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We Have Seen the Bottom in Gold Stocks

10/25/2013

COMMODITIES CORNER

"We Have Seen the Bottom!" gold expert John Doody "shouted" in his Gold Stock Analyst newsletter on July 1. Gold stocks rose over the next few months, before falling back near their June lows. But all of a sudden, gold stocks are on the move again.

John's July call looks like it might be right after all. John has been writing about gold stocks for more than three decades. He's one of the smartest analysts in the industry. You hate to bet against him. Over the last 12 years, his gold-stock recommendations have resulted in 1,200%-plus gains (based on his audited track record).

One of my favorite features of John's letter is his way of tracking whether gold stocks are cheap or expensive relative to the price of gold. It has proven to be incredibly accurate. When gold stocks are cheap according to his measure, you want to buy and right now, gold stocks are CHEAP!

Lately, gold stocks have been undervalued by 40%-plus. Based on history, we've only seen prices this cheap one other time – at the market bottom in 2008. Buying then would have led to 126% gains in six months. In fact, any time John's measure got below 25% undervalued would've been a great time to buy. Take a look.

As the chart shows, big gains followed the last few times gold stocks got anywhere near this cheap. And remember, the only time they were really close to today's value – in 2008 – shares of the Market Vector Gold Miners Fund (GDX) soared 126% in six months.

I believe we're on the verge of a similar move right now. GDX is up as much as 12% over the last two weeks. Like John, I believe we've likely seen the bottom for gold stocks. This could be the beginning of a major leg higher. We have an opportunity for a great trade here with limited downside risk (14%) and triple-digit upside potential.

To make this trade, you could buy the Market Vectors Gold Miners Fund and set a hard stop at the fund's recent low of $22.22. If shares fall below that level, sell the next day. You'll have given up 14% on the downside. If I'm right, and history repeats, you have triple-digit upside potential; possibly in as little as six months.

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What NOT To Do When Investing In Miners

10/23/2013

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Precious metals miners are the most volatile stocks on earth. They're so volatile that investors often forget that underneath those whipsawing stock prices lie real businesses.

Mining isn't an easy business, that's for sure.
More miners fail than succeed. But some today
are executing their business plans well, selling gold and silver for more than it costs them to extract it from the ground. Yet their stock prices remain in the doldrums.

What should you do when you own stock in a business that's making good money, but the market doesn't seem to care?

COMMODITIES CORNER

Well, the most famous investor in history, Warren Buffett, encountered a similar situation during the financial crisis in 2008/2009, when his Coca-Cola stock tanked by 39%.

You don't need me to tell you that he didn't sell. He sat tight, content in knowing that the underlying business was strong no matter what value the market was ascribing to it. Coca-Coca has risen exactly 100% since then.

There are a handful of Coca-Colas scattered around the precious metals industry today, trading at dirt cheap prices despite their strong business performance.

Today's article is from Eric Angeli, broker at Sprott Global Resources and protégé of our good friend Rick Rule. Eric has solid advice on investing successfully in precious metals miners.

Without giving too much away, the key is to focus on the company itself and factors it can control, rather than things it cannot control, like where the price of gold may go over the next 3-6 months.

What Top-Down Investing Gets Wrong

By Eric Angeli

If the past two years have taught us anything, it's that trying to predict short-term moves in the gold price can be a road to ruin. Parsing the umpteen countervailing forces that combine to set the price of gold is tough. And it's even tougher when you consider that oftentimes, market-moving news, such as a central bank trade, isn't reported until after the fact.

In my years spent evaluating natural resource companies as a broker and analyst, I’ve found that there are two ways to successfully invest in precious metals equities. Doing it right can bolster the strength of your portfolio, not to mention your own confidence in your holdings.

Method #1—Top-Down Approach You may have heard this method referred to as “Directional Investing.”

A directional investor decides that gold prices will increase in the long run. That's the starting point of his thesis. He then proceeds to find the companies that will be successful if his prediction comes true. He looks for companies with leverage to the gold price.

If an investor can get the timing right, this can be a lucrative strategy.

There is an obvious caveat, though: for this strategy to work, precious metals prices must rise.

In my role as a broker, I deal with both companies and investors all day long. I can tell you that most speculators involved with gold equities use this top-down approach.

That's why the number one question I’ve heard over the last three months has been, “Why isn’t gold moving up?” To directional investors, the answer to this question is paramount. This mindset leads to the herd mentality and, frankly, gives us our best bull markets.

I prefer method #2.

Method #2—Fundamental Approach Fundamental investors ignore prognostications about where gold prices might move next. We eliminate gold price movements as the crux of our investment decisions, which removes a lot of the guesswork from our portfolios. For a fundamental investor, gold prices are still a piece of the puzzle, but they are not the only driver.

Fundamental investors want to know: which company has a promising deposit in a relatively safe jurisdiction? Which has a tight share structure? This “bottom-up” method, however, does require a lot more homework.

Fundamental investing is all about identifying the difference between a stock’s intrinsic value and the price at which it is trading at in the open market.

While I do believe in higher gold prices eventually—and inevitably—I know that short-term movements in the price of gold are beyond my control. I instead prefer to position my clients for success in the current environment. Instead of focusing on when the gold price will move—which we can never know—we focus on picking quality companies.

Why Hasn’t the Top-Down Approach Been Working? You might say: because the price of gold hasn’t gone up! That's true, but there’s more to the story.

Until quite recently, gold has continued to rise, though not at the same clip we enjoyed after 2008. The problem is that miners' operating costs rose faster than the price of gold. Investors didn't expect that.

Nor did they factor in other cost increases. Sure, the value of a deposit rises every day the gold price rises. But did oil prices jump at the same time, making trucking the goods out more expensive? Did your laborers start demanding high wages? Did energy costs increase? Did the federal government demand a bigger slice of the pie?

Top-down investors can stop trying to figure out why they haven’t been correct over the last several years. They were correct on the gold price—but they ignored underlying cost factors.

This is where the Fundamental Approach shines. All of your investments should fulfill a few key checkpoints:

Look for companies where management owns a large percentage of the stock. A vested interest at a higher share price is even better.
Look for a tight capital structure. A bloated outstanding share count is a red flag. As is a history of management carelessly diluting away shareholder interest by issuing new stock.
Look for a thrifty management team. A good company should spend their capital on projects, not swanky new offices.
The company's mine should remain profitable even if gold drops to $1,000 per ounce. It could happen.
Look for companies with enough cash to finance their current drill program, expansion plans, feasibility study, or construction phase. This year in particular, companies are having a very difficult time finding financing. Those who have adequate cash are diamonds in the rough.
Know which countries support mining. A tier-one asset under the control of a wildly corrupt government isn't really a tier-one asset. You don't want to get caught in the middle of a government dangling final permits above managements’ heads.
Know the geological potential of the exploration area. A four-million-ounce gold deposit is swell, but what if your company discovers not just one gold mine, but an entire new gold district? How will you factor in that upside?

Find a Source You Trust Mining companies have a fiduciary responsibility to make their shareholders money, so they can’t help but paint a rosy picture for potential investors. That's why you need to have a disciplined and impartial eye. Most companies are not worthy of your hard-earned capital.

Having an advisor you trust, or access to technical expertise, is crucial. Ideally you should have both. The most educated investor always has the edge. A source of trusted information is as rare as it is important.

If you prefer a more hands-on approach, Sprott offers complimentary portfolio reviews for investors. I'm fortunate enough to work alongside some of the world’s premier mining engineers and geologists. They have decades of experience ranging from running their own exploration companies to building out mining operations for large-scale producers. If you have any stocks in your portfolio that you're unsure about, give us a call and ask for a portfolio review. It's that simple.

I'll conclude with this: the markets have not been kind to the miners recently. But selling a stock just because it dropped in value is an emotional decision. Seeing red on your computer screen is painful, but it is not relevant. What is relevant is what you do with that capital going forward. Don't let emotion cloud your judgment.

On the other hand, if you’re waiting for the gold price to move higher before you sell, then you’re a speculator masquerading as an investor, and you may as well buy a ticket to Vegas.

My boss and mentor, Rick Rule, recently said, “Bear markets are the authors of bull markets.” When these markets do start moving, if you’re not positioned with the highest-quality tier-one companies, you could miss out on one of the biggest bull market moves of your investing life.

Eric Angeli is an investment executive at Sprott Global Resources. You can reach him at eangeli@sprottglobal.com or by calling 1.800.477.7853.

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Titanium Ore Looks Promising

10/15/2013

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COMMODITIES CORNER

Tronox Limited (TROX) is a $2.72 billion basic materials company that produces and markets titanium ore and titanium dioxide in the Americas, Europe, and the Asia-Pacific. TROX had set up in a very bullish ascending triangle pattern throughout most of the summer before breaking out on strong volume in mid-September.

The measurement of this pattern was $27.00, which was reached within a week of the breakout. Since that time, TROX has been selling off on lighter volume. It’s approaching support near $23.00 with a daily MACD nearing centerline support and an RSI now below 50.

Action To Take: I like the reward to risk on initial entry at the current price with second entry at $23.40. Consider a closing stop below $22.90 with a target back near the $27.00 level.

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A Shocking Energy Prediction and What to Do About It Right Now

10/10/2013

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COMMODITIES CORNER

By Frank Curzio, editor, Small Stock Specialist

"Within 20 years, we will no longer need to import oil from overseas." Last month, I spoke with Dr. Kent Moors on my radio podcast. We talked about an idea I've been following for years. New technologies – like fracking and horizontal drilling – have allowed the U.S. to tap into incredible oil and gas reserves.

My research team and I have gotten a close look at these technologies over the last 12 months in the Permian Basin, Eagle Ford, and the Bakken Shale. This has led to a huge oil boom in America. In 2011, the U.S. was producing 5.5 million barrels of oil per day. Today, it's producing 7.5 million barrels per day. That's a 36% increase in oil production in just two years. And it's the most oil America has produced in 25 years.

Despite this massive boom, the U.S. isn't even close to producing enough oil to meet current demand. But Dr. Moors argues we will be soon. And even if he's half right, a few key players are going to reap enormous rewards.

Americans consume about 18.5 million barrels of oil per day. To reach energy independence, we'd have to increase production by 11 million barrels of oil per day. That's why Dr. Moors' prediction – that in 20 years, the U.S. will no longer need to import oil from overseas – was so shocking.

Dr. Moors is one of the smartest oil analysts in the field. He's a consultant to the world's largest energy companies. And he's basing his call on the latest planning document from the Organization of the Petroleum Exporting Countries (OPEC). OPEC is an oil cartel made up of mostly Middle East countries, and its purpose is to coordinate oil policy. The document projects that not a single member of OPEC will be exporting oil to America a few decades from now.

In other words, the largest oil-producing nations believe America will be energy independent in the not-so-distant future. For the U.S. to become energy independent, it would likely have to open up more shale areas in New York, California, and Florida. It would also have to drill for oil in the Three Forks (under the Bakken shale), the Cline (in the Permian Basin), and the Utica (located under the Marcellus shale). Dr. Moors also suggests that the U.S. will import about 30% of its oil from Canada.

That means the U.S. will need to produce about 13 million barrels of oil per day to meet current demand – 5.5 million barrels more than current production levels. I'm not sure we'll get there in 20 years. But if the U.S. opens up more shale areas and starts importing fewer barrels of oil from overseas, many companies will be huge beneficiaries. I suggest buying some of the largest shale oil producers, like Continental Resources (CLR) and Pioneer Natural Resources (PXD).

These companies drill in the Bakken, Permian Basin, and Eagle Ford – and their oil production numbers are already skyrocketing. Oil-service firms – like Schlumberger (SLB), Baker Hughes (BHI), Weatherford (WFT), and Halliburton (HAL) – will also be winners. These companies sell drilling equipment and services to energy giants like ExxonMobil and Chevron.

My favorite pick is Halliburton – which I believe will be bought by General Electric over the next 12 months. As America pushes to become energy independent, these companies will likely put money in investors' pockets.

Further Reading:

The Most Important Chart for Oil Investors to See

By Matt Badiali, editor, S&A Junior Resource Trader

Each new number out of the oil sector is bigger than the last. As longtime readers know, we're in the middle of an energy revolution. The technology is advancing so quickly, it's like moving from the Model T to the Ferrari in just a few years... and it's helping the U.S. tap incredible reserves of oil and natural gas.

The latest forecasts are out and they're shocking. If you own energy stocks, you have to see this chart. According to the U.S. Energy Information Administration (EIA), domestic crude oil production will hit 7.8 million barrels per day by 2014. That's the highest production since 1988. It represents an astonishing 56% increase from the recent low of 5 million barrels per day in 2008. This chart below shows exactly what I'm talking about.

To put that in perspective, the increase alone will be enough to supply all of Russia's oil demand. It's nearly enough oil to supply the entire continent of Africa. In fact, it's more than enough oil to supply any country in the world except the U.S., China, India, and Japan.

What does this mean for investors? Get cautious. As domestic production increases, the U.S. requires fewer imports. (Oil imports are already at their lowest point since 1998 and falling.) That removes a huge chunk of demand from the global market. Prices will drop dramatically. The EIA is forecasting an 8% decline in the global oil price and a 15% decline in 2014.

If you own high-cost producers – companies that have to spend a lot of money to pump a barrel of oil – you should cut them loose. Take Suncor (NYSE: SU), for example. Suncor is the "poster child" of Canada's oil sands. These energy deposits are tough to mine.

According to Bloomberg, it cost Suncor $139.94 to produce one barrel of oil in 2011 (the most recent data available). Compare that to ExxonMobil (NYSE: XOM) – the world's best oil company – which spent just $9.44 a barrel on average. When you have to spend a lot of money to produce oil, you make a lot less selling it. Suncor's profit margin was just 7.3% in 2012, even with high domestic oil prices.

This company could begin to lose money if oil prices fall even slightly. Many other oil producers are in the same situation. If you own any high-cost producers, take some money off the table and protect yourself. The oil production numbers we're seeing today are extraordinary... and they're just going to get bigger.

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Canadian Oil Rides the Rails

10/10/2013

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First Oil Well in Western Canada

COMMODITIES CORNER

Canadian regulators continue to evaluate
Enbridge's (NYSE: ENB) proposed C$5.5-billion
Northern Gateway pipeline, which would pump
crude from the Alberta oil sands to the Pacific coast
at Kitimat, B.C.

The 1,170-kilometer line is important for oil sands
producers, because it would carry an average of
525,000 barrels a day, which would be loaded onto
tankers and shipped to Asian markets.

However, the project has met resistance from
Aboriginal and environmental groups. It's not clear
which way regulators will lean, but the company
expects the thumbs-up or thumbs-down by
mid-2014. If all goes well, Enbridge says it
will have the line up and running by 2018.

By Chad Fraser

CN Rail to the Rescue?
Canadian National Railway (NYSE: CNR), the country's largest railroad operator, appears to be contemplating a fallback plan in case Northern Gateway is nixed—or at least it was back in late February.

According to a September 22 report from the Canadian Press, an internal government briefing note obtained under the country's Freedom of Information Act indicated that CN was considering shipping crude from Alberta to Prince Rupert, B.C., where it would be loaded onto Asia-bound tankers.

The note, which was dated February 28, 2013, said the company was working with oil sands producer Nexen on the idea at the time. Nexen, you may recall, was taken over by Chinese petrochemical giant CNOOC (NYSE: CEO) last year in a $15.1-billion deal. Notably, CN points out that it would be capable of matching Northern Gateway's capacity.

CN already has track running to Prince Rupert's Ridley Island, but there are other stumbling blocks. "The concept would require the construction of an oil trans-loading facility in Prince Rupert, which does not currently exist,” reads the note. In addition, the note points out that there is a 2.5-year waiting period for new tanker cars, which are typically leased to railways.

Oil by Rail Continues to Grow—But Tragedy Weighs
Still, the existence of such a plan speaks to both how much the shipment of oil has grown over the years and the extent of demand for new ways to move Canadian crude to market.

According to recent figures from the Railway Association of Canada quoted in the Calgary Herald, up to 140,000 carloads, or 230,000 barrels per day, of crude oil and bitumen from the oil sands will be shipped by train this year, up from just 500 carloads in 2009.

Shipping oil by rail costs about $5 to $10 more per barrel compared to pipelines that are already built, but the oil trains are helped by the spread between crude prices. If the spread narrows too much, rail becomes less viable compared to pipelines. Right now, for example, the differential between international Brent crude and West Texas Intermediate (WTI) has narrowed to around $6.70, while Western Canada select is sitting at a roughly $33 discount to WTI.

The safety of shipping oil by rail has also been called into question in the wake of the July 6 tragedy at Lac-Mégantic, Quebec, in which an oil train operated by the Montreal, Maine and Atlantic rolled away after it was left unattended for the night. It then sped downhill, derailed and exploded in Lac-Mégantic, killing 47 people.

The incident has spurred calls for tighter rail-safety regulations, which could significantly increase railways' costs.

Canadian National: A Broad-Based Northern Rail Giant
Canadian National is Canada's largest railway, with about 20,400 route miles in eight provinces and one territory. It also owns track in the U.S. that extends to the Gulf of Mexico.

The company began life in 1918 as a crown corporation (the term for a state-owned company in Canada) and was privatized in 1995.

While the oil-by-rail boom has grabbed a lot of headlines, it's important to keep in mind that oil is just one part of most railways' operations, including Canadian National's. In the latest quarter, for example, petrochemicals accounted for just 19% of CN's total freight revenue.

The largest slice came from intermodal, or containers that can be loaded onto ships, trucks or trains (23%), followed by oil, then grains and fertilizers (16%), forest products (15%), metals and minerals (13%), coal (8%) and automotive (6%).

Overall intermodal shipments continue to rise due to the cost effectiveness of shipping goods by train. As a January Zacks.com report points out, railroads are estimated to be around 300% more fuel efficient than trucks. At the beginning of the year, intermodal accounted for 20% of all railroad revenue, second only to coal.

Oil Provided a Second-Quarter Boost
In the second quarter, Canadian National's revenue from shipping petroleum and chemicals surged 18% from a year earlier. Metals and minerals gained 5%, forest products rose 4% and intermodal gained 3%. Coal revenue was flat, while automotive revenue declined 3%.

It all added up to an overall revenue increase of 4.8%, to C$2.67 billion from C$2.54 billion a year ago. Net income rose 13.6%, to C$717 million, while per-share profits rose 17.4%, to C$1.69, on fewer shares outstanding. Without one-time items, the company earned $1.66 a share, up from $1.50 and topping the consensus forecast of $1.62. Revenue just missed the expected $2.70 billion.

Canadian National's operating ratio—a measurement of railway efficiency—continues to be the lowest in the industry, at 60.9% in the latest quarter, down from 61.3% a year ago. (Operating ratio is operating expenses as a percentage of revenue.)

Former CN Boss Now Heads Its Chief Competitor
The company faces strong competition from rival Canadian Pacific Railway (NYSE: CP), which is now headed by former CN boss Hunter Harrison after activist investor Bill Ackman pushed for Harrison's installation as CEO in the wake of a proxy fight last year.

As he did at CN, Harrison is now focused on cutting CP's operating ratio. CP ended the second quarter with an operating ratio of 71.9%, down from 82.5% a year ago.

CP shares have surged 44% on the New York Exchange in the past year, in the wake of Ackman's boardroom success and the company's ongoing restructuring, compared to a 14% gain for CN. However, CN Rail's shares are less volatile than CP's with a beta rating of just 0.94 versus 1.53 for CP. (Stocks with a beta rating of 1 are as volatile as the market, while those below are less volatile.)

CN also trades at 17.1 times its last 12 months of earnings, compared to 30.1 for CP. In addition, CN carries a higher dividend yield, at 1.60% vs. 1.10% for CP.

Both companies are in good position to ride a continued North American recovery and expected rises in both oil and intermodal shipments. Investors will get a peek at how both trends are playing out in Canada when the pair report their latest quarterly earnings in two weeks.

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The Best Precious-Metals "Mining" Stocks in the World

10/10/2013

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COMMODITIES CORNER

Mining is generally a horrible business. You won't hear many resource analysts say that. But I've been saying it for years. Finding, building, and operating a mine – and making a profit – is tough. You can run into strikes, environmental disasters, government interference, and expensive engineering problems.

There's a way to profit off gold and silver mines without taking on all that risk: royalty stocks. And it's time to start buying. Royalty companies don't actually operate mines. Instead, they own a percentage of a mine's production.

Typically, a mining company sells a royalty to raise cash to build the mine. Once the mine is built, the royalty becomes a revenue stream. After the royalty company makes its first payment, the cost of that revenue is practically zero.

That business model allows royalty companies to generate enormous profit margins of 80% to 90%; a heck of a lot better than the average mining stock. You can see how they weathered the big gold-stock bear market in the chart below.

Franco-Nevada (FNV) is one of the biggest names in the business. It suffered a big drawdown from September 2012 through this summer. But as you can see, it ended the last two years up nearly 30%. Barrick Gold, one of the world's biggest gold producers, is down 60%.

The biggest names in the business are Silver Wheaton (SLW), Franco-Nevada, and Royal Gold (RGLD). Last year, the companies received over $1,600 per ounce of gold and $31 per ounce of silver.

Today, they will get closer to $1,300 per ounce of gold (a 19% decline) and $21 per ounce of silver (a 32% decline). But the stocks are down between 28% and 50% from this time last year. So are they cheap?

I like to use price to EBITDA (earnings before interest, taxes, depreciation, and amortization) to track how cheap or expensive these companies are. The table below shows each company's median price to EBITDA (over the last seven years for Royal Gold and Silver Wheaton and two years for Franco-Nevada) and the current price.

Taking into account the fall in gold prices, Franco-Nevada should have an EBITDA of about $295 million this year. With a market cap of $6.4 billion, its price to EBITDA is 21.8. So Franco is actually on the expensive side.

Royal Gold is cheaper than average and so is Silver Wheaton. Precious metals haven't been this cheap any time in the last eight years. I expect gains of 50%-100% over the next 12 months, just as it returns to a more normal valuation. If you're looking for a diversified way to profit in a precious-metals rebound, start here.

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Reserves Are in Jeopardy

10/3/2013

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COMMODITIES CORNER

By Jeff Clark, Senior Precious Metals Analyst

When you hear about the "gold reserves" a mining company has in the ground, the natural assumption would be that they're talking about a fixed number of ounces. After all, gold doesn't decay, and neither does it grow legs and move someplace else.

But assumptions are dangerous. In fact, industry-wide, reserves are likely to fall fairly significantly in the near future.

When the gold price falls, it doesn't just have a short-term impact on producers—slashed earnings and forced write-downs—it can affect the number of economically mineable ounces a company carries on its books, or even what it can mine in the future.

The Bar Is Higher Reserves are determined by a combination of factors: mostly cutoff grades, metals price assumptions, and projected production costs. For example, based on a gold price of $1,500 per ounce, a project may have economic ore at a cutoff grade of 1 gram per tonne (g/t).

But with gold selling in the low $1,300s, that same deposit may now require a higher cutoff grade, say 1.5 g/t, because the revenue earned from mining ore at the previous cutoff would be lower than the cost to extract it—a strategy that, as we all know, doesn't make a great business plan.

What Was Once "Ore" Is Now Just Dirt Higher cutoff grades reduce the number of economic ounces available for mining, especially if the gold price doesn't recover for a period of time.

Here's the average gold price over the past four quarters:

As you can see, that's a fairly significant drop, and it has undoubtedly forced many company executives to revisit the price assumptions that were used to determine reserves. That means many reserves requiring a gold price of $1,350/oz or higher are likely to come off the books.

This is the reason high-grade projects have better odds of survival than low-grade ones. Sure, all projects make less money when gold falls, but the higher-grade ones tend to have higher margins and see fewer slowdowns or shutdowns. In many cases, they still make great profits.

High Grading However, there's another phenomenon at work that will conspire to lower reserves: high grading.

Many projects have both low-grade and high-grade zones. When prices fall, a company can mine the richer ore and still make money. It may sound shortsighted, but it can be the right thing to do to stay profitable and be able to survive and advance in a temporarily weak price environment. But it does impact reserves, maybe more than you realize…

When metals prices are low and companies focus on high-grade ore, the low-grade material is temporarily bypassed. It's still physically there, but not only is it not economic at lower metals prices, it may never get mined at all.

That's because some low-grade ore only "works" when it's mixed with high-grade ore. Even when
gold moves back up to the price that the low-grade ore needed to be economic when mixed with the higher-grade ore, it doesn't matter, because the high-grade ore is gone. So it's not just gone legally, as
per regulatory definitions of mining reserves, it may be economically gone for good.

Miners could return to some of these zones in a very high gold price environment (something north of $2,000), but that's a concern for another day. The point for now is that many of today's low-grade zones can no longer be counted as reserves.

Now You See Them, Now You Don't Most companies update their reserves at year-end and report revisions in the first quarter. If gold doesn't stage a strong rebound soon, the industry will see a significant reduction in mineable reserves.

This will have repercussions on the precious metals sector, and on us as investors. As you might suspect, some of it is negative, but it also points to an investment opportunity that we believe will make us a lot of money.

Here's what Major Tom radios in about lower reserves and what that means to us investors…

A corresponding decrease in the value of the company. A company with less product to sell won't be priced as high as it was previously. The exception here will be the producers that can maintain strong cash flow; those that do will be the ones that hold up the best.

Watch out for companies that take a big write-down in reserves. Many producers will be forced to report lower reserves in early 2014 if gold prices stay where they are. But the Big Red Flags will be those with unusually large drops, because they may not have the reserves to keep production at the same level. These will mainly be the companies with low-margin projects, or those with low-grade material that will remain uneconomic because of high grading. If production falls, the stock will woo fewer investors.

Lower reserves = lower supply = higher gold prices. Worldwide gold production is basically flat. If we see a substantial decrease in the number of ounces coming to market as a result of the fallout from reserve write-downs and demand stays at least where it is, prices will be forced up. This is already happening, but if it picks up steam, we could see a fire lit under gold prices.

The better junior exploration companies could be big winners. Many producers, out of necessity, have reduced or even cut exploration budgets. Yet if they're going to survive, sooner or later they'll have to find more ounces. Every day a miner operates, his business gets smaller—but if he hasn't been exploring, the ounces won't be there when he needs them.

Enter the junior exploration company with a big, high-grade deposit. These companies will become juicy takeover targets, especially if their projects have strong economics at lower gold prices. Once management teams realize they're running low on ore, there will be a mad scramble for this type of asset.

Even when gold prices return to prior highs, it will take years for large companies that have cut expenses to bring back all the laid-off geologists, identify and drill new deposits, and develop those that are economic.

There will only be one solution, and it will be a pressing one: buy an asset.

That's why right now is the best time to buy those juniors that have robust projects with strong economics. And I just bought one…

Casey Chief Metals Strategist Louis James recommended an advanced-stage gold exploration play in the current issue of the Casey International Speculator. The company has a large, high-grade deposit in Europe that looks poised to become much larger.

I plan to buy the best undervalued juniors now and be patient until the producers come a-calling. A monstrous run-up is coming in the junior sector, and all you have to do to profit is wait for the inevitable to arrive. Reserves are going lower, yes, but we'll be making some money.

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