looking at the three year chart below its clear that stock market deflation has occurred in China – and not just in 2010. Since the beginning of 2008, China stocks are now down a whopping 52%.

 

Yet there are still people out there saying a massive plunge is in the works for the Chinese stock market.

 

 

My question is: to what level? The Shanghai index has now only recovered 50 percent of its value since it bottomed in November of 2008. U.S. indices have fared far better since they bottomed in March of 2009 (recall that China stocks were among the first to stage a comeback).

 

In comparison, the Dow has now risen by 64 percent, the Standard and Poor 500 by 71 percent, and the Russell 2000 by 103 percent.

 

The Shanghai index found support at current levels in September and October of 2009 – I think it will again. I know there are property bubble issues in China – and I won't deny that those, along with a myriad of other issues, are keeping a cap on a China stock market rally. As they should, wealth creation through stock ownership is not supposed to be an overnight phenomenon – it takes time.

 

***But I don't see a full blown stock market plunge in China. As is always the case, certain sectors could be more challenging than others – notably Chinese banks. If property loans do go sour, these institutions will be stuck holding the short end of the stick.

 

But there are other areas investors should consider, if they want exposure to this market. Agricultural stocks are one – China has a lot of mouths to feed. Energy stocks – China has a lot of people to – ok, you get the idea.

 

I wouldn't recommend going all in – I never do. As a member of my small cap research team says, 'It's better to nibble than bite'.

 

Nibbling means averaging into positions, and buying more than one stock. It's still possible that individual China stocks can drop by 20 to 50 percent, or more. But many have already fallen by that much.

 

I've been nibbling on China stocks for a while now, and I've had big gains. I've taken some lumps as well.

I'm not alone in saying investors should consider adding to positions in China now. As quoted in Bloomberg, strategists at BofA Merrill Lynch Global Research said China's stock markets have 'corrected enough' and that 'the probability of a hard landing is not that high'.

 

On the other hand, David Roche from Hong Kong-based hedge fund Independent Strategy believes "The economy in China has peaked, unless the economy in the U.S. really gets going and drives exports."

 

Roche thinks infrastructure building in China faces a chilling future as government lending for these types of projects dries up. Hence his sour view on growth – 90% of which he believes was due to infrastructure spending in 2009.

 

I think China will continue to grow – not at 11 percent annually, but at a more moderate 5 to 10 percent over the next five years. There will be speed bumps, and stock prices will reflect them. Expect volatility, especially in small cap China stocks.

 

But I'm still nibbling. To see what on, check out my Small Cap Investor PRO portfolio by clicking here.

 

**Let's switch gears.

 

Yesterday gold set another record high. The precious metal jumped $19.50 to settle at $1,220 an ounce.  I own a junior gold miner in the Small Cap Investor PRO portfolio. The company expects to pull 70,000 ounces of gold from the hills of Mexico in 2010. And looking at gold prices, that translates to a bundle of cash.

 

I alerted you to a divergence in the price of this stock and the price of gold last week. You can already see that this company, the solid black line in the chart below, is looking to close that gap. It's got some work to do to catch gold, especially if gold continues to rise.

 

 

In the last quarter this company received an average price of $1,119 per ounce, and total cost per ounce was only $425. That's a $694 profit per ounce! That's why I love low cost gold producers, as the price of gold goes up, their margins expand. And the more gold they pull from the ground – well you get the picture.

 

This stock rose over 5% yesterday, and more gains are likely. It's not too late to pick up shares however. Get my full research report here.

 

If gold continues to climb, as I think it will, you won't be disappointed. 

It might not top the hype of the California gold rush of 1849, but the recent run-up in the price of gold has had many investors giving gold and other precious metals a second look. The share prices of many gold miners have consistently been hitting new highs in recent weeks as the price of gold edged toward $1,000 per ounce, a level that was topped on Thursday.

One small cap that is set to profit from these rising prices is Western Goldfields Inc. (AMEX: WGW). At a market cap of $488 million, the company has seen its stock price surge 109% over the course of the past year. Currently headquartered in Toronto, the company was incorporated as the Bismarck Mining Company in 1924. It changed its name in 2002 and went through a corporate restructuring in 2006.

Today it has a seasoned management team that includes executives that have come from other big name gold mining companies such Barrick Gold Corp. (NYSE: ABX) and Kinross Gold Corp. (NYSE: KGC). Officers and directors of the company own approximately 4.5% of its outstanding common shares.

The chief asset of Western Goldfields is its Mesquite mine, located in Imperial County, Calif. and operated between 1985 to 2001 under several different companies including Newmont Mining Corporation (NYSE: NEM). In 2001, the mine was closed due to low gold prices and the estimated costs of expanding the mine, but Western Goldfields acquired the mine from Newmont in 2003 and has since worked to bring it back into production.

As of Dec. 31, measured and indicated resources of the mine were approximately 4.3 million ounces. The mine was brought into production in January and the company is now forecasting full-year production of 155,000 to 165,000 ounces for 2008. Western estimates that the mine has a 12-year useful life. With the mine now up and running, the company will likely be able to shift its focus to other potential opportunities such as expanding into other parts of the southern United States, and possibly Canada and Mexico.

For the year ended Dec. 31, Western reported a net loss of $50.3 million, or $0.43 per diluted share. Total revenue from gold sales checked in at $4.3 million. Investors should keep in mind that these results are not indicative of the company’s projected results for 2008 given that the mine only became fully operable from a commercial production standpoint at the beginning of this year. Company management did view 2007 as a success, however, as it was able to execute on its plan to bring the mine into production on schedule and on budget. For 2008, analyst estimates are calling for EPS of $0.18 per share. Revenue is expected to come in at $125.9 million.

Catherine Gignac, an analyst for Wellington West Capital Markets, is bullish on the stock. “The shares offer positive leverage in a rising gold price environment,” she wrote in a recent research note. Gignac has a “buy” rating on the stock with a 12-month target price of $5.50. Shares of Western closed at $3.64 on Thursday.

Aside from volatility in gold prices, a primary risk that investors in Western Goldfields should monitor is the company’s cash position. As with any start-up venture, the ability to maintain an adequate level of liquidity until cash flow from operations has hit full throttle is key. As of Dec. 31, the company had a cash balance, including restricted cash, of $51.4 million. As of Feb. 7, it had $8.2 million remaining under a credit facility available for expansion of the Mesquite mine. It also had $17.7 available under a credit facility for general corporate purposes.

In 2007, Western’s operations used up $28.6 million in cash, yet its financing activities left the company in a considerably stronger position than it was at Dec. 31, 2006, when it reported cash of $5.5 million. Although this situation should continue to be watched, Western’s cash situation will likely improve dramatically in the years ahead. With its mine now being fully operational, the company projects that it will generate approximately $60 million in cash flow in 2008 provided that they are able to hit their production target and gold prices remain close to their current level.

This year will unquestionably be a pivotal one for Western Goldfields (WGW). The fact that the company has been able to bring Mesquite into production just as gold prices have begun to take off could not have been better timing for the company.

Gold has been the most intoxicating of commodities dating back to antiquity: it has started wars, inspired exploration, exulted great love affairs and toppled regimes. It’s most revered application, though, has been as a store of value and exchange medium, especially during tumultuous times.  In modernity, thanks to modern portfolio theory, that application has morphed into portfolio diversifier: gold and most stocks tend to be lowly correlated, so gold reduces a portfolio's volatility. 

And, of course, gold is valued as a stand-alone investment, though one difficult to value.  Any cash-generating asset, like a stock or a bond, is worth its expected future cash flows discounted to the present, but gold doesn't generate cash. On the contrary, gold is a cash consumer because of storage, insurance and opportunity costs; therefore, investors might consider a more liquid form of ownership, such as a gold-mining stock. 

On that front, we like Vancouver-based Great Basin Gold Ltd. (AMEX: GBN), like most gold mining stocks, performs a dual role for investors, first as a gold proxy and second as equity investment.

Great Basin specializes in acquiring, exploring and developing gold and silver deposits, focusing on two primary projects: the Hollister Project on the Carlin Trend in Nevada, where an underground exploration and development program is underway on a portion of the property called the Hollister Development Block, and the Burnstone Gold Project in the Witwatersrand Basin in South Africa.

Great Basin is considered a “junior” exploration company (at least in industry patois) because it holds advanced development projects, but doesn't actually produce any substantive gold at the moment.

That will soon change; production from a resource of two million gold equivalent ounces at the Hollister property is expected in 2008. What's more, Hollister’s annual gold equivalent production is expected at 150,000 ounces at a grade of 1.01 ounces of gold per ton for the next six years. Production from the Burnstone Mine, which contains gold reserves in excess of seven million ounces, is expected to ramp up to an annual average rate of 254,000 ounces over 19 years once all gears start to mesh.

In the meantime, exploration consumes cash (production generates it), which is why Great Basin operates in the red. For the quarter ended Sept. 30, 2007, the company incurred a loss of $14.4 million compared to a loss of $3.7 million in the year ago quarter. Revenues were a paltry $1.1 million compared to an even paltrier nothing in 2006. According to projections offered by Deutsche Bank, Great Basin is expected to post revenue of $22 million for 2007, which will produce a loss of $15.9 million. The stock closed at $3.04 on Thursday, with shares ranging between $1.80 and $3.66 over the last 52 weeks.

But investing is about the future. Looking toward the horizon, Deutsche Bank analysts expect revenue and earnings to shine once 2008 production is underway. In fact, DB expects revenue to increase five-fold to $109.6 million and net income to burnish the bottom line at $38.8 million, producing EPS of $0.20 a share based on 190 million shares outstanding.

The analysts at Deutsche Bank quantified their prognostication on the Hollister mine moving toward a stated production rate of 150,000 ounces and an average gold price of $725 an ounce (roughly $200 an ounce below current market price) and an average production cost of $230 an ounce, increasing to $280 over time.

Potential revenue outpacing suspected costs at a three-to-one ratio would suggest a “buy” recommendation is in order, but Deutsche Bank has erred toward conservatism and rates Great Basin as a “hold.”

RBC Capital Markets is more optimistic, believing there is “significant value still to be unlocked in the company.”  Specifically, RBC sees Great Basin's value approaching $4.40 a share based on the South African peer group average valuation multiples, which could rise as high a $10 a share based on its North American peer group multiples. Also erring on the side of conservatism, RBC has set a target price at $4.40 a share, a 50% premium from current levels, which translates to an “outperform” rating with average risk.

I also think the risk/reward matrix favors Great Basin. Gold prices are benefiting from the growing difficulty of finding new metal deposits. Meanwhile, Great Basin is developing mining assets in two of the world's richest gold environments — the Witwatersrand Basin of South Africa and the Carlin Trend of Nevada.

What's more, macroeconomic fundamentals around the world favor gold: Europe, because of its vast and sundry social programs, is always susceptible to bouts of inflation (which is why interest rates in the European Union and the United Kingdom are generally higher than in the United States). The Federal Reserve, meanwhile, is actively inflating the dollar to avoid a recession.

And let's not forget that as the standards of living in China, India, Russia and other emerging economies rise, gold ownership will increase. In fact, the long-term secular trend in gold prices is now driven to a greater degree by the level of world prosperity, whereas short-term volatility is driven by the U.S. dollar and economic and political uncertainty, all of which are in full bloom.

In short, the immediate outlook for gold in general and Great Basin (GBN) in particular, is, well, as bright as gold.

Golden Cycle Gold Corp. (NYSE: GCGC) said this morning that is being acquired by AngloGold Ashanti Ltd. through a stock transaction of AngloGold’s ADSs, which was most recently valued at $149 million.

Shares of Golden Cycle Gold (GCGC) rocketed 33.81%, or $3.55, to $14.05 in pre-market. Shares of Golden Cycle Gold have been trading in the range of $4 to $13 for the past 52 weeks.

Shares of US Gold (Amex: UXG) jumped in pre-market trading after the explorer and developer of gold, silver and other precious metals reported that its CEO, Rob McEwen, increased his beneficial ownership in the company to 21.5% (20,687,427 shares) from 19.8% (18,635,348 shares) through the exercise of Warrants of US Gold Canadian Acquisition Corporation.

The additional investment in US Gold totals $3.90 million.

Shares of US Gold (UXG) gained $0.32, or 11.31%, to $3.15 in pre-market trading. Shares of US Gold have been trading in the range of $3.42 to $7.19 for the past 52 weeks.

The sector with the Midas touch these days is gold, the price of which on Tuesday climbed to a 28-year peak of around $825 an ounce for December delivery on the New York Mercantile Exchange.

Gold prices are cyclical and typically rise during periods when the dollar is weak, inflation fears are high and geopolitical tensions are escalating.

Gold’s ascent in 2007 reflects the current economic and political climate, characterized by a declining U.S. dollar, heightened Iran and Iraq tensions, skyrocketing crude oil prices and financial institutions eager to increase their gold stockpiles on any price weakness.

With gold prices nearing record highs, junior gold mining companies such as Great Basin Gold Ltd. (AMEX: GBN) and Aurizon Mines, Ltd. (AMEX: AZK) are becoming increasingly attractive. Both are Canadian mining companies that trade on the Toronto and American Stock Exchanges. Their operating results are reported in Canadian rather than U.S. dollars. 

Great Basin Gold has mining assets in two of the world’s richest gold regions—the  Witwatersrand Basin in South Africa and the Carlin Trend in Nevada. The company’s Hollister property in Nevada has an indicated resource of two million gold equivalent ounces, with production expected to commence in 2008 at 150,000 ounces per year and continue for six years. Gold resources associated with the company’s Burnstone mine in South Africa are estimated to exceed seven million ounces. Feasibility studies indicate that the Burnstone mine is capable of producing 254,000 ounces of gold annually for 19 years. Production from the Burnstone mine is slated to begin in 2009.

While not currently generating revenues, Great Basin Gold has a strong balance sheet, with cash and equivalents of approximately $100 million and no debt to support its development activities. The company recorded a net loss of $17.7 million, or $0.13 per share, in the first six months of 2007, up from $1.1 million, or $0.01 per share, in the same period last year, as a result of increased spending on exploration activities.

With production from the Hollister mine expected to commence shortly, this company could generate meaningful revenues and cash flow in 2008. Great Basin Gold expects to produce 150,000 ounces of gold in 2008, representing a potential value of $97.5 million (conservatively assuming $650 per ounce gold prices). Mining costs are estimated at less than $300 per ounce, suggesting 2008 mining profits potentially exceeding $50 million. These shares have risen more than 100% in the past 52 weeks but still offer appreciation potential. On Tuesday, shares of GBN closed at $3.56. Over the last 52 weeks, shares have ranged between $1.58 and $3.66. My $6 price target for Great Basin Gold shares is 70% above the current share price.       

Another company that’s found its pot of gold is Aurizon Mines, which owns gold mining assets in the Abitibi region of Northwestern Quebec, one of the world’s most prolific gold-producing regions.

Aurizon Mines is increasing its asset base through acquisitions. While the company’s 100%-owned Casa Berardi Mine near Quebec is expected to produce 1.2 million ounces of gold over its initial six-year life, Aurizon Mines has already begun producing gold from the mine; gold production rose 32% in the June quarter to 42,143 ounces from 28,657 in the March quarter. The company estimates it will produce 170,000 to 180,000 ounces of gold from the Casa Berardi mine this year at production costs of less than $320 per ounce.

During the first six months of 2007, Aurizon Mines generated revenues of $31.1 million from the sale of 40,600 ounces of gold at an average price of US$659 per ounce. The company’s operating costs totaled $25.4 million. Aurizon Mine’s first-half 2007 earnings at $7.6 million, or $0.05 per share, benefited from a $9.1 million non-cash gain on a  marked-to-market derivative instrument adjustment, which was partially offset by a $2 million non-cash charge for stock-based compensation. During the first six months of 2006, net losses totaled $17.7 million, or $0.12 per share.

The company announced two significant developments in September. The first is a joint venture agreement with Lake Shore Gold Corp. (TSE: LSG) to accelerate exploration and development of promising areas surrounding the Casa Berardi mine. In addition, the company announced an increase in the indicated mineral resource estimate for its Joanna mining property, also located in northwestern Quebec, to 630,000 ounces of gold and signed a letter of intent to acquire a 75% interest in the adjacent Heva property. Three drill rigs are currently active on the Joanna property and Aurizon Mines has committed an additional $2 million to the drill program.

Aurizon Mines shares have risen more than 60% in the last 52 weeks. With shares of AZK closing at $4.57 on Tuesday, the stock has ranged between $2.59 and $4.59 over the last 52 weeks. My $5.50 price target is 30% above the current price.

Given the auriferous environment, gold mining should remain one of the best-performing industry sectors over the short-term.

Still looking for a good way to strike gold while investing in it? As gold moves solidly above $700 an ounce amid turbulence in the credit markets and on the back of a weak dollar, you don’t have to be a dyed-in-the-wool goldbug to see some merit in investing in the precious metal.
 
An efficient way to do so would be with shares of Royal Gold Inc. (Nasdaq: RGLD), which bills itself as the world’s leading publicly traded precious metals royalty company. It’s an unusual company with an unusual business strategy. How many companies can you name that have a market cap of $875 million with only $48 million in annual revenue and 14 employees?
 
Royal Gold’s revenue consists of royalty payments based on its interests in mines operated by the world’s leading gold mining companies, making it a relatively pure play on gold. As the company puts it, its sliding-scale royalties provide investors with upside leverage when gold prices rise, as they are now, while providing a floor when gold prices fall.
 
Currently, the company—which traditionally has been based on a single mining complex in Nevada—faces the happy prospect of gold reaching a new 26-year high just as the company’s recent diversification in other mining projects is beginning to pay off with these mines coming on stream.
 
Denver-based Royal Gold more or less stumbled into the royalty business after the company, founded in 1981 as Royal Resources, abandoned oil and gas early on to become a gold mining company. The stock market crash of 1987, though, put a stop to that idea and the company realized it could invest in projects operated by others with much less risk. If a site doesn’t pan out, so to speak, Royal Gold still loses, but doesn’t have to worry about permit delays, rising operating costs or the myriad other factors that cut into an operating company’s margins when it does strike paydirt. Instead, it can sit back and wait until the mine starts pouring gold and then collect its royalty on the sale of it.
 
As a result, Royal Gold’s operating cash flow margin is 50%, compared with 19% for North American majors like Barrick Gold Corp. (NYSE: ABX), Newmont Mining Corp. (NYSE: NEM) and Goldcorp Inc. (NYSE: GG). Royal Gold’s net profit margin is 41%, compared with 11% for the majors.
 
Moreover, as the operating company seeks to maximize its return on a site, Royal Gold benefits from the additional reserves found through further exploration without having to contribute more capital. For instance, the Cortez mine in the Pipeline mining complex in Nevada began with reserves of 300,000 ounces in 1995, but had 2.3 million ounces of reserves at the end of 2006, even after production of 8.2 million ounces, because of new discoveries totaling 10.2 million ounces.
 
Royal Gold still derives 80% of its revenue from mines in Nevada, but that is due to change after its diversification into development sites in Mexico, Argentina, Chile and Burkina Faso in West Africa. The Taparko mine in Burkina Faso began pouring gold in July; Royal Gold hopes to begin seeing revenue from the project in the coming quarters. The Penasquito project in Mexico, which Royal Gold believes will be a major producer for two decades, is due to come on stream in the second half of calendar 2008.
 
In addition, Royal Gold is in the process of acquiring Battle Mountain, a smaller royalty company, which has four producing royalties and one development property, including the promising Dolores mine in Mexico, which is due to commence production early in calendar 2008.
 
Royal Gold put in a strong performance for fiscal 2007, ended June 30. Revenue grew 70% to $48.4 million, while net income rose 73% to $19.7 million, or $0.79 a share, from $11.4 million, or $0.50 a share. Free cash flow—operating income plus depreciation, depletion and amortization, non-cash charges, and any impairment of mining assets less minority interest in income of consolidated subsidiary (a non-GAAP performance measure the company reports)—rose to $37.9 million in fiscal 2007, or 78% of revenue, from $20.5 million, or 72% of revenue, in fiscal 2006. The company raised its dividend for the year to $0.26, from $0.22 in fiscal 2006.
 
For the fourth fiscal quarter, net income was up 58% to $5.7 million, or $0.20 a share, well ahead of analysts’ estimates of $0.15 a share. For the current quarter ending Sept. 30, analysts expect $0.23 a share, compared with $0.21 a share in the first quarter of fiscal 2007. The stock currently has two “buys” and one “hold.”
 
In recent presentations, company management has been quite bullish. With gold nearing historic highs, the company is going into the traditionally strong fall season, when purchases for the spring wedding season in India support already strong industrial demand. Management, which owns 15% of the company, took the step earlier this month of extending and strengthening its “poison pill” against hostile takeovers—a rights distribution measure that would be dilutive enough to the acquiring company to encourage talks with the board about an acquisition.
 
The stock closed at $30.73 on Thursday, giving Royal Gold a market cap of $881 million, compared with the 52-week high of $37.50 in December and 52-week low of $23.25 in June.
 
There’s still a lot of gold out in “them thar hills,” as the original gold rush prospectors put it, and global investors are saying they want to have some of the precious metal in their asset mix. Rush or not, you might want to consider whether it’s time for you to do the same.

In today’s column, four noted advisors – Eric Roseman, Tom Bishop, Curtis Hesler and Nick Jones -- look at small-cap mining operations, covering gold, silver and copper. With the caveat that junior miners are dependent on the success of their developing exploration activities and, as such, offer both high risk and high reward, we offer these four favorite mining plays.

“The stage is being set for the next big rally in gold stocks,” says resources expert Eric Roseman in his Commodity Trend Alert. “I know this current market is depressing, but there is light at the end of this tunnel – bright, screaming radiant light.”

Roseman predicts that over the next several weeks, “one of the most incredible rallies will take hold in the mining sector, as the U.S. dollar comes under renewed downside pressure amid lower short-term interest rates. In hindsight, the credit crisis in the mortgage-backed securities market will be a ‘gift’ for commodity investors.”

As to specific stocks, Roseman has added a new mining buy to his portfolio: Northgate Minerals Corp. (ASE: NXG), which has a market cap of $686 million. He explains, “The stock is trading just above its low and ripe for the plucking. Northgate is a rocket, (it) mines throughout the Americas (gold and copper) and has been on my radar for months. Now is the time to kick into action and buy.”

Copper catches the attention of Tom Bishop, who notes, “Taseko Mines Ltd. (ASE: TGB), with a market cap of $619 million, is going a little bit nuts, and has doubled since I picked this as my ‘stock of the year’ in January.”

The editor of BI Research notes, “I have been asked, 'Is this takeover speculation?'  Well, it is possible in this environment of cash rich mining companies looking to add to reserves the easy way.”

Taseko was a recommendation in Bishop’s portfolio in the early 1990s, when it rose from $2 to $14 for a 600% gain.  And now, the fundamentals are stronger; he notes, “Taseko is no longer hand to mouth. It is now enjoying taking the ball across the goal line itself and making itself a serious mining  company.”

Looking ahead, Bishop sees strong growth prospects at the firm’s Gibraltar mine, as well as its Prosperity project. The latter, he explains, is “one of the, if not the, largest undeveloped gold/copper resource in Canada.” Even at current prices, he suggests, “Investors are arguably paying nothing for Prosperity and are just finally factoring in the pending doubling of capacity. The story is getting out.”

Curtis Hesler has been forecasting a decline in gold into seasonal lows in August. Now, he sees that happening and says, “You are likely going to hear a lot of bearish brouhaha about the metals now, which is also typical as gold begins to form a bottom.”

The editor of the Professional Timing Service says, “Selling will continue in financial assets, but freed up cash will begin to find a home in tangibles once reason finally overcomes emotion. The best place to have your money during bear markets has always been precious metals. You should be looking forward to a splendid rally in gold and silver during the late summer and fall.”

Hesler has recently added a new position to his model portfolio, Endeavor Silver Corp. (ASE: EXK). He observes, “They expect to produce 2.8 million ounces of silver and 7,500 ounces of gold in 2007. Their principal activities are in Mexico, with several interesting development projects in the works.” The advisor concludes, “This is a fine speculation on a junior silver producer - something that is not all that easy to find.”

Nick Jones, in the Penny Sleuth, adds, “if you’re like me and you expect the unwinding of the carry trade among credit and subprime concerns to be the equivalent of throwing gas on an already burning equities market, then gold and gold stocks are the way to go.”

Meanwhile, he suggests, “One small-cap company with tremendous potential to profit in the coming gold bull is U.S. Gold Corp. (ASE: UXG). The company is located in Nevada with its property “sandwiched between Barrick Gold and Newmont Mining, which happen to be the number one and number two gold mining companies, respectively, in the world,” Jones notes.

U.S. Gold, he adds, has recently acquired three other juniors in this region, increasing its land holdings to 170 square miles. According to Jones, the company’s current CEO and the former CEO of Goldcorp, Rob McEwen, is a man who is greatly respected in the mining world.

He points out that McEwen raised Goldcorp from a junior to one of the “most profitable gold mining companies in the world.” Jones concludes, “U.S. Gold, under the leadership of Robert McEwen, has potential to become a major gold producer. It’s certainly something to watch.”

The mining sector in general entails significant risk. Needless to say, low-priced, small-cap mining firms should be viewed as highly speculative. For those comfortable with these risks, a trio of advisors sees upside potential in three mining firms – two focused on gold, and one on copper.

“Caveat emptor,” emphasizes Ivan Martchev in discussing DRDGold Ltd. (Nasdaq: DROOY). In his Vital Resource Investor, he explains, “DRDGold, previously called Durban Rooodeport Deep, is a very high risk special situation. DRD may be South Africa’s fourth-largest gold miner, but the share price hit $0.54 March 14, a level it last saw in late 2000 when the precious metals boom started.”

He notes that the company is a “serial diluter,” pointing out that the company had 105.4 million shares back in 2000 and currently has 370.3 million shares outstanding. As a result, he cautions, “Its results are not an apples-to-oranges comparison.”

“Can DRD make it?” he asks. Says Martchev, “My answer has been yes, even though the brilliant managerial talent DRD possesses is starting to wear me out. Indeed, management needs to come to its senses, which is still a work in progress.”

Martchev emphasizes that this is a highly speculative idea, particular because the stock “doesn’t have an obvious catalyst, other than the fact that a sharp rally in gold can make miracles happen.”

Looking ahead, Martchev states, “If the gold price heads toward $800, the fire under DRD’s shares will be difficult to put out given the high-cost nature of production. Because I’m bullish on the gold price and precious metals in general, I think that this remains a great speculation.”

Meanwhile, Adrian Day, editor of The Global Analyst, notes that gold often peaks in the spring, and the stocks drift down. “This is particularly true for the juniors, when volumes dry up at the onset of summer,” Day says. “This combination however makes it a particularly attractive period in which to do some buying.”

Due to this seasonal pattern, Day has decided to add several junior resource stocks to his portfolio, and the first such buy is Miranda Gold Corp. (CVE: MAD).

Day explains, “Miranda is a prospect generator focused on Nevada, particularly the Cortez Trend, searching for large-scale Carlin-style deposits.” He points out that exploration is always a “long-odds enterprise,” and looking for large deposits requires “lots of money and patience.”

He observes that Miranda limits its risk and enhances its chance of success by bringing in partners. Day notes that the company has about 15 projects with seven different partners, one of the top exploration teams in Nevada, and a strong treasury (about C$9 million).

Day observes, “The stock has recently been particularly weak, with the stock falling from “just north of C$2 to $1.22.” Meanwhile, he notes, “Any positive exploration results should result in a solid move up.”

In the meantime, he says, with a market cap now under C$50 million,  Day does not believe investors are “paying up for the high-potential.” He cautions that the stock is being bought for the aggressive part of his portfolio. 

Vivian Lewis, editor of Global Investing, looks to Baja Mining Corp. (TSE: BAJ), a play on copper mining. Despite being headquartered in Canada, she notes that the company is involved in reviving an old mine in Baja California, Mexico.

Lewis explains, “Baja Mining got a definitive feasibility study of its Boleo Project in Mexico, and it is lovely.” She notes that the project, on the east coast of Baja California Sur near the town of Santa Rosalia, contains seven mineralized stacked seams dipping east to the Sea of Cortez.

Proven and probable reserves, she notes, are sufficient for a 25-year mine life, with 275 million tonnes of measured and indicated resources grading 1.77% copper equivalent, and a further 250 million of inferred resources grading 1.29% copper equivalent.

According to Lewis, these “huge reserves” mean that the project will have an after-tax indicated rate of return of 24.7%, or 46% at current market prices for the metals. The net project value at an 8% discount rate is $700 million, or $2.3 billion at current market prices.

Lewis adds that strong support of the Boleo Project has come from the Bay Street financial elite, including “project finance lenders and metal off-take parties.”

Further, she says, Baja's advisor, Endeavour Financial, prepared an Information Memorandum to be distributed to commercial banks and other potential lenders immediately. For speculators, she considers the stock a strong buy.

Steven Halpern is the founder of “TheStockAdvisors.com - Steven Halpern's Guide to Financial Newsletters,” the first website to feature a daily overview of the investment newsletter world.

The profit outlook has rarely been better for gold mining companies. Gold prices have risen from around $265 per ounce in 2001 to a peak of $725 in May 2006, a 25-year high, before retreating to a 2007 level of around $670 per ounce. Most industry analysts forecast continued increases in gold prices, fueled by demand for this metal in investment and technology applications, and some experts predict $1,000 per ounce gold prices by 2010.

Most of us associate gold with rings and other jewelry, and, indeed, jewelry applications are gold’s primary use, accounting for approximately two-thirds of annual gold consumption. The demand for gold in jewelry manufacturing applications is expected to remain firm because of rising jewelry sales in India and China.

Gold is also used in aerospace, electronics and healthcare applications. Demand from these sectors reached record levels of 458 tons in 2006, primarily on the strength of demand from electronics manufacturers. Gold is used in many types of electronic circuitry and is also increasingly employed in nanotechnology applications.

Gold and the U.S. dollar hold a dominant position in international finance. During periods of political and/or economic uncertainty gold prices generally rise. With the U.S. government reporting large trade imbalances and budget deficits, many foreign investors have begun purchasing gold as a hedge against long-term dollar depreciation. Investments in gold bars and coins grew 7% in tonnage terms and 45% in dollar terms in 2006. Gold’s value also rises when other investment classes such as stocks and bonds become especially volatile. Central banks and the International Monetary Fund influence world gold prices through their purchase and sale activities. While the U.S. Federal Reserve Bank holds 16% of its assets in gold, China’s central bank holds only about 1% of its assets in gold and is likely to increase gold stockpiles in the future. Gold acquisitions by central banks are expected to support rising gold prices.

Seabridge Gold

Seabridge Gold, Inc. (AMEX: SA) is a junior gold mining company that owns low risk gold reserves in North America. It controls Courageous Lake, Canada’s largest undeveloped gold project, and Kerr-Sulphurets, one of Canada’s best undeveloped copper and gold plays. Seabridge Gold also owns the Noche Buena gold mining project in Mexico and has more Nevada gold exploration projects in its portfolio than any other junior mining company. The company reported proved gold reserves totaling 10.2 million ounces, unproved gold resources totaling 22.0 million ounces, and gold resources of 0.85 ounces per fully diluted share in a June 2007 investor presentation.

Due to its early development stage, Seabridge Gold is not yet generating revenues. Increased spending for exploration activities resulted in an increase in 2006 net losses to $14.2 million, or $0.42 per share, from a net loss of $5.1 million, or $0.17 per share, in the prior year.  March quarter 2007 net losses totaled $786,000, or $0.02 per share. The company’s 2007 business plan focuses on further development of the Courageous Lake drill program and commencing drill programs at the Kerr-Sulphurets and Noche Buena mines. The undiscounted value of the company’s gold assets (before extraction and other costs) is thought to exceed $560 per share. Seabridge Gold established a 52-week high on Monday before closing at $21.71 on the American Stock Exchange. My target price is $27.

Royal Gold

Royal Gold, Inc. (Nasdaq: RGLD) is also focused on low-risk North American mineral assets. Instead of owning mines, this company owns royalty interests on mine production. It generates royalties from the Pipeline Mining Complex, the Leeville project, the Betze-Post mine, the Bald Mountain and Robinson mines in Nevada and smaller mines in Montana, Argentina, Mexico and West Africa.

At year-end 2006, Royal Gold’s precious metal reserves subject to royalty interests totaled 42.2 million ounces of gold and 595 million ounces of silver. Gold reserves increased 97% and silver reserves jumped 34-fold in 2006. 

In the nine months ended March 31, 2007, Royal Gold’s net income rose 79% to $14 million, or $0.59 per share, from $7.8 million, or $0.34 per share, in the same period a year ago. In April the company announced plans to acquire Battle Mountain Gold Exploration for 1.5 million shares of Royal Gold stock. Analysts expect Royal Gold to produce 50% growth this year and 32% growth next year. Royal Gold shares were recently trading at a 29 times P/E multiple. My $35 price target for Royal Gold is 40% above the current price.    

Usually investing in mining companies means having to choose between a junior company that is working to get a mine up and running, and a more stable, mature miner that is already in production.

With the former, you get more risk, at least until the final permit is received, the mining plan finalized, equipment in place, and ore being processed. Of course, that can often mean greater leverage to metal prices. With the latter, you know what you’re getting in terms of output from the mine, but that typically limits any blue-sky financial upside for investors.

But then there’s Northern Orion Resources Inc. (TSX: NNO, AMEX: NTO), which allows you to put money into both types of play with one stock. The Vancouver-based miner has a minority position in a major gold and copper mine in Argentina that, after a decade of production, is only half-way through its estimated lifespan. And investors also get exposure to the nearby—and soon-to-be-developed—Agua Rica project, which contains copper, gold, and molybdenum.

The stock is now recovering from giving up some 12% in early May due to earnings for the first quarter in 2007 coming in under estimates. But given that the cause was due to temporary setbacks - lower-than-expected recovery, shipment delays, and a higher-than-expected royalty payment - the stock at a recent price of C$5.67 looks attractive, especially once you factor in that the miner is a possible take-over target.

 

Alumbrera

Northern Orion has a 12.5% ownership position in the Alumbrera project, with Goldcorp Inc. (NYSE: GG) having a 37.5% position, and Xstrata PLC (LON: XTA) the remaining 50%. Located some 700 miles northwest of Buenos Aires, Alumbrera is a massive mine. The project covers almost 13,000 acres, directly employs about 1,800 workers, and is served by all-weather roads and air transport. One of the lowest-cost copper and gold producers in the world, Northern Orion’s share of production is some 50-million pounds of copper and 75,000 ounces of goal a year. The mine has been in production since 1997, and its mine life extends to 2016, promising healthy cash flow for another decade.

Agua Rica

The Agua Rica deposit is located just 20 miles east of Alumbrera. The deposit has a drill-defined inventory of 21.8 billion pounds of copper, 13.3 million ounces of gold, and 1.7 billion pounds of molybdenum. The mine is expected to be in production by late 2010 or early 2011. Forecasts put annual production at an average of 150,000 tonnes of copper, 125,000 ounces of gold, and 16 million pounds of molybdenum, with an estimated mine life of 23 years. Future sales are completely unhedged, meaning maximum leverage to the price of copper, gold, and molybdenum.

In addition, there are several other factors that support the notion that Northern Orion is headed higher.

1) Positive trends for both copper and gold prices. In particular, copper prices have more than tripled since early 2003, to around $3.30 a pound. And while the U.S. construction industry—which accounts for almost half of all U.S. copper consumption—is slowing, copper is likely to be a hot commodity in much of the rest of the world. Japan’s economy is recovering and the auto industry—a major user of copper—is improving. India has strong demand for wire rod. And in China, investment in infrastructure means intensive use of wire and cables, and the auto sector (which is growing at 25% a year) has a big and growing appetite for auto wire.

Over the same period, gold has jumped from under US$345/oz. to over $650 currently, after hitting a ten-year high of US$725.75 in early May 2006. Gold is often talked about in the press as a safe harbor in troubled times, but what's at work here appears to be something much more fundamental. New deposits coming on-stream are fewer and farther between, while demand from new areas - including China's and India's rapidly growing middle classes - continues to increase.

2) Mining the "metal of the day." The share price will likely also get some support from the anticipated production of Molybdenum at Alumbrera.  As one analyst puts it, there is an “…ongoing strong investment appetite for molybdenum exposure.”

3) Ongoing wave of consolidation. Given its size and proximity to Alumbrera, many see Agua Rica as strategic. In a recent note, BMO Capital Markets analyst Nawojka Wachowiak wrote, “We continue to believe that the most economic development scenario is the development of the project using the existing infrastructure at Alumbrera.”

The company recently announced earnings for the first quarter of 2007 of US$0.06, when analysts were expecting around US$0.08. Lower copper recovery played a role, according to Salman Partners, as did a higher-than-anticipated royalty payment.

Looking ahead, Raymond James recently reiterated its C$6.50 target. Tom Meyer, mining analyst with the brokerage house, points out that the shares are undervalued when compared to Ivanhoe Mines Ltd. (NYSE: IVN). On a price to net-asset-value (NAV) basis, Ivanhoe trades at 1.10X, while Northern Orion trades at just 0.75. Salman Brothers has a target price of C$6.00, and BMO Capital Markets US$4.25.

And those targets will likely prove quite conservative should Agua Rica go into play. This looks all the more likely given the possibility for infrastructure being shared with Alumbrera. While it’s never wise to invest solely in the hope of a take-over, analyst Tom Meyer of Raymond James wrote recently that “…we believe C$6.50 would be a fair ‘starting point’ under an acquisition scenario… .”

 Here’s a snapshot of Northern Orion’s two key projects:

The Royal Canadian Mint recently unveiled what will likely become the largest symbol for Canada’s vast resource wealth.
 
In April, the Ottawa-based mint took the drapes off the world's first 100-kilogram (220 pounds or 3,215 troy ounces) gold coin with a face value of C$1 million. And the pizza-sized coins are now on sale for between C$2 million and C$3 million.
 
The timing was a bit ironic, however.
 
Gold prices have been slumping this year after a huge 23% increase in 2006 on top of an 18% increase in 2005. After peaking at about US$730 in mid-May 2006, gold is currently trading at about US$665. Part of the reason is the amount of gold suddenly hitting the markets as central banks such as the European Central Bank, the Bank of Spain and the Bank of France unloaded large volumes. “There have been unusually large central bank sales over the past couple of weeks and that’s weighed on the market,” said Bill O’Neill, co-founder of the commodity consultancy, LOGIC Advisors.
 
The Royal Canadian Mint’s monster gold coin debuts at a time when Canada, once one of the world’s largest gold producers, has seen its production drop in the last decade by almost a third to about 140,000 kilograms a year, mostly from about 330 so-called hard-rock underground mines. And few analysts believe that there is the likelihood of any major discoveries in Canada.
 
But that does not stop the gold bugs.
 
For publicly traded companies in Canada, gold exploration and production are still a big deal. Dominated by major producers like Placer Dome Inc., Barrick Gold Corp. (NYSE: ABX) and TVX Newmont Americas (previously known as TVX Normandy Americas), gold companies on the Toronto Stock Exchange (TSX) raised about US$1.5 billion in 2005. Combined, their 3 billion shares are worth about C$58 billion.
 
On Canada’s small cap exchange, TSX Venture, nearly one-fifth of 988 mining companies are gold explorers. 
 
And that makes it a mine field for small cap investors looking for Canadian gold stocks.

That is why small cap specialist Martin Ferguson, director of Mawer Investment Management Ltd. in Calgary, says he never invests in small-cap “golds.” “I avoid them altogether,” he says.
  
Ferguson says gold stock prices are now down despite bullion prices still being strong, even with the recent drop.  “So stocks look cheap,” he says.

But beware, he adds.
 
“Small cap gold stocks don’t always trade on fundamentals,” says Ferguson. “It’s often just prices and psychology. And the gold market is a tough one – it’s illiquid and it’s small and there are so many other factors.”
 
Those include everything from the value of the U.S. dollar against other major currencies to oil prices.  Gold production in Canada is very energy intensive because of the country’s prevalence of hard-rock formations.
 
And because there are so many gold explorers in Canada, it is tough for a small-cap investor to find the right one.
 
“It’s a little scary out there,” says Lysle Stein, head of Red Barn Capital Inc. in Toronto.
 
Stein says the recent tailing off in gold prices after a sharp increase may have frightened gold mining investors, especially those who have become comfortable with high gold prices sending share prices soaring. However, if an investor believes gold prices will soon go up again, now might be a good time to look at small-cap Canadian gold stocks, Stein says.
 
Stein says he has several rules that include checking the reserve allocation, preferably using a new resource accounting tool called a 43101 report – think of it as the accounting equivalent of the Sarbanes-Oxley law -- introduced after the famous Bre-X salting scandal. (Bre-X was a Canadian company that sprinkled its core samples from a mine in Borneo with gold. It led to the largest scandal in Canadian mining history when the company collapsed in 1997, spawning a number of fraud charges that have not yet even gone to court.)
 
Stein likes companies that have large, multi-million “referred” ounces, meaning there is large upside potential. He also likes companies that operate in the relatively politically stable regimes in North America. Once such company Stein recommends is Seabridge Gold Inc. (AMEX: SA), which has a large potential find in British Columbia and the Northwest Territories.
 
There are also several gold-influenced heavy funds such as Nesbitt Burns small-cap weighted index, AGF Canadian Resources Fund, and Investors’ Canadian Small Cap Growth-B. As well, there is Barclays Global Investors’ iShares Canadian S&P/TSX Global Gold Index that has had a five-year return of 9.5%, a three-year return of 16.1% but a one-year loss of 12.2%. The fund, which trades like a stock, tries to replicate the S&P/TSX Global Gold Index.
 
One small cap specialist, Blue Sky Canadian Small Cap Research, said some time ago it liked Vancouver-based Energold Drilling Corp. (TSX Venture: EGD) which is looking for gold and silver in Mexico and Dominican Republic.

“Energold is an unusual junior gold company in that it is profitable,” Blue Sky said in its original recommendation in 2004. Since then, Energold has produced a steady stream of profits. In April, it reported 2006 earnings of C$3.7 million, compared with C$1.1 million in 2005. It’s seen its share price go from C$0.60 to C$2.25 currently, and analysts see a price target of C$3.75 by the end of this year.

Despite the soft gold prices, there are those who believe the market will return.

“The fundamentals for gold are strengthening on an almost daily basis and are inexorably underwriting a sharp upward move in the price in the very near future,” John Embry, chief investment strategist at Sprott Asset Management in Toronto, said recently in Investors’ Digest of Canada.

In the meantime, if you can’t find a Canadian small cap gold stock to your liking, the Royal Canadian mint will sell you one of its gold supercoins for between C$2.5 million and C$3 million.

So far, the mint has received confirmed orders for five coins.