GoldDrivers 2009 Update


"I still hold the view that some high-quality juniors will come out of this mess with stellar returns within a year from now."

  • Gold proves itself as only true alternative for the dollar
  • Confidence in currencies shaken to the core
  • Gulf countries are keen to break away from the link with the U.S. dollar
  • Chinese appetite for U.S. debt in decline
  • Former Bank of England official expects dollar collapse
  • Investors fleeing into gold as U.S. prints trillions
  • HSBC, Citigroup, Merrill Lynch, Goldman Sachs all turning bullish on gold
  • Senior gold shares ready to move higher after impressive 100% bull run since October 2008
  • Junior gold shares waking up - bottomed out in December 2008
The year of 2009 started as how it ended in 2008. The inflation/deflation debate intensified and still there seems to be no agreement whether we're heading into a deflationary or hyperinflationary depression.

I've stated many times that hyperinflation will be the tune of the day coming years. The deflationists can argue what they want but the simple truth is that the U.S. government will default sooner or later on its inability to service its ballooning debt that makes the U.S. dollar worthless overnight. This happened to the Reichsmark, this happened to the Zimbabwe dollar and this could happen to the U.S. dollar. Once confidence gets into a steep decline foreign investors will dump their worthless dollar holdings, which will translate itself into the death of the dollar.

Deflationists may argue that governments can't keep up with printing money as fast as credit is being destroyed through means of weapons of financial mass destruction called derivatives so the net result would be deflation, yet they still miss the point that no government ever managed to create the strongest currency in the world by means of default. The U.S. government is adding debt at the fastest pace ever but no one seems to be willing to take on that debt. The only alternative would be (and will be) to monetize that debt, which will eventually lead to a confidence collapse for the dollar. Any currency facing a confidence collapse will eventually seek its intrinsic value, which is zero.

All this looks quite good for gold and the senior gold shares but what about the junior gold shares? Will they go out of business en masse as we're hearing almost on a daily basis now? Should we avoid the juniors like the plague these days?

The juniors do find themselves in their most depressed levels ever. Fortunately though, it seems that the worst could be behind us and that we might have seen the bottom in December last year. It's a natural event - the senior shares take the lead after bottoming out, and juniors tend to follow a few months later. There's no doubt that the senior shares bottomed out in October last year, so the thesis of juniors bottoming out in December could be very true indeed.

Believe it or not but many juniors already doubled or tripled from their December lows. Now does that mean you should you go out and start buying juniors like crazy (despite the fact that many analysts are warning of massive upcoming bankruptcies in the junior sector)?

The answer is not that easy. Although I would suggest going for safety first, which means the physical metals followed by some senior gold shares, I still hold the view that some high-quality juniors will come out of this mess with stellar returns within a year from now. Simple fact is you'll be buying juniors at bankruptcy levels. This is all caused by the junior's inability to secure the financings necessary in order to advance their exploration projects. But here's the thing to watch for. The supply chain for gold starts with the junior gold exploration sector, 75% of all discoveries are made by juniors. It won't be long before major companies will start to acquire promising projects from juniors or start to joint venture them.

Other things to watch for are the juniors priced at bankruptcy levels but able to secure their own finances in short order. There's obviously a trend prompting juniors to start up small scale mining operations themselves in order to finance their own ongoing exploration efforts. They simply have to since if they don't they will be out of business pretty soon. If you'll be able to pick a junior holding good properties priced at bankruptcy levels and able to secure its financings through small-scale mining operations odds are you'll be rewarded well.

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