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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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.