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The Start of a Gold Bull Run

Commodities / Gold & Silver Apr 09, 2008 - 02:59 PM GMT

By: John_Lee

Commodities

The price of Rice doubled in the last 2 months raising fears of fresh outbreaks of social unrest across Asia, where the grain is a staple food for more than 2.5bn people (See article in FT.com here ).

This should come as no surprise since grains, energy, and just about every other commodity prices have risen a minimum of 50% in the last 6 months. And a strong physical demand and lax monetary policy will continue to fuel high commodity prices.


You might have also read that Carlyle Fund and Bear Stearns blew up in the past month. Two companies going down is not a cause of concern as companies rise and fall all the time. However, when considering they have about $300 billion worth of mortgage positions with their counterparty sweating, you begin to understand why the New York Fed agreed to advance $30 billion to help JPMorgan assume Bear Stearns positions. Last year, I wrote that the mortgage mess was minimum a $2-3 trillion problem. We are about half way through, so expect to still see massive write downs from pension funds, endowments in 2008, together with perhaps another major blow up besides Bear Stearns.

All those bailouts are creating moral hazards and the Fed has no room to raise rates to combat inflation. Monetary instability and fears of inflation are gold's best friends. This is why my focus right now is on precious metals. I expect the mortgage mess climax to take place in 2008, which will more or less correspond to a spectacular rise for gold this year.

Asia barely sneezed at subprime but they sure are catching cold feet on inflation and fever on gold. Technically, at $920/oz Gold is comfortably above previous all times of $850/oz set in 1980. I am very confident the downside is $850-$890/oz. While the upside is anyone's guess, studies suggests a gold price between $1,500 to $2,000/oz based on today's oil and copper price of $100/barrel and $3.7/pound respectively.

Interestingly though, gold juniors as a whole are trading today at their lowest level this decade relative to the price of gold as illustrated in the chart of the following article: http://www.stockhouse.ca/shfn/editorial.asp?edtID=39139

It makes no sense that the American mortgage crisis is impacting Canadian gold and resource juniors. One can now margin at 5% to buy oil trusts paying 15% dividend and gold juniors for less than $10/oz in the ground. I am confident the situation will reverse, offset not by higher interest rates but by higher junior stock prices.

Within two months and as soon as we hit the bottom of interest rates, I expect all the hoarded money to spill out looking for a new home as it simply does not pay to park money earning 2% with real inflation running at double digits.

I monitor hundreds of companies every day and pick entry points. In the last 6 months, juniors have decisively bottomed after their prices have been slashed up to 90% in some extreme cases. I am now seeing nice pops here and there like mushrooms on a sunny spring day after the storm. There are many quality junior companies with good cash positions, a low market cap and good prospects. Some of them are featured at GoldMau .

I hope you have enjoyed this update. I invite you to join the gold ride.

John Lee, CFA
johnlee@maucapital.com

http://www.goldmau.com

John Lee is a portfolio manager at Mau Capital Management. He is a CFA charter holder and has degrees in Economics and Engineering from Rice University. He previously studied under Mr. James Turk, a renowned authority on the gold market, and is specialized in investing in junior gold and resource companies. Mr. Lee's articles are frequently cited at major resource websites and a esteemed speaker at several major resource conferences.

John Lee Archive

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