first majestic silver

Let Your Profits Run

May 13, 1998

"Here Come the Precious Metals!" We are increasingly confident that the silvers made an important Bottom last July and golds last December. Meanwhile, palladium is soaring -- the only commodity in the world to be doing so -- yet which has completely escaped the notice of the savants running markets. Not even aware of palladium's uses, it is no surprise that they have not yet discovered our Stillwater Mining (SWC), but one Canadian and one Australian stockbroker have written reports on Stillwater - the first SWC writeups in the world outside of The Dines Letter, so it should not be long before other professionals begin moving in. Without leadership, investors look but do not see Stillwater, the world's premier palladium producer, and a company that might well turn out to have been one of our biggest winners ever, in coming years. Wall Street is not even aware of our favorite gold stocks Franco-Nevada and Euro-Nevada, perhaps among the most-sophisticated managements in the gold industry which have just made their largest investment ever by having purchased a 5% royalty for $50 million (Cdn) on Stillwater. Follow the smart money. That's why TDLrs were the first ones in, ahead of everybody.

Indeed, the legendary Warren Buffett bought silver two years after you did, which, as we noted at the time, would prompt many Security Analysts to take another look at the precious metals, despite their blatantly obstreperous pessimism toward the group especially after it had been revealed that the legendary George Soros had purchased 20% of Apex Silver Mines (in Bolivia) in 1994. Sure enough, this Monday, Morgan Stanley recommended buying gold stocks, so we can guarantee you that other Wall Street research departments have assigned somebody to look into the group, and that additional recommendations might be forthcoming soon. Two Thursdays ago we noted blocks of buying on the ticker tape into blue-chips such as Barrick, Placer, Homestake and Newmont, perhaps by the whippets running mutual funds. But the public is still massively scornful of the precious metals. There are Upside Breakouts all over the precious-metals stocks, but after their recent runups we would not be surprised to see them simmer down and allow pessimism to regain the upper hand. Such setbacks should provide the final buying opportunity for new TDLrs. Many golds and silvers are still selling at remarkably depressed levels, apparently discounting the unrealistic notion that gold would never again be looked at as real money, a conclusion we reject as preposterous on the face of it.

Driving gold higher might be speculation about the percentage of gold that will back the reserves of the yet to be born European Central Bank (ECB). Meanwhile, we find ourselves in the unusual position of being bullish on both the US dollar and gold. That is remarkable, and we wonder what it means. Could it be that gold stocks were so depressed, and have been so oversold since last July, that this is simply a normal gold rebound reflecting buying from value-oriented investors? If so, small-cap golds and silvers should also move up soon, something that we need to watch for. Perhaps it is an "unthinkable" (to the majority) resurgence of inflation. We give full credit to the following excerpt from US News & World Report for having been the first one to agree with us on this point, as they very correctly pointed to the inflationary implications of the growing money supply, a position so obviously true that it exasperates us when governments locked into falsehoods do not grasp it.

But if the money supply is rising, how then could we still be bullish on the stock market? Because we do not accept the current universal dogma that inflation will ipso facto send the market down! Inflation was high in 1972 and 1973, also in 1978 and 1979, yet the market rose. Virtually every government in the world is devaluing against us, plus interest rates in the US and England are too high. The US dollar can rise on a relative basis, but all that extra liquidity is wending its way into the stock, bond and real-estate markets, just as occurred in 1929. Thus we might be in for a period when virtually all investments rise at the same time, before everything (except the precious metals) peels away and declines in The Big Kaput.

Governments need to raise interest rates when they print too much paper money in order to make the cheapening currency more attractive to the suckers who hold it, so the downtrends in currencies are a warning that another currency upheaval lies somewhere ahead of us, possibly the final one. Higher interest rates imposed by governments will also be bad for business, a phase that has already begun in Canada but not yet reached the United States. The implication of that prediction is that bond markets will make an important top somewhere ahead of us and suffer deeply during The Big Kaput as governments desperately raise interest rates in order to stabilize their currencies, an example of which was seen recently in Asia when interest rates in some cases rose above 50%. We will flash an emergency Interim Warning Bulletin just the moment we detect the Major "Sell" signal on bonds.

TDLrs seeking high current income in the precious metals have very little from which to choose, but we can recommend the Battle Mountain convertibles (bonds and preferreds) yielding over 7.2% now. There are better silver investments available than Hecla Mining common, but their convertible yielding 7.6% is interesting, provided they do not stop paying dividends on it, an element of risk. Our favorite takeover candidate is Getchell Gold (GGO), which has just had an Upside Breakout, while deeply-depressed Cambior (CBJ.TO) and TVX (TVX) look ready for big rebounds as do juniors such as International Pursuit (IPJ.TO), Trillion (TLQ.TO) and Southwestern Gold (SWG.TO). For Canadian TDLrs looking for a conservative gold blue-chip, Teck Corp (TEK.B.TO) may be purchased below 21 with stop 17 (Canadian funds), although it will not be added to our Supervised Lists because it is a little slow for us. Even the South Africans are awakening, with ASA (ASA) having lead the way, and Anglo-American Gold (AAGIY) selling for $4-15/16 looks like a bargain. Also uranium will be in fundamental undersupply worldwide until perhaps 2005, so a bit of an investment in Anaconda Uranium (ANU.V) under 40 cents is a good idea for those with a multi-year horizon. And the following silver article is extremely important.

1. Is inflation about to make a comeback? Last week, the Shadow Open Market Committee, a group of academic and business economists that offers advice to the Federal Reserve, issued a warning: It's time to raise interest rates. The rate of growth in the money supply has been increasing sharply in recent months, the Shadow Fed noted, which is often a harbinger of inflation. The recent drop in oil prices, and the effects of the Asia crisis, have helped to keep general price levels down, but as the Shadow Fed also pointed out, these trends can't last forever. Not counting food and energy prices, inflation increased .03% in February, the government announced last week the steepest gain in 10 months. Phillip J Longman, US NEWS & WORLD REP, 30 Mar 98 Ed: The Shadow knows.

2. On Wall Street it is generally wise to avoid doing what everyone else is doing. We think it would be instructive for investors to challenge the current consensus about equities and gold. The prospects of achieving acceptable long-term results at the prices currently demanded for the average equity would seem far from assured. Gold company stocks, in contrast, offer a potentially fruitful area for investigation. Like life insurance, which is cheapest when it is least likely to be needed, insurance against inflation and financial distress gold can be purchased now very cheaply because the consensus holds it is not needed. Dennis Butler, BARRON'S, 23 Mar 98 Ed: Barron's deserves credit for having been the first major publication to have agreed with our belief that gold is underpriced.

3. The IMF seems to be the best immediate hope for dealing with the Asian crisis. Yet the International Monetary Fund has not covered itself with glory. It failed to foresee the Mexican crisis of 1994 and did not predict the magnitude of the Asian crisis. The crisis gives Camdessus, a former governor of France's central bank, who has headed the IMF for 11 years, an opportunity to greatly enhance the outfit's power and prestige. He has persuaded the board of governors to approve a proposal to increase the fund's capital base, from $199 billion to $288 billion. In theory, the IMF is controlled and owned by its 182 member countries, but the one that counts the most is the US. The US has an 18.25% share of the IMF's "quota" the subscription each country pays to be a member of the club. The IMF has evolved into something quite different from the organization established in 1944 by an international conference at Bretton Woods in New Hampshire. For a quarter of a century, the institution operated in a world of fixed but adjustable exchange rates, with gold as the standard. Member countries had to go to the fund to alter their exchange rates, which could be done only if the IMF certified that this was needed to correct a "fundamental disequilibrium." The aim, of course, was to avoid beggar-thy-neighbor devaluations. But when President Nixon took the US off the gold standard in 1971 and the world moved to a variety of exchange-rate regimes, the fund lost its primary role. Big organizations do not generally fade away. The fund kept on acquiring new reasons for existence. The 1973 oil shock gave it an opportunity to offer long-term finance to poor countries to help with their growing payment deficits. This enabled the fund to invade the turf of its sister organization, the World Bank, which is located next door. From short-term monetary stabilizer, the IMF became a long-term development financier. The fall of the Berlin Wall in 1989 gave the fund another new role nanny to the newly capitalist states of eastern Europe. The fund's biggest break was the Latin American debt crisis in 1982. The IMF's official historian, James Boughton, argues that the first Mexican peso crisis was the turning point for the fund: "It transformed itself into a crisis manager." Did the IMF help, or make things worse at the time? That's a matter of debate, but the crisis did pass and so the IMF can claim credit. Which, of course, is precisely where doctrinaire free-marketeers part company with the IMF. In their view, IMF intervention makes these crises more likely because it removes some of the pain from bad bank loans and rescues countries that pursue atrocious economic policies. Because everyone knows the IMF will bail them out, they take unwise chances. In fact, failures have come thick and fast since that first Mexican crisis in 1982. The fund's American chief economist, Michael Mussa, says that in the past decade alone more than 100 countries have faced major banking problems, and of these, 30 to 40 have required bailouts (not necessarily from the fund) greater than 10% of GDP. Mexico hit the skids again in 1994, once more propelling the IMF to center stage. In a speech in Washington in February, Camdessus proclaimed a new, broadened role for his institution. He said that the IMF's "concerns" now include economic deregulation, reductions in costly military buildups and increased spending on basic human needs. In the future, Camdessus said, the fund would push for good governance and fight against corruption. And so, an institution set up to patrol exchange rates is trying to become a kind of world policeman. Nigel Holloway, FORBES, 6 Apr 98 Ed: Abolish the IMF and try free-enterprise capitalism. It works, you know.

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