Supply Concerns Boost Precious Metals

Our forecasts for this past week were right on target. Gold is supported in the $870’s and most mining stocks settled just below last week’s highs. On May 13th, we recommended buying ANO and ROY and they have skyrocketed last week:

- International Royalty Corp (ROY) increased from $4.80 to 5.90 (+23%) on slightly higher 1st quarter results.

- Anooraq Resources (ANO) shot up from $3.10 to 3.90 (+26%) on news of funding for its acquisition of Lebowa Platinum Mines and on analysts opinions and platinum supply concerns (see Reuters article: http://africa.reuters.com/metals/news/usnL16722072.html?rpc=401&amp

Tuesday’s full moon ushered in a correction, but its worth mentioning that most mining stocks are stabilizing near recent highs and above key support levels. Such actions imply that precious metals are entering a new cycle which may bring further positive momentum. The determining factor will be if gold can stay above its 50-day moving average (roughly $900) and silver above ($17) by Tuesday June 3. Thereafter, expect excellent buying opportunities for our precious metals stock picks.

The new trend is reversing a previous precious metals downtrend that began near the Ides of March. For those who missed the buying opportunity of late March and early April, you’ll get another chance within the next few weeks.

This new cycle is coming amidst reports about a severe shortage in both rhodium and platinum, the king and queen of precious metals (See articles:
Due to supply concerns, rhodium and platinum prices have already increased in value by 50% and 40% respectively this year, outperforming both gold and silver.

Many people worry that precious metals have already peaked, but we think that they’ve still got a long way to go. So, who’s right? We can forecast the long term direction of precious metals by looking at historical prices of each:

- Rhodium prices peaked in 1978 and reversed from a new low in 1998 (See Rhodium historical data at http://66.38.218.33/charts/historicalrhodium.html)

- Platinum prices peaked a year later in 1979 and reversed a downtrend in 1999 (http://66.38.218.33/scripts/hist_charts/yearly_graphs.plx)

- Gold reached a peak in 1980, ending a positive trend that began in 1960 and lasted for 20 years. It reversed from a downtrend 20 years after its peak in 2000.

- Remember that silver usually follows gold, so it’s no surprise that silver reached $ 50 in 1981 and began its new upwards trend in 2001.

What does this information tell us about precious metals cycles? It’s evident that they trend upwards for 20 years, then downwards for 20 years.

Rhodium is now half way into its 20 year trend and is sending signals about the direction of all precious metals. If there’s a rhodium supply concern, then there’s a supply concern for all precious metals. South Africa is producing less metal and the awakening giants, China, India, Brazil and Russia are adding to that pressure.

Mining Companies Are Finally Profiting

The upward trend in precious metals that we had forecast last week was right on target. The positive momentum was aided by good news and healthy 1Q 2008 results from the following miners:

- Rubicon Minerals (RBY)* reported new high-grade gold intercepts at its Red Lake, Ontario site. Since our buy alert, the stock’s price climbed about 16%.

- Apollo Gold (AGT)* finally reported a net income of $3.7 million compared to a net loss last year. The stock was up about 10% since our buy alert.

- Barrick Gold (ABX), the world’s largest producer, posted a net income of $514 million compared to a net loss last year. Its stock price climbed about 7% since last week.

- Goldcorp’s (GG) profit rose 84% and its stock price is up over 10% since last week.

- AngloGold Ashanti (AU) reported higher earnings, an increase in production, and lower mining costs at just $430/oz. Its stock price is up over 10% since last week.

- Rangold (GOLD) said gold reserves at its Ivory Coast site were 52% higher than the previous quarter and profits were 57% higher than last year.

The importance of the aforementioned news is that precious metals mining companies, after several years, are finally profitable. The implications of this are truly astounding considering that mining stock prices have yet to adjust to the market value of precious metals.

If you missed the big profits, then you’ll be happy to know that some metals companies such as Anooraq Resources and International Royalty Corp. have yet to release 1Q 2008 results. Expect good news to be released this week and prior to next week’s full moon.

As metals stocks stabilize near their weekly highs, expect the upward trend to continue until the price of gold rests comfortably above $ 900. Although it’s too early to tell, it seems that precious metals prices will surge this month. One thing is sure, the recent price correction coupled with mining company profits is attracting a slew of new investors. The best advice we can offer is practice patience, even if it hurts. Technical indicators are pointing to higher prices.

The “R” Word

In such a politically divided country, it seems that everyone can agree on one thing: “we’re in a recession.” Surprisingly, I hear people saying this more than ever. The first contribution to this unified opinion is that CNN, Bloomberg, FoxNews, and all the rest are incessantly talking about it.  Next, Americans can tell that their dollar buys less as inflation is at its highest level in decades. Finally, houses are staying on the market for longer periods of time and housing prices are declining. Evidently, most Americans believe a recession means a period of less individual purchasing power and declining home values. The true economic meaning of a recession is a retraction in economic growth and one started a long time before 2008.

I could easily argue that the recession actually began in 2001 after the stock market crashed on September 11th.  The events coincided with a dot com and technology market bust.   During this period of time, we witnessed a decline in American manufacturing and exports.  The only major industry that was late to see a correction was the housing market (i.e. real estate, the mortgage loan sub-industry, and construction).  The main influence to the housing market’s tardiness was the popular yet false beliefs that there would always be a demand for new homes and housing prices would always increase.

As prices continue to drop this year, you must remember that no commodity (land/building) declines forever.  A positive reversal, whenever it should happen, is inevitable.

A weaker US dollar has improved US industrial production.  Those worried about the effects of high oil costs, fail to consider that many companies are increasingly focusing on customers abroad.  Since the dollar’s massive decline against other major currencies, US exports have been steadily rising.  For example, China’s purchasing power and population are growing and relying more heavily on the following US industries:

- automobiles (in a decade, China will have as many cars as in the US)
- aircraft (China adds more than 100 airports annually and Boeing is a huge partner)
- agriculture (China is still growing fast and will import more US beef, wheat, soy, etc)
- culture (American television and cinema will grow in increasingly English-speaking China)
- tourism (Pretty soon, Chinese will be the world’s largest group of tourists. Expect them to visit major US cities, beaches, cruise ships).

Yesterday, we found out that the US economy expanded faster than economists had expected. Major consumer products maker Proctor & Gamble posted profits based on higher overseas sales.
So, the worst of the recession is behind us.

Besides, the US cannot continue to ignore lagging developments in infrastructure.  Urban areas are getting more congested and massive immigration is brisk.  Huge rail projects, bridge plans, highway projects (like the North American superhighway), apartment buildings, and suburban roads are all in the pipeline.  This will require major investment from governments and the private sector for the next decade.  Bloomberg reported on an Urban Land Institute study that found the US needs to invest $170 billion in order to relieve urban traffic and to rebuild aging structures. Worry not, economic production is on its way!