Did you see the bids for Andean Resources (ANDPF.PK, TSX:AND) announced yesterday and today, almost within minutes of each other? First Eldorado Gold (EGO, TSX:ELD), which had been circling and watching its prey for over a year comes out with an announcement of a merger proposal valuing Andean at $3.2 billion. The offer was a whopping 62% premium to Andean’s closing price of $4.79 Cdn. Then in the early morning hours, Gold Corp (GG, TSX:G) announces a buyout of $3.4 Billion USD, that had the approval of Andean’s board. What is going on here? The frantic nature of these proposed deals make it seem like there is a dire rush to buy emerging gold properties

Buy or Die

Gold Corp is the world’s second largest gold producer by market capitalization. Gold Corp produced 2.4 million ounces in fiscal year 2009. That means these gold ounces that are produced are gone now from their reserves and they have to be replaced in order to keep the pipeline of future production coming. The author explained the credo of “Buy or Die” in a previous article about large miners needing to purchase more production ounces here as it is just not feasible to be able to replace reserve ounces by exploration.

The Magic of Accretion

Gold Corp’s last acquisition was their January 2010 friendly takeover of Canplats which owned 1.7 million ounces of gold reserves. In that purchase, Gold Corp fought off Penmont of Mexico, and ended up paying $175 per gold reserve ounce, up from the $133 in the original offer.

Gold Corp’s share price is about $44 and with 735 million shares outstanding their market capitalization is about $32 billion USD. Gold Corp lists reserves of 48 million ounces and resources of 41 million ounces. Simply put, reserve ounces are more confident estimates that are engineered to be mineable, whereas resources are just ore ounces in place. So just considering reserves, Gold Corp is valued at $670USD per reserve ounce. With the magic of accretion, Gold Corp had just purchased Canplats gold reserves for $175 per ounce, and now in Gold Corp’s pocket the gold reserves were worth almost four times more.

Cost per Gold Ounce

Andean’s main project is their high grade, of 6 to 14 g/ton of gold equivalent, vein deposit of Cerro Negro in Argentina. Andean’s March 2010 NI 43-101 compliant resource for Cerro Negro was 3.1 million ounces of gold and 25 million ounces of silver. Andean only has reserves of 2.1 million ounces of gold from their feasibility study.

With the Gold Corp offer of $3.4 billion USD, this values Andean at an absolutely out of this world $1,619 per gold reserve ounce. Granted the feasibility study is predicting a cash cost of $60 per ounce due to the silver credits. However, does it make sense to pay such a world-beating price for just ore in the ground without any mine or production yet? Does Gold Corp know something else about the valuation of Andean Resources that the rest of the world does not?

Contrast the $175 per reserve ounce paid in the acquisition of Canplats to the $1,619 now offered for Andean. In the Canplats deal, Gold Corp had their Penasquito mine that was only 31 miles away. This offer for Andean is a quantum leap of almost ten times the dollar value per reserve ounce!

Gold Corp is now attempting to do the opposite of what large miners are supposed to do, buying smaller exploration companies and with the magic of accretion instantly re-valuing the reserves at the larger miner’s higher price per reserve ounce. How does buying gold reserve ounces at $1,619 help with adding value to the company?

Perhaps it is the nature in the world of Gold that surprising events come to the fore. Is this Andean deal indicative of the rising costs of future Gold deals?

Summary

In acquisitions, investors typically bid down the acquirer’s stock price until they can fully digest the financial details and possible impacts of the acquisition. This was the case this morning with Gold Corp as the shares were moving downwards by 3.5%. In the author’s opinion, the price paid for Andean Resources was too high and will work to put a cap on Gold Corp share prices going forward.

Disclosure: No position in the stocks discussed. Long Junior miners.

August and the summer are now over and investors and savers are now focusing on the autumnal months ahead. Stocks internationally had their worst August performance since 2001 and the ISEQ fell 7.2% in the month. Mounting concerns about the health of the economic recovery in Ireland, the US and internationally saw investors move into government bonds and gold. Some respite came due to the falling price of oil – oil was down 8.9%, its first monthly decline since May.

The Dow Jones Industrial Average ended the month 4.3% lower, while the S&P 500 was down 4.7%. The weak performance of equity markets was mirrored across the world’s major financial centres, with the Nikkei 225 down 7.5% and Germany’s Dax down 5.8%. Mining stocks on the FTSE helped it to only fall 0.6% in the month. With the S&P 500 index down 5.9% for the year and September being historically the worst month for stocks, traders are bracing for a continued downward bias.

Gold was up 5.6% in August thereby regaining the 5% losses seen in July. Importantly, from a technical perspective gold recorded a record (nominal) monthly high close (see chart below) which should see momentum traders continue “to make the trend their friend”. This could result in June’s record high being breached again, possibly as soon as in September. Especially as safe haven demand for bullion internationally remains robust and Indian festival seasonal demand looks set to be healthy.

Gold – 30 days (Tick). Click on image to view full size

Gold is only a few dollars below the record daily high close ($1,258/oz) and record inter day high now ($1,265/oz) but it is important to remember that these record highs are nominal highs and gold remains nearly half the more important record inflation adjusted high of $2,400/oz. Gold is now up 14% so far in 2010 and looks set to have the 10th year of gradual appreciation (some 16% per annum in dollar terms).

The ECB keeping rates at a record low of 1% and zero interest policies in the US and in most western economies remains bullish for gold as the opportunity cost, the lack of yield, of owning gold is negligible, especially with inflation having picked up recently in many economies internationally. Further signs of burgeoning food inflation were seen in the surge in the price of global meat prices which have risen to 20 year highs.

Gold in USD – 5 Year (Monthly). Click on image to view full size

September can be the ‘cruelest month’ for stocks. Conversely, more years than not, precious metals prices perform well in September and many analysts reckon this year will not disappoint those owning gold. Given the uncertain financial and economic outlook, it is important that investors remain diversified with allocations to cash, short dated government bonds, international equities, and gold.

Disclosure: No positions

by Brad Zigler

Real-time Monetary Inflation (last 12 months): -2.1%

This week, gold turned in another mixed performance against the world’s reserve currencies. In addition to its appreciation against the U.S. dollar, bullion gained 0.3 percent against the yen and 0.6 percent vs. sterling. Gold gave up 0.5 percent to the euro and 0.9 percent to the Swiss franc.

For the week ending Thursday, here’s how gold and other U.S. dollar indicators fared:

• London morning gold fixings averaged $1,240 and finished 0.6 percent higher at $1,248; Thursday’s COMEX spot settlement of $1,252 capped the week 1.3 percent higher after averaging $1,244; average daily volume fell 8.4 percent to 92,116 contracts; open interest rose by 13,336 contracts to 579,164 as gold found bidders and relied less on currency weakness to bolster prices; COMEX inventories fell by another 1.9 tonnes (60,228 ounces) this week, leaving 10.821 million ounces to cover 18.7 percent of open interest.

• London gold lease rates eased further, falling 2 basis points (0.02 percent) for three-month contracts and 4 bps for a year’s commitment.

• SPDR Gold Shares Trust (NYSE Arca: GLD) assets teetered this week, rising first then falling by a net 3.0 tonnes (97,738 ounces) to 1,294.9 tonnes.

• Junior mining stocks took the lead this week; the value of the Market Vectors Junior Gold Miners ETF (NYSE Arca: GDXJ) was pushed 4.4 percent higher, while producers comprising the Market Vectors Gold Miners ETF (NYSE Arca: GDX) edged up 1.6 percent; the GDX/GDXJ multiple fell to 1.70x, reflecting investors’ increased appetite for risk; with a 4.1 percent gain for the S&P 500 Composite Index, the blue-chip benchmark’s correlation to senior mining stocks slumped 26 points to 18 percent; bullion’s correlation to the S&P 500 dropped to -9 percent on 5 percentage point dip.

• WTI crude oil prices rose 2.3 percent to $77.02 a barrel, taking the gold/oil multiple to 16.7x.

• Bank lending tightened as a 3 bps easing in three-month Treasury bill yields was matched with only a 1 bp downtick in Libor; as a result, the TED spread—reflecting counterparty risk—was hiked up to 0.17 percent.

• The COMEX gold futures curve pointed to cheaper money as embedded finance rates slipped under one-year Treasurys by 31 bps; for the week, the one-year gold contango ticked up 10 cents an ounce.

• Long bond yields climbed 19 bps to 3.53 percent, steepening the Treasury yield curve to 360 bps.

• The euro gained 1.0 percent against the U.S. dollar to finish at $1.2781; cross rates averaged $1.2729 this week.

• Monetary inflation (click to enlarge) was fairly stable this week with the average year-over-year rate at -2.3 percent; at today’s rate, the real return on three-month Treasury bills retreats to 2.27 percent.

Monetary Inflation

This morning I added PowerShares DB Gold Fund (DGP) to the Barchart Van Meerten New High portfolio purely for technical reasons. The ETF is based on the Deutsche Bank Liquid Commodity Index – Optimum Yield Gold Excess Return and managed by DB Commodity Services LLC. The Index is a rules-based index composed of futures contracts on gold and is intended to reflect the performance of gold. Again this is purely for technical reasons.

The points I considered are:

• 14 new highs in the last 20 trading sessions including 4 of the last 5
• Price appreciation of 11.41% in the last month
• 88% Barchart technical buy signal – 11 of the 13 indicators are a buy
• 14 day Relative Strength Index is 66.68% and rising

Disclosure: No position at the time of publication

Analyst Kevin Grewal is founder, editor and publisher of ETF Tutor, and editor at SmartStops.net and the ETF Institute. Previously, he worked as an analyst at a small hedge fund.

Which single asset class are you most bullish (or bearish) about in the coming year? What ETF position would you choose to best capture that?

Overall, in the coming year, most asset classes appear to be rather bearish; however, precious metals appears to be one of the exceptions. More specifically, of the precious metals, I think that silver has positioned itself well, and for this reason am long the iShares Silver Trust (SLV).

How does SLV fit into your overall investment approach?

When investing in an ETF, I tend to watch trend lines, in particularly the 50-day and 200-day exponential moving averages. When an ETF is trading above both of these trend lines and the sector or index it is tracking has fundamental attractiveness, such as favorable supply and demand imbalances, I buy.

In addition to this, I implement an analytically based exit strategy which enables me to monitor risk and limit potential losses.

As for the iShares Silver Trust, it is trading above both its 50-day and 200-day exponential moving averages.

Can you tell us a little more about the fundamentals of the asset class, and what makes it your top pick?

As a whole, both macroeconomic and microeconomic forces are favorable for silver. From a macroeconomic perspective, the increases in money supply over the past few years to support the U.S. economy and boost artificial demand are expected to lead to increased prices, making inflation inevitable. Additionally, the U.S. government is running a budget deficit of more than $1 trillion per year and has been borrowing to fund this spending spree. This monetizing of debt is more likely than not to support inflation, which will further lead to a reduction in the purchasing power of money, or dollars.

Microeconomically speaking, there is likely to be an imbalance in supply and demand of silver in the near term, providing positive price support to the precious metal. Demand for silver is expected to significantly increase, driven by its heavy industrial uses, a hedge against macroeconomic forces like inflation, and its relative valuation when compared to its sister metal, gold.

On the industrial forefront, silver has unique properties including strength, sensitivity to light, malleability and ductility, electrical and thermal conductivity, reflectivity and the ability to endure extreme temperature changes. As a result, it is commonly used in the electronics space and can be found in plasma display panels and printed circuit boards, as well as in the lining of refrigerators, for food storage containers, and for water purification. Additionally, the metal can be used in the medical sector as an antimicrobial to fight bacteria and as an antiseptic to treat fungal infections. As economies in the developing parts of the world continue to expand and the purchasing power of individuals in these nations rise, demand for products that utilize silver will likely follow.

Silver’s industrial uses further span to the solar energy industry, as that silver paste is used in 90% of all crystalline silicon photovoltaic cells, which are the most common type of solar cells. Additionally, silver is used in another way to generate electricity by reflecting and concentrating solar energy onto collectors containing salts which are used to run generators. Furthermore, as nations around the world continue to seek cleaner energy standards the demand for solar energy will likely increase. In fact, the demand for solar energy has grown at nearly 30% per year over the past 15 years and is expected to sustain this growth in the near future.

On the supply side, it appears that a shortage in silver is on the horizon. In fact, the total annual world consumption of silver is greater than mine production, and has been for nearly twenty years. As a result, inventories of the metal held by governments have started to dwindle away. Furthermore, a study conducted by the United States Geological Survey indicates that silver is nearly twice as rare as gold in the long term because it’s not recycled at the same rates as gold, and at current consumption rates all of the silver that’s in the Earth’s crust will diminish in the next decade.

Further supply woes could potentially form from the fact that roughly 30-35% of global silver is produced through pure silver mines while the rest is produced through electrolytic copper refining, gold, nickel and zinc refining. As a result, a significant amount of silver cannot be produced without disruption to other mining activities leading to the overproduction in other metals, making silver supply from mining relatively inelastic and insensitive to price changes.

The last force that is boosting appeal of silver is its relative value, in historical terms, as compared to gold. Silver is cheap compared to gold. The current gold:silver ratio is about 65:1, significantly higher than the long-term ratio of 16:1, indicating that silver has tremendous upside potential.

As for inflation, historically speaking, gold has been the “go-to” precious metal when it comes to a long-term hedge against rising prices; however, silver provides a similar protection mechanism enabling investors to safeguard their wealth in addition to the flexibility and multiple uses that it carries, making it a top choice.

Are there alternative ETFs that could be used to capture the same theme? What makes SLV your first choice?

Other ETFs that could be used to play silver include the PowerShares DB Silver Fund (DBS), the UBS E-TRACS CMCI Silver Total Return ETN (USV) and the ETFS Silver Trust (SIVR). However, I personally like SLV because it holds physical silver bullion and is the most heavily traded of the four investment vehicles, enhancing liquidity. As for DBS, it is a good choice; however, it utilizes futures contracts in silver to gain access to the metal and is susceptible to the effects of contango and backwardation. USV, on the other hand, is an exchange traded note (ETN) and hence is a debt security which carries an additional risk of default by its provider. SIVR is similar to SLV, in that it too holds physical silver bullion, however, it is not as heavily traded as SLV and hence not as liquid.

As for capturing the influences that macroeconomic factors are likely to have on silver, one could turn to gold, like the SPDR Gold Trust (GLD) or the iShares COMEX Gold Trust (IAU) as that will reap the same benefits; however, gold doesn’t have the same microeconomic imbalances that are likely to provide additional positive price support to silver.

Does your view differ from the consensus sentiment on silver?

With so many opinions and investment positions, it is difficult to pinpoint what is contrary opinion these days, however, it seems to appear that a bullish sentiment in precious metals, in particularly gold, has prevailed.

Many investors are fearful that the U.S. economy is heading for a double-dip recession with stubbornly high unemployment rates, a faltering residential real estate sector and federal government spending plans which are failing to result in a sustainable spark in the overall economy. This is causing many to flee to safe-haven asset classes like precious metals.

Additionally, with the massive borrowing by developed nations in the past few years, in particular the U.S. and nations in Europe, the fear of currency debasement – the decline in the value of a nation’s currency – has some turning to precious metals as a form of currency.

What catalysts, near-term or long-term, could move metals significantly?

A re-emergence of a sovereign debt crisis in Europe could move precious metals rather significantly. Recently, Ireland’s debt was downgraded, the euro lost ground to its counterpart currencies, credit-default swaps on the sovereign obligations of the PIIGS nations [Portugal, Ireland, Italy, Greece, Spain] climbed sharply and yields of bonds issued by the PIIGS have jumped significantly. When trends like these prevail in the market, fear is generally enhanced and investors flock to “safety net” asset classes; in particular precious metals like silver and gold.

On the downside, massive deleveraging and fear could take their toll on silver and other precious metals. In the heart of the global financial crisis many were forced to liquidate positions to cover losses, no matter how attractive their positions were. Furthermore, as these positions are sold, prices start falling, causing many investors to become fearful, jumping on the bandwagon and selling, regardless of whether or not fundamentals of the specific sector remain positive.

Some of our other subjects have said the historical relationship between precious metals and the dollar has broken down, and that metals will appreciate even in deflation. What’s your take on that?

To some extent the relationship has been broken, primarily for the reason that some are starting to use precious metals as a type of currency, regardless of deflation or inflation. As for silver, positive price support is likely to be heavily driven by microeconomic forces, therefore will likely appreciate even if deflation prevails.

What could go wrong with your pick?

At the end of the day, the global industrial sector is the main demand driver for silver. The metal has unique characteristics that make it virtually essential; however, if global industrial growth takes a massive hit in the developing world, the demand for silver could potentially follow.

More specifically, the expected increased demand in silver for industrial use is highly dependent on China and its economic growth. If China faces growth headwinds in the near-term future, a negative impact on silver could result.

As for investment demand for silver, as long as fear and volatility in the global markets prevail, demand will remain elevated.

Thanks, Kevin, for sharing your ideas with us.

Disclosure: Long SLV.

Read more Just One ETF interviews »

If you are a fund manager and interested in doing an interview with us on just one stock or ETF position you’d hold, please email Rebecca Barnett.

Every day New York-based investment gurus Jeff Mosseri and Doug Loud make key decisions for their high net-worth clients. Many of those decisions involve strategically positioning investors in small- and micro-cap gold and silver plays. In this exclusive interview with The Gold Report, you will learn some of the names of those plays and how they use Mosseri and Loud as hedges against a failing economy.

The Gold Report: Today, we’re talking with Jeff Mosseri, president of New York-based Greystone Asset Management and a director of Axiom Capital, as well as Doug Loud, who is the executive director of both companies. How do you go about making your clients money?

Jeff Mosseri: We are paid by our clients to invest in small- and micro-cap stocks. We get very close to a company with a unique or very desirable product and that has recently had a problem or a corporate reorganization. We look for that problem to be solved by new management or with a new business plan. Then we look for an exciting growth picture over the next three years to five years, where we can make a lot of money for our clients. That takes us to mining because we believe that with the slow economy, the Fed will continue to print ad nauseam. The result of that will be that the precious metals, and probably all commodities, will benefit as a protection of buying power.

Doug Loud: As a policy, we hedge a great deal; we often take a hedge-based approach to lot of our precious metals investments.

TGR: Given the uncertainty in the economy and volatility in the markets, what advice are you giving your clients?

JM: Basically, we’re expressing caution to our clients. We are as confused as everybody else about where this market is headed. That’s why we hedge, because we really don’t want to be committed to any one particular direction. We believe that the American economy will probably grow between 0% and 2% over the next three–five years. As such, we want our clients to look for very strong growth possibilities, which should be as immune as possible to the gyrations of the economy.

TGR: What did you think earlier this month when the Fed issued 10-Year Notes at 2.73%, which was the lowest yield ever?

JM: In Economics 101, we learned that part of the growth circle was for the money created to get into the hands of both the consumer and the investor. Right now, the money is circulating between the banks and the government. It’s a closed circuit, and the rest of the economy is not benefiting. There is a lot of talk about the banks having all this money on their balance sheets; all they’re doing is shoring up what was a huge hole in their balance sheets. They’re just paying for past sins. As such, why would they lend to you or me when they can lend to the Treasury at 3.5% or 4% when they borrow at close to zero?

TGR: Could you give us your economic forecast through the end of this year and into 2011?

JM: We think that the big run-up in the market from the lows last year was caused by an anticipation of the numbers that we are seeing in today’s economy. We think the fact that the market seems to have topped out and is heading south is basically an indication of where the economy is likely to go over the next several months.

TGR: What in the economy do you fear most?

JM: It’s very simple. Everybody is afraid of uncertainty. Everybody is afraid of high taxes coming next year. Management at all kinds of companies is not making investment decisions in people or equipment because of this fear—of not knowing what their income statements will look like next year. They’re also afraid of what demand will look like because the unemployment figures don’t look particularly exciting either.

DL: You have lots of new regulations and laws coming into effect, but they don’t yet have those regulations, so you don’t even know what their impact will be.

JM: You’ve got 2,000+ pages each, in the new health plan legislation and the financial regulation bill recently passed by Congress. No one in Congress has read them all, and no one actually knows what’s in there and how the regulations will affect them. Not knowing how your company is going to be taxed, or on what, makes hiring very difficult. They have the uncertainty of the extra charges that are going to come for every existing employee and each one they hire. They just don’t know.

DL: You can’t always pass all those costs on. Theoretically, manufacturers will push all the costs on to the consumers; but the consumers don’t have any money, so that may not happen.

JM: That’s why we are protecting ourselves to such a degree. There’s a misconception that gold goes up under inflation and gold goes down in deflation. Gold actually goes down when there are higher interest rates. There are no higher interest rates right now. Gold will do well in inflation or deflation. The only thing it doesn’t like is nothing happening; it goes sideways with nothing happening. But the key to gold, which people forget, is interest rates. With low interest rates, there are no costs of holding something. An old boss of mine once said, “gold is sterile, oil is cash flow.” Well, it doesn’t matter because if you own a producing mine, you’ll have cash flow. Either way, we believe precious metals are the kind of place to hide until things get clearer and you know what you’re doing.

TGR: Specifically, how are you going to protect your clients?

JM: By hedging—using ETFs, options and all kinds of vehicles to hedge them. We have only four places or “pockets” where we put money.

TGR: What are those pockets?

JM: Anything that comes out of the earth, which includes mining, minerals and energy.

TGR: You mean hard assets?

DL: Well, stocks in hard assets. We don’t actually take delivery of the underlying commodities.

TGR: No, but those companies are producing something tangible.

DL: Yes, or explorers, who will.

JM: Exactly. The second pocket is anything that receives government expenditures because we believe that to be a great growth area over the next five years. Third is medical devices and biotechnology, and the fourth is technology. That’s basically where we put the money. We consider those pockets to be protective.

TGR: Let’s talk about gold and precious metals. What sort of clients do you deal with?

JM: I would say mid to high net worth.

TGR: In general, what’s the asset mix for these clients?

JM: Well, we are approximately between 30% and 40% in cash. That’s the first protection we have. Precious metals are a good portion of the rest, probably between 25% and 30% across precious metals, mining and energy. The rest falls into those other three pockets. We are protected against the U.S. dollar because many of the investments we have are outside the USD area. Actually, of the investments we have, I would say 60%–80%, depending on the time, are outside the USD area.

DL: We joke here that, if you buy a Canadian junior and it does nothing, you’re still going to make money.

TGR: Because of the exchange rate?

DL: Absolutely. Next time you see gold or oil screaming upward, ask yourself: Is it up because it actually is worth more or just because the USD is worth less?

JM: We view gold and oil as currencies.

TGR: What are your thoughts on the gold price now and through year-end?

JM: We generally don’t like to give specific prices or targets; but I suspect over the next few months, gold will work its way higher. Seasonally, gold tends to bottom out around this time of year, and then the next movement is up. We also think that the fundamentals are such that, as they continue to print dollars—and they will because they signaled that earlier this month—we think that will benefit gold, silver and any other store of value. It’s buying power that’s the key. That’s what we’re trying to protect. We are not trying to protect anything else. We’re trying to protect buying power.

TGR: Earlier, you mentioned micro caps. A couple of the companies that you’re fond of are Silvermex Resources Ltd. and First Majestic Silver Corp. (FRMSF.PK). First Majestic produces silver. Silvermex remains an explorer. Why do you look favorably upon these companies?

JM: I’ll let Doug take First Majestic, and then I’ll take Silvermex.

DL: We really like to get to know management in the companies, so we actually go to the mine sites and things like that. We’re old-fashioned that way. I just visited First Majestic’s silver mines in Mexico. One of the great things about a producer, especially one like First Majestic, is that they’re in the manufacturing business. They’re producing silver, and it has more and more uses so it’s easy to sell it. It’s not like you build cars and now you’ve got to go sell them like car manufacturers have to do. And First Majestic keeps finding more silver. If you look at the company’s plans for the future, they’re constrained by their production capacity—not how much silver they’ve got. They’ll produce more and find more. It keeps going around like that.

They’re very well run. One of the things you have to pay attention to is the people on the ground. That’s why we go see them. You get really great managers that show up in New York, but you’ve got to go see the guys working on the ground at the site. They have great depth of management there.

TGR: Are you talking about CEO Keith Neumeyer?

DL: Yes, and COO Ramon Davila, who runs everything down in Mexico. I mean when you’re in Mexico, it’s Keith and us gringos—and everybody else is Mexican. They are all very well spoken and educated, and everyone knows exactly what they’re doing.

TGR: That helps get the locals on side, too.

DL: Oh, yes. They have lots of locals from the area.

TGR: Alright, Mr. Mosseri, what about Silvermex?

JM: In short, Silvermex has superb management that it’s imported from Hecla Mining Co. (NYSE:HL) and from Silver Standard Resources Inc. (NASDAQ:SSRI), in Chairman Art Brown and President Mike Callahan, plus several other senior people.

TGR: When are they expected to bring Rosario into production?

JM: Before the end of next year.

TGR: Do you have a price target on Silvermex?

JM: Yes, I do; but, again, we don’t give out specific numbers. Let’s say they will be considerably higher than the price at which they did a financing about four months ago, which was CAD$0.45.

DL: The reason we do mining stocks is because you can later sell them in multiples of the original price. It’s very disappointing if they only grow 5% or 10% in a year.

JM: But the key to Silvermex is great management, ease of production and low capital expenditures. They should have a capex of less than $25 million to put the mine into production. When they acquired Rosario, they bought basically everything (including the tailings ponds—everything except the mill itself). It should be relatively easy to put Rosario into production.

TGR: But the share price is slumping some now.

JM: We view it as a buying opportunity. In fact, we have bought stock around these prices.

TGR: Another company you follow is Paramount Gold and Silver Corp. (NYSE:PZG), which is also in Mexico. It has the San Miguel Gold Silver Project there and just did a deal with X-Cal Resources Ltd., which owns the past-producing Sleeper Gold Mine in Nevada. These are both exploration plays. The market has not been kind to those lately. What’s your take on this deal?

DL: I haven’t seen Sleeper; I’ve been to San Miguel. We have great confidence in their ability to find good things. For them to be in the U.S., especially with all the money they have behind them now, they should be well ahead (after the takeover).

If you look at a map of Paramount’s San Miguel Project, you discover that Coeur d’Alene Mines Corp. (NYSE:CDE) Palmarejo Project is at the other end of it. In fact, to get there, you have to drive on Paramount’s roads. The mineralized system is sort of shaped like a big seven. There’s all this silver in the seven. Then, in the armpit of the seven, are two gold domes. Paramount is bringing San Miguel along and drilling it out. Now they’ve gone off to get the Sleeper Project, which should turn out very well for them. I haven’t seen it yet, but I know people who have and they liked it very much.

TGR: They are trying to establish themselves as a takeover target?

DL: Possibly; a lot of companies do that. A lot of the work companies do makes it look like they’ll mine it, but they’re really de-risking the project. Having studies already done makes a buyer feel better, because that’s money they don’t have to spend if they take over the company.

When the Spanish arrived in the 15th Century, with a cross in one hand and a pick in the other, they could mine only what they saw. They couldn’t go below the water table, so there’s all this stuff at San Miguel where this artisanal work was done. And now they’re finding lots more. It’s very exciting down there.

TGR: Do you think we’re going to see more M&A in this sector as commodity prices rise?

JM: Definitely, because what’s happened is that the usual sources of cash have pretty much dried up. It’s very tough to get financing. There are lots of junior explorers with very exciting projects that don’t have the money to take them to production or continue to develop them. Those will be takeover targets.

DL: This so-called de-risking costs a lot of money, in terms of the extra drilling and more studies, and a lot of companies can’t afford it.

JM: I think it’s more a question of ounces than money.

DL: Yes, there’s a whole game of how many ounces do you have. And not all ounces are created equal. As an explorer gets closer and closer to being eaten by a producer company, the price goes from $30 or $60 per-ounce-in-the-ground to $100 or, in some cases, $200/oz. This depends on location, grade and ease of production, plus the amount of estimated capex required to get into production. These days it’s a buyer’s market. The producer sometimes can get the ounces for under $50–$60.. But, once the deal is done, the explorer ounces with a low value now get valued at the producer’s higher value.

TGR: Do you see some specific takeover targets among the junior gold/silver explorers?

JM: Yes, we hope we own a lot of them.

DL: That’s a tricky question. It’s very hard to tell because the buyers aren’t always who you think they will be. A couple of years ago, everyone thought various projects were going to be eaten by larger North American companies, for example. Then, out of nowhere, comes an unknown Chinese smelting company.

TGR: Indeed. Let’s look at some other Latin American explorers. There’s Extorre Gold Mines Ltd. (EXGMF.PK), which has the Cerro Moro Project in Argentina. I believe Doug visited that project.

DL: A while back, Exeter Resource Corp. (NYSE:XRA) basically divided its assets. Exeter took the Chilean properties; the Caspiche copper-gold porphyry is the big one. There’s also a little one called Zodiac and you get to it in a Zodiac boat, which is why they call it that. All the Argentinean properties went into Extorre.

The guys who run Exeter are really smart, and they’re really good at what they do. They went out and got all these projects that the big guys couldn’t be bothered with, started exploring them and found wonderful things. There are about 30 projects, other than Cerro Moro, inside of Extorre that they can work on.

TGR: What are the production prospects for Cerro Moro?

DL: They intend to go into production at Cerro Moro within two years, but I’m not sure they will need to. That project could well be taken over before they get it into production. I can tell you this—four small children with some buckets and a spade could work Extorre. The stuff’s sticking out of the ground. When I was there with some silver guys, they just went crazy; they grabbed their rock hammers and were whacking away at pieces of outcropping rock. The mineralization gets even higher grade deeper down.

TGR: Andean Resources Ltd. (ANDPF.PK) is probably the most talked about gold play in Argentina right now. It certainly has a lot of institutional support. It’s over $4. Extorre is around $3.50. Do you see Extorre, and to a lesser extent, Exeter being undervalued right now?

JM: We do.

DL: In theory, somebody is going to come along and eat Exeter. It could take a price in the mid-teens or higher to get that big porphyry. There are all sorts of companies that just want copper/gold porphyry deposits, including their next-door neighbors, Barrick Gold Corporation (NYSE:ABX) and Kinross Gold Corp. (NYSE:KGC). Their Cerro Casale property is very close to Exeter’s Caspiche, if you look on the map.

TGR: Copper/gold porphyry deposits seem to be fetching a premium right now.

JM: Usually, the grades are lower in porphyries than they are in vein systems; so they have to be very big, and Caspiche is very big.

TGR: That’s why copper/porphyry deposits are developed almost exclusively as open pits.

DL: Yes, Exeter’s management jokes that when they get their pit built, you’ll see it from space. The more important thing is that Barrick’s getting ready to go to work next door at Cerro Casale. That will provide a lot of infrastructure in the area because both projects are in the mountains.

TGR: Are both projects part of the same mineralized system?

DL: They’re not the same system, but they’re right next to each other. Think of two footballs standing together on a shelf.

TGR: Just about every company that we talked about today has a Latin American connection. What do you like about South America and Latin America?

JM: It’s not just South America and Latin America—it’s the whole Americas’ land mass. We believe there are serious metal deposits all the way up the Andes and the Rockies. That doesn’t mean they are not anywhere else. We just feel very comfortable with that area. We own shares in a lot of companies operating in Canada; we have plenty in Mexico, South America and in the United States, as well. We look for jurisdictions that are friendly to mining and friendly to oil and gas. They also tend to be in that North-South axis.

DL: We’re really not as interested in Indonesia, Kurdistan or places like that. There are one or two projects we like in Africa; but, other than that, we’re not interested because there’s too much other trouble in those jurisdictions—and we always try to minimize risk.

One point I would like to make is that we’ve talked about producers with First Majestic and Silvermex and explorers with Paramount and Exeter. What’s nice is that the producers also continue to explore.

TGR: So there’s a catalyst for growth.

JM: Absolutely.

TGR: Do you have some parting thoughts for us today?

JM: There’s a whole world out there. The U.S. and Europe may or may not be going in the right direction. But there’s a whole world out there that is growing very nicely. You’ve got huge demographic pressure on food and fertilizers, those kinds of things. Those demographic pressures are not going away. Even with the one-child rule in China, its population is growing. India’s population is growing very fast. Brazil’s population is growing. They need to gentrify those populations. It’s imperative because the alternative in those lesser-developed countries is revolution. No government wants that.

DL: Let’s say you just give everybody in India, who wants one, a refrigerator and the electricity to run it, then we don’t have enough copper. And that doesn’t count China’s need for copper.

Jeffrey N. Mosseri, president, established Greystone Asset Management in November 2005 and joined Axiom Capital Management Inc. in May 2009. Before serving as Greystone’s president and as Murphy & Durieu’s director of Private Clients Group from November 2005 until May 2010, he worked for 20 years as a stockbroker and investment manager at Goldsmith & Harris. Previously, he worked for seven years as a stockbroker and investment manager for Carnegie Capital, the investment advisory division of Prescott Ball & Turben, where he also ran the international arbitrage division and developed the gold mining research and investment department. Prior to that, he was a stockbroker and investment manager at L.F Rothschild in Montreal and at White Weld & Co. Mr. Mosseri holds a Masters Degree in International Affairs from the Graduate Institute for Higher International Studies, Geneva. He currently holds the Series 7, 24 and 63 licenses from FINRA.

Douglass N. Loud, executive director, joined Greystone at its founding in November 2005 and has been executive director of Axiom Capital Management Inc. since May 2009. Prior to that, he was with Murphy & Durieu from October 2005 until May 2009, where he served as executive director of the Private Clients Group. He has over 35 years of investment management and securities industry experience. He is a graduate of Phillips Exeter Academy, Yale University and has a law degree from the University of California, Berkeley. He is admitted to practice law in New York and Hawaii and is a member of the Board of Trustees and the Executive Committee of Fay School, Southborough, MA. He currently holds the Series 7, 9, 63 and 66 licenses from FINRA.

DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Exeter, Extorre, Silvermex and First Majestic.
3) Jeff Mosseri and Doug Loud: We personally and/or our families own shares of the following companies mentioned in this interview: Paramount Gold and Silver, First Majestic, Exeter, Extorre and Silvermex. We personally and/or our families are paid by the following companies mentioned in this interview: None.

It’s that time of year again, folks. Welcome to September.

For all the commentary about gold entering its period of seasonal strength, within the realm of silver much of the attention has been focused on whether the white metal can break $20 on a sustained basis. While much of the recent media attention has been focused on gold setting new all-time highs, silver is nearing a showdown with the key $20 psychological and technical level. This echoes the debate that was taking place at this time last year regarding gold’s ability to break $1000.

As many vividly remember, in 2008-09 gold approached the $1000 level three times, only to fall at the final hurdle or to breach and then correct downward. When it finally broke the level meaningfully in October 2009, it has maintained a healthy barrier above $1000 ever since. The gold/silver ratio is currently above its 50-year average of 45-50, closing yesterday at 64.27. By this measure, at a ratio of 50, $1000 gold would imply $20 silver. As of yet, this has not come to pass, leaving a window of opportunity open for investors.

The last time silver broke $20, albeit briefly, was in March 2008. From September 2007 to early 2008, gold and silver both rocketed 50% higher, breaking resistance in early 2008 and gaining nearly every day the first few months of the year. By March, technicals for each were grossly overextended. Then, just as gold broke $1000 and silver broke $20, came Bear Stearns. It was well known on Wall Street that Bear Stearns held a large commercial short position in silver, and indeed one contributing factor to the run-up involved traders pricing in the possibility of this position being liquidated in a disorderly fashion. When it became clear that liquidation was not going to happen, combined with the overextended technicals, silver had its worst week in a decade.

Price of Silver September 2007 – Present

click to enlarge

While the $20 level for silver might not sound as psychologically significant as $1000 was for gold, the events of 2008 add to the level’s importance. Silver is entering this year’s prime season at a level just below $20. This is the closest it has been since just before the financial crisis. Since the price has recovered, the past few approaches to $20 have failed, just as it took gold several approaches before $1000 was definitively achieved. Unlike in 2008, however, the price has not collapsed after the approaches have failed, indicative of a base forming. Also, the time period between attempts to break $20 has compressed, from over a year to a matter of months. This is the natural result of the uptrend in precious metals inexorably pushing the price toward $20. As long as another panic does not hit, a break upward could lead to a breakout that, with $20 barely 3% higher than current prices, could initiate another short-term uptrend.

Finally, due to the proximity, $20 is just outside current trends for the first time. The price in March 2008 was at least somewhat artificial, far above the trendlines at the time. By contrast, over the past year silver has been trading within a range between $15 and $19.50, not breaking above or below. Since the majority of investors and traders use some degree of technical analysis, price action within chart context is considered before making decisions. Therefore, a price within a trend, whether psychologically significant or not, is always more comfortable. Additionally, until resistance is hit traders are equally unlikely to sell. With $20 under siege now more than ever, the odds of it being breached are high.

Furthermore, over the past generation (1984-2009) silver has eked out an average 2.42% gain in September. Since silver bottomed in 2003, that performance has been an average 3.44%. With silver currently about 3% below $20, even an average price performance in September could do the trick. If not, barring a significant correction it is likely that it will happen sometime this fall.

Source: Kitco

Finally, many commentators have pointed out recently that they are wary of silver’s prospects as a precious metal. Indeed, it is more economically sensitive than gold, and with the global economy still locked in a touch and go state it could easily correct downward. Of course that could happen, but the same risk exists for the global equities market as a whole right now. Additionally, what many are not talking about is the fact that, as China and India are ramping up their purchases of gold, they are buying more silver as well. As investment demand is gradually taking up a greater portion of overall global demand, the chances of a double-dip recession hammering silver down to below $10-12 are shrinking. That is not to say it won’t happen, but that is why any investor should never be overexposed to silver or any other asset class. With silver poised to break $20, given the current trends there is a distinct possibility that this portion of an investor’s portfolio could be the best performing for the remainder of the year and on into 2011.

Disclosure: Long Silver

So much for a lackluster summer and the summer doldrums as gold prices increased by around $100/oz in August 2010, to close at $1251.20/oz . As the chart shows, August has been a great month for gold prices setting the stage for a ‘Fall’ rally which we expect to be dramatically to the upside. The technical indicators are now in the overbought zone and we would normally expect gold to take a breather, however, these indicators have been known to stay high for prolonged periods of time.

By now you should have analyzed your portfolio and weeded out some of the laggards and acquired a few more of your favourite stocks or indeed added some new faces in preparation for the next up leg. Oh yes, it is coming and it’s coming fast so ignore your day job for an hour or two and and do some thinking that will set you up until at least New Year’s Eve.

Next week sees the celebrations of Labour Day, 6th September, in the United States and the return to their desks of the bigger players. Sipping pink champagne on the back of a yacht in the Caribbean eventually loses its appeal, so they tell me.

Now, here’s a graphical representation of just where gold resides, kindly sent to us by money choices, which may be of interest to you.

Followed by a map of the world’s gold producers which is also neat.

Keep an eye on silver prices as they are also on the move and will present us with a few opportunities to make a buck or two, either through positioning ourselves in those stocks that are very responsive to any movement in silver prices or via a well thought out trade in the options sector. As you know on Friday, 27th August 2010, we closed another successful trade banking a profit of 79.46% on Call Options on Silver Wheaton (SLW). We are overweight on Silver Wheaton and today we were pleased to see it add 2.84% on the back of rising silver prices. Keep making comparisons between various stocks and option trades to ensure that you are getting the best bang for your buck. Percentage gains is the name of the game so focus on them and don’t fall in love with a stock, its just a vehicle to protect yourself in these times of madness and return to you a profit. That’s its job so expect it to perform. If it doesn’t, then find the courage to wield the axe.

Stay on your toes and have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

The latest trade from our options team was slightly more sophisticated in that we shorted a PUT as follows:

On Friday 7th May our premium options trading service OPTIONTRADER opened a speculative short term trade on GLD Puts, signalling to short sell the $105 May-10 Puts series at $0.09. On Tuesday the 11th May we bought back the puts for just $0.05, making a 44.44% profit in just 4 days, with more positions opened yesterday. Drop by and take a look.

Disclosure: Long SLW, GLD

The holdings at the iShares Silver Trust (NYSE:SLV) have been climbing recently, some 129 tonnes of the metal added in just the last seven days, as the price of silver has surged from under $18 an ounce to more than $19.50 with more upside likely ahead.

At 9,280 tonnes, the inventory is still a bit short of the high seen in late-2009 at 9,514 tonnes, but, with the price of silver rising as it has been, that could change very quickly.

Disclosure: Long silver coins and bars

This is Part 4 of a 5-part series on gold and silver price analysis. Please read Parts 1, 2, and 3 before proceeding to read this article as each article in the series builds upon the last.

Those who have been following precious metals manipulation in the market have been waiting a long time for the explosion in prices. Since gold is hovering around $1200 now and silver broke $19 very recently, it seems as though the breakout has occurred.

However, I would like to submit to you, in the following analysis, that the breakout we have already seen is simply one stage of price explosion, and that subsequent larger stages are forthcoming. The reason for this is that gold is money and paper dollars are measured in gold, and not vice versa. That is why banks must use gold and gold derivatives to suppress the price of gold. And despite their best efforts, the market is beginning to win.

Gold as Money?

For evidence on whether gold is money, we submit some current examples. Historically, gold has performed as the best money. An examination of gold as money can be found in Murray Rothbard’s History of Money and Banking in the United States, Edward G. Griffin’s The Creature from Jekyll Island: A Second Look at the Federal Reserve, and Charles Goyette’s The Dollar Meltdown. Please check out these works.

Currently, Malaysia has adopted a gold and silver money system to free them from ‘Western hegemony’. Goldsilver.com has a video of a Malaysian explaining why he avoids paper money issued by banks, and retains his buying power by using gold money. The video is entitled An Ironic Reflection.

What is Western hegemony? Murray Rothboard, in the above book History of Money and Banking in the United States, chronicles how the US has used the paper dollar to rob real wealth from many other countries. It is no wonder why other nations are trying so hard to extricate themselves from its use.

There has been a report from a Michigan news outlet that Mid-Michiganers are increasingly turning to commodity money and barter, as their use preserves wealth and does not lead to inflation.

The Liberty Dollar was perhaps the biggest US experiment in hard money, spanning some 13 states. The founder’s office was raided and pending charges against have been filed. Most hard money advocates believe that the Liberty Dollar is not unlawful, and certainly not unconstitutional, but that the government and central bankers cannot allow successful alternate money to take hold in America. This would destroy their ability to tax the people stealthily through inflation.

And because JP Morgan (JPM) thinks gold is only money, we do too.

“Gold Is Money, and Nothing Else.”

- JP Morgan, testifying under oath to Congress before the Pujo Commission, 1913

Ok, so why do we believe the value of money relative to paper dollars will continue to increase? As noted in Parts 1-3, the price suppression schemes have held commodity money down in dollar terms. This means when you buy the physical form of it with paper dollars, you are getting a huge discount. We do not believe $1200 and $19 are the final stops for gold and silver, respectively.

Gold Price Targets

There are several ways to look at it. First, if you take M3, the broadest measure of money, and divide it by supposed US gold holdings, then you could say that gold in the US may roughly be valued at

$14,000,000,000,000 (M3) / 8000 (tons of gold) = $54,000 per ounce

Since all currencies (debt) are intertwined now, that is not the correct number. We would have to calculate the value of all currently issued paper currencies and divide it by all gold known to exist (most of historically mined quantities). Since we only need ballpark figures on this one, we’ll try alternative methods.

Previous Highs

What if we take the high in 1980 of $850 and adjust for CPI inflation? That gives us a $2300 price target. But since we know government numbers are gimmicked, Shadowstats inflation numbers estimate a target closer to $6000 in dollar terms.

Another alternative is that we could measure gold against other commodities and see where we land.

Comparing Commodities

In an article posted on my blog The Drop Shadow, entitled Asset Cycle Investing in a Deflationary Environment, I created a couple of rudimentary charts to show where gold is in relation to housing, the DOW, and oil.

click to enlarge