An Updated Outlook on the Shanghai Index, Dr. Copper, and the Dow/Gold Ratio

Quietly, Chinese stocks continue to slide, now down 12% for the year to date.  Since China had announced its plans to target inflation, the Shanghai Index has taken it on the chin:

Chinese stocks quickly retraced a portion of their 2008 losses - and then slowly faded. (Source: StockCharts.com)

Regular readers know that we like to follow China from a leading indicator point of view.  Chinese stocks topped before US stocks last time around, and also turned up about 3 months ahead in 2009.  We'll see that if the summer of 2009 top in Chinese stocks turns out to be a foreboding one too.

David Rosenberg writes today that the Shanghai index usually leads commodity prices by about 8 months (something I've wondered about recently):

In China, the Shanghai index was down a further 0.5% today and is now off 12% from the start of the year — and this index leads commodity prices by around eight months. Mizuho Research just published a report indicating that even with the government upping its inflation target, this is a sign of reality and not complacency. We are likely to see no fewer than six rate hikes next year out of the People’s Bank of China on top of the two increases this fall, no wonder the bank stocks there are peeling back.

Dr. Copper, though, disagrees with the bearish prognosis being inferred by Chinese shares - the metal with the PhD in economics continues its relentless ascent:

Source: StockCharts.com

I never thought we'd see copper approach it's 2008 bubbly highs - but amazingly, here we are.  And it only took a few trillion newly minted dollars to do it!

Going forward, there are divergences all of the map - gold and silver are near new all-time highs, while most other commodities still lag their 2008 marks.  Bullish sentiment appears to be at or near a high water mark.  And to make things really exciting, interest rates are starting to pop across the globe.

A bet on higher stock prices is probably not an optimal one.  You likely have more upside and less downside by just buying gold straight up.  Since a bet on rising stock prices is really a bet on inflation, why not just go straight to the proven inflation hedge?

The Gold/Stocks Ratio is still in an uptrend in the US.

Of course regular readers know that short-term, I don't really like either - because the dollar is starting to look frisky again.  If the buck does rally, that'd probably be bad for stocks, and somewhat less bad for gold (which is breaking out against most other currencies).

So once again, the "short stocks, long gold" trade is probably the one to be in for at least a few more years.

Gold Supply Graphs and Analysis: Why the Price is Setup to Keep Climbing in 2011

Here's a nice piece of analysis from Jeff Clark, who breaks down the supply situation for gold, and makes a compelling case that gold should keep climbing higher in the years ahead.  Jeff draws some interesting comparisons with the peak of gold's last bull market as well, to show that we potentially have a lot of room left to run.
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Gold, Get It While You Can
By Jeff Clark, BIG GOLD

We've got it easy right now. Click or call, and you can quickly and conveniently own a gold coin or bar. But if global concerns cause another panic or the dollar breaks down, you could find yourself standing in a line at the local coin shop or getting a busy signal. Simply, for reasons I’ll discuss here, you may find it very difficult to get your hands on physical gold when that time comes.

It's happened before. Though there were no precious metal ETFs in 1980, the demand for physical gold was so great that you literally had to wait in line at a coin shop to buy, with plenty of occasions when you would have been turned away due to lack of inventory. And you'll recall we saw serious shortages, unexpected delays, and soaring premiums in late 2008.

Given the fragile state of global affairs and the waiting-in-the-wings crisis for the U.S. dollar, I'll be surprised if we don't see another panic into physical gold. And the question is, will there be enough metal to go around when the public – 95% of which own none – wakes up and wants to buy it?

Answer: No.

Contrary to some claims, it isn't because we're about to run out of supply. While global mine production peaked in 1999 at 82.1 million ounces and has trended down since, take a look at the second largest source of supply – scrap. As you would expect, bad economic times and the surge in gold prices have triggered an increase in supplies from that source.

In fact, since 1999, as the price of gold climbed, the scrap supply nearly doubled. (Scrap comes mostly from jewelry, 75% of which derives from India, East/Southeast Asia, and the Middle East.)

So when you examine the total supply of gold coming to the market, it’s actually nudged up for three consecutive years, hitting 116.6 million ounces in 2009, a modest 8% increase over 1999. In the greater scheme of things, the total supply of gold to market has changed very little.

So what’s the problem?

First, you’d think a higher gold price would lead to rising mine production – but that’s not happening. From 1999 through 2009, the average annual gold price rose 248%, yet gold production fell 6.6%.

This means that as gold continues higher, we cannot count on miners producing more yellow metal for us to buy. This concern will become increasingly obvious as more buyers enter the market.

Second, although scrap has more than supplemented the fall in mine production, as I’ll show you in a moment, it’s still not enough to fully satisfy current demand, let alone any increase in buying.

Meanwhile, the third major source of gold supply is reversing trend. Until last year, central banks around the world had been selling gold, adding a reliable tributary to the flow of metal year after year. This has stopped. As recently as 2007, 17 million ounces came to market from central banks; last year they acquired 7 million ounces. The era of central banks as large net gold sellers has likely ended.

The conclusion we can draw from these signals is clear: known gold supply conduits will not deliver any significant new supply in the future. This will have serious repercussions. While it’s certainly bullish for the price, I think many investors have overlooked a critical angle:

If more and more people want to buy gold and the supply doesn’t increase, what happens to your ability to get it?

You can’t turn a profit if you can’t own it.

Realistically, though, how much more demand can we expect?

One way to estimate this is to compare today’s percentage of global assets in gold to the last great bull market.

While gold’s share of the global financial landscape has grown since 2001, a whopping 385% leap is needed to equal its 1980 peak.

Certainly some of that percentage could result from a decrease in the value of other assets. For example, residential and commercial real estate values will continue to fall as bad loans are unwound, and stock markets will adjust lower as global economies slow from cutbacks in government spending. But the gap is so enormous that investment in gold could easily increase significantly before this bull market is over.

Another way to measure potential future demand for gold is to look at today’s investment and coin demand compared to the last bull market. The following chart first looks at what portion investment in gold comprises of the total uses for gold (i.e., including jewelry and industrial uses). Then we look at the percentage coin buying represents today vs. the peak in 1979. The point is to see if we’ve already reached high investment levels in gold similar to the last bull market peak – or if there’s room for more.

When investment demand for gold (physical metal, ETFs, bank buying, etc.) peaked in 1979, it represented 54% of all uses for gold that year, a far cry from last year’s 32%. Of course, this is just arithmetic; lower jewelry demand could make investment demand look bigger as a share of total demand. But this data makes clear that an increase in investors wanting more gold could rise dramatically.

The picture is more striking when we look at coin demand. Coin buyers represented 36% of all gold investments in 1979; today it’s barely 14%. Coin demand would have to grow by 157% to match the last bull market peak. Yes, gold ETFs have and will continue to replace some of the demand for physical metal, but this shows there remains tremendous room for growth for investors wanting more gold coins.

Based on this data, I believe that despite the strong demand for gold investments we see today, it can go much, much higher in the coming years.

Here are some examples of coin demand straining current supply that you may find surprising....

The Rand Refinery in South Africa, the world’s largest, forecasts it’ll sell 1 million Krugerrands this year. Sounds like a lot – until you consider that from 1974 to 1984, they sold 2.6 millionounces per year. And that was when the world’s population was roughly 35% lower than today.

The U.S. Mint has had difficulty meeting heightened demand when annual sales are only slightly above historical averages.

So far this year, gold production in China is up 5%, but demand for physical gold is up 30%.

During two tense weeks of the Greek crisis in April/May, the Austrian Mint, one of the world’s five largest, sold a quarter-million ounces, an amount that exceeded all of first-quarter sales. And Pro-Aurum, one of Europe’s largest online precious metals traders, had to temporarily suspend sales due to a backlog of orders and insufficient supply. If Greek-style sovereign debt fears spread to other nations – something looking all but assured – rolling bullion shortages could resurface.

While all this is bullish for the price of gold, it’s alarming what it suggests might happen to the availability of physical gold.

So my question is this: if the dollar is collapsing and gold is screaming to $5,000 an ounce, will you feel like you own enough?

Better get some now while you still can.

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At the just-concluded Casey’s Gold & Resource Summit, dozens of resource experts and seasoned investment pros talked about gold and gold investments as an integral part of any crisis-proof portfolio. Listen to the in-depth advice of John Hathaway… Eric Sprott… Richard Russell… Doug Casey… Ross Beaty… Rick Rule… including their top stock picks of the year. Learn more here.

Ed. Note: I am a Casey Research subscriber and affiliate.

Why You Should Consider Shorting Crude Oil Right Now (Hint: Record Long Bets)

Over the longer haul, many of us believe that oil is heading higher.  If you subscribe to the peak oil theory, or at least some derivation of it, this trend is basically regarded as fact.

But for the shorter term, oil may be due for some degree of pullback.  Speculative longs on the black goo is at an all-time high, according to our boy David Rosenberg.  From today's Breakfast With Dave:

We remain long-term secular bulls on commodities, but as the charts below reveal, the net speculative position in gold, oil and copper are far too high right now for comfort. Oil is at a record high in terms of speculative net longs on the New York Mercantile Exchange.

Source: Haver Analytics, Gluskin

Surely, this is because crude is breaking out to new all-time highs, right?  Ummmm, no.

While bets on crude going up are at an all-time high, the actual price of crude is still way off 2008 levels. (Source: StockCharts.com)

Peak oil crowd, beware - if you're making long bets on crude right now, you're not alone.

How to Invest Alongside Richard Russell: Get Into Gold Before the Mania Phase

Richard Russell recently went on record as saying that gold has not yet hit the third - and most lucrative - stage of its current bull market: The Mania Phase.  Casey's Andrey Dashkov agrees, and makes the case that you should use this opportunity to pick up some gold junior miners before things really get out of hand.
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Chart of the Month: TSX-V Speaks Volumes - Gold Mania Still Ahead

by Andrey Dashkov, Casey’s International Speculator

With the gold price hitting nominal highs last month, there is a lot of “mania” and “bubble” ranting going on in the gold community. Should we start selling?

A bull market typically progresses through 3 phases: the Stealth Phase, in which early adopters start buying; the Wall of Worry Phase (or Awareness Phase), when institutions begin buying and every significant fluctuation makes investors worry that the bull market is over; and the Mania Phase when the general public piles on, driving prices beyond reason or sustainability.

This is followed by the Blow-off Phase, when the bear takes over from the bull and the herd gets slaughtered. Judging by the volume on the TSX Venture Exchange (TSX-V), where a lot of gold juniors are listed, we conclude that the next phase of our current gold bull market, the Mania, still lies ahead.

Have a look at the chart below:

Click to enlarge

If a mania were unveiling now, we would expect to see a sharp increase in investment capital entering the TSX-V, driving its trading volume upward. Over the last few months, the TSX-V daily volume has spiked upward sharply, but as the chart clearly shows, short-term volume is extremely volatile, spikes are common, and equally large drops are just as common.

Stocks of junior exploration companies are leveraged to gold, meaning they rise or fall by a greater percentage than does the yellow metal itself. So a spike in volume should be expected in reaction to an ascending gold price. A more reliable barometer is volume’s 10-period moving average that removes interim market gyrations. Using this measure, the TSX-V’s volume looks like it has returned to a slope of ascent similar to before the 2008 market crash, and the longer-term trend is steadily upward – steady being the key word.

More investors are entering our market, but the pace is not yet accelerating greatly, as we’d expect in a true Mania Phase. In other words, an early indicator of the mania in this bull cycle will be a sustained parabolic move upwards in the TSX-V’s average volume. And that is not happening yet.

Our other volume indicator, the GLD gold ETF, behaves in an interesting manner: it frequently moves counter to the TSX-V. An explanation for this might be that GLD is considered a “blue-chip” stock; a safer haven for investors who actively trade on the TSX-V and park their cash in GLD during periods when they consider juniors overly risky.

The moving average of GLD’s volume remains on a moderate multi-year ascent but has turned down recently. However, its daily volume is up in recent trading. Given the observed correlation between trading volumes of the TSX-V and GLD, this may point to a cooling-down in TSX-V trading activity in the near term.

Finally, the ^HUI gold miners index has tracked TSX-V volume as well, also having resumed a slope of ascent similar to that of the years before the 2008 crash. We see this as another indication that we are in an accumulation phase of the bull market.

We will continue tracking these parameters and updates when we see significant changes. For now, the bottom line is that even with the gold price moving sharply higher, the mania remains an anticipated future event.

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[But when the Mania Phase does hit, there’ll be no stopping it. And the best leverage – beating the S&P 500 by more than 8 times – comes from the little-known “gold nuggets” that International Speculator editor Louis James keeps digging up for his subscribers. For a very limited time, you can save $300 on the annual subscription fee – plus receive Casey’s Energy Report FREE for a year! To learn more, click here now.]

Why Natural Gas is Set to Soar in 2011 (Hint: Oil-to-Nat Gas Ratio is Out of Whack)

Natural gas is starting to get some contrarian love as a possible hit in 2011.  It's price action is starting to look favorable, as it looks like "The Natty" has finally put in some sort of bottom.  For a look at oil and gas fundamentals - including the important oil-to-natural gas ratio, here's our energy guru Marin Katusa for a look...
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Where Are Oil and Gas Prices Heading Next?
By Marin Katusa, Chief Energy Strategist, Casey Research

Oil is heading to US$200 per barrel. This isn’t speculation but hard fact. But forewarned is forearmed, and with this price expected within the next five years, investors have plenty of time to position themselves.

We recently have been talking about tools that investors can use to navigate the economic landscape. The gold-to-oil ratio is one such tool, but another popular compass is the oil-to-natural gas ratio.

The oil-to-natural gas ratio relates more to nuances within the energy complex, rather than the gold-to-oil ratio, which relates to monetary values. It’s the WTI Cushing price of crude oil per barrel to the Henry Hub Spot Price for natural gas per million thermal units.

In theory, based on an energy equivalent basis, crude oil and natural gas prices should have a 6-to-1 ratio. Market characteristics, however, have dictated that since 2006, the price of oil follow a pattern of 8-12 times that of natural gas.

As the chart below shows, historically the oil-to-gas ratio from 1990 to 2008 was in the low 9s. This means one barrel of crude oil was equivalent to about 9,000 cubic units (Mcf) of natural gas.

Improved drilling techniques and access to immense shale gas fields across the country have seen a boom in domestic gas production. Nor can gas wells just be shut down willy-nilly. The complexities of a gas well mean that it takes anywhere between three to six months to shut down operations.

And while the number of rigs sprouting up each year is decreasing, natural gas production is on the rise, with many of the shale wells coming online with their sources fresh and untapped.

Thanks to this flood of shale gas, the oil-to-gas ratio has risen to almost 17 on average. That is, one barrel of oil is now worth 17 Mcf of natural gas (17,000 cubic feet of gas)!

When we defined the oil-to-gas ratio, we used the term “thermal units.” It is interesting, then, that based on thermal units, one barrel of oil produces as much energy as roughly 6 Mcf of natural gas. So from a financial perspective, the oil-to-gas ratio is very different than in terms of energy.

Some companies and analysts use this disparity to their advantage, using the 6 instead of the 17 value to come up with the “barrels of oil equivalent” conversion for the value of gas. That’s a fudge factor of 2.8!

It’s an accounting mechanism that’s been turned into a completely legal but very shady promotion mechanism, one we watch for carefully.

It’s worth knowing that things can change very rapidly in the natural gas market. We do believe, though, that the current trend will continue for years to come, with the oil-to-natural-gas ratio ranging between 15 and 20.

For long-term investors, the oil-to-gas ratio is indicative of a paradigm shift in the markets. It is yet another tool in our collection of crystal balls for the economy and, if read correctly, is a great way to add some valuable holdings to a portfolio.

(Fortunately, you don’t need a crystal ball to profit from energy. All you really need is a subscription to Casey’s Energy Report, which you can try for three months, risk-free, by clicking here now.)

Ed. note: I am a Casey Energy Report subscriber and affiliate.

Jim Rogers' 2011 Forecast for Europe's Sovereign Debt Woes and Inflation in the US

Jim Rogers was a guest on CNBC a couple of days back.  He believes - get this - that inflation is here already, and going to get worse.  "I don't know where you people shop!" he deadpans.

Here's the link to the video interview (runs about 9 minutes).

Joking aside, his expectation that wage inflation would follow commodity inflation was an insight I found interesting.  The host hassled Jim a bit about this - and a riled up Rogers is always entertaining.  Personally I was under the guise that broader inflation was not possible without wage inflation - according to Rogers, the causality is actually reversed.

“Everybody watching this show knows that prices are going up,” Rogers said. “Prices are going up, that’s called inflation and ultimately wages are going up too… anyway that’s not good for stock markets.”

Jim also believes many Western European nations are bankrupt, and need to restructure their debt.

“You need to let Ireland go bankrupt. They are bankrupt, why should innocent Germans, Poles or anybody pay for mistakes made by Irish politicians,” Rogers said.

Greece is also insolvent, Portugal has a liquidity problem and countries like Belgium, France and even the UK have various problems, he added.

Source: CNBC

Hat tip to The Daily Crux for the original link.


More Jim Rogers:

• Jim Rogers on QE2 and the outlook for the euro
• Jim Puplava's exclusive interview with Jim Rogers

Why Uranium Prices are Set to Roar Through 2011 and Beyond

Check out the chart of uranium stalwart Cameco - can you spot the trend?

Source: StockCharts.com

And backing it up a bit, we can see that Cameco has decisively pushed to two year highs - and it's making a run at its pre "end of the world) levels:

Source: StockCharts.com

Most trend traders watching CCJ would have likely "gone long" upon its breakout to two-year highs last month - and they'd have been rewarded nicely for it over a short period of time.

But does Cameco - and uranium - have farther to run?  Chris Mayer, one of our favorite analysts, thinks so.  Chris writes in DailyWealth:

I couldn't see how the price of uranium would fail to rise. It seemed inevitable.

First, there is demand. Just look at the number of nuclear reactors under construction. According to Geordie Mark at Haywood Securities, there has been a 61% increase in the last two years. There has also been a 54% increase in the number of reactors planned and a 45% increase in the number of reactors proposed.

Take a look at the countries with the largest number of planned and proposed reactors: China, 159; India, 60; Russia, 44; USA, 31; Ukraine, 22; and South Africa, 15. According to a Morgan Stanley report, the new plants will eat up 32,900 tons of nuclear fuel. This is almost half of the demand from this year's 443 commercial reactors.

Plus, existing reactors are getting extensions. As Mark says, "We're also getting something of a sea change in views on existing reactor fleets, certainly from Europe, where we're seeing policy changes to extend reactor fleet lives." So Germany, Sweden, Belgium, and others are looking to extend their existing reactors.

All of these reactors – new and old – will need uranium. Most of this demand will have to come from the mines. For years, uranium demand has outstripped what the mines produce. The shortfall, so far, comes from existing stockpiles. But these stockpiles are dwindling.

This takes us to supply. The price of uranium is simply too low to support new investment. Most new projects won't make any money, even at $52 per pound. Mark at Haywood Securities estimates we'll need a price north of $65. Even then, "it would probably have to be higher than that to warrant risking venture capital for exploration," Haywood says. "Also, you need to see higher prices for investment in large-scale, leveraged, development-stage projects."

As it is, the uranium industry is having a hard time raising production. We've had some significant shortfalls from large mines, such as the Energy Resources of Australia's Ranger mine and BHP's Olympic Dam mine.

So I think you could see a number a lot higher – easily over $100 per pound at some point. Importantly, the market can easily support such a price.

The uranium price really has little impact on the economics of a nuclear reactor. The uranium is maybe 10% of the cost of nuclear energy. Most of the costs of nuclear energy are upfront. It's not like oil: When oil went over $140 per barrel, lots of businesses practically had to stop... They couldn't afford to operate at that price. It had a big impact on costs. That's not true with uranium.

Remember, the peak uranium price was $136 per pound in 2007. Most other commodities are pushing all-time highs. Uranium has a long way to go. Uranium also has probably the best, most clearly defined demand curve of any commodity.

As I say, I can't falsify it. I don't see any threat to the bull case for uranium in the works. At some point, as with all investment ideas, we'll find a way to falsify our case for uranium. (It is the fate of all investment ideas to spoil, like milk left out too long on the counter.) But that day seems a way off yet. There is lots of room to run – so hang onto those uranium stocks!

You can read Chris' full (excellent) piece here.

I concur with Chris - I love the supply/demand case for uranium.  And it's been awesome for years.  Demand should continue to chug ahead for years to come, and there's just not enough supply coming online to keep up.

If you're looking to play this trend, the aforementioned Cameco (CCJ) is the big dog in this industry.  Though a more diversified basket of uranium miners may be advisable, to protect you from specific company risk.

More commodity reading: Why silver may be setup for a moonshot in 2011

Jim Puplava Interviews Gold Expert Eric Sprott and Neil Howe, Author of The Fourth Turning

Jim Puplava recently sat down with Eric Sprott, one of Canada's top fund managers, to talk about the global economy and gold, at Casey Research's recent investment conference.  Here's a link to the interview below...

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Looking at the out-of-control printing of fiat money and the irresponsibility of central banks and treasuries, Eric Sprott tells Jim Puplava of Financial Sense Newshour, it is obvious to smart investors that gold is the asset to own. Listen to Eric, one of Canada’s most highly regarded asset managers, explain the dire straits the global economy is in and how to protect yourself.

The crisis we’re in today has been absolutely foreseeable, says Neil Howe, co-author of the famous book The Fourth Turning, in the second half of this interview. These recurring “turnings” are driven, he states, by generational aging and are a manifestation of the prevailing social mood. Hear his predictions about what’s yet to come and how long the current “fourth turning” will last.

You can listen to both interviews here.

Eric and Neil are just two of dozens of experts who presented their views, insights, and top stock picks at Casey’s Gold & Resource Summit in October. You can hear all their invaluable advice in 17 hours of audio on CD… details here.

Ed. Note: I am a Casey Research affiliate and subscriber.

Interview with Sergey Kurzin, CEO of Junior Gold Miner Orsu Metals

The following is an interview Jeff Clark, co-editor of Casey’s International Speculator, conducted with Dr. Sergey Kurzin, a Casey Explorers’ League honoree. The Explorers’ League regularly inducts serially successful mine finders with at least three economic discoveries under their belts – a true accomplishment considering that most explorers don’t even have one economic find throughout their careers.

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Kazakhstan: A Positive Climate for Gold

Jeff Clark, Casey’s International Speculator, interviews Dr. Sergey Kurzin

We haven't interviewed Dr. Sergey Kurzin since his induction into the Explorers' League in October 2008. As you'll read, he's had his head down in Kazakhstan but is now ready to speak publicly about his company, Orsu Metals (T.OSU), a gold-copper exploration and development company operating in Kazakhstan and Kyrgyzstan. Sergey is one of the most knowledgeable people we know about the politics in that region, including Russia. Here are his latest thoughts on his company and copper…

JEFF CLARK: It’s been two years since we talked, Sergey. Tell us what you've been doing.

DR. SERGEY KURZIN: I’ve been cleaning up the mess at our Varvarinskoye project, which we acquired from the merger with European Minerals. It was a very complicated arrangement with the banks, who could not agree with each other, and a very unforgiving, hostile, off-take agreement. On top of that, the output was hedged at $575 gold – can you imagine that at current prices? But the main problem was the deposit itself – the grades were 30% below what was stated in the reports. That’s why my head was down, to renovate this company. Now with this cleared up, we have put all our existing projects together and brought them to an advanced level.

Jeff: You’ve been operating in Kazakhstan and Kyrgyzstan for 20-plus years now. Tell us about the business climate there.

Sergey: Well, the business climate, like everything, has its ups and downs. But one can quite comfortably operate in Kazakhstan. If you have a contract with the government, meaning a license or title, and you comply with the requirements of the contract, you don’t have a problem. You just get on with your business. When metal prices moved higher and people were making big profits, they increased taxation in Kazakhstan, as a lot of other countries did, but the climate is still positive.

Jeff: Would you consider Kazakhstan a pro-mining jurisdiction?

Sergey: Yes. Kazakhstan is predominately a natural resource country. It is a giant country with a low population. It has oil in the west and north, and metals in the central region and onwards to the east. They have oil, gas, uranium, gold, copper, zinc, chrome – what did I miss? All the metals you basically want are in Kazakhstan.

Jeff: What about the politics in Kazakhstan?

Sergey: Politically, it is stable. Perhaps it is not an identical democracy to the United Kingdom or Canada, but it is still a democracy as they understand it, in terms of consistency of legislation. Meanwhile, Kyrgyzstan has just had elections, which went peacefully.  The new government is democratically elected and has the support of both the United States and Russia, so I think it is going to be okay.

Jeff: How have you been able to navigate the political waters better than most other companies operating in that region?

Sergey: Well, thank you, that is a compliment. The fact is we’ve done quite a few positive things in Kazakhstan with my previous company, Oriel Resources. We took the Voskhod deposit through all the usual stages of development, obtained all the essential approvals at the regional and district level, and created jobs. I have partners in Kazakhstan who I have been working with for eighteen years. They know what they are doing in this part of the world, so in conjunction with them, we are working quite well.

Jeff: So it's important to have strong local partners.

s, it is usually because they don’t have reliable, trustworthy, long-term relations with a local partner. If you are in Canada, you don’t need such a partner. But in Kazakhstan – which is part of the former Soviet Union – there is a certain way people look at things. They were never part of the British Commonwealth or anything like that, so they look at things differently. I am a Russian by birth and an ex-Russian citizen and lived there for 30 years. I have a lot of people with a Russian background working in the company that help navigate these waters.

Jeff: How did Orsu secure property rights in Kazakhstan?

Sergey: We have a contract with the government and work in accordance with the contract, complying with all the terms and conditions. As long as you do this, you are in good shape.

Jeff: Speaking of Russia, how would you assess mineral exploration in the Russian Federation?

Sergey: Well, that is a very interesting question. As you know, Orsu Metals is not in Russia at the moment. Why? Because there is a federal law that controls strategic assets and creates risk for explorers. But to be honest – in my personal opinion – it has nothing to do with strategic assets. It has everything to do with Russian companies trying to reduce competition.

Jeff: How are they doing that?

Sergey: By keeping them from developing big strategic assets. I believe the Russians already realize that this law is a mistake, because it puts off major Western companies to mining. I think they are currently reconsidering the situation.

Jeff: What do you base that judgment on?

Sergey: Putin and his speeches. But Russia is a large country and pretty slow historically. How fast they will react, I don’t know. But they’re talking about it. At the moment, I am not sure if it is worth establishing yourself in deep Siberia for a project of less than 50 tonnes of gold – just over 1.5 million ounces – which is on the border of what's considered a strategic asset. It would be too expensive and too difficult logistically.

The problem Russia faces with all its restricting legislation and bureaucracy is basically the absence of any new exploration in the whole country! They still exploit and use what they had twenty years ago before the Soviet Union collapsed. So everything that was worth developing is basically taken. There is a lack of new projects, the existing ones are too expensive, and those still undeveloped are usually not worth the effort.

Jeff: Your flagship project is Karchiga in Kazakhstan. I read that you recently increased your interest from 70% to 94.75%.

Sergey: Yes. Karchiga is a copper play. There is a little bit of gold, but we are not even considering it. And Karchiga is the most advanced Orsu project, but not necessarily the largest. It has a lot of advantages, like the location being forty kilometers from the Chinese border. It is a well-defined area and within an historic copper mining belt. 

It is not expensive to develop. We hope to use a lot of Chinese equipment, which will give us some interesting project finance opportunities with potential Chinese off-take agreements. And the infrastructure is good. There are hard paved roads on the Chinese side and a couple of smelters in the vicinity. Electricity is 10 kilometers away, water is plentiful, and the landscape is very gentle. Our contract with the Kazakh government is good until 2022.

As of Q1 2010, we have a 43-101-compliant indicated resource of nine million tonnes at 1.87% copper and an inferred resource of 1.83 million tonnes at 1.6% copper. That's about 400 million pounds of copper, over a billion dollars worth. We expect to complete our definitive feasibility study in September 2011. So this is a good project to turn a company into a producer. We’ve done projects more complicated than this in Kazakhstan, and it is our firm target to complete construction by Q1 2013.

Jeff: I saw that China is investing $13 billion in Kazakhstan. 

Sergey: Kazakhstan is full of natural resources, which China desperately needs for its development and growth. It's easier to bring it from Kazakhstan than import it from South America or Africa. Kazakhstan has a thousand-kilometer border with China. Our Karchiga project is only forty kilometers from the border, so it’s a given synergy. And copper in particular is one of the key metals for infrastructure.

Jeff: So why should I buy shares of Orsu now?

Sergey: Because we have a major resource. Six million ounces of gold equivalent. And our enterprise value is $30 million. What is that, $5 an ounce? It’s a pretty strong case, I think. The company will grow, too. We will acquire added projects and are progressing the existing ones. We are strongly undervalued. If you can discount all the risks, we should be trading at five or six times where we are now. The fact is, we have a track record and a very good technical team. I’ve been on the road and there was big interest in Toronto, New York, and London. We’ve been very well received. I think the stock will see some movement. Nothing happens instantly, as you well know, so give me some time.

Jeff: We will. To wrap it up, Sergey, what do you see going forward with copper and gold?

Sergey: I will answer simply. I think that gold, for the foreseeable future, is not going down because it is a barometer of people's fear. But I’m even more bullish on copper because it is essential. Gold is an artificial thing, a safe haven, and insurance against currency devaluation. But copper – especially in Kazakhstan where you are next door to China – has a strong future. And don’t forget, India is not far away. Of course there will be hiccups, but the overall trend in copper is definitely up, in my opinion.

Jeff: Thanks for your time, Sergey. We'll be watching as you develop Orsu. 

Sergey: Thanks a lot.

[Finding junior mining stocks to invest in is easy… and so is losing your shirt in the process. Finding winning stocks, on the other hand, requires asking the right questions. Learn all about “The 8 Ps of Resource Stock Evaluation,” Doug Casey’s secret of success, in our FREE special report. Click here to read it.]

What Will Happen to Gold When the Stock Market Crashes Again?

If you're like me, you're probably pretty damn nervous about the stock market right now - which looks like it's teetering on the precipice of disaster.  If you own gold, or gold stocks, what's going to happen to them when things melt down?  Louis James tackles that question in his guest piece here...

Gold Meltdown or Mania - Batten Down the Hatches

by Louis James, Senior Editor, Casey’s International Speculator

As Doug Casey said recently, we expect things to come unglued soon. With the ongoing madness in Europe, it seems to me that things are starting to look visibly less well glued already.

In contemplating the possibility of another stock market meltdown, it seems important to me that in spite of the exuberance with which investors rushed back into the market over the last year, the memory of 2008 remains vivid, tempering enthusiasm with caution. For example, the market still has relatively little appetite for early-stage, grassroots exploration projects; by our latest estimates, Mr. Market is willing to pay on the order of ten times more for Proven & Probable ounces in the ground than for less certain resource categories. With this evidence of caution in mind, and the great unwinding of the broader credit markets well underway, it seems likely that our sector is less leveraged than it was before the crash of 2008.

If a panic in the broader markets put liquidity-crunch-induced pressure on the gold price, the meltdown should be less severe than in 2008 and the eventual rebound could be dramatic, possibly triggering the mania we’ve been calling for. Remember: the market crash drove gold almost down to $700 in October ’08, but the same fear drove it almost back to $1,000 by February ’09. Silver topped that with a 60% rebound over the same period.

As the debt-glue holding everything together continues to lose its grip, the ride will only get rougher. As bad as 2008 was, if the Crisis Creature appears to be coming back when everyone on Main Street thought it was dead, the fear should be much worse – and that should drive gold way, way north. It’s possible the fear, coupled with the lack of any safer alternatives, could prevent gold from melting down at all, sending it instead straight through the roof into the clear blue Mania Phase sky.

With its industrial metal aspect, however, another big economic meltdown could hit silver harder than gold, and it might take longer to recover, especially if base metals don’t rebound the way they did in 2009. That said, silver has always tracked gold, so when gold heads for the moon, we expect silver will as well. It could reach even higher, if supply is cut by reduced base metal demand, as most silver production is as a by-product of base metal mines.

Either way, I don’t care if gold drops in the weeks and months ahead; the overall trend is for widespread economic fear and uncertainty to continue, holding gold prices up and eventually driving them higher. That makes the current retreat look like a great buying opportunity. In fact, putting my money where my mouth is, I picked up some more gold buffaloes just yesterday, when gold dropped to $1158. As I type, it has rebounded to $1181. I plan to buy more every time I see a sharp drop like this over the summer.

So, in addition to our multiple recent calls to take profits and go to cash, I want to reiterate that gold is cash. And it’s a whole lot more attractive than the dollar, the euro, or any paper money at present – not just as a speculation but for security as well.

What about the stocks?

Unfortunately, the stampede to safety that drives investors to gold is not likely to drive them immediately to junior exploration stocks. “The most volatile stocks on earth” is not what fearful people will be looking for – not until the panic sufficiently recedes and greed joins fear in equal measure in the marketplace…or in greater measure, come the Mania Phase.

If I’m right about fear being the driving force in the markets in 2010, whereas greed drove them in 2009, gold will have to deliver a serious wake-up call – perhaps holding over $1,500 – to really get the show on the road again for the gold stocks. If that happens while fear of a global economic slowdown continues to push oil prices lower, gold producers should be able to report extraordinary profit increases, even as other industries are tanking, and finally penetrate deeply into the awareness of broader pools of investors.

Cashed-up majors won’t have to wait for that to benefit; they may seize the opportunity created by market weakness to buy successful explorers, with significant discoveries in hand, while they are on sale. Well, some of the more nimble ones, like Kinross or Agnico-Eagle, might. The bigger companies, like Newmont and Barrick, didn’t lift a finger to pick up any bargains after the crash of 2008 and may be too cautious to act the next time around as well.

Be that as it may, acquisitions will increase the demand for quality exploration projects – the pipeline from exploration to development must be kept full – and good prospectors should at last get their day in the sun.

Punctuating this sequence will be the occasional big win on a new discovery. There haven’t been that many this cycle – not enough to replace all the gold the majors are depleting every year – but there have been some, and the market always loves a discovery.

After the first quarter of ‘09, greed outpaced fear and great development stories did phenomenally well; we saw better gains on large and growing gold stories than we did on the big producers. If fear retakes predominance in 2010, it’s profitable production that should do best, and I’d expect the biggest winners overall to be new, emerging, and highly profitable precious metals production stories. Spectacular discoveries should also do spectacularly well, but those are harder to predict. New and rapidly expanding production should be the sweet spots.

Generally, I think we’ll see our markets trading largely sideways over the next few months, with great volatility, until the debt-fueled “growth” in the global economy is exposed for the sugar high that it is. We’ve been forecasting that scenario for long enough here at Casey Research.

I expect this to play out by the end of this year, or 2011 at the latest, depending on how fast fear returns to the broader markets.

What to do

If I’m right about this, the strategy called for is a more cash-focused version of our “Buy only the Best of the Best” program. Buy nothing new unless you’re offered a great bargain in a solid company that can deliver significant new or expanding production. Nothing less than 50,000 ounces gold-equivalent per year in production will get much notice, and anything less than 100,000 ounces per year AuEq will have to struggle for respect. A solid company, of course, has great people, lots of cash, and the goods in hand.

If you want to speculate on a discovery, make sure you have very good reason to believe the project has much better than average odds of delivering a discovery – and it has to have world-class potential. That’s not hundreds of thousands of ounces but millions of ounces of gold, or equivalent.

If things do come truly unglued this year, we may well see 2008-style bargains on great companies with the staying power to recover and go on to new highs. Watch for it. Prepare for it.

Buy Low, Sell High – it’s a formula that requires patience but is the only way to go.

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Louis James has been guiding his subscribers through the ups and downs of the market with a steady hand. It’s no coincidence that every single one of his 2009 picks was a winner. Learn more about Louis’ hands-on approach and the profit opportunities Casey’s International Speculator offers – details here.

Ed. note: I am a Casey Research subscriber and affiliate.

Why the Gulf Disaster is Wildly Bullish for Canada's Oil Sands

Congrats to our friend and energy guru Marin Katusa on his excellent interview recently with John Mauldin!  I subscribe to Mauldin's premium service - thought the conversation was fantasic (which included resource expert Rick Rule as well).

Marin is always on the hunt for energy investments that also have economic advantages over competitors.  He wants stuff that's profitable at the lowest energy prices possible.  And while the Canadian oil sands don't immediately come to mind when you think of low cost oil, things start to click when you reason out which areas will benefit from the coming smackdown on offshore drilling...

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A Run for the Canadian Border

By Marin Katusa, Chief Energy Strategist, Casey Research

The Gulf of Mexico disaster has changed U.S. priorities, costs, and energy supply sources for years to come. But the fact that the U.S. needs energy isn’t changing anytime soon, and as mass sources of green energy are still a while away, the most likely alternative might be the most surprising one.

With US$15 billion invested annually in offshore drilling in the United States, the disaster in the Gulf of Mexico means that this money is getting ready to migrate elsewhere. And it is the Athabasca oil sands of Alberta, Canada, that are number one on the list.

Given the amount of bad press the oil sands get, this could come as a shocker. But technological advances and improvements in recovery methods, as well as reduction of water usage and greenhouse gas emissions, have made oil sands a viable and popular option for the future of U.S. energy.

The numbers, too, are looking in their favor. Out of the 1.34 trillion barrels that is the world’s total proved oil reserves (2009), only about 20% (270 billion barrels) of this number is actually available to free-flowing capital investment – the vast majority is in the tight grip of various national oil companies.

And a good chunk of these “free-market” barrels, about 178 billion, is sitting underneath the feet of Canadians, or as some call them, the Crazy Canucks. For a country that runs on oil, the United States couldn’t have been presented with a better lifesaver. Compared to alternatives such as Chavez’s Venezuela or the oil fields of the Middle East, reliable oil from politically stable and friendly Canada is by far the easier pill to swallow.

As it is, roughly one in every six barrels of oil consumed by a U.S. citizen today comes from the Canadian oil sands. The fact that infrastructure is already in place for oil sands development and oil already flows through pipelines between the two countries only sweetens the deal.

So, we wouldn’t be taking a huge step in assuming that any future capital spending that will be diverted away from the Gulf of Mexico will find it hard to bypass Canada. In addition, as global oil supply is affected by the drilling restrictions, in the long term we’ll be seeing higher oil prices. While this news might not make the drivers amongst us happy, it couldn’t get better for Alberta and the energy companies operating in the oil sands. With oil prices hovering over US$70 a barrel, the stream of investment dollars into the oil sands is guaranteed.

Obama’s first-ever Oval Office address has confirmed our expectations of no more growth in the American offshore drilling industry anytime soon. But the Gulf accounted for a large chunk of U.S. oil production (25-30%) and consumption (9% – the entire consumption of France), and that shortfall must be met.

While renewable energy is where the future of U.S. energy lies, according to Obama, it is still some time before green energy producers will be able to meet the full demands of the nation. In the meantime, authorities have also realized the importance of Canada for U.S. energy and are enticing companies with new pipelines. Plans on expanding the Keystone Pipeline, linking up Texas and Oklahoma to 500,000 Canadian barrels a day, have already been drawn up and put into motion.

The turmoil in the U.S. energy market has created a number of opportunities, both in the short and long term. For now, investment into the Canadian oil sands is about to increase dramatically, and things are moving rapidly. We’ve uncovered the lowest-cost producer with significant upside production, and they’re the one on the list as a takeout target by Big Oil.

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[Discover the oil sands company Marin thinks so highly of… and get ready to profit when shares shoot up. But oil sands are not the only energy investment to benefit from the Gulf Coast disaster – read more here or sign up right now for a $39/yr. subscription with 3-month money-back guarantee.]

Wheat Prices Rally Like Hell, But Fundamentals Lag - A Great Short Opp?

Today, wheat prices hit their highest levels in two years.  Russia announced a ban on exports, sending wheat "limit-up" on the day, as September futures closed at $7.83 a bushel.  It's been a wild ride for wheat this year:

Since the 4th of July, wheat has really taken off. (Source: Barchart.com)

Wheat headlining the Wall Street Journal caught me completely offguard.  Long time readers know we've been on the agricultural commodity beat since 2005, so it's tough to see wheat on the move without being aboard!  Alas, I have to admit I was too distracted by the looming presence of deflation to keep an eye on the grains.

There may be opportunity yet, though - and that may be in shorting corn and soybeans, which are also rallying on the bullish wheat news.  The WSJ writes:

The wheat supply concerns are spurring price increases for other grains too. September corn futures in Chicago hit a seven-month high in early trading, rising 6.2% to $4.25 a bushel. Corn and wheat are linked because both grains are used for animal feed. When wheat locks up at the exchange-imposed limit, traders who want to buy grain futures will likely look to CBOT corn and soybeans.

I saw the supply and carryover stock numbers on beans and corn recently, and there's plenty to go around.  Some services I subscribe to were already suggesting these two as potential shorts - I'd imagine this rally could make that trade even more attractive.

And while wheat is rolling, it remains to be seen how far the actual supply fundamentals will let this rally go:

However, the situation doesn't appear to be as dire at it was in 2008, when crops failed world-wide and wheat prices rose to more than $13 a bushel. According to the latest projection from the U.S. Department of Agriculture, there there will be almost 30 million tons of wheat in U.S. stockpiles at the end of next May, a 23-year high. U.S. inventories had dropped to an all-time low in 2007-08.

When trading the grains, you never want to go against the trend.  The current trend is UP, so that would be the correct short term play.  I, however, would be too skittish to pull the trigger on the long trade at this juncture, given the huge stockpiles still on hand.

Buy the breakouts, and sell the breakdowns, when it comes to the grains.  I'm afraid we missed the breakout, but there could be an inverse play when these skaters reverse course.

Why You Should Avoid MLP ETFs Until the "Froth" Subsides

Wall Street is going crazy for MLPs these days!  The safe, stable, dividend yield of a master limited partnership (MLP) is all the rage right now with investors.  Which is precisely the reason you might want to steer clear of this sector for a bit.

Tom Dyson elaborates in his Daily Wealth column:

Whenever you see Wall Street creating lots of new investment products to sell to the public – especially ETFs – you know investors must love the idea... and prices might be forming a bubble. You should be extremely wary of buying or holding stocks in these sectors. Chances are, they're about to enter a severe correction.

So what's the hottest new ETF sector right now? It's master limited partnerships...

A master limited partnership (MLP) is a special business structure available to a small number of firms trading on the stock market. Right now, there are 91 companies in the sector. MLPs treat their shareholders as partners in a business instead of owners of a corporation. This way, they avoid corporate tax. Many different businesses can qualify for MLP status... including real estate businesses, shipping lines, and money-management businesses. But the biggest companies in the MLP sector are all pipeline businesses.

You can read Tom's full piece here.

If the stock market tanks again - as we're anticipating here - then MLPs might be a great place to look for stable, 10%+ dividend yields.  But at just 6%, I agree with Tom that you're probably best served until some of the current froth is blown off.

More on ETF launches as contrarian indicators:

• Time to Short Brazil? New ETF Dedicated to Brazilian Midcaps
• COPX Launches - an ETF focused on copper miners

Ed. Note: This article was originally published in our sister publication, The Contrary Investing Report.

3 Reasons You Should Buy Gold Right Now

Should you take advantage of the current pullback to increase your gold holdings?  Our precious metals guru Jeff Clark believe so.  Read on as Jeff puts together some historical price action data...

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Is Now a Good Time to Buy Gold?

By Jeff Clark, Senior Editor, Casey’s Gold & Resource Report

While we’re convinced gold and gold stocks are destined for much higher levels, buying when prices are low can mean the difference between a double or triple and a ten-bagger... a week in Malibu vs. a week in Milan. 

There’s no secret formula to buying low, and we aren’t holding the right hand of Midas, but there are periods when prices tend to be lower than others. And if those tendencies play out, it can give us the opportunity to snag a high-quality asset at a bargain price.

So, how do you get a bargain price? You cheat.

I think the secret to getting a low-cost basis on all your gold and gold stocks is this: only buy on significant price pullbacks.

And this can be done without trading or using technical analysis.

I think there’s a good chance we can cheat this summer. For example, here are the average monthly increases in gold since our bull market began in 2001.

In our current 9-year bull market, June and August have seen the lowest average return for gold, representing one of the best times to buy. 

You’ll see that in the bull market of the 1970s, summer was also a good time to buy gold.

What about gold stocks? Since 2001, June and July have been among the weakest months and thus one of the best times to buy.

Obviously, these are price tendencies and not certainties. There were Junes when gold was up, and some Julys when gold stocks were up. Meaning, we’d avoid using these charts for trading purposes or in anticipation of an immediate gain. Instead, use these “trendencies” to look for possible price weakness. And if it arrives, use the opportunity to add to your holdings and position yourself for the next leg up in the bull market.

What are the odds of a correction in gold and gold stocks this summer? 

►Since 2001, almost every precious metal stock, in every summer, has moved lower from its May high. This includes gold and silver. There’s no guarantee this won’t be the summer of galloping unicorn herds, but the record is hard to argue with.

Here are the buy zones I identified for gold and silver, based on a tally of how far they’ve corrected from their May high to their summer low, in each year of the current bull market.

You’ll see that the average price of all pullbacks in gold, from the May highs to the summer lows, is 8.9%, and would take the price to $1,126.98. That’s not to say this price will be hit, but it tips you off that a fall to that level would not be out of the ordinary – and would also be an invitation to buy. You can also see the smallest summer decline, which we’ve already exceeded. We wouldn’t wait for the largest drop to materialize; there’s a good chance you’d be left empty-handed and chasing the stock higher.

Silver is naturally more volatile, allowing us perhaps a better opportunity to buy low. The average summer decline for silver is 16.6%, which would take the price to $16.39. However, the furthest its fallen so far this summer is $17.36, meaning strictly on a historical price basis, a 10% correction from current levels would be perfectly normal. And again, an invitation to buy.

Whatever price (or prices) you select, I’d only use the charts to add to current positions, not for trading. The currency crisis Casey Research believes is inevitable could strike suddenly again and will eventually hit the U.S. dollar, and the last thing you want is to be left standing on the sidelines if gold and gold stocks surge higher. In our opinion, being completely out of precious metals in the middle of a once-in-a-generation bull market would be a mistake. Instead, keep adding to your savings every month and buy when it feels like you’re cheating.

See you in Milan?

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Want to see the buy zones for all our recommended gold and silver stocks? Our Summer Buying Guide is an invaluable resource for buying low. And check out our just-released July issue, where a respected bullion seller tells you why in the near future you may not be able to buy gold, at ANY price. Try a risk-free subscription for only $39 per year. Details here.

Ed. Note: I am a Casey Research Affiliate, Subscriber, and Phyle coordinator.