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Debt Bubbles and the Bull Market for Commodities

By Frank Holmes, U.S. Global Investors, October 28

The “World’s Greatest Investment Event,” the 2010 New Orleans Investment Conference kicked off on Wednesday as gold and natural resources investors descended on the Crescent City for answers to today’s market questions.

The list of speakers for this year’s conference reads like a who’s who of the natural resources and commodity world—Dr. Marc Faber, Newt Gingrich, Dennis Gartman, Dick Armey, Peter Schiff and others.

We know everyone can’t make it down to the conference this year, so we’re going to be sharing some of the highlights with you over the next couple of days.

Rick Rule, chairman of Global Resource Investments, Ltd., was first to speak Thursday morning and he had a clear message for the audience: We’re in a bull market for commodities and natural resources. Rule said that the easy money, what he called “riskless” money, has been made, but the “big” money is still out there.

Rule cautioned that this bull market in natural resources comes with a hefty amount of volatility; however, he told the audience of several hundred to use the volatility to their advantage. Rule said “volatility means items are continually being sold at 30, 40 and 50 percent off.”

One big reason Rule cites for the bull market in commodities and resources are supply-side constraints. A severe bear market in the 1980s and 1990s kept many companies and governments from investing in exploration and today’s consumers are living off reserves discovered in the 1960s and 1970s. With per capita consumption growing in places like China, new discoveries will need to be large and fruitful to prevent supply shocks.

Next up on the stage was Brien Lundin, editor of the Gold Newsletter and host of the New Orleans Investment Conference. Lundin began his presentation on gold showing that the current rally—which he says began in August 2009—has taken longer and appreciated less than recent run-ups in 2006 and 2008.

Lundin says he has been expecting a correction in gold prices that has not come to fruition. This could likely come when the Federal Reserve institutes their second edition of quantitative easing because market expectations have just gotten too high.

Lundin is also positive on copper, saying that analysts have been trying to kill off copper for years but the Chinese have refused to play along. Lundin thinks we’ll see $4 a pound copper sooner rather than later.

Although Lundin thinks a pullback in gold prices is coming, he believes this is the time for investors to reload. His long-term bullish view on gold is based on unprecedented debt levels by the Fed and the oncoming devaluation of nearly every major currency in the world.

Bubble-spotter Peter Schiff led off the mid-day session with a discussion of bubbles and excessive government spending. Schiff says we’re currently experiencing one of the biggest bubbles in history; it’s not a bubble in equities, not in gold or commodities, but a bubble in government. The rest of his half hour speech laid out the case supporting this argument. Schiff says that the 2008 housing bubble was the overture to a much greater debt opera that is nowhere complete.

While Schiff spent his time at the podium explaining where a bubble is, newsletter mavens Pamela and Mary Ann Aden spent their time onstage explaining where there isn’t one—in gold. Mary Ann Aden began by laying out the history of gold’s trip from $200 in the 1990s to more than $1,300 today. One of the biggest drivers has been the explosion of government debt. Mary Ann said that if the government paid $1 million a day on its debt, it would take nearly 2,000 years to pay it off.

Mary Ann said that gold is far from a bubble because of the world’s reliance on paper currency and “there’s not one paper currency in the history of the world that has survived.” Mary Ann says that central banks have seen the writing on the wall and that’s why you’ve seen a pickup in central bank buying of gold this year. Mary Ann’s sister Pamela Aden proclaimed in her speech that gold is currently in a “once in a lifetime” megabull market.

We’ll have more updates from other speakers tomorrow.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

This article is written by Frank Holmes and with his kind permission, O B Research has been privileged to publish his work on our website. To find out more about his work, please visit:


All Asset Prices Set to Rise

Puru Saxena, chief executive at Puru Saxena Wealth Management, reveals why he is optimistic on the prospects for all assets. He shares his investment strategy with CNBC’s Chloe Cho, Jackie Deangelis and Maithreyi Seetharaman, in this edition of Protect Your Wealth.

OceanaGold to Restart Philippine Gold, Copper Mine

Australia’s OceanaGold Corp said on Friday it will restart work on a gold and copper project in the Philippines in the first half of 2011, with initial capital cost estimated at $140 million over the next four to five years.
The Didipio mine, with a reserve life of 20 years, holds 1.41 million ounces of gold and 169,400 tonnes of copper, according to an updated technical report on the mine released by OceanaGold.

Australia’s fourth-largest listed gold miner said it had formed an exploration team to assess the mineral potential of surrounding areas of the Didipio mine in the northern Philippines to see if it can be expanded.

OceanaGold halted construction in late 2008 after spending $80 million due to high cost estimates of the project, initially set at $320 million.

In September, the company said it thought the Didipio project was viable and found it could be completed in 15 to 21 months with additional expenditure of $140 million.

A budget of about $4 million will be set aside for working capital in the first two years of the mine’s operation, on top of the initial cost estimate of $140.1 million.

A further $1.5 million has also been allocated for 2011 for exploration work in surrounding areas of the mine.

Source: Reuters

Related news:
OceanaGold updated Technical Report for the Didipio Project (pdf)
OGC 2010 Third Quarter Results Conference Call Presentation (pdf)

Bolivian Government Agency to Audit Orvana’s Bolivian Subsidiary, EMIPA

Orvana has been advised that the purpose of the audit is to verify EMIPA’s compliance with Bolivian commercial and administrative regulations during the period from 2005 through 2009. EMIPA understands that it is one of a number of companies currently being audited by AEMP.

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There are many companies with assets in Bolivia, and as the release suggests, this audit is not directed on Orvana only, but on several other companies as well. Pan American Silver, Newmont Mining, Coeur d’Alene are some of the companies found to have operations in Bolivia today.

Full release

The Silver Sleuth

By Jeff Clark, Senior Editor, BIG GOLD

We once had an ongoing series in BIG GOLD called, “1001 Reasons to Own Gold.” The idea was that there were so many valid reasons to own the metal that I wanted to track and report on them. If you’ve been invested in the precious metals arena, you know there have been a myriad of bullish indicators for silver this year as well.

Here’s a couple new reasons to own silver that a lot of mainstream investors probably aren’t aware of…

Due to increased demand from industry and investors, silver exports from China are expected to drop about 40% this year. And that’s actually an improvement; customs data show exports plunged almost 60% through the first eight months. China exported about 3,500 metric tons of silver in 2009, but has exported only 970 tons through August of this year.

What a lot of Westerners don’t know is that China ended export “rebates” two years ago to stem the shipment of natural resources leaving the country. As a result of the regulation, silver exports decreased in 2009 but are nothing like what they’re experiencing this year. In other words, the large drop in exports is a direct result of a huge increase in demand within China itself. According to one Chinese banker, the spike in demand is coming from all areas – jewelry, investment, and industrial. In his words, it’s led to a “physical market shortage in the Far East.”

How important is this? China is the world’s third largest producer of silver (after Peru and Mexico), so the amount of silver coming to the global marketplace this year will drop by more than 74 million ounces. This represents roughly 8.3% of total annual global supply from 2009. If worldwide demand continues at its current pace, where is the extra metal going to come from? This alone tells us the price of silver will move higher.

The next item I sleuthed out was that the U.S. Mint is expected to release a new five-ounce silver bullion coin this year, the first ever. The coin will be three inches in diameter and have a composition of .999 fine silver.

I’ve read the five-ounce bullion coins will be near-exact replicas of the America the Beautiful quarters. There will reportedly be five different designs, and the mint plans to produce 100,000 of each. I can’t wait to see them.

The coins will be classified as bullion, meaning they should be available to the same dealers already authorized by the mint. This will likely create excitement in the silver market, especially when you consider its affordability. At $23 silver, the five-ounce bullion coin will cost $115, plus premium. One ounce of gold runs $1,340 as I write, while five ounces will cost you $6,700 plus commission.

Perhaps most bullish is the fact that silver is vastly underpriced when compared to gold. Look at it this way: gold is currently priced 57% above its 1980 nominal high of $850; silver would have to more than double to reach its 1980 nominal high of $48.70. And that’s excluding any inflation-adjusted calculation. Yes, silver’s spike was partly a direct result of hoarding by the Hunt Brothers, but my question to the skeptics is this: what’s keeping us from seeing similar stockpiling today? What if there are several Hunt Brothers out there?

It’s true that central banks don’t buy and store physical silver, so one source of demand that’s common for gold isn’t present for silver. But let’s keep things in perspective: demand for all forms of silver is rising, and we see no reason the trend won’t continue. And with indicators like decreasing supply from China and increased attention from a new bullion coin, I say the big picture on the silver price is extremely bullish.

This silver sleuth says, buy some silver on the next dip. There’s lots of reasons you won’t regret it.