Profiting From
The Global Resource Grab: Part 2

By Dr. Russell McDougal

Historic changes are now transpiring in the global resource sector.  A confluence of macro events is pushing us rapidly toward crunch time.  Those who align their investments accordingly will be richly rewarded.

Event #1 - Reserve replacement requirements

Though I’ll look primarily at gold and silver mining issues here, remember that other commodities are likewise affected.

Large miners such as Barrick Gold and Apex Silver need to continually replace their reserves as they chew through them on an ongoing basis.  This can be accomplished by further successful exploration or by buying reserves from other companies.  If they fail to maintain their reserves, they will eventually go out of business.

Both the problem and the opportunity lie in the fact that the major mining companies are not the ones making the significant new deposit discoveries.  They depend upon the junior explorers for this task.  These juniors do the heavy lifting in global resource exploration, yet they are considered by many to just be “penny stocks.”

Think about that for a moment.  It just screams opportunity.  The vast majority of investors won’t come near a penny stock because they don’t understand them.  That’s OK with me, because they’ll fall all over themselves to buy these stocks once they’ve passed the arbitrary $5 level, and then it’ll be profit-taking time for early shareholders.

The need for resources isn’t going away any time soon!  My colleague, Marc Charles, wrote an excellent IDE article in September entitled “The Penny Stock Myth.” His points are all the more pertinent for junior exploration stocks.

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The other way a major miner can replace reserves is by merging with another major.  Like when Barrick Gold took over Homestake and later Placer Dome, or when Newmont took over Franco Nevada.  Mergers like these create a net zero increase in total reserves, since they’re only corporate events.

There has long been a scramble for replacing reserves and the merger route is the current rage.  But it’s been relied upon for way too long.  It is also a complete folly that leaves the junior explorers in the driver’s seat as this reserve dance continues to play out.

For example, Barrick is currently attempting a hostile takeover of the ultra-successful explorer, Nova Gold.  Nova shareholders are not interested in bailing Barrick out on the cheap, and have spurned all offers to date.  Barrick will have to pay up or they won’t get the deal done.

If you own a junior explorer that finds an economically feasible deposit, it will simply be a matter of time before the majors come calling.  There is no other way out for them.  Owning a junior that has made a significant discovery is a home-run event, plain and simple.

Event #2 – U.S. dollar hegemony is crumbling

Unfortunately, the U.S. dollar is losing its position as the world’s reserve currency.  Decades of spiraling debt and other abuses have brought us to the present untenable position.

Commodities have been priced in dollars for decades, which has been quite an advantage for the West and the U.S. in particular.  For example, someone in Japan who wants to buy oil must first have dollars in hand.  Yen won’t suffice.  Global commerce has long been U.S.-centric.  This is now changing.  There is an international glut of dollars.

Central banks across the globe are now diversifying their holdings to reduce their dollars held in reserve.  The euro, yen, pound, and other currencies are benefiting.  And so is gold.

Fiat currencies, like the dollar and all present global monetary units, have a perfect historical record - they all fail eventually.  The current global monetary system is under extreme pressures and we will likely soon see dramatic changes in its structure.

What does this mean for commodities?  As goes the dollar, so go commodities, but in the opposite direction.  You will want to be properly positioned for protection as well as potential gain as these events unfold.

Event #3 - Western price-setting markets are becoming irrelevant

New York and London markets have long controlled the price-setting mechanisms for global commodities.  The COMEX market in New York largely determines the world’s price of both gold and silver.  Some say it is a contrived market and the moniker “CRIMEX” has appeared.  Future articles will delve more deeply into this issue.

For now, let’s just say that neither gold nor silver trade at free-market prices.

In essence, there is now a global grab for resources and the West is losing its grip on them.  Major countries such as China, Russia, and India are securing future supplies of commodities via private contracts (mercantilism).  They thus totally bypass western price-setting mechanisms. There is a must-read article entitled “Energy Mercantilism on the March” by Jeff Vail that discusses this in more depth.

COMEX may continue to set a low price for silver and gold, but that won’t necessarily mean you can buy a meaningful supply of metal there.  Their price becomes more and more a paper price.

The West is rapidly losing control of global resource pricing.  You can look at a five-year chart of either gold or silver and clearly see that both metals are breaking free of restraints.  The paper-price-setting mechanisms are failing.  Expect this to continue.

Summary

Cheap and ready access to commodities can no longer be taken for granted, not by the major miners and not by western corporations.  And neither should you, given that the competition for all global commodities is intensifying.

Few investors are diversified out of the U.S. dollar since it is all they consider.  Most will be blindsided by macro events that are on the way.  But if you fully comprehend these global events now, you should not be one of them.

Invest Resourcefully,

Rusty

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Market Watch

Technically Strong Rally

By Charles Delvalle

One of the first things I learned about the stock market was taught to me while working the floor of CompUSA.  The store manager, who had been trading the market for 15 years, showed me a way to determine if a rally was technically strong.  Knowing this information allowed me to find out whether I was buying a stock on a dip, or merely buying into a bigger fall in price.

What that manager told me was this: if a stock is rallying on light volume, it means that the rally is weak and probably won’t continue.  In other words, it’s a technically weak rally.

The reason why it’s weak is because the big boys (the institutional investors and hedge managers) aren’t betting that the market will head higher.  The only buyers are retail investors (investors like you and me) who can rarely push a market in any decisive fashion.

But if a stock is rallying on heavy volume, that means the rally is strong and should continue into the future.  This is a technically strong rally.  The rally is strong because the big boys and retail investors are all betting that the stock will rise.

This gives the price rise more meaning and staying power because it’s not just a few investors who think the price should be higher.  It’s all of the investors.

So before you decide to buy a dip, look at the volume to determine whether the rally is likely to sustain itself.

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