October 2010

The Bull & Bear's

Monthly Analysis of Gold Stocks and Precious Metals Trends

Gold and Silver… Blast off

By Mary Anne & Pam Aden The Aden Forecast

Gold is soaring to record highs while silver is shooting up even more, reaching a 30-year high. Palladium, platinum and gold shares are closely following and reaching new highs too. Yes, the stronger phase of the bull market is flexing its muscles. Gold is rising in another leg up, which is part of this ongoing phase. Gold was primed for takeoff, and it’s taking off! The big picture of gold shows it best on Chart 1. Note that the gold price has been in a clear and clean uptrending channel since the late 1960s. It has risen each year since 2001, but once gold reached a sustained record high last year, a stronger phase of the bull market began. Gold’s exceptional rise has now reached our current target level at $1350. It’s been a super rise, up 55% since April 2009… or you could say, gold has soared 17% in the last 10 weeks alone! By any standard, the surge is due for a rest, and perhaps so. But keeping focused on the big picture, you can see the gold market is more likely to eventually get swept up in a mania. When comparing the current

10-year old bull market to the two stellar mania bull markets of the past, the 1970s gold run and the stock bull leading up to the 2000 peak, the three look eerily similar. Most fascinating is the position of today’s bull… as it looks ready to surge forward over the upcoming years. Gold is still far from the mania stage. The average investor is just starting to appreciate the rise in gold. They know things aren’t right and they are learning that gold is

a safe haven. They see the dollar falling, the economy dragging with debt and the Fed trying to keep it together. The public is concerned, but a gold mania is clearly not here yet. And it’s not just the U.S., Europe is also hurting. Whether we like it or not, no country wants a strong currency. With stiff competition for exports in the global economy, a weaker currency gives a country an edge on trade. Continued on page 15



Gold’s Next Big Leg Up Much higher prices within 5 years By Stephen Leeb The Complete Investor Yes, gold has had a great run – but there’s no reason to think it’s going to end any time soon. Don’t call us crazy for thinking gold could top $5,000 within the next half decade. We’ve been urging investors to own gold since we began publishing The Complete Investor more than seven years ago. And our gold credentials go back further still. In the late 1990s, in my book Defying the Market, I predicted that commodities would be the stars of the following decade and that gold would sharply outperform stocks and bonds. In The Oil Factor (2004), I projected gold could reach $2,000 an ounce in coming years. What was true back then is even truer today. Gold, even after its long strong run, is poised for gains that might sound laughably high. But it’s gold investors who will be laughing hardest. We’re not abandoning other investments, but at this point we think investors should weight gold at least on a par with cash, stocks, and bonds. (By gold we mean not just bullion but also gold stocks and even weightings in other precious metals.) Someone recently commented he couldn’t get excited about an investment like gold just because it buys five times more lobster today then a decade ago. Well, a lot of people might be happy with five times more lobster, or anything else. But it raises the point: why has gold, an essentially fallow investment done so well? To answer, let’s look at the plight of the median American, whom we’ll dub Mr. Jones. Around a decade ago his income was $52,000. Today it’s below $50,000 – but that’s overstating what he has. A decade back, energy accounted for around 4 percent of his income. Today the figure is close to 10 percent. In all, Mr. Jone’s purchasing power has dropped by more than 10 percent. As Mr. Jones was losing money because of slow economic growth and commodity inflation, the Federal Reserve was printing dollars like mad. The number of dollars in circulation plus the number of dollars held by banks has increased by three and a half times, from about $600 billion to $2 trillion. In other words, Mr. Jone’s purchasing power has eroded despite a massive increase in dollars. It could take a further increase in dollars to keep Mr. Jones from losing even more ground. Against this backdrop, holding dollars is a losing

proposition. Rather, investors should seek a currency that will hold its value, and then some, in the face of all the factors pushing median incomes down. That currency, clearly, is gold. Gold has been a currency for millennia. It is prized for its special chemical properties that enable it to maintain its shine and to be infinitely malleable. It’s also prized because there is only so much of it around, and what there is of it is essentially indestructible. Nearly all other metals, by contrast, have industrial uses that would detract from any role as a currency. Is gold better during inflation or deflation? The correct answer is both. The key to gold’s appeal as a currency is whether a particular economic scenario eats into purchasing power, which can happen under inflation and deflation alike. Have the past 10 years been inflationary or deflationary? You can make a case for either. What matters is that gold shines when more and more of a currency buys less and less – in other words, when a currency is being debased. Many now claim that gold is in a bubble. We totally disagree. To explain why, we’d start by arguing that currencies are always being debased to some extent or at least are subject to potential future debasement. In other words, there’s always a case for at least some gold. How much or how little depends on the degree of current or anticipated debasement. One way to judge if gold is over- or underpriced is to look at the ratio between the gold supply and the money supply. However, money supply is measured differently today than in the past – for instance, the U.S. no longer calculates M3 – making historical comparisons tricky. A more accurate method is to look at the ratio between gold prices and gross world product (like GDP but for the entire planet) before inflation. This tells us how much gold is in the world relative to all the goods being produced. Because gold doesn’t get consumed the way oil and iron do, the price of gold is a good reflection of the total value of its supply. The simple premise here is that the more volatile and iffy the world, the greater the need for a shelter and thus the higher the ratio of gold to underlying economic activity. Since the early 1970s, the ratio of gold to GWP has averaged 0.65. Today it stands at 0.57, which tells us gold is actually cheap today despite its gains over the past decade. How high would gold prices need to go before they Continued on page 24



GSN: I nvestment N ewsletter A dvisors CROSSCURRENTS, 3280 Sunrise Hwy #125, Wantagh, NY 11793. Monthly, 1 year, $189. www.cross-currents.net.

Targets 6:1 Dow/Gold ratio

Alan Newman: “For several years we had maintained an eventual target of 5:1 for the Dow/Gold ratio but have since pushed our target upwards to 6:1 as a response to the nation’s ability to monitor terrorist efforts and thereby reduce these risks to some extent. We believe that before the super bull market for gold ends, the Dow will trade at only six times the price of bullion. As of the end of August, the Dow/Gold ratio was 8.03. With the exception of February 2009, this was the lowest ratio since 1991. Of course, a 6:1 target for the Dow/Gold ratio does not mean opposite directions in price. For instance, if gold’s bull market were to end at a level of $1250 per ounce, we would expect the Dow to trade at 7500. However, if gold were to eventually trade as high as $3,000 per ounce, a 6:1 ratio would equate to Dow at 18,000. Either 6:1 parameter would satisfy our target. And interestingly, although gold has almost quintupled from the lows of April 2001, if the 6:1 target is valid gold remains the better play. In the case of our first example (gold @ $1250 gold, Dow 7500), gold would go sideways but the Dow would fall by nearly 28%. In the case of our second example (gold @ $3,000, Dow 18,000), gold would trade 140% higher but the Dow would trade up by a lesser amount, 73%. In fact, every in-between computation of a 6:1 Dow/Gold ratio places gold with the advantage.” ***************

INVESTOR’S DIGEST of Canada, 133 Richmond St West., Toronto, ON M5H 3M8. 1 year, 24 issues, $137.

Analysts look to gold for safety in troubled times

“Gold’s rising popularity isn’t surprising. Whenever the world seems out of whack, investors load up on the yellow bars. And the world is out of whack. NATO’s Afghanistan mission seems ever more hopeless, now that Pakistani forces have been shown to be in cahoots with the folks they’re supposed to be helping NATO defeat. Meanwhile, British Petroleum continues to try to pick up the pieces after causing the worst oilspill in American history. And in the U.S., doubts are mounting that the much vaunted recovery is sputtering to a stop. Given gold’s popularity, it isn’t surprising that mining outfits like Goldcorp Inc. (TSX: G; $40.10) have once again caught our analysts’ attention. Of the 12 analysts we polled this month, seven rated it a buy; three, a buy/hold and only two, a hold, lofting the company into fifth spot in our list of top- 10 buys. And Goldcorp is doing well, having swung to

second-quarter net earnings of US$826.7 million, or $1,11 a share, from a net loss of $232.4 million, or $0.32 a share, for the similar period in 2009. Revenue, not surprisingly, was also bettering, climbing 34.3 per cent to $844.3 million, while operating earnings jumped 83.8 per cent to $362.6 million. For the six months ended June 30, Goldcorp’s net income rose to US$774 million, or $1.05 a share, from $58.8 million, or $0.08 a share, for the similar period in 2009. Sales were also stronger, increasing 23.1 per cent to $1.6 billion, while operating earnings grew 59 per cent to $680.2 million. Brian MacArthur, who’s with UBS Investment Research, is one analyst who likes Goldcorp. Although the Vancouver-based miner trailed his own EPS estimate by $0.02, he’s still handing it a “buy” rating. He’s also sticking with his price target of US$53.50 a share. Mr. MacArthur notes that over the next five years, Goldcorp intends to boost production 57 per cent – the highest rate of all the senior gold producers he covers. He also notes that over the past few months the company was able to unlock shareholder value by selling some of its properties and then applying the proceeds to its core growth assets. Our market watchers may have had a soft spot this month for a senior producer like Goldcorp. But they also cast their spotlight on the mother of all senior producers, Barrick Gold Corp. (TSX: ABX; $41.62). Of the 11 analysts we surveyed, six rated Barrick a buy; four, a buy/hold, and only one, a hold, placing the Toronto-based company in six spot in our list of must-have stocks. And for one analyst – Paul Burchell at Dundee Capital Markets in Toronto – Barrick this month delivered the goods. At US$0.77 a share, Barrick’s net income trumped Mr. Burchell’s estimate by $0.06, while beating the consensus call by $0.04. Barrick also proved a surprise on the output side, heaping up 1.9 million ounces of gold at a cash cost of US$457 an ounce – 2.1 per cent more than the analyst had forecast. Meanwhile, the company continues to forge ahead, given that two of its mega-projects – Pueblo Viejo and Pascua-Lama – remain on schedule, as well as on budget. Barrick is also sticking with its 2010 production target of 7.6-eight million ounces of gold at cash costs of US$425-$455 an ounce. Not surprisingly, Mr. Burchell continues to have a soft spot for the company. Not only is he sticking with his recommendation of “buy/medium risk,” he’s also standing by his 12-month price target of $52 a share. The world’s biggest gold producer, Barrick churns out eight million ounces of the metal each year, over a third of which is sourced in North America. Barrick is also a player in other metals, controlling over six billion pounds of copper.”



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Gold & Silver vs. currency turmoil

Ian McAvity: “The currency market turmoil of the past few years makes it clear a major global realignment is needed but there’s no logical alternative for the Dollar dominated system of the past 40 years. The dominant US$ is a little less dominant slipping from over 70% of global reserve currency holdings to the low 60’s. but escalating deficits and soaring new borrowing requirements are generating increased concern from the surplus countries like China, many of their neighbors, Russia, India and Brazil. The debt & deficit problems of the Euro Region & Japan shield the US$ to a degree, but gold and silver are clearly catching outflows from all three major fiat currencies. Silver has a long monetary history albeit the central banks no longer have any vested interest. A look at the Gold/Silver ratio. Since 1985, if you could swap 1 oz of gold for more than 80 oz of silver, it was a good trade. Conversely, if you could get 1 oz of gold for 45 oz of silver, gold was a better buy. With the ratio in the mid-60’s and headed up with an inverted scale, Silver looks poised for an upside breakout above $20, to catch up with the post crash gold breakout.” ****************

LIBERTY’S OUTLOOK, published by Liberty Coin Service. 300 Frandor Ave., Lansing, MI 48912. Monthly, 1 year, $139. www.libertycoinservice.com.

Gold reaches all-time high, Silver at multi-year high

Patrick Heller: “Ignoring inflation, the price of gold has closed at record high levels and silver closed at another 30-month high price. There appears to be at least one deep pockets buyer in each of the gold and silver markets who has made a commitment to take on the price suppression tactics done at the direction of the US government. I have not heard who may be the buyer in the gold market. For silver, there is at least one German conglomerate that is stepping up to buy silver upon any sign of a price dip. Back in 1992, George Soros, Jim Rogers, and other investors sold the British pound short, judging that it was so overvalued that it could not be supported by the British government. At one point, 100% of all assets held by some of their investment funds were devoted to short sales of the pound. This strategy was successful, when the investors “broke the Bank of England,” earning a reported billion dollar profit in the process. It appears that this same tactic is being employed in the gold and silver markets today. Now, the pressure is being applied to the entities holding huge short positions in the gold and silver markets. Officially, the central banks and official agencies report that they hold close to a billion ounces of gold,

part of which could be mobilized to oppose the current buying spree. However, the official statistics don’t tell the true story of what is being held. The US Treasury and Federal Reserve are fighting a Freedom of Information Act lawsuit filed by the Gold Anti-Trust Action Committee, Inc. (GATA). The suit asks for disclosure of gold swap arrangements that the US government may currently have or may have had over the past two decades. There is significant circumstantial evidence that the US government may have mobilized some of its gold reserves by transferring owner- ship to other central banks that have sold or leased their physical reserves on behalf of the US government. Rep. Ron Paul, R-TX, has filed a new bill in Congress calling for the explicit audit of all the US government’s physical gold reserves held at Fort Knox, the Federal Reserve Bank of New York, the West Point Mint, and other locations. Beyond proving the physical existence of the gold, Paul’s bill also calls for a verification of who has title to the stored gold. If the US government really had all the gold it reports and had title to all of it, an audit proving this would actually benefit the US government. The heavy opposition to auditing the gold simply increases the suspicion that the US government has surreptitiously disposed of some gold. For gold and silver to reach record high prices, after taking inflation into account, would mean that gold would have to reach at least $2,300 and silver $150. Those both appear to be achievable figures in the long term. That also gives an indication of just how much both metals could rise in the short term without being an extreme price rise.” ***************

Richard Young’s INTELLIGENCE REPORT, 9201 Corporate Blvd., Rockville, MD 20850. Monthly, 1 year, $249. www.intelligencereport.com.

Gold bull market has room to run

Richard Young: “The other currency you want to be sure you own is gold. Gold reached another all-time high this month. The precious metal is up 13% in 2010 – its 10 consecutive year of gains. Gold is in a secular bull market, and it will remain in a secular bull market until the world’s central banks stop printing excessive amounts of money and governments stop issuing excessive amounts of debt. Before this secular bull market in gold has ended, you are likely to see much higher prices. One indicator of prospective returns in gold is the ratio of the Dow Jones Industrial Average to the price of gold. When the ratio is falling, gold is outperforming the Dow. Over the last 115 years, there have been three secular bull markets in gold versus the Dow. The current bull market is the third. In each of the previous bull markets, the ratio of the Dow to gold dropped below three. Today the Dow is trading at 7.8X gold. Assuming a ratio of two, gold could rise to $5,000/oz. if the Dow stays at 10,000, or the Dow could fall to 2,500 if gold remains at $1,250/oz. In either scenario, gold is the winner. I continue to stockpile gold with no intention of selling, as should you.”



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Osisko’s outstanding prospects

Kuen Chan and David Sandell: “Longtime FundFolio denizen Tocqueville Gold fund, after faring poorly a few years back, has resurged with a vengeance, ranking in the top 2 percent for its category in 2009 and so far this year as well. In the last several quarters, Tocqueville Gold has steadily upped its bet on a Quebec-based junior mining company called Osisko Mining Corp. (OSKFF), adding some 3.5 million shares for a total stake of more than 7.8 million shares. Osisko is the fund’s second-largest position. Osisko is still a year away from generating earnings, but its potential is enormous. One of its chief properties is a world-class gold mine near the town of Marlartic in southeastern Canada. The mine, wholly owned by Osisko, was estimated this February to have 9 million ounces in proven and probable reserves, 86 percent of which are thought to be recoverable. Moreover, as exploration and development goes forward, the reserves estimate could well rise (the 9 million figure was 43 percent higher than the previous estimate). The Marlartic mine will be one of the world’s largest open-pit gold mines. The company has made good progress in readying the property for development, a massive $1 billion undertaking. It has obtained approval from the Quebec provincial government to begin construction work and has nearly completed relocating about 200 families and several public facilities. (Just one family is still refusing to relocate, but Osisko expects the project to proceed on schedule nonetheless – the home won’t be in the way until 2015, while Quebec law favors the company on this issue). In general, Osisko has generated goodwill in the town: in addition to receiving cash compensation, many families report an upgrade in living conditions, with the company building a new hospital, a modern school, and a daycare and recreational center. Further, the mine will employ more than 450 people, more than 10 percent of the town’s population. With the mine shaping up as a positive for the town, the local government should prove supportive for Osisko, while the rewards for Osisko should more than compensate for the costs. It’s notable, too, that the company has developed this world-class property without incurring significant debt – only about $140 million in loans maturing in 2014. Production at Malartic is on track to begin next year’s second quarter. The mine’s projected life expectancy is around 12 years, with costs expected to average a low $320 per ounce. Average annual production of gold during the first three years of operation is anticipated to be about 732,000 ounces; over the mine’s lifetime, average annual production of 630,000 ounces of gold plus 800,000 ounces of silver is expected. CEO Sean Roosen says the Malartic mine can break even with gold at U.S. $420. With gold at record highs near the 1300 level in late September – and in our view poised to go far higher – you don’t need to be

a math whiz to grasp just how profitable the Malartic operation could be. And that’s just one mine. Overall annual gold production for Osisko could exceed 1 million ounces by 2015 or 2016 once a second promising property – at Hammond Reef, in Ontario – comes online. Osisko recently obtained the rights to this property through its acquisition of Brett Resources: it bought around 80 percent of Brett’s shares in May and is set to buy the rest by the end of the third quarter. The mine holds about 6.7 million ounces in inferred resources (a measure less confident than reserves) pending further study and exploration. Gold production at the Hammond Reef mine is expected to average 463,000 ounces a year in the first six years of the mine’s estimated 14-year lifetime. Osisko also has partial ownership or options to purchase stakes in several smaller properties in Canada and one in Brazil. Having paid for the Brett acquisition with all stock, Osisko had $560 million in cash on hand as of March 2010. With the Malartic mine soon to provide ample cash flow, the company should be able to develop the Hammond Reef mine without taking on significant debt. While Osisko looks fully capable of vaulting from a developer to a mid-tier miner on its own, we wouldn’t rule out a takeover by a senior miner seeking growth. Last year one of the world’s largest mining companies, Goldcorp, revealed it had bought 38.6 million shares (or approximately 10.5 percent) of Osisko. Often such minority ownership is a prelude to a full takeover. Osisko’s introduction of a “poison pill” in May – a shareholder plan to defend against a hostile takeover – further fueled speculation of a buyout. Though both Goldcorp and Osisko have denied takeover plans, any buyer, whether Goldcorp or another, would likely pay a hefty premium, giving Osisko shareholders an extra return. The closer Malartic gets to production, the more attractive Osisko will appear to buyers looking to instantly add more than 600,000 ounces of gold per year to their production output. Osisko Mining has joined our Fund Finds Portfolio.”

P.O. Box 917179, Longwood, FL 32791 (407) 682-6170 Publisher: The Bull & Bear Financial Report Editor: David J. Robinson © ­Copyright 2010 Gold Stock News. ­Reproduction in whole or in part without written permission is strictly ­prohibited. Gold Stock News publishes investment news and ­comments of investment ­ advisory newsletters whose thoughts are deemed of interest to subscribers. ­Neither the information, nor any opinion which may be ­ expressed ­ constitute a ­solicitation for the purchase or sale of any ­ securities or investment referred herein.

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