Louis James (Casey’s International Speculator):

At a recent Casey Research editors’ meeting, the team took on the question of whether the somewhat steady recovery since last February’s washout bottom in the broader markets had any of us thinking that the recession might be over. The gathering of minds included: Doug Casey, Managing Director David Galland, CEO Olivier Garret, Casey Chief Economist Bud Conrad, Senior Energy Analyst Marin Katusa (my counterpart on the energy side), myself heading the metals division, and several other editors.

Doug’s guru-vision remains locked on the disaster channel. The U.S. economic problems, he says, remain so profound and, if anything, have been worsened by the government’s actions, that Americans are headed for a significant lowering of their standard of living.

As this reality unfolds, it will send out shock waves that will impact much of the world: the Greater Depression.

And the next step, Doug believes, will be a change in interest rates. The Bright Boys in DC will resist doing this, but while they seem willing to let the dollar slide to ease their mounting debts, they don’t want it to crash. They may soon be forced to raise interest rates. When that happens, Wall Street usually moves in the opposite direction – which could be the end of the “Things Aren’t as Bad as We Thought” rally of 2009.

Bud Conrad – in proper, responsible chief economist-style – considered the question carefully and conceded that there do indeed seem to be many “green shoots” now, but still concluded that conditions will continue deteriorating. He sees the government deficits in the driver’s seat, the main variable to keep a watch on.

As the U.S. government persists with its spending spree, valiantly dousing the deficit fire with more debt-gasoline, it will continue destroying the dollar, and that will push ever more people into gold.

A year ago, Bud predicted that gold would top $1,150 by year-end 2009. His call was bolder than most forecasters’ – but he was right. Looking at the numbers today, Bud’s new baseline 2010 forecast is for gold to top $1,450. He sees a “possibility of further international instability or currency debasement as adding to that baseline.” In plain language, Bud’s confident that resource stocks of all sorts will, on average, benefit greatly from the demise of the U.S. dollar.

Somehow, I can’t shake the image of Bud singing Don’t Fear The Reaper with Blue Öyster Cult for back-up… but that’s really more like something Marin would do.

Speaking of Marin Katusa, he commented that there is money to be made in the current rebound environment, but speculators should be extremely cautious: “You should know you’re dancing with the devil in the pale moonlight. You need to make sure you know the dance steps: get in early and exit before you get the dip by the devil at the end of the song.” (Marin not only has made huge amounts of money for our subscribers, he sings in a rock band, so he knows what he’s talking about.)

My own thinking has evolved into seeing 2009 as being like the eye of a monstrous storm.

The sky has cleared substantially, and the sea looks amazingly calm, given what we’ve just been through. But it’s not over yet; the trailing edge of the storm always delivers the most damage, and that’s yet to come. Anyone fooled into abandoning shelter is taking a terrible risk.

This doesn’t mean we should stay huddled in our huts, however – it makes more sense to go out, restock supplies, repair what damage we can, and get ready for the deluge to come. The renewed fury of the storm will sink many more ships, but it will also make vast fortunes for those who invest in the ships that survive and even thrive in the tumult.

Essential strategy: For the near term, buy only an initial “tranche” (portion of your desired position) in the most storm-proof (cash-rich) companies you can find – ideally with great discovery or development stories that will deliver exciting news regardless of market conditions – and hold a good chunk of cash in reserve for the next big buying opportunity.

Nothing goes up in a straight line, as share prices over the last month have amply demonstrated. There are some great picks that have been heading up all year that are now paused in their advances. Any more correction in precious metals could put them on sale, temporarily, offering great buying opportunities with a lot of the technical (e.g., discovery) risk removed from the plays. You’ll kick yourself if you don’t have any cash on hand to take advantage of them – and kick twice as hard if you paid too much for a large whack of something that goes on sale.

Worried about sitting on cash with the U.S. dollar in a death spiral? Remember: gold is also cash, highly liquid, and with terrific speculative upside to boot.

With gold having just corrected sharply (as I predicted it would in Casey’s International Speculator), gold is unquestionably the best investment we can recommend right now – fluctuations aside, it has nowhere to go but up for quite some time. Perhaps as long as a decade.

That, plus our essential “eye of the storm” strategy as above is what we’re recommending to all our subscribers – and indeed to all investors around the world who want to not only survive the trailing edge of the financial storm still to come, but thrive because of it.

While gold has gone up 38% since last December, junior gold stocks can provide even greater gains than the yellow metal itself. Currently, for example, Louis is following eight juniors that have all the right conditions to become takeover targets by gold majors… which would drive share prices through the roof. If you want to get in early, this is the time: with our special holiday offer, you’ll save $400 on a one-year subscription of Casey’s International Speculator – but only until midnight, December 18. Hurry up and click here to learn more.

Older and smarter minds than mine, minds resting in the cranium of Explorers’ League members, for instance, have been convinced that a number of major discoveries would be announced.

But so far, other than a small handful that appear to hold the stuff, there has only been one legitimate elephant bagged; by the team of Aurelian (T.ARU). Unfortunately, the carcass of that particular elephant rests entirely within the sketchy outlines of the nation of Ecuador where the locals are currently circling like a pack of hungry hyenas.

It has been our contention that what was needed to light the fuse on the junior exploration stocks would be, in no specific order:

1. Sustained higher gold prices.
2. Improving financials and free cash flow of the major producers.
3. A discovery to heat the blood of the investing community.

So far, we have had (1) and we are beginning to see (2), but (3) has proved remarkably elusive.

Now, don’t misunderstand. You can have a whopper of a bull market in these stocks without the discovery – that was the case in the 1970s bull market. But a discovery that fires the imagination can jump-start things in a big way, no question about it.

Evidence of that statement is provided by the gold share bull market of the mid-1990s, the most powerful to date, which occurred against a back drop of flat to falling gold prices. In case some of the big winners from that market have slipped from your memory, they include returns such as; Cartaway, up 26,040%; Pacific Amber, up 4,376%; Arequipa, up 5,692%, and so on and so forth.

So, What’s Going On?

According to MineWeb, Peter Munk, the somewhat unpopular chairman and acting CEO of Barrick Gold, the world’s largest gold producer, stated at the company’s recent AGM that there have been “virtually no new discoveries.”

While we might disagree around the edges of that statement, Chairman Munk is technically correct in that the level of discoveries being made is a small fraction of that needed to replace the depleting reserves of the gold producers.

In short, we appear to have reached the era of Peak Gold. Whereas a major discovery used to be 10 million ounces or more, the threshold for attention-getting discoveries these days has fallen to more along the lines of 1 to 3 million ounces… and even those are hardly falling off the trees.

Viewed from the perspective of an investor in the junior resource sector, this lack of discoveries means the fuse is lit – starting with straight-up supply and demand fundamentals – for a rocket shot tomorrow. Adding boosters to the rocket, we have a commodities bull market that shows no sign of ending anytime soon and, while the U.S. dollar will periodically rebound, it is not going to somehow reinvent itself as sound money in our lifetime.

Importantly, as you can clearly read between the lines in Chairman Munk’s words, once the majors get cashed up and serious about replacing their reserves, they are going to have to look downstream to the juniors with discoveries… even if those discoveries are below the 5-million-ounce threshold they previously required to even consider taking an ore body into production.

A Risk and an Opportunity

Of course, lowering the threshold on deposit size will require trade-offs. For example, in order to be considered for an acquisition, a smaller deposit will almost certainly have to be near surface and open-pittable. It will also have to be near good infrastructure, and located in a jurisdiction with good laws and reasonable taxation. There is, in this situation, an opportunity and a risk.

Starting with the latter, if your portfolio now includes companies going after deposits in the one- to five-million-ounce range, you need to make sure they are not in a remote location, or will require going underground or building a mill to process sulfides. (Under 1 million ounces? Fuggedaboudit!)

As for the opportunity, while the odds and the amount of exploration spending still favor that we’ll see the discovery of at least one and maybe two monster deposits in this cycle (there are a couple of companies advancing projects with that potential), and early shareholders will make fortunes as a result, there has rarely been a better time to invest in junior exploration companies with modestly sized projects in good locations. That said, you should still be focusing only on projects with at least 2 million ounces, or the strong potential of same.

In other words, take the opportunity in these down markets to focus on getting positioned ahead of the majors… that’s where the big money will be made as things gather steam again going forward.

David Galland is managing director of Casey Research, publishers of the International Speculator, now in its 28th year. The current edition includes “Courting the Majors,” a feature on what attributes the major mining companies are looking for in a junior explorer. All new subscribers are invited to give the International Speculator a three-month trial with an unquestioning 100% money-back guarantee. Learn more and sign up now to receive the current edition.

By David Galland, Casey Research

Source: Gold, What Gold?