The Golden Phoenix

by Sean Brodrick 02-25-09

I’m writing this from Phoenix, as the Cambridge House Resource Investment Conference and Silver Summit winds to a close. The bullishness on gold and silver has such a tangible presence that I half-expect to find shiny, yellow hoof prints in the hallways!

Gold and silver traders who had moped around like beaten dogs just months ago are now salivating at the thought of gold taking off like a rocket and silver making an even bigger percentage move higher.

Is there still time to get in on the new gold rush?

You bet. And there’s always more to learn. That’s why I’m sending my Red-Hot Global Small-Caps subscribers a special report on a silver explorer that I got to know a lot better in Phoenix.

Now for the best part … I’d like to send that same report to you! And if you can hold on for a few moments, I’ll show you how to claim your copy, absolutely free.

But first, I want to share with you some important insights on the metals markets …

Gold and Silver —
The OTHER Reserve Currencies

As worried as Americans are about the insolvency of our big money banks, there are banks around the world that are in even worse shape!
The debts carried by these European banks are staggering, especially considering the small size of the countries where they’re based.

As European banks struggle with defaulting loans, currencies, such as the Swiss franc, are bound to feel the pressure.

In essence, there are small countries with very large banks (relatively speaking) that have gone outside their borders to make loans and have done so at levels of leverage far in excess of the most leveraged U.S. banks. And the ability of the “host” countries to nationalize their banks is simply not there.

This means big trouble for the eurozone and probably the Swiss franc and British pound, too. And that sends investors scurrying to the dollar.

But it’s not just European currencies that are at risk — ALL currencies, the financial system of the entire world, are at risk. And while the U.S. dollar is up since the beginning of the year, gold and silver are up much, much more!

Take a look at my chart …

You can see that the U.S. dollar ended last week up 5.64% so far this year — that’s less than half the 12.48% move that gold made. And silver is running rings around everything else, with a 27% move.

At the same time, crude oil is down 15%, and the S&P 500 has dropped 13.76%. Clearly, no one is betting on an economic recovery at this time.

Over a one-year period, the U.S. dollar is still leading the pack. But gold and silver are catching up fast, closing the performance gap enormously during these past couple of months.

To me, this clearly shows that frightened investors are moving out of paper currencies and into real wealth — the rock-solid value of gold and silver.

We Haven’t Seen the
Mania in Gold … Yet

Even though gold has rallied for more than seven years, I don’t think we’re near the top. Sure, investors are scared. But I expect to see at least three other developments before we get to the mania phase …

The first development —
Hoarding …

The Central Banks will start hoarding their gold as fears of sovereign bankruptcy rise. Collapse of credit bubbles in Ireland, Spain, Greece and Portugal could lead to those countries defaulting. And Eastern Europe looks even worse.

Eastern Europe has borrowed $1.7 trillion from abroad, much of it on short-term maturities. It MUST repay — or roll over — $400 billion this year, equal to a third of the region’s GDP. Good luck!

So I expect at least one European or Eastern European country to go bankrupt in the next 12 months, and that will strike fear into the hearts of the Central Banks. Suddenly, they’ll want to prove that they have more gold than anybody. And they won’t sell.

If Central Banks stop selling, a significant source of supply would be taken off the market. In fact, sales are already declining: Central Banks sold 260 tonnes last year — down 113 tonnes from 2007.

The second development —
Russia goes on
a buying binge …

“We are aiming to continue this tendency this year; we are buying gold.” — Russia’s First deputy chairman Alexei Ulyukayev

Russia, which is battling to keep its currency from tumbling, is noisily adding to its gold reserves. First deputy chairman Alexei Ulyukayev recently told Reuters that his country bought $1.5 billion worth of gold in a week. The Russian added, “We are aiming to continue this tendency this year; we are buying gold.”

Russia’s central bank says it would like to hold 10% of its reserves in gold, which could take its inventory up to around 1,200 tonnes from 495.9 tonnes at the end of last year.

The third development —
China jumps in
with both feet …

Finally, one other development I expect on the road to mania is that China, like Russia, will start buying gold on the open market for its own reserves. China’s foreign currency reserves increased 27% in the past year to $1.95 trillion, about 29% of the world’s total. The country already owns $696.2 billion in Treasuries, about 12% of the U.S.’s outstanding marketable debt.

China holds gold reserves of just 600 tonnes, worth only $18.62 billion. Experts say that Beijing’s reserves could easily go up to 3,000 or 4,000 tonnes.

Would that have a huge impact on the market? Bet on it!

I’m Even More
Bullish on Silver

Two-thirds of the world’s silver production comes from mines that mainly produce base metals and churn out silver as a byproduct. The demand for base metals is cratering, so mines are shutting down right and left. This is putting a crimp in silver supply.

The industrial demand for silver is way down. But the investment demand is soaring!

Yet even though the industrial demand for silver is way down, the investment demand is soaring! The iShares Silver Trust (SLV) said its bullion holdings jumped nearly 3% or 214.7 tonnes on Feb. 18 to a record 7,873.75 tonnes.

Indeed, I like the SLV right here — it’s already in my Red-Hot Commodities ETFs portfolio. You might consider adding it here, or on the next dip in silver prices, because while we could get a short-term pullback, I think much higher prices are coming.

Now, About that Company
I Discovered in Phoenix …

Lately I’ve been shying away from explorers — companies that don’t have producing mines or at least something close to becoming a mine. Due to the credit crunch, I favor producers, especially those with lots of cash.

But in Phoenix, I found a silver explorer that deserves a second look. It has a LOT of high-grade silver resources and plenty of cash in the bank. Furthermore, I expect another company will buy it out within the next year.

I’ve written an exclusive report on this company for my Red-Hot Global Small-Caps subscribers. And you can get it, too, with my compliments when you sign up for our new e-zine, Global Wealth Report.

This free, daily electronic newsletter will dish out the latest exciting news and research on the natural resource and Asian markets from Larry Edelson, Tony Sagami and me.

The premier edition of Global Wealth Report will go out on Monday, March 2. So, sign up right now, get your free report on the silver explorer I just discovered, and watch your inbox for Global Wealth Report.

Yours for trading profits,

Sean