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Gold Paradigm Shift

Commodities / Gold and Silver 2011 Mar 29, 2011 - 02:14 AM GMT

By: The_Gold_Report


Best Financial Markets Analysis ArticleAs an investor, sometimes the best action you can take is no action. Jason Hamlin of the Gold Stock Bull newsletter didn't start snapping up stocks on news of disaster in Japan and military attacks in Libya. In this exclusive interview with The Gold Report, Jason tells why he's holding his ground, how high macro issues spanning the globe could push precious metal prices and a few of his top stock picks.

The Gold Report: Jason, the gold price fell dramatically after the Japanese earthquake and subsequent tsunami. Were you buying in the dip, and if so, what were you buying?

Jason Hamlin: I wasn't buying or selling mining shares on the news out of Japan, but did add to my physical stockpile on the dip. Not a really exciting strategy, but I already had a decent amount of exposure to equities. There was a lot of risk and uncertainty in the market after the news out of Japan, so I decided to wait and watch how things progressed. Equities have rallied pretty well, but I am not convinced that we're out of the woods yet.

TGR: Did you panic at all when gold went down to $1,380/oz.?

JH: No, especially with the amount of physical buying in recent months. It seems like every dip has been met by an overwhelming demand for physical gold and silver. I feel that we have entered a new paradigm in which there will be shorter and shallower corrections than witnessed during the past decade.

TGR: There is definitely a lot of international upheaval. What impact do you think the enforcement of a no-fly zone over Libya will have on the gold price in the near term?

JH: I'd like to point out that the no-fly zone was used as a justification for missile strikes; it was a much more aggressive policy than the simple no-fly zone that was originally proposed. It was also done without congressional approval, which I view as a continued violation of the Constitution, which states that only Congress can declare war. I question the political and moral authority of the West to be doing this, especially considering that the U.S. is broke and must borrow $1.6 trillion per year to cover its budget shortfall.

Economically, the ease and swiftness with which the U.S. decided to do this, and with little debate, translates into more fear and uncertainty in the markets. It will prove bullish for precious metals and oil, both in terms of the fear trade and the inflationary impact. Investors are increasingly viewing gold and silver as a better safe-haven investment than dollars or bonds, which have served this function for mainstream investors in the past. I see this trend accelerating in the coming months and years as more investors lose faith in the U.S. dollar and the U.S. government's ability to repay its exploding debt, which has topped 100% of the gross domestic product by some estimates.

TGR: We're not at 200% yet!

JH: Not quite as bad as Japan, but the 90% to 100% range is typically where most economists say interest payments become such a burden that it becomes hard to get the fiscal house in order.

TGR: On Friday, Goldman Sachs set a three-month target price for gold of $1,480/oz. Are you comfortable with that number?

JH: I quit paying attention to anything Goldman Sachs had to say a long time ago, particularly when it comes to forecasting the gold price. They have consistently under-forecasted and underestimated the precious metals market by a wide margin. I essentially view Goldman Sachs and the big investment banks as financial terrorists who should be jailed, not respected institutions deserving of the slightest iota of creditability. The Securities and Exchange Commission and the Justice Department might not want to go after them, but it's pretty clear to me that they disregarded their fiduciary duty and don't have their clients' best interests in mind. Taking their forecasts or analysis to be factual or relevant seems foolhardy.

Also, three months is really too short term to predict the price of gold with any degree of accuracy. However, I believe gold has a good chance of hitting $1,800/oz. by year-end. That's been my target. Gold could then easily pass its official inflationary adjusted high of $2,300/oz. next year. The true inflation-adjusted high for gold is somewhat closer to $5,000/oz. if we're not using the suppressed government statistics. I think there's a good chance that gold will surpass that figure before the bull market is over.

TGR: You mean the consumer price index?

JH: Right. The CPI is pretty well understood to be fudged in order to show inflation as lower than it actually is. Anyone who does the grocery shopping for a household knows that inflation is running more than a couple percent annually.

TGR: Let's talk about silver. Silver has closed the silver:gold ratio, or the number of silver ounces it takes to buy an ounce of gold, to 40:1. Historically, it's been much closer than that, but this is as close as we have seen in recent memory. That raises the question: is silver closing the gap a little too quickly—and overheating?

JH: I believe silver is likely to continue outperforming gold for the remainder of this bull market. I think the ratio will most likely revert back to 15:1 at some point in the next few years. Supply and demand fundamentals dictate such a revision.

For example, 95% of the gold ever mined is still in existence, whereas about 95% of the silver ever mined has been destroyed or used in such small quantities that it can't be economically recovered. The industrial uses of silver continue to increase, including high-tech electronics, solar and wind energy systems, batteries, medical and military applications, and even water purification. Silver truly is irreplaceable in many of today's critical applications.

In the past several months, there have been signs of shortages. Overall, the physical demand is overwhelming the supply. Even absent a short squeeze, the fundamentals dictate a much higher price for silver both in absolute terms and in relation to the gold price.

There is also another perspective on that ratio. If it's based on production of silver versus gold, the ratio would be closer to 10:1. Comparing overall demand to overall mine production, there is a shortfall of 100 to 200 Moz. of silver every year. There's actually less silver bullion aboveground available for investment than there is gold bullion. As the hedge fund manager Eric Sprott said, "There is 75 times more dollars worth of gold to buy than silver."

Despite these statistics, there is an increasing percentage of investor dollars flowing into silver, which is still 30% below its all-time nominal high, even though gold is about 70% above its 1980 price. The numbers just don't add up.

I don't think silver is closing the gap too quickly, but rather that the gold:silver ratio is likely to fall even lower over the next few years.

TGR: Okay. How far off is $40/oz. silver?

JH: Silver is approaching $40 rather quickly, but I prefer to steer clear of short-term predictions. That's just a guessing game. However, I do think silver will likely pass $50 by year end.

TGR: That would be truly remarkable. Given the current market conditions, what sort of junior mining plays are you seeking these days?

JH: My focus is on junior miners that appear undervalued relative to their peers and under-appreciated by the market. I do a good deal of fundamental research and cross-analysis. I look for miners that are well financed, with high-grade drill results, open strike zones, and management that has a track record of moving projects from exploration into production. I like companies that have a clear plan, either for moving into production, entering into a joint venture or being acquired by a surrounding major within a few years.

TGR: Which companies fit that bill?

JH: The Yukon gold rush is on, and one of my favorite plays in that region is Golden Predator Corp. (TSX:GPD). The company has 3,000 square km under claim and three advanced projects moving toward an NI 43-101 resource estimate this year. Its Grew Creek and Clear Creek properties will have their resource estimates by year-end. Grew Creek drilled around 150 meters, just under 2 grams per ton (g/t) gold, and Crew Creek hit around 25 meters of 2–3 g/t gold. Brewery Creek will get an updated estimate with a target of 600,000 oz., which is twice its previous estimate. They just announced the expansion of the Bohemian Discovery with 33 meters of 3 g/t gold. If these initial drill results are any indication, the resource estimates are going to surprise even the most bullish investors of Golden Predator.

TGR: The company recently raised $22.7 million in a bought-deal private placement, so it has the cash to see those projects through going forward.

JH: Drillings and discoveries in the Yukon are still very early on the bell curve. Golden Predator is well financed and drilling aggressively as we speak. It has a great pipeline of future projects and a growing revenue stream from projects in Nevada, which is a bonus. Bill Sherriff is the chief executive, and Mike Burke recently joined as chief geologist (from the Yukon Geological Survey). I have confidence in the leadership at Golden Predator, and I am not alone. Sprott Asset Management decided to get a piece of the action and invested in the company last year.

I also like that Golden Predator has exposure to silver via 5 million shares of its spinout, Silver Predator Corp. (CNSX:SPD), and its ability to acquire another 11 million shares in that company.

I believe the stock is cheap at anything less than $1. It's more of a speculative play than some of the other investments that I look at, but the stock could easily double by year end and has the potential to repeat the success that ATAC Resources Ltd. (TSX.V:ATC) has experienced in the area during the last year.

TGR: Golden Predator could hit the $5 mark?

JH: It's at about 90 cents right now. If its drill results continue at this pace , it has the potential to reach $5 in the next few years. It could certainly mirror the performance of ATAC, which was trading at $6.80 recently. It is up about 400% during the past year on discoveries. Golden Predator has property all around where ATAC's discoveries were made. I really think there's blue sky potential with this company.

TGR: What are some other plays that you have positions in?

JH: I am interested in the junior silver miner Argentex Mining Corporation (TSX.V:ATX; OTCBB:AGXM), which is one of the most undervalued junior silver plays in the market. Its flagship 100%-owned property Pinguino in southern Argentina has a bonanza-grade discovery. It completed a resource estimate that is expected to be updated in the next few months with new drill results. There's also a preliminary economic assessment coming down the line. The company is currently in the midst of a 17,000 meter drill program. It just added another drill rig last week and is expected to release drill results in the next few weeks.

TGR: What are you expecting from the preliminary economic assessment (PEA)?

JH: Based on the drill results we've seen already, I expect some pretty robust economics to encourage the company to move forward on this project. It has 50 veins identified to date, and the mineralization is open along strike and depth that they have tested. I would be surprised if the company didn't continue to hit high-grade intersections and come up with a very strong PEA.

TGR: You provide your subscribers to Gold Stock Bull with a list of the top 10 most undervalued companies in a variety of sectors. Are there any junior mining stocks on your list right now?

JH: There is one that I am happy to talk about: South American Silver Corp. (TSX:SAC; OTCBB:SOHAF), which has the Malku Khota silver-indium project in Bolivia—it's one of the largest undeveloped silver and indium resources in the world.

South American Silver has an experienced management team and is well funded. Similar to Argentex, it's scheduled to release a PEA and resource update this month, with a pre-feasibility study later this year. As those studies and estimates come out, there's a potential for the share price to move significantly higher.

TGR: I have talked to a number of people on Bay Street about South American. They seem to think this is one of the most highly undervalued companies there.

JH: Yes—particularly with the scale of this project. It could be a huge win if all the pieces fall into place. Given the incredible leverage that it has to the silver price, and the lower enterprise value per ounce, it's very undervalued at the current price.

TGR: There is one note of caution, however, because it is in Bolivia. Compared to other companies operating in Bolivia, though, South American Silver seems to have come closer to solving the puzzle.

JH: That's due to their management team and how well they're working with the local government and the local people. They have a track record of successful project development in South American and Bolivia is an emerging resource-based economy demonstrating strong growth. I don't think it's a sure bet; there are certainly some geopolitical risks. However, South American certainly has shown an ability to mitigate that risk better than other companies.

TGR: There's a lot going on politically and financially around the globe right now. There is unrest in the Middle East, and Japan is grappling with the aftermath of natural disasters, as well as staggering national debt. What advice do you give investors in light of those macro conditions?

JH: I believe that investors should have a good hedge against inflation, and that their portfolios should be diversified across various commodities. Investors should also have some of their assets out of dollars and out of the banking system entirely. I am growing increasingly concerned that another currency or financial crisis is coming down the line. It's critical to balance where assets are placed and to have physical gold and silver in your possession. The financial landscape is deteriorating in the U.S., as well as many other countries.

TGR: Jason, thanks for the insights.

Jason Hamlin is the founder of Gold Stock Bull ( and publishes one of the most highly-rated investment newsletters available, focused on strategies for profiting on the bull markets in gold, silver, energy, rare earth metals and agriculture. Mr. Hamlin has a background analyzing charts and trends for the world's largest market research company, is versed in fundamental and technical analysis and has consulted to Fortune 500 companies around the globe. Jason is a cycles investor, student of Austrian economics and speaks regularly at investment conferences throughout North America. The Gold Stock Bull newsletter is focused on finding junior mining companies that are undervalued relative to their peers. Click here to sign up or get more information.

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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