Bull & Bear's Resource Stocks

       Robert Cardwell: "It has now been seven months since crude oil first breached the psychologically important $50 level. A sharp correction soon followed, but to the surprise of most analysts, oil quickly rebounded to $58 a barrel. Subsequent dips have also been followed by sharp rallies to all-time price highs.
       True, oil has been higher on an inflation-adjusted basis, but only in the wake of the Iranian revolution and the Iran-Iraq war, and then only briefly. All the previous price spikes were brief, occasioned by temporary supply emergencies or perceived emergencies. One is almost afraid to say it, but this time really does look different. The supply problem is real and it's probably here to stay.
       Supplies of crude are quite adequate for the moment, confusing some people. But the market is worried about demand during the winter heating season and beyond. At this writing OPEC is again trying to talk the market down - or at least claiming to want lower prices. They will increase production quotas, but that is largely meaningless as OPEC is already producing at or close to the maximum. At this writing crude oil is surging in the face of OPEC's decision. We face a future of steadily rising demand versus limited if any capacity to produce more oil on a global basis. New discoveries have been made and will be made, but at the same time the giant fields we depend on today are declining.
       In most situations, high prices bring on more supply. But oil is now a peculiar commodity in that most of the world's remaining supply lies in inaccessible or politically difficult countries. Lofty prices don't make these nations eager to increase output, but rather to gather in more of the revenue for themselves. In Venezuela, Central Asia, Russia and elsewhere, we see attempts to abrogate previous agreements, increase taxes and generally make things difficult for foreign oil companies. This doesn't make for discovery and development of new fields. There's an increasingly vigorous debate about whether "peak oil" is here or approaching. Whether it is or not geologically, there is reason to worry about energy supplies.
       What are the investment implications? Oil and gas stocks have been the market's best performers for some time. At this point we would emphasize buying them on corrections - understanding the fundamentals, you can buy with confidence when others are selling. We like companies with the potential to find substantial reserves. Such situations can be rewarding in any environment, but given current fundamentals, discoveries are all the more valuable.
       American Oil & Gas (AEZ) jumped to a new high and has since been consolidating around the 4 level. The gain was almost surely related to the Fetter well, which is now drilling in the target zone. This is a "tight hole" (no information available from the company) but we should get a report soon. The odds of success are good - the question probably will be whether the well is a big success or just marginally commercial.
       Keep in mind that the Fetter is a known gas deposit. Production in the past has been limited due to the difficult nature of the formation, but AEZ and partners hope to change this with advanced drilling and completion techniques. Even if the first wells look good, the partners are likely to try various technologies to optimize results. In recent years, such an approach has opened up several now prolific unconventional fields. The Fetter property is vast (and American has other projects besides), so there is still big upside potential in this stock.
       Parallel Petroleum (PLLL) went through a sharp correction and an equally sharp rebound (demonstrating what we are talking about re buying on dips). The stock is now testing its April high. PLLL participated in a very successful recent well, but the buying seems to be in recognition of increasingly evident growth potential from several projects.
       Vintage Petroleum (VPI) made a speculative high in March and then gave back some 10 points over the next two months, which allowed us to take a position. We still think Vintage likely has accumulated a very valuable land package in West Texas, but the company is saying nothing about its well tests and market enthusiasm has cooled considerably. The lack of news is most likely strategy and not an indication that nothing is happening. We'd buy weakness in VPI as it's worth the current price even without West Texas.
       Bankers Petroleum (BNK.V), the other main participant in that West Texas Palo Duro Basin play, is somewhat the same story except that the stock has made less of a recovery from its correction. Unlike, Vintage, Bankers is a very expensive stock except for the potential of the West Texas shale. We've had BNK on Hold and are keeping it there for now.

       The European Union has come under considerable strain with the French and Dutch rejection of the proposed constitution. That relieved pressure on the dollar as the euro slid. Still, precious metals have held their ground in dollar terms. It's partly fundamentals and partly a continuing unease about the dollar. The Italians are thinking about abandoning the euro, demonstrating the tenuous nature of all fiat currencies.
       With American's structural economic problems, we don't think dollar strength will be long lasting. We would continue to accumulate undervalued mining stocks, but use patience and buy on weakness. Copper has made new highs, but copper stocks are lagging, held down by negative sentiment on mining in general. This is an excellent buying opportunity.
       Northern Orion (NTO) released an updated resource estimate for its Aqua Rica property. The calculated net present value was $282 million based on conservative prices of $1.00 for copper, $400 for gold and $5.00 for molybdenum. The payback of capital costs for a mine and mill would be 6.1 years at those prices, but only 1.9 years at current metal prices. NTO has cash equivalents of $143.1 million. So adding the cash and a conservative valuation for Aqua Rica, we come up after subtracting debt with assets worth $399.1 million. That compares with the market cap of $346 - but we haven't included any value for the company's equity in the Alumbrera mine. In the first quarter, Alumbrera contributed $8.9 million in earning to Northern Orion, or 7 cents a share. The net cash flow was higher at $13.8 million.
       Orezone Resources (OZN) remains the same story. The stock dipped, went into a basing pattern for a month, and now is on the upswing again, outpacing the group. The company keeps drilling off impressive intervals of good grade ore - from several properties. There's little doubt that Orezone will either be a significant gold producer or sell out to a larger company at a nice premium. We continue to suggest buying on corrections.
       We suggested two very junior companies for their exploration potential in Nevada. They don't have any booked assets but have a lot of projects - and the stocks are quite depressed. White Knight Resources (WKR.V), which has the backing of more substantial partners, says it will drill no less than nine properties during the balance of the year, with multiple holes in most of them. Work has started on some of these projects. Good results could put the stock up several-fold, while we see limited risk from current levels.
       Victoria Resources (VIT.V) is much the same story. It has raised some money (at C$0.55) and recently begun drilling again on a property where it obtained some encouraging results earlier. We'd buy both these issues on weakness."
       Editor's Note: Robert Cardwell is Director of Equity Research at the Hirsch Organization. He holds positions in American Oil & Gas, Bankers Petroleum, European Minerals, Northern Orion, Orezone, Pacific Northwest Capital, Parallel Petroleum, US Energy and Vintage Petroleum.

       Alex Seagle: "The drumbeat continues on the real estate bubble in the U.S., and the stock, bonds and commodities are all looking relatively expensive. As contrarians, we are by default value-oriented investors. One asset class that has shown excellent historical returns with low correlation to the stock market is timber. One stock that has been a star in Fraser Management's portfolio's that still represents a good value is Plum Creek Timber (NYSE PCL).
       Trees? Timber as an investment? You've probably never considered it. But you ought to. Timber stacks up very well versus stocks. Managed timber (as the professional investors call it) has actually beaten the stock market - with less risk - over the long run. From 1973-2002, managed timber returned roughly 15% annually, while stocks returned about 11%.
       Trees don't know about the war in Iraq, or the bear market in the Nasdaq. While stocks couldn't keep up with inflation in the 1970s, timber investments never had a losing year. While real estate soared, timberland values fell in 2000, 2001, and 2002. Think of your timber investment as a good inflation hedge - the numbers show that to be true. According to legendary investor Jeremy Grantham, over the last century, timber prices have risen at 3.3% above the rate of inflation. Add 5% a year in income, and you've got a timber investment asset that has returned double digits, competing with stocks over the long run.
       The head of Plum Creek Timber said that every American "consumes" a 100-foot tree... every year. He pointed out that we take notes on paper (from a tree), sit at a conference table made of wood, in a wooden chair, in a room with wood trim all around, in a one-story office that was likely framed with, well, wood.
       Forest science is likely advanced. I recently stood among 36-year-old Douglas fir trees that will likely be cut in the next few years. When cut, they'll be in excess of 100 feet tall. And yet, this will be the fourth time this "stand" (as they call it) has been harvested. Instead of chopping down a forest and moving on, it is in the best interest of timberland companies to think in the very long term, and harvest in a sustainable way. In essence, they'll cut and replant roughly 1/40th of their forest every year.
       PCL pays a dividend in the 4% range. It is relatively cheap, with timber assets valued at only $800 to $1,500 per acre. Investing in timberland is something you probably haven't considered in your portfolio. But you should: timber as an investment has beaten stocks, with less volatility. It's uncorrelated to the stock market. You get paid high dividends. And you own millions of acres of exceptional real estate in the U.S. for around $1,000 an acre. Sounds good to me."

       Catherine Hetrick: "We're staying with our current strategy, which is to view gold investments as a defensive hedge and, as such, to maintain our current allocation at a conservative 3% of the portfolio. For stock investors, we still favor Newmont Mining, which is the world's largest gold producer. Mutual fund investors or those who want more diversification in the sector should consider our following featured investment...American Century Global Gold.
       In the alternate mutual fund portfolio, our gold investment is intended to be a proxy for the Newmont Mining (NEM) position held in the Model Portfolio. Our recommended gold stocks and mutual funds will typically be more volatile than the price of gold, but they should follow the same general trend. In a rising gold environment, we expect our gold investments to increase more than the price of gold, thus providing an adequate hedge, despite the fairly small allocation.
       In choosing a mutual fund alternative for Newmont Mining, our focus is on precious metals funds which invest entirely (or at least predominantly) in gold mining companies. American Century Global Gold (BGEIX, 800-345-2021) is our preferred proxy for Newmont Mining. It is one of the few pure gold funds in the category and one of our top gold fund recommendations for many years.
       American Century Global Gold began in 1988 and now manages over $550 million in assets. Since 1992, the fund has been managed by Bill Martin, giving him one of the longest tenures in the category. Mr. Martin works with co-manager Joseph Sterling, who has been a member of the Global Gold team since 1995. Both managers have been employed by American Century for over 15 years.
       The managers run a fairly concentrated portfolio of 62 stocks. The top 10 holdings comprise over 60% of the portfolio, and the two principal positions, Newmont Mining and Barrick Gold, represent 20%. The fund concentrates on larger capitalization gold stocks with over 85% of the portfolio in mid- to large-cap issues. Though smaller exploration stocks may rally more when gold prices increase, this fund should keep pace more with the broader gold market but with less volatility.
       Management is not constrained to investing in any one geographic region and typically holds companies from North America, Australia, and South Africa. Currently 80% of the stocks are foreign domiciled and 20% are domestic.
       The fund purchases only gold mining companies. Therefore, it often doesn't correlate well with others in the precious metals category which may own producers of industrial metals such as copper, nickel, aluminum, platinum and palladium. When analyzing the performance of BGEIX, the XAU Gold and Silver Index is a better benchmark than other funds in the precious metals category. Our graph showing the performance of the American Century fund vs. the XAU Index since gold stocks hit a multi-year low in November 2000. Over this time frame, BGEIX has handily outperformed this benchmark.
       In addition to its focus on gold investments, we like BGEIX because it is offered with no-load and boasts a very low expense ratio of only .68% - one of the lowest in the category. This mutual fund is traded without a transaction fee at most major brokerage houses, though there is an early redemption fee of 1% if sold within 60 days. It is very affordable with a minimum initial investment of only $2,500 for taxable accounts, and as low as $1,000 for tax-deferred and custodial accounts.
       If American Century Global Gold is not available at your brokerage, investors may substitute Fidelity Select Gold (FSAGX 800-343-3548). Note, however, that Fidelity Select Gold may hold other precious metals producers, like platinum and palladium, in addition to gold. Gabelli Gold (GOLDX 800-422-3554) is another essentially "pure gold" investment alternative.
       We continue to recommend Newmont Mining (NEM) as our primary gold company for those who invest in stocks. However, those preferring exchange-traded funds may use streetTRACKS Gold Shares, (GLD 866-320-4053), which invests in gold bullion and should be less volatile than precious metals funds and mining stocks because it tracks the price of gold."

       James Rapholz: "I've got what I'll label as a Hot Speculation Target for you today: They call themselves something that I've never heard of before - but can't say that I do not like the term - "An Exporting Producer."
       Cusac Gold Mines Ltd, 52 week high $0.26 as of 7/2/2004 and a 52 week low of $0.82 as of 6/7/2005. I can't remember when I wrote up a stock this cheap!
       Cusac is a past producer that is aiming to recommence gold production this year (after six years of no production). They have defined gold reserves, a debt-free mill and mining infrastructure and a large-tonnage disseminated gold target ready for exploration.
       Cusac trades on both the TSX, symbol: CQC and the OTCBB, symbol CUSIF. Cusac's ready for production, Table Mountain gold mine and large scale gold target for Taurus II project, are both located in the prolific Cassiar Gold Camp located in North central British Columbia. Over the last 40 years, Cusac has amalgamated the largest claim holdings within the Cassiar Gold Camp. Cusac's management team has extensive mining and exploration experience.

The Taurus Project ("Taurus I") is a bulk tonnage target located on claims owned by Cusac and International Taurus Resources. The Taurus II Project is another bulk tonnage gold target located on Cusac Gold Mines' 100% owned Table Mountain Property. In 1995 - 1996, Cyprus Canada Inc. outlined inferred, uncut resource on Taurus I of 28.4 million tones grading 1.3 grams/tons gold. Cusac Geologists believe that its Taurus II; located on claims adjacent to "Taurus I," have potential for similar or better mineralization. Cusac has developed, a $1.4 million exploration program designed to test new bulk-tonnage gold targets in the vicinity of the existing Taurus Gold project. The budget is a three-phased program starting with compilation and digitization of all current data, followed by two phases of drilling totaling 5,200 meters. Cusac will design diamond drill holes to extend the known gold bearing zones along strike, evaluate untested structures within the deposit area zones and explore for as yet undiscovered mineralization.

"Where did the gold come from?" Is there a "Motherlode" at Table Mountain?
The questions above have intrigued Cusac management and academics for many years and Cusac plans to find the answers to these questions. The theory is that emplacement of gold in quartz veins is attained by fluids moving through fractures in rocks. The fluid movement is propelled by a heat source of molten rock. The quartz veins that host the gold at Table Mountain are much older than the nearest known heat source - Cassiar Batholith. It is therefore believed that a different, buried or "a'hidden" heat source exists below the property that is responsible for the gold deposition. Cusac is looking to raise the necessary funds to drill the 'deep hole' in order to find such a "Motherlode."
After I finished writing Cusac up, I went out and purchased 10,000 shares at $0.099 - I'm the last of the big spenders - gambling away my life's savings! Cusac Gold Mines Ltd., 911 - 470 Granville St., Vancouver, BC V6C 1V5. USA toll-free: 1-800-665-5101, Canada toll-free: 1-800-670-6570, www.cusac.com

       I've dug up some oil and gas producers for you. These stocks can be played as either short or long term investments. The world energy council stated on June 4, 2005 that they expect a barrel of oil to trade at $60.00 or more for one thirty day period later in 2005. I attended a meeting of the S. Florida Market Analysts Association recently and was surprised by the number of people who believe oil will be trading at $100 a barrel before 2006 comes to an end! I like all of these stocks and have listed them according to their selling price, not because I favor any particular issue.
       Vaalco Energy, Inc. (AMEX EGY $3.37), an independent energy company principally engaged in the acquisition, exploration, development and production of crude oil and natural gas. Vaalco has been rated a strong buy for the past 90 days by Dlouhy Merchants, Inc. (a brokerage house).
       Meridian Resource Corp. (NYSE TMR $4.67) an independent oil and natural gas company that explores, acquires and develops oil and natural gas properties utilizing 3-D seismic technology. The company's operations are focused in Louisiana, Texas and the Gulf of Mexico.
       Meridian has been rated a strong buy for the past 90 days by the following brokerage houses: Friedman, Billings & Ramsey, John S. Herold, Inc., Raymond James & Associates., Spelman Research Associates. and three minor houses.
       Petroquest Energy Inc. (Nasdaq PQUE $6.01) an independent energy company engaged in the exploration, development, acquisition and production of oil and natural gas reserves in the Gulf Coast basin, both onshore and in shallow waters offshore.
       Petroquest has been rated a strong buy for the last 90 days by the following brokerage houses: Morgan, Keegan & Co., RBC Capital Markets, Raymond James & Associates and three minor houses."
       Editor's Note: Economic Advice has been rated the world's top market letter specializing in precious metals and energy stocks. In 2004, stock picks on gold, silver, natural gas, oil and coal were up 173.41%. For details see www.economicadviceinc.com.

       Jennifer Dowty writes a column for Investor's Digest of Canada highlighting stocks that offer value and profitability and the following two companies appear to represent potential shareholder value.
      "In the energy sector, Duvernay Oil Corp. (TSX DDV, $30, 403-571-3600, www.duvernayoil.com) is one of my top recommendations.
       The company was founded in June 2001. It is a junior oil and gas play involved in the exploration, development and production of natural gas and crude oil. Production is weighted 85 per cent towards natural gas. Operations are located in northwest Alberta and northeast British Columbia.
       Management and directors have significant ownership positions, so their interests are aligned with shareholders' interests, which is always a good sign.
       Duvernay's production is growing at a stellar rate. In 2003, production was just over 3,000 barrels of oil equivalent per day (BOE/d). This climbed to over 6,000 BOE/d in 2004, and this year the company expects to average 11,000 BOE/d, with a targeted exit rate of around 15,500 BOE/d.
       Meanwhile, cash costs are declining, and the result is escalating cash flows. The consensus estimate for cash flow is $2.65 for 2005, and leaps to $4.10 for 2006.
       The company has also been delivering strong operational results that exceed analysts' expectations, and I believe this trend will continue. Duvernay has a large undeveloped land base, and has had a high drilling success rate.
       It also recently increased its capital program. On June 7, management announced a $50 million bought-deal financing. Funds were raised to expand the company's spending from $180 million to $230 million.
       This issue was received extremely well, with strong institutional interest and, as a result, was several times over-subscribed. I wouldn't be surprised to see Duvernay eventually reorganize into an income trust structure.

       Gold is another commodity whose price may gain momentum. Recently, gold prices have been on an uptrend, rising to a five-week high as investors abandon both the euro and the U.S. dollar and seek the safety of gold. Gold futures are now trading above $430.
       Some investors began to sell euros and buy gold after voters in France and the Netherlands rejected the European Union constitution. Other investors are selling U.S. dollars and purchasing gold in the belief that U.S. economic conditions are eroding. The beneficiary from skepticism and uncertainty with the U.S. and European economies has been gold.
       Crystallex International Corp. (TSX KRY $4.51, 416-203-2448, www.crystallex.com) stands to benefit from the rising bullion price, as well as from anticipated near-term news.
       Crystallex is a Canadian-based gold producer with operations and exploration properties in Venezuela. Its principal asset is the Las Cristinas property.
       I expect the price will go higher principally for one reason: Crystallex will receive the final Permit to Impact Natural Resources. This is the catalyst to watch for. The company may receive shortly, and once it does, construction can begin immediately in order to get commercial production underway by the target date of late 2006.
       Las Cristinas is Crystallex's principal asset, and management is intently focused on bringing this site into production.
       Rumor has it that once the final permit is received, Crystallex will be an attractive takeover candidate.
       Technically, the stock has been drifting in the $4 to $5 range since October 2004. There is technical resistance at the $5 level and then at the $5.50 level. However, once the company receives its final permit, the stock could break through these key resistance levels and set a new 52-week high."
       Editor's Note: Jennifer Dowty, CFA, is an associate portfolio manager at MFC Global Investment Management.

       Joseph Schlussel: "Scientists at the University of Alabama at Birmingham and the Carnegie Institute of Washington say they have a new method to grow synthetics that is faster, cheaper and can create better stones than other methods on the market.
       The Diamond Registry talked to the scientist behind this invention, Yogesh Vohra PhD., a physics professor at the University. Vohra said his new method was far faster than either CVD (chemical vapor deposition) or the HPHT (high pressure high temperature) methods. A press release said it is "able to grow the diamond 100 to 200 times faster than conventional lab-grown methods."
       The new method uses a microwave plasma process, which can grow diamonds one-carat and larger in a manner of days, and allows for multiple crystals to be grown simultaneously.
       The process uses nitrogen in the growth process to create a yellow diamond that is heated under a high pressure to produce a light yellow or nearly color-less crystal. Currently, Vohra is working to develop white diamonds at a high growth rate so that purification steps can be eliminated.
       "With the addition of boron in the microwave plasma, a large blue diamond like the Hope Diamond could be grown in the laboratory," he said. Vohra said that he hasn't submitted the stones to GIA to see if they can be identified, although so far all synthetics are identifiable.
       Vohra told us that he has no plans to market the stones just yet, but there are people looking into it. We don't doubt it. It looks like there may be more (and cheaper) synthetics coming onto the market than we ever dreamed. But is a "Hope Diamond" grown in Alabama really a Hope Diamond"?

       James Turk: "The mounting evidence continues to suggest that the low in the gold mining stocks is behind us. Further, the gold stocks still represent good value.
       The gold mining stocks are still near their buying area.
       The important point that we should take from gold's chart is that gold has climbed relentlessly higher, which has happened regardless of everything that central banks have thrown at it, including their anti-gold propaganda, their build-up of gold derivative positions, and the dishoarding of physical metal from their vaults. In effect, gold is telling us that it does not want to stay below $432, which perforce means that it wants resume its 4-year old uptrend.
       In fact, I think that is what's happening now. The recent (and probably final) successful test of support around $420 means that gold is ready to once again start climbing higher, and indeed, it has in fact been climbing higher since testing that important support. Gold is resuming its uptrend.
       Gold is just a chip-shot away from $500, the next level of resistance. That's where I expect gold is headed, and given the way gold has been trading of late, it will probably reach that level much sooner than we expect.
       Gold does not normally begin to rally during the summer months, but it does happen occasionally. I remember very well how gold rallied in the summer of 1982. It began its climb higher in June of that year, much to the surprise of everyone because there was no apparent reason for gold to rally. The reason for gold's climb did not become apparent until August, at which time it became widely known that Mexico was defaulting on the billions of dollars of debt it owed to US banks. We can see that rally on the chart - gold climbed from $282 to $500 in just six short months.
       That sharp climb is a mark of a bear-market rally, which we now know is what that 1982 rally turned out to be. But gold's technical position is entirely different this time around. In 1982, gold's price had been more than halved from the 1980 high, so a bounce was to be expected. This time, gold is climbing higher from a huge and powerful base in which strong hands - like us - have been accumulating gold.
       Gold's technical position today is a night-and-day difference from that which existed in the summer of 1982. Consequently, if gold can more than double in price in a few months like I did that 1982 summer when it was in a much weaker technical positions, imagine what it can do over the next few months, not to mention the balance of this year. I am increasingly taking the view that my $500 target for this year will probably prove to be too conservative.
       Central banks have been sitting on the gold price for so long, it is increasingly likely that gold will explode to the upside. The experience thirty-five years ago provides a good illustration of gold's potential.
       When President Nixon closed the 'gold window' in August 1971, it was a long-delayed wake-up call fro everyone who had until then been ignoring gold. Gold immediately began a steady and unrelenting climb higher. Only eighteen months later the gold price had tripled.
       Could history repeat making $1200 gold possible in the next eighteen months? YES! It is becoming increasingly clear to me that gold has at least that much upside potential.
       Turning now to silver, I noted in the last letter that silver "climbed too far, too fast". It needed a breather, and we got one. But note how silver has held above $7.25. I had hoped to buy back a trading position below this level.
       We might still fall back below $7.25, but then again, I wouldn't be on it. The fact that silver has repeatedly been unable to close below $7.25 indicates strong support for it. Like gold, there is a lot of money on the sidelines waiting to 'buy the dip'.
       The long-term picture for silver look very bullish. Silver continues to trade within a triangle formation. These are consolidation patterns normally found within uptrends, which is the present case with silver.
       Also, these patterns more often than not conclude with an upside breakout. This chart supports that point of view. It is a very bullish chart, so one would normally expect it to be resolved with an upside breakout.
       Initial overhead resistance for silver begins around the $7.80 area. Look for silver to break through this area in the weeks just ahead, followed soon thereafter by gold breaking through resistance at $456.
       In summary, be prepared for some upside fireworks in gold and silver. These upside fireworks could start anytime."

       Franklin Sanders: "Every industry boasts its yearly surveys of global supply and demand, and one stands out as the standard. In silver's world that distinction belongs to the Silver Institute's World Silver Survey.
       Having read the 2005 edition, I have to winder why.
       When will the Silver Institute wake up and figure out that Gold Fields Mineral Services is short-changing it? Poor writing, analysis supported by data that leaves the reader clueless, and poor writing all drain away the Survey's usefulness. It gets harder and harder to swallow GFMS analysis and conclusions, or even respect them. This year's Survey contains puerile errors and in some points is almost incomprehensible, with half explanations and hints at explanations which are in themselves incomprehensible."
       Here's a sample of what Sanders takes issue with: "Demand for US$1,000 face value 90% and 40% coin bags is more clearly investment related as these typically contain 710-800 oz. silver."
       "Can it be that GFMS, world leader in gold and silver intelligence, does not know that US 90% silver coins were minted at exactly 723.4 fine ounces to the dollar face value? Could they possibly fail to know that the industry counts this most popular form of physical silver investment as 710-715 fine ounce? Or that 40% silver half bags contain only 295 fine ounces? This statement leaves the informed reader gasping like a bass out of water, first for its ignorance, and second for its puerile truism. Of course demand for US silver coin is "investment related." Why else would anyone buy a 55 pound bag of common silver coins? To drill holes in them and make washers?"
       Sanders takes issue with supply and demand revisions, addresses the old story that digital is about to replace silver in photography, the tired old argument that "gold is money but silver is an industrial metal," above-ground silver stocks and more. (Ed. Note: We plan to run the full story in The Resource Investor, at www.TheResourceInvestor.com).

Here are the highlights of the 2005 Survey:

Mine production increased from 611.2 Moz to 634.4 Moz (by 4%), an all time high.
Silver production from primary mines (as opposed to by-product mine) grew to 30% of all silver mined, up from 28%.
Scrap supply fell to 181.1 Moz, a four year low and 2.5 Moz drop from 2003.
For the seventeenth straight year the market showed a "structural deficit." That is, production and old scrap fell short of meeting fabrication demand.
Government silver sales fell by 30%, furnishing only 7% of all supply. Chinese government sales dropped by nearly half.
Fabrication demand fell 2%, but this was a strong showing in the face of a 36% higher average silver price.
Photographic usage dropped 6%, with some sectors falling and some rising. Chinese photo demand grew 6%.
For the third year running, industrial fabrication demand grew, by 5% to 367.1 Moz.
Jewellery and silverware slumped to 247.5 Moz or 9-3/4%, thanks to a huge drop in Indian demand, (Silver rose 30% in rupee terms and the monsoon was poor, pinching Indian farmers' incomes.)
Implied net investment jumped from 2003's 8.7 Moz to 42.5 Moz.

"Nothing I found in the 2005 World Silver Survey changes my outlook for silver. All the following factors remain, all working for higher silver prices:

Long term shortfall of supply against demand (17 years)
Long term undervaluation (much of the 1990s spent with silver's price under production cost)
Wearing out old bulls. No doubt 1970s investors (and their heirs), tired of holding silver so long, supplied much of the 1.5 billion ounce cumulative deficit. The last 17 years has burned up their silver.
No overhanging stocks. Hoards such as the US government's or India's have been dissipated. By the 1980 peak all the U.S. "attic silver" that could be bought under $20 (equal to $50.79 in 2004 dollars) was bought. The rest of the world doesn't have any attic silver.
Demand inelastic to price. In most industrial applications only a tiny amount of silver is used in relation to the end product's price, so usage doesn't shrink much when silver's price climbs. There's more: in most applications no good substitute exists for silver at anything near silver's efficiency or price.
Technological reductions in silver use. Stung badly by the 1980 silver peak, for more than two decades silver users have been applying every technological innovation to squeeze down silver use, further reductions will be tiny.
Primary trend of falling paper asset, rising hard asset cycle. Paper assets like fiat currencies, stocks, bonds more inversely to hard assets like metals. Stocks peaked in 2000, the US dollar in 2002, and bonds in 2003. These trends will last at least a decade. Gold began rising in 2000 and silver in 2001 after more than 20 year bear markets.
Investment or monetary demand moves the silver market at the margin. Only that can take silver to new price heights. Falling confidence in dollars and other fiat currencies stimulates monetary for both silver and gold as alternative monies.

       Since only investment demand for silver really drives the price wild, fundamental demand doesn't matter much for our investment case. Certainly fundamentals must be on our side, since large surpluses or supply overhangs would create a strong headwind. However, since silver has already racked up big deficits, we only want to check fundamentals to make sure the trends favoured silver in the first place still exist.
       They do, and I still cannot see a single investment on the horizon that will outperform silver. I remain convinced that silver will, outperform gold by 400% and will reach US$78.80 or more in the next ten years."
       Editor's Note: The World Silver Survey 2005 is available for US$195 from the Silver Institute, 1200 G Street NW, Ste. 800, Washington, DC 20005. (202) 835-0185; fax (202) 835-0155 or www.silverinstitute.org. The MoneyChanger, tabloid format, covers the markets, gold and silver investments, charts, interviews, alternative health, and much more. For a special Internet subscription offer visit www.the-moneychanger.com.

       Dr. Douglas Anderson, Jr.: "The Central Fund of Canada (CEF) is a closed end foreign fund trading on the AMEX. It invests almost exclusively in gold bullion, so an investment in the fund is an investment in gold, not mining stocks. Gold has outperformed the majority of mining stocks over the past year and is up about $40 per ounce over the year.
       My preference is to hold bullion gold coins, but I believe that CEF presents a convenient way to hold gold or an investment in gold. CEF has been trading in a rather tight range of about $5.10 to $5.40 per share over the past month and from about $6.05 to $5.10 over the past year. With gold currently about $427.10 (July 1), I believe that CEF is a good buy.
       Of course, gold could go a little lower, but it seems to be holding above $400 and has done so since September of last year. I believe the downside risk is minimal, but the downside risk of the dollar is very great. The dollar seems destined to drop substantially in purchasing power as it has done until this recent bear market rally. I have no doubt that it will resume its drop and may have already started to do so.
       I own CEF and plan to add more. This is a safer and surer investment than in any of the currencies of the world. All currencies of the world are fiat currencies backed only by the fiat power of government to force their use (Legal Tender for All Debts Public and Private, as our currency states), and by the acquiescence of the people to use them. None are as safe as gold; however, many are safer than our dollar which is backed only by the full faith and credit of the bankrupt U.S.
       The currencies I prefer are the Australian dollar, New Zealand dollar, Swiss franc, the euro, and Renminbi (China). The Reminbi will appreciate somewhere between 5% and 10% once the Chinese decide to change their peg to the dollar. However, gold is safer."

Roger Conrad's UTILITY FORECASTER
1750 Old Meadow Rd., Ste. 301, Mclean, VA 22102.
Monthly, 1 year, $129.

Southwest Water: The cheapest
stock in the sector

       Roger Conrad: "Rapid industrialization and exploding populations are increasingly straining the world's supply of safe drinking water. That's triggered a bull market in water distribution and treatment stocks during the past few years. One that still has a long way to run: Southwest Water (Nasdaq SWWC $11.55).
       Originally a family business selling water from a California farm, Southwest operates in more than 30 states and serves 2 million customers in small towns and rural areas. The largest division manages systems for municipalities that want to continue owning their water. Southwest also owns regulated utilities (42 percent of sales), primarily in California, New Mexico and Texas, and provides a range of services, including billing management, wastewater treatment and infrastructure development.
       Rapid growth seemed to hit a wall in late 2004 as costs rose unexpectedly and severely depressed margins. That trend at least partly reversed in the first quarter, with the ute breaking even despite wet weather that depressed demand. Improvement should continue throughout the year as rate increases kick in.
       Southwest will thrive to the extent founder Anton Garnier and his management team can integrate the company's many parts. The good news: That's looking like an increasingly solid proposition.
       The stock is the cheapest in the sector, selling for just 1.8 times book value and one times sales, despite being on track for double-digit profit growth. If you don't yet own Southwest Water, it's a buy up to 12."