The Road To Recovery...

“The path to recovery has narrowed, but the path is still open, if action is taken now.” IMF Managing Director Christine Lagarde

“They need to overwhelm the problem in order to get ahead of the markets.” Canadian Finance Minister Jim Flaherty

BNN has scoured the alphabet for stories and settled on a handful, including the IMF, ECB. EFSF, BOC, UBS, LME and XL. And we thought we’d slip in the G20 for good measure.

IMF officials, G20 finance chiefs and central bankers emerged from a weekend of tense negotiations and media availabilities in Washington DC in full agreement that something must be done. They also agreed that something must be done soon. And they all acknowledged that whatever will be done will be expensive. They could not agree, however, on just what should be done, when it will be done and how much it will cost. Nor could they agree on who would pay. Yet stock markets seem mollified by the seriousness of it all and the fact that the IMF conference of central bankers and finance ministers appear to be narrowing their focus on the various ways the euro-zone bailout mechanism, the EFSF, can be enhanced and deployed. The fund sits at 440 billion euros – though even its current level and use has yet to be ratified by a handful of national parliaments – with some estimating that it may need to swell to 3 trillion euros to get the job done. Other components of a plan that may or may not be taking shape include the recapitalization of European banks (but not the big French banks, mais non!) and a managed Greek default.

That’s Europe, but what about Canada? Over the weekend, Bank of Canada Governor Mark Carneysaid the economy, the Canadian banks and the central bank have all the tools necessary to withstand a worsening global economy. In other words, if the global economy is the Toronto Maple Leafs, then we’re Wendel Clark. But what about the near-term shocks of falling commodity prices and shrinking demand for manufactured goods from the middle of the country? Broad measures of the commodity market have slumped to 10-month lows with the price of oil dropping below $80, copper sinking to its lowest in more than a year and silver erasing its tremendous gains for the year. Gold is falling as some investors sell to cover losses in other assets. Let’s talk about earnings expectations for the materials and energy groups today and whether current share prices are justified as earnings expectations fall.

A key component of our energy coverage this week will be the debate over the Keystone XL pipeline, the proposed $7 billion TransCanada project that would carry Alberta oil sands crude to refineries on the Gulf Coast. Beginning today, the U.S. State Department will hold eight hearings across the six states the 2,700-km pipeline will cross. The opposition is fierce, but the U.S. appetite for energy is insatiable. The safety of the environment is a compelling argument as is the case for thousands of jobs across thousands of miles of U.S. territory. Brett Harris will be on the ground in the U.S. this week for the public hearings. He’ll be doing some live hits this week, and then filing a special series on the pipeline in the coming weeks. He starts in Port Arthur, Texas, today. Then he’s off to Nebraska and Oklahoma.

In Ottawa today, Greenpeace is leading a mass protest, including a sit-in against the oil sands and the pipeline. The protest is expected to be attended by top entertainers and actors such as Dave Thomas. At a protest in Washington DC a few weeks ago, actress Daryl Hannah (who most recently wowed audiences in 1987’s Roxanne) told cameras as she was being escorted away by police that the oil sands were an environmental disaster, the only one that could be seen from space. While that may be true, I would add that, thanks to Google Earth, I can also see my house from space, including a raccoon in my backyard, and it is digging up the new sod.

The London Metals Exchange is fielding takeover offers and we need to find out more. Could a foreign buyer purchase this jewel of the British financial industry? As an exchange that is owned by its 90 or so members, could the government block a takeover even if it wanted to?

In the wake of a $2.3-billion loss from unauthorized trading, UBS CEO Oswald Gruebel resigned over the weekend. His departure throws into turmoil the outlook for one of the cornerstones of the Swiss banking industry. Plenty of angles yet to pursue.

Paul Bagnell is attending a speech by Julie Dickson, Superintendent of Financial Institutions, this morning on the lasting impact of the financial crisis on the Canadian financial system.

Fed responds in a big way

The chase by Marty Cej:

The U.S. Federal Reserve was more aggressive than anticipated yesterday, selling $400 billion US in short-term Treasuries to fund purchases at the long end in a bid to drive yields lower, and indicating it will reinvest the proceeds from maturing agency debt and mortgage-backed securities into MBS. But an aggressive move by the Fed at a time of great economic worry can cut two ways: it is a signal that the Fed stands ready to stoke the economy with all the fuel it's got, and it's also a signal that the economy is in such bad shape that it needs to be stoked with all the fuel the Fed's got. The markets appear to be focusing on a single, telling sentence in the Fed's statement, that there "are significant downside risks to the economic outlook, including strains in global markets." Those strains are our focus today.

A quick glance around the globe shows Hong Kong's Hang Seng plunging 4.9 percent and Japan's Nikkei dropping 2.1 percent; the broad Euro Stoxx index is down 3.8 percent while benchmark indices in London, Frankfurt, Paris and Stockholm are down 3.8 percent or more.

The Canadian dollar is plunging against the U.S. dollar and is the hardest hit among the G10 currencies this morning. At last check, the loonie is down a little more than 2 cents at 97.17 cents US, its lowest since October 2010. Yesterday, we said to keep an eye on the Canadian dollar because of the particularly large short position in the U.S. dollar against the loonie -- that warning appears to have been well-founded. It is important to note, however, that all of the G10 currencies are down against the U.S. dollar as the Fed's dovish statement and evidence of cooling economies in China and Germany prompt a flight to the perceived safety of the U.S. dollar. The question is whether this is the start of a longer trend in currency markets.

In commodities, the price of oil has dropped a little more than 4 percent to $82 a barrel, gold has slumped $52 or almost 3 percent and copper, considered the most economically sensitive of commodities, has plunged 5 percent and is now technically in a bear market. We need to talk again about what the simultaneous decline in gold, base metals and oil says about the global economy and the outlook for markets.

A series of reports on the manufacturing sectors of China, Germany and other European countries compounded economic worries overnight with HSBC's China Flash PMI showing the factory sector shrank for a third straight month. Business activity in Germany, meanwhile, grew at its slowest pace in more than two years in September and new orders fells for a third month.
In Europe, the CEO of BNP Paribas, France's biggest bank, is denying reports that he is seeking a Middle Eastern investor to help prop up its capital. Baudouin Prot said a few minutes ago in a radio interview in France that he "formally denies" a Reuters report that he has been in talks with Qatar's sovereign wealth fund and that "we don't need a capital increase." BNP Paribas also said that it will be cutting jobs in its investment banking business.

Worries of a credit freeze between European banks and between European banks and their corporate customers continue to grow.
We will zero in on the threat of a global credit crisis with Europe at its nexus with Rick Waugh, President and CEO of Bank of Nova Scotia. Waugh sits down with Howard Green for a half an hour of conversation at 1:00 pm ET.

We'll talk about the challenges facing European banks and how they are likely to impact Canadian banks and Canadian financial conditions. As the most global of Canadian banks, Waugh has insight unique among his peers. This is one you'll not want to miss.
It is worth noting that Canadian bank stocks are outperforming all of their major world peers but are at a 32 percent premium to the MSCI World Bank Index. Do Canadian banks deserve that much of a premium, and will it last?

But what about companies? Some, like United Technologies, see cheap debt and falling share prices as opportunities to grow and prepare to take advantage of the next upswing in economic growth. United Technologies agreed to buy Goodrich Corp. for $16.5 billion, or $18.4 billion including debt. UTX will finance about 25 percent of the deal with equity and the rest with new debt. When it costs nothing to borrow, why not?

We're watching BCE and Rogers after the CRTC said the companies can't offer TV programs exclusively to their mobile-phone and internet subscribers. UBS analysts call the decision "widely anticipated" and "unlikely to have any significant immediate impact on the industry." We'll see whether the market agrees.

Ivan Lo Says In Equedia Weekly

Five straight days of gains and the best week we've had in over six weeks. The markets are finally showing some life. But is this all a grand illusion?

Despite the negative news engulfing the world markets, stocks are not only holding up but have seen a tremendous rally this past week.

Perception is reality and it looks as if investors are thoroughly expecting a big round of stimulus coming from Bernanke as he takes the stage at the two-day FOMC meeting on September 20-21. While this may appear to have helped our markets, it could also lead to disaster.

If investors are buying based on the sentiment that a new and significant amount of stimulus is coming, but the stimulus doesn't come, you can expect the markets to sell off.

We need news of a strong stimulus package if our markets are going to survive to see next year. I am going to reiterate the fact that we should all be watching the next week as if it were our last. Even with stimulus, we still have to look at what the other side of the world is doing.

How to guarantee a double on your money..?

The European issues have only gotten worse. The Greek bond markets have gone off the scale. Yields have risen by 150 percentage points on some bonds in the space of three months and volumes have slumped to practically nothing.

As a matter of fact, one three-year bond, which was trading at 20 per cent in June, is trading at a yield of 172 per cent, with a bid-offer spread - the difference between what a bank is offering to buy and sell the bonds at - of 47 percentage points. That's worst than most of the illiquid junior stocks on the TSX Venture. Earlier in the week, yields on one-year Greek bonds climbed to more than 130 percent.

No, I am not kidding. 130% yield on one year bonds.

If you believe Greece will survive by helping them out now, they'll give you more than double your money back. Where in the world can you find a government-backed investment like that?

But guess what? Even with those yields, investors are hardly jumping at the chance to buy them. That's because at the end of the day the other European nations (especially Germany whose carrying the Euro on its back), will eventually say enough is enough. When something is too good to be true, it probably is...

Whether our markets like it or not, Greece should default...and default big.

But if they do, we will see a snowball effect all over the world. The question is can it be contained? Bernanke better have a trick up his sleeve next week for the sake of our short term markets.

Bullion for Paper

There's no doubt that the most common question I get from readers is: "Why is there such a disconnect between gold prices and the price of gold stocks?"

There's many reasons but they all boil down to one simple thing: sentiment.

First off, many sell-side analysts use outdated or extremely low gold price numbers to value gold stocks - despite the strength in the price of gold. That's because of the notion that the higher gold goes, the worst shape our financial system is in and therefore, the worst shape the economy is in. If the bearishness remains, equities will falter and analysts base their estimates on the state of the markets. They believe that if stocks fall, gold stocks will too - as they did in 2008.

But this way of thinking doesn't factor in that gold stocks have enjoyed a tremendous run in prices, climbing nearly 1000% from the lows of November 2000 through to August 2008 (based on the HUI Gold Index, a basket of unhedged gold stocks). If you go back through those years, you would see that the juniors had a phenomenal run up in prices as well.

That's not the case today.

Many of the gold producers are now trading at far less than five times two-year-out forecasted earnings based on today's prices. As a matter of fact, many of them are trading at less than three, even two, times two-year-out forecasted earnings.

As I fully expect gold to continue its climb, many of these companies will be trading at less than one time two-year-out forecasted earnings. History will tell you that anytime you have a company that's trading at those valuations, 9 times out of 10 you have a winner.

Also consider that on average, producers are paying roughly $800/oz to pull gold out of the ground. At today's price of over $1800/oz, they're capturing $1,000 per ounce in EBITDA. Try finding another sector with that kind of profit margin.

Another reason why gold stocks have lagged is because of the volatility in the price of gold - but not gold itself. I know it sounds confusing but it's actually very simple.

Most of what is determining gold's price is paper trading - which is fundamentally flawed. The amount of paper gold and silver contracts that trade on the futures and equities exchanges easily outweigh the amount of actual physical trading that takes place.
That means it's the paper markets setting the price discovery for gold. It means that sentiment, and manipulation, are the causes of gold's volatility and not the physical fundamentals of gold itself.

In a report published earlier this year (see Before it's Too Late), Eric Sprott and Andrew Morris pointed out the significant discord between paper and physical supply on the Comex relating to silver:

"...Over 800 million ounces traded each day in April on (the Comex). Further, consider that as at the end of April there were only 33 million ounces of registered inventories to back up all of that paper trading. Just imagine if a mere 5% of all of that buying actually stood for delivery; the entire inventories would be more than wiped out."

Over a year ago, I published a letter that revealed how most of the gold that is traded in the markets are not actually fully backed by the actual metal itself, as many believe (see The Silver Conspiracy):

For years, most people have assumed that the London Bullion Market Association (LBMA), the world's largest gold market, had actual gold to back up the massive "gold deposits" at the major LBMA banks. But it doesn't.

This was confirmed during the CFTC hearings when Jeffrey Christian of the CPM Group said that the LBMA banks have approximately 100 times more gold deposits than actual gold bullion. This means that for every ounce of gold traded in these markets, 99 of them appear from thin air. Has gold and silver been converted into a fiat currency in these markets?

In the LBMA market, for example, an average of 19.6 million ounces of gold was traded per day in July. The world has produced on average approximately 2,497 tonnes per year over the last several years - which is just over 80 million troy ounces.

That means the LMBA, trades nearly a year's worth of worldwide gold production in less than a week.

While gold production has been stable, it's certainly not growing much. When new mines are developed, they're mostly serving to replace current production, rather than expanding global production levels. That's because gold production experiences comparatively long lead times, with new mines taking up to 10 years to come on stream. That means mining output is relatively inelastic and unable to respond quickly to a change in price outlook - as we have seen in recent years.

Even a sustained price rally, as experienced by gold over the last seven years, doesn't translate easily into increased production.

Consider that while the LBMA is essentially trading a year's worth of production in less than a week, it doesn't factor in the amount of trades on the COMEX futures and other major gold ETFs. If you combine all of these exchanges and funds, the amount of gold traded and the actual amount of gold available is staggering.

Therefore, gold's price discovery is clearly out of synch with true fundamentals. When the price of gold is dictated by paper contracts with extremely leveraged physical backing, the price can swing very dramatically. In a market where volatility has investors running for the ropes, the end result is a sentiment that drives them away from gold equities.

But that is now slowly changing.

There have already been many days in the past month or so where gold has fallen, but gold stocks have climbed. There have been days when the Dow has fallen, but gold stocks rallied. There have been days when gold climbs, and gold stocks climb even higher. All of these minor events prove to me that things are changing: that gold stocks are beginning to shine, so to speak. That is why I have told many of my close colleagues, money managers, and our readers since June to start trading bullion for stocks.

Back in June, I said to go long on the gold producers (see Time to Feel the Pain and see The Biggest Buyers of Garbage). A few weeks ago (see The Russian Secret), I explained the profit potential if you invested in the major gold producers early June, as I had explained. Despite the run up in prices, gold and silver stocks - in particular the juniors - are still lagging behind.

That means there is still time to participate in the rise of gold - without having to own gold itself (although I still suggest gold and silver as a portion of everyones' portfolio).

While I am bearish on the world economy as a whole, that doesn't mean I am bearish short term - especially not in gold equities. The market can still rally and with it, we may see new highs. The market has been strong last week but with five straight days of climbs, profit taking could be on the table.

But again, we're going to have to wait and see what Big Ben has planned for us next week at the FOMC...

It's game time.



Until next week,

Ivan Lo

Marty Cej writes a "chase note

"With immediate effect, [the Swiss National Bank] will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities."

- Tough-talking Swiss National Bank telling you how it's gonna be, just in case you weren't payin' attention.

When things get tough, I mean really tough, send for the Central Bankers. Overnight, the central bank of Switzerland said no, nein, non and basta to currency traders who thought they could push the Swiss currency to new record highs. Yesterday, European Central Bank president Jean-Claude Trichet told European leaders to create a Brussels-based euro-zone finance minister to help get the region in order, or bring it to heel, depending on your point of view. On the last day of August, the central bank of Brazil cut interest rates in a surprise move intended to insulate the export-driven economy from a global slowdown.

Goldman Sachs argues today that while QE3 is almost a certainty for the Fed, it is unlikely to work and therefore the U.S. central bank should consider more drastic measures, including a promise to anchor interest rates near zero until the unemployment rate drops to 7 percent. In Ottawa, meanwhile, the Bank of Canada's Mark Carney is foiling-up the knuckles to take on global economic weakness in tomorrow's policy decision.

Our top story today is to examine the efforts by global central bankers to protect, revive or resuscitate their economies amid increasingly fragile financial and economic conditions. We'll frame their actions with the concomitant efforts of politicians to spark growth, create jobs, cut deficits and hang on to their own jobs.

Countries such as Greece and Italy seem to be losing their appetite for austerity, which wasn't exactly hearty to begin with, and the Finns are demanding some sort of collateral if they are going to put up dough to help bailout their weakest euro-siblings. World Bank President Robert Zoellick tells Bloomberg News this morning that risks to the global economy are intensifying and the euro-zone's outlook is dependent on European leaders making the right decisions, as if that hasn't always been the case.

U.S. President Obama has a big speech on jobs Thursday night, too, which may have a lot to say about the U.S. housing market. Watch the homebuilder stocks and Canadian forestry companies.
Our examination of the global economy, interest rates and markets will feature a conversation today with John Taylor, the Stanford University professor who developed the "Taylor rule" – a monetary-policy tenet that stipulates just how much a central bank should change interest rates in response to changes in inflation and other conditions. Beginning at 1:00, we'll find out what he thinks the Fed and other central banks should be doing right now and compare it with what they are doing.

Between 11 and 11:30, it's all about the Bank of Canada, Canadian interest rates and what Canadians should be doing with their money. Last week's report showing a contraction in the Canadian economy in the second quarter revealed two key persistent headwinds: the strong loonie and the weak U.S. economy. Whether rates are cut later this fall or not, neither of those headwinds is likely to disappear anytime soon.

Research In Motion was raised to 'outperform' from 'sector perform' at Scotia Capital this morning amid speculation that the rollout of seven new devices and "legal issues plaguing Android" will mean "RIM is positioned for a strong Q3 and Q4."

A few minutes after that note arrived, activist shareholders Jaguar Financial called on RIM to maximize shareholder value by pursuing "all options including a potential sale of the company or a monetization of the RIM patent portfolio by a spin-out to RIM shareholders." Business Day AM has calls into Jaguar and we are seeking comment from RIM as well.
The Carlyle Group has filed for an IPO. Let's talk about what they are bringing to the market and the timing.

Every morning Managing Editor Marty Cej writes a "chase note" to BNN's editorial staff listing the stories and events that will be in the spotlight that day. Never miss an edition of The Chase.

Ivan Lo Equedia Weekly plan to purchase both large caps and small cap gold stocks, including Barrick which is mentioned in this article.

I know things have been volatile and people are running scared, but even as the market looked like it was about to collapse - it didn't.

Even as short selling bets against the Standard & Poor's 500 Index rose to a nine-month high last week, that doesn't mean we're going to see a major pullback. If we do, those will be prime opportunities to pick up more cheap stock.

That's why I have been proactive in telling readers not to listen so much to the media but rather follow the rally until a true signal tells us to stop:

"While I can't sit here and confidently predict day-to-day events given the political climate, I can't say I am surprised at what happened. For months I have been saying the markets are overvalued and that the US is in trouble - both long and short term. Does that mean the markets will continue to freefall?

The simple answer is no - the bottom for this summer drought appears to be forming." -The Dangerous Unknown -August 8, 2011

Since that time, the markets (while still volatile) have erased most of the losses over the past months and have rebounded back. If you missed that issue, I suggest you go back and read it.

While the summer markets have been shaken, a lot of profits have already been made. If you have been following the Equedia Letter and my timing on picking up cheap shares of the major producers, the volatility and the negative outlook of our markets shouldn't have phased you one bit:

Let's do a quick review:

June 12, Time to Feel the Pain:

My sentiment towards gold has not changed. When you look at the broader picture of the US and the world economies, the flight to safety and wealth preservation remains a top priority. Gold will climb higher - 'nuff said.

The biggest emphasis I want to make is the disconnect between gold and gold stocks. While gold has performed incredibly well, gold equities have underperformed. But sooner or later, as I have mentioned time and time again, it will change. When it does, we're going to see some spectacular gains in gold stocks (and other silver stocks, as well) - including the more speculative issues - as they play catch up.

The market swings in gold equities can be big, as we have already witnessed. Don't be suckered in by selling at the bottom and trying to play catch up when the market turns. I haven't sold any of my gold and silver stocks recently (the last time I sold was the week right before the correction - see Age of America Over?) because I strongly believe that the equity side of precious metals will turn and my patience will be rewarded with some phenomenal gains.

On June 26, "The Biggest Buyers of Garbage":

I believe that at current prices, mining share valuations are absurdly low and that fundamentals are bound to restore them to reality. That means that over the next 6-12 months, I expect the shares of both gold miners and strong speculative explorers to finally beat the returns of gold itself. Summer is finally here and that means hunting season is coming around the corner.

On August 14, The Big Signal:

When the indices plunged mid-week, gold hit a record high of $1800. That's hardly a surprise for me and if you have been reading the Equedia Letter for a long time, you would know this. I think gold will continue to go much higher.

But that's not what caught my attention.

When the indices plunged mid-week and gold hit a record high of $1800, guess what companies soared? That's right, all of the gold majors.

For the first time in a long time, I saw gold stocks rally with the price of gold. Every gold major surged when gold hit $1800: Barrick, Goldcorp, Kinross, Freeport McMoran, Yamana...you name it.

Just take a look at the Market Vectors Gold Miners ETF (GDX) which surged 4 out of 5 days, ending up nearly 6%. Even the Market Vectors Junior Gold Miners ETF (GDXJ) soared, ending up just over 7%.

This is a big signal - one I am shocked that media outlets and other prominent newsletter writers failed to mention. All they saw was the volatility.

The gold mania is beginning and gold stocks are going to be a lot higher soon as gold looks to crack the $2000 threshold. The gold producers climbed significantly when gold rallied to $1800 last week. Imagine what they will do when gold hits $2000. Imagine where gold will go once QE3 is announced. Imagine where gold will go once Europe spends its way out of trouble.

Once the majors get rolling, the juniors will follow as buyouts and takeover rumours begin. The majors will take advantage of beat up juniors and this will fuel speculation into that market segment. Then the triple digit returns will begin.

Take a look at what some of the majors have done since June:


Gold Major Charts as of September 2, 2011


There's no doubt in my mind, despite the early gains already made, that this upward trend of the major gold producers will continue. Aside from the many factors I have discussed in previous letters regarding gold's climb, even more reasons emerge on a daily basis as to why gold prices will continue to climb - as they have for the past 11 years.

There are reasons why senior German government officials are calling for the gold reserves of European countries such as Greece, Portugal, Spain, Italy and Ireland to be used as collateral for future loans.

There are reasons why Kazakhstan has given its central bank a 'priority right' to purchase all domestically mined gold "in full".

There are reasons why major hedge funds and central banks around the world are buying gold. Central banks internationally have been net buyers of gold since 2009, despite being net sellers for nearly two decades. (see The Next Big Boom)

There are reasons why the People's Bank of China is building their gold reserves without declaring it to the world and is encouraging their citizens to buy gold. (see Everything Has Changed)

There are reasons why Venezuelan President Hugo Chavez said that he plans to nationalize the gold sector and use the production to boost the country's international reserves and why he's ordered the repatriation of 90 percent of Venezuela's gold reserves held abroad, to be returned back to Caracas. (see The Hoarding Has Begun)

There are reasons why stock exchanges around the world are allowing gold to be used as AAA collateral. (see The First Time in History)

There are reasons why even life insurance companies are buying gold for the first time in history (see The Next Big Boom)

There are reasons why many states in the US are pushing for precious metals to be used as legal tender. (see The Greatest War in History)

There are reasons why China, amongst other countries, have created new platforms for the trading of gold. (see Before it's Too Late)

The list goes on...and on.

While the media and Ben Bernanke would have you believe that gold is not money nor should it be treated like it, the evidence says otherwise.

Just last week, Russia's central bank announced that it will offer gold-backed loans for up to 90 days at an interest rate of 7 percent, expanding its lending facilities for dealing with any future liquidity crunch in the banking system.

According to Reuters:

The gold-backed lending was approved by the board of directors at a meeting on Friday. The rate on the facility is in line with the central bank's Lombard rate on borrowing secured against high-quality bonds.
"This measure fits the central bank's policy of developing refinancing instruments within the banking system. The facility will be unlikely in strong demand, only at times of liquidity crunches," said Maxim Oreshkin, chief economist at Credit Agricole in Moscow.

Levels of rouble liquidity remain at comfortable levels for now, with the overnight interbank rate having hovered within 3-4 percent range since early 2010 compared to more than 10 percent seen during the crisis of 2008-2009.

Russia has been relentlessly unloading its US bonds. It has been buying gold at record pace. Now they're offering gold-backed loans to expand its lending facilities for dealing with any future liquidity crunch in the banking system. If there is a liquidity crunch, (which is very possible) Russia will be able to hoard even more gold as citizens and those with gold scramble to pay their bills.

Perhaps this is a secret ploy by the Russian government to discretely confiscate gold. Other central banks, stock exchanges, hedge funds, and even insurance companies are hoarding their gold and looking for ways to increase their holdings. Why aren't you?

Gold Stocks

Many of the miners are still trading at valuations that haven't been seen since the 1970's. While many of the majors are now trading at, or near, 52-week highs, the time to add or enter new positions is still ripe. That's because many of the companies have valuations far below gold's current price.

For example, Newmont Mining currently values its resources at a price of $900/oz, which means they try to determine if their projects are feasible at that price. Gold is nearly $2000 ounce. When Newmont decides to move their current resources into the feasibility stage over the coming years, their valuations of resources in the ground would become much more significant - provided gold stays at these high prices.

Another example is Eldorado Gold. Even though it is trading at 20 times next year's earnings and 15 times next year's cash flow, they're expected to double production within 4 years and is currently one of the lowest cost producers with signifcant exploration potential.

The list of big name gold producers are all high a top of my list of stocks to own - if I don't own them already. Many of them have already been mentioned in the chart above and include: Barrick, Goldcorp, Kinross, and Yamana. If you are going to speculate that gold prices are going to climb or remain at these levels, these are all great bets in my books.

The Juniors

With the low valuations given by the market to the gold juniors and mid-tier explorers, I expect to see a strong wave of takeovers, buyouts, and mergers in the coming months.

Just last week, AuRico Gold Inc. announced a $1.46-billion deal to take over Northgate Minerals Corp. Including net cash, AuRico's acquisition valued Northgate at 14.7 times earnings before interest, taxes, depreciation and amortization - that's the lowest valuation since 2004 for a North American deal worth more than $1 billion. If gold prices stay the same, or go higher as I predict, that's a pretty sweet deal for AuRico.

We also saw Cameco come out with a hostile bid for Hathor. While the Cameco-Hathor deal is not of the precious metals sector, the fact is that the majors are looking to acquire many of the battered juniors and this trend will continue.

When the share prices of the majors rise and the juniors lag behind, it gives the majors substantial pull in using their valuations to target the lower valuations of the juniors. The market knows this. You've already seen many of the majors surge since June. This surge will continue and the juniors will eventually follow as I mentioned in "The Big Signal."

September is here and the market will slowly get back to more aggressive trading as the kids go back to school and the adults get back to work. Even with the strong gains since June, gold stocks still have plenty of room to grow.

It's time to shine.

Disclosure: I own and plan to purchase both large caps and small cap gold stocks, including Barrick which is mentioned in this article. I also own long positions in gold and silver through ETF's.


Until next week,

Ivan Lo
Equedia Weekly