The hemorrhaging of stock values in the resource exploration sector, particularly gold stocks, is a direct result of the contraction of available capital at the center of the banking universe. The general sell-off in the market has trickled down to companies that have considerable amounts of gold in the ground, and these companies are a steal right now.

The gold price is starting to really gain traction with the broader market now, and the reasons for that have to do with the onset of economic recession.

Are we going into economic recession? In North America, the answer is “yes”. But globally?

Yes. Here’s why:

The worst piece of news last week, and the one that bodes most ill for the future, was the loss of 17,000 jobs in the United States. That is the first drop in 4 years, and confirms in the minds of many that the U.S. recession is now underway.

With the incessant write-downs of banks that have dominated the news for the last 5 months, one could be forgiven for failing to understand why anyone is surprised about the onset o recession, or why some don’t see it as inevitable.

Banks worldwide have suffered more than $135 billion in credit losses and write-downs, and some analysts estimate that the write-downs could total as much as $800 billion.

This is essentially the global banking system admitting to the public that it has overvalued the quality of the assets backing its loan portfolio. Since this is all essentially sub-prime mortgages on residential real estate, a lot of people, particularly in the United States, have been living way beyond their means, and a lot of the profit that has generated for companies is now going to evaporate as the system is forced to correct itself.

The effect of this contraction in global money supply is that real estate owners are forced to sell assets at whatever price they can get for them to cover inflated financing costs coincident with declining asset value. The owners we’re talking about here are homeowners and the banks who financed them.

Citigroup Inc. (NYSE:C), the world’s largest corporation and the Unites States’ #1 bank, wrote down the value of its portfolio by $18.1 billion. It chopped a total of 21,400 jobs in 2007, and subsequently sold 4.9% of itself to the Abu Dhabi Investment Authority for $7.5 billion and diluted itself again in January with an additional $12.5 billion in financing in a private offering.

And herein lies the great paradox. At the center of the financial universe, the nattily dressed and over-educated Wall Street boobs who have managed to engineer themselves into a Ph.D. level disaster have now sent out ripples amounting to the fire-sale of equities with real value represented by natural resource assets.

This means a buying opportunity for anybody with liquidity.

The forced sale of quality assets is amplified by the Sheep Effect.

Investors see the sell-off and think it’s a reflection of the value of the equities being sold, and in panic they dump whatever they’ve got fearing the worst.

And here we are. Mining and oil and gas stocks at ridiculously low prices, looking for a buyer.

China and India, and to lesser extent, South America and Russia, are widely expected to prevent the recession from growing to global proportions, but it is unlikely that this will be the case.

Yes, China is the manufacturing center of the universe, gobbling up a large percentage of the raw commodities that have powered the mining sector, and India too is in the midst of an infrastructure build-out unlike anything in its history.

But these two economies have grown on the back of a strong U.S. economy, and with the diminishing revenues from this source that are to result from the contraction of the U.S. economy, the impetus of China and India’s growth will also suffer.

Furthermore, and this applies to China more so than India, the U.S. Dollar’s diminishing value and its apparent tendency to try and spur growth through rate cuts resulting in further downward pressures on the dollar means that the US dollars held as foreign reserves are going to have a negative effect on the Chinese balance sheet.

So I think you’ll see growth slow around the world. Which means that its time to buy gold.

And sure, you can buy the metal, but as ever, and especially now, the real big wins will be made from juniors who have the goods. Past producers that shut down and sold during the depressed gold price of the late 90’s with ounces left behind are a safe bet.

Some great deals in the junior exploration sector?

Look at ATW Venture Corp. (TSX.V:ATW), who picked up the Burnakura Gold Mine for a song. The Burnakura Gold Mine consists of 58.8 square km of mining leases and prospecting licenses, a fully permitted 160,000 tonne per annum (450 tpd) CIL gold plant, rolling stock, underground equipment, workshops, office space and a 90 man camp. The project covers 12km of prospective strike length along a major auriferous shear zone and mesothermal gold system. Historic production on the project focused on lower grade surface oxides, which had been historically mined from 15 open pits stretching along the entire 12 km of strike length.

Another good choice: Animas Resources Ltd. (TSX.V:ANI) . This is company was put together in the summer of last year, and in short order has raised over CA$5 million and acquired to large land packages in Sonora, Mexico that includes the past producing Santa Gertrudis Mine containing a historic (non 43-101 compliant) resource of 720,000 ounces of gold. The advisory board and board of directors is made up of past senior management of Phelps Dodge, now part of Freeport McMoran (NYSE:FCX) , Newmont Mining (NYSE:NEM), and Cominco. (TSX:TCK)

And last but certainly not least, Premier Gold Mines Ltd., (TSX.V:PG) formed after Wolfden Resources (TSX:WLF) spun its Ontario gold assets into the new vehicle in a dividend to existing shareholders of Wolfden. Premier is a joint venture partner with Goldcorp (TSX:G), and a major shareholder is Inmet Mining (TSX:IMN).

Premier has had many high grade intercepts of gold on its Red Lake properties, and is exploring a large portfolio of mostly advanced properties in Canada and Mexico. The company has CA$20 Million in cash on hand, and with 6 drills working in various locations, there will be no shortage of news to drive the share price in the right direction.

By: James West

About Trilliant Exploration Corporation

Contact:
Henry Harrison
IR Pro 2.0
407-682-2001
Email: hharrison@insidewallstreet.com

Gold Market News What is Driving Gold and Gold Stocks

Gold and gold stocks have been hit hard in recent days. In part one we examine the reasons as to why, and in part two cover why gold stocks could be one of the biggest trades of 2009.

Gold and gold stocks have been hammered as of late. The yellow metal took a header on Monday, with the futures closing right on the 200-day exponential moving average. If that support doesn’t hold today (Tuesday), gold may even be trading lower by the time you read this.

So what’s going on exactly?

There are a few factors at work at here. To skip ahead a bit, there is still strong reason to believe gold stocks could be one of the best trades of the year – but in the short run, the environment for gold looks challenging.

The IMF Bogey

One old bogey that has come out of the woodwork is the prospect of IMF gold sales. At the recent meeting of the G20 in London, there was general agreement that the IMF (International Monetary Fund) should sell just over 403 tons of gold to free up cash for loans to poor countries.

Yawn…. the “IMF to Sell Gold” headline makes for much better press than the actual details.

For one thing, 403 tons of gold is just not that much. We’re talking roughly $11 billion worth at today’s prices. That’s a drop in the bucket, especially compared to China’s roughly $2 trillion pile of reserves… less than one percent of which are held in gold.

For another thing, the prospect of IMF sales is not new. The IMF has actually been trying to sell gold for more than two years. Part of why it hasn’t been able to do so is because authorizing the sales requires an 85% majority vote from the IMF’s 185 member countries.

On top of that 85% hurdle, the United States basically holds veto power over any IMF gold sales measure (because America’s proportional voting rights are so large). In that regard, the U.S. government has informed the IMF that, by order of law, authorization from Congress is required for any gold sale to go ahead.

So any approved IMF gold sale would be small, in quantities easily absorbed by countries like Russia or China (who have openly stated a distaste for their overlarge dollar holdings).  Any sale would further require 85% approval, plus approval from the United States Congress… and last but not least such sales, if they happened, would probably be disbursed over many years. The remaining 3,200 tons of gold the IMF holds represent quota requirements from member countries and cannot legally be sold.

But, still, gold has been sinking like a stone. What else could be the problem?

Ready to Scrap

Another factor hurting gold in the short term is “gold scrap,” or scrap sales. Private holders of jewelry and trinkets, particularly in Turkey, the Middle East and Asia, have been stepping up and selling their scrap gold.

India, the “world’s largest gold buyer by a wide margin,” has even stopped importing “for the first time in 10 years,” the Financial Times reports. In February and March India saw zero gold imports, while January imports came in light. Vietnam and Thailand, normally reliable buyers of gold, have also been selling. Stepped-up scrap sales have even put Asia scrap sales at a discount to the standard London quote.

It’s important to point out that many of these scrap sales are driven by distress more than any sense of market timing. Unemployment woes and rising food costs have forced hard-up Asian families to dip into their emergency stashes. Traders have further noted that these scrap sales seem sensitive to price.  As the gold price per ounce fell towards $900 and below, scrap sales volume saw a clear decline.

Mark-to-Whatever

Yet another factor weighing on gold has been the suspension of “mark-to-market” accounting rules.

Last week America’s FASB (Financial Accounting Standards Board) bowed to pressure from Wall Street and loosened up mark-to-market accounting rules, causing a huge sigh of relief from the banks.  Here is how I explained it to Macro Trader members on Friday:

Part of the reason stocks rallied big on Thursday was a suspension of “mark-to-market” accounting rules.

In plain English, this means the banks will no longer have to use real-time pricing for the stinky stuff on their balance sheets. They’ll be able to “estimate” what the toxic assets should be worth instead.

This is sort of like a homeowner saying “well, my house might not be sale-able in this tough real estate market, but in a better market I’m sure it would be worth, oh, $300,000… so that’s what I’ll say it’s worth for now…”

Some people think the suspension of mark-to-market rules for bank assets is a smart idea. Others think it’s a terrible idea. Either way, it’s pretty bullish for the financial’s, at least in the short term.

Stocks also rallied (recently) on news of a potential trillion dollar injection into the IMF (International Monetary Fund), and the general perception that the G20 meeting in London was a success.

The mark-to-market change is basically a cheap magic trick. The banks may benefit from the opportunity to abandon real-world accounting in favor of fantasy-world accounting, but toxic assets are still toxic assets. Smoke and mirrors won’t change that.

Hot Money Rotation

In sum, the current weakness in gold and gold stocks is all about short-term perceptions (with the exception of increased pressure from scrap sales, which remain sensitive to distress and price). The IMF news is more hype than substance, and the abandoning of mark-to-market accounting rules is more a tacit admission of how ugly the picture still looks for banks, rather than a concrete step towards fixing the problem.

Meanwhile, rally-happy traders saw the chance to buy up risky assets on the back of mark-to-market suspension and good G20 news. As a result of the major move we just saw – the biggest 4-week rally in the S&P since 1933 – areas of the market that had previously suffered from lack of liquidity, like high-yield debt, commercial real estate assets and so forth, caught a huge bid. There was a fast-and-furious hot money rotation out of “crisis insurance” type assets (like gold and gold stocks) and into “woohoo let’s party!” type assets (like bank stocks and high-yield debt).

That wraps up the near-term end of things as to why gold (and thus gold stocks) are out of favor right now.

Tomorrow I’ll share my reasoning as to why gold and gold stocks could still be setting up for one of the biggest trades of the year.

By: Justice Litle