Start of a Run for Gold

Source:

In the last 6 months, juniors have decisively bottomed after their prices have been slashed up to 90% in some extreme cases. I am now seeing nice pops here and there like mushrooms on a sunny spring day after the storm. There are many quality junior companies with good cash positions, a low market cap and good prospects.

...Carlyle Fund and Bear Stearns (BSC) also blew up in the past month. Two companies going down is not a cause of concern as companies rise and fall all the time. However, when considering they have about $300 billion worth of mortgage positions with their counterparty sweating, you begin to understand why the New York Fed agreed to advance $30 billion to help JPMorgan (JPM) assume Bear Stearns positions. Last year, I wrote that the mortgage mess was minimum a $2-3 trillion problem. We are about half way through, so expect to still see massive write downs from pension funds, endowments in 2008, together with perhaps another major blow up besides Bear Stearns.

All those bailouts are creating moral hazards and the Fed has no room to raise rates to combat inflation. Monetary instability and fears of inflation are gold's best friends. This is why my focus right now is on precious metals. I expect the mortgage mess climax to take place in 2008, which will more or less correspond to a spectacular rise for gold this year...

Interestingly though, gold juniors as a whole were trading yesterday at their lowest level this decade relative to the price of gold as illustrated in the chart of this article.

It makes no sense that the American mortgage crisis is impacting Canadian gold and resource juniors. One can now margin at 5% to buy oil trusts paying 15% dividend and gold juniors for less than $10/oz in the ground. I am confident the situation will reverse, offset not by higher interest rates but by higher junior stock prices.

Within two months and as soon as we hit the bottom of interest rates, I expect all the hoarded money to spill out looking for a new home as it simply does not pay to park money earning 2% with real inflation running at double digits.

I monitor hundreds of companies every day and pick entry points. In the last 6 months, juniors have decisively bottomed after their prices have been slashed up to 90% in some extreme cases. I am now seeing nice pops here and there like mushrooms on a sunny spring day after the storm. There are many quality junior companies with good cash positions, a low market cap and good prospects.

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