We all know the spin. Gold is "dead". Many "experts" say it has lost its importance in the monetary world and has just become another commodity. According to them gold is no longer a hedge against inflation or economic instability. I even heard one analyst make the comment that "gold may be an investment whose time has passed".

This comment just shows the ignorance in the mainstream investment community's attitude towards gold. First of all gold is not just "an investment". It is a currency. Actually, it is THE WORLD currency. Gold is money. That paper stuff you carry around in your wallet isn't money, it's only worth something as long as society thinks it's worth something. And if the government wanted to they could inflate it away tomorrow (it can happen, just ask anyone who lives in Brazil, Russia or East Asia).

This is the real reason why so many of our leaders "hate" gold. They hate it because gold prevents governments from doing what they love to do best: spend. It prevents governments from printing money and politicians from buying citizens votes with this printed money.

If we were on a "gold standard" the amount of money in circulation would have to be directly correlated with the amount of gold a nation had in its reserves. If this were the case the only way a government could spend more would be to increase taxes and we know what the public's response to that would be. Therefore, Inflation is really just a "hidden tax".

That is why gold is not "dead" and why it will soon have its day. Because as long as governments have the ability to manipulate and control the money supply via the printing press they will continue to inflate their economies and deflate the purchasing power of their currencies.

Ever wonder why from the Summer of 1997 to February 1999 the average commodity lost more than 20% of its value but overall prices kept increasing. This is because massive amounts of printed money allowed prices to keep increasing despite the fact that they shouldn't have been. The Asian crisis' deflationary impact on commodities has actually been very beneficial for western governments as it has allowed them to keep the printing presses going at full speed without being punished with increasing prices.

However, there will come a time in the not so distant future, when commodities bottom and begin to rise in price. All it will take is a small bounce of 15% or so on the CRB Index (placing it at 210 or so, which is still historically a very low level) to put inflationary pressures on western economies.

As prices begin to increase rapidly, a worldwide currency crisis will erupt as investors flock from one currency to another in search of stability and safety. This currency crisis has already begun, with the weakest currencies (East Asia, Russia, Brazil) being hit first. The next to go will be the moderate strength nations (Britain, Ireland, Italy, Spain, China) then finally the strongest nations ( USA, Switzerland and Japan). As paper currencies are destroyed people around the world will rush to gold in a mad panic. This will push gold to record high prices.

I realize with gold trading near a 20-year low and with mass sentiment so negative on the metal it may seem unlikely now, but it will happen. Remember 1980. The "Death of Equities" article which appeared in Business Week. At that time the Dow had been trading in the 600 to 1000 range for the past 14 years and in real inflation adjusted terms the Dow lost more than 75% of its value from its 1966 peak to 1982 bottom. Back then "everyone" was bearish on the outlook for stocks as it seemed they would never increase in price. At the same time gold was trading near 800 dollars an ounce and "everyone" was bullish on it.

Just take a look at what has occurred 19 years later. The Dow has increased more than 10 fold to over 9000 and gold has been more than cut in half falling to under 300 dollars an ounce. The shoe is now on the other foot as "everyone" is now bullish on the outlook for stocks and bearish on gold. Telling us what should happen over the next 5 years or so.

It is also important to remember that stocks in 1980 were basically at a bottom, but despite this you still had to wait two more years before they started a full-fledged bull market. Gold first hit bottom in December 1997 and has been building a base to rally off since. This "bottom building" phase giving investors an excellent chance to pick up precious metal investments at dirt-cheap prices.

Those are the two main reasons why gold will skyrocket in the coming years. And for your reading pleasure here is a short recap of them;

(1) Printed money will catch up to governments and cause currencies around the world to collapse, once this happens investors will run to gold in a mass panic.

(2) Mass Negativity is inversely bullish for gold as it means that the "mob" is totally uninvested in gold. This means there is a huge amount of purchasing power out their to push the price of the metal up. Not only that, the "Wall Street Establishment" has been oppressing the price of gold for the past few years. Many brokerage firms and hedge funds have built up huge short positions on the metal and these institutions desperately covering their shorts will add the fire to the coming surge in the price of gold. (For a more detailed explanation of the factors which will push the price of gold up in the coming years please see Chapter 10 of my book Stock Market Panic!)

Now that we know why gold will boom in the coming years, it is time see how to profit from this boom. There are four basic ways to invest in gold: purchasing the bullion itself or through purchases of gold stocks, mutual funds and convertible debentures. In the coming pages I give detailed information on each type of investment method.

How to Invest in Gold

Gold Coins

Coins are probably the easiest way to hold the physical metal. Many major countries' mint coins and the premium on these coins are usually small running at about only 1 or 2 percent or so. The following chart is a list of some of the world's most popular gold coins.

Coins

South African Kruggerand, Canadian Maple Leaf, Mexican Peso, Austrian Crona, US Eagles

Gold coins can be purchased from almost any major bank, an investment agent or in an offshore account.

Gold Mining Shares

These maybe the best way to profit from the coming gold bull market. This is because as gold increases in price a company's stock price can increase even faster as the company's increased profit give its shares a "leveraged" effect. Let me give you an example;

Let's say the price of gold is 300 dollars an ounce and a company produces gold at a total cost (including wages and all other expenses) at 200 dollars an ounce. That's a 100-dollar profit on every ounce produced. Gold climbs to 400 dollars an ounce. By owning the bullion your investment increases by 33% (100/300). But the gold company does much better. Since its cost of producing remains at 200 dollars an ounce, its net profit climbs from 100 to 200 dollars an ounce, for a doubling in the company's profit. This means the company's share price could also double. Another advantage in mining shares is that, unlike most other companies, they have reserves in gold and are therefore protected against inflation and other economic mishaps.

Below is a list of some gold stocks. I have put them into three groups, blue chips, mid caps and explosive juniors. These are not just random lists. I have put in hours of hard work researching the fundamental and technical data of hundreds of gold companies and below are the companies which I feel, at the present time, will perform best in the coming gold bull market.

Blue Chips

Stock (Ticker Symbol. Exchange)

Agnico Eagle (AGE. Tor), Barrick Gold (ABX. NY), Euro-Nevada (EN. Tor), Franco-Nevada (FN. Tor), Homestake (HM. NY), Newmont (NGC. Tor), Stillwater Mining (SWC. NY), TVX Gold (TVX. Tor)

Mid Cap Stocks

Stock (Ticker Symbol. Exchange), Eldorado (ELD. Tor), Miramar (MAE. Tor), Southwestern Gold (SWG. Tor), Sudbury Continental (SUD. Tor)

Explosive Juniors

Stock (Ticker Symbol. Exchange)

Corriente (CTQ. Tor), GranColumbia (GRM. Tor), Oroperu (OROP. Cdn OTC), Rock Resources (RKR. Van), Strathmore (SMR. Van), William Resources (WIM. Tor), Winspear* (WSP. Van)

(*A diamond mining junior which has excellent potential)

Blue chips - These are stocks with large market capitalizations, proven reserves and earnings.

Mid caps - These are stocks with small market capitalizations, some reserves and some earnings. These are a bit more riskier than blue chips, but have more upside potential.

Explosive Juniors - These are companies that for the most part possess extremely small market capitalizations, no reserves and no earnings. When drilling results are disappointing these stocks can plummet in price. But if gold is struck these stocks can fly through the roof. One of the most notable of juniors was Bre-X which climbed from 0.15 C$ a share to over 28$ (post stock split) in just over a year on the news that its mine in Indonesia was maybe the biggest find ever (possibly 200 million ounces of gold). Then just a few months later Bre-X's shares plummeted to zero on news that its mine in Busang was the biggest fraud of all time.

Most gold stocks are extremely depressed at the moment. As I write the TSE Precious Metals Index which represents large and mid cap companies is down over 60% from its 1996 peak. This shows us that most gold mining shares (unlike the rest of the market) are very undervalued. I feel that purchasing any of the stocks in list one will bring great profits in the coming years.

How the Juniors Are Performing

The juniors are performing miserably at the present time as the combination of their lack of liquidity and a loss of confidence in the junior mining industry due to the before mentioned Bre-X scandal having decimated the prices of most junior mining stocks. The Vancouver Stock Exchange (which is seen as a benchmark for junior mining stocks) has fallen from its most recent high of 1460 reached in May 1996 to around 400 as I write, a loss of over 70%. Vancouver has recently been showing signs of bottoming and I feel that now is the time to start purchasing juniors.

If you want to invest in junior mining stocks, you really have to do your homework. You have to learn about the process of mining, you must know studies such as Geochemistry, Geophysics, Geostatistics, Metallurgy, Mineralogy and all that fun stuff. You can buy interpretation guides which put drilling results in laymen's terms (I'm not ashamed to admit I use them, although I try to understand the process of mining in its entirety). You also need to do the usual research such as evaluating a company's books and management.

However, in a full-fledged junior bull market (like the one we saw during the first half of 1996) the price of almost every junior, regardless what they have in the ground (which for most juniors is nothing) will skyrocket. We will again see this kind of manic rally and now is the time to start purchasing juniors in preparation to profit from it.

Gold Mutual Funds

Mutual Fund

Dynamic Precious Metals

BGR Precious Metals Closed-end (BPT.A. Tor), Central Fund of Canada Closed-end (CEF.A . Tor)

BGR mostly invests in juniors, and is an excellent way to prosper from the coming junior bull market (discussed earlier).

The best fund for someone who is conservative and believes that gold could rise dramatically in price in the coming years is the Central Fund of Canada which holds approximately 90% of its assets in gold and silver bullion. It's really just a cheaper way of holding the bullion.

Gold Convertibles

A convertible is a type of bond that can be converted into a firm's common stock (hence the name). The advantages of convertibles are that they pay a fixed rate of interest and increase in price as a company's stock price does (it can also work the other way). The following are just a few gold companies which issue convertibles.

Issuer

Agnico Eagle, William Resources

Australian Gold Companies

These are the most undervalued gold stocks in the world. The major problem with Australian gold stocks is that it is extremely difficult to keep track of the mining scene all the way on the other side of the world. However, many Australian gold stocks are so undervalued that they are worth investing in. The following is a list of 10 Australian gold stocks (all at least medium caps):

1. CRA Gold, 2. Alcoa of Australia, 3. Sons of Gwalia, 4. Posgold , 5. Forestina Gold, 6. Delta Gold, 7. Placer Pacific, 8. Kedstone Gold 9. North Flinders Mines, 10. Gold mines of Kalgoorlie

Silver

Silver is already in a minor bull market with its price increasing over 60% since hitting rock bottom in 1993. Silver has greater appreciation potential than gold as you will see from the following example.

If gold were to go to its previous high of 850 dollars an ounce it would just about triple from its present day value. If silver were to go to its previous high of about 50 dollars an ounce it would increase almost 10 fold from its current price (about 5.50 an ounce as I write).

In addition, silver inventories are at record lows and with less companies solely mining silver every year it is due for a large run upwards (it's always nice to have Warren Buffet on your side too!).

Investing in Silver

Coins

Silver coins are not as easy to come by. You can purchase old silver dollars, and some governments do issue coins. Purchasing the bullion is probably the easiest way to purchase silver.

Silver Stocks

Companies which just produce silver are difficult to find. This is because most of the time silver is mined as a by product of other metals (e.g., Lead, Copper, Gold). An example of a gold company that produces a large amount of silver is TVX gold.

However, some companies still due mine silver as their "main" metal. The following is a list of some of my favorite silver companies.

Stocks (Ticker Symbol. Exchange)

Anvil Range (ARO. Tor), Coeur d'Alene (CDE. NY), Pan American Silver (PAASF. Nas), Sunshine Mining (SSC. NY)

Negative Factors for Gold

In this short report you have learned why gold will probably increase in price in the coming years and what investments to purchase to prosper from this increase. However, as with any investment you should always consider the negatives and in golds case there are two negative factors which could put downward pressure on its price. One of these factors is a short term negative and the other a more major long term negative.

The short term negative factor for gold is purely technical. Over the past 17 years gold has made three significant bottoms, one in 1982, one in 1985 and the one it is making currently. The level that gold has been able to hold during every one of these bottoms has been 270 dollars an ounce. If gold were to fall below 270 a very important support level would have been broken and could cause gold to fall towards 250 dollars an ounce or so.

The long term factor which could have a negative impact on the price of gold is technology. As technology becomes more advanced and efficient, cheaper ways will be found to discover and mine the metal. This could have a negative effect on the price of gold, as it would create an excess amount of supply, which would in turn send the price of gold plummeting.

How to Predict Short Term Movements in the Price of Gold

A way to judge where the price of gold is headed in the short term is through the newsletter The Bullish Consensus, this newsletter reports weekly sentiment indexes on commodity futures.

Usually if the bullish reading on gold is over 80% it's time to sell. When the bullish consensus is less than 20% it's time to buy. Over the past year the consensus has been, for the most part, hovering in the 20% area, telling us that their isn't a better time to buy gold than now.

The 20th century will probably be looked upon as the century in which gold shined brightest as it will have been the only century when gold will have been a prosperous investment rather than just a currency of exchange. Gold will glitter as we approach the 21st century.

Dave Skarica

27 February 1999

Dave Skarica is also an independent financial advisor and may have positions for his clients contrary to the recommendations recommended in this newsletter, or may act before on behalf of his clients on certain recommendations in this report. All information contained in this report is believed to be correct, but its accuracy cannot be guaranteed. The owner, publisher is not responsible for errors, omissions or losses sustained by the reader. Dave Skarica is the editor of an investment newsletter "Addicted to Profits." For more information: seattle@interlynx.net