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"Buy Gold, Not Gold Shares"

A US investment strategist explains why he prefers metal to miners...

CHIEF INVESTMENT STRATEGIST at Blue Phoenix, Inc., an independent energy and metals consultancy based in New York, John J. Licata appears regularly on CNBC, Bloomberg, Business News Network, and Barron's to give his insights on the commodity spectrum.

Bullish on gold, platinum, palladium and natural gas, "If you think that you can be a beneficiary of some commodity strategies, just stick with it in the downturn," says Licata, even though he's anything but bullish on the apparent recovery in the global economy just now.

Here he explains why to The Gold Report, sharing his near- and long-term outlook on the various metals (including gold) plus what he feels are the best investment plays in the sector right now.

The Gold Report: John, you've said that you are not bullish on the recovery. We've recently noticed that things are starting to pull back. What's causing the pullback, in your opinion? Why isn't there more euphoria about some of the recently released earnings?

John Licata: We've been hearing from many companies, prior to earnings releases, that the second half of this year was going to look a lot better. Once these companies actually started to release earnings, however, we started to hear that recovery could be pushed back in 2010.

TGR: You were recently on MSNBC with Maria Bartiromo and in that interview you mentioned that you see further downside in some other commodities like gold and copper. Can you explain that a bit more?

John Licata: Yes. I was talking about the potential for prices to pull back in copper as well as gold. Both of those have actually pulled back since that segment. I'm more enthusiastic about being long gold rather than being long copper at the moment. I think Wall Street's thinking that China is going to be the saving grace for commodities is inaccurate.

Copper prices are up about 40% year to date. As I said, I think they're due for a pullback. As far as gold, I've been advising my clients to become buyers if gold moves back down to the $850 range. We came pretty close to seeing that in mid-April, and today we're sharply up north.

I think gold is one of the best asset plays in the world. I think there's been a fear factor with gold, causing it to move lower because of fears that the IMF was going to be dumping gold prices to raise money. I don't think that's such a credible argument. I think that gold is too important right now and most of the pressure we've been seeing is because of that. But I think that the IMF would not be dumb enough to dump gold and hurt their best investment right now in such a time of market uncertainty. So I do think that there's a buying opportunity around the $850 level and I still have a $1,200 price target on the Gold Price for year-end 2009.

TGR: What's going to drive gold from $850 to $1,200?

John Licata: Well, I think there are a couple of factors. I think that there's been a lot of confusion amongst ECB (European Central Bank) board members whether or not they should be cutting their interest rates below 1.25% and I think that confusion is going to cause gold to be more of a safe haven play. In 2004 there was an agreement signed by the ECB that they would limit gold sales; that expires this year, I believe this fall. So I think that any renewal of that agreement is going to be a bullish sign for gold. I don't think we're out of the woods yet in the stock market globally and I think that gold, once again, is going to be seen as a safety play.

If the IMF reassures people that they're not going to be dumping gold, that's another bullish play and I think that we can see hyperinflation in late 2009 or 2010. I think that's going to be another great point for Gold Prices.

TGR: You're saying at $850, Buy Gold. Are you suggesting physical gold, Gold ETFs or equities?

John Licata: I'm not suggesting buying the equities. Frankly, historically, the equities don't move in tandem with the price of Gold Futures. If I had to suggest anything, I would either buy the GLD, which has been a great performer as of late, or actual physical gold if you could; but I would not buy the gold stocks if I were thinking that the move was going to be so strong. Again, historically, the stocks tend to underperform the physical commodity.

TGR: But the stocks have been driven down so far at this point in time, especially near-term producers, to record lows. Why wouldn't we expect to see some bigger jump in the equities compared to gold, which is already at $850 or $900?

John Licata: First of all, I think that Gold Prices are going to move substantially higher, so on a percentage move, I'd rather be in the futures than in the equities. If I'm looking at some of the producers, I'm not discounting the fact not to buy the Gold Mining stocks. I just think that the best way to play it is to belong to the GLD Gold ETF or the actual futures themselves.

TGR: The same economic factors you are seeing that are driving Gold Prices, will they drive other precious metals and, if so, which ones and to what extent?

John Licata: Yes. I'm actually bullish on palladium prices. I think palladium and platinum prices can move higher. I think palladium can almost be seen as a jewelry substitute, especially in China right now with many manufacturers looking to take in more palladium just because they've seen the trend among the youth in China when it comes to palladium, due to prices. And I do think, when you look from a percentage move year to date, you've seen palladium prices are up 14% year to date, but they're still trailing platinum prices, which are up about 26% year to date. I think those are two metals that tend to get overlooked, but I think PBMs are a good place to be.

When you look at platinum, most people don't realize that you need platinum for catalytic converters in the auto world. So, whether we're seeing a downsizing in cars from trucks to hybrids, you still need catalytic converters. Even though GM might file for bankruptcy, I think there are opportunities for other foreign makers to pick up the slack, so to speak. We've still seen auto demand in China ramp up. It has slowed in recent months, but it's still positive for the year. So I think that platinum and palladium are two metals with much upside and I think that if gold goes higher like I think it will, I think those are two metals that could quietly show some really strong returns.

TGR: You're very bullish on natural gas. We see you're bullish on gold and platinum and palladium. How do you compare these various plays, natural gas against gold?

John Licata: I think the potential for the price of natural gas to double, I think, is tangible. So, in terms of best commodities pitting themselves against each other, I'd like natural gas over gold and that's saying something, considering I'm very bullish on the price of gold. Both crude oil and copper, I think, are near-term shorts, but I do see more of an upside for crude oil by year end than I do with copper. If you're saying to be bullish on gold, then obviously platinum and palladium, you can't discount the fact that silver prices are probably going to go in tandem with Gold Prices.

TGR: Do you see that the ratio between silver and gold will start to become more narrow? Will silver outperform gold?

John Licata: I don't and the reason I don't is because silver also has industrial demand and that's one of the reasons why it's been held in check thus far. Silver is still used in cameras and cell phones and water purification, so I think silver more than the other metals is used more for industrial purposes. So, unless the economy really starts to ramp up, I think you will see a rise in silver, but I think it will be held in check until we start seeing signs of a better economic pulse.

TGR: Very good. John, are there any other insights you'd like to give to our readers?

John Licata: I think that you have to look at some of these commodities from more of a bird's eye view. A lot of their volatility has been exaggerated due to the fact that now we're in more of a global marketplace more than ever. If you think that you can be a beneficiary of some commodity strategies, just stick with it in the downturn, because if you do, I think in the long term you'll be all the better for it.

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