Going For The Gold

On December 18, I told you about three small-cap mining companies I was getting ready to recommend the following Tuesday:

1. A small-cap gold mine,

2. A company that drills for gold miners, and

3. A copper miner that pulls up good quantities of gold and silver as an extra bonus.

So this morning, with one week behind us, let me give you a follow-up on how we’re doing …

I sought to time the reco for a day when we figured gold would be sliding, and fortunately, that’s precisely what happened.

Equally fortunate is the fact that gold has since bounced higher off of firm support it has in the chart.

I also like the pattern in a couple of the technical indicators we use – the stochastic index (shown in the lower chart) and the relative strength index or RSI (not shown in the chart).

There’s nothing unique about the stochastic index – it’s widely used by many traders. And like any statistical formula, it’s hardly foolproof.

But it does help me time the next up move in the market, especially when the index falls below the 20% level, stabilizes, and starts turning back up.

That’s exactly what it did last week, helping to signal a possible upturn in gold.

I also saw a very similar pattern on November 7, which, as you may recall, was the starting point for an $81 surge in the price of gold.

No guarantees it will do the same now. Indeed, gold could consolidate some more at this level here before zooming higher. But I’m not worried either way.

Reason: All three stocks I recommended were already bargains anyway, so I think their downside is limited.

One of them – the gold driller – turned out to be more of a bargain than I originally figured. Subscribers to my Red-Hot Canadian Small-Caps will find out what I mean when they read my interview with the president of the drilling company in this week’s upcoming issue.

Among the three companies, two are already showing open gains, and the one laggard, the copper stock, is probably just waiting for copper to finish its consolidation.

Did you know that, despite the fact that copper is at all-time highs, there are still more copper mines shutting down than opening up? Why? Because of the sheer exhaustion of the copper reserves!

To me, that sounds pretty bullish for the remaining copper mines that can continue to produce efficiently.

Meanwhile …

Powerful Fundamental Forces
Continue to Push Gold Higher

I’ve already talked a lot about the supply-demand squeeze that should push gold to $600 an ounce by the fourth quarter of 2006. I’ll summarize it with a chart, because a picture is worth a thousand words …

Global supplies of gold are falling off a cliff.

Meanwhile global demand, even in the most bearish of forecasts, is going to greatly exceed supplies.

Looking ahead to the next two years (not shown on the chart), the forecast is for supplies to, at best, stay flat in 2006 and suffer a decline in 2007.

As for demand? Well, keep reading …

China and India Are
Liberalizing Gold Laws

The reopening of China’s gold market to investment after 50 years of Communist suppression is one of the great forces driving gold today.

So, it comes as good news that China is planning to loosen its import/export laws on gold. Since China already consumes more gold than it produces, this couldn’t be more bullish for gold, in my view.

Right now, only nine companies are allowed to trade gold in China. But the People’s Bank of China has recently published a draft of new rules which would allow any company with more than $3.6 million in capital to start a gold trading firm.

Meanwhile, in India, the Forward Markets Commission (FMC) said it would allow both foreign institutional investors and mutual funds to begin trading bullion futures at national commodity exchanges.

Both India and China want to compete with the New York and London markets in setting the price of gold.

My opinion: These new players in the game will help gather up more investors in Asia, funneling their money into the world markets and boosting the demand for gold globally. It’s as simple as that.

Many Gold Bears
Still at The Party

Gold bears are like obnoxious guys who keep buying drinks at a bar.

No one likes ’em, but we need them to keep the party going. The fact is, if everyone is already bullish, it implies that they’ve already loaded up with as much gold as they’re willing to buy at this juncture.

But if there are still some gold bears at the bar, it means that many investors are still on the sidelines – a reserve of future gold buying that has yet to come into the market.

So to me, the fact that we’re seeing plenty of gold bearishness right now is actually a very good sign.

The bears were hoo-hooing triumphantly at gold’s recent tumble, with everyone from Merrill Lynch to the Washington Post lining up to say gold is overvalued … gold doesn’t have a fundamental leg to stand on … blah, blah, blah.

Let’s hope the bears stick to their convictions for another month or two. The longer they stay wrong, the more they’ll have to buy in order to jump onto the right side of the market.

Besides, a lot of smart money is already on the move into gold shares, as Martin explained yesterday.

China and India Keep
Growing at 9% and 7%

Not only has China consistently thumbed its nose at doomsayers who periodically predict its economy is about to collapse … its economy actually turns out to be bigger than anyone thought.

An updated census shows China’s economy is worth about $2 trillion, around $250 billion more than had been previously reported.

And still, it continues to grow at breakneck speeds of about 9% per annum. That already makes it larger than Italy, one of the world’s largest industrial economies.

And if it continues at this pace, by the end of 2006, it should muscle ahead of Britain as the world’s fourth biggest global economy.

Meanwhile, India is no slouch. Its economy grew at 8% this quarter, much better than forecasts of 7.4%.

What about next year? It’s expected to grow by at least 7%. That’s double our growth rate, and four times faster than the large European economies.

It’s not all just IT-call centers, either. India’s manufacturing sector grew at 9.2% in the quarter.

By the way, did you know that even though investors poured more than $10 billion dollars into Indian stocks in the last year, less than 5% of Indian companies are listed on Indian stock exchanges?

Man oh man, that economy has a long, long way to grow!

And don’t forget, both India and China have a strong cultural affinity for silver and gold.

The bigger their economies grow, and the richer their people get, the more silver and gold they’re going to buy. There are literally hundreds of millions of people joining the consumer class, and they are going to want a lot of everything, precious metals included.

Merger Mania
Is Heating Up

In recent updates, I’ve talked about how merger mania in the gold fields is kicking into overdrive. Now we have still stronger evidence that we’re going to see a lot more mergers going forward.

Reason: Big companies are willing to pay nearly anything for resources in the ground.

Case in point: Remember that on-again-off-again romance between Barrick Gold and Placer Dome?

First Barrick Gold bid $9.2 billion for Placer. Then Placer said the offer was too low.

Well, they finally sealed the deal last week – at a price of $10.4 BILLION. That’s a 44% premium over the price Placer Dome’s stock was trading at when Barrick made its original offer just two months ago.

Why is Barrick willing to pay so much? Because gold is getting harder and harder to find … because exploration costs are soaring … because it will take years to develop new resources even when they are found … and because the gaping hole in gold’s supply and demand isn’t tomorrow or next year. It’s staring us in the face right now!

Think about that for a moment: If Barrick is willing to pay such a high premium for a fully valued big-cap miner, what kind of premium can we expect in the small-cap arena, where many of the companies are trading at pennies on the dollar?

I think the potential for bonanza-size payouts is now greater than ever.

For example, one of the stocks I recommended last week is sitting on a new gold mine that should come into production in the fourth quarter of 2006. That makes it a prime target for a buyout.

And even if I’m wrong, that just means it’s likely to make money another way – mining the gold itself as the price of gold continues to surge.

I have little doubt gold is going much higher, and I think the next move could come so fast it could take your breath away.

Our Recommendations

I’m glad to see Royal Gold is surging despite the pullback in gold bullion, as Martin showed you yesterday.

But that was just one example. Also outperforming are sector champs including Goldcorp and Newmont Mining.

I’m glad to see precious metals mutual funds doing so well. Two examples:

US Global Investors World Precious Minerals Fund (UNWPX). Its holdings include Goldcorp, Northern Orion Resources, Bolivar Gold and more. It has a total expense ratio of just 1.43% – lower than the industry average – and has returned 16.3% this year.
U.S. Global Investors Gold Shares Fund (USERX). It has an expense ratio of 1.97%, higher than the industry average. But the extra expense might be worth it, because it has returned 17.6% this year. Up to 10% of the fund’s assets may be invested in gold or gold bullion.

Plus, I’m especially glad my subscribers are nicely positioned to ride the wave, and I’ll use any weakness to recommend they add to positions.

If you want to join me now, it’s not too late. (See my latest report on the three mining companies for details).

You may not get the rock-bottom prices we saw last week when gold was tumbling. But you’re only talking a week’s difference. And I think the big action is going to come as we kick off the new year.

Best wishes for a great 2006!

Sean Brodrick
Editor, Red-Hot Canadian Small-Caps

About MONEY AND MARKETS

MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Beth Cain, Christine Johnston, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.

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