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    Juniors – Buy of a Lifetime – part II


    by Eric Hommelberg

    February 18, 2008

    In my piece Juniors - Buy of a Lifetime part I, I noted the extreme undervaluation of the junior sector against gold and concluded that a buy opportunity of a lifetime could be staring right here into our eyes. Now three weeks later nothing has changed my view. Yes, there's a growing sense of frustration among the junior share holders but the simple truth is that major bottoms are characterized by sentiment like this. Some investors are throwing in the towel because they are so demoralized by the fact that most juniors were trading higher in December 2003 as they are now. What these investors fail to recognize however is the cycle of over-valuation/under-valuation. It's simple, back in December 2003 the shares were extremely overvalued against gold and in February 2008 they are extremely undervalued against gold. So the only thing investors need to know is how to recognize significant BUY opportunities which are characterized by extreme undervaluation and severe over-sold technical indicators.

    It's only a matter of time before the junior under-valuation will morph itself into a severe over-valuation against gold again, the only question remains when. When looking back at the bull market of the seventies we see that the gold shares really took off in the very latest stages of the bull market. It wasn't until early 1979 before most gold shares went ballistic. What does it tell you? Well, it tells you that most junior shares are likely to take off seriously when investors realize that gold is going ballistic. Needless to say we are not there yet since the mainstream view has been bearish towards gold ever since 2001. The gold bears keep singing their popular bear tunes over and over again and to be honest they have been quite successful in order to prevent any kind of excitement to evolve in the gold arena.

    Some popular bear-tunes:

    Bear-tune: China's gold production will increase and will off set the terminal decline in South Africa. The net result will be an increase in world gold production thereby bringing down the price of gold.

    Comment: CPM is playing this tune ever since $430 gold. Now how would you have felt when you'd sold out your gold positions in 2005 at $430 because CPM had said that world gold production was going up which would bring down the price of gold? The simple fact is that gold production is not going up and has not been going up ever since 2001. China is not coming to the rescue either since China is looking all over the world itself in order to secure future gold supply. They have to since China's own gold reserves could be very well depleted within the next 6 years.

    Bear-tune: The US will slip into a recession which will hurt demand for gold.

    Comment: The US is not the center stage of world physical gold demand. Total US gold demand is only about 300 t/year. Compared to India's gold demand of about 1000 t/year the US amount is not significant. If you want to get a glimpse of future physical gold demand then look at India/China and Middle East, not the US. Demand trends are clearly up, not down!

    Bear-tune: Most gold is used for Jewelry. If gold prices rise then jewelry demand slows down thereby reducing overall demand for gold which in turn will lead to lower gold prices.

    Comment: Really? If that were the case indeed then why has gold demand soared dramatically by world's greatest jewelry consumer (India) over the last 5 years on the back of sky-rocketing gold prices? And what about the Middle East? Well, the World Gold Council just reported a total Middle East gold consumption of 10%. This despite a 15% rise in gold!

    I could go on and on but the key thing is that again most mainstream analysts fail to recognize the 'BIG' picture which is a bankrupt nation (US) refusing to deal with the concequences. A tsunami of inflation is heading towards the US which will destroy the value of the dollar and catapult the gold price into the stratosphere. The US is facing fiscal liabilties exceeding $50 trillion dollars and still no politician dares to touch this painful subject (exception Ron Paul). The only politician who did adress this issue was former Treasury Secretary Paul O'Neill but obviously predident Bush didn't like the message so O'Neill got fired. I've covered this subject in detail in chapter III Gold & Inflation of my Gold Drivers Report written in May 2005 but the reason why I come up with it now is that finally some americans are waking up and bringing this subject to the public. I strongly urge you to view this YouTube clip in which CNN's Glenn Beck addresses the $50+ trillion fiscal liability and a technical bankrupt US.

    http://www.youtube.com/watch?v=I-16u9x3tfE

    It's quite obvious that the US government has tried to maintain the illusion of a strong dollar all these years by suppressing the gold price but it seems that they've lost control over the gold market and as GATA clearly documented, losing control over the gold price could lead to an upward explosion of the gold price up to several thousands of dollars per ounce in the years to come. It goes far beyond the scope of this article to discuss what GATA knows but readers interested could visit GATA's website at www.gata.org

    The bottom line is that as long as the US government won't be implementing a policy in order to halt the dollar's slide and to reverse the current account deficits the dollar will continue its terminal decline and gold continues to rise. Keep this in mind during the next correction in gold because the bears will be all over you again urging you to sell your gold based on the bear-tunes mentioned above.

    Now the latest popular bear-tune is the one of selling IMF gold (3000 tonnes) which will bring gold prices down. The timing is quite obvious since gold was heading towards $1000 fast and a fast rising gold price is sometithing our beloved politicians don't want to see. They don't want to see sky-rocketing gold prices since it will undermine the illusion of a strong dollar, it's as simple as that! It's like deja vu all over again, former FED president Paul Volcker said in his memoirs (referring to the dollar crisis of the 70's):

    Paul Volcker, Former FED president:

    Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake. Through March, the price of gold rose rapidly, and that knocked the psychological props out from under the dollar." END.

    The US government tried to prevent a dollar collapse (partly) by gold sales before. The Wall Street Journal reported in Jan '05 (referring to the dollar crisis of the seventies) :

    WSJ Jan 17, 2005

    Worried the falling dollar was undermining its anti-inflation efforts, the Carter administration announced a multi-part support package on Nov. 1, 1978: The Treasury would use gold sales and foreign borrowing and draw on its reserves with the International Monetary Fund to defend the dollar. At the same time the Federal Reserve raised its discount rate a full point." END.

    So there it is, the US government used gold sales in order to support the falling dollar. As said above, it's like deja-vu all over again and you still wonder why the IMF came up last week with their brilliant idea of selling its gold?

    The bottom line is it didn't work in the seventies and it won't work now, gold is heading towards its inflation adjusted all time high of $2250 and beyond and nothing will stop it. Whether we'll see $2250+ gold in 2012, 2011 or 2010 I don't know but $1000+ gold in 2008 seems to be a sure bet to me.

    As mentioned above at some point when investors realize that gold is going ballistic indeed then the high quality juniors will wake up and start rising to levels hard to imagine these days. It's just a law of nature, all items swing from one side to the other, in this case juniors will swing from a severe under-valuation to a severe over-valuation. Again, during the bull market of the seventies most junior shares were hardly moving at all until 1979. Many juniors appreciated by a multiple of 1000% in the final gold blow which took less than a year!

    Again, it's hard to predict when the juniors will take off but the only thing that is relevant right now is to recognize the extreme under-valuation of the junior sector and as the saying goes, 'BUY LOW and SELL HIGH'!

    In my piece 'Juniors - Buy of a Lifetime' of January 25 I pointed towards the extreme undervaluation of the junior gold shares against gold and suggested that a tremendous 'BUY' opportunity could be right here right now indeed.


    Food for thought eh!
    Cheers
    Nev


    [email protected]
 
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