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When Gold Confidently Clears $1,200 per oz...

In the last decade we saw $140 billion worth of Canadian juniors taken over. Many of the deals targeted copper projects, which means bigger fish already own many of the best copper deposits.

The same is not true of gold. Some gold discoveries were taken over but many are still held by juniors. And they will stay there until share and metal prices start to climb for real, because until then majors will stay mostly on the sidelines.

But that will change when the gold price moves confidently above $1,200 per oz., a number that has become imbued with significance by a three-way coincidence.

The first is that $1,200 is just enough above where gold bottomed – at $1,140 per oz. on Nov. 5th, as called by yours truly – to provide confidence the worst is over.

And confidence is so important with gold.

Gold is the most reliably cyclical of all metals, so in a down cycle speculators simply bide their time, awaiting a clear bottom before returning for the ride back up. The fact that gold has hovered near $1,200 for two months is providing precisely that confidence.

The second coincident happening is that, after costs crept up and up during the bull market, several years of cost cutting have now brought the average all-in cost to produce an ounce of gold down to roughly $1,200.

That's great, but majors want to lower their costs even more. That means they are eyeing mines or development projects where production costs even less. Whether a project can produce good returns at $1,200 gold has become a go-to question.

In the third coincidence, it turns out many projects offer an answer to that exact question.

Economic assessments generally use conservative metal prices, derived from a combination of three-year trailing prices and future forecasts. The last time any significant number of companies had the funds and momentum to complete economic assessments was in 2011 and 2012, when gold spent 18 months hovering between $1,600 and $1,800 per oz.

Given those prices, $1,200 was conservative. It was also roughly the three-year trailing price. As a result, a raft of economic assessments was completed based on $1,200-per-oz. gold.

Some returned healthy economics. Many others were marginal at $1,200 – but improved markedly at $1,400 per oz.

That means once gold moves up a touch more and shows staying power, major gold producers in need of new ounces will start moving on advanced projects.

And majors need new ounces. After a few years focused on spending as little as possible, most majors have a lack of new mines or realistic development-ready projects in their pipelines. This multiyear lack of investment in the future means gold output is set to decline in the medium term…while demand rises.

Central banks are buying gold. China and Russia are trying to push the world away from the US dollar, in favor of the renminbi or simply direct currency swaps. Either way, gold plays a key role. In addition, when their efforts start to really bear fruit the resulting US dollar instability will be great for gold. Meanwhile, Chinese and Indians individuals are also accumulating the yellow metal.

Then there's geopolitics. The recent and sudden decline in the oil price below $50 a barrel is a very destabilizing global force. Major oil producers like Russia, Venezuela, and even Mexico rely heavily on sustained high oil revenues. Deteriorating relations between the US and North Korea and between Russia and the West are also amping up geopolitical risk.

In Europe and Japan, recession is a real risk and quantitative easing is either already underway or likely. Ukraine's currency has fallen dramatically, as has the ruble; the yen is also down. That all bodes well for gold.

Closer to home, in recent years high oil prices have provided major capital and liquidity to the highly leveraged US financial system. With that support now gone, the risks of a US stock decline have risen.

Also, contrary to many, I do not expect the US dollar rally to last all year. The Fed will raise interest rates if the economy performs well; rate hikes are highly correlated to a weaker dollar. If the economy falters, the Fed will not raise rates and the dollar will falter. Either way, the dollar will lose steam.

In general, I expect the US markets to sour later this year, sparking a new round of safe haven gold investing.

Because when risks run high – economic risks, geopolitical risks, supply-demand risks – investors turn to gold.

That is why gold will climb above US$1,200 per oz. and catalyze a wave of M&A. It will take some time for the wave to build: gold majors are a conservative bunch and will not start moving on deals until gold is clearly on an upswing. (That is also why majors often buy assets near the top of the market – if you require assurance of an upswing, you by definition miss the bottom.)

But it will happen. The stage is already being set. Majors' balance sheets are far healthier than they used to be. Tires are being kicked at projects around the world. Some deals are already being done; the only reason we aren't seeing more is that, while share prices and metal prices remain low, there is little pressure to sign.

When share and commodity prices start to climb, the scramble will begin. The current surge will provide a bit of a push and a few triggers could be pulled in the coming months, but the conservative majority will wait until after the summer, after the seasonal effect dies off and the summer doldrums are played out, after the oil price has stabilized and its impact on the US economy is more clear, before making their moves.

That's when they will move – but it is not when investors should move.

There are seasonal gains available right now. One of the stocks I recommended six weeks ago is up 55%, thanks primarily to gold's gain. Another is up 30%, due mostly to the early arrival of the seasonal effect.

As my subscribers know, quite of few of my picks are short-term holdings only. I bought them to take advantage of these short-term effects and I will sell them before the summer doldrums steal my gains away.

But I also believe in the long term, not only for gold but also for copper, silver, uranium, zinc, nickel, and other metals. I believe the world relies on metals, more so every year as populations grow and standards of living improve. I know that metals cannot be grown, or synthesized, or recycled in sufficient quantity to satisfy this reliance.

That means mining is necessary, critical, to how our world works. It just so happens that the interplay of investment interest and commodity prices and exploration technologies and production hindrances and development politics and other factors transforms this constant need into a cyclical sector.

But it is a reliably cyclical one. More importantly, the reliability of metal cycles is based not in esoteric chart analysis but in supply, demand, and population – tangible, quantifiable things.

With metals, what goes up must come down and what goes down – for four long years – must go back up.

If you want to hear more about how to invest in metals now and in the future and you will be in Vancouver Jan. 17-18th, come down to the Vancouver Resource Investment Conference. I will be speaking twice – 2pm on Sunday in Workshop 4 and 11am Monday in the Yukon Pavilion – and conducting a whack of interviews. Every other spare moment I will spend at my booth (1404), so please drop by for a chat.



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