Let me start out by saying that I do not believe that bonds are any “better” an investment than stocks, at least in principle. They both have their advantages.

For bonds, the advantages are that they provide an income stream – the principal and the interest payments are guaranteed in the case of most government securities; and in the case of the corporate sector, it inevitably comes down to the quality of the credit and the longevity of the company in question. In addition, the yield at the time of purchase is almost always at some significant positive spread over CPI inflation.
Stocks represent ownership in corporations that have assets and strive to make a profit, often paying out a portion of the profit in the form of dividends and retaining earnings to grow the business and increase the dividends in the future.

But the primary purpose of this comment is to suggest what things may look like when the Great Bull Market in Bonds, which began in 1981 with 30-year Treasury Bonds yielding 15.25%, finally comes to its glorious end.

For starters, I think it is safe to say that the bull market in bonds will end reasonably close to the point in time that inflation (or deflation) bottoms. This is because we have determined that by far the major economic factor that correlates consistently with the direction of market-determined interest rates, at least for long term Treasury Bonds, is CPI Inflation (headline and core).

The bond market, like politics, is an emotional issue and not well-liked in general by Wall Street because it has a negative correlation to the stock market most of the time. For a growth bull, the bond is the “enemy”. The economic environment that most favours the long end of the bond market tends to be low or no growth and bonds have traditionally been an asset allocation decision that is bearish on the stock market.
As a result, fear mongering often takes the place of thoughtful and objective analysis when it comes to bond market commentary. One way or another, the long end of the bond market has continually been characterized as high risk for the last 30 years that it has been outperforming the S&P 500. That’s a little unfair – after all, it is the benchmark risk free asset for funding actuarial liability when taken to the extreme of a 0% Coupon Treasury Strip.

Let’s move on and make a sensible and objective effort at making a long-term forecast for core CPI Inflation. Based on our analysis, we could well see core inflation receding from around 1% now to near 0% in the next 12-to-24 months, which would imply an ultimate bottom in the long bond yield of 2.5% and 2% for the 10-year T-note. We should add that as long as the Fed funds rate remains at zero, reverting to a normal shaped Treasury curve would generate similar results for the long bond and 10-year note at the point at which the inevitable “bull flattener” reaches its climax. As we saw in Japan, this will take time, but yields at these projected levels will very likely come to fruition in coming years.

So what will be the cause of the next secular uptrend in inflation or hyperinflationary shock? It pays to look back at history. Prior to the inflation of the 1970s-early 1980s, periods of very high inflation were primarily associated with war. Increased credit demands to fund the war effort combined with the drop in productivity that goes along with blowing everything up is an inflationary stew.

Wars were typically followed by brief periods of deflation followed by stable prices until the next war. In the 1970s several factors other than war led to the brief bouts of hyperinflation and they are much debated. What is perhaps most important to recognize is that whether it is war, OPEC or rampaging Baby Boomers, history supports the notion that high inflation, at least at the core CPI level, tends to occur in brief bouts.
A quick look at the core CPI chart shows that for all but a brief period since WWII, inflation has been well below 5%. But it was the period from 1970 to 1980 that contained all readings above 5%. Coincidentally, this was the period in which the Baby Boomers were buying their first refrigerators to go along with a bungalow as they formed their households.

By 1983, core CPI was back down to 5% and never looked back, but the psychological damage was already done. Inflationary expectations were indelibly etched into the mindset of the Baby Boom cohort. So everyone positioned themselves for inflation by leveraging up their asset purchases. Inflationary expectations were the rationale for overconsumption and depleted savings rates.

What resulted was an interesting dichotomy. Asset prices inflated during the 1980s, 1990s and into the 2000s. Although the secular bull market in equities ran out of steam early in the last decade, most other asset prices (particularly residential real estate) went parabolic into the peak of the secular credit cycle in 2007.

Core CPI on the other hand, has been continually slowing since the peak of 13.6% in 1980 and even at the peak in the ratio of household debt to disposable income in 2007, was running no higher than 3%. Unlike geopolitical disruption or demographic shocks, asset bubbles and the credit cycle tend to have an important secular behavioral impact on society and therefore, the economy.

The credit collapse of the 1930s around the globe dramatically altered social norms related to consumption, speculation and saving. Those who were adults with families in the 1930s shunned debt and believed in “pay as you go” for the rest of their lives. By way of comparison, the inflationary shock of the 1970s enticed the Baby Boomers into a spending and speculative binge. Rather than save, they executed a failed strategy of speculating their way to a dignified retirement.

Now the clock has run out and household behavior is poised for a dramatic change. If the 55 year-old Boomer resolves to work longer and harder, cut the budget to save more and liquidate debt, can we really expect the politics to maintain the status quo? This type of behavior from the developed world will exert enormous deflationary pressure. In addition, the huge amount of debt and entitlement expansion that has occurred at the government level, particularly in response to the financial crisis, will be an enormous drain on economic growth as taxes are raised to service the debt and budgets are dramatically cut.

For this reason, it is appropriate to consider the possibility that the next secular uptrend in inflation must await the rebuilding of the household and government balance sheets to levels that launched the last uptrend. That, by the way was about 30% debt to disposable income in 1950, 60% in 1970, and realistically, it could take a generation to get back to that range from current levels of around 125%.

The outlook is not entirely dependent on the behavior of the developed world’s consumers and governments, however, if we are really trying to envision the next 20 years, the emerging market consumers (in places like China and India) have extremely low debt levels and high savings rates. Changes in emerging market consumer behavior should be, on balance, a source of counteracting inflationary pressure. Then again, the forces that most contributed to disinflation in the last three decades were globalization and technological innovation that lead to dramatic improvement in productivity and lower unit costs.

There is no reason to doubt that these forces will continue to be moderately supportive in the near future, even if higher marginal tax rates and reduced labour mobility (due to the fact that one-in-four Americans with a mortgage have negative net equity in their home and are thus “stationary”) end up constraining the noninflationary growth potential in the United States (and Europe).

While the disinflation from 1980 to 2007 was mostly supply-side related, the deflation pressure now is coming from the demand side – a deficiency of aggregate demand caused principally by the contraction in credit (40% of the private market for securitized consumer and mortgage loans has vanished over the course of the past two years).

So, putting it all together, it is reasonable to conclude that prices are most likely to be stable for a generation. By stable, I mean flat and perhaps oscillating around plus or minus 2% (look at Japan, where there has been no such downward price spiral – the CPI sits right where it was 18 years ago). Because the economy is still gripped with overcapacity in several sectors, real estate and labour in particular, we may be headed towards an outright deflationary backdrop over the near- to intermediate-term, but a deflationary spiral seems overly pessimistic considering all the good things in the mix, including a reflationary policy backdrop which certainly helped establish a price floor in Japan in recent years.

That said, a “V” shaped recovery has always been off the table from our perspective because we still have so far to go in the secular credit collapse, so all the balance sheet expansion that the Fed has done and will do in the future should continue to offer up little more than an antidote. In turn, a reversal of CPI or core CPI trend to the upside for the next couple of years seems like a low- probability event, particularly given the demographic and retirement pressures that increasingly favor savings over spending in the broad consumer sector.

And what about the end of the Great Bull Market in Bonds? It could come pretty soon. You heard right. Long-term Treasury Bond yields could reach a secular bottom in the next couple of years. And what will it look like?

Well, rates will likely be much lower than anyone expects and, as typically occurs at secular market peaks, the public will probably swear by long bonds at the primary lows in yields. After all, what other safe investment has delivered inflation plus 2% or much better, guaranteed, in the past 30 years? But in order for the public to adore 2.5% yielding long Treasury Bonds, it will first have to believe in stable or modestly deflating core CPI as a long-term forecast. At last count, households still have a near-3% long-run inflation expectation according to the most recent University of Michigan survey.

The public will also need to be fed up with risk and, judging by the performance of stocks and real estate in recent years, who could blame them? And for the Baby Boomer at 55 or 60, “Gambler’s Ruin” isn’t an option. We can see that they are already voting with their feet as the mutual fund flows clearly indicate – increasingly towards income and away from capital appreciation strategies.

Finally, the public will probably need to be afraid to be out (of the bond market, that is). That will most likely be due to a “flight to quality” as we continue suffer the secular bear market in stocks and real estate and suffer the economic setbacks of renewed recession sooner than many pundits think.

One last thought on stocks: Like I said before, bonds are not better than equities. They are different. Every asset class has its time to be the leader. It goes without saying that the best time to allocate to equities is at the point of maximum pessimism and when the market is trading very inexpensively as it was at previous post-war secular bear market bottoms.

We know that historically, that “moment” has coincided with valuations below 10x on trailing “reported” earnings and dividend yields above 5% as measured by the S&P 500 Index. Note that while many a pundit cites the consensus as being $96 EPS for “operating” earnings for 2011, it is closer to $76 on a true “reported” basis (so apply a 10x or even a 12x multiple on that estimate!).

We also know that the conventional wisdom is oh, so wrongly linear at inflection points, so not only is the market cheap at these secular lows, but the future is much brighter than generally perceived. Pulling the trigger at that magic moment when bonds have peaked (yields have bottomed) and stocks can’t hurt you anymore, with dividend yields secure at twice the Treasury rate, would be nice. But you never know for sure at the right time, or you think you know for sure but are too early.

For now, we are not even close. Sentiment toward long bonds and inflation are still extreme and recent survey data show the typical balanced institutional portfolio manager with a 68% allocation towards equities. As for bonds, the yield on 30 year Treasury was recently core CPI plus 3%; 4% for a BBB corporate bond; and a 6% real yield in the BB space. The S&P 500, meanwhile, sports a P/E multiple of close to 15x and the dividend yield is barely over 2%.

In this light, it would seem highly appropriate to maintain a SIRP – Safety & Income at a Reasonable Price – strategy for the near- and intermediate-term, while keeping a close eye on the exit plan from this recommendation, though that could still be a few years down the road.

Economic shocks come from nowhere. One day the global economy is humming along; the next day it collapses. Crashes don’t occur because the fundamentals suddenly change; they occur because the public at large recognizes the fundamentals and heads for the exit at the same time. What’s crashing next is the public’s confidence in governments across the Western world. You can guess how that will affect the price of gold.

Gold Rocket Launch

Use the above link to subscribe to the paid research reports, which include coverage of several smallcap companies positioned to rise during the ongoing panicky attempt to sustain an unsustainable system burdened by numerous imbalances aggravated by global village forces. An historically unprecedented mess has been created by compromised central bankers and inept economic advisors, whose interference has irreversibly altered and damaged the world financial system, urgently pushed after the removed anchor of money to gold. Analysis features Gold, Crude Oil, USDollar, Treasury bonds, and inter-market dynamics with the US Economy and US Federal Reserve monetary policy.

Double Dip used to pertain to ice cream cones, but now to dreaded return to economic recession. Green Shoots used to refer to gardening projects, then to deceptive economic viewpoints. My favorite is the second half recovery mantra, indicative of totally clueless. This year’s promised recovery in the second half of the year will feature a return to recession instead, thus stripping mainstream economists of any remaining credibility. The endless links in the chain are impressive by the clueless cast of economists that disgrace the US landscape. The chain of ignominy includes gaping blind spots, blatantly wrong forecasts, minimized ignitions that spread crisis, misguided focus on goofy indicators, outright removal of important indicators, sloppy deception of monetization efforts (see last week’s article), clumsy justification of Wall Street welfare, backwards perception of Too Big To Fail banks, and lying before the USCongress. The nation is dominated by fools who profess the lasting benefits of ‘Hand to Mouth’ approaches like tax rebates, purchase credits, jobless insurance extensions, and helicopter drops. Their worst investments are their biggest investments, like Fannie Mae and AIG nationalizations travesties. Harken back only to last winter, when economists were talking about a second half recovery, running all the red lights and stop signs. Then they shifted the klapptrapp to claims of a jobless recovery, which should evoke laughter from its impossibility. The economic counsel has forgotten what capital formation means, while they prepare for their next tourniquet to be applied to hemorrhages. The objective of monetary policy and banking policy is not recovery, but instead very clearly to retain power.

DUMBEST GUYS IN THE ROOM

Pay homage to the dumbest guys in the room. Tip the hat to morons at the helm. Genuflect to the high priests of failure. The cast of economists in charge, if truth be known, includes Robert Rubin in the background as Wizard of Oz. He pulls the strings with his puppets Tim Geithner from the Treasury Secy post and Larry Summers from the White House Council of Economic Advisors. Neither puppet has anything remotely resembling a successful banking or economist resumé. Bring in USFed Chairman Ben Bernanke who has no business experience, a few key regional Fed Presidents, and you have the dumbest guys in the room. They might as well read tea leaves, tarot cards, chicken bones, and animal entrails. If they had any skill whatsoever, they would notice the nasty economic signals delivered by basic data. Take some examples. Check federal income tax withholdings from payrolls, state sales tax receipts, trucker miles logged, total volume of electricity usage, and food stamps. They all scream recession for the USEconomy. Merely pointing to stimulus funds, state budget plugs, liquidity programs, mortgage redemptions, and expanded central bank balance sheets totally miss the mark on effective economic craft. Their blindness to the economic distress is only exceeded by their disdain and contempt for the public. Before long it will be illegal to be wealthy unless a card carrying member of the financial syndicate that wields tyranny.

GOLDEN CHAMPAGNE FOR THE QE2 LAUNCH

Before launching into graphic exercises, bear in mind that for 18 months, the United States has operated with a near 0% official interest rate. As forecasted a full year ago, the 0% rate has become a permanent fixture, since this is NOT a normal credit cycle. My open disrespect and criticism has been directed at the short-sighted gnome occupying the USFed Chairman post, who babbled moronically about an Exit Strategy a few months ago. My rebuttal claimed that no such exit from the current 0% strategy is available to the Bernanke, and more grand monetizations were to be come. Now we see no exit strategy door is offered, rather a stuck condition as the USFed has painted itself in the corner. A close inspection of the trap door under which Ben sits has staircase attached to it, the Third World.

Talk has returned of a renewed Quantitative Easing cycle. The monetization engines in full usage would be put on stage in full view. The Bernanke track record is nearly perfect, nothing correct on forecasts, no effective outcomes, steady focus on the silly measures, lies given to the USCongress. The benefit to the financial syndicate on Wall Street is the only priority of monetary policy makers. The USFed and USCongress are are stuck, forced to curtail an explosion of money for political reasons. Unfortunately for the USEconomy, the recession that will turn from the steady decline into a galloping decline at a time when the USFed cannot lower interest rates. The USFed is out of tools except massive monetary inflation. Imagine, 18 months of 0% has done nothing to jumpstart the growth of the nation. The USGovt is saddled with annual $1.5 trillion deficits, that do not cause much alarm anymore. Why should it? Nothing has been done in financial reform, bank asset liquidation, financial audit of the major banks (including the central bank), business regulation streamline, tax relief, end of endless war, reduction of lobby influence, Goldman Sachs stranglehold of the USDept Treasury, or anything else that truly counts. During this next downturn, the policy failure will be more obvious, the failed central bank franchise system will be more obvious, and the ruined currency system will be more obvious. The absence of policy options will be more apparent to all. Only dispensing printed money will be offered in response. The failure of 0% to produce a revival is indirect proof that easy money was the cause of the banking collapse and credit crisis, and therefore cannot serve as the main tool toward remedy.

David Rosenberg is one of several rare economists with adept skill and razor sharp focus who is not fooled by the mainstream drivel. He recently wrote, “You also know it is a depression when a year into a statistical recovery, the central bank is still openly contemplating ways to stimulate growth. The Fed was supposed to have already started the process of shrinking its pregnant balance sheet four months ago, and is now instead thinking of restarting Quantitative Easing.” He is too much a gentleman to call Bernanke an idiot or hack or tool or faculty groupie. When QE2 is launched, the confidence in the Bernanke Fed will hit rock bottom. The pain will be delivered to the USDollar and USTreasury Bonds, which by then will only have buyers from the Printing Pre$$ output. Even Bill Gross of PIMCO shows doubt that the current course will avert a Double Dip recession.

Jim Grant joins the chorus of the enlightened within the financial industry, as he expects another powerful round of monetary easing. He is confident of QE2 right around the corner in a second launch. Ambrose Evans-Pritchard seconds the opinion. They see how the temporary lull in extreme monetary inflation tied to the economic stall leave the USFed only one choice, more Quantitative Easing. The first round involved $2.5 trillion. Ambrose Evans-Pritchard expects the next round to be coordinated $5 trillion global initiative. Vast monetization of debt and sustained stimulus & rescue with phony electronic money backed by debt are the only options left to central bankers, fast out of tools, naked on stage. Endless crutch support is their constant refrain, their glory epitaph. When money is again openly printed with utter abandon, under official blessing, that is bad for the monetary system. USEconomic decline will worsen from the assault on legitimate capital. That will amplify attention to fast debased debauched currencies, and push upward the price of Gold. The next QE2 round will send the Gold price to $2000 amidst a totally new darkened atmosphere of broad systemic failure.

FALLING MONEY SUPPLY PARADOX

The money supply continues to careen downhill fast. Its growth has plunged to a pace last seen in the 1930 decade. The broad money supply has remained elevated greatly, as the USFed still holds huge bank reserves used lately to maintain some USTreasury demand. Despite mammoth monetary inflation and outsized banker welfare programs, the money supply decays at the Main Street level. The fiscal and monetary experiments have failed before our eyes. The first Quantitative Easing initiative failed to turn the tide; so they will do another. The Adjusted Monetary Base rose from $880 billion in summer 2008 to a peak $2200 billion at the end of 2009, then down to a little over $2000 billion through June 2nd, according to the St Louis Fed. The aggregate stock of money declined from $14.2 trillion to $13.9 trillion in the three months ending April, making an annual 9.6% rate of contraction. Such a negative signal almost always means economic recession, a signal ignored by economists. The broad measure in the M3 money supply is contracting at an accelerating rate within the USEconomy, despite near 0% interest rates and the biggest monetary profligacy and fiscal extravaganza in modern history.

The Shadow Govt Statistics folks do a sterling job, including upkeep for the M3 statistic that the USGovt discontinued in 2006. Notice the M3 in the chart (in thick blue), an index in a plummet. Money is not moving within the USEconomy with gusto. Businesses are not expanding. Workers are not spending with confidence. Construction is heading toward a standstill. Credit is not being extended, as banks distrust borrowers almost as much as fellow banks who are trying vigorously to dump toxic bonds of all stripes. When the M3 goes down, that is bad. USEconomic decline will worsen, resulting in a powerful second round of Quantitative Easing. That will amplify attention to fast debased debauched currencies, and push upward the price of Gold.

WEEKLY LEADING INDICATORS

The ECRI and the Conference Board (slightly more prestigious) each run their leading economic indicators. Below is the Weekly Leading Indicator by the ECRI, not in decline but something much worse. The plunge of the WLI means that various measures are looking bad that relate to future increased job growth from increased business investment and increased economic activity. The current WLI is in a nosedive since May 2010. It stands at a lower level than the autumn months of 2007, when the USFed and the majority of US-based economists missed the last recession. They were very busy back then denying the powerful impact of the mortgage crisis. It was not limited to subprime mortgages, but rather, as the Jackass warned, it turned global in an absolute bond crisis that affected all types of bonds, from sovereign to commercial to junk to municipal. When the Leading Indicators drop, that is bad. USEconomic decline will worsen, resulting in a powerful second round of Quantitative Easing. That will amplify attention to fast debased debauched currencies, and push upward the price of Gold.

NEXT LEG DOWN IN HOUSING DECLINE

The end to the home buyer tax credit has resulted in a sudden collapse of pending sales. The USCongress threw a hollow bone to the buyers, with minimal and temporary impact. Price always obeys the Supply & Demand dynamics, eventually. Home prices will fall again, despite the propaganda of stability achieved. Stability is not a function of time or money thrown at the wall to see how much sticks. The National Assn of Realtors reported in June that its seasonally adjusted index of sales agreements for existing homes dropped a whopping 30% in May from April, falling to 77.6 from 110.9. The May mark was the lowest dating back to 2001, an indisputable signal of resumption to the housing sector bear market. Home loan refinance demand also fell hard despite near record low mortgage rates under 5%. The USEconomy growth from 2002 to 2006 was built upon the housing bubble and mortgage fraud expansion. My forecast in 2007 and 2008 called for near total destruction of the US banking system, an endless housing bear market, and grotesque homeowner foreclosures amidst rampant insolvency, all of which occurred. Next comes another economic recession downleg. When the home sales crash, that is bad. It results in lower housing prices, like night follows day. USEconomic decline will worsen, resulting in a powerful second round of Quantitative Easing. That will amplify attention to fast debased debauched currencies, and push upward the price of Gold.

Bear in mind that in 2001 and 2002, the moronic cast of economists were all abuzz over the benefits of the Low-Cost Solution from dispatching the US industrial base to China. The Jackass was not fooled, but rather regarded the move as a 5-year warning of US systemic collapse. Economists missed that signal completely, a simple signal in my view. My forecast at the time was for economic plague and bank system ruin, as soon as the housing market bubble turned course toward a bust. From 2003 to 2006, the Greenspan Fed along with a parade of deviant economists gave blessing to the USEconomic expansion. However, it was built upon the shifting sands of a housing bubble. Dr Housing Bubble puts it well, claiming a real estate Frankenstein was created with a mind focused on the perverse notion that it actually constitutes the economy. The pending home sales are in a plummet. They foretell of falling home prices. The mountains of unsold bank repossessions from foreclosures, properties held in bank inventory, assure a continued home price decline. Low mortgage rates under 5% are doing nothing to revive the housing market. The entire real estate market is broken, without recognition. The appraisal process has entered the picture, laden with foreclosures and short sales (price below seller home equity). Appraisals are the bridge that acts like a noose around the neck, attached to a two-ton brick. The appraisal process has halted thousands of sales in the pipeline. The housing decline is set for a powerful resumption, rendering additional damage to the USEconomy which depends so tragically upon it, rather than industry. The decline merely took a pause, aided by a tax credit. When the home price decline resumes, that is bad. USEconomic decline will worsen, resulting in a powerful second round of Quantitative Easing. That will amplify attention to fast debased debauched currencies, and push upward the price of Gold.

GLUT IN BANK OWNED PROPERTY INVENTORY

The monitor RealtyTrac reported last month over 300,000 foreclosures for the 15th straight month. The May total foreclosure filings rose to 322,920 which is 1% above May 2009. The bank owned property tally meanwhile is skyrocketing. Banks are reluctant to dump inventory on the already bloated housing market, but they are giving up. The Real Estate Owned (REO) inventory hit a record for May and April, with 93,777 properties repossessed by bank and mortgage firm lenders, an increase of 44% from May 2009. All 50 states posted annual increases in REO activity. In no way whatsoever will housing prices rise in such an environment of overburden in bank owned property held on the balance sheets. The REO bulge is the #1 current factor that eliminates any chance of a housing price recovery. When the bank owned property inventory rises, that is bad. Zombie banks are bad. USEconomic decline will worsen, resulting in a powerful second round of Quantitative Easing. That will amplify attention to fast debased debauched currencies, and push upward the price of Gold.

LOUSY COMMERCIAL FOREFRONT

Commercial property defaults are dreadful and growing exponentially. Witness the crucial sector sheltered from the news for two years. The Hat Trick Letter has consistently warned about the hammer hitting for that entire period of time. Commercial loan portfolios have not been written down for losses yet, even though the property values have plummeted. Rollover refinance loans in the commercial sector are next to impossible anymore. So the banks extend terms and turn into darker zombies that approve fewer loans. Commercial real estate (CRE) is the next tragic chapter in the bursting bubble. Its prices have already fallen by 42%. At peak just three years ago, commercial RE values in the US reached $6.0 to $6.5 trillion. The banks are crippled. Parallel to zombie homeowners with negative equity, are commercial fields creating zombie businesses. The Extend & Pretend actually harms the banks in the future, since the loss would be less if suffered today, bigger tomorrow. Almost no political will exists to bail out the enormous commercial market. Wall Street does not own their debt, PERIOD. Bank failures, mostly small and regional, have increasingly been tied in recent months to commercial portfolio exposure, as much as residential. Politics enter from a negligence standpoint, unwilling to save the consumption craze. When the commercial mortgage delinquencies rise, that is bad. When a bank carries impaired loans and cannot lend, that is bad. USEconomic decline will worsen, resulting in a powerful second round of Quantitative Easing. That will amplify attention to fast debased debauched currencies, and push upward the price of Gold.

JOBLESS CLAIMS, THE FESTERING WOUND

The end to emergency unemployment coverage acts as salt on the wounds, although it seems merciful EUC extensions are to be improved. An uptrend in jobless claims is in the making. Jobless claims stubbornly maintain above the 450k weekly level, showing no improvement, soon to rise. The weekly jobless claims provide ample evidence of economist ignorance of their craft, defiance of reality, and a lame forecast for a second half recovery. Persistent unemployment somehow serves as powerful evidence of no USEconomic recovery. Many conclude that the USEconomy is at risk of a freefall zone with government blessing, if not neglect, except for a politically unpopular extension. In the balance lies the insured basic income at risk of the loss by $5 billion per month. People are declaring bankruptcy at record numbers still, as their situations are aggravated by home foreclosure. The July Hat Trick Letter shows many details on the labor front and household front. When the people remain out of work, that is bad. When they file for bankruptcy, that is bad. USEconomic decline will worsen, resulting in a powerful second round of Quantitative Easing. That will amplify attention to fast debased debauched currencies, and push upward the price of Gold.

THE M.E.R.S. OPEN DOOR TO CIVIL DISOBEDIENCE

The mortgage fraud industry suffered another major legal blow. The Mortgage Electronic Registration Systems (MERS) is an overly clever property title database. MERS was again was permitted zero legal standing, this time by California. Homeowners can often flaunt the banks and not pay, without risk of being expelled from their homes. The public is pulling off strategic defaults more often, and simply defying banks on an increasing basis. The potential for successful civil disobedience, Henry David Thoreau style, has never been more ripe. Already 250 thousand Bank of America mortgage holders are not paying anything in monthly payments. The US Bankruptcy Court for the Eastern District of California has ruled that MERS cannot transfer a note (home loan mortgage) for want of ownership. MERS has proven to be the point of extreme legal vulnerability for corrupt Wall Street fraud kings. It was originally designed to track the property titles, put them in a national database, and facilitate the brisk sales between parties of mortgage bonds tied to those titles that constitute the income stream from monthly loan payments. The courts have ruled consistently that MERS has no legal standing and cannot serve as the lever that removes a person from the home via foreclosure. Again MERS holds the titles, but MERS has no legal standing to transfer the home loans in the foreclosure process. The importance of the string of negative court decisions (State Supreme Courts) is significant in permitting home mortgage owners to defy the banks, not make the monthly payments, and remain in their homes without fear of foreclosure and removal. Details of the case can be found in the July Hat Trick Letter report. When people stop making mortgage payments, that is bad. Banks retaliate, and that is bad. USEconomic decline will worsen, resulting in a powerful second round of Quantitative Easing. That will amplify attention to fast debased debauched currencies, and push upward the price of Gold.

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting.   He holds a PhD in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at  www.GoldenJackass.com. For personal questions about subscriptions, contact him at  JimWillieCB@aol.com

When too many players are on the same side of a trade they eventually find themselves in a crowded position where most everyone around them has the same motivation – to reverse their position when the tide changes.

Little by little, as participants slip out the back door by changing the bias of their position, the pendulum of price swings more sharply against the remaining herd in the crowded trade. Inevitably, something akin to panic sets into the herd as they begin to aggressively reverse their position for financial survival. The primary ingredient that causes price to catapult, up or down, is sentiment oscillation and capitalization from one sentiment extreme to the other.

An astute market technician, investor or trader will look for those flash points where conditions are ripe for a market reversal. It sounds easy to do, but remember that when the analysis is very convincing, the preponderance of market participants will disagree. It seems that to be effective at market timing one needs to listen not to what others are saying, but to what the sentiment data represents as truth.

With these thoughts as a foreword, let’s see what the current sentiment situation is for the SP-500.

The following chart is from Market-Harmonics and assimilates 4 years of bull/bear percentage data from Investor’s Intelligence. To this chart I have measured and notated in blue the percent change in bearish advisors per the Investor’s Intelligence data, for each downswing of the SP-500. My notation in green is the percentage change in bearish advisors for the related upswing of the SP-500.  The price of the SP-500 is notated in black at each swing peak and trough.

One of the most striking observations I have made of this data is that it appears the maximum pendulum swing in the bearish direction is a 20% change. This occurred in Q1, 2008.  More frequently this percentage change has topped out at 19%, followed by 16%, 11% and smaller percentage changes.

The obvious conclusion I come to is that our current bearish % change situation, at a 19% reading, is about at the maximum. History seems to show that investor’s emotions, like a physical rubber band, can only be stretched so far into pessimism (19-20%) – the bearish direction – before they snap back in the opposite bullish direction.

The pendulum swing in the bullish direction is about to begin at this very time.

I would expect that the stock market could not possibly peak until the % of bears decrease by a minimum of 8%, and more statistically likely 10-15%.  With a current reading of 36%, I am suggesting that we should not even consider a peak in the stock market until the bear percentage reading drops from where it is now at 36% to 28%, and more likely to around 26-21%.

What this means for now is that 1100 is not the top in the SP-500.  Far from it.  The bears have not even begun to turn into bulls. Price will go much higher from here and it will take weeks, if not a couple of months, minimum, to reach a shift where the % of bears are themselves finally out of whack on the teeter-totter.

Gold, while not covered by Investor’s Intelligence to my knowledge, would appear to be in a similar setup as the stock market. For this I turn to data published this past week at Schaeffer’s Investment Research and look at the 2 year history of the GLD put/call option ratio.

When the put/call ratio spikes high, it means that traders/investors are convinced that the price of gold will fall.  I have circled on the chart such instances from the past two years in red.

What we can observe is that when the bearish trade gets excessively crowded, when a preponderance of participants are convinced that gold will fall, that is not the top in gold. Rather, it is the bottom.  I have circled with green the price of gold for each occasion of a put/call ratio spike.

Again, think about what is going on here. When the put/call ratio spikes upward you have an intense perception and emotionally dramatic conviction of traders that substantially puts too many folks on the same side of the trade. When gold starts to move against them, even just a little out of their expectation range, each owner of a put option is no longer a seller of gold, but becomes a motivated buyer of gold!  This is precisely how huge brisk run ups in price are both setup and then executed.

If I were presently short gold and looked at this chart it would send shivers down my spine. No kidding. Nothing like finding out you are in a crowded trade that once it starts to go bad, you KNOW it will go very bad.

Now, I am not saying that the bottom for gold is in just yet.  Gold could still delight the bears and frustrate the bulls with one last brief maneuver lower this week.  But after that, if it happens, I believe gold’s low will most definitely be in and then there will be a lot of folks who will wish they did not hold puts on gold.

While gold has not yet told us if the last shoe has dropped, the GDX miner ETF, however, is suggesting a favorable outcome. The following daily chart is the GDX and below its price movement is the True Strength Index Indicator (TSI) with volume. You can make you own chart and use the TSI indicator by visiting Free Stock Charts.

On the negative side for GDX, the True Strength Index indicator reading is still barely below ZERO in negative territory (-0.06). On the positive side, GDX is sporting a positive divergence between price and the indicator, a recapture of the uptrend line begun last February, a breakout of a 4 week price downtrend line and a breakout of the TSI indicator on increasing positive volume. All in all, I regard this setup as bullish for GDX and most likely for GLD, as well.

If you are interested in reading more about the techniques of using the True Strength Index (TSI) indicator, want to be exposed to discussion and analysis of various mining stocks, as well as the US Dollar and stock markets, or just want to participate in a blog where your thoughts are heard and responded to, I invite you to join me at my website which is: The TSI Trader. Or jot me an email, tsiTrader@gmail.com

I wish you a profitable week!

John Townsend
Website: The TSI Trader
Email: TSItrader@gmail.com

Gold is now reaching long term trend support after falling the last few weeks as investors returned to bid up the Euro and equities.  The bounce in equities, especially financial, retail and real estate may be short lived as volume indicates that there is not much conviction from major investors on the upside.  Gold has recently been the safe haven as investors sought shelter away from the Euro when it was having the sovereign debt issues.  Now that those issues have been quelled, gold has had some selling and it has now reached an oversold  condition and a long term trendline which is acting as major support.

Stock prices move in trends.  In a bull market, it is quite often easy to identify the ascending bottoms.  Being familiar with trendlines allows the investor to enter long term bull markets when they are oversold and at key support.  An investor must always be aware of a stock’s underlying long term trend. This can be counter-intuitive and awkward, as most times when it comes down to support you have to think against the market herd and buy when others are selling.  It’s like buying a winter coat in the heat of summer. Gold is on sale, and presenting a low risk, high reward trade, but it requires non conformity with the crowd which is not an easy task for anyone.  Many of us like to be in what’s hot now situations, rather than seeing the bigger picture and entering into a trade when it is uncomfortable.

Gold is now at my buy point of the rising long term trend support line.  GLD touched that line 6 times, which signifies that this trendline is a reliable point of support.  The significance of this line is that it is not steep, which also brings a higher probability that GLD will find support here.   It is also oversold.  Continued weakness here and a break below this long term trend would be troubling and highly unlikely.  If there is a break most likely it would be exhaustive, meaning that it will shake out a lot of shares before the next move higher.  I do not see $1200 as a top in gold as there are no technical signs of a major top.

On the other hand, financial stocks may be finding key resistance here following a low volume rally.  As investors are digesting earnings reports that claim credit is improving and lending is increasing, consumer confidence is weakening and the unemployment rate is still very high.  A jobless recovery is what many are considering we are experiencing.  It seems that this recovery has been good for wall street while main street has not seen an improvement. The financials have found resistance at the 200 day moving average and have now failed four times, significantly breaking through this point of resistance.  Historically speaking, after a few failed rallies a major drop could occur.

At the writing of this article, housing has also had a significant reversal after recent data showing an increase in pricing in some metropolitan areas.  Investors are selling home building stocks on positive news, which  indicates that there is some caution over what the real estate market will resemble after the home buyer tax credit expires.  The chart shows a clear reversal and I expect that the rally in equities will be coming to an end and that gold’s poor summer performance will be different this fall as many weak hands were shaken out.  An explosive fall rally into new highs is expected as I still have a target of $1400 by year end.

Disclosure: I own shares in gold and silver mining stocks.

This essay is based on the Premium Update posted on July 23rd, 2010

In our previous essay entitled Dollar’s Never-Ending Plunge and Its Golden Consequence we have analyzed the current situation in the USD Index and its possible influence on the prices of gold, silver and mining stocks (generally we were bearish on gold). We have also provided our thoughts related to one of the questions that we’ve received from our Subscribers.

Since that essay caused a very positive feedback, we would like to provide you with a similar one – however this time we are going to cover the situation on the general stock market, but the emphasis will still be on the influence this might have on the precious metals market.

Let’s use the SPY ETF as a proxy for the general stock market (courtesy of http://stockcharts.com).

While the bias for the main stock indices is now more bullish than was the case when we’ve created the above chart, we would still like to bring your attention to the relative performance of gold, silver, and mining stocks.

Even though stocks moved higher in the previous days, the precious metals’ reaction has been quite weak. Whereas the general stock market has moved nearly all the way back to its pre-decline levels (second week of July), gold silver and mining stocks have not followed suit. This is indeed a bearish indicator for precious metals Investors and Traders alike.

While we have covered the readings from our correlation matrix in our previous essay, we would like to provide it once again, as it provides us with a useful illustration.

The correlation matrix is a tool that we use to quantify observations made throughout the update – at times it provides insight not visible directly on the charts or by analyzing the fundamental situation of the precious metals market. When two markets or indices move in a similar fashion, the correlation coefficient in the matrix table above will be high, that is above 0.50.

Precious metals and the general stock market have some positive correlation but the levels are quite low. It appears that in recent weeks, the general stock market has been leading the precious metals sector to some extent, and the correlation values would not reflect that (they don’t take into account the fact that one market may lead or lag another one – come to think of it, this is something that we might want to develop in the future).

Summing up, there are bearish indications for gold, silver and mining stocks in the next several weeks (we are likely to see a short-term bounce to the upside though – perhaps very soon) due to the recent recovery and rally seen in the Euro Index, and the fact that it has been rallying rather poorly given recent upswing on the general stock market. Much more detailed information is available to our Subscribers (we have sent out a Market Alert today.)

Before finishing this essay, we would like to share our thoughts regarding two additional issues – we have received several questions last week, and we will provide you with our replies to two of them.

The first question is about copper – would copper, as a purely industrial metal, be a relevant proxy measure for the industrial forces acting on silver? These would obviously be visible through a suitable spot price or ETF etc.

Generally yes, but what we would be looking for in copper is the “general stock market influence” in order to apply that to the analysis of silver market. It would be imperative to do so if we didn’t have any other measures available. However, since we can analyze the main stock indices or even check volume trends through ETFs, we are not missing much information by analyzing them directly. We agree that the analysis of the copper market might be more useful if we determined that it is the general stock market that is the main force behind silver’s moves – which is not the case at this point.

At times we can see copper leading the main stock indices, which would be bullish here as copper (and copper mining stocks) appear to have broken out of the downtrend. However, on the other hand, we have seen the death cross meaning that the 50-day moving average moved below the 200-day moving average, which is commonly referred to as a bearish signal. The previous time that we’ve seen it take place was at the very end of 2007, just before the massive plunge materialized. Still, at this time, the bias is slightly bullish.

Another question is about the flag formation (price trading sideways but generally moves slightly in the counter-trend direction) – is it bearish or bullish for a given market. The answer is that the flag formation is often a sign of continuation of a previous move. In other words, if the price was moving lower before entering the flag formation, the formation is bearish, and if the price was moving higher before entering the flag formation, the formation is bullish.

To make sure that you are notified once the new features are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, I urge you to sign up for my free e-mail list. Sign up today and you’ll also get free, 7-day access to the Premium Sections on my website, including valuable tools and charts dedicated to serious PM Investors and Speculators. It’s free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

P. Radomski
Editor
www.SunshineProfits.com

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I want to discuss something that came up on the blog Friday. An anonymous poster hinted that we were going to see more gold weakness in the days ahead because big money was having to sell  positions. Folks, big smart money traders don’t sell into weakness. These kind of investors don’t think like the typical retail investor who is forever trying to avoid draw downs. Big money investors take positions based on fundamentals and then they continually buy dips until the fundamentals reverse. The fundamentals haven’t reversed for gold so I’m confident in saying that smart money isn’t selling gold, it is using this dip to accumulate.

With that being said there are times when big money will sell into the market and it is why so often technical analysis as it’s used by retail traders doesn’t work. They do so in order to accumulate positions. Let me explain.

When a large fund wants to buy, it can’t just simply start buying stock like you or I would. Doing so would run the market up causing them to fill at higher and higher prices. Unlike the average retail trader, smart money attempts to buy into weakness and sell into strength. (Buy low, sell high). In order to buy in the kind of size they need without moving the market against themselves, a large trader needs very liquid conditions. Ask yourself, when do those kind of conditions exist? They happen when markets break technical levels.

If big money is selling it is because they are trying to push the market below a significant technical level so all the technicians will puke up their shares. By running an important technical level big funds can trigger a ton of sell stops to activate, allowing them to accumulate a large position without moving the market against themselfs in the process. We saw this very thing happen in the oil market recently and also in February as gold bottomed.

The reason of course is that gold is still in a secular bull market. In bull markets you buy dips.

Also the dollar with the break below 82 this morning is starting to show signs that it is now in the clutches of the 3 year cycle decline. Every C-wave so far in this 10 year bull market has corresponded to a major leg down in the dollar. I’m confident this C-wave will inversely track the dollars move into that major cycle low due early next year.

Sentiment wise gold has now reached levels more bearish than at the February bottom. That means gold is at risk of running out of sellers.

And finally, and most importantly it’s just simply too late in the intermediate cycle for gold to have enough time for a significant drop. This is the 25th week of the cycle and the intermediate cycle rarely lasts more than 25 weeks. That puts the odds heavily in favor of a major bottom either sometime this week or next. And don’t forget gold is about to move into the strong demand season. Like clockwork gold invariably puts in a major bottom in July or August before the run up into the strong fall season.

The bears are going to be wrong again.

Source: http://goldscents.blogspot.com/2010/07/hoping-for-break.html

Could gold hit $1,500 by year-end? Ubika Research Cofounder and Analyst Vikas Ranjan thinks so. In this exclusive with The Gold Report, Vikas tells us he’s pretty bullish on the yellow metal and lists a handful of gold plays he believes have strong potential for serious gains.

The Gold Report: Vikas, in a July market overview you said: “The world economy is certainly at an interesting juncture. On one side, markets are fretting about the end to government stimulus measures and the likely impact on economic growth, while at the same time remaining concerned about rising government debt and deficits.” Where does that leave us?

Vikas Ranjan: We really have a situation that is mixed. It seems to us that the world is divided into two camps. First are the Western countries that have debt fatigue. They are keen to get the deficit and debt down and are facing weak domestic demand. Second are the emerging countries like Brazil, China and India, which are growing fast and do not seem to have that problem.

Overall, we feel most of the developed nations in the Western world will look to reduce deficits and debt. However, we would say the U.S. is an exception because of its grim unemployment conditions and very sluggish economy. It still believes in expansive monetary and fiscal policies. The emerging economies will continue to grow at a relatively fast clip. So, in the end, that will leave us with a world economy that will grow but at a sluggish pace for maybe the next year or so.

TGR: So, you believe growth in Brazil, Russia, India and China (BRIC) and other emerging economies is going to be enough to overcome the debt issues related to Europe and the American economy?

VR: To a certain extent, yes. As I stated earlier, the emerging economies’ growth certainly provides a cushion against the headwinds capital markets face today from the debt crisis in Europe and sluggish U.S. economy. But, at the same time, we do not believe it will be enough to contain the damage to the demand situation in these wealthy countries. Emerging countries will pull up the world economy to a certain extent, but we see the danger of sluggish demand in developed countries, including the U.S., dragging down the overall world economy. That will be felt even more so in the next 12 months; but after that, we believe growth in these developed countries will pick up and that the emerging markets will continue to grow at a faster clip. Our outlook for 2012 and beyond is much better than what we see for 2011.

TGR: In terms of growth, what sort of percentage are we looking at?

VR: In the U.S. and Canada, 3% would be a decent rate of growth; but the way things are looking right now, it will be trending just above 2% in these countries. Not a huge disaster, maybe half a percentage point lower than the trendline. For other developed countries, especially Western European nations, the growth rate could be even lower than that. Emerging economies, however, will grow at a faster rate and that will put the global economic rate in the 4%–4.5% range in 2011 and beyond.

TGR: What sectors are going to perform well in this burgeoning economy that you foresee in 2012 and beyond?

VR: The secular trend, in terms of emerging markets growth, remains intact, which means the commodity markets will consistently outperform and continue to grow. Within commodities, we are particularly optimistic about precious metals and energy. If you’re looking at sectors, particularly those sectors that have been very volatile, they will probably level out and then take off again from those levels. Apart from that, the financials should also do well once consumer spending kicks back in with an improving employment situation, particularly in the U.S., and demand for credit picks up.

TGR: In another Ubika research report, you quote Aram Shishmanian, CEO of the World Gold Council, as saying, “With the global economic recovery still burdened by high and rising debt levels in Western economies, the outlook for gold as a liquid reliable asset class and store of wealth remains highly favorable.” Where does Ubika stand on gold as currency?

VR: Actually, we hold similar views. We also believe many investors view gold as not just a commodity but a store of value and an asset class. We are actually surprised by gold’s strength in an environment where inflation continues to be low. As you know, gold has traditionally done well in high-inflation situations, but not as well in low-inflation situations. Strong gold in these low-inflation environments suggests to us that investors will continue to seek refuge in gold as long as capital markets remain uncertain.

Our outlook on gold is pretty bullish. In the short to medium term, we believe that it is proving to be more resilient than previously thought. Actually, if you look at the correlations between the U.S. dollar and gold, typically that used to be in reverse, but of late they have been moving in tandem; when the U.S. dollar rallies, gold continues to be strong. There are very strong fundamentals that support the positive outlook for gold and that will continue to be the case for the foreseeable future.

TGR: Would you care to be more specific in terms of your gold price forecasts?

VR: Well, forecasts are always very difficult to make; but, looking at the trendline, it would not be surprising to us if gold ends up around the $1,400–$1,500 range by year-end. Beyond that, it will probably be finding similar support levels for sometime before making another move, depending upon the economic environment.

TGR: How does Ubika recommend gaining exposure to gold?

VR: There are various ways to get exposure to gold. Obviously, the easiest way is to buy some bullion, which not everybody can do, and there are investment instruments with exposure to gold. The easiest method that comes to mind is buying exchange-traded funds (ETFs) that are linked to gold. For savvy investors willing to take more risks, we believe directly buying stocks of gold producers or explorers is definitely a good way to go. In our opinion, junior gold explorers offer compelling potential because their values have not caught up with gold’s gains. Various gold junior exploration companies are very undervalued and not well known, presenting very compelling opportunities.

TGR: What are some of the companies you’re following?

VR: We are following quite a few companies; in gold, we have a particularly strong portfolio. Some of the notable names include: La Quinta Resources (TSX.V:LAQ), VG Gold Corp. (TSX:VG; OTC:VGGCF; Fkft:VN3), and NWM Mining Corp. (TSX.V:NWM; NYSE:NWMMF), Rye Patch Gold Corp. (TSX.V:RPM), Eagle Hill Exploration Corp. (TSX.V:EAG) and Atlanta Gold Inc. (TSX.V:ATG).

TGR: One company that you mentioned, VG Gold, just hit about 31 grams gold over about 25 meters on its Paymaster property in Northern Ontario. For our readers who don’t know, VG stands for Visible Gold; there’s clearly some visible gold in that drill core. Tell us about that company.

VR: VG Gold is one of the companies we follow and have followed for a long time; and, as you rightly said, they had a very interesting drill result recently. All of VG Gold’s properties are located in Timmins, Ontario, which is one of the world’s best gold-producing zones. The key focus for VG Gold is Paymaster, which it optioned from Goldcorp Inc. (NYSE:GG; TSX:G). There was a huge drill result that returned almost an ounce of gold per ton over 25 meters. That provides evidence for a strong gold-mineralized system, typical of porphyry-system mineralization, which is what we believe the West Paymaster property has. The property shows near-surface mineralization amenable to open-pit, bulk-tonnage mining and also strong underground-mining potential.

This property is situated very close to Goldcorp’s Dome Mine, which so far has produced over 17 million ounces of gold. Other discoveries have been made in the area, including one by West Timmins Mining Inc., which was acquired this year by Lake Shore Gold Corp. (TSX:LSG) for more than $400 million. We believe VG Gold has similar potential; based on our research and analysis, we think it could be one of the few junior resource companies with the potential to break out and provide the types of returns investors crave. The company has three other high-potential properties in the same area. It already has an NI 43-101 compliant 1.2 Moz.-gold resource and at least two properties are fully permitted for production. We believe it has probably drilled less than 20% of what is available and has the potential to develop multimillion-ounce gold resource base. We are watching that one very closely.

TGR: And that’s in Canada. It doesn’t get much safer.

VR: Yes, all the properties are near Timmins, in Canada, which has very good infrastructure and a system of mining financing, as well. That really helps junior exploration companies.

TGR: Another company you mentioned, La Quinta Resources, recently shuffled its management. It got out of the Congo, has two “new” old properties in Nevada and “new” old management. Tell us about that one.

VR: La Quinta is another interesting junior gold explorer that we recently added to our research portfolio. The company is focused on its Easter property in Lincoln County, Nevada. A little bit of history—La Quinta did have an exploration project in the Congo and has since scaled it back, which we believe was a good decision because it’s not easy to operate in challenging countries like the Congo.

Now La Quinta is totally focused on Nevada where both its properties are; but the focus is the Easter property, which has a significant exploration history. La Quinta recently announced an NI 43-101 compliant resource estimate, which outlined about 101,000 ounces of gold in the indicated category. That is very good, in our opinion.

What we really like about La Quinta is it acquired this high-potential property at very compelling terms and has been putting together an exploration plan that, I believe, can expand the resource base significantly. Obviously, that would be very good for shareholders.

TGR: And the man driving that is Walter Martin, who was a director and is now La Quinta’s president. He’s a geologist and has been in the industry quite a long time. Tell us a bit about the management changes and subsequent change of focus.

VR: That’s a very good point. There were significant management changes after the company decided to scale back from the Congo. Glen Watson, who is the CEO, took over the company. In his previous role, he was on the corporate development side but he’s also one of its founders. He decided to take hold of the company and refocus it, and we believe he has done a very good job. He has started to attract good talent, including Walter Martin, and other people on the board and advisory team. Walt has significant experience in mining, especially in the area where the property is, and in U.S. gold exploration. He is now leading the exploration effort. La Quinta also recently attracted Mark Abraham, a geologist with more than 30 years’ experience with companies like Agnico-Eagle Mines Ltd. (NYSE:AEM;TSX:AEM) and Placer Dome (purchased by Barrick Gold Corporation (NYSE:ABX; TSX:ABX) in 2006). They have a good team on the technical side and business/financial side. I think that bodes very well for the company.

This is a good example of investors being able to get exposure to gold at a low entry point and how some junior gold explorers can provide strong potential for growth. La Quinta is at a really low valuation stage simply because it is kind of re-launching itself with this new property. An investor could see some growth potential as the company carries out exploration in 2010 and beyond. And, if it succeeds, in that exploration program the value could be very rewarding.

TGR: What about NWM Mining? One of your research reports said it’s “right at the inflection point of the value curve, which can substantially reward its shareholders.” Please explain that.

VR: What we meant is that we believe the NWM story is relatively unknown to many investors. This is not an early stage exploration company; it has 370,000 ounces of gold in the proven and probable category—it’s not a resource, now it is reserve.

The company is well financed, close to small-scale production and it trades at a really low valuation. We believe that will likely change as the company implements a new 25,000-meter drill program. NWM has the potential to substantially improve the current reserve estimate by year-end. We believe NWM has the potential to produce up to 50,000 ounces of gold within two years.

TGR: 50,000 ounces annually?

VR: Exactly. It can use cash flow to keep exploring and continuously increase the resource base—that’s another advantage. Something comparable would be Capital Gold Corp. (TSX:CGC; NYSE.A:CGC; Fkft:CGU), which mines in the neighborhood of NWM’s property. It currently produces 60,000 ounces of gold from nearby El Chanate gold mine and has a market cap of $184 million. NWM’s market cap is about $20 million. Just think of that! We believe investors could do well if they have exposure to this company after this stage.

TGR: There’s also some copper in NWM’s property, right?

VR: Yes, there is some but this is a primarily gold company. But because that ore body is copper-rich, they are using a particular processing method that has been proven very successful in extracting gold from ore bodies with a complex copper composition.

TGR: Yes, the ore at NWM’s project in northwestern Mexico seems to be a little difficult to process. They are using a sulphidization acidification recycle thickening (SART) plant. Do you think they have a grasp on that?

VR: We think they have a good system in place. That SART program has been proven to be very effective, and it’s actually more environmentally friendly than other programs to extract gold from those types of copper-rich ore bodies. Companies are already using it successfully.

TGR: Any other companies?

VR: Another company we like is Atlanta Gold, an Idaho-based gold exploration company. Its main focus is its Atlanta Gold project in Atlanta City, Idaho. Again, this is a company that has a very strong management team, an internal NI 43-101 compliant resource and near-term production potential.

TGR: What is the resource?

VR: Based on the internal NI 43-101, the current resource is roughly 475,000 ounces of gold in the measured and indicated category. They have an intensive drilling program going on right now—two drills are working full time—and the results should provide short-term catalysts. They also have a plan to move to small-scale production very soon.

TGR: What is the timeline on that?

VR: Based on our discussion with management, in two to three years they will start producing 40,000–50,000 ounces of gold while they continue to explore. Mind you, this property is at a site where old mines existed; so, it is easier to create an onsite processing facility there. The Atlanta Shear Zone, where its current exploration program is focused, is open along strike and at depth; and, based on past drilling data and current and future drilling plan, we believe the company has potential to develop 3+ million ounces of gold at this property.

Another gold company we follow is Eagle Hill Exploration, which is a Quebec, Canada-based company. This is in the Val d’Or Mining District, a very famous mining camp in Canada; the property is called Windfall Lake Property.

TGR: Right, this is the former Noront Resources Ltd. (TSX.V:NOT) property.

VR: Exactly, Windfall used to belong to Noront until recently. Eagle Hill acquired Windfall and, in our opinion, got it at very compelling terms—only $3 million and I believe there is a royalty. This is a property where Noront spent more than $22 million in exploration, so there is a rich history of exploration data and knowledge Eagle Hill is using. They had a spectacular drill hole in March, when they got 14.52 gpt over 52 meters. That shows strong evidence of mineralization, gold mineralization, and for open-pit and underground mining. There is potential for higher-grade gold at depth. Eagle Hill started Phase II of its exploration program in June, and we believe the goal is to expand the resource and confirm a big deposit there.

TGR: We don’t usually talk about potash in The Gold Report, but you have a target price on Allana Potash Corp. (TSX.V:AAA) of $1.02 and it’s trading at around $0.30. Your risk level on all of these companies is high, but what do you see in Allana that garners such a high target?

VR: That’s a good question. Allana is a potash exploration company with a project in Ethiopia. The reason we have a high target on Allana is due to its potential and the resource estimate. This project was drilled probably 45 years ago and has just been sitting there. Obviously with potash prices on the upswing in the last couple of years, the project garnered some interest.

Allana just started Phase I drilling at the Dallol potash property and has been receiving very good results. There is strong evidence of near-surface mineralization; the deposit seems to be open in the eastward direction and the company is finding evidence of new zones of potash, so the resource base could be expanded. Now, one of the reasons we like the company is because it has the potential to be one of the lowest-cost potash producers in the world. The reason for that is because it’s in the Ethiopian desert, so the climate is very dry and hot. Allana could use a potash-processing method called solar evaporation, which will bring down the operational costs as it uses less energy. And because the potash seems to be near the surface, it is amenable to lower-cost open-pit mining.

Allana has done a good job of putting together other pieces of the puzzle by entering into a strategic partnership agreement with China Mineral United Management Ltd., a Chinese mining investment group closely associated with one of the largest fertilizer companies in China. China Mineral has agreed to fund up to 45% of the project costs as Dallol moves toward production. And Allana has de-risked the project to a large extent. They have 105 million tons of potash in an NI 43-101 resource. We expect them to at least double that as they continue drilling.

TGR: Our readers might think Ethiopia is something of a jurisdiction problem, but perhaps a Chinese partner offsets that somewhat. Can you comment on that?

VR: We acknowledge the risk is higher when you operate in places like Africa, but not all countries within Africa are the same. We believe Ethiopia is a fairly stable and mining-friendly jurisdiction. There has been lots of interest from Chinese, as well as Indian, companies. And the big advantage for a potash project in Ethiopia is it’s closer to India and China, which are two of the largest consumers of potash—and potash is a heavy fertilizer to ship. If you’re sending it from Ethiopia, it takes a lot less time and cost to get there as opposed to sending from Saskatchewan or New Mexico.

TGR: What about some other gold juniors that offer investors some exposure to gold?

VR: We like Rye Patch Gold, another compelling Nevada-based junior in a new gold trend called the Oreana Gold Trend. They were one of the pioneers in discovering that trend, which has an NI 43-101 compliant resource estimate of close to 4 million ounces of gold and gold equivalent, and 1.2 million of that is in the indicated category. The company trades at a very low valuation based on the in-situ valuation and compared to its peer group; $15 million is the market cap.

Once again, I would say this is a classic case of the market not being fully aware of this company’s potential. It has excellent properties in a high-profile place like Nevada and a strong management team. The CEO comes from Placer Dome, which was acquired by Barrick Gold Corp., and other management and board members have been in this business a long time. The company is focused on building a large resource base and has been very successful in doing so at a very low cost until now. The fact that it accumulated close to 4 Moz. gold within a few years and spent only $1.25 to find each ounce speaks volumes about the proficiency of its exploration team. We believe the company’s strategy of building a large gold reserve that can be economically mined could be very attractive to larger producing miners in the area and that an investor could do well with exposure to this company at this stage.

TGR: Are there any thoughts you would like to leave us with?

VR: I would just say the markets seem choppy currently, and that is typical in the summertime. We believe the outlook is not as grim as a lot of people would want us to believe. We do not see strong potential for something like a double-dip recession or capital-market collapse as was the case in 2008. Yes, there will be volatility in the market, sluggish growth and probably lower returns than we anticipated maybe six months ago; but we still see potential in the market, and especially good potential in the junior gold sector.

Vikas Ranjan is a management and investment professional with over 15 years’ experience in diverse areas of investment management, finance, customer analytics and investment research. Vikas is a principal of Ubika Research, a specialized research and analytics company with a wide range of small-cap clients and operations in Toronto and Vancouver. Vikas’ previous experience includes various management positions in companies such as TAL Global Asset Management and Bank of Montreal. Vikas has a strong knowledge of financial markets and has researched and analyzed companies in diverse industry sectors and markets. He holds a B.A. in Economics (Hons.), Masters in Management Studies from University of Mumbai, India and an M.B.A. in Finance from McGill University. Prior to co-founding Ubika, Vikas co-founded P2P Systems Inc., a company acquired by Toronto-based technology company, Microforum Inc.

Ubika Research specializes in small-cap companies where market capitalization amounts to less than $500 million and offers fresh and timely market insights to end investors and market participants.

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Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report or The Energy Report: Goldcorp, Capital Gold, Allana Potash and La Quinta.
3) Vikas Ranjan: I personally and/or my family own shares of the following companies mentioned in this interview: VG Gold Corp. and Allana Potash Corp. I personally and/or my family am paid by the following companies mentioned in this interview: None.
4) Ubika Research has received fees from all companies mentioned in this interview to provide research coverage. Ubika Corp. also has an agreement in place to receive options from the following companies mentioned in this interview: Rye Patch Gold Corp., NWM Mining Corp. and La Quinta Resources Corp.

Except for the historical information presented herein, matters discussed in this interview/document contain forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from any future results, performance or achievements expressed or implied by such statements. Nothing in this interview and report constitutes an offer or invitation to purchase or acquire any shares in any company or any interest therein, nor shall it form the basis of any contract entered into for the purchase or sale of shares in any company mentioned in this interview and report.

Ubika Research and www.smallcappower.com are both divisions of Ubika Corporation. They are not registered with any financial or securities regulatory authority and do not provide or claim to provide investment advice or recommendations to readers of this report. For making specific investment decisions, readers should seek their own advice. For full disclosure, please visit: http://smallcappower.com/disclosure.aspx.

The Gold Report: According to Struthers Resource Stock Report early this month, the market rally would continue for as little as two weeks. What fundamentals led you to that conclusion?

Ron Struthers: In the first place, the U.S. economy has never been in recovery. It was more or less just a statistical recovery. GDP increased because of the way it is calculated, but the real economy and people on the street experienced no growth. Better employment numbers were the result of temporary government hires and those created by the Bureau of Labor Statistics’ (BLS) small business birth-death rate model. “Cash for Clunkers” helped the auto industry temporarily, but now auto sales have plummeted. Stimulus for housing only slowed or paused the decline; now that those programs have expired, housing has plunged further. I could go on! Those bearish fundamentals and others are coming back to the point that the market and its followers are beginning to realize the economy is still declining. A lot of people are calling for a double-dip recession, but I don’t even think we came out of the recession. This is just a deeper plunge, and will feel more like going into depression.

There are also the debt issues. So far this is mostly focused on Europe, but the U.S. is a bigger problem. Many of the U.S. states are bigger than Greece, and 40 or more of them are in the same bad shape. I expect that to come to the forefront before long because those states are going to have to have federal bailout assistance.

TGR: Are you saying the U.S. government is going to have to print more money?

RS: They’ll probably try that as a solution. Whether the market will put up with it, I don’t know. We’ll see. At that point, you’d have to watch the bond market and the U.S. dollar to see how they’re reacting. Like Europe, they might have to go more with severe austerity programs that will push the economy down further.

TGR: You watch the market very closely. Your research seems to indicate that you look to the S&P 500 for monitoring the market.

RS: I think that’s the best index to follow as a gauge for the market. It’s fairly broad based compared to the Dow.

TGR: What are you seeing in the S&P 500 that made you think it would be just a short-term rally?

RS: We had that topping formation in May and June. I was actually expecting to see the market rally up further, maybe come close to retesting that top as more of a confirmation that we had a top. Instead it’s done much worse. It’s actually broken down far enough to make a lower low than February’s. It’s really turned into bear market territory in the short term.

TGR: As a hedge against a significant market correction, you recommend investors hold about 40% of their portfolios in cash. Does that include gold?

RS: No, I’ve been suggesting about 15% in gold. If you go 20%, that’s not bad either. In my portfolio, we’re really sitting on 15%–20% gold and 35%– 40% cash.

TGR: What’s in the cash component?

RS: Right now it’s strictly cash, but I’ve been suggesting that cash be used to start shorting the market through ETFs. The one I like is Horizons BetaPro S&P 500 Inverse ETF (HIU). It’s not leveraged at all, so it’s much better for a longer-term hold. You really have to be a trader to use leveraged ETFs effectively.

TGR: Is the premise of that ETF an inverse relationship to the S&P 500?

RS: Yes, it’s just 1-to-1 in terms of an inverse relationship. It’s not leveraged at 2-to-1 or 3-to-1 like some of the ultra-short ones. I suggest putting about a third of the cash position into that.

TGR: How long should you stay vested?

RS: The time horizon we’re looking at for the market to move down substantially is before the end of the year. If it rallies more and we have a better entry point, we’ll add to the HIU. Or if it breaks down further and confirms momentum to the downside, we’d also add more to the position.

TGR: You quote a stat in another Struthers Resource Stock Report that says 90% of short-term trades lose money. You also stick to the old adage that says, “The trend is your friend.” With those two points in mind, what are some long-term trends you see in the gold sector?

RS: Obviously gold itself; it’s been in a bull market for 8–10 years, depending on how you want to measure it. We basically don’t sell or trade our gold. We just buy and hold it. We’ve been increasing the percentage held; we were at 0%, then 5%, 10%, 15%. We are just going to hold it until I see some good signs that the market is peaking out and reversing. Then, of course, we’ll be selling.

TGR: In that 15%, what is your equities-to-bullion mix?

RS: That 15% is just bullion. I suggest you have actual physical gold like coins and bars or funds. I like the Central Fund of Canada Ltd. (NYSE.A:CEF; TSX:CEF.A), which is 50% gold and silver, or Bullion Management Group, Inc. (TSX:BMG100), which is divided evenly between platinum, gold and silver. Basically, these funds have the precious metals allocated and audited—you know the gold is there. Sprott has one called Sprott Physical Gold Trust (NYSE.A:PHYS; TSX:PHY.U), which is 100% gold. I really watch the premiums. The one with the lowest premium is what I’d be buying.

TGR: So you believe in holding physical gold, holding coins.

RS: Yes, you can look at it as insurance or just a core savings. The bullion holds its value. If you hold cash money in the bank, you lose purchasing power all the time. With low interest rates, your return on investment is not good; you’re not getting anything on it. And there aren’t many good alternatives. Either buy gold or hold cash that pays you nothing. You could put your money into bonds, but they’ve been in a 20- to 30-year bull market so there’s nothing left to be gained there. The risk is high that bondholders are going to lose money in the years ahead as interest rates rise, pushed by high debt levels. Or you could gamble in the stock market. I think gold is a pretty important asset to hold right now.

TGR: But for people who don’t want to buy coins or hold bullion, gold equities are another way to gain exposure to gold. Some gold plays are always media darlings.

RS: One that’s had some recent articles in The Northern Miner, Resource World and Casey’s Gold Research is Otis Gold Corp. (TSX:OOO; OTCBB:OGLDF). I like them, too, and have been following them since inception. I know some of the principals involved and their geologists.

That’s a key thing in any of these companies—the people. It’s the people who build a company, so it’s important to have confidence in who’s running a company. That’s the number-one thing I look for in junior mining companies. The other consideration when I’m looking at junior gold stocks is their gold in the ground. I think Otis is probably up to about half a million ounces. With this drill program they’re doing now, they’re probably going to be closing in on the million-ounce mark.

TGR: What are the Otis people telling you about their Kilgore deposit in Idaho?

RS: There’s not a lot of risk there anymore. A fair amount of drilling has been done and data collected on it. It’s now more of a matter of drilling and proving out the ounces; stepping out on trend and checking some of the other areas nearby. That gives it the upside. The key upside will be when they drill the Dog Bone Ridge target, which lies on the other side of the Kilgore deposit. . .the potential is 3 million ounces there if they hit. Drilling is slated there for September.

TGR: Otis is trading close to its 52-week low. Given the positive drill results you just mentioned, to what extent do you consider $0.39 a good entry point?

RS: The positive drill results were in the last drill program and they just started a new 6,000-meter, 30-core hole drill program in June. One could buy the stock now ahead of expected drill results because we know, from past drilling, that the gold is there. We should see some good results that could move the stock again. The stock is down around $0.44 with the recent correction in the junior gold stocks, and it is not pricing in any speculation on the current drill program. With Otis, the time and conditions are right—exactly how I like to buy junior golds on an exploration play. Downside is small but upside can be very high, depending on what the drills turn up.

TGR: This past spring you said your plan was to add some more gold and silver stocks to your list, starting with Everton Resources (TSX.V:EVR; Fkft:ERV). At the time, the stock was trading around $0.30; now it’s about $0.20. Tell us about that one.

RS: We got into Everton around $0.26; at $0.20, it is even a better deal. They don’t have any proven gold yet; but I like Everton because they’ve had lots of good drill intersections on some of their properties, such as 6 meters of 192.5-gram silver at their La Lechoza prospect. Their main project is right next to Barrick Gold Corporation (NYSE:ABX; TSX:ABX) and Goldcorp Inc.’s (NYSE:GG; TSX:G) Pueblo Viejo Mine, which hosts around 29 million ounces gold, in the Dominican Republic.

Everton is right on trend. Some of their drill core on some wildcat exploration holes hit the exact same host rock as Pueblo Viejo. Their challenge is about a 30-meter cap over the host rock; there’s not much outcrop to guide drilling. They’ve gone back and done all the geological work, the induced polarization (IP) surveys, geochemistry, soil and stream samples to come up with good drill targets. They should be drilling more on this pretty soon. I think more information will increase their odds of hitting mineralization.

TGR: Why wouldn’t Barrick have staked all the land around that deposit?

RS: That is a good question. In fact, they did have quite a large area staked because their land position there is pretty huge. But you know, Barrick and a lot of the other majors aren’t really the explorers anymore. They cut back on all their people and exploration budgets in the downturn in late 1990s, early 2000s, and it is very hard to get back or find good people in the industry now. So they focus their exploration around their current mining operations and try to keep growing reserves at their mines. It is cheaper for them to let the juniors explore and buy the deposits from them when found.

TGR: What other gold companies are you following, Ron?

RS: Another one I like is down in Mexico: Levon Resources Ltd. (TSX.V:LVN; Fkft:L09; OTC:LVNVF). They’ve made what I would say is a potentially massive discovery. It’s a silver/gold/lead/zinc target very similar to the Peñasquito mine that Goldcorp’s putting into production now. Peñasquito probably will be one of Goldcorp’s most profitable mines, and Levon’s discovery hole is actually higher grade than the average Peñasquito grades were in the beginning. The discovery hole is 152 meters of 80 grams silver, 0.6 grams gold, with 1.4% zinc and 1.2% lead. That’s some very good, rich rock over long intervals—and that’s important. The intervals go for hundreds of meters.

TGR: Would it be the same mineralized system as Peñasquito?

RS: Yes, basically, Peñasquito’s not too far away. I think it’s maybe 20 or 30 kilometers. It’s kind of on the same belt and trend. Levon actually has quite a large property, with about four more targets like this. There’s potential for a couple of large deposits there. The mineralization also starts at surface, so strip ratios will be low, adding to the profitability.

TGR: Mexico seems to be a hot spot. In addition to Levon and Peñasquito, are there any other silver or gold plays in Mexico that you like?

RS: Minefinders Corporation (TSX:MFL; NYSE:MFN) recently went into production. Another one just starting production is Avino Silver & Gold Mines Ltd. (TSX.V:ASM,OTCBB:ASGMF). They have owned the Avino Mine for quite some time. I think they originally owned 50%, but now they have 100%. It was producing up until 2001 or 2002 and was closed because of low metal prices. They’ve completely refurbished and rebuilt that mill and are just now tweaking it and fine-tuning the recoveries. Prior to that, they discovered another new zone with fairly high-grade silver; it’s running 5–6 ounces silver per ton with some copper. I’m expecting that stock to do well as production ramps up and cash flow and earnings kick in.

TGR: What are some other silver companies you’re following?

RS: I follow First Majestic Silver Corp. (TSX:FR; OTCQX:FRMSF) in Mexico, as well. It has a good production growth profile and the cash flow and earnings are growing as well. In the second quarter ending June 30th, production hit a new record of 1,651,411 silver equivalent ounces, up 72% over the same quarter. In 2009, we also picked up Hecla Mining Company (NYSE:HL), which operates some in Mexico with all their production now coming from well-established, low-cost mines—Lucky Friday in Idaho and Green Creeks in Alaska. It was a bottom-fish play in 2008 when the market collapsed. We picked up a lot of bigger-name companies that I thought were on the cheap. We were able to buy Hecla at $1.25. When you can buy those major mining companies at those prices. . .that’s why I jumped in.

TGR: Does Hecla have any mines coming onstream in the near future or is it simply a steady producer?

RS: Yes, that was the main reason we went in. It was just a good production story and management has a lot of experience dealing with difficult markets over the years and low metal prices. I think it was like all the companies that had a bit of debt back in 2008. When companies had debt, everybody started worrying.

TGR: Has Hecla taken care of that?

RS: I think Hecla’s debt level is small or gone now. It never was a big problem; it was just the market’s perception. Everyone was fearful of debt in 2008. Hecla took on some debt in 2008 to buy 100% of Greens Creek, which, in hindsight, was bad timing. Then the stock dropped and the equity-to-debt ratio looked terrible; but the problem was the equity value, not the debt level. It was trading way below book value.

TGR: Tell me a bit about what you like about silver as a commodity.

RS: Silver has two roles—as a commodity and for industrial demands. It’s big in the electronics industry, which we know just keeps growing and growing. It’s also used heavily in the automotive sector, which may not be growing here, but Asia is seeing strong growth; so there’s an underlying demand there it terms of industrial uses.

Silver has become more of a currency, as well, along with gold; it’s sometimes called “poor man’s gold.” Silver was in all the coins up until the late 1960s. It was accepted as real money until that point. I think demand will only increase as the gold price rises. New investors will come into the precious metals market and they might not want to pay $1,500 or $2,000 for an ounce of gold. They’ll look at silver as a cheaper way to get into the market. I think that will be another market development down the road.

TGR: What’s the multiple right now of silver to gold?

RS: In the neighborhood of 66-to-1 or 67-to-1.

TGR: That’s a little on the high side compared with historical averages.

RS: Yes, historically, I think it’d be more like 55-to-60 or close to that range. It’s offering a little bit of value when you measure it that way. I think silver has a bit more potential in terms of percentage growth than gold. It probably has to break through the $20 mark, just as gold had to with the $1,000 psychological barrier.

TGR: Then it might shoot up from there?

RS: Yes, that’s what I’m looking for. While gold has broken well above its 1980 high, which was just over $800, silver is nowhere close to the $50 high it achieved back then.

TGR: This has been great. Thanks so much for your time today, Ron.

Ron Struthers, editor of Struthers’ Resource Stock Report, retired at an early age from IBM, where he spent many years in customer service and as a systems, business and inventory analyst. He began the Struthers’ Resource/Tech Stock Report almost 20 years ago and now has roughly 450 subscribers. Over the previous 10 years, Ron’s top 82 stocks averaged a gain of 935%. Ron focuses on mining, oil and gas and one to three tech stocks a year. He hunts for stocks that are not yet discovered and gets in before the crowd. Most of these are companies on the verge of new mineral discoveries, moving to producer status or simply on an accelerating growth path. Coverage includes senior and junior companies with ample trading liquidity. Ron’s a long-term investor, picking major trends and sticking with them.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

DISCLOSURE:
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Otis, Goldcorp, Minefinders, First Majestic and Everton.
3) Ron Struthers: I personally and/or my family own shares of the following companies mentioned in this interview: Horizons BetaPro ETF, Central Fund, Otis Gold, Everton Resources, Avino Silver, Levon Resources and First Majestic. I personally and/or my family am paid by the following companies mentioned in this interview: None.