Gold Investment, Gold Companies

Source: James West, Midas Letter  (12/18/08)

The biggest error an investor might make in the burgeoning third phase of the gold bull market is thinking the boat has been missed after new price territory is reached. Limiting your gains by trading in and out of the physical is insanity.


The biggest error an investor might make in the burgeoning third phase of the gold bull market is thinking the boat has been missed after new price territory is reached. Limiting your gains by trading in and out of the physical is insanity. Physical gold should only be considered if you plan to hold on to it for years, not months. Transportation, storage and security issues will chew up short term gains.

Moving into the market we are, where the US Dollar is going to crash in value, and gold is going to head in the opposite direction, it's time to allocate investments intelligently among various assert classes that will benefit from the gold bull.

Producing mining companies are a great way to capture the upside gold will impart, and provides a very limited exposure to risk – especially if you’re considering one of the major producers such as Barrick, (NYSE, TSX:ABX) Newmont (NYSE:NEM) or Goldcorp (NYSE:GG,TSX:G), who tend to develop assets with strong economics in relatively stable countries.

South African senior producers have a special set of challenges ahead of them that make investment there riskier than in their North American counterparts. Electrical infrastructure is in major need of upgrade, and the depths to which these mines now extend negatively impact production costs going forward.

As you proceed down the list of producers, risk is intensified. This is because mid-tier producers typically gain access only to projects too small, too risky or too expensive for the big players. With increased risk comes the potential for a greater reward – especially with companies who have not yet defined the limits of deposits under development, or where the political situation is uncertain.

The biggest leverage right now, especially considering the drubbing they’ve experienced this year, are among the junior explorers. The juniors also occupy the highest risk segment, but no pain, no gain…or at least, little gain.

The current market is not differentiating efficiently the companies with potentially world class deposits and management from the “wanna be’s” who are probably never “gonna-be’s”. And in that lack of efficiency lies tremendous opportunity for risk-tolerant and patient investors.

You’ve probably heard a lot of talking heads on business stations suggesting that the economic stimulus initiatives are going to have a positive impact on stocks, and how the worst is over, and blah blah blah blah…the same guys were saying the worst is over back in August of last year. All data suggests that we are heading for a prolonged DEPRESSION, and just as in every long bear cycle, there will be little bullish corrections that will snag the naïve predictably.

The pressure on gold will be accordingly intensified. The premium will be on physical and senior production, which is why right now is the time be accumulating gold juniors. Historically, they are the last to benefit from strengthening gold fundamentals, and in this new environment of mistrust and paranoia, it will be no different.

Again, the primary consideration here must be advanced exploration/near-term production, plenty of cash on hand, and aggressive but sensible management. In the last year, I’ve visited several gold deposits, all of which have exceptional potential, and will continue to do so in the months ahead.

When I say exceptional potential, I mean companies that have the potential to earn investors ten times the money, just because they have not yet published a Canadian National Instrument #43-101 report, which is quickly becoming the accepted standard worldwide for mineral resource reporting.

The key is in looking closely at the exploration results and ignoring the headlines. There is a tendency emerging to call everything over 2 grams per tonne gold “high grade”, which is just plain misleading. And high grades can be less relevant where huge tonnage potential exists near infrastructure or existing milling operations, especially if they start at or near surface and have low strip ratios.

The key to evaluating results from a lay person’s perspective is continuity. Long intercepts of low grade mineralization that start near surface are better than short intercepts of higher grades at depth. If mineralization doesn’t start anywhere in the exploration zone above 200 metres in depth, there’s a lot of overburden to go through to reach the good stuff.

Similarly, and was NovaGold (NYSE Alternext, TSX: NG) is discovering, you can have a monstrous low-grade high tonnage deposit, and discover that the cost of building access and infrastructure can discourage investors and derail the path to production.

In NovaGold’s case though, as long as they are able to navigate through this troubled period where raising cash is tough, the economics improve as gold increases in value and construction materials and energy costs decline. Financing for these projects will become available as these economic factors solidify.

2009 will be a devastating year for many investors. Those with no experience or with little tolerance for risk will miss out on what will become the most profitable phase of the long term bull market for gold that began in 2002. Investors who buy a diverse basket of the very best juniors are going to make out very well, both in the short term and the longer.

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