Gold may hit $2,000 within 3 months: James Turk

James Turk, Chairman and founder of GoldMoney,  claims that the 2012 bottom for  Gold  came during the first week in January. If the year's low is already history and if his projection that gold will hit the $2,000/oz mark within three months is on target, you do the math. " Gold is way too cheap," he tells in this exclusive interview.

The Gold Report:  Given the volatile 2011 market and the fact that gold trades at seasonally lower prices in the summer, James, what led you to say you believe we've already hit the low for the gold price in 2012?

James Turk:  We started this year in an unusual position. Normally, we see seasonal strength in the last quarter. We didn't get it. We'd been in a correction since the high in  Silverback in April 2011. The high in gold came during the summer, which was very unusual, but basically both metals have been moving sideways. Starting from the end of a correction, value is more important than seasonality. Clearly, gold and silver both represent good, undervalued assets at the moment.

The other factor is continuing problems in the financial system. The European banks are still on the brink and many American banks are in a similar situation. Questions about the currency—whether the euro will survive—and the ongoing sovereign debt issue will cause people to look at the precious metals. I've said we saw the low in the gold price the first week of January, and the further into the year we get without going lower, the greater the probability that it was, in fact, the low for the year.

TGR:  Considering all the issues you mentioned that existed last summer as well, why didn't that seasonal strength return late in 2011?

JT:  An interesting thing about markets is that nothing works all of the time. You just have to respond accordingly in looking at how things are going to unfold. That's why I think the low has been made already.

TGR:  You also mentioned in a recent interview that you thought gold could get above $2,000/ounce (oz) in the next three months. With all the monetary issues on the table, not to mention a few new wrinkles, what will make the gold price pop up so much in such a short period of time? What's the catalyst?

JT:  I can't tell you what the event will be, but I look at charts and things of that nature to give me an indication as to when something's ready to move. The fact that we've been in a correction for several months is one indication that something will happen. Whether it's a bank failure or a problem with the euro or some European bank, you can't really tell. But whatever is coming, the markets reflect it. It's like following footprints in the sand on the beach, leading a certain way. The charts and the circumstances are telling me to expect a big pop in the gold price this year.

TGR:  And would it correct immediately afterward?

JT:  Not necessarily, because at some point, the currencies will collapse. When they do, gold won't correct. It will just keep going up.

TGR:  So are you projecting currency collapses within the next few months?

JT:  No, I'm not, but they will at some point. It could happen in the next several months it could happen in the next several years. We are in a bubble, not a  Gold  bubble but a fiat currency bubble. The belief that fiat currencies have value will be tested. I think fiat currencies, which are backed by nothing but government promises, will collapse, and gold will return to center stage in global commerce. When it does, expect a straight shot up. It may be three months or three years. Take it month by month and see how it goes. Don't try to trade the gold market. Continue to build your gold and/or  Silver  holdings, and when all is said and done, you'll be very, very happy.

TGR:  You've also indicated that you expect the U.S. to get into hyperinflation, citing examples of currencies in the Weimar Republic, Argentina and Zimbabwe. None of those currencies was world reserve currencies as the U.S. dollar is. Would the world allow the U.S. dollar to go into hyperinflation?

JT:  The world can't do anything to stop it. President Nixon's Treasury secretary, John Connally, captured it perfectly when he told one of his European counterparts, " The dollar is our currency but your problem." That's still true 40 years later.

The dollar continues to be the world's problem, and the U.S. government isn't doing anything to make the dollar worthy of the esteemed position of being the world's reserve currency. There is no pressure that can be brought to bear on the dollar that would cause the U.S. government to reverse course and go in the right direction.

We are seeing countries around the world accumulating more gold in case the dollar collapses, which is what individuals should be doing as well. Countries around the world are also taking other steps to protect themselves. For instance, they're entering bilateral trade agreements that don't involve U.S. dollars. China has been doing a lot of bilateral trade agreements that completely exclude the dollar. India and Iran, of all places, just recently announced an agreement whereby they're going to use gold for transacting.

TGR:  In King World News in October you wowed the world with the Gold Money Index discussion and how it shows that the fair price of gold is really $11,000/oz. You based your calculation on the combined total of central banks' foreign exchange reserves divided by their gold holdings. Why do you use only foreign-exchange reserves in that calculation and not total reserves?



JT:  Because gold is international money, and I'm trying to focus solely on the monetary component. Instead of moving gold around as they did under the classical gold standard, the central banks have been using foreign currencies as a money substitute. If you're using a money substitute, the money itself should be equivalent to gold. The real factor underlying all of this is that gold is way too cheap, and accepting paper currencies instead of gold is the wrong thing to do, which is what the Gold Money Index shows.





So it's basically reestablishing gold's role in the international monetary system and what its value would be based on historical evidence, particularly from the 1960s and 1970s, when the index was working much more clearly. Over the last 20 years, the gap between the fair value of gold and its actual price has become huge. 

TGR:  Have you gone back to 1900 with that calculation?

JT:  It's hard to get all the data, but the logic is basically there. I've gone back prior to 1900, not with the  Gold  Money Index, but with my Fear Index, looking at domestic money supplies. The Fear Index is at about 3% now, so gold today backs about 3% of the domestic money supply. 

When Sir Isaac Newton devised the classical gold standard, an average of 40% of the monetary system's value was based on gold and 60% on paper. That we're so far below the guideline he established is an indication to how undervalued gold is relative to all the paper money systems out there.

TGR:  You mentioned using foreign-exchange reserves because they mimic the way gold was transferred under the gold standard. But wasn't it part of being on the gold standard that each currency unit reflected a gold component?

JT:  Yes. But, the Fear Index and the Gold Money Index distinguish between domestic and international money supplies. That's why I was saying this 40% on the Fear Index is the historical norm.

TGR:  Your Gold Money Index is interesting, and the $11,000/oz number grabs a lot of attention, but maybe the real underlying question is whether this ratio is really relevant.

JT:  What makes the ratio relevant is that it had relevance up until the last 20 years. The fair price and the actual price have separated so far due to government intervention—attempts to cap the price of gold. Governments intervene in the gold market for the same reason they intervene in any market. When they don't like the outcome, they try to change things around. This index gives people an opportunity to understand how undervalued gold is.

The index is relevant, too, in that it makes it very clear that we're living in a bubble. How can something work for so many years and then all of a sudden not work? It's because we're in a bubble.

TGR:  Didn't it work for so many years because we were on a gold standard?

JT:  Exactly, but we went off the gold standard in 1971, and even in the 1970s, that ratio worked. It continued to work in the early 1980s. Then it stopped working.

TGR:  So it wasn't until they started printing money, and expanding the M1—increasing the money supply—that the imbalance grew.

JT:  Yes. The attributes that gave gold value and made it money in the first place did not disappear, but they were ignored or forgotten. Gold was marginalized. Then in recent years, people started to rediscover those attributes and realized that gold is very, very useful.

At some point the price of gold will just keep rising and not stop. That's when the currency collapses. And while we can't predict when it will happen, people have to reach one of two conclusions. Either 1) monetary history is not relevant and the fiat currency system will survive, or 2) monetary history is relevant, this is a bubble, the fiat currency system will collapse and gold is much undervalued.

TGR:  There's no doubt about which conclusion you've reached. You've also made it clear that while you can't predict when the fiat currency will collapse or when hyperinflation will kick in, you recognize where the path we're going down leads. Still, as an astute historian of the currencies, could you tell us how long it took from the tipping point to all-out hyperinflation in the countries that experienced it?

JT:  Once you hit the tipping point, it's usually six months before the currency is finished. To give you an example, I went to Argentina in 1991 to study what was happening there. Hyperinflation appeared to be brewing. The currency, the austral, was linked to the U.S. dollar at 14:1 in January, and the link was broken. During the first week of May, when I arrived, the austral had already devalued to 64:1 against the dollar. When I left at the end of the week, it was 96:1 and by December, it was 10,000:1. So I was right there at the tipping point.

But here's the interesting thing. Hyperinflation is first recognized outside the country before it's recognized within, because foreigners own another country's currency by choice. If they don't like what's going on, they sell that currency and move into something else. Where we are with the U.S. dollar, so many indications suggest that internationally we've hit the tipping point, but not yet within the U.S., where people are still getting paid in dollars and still spending dollars. Once the domestic tipping point is reached, it's six months before the currency collapses.

TGR:  Considering that you're based in London now and presumably have greater insight into what's happening with the euro and in the European Union than most of us, how do you see the situation in Europe vis-à-vis the U.S.?

JT:  Last year, the euro was in the doghouse and the dollar was relatively strong. A couple of years ago, the dollar was in the doghouse and the euro was relatively strong. As a famous hedge fund manager in New York said, trying to pick between the currencies today is like trying to choose the best-looking horse in the glue factory. You really can't say that the dollar is a good choice just because the euro is weak this year. It's not. All fiat currencies have serious problems.

The problems differ to a certain extent, and at any moment in time—depending upon what different central banks are doing or how investor sentiment is moving—you could have relative strength in one or the other. But they're all sinking relative to gold, so when deciding how to hold your liquidity, you have to consider gold bullion as one of the best choices simply because it's done so well against all of the world's major currencies for the past decade.

TGR:  You've said many times that anyone who gets into precious metals needs to know why. You've suggested it's either exposure to the  Silver  and gold prices—in which case people can opt for instruments such as exchange-traded funds—or elimination of counterparty risk, which means they need tangible assets. Most of the rationale for people getting into precious metals these days is the insurance factor. Does protection against currency devaluation fall into either of those two categories?

JT:  It falls into the tangible asset category. If you're holding gold or silver for insurance, you're holding bedrock assets with thousands of years of history. Come what may, they're going to have value in the future.

TGR:  The typical advice for people holding gold as insurance is to have 10% of your assets in gold. Maybe now that things are so volatile, 20% would be a better idea. But you're even more aggressive on that.

JT:  I am, but everybody has unique circumstances, so it's hard to make sweeping generalizations. My basic view, though, is the older you are the more conservative you should be and, therefore, the more gold you should own. As a rule of thumb, use your age as a guide. If you're 20, you may want 20% of your portfolio in gold and the rest in higher risk assets because you still have time to generate wealth as you get older. But once you're older, you want to be conservative, and the way to be conservative in this environment is to own physical bullion. If you're 60, you should have 60% of your portfolio in gold.

TGR:  People look at gold now and see the wonderful returns—17% annually on average, in the U.S. alone. What about an investor who says, " Hey, I'm just going to invest in gold because it will give me a better return than equities" ? Is that a bad way to look at it?

JT:  No, but understand that gold doesn't create wealth. It doesn't have cash flow, it doesn't have a management team and it doesn't have a price/earnings ratio. It's just a sterile, tangible asset. Gold doesn't even really generate a return. When you talk about returns in gold, you're actually talking about the lost purchasing power of the dollar. An ounce of  Gold  today buys the same amount of  Crude Oil  it did 60 years ago. It didn't increase your wealth. It basically just preserved your purchasing power over that period of time.

Even when the gold price rises, even at 17.7%/year on average over the last 11 years against the U.S. dollar, it's not creating wealth. It's taking wealth that already exists and is being held by people who own fiat currencies. That wealth is being moved from them to people who own gold. But gold is not a wealth-generating asset. It doesn't grow anything.

TGR:  A lot of vehicles that people put in their portfolios mimic stock indices, which also don't create wealth, but they do create returns.

JT:  If they mimic stock indices, they create wealth. Ultimately, if the shares themselves go up, what mimics those shares goes up. If the stock in these indices goes up, the wealth in the world expands because it generates cash flow. A company generates some goods or services that benefit people, and people are willing to use their hard-earned cash to buy those goods or services. Ultimately, the firm grows and, as a consequence, creates wealth.

TGR:  Now that we're talking about stocks, what's the role of gold equities? You said that people should use their age when they think about what percentage of their portfolio should be in gold. Let's say someone is 50. Would that 50% be in physical gold, or could it also include gold equities?

JT:  Gold equities are different than gold. Gold equities are investments. Gold bullion is money. A portfolio has two components. The investment component focuses on risk versus return. The monetary component provides liquidity. When you sell an investment, you have liquidity, whether gold, a national currency or some mix. You hold that liquidity until you're ready to use some of it to make your next investment or to buy goods or services.

But, mining stocks are fundamentally different than gold. A company you invest in has a balance sheet. It has a management team. Acts of God can destroy a mine. There are political risks and other considerations involved in owning mining stocks. Of course, that's also how you actually create wealth—if you choose the right stock, you get a return. It's also true that these stocks have exposure to the gold price in the sense that if the gold price goes up, the mining stocks probably will go up also. But even then, there's no guarantee that the mining stocks will go up.

And remember, gold mining stocks are investments. Gold is money. Do you want liquidity or do you want an investment?

TGR:  For those who want an investment, how do you feel about the gold equities? They do carry the additional risks you outlined but not so much the counterparty risk.

JT:  I happen to be bullish on mining stocks because I think their bear market ended a few years ago. We're just now retesting lows that had been made previously, and with the rise in gold and  Silver  I expect this year, I think we'll see the mining stocks go up as well.

In fact, if you choose the right mining stock and the gold price increases, the mining stock should rise by a higher percentage than gold itself. This has to do with the fact that a rising gold price improves the bottom line, increases the profit margin and ultimately results in a higher price/earnings ratio because the market senses that this is a major bull market, and the earnings and cash flow generated willLead  the company to possibly increase dividends or something like that down the road.

As I indicated at the start of our conversation, though, an interesting thing about markets is that nothing works all the time. So while generally speaking, mining stocks rise by a higher percentage in a rising gold price environment, it doesn't always work that way. For the last 10 years, gold has done very well, but the mining stocks have basically gone nowhere.

TGR:  One of the themes of the Vancouver Resource Investment Conference seemed to be that gold stocks are a really good deal for that very reason, and that they're on sale at bargain prices right now.

JT:  I agree completely.

TGR:  You're also bullish on silver and apparently expect the silver/gold ratio to return to historic levels.

JT:  I am very bullish on silver, but not because of that ratio. The ratio is basically just the outward measure used to show how silver is undervalued relative to gold. The underlying fundamentals suggest to me that the silver price is very cheap relative to how I sense the supply and demand characteristics.

TGR:  We have minimal economic growth in Europe and the U.S., if any, and everyone seems to agree that China's growth is slowing. With the world economy in slow motion, and silver being an industrial metal, what makes you so bullish on this commodity? What underlying fundamentals will drive the silver price up?

JT:  It's a good substitute for gold. Fifty-one ounces of silver do the same thing as one ounce of gold. Silver is a monetary asset that preserves and protects purchasing power. It's the combination of the monetary and industrial demands that creates so much volatility in silver relative to gold. With gold, you have only the monetary demand. Economists call that demand inelastic, because people want to own gold regardless of the price. With silver, the demand is very elastic, meaning it's very sensitive to changes in price.

TGR:  If people want both metals in their portfolio, what kind of balance do you recommend?

JT:  Two-thirds gold and one-third silver.

TGR:  You've suggested that silver prices are going to rise faster than gold. Should that carry over to silver equities? Do you expect them to outperform gold equities?

JT:  Yes, I do. Again, it's difficult to make a sweeping generalization, but the odds are that silver stocks will do better than gold stocks in the foreseeable future.

TGR:  You've covered some of the same points here that you made in your presentation at the Vancouver Resource Investment Conference. What would you consider the key takeaways from that presentation?

JT:  First of all, I hope people understand more clearly that gold is money, and that they view it from that perspective in order to properly assess whether it makes sense in their portfolios. Secondly, I hope people realize that despite the fact that the gold price has risen, it's important to distinguish between price and value—they're different things. 

The gold price has risen because the dollar is being debased, but gold remains very undervalued and it's well worth it for you to continue to accumulate it. Work it into your family budget, and every month or two, buy more gold—and silver, if you're so inclined. That leads to the third point. Don't try to trade gold save it. When you're doing that, you're saving sound money, and that's a good thing.

TGR:  When you started GoldMoney, you talked about a vision that at some point people would use GoldMoney units as currency to trade for services—a bit like using PayPal or an online bank but using your digital gold currency (DGC) instead. Do you still see that coming?

JT:  Yes, it seems inevitable to me. In fact we've used the DGC payment feature, but recently stopped for a variety of reasons. It had not been used very actively anyway because of Gresham's law—that bad money drives out good. In today's world, people would rather spend fiat currency as a form of payment and save their gold and silver. That's a good thing, for now, but that will change as fiat currency itself becomes less trusted and ultimately collapses.



Courtesy:  Theaureport 

Junior gold stocks extremely undervalued - Ratio analysis

Gold: The target is between $2,750 to $3,000 by June 2013

Which commodities are most vulnerable to a recession

NEW YORK :  A Barclays Capital research notes that  Goldprices are vulnerable to a recession - more so than some of the other commodities. In the last recession of 2008, gold prices appreciated the least among precious metals.

This time however, gold prices have not considerably softened before an impending recession - as it did in 2008.

Of all commodities, gold is placed as the eighth most vulnerable in a recession, according to the BarCap study, which took into account inventory levels, correlation to emerging markets and their performance in the crisis of 2008.

Gold's strong performance in previous economic downturns is a positive, but not enough to offset these other negatives. It is important to note, however, that gold's high ranking is also a function of fundamental factors such as costs and emerging market exposure, which are arguably less important in influencing  Gold  prices than they are for other commodities.

In addition, gold-supportive factors that are less important for other commodities, such as being a hedge of economic and financial uncertainty, have not been taken into account in the BarCap research.

" Therefore, the implication of gold's high ranking needs to be hedged somewhat. Nevertheless, it does suggest that if the financial factors that have supported physical investment buying were to fade, then gold prices could start to look very precarious indeed."


  Source:  zawya 

Gold to climb to $1915/oz in 2012: Dennis Gartman

NEW YORK (Commodity Online):  Dennis Gartman expects  Gold  to climb to $1915 per ounce in 2012. That’s the level at which he’d take profits.

Gartman is the author of the widely read The Gartman Letter and an esteemed commodities strategist, said in an interview with CNBC he is getting very bullish on gold.


And after parsing through the recent Fed statement and ECB commentary he is confident that, “Central banks of the world are committed to easier monetary policy and injecting reserves into the system. That should drive  Gold  higher. Given the problems don't seem to get resolved, I think gold has a lot of upside."  

What made Gold break out?

By Julian D. W. Phillips
Last week,  Gold  broke through heavy overhead resistance, as did silver, to look very positive for the days ahead. Many technical analysts didn't feel that gold had that kind of momentum but then came the break. It wasn't a struggling break it was robust sweeping resistance aside as though it wasn't even there.

Fed's Announcement Last Week

You're probably saying now that it was the announcement from the Fed that interest rates would be held at current levels for another year more, through to the end of 2014. The superficial assumption is that this means that the dollar will earn nothing, so risk assets should outperform dollar deposits. That's true, but a great deal more was implied in their statement (as we detailed in the latest issues of the Gold Forecaster &   Silver  Forecaster). The Fed pointed to long rates rising to above 4% over time, while inflation remained at 2% -and could fall further. Why?

If long-term rates are going to rise while inflation is dropping and short-term rates are flat, it's more than likely that there will be a robust recovery. In those conditions it is more than likely that it is the dollar that will become suspect with dollar investors moving out of Treasuries. This could cause long-term rates to rise as they sell. The dollar would suffer in the process. What's of considerable importance is that a rise in long-term rates means that the Treasury markets will fall to reflect interest rate rises. Currently, long-term bonds are at very high prices, so a fall could prove particularly harmful to those markets as well as the broad economy -including housing at a time when that will hurt that struggling market even more.

It is difficult not to see a sad picture for both the dollar and other facets of the developed world economies going forward, despite the noble efforts of the Fed.

What Made Gold, Silver Rise Beyond the Announcement

Investors who are aware that the U.S. gold market is not the hub of the gold market, must be asking why did the price jump in U.S. time? The sophisticated nature of the developed world market allows the U.S. trading markets to act like the waves on the sea shore and move prices quickly and dramatically. It takes the 24-hour market to smooth out the moves to reflect the true demand and supply picture. That's why London pulled back the  Gold  price on Monday this week. But the jump of $65 after the announcement reflected short covering and new long positions being established in those markets. The jump through $1,700 has been held in position and looks like staying there now.

The gold market did feel that Chinese buying would stop when the Lunar New Year holiday started there, but this was not the case. Buying jumped heavily in China. The picture coming is that gold sales in the retail sector are more than 50% higher than last year confirming the tidal nature of this essentially one-way market. Now combine this with a stronger Indian Rupee, which has resuscitated Indian demand, and Asia demand greatly contributed to the leap in gold and  Silver  prices.

What's also frequently overlooked is that both Chinese and Indian demand is oblivious to the trials and tribulations of the U.S. dollar. The Chinese see Yuan prices, Yuan inflation and the excellent performance of the gold price over the last few years in the Yuan, which Asia now firmly believes will continue on into the future. They're investing in a safe, proven investment, which is doing what savings should do. Deposits at banks are not. Stock Exchanges are too volatile and take too much knowledge for the unsophisticated Asian investor. And why should they go to all that trouble when they don't have to. Gold is doing the job they want, so why look elsewhere?

In the developed world where the Technical picture exerts such an influence, many investors are still sitting open-mouthed at the ease with which the gold price brushed aside resistance, which is now support. The Technical picture has become very positive. Of itself this will influence developed world investors contemplating precious metal. On the broad front, the developed world will not supplements global demand and selling will retreat. With demand and supply being as it is, this change of attitude could have a disproportionate effect. So we ask, " here will the gold price move to now?"



Source:  Gold Forecaster 

Gold and silver are underpriced, will gain massively in 2012

The Gold Report (TGR):  When you last spoke with The Gold Report in early March of last year, gold was trading around $1,420/ounce (oz) and silver was around $36/oz. Silver peaked about $49/oz in late April and then gold hit around $1,900/oz in September. Now we're back up above $1,700/oz on gold and about $33/oz on silver. Where do you see these prices going this year, after it appears that they have likely bottomed out?

Matthew Zylstra (MZ):  We're long-term bulls on both metals. Gold has been correcting since September and it looks like it bottomed out around $1,500/oz. We believe the recent decline is a normal pullback in a longer-term uptrend where nothing has really changed to the outlook. We see a perfect environment for the metal—concerns over our currency debasement, negative real interest rates, geopolitical friction, etc. I expect gold will reclaim the 2011 highs and could reach $2,000/oz.

For silver, the picture is less clear. Silver is, in part, an industrial metal accounting for around 50% of demand and less of a currency. Silver peaked at almost $50/oz in April 2011 and the price has been very volatile. We think the move is a correction, again, in a longer uptrend going back to 2003. I expect silver will trade around the mid-$30/oz range this year.

We actually feel  Platinum  has a lot of potential. South Africa, Zimbabwe and Russia account for about 90% of platinum production and there's a scarcity of good platinum metals group (PMG) projects outside those countries. We expect increased investment demand and believe that supply disruptions, as well as resource nationalization concerns, will drive the price higher. We note that Sprott Asset Management has formed a physical platinum and  Palladium  trust, which could boost investment demand.

TGR:  So, what really happened to the platinum market? Historically, platinum traded at a 30–40% premium over gold. Does it have to do with industrial demand or what happened to cause it to trade below gold?

MZ:  The main industrial use for platinum/palladium is automotive catalysts. With fears of a global slowdown, their prices came off. But our view is that supply is not going to be able to meet the demand going forward. And, as you mentioned, platinum has historically traded at a significant premium to gold but the value is now only about 95% of the price of gold.

TGR:  Getting to the actual equities, the gold and silver stocks certainly didn't track the metals prices very well the last year. What's been the problem?

MZ:  Gold stocks have performed poorly compared to the metals. We believe this has to do with investors being leery about another period similar to what occurred in 2008 when credit markets froze. Exploration and development companies, in particular, are sensitive to what's going on in the capital markets since they require capital to continue exploration. Take, for example, Trade Winds Ventures Inc., which was acquired last year by Detour Gold Corp. (DGC:TSX). Shares of Trade Winds traded down to $0.03 in the 2008 crisis. Trade Wind shares were later bought for cash and stock, which at the time amounted to about $0.45 a share. My point is that people are nervous but that creates opportunity especially with what I believe will be a catch-up in equity prices.

TGR:  I hope with metals prices staying up, the credit markets will be a little more optimistic and will loosen up a bit.

MZ:  We certainly don't expect another period like 2008. I think that was an aberration.

TGR:  So, I hope the stocks start picking up here and not continue acting like gold is $800/oz and silver is $15/oz.

MZ:  That is what we expect and the precious metals stocks could really get a boost on QE3 or other stimulus programs.

TGR:  So, what do you think is going to be some sort of catalyst to get people more excited faster? Or is this just going to have to be a gradual progression and we are going to have to wait for $2,000/oz gold and $50/oz silver for people to really get into this market?

MZ:  The disconnect between gold/silver prices and mining company equities has grown considerably. The sector is cheap by historical standards when you consider the price of gold miners' shares relative to the price of gold. The Philadelphia Gold and Silver Index (XAU), which is an index of 16 precious metals and mining companies, is close to the lowest level it has been since the 2008 crisis relative to gold. We expect this ratio to gradually work its way back to the average. If we see gold mining stocks move up to even the low end of their historical range versus gold, it will mean a significant gain for many of these companies.

Increased merger and acquisition (M& A) activity in the sector will get people interested in a lot of these companies. As the price of gold and silver continues to rise, the economics become very compelling, especially for large- and mid-cap companies to acquire smaller players.

More interest in precious metals will help too. With what I see as a developing currency war—a race to devalue—I think more investors are going to turn to precious metals and related equities.

TGR:  It certainly seems like there are a lot of smaller companies out there with some interesting looking projects that may be sitting ducks for being taken over. If they have to keep going back to the market to raise more money and create more dilution, that could be a problem. What's your thinking on that?

MZ:  Small exploration companies are going to continue to need funds to advance their projects, and costs have been increasing. That's a major problem. The need to raise capital isn't going to change but we are seeing alternative ways of financing such as gold and silver streams, alternative debt arrangements and joint ventures, which mean less dilution.

TGR:  A lot of companies that were able to load up with plenty of cash at reasonable prices are obviously happy in this market. Do you think they're going to get pushed to go out and do acquisitions?

MZ:  I think what we're seeing now are mining companies with the ability to acquire languishing juniors taking advantage of the environment. The seniors and intermediates, which have filled up their treasuries with robust gold and silver prices, certainly have the ability to do the same. At the end of the year we saw companies like Agnico-Eagle Mines Ltd. (AEM:TSX AEM:NYSE) acquiring Grayd Resource Corp, AuRico Gold Inc. (AUQ:TSX AUQ:NYSE) acquiring Northgate Minerals, and New Gold Inc. (NGD:TSX NGD:NYSE.A) acquiring Richfield Ventures Corp. and Silver Quest Resources Ltd. We see this trend intensifying, especially if mining company valuations don't keep pace with rising metals prices.

TGR:  That brings us to a little follow-up on some of the companies that you talked about last time. A couple of the junior producers you talked about were Barkerville  Gold  Mines Ltd. (BGM:TSX.V) and Orvana Minerals Corp. (ORV:TSX). Can you tell us what's going on with them?

MZ:  The market has been disappointed with production from both companies. Barkerville recently got a boost after receiving a permit for its Bonanza Ledge property, which is a high-grade open-pittable gold resource. The delay in getting that permit meant that production was not what we had originally expected. Updated resource calculations for the company's Bonanza Ledge, Cariboo Quartz and B.C. vein zone in the first half of 2012 could be a positive there.

Orvana has two properties that were both put into production in 2011. In Spain, the company's El Valle-Boinás/Carlés is an operating gold mine, which is not seeing the head grade we had expected. Grades are slowly increasing from around 2 grams per tonne (g/t) to an expected 3.5 g/t. Its other project in Bolivia, the Don Mario mine, has a different problem. It's an open-pit, copper-gold mine where recoveries have been less than expected—around 50% versus 70–80% for copper. We look for recoveries to improve and think a lot of the bad news has been priced into the shares. We're also encouraged by the fact that Bill Williams has now taken the helm of the company. Bill has exceptional operational technical expertise.

TGR:  So you feel both of those are reasonable values at this point?

MZ:  On Barkerville we're taking a wait-and-see approach and have the stock rated as a hold. On Orvana we believe the negative news has been priced into the shares and valuation looks compelling.

TGR:  So, how about some of the near-term producers that you follow, such as Canadian  ZincCorporation (CZN:TSX CZICF:OTCBB)?

MZ:  Canadian Zinc is a situation where the valuation has not kept up with the project. The company recently passed the major hurdle for environmental approval of its Prairie Creek mine. It's a really interesting story—an old Hunt Brothers mine that could be in production in 2014 or maybe even as early as 2013. For readers who don't know the history of the Prairie Creek mine, it is in the Northwest Territories and was just a few months away from going into production when  Silver  prices collapsed in the early 1980s and the Hunt Brothers went bankrupt. It's a high-grade silver-lead-zinc mine with much of the infrastructure in place that we think has a lot of potential. We actually believe this is an ideal time to own shares of the company since fundamentals have improved and the share price has drifted lower with the sector.

TGR:  So that's another one to watch closely and this may be a good time to be picking some up. What about some of the other junior explorers that you like and have talked about in the past?

MZ:  For very near-term production I have followed but do not cover Armistice Resources Corp. (AZ:TSX). The company expects to produce 25,000 oz gold in 2012. At around $0.22/share, which is about 50% less than last year, valuation looks interesting. Two that I cover, which are exploration stories, are NioGold Mining Corp. (NOX:TSX.V NOXGF:OTCPK) and Prophecy  Platinum  Corp. (NKL:TSX.V PNIKD:OTCPK P94P:FSE). NioGold continues to drill at its Marban project in Val-d'Or, Québec. This is a joint venture with Aurizon Mines Ltd. (ARZ:TSX AZK:NYSE.A) where Aurizon is funding $20 million for exploration. We think the resource could grow fairly significantly from the current 960,000 oz to 1.4–1.5 million ounces (Moz). We actually think Marban could give Aurizon's other project, Joanna, some competition. I think the valuation looks fairly attractive here, trading at about 60% lower than our calculated net asset value.

We're also excited about the potential of Prophecy Platinum. Prophecy has the Wellgreen deposit in the Yukon, which contains 12 Moz of combined PGMs and gold plus 2.4 billion pounds (Blb) of  Nickeland 2.2 Blb of copper. The in-situ value is around $50 billion and we think a preliminary economic assessment due out in Q112 will show some strong economics for an optimized open-pit. The company is carrying out other work to derisk the project, including metallurgical studies and additional infill drilling for which we'll start seeing results early this year.

TGR:  So, that one is well priced at this point and a buy as far as you're concerned.

MZ:  Absolutely. The price drifted down after the excitement over the updated resource estimate, but it's come down to a level where we think it offers very good value. We have a $6.40 target price.

TGR:  So then, let's look at some silver juniors. One that you follow is Cream Minerals Ltd. (CMA:TSX.V CRMXF:OTCBB DFL:FSE). What's going on with that one?

MZ:  Cream is a company I cover and which I visited late last year. It's an exploration company with a 41 Moz silver deposit called Nuevo Milenio. It also has about 300,000 oz gold. We believe the company has the potential to really expand the current resource. Cream completed about 20,000 meters (m) of drilling in 2011 and we expect an updated resource out late Q112. This should actually upgrade a fair amount of the Inferred resource to Indicated and could add about 30% to that resource. We also see it doing another round of drilling of 20,000–30,000m in 2012, which we think has the potential to more than double the current resource.

TGR:  That sounds promising.

MZ:  Another one I don't cover but I think is very interesting is Oremex Silver Inc. (OAG:TSX.V OARGF:OTCBB OSI:FSE). This is a small-cap silver exploration company with assets in Mexico. The company recently moved up on good initial results on its Chalchihuites project. The project is in the same area as First Majestic Silver Corp.'s (FR:TSX AG:NYSE FMV:FSE) Del Toro project, and we understand First Majestic is aggressively acquiring property in the area. The company's flagship property, Tejamen, has a defined 51 Moz silver deposit. We think the president and CEO is also a real asset for a company with a market cap of around $20M. He's been manager of exploration and development for Barrick Gold Corp. (ABX:TSX ABX:NYSE) in South America.

TGR:  So, are you expecting that 2012 is going to be the year that mining stock investors finally wake up and smell the gold and realize it's time to get into this market?

MZ:  I think this is the year! Investors have been cautious and focusing just on the downside, holding their money in cash. I think investors should be opportunistic and look for well-run companies with strong management and great assets.

TGR:  Well, we're certainly hoping for that also. We appreciate your joining us today and look forward to talking with you again.

MZ:  Thank you and I appreciate the opportunity.

Source:  theaureport

Silver and Gold: Winning 2012 asset return race with 11 months left