Safe Haven | Gold: The Antidote To Our Problems

After a prolonged bout of weakness, the US dollar rallied 20 percent as investors fled risky assets and hedge funds unwound bad bets to repatriate funds. A strong dollar also gave the Fed room to lower interest rates even more. However the Fed's reduction in rates undermined the dollar but in the short term actually prompted a further unwinding of the massive carry trade which temporarily boosted purchases of dollars. However, as the Fed spends more and more, it must print more and more dollars destroying the buying power of every other dollar in circulation. And since the creditors of the US hold a large portion of their cash in Treasuries, these holdings depreciate in value every day. It is fitting irony then that the Fed has created instead an even bigger "carry trade", and what is perceived as a lifeline, will prove to be an anchor taking down those who are seeking a safe haven in the dollar.

The market is going through a catharsis akin to the five steps of grief. First is denial where investors refuse to believe what has happened. Then anger, where we blame others such as our politicians pointing fingers at the greed of Wall Street or automakers. Then there is the bargaining stage where we talk ourselves into waiting for the next rally for yet another chance to get out. Now we are close to the fourth step of depression with talk of a repeat of the Dirty Thirties and the grievance of the losses in portfolios. The last step is acceptance but that is still off in the future since portfolio managers still cling to the belief that stocks are cheap relative to last year's results, a year when values were inflated. Investors have yet to adjust to the new "golden" reality.

The problems of today stem from a decade of financial excess and yet the policy prescription to pull the economy out of its downward spiral is the same recipe of easy money and easy credit that caused the problems in the first place. In other words, consumption whether from government spending to household credit cards to bailouts should not be financed by selling ever larger amounts of debt. The main problem is that the government's solution to use "all available tools" includes printing ever larger quantities of cheap money which will lead to a whopping big increase in public debt perpetuating the "borrow and spend attitude" which got us into the problem in the first place. Having already abandoned its free-market principles to bailout the financial industry, the Bush Administration has unveiled its third bailout becoming a serial issuer. This Keynesian reflation has caused even bigger losses and runs on financial assets needing more government capital and a massive deterioration of the government's balance sheet. Is all this money doing any good?

Fearing a repeat of the 1930's deflationary experience, investors are dumping assets in order to repay debt and reliquefy balance sheets. Capital preservation rather than growth has become more important than yield. The Bank of England slashed borrowing costs by one percent to two percent, a 57 year low. China is also lowering rates. Canada slashed rates to one and a half percent. The Fed has reduced its rate to near zero percent, the lowest levels ever. Unfortunately, the extraordinary rate reductions have also sparked a domino-like competitive devaluation reminiscent of the Thirties. Similarly, the near zero rates and trillion dollar bailouts has not worked because the velocity of money or the rate at which money turns over has not picked up as the banks hoard cash and scale back lending. At zero percent, money has become worthless - it might even be better to keep savings under the mattress. And this stimulus, whether for public works like bridges to nowhere or state sponsored bailouts increases deficits, eroding the value of the dollar.

Home prices fell a record 16.6 percent in the third quarter. The US consumer price index fell 1.7 percent in November, its biggest dip since 1932 and oil prices too have collapsed below $50 a barrel. Suddenly inflation is out and deflation is in. With whiffs of deflation in the air, the convergence of high leverage and falling prices has prompted concerns of a Depression II. Deflation, the opposite of inflation is a decline in prices as a result of the shrinkage of money supply or credit. In the Nineties, Japan's burst real estate bubble and subsequent deleveraging caused a decline in real estate for almost 20 years and an 83 percent decline in the stock market. Noteworthy was that zero interest rates did not help the Japanese economy because cash too was hoarded, while money velocity collapsed. In the Thirties, the Fed slashed interest rates and Roosevelt's devaluation of the greenback sparked a "beggar thy neighbour" competitive devaluation race and a round of protectionism. Stock prices fell almost 90 percent.

Although there have been eleven recessions, there's only been three major economic downturns; the Civil War from 1864 to 1879, the Great Depression and the Japanese deflation from 1990 to 1996. Each period was preceded by a boom, each saw banks and regulators panic and each was followed by a bust with a deflation in prices due to a severe contraction of monetary and fiscal policies. Policymakers reacted but it was never enough nor timely. Today as then, there are many parallels but the financial situation is very different. In the Thirties for example, GDP fell by half as US money supply dropped 25 percent. Today, monetary base has ballooned by 38 percent as the Fed has begun unprecedented easing. In the Thirties, safety net institutions were not in existence and some 9,000 banks failed. Today the Federal Deposit Insurance Corp. (FDIC) insures bank deposits up to $250,000 per customer and so far only 25 banks have failed. In the Nineties, Japan was a creditor nation with more money flowing in than out. Japanese savings were at 16-17 percent while the US has none today. Although the US is the world's largest debtor, the $2 billion a day gap has been financed by the Asians, Middle East players and Russians who are flush with cash but are unlikely to sit quietly and allow the greenback to fall in value. These savings could save the United States, but at what price?

Gold does well both in deflationary and inflationary times. While there is disappointment over gold's recent performance, gold has been the best performing asset of all classes on a relative basis. History shows that during the Civil War, gold convertibility was suspended, between October and December of 1857 and the black market price of gold skyrocketed above the official price. In 1933, Roosevelt devalued the dollar by 40 percent against gold which led to a flight out of dollars into gold as well as a debasement of its debts. Roosevelt also banned gold exports, confiscated gold and fixed the price but freely traded Homestake Mining rose over 600 percent from $65 a share in 1929 to over $500 per share by December 1935. At one time, it was the highest priced stock on the New York Exchange and paid $128 in dividends during that period. In 2001, Homestake was acquired by Barrick Gold. In the Nineties to reverse deflation, Japan introduced a series of fiscal stimulus packages. In five years, gold jumped 150 percent to 75,000 yen/oz even with no sign of inflation. Deflation now? Unlikely, but history shows that in deflationary times, gold provides protection against the inevitable devaluation of currencies.

The problem today is that the scale is so huge. For example, while the world economy is about $60 trillion, the notational value of global derivatives is $500 trillion or eight times the size of the world's GDP. For many years, we have been warning about the excesses of America and its debt fuelled property boom. We worried about the modern financial system with its deregulated markets, highly leveraged participants, global imbalances and the lack of a monetary anchor. Banks in the past funded their long term obligations with short term obligations like derivatives and commercial paper. Risk? Why worry when that risk could be sliced and diced into tranches and the pieces could be bought and resold to others. But now, to pay off those leveraged liabilities, the system needs capital because those structured products were found to be faulty. The capital of the global banks is only estimated at $2.5 trillion, with less than half written off. Yet the total committed money in the government bailouts is somewhere in excess of $9 trillion, and this is still not enough. Why?

The heart of the problem is credit default swaps (CDS) and the failure of governments to limit the losses is today's problem. Credit derivatives have exploded by trillions of dollars, particularly following the disasters of Fannie Mae and Freddie Mac. CDS are complicated financial instruments designed by Wall Street as insurance against a default by a company or even a country. They typically transfer or redistribute risk among financial market players. The size of the CDS market peaked at more than $70 trillion but by the end of the second quarter there was still some $51 trillion of obligations in circulation. Credit derivatives are the linchpin of the credit markets and even today are at least two steps removed from the underlying collateral. Recent failures ultimately killed Wall Street's investment banks and the counterparty-risk caused an unwinding prompting the Fed's quick reaction to save AIG, one of the biggest derivative players. And yet, it is the taxpayer that appears to be the bag holder inheriting the risks of the past.

Wait it gets worse. As a debtor nation, America's spending on a massive scale means layering debt upon more debt because the United States lacks a savings pool. Spend more and save less. Debt levels are at historic highs. Since Labour Day, the Fed's balance sheet of assets has doubled from $894 billion to a record $2.3 trillion representing an increase equivalent to 10 percent of GDP. The printing presses are working overtime. The composition of the Fed's balance sheet was traditionally in the form of Treasuries but this time with Paulson's backstops and the assumption of toxic assets, the quality of its balance sheet includes money market funds and mortgage-related securities with Treasuries less than a third. The US budgetary deficit for the fiscal year ending September 30 was a record $455 billion. And it still grows because the cost of the bailouts and funding programs will push the fiscal deficit to more than $1 trillion for each of the next two years. At the current rate of spending, the deficit could reach $2 trillion, a whopping 16 percent of GDP.

Meanwhile money supply has grown at double digit levels and monetary base according to Shadow Stats grew at a whopping 38 percent year over year.

President Bush inherited a budgetary surplus and leaves President-elect Obama with a deficit, two wars and the worst economic crisis since the Depression. Today the deficit will top 7 percent of GDP surpassing the record 6 percent of GDP set in 1983. Because the economy hasn't responded to zero interest rates, the Fed's "quantitative easing" plan involves printing money to drive down interest rates, instead of controlling money supply to lower the price of credit. However, the borrowings to finance the bailouts pushes the national debt past 70 percent of GDP, the highest since World War II. Gross US debt which includes debt held by the public and by government agencies is expected to top $11.3 trillion. In the next nine months, the US Treasury must somehow borrow almost $1 trillion as it has become the borrower and lender of last resort. In only a few short months, government has built a safety net with the taxpayer assuming the risks of a boom gone bust which will take years to repay. As a result the credit worthiness of the US government has become a question mark.

After pumping billions of taxpayer dollars into Wall Street, Detroit's automakers are lining up for some of Washington's largesse. Auto sales have fallen to the slowest pace in 25 years. Another day, another bailout. After jamming the $700 billion bailout bill (TARP) through Congress, Paulson wisely scrapped the centerpiece of his plan to buy toxic assets and instead committed $335 billion to invest directly into Wall Street. And in a turnaround the government bailed out Citigroup by backstopping over $300 billion of toxic assets and followed with another $800 billion to bolster consumer loans. The situation is further complicated by the possibility that the next Administration will alter the program yet again amid growing "bailout fatigue". Treasury has just $15 billion left in the first tranche of the rescue fund and a bailout will be needed for the bailout. Payments to Wall Street these days seem to be only down payments.

Meanwhile, the debt laden US consumer has stopped buying with spending falling at an annual rate of 3.1 percent in the third quarter. Spending, which once drove 70 percent of the US economy has fallen for five consecutive months. Consumer bankruptcies soared 40 percent in October. Consumer debt has risen to over 100 percent of GDP, twice its level a quarter century ago, hitting a record 133 percent of disposable personal income by the end of 2007. Since the banks cannot carry out their intermediary function, the Fed has offered new facilities to back consumer credit, cards, student loans etc. America has gone from zero percent financing on cars to zero percent money. Yet the US continues to live well beyond its means.

And after throwing good money after bad money, the government is also tinkering with the regulatory process coming up with new regulations after the horses have left the barn. Remember the much hated Sarbanes Oxley Act was a product of the last burst bubble. It seems that the new regulatory proposals will cover areas where there is no regulation.

As the contagion spreads, the more over-leveraged European banks are caught in their own subprime type disaster as their exposure to emerging market debt further weakens their balance sheets. According to Standard & Poors, European banks and companies will need some $2 trillion in financing over the next three years. The latest data from the Bank for International Settlements (BIS) shows that almost three quarter of the nearly $5 trillion cross border bank loans are to Eastern Europe, Latin American and emerging Asia which tests the underlying currencies of those countries. The unwinding of the biggest "carry trade" where investors borrowed money in a low-yielding currency like dollars to earn higher returns in other countries like Iceland or Hungry have caused turmoil in the currency markets, nearly destroying these currencies. A vicious cycle of competitive devaluations is underway.

Even the IMF is not immune from money woes. The IMF has approved $50 billion of loans to countries in financial trouble including a $16 billion loan to the Ukraine after a $2 billion rescue loan to Iceland. The IMF only has $260 billion left with access to another $5 billion which is dwarfed by the $5.5 trillion foreign currency reserves held by emerging market countries. Today, to play an active role in the emerging market, the IMF is going to need additional funds.

In what may well be symptomatic of a capital short world, Argentina has raided the proverbial piggy bank with the proposed nationalization of its private pension funds. Argentina's public debt stood at 28 percent of gross domestic product (GDP) at the end of 2007 but is now over 100 percent this year after taking over its banks. The sudden loss of credit has forced President Fernandez to takeover the $24 billion of pension fund assets in order to fund its requirements. The abolition of the 14 year old private pension system is an example of another violation of individual liberties in order to fund a desperate state's needs.

Trust is everything in finance but little has been done to restore this essential ingredient. Investors are left wondering whom they could trust. Indeed recent events such as the "pay for play" sale of Obama's Senate seat to the $50 billion Ponzi scheme by one of Wall Street's icons have magnified our difficulties. President-elect Obama brought fresh hopes for the economy but is involved in a tug of war with the White House in aid to the automobile industry. The Bush Administration itself flip-flopped and spent some of that $700 billion bailout plan to acquire stakes in financial institutions rather than buy assets which we were told was the central problem. Bloomberg News is suing the Fed simply to get the name of recipients and type of assets behind the taxpayer funded $2 trillion of emergency loans. In Europe, governments launched a coordinated deposit guarantee scheme which isolated some countries but Britain still seized the deposits of Icelandic banks. Now politicians are threatening the very financial institutions that they bailed out to lend or pass on lower rates to customers. It's all about trust or lack thereof. And despite espousing free market principles, our leaders have used the crisis to get greater control of markets and industries. Sadly, there is little difference today between Venezuela's takeovers and the takeover of America's financial system or even Argentina's takeover of its pension funds.

Any restructuring strategy today for the financial sector must be transparent. Somehow the global credit default swaps needs to be unwound or liquidated. Recapitalization is essential if institutions are deemed to be trustworthy. Deleveraging is a must. Despite an infusion of billions, the financial sector still does not have enough equity. Banks must shrink their balance sheets more and somehow refinance the gap between customers' deposits and loans. Needed is a further consolidation of the financial sector. We believe that the bailouts should not be used to bailout Wall Street's cronies which destroys "moral hazard",but to boost investments in technology, green science, energy conservation, etc. The United States needs a very different set of policies and priorities. Needed most is a restoration of trust. It needs change.

America has borrowed from foreigners for some time. The key is whether the available savings in the US and foreign purchases of US debt will be sufficient to met the government's monstrous requirements. Already the UK and Italian governments are experiencing financing difficulties. In Germany, a November bond auction failed. One way is not the UK's regulator (FSA) insistence that all deposit takers must hold billions of pounds of government bonds as liquidity buffers in the event of bank runs. At the same time other governments have unveiled stimulus packages providing competition for the market in treasury bills. China too, the largest holder of US Treasuries, recently announced its own stimulus package and worse still, might sell some of its $585 billion in Treasury debt to pay its bills.

As the world's largest debtor, the US must borrow, tax or simply print money to keep its economy afloat. Of concern is that after the trillion dollar bailouts, what certainty is there in the Treasury's ability to raise the vast amounts of debt needed to fund the stimulus packages or deleverage the economy or recapitalize the banking system? Can the growing line-up of borrowers from the automakers to state governments swamp the world's largest debtor? And the interest expense on borrowings further worsens the current account deficit. Who will bailout the US government?

Furthermore, left out of the picture are the coming failures of the hedge funds, private equity funds and other structured investment vehicles which are similar in size to the US banking system in terms of balance sheet. Also left to be dealt with are the rescues of ailing countries with their out-of-control deficits where the funding gap exceeds the financial capacity of the government. "Crowding out" is a disquieting concern particularly with the demise of Wall Street's intermediaries, the investment banks. To be sure, with trillions of dollars of bailouts, the focus should be on the consequences. The seeds of much higher inflation, not deflation have been sown.

Fundamentally, the West has lived beyond its means creating huge global imbalances and an appearance of prosperity. But it was illusory. However very real was the vast transfer of wealth to the Asians and Middle East players who benefitted from high commodity and oil prices. With bloated treasuries they are now sitting in the cat-bird seat but are unlikely to allow their hoards of dollars to depreciate further.

China, with the largest foreign exchange reserves in the world at almost $2 trillion enjoys an enviable eight percent economic growth, a current account surplus, a budgetary surplus and the highest savings rate. World markets rallied when China announced a near $600 billion spending package, or about 15 percent to GDP to stimulate its economy. However, unlike the Americans, China does not need to borrow to finance its stimulus package. China has been criticised for its state owned enterprises for being too big but that model ironically is being emulated with western governments spending hundreds of billions of dollars taking over their banking systems today.

Obama is to soon learn that his monetary policy will not be made in Washington but Beijing. Somehow he must persuade investors to help pay for his large infrastructure building program and its deficits. Indeed, there is speculation that China could lend a portion of their reserves back to the United States for a gold linked piece of paper based on America's vast gold reserves. China would get access to gold because it has less than one percent or 600 tonnes of its reserves in gold. Bullion purchases would make use of its vast dollar reserves as well as provide protection against further dollar debasement. The United States in turn could use the funds to bail out its financial system. Indeed there has been speculation that China's central bank is planning to boost its gold reserves to 4,000 metric tons or about five percent of its reserves to diversify its portfolio risk.

With the world awash in dollars and Wall Street decimated by its funny money creation of derivatives, the world is searching for alternatives. With trillions of newly created paper, the experiment with fiat money and floating exchange rates has failed and a return to a gold backed currency makes sense. From a long term perspective of 6,000 years, gold has served as a store of value and monetary asset. It is an alternative to the dollar. It is no coincidence that following three of the most devastating depressions- the panics of the Civil War, the Depression and Japan's lost decade, gold's role as a store of value contributed to their economic recoveries. Today it is still a safe haven. Since yearend in sterling is up a third to an all time record and up 10 percent in euros. The same goes for gold in yen. Despite gold hitting a peak at $1033 in March, it is up 7 percent and will record new highs when the "dollar world" wakens to the biggest devaluation in American history as Bernanke devalues the dollar against gold. The easiest way to reduce debt is through inflation achieved mainly through currency devaluation. Gold's allure today is its store of value in a world of sinking asset values.

The world cannot return to a gold standard overnight. Needed however, is a new benchmark and likely is a basket of currencies with gold a very much a part of that. Such a move would inject certainty, trust and integrity into the financial system as well as a solution to the flood of devalued dollars.

History shows that gold acts better than cash or dollars in both deflationary and inflationary times. Gold's supply grows at only one percent a year, while the supply of dollars has doubled in the last five weeks alone. Mine production peaked in 2001 and supplies of gold have been declining since. In South Africa, one of the world's largest producers, production fell 18 percent in September from a year ago. Cash is king but only as long as it maintains its value. We believe that cash becomes trash when the monetisation of this newly created debt (aka quantitative easing) gives way to inflation and massive currency depreciation. Cash then is a temporary home, not a permanent one like gold.

Gold was the United State's official monetary unit from 1792 and by 1870 every major country was on the gold standard. Gold's usage in day to day coinage ended in 1934 when Roosevelt devalued the dollar some 40 percent from $20.66 an ounce to $35 an ounce giving the Americans an export advantage, setting off a wave of protectionism. Roosevelt also prohibited the ownership of gold making the Federal Reserve the only entity allowed to own gold under the Gold Reserve Act. In 1944, under the Bretton Woods Agreement, gold returned to the center of the international monetary system and all currencies were anchored to gold and the dollar. However when Washington let prices and liabilities get out of hand, Nixon was forced in 1971 to devalue the dollar against gold, severing the last link between dollars and gold for fear that the government would run out of gold with which to back the greenback. The US dollar subsequently became the world's reserve currency and the Federal Reserve, the world's central bank. But backing that dollar was debt and more debt. Without the discipline of money creation, what followed was a quarter century of a phenomenal increase in money, particularly in the last decade with an exponential increase in cheap money, derivatives and debased dollars and ever bigger bubbles.

We believe that the need for a store of value and a medium that is accepted by all is behind the demand for gold bullion being hoarded like cash. The US has even run out of half-ounce and quarter-ounce American Eagle gold coins because of unprecedented retail demand. Indeed, the bullion previously loaned out by central banks is now being repurchased underpinning the gold price. The World Gold Council noted that demand for gold reached an all-time quarterly record of $32 billion in the third quarter. Gold prices have risen more than 20 percent since Lehman's collapse and the world's largest ETF now has 765 tonnes of gold. Gold today is currently held in the vaults of most central banks. While central banks still transact in dollars, gold remains a major part of their reserve assets. Ironically, the US remains the world's largest holder of gold. Iran recently reportedly purchased $75 billion worth of gold. The 10 year old euro even has a 15 percent backing of gold.

When Ben Bernanke was a professor at Princeton, he presciently spoke in 2002 about our present economic problems:

"The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."

Eight years later, Fed Chairman Bernanke should heed his own words. So paper or gold? Gold is unique. It does not represent a liability of any institution and is not backed by debt. It is real money. It is a defacto currency. During the Depression, the loss of confidence in institutions and currencies pushed investors to seek refuge in gold as a store of value. In Japan, gold protected investors from the depreciating yen in the Nineties. To be sure, the move to zero interest rates and trillion bailouts will set off an inflationary surge devaluing the dollar further. Gold has tripled in value over the last seven years, outperforming fiat currencies and fiat markets. It cannot be created except by an expensive mining process. It is an asset that is both liquid and a currency. For that reason, gold will reach $2,000 per ounce next year once investors realize, as Bernanke realized eight years ago, that gold is the antidote to our financial problems.

Ever since the peak at $1,033 an ounce in March, investors have been disappointed in gold's performance in the wake of the global meltdown forgetting that gold has appreciated 63 percent over the past few years. And gold stocks have lagged gold bullion rising 14 percent in the same period. The stocks are attractively priced. Particularly depressed are the junior producers caught up in the rush for some liquidity. The lack of capital for projects has forced many juniors to merge or close down. Political risk has overshadowed geological potential and permitting problems have plagued the industry. As such we continue to recommend the big cap players because of their liquidity and expectations that institutions will initially invest in the big cap liquid names. Among the mid-tier gold producers we also recommend Agnico-Eagle with its low political risk and expanding production profile as well as Kinross who is benefitting from newly expanding operations in Brazil and in Russia. Barrick is the premier senior producer.

The gold market has moved into "backwardation" where the spot price is trading at a premium to the future price. We believe that this backwardation is attributable to the heightened demand for physical metal in the form of coins and bars. As more players demand delivery, Comex only has a limited amount of gold in the warehouse and investors are fearful of a squeeze. In the past however, Comex has simply rolled over these contracts into the next month averting a squeeze. Meanwhile there is resistance at $930 per ounce, but we expect that to be surpassed with $1000 per ounce our next target. The catalyst will come when cash becomes trash, and the US enters a dollar crisis along with their debt crisis.

We remain positive on gold and expect it to top $2000 an ounce next year in response to increased physical demand, lower central banks sales and expectations of a weak US dollar in the wake of the US monetization of its massive debt. We also believe that the needed discussion of gold's role as a monetary medium of exchange will attract interest. Meantime, we do not see supplies coming to the market so the supply/demand factors remain favourable for higher gold prices. To be sure the lower gold price lends itself to heightened merger and acquisition activity, particularly among the junior explorers and developers who are in desperate need of financing. Financing has become as important as permitting, and the mining industry is now faced with survival. As such we have dropped coverage of Campbell Resources, Crystallex Int'l and High River Gold, who are facing major financing or permitting obstacles.

Agnico-Eagle Mines Ltd.
Agnico-Eagle's results were lower due to weaker by-product credits for zinc, copper and silver. Cash cost in the latest quarter rose to $113 per ounce up from a negative $700 an ounce a year ago. LaRonde remains the crown jewel and the company recently successfully raised $250 million to take care of its capex over the next few years. Agnico-Eagle will produce 1.4 million ounces by 2011 from LaRonde and five other mines. Newly commissioned Goldex made a contribution this year. And next year Agnico will produce 590,000 ounces with contributions from high grade Lapa and Pinos Altos in Mexico. The Company will spend $54 million in exploration next year. We continue to recommend purchase for its rising production profile, reserves and experienced management. Agnico-Eagle will outperform its peers.

Aurizon Mines Ltd.
Aurizon's 100 percent owned Casa Berardi mine in Quebec had a good quarter due to higher grades and the weaker Canadian dollar. Aurizon produced 41,500 ounces of gold at a cash cost of $412 per ounce and will produce 160,000 ounces this year. Casa Berardi is a tough mine and Aurizon has successfully put it into production expanding its reserve base with a three year successful exploration program. Aurizon continues to drill the Joanna property in Quebec and a resource estimate to expand the two million ounce resource is expected early next year. We continue to recommend this junior producer for its 300 square mile exploration potential and Casa Berardi production base. Aurizon has $56 million of cash.

Barrick Gold Corp.
Barrick's results were inline with expectations and its guidance was unchanged for the year despite lower copper prices. Barrick has the best balance sheet among the gold producers and is likely to take advantage of the depressed prices by picking up a fallen angel or two. Barrick has begun work at the Pueblo Viejo property in the Dominican Republic which will cost $3 billion to bring into production. Next year, Buzwagi project in Tanzania will contribute and the huge Cortez Hills project in Nevada will also be in production towards the end of next year. Barrick still has hedges against Pascua Lama which is a stillborn project. Logic dictates that this project will not go ahead because of economics, price tag and negative market to market hedges. However we continue to recommend Barrick and expect it to use its pristine balance sheet to leverage up for a good sized acquisition. Buy.

Eldorado Gold Corp.
Eldorado's results were slightly above expectations in the third quarter due to wholly owned Kisladag mine in Turkey. The heap leach operation is performing well and Eldorado also had a contribution from 90 percent owned Tanjianshan mine in China. With Kisladag now running at full capacity, Eldorado is building its second mine in Turkey and the Efemcukuru project will be a contributor late next year. Eldorado has a good record in building mines and the company has received about $70 million from Anglo Ashanti for the remnants of the Sao Bento mine in Brazil. We continue to recommend Eldorado for its growth profile.

Goldcorp Inc.
Goldcorp's results were disappointing due in part to lower production from Red Lake and disappointing results from the Latin American projects. While construction of the huge Penasquito project in Mexico is on schedule, the $1.5 billion project will not be brought into full production until early 2010. So far, Goldcorp has spent a lot of money at Penasquito and the project has grown in size. We note the timing of McArther's sudden departure to be replaced by Chuck Jeannes and wonder whether there are operational shoes ready to be dropped. Goldcorp continues to lower its production forecast to 2.3 million ounces now. The acquisitions of Gold Eagle mines were expensive and together with the Eleonore project in northern Quebec, Goldcorp has its plate full. And with its problem prone mines, bringing these expensive acquisitions into production will take time and money. Switch.

Kinross Gold Corp
Kinross' results were above expectations in the third quarter reflecting its contribution from the high grade silver/gold Kupol mine in northern Russia and Fort Knox in Alaska. Kinross produced a record 551,000 gold equivalent ounces in the quarter in which the Kupol mine contributed slightly over 200,000 ounces. Looking ahead at the Paracutou expansion in Brazil is complete and a contribution is expected in the first quarter of next year. Kinross also brought the Buckhorn mine in Washington into production where material is being processed at Kinross' Kettle river mill. Kinross also signed an opportunistic deal with Teck Corporation to acquire the 60 percent in Lobo-Marte deposit which consolidates its play in Northern Chile. Kinross' Maricunjiga mine is located nearby and the Lobo-Marte deposits have a 5 million ounce resource. We like Kinross here which will benefit from a full year output from Kupol, Buckhorn and Paracutu. In addition, Kinross remains a tasty takeover tidbit.

Newmont Mining Corporation
Newmont's results were disappointing and that company is stuck on a treadmill. Newmont has a mature asset base and seems to be harvesting its mines. However, even with a limited growth profile, the shares are a suitable safe haven. Newmont has excess free cash flow and would make a good acquisition candidate. As such we recommend the shares as part of a package.

Mag Silver Corporation
As expected Fresnillo Corp, the biggest silver producer in Mexico, has made a "take under bid" for Mag Silver, for the Juanicipio joint venture where Mag and Fresnillo have outlined an inferred silver resource of 238 million ounces. Mag's share is 140 million ounces. Fresnillo currently owns 19.8 percent of the company and its bid of US$4.54 is less than the company's worth particularly since a new resource is expected to be released shortly. Mag also has almost $55 million of cash. In addition, there are significant silver-lead-zinc discoveries at Cinco de Mayo plus success at Bato Pilas as well as drilling news to come from the huge Legarto land spreadwhich could be spun-off. We expect a higher offer by Fresnillo, since Mag is a critical part of Fesnillo's expansion plans. Buy.

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