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Monthly Digger - August 2009


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We're right at an "edge" here. The US Peso continues to be key.

 

The beating suffered by the USD today should have sent POG higher with more conviction. Of course, Gold/Gold Stocks saw it coming on Wed/Thur. I'm watching the USD and a batch of liquidity indicators as well as the various PM sectors for the next consolidation/correction.

 

I'm posting several small inverse Head & Shoulders that have developed alerting us to this edge.

 

I have some thoughts on the subject and hopefully I'll have time later to post a few of them.

 

Charts:

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Bernanke’s “Boss Man” speaks out.

 

Of course the incestuous relationship between the Fed and Pimco (and other financial entities) is no secret, but

when this guy from Pimco speaks (along with several other “Boss Men”), Bernanke listens.

 

Fed Won’t Raise Rate Till 2011, Pimco’s McCulley Says

 

Aug. 2 (Bloomberg) – “Federal Reserve Chairman Ben S. Bernanke won’t raise borrowing costs before 2011 as the threat of deflation remains for the U.S., said Pacific Investment Management Co., which runs the world’s largest bond fund.”

 

http://www.bloomberg.com/apps/news?pid=new...id=aPZx5kGyDavA

 

The point I've been making all along and continue to pound the table is that given the "Default or Debase" Rock & Hard Place dilemma and the Bernanke Fed agenda to save the banking system and rescue the economy, the US Dollar would be sacrificed, that interest rates would plummet (they did). And although some of us concluded the USD would be sacrificed, we believed that it was in the best interest for a controlled descent. So far so good on that prediction made several years ago here.

 

With yet another low today, the question inquiring minds want to know now is where does this USD weakness potentially accelerate and trigger corresponding upside acceleration in both Gold and Gold Stocks?

 

My feelings are that the big move for Gold/Gold Stocks will be in the Fall for the reasons already given (not that we haven't already experienced a HUGE move for the few of us that backed up the truck in late October for the many rock-solid reasons given as posted then. And among many notable 400% gainers, the 1,300% plus gain in NG wasn't anything to complain about. :lol: )

 

Later this week we get Friday’s jobs report. As the market consensus ignoramuses (like the ones who sell us their NG shares at the absolute bottoms) begin to connect the dots that the dollar is not falling based on “OPTIMISM” for the US economy, but instead, is falling because of all the Fed’s exorbitant MONEY PRINTING and that PRICE INFLATION will invariably be the result, the USD weakness has the potential to accelerate. In the same way, when the market consensus ignoramuses finally connect the dots that a continued weak US economy and concomitant rise in unemployment (despite all of the Fed’s money printing) insure that the Fed will be forced to continue to feed the "Inflation Monster" too, then these ignorati will perhaps finally grasp the full negative implications for the US Peso. The "moment of recognition" for these market morons turned out to be a much too ambitious expectation, and instead the moment has morphed into a painfully slow grind similar to a glacier that makes its way down the mountain.

 

At any rate, Gold/Gold Stocks may not even wait for such confirmation reports to accelerate higher.

Yes, it's not unreasonable to think that Gold/Gold Stocks may not have to wait until Fall to challenge their recent June highs.

But once they do, once Gold for instance can break through $960 with gusto, then I think there will be another run in the Gold Stocks above their old highs (and gold above $1,000). My target remains $1250, then $1,500 on Gold as posted before on the charts of an intermediate time frame.

 

Yes, Gold Stocks reversed from the their highs today right at the edge, but importantly still closed higher.

Given the choice, I much favor "climbing the wall of worry" over $1,000 as to exploding out of the box here and now.

I think this Fall we'll be presented with the grand opportunity for the latter. For now a healthy dose of skepticism to temper the Bulls' enthusiasm and becoming too extended is just what the doctor is prescribing.

 

Finally, here's another example of Obama trying to reassure the concerned FCBs (China to name the one who just visited) by suggesting that new taxes could be imposed on the middle class to pay for all the reckless new social and bailout programs. Obviously, we already know the Obama administration has not chosen fiscal austerity, but instead the money printing price inflation path. No, IMO the "poll sensitive" Obama/Democratic administration, like it did with the USD, will choose to throw the foreign creditor bag holders from the overpass into the path of the speeding bus rather than impose higher taxes on their constituents regardless of how desperate they become.

 

With an agenda to fund programs requiring enormous budgets and an aversion to cutting spending, one can draw the conclusion that eventually the US Peso and US Bond markets are road kill. Debase or Default, either way it's a win win situation for Gold/Gold Stocks. Default would lead to financial collapse, chaos and the big zero tax receipts collapsing the US Peso along with it leading to hyper-inflation or Debase, the current path the US is headed down.

 

Obama officials: No guarantee taxes won't go up

 

2 Obama administration officials can't guarantee middle-class Americans won't see tax hike

 

"WASHINGTON (AP) -- President Barack Obama's treasury secretary said Sunday he cannot rule out higher taxes to help tame an exploding budget deficit, and his chief economic adviser would not dismiss raising them on middle-class Americans as part of a health care overhaul."

 

http://finance.yahoo.com/news/2-Obama-offi...ml?x=0&.v=7

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News you can use:

 

As discussed in the past, the Hong Kong Dollar (as well as many other “Dollar Pegged” currencies) is in the same boat as the Chinese Renminbi.

 

I’ll just reinforce what I've been discussing in my prior posts by saying that any revaluation of the Yuan would encourage/necessitate a revaluation of the Hong Kong Dollar as well for the obvious reasons.

 

Just in the last 9 months to defend their US Dollar peg, Hong Kong has printed US$44 Billion. Just as is the case with China and other foreign countries, this large percentage of GDP will have a magnified inflationary effect on their countries assets possibly developing into various bubbles.

 

Of course $44 Billion is small compared with China’s QUARTER TRILLION it was forced to purchase just in the 2nd Qtr of this year, but once the market consensus ignoramuses get their brains wrapped around the full extent of this possibility, the fear alone could significantly impact the currency markets (bad news for the US Peso).

 

Betting Against The Hong Kong Peg

 

“Hong Kong won't break its 26-year-old currency peg to the U.S. dollar.

 

Wanna bet?

 

Traders in the currency forwards market are doing just that. Forwards give investors the right to buy or sell a currency at a fixed price at a certain point in the future, and they're now being traded with a view that the Hong Kong dollar is going to appreciate against the greenback.”

 

http://online.wsj.com/article/SB124936232577403907.html

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Gold Majestic - I bought a few starter positions in some companies mentioned here a few days ago by some excellent members. And things look pretty good for gold stocks.

 

Are you a buyer here and do you have any recommendations?

 

Thank you in advance for any input.

 

Surfer Dood Doo

 

Hi Surfer,

 

Not sure who recommended what, when, but I'd be careful as some "traders" have a long history of buying and selling at the precisely the wrong times.

 

Instead, I would highly recommend that you perform your own due diligence on the FUNDAMENTALS of the markets, sectors and stocks that you plan to invest in. When you understand the fundamentals of a company, you understand when the "Market Consensus Idiots" have OVER-PRICED or UNDER-PRICED the stock of a company/sector/market.

 

Then you can buy WITH FULL CONFIDENCE AND CONVICTION at the bottoms and/or sell at tops (if you trade). Just go back to the October '08 posts to read what was written then. You'll find that ALL of the so called "TA traders" were scared sh*tless and were completely clueless as well with their projections of MUCH MUCH LOWER prices. They were ONCE AGAIN proven to be wrong at the exact bottom. Yet, I'm sure this same crowd would be telling you now to buy this or that after (in some cases) 1500% moves. That's right, not a typo.

 

Once you understand that contrary to what has been written here by the "TA Trader" guru followers that "Market Consensus" determines the relative price value at any moment in time, that instead a knowledge of the FUNDAMENTALS of a particular company allow one to assess a reasonable fair value of the company enabling you to profit from these extreme market price distortions.

 

My method is to understand everything I can about a company, then wait until the Market Consensus Ignoramuses sell it down to historically Dover Sole prices, to step in "Back Up the Truck" on about all the shares I can get my hands on (depending upon liquidity) and then to sell your initial stake once the stock has at least doubled. (Using a trailing stop, sometimes you'll get a triple or quadruple before getting stopped out of a portion of your position. Quadruple means only having to sell a quarter of your shares to recover your FULL investment capital.) This technique which I started using back in 1993 at the beginning of the tech bubble has allowed me to accumulate "Free Shares." You have the welcomed problem of having to keep reinvesting your initial seed money, but you patiently wait until significant bottoms, i.e, Nov 2000, Oct 2008 and the many in between.

 

This leaves you with very little risk and "Married to your free shares." Eventually, these "free shares" if chosen carefully, get bought out leaving you with HUGE profits and low capital gains taxes. I've had shares in 23 companies that were bought out just since 2000.

 

Most of these companies had profits in the multi-thousands percent. I've posted quite a few of the ones since 2004, but finally quit as there seemed to be little if any interest.

 

The "traders" will tell you that "Buy and Hold" has been a losing proposition - BS!. What I'm describing to you is a variation of a buy and hold strategy that has been wildly profitable. The Gold Bugs will tell you that owning Gold has been better than owning the Gold Shares - BS! Don't get me wrong, I own Gold, Platinum, Silver and lots of it, but for different reasons. My stocks have outpaced the metal by a factor of at least 20 times.

 

Currently I own shares in over 65 companies (various sectors with excellent management). I have posted several of my favorites in the past. My favorites are the ones that I think have the best relative value, with excellent management, and in safe jurisdictions.

 

I'll give you an example of just one "laggard" (over-sold company that exploded to catch up w/ the pack) that I bought in November '08. (I'll post it after this.)

 

But before that, I'll answer your question.

 

No, we're probably ready for a consolidation/correction here. I follow a range of "RATIO CHARTS" that have been unparalleled in confirming the fundamentals that lead to tops/bottoms of varying degrees. Also I follow a number of Liquidity charts that accomplish the same.

As a matter of discipline, it's best to wait for a significant correction before buying. And then, only stock in companies that have been Dover Sole relative to fair value as determined by an understanding of their all-important fundamentals.

 

We just saw a significant bottom back up the truck buy opp a month ago in early July. You'll get another inevitable opportunity to jump in in about a week or two. However, I like New Gold (NGD) under $3 right here and now.

 

But before you buy, do your own research. B)

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GOLD:

 

It is now overbought (as measured by Stochastics) in both the weely and daily time frames.

 

In each case, the patterns appear to be corrective---a triangle in the weekly and an abc in the daily.

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Surfer Dood -

 

Here’s just one example of a “laggard” to the other precious metal stocks that had already bottomed in October that I bought in Nov ’08. In Oct it was not AS Dover Sole as some of the others but became extremely so in November.

 

This company is Richmont Mines (RIC) that I’ve mentioned here before. Although not the 1300% plus of Nova Gold that I recommended investors to buy in Dec/Jan?, this company only nearly QUADRUPLED as many of the others I bought in October.

 

When the market consensus spoken of so highly by the Prechter TA devotees get it wrong, they do so in spades to the benefit of the advocates of the importance of understanding the fundamentals will tell you.

 

It was clear that when these panicking “TA idiots” were throwing Richmont Mines under the bus near a buck, one (or two?) of us were buying with both hands.

 

There are many stocks that can be used as examples, but I’ll focus on just this one, RIC which is listed on both the Toronto Stock Exchange and American Stock Exchange.

 

In no particular order, here’s a rough, abbreviated example of what I look for in an over-sold company.

 

RIC’s current strategic goal is to develop an initial proven and probable gold reserve of One Million ozs of gold and to produce 180,000 to 240,000 ozs of gold on an annual basis from three to four facilities producing each 60,000 ozs/year.

 

RIC has a total gold resource in all categories of 1,682,000 ozs of gold of which 361,000 ozs are proven or probable, 561,000 are measured or indicated, and 760,000 ozs is inferred. The average grade of these resources is 8.14 g/t gold. This resource was calculated in 2007 and is based on a price of gold of $C650. Gold is currently trading at $C1033. Based on Richmont's Nov ‘08 market capitalization of $US29.344 Million (26.2 millions shares out x US$1.12). Its enterprise value (market cap minus US$16 Million cash) was approximately $US13.344 Million, giving each of these ozs a valuation of approx. $US7.93. (That’s called RELATIVE VALUE my friend – don’t let the TA Market Consensus idiots convince you otherwise.)

 

Other factors to consider:

 

RIC has been successful over the years in generating good cash flows from its small mines which importantly allowed the company to limit dilution (MANAGEMENT IMPORTANT) while pursuing its growth.

 

Richmont has no debt. As part of its assets, Richmont owns the Camflo Mill located near Val D'or in Northern Quebec. The mill is rated at a capacity of 1300 short tons per day and currently processes ore from Richmont's Beaufort Mine. The company also does some custom milling for other companies. This mill has a replacement cost in excess of $30 Million. Richmont also owns the Island Gold Mine complex in Wawa Ontario developed at a cost near $C30 Million, the past producing Francoeur and Wasamac gold mines in Quebec, and the Valentine Lake gold deposit in Newfoundland.

 

After completing the acquisition of Patricia Gold Mines (I WAS MARRIED TO PATRICIA GOLD MINES W/ FREE SHARES AS IT WAS BOUGHT OUT!!!! :), Richmont ended the year with approximately $C20 million in the bank.

 

In 2009, Richmont expects to produce approximately 75,000 ozs of gold from its Beaufort (25,000 ozs) and Island Gold (50,000 ozs) projects. After a difficult year in 2008 where costs escalated due to the market conditions (commodities/oil) start-up costs at Island Gold, Richmont expect to be averaging near C$500 (or US$400) per oz. But this year those costs are expected to be reduced. Based on a current gold price of $C1033, the gross margin on each ounce of gold would reach near a sweet $C500!

 

The Beaufort Mine should produce 25,000 ozs in 2009 and currently has approximately 3 years of proven and probable reserves and one year of measured and indicated resources. In 2008, Richmont completed several thousand meters of drilling testing extensions of the various veins and a new resource calculation is expected soon.

 

The Island Gold Mine could produce 50,000 ounces in 2009 and currently has approximately 5 years of proven and probable reserves, 4 years of measured and indicated resources and also 3 years of inferred resources. The mine is a new start-up and is only just now reaching full production. Once fully optimized, the mine complex may produce as much as 65,000 ozs of gold per year. Richmont is planning an exploration program in order to increase the size and quality of the resources.

 

The Francoeur Gold Mine produced in the past, 345,000 ozs of gold at an average grade of 6.3 g/t gold. Current remaining resources at different levels of the mine total 885,000 tonnes at 7.9 g/t gold for an indicated resource of 225,000 ozs. The company is planning more exploration this year with the hope of resuming production in the next two years. The ore would be trucked to the Camflo Mill for processing.

 

The Valentine Lake gold deposit is a joint venture (RIC 70%) with Mountain Lake Resources (30%). The deposit is located in Newfoundland and has an inferred resource of 920,000 tonnes at 8.5 g/t gold for a gold content of 251,600 ozs.

 

Richmont was clearly selling at a huge discount of its net asset value. Its Beaufort Mill alone has the capacity to produce in excess of 100,000 ozs of gold per year. In a couple of years it could be producing that much from Richmont deposits in Abitibi. The value of this mill plus the cash in the bank significantly exceeds Richmont Mines current market valuation.

 

Island Gold will likely become a steady producer of 60,000-65,000 ozs per year for the next 10 years, not counting any possible expansions. Finally, the Valentine Lake Project, could also become a mine within the next 3-5 years as additional exploration will likely add to the resource.

 

As a producer, RIC must be valued based on cash flow and profits. The company expects to produce possibly as much as 75,000 ozs of gold in 2009 at a probable gross margin approaching 50% (they were at 38% in 3rd Qtr 2008). With the price of gold at C$1033, it’s reasonable to bank on a margin of $C500 per oz for a total gross profit for 2009 of $C37.5 Million. Royalties, administration and other costs should take out some $6 Million while depreciation and depletion could reach $6 Million as well. Finally, although the exploration budget for 2009 is not set in stone, it should approach $6 Million. Profit before taxes could be as much as $19 Million leaving net profits in the $12-14 Million range or $0.50 per share. Cash flows would end up in the $18-$20 Million or $0.73-0.75 range per share before any capital expense. The understand that the company plans to buy some additional scoops or loaders for Island Gold next year.

 

With the stock selling at $1.12 (Nov ’08) it was OBVIOUS that it could/would easily climb back to the $4-$5 range where it was selling March ‘08. In 2010 and beyond, RIC should move to an all time high and reach at least the $7-$10 range or a market cap of $180-$260 Million if it is successful in bringing Francoeur back to production. A range of $10-$20 can also be a potential target within 3-5 years if the company achieves its strategic goals discussed above.

 

For all these reasons and assuming that gold remains at least near current levels in 2009-2010, Richmont Mines is an excellent investment.

 

Now take the highly probable event, IMO, that Gold will hit US$1250-$1500 oz by 2010/2011, then you can expect a SIGNIFICANTLY higher price for RIC.

 

At $1.12 in November, it was a “no brainer.” Another "20 Bagger" in the making. Someday I will mention it, but sadly, if history be our guide, no one will even say, congratulations on that great call.

 

This is the kind of fundamental analysis you should do with all your potential stock acquisitions before buying. Forget the numb skulls trying to trade in and out, buying near the tops, selling near the bottoms. Again, I'd wait another couple weeks for the next buy opp.

 

Gooberout

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GM

Maybe you did not notice but all those horn blaring drum beating traders of yonderyears are gone with assmaster of the open stockcharts leading the broke and bleeding I guess

I know a score of buy and trade it on margin guys from germany that lost millions and are now using lawyers instead of investing . Even Jickiss of the general is no longer blaring acres of diamonds .

 

I am an harcore holder ; I was down 90% on Echo Bay and recovered 100% and gained by the take over by Kinross . But in euroland my best investment is still pure gold since the goldmines are only just now entering the recognition phase. I do not think there is going to be any meaningfull correction anymore ( that is 20 % or greater ) So I am fully invested and liquidating intrest bearing funds to invest more . You took large risks with capital you had and won . But for every success story there are 100 disaster stories .

You should stop to believe that everybody has access to the information you have .

I got an MBA and I know how easily the paper information can hide a company that will be bankrupt in 6 months . They tried to make a predictor of companies going bankrupt and the predictor failed miserably . So what I am saying is that if you have concrete advise give it for evaluation ; but do not expect anybody to sieve thru 100 would be survivor would be miners .

Anyway thank you for keeping posting and congrats on all your wins

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gm-thanks for the in depth analysis of ric.

i am sure the 6 of us or so, who survived last years drubbing, consider all that each of us has to say!

ageka- i do think that last years low was the bottom of the 9yr and 4.5 yr low. i think the rally off of that, as a possibility was 1of 3 w/2 of 3 to be played out, my stuff shows oct /nov. so, while i do think the lows are in. i do think a good correction is possible.

then i see a run to 1300 by march. just my 2c

dharma

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A correction is sure to happen ; but not likely 10% or more

This is the first time our work disagrees in timing

 

7 sent me that triangle Bearvest is showing with a red arrow straight up after the wave down and called it a 3.3.3.3.3 structure

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