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Market Alert

We sent you this Alert on the 6^th October, based on a report from a leading British newspaper, the “Independent”: - Further to our Alert of the 20^th August 2009 we have just received newspaper news [we need to hear this from the States involved first before it is accepted] that we have been forecasting for some years: -

“China, Russia, Japan & France are working with oil producers in the Middle East to permit currencies other than the U.S. $ to be used to pay for oil.   This basket of currencies will include the Japanese Yen, the Chinese Yuan, and the €.   It is reported in leading U.K. newspapers that this payment may be in a ‘new’ currency that is made up of these currencies.   It is also reported that a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar would form part of this ‘basket’   While we wait for confirmation from the countries involved, the news is in the market place and affecting gold strongly now.   The most likely candidate for the ‘new’ money is the old Special Drawing Right of the International Monetary Fund.   With the Chinese Yuan heading for one of the component parts of the Special Drawing Right in its next review by the I.M.F., the move would also incorporate the U.S. $, but break the link between oil and the $ a feature of the monetary world that has persisted for around 40 years now.” -  

Russia and Saudi Arabia have denied this news already and it is likely that if there is any truth to the story it will not be publicized this way.   However, it remains expected by the market eventually and because of this the gold price is moving through overhead resistance!   It is as if to say we expect it, so it is time to discount it now!

Once proved true and if true now, the era of uncertainty and monetary instability will be exacerbated by this break, taking the $’s prime support away from it and exposing it to the criteria that measures all other global currencies.   This accounting will be bad for the $ and very, very positive for gold!

True or False?

The weight of China’s growing power demands that the Yuan come onto the world monetary stage.   The weight of $ reserves [$2 trillion+] demands that the $ retain its buying power while being slowly eased to one side.   The weight of China’s economic power [which still has a huge way to grow] demands that it issue the Yuan internationally and allow exchange rate forces to impact upon its exchange rate value.   With its Balance of Payments strength, the Yuan should rise, but if the Yuan were issued freely abroad, the market would not let it appreciate so much.   So why are they concerned about the $ oil price?

It is rapidly being accepted that the future points to the waning economic power of the U.S. and the rising economic power of the East.   For over 40 years the oil price has been made in the U.S. $ almost exclusively.   With the U.S. sitting with major economic problems and yet providing the globe with its reserve currency the world is realizing that the global reserve currency should be independent of any single currency, particularly under one nation’s exclusive influence.      But it is also true that any transition must be done slowly to allow the ‘departing’ currency to retain its buying power on the way down.   This is the dilemma facing the world.  

With the world running on oil the world must run on the $ so long as it is the sole price of oil.

If there is to be an eventual new basket of currencies [whether under the umbrella of the I.M.F. as an S.D.R. or not] as the ‘new’ global reserve currency, a lessening dependence on the $ has to follow.   Likewise, trade between two nations outside of the U.S.A. should be permitted in the currencies of the two countries concerned or in the ‘new’ global currency and not rely on the $.   This should include oil too.

The world cannot use the $ as the only oil currency if oil producers are to receive a well priced amount for a barrel of oil, if that currency is declining steadily.   The international power that the currency of oil brings is enormous!   Should that power lie with a nation who is experiencing monetary problems, alone? What is certain is that further global monetary changes must come.   The story from the Independent whether true or false, is saying what we are all saying!

The longer the changes take, the greater the future currency uncertainty and greater international frictions will be on that road.  

As to present realities?   Russia is ready to consider using the Russian and Chinese national currencies instead of the dollar in bilateral oil and gas dealings, Prime Minister Vladimir Putin said on Wednesday.   On Tuesday Russia and China agreed terms for Russian gas deliveries at a level of up to 70 billion cubic meters a year. China also imports oil from Russia.   "Yesterday energy companies, in particular Gazprom, raised the question of using the national currency.   We are ready to examine the possibility of selling energy resources for rubles, but our Chinese partners need rubles for that. We are also ready to sell for the Yuan," Putin said.   The Russian prime minister said the issue would be addressed among others at a meeting of Shanghai Cooperation Organization finance ministers, who are to convene before the end of the year in Kazakhstan.  

The real issue

If oil is not priced in the $, the $’s exchange rate value will drop like a stone.   This is because a large proportion of U.S. dollars is used in oil transactions by all countries.   Oil producers need a strong $ to get the largest amount of income for their oil.   If the € climbs 20% against the $, oil becomes 20% cheaper in Europe.   If oil were priced in a ‘basket’ of the world’s most used currencies, oil producers would find protection against one of those currencies weakness.   So it makes sense to oil producers to receive other currencies on top of the $.

As to a country whose currency is rising against the $, the oil price they get charged drops so reducing petrol’s cost.   In many countries the local oil/petrol price is a very newsworthy item.

Hence the exchange rate complication enters the world of commodities.   Yes, market forces will shove the $ price of an item up, if the $ falls, but many feel that the $ has no business in the formula at all.   If the U.S. $ is sidelined in global matters, international trade would be easier and the rest of the world not burdened with the ailments of the U.S. $.   But it is also a power play.   For a change of oil currency to take place, without monetary disturbance, it must take a long time together with a willingness, on the part of the U.S., to relinquish such power.   Will it?

Relevance to the Gold Price

The concept of a world without one superpower dominant, has always been a temporary situation and one preceded or followed by war.   In a world where economics and money dominate, the same principle applies.   Whatever happens, uncertainty reigns until Pax Romana or Pax Americana, or any other Pax persists.   The difference this time is that the war will be fought in the global economy and in foreign exchanges.

In such a world, national monetary certainty is illusive.   It is in this type of world that gold reigns supreme because it is trusted all the world over as being untied to any government.   It is the currency that enemies can pay each other in.  

So whether rumors are true or not, the environment in which they are taken, seriously defines their relevance.   The concept of oil priced in currencies other than the $ will happen, it is simply a case of when.   Meanwhile, it is time to get ready for that day.   and possibly to an eventual five figures, so long as governments will allow its individuals and institutions to do so?

The Impact on the Gold Price?....

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Legal Notice / Disclaimer

This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina only and are subject to change without notice. Gold Forecaster - Global Watch / Julian D. W. Phillips / Peter Spina assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.

The convergence of an assortment of forces—probably the least compelling of which is jewelry demand and the possible role of gold in oil transactions probably the most powerful—promise to keep driving up the price of gold, according to GoldSeek.com founder and president Peter Spina. Still, in this exclusive Gold Report interview, as the gold price climbs toward $2,000, he suggests that investors might wait for another market rally in mining stocks, take some profits and invest the proceeds to add some physical gold to their portfolios. A year from now, says Peter—who also co-founded GoldForecaster.com—we'll look back on $1,000 gold as a bargain.

The Gold Report: We've seen some big bumps for gold several times this month, with the price nudging the $1,050 mark now. What's behind the spike?

Peter Spina: There's a lot of confusion out there now, but the bull market in gold is not about jewelry demand; it's about money. As gold keeps reaching new record highs, it's becoming more apparent what's driving it. The true issue at hand is trust (or lack of it) in the value of paper money—specifically the U.S. dollar. What's really made this country so strong has been the value of its currency.

We're seeing a shift away from U.S. dollar reserve assets. The value of the dollar had been primarily driven by demand in its global use, including trade in dollars, specifically, the oil trade. There are growing rumors about shifting some of that oil trade away from the dollar, and at the same time, central banks around the world are diversifying away from it. Combine that with other factors we're experiencing—trade deficits, internal deficits, the incredible amount of printing of dollars to bail out banks and provide stimulus and so on. It can't go on.

The U.S. internal deficit is nearing $2 trillion a year and growing, especially in the last year. Now they're talking about projections from the recent financial bailouts total obligations exceeding $20 trillion. That doesn't take into account future banking and derivative issues, which are upcoming. Already, we do not have the ability to finance our debt. It requires about 80% of the world's savings to support our debt habits, and we're just increasing our debt load so quickly—our appetite for a debt is increasing.

How do we continue to finance this kind of system? This has to play itself out at some point and I believe inflation will be the outcome from all this paper printing via growing monetization of U.S. debt. It will cheapen the debt load, but there will be some severe consequences to pay. The price we'll pay will be reflected in devaluation of the U.S. dollar along with a degree of influence such power provides. Gold will benefit from this process. As people look for sound money and a safe-haven asset, gold will be the obvious choice.

TGR: Aren't most governments printing more currency to do some form of stimulus in their own countries, and not just the U.S.?

PS: Yes, they are. Gold is actually moving up in foreign currencies as well as U.S. dollar terms, and we could see a widespread devaluation of paper currencies versus gold. A global paper currency problem really brings gold to the forefront.

TGR: Why didn't gold take off earlier in the year, when a lot of that activity you described was already taking place? This is not news.

PS: It's a process. In relative terms, gold is such a tiny market that it commands quite limited attention in the financial world. That's changing, but it's a process that takes time. Some heavy accumulation behind the scenes helps support the gold price to this point, but some other factors tended to calm down the price appreciation. Primary among these factors has been general stabilization of this turmoil that engulfed us toward the end of last year and early this year. The mass psychology of the markets has shifted and is actually quite good, all things considered. Removal of the fear factor has driven away tension and stabilized things.

I just think there's not a broad understanding of the process, which is ongoing. I believe the U.S. dollar is going to really start losing its footing but the stock market is going to continue to stay firm and grow. As the dollar begins losing its value and gets to the point where that may happen very quickly, the situation will change and people should realize quickly what's going on. The squeeze on the dollar will be reflected in the gold price taking off.

TGR: How high can gold go? Won't people who aren't invested in it already going to get minimal return because it's already spiked up so much?

PS: There are definitely short-term risks after spikes. Gold reached $1,000 a couple of times and then pulled back to the $900 for most of this year. Now, after breaking through $1,000 again, it could rally to $1,100 to $1,300 and then pull back somewhat. That said, same time next year I believe we'll look back and say, "Wow, $1,000 was cheap; it was a bargain." So $1,500 to $2,000 gold in the next 12 to 18 months seems definitely within sight.

TGR: Do you see a situation where we might use gold as actual currency and actually go back to a gold standard?

PS: Direct use of it, while possible, is not likely. But I believe we'll be using gold in form or other in trade and/or in backing a new currency. We'll see central banks holding more gold in attempt to stabilize their currencies. They've already shifted from disposing gold on a net basis to accumulating gold to their reserves.

TGR: As you look at the gold sector just in the last year, the spot gold price has gone up 20% to 25% up until these recent bumps. But during that period, the gold equities have doubled, tripled, quadrupled. It's been amazing. Is the play here in gold the physical or the gold equities?

PS: When you invest in mining stocks you take on a greater degree of risk; for that you are entitled to a greater reward. As we saw last year when the markets collapsed, mining equities dropped quite severely. Valuations on many of the stocks went down 70%, 80%, 90%—so these equities are a lot more volatile and sensitive to general market conditions. There are arguments for and against, but I believe a good portfolio should contain both bullion and mining stocks and, within the mining stocks, include more stable mining equities and some high-risk speculative investment opportunities such as exploration plays. But I believe the mining stocks, the gold stocks, will outperform the metal itself.

TGR: You mentioned that an investor should be looking at fairly stable equities along with some more speculative exploration opportunities. Do you define "stable" as the majors?

PS: Yes, the Goldcorps (TSX:G) (NYSE:GG) and Agnico-Eagles (TSX:AEM) of the world, those that would be classified as senior gold companies, with annualized gold production in the multi-millions of ounces. With a basket of those companies, you can march down to the mid-tiers and the smaller-cap gold stocks for more leverage.

TGR: A couple of years ago, when we had a handful of uranium companies, uranium had a run up, and then suddenly hundreds and hundreds of uranium companies flooded the market. Does that happen any time a mania begins? Are we likely to see the same thing in gold, except that hundreds of gold companies may multiply into thousands? If that happens, how do you decide where to invest?

PS: As the gold prices rise, I think we will see some companies coming in that people should be very careful about investing in. They may do well in the bull market, but when all is said and done, if there's nothing really behind them, they will be the ones that will go away first. As you know, we saw a bit of a washout last year with the market correction. Some good quality companies took a hit and went under or emerged as somewhat different companies. But there were others that I would never have invested in, kind of moose pasture want-to-be gold investments. When those faded away while the good assets remained, that was good for the market.

TGR: So what would a careful investor look for?

PS: When investing in junior exploration gold and/or silver stocks, I first look at the management, look at their history. A company comprised of solely financial backgrounds who have no mining experience should be an obvious red flag. Junior explorers typically have to go to the capital markets to raise equity to explore and develop a project, so company with a bloated share structure to start off with will have a difficult time building a strong share price as it develops these assets. So in the junior exploration stocks, share structure also is very key.

With any of these small capitalization companies, it is typically about raising money in the public markets. So has the company been capable of obtaining a proper value of their assets for their shareholders? So ask yourself some questions: Are they communicating with the public? It's a publicly traded company; are they telling their story to the public? That's very important factor to attract investors and to preserve a small capitalization's primary key advantage which is share structure

And then, of course, the property. You want to look at various criteria in that respect including geography. I prefer locations in Mexico, Canada and Nevada for mining companies. Grades, environmental location, etc. are all very key investment decision makers.

Also look at the business model. Does the company provide any cash flow or is it expecting any near-term cash flow perhaps because it's close to production? You don't want to get into another situation like last year where your business model is entirely dependent on raising capital in the equity markets and the capital markets fall apart. However, that seems to be less of a threat if the gold price continues to rally and new capital sources, interest in the gold sector continues to grow. That would keep investment capital flowing into the sector at an accelerated pace

Those are several of the criteria that I look at. All things considered, you have to be very careful. The best thing an investor can do is to just do your research. Call up the company and speak with them and really get a feel for who's managing the company. Public filings provide excellent insights into the financial condition and management discussions. The resources available online add other easily accessible data and information.

TGR: Can you give us examples of some junior stocks that meet your criteria?

PS: One is Timberline-Resources Corp. (NYSE/AMEX:TLR) which has a terrific share structure, around 35 million shares. They're about a year away from gold production in Montana, an underground high-grade gold project. They're in a 50-50 joint venture with Small Mine Development, Llc (SMD), one of the largest underground mining contractors in the United States – serving clients including Newmont Mining Corp. (NYSE:NEM) and Anglo Gold (NYSE:AU, JSE:ANG, ASX:AGG, LSE:AGD). With Small Mines Development carrying the project to production, Timberline does not require to finance to reach production point, which means their share structure should stay intact. At $1,000 gold, they should be bringing in up to $20 million in pre-tax cash. For a company with about $25 million market cap, that's quite the value.

Additionally, Timberline is looking at other near-term gold production assets and has two drilling divisions, which I believe pull in around $15 million a year. Drilling margins are not very exciting right now because a lot of exploration activity has been slow to come back from last year's market correction. Still, I believe we'll see a nice uptake in the next six to 12 months in exploration and thus drilling services. So that company is definitely of interest.

TGR: Who else is on your radar?

PS: Another would be Gold Resource Corp. (OTCBB:GORO, FSE:GIH), which has several properties in Oaxaca in southern Mexico. They have under 50 million shares, no debt. They have several large shareholders, including management. One of the largest investors is Hochschild Mining (HOC: LSE) and the Tocqueville Gold Fund. Gold Resource Corp. is expected to produce 70,000 ounces of gold in the first year at $100 an ounce production cost at its El Aguila property. That's very high-grading gold. They're going to increase that to 110,000-plus ounces in years two,177,000 gold equivalent ounces in year three and onwards. As they encounter more base metals, those will be used as credits against production, so their production costs will go to zero or even go to a negative cost.

A lot more exploration work is needed to define the size of this project because of the significant upside their property remains huge. Right now they have several years of production reserves, and we'll see how that exploration work pans out.

TGR: How close are they to production?

PS: They're actually mining the open pit ore right now. They have all permits in hand. From what they've said in the recent past, the mill should be completed within a matter of days, weeks. I would expect some sort of initial production to begin this month or next.

TGR: So they meet your criteria of being able to essentially live on their own cash flow, not needing to go to the capital markets.

PS: Exactly. They're going to be producing an incredible amount of cash flow. If you're looking at 70,000 ounces with a net $100 an ounce margin in the first year alone, that's up to $1.50 a share right now in free cash flow. Gold Resource also plans to pay out about a third of their cash in the form of a dividend payment, which could be quite the dividend going forward. That's definitely a company to consider.

TGR: Any others?

PS: Timmins Gold Corp. (TSX.V:TMM) is another one in Northern Mexico. They're just starting production in an old open pit gold heap leach operation in Sonora. I believe this class of gold producers will soon see additional attention from investors and larger gold miners looking to grow their reserves and production levels therefore providing more upside. With just over 100 million shares, it's not as attractive of a share structure, but Timmins is now fully financed and soon producing cash flow with their first gold pour expected in January. They're looking at 80,000 ounces a year, $400 or so an ounce production cost, and they're trading around 70 cents a share. They have other prospective projects and some strong investor backing. That looks like a pretty good value to me.

TGR: Great. That's a pretty good list.

PS: Then there's a new company, Canada Gold (TSX-V:CI; FSE:T9N; OTCBB:CNGZF). They're just getting going, actually, and I'm not an investor in the company yet. They have a unique business plan, to build a toll mill facility in northern Peru and work with several thousand plus local small and independent gold miners that don't currently have an ideal place to have their gold ore milled. The Peruvian government estimates that around 3,000 tons per day of high grade gold is currently being extracted. I would expect this number to swell along with the gold price. These miners have been either loading their pickup trucks with ore and driving roughly 1,400 kilometers for processing at a cost of up to $100 per ton, or using mercury for on-site gold recovery, which is health risk to the artesian miners and a potential environmental biohazard. Inevitably these miners only get a fraction of what they could and should.

So within a year, Canada Gold is looking to open its first toll mill and to cater to these small miners, giving them a higher payout and milling the gold for them so they will no longer need to involve themselves in using mercury for extraction. Starting at 300 tons a day with grades pushing ¾ to 1 ounce a ton average, there is significant cash flow potential. Add mill number two, three and more, Canada Gold could grow into a significant gold operation and they can do this without having to deal with the mining and exploration risks.

That's definitely an interesting and new story. They have a $4 or $5 million dollar market cap and the several million dollars required to get the first mill going has already been financed, so additional capital needs are minimal Definitely, it's a good win-win situation, which I think will find good backing from some non-traditional sources, including environmental groups and NGOs.

I try to look for stories like that—unique business models and win-win situations.

TGR: It sounds good, but the value of a mill depends on the ounces it can process, so this one will depend on what these small miners can produce. Where's the guarantee their production will continue in some meaningful fashion through the life of the mill?

PS: With the price of gold where it is and the fact that these miners bring in on average about three-quarters of an ounce a ton of gold with no mill capacity nearby, the payback period could be within a year. Thus, there shouldn't be much fear that this won't progress for some years down the road. Because Canada Gold doesn't have to spend all kinds of money and time trying to find a deposit and mine it, this puts them in a much lower capex situation to get cash flow going. And at the same time these miners who are spending a day mining and two days extracting gold now will be able to focus strictly on mining.

TGR: So the payback period is a year. Why didn't someone jump on this earlier?

PS: I've been asking myself the same thing. I wish I had an answer. I know one or two private firms that do work like this, but no other public company has gone this route that I am aware of. I believe the business model is going to be quite successful, and from everything I've looked at initially, it strikes me as a really good story. They want to build this thing up quite aggressively, to the point where they could be producing half a million ounces annually within two, three or so years down the road. The gold's there. It's being processed. I believe their advantage will be in making higher payouts to the locals for their gold and being in a strategic location where a lot of this mining is going on along with all the necessary circuits to process various ore types

TGR: Is the Peruvian government likely to facilitate things for Canada Gold, given the ecological question?

PS: They already have government support and see continued support coming in for these environmental reasons as well as general economic ones.

TGR: So there's another win in this win-win scenario for Canada Gold.

TGR: Are there any other companies that you're following?

PS: Otis Gold Corp. (TSX:OOO) has five projects in Idaho and one in Nevada. I just visited their flagship, the Kilgore Gold Project in southeastern Idaho. It's an old gold property with some old production workings on it from the mid-'90s. A few companies such as Placer Dome, Echo Bay and Pegasus have previously worked it. Over 120,000 feet of drilling has been performed on the property to date. The deposit they're trying to define with the drilling exploration work that's ongoing as we speak, is to step out on some historic high-grade gold intercepts in an effort to define a high grade deposit that could be mined by underground mining methodologies . In addition, there is an existing bulk tonnage, open-ended 700,000 ounce gold resource that has significant expansion potential. This could turn out to be a multi-million ounce gold deposit. With a market cap of around $12 million dollars right now, Otis is looking pretty cheap. Their per-ounce gold valuation is in the neighborhood of $12 an ounce with their million ounce or so gold resource. The drilling expansion should continue to bump up those numbers. We're seeing around $40, $50 an ounce valuation now for this kind of deposit reserves, so they're looking rather inexpensive to me.

TGR: When will they be able to validate the presence of that high-grade intercept?

PS: The high grade exists. They need to continue to drill it out both the high grade and bulk tonnage targets to build the model better to confirm their ideas of this gold deposit. I think they're doing a 12,500-foot drill program now and the first results should start coming out soon. This first round will help define the deposit and see if indeed this high-grade gold deposit can be expanded. There are a lot of signals that it has the potential.

Once gold really gets at $1,200, $1,300, $1,500 an ounce and these majors need to replenish reserves, deposits that fit certain criteria—and I believe the Kilgore Project that will be one of them—definitely will become quite attractive. So it's a good opportunity to still get into some of these junior exploration stocks that have very inexpensive per-ounce valuations. Otis also has a terrific share structure, under 20 million shares. With some exercise of warrants coming up, they should have a couple of million dollars in the bank, so they're cashed up and have quite a few drill holes coming through soon. That could provide some upside pressure on the stock.

TGR: Sounds like another winner.

PS: It could be. If these exploration stocks hit some high-grade gold, you can see things really take a pop. Especially I love these older gold projects that had work done on them. Back in the mid-'90s a lot of these projects had millions and millions of dollars worth of work done on them. But then the gold price drop made them uneconomical and exploration development budgets were extinguished, so they just sat there. With the gold price making them very economical now, I'd say a lot of good gold projects like that are just waiting to be developed.

TGR: It was in the mid-'90s—1995 to be precise—that you founded GoldSeek.com. What did you see then, when everyone else was looking at the high-tech bubble?

PS: At that time, interest in the gold market related to the imbalance of supply and demand. A declining supply was coming from the major gold-producing countries, specifically South Africa, and demand was well above the supply. Investors perceived the imbalance as a market opportunity. But unfortunately it was too early. Central Bank selling closed a big part of the gap along with gold producer forward selling.

The gold market bottomed out in the late '90s-early 2000. At that time it was about that opportunity to buy low. Today it's different. It's the interest in gold market and gold itself as money that led us to the point we are today. Gold is now finally becoming more and more recognized for historical attribute as money.

TGR: GoldSeek.com is still going strong, and more recently, you've also co-founded GoldForecaster.com. Could you tell us a bit about major trends you're recommending there?

PS: GoldForecaster.com follows the gold markets from a global perspective on a weekly basis. We're watching the record high gold price around $1,035. If we have some consecutive closes above this, we expect another surge, a wave of demand to take the price a lot higher, so we're in the view that any pullbacks are excellent buying opportunities.

It looks as if the sub-$1,000 gold phase may be coming to a close, so we're looking for gold to move up to a much higher range and, in the process, take these mining companies to much higher values. So we see a lot of opportunity in all parts of the gold mining stock sector. As the price gets higher and the bullishness and excitement grow, the smaller caps and the juniors will start getting a lot more interest, too.

TGR: Are we in the mania stage yet?

PS: No, not at all. I believe we're entering the next phase of this global market, which will bring it more into the mainstream. Right now the average investor still doesn't own gold. They're starting to know what's going on. They know gold is getting to a record price but not exactly fully understand why. The big institutions, the big buyers are just starting to get coming in, but it's still not a mainstream investment yet. That still may take years—not just months—to develop. The mania stage is still quite a way off.

TGR: Thank you, Peter. Any parting thoughts that you want to give to our readers?

PS: I believe the key here in the gold market is what gold represents, what it has been and that's honest money and as we see this bull market develop, the reason for it is going to be from investment demand. It's going to from people looking for stable, honest money and with declining trust and confidence in paper currencies and as they continue to devalue, gold will become one of the choices for investors to preserve wealth.

I think we'll see some extreme volatility continuing on forward. We saw some examples of that last year and mining stocks will just amplify that. So you have to recognize that there will be some extreme wild swings in this market. Taking profits on the way up and diversifying those profits, I think, is always a great idea. Personally I am more overweight in the mining stocks. My strategy at this time would be to wait for the next significant rally and then start monetizing those profits into physical gold and silver.

DISCLOSURE: Peter Spina
I personally and/or my family own the following companies mentioned in this interview: (partial: Timberline Resources, Gold Resource Corporation, Timmins Gold, Otis Gold).

I personally and/or my family am paid by the following companies mentioned in this interview: (partial: Timberline Resources, Gold Resource Corporation, Timmins Gold, Otis Gold)

Peter Spina's experience with the precious metals markets dates back to the 1990s, and the GoldSeek.com website he debuted in 1995 now ranks among the top three most popular gold websites globally. When a secular bull market in precious metals was taking shape, Peter established the technically focused subscription newsletter, Gold Seeker Report; early in 2005, he merged it into the more comprehensive GoldForecaster.com service. In addition to the newsletter and websites, Peter frequently appears in the media, including Investor's Business Daily, Wall Street Journal's MarketWatch, Reuters and TheStreet.com.

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The G-20 meeting last week was hoped to be a watershed for the global economy.   It was hoped that accepted that there has to be a global solution to the financial crisis that triggered the credit crunch and the worldwide recession.   Those solutions had to include the full cooperation of other key governments, including China, before we could hope for a sound recovery of the global economy.   If we have more superficial statements with no real action, expect yet another crisis as confidence is lost, not only in currencies, but in global money systems.   You all know the old adage, “Cheat me once, shame on you cheat me twice, shame on me.” Just how much ‘spin’ can the globe take, before losing heart?

So where are we now?

The gold price has shattered overhead resistance, which is now support at $1,032, reaching $1,065 and due to consolidate now [Subscribers will be told at what levels].

Investment demand [Europe and Asia for bullion itself] is growing.    Physical demand is coming in from India as the wedding season takes off, but at lower levels than seen in past years.   Speculative demand rose taking the net speculative long position to new record highs in line with the gold price.   So there is no wavering in the confidence in gold, even after the G-20 meeting.   As the G-20 meeting progressed and the statements came from the conference, the inclination of the gold price was to struggle to hold ground and we saw it slip from $1,017 to $992.   The $ itself appeared to hold ground in the $1.46: €1 zone, which ground it has since lost.   What did this mean?   A look at the results of the G-20 should point the way forward.

As only politicians can do, the ‘spin’ to come from the conference, pointed to a solution and an air of renewed confidence.   But did this bear examination?

1.       After Mr. Geithner, the Fed Chairman’s massive issuance of new money through Quantitative Easing a major fear has and is that any withdrawal of this money will renew deflation at a more destructive rate.    “We will avoid any premature withdrawal of the stimulus," said the G20 communiqué assuring us that worldwide this money will stay in place.   With the Fed having stated that interest rates are not going to be lifted for some time to come the U.S. $ is now the “Carry Trade” [borrowing in a currency with low interest rates and lending into a country with high interest rates] of choice.   Previously it was the Yen, but the Yen kept on rising and taking away profits from the transactions.   With the $ likely to fall, the $ now allows borrowers a currency that is going to be cheaper to repay leaving interest rate profits intact.   So, while the attempt to resuscitate economic growth through the stimuli, the key global reserve currency is weakening against the bulk of the world’s other currencies.   This is gold positive.

2.       While the ‘carry trade’ will enjoy the weakness of the U.S. $, the $ will be protected by its very size and only be allowed to fall gradually [no brutal drops], other $ dependent currencies will not fare so well.   It appears more than likely that Britain’s Pound Sterling is headed for a “brutal collapse”.   We have talked about Capital and Exchange Controls for some time now, so brace up for these in the U.K.   This will bring U.K. investors streaming into gold.

3.       Another part of the communiqué stated, “We will adopt policies needed to lay the foundation for strong, sustained, and balanced global growth.”   Perhaps we misunderstood something here.   We thought that this planning had been going on for some large number of months and that this conference was going to reveal these policies?   There is little to rely on here.   What we do know is that China is not going to allow itself to pay for past U.S. mistakes in any reformations, so we foresee at least some conflict of interest to prevent such an objective.   Nothing solid here, again gold positive!

4.       The communiqué called for "global architecture that meets the needs of the 21st century."   Sounds inspiring but with the International Monetary Fund being put forward as the body that will monitor nation’s progress and possibly provide the new global reserve currency in the form of Special Drawing Rights [this failed before] nothing was done to re-distribute voting shares within the body.   China will certainly not go along with a body where the U.S. has the final say on resolutions the I.M.F. makes [85% of members votes are needed to pass any resolution, the U.S. has 16.83% of the body’s votes] .   With the economic power of the East rising rapidly and the developed world facing a potential lurch back down into a deeper recession [depression?] this matter has to be addressed before a start is made on a ‘global architecture to meet the needs of the 21^st century.’   Until this issue is properly addressed, no progress will be made on a reformed global monetary system. At the moment the issue is not expected to be addressed until early 2011 by the Fund's 186 member countries.

5.       The reassurance that “economic stimulus measures” would remain in place "for some time” is reassuring, but as we see disturbing signs that far more is needed than we have seen to date. While German car sales were up 28% in August, the Center for Automotive Research says sales will fall by a million next year:   This will be the largest downturn ever suffered by the German car industry.   Fiat's Sergio Marchionne warns of "disaster" for Italy unless Rome renews its car ‘cash for clunkers’ subsidies.   Chrysler too will see some "harsh reality" following the expiry of America's scheme this month.   Some expect U.S. car sales to have slumped 40% in September and worse in October, unless these policies are made more permanent.

6.       More than that, where are we in terms of the “recovery”?   We were led to believe it was taking off rapidly and that 2010 would prove to be a return to prosperity.   The figures are now painting another picture, China's exports were down 23% in August, Japan's were down 36% with industrial production dropping by 23% in Japan, 18% in Italy, 17% in Germany, 13% in France and Russia, and 11% in the US.    What can we expect by way of a response?   It has to be more stimulation and more currency issuance.   Of course if all do this in concert then all will fall in value at the same rate, giving the appearance of stability.   Gold Investors won’t buy this and gold will reflect that fall in buying power.

7.       With all the repairs being made to the global banking system, surely the banks are fuelling growth now?   The reality is that U.S. bank loans have been falling at an annual pace of almost 14% since early summer.   M3 money has been falling at a 5% rate, M2 fell by 12% in August, the commercial paper market has shrunk from $1.6 trillion to $1.2 trillion since late May, and the Monetary Multiplier at the St Louis Fed is below zero (0.925).  In Europe, M3 money has been contracting at a 1% rate since April.   Private loans have fallen by €111 billion since January.  Europe is headed for a new credit crunch now.   And what of all those Eastern European bad loans?   What happened to gold when this happened last time round was a rise in its value?   Now that we’re going round for a second time, the road to gold will be shorter, as uncertainty and fear reach new heights!

So with this bad turn in the global economy, after the powers that be tried to make us believe that all is going to be well, we seem to have come to a major turn and a bad one.   So why should we abandon gold?   When we look at the G-20 meeting yet again we ask, was there anything said there that changes the global economic and currency picture except more good intentions in the face of a decaying system?   So where will gold go now investors are wising up.   How high and just how far will the gold price move?   Could this be the start of the real ‘bull’ market in gold?  

The Impact on the Gold Price?....

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Jim Rogers has been one of the leading advocates for agriculture investing for years. With the exception of the summer of 2008, when agriculture was getting too frothy, we’ve been right there with him.

The Wall Street Journal notes in Commodities Guru Rogers Likes Silver, Palladium, Agriculture:

Most agricultural products are hugely depressed on a historical basis. Sugar is going to be much, much higher in the next decade.

Rogers also brought up something we’ve been talking about since August – the oil to natural gas ratio. This ratio proves how much oil was undervalued compared to natural gas on historical and energy equivalent ratio. Rogers suggested a short-oil/long-natural gas (sound familiar?) play to profit from the situation.

Although Rogers’ comments hardly identified any new opportunities or anything like that. His past investment successes and track record for getting the big things right makes him certainly some good company to be with as we move forward.

Agriculture investments continue to be one of the best opportunities anywhere in the markets today and Rogers has been very consistent on it. And natural gas, although it has rebounded strongly, will be a solid opportunity over the long run.

Ranked #3 on Forbes' Best Brokerage Analysts for 2009, Oppenheimer Senior Analyst Fadel Gheit sat down with The Energy Report to shed light on existing conditions in the oil and gas sector. In terms of oil prices, "financial players are more in control now than oil companies or OPEC," according to Fadel, who is currently more bullish on gas than on oil. "Despite the fact that gas stocks gained significantly this year," he says, "we think the upside potential remains great."

The Energy Report: Why is there such a high ratio and differential between natural gas and oil right now?

Fadel Gheit: Because oil is a global commodity; gas is a regional commodity. You can have a huge discrepancy in gas prices from country to country, from continent to continent, because of a lack of adequate transportation— the means of shipping to take gas from where it's found in abundance to where it's needed. For example, gas in the Middle East has no value because there is no local market for it. Most of the oil-producing countries actually flare gas because, basically, they use gas, you call it, as a drive. They use gas to pump it back in the oil field instead of water, because they don't have water, so they use natural gas that comes as a co-product with oil to pump it back into the wells to push oil because that's what they want. They want oil; they don't want gas.

We do the same thing in the Alaska North Slope. The oil companies that operate the fields put away the used gas to push it back into the oil field to lift up oil because there is no pipeline to take the gas into the lower 48. So the reason that oil will always sell at premium to gas is because of the ease of transportation from one place to the other. Pound for pound, it's only the transportation differential between oil delivered to Rotterdam or oil delivered to Houston. Oil, also, is the more politically-driven commodity than is gas—much more politically driven. If OPEC decided to do something and if Russia, OPEC and other producers decided to slow down, guess what? Oil prices will go up. We don't have a cartel or consortium to control natural gas.

TER: Yet.

FG: Yet.

TER: Sometimes I think Putin thinks that he has the beginnings of a consortium.

FG: It's very difficult to implement. Theoretically, it could happen, but I would say decades from now because the global distribution system is light years behind oil. Ships are not available and cheap enough to make natural gas a global market yet. As I said, it will take decades in order for us to reach parity between oil and gas. Gas is a much more preferable fuel. It's cleaner, it doesn't have any messy spills and it doesn't kill. But, obviously, how to transport it is the tricky part.

TER: Supply and demand seems to be an equilibrium at about 80 million barrels a day. What's going to kick in demand?

FG: Two things. Oil prices have not been driven by supply and demand fundamentals for years. This was exacerbated by the incredible influx of money from financial players into the commodity markets over the last five years and especially oil, which basically created the oil bubble that we had last year. Supply and demand fundamentals are beginning to play a secondary role now in oil prices. Financial players have much more clout and basically manipulate—influence, if not manipulate—oil prices; that is very clear. That's why we have the investigation by the CFTC and all the hearings. I am not holding my breath to see any changes because the politically motivated individuals and the incredible lobbying by financial institutions make it very, very difficult to regulate or enforce regulations in the books to stem that incredible increase in financial institution influence on the commodity prices.

TER: So do you have a view as to where oil is going to go over the next 6 to 12 months?

FG: I can tell you oil prices will remain inflated and not fully reflect supply and demand fundamentals. I just got a call from the Kuwait National Oil Company. They are wondering when this is going to end. I said, don't hold your breath. It's not going to end. They basically believe what I believe—that financial players are more in control now than oil companies or OPEC or anybody else. They play on the perception or the outlook—oh, OPEC is going to cut production. Okay, then they jack up, they start making bets that oil prices will go higher. We have not had any supply problems with the brief exception of the hurricane and, even with the hurricane, the fact of the matter is that the hurricane impaired our refining capacity more than oil supply. The Kuwait guy was just telling me that after Hurricanes Rita and Katrina, everybody said, 'oh, send us more oil.' He said, why do you need more oil? You don't have the refining capacity to process the oil. There's no shortage, yet oil prices obviously moved up very sharply because financial players, again, gave this perception that, my God, we're going to run out of this or out of that. But in fact, we had a shortage of gasoline not because we did not have enough oil. It's because we didn't have enough facilities available to process the oil that we have.

TER: So that provided the squeeze, but just further down the food chain?

FG: Absolutely. For all practical purposes, the reason I think oil prices will remain inflated is because I truly believe the financial players—who've already tasted blood and are not going to let go because this has now become the single-largest source of trading revenue—are betting on commodity futures. First of all, the derivative, which destroyed the financial market, was basically like a chain letter. You send it to your neighbor and so forth, nobody can really catch it anymore. It's like the flu. It just will become contagious throughout the world. If you look at the income statements of the major financial institutions, they don't break up their revenue from oil trading. But it's a multi-billion dollar business for the large players like Goldman Sachs and Morgan Stanley. And they absolutely refuse to and do not disclose it because it is more lucrative than bank robbery. As I said, it's not illegal because it's deregulated. One of the biggest players now in addition to ETFs, believe it or not, is pension funds. Pension funds are buying huge amounts of oil because it is something that they think will continue to generate huge returns and they have and they've been very successful. Anyway, I find it very difficult to believe that the CFTC will be able to regulate trading.

TER: What would you recommend in terms of an investor's portfolio of some of the stocks that you recommend they buy? Maybe start with some major integrated companies.

FG: Actually, on the major integrated oil companies we think they are going to do okay. But, as I predicted earlier this year, they are not going to outperform the market. So we think "market perform," and that is at best. The market perform was the fact investors are willing to pay the stocks, number one, because they are safer, more secure and they pay dividends. All these things are very positive and that is an attribute that you cannot find at the smaller companies. However, smaller companies offer things that the large companies don't have and that is basically the upside potential.

We've been bullish on smaller integrated oil companies like Hess Corporation (NYSE: HES), Marathon Oil Corporation (NYSE: MRO) Murphy Oil Corporation (NYSE: MUR), and Hess did not do as well, but Marathon and Murphy clearly outperformed the market. Why? Because any exploration success will be meaningful for any of these companies and they are more leveraged, if you will, to improvement in oil prices.

A company like Exxon (NYSE: XOM) is the largest company in the world—the largest oil company—obviously. They are down so far this year 12%. The market is up 18%. So you're basically down 30% vs. the market; that is not a good year for Exxon. It has the strongest balance sheet, it has more cash than debt, but investors say 'why should I care?' There is no capital. They cannot grow reserves, they cannot grow production. There is no gross prospect, so why should I pay any premium for stock if it's going to give me 2% or 3% dividend yield? That's not enticing enough. So we shied away from companies that have exposures to refining, especially the larger companies, because, as I said, the larger companies have no prospects for real growth or interesting or meaningful growth. They can hardly keep their production from declining, let alone grow it. Because most of their operation is outside the U.S., rising nationalism limits their access to resources. Venezuela kicked Exxon out, for example, and ConocoPhillips (NYSE: COP). The Nigerian situation makes life more miserable for Chevron Corp. (NYSE:CVX) and for Royal Dutch Shell plc (RDS/A). Russian corruption and arm-twisting by the government and all these things make it very difficult for oil companies to do anything there. So our focus has been from the beginning and continues to be the large and the small, basically, the E&P companies or the domestic oil and gas producers, and they have done very well.

TER: What are some of the names of the small and large companies?

FG: The large cap E&P are Anadarko Petroleum Corporation (NYSE: APC), Apache Corporation (NYSE: APA), Devon Energy Corporation (NYSE: DVN), EOG Resources, Inc. (NYSE:EOG), Noble Energy, Inc. (NYSE:NBL), Occidental Petroleum Corporation (NYSE:OXY) and XTO Energy, Inc. (NYSE: XTO). The smaller names—actually, I don't have many of them and that's where we're going to expand—are Cabot Oil & Gas (NYSE: COG), Comstock Resources, Inc. (NYSE: CRK) and Pioneer Natural Resources (NYSE:PXD).

TER: Any other points you'd like to make before we wrap up?

FG: Yes. We are more bullish on gas than on oil. Oil prices are up 62% so far this year, but natural gas prices are down 53%. So if you do pair trade, you're off by 95%. The reason being, as I said, because oil prices are manipulated and also politics get into the way when natural gas prices are depressed because of the glut in natural gas, so it's more a reflective of what's happening right now. So we went, again, with the conventional wisdom and we said, despite depressed gas prices, the upside potential in gas stocks is the highest because they offer real growth opportunity. We saw that clearly today. Anadarko announced some discovery in West Africa. The stock is up 10% in one day. Obviously, Exxon will never be up 10% in any one day even if they discover another Kuwait. So you can see, the relatively smaller company—anything compared to Exxon is small—that has the added catalysts, which is upside potential for exploration, obviously, gains the most.

So any company that has exposure to exploration did very well, especially if they delivered on this promise and basically made discoveries; and Anadarko is obviously the one that benefited the most because they have announced a new discovery almost every month. How many times did Exxon announce a discovery? Not for years. So still, despite the fact that gas stocks gained significantly this year, we think the upside potential remains great and we think the upside potential is greater than the downside risk. We don't think that gas prices can go any lower from there because they cannot be sustainable at lower prices because that will dry up domestic production and, basically, 80% or 90% of our demand is satisfied by domestic production. So the market will be self-correcting.

The longer gas prices remain low, the more violent, if you will, the rebound and the price is going to be. But I still believe we are not likely to see gas prices going to $8 or $9 as they were a year ago. We think more likely they're going to basically be within the trading range of, say, $4 to $6, closer to $5–$6. When you do that, you bring the gap in expectation between buyer and seller closer and, therefore, you get what you've been waiting for, an industry consolidation. This industry needs to reconsolidate so desperately because that would bring additional efficiency, clout, diversification, economies of scale and it will lower risk and increase return. It's only a matter of time before that will take place, which will be good for the stock, good for the industry and good for the country.

TER: This has been great, Fadel. Thanks so much for your time.

Oppenheimer & Co. senior analyst Fadel Gheit is a Managing Director covering the oil and gas sector. He spent six years with Mobil Oil and five years with Stone & Webster. He has been an energy analyst since 1986 with Mabon Nugent and JP Morgan and has been with Oppenheimer & Co. Inc. since 1994. He has been named to The Wall Street Journal "All-Star Annual Analyst Survey" four times and was the top-ranked energy analyst on the Bloomberg Annual Analyst survey for four years. He is one of the most quoted analysts on energy issues and has testified before the U.S. Senate and the U.S. House of Representatives about oil price speculation, and is a frequent guest on TV and radio business programs. Fadel holds a B.S. in chemical engineering from Cairo University and M.B.A. in Finance from New York University.

Company Specific Disclosures
The analyst/associate/member of the analyst's or associate's household owns a long position in BP.
The analyst/associate/member of the analyst's or associate's household owns a long position in COP.
The analyst/associate/member of the analyst's or associate's household owns a long position in CVX.
The analyst/associate/member of the analyst's or associate's household owns a long position in DVN.
The analyst/associate/member of the analyst's or associate's household owns a long position in RDS/A.
The analyst/associate/member of the analyst's or associate's household owns a long position in XOM.
The Oppenheimer & Co. Inc. analyst(s) who covers this company also has a long position in BP, COP, CVX, DVN, RDS/A, and XOM.
A member of the household of an Oppenheimer & Co. Inc. research analyst who covers this company has a long position in BP, COP, CVX, DVN, RDS/A, and XOM.
Oppenheimer & Co. Inc. expects to receive or intends to seek compensation for investment banking services in the next 3 months from XTO.

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