Be sure to read the analysis of the US Dollar Below – Money Talks Ed

Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective.

On Friday, crude oil lost 1.65% as a stronger U.S. dollar and news that Saudi Arabia lowered the price of oil for buyers in the U.S. and Asia continued to weight. As a result, light crude moved lower for the fourth time in a row and closed the week at its lowest level since mid-Jul 2009.

On Friday, the Labor Department showed that the U.S. economy added 321,000 jobs in the previous month, beating analysts’ expectations for jobs growth of 225,000. Additionally, the U.S. unemployment rate remained unchanged at 5.8% last month. These stronger-than-expected numbers pushed the USD Index to a fresh multi-year high of 89.49, making crude oil less attractive in dollar-denominated exchanges, especially among investors holding other currencies. On top of that, news that Saudi Arabia lowered the price of oil for buyers in the U.S. and Asia continued to weight, which helped soften the price of crude oil. In this environment, light crude dropped once again, approaching the support zone. Time for rebound or new lows? (charts courtesy of http://stockcharts.com

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Looking at the above charts, we see that crude oil moved lower for the fourth time in a row and closed the week at its lowest level since mid-Jul 2009. In our opinion, this suggests that we’ll see further deterioration in the coming day and a test of the strength of the recent low and the solid support zone (created by the 61.8% Fibonacci retracement and the Aug and Sep 2009 lows). If this area holds, we could see a post double-bottom rally. In this case, crude oil would increase to at least to the last Monday’s high of $69.54. What could happen if oil bears win and push the commodity lower? If crude oil extends losses and broke below the above-mentioned support zone, we could see a drop even to around $58.32-$60, where the Jul 2009 lows (in terms of intraday and weekly closing prices) are.

Nevertheless, before we see a realization of any of these scenarios, we would like to take a closer look at the current situation in the USD Index as the U.S. dollar was one of the major forces, which affected the price of the commodity in recent weeks.

On the above chart, we see that the USD Index moved higher earlier this month and reached the strong resistance area created by the 2009 and 2010 highs. On Friday, we saw a breakout above these levels, which is a strong bullish signal that suggests further increase to the next upside target – the 38.2% Fibonacci retracement level based on the entire 2002 – 2008 decline (around 89.80). What does it mean for crude oil? Based on a negative correlation between the commodity and the U.S. currency that we noticed in recent weeks, it seems that light crude could move lower once again in the near future. Nevertheless, we should keep in mind that despite the greenback’s new high, crude oil didn’t hit a fresh multi-year low on Friday, which is positive sign for the commodity.

Taking the above into account, and combining it with the fact that the space for further growth in the USD Index seems limited, we think that even if the USD Index moves little higher, crude oil could show strength – similarly to what we saw in May, the first part of Jun and also in Sep. Additionally, if the index reverses and moves lower in the coming days, we’ll see a rebound in crude oil as a weaker U.S. dollar makes the commodity less expensive for buyers in other currencies.

Summing up, the overall situation is still too unclear to open any positions as crude oil is still trading in a narrow range between the support and resistance areas. However, taking into account the current situation in the USD Index and a negative correlation between the commodity and the U.S. currency, it seems to us that trend reversals in both cases are just around the corner. Nevertheless, until the uncertainty about future movements is in play, we believe that waiting on the sidelines for the confirmation that the final bottom is in is the best choice at the moment.

Very short-term outlook: mixed with bullish bias
Short-term outlook: mixed
MT outlook: mixed
LT outlook: bullish

Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective at the moment, however, if last week’s upward move won’t be followed by a fresh multi-year low and we’ll see a breakout above the 38.2% Fibonacci retracement (based on the recent downward move), we’ll consider opening long positions. Until this time, waiting on the sidelines for the confirmation that the final bottom is in is the best choice

As a general rule, the most successful man in life is the man who has the best information

De Beers shaped today’s diamond market. They started in the U.S. back in the late 1930s.

De Beers wanted to expand its market (at the time De Beers controlled 90% of the global diamond market). Diamonds, the larger diamonds, had always symbolized wealth and status but how could De Beers market the smaller diamonds to the masses? 

In 1938, De Beers hired Philadelphia ad agency N.W. Ayer. The agency set an ambitious goal, they set out to: “create a situation where almost every person pledging marriage feels compelled to acquire a diamond engagement ring.”

A U.S. promotional campaign was planned and it focused on telling every guy (and maybe even more important every girl) that he absolutely needed to give his special her a diamond ring (and diamond jewelry) to express his true love and lasting commitment, because, just like his love and commitment, ‘a diamond is forever.’

“The agency wanted to make it look like diamonds were everywhere, and they started by using celebrities in the media. “The big ones sell the little ones,” said Dorthy Digham, a publicist for De Beers at N.W. Ayer.” 

How Diamonds Became Forever,The New York Times

The “A Diamond is Forever” campaign was so successful the U.S. became, and still is at $9 billion a year, the world’s largest diamond jewelry market. 

The same campaign was also a huge success in Japan with diamonds replacing pearls in the 1950s. Today China and India’s 2.6 billion people are targeted – because only diamonds can show her how you truly feel. 

“If you look back 20 years, there was no diamond acquisition culture in China. But today in Beijing, Shanghai, and Guangzhou, there is an obvious launch pad. 40% of brides in those cities are getting diamond engagement rings. It was zero 15 years ago.” Gareth Penny, CEO DeBeers

The decade to come will be the years of the diamond. According to a Bain & Company report global rough-diamond demand in value terms should increase at a compound annual rate of 5.1%, to $26 billion by 2023. 

“The appetite for high-quality diamonds in China and India is growing,” notes Gerhard Prinsloo, the author of the report.” In terms of market share, India and China will represent 30% by 2020, equal to that of the United States. Supply should only increase by 2.8% per year, leading to a structural shortage.”

Diamond demand, over the next decade or so, will be particularly driven by India and China due to a doubling of the middle class in these countries (of the two China has the fastest growing demand, jumping to a share of about 15 percent of the world’s diamond market from less than three percent in 2003). 

There’s no shortage of future markets – it won’t be long before one out of every four people on the planet is going to be an African. They don’t know it yet but there’s diamond jewelry in most of their futures.

Current diamond demand is 175 million carats, by 2020 demand is expected to reach 247 million carats. 

Two new diamond mines are expected to start production in Canada over the next few years – Gahcho Kué and Renard.

Dominion Diamond’s Ekati mine will increase production by starting to mine the Misery pipe.

Globally there are three large mines scheduled to start operations within the next four years: Lace, Botuobinskaya and Bunder. The last major mine discovery came a decade ago in India, at Rio Tinto’s yet to be completed Bunder project. 

LUKoil’s Grib mine started production this earlier this year and Alrosa’s Karpinskogo mine started production in October.

Some of the largest and most important mines in the world are running out of diamonds to mine – Orapa and Jwaneng (Botswana) have less than 15 years of production left at current parameters. Orapa and Jwaneng are the largest diamond mines in terms of total dollar value produced. 

The alluvial Marange diamond fields (Zimbabwe – 13% of global rough supply in 2013) are expected to produce eight million carats of diamonds in 2014. Mining is transitioning from easily accessible loose surface gravel to hard conglomerate rock. Most miners are not willing to make the necessary investment at current rough diamond prices. Conglomerate rock grades are 0.4-0.5 carats per tonne while surface grades were 3.75 cpt 

Marange is the largest producing project in the world in terms of total carats produced. It is third in terms of total dollar value after Botwana’s Orapa and Jwaneng mines.

Pikoo Kimberlite Field

Let’s take a look at what might well be the world’s newest emerging diamond district.

Stornoway Diamond Corp.’s (TSX – SWY) regional exploration programs were intended to test the diamond potential of the Sask craton in north-central Saskatchewan.

Exploration work included KIM sampling programs, an airborne geophysical survey (to detect magnetic differences on the ground), prospecting and geophysical anomaly checking – ground truthing of targets. 

Kimberlite indicator mineral (KIM) sampling consists of digging a hole and taking up to 20 kg of glacial till – dirt – and sending it to a laboratory for the recovery and analysis of indicator minerals – if any. 

Assortment of kimberlitic indicator minerals including purple pyrope, red, orange and pink pyrope garnets, chromian diopside, picroilmenite and chromite.

Indicator minerals such as pyrope garnets, chromites, and ilmenites are used as kimberlite tracers because these KIMs are found in the same place diamonds form, deep beneath the earth’s surface in the diamond stability field.

….read page 2 HERE

Why Nuclear Energy Stocks Will Soar in 2015

You don’t have to be a rocket scientist to have seen some upward trends in the nuclear industry lately.

There are several key indicators that point in a bullish direction on nuclear stocks, and all are worth examining before adding any uranium-themed investments to your portfolio.

No doubt the global nuclear energy market is growing. So-called “green” alternatives like wind and solar haven’t made much of a dent in the world’s energy bourses, and that’s where nuclear enters the picture.

According to Statista.com, the value of the global nuclear energy market stands at $133 billion right now but is expected to grow to $300 billion in 2015.

Additionally, the worldwide radiation management market is worth $69 billion right now and will grow to $267 billion by 2030. Construction and services show similar growth trends (expected to hit $53 billion and $22 billion in value over the next 16 years).

But in the past few years, growth has been muted by another high-profile industry event: the Fukushima nuclear disaster in April 2011 that led Japan to close all 48 of its nuclear power plants.

These plants provided 40% of the nation’s electricity needs, and for a short time, the talk was that Japan could make do with non-nuclear fuels to provide energy for the highly populated country — a move other countries (like Germany, Italy, and Sweden) said they would emulate.

That tamped down nuclear stocks, as investors took to the sidelines to see how alternative energy solutions would pan out for nuclear-shy nations. But that scenario is changing, too.

“Nuclear power has been in use for over 50 years,” notes the Emirates Center for Strategic Studies and Research, which published a recent report on the nuclear industry. “Nevertheless, the majority of the world’s nuclear power plants are concentrated in industrialized countries with large economies.”

Several new countries are now considering using nuclear energy, the report adds. “The challenges of maintaining nuclear safety have yet again become the focus of arguments against nuclear power among its opponents. These arguments are not new, having been used after the nuclear incidents at Three Mile Island in the USA and Chernobyl in Ukraine.”

Boosting Nuclear Stocks

The move toward alternatives lost steam, and now nuclear is once again at the top of the list for energy options for a burgeoning number of countries — Japan among them.

Consider these recent developments in the nuclear sector, all of which should add to demand for uranium and boost nuclear stocks:

• Japan has reopened many of its nuclear power plants after demand for alternatives and fossil fuel-based energy sources weakened.
• The U.S. has announced plans to roll out 13 new nuclear power plants.
• The U.K., France, and Canada have also announced plans to beef up their nuclear energy industries.

With renewed interest in nuclear energy, the stocks to watch right now have a uranium bent. One of the earth’s most valuable resources, uranium is the path to profits for investors in one key way: 435 nuclear power plants across the globe rely on uranium to fuel energy development.

All of those plants use about 86,000 tons of uranium annually, but the uranium industry doesn’t really produce that much volume on a yearly basis. Actually, it produces about 75,000 tons of uranium each year.

That’s manna from heaven for uranium stocks and funds, as the price for valuable uranium goes up as demand spikes. Uranium prices are up by 28% so far in 2014 and heading higher as they outpace all five energy benchmarks in the Bloomberg Commodity Index.

“There are a few key factors that are making traders believe that prices should be going up, this includes the good news of Japanese reactor restarts,” said Jonathan Hinze, a senior vice president at Roswell, GA-based Ux. “Expectations that demand will grow even stronger due to China” should also drive uranium prices upward.

Further pushing uranium prices upward are “shovel in the ground” projects for 70 new nuclear power plants coming on line globally in the next two or three years. Some analysts predict uranium prices will rising from $40 today to $70 in 2015.

Which companies offer the best opportunities for atomic energy-minded investors?

For starters, look to Uranium Participation Corp (TSX: U), which owns a stockpile of several million pounds of uranium. UPC’s performance is strictly tied to the ebb and flow of uranium prices, making it a no-frills but potentially ample upside investment given the current trend of uranium prices.

Another option is Cameco (NYSE: CCJ), which is currently trading at $18 per share with an upside, analysts estimate, of $23 per share. Cameco is expected to benefit substantially from Japan’s decision to re-ignite its nuclear power industry.

According to Morningstar, Cameco is the world’s largest publicly traded uranium miner with high growth prospects. “We expect annual output, which was 23.6 million pounds in 2013, to rise roughly 50% through 2019,” the firm says in a recent research note. “Cameco’s new volume will be low cost, with the majority coming from one of the highest-grade deposits in the world.”

Morningstar also notes that uranium consumption is “set to grow at the highest pace in decades as emerging economies turn to nuclear as a carbon-light source of base-load power. Meanwhile, as decades-old existing stockpiles of uranium are whittled down, we expect to see increased pressure on mined supply to meet that growing demand.”

Another option is the Global X Uranium ETF (NYSE: URA), which tracks 23 worldwide uranium mining companies, most of them in Canada. This ETF has a small-cap flavor (aside from a 23% position in Cameco), with a 32% weight toward small-cap energy firms and a 31% weight on uranium microcap firms.

After struggling all year, URA is up 7% in the past three months and shows signs of growing stronger as demand for uranium picks up.

The takeaway? Adding nuclear power to your portfolio is no longer a luxury. With industry growth on the front burner, going nuclear in 2015 — especially with uranium mining companies — is a necessity.

Until next time,

Brian O’Connell for Wealth Daily

During a time in which downward volatility of the junior resource sector has resumed in force, Rick Rule, Chairman of Sprott U.S. Holdings was asked if we’ve seen the ultimate capitulation in junior resource markets yet.  Rick noted that, “We haven’t had a capitulation yet… we’re beginning to see the types of market volatility, rabid moves up and down on no volume, that are normally the “rattle” of the rattlesnake of capitulation. But the market hasn’t followed through yet, and I think that’s a consequence of the recent strength in the gold price.”

With regard to the recent political and social turbulence associated with West Africa, Rick commented that, “With regards to what happened in Burkina Faso, the probability of that set of events being unpleasant for mining is very small, and so it’s pretty obvious to me that the sell-off engendered an opportunity.”

Rick further added that when investing in politically turbulent markets, “Having the cash and the courage

to make a binary bet in an extraordinarily bad situation where the risk to reward is $.20 cents on the downside and $10.00 on the upside, is a set of circumstances that everybody should be lucky enough to have once or twice in their career.”

Here are his full interview comments with Sprott Global Resource Investment’s Tekoa Da Silva: 
 
Tekoa Da Silva: Rick, you published a commentary on October 16th in which you said, “It’s my belief now that we have a 50% chance of entering a capitulation phase in this bear market. If that’s true, in the next few weeks, we will see two or three weeks of fairly dramatic, fairly ugly, but fairly short term of a sell-off. This is consistent with what we saw in ’92 as well as the bear market bottom in 2000.”

Given the sell-off we’ve seen in the resource sector over last two weeks of October, do you have any updated thoughts?

Rick Rule: We haven’t had a capitulation yet. I think the increase in the gold price forestalled a capitulation. I also think there are more psychological forces in the market, which could take it lower in the short term.

We’re in a very interesting situation from a valuation viewpoint. The best 300 of the juniors out of the 3000-junior universe are not merely cheap; they’re very, very, very cheap. So while the stage is set for a move to the upside from an empirical point of view, in the near term, markets aren’t driven by empirical data. They’re driven by emotion.

So any further weakness we could see in commodity prices, in particular weakness as a consequence of a strengthening US dollar, could push us over the edge again into a capitulation, which I think is a condition for a higher market.

At the point in time in which we’re talking, we’re beginning to see the types of market volatility, rabid moves up and down on no volume, that are normally the “rattle” of the rattlesnake of capitulation. But the market hasn’t followed through yet, and I think that’s a consequence of the recent strength in the gold price.

TD: Do you still feel there is a 50% chance of a major market capitulation?

RR: I think so. I think the next excuse for the market to go one way or another is tax-loss selling, and any move to the downside would likely promote an emotional as opposed to a rational response.

Understand that capitulation is a completely emotional event and decision. It’s not an empirical decision. An empirical decision would be to sell the 2700 poor-quality juniors that pollute the universe and buy the best 300—a transfer of weak investments to strong investments. We’ve already seen a transition from weak hands to strong hands, but we need one more emotional sell-off I think in order for the market to clear and move higher.

TD: Rick, during that last week of October I saw four newsletter writers hit the sell button on the junior resource sector for various reasons. Is there a capitulation that occurs there too, among the wholesale buyers and sellers of stocks?

RR: Very unhappy outcome for their subscribers, but of course very good for the market as a whole because we need market clearing events. What I think needs to be remembered is that newsletter writers are human beings too, and every human being is subject to the same emotional response unless one can employ real, real discipline.

The most important factor to note is that people’s expectation of the future is set by their experience in the immediate past, and if all of your experience in the immediate past is negative, the expectation you have for the future is that you’re going to get spanked again.

In particular, if you’re a caring newsletter writer responsible for the fortunes of other people, the trauma you feel coming up with good ideas and seeing your subscribers lose 25% in response to your good ideas is incalculably unpleasant. The consequence is that the emotional turmoil you feel is multiplied. Many newsletter writers are like politicians in that they have the desire to be loved, when in fact despite their best efforts they’re doing harm.

So the psychological impact on them is multiplied, and it causes the reaction you see in the market. It contributes to the spasmodic selling of a market already down by 83%.

TD: Rick, we also saw a political event unfold in Burkina Faso at the end of October, in which the segment of junior resource stocks with operations in that country were down 20% to 50% percent in a matter of a day or two on various sell recommendations. What are your thoughts when you see those types of events unfold?

RR: Well, that brings up several topics of discussion. One is that utilizing newsletter writers and analysts for the market response they generate as opposed to their advice is a very good thing.

If you own stock that is recommended by a newsletter writer, and the editor (or an investment conference) generates a response in the stock, you’re wise to sell. Very often a newsletter recommendation can cause a stock to trade up by 25%. We call it “newsletter syndrome.”

Using that response to sell the stock and then waiting five or six weeks until the response intended by the newsletter writer subsides, before buying back the stock can be a very good way to trade. I did that for years when my business was small enough that I had the time to do it. I can’t do it anymore but there’s nothing to stop our clients from doing that.

Conversely, a position in a company that has been held for a long time by newsletter subscribers who are suddenly advised to sell can cause a stock to move down by 25% or 30%.

What has really changed is simply the editor’s opinion of the company. It doesn’t necessarily mean that the company has changed. So utilizing sell recommendations by newsletter writers is still a technique that I employ to the extent that I see a stock come off a lot that is on my acquisition list. Certainly you should study the reason for the recommendation and test it against your thesis. But if you believe you are right and they are wrong, they may be giving you a 25%-off-sale, which is very, very good.

With regards to Burkina Faso, you need to be very careful about changes in political conditions in frontier markets. The reason is that they’re very poor and absurdly political. Political risk is smaller in very large countries like the United States only because the advanced countries are less political. The reason frontier markets are poor is precisely because they’re so political and the importance of their political events takes on an outsized character.

With regards to what happened in Burkina Faso, the probability of that set of events being unpleasant for mining is very small, and so it’s pretty obvious to me that the sell-off engendered an opportunity.

TD: Rick, I spoke with a client this morning about the Burkina Faso issue, and he noted to me that he was reminded of the phrase, “You can’t read the score card” during situations like that. What has been your experience investing in emerging countries that have what look like obvious political problems at the surface?

RR: My experience has been superb. That doesn’t mean I haven’t been hurt politically before, I have. As examples, in 1996 or 1997, the situation in Congo would have been comical had it not been so tragic for the Congolese. The chaos that engulfed the Congo was absurd. You had as headlines; AIDS, Ebola, malaria, and an internecine conflict that killed 2 million people.

The sub-surface mineralization in the Congo however, didn’t care about the human tragedy that was taking place at the surface. Congo’s copper was put in place 35 to 45 million years ago by a complex series of geological events, and it didn’t care much who killed who.

While that sounds heartless, I was powerless to stop AIDS, Ebola, malaria, or internecine conflict in the Congo. I came to understand that in the Congo, the price of some of the best mineral deposits in the world following those tragedies—Kolwezi, Kipushi, Tenke and Fungurume — was so cheap that I could afford to speculate on a binary outcome.

I’m reminded that Tenke Mining which was under the stewardship of the Lundin family (the finest mining entrepreneurs on the planet) held the best undeveloped copper deposit in the world, and was selling at $.20 cents per share with $.30 cents per share cash. So you had the opportunity to buy the best copper deposit in the world, managed by the best stewards of wealth in the world at a discount to cash.

It occurred to me at the time that I could take a risk with money I could afford to lose all of because there were going to be two circumstances. Either Tenke mining was going to go to zero or it was going to go to from $.20 per share to some number like $10.00 per share.

Having the cash and the courage to make a binary bet in an extraordinarily bad situation where the juxtaposition of risk to reward is $.20 cents on the downside and $10.00 on the upside, is a set of circumstances that everybody should be lucky enough to have once or twice in their career.

I have made bets like that successfully in places like Congo, the Ivory Coast, Sudan, Ethiopia, and Eritrea. I made a bet in Afghanistan and had the other kind of experience—I lost all the money I put up.

One of the things I’ve also been lucky enough to figure out is that part of the reality of political risk is perception, and in my 35 years of investing in natural resources I’ve learned that the most dangerous politicians are not the ones who appear the most odious on the evening news. They’re the ones who are closest to you because they’re the people that have the ability to get at your wealth.

The greatest political risk I’ve suffered personally was here in the People’s Republic of California. We somehow believe that money stolen from us by people in North America according to the rule of law is somehow “less gone.”

An example would be when the Alberta legislature doubled the natural gas royalty in Alberta in response to rising natural gas prices 10 years ago. Having extracted the front-end rents based on an old fiscal regime, they then changed the fiscal regime.

In other words, they stole $2 billion from shareholders. But stealing the money in a legislative sense according to the rule of law, somehow made it less odious than had it occurred in Africa by traditional methods.

TD: Earlier in the month Rick, I visited a local hospital and saw a map of Western Africa at the information desk. Liberia was highlighted in red. When I drove home, I turned on NPR, and Liberia, Ebola, and West Africa was being talked about. It was also the buzz around the Sprott Global offices all that week as well.

Is there a bubble of “fear” in regards to West Africa and the West African segment of the junior resource sector?

RR: There is and it will get worse. Ebola would appear to be a fairly erasable medical and social challenge, but those are fragile countries, ill-suited to deal with the challenge.

We’ve seen Ebola spread to Mali and it will likely spread further in West Africa, and as a consequence, fear of Ebola which is already high will continue strong.

We will find a way to deal with Ebola but it might take two or three years. The commercial rubber industry in West Africa implemented social changes among their labor force and as a consequence of that, shielded their labor force from Ebola. That example is instructive of two things; it’s instructive of the fact that private solutions to social problems are always better than public solutions to social problems—meaning that the private sector protects workers better than the government protects its citizens.

The second thing it points out is that in rural areas where you can control the local population because they work for you, the Ebola challenge doesn’t have to be as problematic as it is in urban areas in West Africa where there are complete breakdowns in social order.

A third thing is that if gold in ancient Archaean terrains in West Africa was in place 300 million years ago and it takes three years to solve the Ebola problem—the gold will still be there.

If the company that holds the gold concession is well enough positioned that it can survive three years, the truth is that the fiscal regime in countries that are increasingly in need of cash from gold mining will become better to operate in over the next three years.

So people who have the cash and courage to stay the trade need to understand Ebola in its entire context; a social tragedy and a political reality, a risk to the gold mining industry, but certainly an opportunity for a speculator.

TD: What are your thoughts on the junior streaming and royalty sector after observing the recent combination of Virginia Mines and Osisko?

RR: Well, I think the junior sector is going to be stressed. The junior royalty and streaming companies are going to continue to have challenges competing with the bigger royalty companies. I would suggest that the resultant combination of Osisko and Virginia isn’t a junior given that there’s a $1.3 billion market cap, $275 million in cash, and a substantial free cash flow.

The big opportunity in streaming and royalty as I see it is the delta between the market valuations and free cash flow.

The market values precious metals streams at something like 15 times EBITDA, which is another way of saying that the market is willing to accept a 4.5% to 5% yield on current investments with the hope of upside from either a precious metals price increases or further discoveries.

That same EBITDA, if it’s on the income statement of a base metals producer, is priced at 5-7 times EBITDA. So cash flow in one corporate circumstance is valued at 15 times EBITDA, and in a different circumstance, is valued at six times EBITDA. That means there’s a $20 billion opportunity in the market right now for big streaming companies that can afford to do $2-$3 billion sized transactions; to buy streams from base metals producers of byproduct precious metals production, in transactions that simultaneously lower the cost of capital.

For base metals producers, it allows them to put mines into production at a lower cost while enhancing the visibility of free cash flow on a per share basis.

This is a $20 billion opportunity and I see it being realized over the next two or three years. This is a catalyst to change the affairs and valuations of the senior streaming companies. The junior streamers will have to inhabit a different place in the landscape. They’ll have to be more aggressive, they’ll have to fund definitive feasibility studies and development, and they’ll have to take on smaller but attractive opportunities. They also won’t be able to avail themselves of the single greatest opportunity in the streaming trade that exists today, which is the arbitrage of the insane delta between the valuations of free cash flow as a precious metal stream or as base metals free cash flow.

TD: Rick I heard someone ask the other day, “How do I make money here?” It caused me to think about the process of making money. Do you make it when you buy or do you make it when you sell? What are the ingredients required to make money as an investor based on your experience?

RR: I think you start by examining yourself and the environment in which you’d like to make the money. There’s a bunch of ways to make money in the markets. I myself am not particularly suited to trading. There was a point in time where I did more trading because I had less capital.

But I am by nature a capitalist, which means I employ capital for the long term, and I’m a speculator. I have also learned techniques that are suited to my personality.

One thing I understand well is that the process of speculation involves accepting failure. It involves accepting the fact that six or seven out of ten of my decisions will end up being bad. I am willing to accept 20% to 30% losses on 60% to 70% percent of my positions. Conversely, one or two out of ten may provide returns that more than make up for these losses.

I’ve also come to understand the admonition I’ve told you so often Tekoa, which is that you have to be a contrarian or you will be a victim.

Another truth in resource markets—at least if you’re Rick Rule—is that you will not sell as much at the top as you should.

A rational person would look at the fact as I did in 2011—that there wasn’t much to buy, and that in itself should mean they ought to be selling.

Did I sell enough? No, I didn’t. Hubris set in, and it will again for sure. My thinking was that, I’m a better analyst than the other guy, and I am. I think that I back better management teams with more discipline, and I do. I think the balance sheets of companies I invest in are better than others, and they are. I think the projects my analytical team helps me choose are better than the competition’s, which is also true. But none of that matters when the market goes down.

When the market goes down, everything goes off the bridge. The fact that I sold 30% or 40% of my positions at the market top doesn’t excuse the fact that I held 60% or 70%. The 60% or 70% I held lost me 50% or 60%.

But the interesting part of being a contrarian is this: Once every 10 years you experience a 50% decline in the value of your speculative holdings. I believe that’s followed four or five years later by an inevitable up cycle where you make a five or tenfold return.

So let’s think about the arithmetic associated with that. Let’s assume that you start the exercise with $100,000 and you draw it down to $50,000. Then you turn the $50,000 into $250,000 or $500,000, which means what you ultimately did was turn $100,000 into some amount of money between $250,000 or $500,000 or better.

Now what part of this bargain don’t I like? Of course the part I don’t like is the fact that it goes down. But the fact is that it’s going to go down and you have to accept that. The other arithmetic people need to take into account if they’re going to be speculators — not investors but speculators — is that most of the investment decisions they’re going to make will be wrong.

They have to understand that you need to “court” risk in order to generate alpha because it’s the risk that generates reward.

TD: Rick, you mentioned to me one day the importance of the phrase, “You never ever, ever get it right.” For the reader considering discussing this market with their financial adviser or broker—is this a good time to consider taking bite-sized pieces of high-quality companies?

RR: I think so, but I know what I always get wrong. What I get wrong is that I’m entirely empirical and entirely rational. My fault is this: I confuse two words, which are “inevitable” and “imminent”. So I’m always too early on the buy side; it can also lead to being too early on the sell-side, though, as the example of 2011 illustrates, not always.

When I say you can’t get everything right, I mean that if you are a good buyer, sometimes you can get a market bottom. But if your psychological makeup is that you’re going to catch a market bottom, you’re not going to catch a market top on the sell side. That’s just the way it works.

If you’re a good trader, you’re going to cut your wins before they’ve fully matured. You’ll cut your losses too probably, which is a good thing. What’s more important is for people to understand their own emotional makeup and how that makeup is going to govern their actions in the market.

It’s important for one to compensate as best as they can for their psychological makeup by a disciplined plan of speculation, which will enable them to use their own skill sets and prejudices to their advantage as opposed to being disadvantaged by who they are.

TD: Rick, we’ve talked about this before but if the reader is joining us for the first time—what’s the biggest risk an investor faces and how can they mitigate that risk?

RR: Simple. The biggest risk is to the left of your right ear and to the right of your left ear. It’s not Obama, not the gold price, nothing like that. The biggest risk is not being able to work hard. The biggest risk is “got a hunch, bet a bunch”. The biggest risk is going into a speculation without a plan, not knowing why you made the investment, not knowing what would cause you to sell, both in terms of success or failure.

Indiscipline is a big risk. If a stock goes down, does that mean you sell it reflexively or does it mean you reexamine your premise and buy more if you think you are right and the market is wrong—because the market is frequently wrong.

Remember that making money in speculation is done by taking advantage of the delta between opinion and fact. It has been said by many knowledgeable observers that the market in the near term is a voting machine. In the long term it’s a weighing machine. Speculative profits are the delta between the way people vote (which is always stupid) and what stuff weighs.

TD: Rick Rule, Chairman of Sprott US Holdings, thanks for sharing your comments.

RR: Thanks for the opportunity.

For questions or comments regarding this article, or on investing in the precious metals & resource space, you can reach the author, Tekoa Da Silva, by phone 800-477-7853 or email tdasilva@sprottglobal.com.

This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested.

Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and nowadays also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment.  Because of significant volatility,  large dealer spreads and very limited market liquidity, typically you will  not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally  associated with  domestic markets, such as political,  currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.

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