The chart below shows the S&P 500 from 1984 to 1993. Following the 2008 crash, the S&P was able to reach its old high in less than two years, then make a new high. As you can see, there was about a 20% decline and mild bear market in 1990 before the bull would resume.

Please note that we use the CCI (continuous commodity index) for Commodities and not the CRB, which as the result of the most absurd weightings, obfuscates what is really going in Commodities. Below is the chart of the CCI.

Recently we’ve been quite cautious on Commodities. Unlike various day traders and short-term oriented media, we realize that Commodities are in a bull market and this is only a correction. We do expect it to go further and run longer in terms of time. Furthermore, Commodities have followed the post 1987 stocks template very closely. The template calls for a 50% retracement a decline to 510. We are looking at 525-550 as a downside target.

What do you do in the meantime? In our premium newsletter we’ve discussed the one sector that is likely to benefit should Commodities continue to correct or consolidate. Consider a free 14-day trial to our premium service.

Jordan Roy-Byrne, CMT
Trendsman@Trendsman.com

Back in 2005 I commented in an article that “my investment portfolio is almost exclusively invested in a basket of commodities (gold, silver, potash, uranium and crude oil) of which the bulk is precious metals. A third of my investments are in gold and silver bullion and a range of individual commodity-related stocks, from the very large producers to the very early stage small junior exploration companies, or their long-term warrants where they exist. Two thirds are in precious metals ETFs.”
It is now 2011 and my rationale for doing what I did back then has stood the test of time and, I expect, will continue to do so for many more years to come.
Let me explain why I still think such a basket of commodity-related assets is the only way to go. I also encourage you to read my recent article entitled “Confessions of a Conservative Investor” here in which I explain why I believe there is nothing speculative about investing in commodities and why, in fact, they are the ideal investments for cautious investors.
From my perspective the economic and political risks on the global horizon are even more serious than they were a few years ago. Therefore, I still believe that the best way to preserve my equity, and secondarily, to grow it, is to invest in precious metals, energy and agriculture. Other sectors like the stock and bond markets are currently either overpriced by historical standards and/or highly vulnerable and, as such, the downside risk of precious metals, energy, agriculture and even most base metals is far less than those alternatives.
What Will Continue to Make Investing in Commodities a Winner?
Many events and circumstances could be the trigger that causes the system to implode, explode or go off on some tangent, It will probably be a sudden factor which will trigger yet others such as a leveraged hedge fund or sovereign debt collapse, unexpected military aggression or major terrorist activity (such as the sinking of a petrol ship coming through Hormuz or Malacca straits or perhaps even the Suez Canal.) Whatever unfolds will definitely cause currency gyrations and imbalances which will all cause public opinion and confidence to shrink dramatically. It is that last component which is the truly ugly part for which manipulation by the power brokers will be ineffective to counteract.
There is virtually nothing on the economic and political horizon to tell me that any country – anywhere - is changing course. The U.S. with all of its current policies, practices and scary economic and financial realities continues to operate as if it is business as usual. Moreover, there is absolutely nothing in terms of facts to suggest that the system will get any better. U.S. politicians, for example, only have a time horizon spanning to the next election – 6 years for Senators, 4 for the President and 2 for Congressmen – with the calendar always shortening. Their goal to is to be reelected, not make waves, always bribe the voter with their own, or borrowed, money and never ever tell the ignorant masses, or the fifty percent who actually vote, the ugly truth because they are sure to turn on the messenger.
Denial always trumps an acceptance of the truth even when one is endorsing a system designed to leave one’s kids with bad values and worse circumstances than we have now. The public will always opt for the pleasure of the moment rather than deny themselves to ensure a better future for themselves and/or their children. Proof of that  is everywhere you look – home “owners’ with no equity in their homes and mega-sized debts to the banks, credit card debt often in the tens of thousands of dollars, leased cars in the driveway, expensive holidays they can’t afford, shopping sprees with money they don’t have, little or no savings in their bank account and either no retirement savings plans at all or ones that are totally under-funded – all topped off by a major aversion to paying their fair share of taxes to maintain the benefits their various levels of government provide. Ah, the good life!
Conclusion
So how do I end this rant? Economic and political realities are grim and getting worse. There is scant evidence of any serious and realistic policy initiatives. If there were the public would reject them because it would invariably entail sacrifice and deferral of an enhanced lifestyle until some unspecified future date.
My best advice is to put all (or almost all) your investment eggs (dollars) into a basket of precious metals (gold and silver), agricultural (potash) and energy (uranium and crude oil) assets including a mix of bullion, individual stocks and/or their associated long-term warrants (where available) and ETFs. Doing so will preserve what monies you have and to make the most of the dire circumstances many “first world” nations find themselves in today – and will to an even greater degree in the months and years to come. The U.S., the UK, and most of Europe for that matter, get all the media attention but smug Canadians and Australians, and others too, are not immune to the political and economic/financial uncertainties that abound. Remember, many people hatched their future fortunes by judicious acquisitions in the 1930′s when everything looked bleak so it is not too late for you to take both protective and profitable action today.
I conclude this rant by asking two simple questions: “Have you invested to the maximum in precious metals, energy and agriculture assets and, in particular, in gold and silver based investments?” and “If not, what are you waiting for?”
Arnold Bock is a frequent contributor to www.FinancialArticleSummariesToday.com, “A site for sore eyes and inquisitive minds”, and www.munKNEE.com, “It’s all about MONEY” of which Lorimer Wilson is Editor and who offers a  FREE weekly “Top 100 Stock Market, Asset Ratio & Economic Indicators in Review”

Now I am no expert when it comes to retirement investing so I can’t tell you if annuities or TIPS are adequate or not. What I can tell you is that I am an expert on inflation and that this article is either incomplete or extremely negligent.

How can one talk about beating inflation and not include Precious Metals and Commodities? This is totally asinine. Commodity bull markets go hand in hand with inflationary periods. Yes, Gold doesn’t always match inflation. It rises when inflation expectations rise and not when there is disinflation. And yes, clearly the author and most followers of mainstream publications fail to realize that excessive sovereign debt is a precursor to severe inflation. Bank lending, consumption, etc is not relevant in this environment of impending sovereign bankruptcy, zero percent interest rates and quantitative easing.

Moving along, the author makes the Altucher argument which perma-bulls constantly resort to. Who cares if there is inflation, buy stocks anyway! Ok, fine. But these stock pumping a-holes don’t even consider the right stocks. We know they will never recommend gold stocks. However, you can’t even get them to recommend energy stocks, agriculture stocks or any kind of miners. Instead, they will pick some big conglomerate with a minuscule dividend. Good for dis-inflation but worthless for the kind of inflation that is coming.

Finally, the author fails to even consider emerging market shares or debt, which, although seemingly riskier, will outperform over time. Those economies are growing faster and so to will fiscal improvement. Nevermind that some of these governments are far less indebted than the US, Europe, UK and Japan.

Retirees should at least get started by putting a little bit in Precious Metals, Commodities, and Emerging Markets. Hell, these things are actually in bull markets! What a concept. Do that and you can still feel comfortable with your grossly over-sized and wasteful position in US equities and bonds.

Full disclosure, yes I am talking my book. I write a gold newsletter and have been a commodity bull for a while and will be in the future. However, unlike most perma-bull stock pumpers, my book makes money! How about that. If you want real perspective on inflation and how to make a killing during what is coming, then consider a free 14-day trial to my premium service.

2.   I’m talking about the markets, not the survival pouches of both gold and food, although that should not be ignored either.  One of my richest paid subscribers, billionaire T-Rex, has been buying massive tracts of farmland over the past few years.

3.   Jim “mighty man” Rogers has done the same, and Mighty Man calls the agricultural markets the best value in the world today.

4.   Value plays are where all the real wealth is built, and food is right now the ultimate value play.  Here’s the Corn Chart

5.   Note the Fibonacci retracement line at the 370 region.  That’s your first buy point IF price corrects, and IF you are out.  It should be very modest in size.  Always assume you are wrong in the market when calling a top or bottom, if you are interested in making money.  Money-making and projecting the market are related, but not the same thing.  Profits had to be booked this morning in the food markets, but only on trading positions, not core positions.

6.   The banksters understand this reality the best, and, not surprisingly, Public Investors have the lowest grasp of the concept, and the lowest wealth.  Is there a correlation?  Obviously there is.  Public Investors if you can believe it, are actually net short the food markets.  See COT reports at Comittment of Traders and you can see the public investors (non-reportables) holding massive net short positions in corn, wheat, soybean, and doing it with huge leverage, against the banksters, into the recent lows.  The public “knew” the food glut would never end.   Wrong.  Some of you know the Canadian Wheat Board is projecting the smallest wheat crop since 1971.  Is the public paying attention?  NO.  What entity is going to buy that short position when the public bails?  Answer nobody at these prices.

7.   I emphasized the new horror reported on Bloomberg News, the new horror that “Elmer Fudd” Public Investor has been focused on buying the “principal-protected” derivatives products, which could be a “growth with safety” scam hawked to him by the laughing banksters, after they blew him to kingdom come in the stock and real estate markets.  Public investors tend to disdain value, and patience.   Wealth is built with an understanding of TIME & VALUE.  Respect time, and understand there’s a reason it’s called “Father Time”, not “My Personal Slave is called Time”.  Professionals understand time rules them, not the other way round.  Most investors want “the juice”.  If a market offers 1000% gains, they want to leverage it to make 10,000%.  This thinking is madness for anything but wild gambling money.  What the banksters do, and the best hedge fund managers do, and this point is all-critical, what they do is they leverage consistency.

8.   If somebody is gaining 5% a year with tiny drawdowns, there is vastly more opportunity in leveraging that performance, than trying to figure out that since gold could rise to $1500, if I leverage that 10 times over, I make $3000.  That’s true, but if the item has volatility, I’m wiped out long before I make any $3000 an ounce.

9.   Those of you that are gamblers need to sit down and decide the right amount of leverage.  You’re probably trading 5-10 times too big.  Professional hedge fund managers will typically allocate 1% of their fund assets to a gamble and carry just 1 or 2 gambles a year.  The rest of the assets are allocated to leveraging consistency.

10.        Corn, wheat, and soybeans are on a short-term tear upside right now, while oil and gold flounder, with the shorter-term charts looking terrible.  Much more importantly than any hot streak this week, the food markets may be putting in bottom prices that may not be seen again for 10, 20, or 30 years.

11.        Here’s the oil chart, basis USO-nyse.  Oil Wedge Chart I see a lot of technicians frequently drawing wedge chart formations on various charts, when there is actually a parallel upchannel.  Using high and low points from a previous up or down trend to create a wedge pattern in a current up or down trend produces a “fantasy wedge” (and real losses on positions put on based on these fantasies).  The gold community lost millions trying to short the stock market based on a perceived rising wedge that I adamantly maintained was a parallel upchannel.  I’ve highlighted a real wedge pattern on the oil chart, using a blue demand line and a red supply line. Here’s the  Oil Monthly Chart.

12.        Note the huge HSR (horizontal support and resistance) in the 40 area.  It is actually more in the 42 area, but I like to deliberately be inaccurate with charts, erring on the side of risk, not reward. It also serves to remind me that I’m not smarter than liquidity flows.  What is happening in the oil market now is that investors who bought at the 40 area on the way up to the high at 119, and bought in the 40 area on the way down, well, all want OUT of oil.  Many want out of risk altogether. They are going into cash in another price-chase, and doing so at the most horrific time to do so in 80 years, and arguably the most horrific time in all of history.

13.        Nick Moore, head commodities guru for Scotland’s top bank, says commodities will be back in vogue within 12 months as the “go to” asset.  You need to be already in the market when that happens, or you’ll be back chasing price, back getting whipped in and out of by the banksters.  Again, remember my statement in the next paragraph, that to avoid being attacked by the banksters, your market entry points need to be isolated from the actions of other groups of size, namely the fundsters and Elmer Fudd Public Investor.  Oil looks lower, yes.  In time, USO at $42 will look like gold at $400 does now.  Don’t back up any oil tanker truck on the buy, but feather in, as the banksters do, using my pyramid generator to execute in action professionally.  Preferably, your buys grow in size, all the way to zero.  The oil market is getting lonely, which means the banksters are not that interested in mauling the new buyers of these levels.

14.        The banksters have so much wealth, that their MARKS are always, by definition, huge groups of investors engaged in mass-action.  If you want to survive the market wars, you are best served by not being a target.  The idea that “well, everyone else is worse off, so I’m relatively the same” works in a market correction, not in a wipeout. If everyone else is headed to the breadline (very possible if not likely), or the gulag, I would suggest that type of “relative logic” is flawed at best.  The lower the price of a solid asset is, the less the odds are of it going to zero.  The lower the price of an item is, the more that Elmer Fudd public investor will scream that it is going to zero. With food, if prices fall low enough, starvation occurs as farmers abandon fields.  Bottom line: Elmer Fudd goes to zero long before food does. This horror can happen more quickly than most people think, and has many times over history.  Starvation tends to be a bit of a wake-up call, agreed?

15.        The time is now for leveraged investors to use modest leverage in the grains markets, as it was at gold $300.  If you like getting electrocuted on a regular basis with a million volt bankster powerline, then wait for the grains to trade over $20 a bushel before using leverage.  Using leverage is VERY difficult NOW in the food markets.  At $20 a bushel, it will be hundreds of times more difficult.  The typical futures trader uses 10 to 1 or 20 to 1 leverage.  That’s vastly too high, and is the sole reason they build a blood bank, not wealth.  Options can mitigate some parts of that risk, but how many people build wealth with options?  Answer:  Almost none. If you bought $4 of wheat with $3 of paper money, that is a huge amount of leverage, and can build enormous wealth.  Do you drink a few glasses of fine wine with dinner, or swig down 20 bottles?  Approach leverage the same way, with class.

16.        If you don’t normally use leverage, should you use it now in the food markets?  NO.  You don’t need leverage to build wealth, but for those who have a history of using leverage, now is the time to consider looking in the mirror, and making the decision to use leverage professionally to build real wealth with a real opportunity.  It means a big step down in the amount of leverage, and a big step up in the amount of time you are prepared to wait for your leveraged wine to age properly.  As price rises, you withdraw leverage, phasing down to zero, the exact opposite of the action of most investors.

17.        Obviously, I’m ringing the cash registers in the grains markets this morning with my trading positions.  Price rises, the pyramid generator triggers the sells into strength.  Strength must be sold, and weakness and that’s non-negotiable if you want to build wealth and sleep properly.

18.        Just because your analysis tells you a market is going lower does not mean you should not be buying now. That concept is another little-understood one, and big surprise, another key wealth-building tool.  The gold chart looks lower.  You know it, I know it, the banksters know it, the funds know it, and even some Elmer Fudds know it.  The banksters are buying anyways and so am I.

19.        Why would you buy now, when you “know” price is going lower?  A number of reasons:  First, if you are committed to gold as the ultimate asset, you know that over time, the current price gridline points, in terms of paper money, will be dwarfed.  Second, natural and man-made super events, like the Iceland volacano that has yet to explode but likely will, or a nuclear attack by a rogue state or terrorist cell, could cause the gold price to explode upside, turning your bear signals on your charts into graffiti.  There is the possibility of an emergency G20 meet to deal with a looming US dollar currency crisis, caused by the use of OTC derivatives by now technically bankrupt city and state govts.   There are the long term gold buy programs of the world’s central banks.  The list goes on, and on, and on.

20.        Here’s the daily gold chart for the GDX, the gold stocks ETF.

GDX Daily Chart. The Sell Signals are Buy Signals for YOU

21.        Most in the gold community own gold stocks, and a lot of them.  I don’t see anything on that chart to be of concern.  Projected lower price and concern should be separated.  You should be concerned if you are piloting the good ship Gold Cork; if you are fully invested in gold at the 2006 highs or the 2008 highs, you should be concerned, but not in the way that you are likely concerned now.

22.        Here’s where I differ from most gold analysts, and from most investors: If you are a “gold cork”, I would not be concerned about your current positions. That concern is directly correlated to your obsession with paper money, as opposed to wealth building.  You should be concerned that you have no ability to buy more as the price of your gold items in paper money declines.  That’s a key point that is very well understood by gold fund managers, but not very well by individual investors in the gold community.

23.          The $55 zone on the GDX is widely followed in the gold community, because it is such a key high.  It is a key high because so many people bought there, afraid gold stocks were “getting away”.  To make money, you want to operate against your own emotions and under the radar screen of the banksters.  I’ve termed the fall to $49 “Black Thursday”, and have noted to subscribers that I absolutely believe the gold community and the fund community bailed on hundreds of millions of dollars of gold into those lows at gold $1196 and GDX $49, and horrifically, they are using the same failed tactics, now, that failed them then, to look for a bottom.

24.        Let me elaborate further.  You bought in size basis $55 on GDX and liquidated at $49, or at least considered bailing. The chart now shows some short term signs of bottoming, but it looks like the daily chart “downcycle” has further to go.  The problem for you, is that the banksters operate by creating large bait traps.  While the GDX may well bottom at say, $45, what if it doesn’t?  When you PLOP in a big wad of capital based on your analysis at $45, what happens to you if the banksters maul the price to $40?  Answer:  You bail.  While $49 is unlikely to be any final bottom, price could gyrate between $49 and $55 and you could book profit, perhaps numerous times, while everyone else stands there in audience mode.  Move in the market quietly, not waving a flag.  “Here I am Mrs Bankster, together with the MACD cross mob, come and get me!”.  I don’t suggest you engage in that action unless you have a death wish.

25.        Calling tops and bottoms with technical, fundamental, and cyclical anlaysis doesn’t build wealth.  All the banksters need to do is whipsaw the market, and since they see where all the stoplosses and entry points are, it is not rocket science for them to say good-bye to you in very short order.

26.        Here’s the bullion chart, in paper money.

Gold Daily Chart.  Looks Lower.  So Start Buying, Obviously.

In time, you’ll find the price of gold in paper money starts to lose power and lose meaning for yourself.  “So what if the price is up $30, or down $30”, you say.  What matters is how you use that information to accumulate ounces.  What matters is your ounces count, not your paper money count.  I gave subscribers a very clear picture on the week-end of the difference between a display case full of gold bought last week, and a display case full of toilet paper money that is the remains of failed market plays.  That’s a double kick in the financial head.  You attempt to buy gold, but buy too much, panic, and end up with even less paper money than you had before you bought the gold!  Now you are staring at a display case full of paper money unsure of your next smove, totally demoralized.  Let’s end that insanity today:

27.        I discussed the GLD-n ETF product that is highly suspect, in terms of whether it holds the gold it claims to, for the people it claims to hold it for.  This ETF is far more liquid than the others, and trades early in the morning when the others have massive bid-ask spreads.  It is the ultimate gold shorting vehicle with the kicker that it could be a fraud!  I’m currently running a short GLD-n program with my pyramid generator, using about 15% of my long gold allocation.  I would NOT trade GLD-n from the long side.  Rather than playing Sherlock Holmes and trying to pick the exact bottom of the gold sell-off, I suggest running an up to 30% short position against your much larger gold long positions, while you buy this weakness of gold against paper money.  That weakness of gold against paper money should NOT be a concern for your existing positions of gold ultra-wealth, but only a concern if you are not in a position to build more gold wealth.

28.        Special Offer for Website Readers: Send me an Email to freereport4@bell.net and I’ll rush you my “Get Me More Gold Stock Now!” report.  I’ll show you the techniques to add to your existing gold stock positions, using a bear gold stocks ETF to build those positions and ensure each and every night you sleep like a gold baby!  Thanks!

Thank-you

Stewart Thomson

Graceland Updates

Graceland Updates.

www.gracelandupdates.com

Email: s2p3t4@sympatico.ca

Risks, Disclaimers, Legal
Stewart Thomson is no longer an investment advisor. The information provided by Stewart and Graceland Updates is for general information purposes only. Before taking any action on any investment, it is imperative that you consult with multiple properly licensed, experienced and qualifed investment advisors and get numerous opinions before taking any action. Your minimum risk on any investment in the world is: 100% loss of all your money. You may be taking or preparing to take leveraged positions in investments and not know it, exposing yourself to unlimited risks. This is highly concerning if you are an investor in any derivatives products. There is an approx $700 trillion OTC Derivatives Iceberg with a tiny portion written off officially. The bottom line:

Are You Prepared?

In the first stage, the economy enters a recession after a large credit bubble. The recession and end of the credit bubble lead to deflation. As a result, the US Dollar and US Treasuries outperform. Think 2008.

Policy makers (a term for interventionist bureaucrats) then provide stimulus via monetary easing and deficit spending. Gold and gold stocks outperform with silver not far behind. Think late 2008 to early 2009.

The economy gets a bump from the stimulus and economically sensitive markets such as commodities and stocks outperform. Think 2009.

This brings us to where we are now. The market is starting to sense that Europe’s debt burden is too high as its economies struggle to recover under the weight of excessive debt. The market is beginning to sense a rising probability of default. Precious metals are soaring against the Euro, the Pound and the Swiss Franc.

Meanwhile, with money moving back into US Treasuries, the US will have the ability to attempt another stimulus and announce further quantitative easing.  Europe is currently ahead of the US on its track to currency depreciation, rising inflation expectations and rising CPI/PPI. The US still has time before the market begins to worry about its debt burden.

The next stage is the transition from the initial outbreak of price inflation to severe inflation. Inflation accelerates due to a loss of confidence in governments and currencies. A failed economic recovery leads the market to realize that the debt burden is too large and will ultimately be defaulted upon or inflated away. At this juncture, all commodities begin to perform well again. It may take anywhere from six to 18 months for this stage to be evident.

Finally, inflation is exacerbated as supply shortages emerge. Tight credit restricts new production and consumers begin to hoard. During such a period, precious metals and commodities will continue to perform well but the agriculture sector will be the real leader.

In order for an investor to maximize returns, they must be able to hold their convictions and adapt to the changes in the coming cycle of inflation. Currently, precious metals are obviously far and away the best play. While more and more investors are waking up to gold, they are not embracing it enough. If it is clear that Gold is a safe haven, why are you only devoting 5-10% of your portfolio to it? Moreover, why do you have zero or 5% exposure to gold stocks when their outlook is superior to commodity stocks and emerging market stocks?

Of course market timing is important and we are here to help. Our combination of technical analysis and sentiment tools has allowed us to catch the last two short-term bottoms in the precious metals sector. We also use the same techniques in our Macro newsletter. If you’d like professional help in navigating the coming mania in the gold and silver stocks, then consider a free 14-day trial to our premium service.

Good luck and protect yourself!

Jordan Roy-Byrne

http://www.thedailygold.com

Jordan@TheDailyGold.com

http://www.theaureport.com/pub/na/6252

“The price for manganese ore has recovered a lot more swiftly and strongly than we anticipated,” explains Helen O’Malley, a bulk manganese specialist with London-based CRU, adding: “The price bottomed out last year to about $3.50 per dry metric ton unit (DMTU) and now it’s up to about $8.00.” In this exclusive interview with The Gold Report, O’Malley sheds some light on the seldom-discussed metal and its supply and demand fundamentals. She also explains how the market is really being driven by China and even lists several junior mining companies who are actively exploring manganese properties.

The Gold Report: Helen, our readers may be unfamiliar with manganese and its applications. Could you please provide us with an overview of the metal and its main uses?

Helen O’Malley: We estimate about 98% of manganese is consumed in carbon steel or stainless steel. So that accounts for the bulk of consumption. The other 2% is chemical applications, mainly for making batteries, so it’s really a small segment. CRU is focused on the steel side of demand.

The annual production or demand of the manganese ferroalloys would be around 14 million tons per year and of that manganese metal would be just over 1 million tons a year.

What is a manganese ferroalloy? Well it’s essentially an alloy of iron, hence the “ferro” in the name. They contain a high proportion of manganese, anything between 65% and 78%, perhaps even higher.

The ferroalloys fall into three main categories. We have silico-manganese, high-carbon ferromanganese and refined ferromanganese. These grades differ in chemical composition, with varying levels of carbon, manganese, silicon and impurities.

These alloys are used in the production of carbon steel. There are two main uses of manganese alloys in the steel-making process. Firstly as a deoxidizer and desulphurizer in the steel-making process and also they’re added to steel in varying quantities to give it certain properties like hardness and strength. You can’t make steel without manganese.

Manganese metal, on the other hand, is mainly used to make stainless steel, as well as other specialty types of steel.

TGR: What are some of the specialty steels?

O’MALLEY: Stainless steel would be classified as a specialty steel. Manganese is used in relatively high proportions to make 200 series stainless steel. This grade of stainless steel has emerged in the last few years, particularly in China, in response to high nickel prices and it has gradually grown as a proportion for the stainless steel market. Other steels containing a high manganese content might be line pipe, tool steels and high-strength low-alloy (HSLA) steel, which is a class of alloy steel that has good mechanical properties and is lighter than carbon steels.

TGR: How much manganese is used to make a ton of steel?

O’MALLEY: We estimate you need about 10 kilograms of manganese alloy to make 1 ton of steel (carbon steel). This consumption rate is actually gradually rising over time, very slowly; but we think this is due to increasing demand and, therefore, production of these high-strength steel grades.

The consumption of manganese is highly dependent on the type of steel you’re producing, whereas the relative consumption of each grade of alloy depends more on the steel-making process route (electric arc furnace [EAF] versus basic oxygen furnace [BOF]) and availability of alloy to the steelmaker.

TGR: You’re a bulk manganese specialist. Where does bulk manganese fit into the sector?

O’MALLEY: It’s called bulk because there’s actually a large family of metals under the umbrella “ferroalloys.” So you might have things like ferrovandium, ferrotitanium and lots of other alloys; but we put a fence around three main groups of alloys, which are relatively large in volume. These are manganese, silicon and ferrosilicon.

On the other hand, if you compare these to markets like coal (around 800 million tons per year) or iron ore (around 2 billion tons per year), then the scales are actually very small.

TGR: You follow manganese prices as well. Judging by my research, manganese prices are up year-over-year by about 20% and about 7% since the end of 2009. What’s causing the demand side pressure on the price?

O’MALLEY: If you look at the difference between the trough in prices last year and where we are now, prices are actually up about 80%. So prices have come up quite a bit from the middle of 2009. However, they are still about 40%-50% below the peak levels of 2008; while there has been some recovery, they’re still long way off pre-crisis levels.

TGR: What’s been causing this rise?

O’MALLEY: There are two factors. First, the tightening in supply/demand fundamentals. This is directly in line with recovery in global steel production, so that’s your demand pull. On the supply side, last year the major producers around the world slashed production quite aggressively. That’s been putting pressure on supply side fundamentals.

Another factor is that production costs have been rising, so this has been raising the floor price for manganese. This is coming from rising manganese ore costs. In fact, manganese ore is a very important component of production costs and it can account for as much as 60% of the manganese alloy production costs. So it’s a very important driver of alloy prices. The price for manganese ore, for example, has recovered a lot more swiftly and strongly than we anticipated. The price bottomed out last year to about $3.50 per DMTU (dry metric ton unit) and now it’s up to about $8.00. This market is really being driven by China; but, because it feeds into production costs around the world, it’s affecting global alloy prices.

TGR: Please explain the unit price.

O’MALLEY: The price unit that most people refer to is dollars per DMTU because it’s a way of normalizing ore to manganese content. It means that the price per unit (based on 100 units per metric ton) of pure manganese would be $8.00, at today’s prices. If you want to convert that to a price in dollars per ton of actual ore, you would have to multiply it by the contained manganese of your product and multiply again by 100 (to bring it from a unit to a metric ton).

TGR: How do you determine the grade of manganese in products in order to set the price?

O’MALLEY: We choose a benchmark grade, which is a medium grade ore. That would be around 43%–44% manganese. It’s important to understand the distinction between the ore market, which is obviously a mined material, and the alloy market, which is a processed metal.

TGR: What price do you expect both manganese alloy and ore to fetch in 2011 and 2012 and even beyond that?

O’Malley: Looking at the alloy side first, the price is rising at the moment and that’s because supply and demand fundamentals are tight and also because ore prices are rising. We think that this tightness in the alloy market will persist for another couple of years. This is because global demand from the steel sector continues to recover. You’ve got recovery in Europe and North America, as well as continued very strong growth in the developing countries—especially China.

There are really only a few producers that account for the bulk of production. We think that they will be maintaining supply discipline for the next couple of years. That will help to keep fundamentals tight enough for prices to rise. We expect prices to continue firming through 2011. On an annual basis we would expect prices to rise between 20% and 30% this year over the 2009 average; next year another 10%–15% on that.

This is referenced to 2009 where prices got quite low. After 2012, we sort of see some downward pressure emerging as more supply comes into the market and demand growth starts to moderate.

That said, we don’t think that either manganese ore or manganese alloy price will return to historical trends. This is because we think the manganese ore market is going to remain structurally tight. This is going to add or provide support to alloy prices.

TGR: Helen, let’s say you were talking with an investor who wanted to play the manganese market. What should that investor know and should she or he be excited?

O’MALLEY: I’m biased. I think the manganese market is exciting anyway! In previous years, the manganese market was kind of hidden. No one really talked about it; no one really knew what it was. We saw prices increase very sharply in 2008, then collapse and now they’ve come back strongly. I think this is exciting for investors and maybe junior mining companies.

The manganese market is mostly either privately held or represents one of a number of commodities for someone like BHB Billiton Ltd. (NYSE/ASX:BHP,PKSHEETS:BHPLF). It’s pretty difficult to get a pure play exposure to manganese at this point in time.

There are a few hot spots that you should keep an eye on in terms of developments in the market. The first one is the ore market. Prices have come back a lot more quickly and strongly than we were anticipating. This is a market that’s really driven by China, which is “hoovering” up any manganese ore it can get its hands on because of the strength in steel production and the constraints in China’s domestic ore production. The supply chain cannot really keep up.

The international manganese ore market is really in the hands of only a few producers in three or four countries. Manganese is a bulk commodity, so it’s going to be subject to constraints from infrastructure. Mines are ramping up as quickly as they can in an attempt to bring on new capacity. But at the moment it’s lagging the rate of growth in demand.

In 2008, you saw prices spike up to $18. I don’t think we can rule out another spike in prices.

TGR: Is that what’s causing Australian-based companies OM Holdings Ltd. (ASX:OMH) and the private firm Consolidated Minerals to merge?

O’MALLEY: As I said, it’s Chinese demand for manganese ore that’s really driving prices higher. If you have a view that this pattern is going to continue, then you’d certainly be interested in expanding your exposure to the metal. In terms of what this could do to the market, it’s hard to say, but, as I’ve said, the ore market is already very consolidated.

The size of the market, excluding India and China, in terms of supplies is around 25 million tons a year. Only about five or six producers account for that production.

TGR: Are there some junior companies out there that have manganese properties that perhaps investors should be looking at?

O’MALLEY: We try to keep a database of all known manganese mining projects. I can tell you that the list of projects in Australia has gone from a handful to several handfuls just in the space of about six months. There has been a lot of activity in Australia among the junior mining companies, although almost all of them are pre-exploration phase. They’re trying to raise money to start exploration programs. Just to name a couple, Aurora Minerals Ltd. (ASX:ARM) and another called Encounter Resources Ltd. (ASX:ENR), are both set to start drilling this year.

There’s another one called Spitfire Resources Ltd. (ASX:SPI), also in exploration stage. Spitfire completed an initial Joint Ore Reserves Committee (JORC) compliant resource estimate on part of its deposit last year, but continues to raise finance to fund further exploration.

There’s one company that’s actually started trial mining already. They’re called Auvex Resources Ltd. (privately held). They started trucking ore from their mine at Ant Hill to Port Hedland late last year and plan to start full production this year. Auvex is in a joint venture with a company called Mesa Minerals Ltd. (ASX:MAS) (formerly HiTec Energy Ltd.).

TGR: Are there any explorers in the U.S. with significant manganese assets?

O’MALLEY: There’s Wildcat Silver Corp. (TSX.V:WS) and its Hardshell silver-manganese-lead-zinc property in Arizona. As we understand it, silver is the main product. I think Wildcat’s deposit and the manganese stream is from a pretty low-grade deposit relative to the standard manganese mines owned by primary producers. I think that’s one difference; and, if silver is the main product, that probably will be more key in determining the actual viability of the mine as opposed to necessarily manganese.

However, given the relatively large size and breadth of the manganese market, there is a place for Wildcat Silver to participate as long as the project is competitive and that they produce a product this market can use.

TGR: I don’t know how many manganese players there are in the U.S., but there can’t be many. What would it mean to have a company producing manganese in the U.S.?

O’MALLEY: You’re right. As far as I know, there aren’t any active primary manganese mines in the U.S. There are only two main manganese smelters in the U.S., and each is owned by major international producers who source manganese ore from their captive mines overseas. The U.S. is also dependent on imports of manganese alloys for its steel sector.

TGR: Helen, thank you for your time. We’ve learned a lot.

Helen O’Malley joined London-based think tank CRU Group CRU’s Steel Raw Materials Team in 2005, and has since developed considerable knowledge of and expertise in the analysis of metallics, iron ore, crude steel, and ferroalloys markets. Up until early 2009, she managed CRU’s Iron Ore Cost Model and was a key contributor to research in the iron ore market, with her expertise focused on iron ore supply and production costs. Her current responsibilities centre on the production of CRU’s manganese ferroalloys market analysis and forecasting products: Helen is editor of the Bulk Ferroalloys Monitor and the Manganese Ferroalloys Market Service. In addition, she supports research activities in manganese production costs. Prior to her career at CRU, Helen completed a Masters in Engineering from Cambridge University, this incorporating a year of study at Massachusetts Institute of Technology (MIT), Boston, Mass.

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DISCLOSURE:
1) Brian Sylvester and Karen Roche of The Gold Report conducted this interview. They personally and/or their families own none of the shares of the companies mentioned in this interview.
2) The following company mentioned in the interview is a sponsor of The Gold Report: Wildcat Silver.
3) Helen O’Malley: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family are paid by the following companies: None.

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I did send out some charts and a video on Thursday night about the market crash/recovery if you have not seen it. It’s called “Stock Market Micro Intraday Crash Shows Us Where The Safe Havens Are”.

Below are my ETF charts for the commodities and index I actively follow and trade.

GLD – Gold Bullion ETF – Daily Chart
GLD is a great ETF to trade as it generates 10-20 quality low risk setups each year for subscribers. The chart clearly shows the large rally in late 2009 and the correction as it formed patterns moving from a down trend – base – and back to an uptrend.

$USD – US Dollar Index – Monthly Chart
This weekly chart I think shows some serious potential for gold and silver prices. The US Dollar is now trading at a key resistance level which I think it will have a tough time moving higher. The dollar has been moving up for several months and looks ready for a pullback or at least a pause. If the dollar starts to roll over in the next few months then we should see gold and silver move substantially higher.

SLV – Silver Bullion ETF – Daily Chart
Silver like gold bounced off a key support level last week as investors started to buy silver as a safe haven. Gold moved up sharply on the day of the intraday market crash while silver traded sideways for a day before joining the party. The following day investors starting buying up silver because it was lagging its big sister “yellow Gold”.

USO – Oil Fund – Daily Chart
Several weeks back I posted this chart showing how volume was drying up as oil tested resistance on declining volume. This indicated to us that once/if the price started to roll over it would trigger a sharp sell off as short term traders who bought in anticipation of a breakout to the up side sold out of their positions once support was broken. This is what caused the heavy volume and sharp price drop.

SPY – SP500 INDEX Trading ETF – Daily Chart
It’s tougher now to read the index charts as last weeks heavy volume market crash could be seen in two very different ways…

One – We are starting a correction and had a jump start with the human error of selling billions of dollars worth of investments instead of millions prematurely pushing pulling the market down to a level where I think it should/will test again before moving up.

OR

Two – This extremely heavy sell off is just the start of what is to come…

Since the government owns the largest banks and the banks are unloading/selling massive amounts of shares calling it an error how do we know it’s not a scam for them to completely short the market in anticipation for a collapse which would make them unheard of amounts of money as the market drops… It is tough to trust anyone sitting up there in those power positions after everything they have been caught for already…

I personally think we could see lower prices in the coming month then the market will bottom and we will see new highs for 2010.

Weekend Commodity & Index ETF Trading Strategy Conclusion:
Stepping back and looking at the above charts it looks as thought we could see stocks and commodities digest the recent moves. In short, gold and silver have rallied strong and now trading near resistance. Oil dropped last week and is now trading near a key support level. I feel it the market will trade sideways and stabilize before for a while as the SP500 had that crazy drop last week and now the market is in shock. I figured it would see 3-4 weeks to reach those prices yet it happened in 1 day so now the market could do very little for 3-4 weeks…

The US dollar is something we will be watching more closely because it’s trading at key resistance level. In the past it has taken a month or two for a rally to roll over and head back down. This could play out very nicely if the dollar tops and the rest of the market trends sideways to digest the recent moves. Once the dollar starts to fall it will provide fuel for the next rally in both stocks and commodities.

If you would like to receive my ETF Trading Strategy and Trading Signals Please check out my website: www.TheGoldAndOilGuy.com

Chris Vermeulen

The Gold Report: First, congratulations on your Encompass Fund performance of 137% last year. Morningstar rated your fund very highly in 2009.

Marshall Berol: In their database of over 16,000 funds, Encompass Fund was number five for 2009, and number one in the World Stock Fund category.

Malcolm Gissen: For the three-year period, the Encompass Fund ranked in the top 1% in the World Stock Fund category. The fund is about three-and-a-half years old.

TGR: What did you see in the investment landscape last year that others apparently missed?

MG: I think it’s a combination of things. We continued to emphasize resource companies and some healthcare companies, the sectors that we felt would perform well. The companies that we liked in those sectors did even better than the sector as a whole. For example, last year gold was up 24%. The gold companies that we liked, and also the silver companies for that matter, mostly doubled and tripled in value in 2009.

Early in 2009, Marshall and I discussed the fact that a number of these resource companies had been battered in 2008. We felt that they were performing well. They should not have declined in 2008 and they offered an even better opportunity. We had the courage of our convictions to add to our positions and to initiate new positions in some companies in these sectors. Our investors were well rewarded for our doing that.

TGR: What do you think was the difference between 2008 and 2009?

MG: In 2008, a lot of hedge funds had made money, as we had in prior years, by investing in resource companies, especially in the junior mining companies. We were pretty heavily invested in those areas in 2008. When the hedge funds had a lot of redemptions and had to come up with cash to pay their outgoing investors, the first thing they sold tended to be the companies in which they had large gains. In many cases these were the resource companies.

In the case of the junior mining companies, many of those companies’ stocks are thinly traded. So when these hedge funds started simply dumping millions of shares of these thinly traded stocks in the market, a lot of the junior mining companies fell 50% to 95% in value during the second half of 2008. Marshall and I started calling these companies saying, “We don’t understand. You just discovered 5 million more ounces of gold and your stock is down 15% or 20% in two days. This makes no sense.”

The companies told us they didn’t know what was going on, but somebody was clearly selling a lot of shares. It wasn’t until about October that these companies were in New York visiting East Coast hedge funds, and learned that the hedge funds had simply dumped their stock in the marketplace. That had a very negative impact on these junior mining companies. It certainly hurt the Encompass Fund.

MB: At that time, it was not only the redemptions that the hedge funds were getting. The hedge funds were getting margin calls. Individual investors were getting margin calls. Individual investors and the professional investors were very nervous. They were shell shocked as the second half of 2008 and the beginning of 2009 wore on. There was a tremendous amount of liquidation.

A larger gold company such as a Newmont Mining Corp. (NYSE:NEM) or a Barrick Gold Corp. (NYSE:ABX;TSX:ABX) could take that liquidation and go down some. Some of the smaller companies, the junior companies, went down tremendously, as Malcolm has said. They went down 50% to 90%.

We went back and looked through the portfolio. We went through the companies we owned and assessed what the attributes were, pro and con, of those companies. We looked at their finances, their management, their projects. Then we decided to eliminate a few of the companies that we felt weren’t as strong, weren’t as solid. We added to existing positions in companies that we felt were solid and the prices were mismatched to what the company represented. Then when the markets started to recover in March of 2009, a number of these companies went on to perform spectacularly for the balance of 2009 and into 2010. That’s what certainly contributed to the excellent performance of the fund, and what we think will continue to contribute to a positive performance of the fund going forward. Of course as we all know, and as the SEC requires us to say, past performance is no guarantee of future results.

Having said that, it is important to look at where a company has been and is and try and determine where you think it’s going to go as a company and as a stock investment in the future.

TGR: Marshall, in our last interview, you said the resource investment story is not over. We’re in the early innings. Where are we in the resource story today and what resources have the best investment story?

MB: Where we are in the continuum of the story is we feel it’s still early on. It’s not as early on as it was a year ago, or two, or three or five years ago. Gold has gone from $275 to $300 an ounce to currently, say $1,150. In the U.S., it’s a little off from the high reached last year of $1,220.

If you’re in Europe and you’re looking at gold in the context of euros, gold has hit new highs. That’s the same with various other currencies of the world. We feel that’s going to continue. We feel there are various reasons why it will continue for gold and silver. Silver has some of the same attributes as gold in that it’s a precious metal and it’s looked at as a monetary metal. But silver also has its industrial uses. That’s a major component with what happens with silver.

We continue to like copper and some of the other base metals. We continue to be very positive on some of the commodities involved in the energy complex, particularly uranium and coal and to a lesser degree oil and natural gas. Oil and natural gas march to their own drummer, if you will. These other commodities, the precious metals, the base metals, we feel certainly have further to go on the upside. If the next question is how far and how high, we wish we knew. We don’t have a good enough crystal ball to say. We would say that we’re still in the earlier innings of the ball game, if you want to use that sports metaphor.

TGR: Are you saying that’s specifically about gold or do you see that across the entire resource sector?

MB: It’s certainly gold, but basically along the entire resource sector. With regard to the commodities, the base metals, the industrial metals, it’s also dependent, particularly in the shorter term, on the economies of the world. It’s the U.S. economy. It’s Europe. It’s Asia. It’s China. You’re not going to have copper continuing to go up, as it has over the last number of months, unless the economies of the world continue to improve. We think that’s going to happen. It doesn’t happen in a straight line. There are fluctuations and there’s volatility.

If you look out a period of time, and by that I’m talking about 6, 12, 18, 24 months, yes we remain positive. Our outlook is based on a longer-term investment. We are looking for capital appreciation. We are not traders as such. We are not looking for short-term movements. Although we are aware of them and conscious of them, what we’re looking for, both for our individual client accounts and for the mutual fund, is long-term capital appreciation.

TGR: Haven’t some investors gotten impatient waiting for the long term? In other words, is the long term shorter now than it used to be?

MG: The long term is definitely shorter that it used to be. The markets are far more volatile. You have far more information available. You have many more individuals with all the information at their computers who are day trading. You have hedge funds and private equity funds controlling enormous amounts of money that have a profound impact on the market. All of this has tended to force investors to shorten up their horizons. The long term used to be 5 to 10 years, now it’s probably 3 to 5 years.

TGR: Has that changed the way you manage the fund in that case?

MG: Yes, it’s changed the way we manage money both for the fund and for individual clients. We had to make that change because of the volatility in the marketplace. We have to respond to that. We have to be aware of it. It enters into the way we operate, the way we invest.

MB: Having said that, we’re still looking to invest for the long term for capital appreciation. What it does change is that instead of having a 5- or 10-year horizon, as Malcolm said, you shorten that horizon to 2, 3 or 5 years. You also need to be more constantly aware of what the markets are doing and what’s happening with a particular company and the stock of that company so you can react if you feel it’s warranted.

Investors, particularly individual investors, but certainly professional investors as well, are human beings. Too many investors are acting too quickly because of the ease with which you can buy and sell equities these days. They’re acting too quickly. They’re pushing a button to buy or to sell before getting the full amount of information they probably should be utilizing. Having said that, that’s the market we’re in. You have to be aware of that and you try and take advantage of that.

TGR: Given that the long term has gotten shorter, how does that affect when you’re investing in resource companies? In other words, do you steer clear of companies that are just in the exploration mode and stick only with producers?

MG: No, we don’t. We invest in a good number of exploration companies. Some will not go into production without a joint venture or acquisition of the company.

MB: Because we anticipate that they may be bought out and somebody else will take it into production.

MG: Or they don’t want to get into production. A change for us is that we may be more apt to take profits than 5 or 10 years ago. For example, a good number of the resource companies in which we are invested have soared 200% to 400% in one or two years. We may still like the company and believe it has further appreciation potential, but nowadays we might consider selling part of the position in order to realize the large profits we attained. In other words, we will be taking some money off the table even though we might think that company has a bright future and the stock could go higher. That’s one of the ways in which our style, our methods, have changed as a result of the shorter-term focus and view that many investors have.

TGR: Now when you’re looking at those companies, are you looking for ones that are likely acquisition targets, or is that just a hope that that’s going to happen?

MG: That’s a hope that it’ll happen. We don’t like to rely on the fact that this company is likely to be acquired because too many things can happen. That should not be a determining factor in our decision to invest. We’re investing in companies that we think on their own will continue to increase shareholder value. A company that we think has excellent management and excellent prospects on its own. In the back of our minds, we’re aware that this company would be a very attractive acquisition target for certain larger companies and that might happen. If it does, that’s just a bonus. This would be in addition to the excellent returns we expect to get based on the fundamentals of that company itself.

TGR: That being said, what precious metals companies are you excited about right now?

MG: One of the companies that you’re probably aware we’ve been invested in is Exeter Resource Corp. (NYSE.A:XRA;TSX:XRC; Fkft:EXB). Exeter recently spun off its Argentinean resources into Extorre Gold Mines Ltd. (TSX:XG). The investors in Exeter received shares in Extorre. We like Exeter. We like its resources. We think it has excellent management. We think its resources would eventually be attractive to an acquirer, but on its own we think that Exeter will continue to increase the value of the company through their organic growth, through the drilling that it is doing. They’re doing substantial drilling at Caspiche, their Chilean operation in the Andes Mountains. We think that will continue and we think that the resources will continue to be expanded and upgraded.

As far as Extorre, we also like the projects it has in Argentina. It is continuing to drill at its Cerro Moro project in southern Argentina. We think they’ll have good drilling results. They’ll expand the resource. There’s very good quality gold there, high-grade gold and also silver. We think that is a project that could get into production relatively quickly, which is a very attractive attribute, as you know.

TGR: Is Extorre a single resource company or do they have multiple projects?

MG: It has a primary project where it’s drilling. It has other properties with substantial resources in Argentina. One has been held up for political reasons; the company is hopeful that it will be able to further explore and eventually mine. Extorre also has other exploration opportunities in Argentina.

MB: It has other exploration prospects that it anticipates working on down the road but currently the major activity is this Cerro Moro project (gold and silver)in southern Argentina.

TGR: Any indication of how large their resource is?

MB: Yes. Extorre has a 43-101 that’s approximately 625,000 gold-equivalent ounces. They’ve reported some of the drilling results that have been going on over the past six months or so, but there’s been no update on the 43-101 resource. That’s anticipated to be out in the next 30 to 60 days. So we’ll see. Some of the analysts are anticipating that there could be a doubling of the resource in the upcoming 43-101, but of course we don’t know. We’ll find out when it’s published. (Subsequent to this interview, Extorre reported an updated 43-101 resource report indicating more than 1 million gold-equivalent ounces.)

Exeter has just updated their 43-101 for their Caspiche project. They have over 30 million ounces of gold and gold equivalents. Caspiche has substantial copper in the deposit in the project. Converting copper to gold-equivalent ounces, you end up with over 33 million ounces of gold equivalent at the Caspiche project, one of the largest undeveloped copper-gold projects in the world.

MG: We should add that Marshall and I visited both of these properties in November. The Caspiche property is about 14,500 feet up in the Andes Mountains.

TGR: Does that make it difficult to recover those resources?

MG: It’s challenging. You have issues of infrastructure. One of the benefits with this particular property is that it’s very close to the Cerro Casale property that Barrick and Kinross Gold Corp. (TSX:K;NYSE:KGC) own. That is also a very large resource. This has led to speculation that the Caspiche property will be very attractive, particularly to Barrick, which recently bought 25% of Kinross’ interest in the Cerro Casale project to increase Barrick’s interest to 75% (Kinross continues to own 25% of Cerro Casale).

MB: While mining at 14,500 feet is challenging, it’s certainly doable these days. To the north of Exeter’s Caspiche project, Kinross has their Maricunga operating mine, which is about 10 kilometers north of the Caspiche project. Exeter and Extorre are not in production. Extorre is hoping to be in production in the next 12 to 18 months.

A company that we’re invested in that is in production, and has been increasing production, is Avion Resources Corp. (TSX.V:AVR). Avion is operating projects in Mali, West Africa. It acquired a project from Nevsun Resources Ltd. (TSX:NSU;NYSE.A:NSU) a couple of years ago at pennies on the dollar. Nevsun sold because it was concentrating on another project that Nevsun had in Eritrea. Avion has brought their project into production and is increasing production. It continues to drill and has acquired some additional land and additional projects. It’s a company that we’ve been invested in for the past couple of years. It has done extremely well both as a company on their business plan and as a stock.

TGR: In terms of silver, are there specific companies that you got an eye on?

MG: We’ve been invested in Endeavour Silver Corp. (NYSE.A:EXK;DBF:EJD;TSX:EDR). Endeavour has two major facilities in Mexico that we visited in July.

MB: Facilities being producing mines?

MG: Yes, they’re in production. Endeavour’s stock more than tripled last year.

TGR: What do you like about them specifically?

MG: There are several things. We like their properties but we also like the management. Management has a history of getting great buys for properties that are very easy to get into production. They have a history of getting into production quickly. As you know, production means cash flow. So from the time they make an acquisition, if they can get into production and be producing revenues, it makes the company more attractive because the cash flow enables them to continue to expand both organically as well as through acquisition.

TGR: Are they planning any acquisitions that you know of?

MG: I recently had dinner with the chairman and he would only say that there are a couple of attractive candidates, but he would not say more than that.

MB: Another company in the silver space that we own in the portfolio that has a different business model and game plan that we feel is very attractive is Silver Wheaton Corp. (NYSE:SLW;TSX:SLW). Silver Wheaton does not explore for silver, or discover silver, or mine silver. Silver Wheaton is in the business of providing financing to silver miners. They provide financing on an upfront basis and will buy the production, the silver production from a company on a long-term contractual basis. So it does not directly have the risk of the mining operation. Instead they will benefit from an increase in production at the mine or mines of a company that they have an agreement with, as well as benefit from an increase in the price of silver. The model has been very successful.

TGR: The rare earths have been getting a lot of attention lately. What’s your take on those?

MG: We got into the rare earth metals through a company called Avalon Rare Metals Inc. (TSX:AVL;OTCQX:AVARF). We did that about three-and-a-half or four years ago. We felt that the demand for rare earths would only increase. The Chinese are producing 95% of the world’s rare earths and have continued to talk about keeping the rare earths at home and not exporting them to the rest of the world. Meanwhile, rare earth metal applications are increasing all the time. They are particularly relevant in certain industries involving green technology. If you look at hybrid or electric cars, there are more than 20 pounds of rare earth metals in every hybrid car. If you look at solar installations, if you look at wind power, they all use rare earth metals. The most valuable rare earths are the heavy ones. Avalon has more of the heavy rare earths than any other western company.

MB: A company that has a different game plan on the rare earth metals is Dacha Capital Inc. (TSX.V:DAC;OTCQX:DCHAF). Dacha is a Canadian company and trades in Canada. It has a business model of acquiring rare earth metals in China and warehousing them outside China. The inventory is available for sale to companies around the world. It’s an unproven concept as far as it goes with rare earth elements. There are certainly other companies that have done similar things in other industries and other products. Dacha believes that it has the contacts and the sources to acquire the rare earth elements to store them and warehouse them and to be a seller of them at a profit over time. We think it’s a very interesting concept.

TGR: Thank you both for your time today.

Malcolm Gissen founded Malcolm H. Gissen & Associates Inc., an investment advisory services firm, in 1985. He has been an investment advisor since 1985 and has managed separate accounts since 1999. Mr. Gissen’s management experience has focused primarily on investments in publicly traded companies, including real estate investment trusts. Mr. Gissen received a B.S. degree from Case Western Reserve University and a J.D. degree from the University of Wisconsin. Marshall Berol has been engaged since 1982 as an investment manager in San Francisco, CA. Since 2000, he has been the Chief Investment Officer of Malcolm H. Gissen & Associates, Inc. In addition, for more than 20 years, Mr. Berol has owned his own investment firm, BL/SH Financial. Mr. Berol’s investment management experience has focused primarily on investments in publicly traded companies. Mr. Berol did his undergraduate work at the University of California (Berkeley) and received a J.D. degree from the University of San Francisco School of Law.

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) Tim McLaughlin of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) Of the companies mentioned in the interview, the following are sponsors of The Energy Report or The Gold Report: Avalon Rare Metals and Exeter Resources.
3) Marshal Berol: I personally and/or my family own shares of the following companies mentioned in this interview: Encompass Fund, Extorre, Exeter, Avalon, Avion and Dacha. I personally and/or my family are paid by the following companies: None.
Malcolm Gissen: I personally and/or my family own shares of the following companies mentioned in this interview: Encompass Fund, Extorre, Exeter, Avalon, Avion and Dacha. I personally and/or my family are paid by the following companies: None.

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In the event of a full-blown sovereign debt crisis, hard assets will become deeply desirable as one of the few “stores of value” left.

…all too often the size of debts, especially government debts, is hidden from investors until it comes jumping out of the woodwork after a crisis.
– Prof. Ken Rogoff, Financial Times column, “Bubbles lurk in government debt”

Last week, in “How to Protect Against Currency Collapse,” we talked about the mounting debt problem and how Western governments will deal with it.

If the debt is issued in your own currency, you ultimately just print more currency to inflate that debt away. (If the debt is issued in someone else’s currency, you are in deep trouble… as Greece, Latvia, Iceland and others have all found out.)

Right now the global economic recovery has the appearance of being cost-free. This is due to an age-old confidence trick known as “ignoring the bill.” To pull off this trick, you spend huge amounts of money on a high-limit credit card… ignore the mail when the bill comes due… and conveniently forget to reconcile your accounts.

Complacency reigns because the true costs are not being tallied. The Bank for International Settlements – an age-old central banking watchdog based in Switzerland – is having none of it.

The “simmering fiscal problem” of sovereign debt is set to bring industrial economies “to the boiling point,” the BIS reports in a new study. “Bond traders are notoriously short-sighted,” the BIS further scolds, “assuming they can get out before the storm hits… the question is when markets will start putting pressure on governments, not if.”

The Bank of International Settlements further believes that, if we do not turn from this path, inflation will spiral out of control. “Monetary policy may ultimately become impotent to control inflation,” the BIS scowls, “regardless of the fighting credentials of the central bank.”

Not China or Japan

Last week, readers wrote in to ask whether China’s currency might count as a viable hedge against collapse – perhaps through a vehicle like the Dreyfus Chinese Yuan Fund (CYB:NYSE).

The answer there would have to be: “Nope. Too risky.” China’s fortunes are still deeply linked to those of the United States:

• China’s currency is still pegged to the USD.
• China’s economic future is still heavily dependent on exports.
• China still owns massive quantities of U.S. Treasuries.

The above factors make it hard to determine how China will fare in the event of Western currency meltdown. The Japanese yen is also a deeply risky proposition, given its heavy export dependence, major UST holdings and massive internal debts.

This all goes back to a talk your editor gave in Chicago last summer, discussing the shape of the world’s next reserve currency. The gist was that all those who would seek to dethrone “King Dollar” are impostors.

China’s currency regime is not ready for primetime. Japan is struggling with a demographic death spiral. And the euro is crumbling before our very eyes.

In a paper-debased world, that leaves hard assets as the last option standing.

Where Have You Gone, Joe DiMaggio

Try as they might, investors will not be able to ignore the sovereign debt problem forever. When the reckoning comes due, the printing presses will kick into hyperdrive… and faith in the system will crumble (or perhaps shatter like brittle glass).

At this point, investors will turn their lonely eyes to hard assets, looking at precious metals and basic building-block commodities in a new light.

Up till now, hard assets have more or less been treated as a “hot money” play on global economic recovery. Price movements have been linked to speculative appetite and the general degree of optimism.

The onset of a sovereign debt panic could thus lead to a short, sharp and temporary drop in hard asset prices, as the “hot money” beats a hasty retreat. But over time, a post-crisis shift in psychology will occur. In a world where all major currencies are being debased, oil and metal in the ground will stop looking like speculative plays and start looking more like stores of value.

A Pending Rocket Ride

The Reuters/Jefferies CRB index tells the story of commodities’ lackluster performance. While equities have been going gangbusters, the CRB has been more or less flat for half a year.

That is because focus remains on cost-free recovery for now. There is widespread belief that the U.S. economy is in a sweet spot, with a goldilocks-like ability to push profits up while keeping short-term interest rates near zero. The Fed is widely revered at moment for having succeeded in its mission. Some bulls are even musing aloud now whether the “great recession” was even all that “great” – as if it were over and done, finis, all consequences postponed indefinitely.

It is an environment, in other words, that very much favors “paper” (leveraged financial plays) over “stuff” (hard assets).

But when faith in Western governments’ ability to shoulder the sovereign debt load evaporates, that equation will reverse rapidly. (And as the BIS noted in its gloom-and-doom report, it is a question of “when,” not “if.”)

And so, after a period of renewed fiscal panic, in which it is driven home, yet again, that the grossly indebted central bankers of the world do NOT have control – only the illusion of it – a need to take shelter from the ensuing inflationary paper-debasement storm will become paramount.

THAT is when hard assets will become most attractive… not as hot money speculative vehicles, but emergency stores of value. A true rocket ride for commodity prices – the likes of which we haven’t seen yet – could be the result.

A Simple Proxy

Not to beat a dead horse, but the above is further reason to consider the EverBank Ultra Resource Index CD (as mentioned last week).

The countries represented in the Ultra Resource Index CD were selected not just for their attractive cash positions, but their rich abundance of hard assets. Countries with vast quantities of natural resources “in the ground” – like Canada, Australia and Norway for instance – will be seen as sitting on vast treasure chests.

Such resources would have permanent and lasting value even if the entire global financial system melted down completely. (People can go without paper, but they will always need to eat, drive, build, and so on.) As the sovereign debt crisis unfolds, investors may well flock to these “hard” currencies in droves as their home-based scrip turns to confetti.

To find out more about the Ultra Resource Index CD – a product created at Taipan’s request, for which we receive a small commission – follow this link.

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Other Related Topics: Currency , Debt Problems , Justice Litle , Macro Trader

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