Issue link: http://resourceworld.uberflip.com/i/124506
that the costs of mining are still going up and commodity prices are going down. I think the bear market has a little bit more to play out; however, I do think we will get to the point when cost escalation will abate and commodity prices will turn around. If you can invest at the bottom, obviously, that's a good time to do so." Watson said that when it becomes apparent that the bear market in juniors is ending, there are certain criteria investors should look for. "It's important to focus on assets that are of high enough quality that once things turn around, those companies will be the first ones able to arrange financing and push themselves forward." "Usually what happens in a bear market is that companies eventually need more capital to advance. When a long list of people is lined up, ready to access the capital markets and a bull market begins, the top names get out," said Watson. "Sometimes the bottom names continue to suffer while the market works through a backlog of companies that need capital. The best ones get the capital first." Watson advises that what an investor should not do is invest in companies that are very cheap because they have poor prospects and can't raise capital. They will be the last ones to obtain funding when a bear market ends. "You want to be invested in quality companies at a low price to be ready when the market opens up again." In other words, investors should look at a company's fundamentals such as having an excellent mineral project, great management and access to capital. We are currently seeing a shake-out of junior miners as they run out of money and can't raise more. Although this is painful for the companies and their shareholders, Watson is of the view that this is good for the industry as a whole in the long run. "One of the reasons the shake-out is good is that institutional investors have been particularly weary and reticent to invest in the mining industry because they have lost a lot of money on bad companies and poor management teams that are going by the wayside. If the industry pares itself down to higher quality projects and management, that's a good thing for the industry because investors may have a chance to come back when they realize that what is left are good assets." M AY 2 0 1 3 GOLD April 15th saw a huge drop in the price of gold as its safe haven status unwound with diminishing fears of inflation and a stronger US dollar. This led to panic selling where selling triggered more selling. Some news outlets reported that a 124.4-tonne sell order by a large investment bank spooked the gold market and led to the liquidation of gold ETFs. Sprott analysts view this as the capitulation phase and, similar to 2008, a rebound is in the cards. Meanwhile, many central banks around the world are buying physical gold and printing money. Watson says that the massive printing of fiat currency is eventually bound to have an effect on the price of gold. "Right now there many deflationary pressures so what is happening is that central banks around the world are printing great amounts of money," says Watson. "They are increasing the supply of money, but the velocity of money (the average frequency with which a unit of money is spent on new goods and services) is decreasing, and therefore, there has not been much inflation stoked just yet. I think that will continue for perhaps another couple of years. As they continue to print, which I believe they will need to in order to keep their governments solvent, eventually inflation will be stoked and propel the gold price upwards quite a bit." Watson says that one reason the price of gold is so volatile is that the amount of gold that is produced in any given year is only 1.5% of the amount of gold that is sitting in bank vaults around the world that could be sold at any given point in time. The amount of global gold production is not relevant to the price of gold. Very small changes in terms of investors selling gold or investors buying gold can have a dramatic impact on the gold price. Speculators know that and are always looking for any sign that the fundamental supply/demand situation will change for people buying and selling the actual metal. They get jumpy and can move the price a lot." Some newsletters are saying gold has never been so oversold since 1975 following its drop to US $1,357/oz. Perhaps gold is now a bargain. Gold guru Nick Barisheff is of the view that gold fundamentals are still in place and we only experienced a weakness in investor sentiment. Currently, there is great demand for physical gold. If you want to buy physical gold at Border Gold near Vancouver, there is a waiting list. SILVER Watson says that some people view silver as money and some do not. It certainly has more industrial applications than gold which can be a good thing for silver. Even if investors don't want it, industry will need it for manufacturing and other industrial applications. "Generally speaking, I think that silver has tended to track gold and will continue to do so into the future," says Watson. n www.resourceworld.com 43