From Le Metropole Cafe tonight:

Murph:
Back in mid-March, I posted a chart illustrating the performance of the TSX Venture Exchange against the price of gold. The CDNX is the ultimate proxy for the junior resource sector as most of the new discoveries on the planet have their origins from companies financed on this exchange.

TSX Venture VS. Gold March 2009

It showed just how far the CDNX crashed during last year’s meltdown as over-leveraged hedge funds were indiscriminately purged from their illiquid junior positions sucking with them the thoroughly-panicked retail holders.

Fast forward to September 2009: Despite a huge move in the major markets and a big move in bullion, the rebound in the TSX Venture Exchange has been muted at best as it continues to reflect the level of risk-aversion amongst traditional speculators. The need for liquidity has kept the junior mining sector largely off the radar screen for the larger professional investors and the proof of this was this week’s mad scramble to participate in the Barrick secondary offering. It proved to me that there is simply not enough decent product to satisfy the demand of the widely-expanding capital pool chasing the precious metals sector. Despite the horrid history of Barrick’s hedging book and balance sheet, it was massively over-subscribed.

TSX Venture Exchange (weekly)

As stated in my April 1 report, I continue to believe that once we see the $1,000 level for bullion successfully breached on a three-day-closing basis, we will enter the next speculative mania that propelled the junior resource arena in the late ‘70’s to significant valuation levels. Even in the 90’s within the 1980-2002 bear market in gold, junior discoveries were assigned market capitalizations in the hundreds of millions of dollars while the per ounce multiples for juniors was five or six times current levels.

It is my belief that since the majors are incapable of meaningful organic growth, juniors discoveries will be snapped up in order to rationalize their current multi-billion dollar market caps where reserve depletion is their mortal enemy. “The juniors find it; the majors buy it” will be born out in this next supercycle resulting in big returns for those that understand what it takes to identify the really explosive “little guys”.

Look at the chart of West Timmins Mining (WTC.T) ($2.30) whose Thunder Creek discovery west of the mighty Timmins Gold Camp (70m ounce camp) is shaping up to be a monster. (You could have bought it for $.13 in late 2008.)

West Timmins Mining (WTM.T)

Current market conditions around the globe are experiencing a “melt-up” but in this writer’s opinion, it has nothing to do with “green shoots” or “economic recovery”; it is about global reflation of the financial system. It is the “Zimbabwe Effect” and it is underscored by the old axiom used here ad nauseum that investors and speculators should NEVER UNDERESTIMATE THE REPLACEMENT POWER OF EQUITIES WITHIN AN INFLATIONARY SPIRAL. I believe that the real returns on stocks versus the metals will once again favour the latter once the debilitating effect of the upcoming inflation numbers begin to attack P/E multiples thereby setting apart gold/silver ownership from the industrials and the techs. This is where all of the talk about the Coming Crash is flawed. The “crash” will be in the under- performance of the non-metals but it will not be a “crash” in real dollar terms unless we see a massive shift in policy.

This is all about policy – global monetary policy – and the Chinese are no different than the West in acting in support of financial markets. You dare not be “short” in a period in which the printing presses are blasting away and until those spigots are shut and shut hard, equities will rise as a replacement for fiat currencies. In my view, long before that occurs, the PM’s will have had the Ride of the Century with the leverage being in the juniors.<> BRT