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Much of it we expected, though we are surprised by the strength of some the moves and the size of these swings.  Like you, we saw a bottom in March and expected to see good rallies coming off of it.   We also expected metals to do well this year. We’ve been saying we’re in a secular bull market for commodities for years and that belief seemed validated when base metal inventories at the London and Shanghai exchanges topped out early this year at about one third the levels they reached in 2001-2002.  That was at the end of a far milder recession than the one we are going through now.  To us, that was further proof that the metals markets were tighter than at any time since the 1970’s, which was the last secular bull market for metals.  Indeed, we said in January that we expected the top percentage gainer of North America markets would be the TSX Venture.  I think people were looking for a rubber room for us back in January on that comment.

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That’s how we are treating it but I am not losing sleep over what to call it.  Even if we’re in a secular bear for most G7 markets that doesn’t mean we have to see lower lows.  Anything is possible but it’s not a necessary condition.  I think it’s just as likely we will put in an intermediate high then pull back and bounce around in a narrower range, maybe for an extended period.  It’s not uncommon to go sideways in a broad trading range in a bear market, for years sometimes, while company earnings catch up with the valuations being given to them by the market.  We expect a pull back since the move has been so large off the bottom and volumes across many markets are still light.  Clearly, there are traders who are not convinced the move will last.  Whether those people capitulate and buy or wait for a large pull back remains to be seen but, at this point, I think they will wait. It increasingly feels like the US particularly is in a funk that will not pass soon.  Unless the inventory cycle generates some jobs in Q4 and Q1 2010 to cheer people up and invigorate what Keynes use to call the nation’s “animal spirits” the US economy is in for a hard slow climb out of recession.  I do expect gains from inventory re-stocking but unless companies are comfortable to start re-hiring people it will be tough to sustain.

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Well, not for us. If this is a “normal” secular bear market and we chose to stay completely out we would be twiddling our thumbs for another nine years which could get a bit tedious. I know there are perma-bears telling everyone to stay away from equities but if you are a trader you should certainly be able to play a rally as large as this one, but you have to be sensible about it. In a bear market you have to take money off the table on good trades.  When the market does pull back it’s safer to wait for the market to show you a bottom before buying in again.  In bull markets people always worry about being too late but in bear markets it can be just as dangerous to be too early. No, it’s not a risk free proposition to do it, but you can always buy Treasuries and get a 0.01% yield if that is where your comfort level is.   It’s a matter of finding value and taking profits when the market offers them or accepting you might have to wait out a large dip in the markets on some holdings.  If you are taking some money off the table when you get a good price move you can bring your average costs down enough to be more comfortable if you do have to sit on a position for a while.

You can make the augment that what we are seeing is “just a bubble” but when “risk free” rates are sitting at or near zero that is going to benefit other asset classes, including equities. Zero interest money is an incredibly powerful stimulus, even for economies as battered as the G7 debtor economies are. The broader market is definitely ahead of earnings right now, but a chunk of this rally is about P/E expansion due to those falling interest rates.  As long as traders believe rates will stay down they are willing to live with that P/E expansion, even if the “E” part is pretty slow in coming.  Of course, the converse of this argument is that when rates do start to climb that market will start giving that back.  We don’t see most of the G7 central banks to lift rates any time soon, but sometimes the bond market makes the decision for them.  We have told readers for months to keep an eye on things like the TNX or ten year bond yield index.  If that starts to climb rapidly the market could get nasty again fast.  It’s not happening yet and yields have continued to fall but we don’t want people to be too complacent.

On the subject of bear markets, one important distinction should be made. While we think the consensus about a secular bear in most large North American and European exchanges is right, I don’t see one on the exchanges of countries like China, India,  Brazil and a number of other high growth and/or resource rich countries.  Even Canada’s TSX index, which tends to follow the S&P around like a lost puppy, doesn’t look like it meets the conditions of a secular bear.  The 2008 high and 2009 low for the TSX were about 30% higher than the 2000 high and 2002 low, respectively.   I’m not saying it won’t get clobbered during a down leg in New York but it’s important to make these distinctions.  Most of the countries that provide the demand that drives the resource market are in far better economic shape than the US and Europe.  They will increasingly tread their own path in the world economy.  If you trade resource stocks and are going to wait for strong sustained growth in the US and Europe you will be waiting too long. In this secular commodity bull, it is developing countries pulling the train, not the G7.

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Longer term yes, for most of them, but for the short term we have gotten cautious about base metals. After peaking and then falling earlier this year, base metal inventories are climbing again and are at or above the spring peaks.  Even so, the prices of most metals have held up very well and are very close to or at 52 week highs.  Obviously, the trade against the Dollar is helping to levitate them and we would be foolish not to be concerned about that.  At some point we will get a correction.  We’re quite interested to see how the warehouse inventories react to the situation if there is a large price drop.   We suspect some of those inventories go away as sellers decide the price is too low to have the metal on offer. In that situation the base metal markets would start to firm up as they did earlier this year.  Medium and longer term we think the underlying demand and tight supply are real and these issues will again dominate the markets.  We sold a couple of long term copper stories off the HRA list earlier this year, particularly First Quantum (FM-T) which was a 4000% percent gainer for us.  We’re looking at new base metal stories but I don’t think we would introduce them, except perhaps to our premium Special Delivery list, until we see a pullback in copper prices. We recently added a nickel story at the SD level I can’t name that is up about 60% but that was a special situation.  For the time being we will continue to stick with gold stories.

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Early this year we decided precious metals were likely to go a lot higher. Given the extreme measures the US and other countries were taking to forestall financial disaster we were comfortable that the Dollar would turn around and head lower again.  We thought that gold had done a good job of protecting portfolios and that would not be lost on investors.  We have a number of producers and near producers on the list that we either followed from the exploration stage or that took over HRA list companies so we were comfortable readers had choices there.  We added a group of explorers that had either the potential for outsized asset growth in the form of new discoveries or the financial strength and management to bring in projects that fit that bill quickly, preferably both.  I’ll give you a couple of examples.  The first addition we made was at the market’s nadir in March, a company called East Asia Minerals (EAS-V).  We were extremely impressed with their Miwah project that we thought had obvious multi million ounce potential.  They had enough cash to start drilling and had given shareholders a good win already in the form of a $1.30 dividend so we didn’t perceive financing as an issue.  EAS has been drilling for four months now and the results have been excellent.  They did a financing at 51 cents at the start of the drill program and that combined with warrant and option exercise has the treasury fuller now than it was when drilling started.  They are adding a second drill and results are matching the geological model that we think gives the project 5-10 million ounce potential.  It’s up 500% but we think there is plenty of upside still both for the project and the stock.

The second stock we added is one we know you are fond of too, Evolving Gold (EVG-V) which is working on a gold discovery in Wyoming and may have another one in Nevada.  We liked the look of the phase one results at the Rattlesnake Hills project last fall, but of course no one cared then with the world coming to an end.  We were impressed by the results of the first drill phase and by the fact the company had raised money at much higher prices.  Their treasury would be more than enough to handle even a very large exploration program with plenty to spare.  We wanted to see an outline of this year’s drill program before adding it, which we did in May at 35 cents.  The first hole of this year’s program was even better than we hoped and the stock was soon trading above $1.80.  It came back below $1.00 before strengthening again since many traders were just hoping for a repeat of that first hole.  EVG has released a number of good holes, many of them with bulk tonnage grades, not the high grades that got people excited in the summer.  This is what we told our readers to expect.   This play, pardon the pun, is still evolving and the company is working out the overall mineralized system and controls on the gold grades as they go.  From what we have seen, the system has not been cut off so there is room to keep growing it.  There are still lots of questions to be answered about things like gold recoveries and whether open pit or underground or both are the way to go but it continues to look like a large robust system.  There are still plenty of drill holes coming and our readers are up about 250% even after the pull back so we’re not complaining.

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Any time a market goes one way for a long time you have to start thinking defensively.  Even a secular bull market will have some big dips.  Anyone who has followed gold for more than a few months doesn’t need reminding of that.  There have been several substantial pullbacks on the way up over the last few years and I don’t doubt there will be more before it’s done.  We recognize how big a factor the US Dollar and the low interest rate environment has been in recent moves.  The US Dollar may bounce at some point and its likely gold will pull back when that happens.  But the overall move which is now eight years old is a secular one and the drivers are the same as for a number of other commodities.  We consider the US Dollar decline an “end of empire” type phenomenon and it could run for some time yet.   We don’t know if it sees a fall as large as the 65% drop that afflicted the UK Pound but more downside is certainly reasonable. The simple truth is that the US is having no trouble selling debt.  It’s impressive how low the yields are and how high the coverage ratios are still at US debt auctions.  As long as that continues why would the US want to defend its currency?  There is a lot of hand ringing about it in political circles but when the world will lend you money at less than  one percent and currency drops don’t impact prices much because you have (for now at least) the world’s pricing unit, why would you mess with that?   In addition to the “anti Dollar” trade there has been a clear broadening of appeal for gold in the past few months.  It recently saw new highs in several other currencies.  We don’t consider ourselves gold bugs but the appeal of an asset class that is not someone else’s liability is pretty compelling after what the world has been through in the past two years.  While we expect pull backs we think the support levels are much higher now.

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Yes, we recently added a couple of more companies to the HRA portfolio.  Both were added when we thought there would be a quiet period between results that would allow readers to accumulate them.   One of them just started reporting again and doubled in price based on that reporting.   I won’t name it here but we like what we are seeing. If your readers want to know more about it we are providing a set of samples to them that will include some of the initial coverage of that company and updates from our Special Delivery Alert Service (click here for more info).   We are tracking a number of gold explorers right now and will be adding some of them through the SD service when we think the time and the price is right.  Year end is coming there may be some profit taking before or after that which might bring some other companies to price levels we would find interesting.  As long as we think the precious metals markets will be strong enough for good results to be rewarded we will be on the lookout for new stories for our readers. We have found that explorers with the right management and projects are delivering big gains when new results are favourable so we have several of those on the watch list.

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There are three levels.  The basic is the HRA Journal, a monthly newsletter we’ve been publishing since 1995.  Some of the longer editorial content and the extended coverage of companies we follow appear there, along with updates on companies already on the HRA list.  The Dispatch is a mid month publication that has a bit more editorial and more frequent updates of companies we follow.   The premium service is the Special Delivery Alert service.  There is no schedule for those of course since they are event driven.  The SD is where we usually initiate coverage on new companies.  Many of the Alerts will update companies we already follow based on breaking news like new exploration results.   Evolving Gold is one good example of that.  Readers knew about it already due to the extended review in the May Journal, but Alert subscribers got an update as soon as the first hole of this year’s program came out.  That allowed us to lift it to “strong buy” based on those results while the stock was still halted at $0.45.  As it happens, that Alert also had an update of another company we know you like, Nevsun (NSU-T) which announced a debt deal for Bisha at about the same time.  Both of those stocks have of course seen very strong up trends since then.  EVG’s price increased by 300% in a couple of weeks and Nevsun quickly moved from the $1.30 level through $3.00 on the TSX and hasn’t looked back. There were similar well timed Alerts on East Asia when it started reporting from its current program.  The latest Alert was on that recent pick that just doubled.  We had an alert out in the morning they released the first set of drill results while it was still moving higher.

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Yes, though we also use it to update companies if the news is significant even if we don’t necessarily expect a big price move one way or the other and to comment on general events in the market.  Since there are usually a number of companies that are only followed at Alert level it’s the only update source for those.  One other important aspect of the SD service is the “trip reports” that David writes.  As you know, Dave spends a lot of time flying around looking at projects.  Most of these are not added to the HRA list, at least not right away.  David does include details on that trip in the SD however, even if they are not companies formally followed by HRA.  This gives our Alert readers a chance to get Dave’s thoughts and insights on various plays and areas he has visited that they might be interested in themselves.  Readers appreciate those reports, though most people who sign up for it want it for breaking news on companies we follow or the first access to new companies we add to the list.

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I understand that HRA has a special offer for Grandich followers only.

Can you tell us about this?

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Yes we do.  We call it our “Friends of Peter” sale.   It’s available on the Special Delivery Alert service.  First off we are offing your readers a package of recent HRA coverage from the Journal and the Special Delivery so that they can see some of what we’ve been talking about and why.   They can go to the special page we set up for your readers at http://www.hraadvisory.com/grandich.html to access the report.   In addition, we are offering your readers savings of 30% on the SD Alert service,   Please note though that this is a very time limited offer.  Its only good for 5 days and can only be accessed through the page we set up for your readers.  You won’t find it anywhere else.

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