Originally published on May 27, 2014.

1. Today is expiry day for gold options. Please click here now. I’ve suggested that gold is unlikely to begin a trending move until options on the June COMEX contract expire.

2. On that note, please click here now. That’s the weekly chart for gold. I’ve highlighted the price action that has occurred after the Stochastics oscillator (14,3,3 series) flashed a buy signal.

3. While gold is off to a bit of a disappointing start this morning, I think investors in the Western gold community should watch this oscillator closely now. It’s moved into a position where significant rallies have occurred.

4. From a technical standpoint, senior gold stocks look similar to gold. Please click here now. This weekly GDX chart suggests senior gold stocks are likely poised to begin a significant rally.

5. Please click here now. That’s another look at the same GDX chart. I’ve highlighted all the key intermediate trend highs.

6. Since 2011, only once has GDX managed to rally above any of those highs. The election of the new pro-growth government in India is good news. It’s one of two fundamental catalysts that could be behind the bullish technical set-up on the charts.

7. Another catalyst is the news that the Chinese central bank has granted approval to the Shanghai Gold Exchange (SGE) to launch a global gold trading platform.

8. Please click here now. In this news release from Scrap Monster, note the words that I’ve highlighted in gold.

9. Some members of the gold community may be nervous about the ramifications of inviting major Western bullion banks into the Chinese gold market, and rightly so.

10. While the issue of manipulation on the COMEX and LMBA markets can be endlessly debated, there’s no question that gold in the West gets a lot of bad press.

11. Jiang Shu’s words that China’s strong gold demand is currently “only a number, not a power” make it clear that the new platform will be designed to put upwards pressure on the gold price.

12. Gold is entering a new era, centred on gold jewellery demand in China and India.

13. On the Shanghai platform, the banks will be expected to act with a level of professionalism that perhaps has not existed in their COMEX and LBMA operations. I expect them to consistently endorse gold as an asset of the highest quality. These banks will essentially provide the SGE with a set of gold price discovery “shark teeth”!

14. Please click here now. That’s the weekly silver chart. From a technical perspective, the Stochastics oscillator looks superb.

15. Like gold, silver appears to be in the process of gearing up for an intermediate trend rally.

16. Please click here now. That’s the daily chart of SIL-NYSE (silver stocks ETF).

17. A bullish wedge pattern has become more apparent over the past few trading sessions, and the Stokeillator (14,7,7 Stochastics series) suggests a rally is imminent.

18. Junior gold stocks are the first love of most investors in the Western gold community. Please click here now. That’s the GDXJ weekly chart.

19. I labelled the October 2010 period the “loss of sanity” zone, because of the widespread view that the Western world’s financial super-crisis was destined to catapult junior gold stocks into the stratosphere.

20. Note the red horizontal bars on that GDXJ chart. Those mark intermediate trend highs.

21. It’s clear that junior gold stocks have not staged a single intermediate trend rally that has exceeded even one of those highs.

22. The bottom line is that for the past four years, the super-crisis and the “gold fear trade” have failed miserably, as a junior gold stock price driver.

23. Ironically, the “love trade” (gold jewellery) may be the price driver that creates even higher gold stock prices, in a more stable manner, than anything envisioned by even the most bullish super-crisis analysts!

24. Please click here now. I’ve highlighted the Stokeillator on this daily chart of GDXJ. When the bullish posture of key oscillators on both the weekly chart and the daily chart are considered alongside the bullish fundamental news about the Shanghai Gold Exchange, I think Western junior gold stock investors are poised for a very positive ending to the 2014 calendar year!

Stewart Thomson of Graceland Updates, Guest Contributor to MiningFeeds.com

It’s constructive to look at the other side of your positions to see where you might be wrong. If you’re long a market a good way to do this is by taking the inverse of the symbol representing your position. At stockcharts.com, you do this by putting “$ONE:” in front of your symbol and it shows you a chart of the inverse of your position.

I like to do this instead of looking at the leveraged ETFs because they tend to decay over time. The non-leveraged inverse ETFs are fine but they don’t exist for many markets. Therefore using “$ONE:” gives you the bear market perspective of anything you want to look at.

Let’s take a look at the bear market in gold stocks that launched in 2011 by looking at $ONE:GDX. From a Stage Analysis perspective you can see a nice Stage 1 base that developed in 2011 followed by a breakout of the base in 2012. Then the bear market in gold stocks retested the base which happens a lot in early Stage 2 transitions. After the retest the bear market was off to the races in 2013 with the recent high occurring in December 2013. Notice though that in 2014 we are now seeing the 30-week moving average flatten out, and a head and shoulders topping formation has shown up on the chart. This is classic Stage 3 topping action.

A key thing to notice is the divergence in momentum between the left shoulder, head, and right shoulder in the pattern.  Each peak has less momentum on the MACD.  This is also typical of a potential top.  Finally the 14-week RSI is sitting right at 60.  A failure to get above 60 and get to an overbought level is another classic sign of a topping market.

Next let’s look at the gold bear market.  It’s showing similar things to the bear market in gold stocks.  The head and shoulders pattern isn’t as clean as with gold stocks but the failure in momentum is present, as well as the RSI right at 60.  We’re clearly at an inflection point in the gold bear where it needs to start accelerating to continue going, otherwise it’s displaying signs of an exhausted market.

An analog I like to the current bear market in gold is the bear market in the S&P 500 from 2000 to early 2003.  First we saw the breakout into a Stage 2 in early 2001 after a year long Stage 1 base in 2000.  Then by late 2002 the bear market started losing momentum and a Stage 3 head and shoulders top started forming.  Notice how momentum in the MACD made lower highs, just like we are seeing in gold and gold stocks currently.  The RSI also failed to take back the 60 level by the end of the right shoulder, which is right about where we are at with gold and gold stocks currently.  So we’re at a similar juncture in gold and gold stocks to where the bear market in the S&P 500 finally failed in 2003 and transitioned back into a bull market.

Bear markets thrive on momentum because momentum to the downside produces fear.  Heightened fear causes people to sell for preservation of capital purposes, and to ignore the ability to buy value.  With gold there is a natural floor to how far gold can go down.  It can’t go to zero, unlike over-leveraged banks, or non-profitable tech companies.  They can go to zero.  Mining stocks can go to zero if they go bankrupt and can’t produce gold profitably at low prices.  Exploration stage mining companies are especially vulnerable in gold bear markets because investment capital dries up and that is the only lifeblood they have to find gold.

A return to value is the result of a bear market, but as long as fear remains heightened the bear market can perpetuate and produce even greater value until the fear is dissipated.  So a loss of momentum in the gold bear market is a potential catalyst for the end of the bear.  We’re at a critical juncture and even though fear is ramping up again in the gold sector, in reality the bear has work to do to keep going.

Justin Smyth of Next Big Trade, Guest Contributor to MiningFeeds.com. Connect with him on Twitter: @nextbigtrade

Briefly: In our opinion speculative short positions (half) in gold, silver, and mining stocks are justified from the risk/reward perspective.

The history repeats itself once again – gold just attempted to move higher but failed to ignite anything more than a small daily rally. Let’s see if there’s anything that this can tell us (charts courtesy of http://stockcharts.com).

Click here for reference chart.

There’s one clue. It’s not a very strong one, but at least we have something new to comment on. The last 2 sessions were very similar to what we had seen at the beginning of the month. Back then gold declined quite visibly, so perhaps the same reaction will be seen also this time. In this case, such a decline would have more bearish consequences, as it would take gold below the previous lows and such a breakdown would likely lead to further declines.

Other than that, there’s not much that we can say about the changes in the gold market itself. What we wrote about gold in the previous alert remains up-to-date:

We wrote that the strength that we could see here would likely be temporary. It turned out that the rally that this reversal generated was indeed very small and temporary. We saw another lower intra-day high in gold, and the move higher materialized on low volume. We’re once again seeing this bearish combination. If the USD Index confirms its breakout, gold might finally break below the short-term support.

How far can it go initially? Our best guess at this particular moment (this might change as the situation develops) is the $1,200 level or close to it. One of the ways to estimate the size of a given move is to assume that the move following the consolidation (which we’ve been seeing since the beginning of April) will be similar to the one preceding it. In this case, the move following the breakdown could be similar to the March decline, and such a move would take gold close to the $1,200 level. This level is very close to the 2013 lows, so we expect gold to pause there (but not to end the decline).

There is not much to comment on in case of silver and mining stocks but the situation in the USD Index has changed more visibly.

The U.S. dollar moved higher once again and almost confirmed the breakout above the declining resistance line. Precious metals are not reacting yet. Unless metals start to react to the dollar’s strength (by declining) we will view this as a sign of their strength. For now we still think that the reaction is delayed – not really absent.

One of the reasons for the lack of reaction could be the situation in the silver market.

Silver is right at its support line. In addition to the 2013 lows this is the key support level that prevents silver from moving much lower – to the $14 – $16 target area. Once this level is broken, silver may and likely will move sharply lower. Being this significant, it’s no wonder that this support line is not easy to break. Since gold, silver, and mining stocks are highly correlated in the short term, it’s also no wonder that silver’s refusal to move lower already is accompanied by a similar refusal in the case of gold and mining stocks.

Summing up, the outlook for gold, silver, and mining stocks remains bearish, but not extremely bearish, which means that we are not increasing the size of the short position just yet. Precious metals are not responding strongly to the dollar’s rallies so far, but it seems that investors and traders are simply waiting for a confirmation of the breakout in the USD Index (there have been cases when the metals’ reaction was delayed in the past).

To summarize:

Trading capital (our opinion): Short positions (half) in: gold, silver, and mining stocks with the following stop-loss orders:

– Gold: $1,326

– Silver: $20.30

– GDX ETF: $25.20

Long-term capital (our opinion): No positions

Insurance capital (our opinion): Full position

Thank you.

Przemyslaw Radomski, CFA of Sunshine Profits, Guest Contributor to MiningFeeds.com

Disclaimer All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Briefly: In our opinion speculative short positions (half) in gold, silver, and mining stocks are justified from the risk/reward perspective.

The history repeats itself and we have just seen another example confirming this statement. Gold once again moved higher initially but failed to hold its gains even until the end of the session. This made yesterday’s session very similar to May 19. The intra-day high was once again lower. Before discussing this situation, let’s take a look at the USD Index (charts courtesy of http://stockcharts.com).

Click here for reference chart.

The USD Index moved a bit higher yesterday, which made the situation more bullish – that was a first daily close above the declining resistance line. We don’t think that this move makes the breakout confirmed yet – we’ll wait for 2 more consecutive closes above this line before saying that. However, it’s some kind of improvement and the implications for the precious metals market are a bit more bearish. They will likely be much more bearish once the breakout in the USD is confirmed.

Click here for reference chart.

Yesterday we wrote that the intra-day reversal that had taken place on relatively big volume was much less significant than it appeared at the first sight because it was not confirmed by spot gold and because gold was simply reflecting the U.S. dollar’s movement. We wrote that the strength that we could see here would likely be temporary. It turned out that the rally that this reversal generated was indeed very small and temporary.

We saw another lower intra-day high in gold, and the move higher materialized on low volume. We’re once again seeing this bearish combination. If the USD Index confirms its breakout, gold might finally break below the short-term support.

How far can it go initially? Our best guess at this particular moment (this might change as the situation develops) is the $1,200 level or close to it. One of the ways to estimate the size of a given move is to assume that the move following the consolidation (which we’ve been seeing since the beginning of April) will be similar to the one preceding it. In this case, the move following the breakdown could be similar to the March decline, and such a move would take gold close to the $1,200 level. This level is very close to the 2013 lows, so we expect gold to pause there (but not to end the decline).

There’s one more sign that suggests that we may not have to wait much longer for the next move lower.

Silver’s cyclical turning point is just around the corner and the most recent short-term move was up thanks to Thursday’s rally. Consequently, reversing direction means a decline in this case. The turning points work on a near-to basis, so we can expect the next move lower in the following days (even if it doesn’t happen right away).

Summing up, the outlook for gold, silver, and mining stocks remains bearish, but not extremely bearish, which means that we don’t increase the size of the short position just yet. Precious metals are not responding strongly to the dollar’s rallies so far, but it seems that investors and traders are simply waiting for a confirmation of the breakout in the USD Index (there have been cases when the metals’ reaction was delayed in the past). Plus, silver’s strong performance and the lack thereof in the case of mining stocks, plus lower highs in gold and mining stocks, are a bearish combination.

To summarize:

Trading capital (our opinion): Short positions (half) in: gold, silver, and mining stocks with the following stop-loss orders:

– Gold: $1,326

– Silver: $20.30

– GDX ETF: $25.20

Long-term capital (our opinion): No positions

Insurance capital (our opinion): Full position

Thank you.

Przemyslaw Radomski, CFA of Sunshine Profits, Guest Contributor to MiningFeeds.com

Disclaimer All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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1. Gold continues to trade sideways.

2. The next trending move may be decided by an important economic report. Janet Yellen is scheduled to speak at Yankee Stadium tomorrow morning, and the FOMC minutes will be released a few hours later.

3. Investors in the gold community know that most bank analysts are bearish on gold, and bullish on the US economy. The first quarter was a disaster, with GDP growth almost non-existent.

4. The Dow has become a bit of a “wet noodle” in 2014. It tends to rally on speeches by Yellen, but then falls as GDP and participation rate numbers are released.

5. Yellen is arguably now more like a stock market cheerleader, than somebody working to meet inflation targets and create jobs for the average American. The money the Fed has printed with its QE program has been used to buy bonds from the government and to buy OTC derivatives from the banks. This is a very risky way to attempt to rebuild the American economy.

6. The Fed’s board of governors and bank economists continue to predict a much stronger economy, but it has yet to materialize. The velocity rates of M1 and M2 continue to decline, despite the truly enormous amount of money printing that has occurred.

7. Bank economists suggest that a modest slowdown in China (a GDP drop from 7.4% to 7.2%) is very bearish for commodities, yet a decent rise in US GDP (to about 4%) is somehow defined by them as also bearish for commodities.

8. I fail to see how US growth is bearish for commodity prices, and I’m predicting Chinese growth will rise to 7.5% in the second half of this year. Also, my feeling is that US money managers are on the lookout for the signs of inflation that a late-cycle burst in US GDP tends to create.

9. On that note, please click here now. This snapshot of the SPDR fund gold holdings shows very little change since the beginning of the year. If money managers believed the predictions of the economists, they would have sold enormous numbers of SPDR shares. That hasn’t happened.

10. When the American OTC derivatives super-crisis began, money managers bought SPDR shares aggressively. They sold a lot of them in 2013, in a panic. That’s because bank economists and some Federal Reserve bank presidents began talking about tapering the QE program.

11. The selling that has occurred since tapering began is negligible. That suggests to me that most SPDR shares are held by very strong hands.

12. If the long-promised higher GDP numbers do materialize in America, it could cause inflation numbers to rise. Value-oriented money managers are more likely to buy natural resource stocks during a late-cycle surge in GDP than the general stock market. That’s good news for gold stock investors.

13. As Western money managers have begun to focus more on inflation than risks to the financial system, Asian investors have moved their focus from gold bars and coins to gold jewellery.

14. In my professional opinion, trend shifts in both the West and the East are responsible for gold trading in 2014 with much less volatility, but with an upwards bias. “China’s demand for bars and coins dropped to 60 tons in the first quarter from 134.6 tons from a year earlier, while jewelry consumption climbed to 203.2 tons from 185.2 tons, according to the producer-funded council.” – Bloomberg News, May 20, 2014.

15. The demand for gold jewellery in China is enormous, and growing. At about 800 tons a year, it’s already as large as the entire SPDR fund holdings!

16. In India, the world’s “ultimate” gold market, gold jewellery stocks are surging higher in today’s trading. In 2013, these companies were crushed. In terms of intensity, that crash rivalled the US stock market wipeout of 1929.

17. That situation has changed dramatically. Please click here now. That’s the daily chart for Gitanjali, one of India’s most important jewellery companies. The chart looks spectacular.

18. Many other Indian jewellery stocks (like Titan for example) are also moving higher this morning.

19. The landslide win of Narendra Modi just days ago is viewed by Indian economists as the catalyst that will raise Indian GDP growth to 8%. The bottom line is that India’s gargantuan population is young, vibrant, and hungry for gold!

20. The only way for Indians to get the enormous amount of gold they will demand as their economy grows, is to buy it from mines owned by Western gold community investors.

21. Please click here now. That’s the GDX daily chart. I’ve highlighted two key periods of time. As gold rose towards $1392, and GDX traded in the $26 – $28 area, the Ukraine was in the news, and gold investors were very excited. Unfortunately, Indian dealers were pulling their bids then, and predicting a $100 decline in the price of bullion.

22. That’s what happened, and gold stocks also declined. Now, Indian dealers are talking about the possibility of a significant rally. It’s unknown whether the massive rally in Indian jewellery stocks is based on enough demand to overcome the bearish statements and actions of Western bank economists, and push the gold price higher. Regardless, I’m certainly not going to bet against India at this point in time.

23. Please click here now. That’s the daily US T-bond chart. Generally speaking, bank economists haven’t fared very well in 2014 with their predictions. Gold was supposed to fall hard as the Fed tapered. The Fed did taper, but gold rallied higher. The economists have been predicting higher rates, but that hasn’t happened. Even if US GDP numbers get stronger for a few quarters, Indian gold demand appears set to begin a growth spurt far larger than any Western ETF selling would be.

24. Please click here now. That’s the weekly XLF chart, which is an ETF of Western financial stocks. Note the horrific deterioration of the Stochastics 14,3,3 series oscillator, at the bottom of the chart. Please click here now. That’s another look at XLF, via the daily chart. Financial stocks have been the main driver of the US economic recovery, and now they appear to be in a fair amount of technical trouble. While Indian and Chinese gold jewellery demand grows at a solid pace, the case made by bank economists for stronger growth in America seems questionable at best. In contrast, the case for higher gold stock prices in the second half of this year is very strong indeed!

Stewart Thomson of Graceland Updates, Guest Contributor to MiningFeeds.com

Briefly: In our opinion speculative short positions (half) are justified from the risk/reward perspective in gold, silver, and mining stocks.

The previous week started quite favorably for precious metals bulls, but as the week progressed, the situation became less bullish, and finally we saw some bearish signs. Overall, the previous week didn’t change much. Let’s take a closer look (charts courtesy of http://stockcharts.com).

Click here for reference chart.

In the previous alerts we wrote a lot about gold, silver and miners’ reaction to the dollar’s rally (more precisely: about the lack of reaction) and the strength of the implications. In short, we didn’t think that the consequences were really bullish, because there had been many cases when the precious metals’ reaction was simply delayed, not absent. We saw some other bearish signs, but we’ll move to them in the following part of this alert. As far as the USD Index is concerned, we saw a pause after a strong rally. It was nothing surprising, as the previous rally was quite sharp and the index moved to the short-term resistance line.

What’s interesting is that while the first part of the last week was rather bullish for metals – they didn’t decline despite the dollar’s rally – the final part of the week was bearish as metals declined without a rally in the dollar. It could be the case that metals are starting to catch up as far as their reaction to the dollar’s rally is concerned.

Has the USD Index really paused or is the rally already over?

The medium-term chart suggests that the move higher has just begun as we saw a breakout above the important resistance line, and we saw a weekly close above it. Another move higher will further confirm the breakout and likely convince more traders that the currency is really about to rally substantially in the coming weeks.

This means that the biggest (bearish) impact on the precious metals sector is still ahead of us.

The situation in the gold market didn’t improve on Friday, and what we wrote in Friday’s alert remains up-to-date:

Yesterday, we wrote that GLD ETF had moved higher on tiny volume, which was a bearish sign. Another bearish sign (or more precisely: not a bullish one) was that we didn’t have gold above the previous local high. Moreover, we emphasized that this week’s small upswing hadn’t made gold move above the 50-day moving average and that the small move higher still seemed to be a counter-trend move.

The above is up-to-date and yesterday’s session confirms it – the GLD declined on volume that was significantly bigger than the volume accompanying the previous daily rallies.

The price-volume signs continue to point to lower prices in the coming days.

Mining stocks moved lower even more visibly than gold did. In fact, please note that while gold is above its March and April lows, the GDX ETF has just closed slightly below them. Mining stocks are showing weakness and suggest that another move will be to the downside.

What we wrote previously about the mining stocks sector remains up-to-date:

The “lower highs” observation applied to the mining stocks sector and the bearish price-volume implications were seen here as well. Just as it is the case with the gold market, the situation remains bearish, and yesterday’s decline on relatively big volume confirms it.

The precious metals sector usually declines in the middle of May, so we have bearish implications also from this perspective.

Before we summarize, let’s take a look at the long-term silver chart.

In the May 15, 2014 Alert we wrote the following:

Silver, on the other hand, has moved visibly higher this week. Is this a bullish factor? Not necessarily. Silver’s outperformance used to be a very bullish signal in the past years, but that was not the case in the more recent past. Since March all cases of silver’s outperformance (and many cases before that) have been the final sell signals for the precious metals sector.

History – the recent history – seems to have repeated itself once again. Silver moved sharply higher only to disappoint in the following days. Overall, the white metal moved higher by only $0.15, which means that it was basically flat.

The important factor to keep in mind here is that silver was (at the beginning of the week) and once again is right at its rising support line. Once this line is broken, we can expect a big (say, more than $1) move lower. It’s quite visible – many traders realize this. With this in mind, it’s no wonder that the current support was the start of a sharp rally. However, the fact that the rally was only very temporary and followed by an immediate move back to this line means that the strength of buyers is smaller than the strength of sellers.

Summing up, the outlook for gold, silver, and mining stocks remains bearish, but not extremely bearish, which means that we don’t increase the size of the short position just yet. Precious metals are not responding strongly (we saw some reaction in the final part of last week, though) to the dollar’s rallies so far, but it seems that investors and traders are simply waiting for a confirmation of the breakout in the USD Index (there have been cases when the metals’ reaction was delayed in the past). Plus, silver’s strong performance and the lack thereof in the case of mining stocks, plus lower highs in gold and mining stocks, are a bearish combination.

To summarize:

Trading capital (our opinion): Short positions (half) in: gold, silver, and mining stocks with the following stop-loss orders:

– Gold: $1,326

– Silver: $20.30

– GDX ETF: $25.20

Long-term capital (our opinion): No positions

Insurance capital (our opinion): Full position.

Thank you.

Przemyslaw Radomski, CFA of Sunshine Profits, Guest Contributor to MiningFeeds.com

Disclaimer All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Silver has suffered as a market pariah this year, dragging along doggedly near major lows. Investors have seemingly abandoned it to chase the Fed’s general-stock-market levitation, an affliction plaguing most of the alternative-investment realm. But rather provocatively, silver buying remains quite strong even in this dreary sentiment wasteland. This stealth buying will likely explode once gold starts running.

After silver plunged 35.6% in 2013 and hit 2.8-year lows, it’s easy to understand why it remains deeply out of favor today.  With the Fed’s extreme money printing and jawboning dramatically catapulting general stocks higher, mainstreamers forgot about alternative investments including silver.  But for the brave contrarians who would rather buy low than buy high, silver remains an incredibly alluring investment.

Just this week the Silver Institute, the world’s premier authority on this metal for decades, reported all-time-record-high worldwide physical silver demand in 2013!  It was up 13% to 1081m ounces despite silver’s plunge, led by a massive 76% increase in retail investment demand.  Far from scaring away all investors, bargain hunters flocked to this cheap metal.  And that buying trend has continued into 2014.

That certainly seems rather incongruous given silver’s weak price action this year.  Other than a short-lived spike in February, this metal has languished around $19 to $20.  The primary reason is gold.  Capital only floods into silver when gold is decisively rallying, that’s always been the universal silver buy signal.  Gold is silver’s primary driver, dominating sentiment in precious-metals land.  But stealth buying is still underway.

Unfortunately physical buying is greatly fragmented, spread across many silver forms and countless venues globally.  So only an elite well-funded organization like the Silver Institute can hope to track it.  Here in the States the US Mint publishes its silver-bullion coin sales monthly, but they are just a tiny fraction of the overall silver market.  But there are two excellent proxies for American big-capital silver demand.

They are silver futures and the dominant iShares Silver Trust silver ETF, which trades as SLV.  These are the big high-profile destinations professional money managers pour capital into when silver starts moving on a gold rally.  That heavy buying leads to ballooning speculators’ long positions in silver futures, and large builds in SLV’s silver-bullion holdings.  And this data reveals 2014’s silver stealth buying.

Silver-futures positions are published weekly in the CFTC’s famous Commitments of Traders reports, and SLV’s custodians offer an even higher-resolution read by posting daily holdings data for their ETF.  But silver futures are the best place to start, as the buying and selling in that centralized market utterly dominates silver pricing.  Silver futures are revealing both stealth buying and a main reason silver remains low.

This chart looks at SLV share prices superimposed over American speculators’ total long and short silver-futures positions.  Remember futures are a zero-sum game where longs and shorts are always perfectly equal, but total positions vary between hedgers and speculators.  The former actually produce or consume silver, while the latter simply bet on its price action and end up determining a great deal of that.

While gold’s price action certainly drives silver sentiment and thus silver prices on a macro level, on a day-by-day basis silver prices are determined almost exclusively by American speculators’ buying and selling of silver futures.  No investor trying to time silver entries and exits in any vehicle from SLV to bullion coins can afford to ignore silver-futures action.  Silver prices are slaved to futures speculators’ whims.

When this elite group of traders buys, either through adding new long positions or closing existing shorts, silver surges.  This ironclad relationship is readily apparent in this chart, where the green line and red line show speculators’ total silver-futures long and short positions respectively.  When longs are rising significantly, and/or shorts are falling significantly, silver is rallying due to this futures buying demand.

A great example occurred in the third quarter of 2012, when silver and therefore SLV shares surged about 29% higher in just a couple months on strong speculator silver-futures buying.  Conversely silver’s sharp 39% plunge in the first half of 2013 was the result of heavy speculator silver-futures selling, both by exiting existing longs and adding new shorts.  As soon as this selling ceased midyear, silver stabilized.

Just like speculators’ gold-futures trading dominates gold prices, their silver-futures trading dominates silver prices.  When these guys get bullish and buy, silver rallies.  When they get bearish and sell, silver falls.  While this dynamic irritates physical-silver investors to no end, they have to respect the strength of this decades-old relationship.  Silver can’t rally meaningfully unless American futures speculators are buying.

And amazingly they have been in 2014!  This is a substantial part of the stealth silver buying underway.  Speculators’ total silver-futures long positions have climbed gradually and persistently throughout 2014, despite the low and basing silver prices.  And the latest CoT week’s read of 69.5k long-side contracts held by speculators isn’t trivial.  At 5000 ounces per contract, this represents 348m ounces of long bets.

That is the equivalent of nearly a third of last year’s record global silver demand, and is definitely on the high side by recent years’ standards.  Between 2009 and 2012, the normal post-stock-panic years before 2013’s extreme gold-selling anomaly crushed silver, speculators’ total long silver-futures positions averaged 63.9k contracts.  So by that baseline, futures speculators are actually fairly bullish on silver today!

The degree of their stealth buying over the last couple quarters is rather remarkable considering silver has merely ground lower and sideways.  Since the late-September low in their total long positions, they’ve grown these by over 50% by mid-April despite silver drifting nearly 10% lower over that span.  These guys obviously see big potential in silver, bucking its prevailing sentiment trend of hyper-bearishness.

And the risk in these bets is serious.  To hold a single silver-futures contract controlling 5000 ounces of silver worth $100k at $20, the required margin is just $9k.  So if silver merely moves 9% in the opposite direction of their bet, all their capital risked will be wiped out.  You have to have some pretty strong conviction to make bets on a super-volatile metal like silver running at exceedingly-risky 11x leverage!

And that makes the other speculators’ huge short-side bets very interesting.  These traders are holding a whopping 49.2k short-side contracts as of the latest CoT report!  That is not far from early December’s secular-bull-record 54.3k contracts, the highest level of speculator silver-futures shorting seen in at least 14.9 years.  A mere 9% silver rally, child’s play for this metal, will totally obliterate fully-margined shorts.

And I think this near-record speculator short position is the key to silver’s languishing price.  In the normal baseline years between 2009 and 2012, after 2008’s stock panic and before 2013’s effective gold panic, speculators’ total silver shorts averaged 21.5k contracts.  We haven’t seen those levels since early 2013 when silver was still way up around $31.  Speculators started shorting silver heavily soon after that.

As long as those speculator short positions remained high, silver and therefore SLV shares have not been able to meaningfully recover.  Note above that all the major silver lows including these recent ones happened when speculators’ total silver-futures short bets were around 50k contracts.  Such extreme levels of silver shorts can’t be sustained, they are simply too risky to maintain for long periods of time.

If silver continues to grind sideways near lows, speculators will get bored and cover and move on to greener pastures.  But the far-more-likely scenario is a resurgent gold upleg ignites a silver surge that forces the short traders to quickly buy to cover.  Silver is a strange metal, after long periods of listless slumber it just explodes higher on new investment demand.  These rallies slaughter speculators trapped on the short side.

So back at the dawn of this year I expected a major short squeeze was coming with silver so low and speculators’ shorts so high.  And it indeed soon started although it was short-circuited and amazingly actually reversed in February a month before gold started retreating.  But with speculators’ total silver-futures shorts now back up near last year’s extreme highs, the odds of an imminent silver short squeeze are very high again.

And ironically it may be silver-futures action that triggers it.  While most speculators are aggressively short, others have been stealth buying longs this year.  The ranks of this minority silver-bullish group will grow dramatically when gold and therefore silver inevitably start moving higher again.  As these long-side traders accelerate their buying, it will put tremendous pressure on the short-side ones to quickly buy to cover.

And their buying could be massive.  Merely to return to 2009-to-2012 normal-year averages of speculator silver-futures short positions, traders would have to buy to cover an astounding 27.7k contracts.  This equates to 138.4m ounces of silver, or the equivalent of over a sixth of total global mine production last year!  If this buying all happens in just a matter of weeks as short squeezes are fast, silver will certainly fly.

As a contrarian who likes to buy low when others are scared, it never ceases to amaze me when traders choose to be super-bullish and heavily long at major highs or super-bearish and heavily short at major lows.  To buy low and sell high, the polar-opposite outlook and bets are necessary.  So I remain wildly bullish on deeply-out-of-favor silver near these major lows.  It’s formed a strong base and is ready for a major upleg.

And it’s not only me and a minority of futures speculators that feel that way, a growing number of stock traders do too.  This next chart looks at SLV-share prices again in blue superimposed over this ETF’s total silver holdings in red.  These are super-valuable for investors to track, because they show whether the colossal pools of stock-market capital are flowing into or out of silver bullion via this flagship silver ETF.

SLV’s silver bullion held in trust for its shareholders has grown rather impressively this year.  As of early May its holdings were up 4.2% year-to-date while silver was only up 0.2%!  Stock traders are buying SLV shares faster than silver is being bought, forcing this ETF’s custodians to increase its holdings.  This silver stealth buying is even more remarkable given general-stock euphoria sapping alternative-investment demand.

Since SLV is a tracking ETF, it will fail its mission if its share price decouples from the underlying silver price.  So whenever stock traders buy SLV shares faster than silver itself is being bid higher, this ETF’s custodians have to equalize this differential buying pressure directly into silver.  So they issue new shares to sop up the excess demand, and use the proceeds to buy more silver bullion for their holdings.

And that’s exactly what has happened so far in 2014.  Despite the hyper-bearishness plaguing silver at such low prices, there has been major differential buying pressure on SLV shares.  Stock-market capital is stealthily flowing into silver, making the bet silver is due for a new upleg erupting from this past year’s strong technical basing.  And I certainly suspect this big SLV-share demand is coming from hedge funds.

For over 14 years now, I’ve been studying the financial markets, trading, and writing newsletters on all of it.  Over that time I’ve heard from countless investors and speculators.  And generally individual silver investors loathe SLV.  They understandably consider it and silver futures just “paper silver”, mere claims on silver rather than silver itself.  So the great majority of individuals, including me, prefer to own physical silver.

But professional money managers who merely want silver-price exposure love SLV.  It is quick, easy, and dirt-cheap to trade, and there are no large premiums or logistical hassles like when dealing with physical silver.  So usually when SLV’s holdings rise or fall significantly, it is professional fund capital moving in or out.  And if today’s relatively-small hedge-fund bets in SLV start winning, far more capital will start chasing it.

This silver stealth buying underway from the professional traders who traffic in silver futures and SLV is exceedingly interesting.  Big capital has been increasingly positioning on the long side of silver at a time when sentiment is atrociously bearish.  It is definitely a smart contrarian bet, but atypical before silver shows some more convincing signs of life.  But sentiment aside, silver’s technicals are very appealing.

For nearly a year now while silver (and gold) bearishness has remained extremely high, silver has ground sideways on balance.  Neither additional silver-futures selling nor SLV liquidations were able to push silver much below its strong support between $19 and $20 for long.  And if silver can’t be forced any lower after suffering its worst year in a third of a century, then any shift to buying should catapult it higher.

And nothing begets buying like buying, it feeds on itself.  As more silver-futures speculators add new long-side bets, and more stock traders buy SLV shares, silver’s price will recover.  And soon after gold starts rallying decisively and flashes that ultimate silver buy signal, the silver buying will accelerate in a big way.  This is going to put tremendous pressure on the futures speculators to cover their outsized silver shorts.

Merely to return to their normal-years average levels, these traders alone will have to rapidly buy the equivalent of 138m ounces of silver.  And the last time their total shorts were at these averages, the silver price was far higher near $31.  If silver makes a move back up to similar high-$20s or low-$30s levels today, it will attract in vast amounts of additional new buying.  Silver uplegs are spectacular and exciting.

And a fascinating buying catalyst just emerged that could help accelerate the silver stealth buying into a major new upleg.  Just this week, the company that administers the 117-year-old London Silver Fix said this anachronism would cease in mid-August!  As I’ve covered extensively in our newsletters, there’s widespread evidence of abnormal trading during those conference calls before the resulting prices are published.

This is the equivalent of insider trading, using privileged data not available to anyone beyond the gold and silver fixing calls to gain an unfair advantage.  So regulators in multiple countries have been putting serious pressure on the fixing banks, which are abandoning this process.  Since silver often fell during the daily London Silver Fix, its death may trigger some short covering among American futures speculators.

While silver and SLV will surge as silver stealth buying erupts into major buying, the beaten-down stocks of the silver miners will soar.  These companies are trading today as if silver was just a fraction of its current price and will never rise again.  Once silver starts moving, capital will flood back into this radically-undervalued sector.  In December we published a fascinating 27-page report detailing our dozen fundamental-favorite silver companies.

The bottom line is silver has actually enjoyed strong stealth buying this year.  Professional traders are adding to their long-side silver bets despite this metal’s price continuing to languish near major lows.  A minority of futures traders have been relentlessly buying long contracts, while stock traders are buying SLV shares fast enough to drive an impressive year-to-date holdings build.  They know silver is overdue to surge.

This hasn’t happened yet for two reasons.  Gold’s young upleg suffered a pullback and consolidation, and the majority of futures speculators have sold aggressively to accumulate near-record silver short positions.  But as gold recovers, silver sentiment will thaw and the shorts will be forced to rapidly cover to stave off catastrophic losses.  And the silver stealth buying will spread and erupt, catapulting silver higher.

Adam Hamilton, CPA of Zeal LLZ, Guest Contributor to MiningFeeds.com

Summary

– NuLegacy Gold is earning into a 70% interest in the Iceberg deposit, one of Barrick Gold’s prized Cortez Trend (Nevada) properties.

– The Iceberg deposit is on Trend with 3 world-class Barrick properties that contain from 15-21 million ounces of gold each.

– Minimal equity dilution necessary if, as expected, Barrick elects to clawback a 70% interest in Iceberg, leaving Nulegacy Gold with a 30% interest that’s carried to commercial production by Barrick!

– Strong and very experienced management team for a junior company with a market cap of just US$ 13.6 million.

The following interview of CEO James Anderson of NuLegacy Gold (OTCPK:NULGF) (NUG.v) was conducted by phone and email on May 8-13, 2014.

NuLegacy is an emerging Nevada gold explorer [113 million shares at $ 0.12/share = $13.6 million market cap at 5/13/14] with a highly prospective earn-in opportunity on one of Barrick Gold’s (ABX) Cortez Trend properties. The Iceberg gold deposit is the 4th, along trend after three truly world-class deposits in one of the best jurisdictions on the planet.

While the Iceberg deposit is an exploration-stage opportunity, Barrick has three massive projects, situated approximately 4.5 miles apart, on trend with it; the Pipeline project has delineated 21 million ounces of gold, Cortez Hills 15 million ounces and most recently the Goldrush project with 15.6 million ounces. Clearly, Nevada is key to Barrick’s future.

The significance of the 4.5 mile spacing between each of these three prolific zones coincides with the underlying geology, (please see interview below) suggesting that Iceberg could be the next major deposit along the Cortez Trend. If Iceberg turns out to be a fraction of the average size of the other elephant deposits, it could be quite valuable.

Yet, the market is heavily discounting the substantial value of NuLegacy’s earn-in agreement with Barrick. At least, that’s what James Anderson and NuLegacy’s top-notch team believe. Please see the end of the interview for management bios, this link for a very helpful video clip of the company’s property, and of course the corporate presentation.

CAUTION: There are no known resources or reserves on the Iceberg deposit, NuLegacy’s proposed exploration programs are exploratory searches for commercial bodies of ore. The close proximity of and presence of gold resources on Barrick’s Pipeline, Cortez Hills and Goldrush projects is not necessarily indicative of the gold mineralization on the Iceberg Deposit.

NOTE: Peter Epstein, the author of this article has no prior or existing relationship with NuLegacy Gold, but is a shareholder.

Peter Epstein: NuLegacy Gold’s primary asset is an option to earn into 70% of Barrick Gold’s Iceberg deposit in the Cortez Trend of Nevada. What makes the Iceberg deposit so special?

James Anderson: The primary thing that makes the Iceberg deposit so special is its location. It’s in Nevada, one of the best jurisdictions in the world to explore for gold and to put deposits into production. Secondly, it’s on trend with 3 of the largest Carlin-type gold deposits anywhere in the world, of which one is among Barrick’s lowest cost projects. Importantly, Iceberg shares a common geology with those other deposits.

Peter Epstein: Is NuLegacy fully-funded through earn-in of a 70% interest in the Iceberg project? Will that require selling some or all of your shares in GRIT?

James Anderson: We anticipate that between our current cash on hand and the prospective proceeds from the sale of our stake in Global Resource Investment Trust, “GRIT” we would be very close to having sufficient funds to complete the remaining US$2.9 million of qualifying direct exploration expenditures required to earn a 70% working interest in the Iceberg deposit.

However, to be safe, it continues to be our intention to do another financing, preferably at a more advantageous price, after we’ve completed some additional drilling. This financing is to enroll institutional and industry partners to fund the non-exploration, corporate overhead expenses and provide some financial flexibility and competitive tension.

Peter Epstein: When do you expect to achieve the 70% Earn-in?

James Anderson: Our agreement with Barrick requires NuLegacy to spend at total of US $5.0 million to earn-in a 70% working interest by December 31st, 2015. To date, we have spent $2.1 million.

Once we provide a certificate of completion Barrick has 90 days to elect to earn-back to a 70% working interest, by spending $15 million over 5 years and thus converting NuLegacy’s interest into to a 30%, ‘carried to production’ interest.

If NuLegacy obtains a 70% interest, Barrick has three options:

1. Remain the 30% minority partner in the Iceberg Project.
2. Spend $15 million advancing the Iceberg Project to earn-back to 70%, or
3. Acquire NuLegacy Gold outright to consolidate its ownership of the Cortez Trend.

It’s unlikely Barrick would opt to be a minority partner to a junior mining company in a property that is adjacent to, and on strike with, three of Barrick’s largest and most important gold deposits.

Our plan is to spend the next $2.9 million on 4 phases of drilling, and to complete the earn-in over the next 16 to 18 months. The first phase of that drilling commenced on May 7th.

Peter Epstein: Are there any other requirements that need to be met to earn-in the 70% of Iceberg?

James Anderson: None, and since it is unlikely that Barrick would leave NuLegacy as the senior partner we feel confident that at a minimum the property will receive an additional $15 million of exploration/development capital. That is a great opportunity for a junior in these difficult resource markets.

Peter Epstein: How did a small company end up with such a significant asset? Surely Barrick knew what it was doing back in 2009 when it signed this agreement…

James Anderson: There are three principle reasons for this.

First, the agreement with Barrick was negotiated in 2009 on the heels of a major financial crisis, which dropped gold from about $1,075 to $680 per ounce. Even Barrick wasn’t immune, as it laid off 80 people at its head-office. Also, at that time Barrick had yet to make their major discovery at Goldrush. They were drilling a few holes at Goldrush but they had yet to figure out the controls of mineralization or the stratigraphy.

When the global crash came, Barrick ceased exploring the Goldrush altogether and prudently focused all their attention on optimizing operations at Pipeline and advancing Cortez Hills into production as quickly as possible. Suffice to say, now that Goldrush has developed into a 15.6 million ounce monster, it’s highly unlikely that NuLegacy would be able to secure an option on adjacent ground on such favorable terms.

Secondly, Albert Matter’s (our Chairman) forte is buying good assets during distressed times. For example, when gold was much in disfavor back in 2001, he lead a group of investors in acquiring the 3.2 million ounce Mulatos gold deposit, later merging it into Alamos Gold (AGI) in 2003, creating an important mid-tier gold producer with a market cap exceeding $1 billion.

Thirdly, is the contribution of our COO and head geologist Roger Steininger. Roger is credited with the discovery of the 21 million ounce Pipeline deposit, the first of the giant Carlin-type gold mines in the Cortez trend. Dr. Steininger’s discovery record and his reputation for thorough scientific exploration is well known to many of Barrick’s personnel, and is what made it possible for Mr. Matter to negotiate the favorable earn-in, as Barrick took the view that NuLegacy Gold would effectively be an extension of their own exploration efforts.

Peter Epstein: How is it that NuLegacy is likely to end up with a, “carried interest” of 30% in Iceberg as opposed to just a 30% interest? Can you explain exactly what that means?

James Anderson: The short answer is that it’s the result of the negotiating skill and hard work of Chairman Albert Matter. The longer answer is that back then Barrick hadn’t yet discovered the potential of the adjacent Goldrush deposit. Therefore, Barrick was happy to have someone with Dr. Steininger’s exploration expertise undertaking the high-risk, early money to explore the Iceberg, under the terms of being able to earn-back a majority position upon exploration success.

Peter Epstein: Can you explain exactly what, “30% carried interest” means?

James Anderson: It means that, after Barrick spends an incremental $15 million, starting next year, (and earns back a 70% interest), future costs of exploration, development and construction through commercial production are borne 100%by Barrick.

Once in commercial production, Barrick would get repaid for NuLegacy’s fully carried portion of development expenditures by retaining 90% of NuLegacy’s share of the project cash flow. After payback, NuLegacy would retain 30% of project cash flows.

Peter Epstein: Can you discuss your key shareholders, or describe what type of investors are backing you?

James Anderson: To date NuLegacy has largely been financed by a remarkable shareholder group of individuals – friends, family and business associates of the management team and directors – many of whom are well known mining entrepreneurs and investment bankers.

Some 20 individuals have bought more than one million shares each via private placements, with half that number having bought multiple millions of shares. Approximately 10 more have bought over a million shares in combinations of private placements and open market purchases. We refer to them collectively as, “NuLegacy millionaires”. Then there are the three score who have bought between 250,000 and 750,000 shares through private placements. We have an amazing group of shareholders.

It would be indiscreet for us to provide names…other than those that are listed in our board of directors, our advisory council and through public filings, which are all available on our website.

Peter Epstein: Please describe your drilling plans for 2014-15?

James Anderson: These are fully described in our April 8th and May 8th news releases.

In summary, the 2014 Program will consist of 30-35 holes to be drilled over seven months:

• In sets of 8-10 reverse circulation (RC) holes drilled deep enough to test for the three known gold bearing horizons of the Iceberg.
• Assay those holes and use the results to refine the location of the next 8-10 holes.
• Repeat for two or three “sets” as needed to delineate a threshold resource and discover a higher grade core (a total of 24 to 30 holes).
• Intersperse these drilling shifts with 5 to 7 deeper RC “wildcat” exploration holes outside of the Iceberg deposit, and 2 or 3 core holes within the Iceberg to advance the understanding of the stratigraphy.

Peter Epstein: You have a potential exploration target of approximately 90 to 110 million metric tonnes of near-surface, oxide material at 0.7-1.0 grams per tonne, “gpt.” How does that indicative grade compare to grades at existing heap leach projects?

James Anderson: First, please allow me to remind readers that these tonnages and grades are conceptual in nature based on 149 historic and 16 NuLegacy holes drilled in and around the Iceberg deposit. There has been insufficient exploration to date to define a mineral resource and it is uncertain if further exploration will result in the Iceberg deposit being delineated as a mineral resource.

To answer your question, on April 24, RBC Capital Markets published a report on junior gold companies with heap-leachable deposits. In the preamble, they state that the pre-production projects they reviewed have grades averaging 0.7 gpt gold, while producing heap leach mines have grades averaging 0.9 gpt gold. While we have not carried out a Preliminary Economic Assessment “PEA” or other study on the Iceberg deposit, conceptually, our potential grades fall within the average grades of the bulk tonnage, heap leachable projects reviewed by RBC.

Interviewer Comment: RBC’s report also noted that on average heap leach projects have all-in sustainable costs of $300/oz below that of non heap leach projects. Therefore, Iceberg could be in the sweet spot in terms of grade and superior (in my opinion) in terms of jurisdiction.

Peter Epstein: Please summarize / reiterate what Albert Matter recently said regarding breakthroughs in the understanding of Iceberg’s geology.

James Anderson: Recent breakthroughs in our understanding of the Iceberg deposit are a result of this past winter’s analysis of all previous exploration programs and the integration of recently surfaced information shared by Barrick’s exploration team at its Thayer-Lindsay Award presentation on the Goldrush discovery process.

• While the Goldrush deposit has gold in the “contact zone” between the Devonian Horse Canyon and the Devonian Wenban (Unit 8) carbonate horizon [‘HC-W8’] the bulk of the higher grade gold is in the brecciated lower Wenban-5 carbonate horizon at depths ranging from 300 to 750 meters.
• To date, NuLegacy’s exploration focus has been the near-surface oxidized gold mineralization in the “contact zone” between the Devonian Horse Canyon and the Devonian Wenban (Unit 8) carbonate horizon [‘HC-W8’] which comes to within a few tens of meters of surface in the Iceberg. Sufficient favorable geology and extensions have been identified in the Iceberg’s contact zone to indicate a potential near-surface oxide gold exploration target of 90 to 110 million tonnes grading between 0.7 gpt and 1.00 gpt of gold. See Note (1) below.
• There is also evidence of gold in the Iceberg’s lower brecciated Wenban-5 carbonate horizon in the few holes drilled to depth at 250 to 400 meters.
• As well our reinterpretation of the geology indicates there are two ages of over-lying volcanics at the Iceberg: a 35 million-year old dacite and sedimentary unit that hosts worthwhile grades of gold and a younger partially over-lying 13 million-year old basalt flow that is barren of gold.

Thus we are fortunate to have multiple gold-bearing horizons! See Note (2) below.

Peter Epstein: Since Barrick would have 5 years to invest $15 million to claw-back its interest to 70%, could they sit on the project for 3-4 years and then spend the $15 million in the final 1-2 years?

James Anderson: The contract requires Barrick to spend a minimum of US$1.5 million per year. Barrick have been excellent partners, and these are small numbers for them. Barrick has a similar transaction with another Nevada junior called Midway Gold (MDW) on their Spring Valley property, where Barrick has just completed spending $38mm to earn a 70% interest in that property – approximately one year ahead of schedule. As Barrick needs to replace the 6.5 million ounces of gold that they produce each year, if they elect to earn-back to 70% on Iceberg it’s unlikely they would delay exploration / development… so long as they are getting favorable results it’s more likely they would accelerate the earn-back.

Peter Epstein: Can you give readers an update on your capital structure? How much cash does that leave the company with? How many shares are outstanding, and how many warrants and options?

James Anderson: There are 113 million shares outstanding. There are 31.6 million warrants at an average exercise price of C$0.20/warrant that would generate approximately $6.4 million on exercise. There are 12.8 million options at an average exercise price of C$0.20/option that would generate approximately C$2.6 million on exercise. Fully diluted there would be 157.4 million shares outstanding with an additional C$9.0 million of cash in the treasury.

Peter Epstein: What aspect(s) of the NuLegacy story do you wish that potential investors knew more about?

James Anderson: I think few people quite realize how valuable one of these giant Carlin-type deposits can be, and how important it is to be in a politically stable, geologically endowed and logistically superior jurisdiction like Nevada.

Let’s look at Barrick’s case. It was a small Toronto stock exchange listed oil and gas explorer until it was fortunate enough to acquire the nascent Goldstrike deposit in the Carlin trend. That Carlin deposit turned out to be so rich that it allowed Barrick to expand aggressively through acquisition to become the largest gold producer in the world.

Or, as in the instance of Royal Gold which was a $0.15 penny stock when it discovered the first portion of the Pipeline deposit in 1989 with NuLegacy’s COO Roger Steininger in charge of the exploration on the project.

The early revenues from the Net Smelter Royalty on the Pipeline project that Royal Gold ended up with are what enabled the company to become what it is today – $60 per share with a $4 billion market capitalization that has paid a dividend for the last 10 years.

Peter Epstein: Given all of the positive things we’ve just covered, why do you think that NuLegacy’s market cap is under US$ 15 million?

James Anderson: The decimation of the junior exploration industry as a whole, as a result of the three-year bear market in gold, which is likely ending, and the over-regulation of the industry, which appears to be in retreat.
If your company’s deal with Barrick is as compelling as it sounds, why hasn’t a mid-tier or Major precious metals company taken NuLegacy out already?

The three-year bear market in gold and gold stocks since the 2011 peak has made companies cautious, particularly after many of them chased valuations and over-paid during the last run-up to the peak. That’s a normal part of the business cycle, and a normal part of the commodity cycle. But that always come to an end.

Peter Epstein: Why hasn’t Barrick Gold taken you out?

James Anderson: Barrick can earn-back an additional 40% of the Iceberg for spending $15 million… so unless we get some spectacular results, Barrick is unlikely to do anything until we have completed our earn-in.

However, once NuLegacy has completed the earn-in Barrick must decide:

• Do they want to spend $15 million to earn-back…all the while improving NuLegacy’s position in two ways:
• The expected improvements to the Iceberg’s value…30% of which will accrue to NuLegacy.
• The benefits of being converted to a 30% carried interest (no more dilution of NuLegacy to support exploration/development of the Iceberg) which is often considered as valuable as a 50% working interest,
• Remain a 30% minority party, or,
• buy NuLegacy out

Notes:

1. As reported in NuLegacy’s Sept. 5, 2013 news release, these figures are a conceptual exploration target only and should not be construed as a calculated resource under NI 43-101 standards as insufficient exploration has been completed to date to define such a resource and there are no assurances that additional exploration will confirm the existence of a NI-43-101 resource.
2. The above scientific and technical information has been prepared and/or approved by Roger C. Steininger, NuLegacy’s Chief Operating Officer, CPG 7417, and a “qualified person” under NI 43-101.

Management / Advisor Bios:

Albert J. Matter, BA Econ, Director & Chairman

Albert has 40 years of diverse experience financing both public and private companies, and structuring and negotiating transactions with particular expertise in the mining industry. He provided corporate finance, strategic planning, mergers and acquisition, and business development assistance to numerous corporations and high net worth individuals, frequently working with leading names in the Western Canadian business and investment communities. He is one of the founding partners of National Gold Corporation, Gryphon Gold Corporation and NuLegacy Gold Corporation.

James Anderson, BA, Director & Chief Executive Officer

A graduate of the University of Alberta, James spent 19 years as an investment banker, then manager, with several boutique-sized Canadian investment firms including First Canada Capital Partners Ltd., Research Capital Corp., and Majendie Securities Ltd. James has spent much of his career providing investment advice to clients who were directly involved in the capital markets. He was instrumental in obtaining financing for numerous micro-cap public companies, especially in the area of mineral exploration. James was born in the mining community of Timmins, Ontario, and now makes his home in North Vancouver, B.C. with his wife and two teenage children.

Roger C. Steininger, PhD, CPG, Director & Chief Operations Officer

Roger has more than 40 years of experience in exploration, evaluation and development of metal deposits. For the last 25+ years, he focused on Nevada gold geology and exploration. He is credited with the discovery of the South Pipeline and Long Valley gold deposits, as well as participating in the discovery or expansion of gold reserves at numerous mining operations. He is a Qualified Person as defined by NI43-101. Roger was Exploration Manager for Amselco Minerals (part of BP Minerals) for seven years, and maintained a consulting practice for the last 21 years. Clients included numerous major mining companies such as Royal Gold, Phelps Dodge, Amax Gold, Gold Fields Mining and Galmis Gold in addition to a selection of junior development and exploration companies.

Alex Davidson, Corporate and Strategic Advisor

Mr. Davidson is a recognized leader in designing, implementing and managing highly successful and strategic gold and base metal exploration and acquisition programs throughout the world. Until 2009 he was the Executive Vice-President of Exploration and Corporate Development of Barrick Gold Corporation with responsibility for all its international exploration programs and corporate development activities. During his tenure he was instrumental in the acquisition of the Cortez gold complex in Nevada (from Placer Dome Inc.), and the discovery of the Lagunas Norte deposit in Peru, two of Barrick’s five key mines.

Briefly: In our opinion speculative short positions (half) are justified from the risk/reward perspective in gold, silver, and mining stocks.

Yesterday was another day during which the precious metals sector didn’t really decline (just a little) despite a move higher in the USD Index. Let’s check if the situation is bullish now (charts courtesy of http://stockcharts.com).

Starting with gold, we saw a small move lower, which might appear slightly bullish given that the move materialized on low volume. This might have been a suggestion that the move lower was not the true direction in which the market was moving, but that was not really the case. The above is the case, in general, for an opposite situation – if a given market moves higher on very small volume, then it indicates that the buying power is drying up and that prices are about to move lower. The situation is not symmetrical, because the price doesn’t stay at the same level when there are no buyers and no sellers – it declines. In short, yesterday’s price-volume action is only slightly bearish.

What’s more interesting is that the first 2 days of this week are quite similar to the first 2 days of the last week. We saw a sizable decline after this 2-day action last week, so we can say that it’s a quite bearish pattern on its own. There was only 1 situation similar to the last 2 days, so the implications are not strongly bearish, but the closeness of the situation and the level of similarity make it bearish.

We can actually see a similar kind of 2-day pattern in the GDX ETF. Again, the implications are rather bearish. The mining stock sector is close to the March and April lows, and with each local high being lower than the previous one, it seems that we might finally see a breakdown this month.

The precious metals sector usually declines in the middle of May, so we have bearish implications also from this perspective.

On the other hand, the bullish fact is that the above-mentioned small-volume decline materialized when the USD Index moved higher and was already after a sizable rally.

We previously commented on the USD Index in the following way:

The US dollar moved higher in the past few days and it’s about to take out the important declining resistance line that stopped the previous rally earlier this year. Once it moves above it, we are likely to see a strong upswing, which could translate into a big decline on the precious metals market. It seems quite likely in our view.

The USD Index moved higher and above the declining resistance line. It’s now more or less as much above it as it was during the previous attempt to move lower. Since the previous move failed, it seems to us that traders are waiting for some kind of confirmation that this breakout is a sustainable one. As such, it might not have had a bullish impact on the precious metals market just yet. It doesn’t mean, however, that we won’t see any in the coming days. There have been cases when precious metals’ reaction was simply delayed. This could still be the case, and we are not yet convinced that metals are showing true strength here.

The short-term USD Index chart reveals that there is one additional resistance lvel that needs to be taken out before the USD can rally much higher – the declining line based on the February and April highs. Once we have the USD Index above this line and the breakout is confirmed, traders should become convinced that the next move in the U.S. dollar is up, and that’s when we might see metals and miners finally respond to the USD Index’ strength (by declining).

Summing up, the outlook for gold, silver, and mining stocks remains bearish, but not extremely bearish, which means that we don’t increase the size of the short position just yet.

To summarize:

Trading capital (our opinion): Short positions (half) in: gold, silver, and mining stocks with the following stop-loss orders:

– Gold: $1,326

– Silver: $20.30

– GDX ETF: $25.20

Long-term capital (our opinion): No positions

Insurance capital (our opinion): Full position

Thank you.

Przemyslaw Radomski, CFA of Sunshine Profits, Guest Contributor to MiningFeeds.com

Disclaimer All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

– Pershing Gold released encouraging preliminary testing of prospective gold recoveries… an important de-risking event.

– Pershing management team in talks with the BLM to restart operations within prior pit boundaries.

– Company presented last week at the European Gold Forum, institutional interest in Pershing continues to grow. See link to Gold Forum presentation.

– Company releases upgraded gold resource of 717,000 Measured, Indicated & Inferred ounces.

NOTE:The author has no existing or prior business relationship with Pershing Gold (PGLC). All information contained herein comes from press releases and the brand new corporate presentation. Investors are urged to review the latest corporate presentation, updated this month.

Pershing Gold continues to advance and de-risk its past producing Relief Canyon Mine in a prudent and methodical manner. On May 12th, the company announced encouraging preliminary results on column leach testing. According to Chairman/CEO Steve Alfers,

“The results from the column leach tests are a real game changer for the Relief Canyon deposit because these recoveries are so much higher than what has been reported for the two operators that mined the deposit in the 1980s,”

Another encouraging bit of news can be found in Pershing Gold’s March 31, 2014 press release, see here…

“Pershing Gold is discussing with the BLM a plan to reopen the mine within the existing footprint of the pits under the existing Plan of Operations.”

This suggests to me that Pershing is pursuing an opportunity to possibly start mining activities sooner than the second half of 2015 (as stated in the company’s annual 10-k report). In other words, the company could be in production within 12 months. If the company can achieve this goal, Alfers and his team could work out the logistics and optimize production to be in the position to deliver a meaningful amount of gold by 2016.

Also found in the March 31st press release is a summary of the company’s updated resource, in which it’s reported that,

“Pershing Gold is pleased to announce that Mine Development Associates (“MDA”) of Reno, Nevada has completed an updated gold resource estimate that includes the results from the Company’s 2013 drilling program. The updated resource estimate shows a Measured and Indicated Resource of 552,000 ounces of gold and an Inferred Resource of 165,000 ounces of gold…”

The company has made real progress in increasing its resource, from a total of 155,000 Measured, Indicated & Inferred ounces in June, 2010 to 717,000 ounces today. To be clear, back in 2010 there was only Indicated & Inferred ounces. Importantly, the new resource report is based on a much lower gold price than the $1,650/oz used in last year’s report. Therefore, if gold prices rebound, a significant amount of ounces would fall back into the model.

Pershing Gold Invited to Present at the European Gold Forum

Pershing Chairman/CEO/President Steve Alfers was in Switzerland this week where he made a presentation at the European Gold Forum. Please see the video of this presentation here. Institutional investors are increasingly coming across the Pershing name as Alfers attends high profile conferences like this one. In the presentation, he explained that the Relief Canyon Mine project is shaping up to have the capacity to produce up to 80,000 ounces per year. This would be a solid, low-risk open-pit mine with which to grow, and organically fund, the company once in operation.

Importance of Nevada Growing

As many mid-tier and Major gold companies continue to face severe challenges in foreign jurisdictions like Indonesia, Chile, the Dominican Republic, Russia and Kyrgyzstan, even Mexico with its recent tax increase- the importance of doing business in the U.S., and specifically in Nevada, is increasingly clear. Both Barrick Gold (ABX) and Coeur Mining(CDE) reiterated that Nevada is front and center of their respective growth plans. Barrick in particular has been stung by a series of problems outside the U.S. including Pascua-Lama on the border of Chile and Argentina and the Pueblo Viejo project in the Dominican Republic.

With gold prices near $1,300/oz, down from $1,900/oz in September, 2011, gold companies ill afford to take on resource nationalism alongside mine development and funding risks. Therefore, dozens of companies with far flung operations in remote corners of the world are anxious to revisit Nevada, (home to about 3/4′s of all U.S. production). Barrick and Newmont Gold (NEM) have been shedding high-cost, high-risk operations in places like Africa and Australia, to double down on Nevada. This trend is certain to continue. Gold producing assets in the State will increase in value as M&A activity escalates. Pershing is expecting to be in production in about 15 months, with a chance of initial activities commencing sooner. As such, Pershing remains a prime takeout candidate.

Conclusion:

Pershing’s recently released resource report with a total of 717,000 Measured, Indicated & Inferred ounces, its fully built, paid for and permitted processing facilities, 25,000 acre land package, highly experienced management / technical team and location in one of the best jurisdictions on the planet, position the company for success for years to come.

Last week we speculated that a decline in May would create an opportunity. We concluded: The near term prognosis looks cut and dry. Until proven otherwise the short-term trend is down. If that is confirmed in the coming days then let these markets fall to strong support before buying. The Ukraine-induced alleged safe haven bid for Gold could be starting to come out of the market. Regardless of the cause, the charts for the miners (and Gold) continue to urge caution as lower prices are likely ahead before the next major turn.

GDX and GDXJ (shown below) have had a very weak respite since the end of March. Both markets failed twice at their 50-day moving averages. The second failure occurred a few days ago at now declining 50-day moving averages. The markets reversed before even touching the moving averages. The path of least resistance is definitely lower.

Click here for reference chart.

We strongly believe the next low for GDX and GDXJ will occur at or very close to the December 2013 lows and it will be a major low, similar to the June 2013 and December 2013 lows. Its presumptuous to say but not when you take into account the next chart, which many of you have already seen. This chart helped us spot the last two major lows. It may not tell us where the next low will be but it strongly argues that the next low will likely be the final low in this arduous bottoming process which is already in its 11th month.

So how could this next bottom play out? No one knows for sure but we’ll take a stab at it in this next chart and point out a few things. Note how the 200-day bollinger bands were far apart when GDXJ first peaked in 2011, yet tightened before GDXJ began to breakdown. Currently, the 200-day bands are far apart and GDXJ is yet to touch either side. Perhaps GDXJ will touch the lower band next and then a months later touch the upper band. These bands will need to pinch in before GDXJ attempts a major breakout. Volatility continues to be low as demonstrated by the ATR indicator. It is declining and near a multi-year low. Until that reverses, don’t expect any huge breakout in GDXJ.

With respect to our projection, let’s keep in mind that GDXJ rebounded 59% in two months in summer 2013 and recently surged 53% in less than two months (from late December to mid February). Our past historical work shows that the large cap miners usually recover 50% in four to five months after the bottom. Hence, a move for GDXJ from 30 to 50 (more than 50%) in four to five months would be inline with historical tendencies.

One security I am looking at is JNUG the 3x long GDXJ ETF. This is essentially an option on the already volatile GDXJ. JNUG is super volatile but the upside potential is tremendous. During that less than two month period in which GDXJ surged 53%, JNUG returned 210%! I am looking to buy that in the coming weeks when the downside risk becomes very low. I am also looking to buy several juniors I believe have exceedingly strong upside potential over the coming quarters and years. In any event, be patient over the coming weeks and let this final selloff run its course.

Article written by Guest Contributor to MiningFeeds.com, Jordan Roy-Byrne of The Daily Gold.

A major selloff is brewing in the lofty US stock markets, which have been grinding sideways for a couple months now.  Momentum has faded despite selective positive earnings-season news and Janet Yellen’s jawboning.  Stocks remain very overvalued, way too expensive for prudent investors to buy.  And it’s been far too long since their last necessary and healthy correction to rebalance sentiment, so one is seriously overdue.

Last year’s extraordinary stock-market levitation has run out of steam.  In the 15.7 months leading into early March 2014, the flagship S&P 500 stock index blasted 38.8% higher!  Capital indiscriminately flooded into stocks regardless of fundamentals or valuations because the Federal Reserve was doing its darnedest to convince traders that it was effectively backstopping the stock markets.  This bred extreme complacency.

Top Fed officials including Ben Bernanke and now Janet Yellen kept implying that the Fed was ready to spin up its monetary printing presses to arrest any meaningful stock-market selloff.  So traders greedily bought stocks, ignoring all normal stock-market-topping warning signs.  But in the past couple months, this buying has largely vanished.  While the S&P 500 has stalled, hyper-overvalued momentum stocks are crumbling.

These growing fissures in the stock markets are on the verge of splitting wide open to shake everything.  Since early March the tech-dominated NASDAQ stock index is down 6.7%, with many of 2013’s beloved high-flying stocks falling far more.  Just as these market darlings had a disproportionate positive broad-market sentiment impact on their way up, they are poisoning general psychology on their way down.

And this troubling divergence isn’t happening in a vacuum.  The US stock-market valuations remain at very dangerous topping levels.  As April waned after the great bulk of the elite S&P 500 component companies had reported their first-quarter profits, that index still traded at incredibly high valuations.  On balance corporate earnings barely grew, leaving market price-to-earnings ratios extremely expensive.

On a trailing-twelve-month basis, the average P/Es of the S&P 500 component stocks were running at 22.6x when weighted by their market capitalizations and 25.9x in simple-average terms!  This 23x to 26x compares to the century-and-a-quarter fair value in the US stock markets of 14x.  21x marks expensive levels, when stocks rarely enjoy positive returns in the coming years.  And over 28x is actually bubble territory.

These exceedingly-risky overvaluations exist at a time when the US stock markets have gone far longer than normal without a 10%+ correction to rebalance sentiment.  On average in healthy bulls, these come on the order of once a year or so.  The longer stocks advance without some serious selling to slice away the excessive greed and complacency that rising markets breed, the greater the odds of an imminent major selloff.

This first chart looks at the S&P 500’s extraordinary Fed-driven levitation over the past year and a half, seen through the lens of the mighty SPY SPDR S&P 500 ETF.  Not only is the stock markets’ recent stalling out very apparent, but so is the lack of serious selloffs over this time span.  If this beloved stock bull is going to even have a chance of continuing higher, it absolutely needs to see a large correction soon.

In broad stock-market terms, selloffs are stratified by magnitude.  Anything under 4% on the S&P 500 or SPY doesn’t even have a name, it is just normal volatility.  Over 4% and selloffs are classified as formal pullbacks.  We’ve seen four of these over the past year and a half or so, but all have been minor.  And naturally the efficacy of selloffs for rebalancing sentiment is of course directly proportional to their size.

Big pullbacks approach 10%, at which point they become full-blown corrections.  Thanks to the Fed’s money printing and jawboning, SPY rocketed an astounding 39.2% higher in just 16.5 months without even a hint of a correction-magnitude selloff.  When stocks do nothing but rise, investors quickly forget about their inherent riskiness.  So greed and complacency grow out of control, threatening to choke off the bull.

As the next chart reveals a little later, it has actually been a truly mind-boggling 30 months since the end of the last S&P 500 correction!  It ended way back in early October 2011.  Since then SPY has blasted 71.8% higher at best, with no check on increasingly rampant greedy sentiment.  In a normal healthy bull market, we would’ve seen two or three correction-magnitude selloffs during that time to keep psychology in line.

The problem with excessive greed is it foments major market toppings, bull-slaying events.  Greed sucks in all available buying, burning itself out and leaving a vacuum that selling fills.  Greed pulls in capital from the sidelines, and greed pulls future buying back into the present.  That leaves insufficient buying fuel to keep the bull chugging higher, so it fails.  While there’s no greed gauge, greed’s polar opposite is fear.

And stock-market fear is beautifully approximated by the famous VIX implied-volatility index.  While it technically looks at evolving S&P 500 index-options pricing, it effectively measures sentiment.  Greed and fear are very asymmetric emotions, the former builds gradually while the latter flares rapidly.  So a high VIX shows the widespread fear seen at major stock-market lows, and a low VIX shows the absence of fear.

That’s greed, as these two opposing emotions constantly war back in forth in traders’ hearts.  And greed, revealed by a low VIX, is seen at major stock-market highs.  Today’s VIX is very low, still down in the 13s this week which is topping territory in historical context.  Given this, the rampant overvaluations, and the extraordinarily long time since the last correction, there is zero doubt a correction-magnitude selloff is looming.

But unfortunately speculators and investors have very short memories.  After two-and-a-half years without a 10%+ stock-market selloff, the vast majority have forgotten what they are like.  In SPY terms, a 10% drop from the recent early-April S&P 500 nominal record highs would drag it back down to $170.  That may not sound like much, but those levels were last and first seen in October and August of last year.

So even though the past year-and-a-half’s amazing stock-market levitation catapulted SPY 39.2% higher, a mere 10% selloff would erase nearly half of this rally’s duration and almost 3/8ths of its entire gains!  Think about the wailing and gnashing of teeth in high-flying technology stocks today, and just imagine general psychology if 3/8ths of the recent stock-market run vanished.  It would get quite bearish.

Selling and fear feed on themselves, forming a powerful vicious circle.  Traders sell, so stocks fall, so fear and bearishness grows, so still more traders sell.  And stocks go lower and this cycle keeps renewing itself.  So given today’s epic greed and euphoria, last year’s wildly-anomalous Fed-driven stock levitation, and the super-excessive span since the last full-blown correction, I can’t imagine this selloff stopping at 10%.

The longer a bull market goes without critical sentiment-rebalancing corrections, the bigger they need to be to drag psychology back into line.  A 15% correction, merely mid-range as far as corrections go, would batter SPY back down near $161.  These levels were last seen in late June and first seen in early May.  This would lop off well over half of this powerful upleg’s entire advance, utterly devastating trader sentiment.

But 15% is really pretty mild after such an abnormal span without corrections, so the odds wildly favor a large specimen approaching 20%.  Heck, this cyclical bull’s past two corrections which didn’t occur in euphoric extremely overbought stock markets ran 16.1% and 19.4% in SPY terms.  A totally healthy full-magnitude 20% correction would crush SPY back down near $151.  Look at how low that is in the chart above!

$151 was first seen in early February 2013, so a full correction would almost wipe out the entire bull run of the past year and a half or so!  Nearly 3/4ths of SPY’s entire gains would vanish, and today’s younger or newer traders can’t even imagine the psychological carnage this would spawn.  And if today’s cyclical stock bull can stay alive, 20% is certainly enough.  Greed would be largely eradicated, with fear and the VIX very high.

But because of today’s extraordinary situation, the future viability of this massive bull market is seriously in question.  Between March 2009 and April 2014, this stock-market bull as measured by the dominant SPY S&P 500 ETF soared 177.3% higher over 5.1 years!  This is far beyond the normal averages of a doubling in just under 3 years.  Thanks to the Fed’s manipulations, today’s bull is far older and bigger than normal.

On top of that we have today’s extreme stock-market valuations between 23x to 26x earnings depending on the averaging of the S&P 500 components’ individual trailing P/Es.  These historically expensive valuations approaching bubble territory coupled with a geriatric bull really challenge the notion that a 20% selloff would be enough.  Corrections normally take a few months, not enough time for corporate earnings to materially grow.

So say the overdue correction soon materializes and the S&P 500 is down by 20% a few months from now.  At that point valuations will still be high between 18x and 21x, and remember 21x is expensive historically.  So powerful arguments can be advanced that instead of a mere bull-market correction, we are now experiencing a bull-market topping that is going to lead to a new cyclical bear market in stocks.

Any selloff over 20% in the S&P 500 is formally classified as a bear.  And these rarely stop near 20%.  At our current stage in the great third-of-a-century Long Valuation Wave bull-bear cycles, cyclical bears tend to cut stock prices in half.  That’s right, 50% peak-to-trough declines!  This next chart zooms out a bit to show SPY’s current massive cyclical bull, and the brutal implications of a new bear market for stocks.

A 30% decline is mild as far as stock bears go, too common to get excited about.  And after SPY rocketed 29.7% higher last year alone thanks to the Fed’s money printing and jawboning, a mild bear certainly seems reasonable to rebalance sentiment.  But even that would crush SPY down near $132, taking it to levels last seen in mid-2012 and first seen way back in early 2011.  Literally years of bull would be wiped out!

A 40% peak-to-trough selloff would leave SPY just above $113, and as you can see that was last seen near the bottom of this bull’s last correction in mid-2011 and first seen in early 2010.  And a garden-variety cyclical stock bear which cuts stocks in half would leave SPY devastated near $94, levels last seen in mid-2009.  A normal full-blown stock bear would eliminate nearly this entire bull run in a couple years!

Between March 2009 and April 2014, SPY climbed almost $121 higher.  And a full bear market would erase nearly 4/5ths of those entire gains!  This is why it is so unforgivably foolish to be greedy and euphoric when topping signs abound, to buy stocks high rather than buying stocks low.  The stock markets are forever cyclical, and investors who naively or brazenly buy into a topping just get slaughtered.

If there is a good chance for a new bear, and there is a high chance right now, it makes no sense at all to buy the vast majority of stocks.  It takes many years to recover from 50% losses, and we mortal humans generally only have a few decades of earnings from which to divert surpluses to invest.  So the setback from a bear is devastating.  And their psychological impact is so great bears force many weaker traders out of stocks forever.

For today’s seriously overextended and overvalued US stock markets, the best-case scenario is a full-blown correction approaching 20% emerging soon.  And the worst case is a new cyclical bear market that ultimately leads to catastrophic 50% losses.  So prudent investors need to be exceptionally careful today, ready to pull out.  With this bull running out of steam in recent months despite good news, a topping is likely underway.

Wall Street never calls stock-market toppings, it’s bad for business.  Professional money managers get euphoric and greedy along with everyone else, and most are surprised by bear markets.  So bears are something that always seem exceedingly unlikely when they stealthily begin awakening near major highs when everything seems awesomely bullish.  They only gain recognition and acceptance in retrospect.

And ignored topping signs abound these days.  In the chart above for example, note the normal bull-market trajectory shown by the yellow dots.  Healthy bull markets surge sharply initially out of bear-market lows, but then slow into a horizontal parabola.  The Fed’s extraordinary money printing and jawboning on backstopping stock markets decoupled SPY from that healthy trajectory just over a year ago.

And without any corrections, the artificial nature of that Fed-driven levitation is glaringly apparent.  This bull’s first correction started 13.5 months in, and its second correction began another 9.9 months after that first one ended.  But we haven’t seen a 10%+ correction for 30.0 months now, a crazy span!  In market history, long correction-less spans (still shorter than today’s) are usually only seen leading into bull toppings.

Even if Wall Street has you so brainwashed that you can totally dismiss the possibility of a new cyclical bear looming, it makes no sense to buy stocks again until we get a major VIX spike.  Note that both of the earlier full-blown corrections in this bull catapulted this definitive fear gauge up above 45.  Stocks will not be safe to buy again in any way until we see a selloff big enough to propel a VIX spike above 40!

Thankfully major corrections and bear markets are easy to weather.  The most obvious way to do it is to sell your overvalued stocks and hold cash.  Rather than suffer a devastating 20% to 50% loss, all your capital is preserved so you can buy the stocks you love 20% to 50% cheaper after the selloff.  But an even superior option is gold, because major stock selloffs greatly amplify demand for alternative investments.

While few want to remember it today, we’ve actually suffered two major cyclical bears since the last secular stock bull topped in early 2000.  The first cut the S&P 500 by 49.1% leading into late 2002, while the second cascaded into a stock panic ultimately leading to 56.8% losses by early 2009.  During those brutal cyclical-stock-bear spans, gold rallied 12.6% and 24.8% respectively!  Gold thrives in stock bears.

And when gold is climbing on balance due to growing investor demand, gold stocks tend to soar.  This is especially true if their general-stock-bear-market run begins from deeply out of favor and radically-undervalued levels like today’s.  If a new cyclical stock bear indeed ravages general stocks in the next couple of years, the gold stocks should easily quadruple over that span.  Buy cash, gold, and gold stocks.

Imagine quadrupling your investment holdings while general stocks are cut in half.  That would give you 8x the purchasing power you have today to buy elite general stocks late in the next cyclical bear paying dividend yields twice as high as today’s!  Such incredible opportunities to multiply wealth so greatly in such a short period of time are quite rare, and can set up prudent investors for the rest of their lives.

The bottom line is the US stock markets are overdue for a major selloff.  Absolute best case, this will be a large correction approaching 20%.  These are necessary within healthy ongoing bulls to keep sentiment balanced, and thanks to the Fed it has been far too long since the last one.  But given how old and large today’s cyclical bull is, and how extremely overvalued stocks are, a new cyclical bear is much more likely.

It doesn’t take much additional selling late in a major correction to push cumulative losses over 20% into formal bear territory.  And cyclical stock bears tend to cut stock markets in half over a couple years.  That would wipe out the great majority of the last cyclical bull, and gut the vast majority of traders trapped in it unaware.  Thankfully prudent investors can sell expensive stocks, and hold on to the cash or buy gold.

Adam Hamilton, CPA of Zeal LLZ, Guest Contributor to MiningFeeds.com

Briefly: In our opinion speculative short positions (half) are justified from the risk/reward perspective for gold, silver, and mining stocks. The most important thing that we saw in the markets yesterday was the major decline in the USD Index and the lack of proper response from gold, silver and mining stocks. Such a bullish factor should have made precious metals move much higher – but they didn’t… Or did they? (charts courtesy of http://stockcharts.com).

Click here for reference chart.

Gold didn’t even rally on Tuesday. It declined by $1.80, which is odd and bearish given that the USD Index declined heavily. The decline itself wasn’t significant, but we can point out that gold didn’t move above the 50-day moving average. Basically, the Tuesday session was bearish on its own. Since the currency markets were so important on Tuesday, let’s take a look at both: the USD and Euro Indices.

Click here for reference chart.

Generally, we saw a breakout above the declining, long-term resistance line in the Euro Index. At this time, however, the breakout is unconfirmed, and without meaningful implications. What’s more important, though, is how gold and silver reacted. They didn’t. Gold and silver moved just a little higher and that’s highly visible underperformance in case of gold and silver. They are not even close to moving to their 2014 highs.

Click here for reference chart.

Meanwhile, the USD Index moved significantly lower. In this case “significantly” means that it moved to the 2013 low, and that’s a major support level. Gold and silver are not even close to their previous highs, and this means that they are underperforming the USD Index, and as soon as the latter rallies, the former will decline. Are there any sings suggesting that metals are about to move lower? Yes! The cyclical turning point for the USD Index suggests a move higher as the current move has definitely been down. This means that when things change, the precious metals market will get a bearish push and that it will then decline significantly. The outlook for the precious metals market, therefore, remains bearish.

Summing up, the way precious metals market reacted to the U.S. dollar’s move lower (to the 2013 lows) is a bearish sign, and it confirms the bearish outlook that we outlined in previous alerts.

To summarize:

Trading capital (our opinion):

Short positions (half) in: gold, silver, and mining stocks with the following stop-loss orders:

– Gold: $1,326

– Silver: $20.30

– GDX ETF: $25.20

Long-term capital (our opinion): No positions Insurance capital (our opinion): Full position

Thank you.

Przemyslaw Radomski, CFA of Sunshine Profits, Guest Contributor to MiningFeeds.com

Disclaimer All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

In studying the rapidly growing graphite market and the junior companies that hope to be its leaders, it quickly becomes apparent which attributes are of paramount importance. It largely comes down to security of supply, jurisdiction, economies of scale, in-situ grade, suitability for high-technology applications, time to first production, position on the cost curve and access to project financing.

Of the dozens of publicly-listed graphite juniors, less than 10 have projects that score high on a significant number of these metrics. [Note: A lot of the companies don’t make my list of contenders simply because they are 5 years + from production]. A U.S. graphite junior that rises to the top of the pack is Graphite One Resources (GPHOF) & (GPH.v). Graphite One has an Inferred resource of 12.76 million metric tonnes, “Mt” of in-situ flake graphite (includes 8.6 million Mt @ 12.8% Graphitic Carbon Grade, “Cg” at-near-surface or 1.1 million Mt) on just a quarter of its deposit’s strike length.

Not only does Graphite One stack up well on some key fundamentals, it trades at a cheap valuation of just US$ 19 million, (C$0.175/share on 5/6/14). This for a company that I believe is sitting on a highly economic deposit with a Net Present Value, “NPV” possibly reaching into the hundred(s) of million(s) of dollars. [Note: This is my opinion only] Graphite One is committed to releasing a Preliminary Economic Assessment, “PEA” by early next year. Reviewing peer PEAs from companies like Northern Graphite (NGPHF), Flinders Resources (FLNXF), Focus Graphite (FCSMF), Mason Graphite (MGPHF) and Energizer Resources (ENZR) as a rough guide, Graphite One could be looking at a project with industry-low operating costs due to its high-grade, at surface deposit and the economies of scale from a large operation.

Graphite One’s Graphite Creek deposit could become a very large producer, with 285 million Inferred Mt at a Cg of 4.5%, (including 37.7 million Mt at 9.2% Cg and 8.6 million Mt at 12.8% Cg). That combination of a high-grade, near-surface, long-term production profile, in the safe jurisdiction of Alaska, USA, places the company’s project as one of the top in 5 in the world. First production is expected in 3-4 years, coinciding with the opening of Tesla Motors’ (TSLA) giga-battery factory in the southwestern U.S. Please see Graphite One’s Corporate Presentation.

Security of Supply

Deemed a, “supply critical mineral” in the U.S. and a, “strategic mineral” in Europe, graphite is increasingly valued for both existing and future high-technology applications. Yet future supply of this mineral is far from certain and the U.S. imports 100% of its graphite needs. Further, China currently produces 70% + of the world’s flake graphite, but is consuming more and more of it domestically.

Resource nationalism is growing threat to the supply of globally traded commodities. Gold, copper and uranium are the commodities perhaps best identified with supply challenges, but all high-value, materials are at heightened risk. At roughly $1,500/Mt, flake graphite is a valuable and sought after commodity. By comparison, bulk commodities such as potash, iron ore and coal trade at prices ranging from US$50-US$350/Mt.

Today, a large majority of global graphite comes from China. However, this dynamic is rapidly changing. China’s mines are mostly small, inefficient and environmentally unfriendly. China is closing a significant number of graphite mines and keeping an increasing proportion of its production for domestic uses. Consider the following quote from this Industrial Minerals, April 17th article.

“Industrial Minerals’ Simon Moores reported that China’s Heilongjiang province, the world’s top flake graphite-producing region, has officially announced plans to start consolidating graphite mines in the next 18 months.”

Security of supply for North American end users will increasingly revolve around sourcing a lot closer to home. In fact, Tesla announced plans to source as much raw materials as possible from North America going forward. Graphite One is gearing up to be the ONLY U.S. junior of scale positioned to meet North America’s rapidly growing demand.

Not to mention, anodes in Aluminum Smelting. Anodes are large carbon blocks which act as electrical conductors, allowing the smelting process to take place. The anodes weigh approximately one tonne each. What this means? Chinalco is looking to use flake graphite as a substitute for petroleum coke and anthracite in its aluminum production. This is a really important development because this end-use was largely not factored into graphite industry growth models. Further, this new segment (anodes in aluminum smelting) is a 14 million Mt/year market. That’s 10 times the size of the existing flake graphite market!!

Jurisdiction

Graphite One’s deposit is located in the State of Alaska, ideally situated for sales into the incredibly important southwestern U.S. How important is the southwest turning out to be? Given last month’s giga-battery factory news, the U.S. could become one of the largest end markets for flake graphite on the planet. Importantly, jurisdiction is more than just a geographic location.

Rule of law, resource nationalism, indigenous peoples, environmental concerns, access to water, power and transport infrastructure– all of these and more are increasingly essential factors to consider. Suffice it to say that the State of Alaska, USA, ranks high on these measures compared to countries like China, India, Mozambique and Sri Lanka, where some peer junior graphite companies hope to do business. According to this website, North Korea! is currently a top 5 producing country. Recently, the Fraser Institute ranked Alaska #1 on a list of jurisdictions as ranked by, “Mineral Potential Index”.

Economies of Scale

As mentioned, of the major projects slated to come online by the end of the decade, some are in sketchy countries, have deposits located far from key end markets or will be logistically challenged in any number of ways. Graphite One’s proposed Alaskan project is not without challenges and risks. However, economies of scale play a very decisive role in any project’s economic viability. Said another way, large scale can make up for potential shortfalls in other areas of a project.

In my opinion, (not necessarily that of management) Graphite Creek could produce 100,000 tonnes of graphite annually. Why do I think this? As mentioned, the company has already identified 37.7 million near-surface Mt of 9.2% Cg and 8.6 million Mt of 12.8% Cg material. To be clear, this deposit is currently defined as Inferred resource, not the better defined Measured and Indicated resource categories (an upgraded NI 43-101 report is expected within 9-12 months).

As it stands, 37.7 million Mt @ 9.2% Cg is already approximately 3.5 million Mt of graphite– enough for 35 years of production at 100,000 Mt/year. Further, the company’s resource is found on just 27% of the deposit’s strike length. Therefore, it’s possible that over the next year or two that the size of the deposit could double or triple as it also migrates to a NI 43-101 compliant Measured & Indicated resource. Regardless, the deposit is almost certainly much larger than reported.

In-Situ Grade

Graphite One’s in-situ grade is one of the most compelling parts of the story. The company’s deposit is the largest in North America, but large scale alone is meaningless without a viable in-situ grade. The majority of existing mines in China are lower-grade than what Graphite One will be mining. In fact, the first 8.6 million AT-TO-NEAR-SURFACE Mt have a grade of 12.8% Cg, (using a 10% Cg cutoff, which is higher grade than most other deposits). While most in-situ grades can be upgraded through processing to 90%+, the mining costs can be daunting. For example, it takes the movement of six times the volume of material to mine a 2% Cg deposit as it would a 12% deposit.

Suitability For High Technology Applications

Last month, Graphite One announced exciting news. As reported by the company,

“Graphite One Resources Inc. announced promising results from a second series of benefaction tests conducted at SGS Canada Inc. on samples taken from its wholly owned Graphite Creek Deposit. Using a leaching process, the trials yielded results from a rough concentrate exceeding 99.9 percent carbon.”

It’s vitally important to recognize that most, but NOT ALL graphite deposits have the exacting specifications that high technology applications, (most notably lithium-ion batteries) require. In speaking with industry experts and a number of company management teams, that realization will come as an unpleasant surprise to shareholders of a few companies. With last week’s news, Graphite One has proven beyond doubt that it’s deposit will stand up to the very highest specs.

Time to First Production

In the best case scenario Graphite One will be in production in about 3 years time, by mid-2017. Admittedly, that timeline could be stretched by 6-12 months depending on permitting and other factors. 3-4 years may seem like a long time, but it’s not. In fact, Graphite One’s timing could prove to be impeccable as China’s exports continue to shrink and demand for graphite in batteries takes off due to Tesla’s giga-battery factory.

The vast majority of emerging producers are still early-stage explorers 6-12 years from production. However, most of these projects will never get off the ground. There’s only a handful of notable projects that could possibly be in production within 5 years. By notable, I mean projects of at least 15,000-20,000 Mt/year.

Position on Cost Curve

Before a PEA is released, (expected within 9 months), it’s difficult to forecast exactly where Graphite One might sit on the industry cost curve. However, in my opinion, the deposit appears to be supportive of a low-cost operation. Several of the most important determinants of any mining operation are; strip ratio, in-situ grade and economies of scale. I’ve already touched upon the potential scale of the operation and the in-situ grade. In terms of the strip ratio, there’s no question that it will be extremely low.

The strip ratio is the ratio of barren material to ore, a ratio of 1:1 means 1 tonne of waste needs to be removed to extract 1 tonne of ore. Depending largely on the depth of a deposit, strip ratios can be as high as 10 or 15 to 1, as can be seen in some of Queensland, Australia’s mature coking coal mines. Since the Graphite Creek deposit outcrops, and its highest grade material happens to be nearest to the surface, mining will be at a strip ratio well below 1:1.

Access to Project Financing

A big mistake is made by investors who take project financing for granted. Since raising large sums might be a few years away, it’s tempting to ignore that eventuality. However, access to project financing for natural resource companies has been extremely challenging to obtain. This situation cuts across geography and commodity. Emerging iron ore, potash, coal, gold, copper, uranium….almost any large-scale project is capital starved today. Many projects have been canceled, many more have been indefinitely delayed. In some resource sectors, the upfront capital required before first production runs into the billions.

For the most part, large graphite projects can be put into production for less than $200 million. Several of the proposed projects by the short list of companies mentioned above show capital requirements in the $100-$200 million range. In the key area of project finance, Graphite One has an incredible opportunity to stand out. The State of Alaska (AIDEA) has a loan program for emerging natural resource producers that the company could apply for next year. The amount of the loan could be for well over half of the project’s cost. Any questions? Ask Ucore Rare Metals what they think about the support of AIDEA and the State of Alaska! Ucore has been conditionally approved for a $145 million loan on a $221 million project.

Valuation & Peer Comparisons

Companies on my list that could be in production of meaningful amounts of graphite within five years are, Flinders Resources, Focus Graphite, Energizer Resources, Mason Graphite, Northern Graphite, Zenyatta Resources (ZENYF) and Syrah Resources (SYAAF). Big North Graphite (BNCIF) is a smaller company (of which I am a shareholder) with an exciting flake graphite project in Mexico that could reach initial production next year. I leave Big North out of the peer group only because its initial expected flake production is under 15,000 Mt/year.

Therefore, of the seven companies with notable projects, the average market cap is US$ 128 million. However, that average is skewed higher by Syrah Resources’ market cap of US$ 525 million. Even without Syrah, the average market cap of the peer group stands at US$ 62 million, which is 3x Graphite One’s market cap of US$ 19 million. Said another way, Graphite One is trading at a 70% discount. I believe this massive valuation gap is unwarranted and will close over the next 12 months. Don’t get me wrong, since I love the fundamentals for graphite, I like 3 of the companies in the peer group, but I think that Graphite One’s stock has the most upside.

Graphite One’s Prospective Metrics:

295 million Mt Inferred Resource @ 4.5% Cg including,

37.7 million Mt @ 9.2% Cg including, (At-Near-Surface)

8.6 million Mt @ 12.8% (At-Near-Surface)

Strip Ratio: forecast to be among the best in the industry, well below 1:1.

With only the 3.5 million Inferred, in-situ Mt @ 9.2% Cg, a prospective project of 100,000 Mt/year for 35 years is possible. Again, just my opinion, subject to pending PEA.

Operating cost: Likely to be quite competitive, (subject to pending PEA), due to very low strip ratio, solid in-situ grade and strong economies of scale.

NPV: Graphite One’s project, (in my opinion only), could have a NPV in the hundred(s) of million(s) of dollars. If true, the company’s market cap is a small fraction of its prospective NPV. Support of a NPV possibly in the hundred(s) of million(s) comes from, large operating scale, low strip ratio and high grade. We know that each of these component factors is favorable, which just don’t know yet how they all come together. The PEA will reveal the preliminary economics in due course.

Peer Project PEA Metrics:

Focus Graphite: Upfront Capital: $126 million, NPV US$ 316 million, proposed annual production 44,200 Mt, production within 2 years. 50% off-take agreement signed with Chinese partner.

Mason Graphite: Upfront Capital: $90 million, NPV US$ 364 million, proposed annual production 50,000 Mt, production within 2 years.

Energizer Resources: Upfront Capital: $162 million, NPV US$ 421 million, proposed annual production 84,000 Mt, production several years away

Northern Graphite: Upfront Capital: $102 million, NPV C$ 231 million, proposed annual production 33,200 Mt, production within 2 years.

Flinders Resources: Remaining Upfront Capital: minimal, NPV US$ 27 million, proposed annual production 16,000 Mt. The company is fully-funded through initial production in July, 2014. Management states it could expand to 30,000 Mt/year if market conditions warrant. Interestingly, Flinders’ valuation is at a premium to its projected NPV.

Conclusion:

If, like me, one is bullish on the fundamentals of graphite, Graphite One’s project in Alaska is a top contender to be a leader later this decade. Make no mistake, there are a small handful of peer junior graphite companies that will also be successful, but with a market cap of just US$ 19 million, Graphite One has the most upside. Today, the company is trading at roughly a 70% discount to the above mentioned companies.

I believe that the stronger graphite plays will increase in value and that Graphite One will close the valuation gap, leading to a large increase in the share price in the next 12 months. To reiterate, Graphite One is not without risk. The biggest risk is that the company is still 3-4 years from production while 2-4 peers will likely be in production within 2 years. However, if one is bullish on graphite demand, this risk is somewhat muted.

In the next 12 months Graphite One will release a PEA and upgraded NI 43-101 report in which a majority of the current Inferred resource should migrate to the Measured & Indicated categories. Later next year, discussions regarding off-take agreements should begin, samples of graphite will be sent to potential end users and the company will be talking to Alaskan officials about State sponsored loans. The next 12 months will be an exciting time for graphite investors and especially for Graphite One.

I listen to CNBC sometimes. Usually when I’m running around or working out or something. Not for the opinions of the traders, which I find more entertaining than useful or informative. Mostly for the news: earnings reports, profiles on new products and companies, etc. They do an okay job of covering major financial news stories of the day, even if they tend to be biased towards whatever is hot at the time and over-hyped (which also makes CNBC an interesting sentiment gauge).

One of my favorite things from an entertainment perspective is when one of the hosts turns to one of the traders and says: “What trades did you do today”? And usually whoever the trader is gets all fired up and gives some glossy rationale for why the trade they just put on is awesome and should make a bunch of money. I find this behavior amusing in multiple ways but what would be great is if just one day the trader would say: “You know I didn’t do anything today, there wasn’t anything to do.”

These people act like the market gives you big opportunities on a daily basis. In reality the daily opportunities are all about squeezing profits out of little minuscule moves in the markets often using excessive leverage. And when the market gets volatile and choppy this excessive leverage often works against you and causes you to get stopped out trade after trade. This causes your account to get “chopped up” as the small losses start building up and also effects your psyche in a negative manner.

Markets give opportunities after sell-offs or bear markets, and after periods of dis-interest generated by choppy, sideways action. The problem is few people have the patience, emotional fortitude, and open-mindedness to wait for these opportunities and take advantage of them. If you think about when the two big opportunities were in the last 5 years in the stock market, they were in early 2009 after a horrible bear market, and in late 2012/early 2013 after a sideways bear market. During both periods I remember distinctly how oppressive the bearish sentiment was. In 2009 it was the financial crisis and in late 2012 the fiscal cliff had people scared of the markets.

Coming into 2014 the U.S. stock market had a historically high cyclically-adjusted P/E ratio, and was coming off of a multi-year bull run where investor enthusiasm recently hit multi-year highs. That didn’t sound like a big opportunity to me when the year started. But if you took a contrarian look at commodities, bonds, and some foreign markets coming into the year that was where potential opportunities lay.

I’d like to emphasize the word “potential” because one of the key things I’ve learned from the gold market in particular over the last couple years is the idea of letting bear markets run their course. It’s very tempting to call a bottom in a bear market and try and get positioned for a bull run. But bear markets have to run their natural course, and will have false rallies on the way down that will frustrate those that aren’t willing to accept that they occur.

The opportunity in the gold stocks is that they are trading at low P/E ratios, low P/B ratios, and there is investor dis-interest and apathy after suffering such big losses in a bear market. The problem with gold though is it’s fighting against overhead resistance, as sellers that are locking in losses are about at equilibrium with buyers looking to “buy the dip”. This is what creates the conditions for the Stage 1 base that we are in now as shown in the chart below.

Justin Smyth of Next Big Trade, Guest Contributor to MiningFeeds.com. Connect with him on Twitter: @nextbigtrade

1. Western bank economists continue to make very bold and aggressive statements about lower gold prices in 2014, based on stronger growth in America.

2. Their thesis is that stronger growth will trigger more ETF selling in gold ETFs. These economists seem to assume that current Western investors are as weak-handed as those who liquidated positions in 2013.

3. In contrast, I believe the bulk of Western investors who held gold through the 2013 decline can rightfully be described as “stoic”.

4. Please click here now. That’s a snapshot of the tonnage held in the SPDR gold fund. There’s been very little change in the tonnage. It looks solid, staying in the 780 – 820 tons zone in 2014. It sits at 792 now. I don’t see that number as a cause for any concern.

5. It’s possible that gold prices could move modestly lower during gold’s weak season, as it often does, but the market is supported by very powerful hands in both China and India.

6. In 2013, the gold market moved on the selling action of investors focused on the “fear trade” (Western investors who originally bought gold because of fears that QE would crush the dollar).

7. In 2014, the gold price discovery mechanism is based more on the “love trade” (Eastern weddings and cultural/religious events). That’s a trend that I believe is only in its infancy. The East is poised to import immense gold tonnage, in the years to come.

8. Please click here now. That’s the daily gold chart. Note the blue channel lines that probably define gold’s current trend. That modest rate of ascent is likely capable of producing 50% returns for gold stock investors, annually.

9. I prefer to see gold rise modestly, because it doesn’t attract leveraged speculators. Governments also tend to leave gold alone, when it draws little attention from the media.

10. In the very short term, gold could pull back a little bit, but that’s not a concern. Please click here now. That’s the hourly bars chart. Gold staged a key breakout over the $1308 area yesterday, and a pullback to the $1285 -$1295 price zone would be perfectly normal. Watch the $1315 area closely. A move above there should send gold to $1332 very quickly.

11. In 2014, if gold continues to rise at the current general rate of ascent, gold mining companies that have low production costs can make solid profits.

12. Please click here now. That’s the daily silver chart. Silver staged a tentative breakout from a nice bullish wedge pattern early this morning. Note the bullish action of my Stokeillator oscillator, at the bottom of the chart.

13. I’ve noticed that Western precious metals investors seem less afraid of lower prices now, and rightfully so. The market is fundamentally solid. Gold and silver have always been the strongest assets in the world, and the growing love trade is making them even stronger!

14. I’ve asked the gold community to be on the alert for gold to rise, on the release of a jobs report that shows over 250,000 new jobs being created. Western money managers can move enormous amounts of liquidity, and when they are concerned about inflation, they move it into gold and gold stocks. A large spike in jobs creation can be viewed as inflationary. That’s bearish for the stock market, and bullish for gold.

15. On Friday, economists were stunned when the Employment Situation report showed 288,000 jobs were created. Gold rose strongly on that news. While M2 velocity is still falling, I think transition from deflation to inflation is clearly in play now.

16. It’s only a matter of time (and probably not much time) before M2 velocity begins to move higher. That’s good news for gold investors around the world.

17. Many analysts have noted the large flow of gold from London to Swiss refineries. Western gold bars are refined into smaller ones, and shipped to China.

18. Analysts have assumed this is bullish for gold. The problem with their thesis is that Chindian jewellers are relying on Swiss refineries to meet their demand for gold. Supplies can be cut off when banks don’t make enough profits from the bid-ask spread, or when government policy changes, as it did in India.

19. A new Dubai refinery may open the door to a more consistent supply flow of gold from Western mines to Eastern jewellers. Dubai is known as “Offshore India”. 40% of the world’s physical gold flows through Dubai, but it is mainly gold that is refined in Switzerland.

20. Please click here now. Gulf News suggests that the new Dubai refinery will be a game changer. With a capacity of 1400 tons, Dubai will soon be in a position to bring Indian jewellers enormous amounts of gold in a more direct manner, bypassing Western middlemen.

21. Saudi Arabia is the world’s fourth largest gold market, and the Chamber of Commerce there is working with jewellers to make the market vastly bigger and more efficient.

22. On that note, please click here now. All gold stock investors should read this news article carefully. Saudi gold dealers are limited in the tonnage they can import, because of government red tape. The government has acknowledged this critical issue, and is working with the gold industry to fix the problem.

23. I expect Saudi gold imports to grow at close to 30% a year, once that’s done. Mine supply can’t grow at anywhere near the rates of demand growth that are already occurring in the world’s most important gold markets. Governments in those markets are beginning to boldly embrace the gold industry. This will produce even greater demand for gold from Western mines.

24. Western gold stock investors have nothing to fear from the bearish prognostications of bank economists. Please click here now. That’s the GDX daily chart. It feels solid, and my Stokeillator suggests that technically, it is solid. The gold market bears keep talking about “one more trip down”. In contrast, I don’t think fear is even relevant to the new gold era. It’s going to be an era of comfort and stability, for Western gold stock investors!

Stewart Thomson of Graceland Updates, Guest Contributor to MiningFeeds.com

New Gold’s 2014 midpoint guidance has it producing 400k ounces of gold at all-in sustaining costs of $825 per ounce. This production profile, which is the product of a well-diversified portfolio of mines, places NGD among the mid-tier elite. But perhaps most impressive about this company is its spectacular pipeline of growth projects.

Growth is something that New Gold has long been quite proficient at, especially since 2008 when a three-way merger formed the company we see today. Peak Gold, Metallica Resources, and New Gold were each junior-level companies that brought fantastic projects to the table. And as a result of subsequent acquisitions and organic growth, NGD has seen gold production soar by nearly 50% over the last 6 years.

New Gold now operates four mines located in Australia, the United States, Canada, and Mexico. These countries have long been top-rated jurisdictions for geopolitical safety. And with their attractive geology, they’ve been party to enormous mining investment over the years. In 2013 they ranked as the world’s #2, #3, #7, and #8 gold producers respectively, and combined for about 25% of global output.

New Gold’s Mexican and Australian mines are located in historic districts that have seen mining for centuries. They currently rank as its smallest operations measured by production volume and resources. But with strong histories of discovery and reserve renewal, they should be solid producers for years to come.

New Gold’s newest operation is its New Afton mine located in British Columbia, Canada. New Afton achieved commercial production in mid-2012, and it has grown to become NGD’s cash cow. With a substantial revenue credit from a strong copper coproduct, New Afton’s gold is produced at operating costs well in the negative. And since it is still in the very early stages of its life, it will be spinning out cash for a long time to come.

New Gold’s largest mine by volume is its Mesquite mine located in California. NGD procured Mesquite via its 2009 acquisition of Western Goldfields. And as part of this deal not only did it gain a large gold deposit that now contains over 5m ounces, NGD gained the services of industry titan Randall Oliphant.

Randall Oliphant, who currently serves as New Gold’s Executive Chairman, has an impressive resume that includes a stint where he served as the CEO of Barrick Gold. Oliphant has served on the boards of numerous mining companies. And he is currently the Chairman of the World Gold Council. This guy knows the gold-mining industry inside and out. And under his guidance and the day-to-day leadership of CEO and industry veteran Robert Gallagher (of Placer Dome and Newmont Mining cloth), New Gold is targeting growth that will transform it into one of gold’s elite senior producers.

This growth will come from a project pipeline that truly is something to behold. New Gold’s Rainy River, Blackwater, and El Morro projects hold a combined 15m ounces of proven and probable reserves. And they are collectively capable of producing a staggering 900k ounces of gold per year.

The Rainy River project, located in Ontario, Canada, is the most advanced of the group. New Gold got its hands on this project via its October 2013 acquisition of aptly named Rainy River Resources. And what a prudent acquisition it was for Oliphant and team.

Many of the larger gold companies had long had their eyes on this project, New Gold wasn’t the only one that recognized Rainy River’s incredible potential. This project’s prospects didn’t pass investors by either, with Rainy River valued at over C$1b just a few years ago. NGD took advantage of 2013’s wretched market conditions though, and snatched it for a price tag of only C$310m.

Per the latest feasibility study, this mine will be developed as a combination open-pit/underground operation. The plan is to produce 325k ounces per year over the first 9 years of a 14-year mine life. And with all-in sustaining costs projected at only $736/ounce, plenty of margin is to be had even at today’s gold prices.

A ground-up mine build of this size won’t be cheap though, with pre-development capital estimated at approximately $840m. Fortunately New Gold’s strong balance sheet, including $588m in working capital as of its latest filing, gives it a good start. And I suspect it won’t have a problem financing the balance given Rainy River’s excellent economics.

New Gold has already gotten the ball rolling with $105m tagged for capex this year. Over half will go towards property, plant, and equipment, with most of the rest going towards detailed engineering, environmental monitoring, and permitting. NGD hopes to procure all the necessary permits by the first half of 2015. And assuming it is able to procure financing in a timely manner, it is targeting commissioning for late 2016.

Once up and running, New Gold plans on using Rainy River’s cash flow to help fund the build of its large Blackwater mine in British Columbia. NGD gained this project via its 2011 acquisition of Richfield Ventures (for C$510m). And with nearly 10m ounces of resources, Blackwater ranks as one of the world’s largest undeveloped gold deposits.

This isn’t just any 10m-ounce deposit though, it’s one that’s been proven up via a full feasibility study that was completed just last year. Based on a proven-and-probable reserve base of 8.2m ounces, Blackwater is drawn up as a massive open-pit operation capable of producing an average of 485k ounces per year over the first 9 years of a 17-year mine life. It would be one of Canada’s largest gold mines!

On the capex front Blackwater will not be cheap to build. Per the feasibility study, pre-production capital will be in the neighborhood of $1.8b. This is certainly not excessive for a mine this size, but you can understand why New Gold must stagger Blackwater’s development behind Rainy River’s.

With Rainy River and an expansion at New Afton currently seeing the majority of new-development capex, Blackwater won’t see a ton of work for now. But New Gold has gotten the ball rolling on permitting, with a target of it being development-ready by the time Rainy River is firing on all cylinders.

Raising capital for Blackwater’s mine build will naturally be a major undertaking. But as long as the price of gold cooperates, it shouldn’t be too difficult. New Gold will have substantial free cash flow from operations by then. And the economics outlined in Blackwater’s feasibility study ought to make banks and investors quite comfortable dolling out cash via debt and/or equity financings.

It is projected that Blackwater’s all-in sustaining costs over the first 9 years will average only $685/ounce, easily in the lower quartile of industry average. And at $1300 gold it is projected that the entirety of the capex will be paid back in 6.2 years. This mine would make New Gold one of the elite 1m+ ounce-per-year gold producers.

Rounding out New Gold’s pipeline is the spectacular El Morro project located in Chile. New Gold is actually a 30% carried-interest joint-venture partner, with Goldcorp running as majority owner and operator. El Morro holds a world-class gold/copper deposit that’s been proven up and is ready for development. To give you an idea of its size, New Gold’s portion of production alone is 90k ounces of gold and 85m pounds of copper per year over a 17-year mine life.

El Morro’s economics are also smashing, with gold cash costs being well in the negative after the copper credit. Even with a nearly $4b price tag, building this mine is a no-brainer (Goldcorp will fund 100% of capital). Sadly Goldcorp has run into geopolitical issues that have put a halt to construction. It is confident it can get things resolved, but there’s no timeline as to when this will happen. Fortunately New Gold’s interest is structured to where it has little financial risk with this project.

In all New Gold’s development pipeline is second to none amongst its peers. Rainy River and Blackwater in particular are the product of savvy acquisitions by a management team that is bullish on gold and has big plans for the future. And as long as gold stays strong, investors ought to be richly rewarded as New Gold rolls out its growth plans.

New Gold’s stock is one that’s long responded well to its underlying metal. And it’s even responded well amidst gold’s recent rough patch. It has of course fallen on balance along with the rest of the sector. But when gold has shown signs of life, NGD has consistently exhibited good positive leverage.

As you can see in this chart, NGD (in blue) has a very similar-looking pattern to that of gold (in red). And this is to be expected for a company that lives and dies by the yellow metal. The higher gold goes, the higher New Gold’s profits and thus the higher its stock price. And inversely as gold falls, so do New Gold’s profits and hence its stock price.

Gold has had four meaningful uplegs subsequent to its 2011 all-time high. The first two occurred in that healthy consolidation period in the year or so following its apex. In both uplegs gold gained 15%. And in both NGD responded well with good positive leverage of 1.9x and 2.5x. This leverage to gold is a nice reward for owning a much-riskier gold-mining equity.

The most recent two uplegs occurred coming out of gold’s brutal Q2 2013 correction. Still loathed by nearly all and the ultimate contrarian play, gold has mustered two surges over the last year in its quest for normalcy and in finding a base to catapult higher. While gold gained 18% and 16%, NGD responded well with respective gains of 37% and 36%.

Again NGD exhibited solid positive leverage in excess of 2.0x in these latest two uplegs. But I expect even better leverage going forward once investors really start getting interested in gold stocks again. New Gold has the rare combination of excellent management, solid operations, a strong balance sheet, and a spectacular development pipeline. There aren’t many gold stocks out there better than this one!

To add to its allure New Gold is bucking the industry trend by actually lowering its year-over-year operating costs. This is an impressive feat, especially considering it is already one of the lowest-cost producers out there. In Q1 NGD’s cash/all-in sustaining costs were exceptional, coming in well below guidance at $254/$674 per ounce. And this allowed it to see a 39% increase in net cash generated from operations over a year ago.

New Gold is a gold stock we really like at Zeal. We profiled it in depth in our latest research report focusing on our favorite mid-tier gold stocks. And we’ve recently recommended this stock in both our weekly and monthly newsletters.

Believe it or not, New Gold is one of only a handful of quality mid-tier gold stocks available to investors. And after extensive research we corralled this group into a report that fundamentally profiles these elites, explaining why we believe they are positioned to thrive as gold pushes higher. To see the profiles of New Gold and 11 other excellent mid-tiers, buy your report today!

Another thing that’s rare is a quality source of contrarian-focused market analysis. Fortunately Zeal is still going strong, and our acclaimed newsletters provide just that. We’re no doubt in fascinating times. And we anticipate an imminent major inflection point that will either make or break investors. Subscribe to one of our newsletters to see how we’re navigating today’s and tomorrow’s markets!

The bottom line is New Gold has quickly grown to become one of the world’s leading mid-tier gold miners. Its producing assets are located in some of the world’s top mining jurisdictions. And they collectively deliver their gold at some of the lowest operating costs in the industry.

But perhaps most intriguing about New Gold is its unrivaled growth pipeline. This pipeline contains interests in three world-class gold deposits. And if NGD can develop them into producing mines, it’ll more than triple the output it delivers today. NGD will continue to be an investor favorite given its strong tendency to positively leverage its underlying metal.

Scott Wright of Zeal LLZ, Guest Contributor to MiningFeeds.com

Last week we noted that the gold and silver shares had formed a short-term rebound in response to an oversold condition. Yet we felt that the downtrend that originated from the hard reversal in March was still in effect. As we go to publish, the rebound appears to be petering out. Be aware that there is more potential downside in May. The good news is a decline in May will likely create a great buying opportunity at the end of the month and in June.

Let me start with the silver complex as its providing the most clarity. We wrote about the coming opportunity in Silver at the end of March. We posited that a break to new lows would likely mark the end of the bear market and signal an excellent buying opportunity. We derived that view from a few charts including the bear market analogs chart which is posted below. The chart (which excludes the 1980-1982 bear) makes a strong case that Silver should bottom sometime in the next four to eight weeks.

Click here for reference chart.

Though Silver has broken below its December 2013 low and is inches from a new bear market low, the silver stocks remain (at the moment) comfortably above their bear market lows. The chart below plots both SIL (seniors), SIL against Silver, SILJ (juniors) and SILJ against Silver. SIL would have to decline 14% to test its December low while SILJ would have to decline 19% to test its December low. The relative strength of the silver stocks amid a breakdown in Silver is a signal that a major trend change is developing.

Unlike the silver stocks, the gold stocks haven’t had a chance to prove their relative mettle as Gold is a good $100 above its bear market lows. I reiterate that the gold indices likely bottomed in December. (I say indices because plenty of individual companies have already bottomed). GDX would have to decline 15% to test its December low while GDXJ would have to decline 19% and GLDX would need to shed 22% to test its low. There is a bit of room for these indices to decline but the closer they get to the December lows, the better buys they become.

The near term prognosis looks cut and dry. Until proven otherwise the short-term trend is down. If that is confirmed in the coming days then let these markets fall to strong support before buying. Also, silver and the silver stocks peaked first in the first half of 2011. Keep an eye on the silver complex as it could bottom ahead of Gold. In any case, be patient and let this potential selloff run its course which it could by early June. We are preparing to take advantage of further weakness in the coming weeks.

Article written by Guest Contributor to MiningFeeds.com, Jordan Roy-Byrne of The Daily Gold.