Armageddon in the Markets

With all markets in the world down by an average of over 20%, people that have been so used to good returns have been a little shocked..to say the least. The media is now calling this the bottom and even our very own prime minister is predicting that a recovery is close. The question that we all now ask, is this the time to pick up some bargains?

Technically speaking, markets are due for a bounce but will it be a dead cat bounce or will we see a fall rally. The biggest barrier to this rally is the fact that credit markets have pretty well shut down. Banks are not lending to each other and are not lending to companies or individuals. There is a crisis in confidence around the world and the result is a lack of trust. No one believes the governments and their bail out plans, no one believes the banks and now people have lost faith in the capital markets.

So during this time of mistrust, where is the best and safest place to keep your money? The overall commodity market has just been hammered. The fundamentals are still very good but with lending frozen, some of these companies with great properties may be forced to sell out or go bankrupt. The producers that have positive cash flow and low debt levels will be the survivors.

For the short term, the safest place appears be in the commodities of Gold and Silver. Interestingly, both have gone down in the last week, even though we are in an ideal environment for these two precious metals. To begin, the government's fiat money system has placed the printing press on full blast, hoping to inject enough monopoly money into the market to make everyone feel better. Its kinda like a drug junkie hitting up. He feels better for a short while but then feels a lot worse. His condition continues to worsen each time, which is what is happening to the markets each time a liquidity injection occurs.

Secondly, there is a great deal of FEAR and UNCERTAINTY in the markets. No one really knows what will happen next. To make matters worse, the biggest investors in the market right now are baby boomers that are just years from retirement. Many have seen their nest eggs that they have worked their lives for cut in half. This can make anyone feel uneasy but especially those that do not have time to wait for the markets to recover. The baby boomers will move to safer investments which usually means bonds. The one problem with bonds is that they are backed by companies and governments that have the highest debt levels ever seen in history. Is there a chance that some of these bonds may go belly up like the ones with AIG, Lehman Brothers, etc. have? The one thing about Baby Boomers is that some of them have pretty good memories. They can remember what happened in the 1970's and early 80's when gold soared to an inflation adjusted price for today of over $2000. Some can even remember back to the dirty thirties when Gold was the only asset that didn't lose its value. Housing, stocks, etc. all were hit during the dirty thirties but Gold went up. Could they be thinking that this might happen again?

Finally, the world political seen is very fragile right now. The middle east is teetering on all out war between Iran and Israel. Pakistan and Afghanistan are in the midst of political changes that could totally destabilize the countries. Even Russia is fighting with the US and you know that this can not be a good thing. This unstable nature of the world plays well for gold and silver. If you don't believe me, just watch the next time a major terrorist event, attack or war breaks out. The first thing that happens in the markets is that gold and oil go higher. I predict that the number of these type of events will continue to increase and thus will be good for Gold and Silver.

If all of this hasn't convinced you to buy physical Gold and Silver, the cherry on the cake is the fact that there is now a world shortage of these precious metals. This seems odd, since the paper price hasn't really gone up...but it will. It is just a matter of time and when it happens, expect it to be explosive. We got a small taste of this recently when AIG collapsed. If you don't have time to go to a bullion bank (Bank of Nova Scotia in Calgary) or a coin dealer, the best way in my humble opinion to play the commodity is through the HORIZON BETA PRO GOLD Bull fund. The fund offers 2 times leverage to the price of gold, can be bought in your RSP and can be traded just like a stock. The safest bet is still physical gold versus derivative and futures gold which the Beta Pro trades in but for the short term you can make some real money with a rise in the price of gold. Happy Thanksgiving and Happy Trading! Let's hope the government does not make Turkeys out of us through their continued lack of responsibility and printing of money,

Dog Days of Summer

The dog days of summer are here again and as the July heat warms us up, our stock portfolios have been frozen by uncertainities in the financial markets, panic selling and the irrational trading activity of investors around the world.

It is an understatement to say that 2008 has been a very challenging year to be an investor. At this point in time, the best advice is to research your portfolio holdings and develop a deeper understanding of why you made the investment in the first place. Some dogs with fleas will surface and should be put out of their misery before they cause more harm to your portfolio returns. On the other hand, some real gems will also become more apparent and should be bargain hunted before the rest of the market wakes up. Commodities have been the one area in the investment world that continues to rise, although some so called "experts" want us to believe that they are also a bubble ready to burst. The one difference between commodities and other bubbles like the technology and real estate ones is that the fundamentals of supply and demand are backing this rise in price. With emerging markets like China, India, Brazil, Russia, etc. all expanding at astounding rates there has been an insatiable demand for energy to drive this growth. Problem is that most large oil fields around the world have reached peak output and some are now in decline. So essentially you have demand increasing and supply decreasing. This is the main reason you have seen energy prices double over the last year. The second fundamental occuring is the depreciation in the US Dollar which commodities are priced in. As the US government continues to attempt a rescue of its economy by printing greenbacks, they are actually creating one of the highest inflationary periods of recent history causing the price of the commodities to continue to rise. Finally, you have a very unstable political climate in the world today. Iran and its fundamental opposition to the US and Israel has movied it to the top of the list of problem areas in the world and being one of the top oil producing nations, any action in that area will drive energy prices even higher.

We now need to look at what commodities offer the biggest near term gains for the companies that produce them and then invest in these companies. Gold, Silver, Copper, Uranium, etc. all are projected to go higher in price over the next year. The one issue is the costs to produce these metals has actually increased more than the metal prices. This is hurting the bottom lines of producers and will require a drastic rise in the commodities prices to make up for the high energy costs. Thus I would hold these companies or sell some of the dogs that you think might not beable to hang in there until their commodities increase in price. I still predict that gold will break $1500 an ounce by next spring and is thus a great investment. Gold Ishares is a direct way to play this but some believe buying the physical metal is safer.

The one commodity that will greatly benefit from rising prices but will not be as hard hit by inflationary pressures is natural gas. It just happens that the summer months are one of the best times to invest in this commodity as there is less demand at that time. I am thus reccomending that you take advantage of the current correction in prices (especially in the companies producing natural gas) and do some bargain shopping. Here is a quick breakdown of the companies at the top of our list. Please do your own research and use this to guide you in selecting the companies that you think have the best investment potential.

Here is a little bit more background from one of our anaylsts:

Energy - A Huge Disconnect

"TSX Energy space off almost 4% today on the back of a 3% pullback in crude. While on the surface this might make sense, it overlooks the huge disconnect between the performance of the energy stocks over the past year vs. the performance of crude. Consider the following chart:
Crude is up 100% over the past year, while the TSX Energy index is up 20%. In our view, one of two things are at play here: 1) There is a huge amount of skepticism in the sustainability of the crude price and we are destined to see prices fall sharply; 2) There is a huge amount of value in energy stocks.

Now, it's easy to say that oil prices are going to come down, but very few people seem willing to explore the alternative - that oil prices are going to go significantly higher. We have thrown everything at oil in the past six months - sharply slowing North American demand, huge subsidy cuts in China, Indonesia and India, sharply slowing economic growth, a stabilization of the US dollar - and yet oil shrugs it all off (kind of like the anti-Shylock - "prick us, do we not bleed", well, actually, no you don't). Our guess is that the doubts about $130+ oil may soon start to ebb and the oil stocks may ride a very big wave for a while.

What if we're wrong? The stocks price in $90 oil now, so being wrong is fairly well insulated. That doesn't mean that the stocks won't go lower if crude pulls back sharply, but we're confident that the slide will be manageable and they'll quickly bounce back. Further, should crude pull back sharply, the rest of the market probably catches a bid, so portfolios probably skate through okay. On the flip side, we're worried we'll be right and this may be the only area of the market that holds us up for a while."

Stocks to Buy

Majors: Encana (ECA), Canadian Natural Resources (CNQ), Suncor (SU) and Canadian OilSands (COS.UN)

Intermediates: Crew (CR) and Celtic (CLT)

Juniors: Delphi (DEE), Iteration (ITX), Cinch (CNH), Tusk (TSK), Glamis (GLM.A), Open Range (ONR), Vero (VRO), Alberta Clipper (ACN), Profound (PFX)

Offshore: Antrim (AEN), Ithaca (IAE), Solana (SOR), Pan Orient (POE), Grand Tierra (GTE)

Service Companies: Cathedral (CET.UN), Calfrac (CFW), Precision Drilling (PD.UN)


Remember to always do your own research and have fun shopping during the Dog Days of Summer. Some of these dogs just might turn out to be darlings...

Doom and Gloom at Calgary Gold Show

The Calgary Gold Show occurred over the weekend and brought together investors, industry experts and junior resource companies. The central theme at the conference was the huge mess that the US has got itself in and how the inflationary rescue of printing more and more dollars to cover up the mess will only worsen the situation. This is terrible news for US Citizens who have savings, real estate or are invested in the US Markets.

The silver lining to the Doom and Gloom message was that one asset class will definitely benefit from the US Economic Strategy of printing money and getting into more and more debt. If you want to make money as an investor, you will need to invest in commodities (hard and soft) and energy. Gold, Silver, Platinum, Copper, etc. will all continue to rise in price as the dollar falls. This will assist the bottom lines of the companies that are mining them and will offset inflationary pressures which are currently holding them down. When the general public (CNN, CNBC, etc.) start to recognize this we can expect a stampede of investors into commodities. This is the stage where the most money is made and we need to start thinking about an exit strategy. The experts agreed that this will not happen for a few more years but will continue to build. Eventually the misguiding of the media will be discovered and revealed for what it was. Unfortunately, many americans and other people around the world will have lost their hard earned savings by that point of realization. Energy will also continue to rise in price as demand from China, India, Brazil, Europe, Etc. will make up for a recessionary slowdown in demand from the US. Uranium and Alternative Energy will continue to benefit from increase energy demands and tighter environmental rules.

There were some very interesting companies were presenting at the conference that could provide us as investors with big gains down the road. In no particular order, here is a quick run down of some of my findings.

Companies we currently hold:

Silver Eagle Mines (SEG)-http://www.silvereaglemines.com/overview.php
Company has proven up reserves of over 30 million ounces of silver. They will be coming out with a new resource estimate this summer that could double that reserve. They are producing and will grow production expontially over the next two years. Trading at $0.80 a share and I have a target price of $2.00 a share by next year this time.

Aurcana (AUN)-http://www.aurcana.com/s/Home.asp
Aurcana's management has maintained its strategy of acquiring past producing mines and putting them back into production. They recently signed a deal with Silver Standard Resources to take over the Shafter Silver Mine in Texas. There goal will be to have it into production in 15 months. Once into production, it will add 2.5 million ounces of silver to their production profile per year. This will provide huge leverage to the price of silver. The company will be doing a financing in the near term to pay for the acquisition. This will hold the stock down but as it moves closer to getting this mine into production, you can expect a rise in price closer to its peer group of 2 million ounce plus producers. That would value Aurcana at about $2.50 a share when it is currently trading at about $0.75 a share.

Avalon Ventures (AVL)http://www.avalonventures.com/
We spent a lot of time speaking with the president of this rare earth gem. Avalon has been progressing towards becoming the first rare earth producer in Canada. Changes in technology (Hybrids, Batteries, Solar Cells, Flatscreen TV's, IPODS) recently have created a huge demand for Rare Earth Metals. This year alone there will be a 50 000 ton shortfall in production which is coming primarily from China. Avalon has been meeting with Japanese Investors who need to secure these metals for production of electronics. The company has a 100 million dollar market cap but potentially over a Billion dollars of metal in the ground. We liked what the president said and see this company as a leader in this new niche market. Target price by next year is $3.00.

Interesting Companies to Keep an Eye On

Metanor Resources (MTO)
http://www.metanor.ca/exploration-miniere/apropos_profil_ang.cfm
I have liked these guys for a while now and was excited to hear that they would be presenting at the goldshow. Metanor is a producing gold company (45000 ounces this year) that is operating near Val D'or, Quebec. They have a number of properties located around their mill and have reserves that are now over 1 million ounces of gold. The really exciting fact I learned at the tradeshow is that Robert Cohen, Fund Manager of Dynamic Precious Metals fund has just bought 3 million dollars of stock in the company on the open market. Metanor's cashflow from operations will be reinvested in the exploration and increase of the companies milling capacity. I have a target price of $2.00 a share on this one as well.


Arian Silver (AGQ)http://www.ariansilver.com/s/home.asp- I might be a little biased on this one as they took me out for a fabolous dinner on Saturday night. I did get a chance to sit next to the CEO and took the opportunity to fire a million questions at him. I was impressed by his passion for the project and his knowledge of the deposit. Arian is striving to prove up 100 000 000 ounces of silver in the next year. They have the goal of putting the San Jose mine back into production by 2009. A 4301 resource estimate should be arriving this summer which will greatly enhance the fundamentals of this project. Trading at a discount to net value at $0.35. My target on the stock is back to its high of $0.70 by next fall. That is a near term double which is always nice in the investing business.

Gold-Ore Resources (GOZ) http://www.goldoreresources.com/s/Home.asp
This is a small gold producer that is headquartered in Sweden. They took over a past producing mine and have put it back into production. They will exit 2008 at 25 000 ounces of gold. The gold that they are mining is actually found in quartz. They are planning on building shareholder value by using the funds from production to explore some very prospective deposits on the same property. I was impressed with the management team at the conference and with the fact that the CEO was the past president of Cumberland Resources which just last year got taken over by Anigo Eagle.

There was many other interesting companies at the conference and the excitement was definitely in the air over things to come for this sector. Some other companies of note include: Barker Minerals http://www.barkerminerals.com/s/Background.asp, Discovery Air http://www.discoveryair.com/ and Kodiak Exploration http://www.kodiakexp.com/.

I see gold and silver being caught in a trading range (consolidating) for the next few months and predict that the next leg up in the fall will drive gold to $1200 an ounce and Silver to $30.00 an ounce. The juniors haven't had a big move yet but when the prices run in the fall, the patient investors should be rewarded.

The Number One Precious Metals Fund

Today the Federal Reserve Board cut lending rates by another half percentage point bringing the key government lending rate to 3%. This follows last week's 75 point cut which makes this month's action by the Fed the most aggressive cut in rates by the Federal Reserve in history. While the Fed tries to save the US Customer who has maxed out their debt and is seeing their equity in their number one investment (their home) eroded by falling real estate prices, gold and other commodities continue to benefit from the falling US dollar.

One very easy and effective way to get some more exposure to the rising price of Gold is through a Precious Metals Fund. The 20 year bear market in precious metals eliminated many of the funds and experts in that area from the mutual fund industry. With renewed interest in precious metals investing, we are starting to see more precious metal funds pop up. The key behind choosing any mutual fund is finding out who is making the decisions. You are paying a hefty MER (usually between 2 and 3%) for this expertise and thus should know who you are trusting your hard earned money with. With the recent departure of Charles Oliver from the AGF Precious Metals Fund, this decision just became a little harder since Oliver's Fund was a great performer averaging 26% return over the last five years. The index only averaged 16% return. The sign of a good fund manager is someone who can pick high performing equities for his portfolo that are outpacing the general index.

With the departure of Oliver from AGF, another "young gun" has risen to the top of the Precious Metals Fund Manager List. His name is Kevin Maclean and his Fund is called the Sentry Select Precious Metals Fund. Kevin started the fund at Sentry Select in August of 2004. At that time, the fund had a net asset value of $13.85 per unit. By January of 2008, the NAV of Kevin's Fund had ballooned to $41.05 giving him an exceptional 3 and a half year return of 207%. In other words, $10 000 dollars invested in the Fund in 2004 would now be worth $40 000.

Kevin Maclean began his investment career in Precious Metals working with one of the most respected managers in the Fund Industry, John Embry at RBC. This experience proved invaluable in assisting him in getting the know the ins and outs of the mining industry. He applied his engineering background to the analysis of mining potentials of companies and used this to assist him in picking the winners in the industry. He is an active trader and thus has taken advantage of the volatile precious metals sector, locking in profits and buying equities when they are on sale. He recently was the Winner of the 2007 Canadian Lipper Fund Award* for Sentry Select Precious Metals Growth Fund: best risk-adjusted performance (over three years) in its category. The Fund was also the top performer in the precious metals category in 2005 and 2006.

The current top nine holdings of the fund include:
1/Yamana Gold-7%
2/Osisko-6%
3/Kinross Gold-5%
4/ Quadra Mining-4%
5/ Silvercorp-5%
6/ Jaguar Mining-5%
7/ Semafo-4%
8/ IAMGOLD-4%
9/ First Uranium-4%

Kevin Maclean's strategy is to pick mid-tier to small cap stocks that are prime takeovers or have a huge growth profile ahead of them. He is an active trader and thus his portfolio changes as value surfaces in the precious metals industry. One of his newest holdings, Jaguar Mining, has performed over a 100% in the last six months.

An investment in Sentry Select Precious Metals fund secures you a highly leveraged position in the Gold Bull Market. It also ensures that you have a proven expert in the industry making non-emotional decisions for you that have the potential to net you huge gains in your investment portfolio.

Warranting for a Great Spring

The New Year has started off with a bang for commodities as oil has passed the psychological number of $100 and gold has surpassed its old high of $850 an ounce set back in 1980. A number of factors have fueled this 2008 blast off including unrest in Pakistan, further rate cuts expectations by the US Fed and a recent OPEC announcement stating that will not be able to meet production goals by 2024. This New Years rally is confirmation that the Resource Bull Market is intact and ready for another spring run.

One way to get extra leverage to this springs resource run is through warrants. A warrant is an option provided by a company to purchase shares at a set price. There are two types of warrants: free trading and non-trading. Free trading warrants can be bought through any brokerage and trade just like stocks. Warrants are usually offered as "sweeteners" during private placements to reward investors for participating in the offering. They became very popular with Canadian Mining companies after the Bre-X debacle and the subsequent bear market in commodities. It was one way to entice investors to give their hard earned money to these struggling mining companies. Fast forward ten years and we are now entrenched in a "hot" commodity market where mining companies are being given much more attention by the investment world. Old habits don't change and thus companies are still offering warrants to investors as "sweeteners".

There are a few of drawbacks to free warrants being thrown around by mining companies. One is that it adds to dilution of the share value in the stock. The other is that warrants can hold the share price of a stock back until they are exercised as people don't want to race into buying a stock that will have a whole bunch more of shares free trading. Finally, warrants trade like options in that they have a set lifespan which is usually 18-24 months from the date of issue. Thus they can expire worthless if they are not in the money (stock must be above the exercise price).

So why invest using warrants if there are drawbacks to it? Leverage! That's right, warrants allow you to make more money on a stock than you would if you were just holding its shares. Warrants provide this leverage by allowing you to buy more with less. This can also limit your downside if a stock unexpectantly crumbles. Thus, it is my belief that warrants are another very effective and lucrative way to gain a larger exposure to the resource bull market occurring right now.

Here are a few guidelines to assist you when investing in warrants:
1/ Take a Macro Look at the investing world and choose a sector that is hot (ex. commodities)
2/ Research the companies in that sector and choose your favorites based on production, exploration potential, management, etc.
3/ Check to see if the company has free trading warrants (some warrants are not free trading)
4/ Find out what the exercise price of the warrant is (price that the stock must be at to exercise the warrant)
5/ Find out the expiry date of the warrant (more time is always better)
6/ Check the chart of the stock and make sure that the warrant follows the stock

Here is a link to assist you in your research:

http://www.financialpost.com/markets/market_data/group-warrants.html


Here are a few of my favorite warrants right now:

Yamana Gold A Warrants (YRI.wt.a)- is a Canadian gold producer with significant gold and copper-gold production from seven operating mines in Brazil, Chile and the U.S., as well as gold development stage properties, exploration properties, and land positions throughout North and South America. The company is in the right industry, unhedged and is increasing production. They have a few warrants that are free trading. My favorite is the A Warrant that is currently trading at $6.50. Two weeks ago it was trading below $5. The YRI.wt.a warrants have an exercise price of C$2.50. On exercise the holder would receive 0.6 of a Yamana share. These warrants expire on November 20, 2008. These related to previously existing warrants of Desert Sun Mining. We reccomend this as a strong buy as you get access to a mid-tier gold company at a junior price.


Breakwater Resources Warrants (BWR.wt)-Breakwater is a mineral resource company engaged in the acquisition, exploration, development and mining of base metal and precious metal deposits in the Americas. Breakwater has four producing zinc mines: the Myra Falls mine in British Columbia, Canada; the Langlois mine in north western Quebec, Canada; the El Mochito mine in Honduras; and the El Toqui mine in Chile. They have great cash flow (a recent UBS report has them increasing cash flow by 130 million in 2008) and have lots of growth upside through exploration and a possible takeover premium. The BWR.wt warrants have an exercise price of $1.00. The warrants are good till January 2009.


Baja Mining Warrants (BAJ.wt)- Baja Mining Corp. (“Baja”) owns a 100% interest in El Boleo Project, an advanced polymetallic (copper, cobalt, zinc, manganese) property located in Baja California Sur, Mexico. Baja has assembled an exceptional management team who are developing Mexico’s largest copper-cobalt deposit. Baja should be producing by July 2008. The stock price should increase as they get closer and closer to production. The Baj.wt warrants have an exercise price of $1.25. The warrants are good till April 2009.


European Minerals A Warrants (EPM.wt.a)-European Minerals is a mineral exploration and development company that is developing an open pit mine at the Varvarinskoye gold-copper deposit in Northern Kazakhstan.

Independently assessed proven and probable reserves at Varvarinskoye are currently 2.2 million ounces of gold and 254 million pounds of copper at metal prices of US$525/ounce for gold and US$1.30/pound for copper. The Varvarinskoye project shows strong project economics with an initial mine life of 17 years and production is expected to commence in October 2007. With its first gold pour occurring weeks ago, European Minerals is poised to take full advantage of a gold run to $1000. The EPM A warrants have an exercise price of $1.20. The warrants expire in April 2010.

The companies above represent a variety of commodity producers and geographic regions. I prefer producers over exploration companies for warrants as their positive cash flow can outweigh some of the drawbacks mentioned above.