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Higher Gold Prices are the Only Logical Conclusion

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Check your long term charts if you're getting antsy about precious metals. I'm very relaxed.

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G'day. The reversal in the fortunes of the precious metals has been nothing short of hilarious to me. Sure the reval hurts a bit but nothing has changed in the last few weeks to alter my view. Bernanke can say whatever he wants but he cannot change this mess with an "extra" 25 or 50 BPS interest rate move. He won't take the prescribed medicine to fix this inflationary mess and certainly won't stop the printing presses. He can't do a Volcker çoz that will screw everyone who is carrying the massive consumer debt (the major risk to the economy). No consumer, no economy! Helicopter Ben is trapped but jawboning will buy a little bit of time in the grand scheme of things. Tick, tick, tick. Check your long term charts if you're getting antsy about precious metals. I'm very relaxed – this whole mess is gonna take a lot longer than a few months to resolve itself and higher gold prices are the only logical conclusion.

Physical metal is being hovered up all across the globe. Don't be fooled by the games being played in the paper metals markets, mostly by traders who have never seen a real bar of gold let alone understand what gold/silver really is. This bull market in precious metals is still in its infancy and retracements like this are just big old fat buying opportunities, in my humble opinion. It all comes down to the timeframe one is looking at. I look further forward than most who are playing this game, but each to their own. Fast money is always gonna do this sort of stuff but they certainly can't do it for long to the physical market. I hear the Bank of England has contributed a fair whack of real metal to the market in the last couple of weeks. The Poms didn't learn much from their US $7 Billion mark-to-market loss from the last sales if this is the case. Hmmm. I note Russia is all over this flight from Fiat and they aren't alone. The Russians know their history.

On D- Day back in 1972, gold closed at a record price of US $60 per ounce. That's a dollar devaluation of over 90% in 34 years all due to the massive inflationary fiscal and monetary policies of the USA. The ounce of gold has never changed. There's nothing more to know about their relationship. Now we have Central Bankers who actually want (target) a 2-3% inflation rate meaning that if you save in paper it will devalue in front of your eyes as a matter of official policy! See how 3% per annum inflation looks in 10 years when you check the value of your paper savings versus gold.

In my 11 May offering, I suggested that "gold's downside was $630 at first glance". I'm pretty comfy with it down here now and am slurping up bits and pieces as I see some big opportunities. I suggested silver might head to 11.85 "on a big dummy spit". We got the "big spit" (and more) and this 11.50 level looks very pretty to me. I'm buying more, personally. The sell-off in gold was self fulfilling and much anticipated so nobody should get too barred up about getting it "right". Markets don't go one way and there are plenty more painful periods for we bull-riders coming in the next decade. Check the 1971-1980 bull to get a feel. 50% pullbacks happened a few times. That being said, I think there's a better than even chance we head aggressively higher in the next month. A savage move back to $680+ is what I'm looking for. The catalyst could be anything and will be paper metal/cowboy trader driven. I contend that we'll be back above that level by Bastille Day. I've sold a few of my horses over the past few weeks and am hoping that metals prices stay where they are (or head even lower). Can you believe the settlement of thoroughbred horses sold through our major auction takes 6 to 8 weeks??!! That's a longer settlement period than selling a bloody house! Hmmm.

Speaking of horses, I put an impeccably bred yearling colt through a major auction ring on Monday. I set the reserve quite low for the quality of the animal. I want gold/silver, not racehorses in the current environment. The colt sold, but about 30% lower than what I expected and about 50% of what I hoped for. The clearance rate of the auction was very poor. When you can't get a serious bid for a Rock of Gibraltar colt out of a multiple Grade 1 winning mare, things are pretty stiff! Only 290 yearlings sold out of 500 catalogued and that indicates to me that the "high end discretionary consumables" market is looking pretty bloody ordinary. We talked about such in my 19 May scribble and it is my opinion that there is gonna be a heap more of these sorts of dynamics appearing in the economy. What you need versus what you want. How's the boat market?

I note my old shop is getting a little bulled up on the yellow metal. I left the commodities group in April 2002 and there wasn't a person in the place who was bullish gold apart from me and my mate Ross. They axed their metals research team in NYC. That timing was ordinary to say the least. To say they have been positive on gold for over 3 years is disingenuous at best. Actions speak a lot louder than words. I do like their NEM targets though and heartily agree on that point.

The London Gold Fixes have been very resilient in the face of such determined paper metal selling. That the Central Banks of the world are concerned about gold's price rise is a given. Gold is the antithesis of Central Banking and Government deficit spending. Who has most to lose as this fiat currency "experiment" of the last 30 odd years draws to its inevitable destructive conclusion? I would be surprised to see a fix below $600 but one can never discount lunacy and we might have another crack at $580. Again there will be huge volumes of real metal required to satisfy demand. Where's it gonna come from? Buggered if I know but it wont be from massive increases in mine production!

The equities are still some 25% off their highs and anywhere down near the 310 HUI level is pretty good value at present. There are plenty of really good buys out there, IMO, especially lower down the market cap chain. Who am I watching closely? Goldcorp (GG), Golden Star Resources (GSS), Silver Standard Resources (SSRI), Pan American Silver (PAAS), Silver Wheaton (SLW), Nevsun Resources (NSU), DRDGOLD (DROOY), Harmony Gold Mining (HMY), Newmont Mining (NEM), Kinross Gold (KGC), amongst others. I have positions in all of those companies mentioned and, now that one of my horse sales have settled today, I'm picking up more of my faves. I won't go into any of the small caps I watch, but that's where the big bang for your buck is gonna come from, IMO.

I compare different producers all the time and see GSS as the most undervalued of the sizeable producers. They have been a royal pain in the arse to my return profile in recent years but I am one of the "true believers", even with such disappointments of recent times. Why so? The gold in the ground isn't going anywhere so I don't give a toss how long it takes to come out, as long as they NEVER hedge another bloody ounce of gold. Their bugs might need some tinkering with but the gold will come out of the ground, one day. I like their optionality. They are roughly 40% of the market capitalization of one of their peers – Iamgold (IAG). They are so similar yet market cap differs by a billion bucks. Do the very simple analysis yourself- my 7 year old daughter did. Compare reserves, resources, costs, production, location etc. etc…. Most should have such data at their fingertips! GSS need to prove that their "Bugs" work on their sulfide ore and they will be off to the races. I reckon the whole GSS scene will be very different in 12 months, if they still exist. One of the big boys like NEM might just gobble them up beforehand as they race to replenish their depleting reserve base. Not advice, just sharing what's going on in this flu-ridden head.

See you on the Buzz- probably in another day or so when I kill this flu bug that The Lisa gave me last Thursday and has had me bed-ridden with since. I never wanna see another bowl of chicken noodle soup!

Cheers,
Laurie.

Positions in GG, GSS, SSRI, PAAS, SLW, NSU, DROOY, HMY, NEM, KGC

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