Agora Financial’s Rude Awakening

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Dubai, UAE

• Three factors to light the fuse for junior mining companies,
• Gold – even more precious than we think? 
• Getting the woman you don’t deserve and plenty more…

Joel Bowman, reporting from Dubai in the Persian Gulf…

When you are a single man, you will notice that women, largely, are not interested in you. It is only when you become “unsingle” that you are worth the price of seduction.

The fairer sex (as many of its representatives have informed us) possess a keen sense for desperation…and desperation must surely rate among the most unattractivecharacteristics when females are seeking a strong mate.

The longer the singledom continues, the more desperate a situation the man finds himself in. Desperation forces him to act more assertively…more desperately. He buys fancy cologne, irons a crisp new shirt and hits the local clubs, but to no avail. The women he seeks can smell him a mile away.

Desperation, in other words, begets desperation. We might call this a negative feedback loop.

Then, when he is most destitute, he chances upon a smile from an attractive single at the other end of the bar. Never mind that she is winking to the gentleman behind our hero…the wheels of possibility have already started turning in his mind.

Strutting to the next bar, a few nights later, our man has a new sense of self. He is no longer bothered with the shallow end of the female beauty pool. Instead, he concerns himself only with the best lookers, the most glamorous women in the bar.

His confidence is apparent and soon, perhaps after a month or two, he finds himself in a steady relationship with a women he doesn’t deserve and who thinks herself lucky to have him.

Now that he is “unsingle,” women cannot throw themselves at him with enough fervor. We might call this a positive feedback loop.

In the world of investing, this phenomenon may not be quite as sexy, but it certainly pays to watch the trend. 

“You can think of the commodities bull as a positive feedback loop,” writes Dan Denning in the Australian Daily Reckoning. “That’s a situation where the causes of a given phenomenon accumulate and amplify the phenomenon. Boom begets boom.

“Higher prices in commodities beget higher prices because they attract both investment demand (hot hedge fund and futures money) and eventually, hoarding. The great unknowns in the market are how much demand is real economic demand and how quickly supply can grow.”

As gold regains its confidence and once again steadies for its run toward a new record high (around $2,300 - adjusted for inflation) we reckon there may be a few overlooked opportunities among the more, shall we say, nubile participants.

In the column that follows, Dave Galland takes a peek at the irresistible attraction of gold juniors. Enjoy…

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Gold Rush, Jr.
By David Galland, Casey Research

Gold may be even more precious than we think. During the last several years, mining companies around the globe have discovered almost no new large-scale gold deposits. So if the world’s major gold companies can’t find any new gold deposits in the ground, they’ll have to find them in the stock market…by buying companies that already possess proven reserves.

Therefore, forward-looking investors might want to take advantage of the current weakness in the gold share market to invest in some of the small mining companies that would be attractive takeover targets.

One of the most intriguing aspects of the current market is the dearth of major discoveries so far in this cycle. This despite record amounts of money spent on exploration since this bull market began in 2001.

Older and smarter minds than mine had predicted that the soaring price of gold would produce a new wave of exploration that would, eventually, produce a new wave of major discoveries.

But so far, as Barrick Gold’s CEO, Peter Munk, recently observed, “There have been virtually no new discoveries.” Only Aurelian (T.ARU) has landed a legitimate “elephant” deposit bagged. Unfortunately, the carcass of that particular elephant rests entirely within the sketchy outlines of the nation of Ecuador where the locals are currently circling like a pack of hungry hyenas.

It has been our contention that what was needed to light the fuse on the junior exploration stocks would be, in no specific order:
1. Sustained higher gold prices.
2. Improving financials and free cash flow of the major producers.
3. A discovery to heat the blood of the investing community.
So far, we have had (1) and we are beginning to see (2), but (3) has proved remarkably elusive.

Now, don’t misunderstand. You can have a whopper of a bull market in these stocks without the discovery – that was the case in the 1970s bull market. But a discovery that fires the imagination can jump-start things in a big way, no question about it.

Too bad nobody has found one recently.

In short, we appear to have reached the era of Peak Gold. Whereas a major discovery used to be 10 million ounces or more, the threshold for attention-getting discoveries these days has fallen to more along the lines of 1 to 3 million ounces… and even those are hardly falling off the trees. 

Viewed from the perspective of an investor in the junior resource sector, this lack of discoveries means the fuse is lit – starting with straight-up supply and demand fundamentals – for a rocket shot tomorrow. Adding boosters to the rocket, we have a commodities bull market that shows no sign of ending anytime soon and, while the U.S. dollar will periodically rebound, it is not going to somehow reinvent itself as sound money in our lifetime.

Importantly, as you can clearly read between the lines in Chairman Munk’s words, once the majors get cashed up and get serious about replacing their reserves, they are going to have to look downstream to the juniors with discoveries… even if those discoveries are below the 5-million-ounce threshold they previously required to even consider taking an ore body into production.

Of course, lowering the threshold on deposit size will require trade-offs. For example, in order to be considered for an acquisition, a smaller deposit will almost certainly have to be near surface and open-pittable. It will also have to be near good infrastructure, and located in a jurisdiction with good laws and reasonable taxation. There is, in this situation, an opportunity and a risk.
 
Starting with the latter, if your portfolio now includes companies going after deposits in the one- to five-million-ounce range, you need to make sure they are not in a remote location that would require a massive infrastructure investment.

As for the opportunity, while the odds and the amount of exploration spending still favor that we’ll see the discovery of at least one and maybe two monster deposits in this cycle (there are a couple of companies advancing projects with that potential), and early shareholders will make fortunes as a result, there has rarely been a better time to invest in junior exploration companies with modestly sized projects in good locations. That said, you should still be focusing only on projects with at least 2 million ounces, or the strong potential of same.

In other words, take the opportunity in these down markets to invest in the kinds of junior mining companies that major mining company might want to acquire…That’s where the big money will be made as the gold market gathers steam again.

Joel’s Note: David Galland is managing director of Casey Research, publishers of the International Speculator, now in its 28th year. The current edition includes “Courting the Majors,” a feature on what attributes the major mining companies are looking for in a junior explorer. All new subscribers are invited to give the International Speculator a three-month trial with an unquestioning 100% money-back guarantee. Learn more and sign up now to receive the current edition.

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[Rude Endnote: “I want to compliment you on your thought-provoking newsletter,” writes one reader in response to yesterday’s column (partly written by other Rude readers).

“Now I want to pass on a thought to provoke your thinking,” he continues. “I spent 12 years working for a company that manufactured military jet engines in a business planning position that required that I always looked out over the next thirty years and tried to paint a probable scenario of world disasters and what military response the US should take.
 
“The conclusion I always reached was that the oil producers have oil…but they do not have a military structure that would allow self defense…they rely on the United States. The American might and only that, in my view, will discourage the Middle East Countries to abandon the US dollar as the international standard for oil purchases: even as the dollar continues to lose value, as your service predicts. 

“Just a thought to consider. Regards, GF.”

Consider it considered, GF. Inflation is rampant here in the Gulf, but the governments, save for Kuwait, appear resolute in their stance by the buck. Perhaps it depends which fails first – the overstretched printing press, or the Empire’s military.

By the way, it’ll cost you 127 of those dollars to buy a barrel of oil today. An ounce of gold will set you back $905.

Until tomorrow…

Cheers,

Joel Bowman
Rude Awakening