Each year the mining industry must come up with a major new gold discovery of five million ounces just to replace what one of the world’s top gold miner’s digs up. Because large pure gold deposits are so hard to find – the low hanging fruit has already been picked – gold miners are turning to deposits that contain other metals like copper.

“In the case of gold, the world is currently mining it faster than it is finding it. Furthermore the average size and grade of gold discoveries continues to decline.” Richard Schodde, Managing Director of MinEx Consulting

Mining is the story of depleting assets, that asset must be constantly replenished; miners that want to stay in business must replace every oz taken out of the ground and there isn’t a lot of the larger size gold deposits left to find or buy that would really affect most of these larger company’s bottom lines. Replacing what they’ve mined let alone finding more productivity/resources is getting harder and harder.
“It’s not a bad time to diversify if you are a gold miner. There are lots of reasons to be bullish on gold, at the same time copper has a stronger long-term outlook. Over the next five years I am by and large bullish and wouldn’t be surprised if copper saw an upper range between $10,000 to $12,000.” William Adams, analyst at FastMarkets.com

Porphyry Copper/Gold Deposits

Porphyry copper/gold targets are becoming increasingly important in the global quest to replace declining copper and gold production. These kinds of deposits yield about two-thirds of the world’s copper and are therefore the world’s most important type of copper deposit.

Porphyry copper deposits are copper orebodies which are associated with porphyritic intrusive rocks and the fluids that accompany them. Porphyry orebodies typically contain between 0.4 and 1 % copper with smaller amounts of other metals such as molybdenum, silver and gold.

There are two factors that make these kinds of deposits so attractive to the world’s major mining companies – firstly by focusing on profitability and mine life instead of solely on grade your other inputs of scale/cost can offset the lower grade and this results in almost identical gross margins between high and low grade deposits. Low grade can mean big profits for mining companies – Copper/gold porphyries offer both size and profitability.

The second factor affecting profitability of these often immense deposits is the presence of more than one payable metal ie for gold miners using co-product (copper) accounting the cost of gold production is usually way below the industry average.

So not only are the traditional miners of these scarce and often immense ore bodies in competition for them but increasingly yesterdays gold only miners are becoming interested as well. These kinds of deposits are one of the few deposit types containing gold that have both the scale and the potential for decent economics that a major gold mining company can feel comfortable going after to replace and add to their gold reserves.

The Vancouver Sun newspaper said high copper demand combined with limited new supplies have made copper the new gold as far as profit margins are concerned.
Copper boasts a higher profit margin than gold – at US$4.29 (U.S.) per pound copper has a 68-per-cent profit margin over industry average break even costs, compared with gold’s 52 per cent.
“As 2011 unfolds, we expect copper to touch $5, yielding an extraordinary 70 per cent profit margin over average world break-even costs including depreciation.” Patricia Mohr Scotiabank economist
Supply and Demand
Copper is supported by:

• The growth in demand from Africa, China, India and other emerging markets
• Global infrastructure deficit
• A low interest rate environment bodes well for the whole resource sector
• The overall weakness in the U.S. dollar translates into support for dollar denominated metal prices

In the Scotiabank Commodity Price Index report for April Mohr said “Copper could still retest the previous US$4.60 record of February 14. Chinese copper fabricators destocked copper and produced 2.1% fewer copper semis in January and February due to credit restrictions and high prices. However a big seasonal pick-up in consumption in the second quarter will lift prices.”
“We see renewed strength in the second half and you’ve got to be bullish copper for the next few years. The global recovery is becoming more broad-based and you’re not going to see any new mines coming on stream for at least this year.” Christin Tuxen, analyst at Danske Bank A/S
Australian equity research firm Resource Capital Research (RCR) said it expects the copper market to move from a small surplus in 2010 to a deficit of around 400,000 tonnes by 2011.
According to JPMorgan Securities Ltd, the world refined copper market will have a 500,000-metric-ton deficit in 2011.
BHP Billiton Ltd. (BHP), the world’s largest mining company, said in January that output from their Escondida mine in Chile, the world’s largest copper mine, would drop by as much as 10 percent in the year ending in June because of lower ore grades.
Codelco, based in Santiago and the world’s largest copper producer, said on March 25 that supply from its mines fell for the fifth time in six years.
London based Anglo American Plc and Kazakhmys Plc reported lower output this year.
Michael Jansen, metals strategist at JPMorgan Securities Ltd, predicts a deficit of 500,000 tons to 600,000 tons this year.
Macquarie expects a shortfall of 550,000 tons.
Morgan Stanley projects copper prices will average $4.45 a pound in 2011, up 24 percent from an earlier estimate.
Australia & New Zealand Banking Group Ltd expects copper to average $4.57 a pound this year, up 12.5 percent from a previous estimate.
European copper producer Aurubis said that the global economy continues to recover, according to the IMF, and should achieve a growth rate of 4.4% in 2011 followed by 4.5% in 2012. This indicates sustainably high copper demand that cannot even be harmed by China’s restrictive interest rate policy or the economic weakness of certain countries.
The market will see a wider deficit because of steady demand growth in emerging markets, including China and Brazil, a gradual economic recovery in the US and Europe and tight mine supplies. This year’s deficit will be the most since 2004, according to company data. Hidenori Kamoo, general manager of the marketing department at Pan Pacific Copper Co
Tom Albanese, CEO Rio Tinto Group, the world’s second largest mining company, said that the industry has struggled to maintain supply because of declining ore grades, delays to mine expansions and disruption from strikes.

Ore grades averaged 0.76 percent copper content in 2009, compared with 0.9 percent in 2002. CRU, a London based research company.

Chile mined 6.6 percent less copper in February than a year earlier, the fifth decline in the last six months. National Statistics Institute
“There are still reasons to be bullish on copper into next year. The market is still going to be tight.” David Wilson, analyst Societe Generale SA

Freeport-McMoRan Copper & Gold Inc., the world’s largest publicly traded copper producer, said in January that it would produce less metal than forecast this year.
Barclays Capital says copper demand growth will slow to 4.1 percent this year, down from 9.6 percent in 2010 – still more than twice the anticipated 1.7 percent expansion in supply. Barclays forecasts an 889,000 ton shortfall for 2011.

“We’re still seeing an incredibly tight market. China has to buy copper. They can’t find substitutes.” Kevin Norrish, managing director, Barclays Capital
RBS forecast average prices between $10,000 and $11,500 in 2012, 2013 and 2014.
Barclays Capital saw copper trading on average at $12,000 in 2012.
StanChart’s Zhu saw prices at just under $12,000 in 2014.
Christine Meilton, chief consultant at CRU Group said there was a risk some copper projects, expected to come on stream in 2012 and 2013, will be delayed because of red tape, poor infrastructure and funding difficulties.
“We suggest the upcoming summer period could be a very exciting time for LME copper prices. The market is positioning for declining LME copper inventories during the June-July-August period. In response, we believe copper prices should move higher.”  John Redstone, analyst Desjardins Securities Inc.
Redstone is maintaining his average copper price forecast of $4.50 per pound in 2011 and $5 in 2012.
Urbanization
“For at least the next three years we are still very bullish on copper as the market will remain in deficit over that period, even under the most conservative global demand forecasts, and there is a possibility that this deficit could be more prolonged if demand grows faster than expectations. Copper is highly exposed to Asia, and urbanization in China and India will provide upside momentum for at least the next 10 years and perhaps as long as 20 years.” Judy Zhu, analyst Standard Chartered Bank
Urbanization is a macro-trend, in 1800 two percent of the global population was urban, by 1950 it was 30%. The UN projects that by the year 2030 there will be 1.5 billion more people living in cities. China has one fifth of the world’s population, India has another 1.2 billion people and Africa adds another billion. China and India consume a lot of copper, so increasingly will Africa.
Urbanization and the accompanying necessary infrastructure build out – power, construction, energy and transportation – needed to accomplish developing countries urbanization/industrialization plans are obviously key drivers in increased copper consumption.
Infrastructure Deficit
Equally as important is the fact we have a global crisis in existing infrastructure. The demand this crisis is going to place on copper might very well be more than the demand coming from developing countries to build new infrastructure.
The amount of money, commodities and effort required is going to be massive:

• The American Society of Civil Engineers (ASCE) estimated, in 2005, US infrastructure investment needed to be $1.6 trillion dollars over the following five years

• European Union Energy Sector alone requires – $1.2T over 20 years

In a 2007 report, Booz Allen Hamilton estimated that investment needed to “modernize obsolescent systems and meet expanding demand” for infrastructure worldwide between 2005 and 2030 was about US$ 41 trillion.
Infrastructure spending by sector:

• Water and wastewater $22.6 trillion
• Power $9.0 trillion
• Road and rail $7.8 trillion
• Airports/seaports $1.6 trillion

Infrastructure spending geographically:

• Middle East $0.9 trillion
• Africa $1.1 trillion
• US/Canada $6.5 trillion
• South America/Latin America $7.4 trillion
• Europe $9.1 trillion
• Asia/Oceania $15.8 trillion

In January of 2009 CIBC World Markets issued a study that said a sharp deterioration in existing infrastructure could lead to as much as $35 trillion in public works spending over the next 20 years.
Infrastructure spending geographically:

• North America $180 billion/year
• Europe $205 billion/year
• Asia $400 billion/year
• Africa $10 billion/year

The World Economic Forum’s report, Positive Infrastructure, released in May  2010 finds that the world faces a global physical, hard asset, infrastructure deficit of US$ 2 trillion per year over the next 20 years.
In 2009 the ASCE updated their 2005 report on US infrastructure – no area rates higher than a C+. Roads, aviation, and transit declined in score while dams, schools, drinking water, and wastewater held at D or lower. One category, energy, improved, from a D to a D+. Below are the 2009 grades and new spending requirement:

• Aviation D
• Bridges C
• Dams D
• Drinking Water D-
• Energy D+
• Hazardous Waste D
• Inland Waterways D-
• Levees D-
• Public Parks and Recreation C-
• Rail C-
• Roads D-
• Schools D
• Solid Waste C+
• Transit D
• Wastewater D-
• America’s Infrastructure GPA: D
• Estimated 5 Year Investment: $2.2 Trillion

The 2009 fiscal stimulus package – the American Recovery and Reinvestment Act (ARRA) – included $72 billion for infrastructure upgrades – enough to cover six percent of the 5 year infrastructure deficit estimated by the ASCE. Half a percentage point in maintenance cost will cut the life span of an infrastructure asset by 10 years.

Electrical Grid
ASCE’s Report Card for America’s Infrastructure gives the US Electric Grid a rating of D, its summary:
“The U.S. power transmission system is in urgent need of modernization. Growth in electricity demand and investment in new power plants has not been matched by investment in new transmission facilities. Maintenance expenditures have decreased 1% per year since 1992. Existing transmission facilities were not designed for the current level of demand, resulting in an increased number of “bottlenecks,” which increase costs to consumers and elevate the risk of blackouts.”
“Our grids today are more stressed than they have been in the past three decades. If we don’t expand our capacity to keep up with an increase in demand of 40 percent over the next 25 years, we’re going to see healthy grids become increasingly less reliable.” Today, with the grid operating flat-out, any disruption—like the downed transmission line that sparked the 2003 blackout in the Northeast—can cripple the network.” Kevin Kolevar, assistant secretary for electricity delivery and energy reliability at the Department of Energy

April 15th 2011 the International Copper Study Group (ICSG) said “global growth in copper demand for 2011 is expected to exceed global growth in copper production and the annual production deficit, estimated at about 250,000 metric tons of refined copper in 2010, is expected to be about 380,000 t in 2011. In 2012, refined usage is again expected to increase in all major world markets, with global demand expected to rise by more than 4%.”
The ICSG does not forecast copper production catching up with demand anytime soon, certainly not in 2011 or 2012.

“The global economy is running a major infrastructure deficit as the cost of decades of under-investment is now surfacing.” Benjamin Tal, analyst CIBC World Markets

High Speed Rail (HSR)

To attract new businesses to our shores, we need the fastest, most reliable ways to move people, goods, and information — from high-speed rail to high-speed internet. Excerpt from US President Obama’s recent State of the Union address
Obama is calling for eighty percent of Americans to have access to high speed rail by 2036 – currently no American has access to high speed rail.
A projection from rail proponents FourBillion.com indicates that building the 9,000 miles of high speed corridors identified by the U.S. Department of Transportation would:

• Create 4.5 million permanent jobs and 1.6 million construction jobs
• Save 125 million barrels of oil
• Eliminate 20 million pounds of CO2 per mile per year
• Reinvigorate U.S. manufacturing
• Generate $23 billion in economic benefits in the US Midwest alone

These new lines also require massive support infrastructure: stations, metro transport links in cities and modern signaling/safety systems.

Copper is the key to the increased speed of modern high speed trains. Today’s high speed trains do not have a motor located in the locomotive, instead they use a series of motors and transformers located under the length of the train. New high-speed trains with their electric traction engines use from 3 to 4 tonnes of copper per train.

An additional 10 tonnes is used in the power (catenary system – overhead cable made of copper or copper-alloy that is suspended horizontally above the track and supplies the trains electricity) and communications cables per kilometer of track.

China’s already found an area where it could rapidly increase public investment to stimulate growth – rail construction.

China’s total investment in high speed rail was first reported to be about US$300 billion – the Chinese planned a 12,000km high speed passenger network supplemented by 20,000km of mixed traffic lines capable of 200-250kph.
Recent reports indicate that over US$600 billion will be spent on rail construction during the 2011-2015 Five Year Plan. By 2020 there would be at least 16,000 km of passenger dedicated high speed rail. The total rail network by 2020 would be 120,000 km – 80% of it electrified.
By early fall 2010, the Ministry of Railways announced that China had more than doubled the length of high speed track to over 7000km.
China has plans to construct its high speed rail line through Asia and Eastern Europe in order to connect to the existing infrastructure in the European Union (EU). Additional rail lines are planned into South East Asia as well as Russia – this will likely be the largest infrastructure project in history.
The project will include three major high speed lines:

• UK/Europe to Beijing (8,100 km) and then extend south to Singapore
• A second line will connect into Vietnam, Thailand, Burma and Malaysia
• The third line will connect Germany to Russia, cross Siberia and then back into China

http://aheadoftheherd.com/Newsletter/2011/Coppers-Talking-Infrastructure_files/image005.pngFinancing and planning for this monumental project is being provided by China – who is already in negotiations with 17 countries to develop the project .  In return the partnering nation will provide natural resources to China.
“We will use government money and bank loans, but the railways may also raise financing from the private sector and also from the host countries. We would actually prefer the other countries to pay in natural resources rather than make their own capital investment.” Wang Mengshu, a member of the Chinese Academy of Engineering and a senior consultant on China’s domestic high-speed rail project
The exact route of the three lines has yet to be decided, but construction for the South East Asian line had already begun in the Chinese southern province of Yunnan and Burma is about to begin building its link. China offered to bankroll the Burmese line in exchange for the country’s rich reserves of lithium, a metal widely used in batteries.
Russia and China have announced plans to build a new trans-Siberian link. Iran, Pakistan, and India are each negotiating with China to build domestic rail lines that would link into the overall transcontinental system.
China has mastered the art of building high speed rail lines quickly and inexpensively. “These guys are engineering driven — they know how to build fast, build cheaply and do a good job.” John Scales, the lead transport specialist in the Beijing office of the World Bank.
China hopes to complete this massive infrastructure project within 10 years
Conclusion

Major infrastructure projects typically boost productivity throughout the economy. Massive stimulus packages that focus on creating jobs at home – through public works projects – will, in this authors opinion, become very popular with governments looking to generate massive employment and restart the global economy.

Interest in the junior mining space is going to become intense but there is still time for investors to capitalize on the coming infrastructure boom.

Are junior resource companies, run by quality management teams with outstanding projects, on your radar screen?

If not maybe they should be.

Richard (Rick) Mills
rick@aheadoftheherd.com
www.aheadoftheherd.com

If you’re interested in learning more about junior resource, bio-tech and technology companies please come and visit us at www.aheadoftheherd.com

Free investors forum, free newsletter, no credit card or personal information is asked for.

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Richard is host of www.aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 300 websites, including: Wall Street Journal, SafeHaven, Market Oracle, USAToday, National Post, Stockhouse, Lewrockwell, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, Mineweb, Resource Investor, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor, FNArena, MetalsNews and Financial Sense.

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Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified.

Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission.

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The Gold/Silver ratio has just broken in favor of Silver. In other words, the ratio has broken to the downside. This development along with persistent strength in Gold has prompted the mainstream gurus and “experts” to talk up Silver. We’ve been writing about the potential in Silver on more than one occasion. See here and here.

There are some important points to take away from the Gold/Silver ratio. We show the Gold/Silver ratio in Silver in the chart below. Take a look and think about what you see.

The positive is that breakdowns in the Gold/Silver ratio tend to be an accelerant for Silver. However, such breakdowns often occur at about the midpoint of a move. Note that Silver has made an important top after each major breakdown in the Gold/Silver ratio. Should we expect that soon? The chart shows there is plenty of room for the ratio to fall. A fair target looks like 57.

Our target of $24-$25 for Silver looks well on track after the breakout past $19.50. There is plenty of room ahead in the next few months. However, that target could be the point where the market begins a multi-month pullback. Don’t assume that Silver will forever outperform Gold. It comes in fits and starts. Breakdowns in the Gold/Silver ratio lead to big moves but also to important interim tops.

The Gold/Silver ratio can be an economic indicator as a surge can indicate recession, tightening of credit, etc. The reverse can be true on the downside. However, we are currently in a strong precious metals bull market. For over a year Silver has acted far more like Gold than an industrial metal. For a better economic indicator, I would look at the Gold/Copper ratio. In the chart below we show the Gold/Copper ratio, Commodities and the S&P 500.

We highlight (in yellow) when Copper outperformed Gold. Stocks were especially strong during those periods and Commodities also performed well. The point is that Gold/Copper is presently a better economic indicator than the Gold/Silver ratio. Don’t assume that a falling Gold/Silver ratio is bullish for Stocks and Commodities. Check the Gold/Copper ratio for confirmation.

The Gold/Silver ratio, as applied to precious metals can tell us quite a bit. Typically, a breakdown tells us that a more speculative, momentum filled run is beginning and that the sector is moving closer to a top. This being said, the breakout in Silver past $20 will be the most significant breakout to date. We do expect a top at $24-$25, but nothing major.

How does one play the Gold/Silver ratio? Our recent editorials called for an overweighting in Silver stocks as there was more opportunity and better value there. Continue to hold those positions. Realize that a weak Gold/Silver ratio means the market is in a more speculative mood which means greater volatility, risk and reward. Make sure you are buying a stock for the right reason. If it is a long-term play than look for something that isn’t overheated. If you are wanting momentum and short-term gains, make sure to define your risk.

These are all factors we employ in our premium service. It has allowed us and or subscribers to take advantage of the different opportunities within the changing environment in the precious metals sector. If you are interested in more professional guidance in navigating this bull market, then consider a free 14-day trial to our service.

Good luck ahead!

Jordan Roy-Byrne, CMT

Jordan@TheDailyGold.com

http://www.thedailygold.com/newsletter

Today (Wednesday), Copper is lower by about less than 1% in the overseas session. The market opened Asian trading sharply lower and has since recovered gradually.

News of the earthquake in Chile boosted the market on both Monday and Tuesday. Chile is the world’s leading copper producer. The reports proclaim that most mines are resuming operations and that activity at the largest ports is back to normal.

Ironically, Copper’s strength is being driven by other unidentified factors. We say unidentified because we aren’t sure and neither are many of the pundits. Inventories at the London Metal Exchange are at a five-year high, China has restocked while now tightening its monetary policy and the COT structure remains negative, as non-commercial traders are modestly long. Furthermore, one must note the long-term resistance in the 300-400 range.

For the time being, macroeconomic factors seem to be overriding copper-specific fundamentals. Widespread currency weakness (as a result of sovereign debt troubles) is enhancing the appeal of commodities as a store of value. Note that while Copper has yet to surpass the early January high in US$ terms, it already has against most foreign currencies, including the British Pound and the Euro. The US Dollar index is now struggling at resistance at 81 and that removes an impediment to all commodities. Also, perhaps the worries about a dramatic slowdown in China are overblown?

The trend is your friend and for the May 2010 contract it remains intact. The weekly candles illustrate how 340 is strong resistance. The May contract has yet close above 340 on a weekly basis. A close above 340 should take the market to 355, the early January high.

Platinum

As we go to press, Platinum is higher by $3 to $1579. It appears to be following the precious metals.

In January we saw the debut of the first Platinum ETF. It comes from ETF Securities Ltd and is backed by Platinum. Investment demand only comprises 8-9% of total Platinum demand. The lion’s share comes from automobile demand (70%). Investment demand in Gold has surged in the last five years. If the bull market in precious metals continues, Platinum is sure to benefit by way of greater investment demand. Investment demand for Platinum may be in its infancy, though the introduction of the ETF is a turning point.

As we noted, macroeconomic factors seem to be driving the commodities markets.  Sovereign debt troubles are causing widespread currency weakness, which in turn, is enhancing the appeal of commodities as a store of value. Yesterday Platinum closed at a new recovery high in Euro terms. A few days prior it closed at a new recovery high against the British Pound. Hence, it is always important to judge markets in real terms. How is one performing against the other markets? It helps to expand our analysis. Platinum has held up very well despite a strong rally in the US Dollar.

Technically, a move to 1600 is very likely. The market has tried and failed thrice to surpass 1600 on a weekly basis. A close above 1600 should take the market to its January high near 1650.

Gold

Gold finally took out resistance at $1120. It is solidly higher today, having held above $1130 in both Asian and European trading. Yesterday the buck was higher but that didn’t deter Gold. Today, the greenback is marginally in the red. The next target for Gold is $1150, which looks very likely. A close above $1170 and we can expect $1200-$1220.

Silver

Silver has more resistance to deal with. Go back several months and one can see that there figures to be a lot of supply around $17.00. If Silver can sustain its strength and follow Gold, then we’d look for $17.50- $17.75 to be the next stopping point.

The Gold Report: You have practiced technical analysis (TA) since the late 1970s. On a simple level, explain why TA is a reliable predictor of future stock price movement?

Clive Maund: Because the latest price of a stock is the summation or distillation of all fundamental information that is known about the company. In the earliest stages of a major uptrend, it is only the “smartest money”—that is to say those in possession of the best intelligence that are on to the improving fortunes of the company—and they may well be insiders. Technical analysis detects their buying at a time when the reason or reasons for it is not yet known. The average retail investor, who is at the bottom of the “food chain” will be the last to learn the good news, when it is broadcast by the mainstream financial media, usually as the stock is about to top out towards the end of a bull run.

TGR: How is the average investor to make money? From your answer, it seems the deck is stacked against the average investor?

CM: The average investor must learn to break the habit and the common mistake of going after stocks that have already made substantial gains and for which the news is already rosy, chasing popularity. The time to accumulate stocks is when they are oversold but have stabilized and the fortunes of the company are just starting to improve.

TGR: As a technical analyst, do you analyze and incorporate economic trends into your projections? In other words, do you rely on the output of TA for your stock trades or do you use the output as one factor of many in making predictive stock judgments?

CM: Properly used, technical analysis does not require the use of other inputs—such as the analysis of economic trends—to be effective. Having said that I do study the major forces driving the markets, such as debt levels and quantitative easing (otherwise known as manufacturing money), as these do give some additional clues with regard to timing.

TGR: You study debt levels and quantitative easing. What about unemployment and GDP, which are more widely discussed in the popular press?

CM: Unemployment and GDP are symptoms of the genuine health of the economy and thus of crucial importance. The term “jobless recovery” is an oxymoron and just spin. The key point to grasp is that the stock market has been rising not because of economic improvement but because it has been driven up by manufactured money and the resulting fear of inflation.

TGR: Many analysts/pundits are predicting another downturn for the markets and international economies—some argue inflation is pending and some believe deflation is imminent. What is your viewpoint on the direction of the markets and economies?

CM: This is a crucially important question. The lives and fortunes of billions of people depend on how the inflation/deflation issue plays out. The key point to understand is that the background dynamic is highly deflationary, but as politicians and business leaders do not want to face the grim consequences of deflation, which at best could result in their losing office and their positions of privilege and at worst could result in them losing their lives or being sent into exile, they can be relied upon to resist deflation tooth and nail.

Deflation “broke out of its cage” in 2008 and the result was a devastating collapse in the markets. They beat it back into its cage with a combination of bailouts, quantitative easing and monetization to prevent asset classes such as bonds from failing. The end result of this interference with, and obstruction of the natural corrective forces of the free market, is that debt has reached astronomic levels, arriving at the point where it is unserviceable.

This can result in one of two outcomes: 1) default and economic implosion, or 2) runaway inflation leading to hyperinflation. As the latter will buy more time for politicians and business leaders, this is the road that they can be expected to take. However, if deflationary forces overwhelm them, possibly due to calamities in other parts of the world, such as a collapse of the European Union or China imploding, we could see a depression in the U.S.

TGR: So the only outcomes for the U.S. is hyperinflation or depression? How does the average investor manage a portfolio with such divergent outcomes?

CM: As long as inflation has the upper hand, which the recent action of the Commercials (banks and institutions) in scaling back their short positions (as revealed by COT—Commitment of Traders-figures) demonstrates continues to be the case, investors can look forward to advancing commodity and stock markets. The big danger for investors is deflation. With regard to this major risk we use Technical Analysis to assist investors in identifying the onset of major bear market phases such as the 2008 meltdown as soon as possible, so that they can get out of harm’s way by either moving to cash or short-expiry Treasuries, or hedge positions that they continue to hold.

TGR: You are now engaged in private trading utilizing the Internet and online trading tools. Do you think the speed which with Internet trades can be made has changed stock market dynamics? Has it created a new breed of trading that is based on intraday market-trading trends rather than a company’s or economy’s fundamentals?

CM: The Internet has definitely increased the speed of reaction of individuals and the market to news announcements and to emerging trends, so that it is now almost instantaneous. Those closest to the market are, of course, able to front run market moves, and can “scalp” substantial profits by so doing.

TGR: In your online bio, you state: “We are set to witness the most exciting time in the energy and precious metals sectors since the mid-1970s” caused by gross excesses of the global fiat money system. Can you elaborate?

CM: Excesses in the fiat money system automatically lead to inflation as larger amounts of money chase the same or a finite quantity of goods and services. In an inflationary environment, money naturally gravitates to assets or commodities that are real and have intrinsic value, such as oil, gas and also uranium, and will hold that value by rising in price as the value of currencies is eroded by inflation.

TGR: Is this logic true for other sectors such as food or consumer staples? If so, what makes energy a better investment opportunity?

CM: Yes it is, but what makes energy a better investment is that it is finite and depleting and is perceived to be so, especially in a world of rising population and expanding demand. You have all heard about Peak Oil that, if true, must result in a continuing long-term uptrend in the price of oil.

TGR: What do you see for gold and silver prices for the next six months? If precious metals are being acquired more as currency and less for jewelry, do you see the typical seasonality for gold being eliminated this year or in future years?

CM: This is a difficult question to answer because if deflation breaks loose again, which could happen if there are sovereign defaults, the Chinese economy implodes or rates enter a determined uptrend, we could see another severe bear market emerge in a wide range of asset classes, including precious metals. On www.clivemaund.com, we play the trend and listen to the message of the market.

Currently, gold is in a downtrend that started early in December. However, this downtrend is showing a marked convergence—meaning that it could be what is known as a “falling wedge,” which is a bullish pattern. If it breaks out upside from this pattern, we will go long with a close stop because it could lead to a powerful advance. On the other hand if it drops below the strong support in the $1,000 –$1,030 area, the decline could accelerate to the downside.

The situation is complicated as silver recently broke down from a major uptrend and its rally from oversold since last weekend, which we expected, looks at this stage like nothing more than a pullback following a breakdown that will be followed by renewed decline.

Copper looks bearish, too, with a severe breakdown several weeks ago, also predicted on the site a few days before it began, followed by a sharp recovery back towards the underside of its downtrend where we would expect it to roll over and head south again. Our approach is pragmatic—we position ourselves for big gains but have close exit points to limit losses if market action proves our judgment to have been incorrect. Thus, if gold breaks above $1,100 over the short term we will probably go long with a close stop. But if gold rises up to its upper-trend channel, and at the same time silver and copper rise up close to the underside of their failed uptrends and all three start to roll over, then we will probably short all of them with close overhead stops.

TGR: What companies do you feel represent opportunities for growth?

CM: Broadly speaking, the precious metals sector is viewed as providing outstanding growth opportunities. We are likely to see the current bull market end with a spectacular parabolic blow-off move that certainly hasn’t happened yet. The complicating factor now is that we may see another deflationary scare similar to 2008 first, which would clearly be ruinous for anyone long the sector. This is why it is considered wise to wait to see if gold can break out upside from its current potential falling wedge pattern before going long. The uranium sector is similar, but we will want to see prices of uranium stocks start to advance away from clearly defined base areas before taking positions.

That said, I believe the chart for Timmins Gold Corp. (TSX.V:TMM) is a positive chart with a broad uptrend and rising 200-day moving average (MA). Nice bull hammer in Timmins last Friday, which has strong underlying support above its 200-day MA. If gold breaks out upside from its current wedge pattern Timmins should take off with it.

Kent Exploration Inc. (TSX.V:KEX) is in a broad uptrend with bullishly aligned moving averages. Bull hammer in Kent last Friday, when it looks like it may have hit a cyclical low. On an upside breakout by gold, it should run up to recent highs at about 24 cents and could carry on somewhat higher.

Evolving Gold (TSX.V:EVG, FSE:EV7) got slammed by a recent share issue and knocked down to a clear and strong support level at about 90 cents at the lows of last October into November. Although still somewhat overhung by this development, it looks like a buy here with a close closing stop beneath the support, say at about 87 cents.

Paramount Gold and Silver Corp. (NYSE/TSX:PZG) appears to have been consolidating since last May forming the handle of a large pan and handle pattern. Moving averages are in bullish alignment and volume pattern is positive, so it should take off on another upleg if gold breaks out upside.

The chart for Pediment Gold Corp. (PEZ:TSX; PEZGF:OTCBB; P5E:FSE) is a favorable picture with the overall trend up and bullishly aligned moving average. The volume pattern is positive and it is no longer overbought after its recent reaction. Should gold break out upside it is in a good position to stage a substantial rally from this point.

Clive Maund has been president of www.clivemaund.com, a successful resource sector website, since its inception in 2003 early in the sector bull market. He has 30 years’ experience in technical analysis and has worked for banks, commodity brokers and stockbrokers in the City of London and holds a Diploma in Technical Analysis from the UK Society of Technical Analysts. Clive now lives in southern Chile.

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) Karen Roche, of The Gold Report, conducted this interview. She personally and/or her family own none of the companies mentioned in this interview.
2) The following companies mentioned in the interview are sponsors of The Gold Report or The Energy Report: Timmins Gold Corp., Kent Exploration Inc., Evolving Gold, Paramount Gold and Silver Corp., and Pediment Gold Corp.
3) Clive Maund – I personally and/or my family do not own any of the companies mentioned in this interview. Neither myself, nor my family receive any payments from any companies in this interview.

Jordan Roy-Byrne, CMT

Platinum

Platinum continues to act more as a precious metal than as a base metal. Precious metals have strengthened and it certainly helps that Copper is in the black. The big news of the day was an unexpected “no-change” in interest rates from the Reserve Bank of Australia, after they had previously hiked rates three times. These initial rate hikes were the first global signs of tight policy. This is positive for the metals and it comes at an opportune time; amid strengthening technicals.

Yesterday the April contract closed above $1525, thus validating the bottoming formation we pointed out in the last two updates. The market’s initial thrust went past $1550 before running into some supply. We’ve noted the importance of the $1550 level. A strong daily close above $1550 would give the market a chance to test the recent high. In fact, in looking at a daily chart, one has to believe that a close above $1560 would position the market for a retest of $1647. As we go to press, Platinum has broken above $1,550.

Copper

Copper futures are suddenly in the green as we begin the US session. The March contract continued its recovery yesterday after rebounding from support at $3.00. Predictably the rally continued until meeting ample supply at $3.10-$3.11. Prior to yesterday’s bottom, Copper shed 10% in just four sessions. Negative technicals along with a bevy of fundamental negatives (rising inventories, Chinese tightening, firm US$) have weighed on the market.

It is also important to note the most recent Commitment of Traders report. The data shows a surge in speculative long positions since December. Meanwhile, the commercial hedgers net short position is nearly at a five-year high. As we noted last week, market weakness will beget more weakness when there is a substantial speculative long position.

Turning to the charts, I see good resistance at $3.10 and $3.20. As long as $3.00 holds, the reprieve will continue. As we go to press, Copper has inched up to nearly $3.12. The rally in the metals is building despite a lack of weakness in the US$. Copper has a good chance for more gains. In regards to news, keep an eye on pending home sales data, which will be reported today.

Gold

Gold is higher by $9 and that is impressive follow through after yesterday’s ~$20 advance. The market got a boost when the Reserve Bank of Australia decided not to raise rates. The RBA had previously hiked rates the last three meetings. Their statement mentioned though not in exact words, Chinese tightening and escalating concerns over sovereign debts. Though this is likely a pause on the RBA’s part, it still buoyed a market (Gold) that yesterday emerged from bottom.

We should also note that the World Gold Council said that suggestions of a gold price bubble do not take into account ‘strong fundamentals.’ We couldn’t agree more. Reserve diversification as well as supply constraints were noted as several of the key fundamentals.

Turning to the chart, the market consolidated its gains in Asia and then moved higher in the European session. The market has emerged from a bullish consolidation and should continue unabated until resistance at $1120. We should note that the bulk of this ~$30 gain has come without any US$ weakness. The US$ is now in the red and appears to be only following Gold’s lead. In recent days we noted that Gold was holding up well in relative terms.

Silver

Silver continues to follow Gold. Now that Gold has turned, Silver has followed and is outperforming. The consolidation for much of today’s overseas session looks to be a bull flag, which projects a move to $17.20. The market should see resistance in the $17.00-$17.50 zone.

Jordan Roy-Byrne, CMT

Platinum

Platinum futures are up nearly 2% as we begin the US session. With Copper down slightly, and Gold and Silver higher, Platinum appears to be acting as a precious metal today. The US$ weakened following President Obama’s state of the union address. Meanwhile, today two Platinum producers (Lonmin and Aquarius) announced lower quarterly output.

Such factors along with an extreme oversold condition (in terms of hours rather than days) can explain the near 2% rise in trading overseas. We show a chart that doesn’t include today’s action. What we see is strong distribution in four of the past five sessions. In other words the market has had trouble holding gains and has closed closer to the lows than the highs. While such selling is bearish in the larger picture, it has left the market very oversold and due for a bounce. The first area of resistance is ~$1530 followed by $1550. Going forward, weakness will resume upon a close below $1500.

Copper

As we pen this, Copper is hovering around unchanged. Most contracts are lower by a penny or two. Today in China, the Chinese banking regulator told banks to further scrutinize property loans. As we’ve noted recently, we’ve gone from fears of tightening to actual tightening in China. Very short-term rates are rising and banks have been ordered to raise their reserve ratios.

Turning to the chart, yesterday we wrote that a weekly close below $3.30 would send the market to $3.10. As soon as the market fell below $3.30 it went as low as $3.17.  As you can see, the market is hanging on a trendline. On the low end watch $3.10 as a support level. During the past 24 hours $3.17-$3.18 has been support. If the market can’t hold $3.17 today then a move to $3.10 is very likely.

Gold

Gold for February delivery is up $6 to $1090/oz. The other futures contracts show a $5-$8/oz gain. Interestingly, the US$ is basically flat. It was higher in the early Asia trade but lost gains and that continued until reversing higher in Europe. As we begin US trade, the greenback (index) is in the black by nearly a dime. The buck remains buoyant even after a failed test at 79.00, which will be key resistance.

There wasn’t anything new from neither President Obama nor the Federal Reserve. If the economy weakens, more stimulus is coming and that is good for the yellow metal. The question remains if the mortgage market can stabilize in the absence of Fed support. If unemployment continues to rise, it is highly doubtful. In other news George Soros in Davos said that Gold was the ultimate bubble. Traders are not paying attention as Gold is holding up well amid a flat to partially higher greenback.

For February Gold, $1080 remains important support while $1090-$1092 is the current resistance level. A close below $1080 and the market is likely to fall to $1030-$1050. A daily close above $1100 would likely confirm an important bottom. As you can see from our chart, the market is either going to hold support at $1075-$1080 or will plunge towards $1025-$1030, likely forming a bottom there. The bottom row of the chart shows Gold already bottoming against the commodity sector. In real terms, Gold is making a bottom here. Eventually that is bullish for Gold, but not necessarily for the next few days.

Silver

After dramatically underperforming Gold in the last few sessions, Silver is rebounding in both real and nominal terms. It is not difficult to see why as the market is very oversold in the short-term and very close to strong support at $16.00. When a market nears good support in an already oversold state, it is likely to rebound. As you can see from our chart, Silver has good support at $16.00 and above. Yesterday’s low was actually higher than Wednesday’s low. So the market is digging in. Watch $16.60-$16.70 as a close above this resistance will confirm that a bottom is in place. We are referring to the February contract.

Jordan Roy-Byrne, CMT

Platinum

The spot market is currently at $1517/lb, right near the levels seen as we penned yesterday’s commentary. On most contracts, Platinum is down about 1%. Yesterday in US trade, the spot market continued its losses, only to reverse nicely after testing support at $1500. Platinum was soft in the Asian session, dipping towards $1500 only to reverse higher again. This could be a short-term double bottom. The market has overhead resistance in the $1530-$1540 area. Looking at the daily chart, the market is in a short-term consolidation or correction until it can close above $1550.

Today all eyes or ears will be on The Fed as they wrap-up their meeting. It is unlikely that we hear any breaking news, as the Fed likes to telegraph things in advance. To us, the trade (before and after the meeting) will be to the upside as few expect any signs or hints of tighter policy in the future. Unemployment continues to rise and that prevents the Fed from raising rates. The tighter policy (the end to the purchases of mortgage-backed securities) is mostly priced into the market.

Copper

Copper is currently down 1.6%-1.67% on most contracts. The spot market is currently at $3.28/lb as it lost nearly 2% in Asian trade. Concerns over tighter monetary policy that could impact economic demand, caused the fall. As we noted yesterday, such concerns are well founded. The market is responding to events in China, rather than the US market, as China’s demand plays a larger role.

Turning to the charts we see support at $3.30. A weekly close below $3.30 could send the market down to support at $3.10. Over the next day or two, look for $3.34 to be resistance. A move beyond that would target $3.40.

Today all eyes and ears will be on the Fed decision. Pundits will spend a lot of time obsessively analyzing every sentence and every word. With high unemployment, a fledgling recovery and the recent downturn in markets, we highly doubt anything negative comes out of the Fed. That goes for today and in the foreseeable future.

Gold

On the spot contract, Gold is down fractionally as its pared losses in the last several hours. In the same time frame, the US Dollar index about 0.35 points. For most of the Asian session Gold weakened as the US Dollar strengthened. In the very near term, Gold continues to take its cues from the US Dollar.

The US Dollar Index remains buoyant but is struggling with overhead resistance at 79.00. However, the market’s buoyancy does suggest that it eventually pushes above 79.00. There is also resistance at 80.00 and 81.00. While Gold is clearly in a corrective state, it may be mitigated by the greenback’s struggles with overhead resistance.

It is hard to envision something coming from the Fed meeting that would be bearish for Gold. The Fed will not introduce tight policy until unemployment declines or the market forces its hand. Our longer-term view is that more monetization will be needed and this could eventually force the Fed to begin hiking rates.

Technically speaking, we suggest keeping an eye on the recent lows near $1080. The market is trying to hold this bottom and in doing so, would hold above the December bottom. A daily close above $1100 would give us confidence that this bottom would hold over the next few weeks.

Silver

Once again we note that Silver is underperforming Gold. We give ourselves a little shoulder tap for this repeated observation. On the spot contract Silver is in the red by 1.5% compared to about 0.5% for Gold. Yesterday Silver declined through and closed below the critical $17.00 level. The next crucial support is near $16.00.

Interestingly, we are seeing a little bit of a divergence between the metals as Silver has broken its December low while Gold continues to hold above it. As we finish our thoughts we see that the metals have taken a dive in the last 15 minutes or so. Watch Gold at $1080 (today and tomorrow). If Gold can continue to hold above $1080 while Silver makes new lows, it would be a bullish divergence. In that case Silver would reverse to the upside. Once again, Silver will take its cues from Gold.

Pre-Market Commentary

Jordan Roy-Byrne, CMT

Platinum

Heading into US trade, Platinum is in the red along with the other precious metals. The spot market is down 2% while the April contract down by 1.5%. The primary reason was growing concern over tighter policy from China.  Bloomberg reported that China’s seven-day repurchase rate rose by 30 basis points to 1.64 percent, the biggest increase in a month. Goldman Sachs downgraded Chinese banks over concerns of higher borrowing costs and slower economic growth. As one can imagine, Chinese-related concerns are not unfounded.

Moving forward there are some big events that could move the market. This week we have the FOMC meeting, President Obama’s state of the union address, as well as Treasury auctions. Needless to say market participants will have quite a bit to digest.  Turning to the technicals we point to long-term support (on the spot contract) at $1500 as well as support at $1400. Further losses in today’s or tomorrow’s session should arrest at $1500.

Copper

Copper was down in the Asian session but made a little recovery in European trade. The 1-day chart shows a potential double bottom as trade begins in the US.

Growing concerns over tighter policy in China as well as a firmer greenback contributed to the day’s losses. Bloomberg reported that China’s seven-day repurchase rate rose by 30 basis points to 1.64 percent, the biggest increase in a month. Furthermore, Goldman Sachs downgraded Chinese banks while expressing concerns over higher borrowing costs and slower growth in China.

While China has been the recent fundamental driver, look for US events to impact the trade as the week matures. All this week the US has Treasury auctions, the FOMC meeting and President Obama’s first state of the union address. While the market is focused on tighter policy from China and the potential for tighter policy globally, one must consider the potential for a market-moving announcement from Obama. Perhaps a second stimulus package?

Turning to the charts, we see good near term support at $3.25-$3.30/lb with strong resistance from $3.45-$3.50.

Gold

On the spot contract, Gold is back down close to Friday’s low at $1085. Friday’s low was $1080. Resistance in today’s session figures to be $1090-$1095. Look for the metal to recover from these early lows, as Friday’s low should provide support.  Gold can blame US$ weakness along with adverse news from China for causing its ~$10 fall on the spot market. China has been a big buyer and supporter of Gold. Tighter policy from China could equate to less demand for the yellow metal, at least in the near term.

Moving back to the US, there is a lot of market-moving events straight ahead. There are several Treasury auctions this week, the FOMC meeting and President Obama’s first state of the union address. Your humble author notes that often times the US$ is weak ahead of both Treasury auctions and Fed Meetings. Alls will be interesting to watch as Gold tests its December low at $1075.  How will Gold react if the market is reassured that the Fed isn’t tightening anytime soon and Obama announces more simulative measures? Traders will have to consider that and the many other potential outcomes along with the context of the aforementioned technical support.

Silver

Yesterday we noted that Silver had resumed its underperformance to Gold. In other words, Silver is lagging Gold. This is nothing new to seasoned market-watchers as it is typical when the precious metals are not strong. Whereas Gold is down near 1%, Silver is in the red by ~2%. The same short-term factors ailing Gold (Chinese tightening and US$ strength) are plaguing Silver.

Technically speaking, Silver is the most interesting of these metals. The market is at risk of breaking an uptrend or topping pattern that began in September of last year. A close below $17.00 would trigger some downside momentum that would increase with a close below December’s low of $16.72. The next strong area of support would be $16.00.

Moving forward, we noted the many things (or events) that could impact Gold in the coming days. Silver will take its cues from Gold and react accordingly. That means a more volatile reaction.

Platinum is bucking today’s gains in the other metal markets. As we pen this spot market is in the red marginally (down $2 @$1545), though with a decent chance to make it into the black.

This divergence is likely due to the fact that Platinum has been lagging Gold and Silver and is fresh into its selloff and not as oversold as its counterparts. Platinum made a new high on Tuesday, struggled mid-week and finished Friday with a short-term technical breakdown. Lingering downside momentum could be trumping US$ weakness and the current tide amongst Platinum’s peer group.

The weekly chart shows $1500 as a key long-term pivot point, dating back to 2007. Failure to hold this level or failure to stage a bounce would imply that Platinum’s unimpeded advance since July is over.

The Commitment of Traders data shows that the speculators hold the majority of long positions. Hence, any weakness could precipitate more weakness as speculators quickly close long positions.

Copper

Copper is higher across the board (all contracts) by 1.5%. Unlike Platinum, Copper peaked two weeks ago. Its oversold condition combined with US$ weakness and some positive news out of Europe helped the metal rebound. European industrial orders in November increased more than expected while inventories, as per the London Metal Exchange, declined for the second straight day.

Near-term technicals are not very favorable for Copper. The market will have to digest a lot of supply from $3-$4/lb and commercial hedgers have moved aggressively to the bearish side in just the past few weeks. In fact, commercials are the most net short since 2005.

After such a terrific and unimpeded rise, it is difficult to see positive short-term drivers. Stronger economic data would actually have a negative impact. Weaker data would ease fears of global tightening but given the technical situation it is hard to envision a huge benefit to Copper.

Gold

US$ weakness and technical support have combined to give Gold its first gain in four sessions. Note that Friday the market formed a classic bullish candlestick with its late day recovery. Friday’s decline reversed after a test of December’s low. On the spot contract Gold looks to have support at $1095. On the two-day chart we notice a potential reverse head and shoulders formation, which targets $1110.  Strong short-term resistance will come into play at $1115-$1120.

Our work leads us to conclude that in the very near term, the Gold-US$ inverse relationship has been very strong and will continue to be strong in the near term. Few pundits noticed that the relationship wasn’t strong for quite a while. At present, the US$ is battling resistance at 79.00 and below. Technically speaking there is a bit of room for the greenback to move higher and this will put pressure on Gold.

It is hard to see a catalyst for Gold in the near term as short-term developments have come to the forefront. Some central banks have started to tighten and there are fears that China could tighten. Fears of Fed tightening, to us are totally unfounded but they have to be considered Moreover, with Gold’s recent rise to a new all-time high, good news has been priced in and there is naturally an ensuing digestion period ahead.

Silver

Silver is higher this morning for much of the same reasons as to why Gold is higher. The US$ is weaker and Silver is continuing its momentum from the end of Friday’s session and particularly from today’s Asian trade. Note that $17.00 is an important support level. That combined with three straight days of heavy losses (as well as the aforementioned US$ weakness) is what is allowing the market to recover.

We do note that Silver has resumed its underperformance against Gold. This is very important to consider as it means that Silver is trading more as an industrial metal. The current fears of global tightening and the recent weakness in Copper and Platinum should confirm that Silver, in the very near term will continue to underperform Gold or at least be a distant follower on the monetary side.

As with the Gold market, the commercial hedgers remain heavily short Silver. That is an impediment for the bulls until enough weakness has wrung out the “weak hands.” Going forward, $17.00 remains a very important level on the spot contract. A strong close below could create further liquidation of speculative positions.

The Gold Report: Craig, in June you wrote that real interest rates are the primary factor driving the rise in gold prices. Can you elaborate?

Craig Stanley: It’s important to know the fundamental drivers of the price of any financial asset or commodity in order to determine the long-term trend. For commodities like copper, you have to focus on factors such as mine supply and scrap on the supply side, and GDP forecasts, restocking and index demand on the demand side. But gold is different. It’s stored, not consumed in the traditional sense. Hence, basically all the gold ever mined can come back to the market

Real interest rates are the only metric that is correlated with the gold price. If you can hold U.S. dollars via Treasury bills, notes or bonds and they are paying a positive real interest rate that is not being inflated away, then why hold gold that doesn’t pay anything?

However, it is not a linear relationship. Instead, gold prices tend to significantly increase only if real rates become negative. The current bull market in gold that started in 2001 corresponds to U.S. three-month Treasury bill real rates falling below 0%.

That’s why I like to state that gold is money—money that offers no yield (a negative yield after taking into account storage and insurance) and which is continually valued against fiat currencies that offer a yield.

During times of low to negative real interest rates, gold reclaims its traditional role as money, with investment demand the prime driver of the gold price.

During the summer, the gold price in U.S. dollars stagnated as the three-month nominal rate was flat. Then starting in September, the three-month yield started to fall as inflation expectations (as measured by The University of Michigan one-year inflation expectations) rose, meaning real rates went negative and gold price went higher.

TGR: Using the real interest rates measurement, is that a price where gold overcompensates for negative real interest rates? What is that price?

CS: Real rates are a measure to identify the long-term trend of the gold price, not a short-term trading tool. And there is not a specific gold price that compensates for a specific real rate. Look at the trend and focus on when real rates go negative.

Given the U.S. dollar’s role as the world’s reserve currency, I look at U.S. interest rates. The gold price starts to rise when three-month real rates go negative (when rates are positive, you’re getting paid to hold dollars whereas gold doesn’t pay anything). However the gold price really takes off when 10-year real rates go negative. That’s what happened in 1979 and very briefly at the end of 2007. The 10-year real rate is positive right now, around 1.6%. As the three-month rate is negative, it’s positive for the gold price but if the 10-year real rate goes negative and stays in negative territory, look out. The gold price could really spike.

TGR: Given the tremendous increase in metals prices, why can’t most mining companies greatly increase profits?

CS: Some producers have been able to increase free cash flow. But in general, for the gold miners, up until the past year, prices for the inputs used in building and maintaining mines rose faster than the gold price. On average, these inputs, such as labor, steel, diesel and increased over 15% annually. However since peaking in 2008 these costs have come down and should flow through to the bottom line once higher cost inventories are worked through.

In addition, foreign exchange has had a big impact. In general, cash costs have increased for mines operating outside the U.S. as the greenback has declined.

Another factor that is rarely discussed is decrease in average grade—in order to produce the same amount of ounces each year, companies have been moving an ever-increasing amount of rock.

Of course, even if earnings and cash flow increase, they won’t necessarily on a per-share basis given the large amount of share issuance, for example in early 2009.

TGR: Pinetree invests in junior exploration and development companies because they represent superior returns, but with that comes higher risks. How does Pinetree minimize these risks?

CS: Our portfolio consists of a large number of holdings diversified among stage of exploration and/or development, commodity focus and geography.

TGR: Can you comment on some of the holdings in Pinetree’s precious metals portfolio?

CS: The three largest positions as of September 30, 2009 were Queenston Mining Inc. (TSX:QMI), Colossus Minerals Inc. (TSX:CSI) and Evolving Gold (TSX.V:EVG).

Queenston Mining is a gold explorer focused on the Kirkland Lake camp in northern Ontario. On the west end of the camp it has a joint venture with Kirkland Lake Gold Inc. (TSX:KGI) as well as 100%-owned ground. KGI is in production and has had great exploration success with the discovery of the high-grade South Mine Complex, which trends onto QMI’s ground. On the eastern side of the camp, QMI is advancing four gold deposits towards production: Upper Beaver, McBean, Upper Canada and Anoki.

Colossus Minerals has a 75% interest in the high-grade gold-platinum-palladium Serra Pelada project in Brazil. It’s a very unique project that was mined in the 1980s by garimpeiros. Colossus has reported phenomenal grades and widths, such as 70.7 metres of 53.59 g/t gold, 20.77 g/t platinum and 31.30 g/t palladium.

Evolving Gold is a gold explorer focused on the Rattlesnake Hills project in Wyoming. It’s still relatively early but they’ve produced intercepts that indicate the rocks were subjected to a large gold mineralizing event similar to the Cripple Creek mine in Colorado. Quinton Hennigh, EVG’s president and chief geologist, previously worked at Newmont and is a great geologist.

All three companies have healthy cash positions and provide great gold price and exploration leverage.

TGR: Pinetree is bullish on base metals (copper, nickel and zinc) because of the growth in China and India. On your website you comment on copper’s supply issues related to outages and strikes spiking the price of copper. If the supply issues are choppy, doesn’t it make investing in this sector choppy as well and if so, are you trading in and out of this sector to maximize the spikes in copper prices? Any base metal company in your portfolio you care to comment on?

CS: Pinetree’s mission is to identify long-term trends then invest in small-cap companies that can benefit from such trends. We’re a long-term buy and hold investor.

In regards to copper, we’re focused more on companies exploring for copper, not producing it. The biggest factor driving the share price of a copper explorer is exploration results. Short-term fluctuations in the copper price don’t generally have a correlation to the share price of an exploration company.

Also, you can miss out on the potential gains from investing in the long-term trend by getting cute and trying to time short-term reversals. That’s not our objective.

Pinetree has been involved in Noront (NOT-TSXV) for a while. The company is advancing its Eagle Nest nickel, copper, and platinum group metals (PGE) and Blackbird chromite projects in northern Ontario. A big challenge to mining these deposits is infrastructure as they are located in a very remote region. Noront recently failed in its hostile takeover of Freewest Resources and its nearby Black Thor chromite project to Cliffs Natural Resources. However, we think it’s positive for Noront and all the other companies active in the McFaulds Lake region that a large company like Cliffs, with its deep pockets, is moving into the camp as it could help address the infrastructure challenges. However Noront’s Eagle Nest project is the lynchpin in developing the camp as it will likely be the first deposit to be mined, due to its higher rock value than the chromite deposits, and hence will drive and fund the camp’s initial infrastructure. Also, Noront is much farther along in working and consulting with the First Nations communities in the region, who will be very important in getting these deposits developed.

TGR: In your view, where are we in the base metals cycle? Does your answer depend on the particular base metal?

CS: We’re in a very long-term cycle whereby metal prices are supported by factors that have become well known over past few years: demand from emerging markets, especially China; limited exploration and resulting discoveries of large deposits over the past few decades; and the secular downtrend of the U.S. dollar.

We focus more on a company’s management and its projects, only taking the outlook for the commodity into consideration after this.

TGR: Craig, thanks for your time. Much appreciated.

Other holdings in Pinetree’s Precious Metals portfolio, as of Sept. 30, 2009:

African Gold Group (AGG:TSXV), Bear Lake Gold Ltd. (BLG: TSXV), Caledonia Mining Corp. (CAL:TSX), Canaco Resources Inc. (TSX-V: CAN), Commander Resources Ltd. (CMD:TSXV), Gold Canyon Resources Inc. (GCU:TSXV), Latin American Minerals Inc. (LAT:TSXV), Mega Precious Metals (MGP-TSXV) , Merrex Gold Inc. (MXI:TSXV) , Metallic Ventures Gold Inc. (MVG:TSX) , NioGold Mining Corporation (TSX-V: NOX) (otc: NOXGF.pk), Nortec Minerals Corp. (NVT:TSXV), Ontex Resources Limited (ONT:TSX), Redstar Gold Corp. (RGC:TSXV), Rye Patch Gold Corp. (RPM:TSXV), Silver Quest Resources Ltd. (TSX-V:SQI), Solitario Exploration & Royalty Corp. (SLR:TSX), Temex Resources Corp. (TSX.V:TME) (FSE:TQ1), TNR Gold Corp. (TNR: TSXV) and Unigold Inc. (UGD:TSXV).

Craig Stanley, Vice President, Research joined Pinetree Capital (PNP:TSX) in January 2009 as Resources Analyst. Pinetree is a diversified investment, financial advisory and merchant banking firm focused on the small cap market. Pinetree’s investments are primarily in the resources sector: Uranium, Oil and Gas, Precious Metals, Base Metals, Potash, Lithium and Rare Earths. Stanley is responsible for aiding the management of Pinetree’s existing portfolio as well as researching and analyzing new investment opportunities. Prior to joining Pinetree, Craig worked both as a buy-side and sell-side analyst, the former at a firm with over $1 billion in mining investments in actively managed mutual funds, exchange-traded closed-end funds and flow-through limited partnerships. Craig holds a Master of Science in Geology from The University of Western Ontario and is a member of the Society of Economic Geologists, the Society for Geology Applied to Mineral Deposits and the Prospectors and Developers Association of Canada.

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DISCLOSURE:
1) Karen Roche, of The Gold Report, conducted this interview. She personally and/or her family own none of the companies mentioned in this interview.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Queenston Mining, Colossus Minerals and Evolving Gold, NioGold Mining Corp. and Noront.
3) Craig Stanley—See Pinetree Capital’s disclosure policy http://www.pinetreecapital.com/investments/disclosure_criteria