TDL's Latest on Gold & Silver: Biding its Time

March 25, 1998

Nothing is more annoying than to be obscurely hanged. Voltaire

With the stock market, it is sometimes difficult to discern whether we are in a bull market, or a situation that simply looks like a bull market but is not. Almost nobody believed our predictions that there would be a currency crisis emanating from Asia. Then, when Thailand caved in last July Wall Street underestimated it, and the consensus still does not take it seriously enough, in our opinion. The Vietnamese currency has now also dropped by 5%, China or Hong Kong might devalue, Japanese banks might get into trouble, and we are concerned that the Canadian dollar might be swept lower in the next downwave. What would it take to make the world see that the danger of an all-out currency crash is palpable? We continue to insist that Asia's 1929-type crash must have some impact on the rest of the world, but the financial press does not see that at all. We have been warning about a growing US trade deficit, because Asia is not only desperate to export, but their cheaper currencies will make them lethal competitors, fulfilling our predictions of "The Coming Competing Currency Devaluations." Just last Friday, a sharp increase in our trade deficit sobered up Treasury Secretary Robert Rubin enough to have issued a warning to Asia "not to rely on exports" to bail themselves out of trouble. Ha. Ha. Asians have no other choice. (Unless Asians link their currencies to gold. But the venomous hatred toward gold by central bankers is so intense that we see no chance of that happening yet. It will.)

Gold bullion is not doing much, fluctuating near the $300 area, probably waiting to see whether the new European currency will be backed by some gold. We have been looking for a "surprise" leap in the US trade deficit in the first half of this year, and that might trigger a gold-buying stampede, especially since there is so much pessimism toward this underpriced, sold-out and shorted arena. Meanwhile, Asian central bankers are running the printing presses full blast in an attempt to buy their way out of their crisis that we insist apparently alone was caused by printing too much paper money; they are apparently working on the hypothesis that cancer stops smoking. Well, it does.

It is difficult to see how gold might rise, but Asia's lesson is instructive. In the midst of their boom, rich Asians were the envious cynosure of the world. But a matter of months later they were in destitution, which could happen to any other area of the world. Many formerly-rich Asians now have a new name.* We worry whether our TDLrs are prepared for an economic downturn of a seriousness few consider today. Beware of excessive debt, and consider what would happen if your banker called a loan, or a broker closed, at least temporarily. The failure of Peregrine in Hong Kong left many who had bought put or call options and derivatives as their hedges against a currency upheaval with no one from whom to collect. The world can be really cruel and unfair, which is why every portfolio should hold a "core position" in precious metals, preferably with mines in several different countries.

* Waiter!

Silver is also instructive, where Warren E Buffett surreptitiously began buying silver at $4.32/oz before it soared to $7.40, and something like that could happen to gold at these depressed levels. As indicated in our Interim Warning Bulletins, we are looking for choppy, lateral motion in silver for a while as profit-taking selling is absorbed. Silver had been so beaten down, and bulls so demoralized, that they are hastening to grab profits on this rise, which instead we spurn because we are looking for a "killing" in silver some day. Silver is in fundamental undersupply, and many Asians who held silver (also gold, platinum and diamonds), learned the hard way that it was their only asset that went up even as their currency, real estate and stocks crashed. True, much of their precious metals were sold in order to bail themselves out, but the lesson was not lost, and as they struggle back to their feet many will undoubtedly be certain to hold a core position in the precious metals again, against future currency upheavals. Buffett has taken a huge chunk of silver off the table, which means tighter supplies, and he is a long-term investor, so further bouts of silver weakness might tempt him to do additional buying. The contraction of silver buying in India is typical of odd-lotters' skepticism at the beginning of new bull markets.

Pan American (PAASF) is expecting the feasibility study on its huge Dukat Silver Project in Russia to be completed by this June, and the completed sampling program shows excellent correlation with Russian assay data. Ore reserves are being updated and mine-designed engineering is under way. Bulk samples have been collected and processed to provide metallurgical data for mill design, and initial results confirm high silver and gold recoveries. Discussions concerning project financing on the 477-million ounce silver deposit are ongoing. Pan American last year produced 2.84-million ounces of silver from its Quiruvilca Mine in Peru and is in good financial condition with $37.8 million (US) in working capital, no debt and positive earnings. Pan American is our silver recommendation of choice, but we also recommend Peñoles and Silver Standard.

Finally, palladium has gone sky high and we must keep in mind that it is interchangeably used with platinum in automotive catalytic converters, so either palladium will fall or platinum will rise. Meanwhile, Russia still has not shipped any of the two metals this year, and nervous automakers will be looking to our favored Stillwater Mining (SWC) for supplies as they come on stream.

The accompanying chart is the ratio of gold and the Dow-Jones Industrial Average way back to 1895. Point #2 was at the 1929 stock-market peak, and #4 was at the 1966 high, at which time we predicted "The Coming Invisible Crash" (the name of your editor's second book) that would be concealed by the sky-high inflation of the 1970s which came too true.

Today's point #6 once again shows us up to the elevated levels of 1929 and 1966, ominously enough. According to this chart we are due for a move down toward point #7, which means either a sharp rise by gold, a historic decline by the Dow-Jones Industrials, or both. That is why we are more determined than ever to do everything we can to get our loyal, long-term TDLrs out within 10% of the ultimate Top, before "The Father of All Bear Markets."

FOLLOW-UP WRITEUPS

Franco-Nevada (FN.TO) and Euro-Nevada (EN.TO), the world's largest public gold-royalty companies, last year reported mind-boggling improvements in their Midas Joint Venture with resources of 6.0-million ounces gold equivalent, a stunning 46% jump over the previous year. That this gold-silver property is still in its earliest stages of development is simply breathtaking, and it is no wonder that these two stocks are near their all-time highs despite nondescript gold-bullion prices. All the environmental permits and approvals have been granted, so the Ken Snyder Mine is on schedule and on budget for full commercial production of 250,000 ounces of gold equivalent annually by May 99. Best of all, it will be one of the world's lowest-cost gold mines at a cash cost of $78 (US) per ounce. Either or both of these two blue-chips should be part of ever TDL portfolio by now.

The Stillwater (SWC) mine is expected to produce nearly a half-million ounces of platinum and palladium this year at a cash cost of around $150/oz. Stillwater is two-thirds finished with building its new tunnel-boring machine for the East Boulder project, paving the way for a serious production expansion to reflect the vastness of its ore deposit, starting in 1999. SWC is the only US producer of platinum and palladium, and the only significant source outside South Africa and Russia. Plan to hold this blue-chip for several more years and exceptional, seemingly-assured capital gains.

Laramide: As indicated in our Interim Warning Bulletin of 26 Feb 98, Laramide has acquired an area play near Western Copper Holdings (WTC.TO) that went ballistic after it found perhaps the thickest massive-sulfide mineralization on record, with plenty of blue sky available, consisting of copper, zinc, and precious-metals credits. Massive-sulfide deposits almost invariably tend to cluster, with a half-dozen deposits frequently contained in a single camp. Laramide's acquisition (approximately 10 kilometers northwest of Western Copper/Teck's joint venture) already has a measured zinc-lead-copper-silver resource on it that had been mined primarily for lead during and after World War I. Kilborn suggests that this former mine might be open pittable, with potential for new base metal and silver deposits. But, as with many Mexican mineral properties of merit, Laramide's new acquisition has never been drilled; additional information is available at www.laramide.com.

This unusual chart of silver related to the S&P shows the long bearish Downtrend (D) from 1994 to July 97. Downtrendline (D) was penetrated on 3 Oct 97, and since then has been rising above Uptrendline (U). What this chart means is that London silver bullion has been outperforming the rest of the stock market since Oct 97. By this time, all TDLrs should own a silver "package" of Pan American (PAA.TO), Silver Standard (SSO.V), and Peñoles tucked away in back of portfolios, especially now that Warren Buffett has climbed aboard.

The volume of all the gold ever mined can occupy a cube 63 feet on each side.