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The Case for Gold Price Manipulation

Commodities / Gold and Silver 2011 Jul 19, 2011 - 02:10 AM GMT

By: The_Gold_Report


Best Financial Markets Analysis ArticleAs a geologist by training, it's no surprise that S&A Resource Report Editor Matt Badiali takes a data-driven approach to investing. In this exclusive Gold Report interview, he shares calculations for trailing stops and strategies to take profits with prospect generators and points to the signs of gold price manipulation.

The Gold Report: Matt, in the June edition of S&A Resource Report, you wrote that resource stocks could see some pullback once quantitative easing (QE) was no longer injecting money into the system. QE2 ended last week. Is your thesis proving correct and what are your strategies to mitigate post-QE2 portfolio risk?

Matt Badiali: A lot of the resources—silver, oil and even gold—pulled back at the end of April. We felt there was enough commodity risk that we wanted to be careful investing in a lot of those companies. However, we jumped back into several silver companies because they just got too cheap not to take action. It looked like they had been oversold.

I still feel oil is inflated. I think gold is still in a bull market, but no bull market goes straight up. With the end of QE2 we could see gold reverse a little bit. My recommendation this month was coal. With European countries jumping out of nuclear power, coal is a fairly bulletproof market; it has less commodity risk than the rest of the group.

TGR: The headline on that article was "Ignore the Noise and Focus on the Big Trend." What is the big trend?

MB: For one, gold is still a fantastic long-term investment. That won't change until the U.S. and Europe get their financial houses in order. That's when I'll start looking bearish on gold and silver. We've seen a spectacular run in the silver price, then a big correction. Eric Sprott, for one, makes the case that silver will appreciate more than gold over the next year or two.

TGR: But for silver to return to its long-held ratio of 16:1, it would have to accelerate at a rate more than double that of gold. That's a steep climb.

MB: I think inflation is still one of the best arguments; silver remains a good store of value. But silver also has one foot in industry, where demand is rising.

TGR: You've also written about the manipulation of the gold price. You made your case by looking at single day jumps in the price of gold and other commodities over the last 10 years. Over that span, gold had gone up more than 5% in 1 day only 3 times, oil went up more than 5% on 53 days and silver on 32 days. More to the point, gold never went up more than 10% in a single day over the previous 10 years. That would suggest the gold market is being controlled. Are you concerned about placing so much faith in a market that is being controlled by non-market-related events?

MB: Well, let me preface this by saying I went into this as a skeptic. I'm a geologist, a scientist. I looked at the gold price at Eric Sprott's suggestion; he gave me an idea that I could test with data from Datastream. When we did the math, I was shocked. So, now I do believe that the gold price is being manipulated somehow.

As to my concern about investing in a manipulated market, I do my absolute best to hedge commodity risk by finding companies that are undervalued. You can't argue with the long-term trend: the price of gold has gone up every year for the last decade. Either the manipulators are doing a terrible job or the trend is so inevitable that all they've managed to do is dampen it a little bit. The implication is that if the manipulators lose their ability to manipulate, gold prices could soar.

TGR: Let's move on to your specialties. You recommend using trailing stops to lock in profits on equities. A trailing stop is triggered when an equity goes below a certain percentage of the previous day's closing price. Given resource stocks' inherent volatility, how do you determine trailing stops for junior resource equities?

MB: My colleague Steve Sjuggerud helped design a computer model we use to determine the most effective trailing-stop price. Trailing stops work off the high price. So, we base our percentage on the highest price that the equity achieved at the close of the day's trade. For example, an investment in ExxonMobil would use a 25% trailing stop.

TGR: Because that's not a volatile stock.

MB: Exactly. For juniors, we use 50%. Really, it's about protecting yourself against major losses. We believe 50% is as much of a loss as we want to take on any position. To me, the trailing stop is a great way to take profits. If you start with a 50% trailing stop on your volatile stocks, you can tighten it to 25, then to 15 and 10 as you make money.

TGR: How do you determine how much to tighten?

MB: This is when the strategy has to go beyond the company. So, say we bought a junior miner operating in the Yukon. We made a big gain during the field season and in September we're sitting on 60% or 70%. This is a great time to ratchet down your trailing stop because news flow is the life blood of junior miners. You can take a profit and plan to get back in the next summer.

TGR: Let's talk names. Stansberry & Associates Investment Research developed a list of the Top 10 Prospect Generators. What are some prospect generators you're following that might be considered undervalued at this point?

MB: Mirasol Resources Ltd. (TSX.V:MRZ) has been one of my favorites for years. It's a silver explorer working in the Deseado Massif in Argentina. Marisol has smart, experienced folks who explore using cutting-edge technology. For example, Marisol has used satellite imagery and high-altitude aerial photography to explore. This allowed them to make two discoveries.

They just put out a resource on the first property, Joaquin, which is a joint venture with Coeur d'Alene Mines Corp. (NYSE:CDE; TSX:CDM). I suspect that Joaquin is going to become a mine.

I should add that one of the ways that I value prospect generators is the quality of their partners. Some companies will look for discoveries just to sell the project to someone else. Coeur d'Alene, on the other hand, has a vested interest in building a mine at Joaquin. They are serious, committed partners.

The other discovery is called Virginia, 100% owned by Marisol right now. That's progressing very well; it has high grades. This year, the share price has been as high US$8; now it's below US$5. If this discovery begins to grow in size, I could see Coeur d'Alene buying the entire company.

TGR: Given that Marisol was at US$8, would you consider it undervalued at US$5?

MB: Yes, and it's because they're in between field seasons.

TGR: What are some other prospect generators?

MB: One that's been a rock star for me is ATAC Resources Ltd. (TSX.V:ATC). ATAC is a junior miner exploring gold projects in the Yukon. In 2008, the company made a big discovery in the Rau Gold Project, Rau is part of the Rackla region. In early July, ATAC put out game-changing results: 82 meters at 4 g/t gold within an interval of 115 meters at 3.1 g/t. That really proves continuity on this project.

TGR: So, that's a 100m step-out hole from the original discovery hole that was found at Rackla in November 2010. Are there plans for infill drilling in the meantime?

MB: I'm heading up to Vancouver the end of this month to get the entire story. They have a lot of rigs on site, but I just don't know what their plans are. It's important for them to get a feel for the size of it.

Right now, I believe it's time to sit back and see which mining company or companies decide they need to own this project. I think ATAC will be the story that we go back to over the next 5 or 10 years and say, "Wow, what an amazing discovery all the way through its buy up."

TGR: With a market cap of over US$800M, it will have to be a pretty major player to buy out ATAC. Any idea who some suitors might be?

MB: I'm not sure who the suitor will be. I don't think you'll see somebody like Kinross Gold Corp. (TSX:K; NYSE:KGC) sneak in and buy ATAC for its current market value. I think you're going to see competition. And I'm hoping that it is north of US$2B. That would be pretty nice.

TGR: Do you have one more prospect generator before we move on?

MB: There's a new company called Renaissance Gold Inc. (TSX.V:REN). This is another company where the people are the most important thing. The CEO is Richard Bedell and AuEx's former CEO, Ron Parratt, is on the management team as well.

Renaissance has an exciting copper-gold project in Spain called Baza. It's a partnership with Concordia Resource Corp (TSX.V:CCN) (previously Western Uranium Corp. TSX.V:WUC). The company is drilling there now. It also has several grassroots projects in Nevada that are comparable to Long Canyon. Lastly, it has an exploration agreement with Agnico-Eagle Mines Ltd. (TSX:AEM; NYSE:AEM) on four projects in Patagonia, Argentina.

TGR: Are there some juniors that may be underperforming right now, but could see a bump by the end of the year based on drill results?

MB: I'm expecting great things from Kaminak Gold Corporation (TSX.V:KAM). The company has a real discovery in Coffee; it's a company-maker. Kaminak made a series of discoveries in the Yukon and named each one after a different kind of coffee drink. Kaminak really needs to find out if the discoveries are connected. I was up there last year and was very impressed with the size. I think that this is going to be their field season.

The CEO is Rob Carpenter. He's a Ph.D. geologist, a very, very, very smart guy. Up in the camp, where everyone lives in tents, the company used a satellite dish with an XRF fluoroscope to do rough assays on site. It was really exciting to see him applying this new technology in the field on an active discovery.

Another junior that I like and own is Miranda Gold Corp. (TSX.V:MAD). It has a project called Pavo Real in Colombia and it is drilling in Nevada right now. I think that a little success will go a long way in improving their share price.

TGR: Could you comment on Kiska Metals Corp. (TSX.V:KSK)?

MB: I've known the management group at Kiska since 2006 when they were Rimfire. I have a lot of respect for them. They got away from the prospect generator model when they merged with Globex in 2008. Their Whistler project in Alaska is a series of gold sniffs. It's copper-gold porphyry, which tends to be large and low-grade.

Comparable projects might be Northern Dynasty Minerals Ltd.'s (TSX:NDM; NYSE.A:NAK) Pebble project and Seabridge Gold Inc.'s (TSX:SEA;NYSE.A:SA) Kerr-Sulphurets-Mitchell deposit. These are all low-grade, but really, really big projects.

The Whistler project is relatively underexplored, so it has a lot of potential. If they get a couple of good drill holes, the share price could rise quickly. The company has a resource on it now.

TGR: Whistler has about 5.5 Moz., indicated and inferred combined.

MB: I think it has the potential to double. This could be one of those long, slow explorations. The average grade there is half a gram, so they need to string a lot of holes together. That's what we saw with Seabridge. It took several field seasons, but they wound up with more than 30 Moz. just from drilling and delineating the deposit. That's what Kiska will have to do.

Kiska does have a new technique for drilling that they think might speed things up, and a new target area. The company is going to do more than 30,000m of drilling this year. Kiska is worth speculation at this point. Their high was US$1.74 last fall and their 52-week low was US$0.65. Now, it's around US$0.77. Unless they have some sort of calamitous accident, this is pretty close to a likely bottom. It looks like this is a company that you can speculate on.

TGR: What would the trailing stop be?

MB: I would use a 50% trailing stop.

TGR: Let's close by going back to a more strategic topic: management groups. What's your approach to evaluating a management group?

MB: Doing your homework really pays off in this industry and not doing your homework will ruin you. There's an old saw that says the best way to make a million investing in junior miners is to start with two million. That's true.

I do the homework—and the legwork—for Stansberry. I make the phone calls. I go to Vancouver and attend the conferences. Meeting management is crucial; I go to their offices. I go out to the projects and kick the rocks. I keep a contact list of industry experts from geologists to brokers to successful speculators to retired geologists that aren't in the field anymore. I vet projects and companies as thoroughly as I can before we ever invest in them.

TGR: Matt, thanks for helping our readers get a start on their homework.

Matt Badiali is the editor of the S&A Resource Report, a monthly investment advisory that focuses on natural resources—from small exploration outfits, to equipment companies, to the biggest commodity companies in the world. As a geologist, Matt focuses on all natural resources including silver, uranium, copper, natural gas, oil, water and gold. He's also a regular contributor to Growth Stock Wire, a free pre-market briefing on the day's most profitable trading opportunities. Matt has real-world experience as a hydrologist, geologist, and a consultant to the oil industry and he holds a master's in geology from Florida Atlantic University.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Timmins.
3) Ian Gordon: I personally and/or my family own shares of the following companies mentioned in this interview:Timmins Gold, Golden Goliath, Millrock and Lincoln. My company, Long Wave Analytics is receiving payment from the following companies mentioned in this interview, for receiving mention on my website, Golden Goliath, Millrock and Lincoln Gold.

The GOLD Report is Copyright © 2011 by Streetwise Inc. All rights are reserved. Streetwise Inc. hereby grants an unrestricted license to use or disseminate this copyrighted material only in whole (and always including this disclaimer), but never in part. The GOLD Report does not render investment advice and does not endorse or recommend the business, products, services or securities of any company mentioned in this report. From time to time, Streetwise Inc. directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

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