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The Gold Hero

 

It’s no surprise that we’re seeing more sell-offs.

Last week, I ended my letter telling readers to “Protect (themselves) from inflating currencies: Buy gold.”

Without a doubt, the biggest headline in the investment world this past week was the big gold and silver selloff. So was I wrong? Was telling my readers to buy gold the wrong thing to do?

Not even close.

The market, and that includes gold and silver, has been volatile this year. The year is coming to an end and that means the last chance for anyone to sell what they can to buy presents or save taxes.

The dollar has been strong against other world currencies recently and that generally means a short term break in gold. But as we have seen throughout the last few years, this correlation no longer applies over the longer term.

So while sceptics of gold cheered the recent pullback, smart investors are loading up. Does that mean we have seen the bottom for gold? Does it mean we have seen the bottom for gold stocks?

The price of gold is made on a daily basis by funds and institutions reacting on what I believe to be political fundamentals – these are the guys that set the price of gold in the short term. Those that own gold for insurance and investment purposes, such as myself and the central banks of the world, are spectators to the market but not the price makers.

So while gold and gold stocks may trend lower in the short term, I am confident that prices will continue its longer term rise. This may not be the exact bottom in gold and gold stocks, but I am continuing to look at buying big producers and juniors that I think will be taken over within the next few years. Don’t let short term volatility scare you away from the fundamentals that clearly show strong under valuations in great companies.

Over the next few weeks, look out for more fire sales in the junior precious metals sector. The rewards may not come tomorrow, but they will come. Don’t look at daily volatility. Instead, look at what makes sense. I expect the recent cycle lows for gold to occur within a month or so, so expect gold to remain volatile in the meantime. Use this volatility to accumulate.

The Gold Superhero

Every year before the holidays, I like to republish a story that our long time Equedia Letter subscribers have heard before. It has become so popular amongst our readers that it is now a tradition here at Equedia for us to publish this story every year before the new year begins. With our strong focus on the junior resource sector, in particular precious metal stocks, it’s only fitting that we revisit this incredible story.

It’s a story about a real life gold super hero whose deviance of conventional wisdom turned a failing corporation into one of the world’s largest gold producers. Rob McEwen wasn’t a miner. He was a young man following his father’s footsteps into the business world. Like his dad, he had a fascination for gold.

After years of growing up hearing stories around the dinner table of miners and prospectors, he finally got his shot.

One day, he stepped into a takeover battle as a white knight and emerged triumphantly as majority owner of a mine in Red Lake, Ontario. Here he stood at the head of the boardroom table filled with a room full of experienced senior geologists, all of whom doubted his ability to lead this company. Who could blame them? He was a mutual fund manager turned CEO of a gold corporation overnight.

But it was hardly a dream come true. The company he had taken over was plagued with negative news and on the brink of failure. The miners were on strike and they were overwhelmed by lingering debts. The gold market was contracting and the mine’s operating costs were exceedingly high, forcing them to cease mining operations. Unless they found evidence of new gold deposits, the fifty-year old mine was about to be shut down along with the company.

McEwen knew that the mine had potential. “The Red Lake gold district had 2 operating gold mines and 13 former mines that had produced more than 18 million ounces combined,” he says. “The mine next door had produced about 10 million ounces. Ours had produced only 3 million.” So he sent his geologists packing with $10 million dollars and a plan to drill in the most remote and deepest parts of the mine.

A few weeks later the geologists returned. With smiles on their faces, they broke the news to McEwen that would save the failing company – at least for another few years. They had found results signalling new deposits of gold as much as thirty times the amount they had been mining at the company. But that wasn’t enough.

The senior staff continued years of further exploration in attempts to find a more accurate depiction of the gold’s value and location. Despite the expertise and experience among the staff of senior geologists, their efforts proved stagnant. It had become obvious that something critical needed to change if they were to secure a future for their company. They needed to act faster.

Exhausted and uncertain about his company’s future, McEwen decided to take a break for some personal development. He attended a MIT conference in 1999, where corporate presidents from around the world had come to learn about advances in information technology. Perched up in his chair, he listened as the lecturer talked about how Linus Torvalds built a masterpiece computer operating system by revealing his code to anonymous programmers all around the world on the internet.

Without the help of thousands of anonymous participants, the Linux system would have cost millions of dollars to produce and would have taken years. But it didn’t.

Then it hit him. If his senior geologists couldn’t find the gold in Red Lake, maybe someone else could.

McEwen wasn’t a miner. He didn’t think like one either. But that was his strength. So he rushed back to his corporate head office in Toronto to share his idea of “open sourced” mining.

McEwen wanted to take all of the data the company has spent creating in the last fifty years and he wanted to share it openly with the world by posting it on the internet: “Then we’ll ask the world to tell us where we’re going to find the next six million ounces of gold.”

At first, the Company’s geologists were appalled at the idea of exposing their fifty years of secret data to the world. And they had good reasons to be. The mining industry is an intensely guarded business and geological data is to miners what treasure is to pirates. Giving this sort of data away could not only subject you to takeover risks, but can also imply that your company no longer has the ability to move forward on its own.

Despite the inherent risks, McEwen decided to push forward and in March 2000, he launched a new “Challenge.” They posted every bit of information they could on their 55,000-acre property through their website and setup a contest offering $575,000 worth of prize money to the participants that could show his Company the best methods and estimates on their property.

McEwen knew this strategy entailed big risks. But the risks of continuing to do things the old way were even greater.

“Mining is one of humanity’s oldest industrial pursuits,” McEwen says. “This is old economy. But a mineral discovery is like a technological discovery. There’s the same rapid creation of wealth as rising expectations improve profitability. If we could find gold faster, we could really improve the value of the company.”

And improve the value they did. Within weeks, submissions from over one thousand virtual prospectors in over fifty countries crunched the data. But geologists weren’t the only participants.

Mathematicians, graduate students, consultants, and military officers all submitted entries. They had, “applied math, advanced physics, intelligent systems, computer graphics, and organic solutions to inorganic problems.”

Not only had the contestants identified new targets on the Red Lake property, they introduced the Company to state-of-the-art technologies and exploration methodologies, including new drilling techniques and data-collection procedures, and more advance approaches to geological modeling.

McEwen had harnessed a technological trend that most in the industry would have shunned. As a result, he turned his destined-for-failure $100 million company into Goldcorp – one of the world’s largest gold producers and a company today worth close to $34 billion.

McEwen’s courage to challenge the mining industry’s safe-keeping of geological data reveals to us that change can lead to astonishing results.

The junior resource stocks give us ample opportunity to beat both the markets and the returns that mutual funds and bonds can offer. We have already seen a major run in many of the mid-tier and junior precious metals stocks over the last few years.

Despite the sell-off, commodities and precious metals prices remain high. Eventually, fundamentals will overcome fear. It may take a few months, or even a few years, but these low valuations will eventually be reversed.

The Equedia Letter will be taking a few weeks off for the holidays. I hope everyone enjoys the remainder of the year and I am looking forward to 2012 as a year for great opportunity.

Happy holidays!

Disclosure: I am long gold and silver through ETF’s and bullion, as well as long both major and junior gold and silver companies.

Until next week,

Ivan Lo

Forward-Looking Statements

This Newsletter and report contains certain forward-looking statements that may involve a number of risks and uncertainties. Actual events or results could differ materially from current expectations and projections. Except for statements of historical fact relating to the project, certain information contained herein constitutes “forward-looking statements”. Forward-looking statements are frequently characterized by words such as “plan”, “expect”, “project”, “intend”, “believe”, “anticipate” and other similar words, or statements that certain events or conditions “may” or “will” occur.

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Cautionary Note to U.S. Investors Concerning Estimates of Inferred Resources

This presentation uses the term “Inferred Resources”. U.S. investors are advised that while this term is recognized and required by Canadian regulations, the Securities and Exchange Commission does not recognize it. “Inferred Resources” have a great amount of uncertainty as to their existence, and great uncertainty as to their economic and legal feasibility. It cannot be assumed that all or any part of an Inferred Resource will ever be upgraded to a higher category. Under Canadian rules, estimates of “Inferred Resources” may not form the basis of feasibility or other economic studies. U.S. investors are also cautioned not to assume that all or any part of an “Inferred Mineral Resource” exists, or is economically or legally mineable.

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