Gold News

Speculation Fraught with Difficulty

Gold Mining investment gets tougher with the metal now "overdue a correction"...

PERIPATETIC geologist Mickey Fulp covers a lot of territory for his Mercenary Geologist subscribers, as he does here in this Gold Report interview.

With 30 years experience as an exploration geologist, Fulp touches here on why he looks forward to a correction in Gold Prices, and what criteria he uses to evaluate the "best of the best" Gold Mining stocks, picking only those he believes could double within 12 months...

The Gold Report: Returns from some of the companies you've written about since you launched Mercenary Musings in the summer of 2008 have been nothing short of astonishing. While some of the price appreciation came with the markets recovering from their 2008 lows, we see doubles, triples, quadruples, five and sixbaggers – even one twentybagger. Now that the markets have rebounded, how much do you expect juniors to increase over the next 12 months?

Mickey Fulp: That is a speculation fraught with difficulty. I expect commodities to remain at high prices but also expect food inflation and resulting unrest and turmoil in emerging market countries to continue. This could affect all world stock markets negatively. All the North American markets are long overdue for a correction.

TGR: If you're anticipating a pullback in the general markets, do you think your picks in 2011 can achieve doubles in 12 months or less?

Mickey Fulp: I pick only the stocks that I think have strong chances to double in 12 months or less. That is the criteria under which I operate.

TGR: Gold experienced a 23% gain in the last nine months. To what extent do you foresee that rate of appreciation continuing?

Mickey Fulp: Gold Prices are overdue for a correction and, in fact, were in the midst of one with a 7% drop before Middle East turmoil in late January caused safe-haven and speculative buying. In my opinion, recent geopolitical issues have distorted the precious metals markets, caused safe-haven buying and prevented a full-blown correction from occurring.

TGR: How much of a correction are you anticipating in gold? Then, once it does correct, do you expect it to return and exceed its previous high this year?

Mickey Fulp: A market correction is defined as a 10-30% drop. Corrections are always healthy because markets, commodities or stocks appreciate too fast and become frothy, risky and overbought. A 10-year chart of gold shows a near-constant increase in price year-over-year, so I expect that trend to continue. The Gold Price is driven largely by worldwide currency devaluation and gold always maintains its purchasing power over the long term.

TGR: To what extent will the gold price need to continue increasing for Gold Mining juniors to appreciate?

Mickey Fulp: The Gold Price recently forged ahead of the stock market with a selloff in junior gold explorers as profits were taken after a robust run-up over several months. Keep in mind, juniors generally correct more than the price of gold because they are purely speculative and volatile plays.

TGR: In a December Mercenary Musing, you wrote that nearly all juniors will have a low to high double in any given 52-week period. Could you elaborate on that?

Mickey Fulp: I'll challenge anyone to find an active junior with a running 52-week high and low that's not at least a double. That's because juniors operate in phases of acquisition, financing, exploration, receipt of results and reporting. The stock price tends to go from low to high within each phase. Low and high price cycles correspond to low and high volumes. By employing a contrarian philosophy, i.e., buying at low volumes and low prices and selling at high volumes and high prices, we can achieve consistent doubles.

TGR: Rare earths continue to be a hot topic, though now people more often call them either "strategic" or "technology" metals. You've described this as a "conflicted categorization."

Mickey Fulp: All these newly coined terms for what used to be called "minor" or "specialty" metals are conflicted categorizations and confuse the investor. I object to the terms rare, strategic, technology and/or critical metals. The specialty metals have the following characteristics: They have minor but special uses, do not trade in appreciable tonnages or Dollar amounts, do not trade on open world markets and often are controlled by a single country, company or cartel. Security of supply is a concern to those who depend on geopolitically unstable, corrupt or unfriendly sources. Rare earth elements are a part of the much larger group of specialty metals.

TGR: As you've pointed out, the REE sector graduated from "flavor of the year" in 2009 to forge ahead in 2010 with valuations increasing exponentially. Although much has been written about China's export quotas, particularly in terms of the REEs, another issue came up during a strategic metals conference in January – the cost to extract and refine these metals.

Mickey Fulp: Metallurgy and processing is a potential fatal flaw for all REE projects. There should be priority given to construction of a complex to separate and process heavy rare earth elements (HREEs) outside of China, and preferably in North America. It is the logical solution for a HREE project on this continent to ultimately succeed.

TGR: How has this potential, fatal flaw impacted investment in the industry?

Mickey Fulp: So far, there has been little impact on speculation in the companies with exploration projects of merit. I expect increased awareness as we get further into 2011 and hope to see a new effort made to address this important issue. There are, however, alternatives for developers and miners, such as offtake contracts or strategic alliances with users who have access to processing facilities in China.

I just think it makes sense if we can go mine-to-market for all the rare earths in the United States. Our government seems to think so, too, though they say it will take 15 years to happen. Being an exploration geologist and, as such, realistically skeptical but generally optimistic, I think that can be fast-tracked.

TGR: You just returned from PDAC. What's the "buzz" in the precious metals from that conference?

Mickey Fulp: Although precious metals markets are completely overbought, the gold and silver bugs are full of grandiose ideas about exorbitant prices in the future. To me, it's a broken record that's reminiscent of the Beatles' "Number nine, number nine, number nine" from the White Album. The junior resource stocks will continue to sell off as industry and market pros take profits and front-run ahead of the Sell-in-May-and-Go-Away philosophy. It is always a good idea to take profits when markets are going higher, using open-order programmed selling and setting programmed profit stops to sell on the corrections and downticks.

TGR: Did you uncover any interesting new companies that you will be looking into?

Mickey Fulp: Yes, in fact, I recently invested in three newly formed companies in the uranium, precious metals and oil and gas sectors. They are high-risk speculations that may be presented to subscribers in the future as the companies and their markets develop and the risks are better quantified.

As a professional junior resource investor, my risk appetite is much higher than I would encourage for anyone else. I currently cover 11 stocks but speculate in well over 30. I present only "the best of the best" to subscribers (i.e., those that I think have the best chances to double within 12 months). I encourage every investor to visit my website and read my musings for doing thorough due diligence on junior resource stocks.

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