You scan the menu and notice that the prime rib and the hamburger are the same price. What do you order? The precious metals market isn’t so different, according to “Mexico Mike” Kachanovsky, consultant to hedge funds and mining companies and contributor to SmartInvestment.ca. The market has pulverized the price of top-notch mining stocks to the same level as the struggling names. So, which would you buy? In this interview with The Gold Report, Kachanovsky reveals how to find the prime rib of the gold market.

The Gold Report: Mexico is a mining jurisdiction where mining investors have made a lot of money, especially over the last decade. Mexico recently passed a 7.5% royalty on earnings before interest, depreciation and amortization (EBIDA) for mining companies operating there. Are the salad days over for miners in that jurisdiction?

Mike Kachanovksy: There are still a lot of unknowns on how this new royalty is going to affect mining companies in general and how it’s going to be applied within the country.

The majority of the producers I talk to don’t feel it is going to be that disruptive because it’s a royalty on earnings, not a gross smelter royalty. The way it is structured, companies that aren’t making a lot of money right now won’t be paying a lot of extra taxes. There are also going to be deductions that companies can put in play that would lower their overall tax spike from the new royalty.

For the companies that are already in production and that have been established in Mexico, it’s really not going to doom their operations. However, it is discouraging retail investors from participating and buying up Mexico-related stocks. There’s uncertainty and fear in the market until people start to understand it’s not going to devastate the bottom lines of miners.

TGR: Could the tax be lowered?

MK: I don’t think the Mexican government will change the actual total amount, but it will probably allow more leeway and flexibility on what counts as earnings and what deductions will be allowed against that royalty. One thing to keep in mind: Part of the rationale for bringing this new law into place was that it would force companies to pay a certain amount of money back. It would go to the immediate local domestic or regional government. That money could be used to pay for schools or road construction or a lot of the things that the mining companies are doing now voluntarily.

Perhaps some of these companies that already have scholarship programs and are building playgrounds and schools for their local communities will be able to deduct that money they’re spending already in goodwill. My feeling is that there will be enough pressure behind the scenes that the structure of this royalty will be less restrictive than how it stands right now.

TGR: Do you think companies are going to avoid Mexico as a result of this royalty?

MK: I’ve heard some saber rattling from certain companies that say they are going to restrict investment within Mexico and start looking at other jurisdictions. I think it’s a lot of political brinkmanship. The arguments for continuing to operate in Mexico are still more positive than negative. Even with this new royalty, Mexico is still one of the most favorable and lowest-cost mining jurisdictions in the world.

TGR: Timmins Gold Corp. (TMM:TSX; TGD:NYSE.MKT) and Torex Gold Resources Inc. (TXG:TSX), which both operate in Mexico, were among a handful of junior mining companies that recently completed bought-deal financings. Does this signal a warmer financing environment for junior mining companies—especially those operating in Mexico?

MK: I consult for a number of funds that are saying now is the time to start investing in these junior mining stocks. The stocks are so beaten down that a firm can put $2 million ($2M) down on a financing and end up owning a third of the company. I believe that we’re going to see bought-deal financings and more appetite for private placements that will allow companies to get funded and move forward.

However, there are still companies that have extremely attractive projects that are not able to get financing just yet. The market is still too weak for them to attract funding. I think we’re still at the much earlier stage. At some point we’re going to see a lot of money flowing into the sector. Right now, the lowest-hanging fruit is being picked. We’re still a long way from a healthy speculative market.

TGR: SNL Metals Economics Group, which is based in Halifax, Nova Scotia, estimated that the total worldwide budget for non-ferrous metals exploration dropped about 30% to $15.2 billion ($15.2B) in 2013 from $21.5B in 2012. Yet Mexico remained a top-five destination for exploration spending. What keeps the drills turning in Mexico?

MK: Mexico is still relatively underexplored and it has a treasure trove of prospective geology. There’s always going to be that discovery potential that makes the risk/reward balance in favor of continuing on with exploration. Even in an environment where metals prices have come down, the chance of finding a brand-new high-grade deposit in Mexico that could be economic to develop will have companies spending money.

The cost of exploration in Mexico is still much lower than many other places in the world. Exploration spending has dropped now that a lot of junior mining companies have access to high-quality consulting firms and drilling contractors. A company can get a lot more meters of drilling done today for less than it would have cost two years ago.

TGR: Mexico is known more for its silver than gold. Which are you more excited about right now?

MK: I’m a silver bull, but investors need to have leverage to both. We’re at the latter stage of a very long and severe correction for both metals. As things roll over into a more bullish posture, silver tends to outperform gold on the upside. If I were going to be putting new money into a metal today, I would probably put a little bit more weight toward silver.

TGR: Mining magnate Rob McEwen, who’s well known in mining circles, told Mineweb.com that consolidation will pick up this year. He added that his namesake company, McEwen Mining Inc. (MUX:TSX; MUX:NYSE), is likely to grow through mergers and acquisitions (M&A). Do you see an uptick in M&A coming?

MK: Absolutely. The urgency and likelihood that it’s going to pick up this year is just that much higher because there’s less exploration spending and existing mines are being depleted. If these companies want to stay in business they’re going to need to either find more minerals or buy them. The severity of this correction means there are a lot of very attractive projects available that have lost half or even 90% of their market value. It’s cheaper to buy late-stage defined deposits than it is to look for them and drill them.

TGR: What are some companies producing silver and gold in Mexico that finished the year strong and are poised for further gains this year?

MK: Investors have to look for the companies that survived the downturn intact with prospects for growth. I’d select a company like Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.MKT), where production is increasing 19% on a silver equivalent basis year-over-year and guidance for 2014 is for a further 10% increase in total metals output. Great Panther has $24M in cash on the books with no long-term debt. It has a very strong financial position and the market cap is a fraction of where it was a couple of years ago when there was a lot more risk in the story.

TGR: Do you think that Great Panther is likely to attract an acquirer?

MK: A lot of companies have been saying they want to do acquisitions and are looking at possible targets for mergers. The problem is that a lot of the acquisitions won’t be acquired at current market value. Companies are going to have to pay a premium to get them. All of a sudden it doesn’t look as if a project is an accretive acquisition any more. Sure, assets are cheap, but some of these companies that are in a position to do a deal are gun shy because by the time they pay a premium to take over something, it looks expensive in hindsight. We’re going to need to see a rebound in the price of the metals and locking in the cheap market caps of some of these acquisition targets. We may be just on the cusp of that. It’s too early to say.

TGR: Great Panther exceeded its 2013 production guidance. Are you willing to go out on a limb and say it might beat its guidance for 2014?

MK: It will at least be in the ballpark. Great Panther’s president has done a very good job of underpromising and overachieving. Companies that have missed expectations get severely punished in the market. Just this week, Alamos Gold Inc. (AGI:TSX), which is a very successful midtier producer in Mexico, missed expectations and issued lower guidance for 2014. The stock is down by more than 30% in one week on numbers that are not that bad. It makes more sense to be very conservative with guidance and then go out and surprise the market.

TGR: What are some other companies that you like in 2014?

MK: Excellon Resources Inc. (EXN:TSX; EXLLF:OTCPK) has operational and financial strength. It had about 2.1 million ounces (2.1 Moz) of silver equivalent output in 2013, but plenty of spare capacity in its mill. It has a defined resource with more than 10 years of mine life. Its cash costs are extremely low. It has $9M in cash. It’s positioned to move forward even if the market remains unmoved.

Another junior I’ve liked for a long time is Avino Silver & Gold Mines Ltd. (ASM:TSX.V; ASM:NYSE.MKT; GV6:FSE). Even in this market, it reported a 260% increase year-over-year in silver production numbers. Gold output increased by 162% and its all-in costs are still below $11 per ounce of silver net of byproduct. This is the kind of company one can buy right now. It’s still very cheap relative to its peers, but it’s not likely to surprise anybody or get in trouble with weak margins if metals prices don’t start rebounding in the next little while. It gives investors that extra degree of confidence.

The final company I should talk about is Endeavour Silver Corp. (EDR:TSX; EXK:NYSE; EJD:FSE), which is one of those companies that year after year, good conditions or bad, has always been able to report increases in production. This most recent year is no exception. Endeavour Silver has been able to lower its costs and increase profit margins. Its production was 6.8 Moz silver in the most recent year. It has $35M on the books. Endeavour Silver is a proven winner and has been able to build shareholder value year after year.

TGR: What about some other juniors that are having exploration success but are not yet producing?

MK: A producer that I would categorize as more of an explorer—the best exploration story in all of Mexico—is IMPACT Silver Corp. (IPT:TSX.V). The company has identified literally thousands of historic mine workings within the property holdings that it controls. These are high-priority exploration targets that the company can look at to outline new resource zones that were overlooked in the past. It’s not just a theoretical model. Over the last five years IMPACT put several new mines into production that it discovered just through advancing exploration around old workings.

IMPACT advances an extremely aggressive exploration budget year after year. This year, the company is planning on drilling between 15,000 and 20,000 meters, funded by cash from its current production levels. It has more than $6.5M in cash on its balance sheet. IMPACT has an enormous inventory of high-profile targets and a fantastic track record of achieving exploration success and then rapidly advancing to new mine development. To me, IMPACT is head and shoulders above the pack in being able to demonstrate strength in exploration.

TGR: What are your thoughts on IMPACT’s management?

MK: I’ve known CEO Fred Davidson for about 10 years. I first started investing with his other company,Energold Drilling Corp. (EGD:TSX.V). Energold is another superb story with financial flexibility and diversified operations into geotechnical and petrochemical drilling. Davidson has done a good job of building growth and maintains a conservative financial posture, which is hard to do. Usually a company has to take on a lot of risk if it wants to grow quickly. I still own a personal position in both companies and they will probably remain core holdings for me as long as I’m investing in the sector because they’re such solidly run companies.

TGR: Is it a big advantage for IMPACT to have a relationship with a drilling company?

MK: It’s not an advantage right now because so many drillers have inactive rigs that are being offered at a discount. As drill rigs become harder to get on contract as prices start going up, it will become a much bigger advantage to have an in-house relationship with a company like Energold.

TGR: Which strictly explorers do you like?

MK: There are two companies that have seen a nice rebound in the last month. Garibaldi Resources Corp. (GGI:TSX.V) has a core group of holdings in Mexico that the company is currently drilling in proximity to large-scale mines in Mexico. Any drill-bit success that it accomplishes could become a very attractive takeover target. Garibaldi is unique in that earlier in the cycle it did just that. It found a large gold and silver deposit, which it successfully vended to another company, making a lot of money for its shareholders. The company has done a very good job of managing its cash position.

Garibaldi also has an asset in British Columbia that I originally wondered why it even bothered to keep when Mexico was doing so well for it. However, this part of British Columbia has recently become more active, with two other companies at the limits of the property. Speculation is coming into the stock on the basis of “closeology”—that there may be a significant discovery next to its Grizzly property in British Columbia that could suddenly be a much more attractive asset for a transaction. Garibaldi’s share price has more than doubled in just a few weeks based on that speculation.

Another explorer that I like is Minaurum Gold Inc. (MGG:TSX.V). The company had a fund come in and put some money on the table that will enable it to drill on a gold-copper prospect in Mexico that shows a lot of promise.

TGR: You’ve had success as an investor by getting in on a big move at the beginning of a cycle. As an investor, what signs will signal that the next move is close?

MK: I’m encouraged by the fact that the junior miners as a group are outperforming the metals. In the beginning of this correction, the metals were still moving higher but the stocks had started to sell off. They stayed in this bearish posture for more than two years.

A big part of what drives the overall performance of a sector is what big money investors are doing. There were a lot of mutual fund redemptions and hedge funds selling across the board in the mining space during the last several years. A great many of them I suspect were positioned net short. That is now starting to unwind and they’re starting to aggressively accumulate sector leaders that have been beaten down. When I start seeing high-volume accumulation off the lows, the bottom is in for the entire sector.

There is a parallel to 2003 when I first started to make money in these mining stocks. There was a long, painful bear market that had driven a lot of the mining stocks down to extreme lows. Then there was this uptick. The first hint was that metals started to increase in value and mining stocks were increasing at a faster pace than the metals. There were fewer exchange-traded funds in 2003, but some of the larger junior mining ETFs that are available today, like Market Vectors Junior Gold Miners ETF (GDXJ:NYSE.Arca), are showing much faster gains than overall metals. That tells me that investors are starting to buy a basket of these undervalued stocks and position themselves for the next bull market.

TGR: Could the big funds just be coming in to take advantage of a short-term rally?

MK: I don’t think so. The liquidity isn’t there to flip these stocks. Companies are buying these stocks because they’re at extreme low valuations and it’s unlikely that they’re going to trade them after a short bounce.

TGR: Do you have any final thoughts for us?

MK: Investors have to be very systematic. In the more speculative days of the sector, an investor could just about buy any name and make money on it—hype and speculation ruled the day. In this market, investors need to spend more time doing research before putting money on the line to identify the stronger companies, the ones that have the best management, projects that will still be producing years down the road, and that have been able to meet the challenges of lower metals prices by lowering their costs and improving their profit margins. Those are the kind of companies that it takes a little extra time to find and those are the ones that you could buy with confidence now.

The advantage of this terrible correction is that top-quality companies are now priced in the same range as the junk. You’re buying prime rib and paying the price of hamburger. You might as well go and sort through and find where these prime-rib candidates are and load up. You might as well buy the best companies and be positioned to make the most money instead of just picking up some of the weaker performers that are also trading at their lows.

TGR: Thanks for your time today.

MK: It’s always my pleasure.

Mike Kachanovsky is a consultant providing analysis of junior mining and exploration stocks. His work is published on a freelance basis in a variety of publications, including the Mexico Mike column in Investor’s Digest of Canada. He is a founder of www.smartinvestment.ca, which serves as an online community for the discussion of all topics relating to junior mining stocks.

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I would like to show you the Chartology of silver that you won’t see anywhere else on the planet. Some of these charts might not conform to the classic textbook scenarios most chartists believe are the only correct ways to construct a chart pattern. I have learned through many years of charting the markets that there are areas in this field that can be opened up for further interpretation and still fall within the loose confines of what is considered a chart pattern. Keeping an open mind in any of the trading disciplines of the markets from Elliot Wave, to cycles or charting can give one more insight and clarity than any one book can give you. Real time analysis and interpretation is the only way to really get to know your chosen field for investing in the markets.

With that said lets look at some silver charts. We’ll start with the short term charts and work our way out to the very long term charts that hopefully will put what silver is doing right now into perspective . When you look at the quarterly chart going back to the 1970′s, What happened those many years ago still has a direct impact on what is happening today , even though this seems impossible.

Lets start with a 10 month daily chart for silver that has a lot of information on it. If you’ve been follow the precious metals sector you know that silver had a huge day on Friday February 14. Happy St. Valentine’s day silver.

What makes Friday’s big move so special? There are several very good reasons. First, silver broke out from a red 2 1/2 month long rectangle reversal pattern to the upside. This breakout also took out the brown shaded support and resistance zone that had been in place since July and August from last year. Note how the brown shaded support and resistance zone acted as resistance back in August and then once it was broken to the upside it reversed its role and held support back in October and November. This support and resistance zone gave way to the downside when silver made its ultimate low in December, again reversing its role from support to now resistance. As you can see on the chart below silver was unable to penetrate that brown shaded support and resistance zone until Friday of this past week. For 2 1/2 months silver was trapped in the narrow rectangle while the precious metals stocks were racing higher. The top rail of the downtrend channel was also taken out this week which has now cleared the way for silver to run higher. Whenever you see a huge spike like we seen on Friday this tells us the bears have become exhausted and have no fight left. If you want to kick them while their down now is a good time to get your licks in.

This next daily chart goes back about 1 1/2 years that puts the downtrend channel and the red rectangle into perspective. Note the last bar on the bottom far right hand side of the chart that shows you what a breakout looks like. These kinds of days don’t come around very often but when you see such a day take notice as it usually means something significant has happened. The other important feature on this daily chart is the possible double bottom that maybe forming. You can clearly see the June and December lows that formed in the same general area. Silver along with gold are both showing this same setup. I believe they are going to do one of two things. First, this possible double bottom will be the reversal pattern that reverses the almost 3 year decline in silver. Second silver could be building out a large consolidation pattern that will eventually break to the downside. The August high of last year will be the key to which pattern wins out. For the time being though we have a nice rally getting underway that should take the price of silver back up close to the August high around the 25 area. At that point we’ll have to reevaluate the situation again and take it from there.

There has been a chart pattern we’ve been following, at Rambus Chartology, that was a blue 6 point Diamond consolidation pattern that has shown up on gold, silver and precious metals stock indexes. They had all the characteristics of playing out to the downside but a funny thing happened on the way to the Bottomz Inn. After they broke to the downside, as we anticipated, they slowly started to form a small chart pattern that ended up being a reversal pattern before the Diamonds could fulfill their measured move. This is how the markets talk to you. When you see a beautiful setup and it starts doing what you think it should do but then doesn’t follow through you have to take notice. The only way you can do this is to keep and open mind all the time as there are no absolutes in the stock markets. As you can see on the chart below the 6 point Diamond, the bottom dashed rail was the original bottom of the Diamond pattern. I just made two changes to the original 6 point Diamond. First I extended the top rail down to the apex keeping the same angle. The biggest change was the solid blue rail that starts at reversal point #3 and catches reversal points five and seven which creates a reversal pattern to the upside.This is a classic Example of a Morphing Pattern . What initially appeared to be a breakout to the downside of a perfect diamond turned out to be a Diamond of another cut . This is a very big deal because it now gives us a very nice reversal pattern that has formed after an almost three year decline. A Diamond Bottom . I will show you what I mean a bit later.

This next weekly chart shows you why this seven point Diamond reversal pattern is so important. This weekly chart goes all the way back to the all time high made in April of 2011. You can see silver formed another beautiful Diamond, the 8 point blue Diamond, that was a halfway pattern. Keep in mind an even number of reversal points creates a consolidation pattern and an odd number of reversal points creates a reversal pattern. Notice the big long bar on our red seven point Diamond reversal pattern. I will show you why I think this could very well be the bottom for silver on the charts to follow.

Below is basically the same chart I showed you above but this chart has a downtrend channel in place. As I mentioned above that the blue 8 point Diamond was a halfway pattern to the downside. By that I mean it formed in the middle of the three year downtrend channel. Many times these types of halfway patterns can measure out a price objective pretty close. In this case you can measure the distance between the first two blue arrows and add that distance to the last reversal point on the blue Diamond at reversal point #8 to get your price objective down to the 18 area. Once the price objective is reached the stock can do one of two things, First it can form another consolidation pattern, which the red Diamond could have been until last Friday. Or it can form a reversal pattern. With silver’s big move on Friday I have to give a really big edge to the red Diamond pattern being a reversal pattern to the upside instead of a consolidation pattern.

This next chart shows you why I think the red 7 point Diamond is a reversal pattern. On the left hand side of the chart you can see the red bullish rising flag that I measured using the breakout to breakout method as explained by the red annotations. As you can see it nailed the top of the bull market close to 50 which said that part of the bull market was over and started the three year decline. On this chart I’m using a rectangle as a halfway pattern to the downside which corresponds closely to golds 22 month rectangle. You can see the spike up through the top rail at reversal point #4 which I used to create the Diamond. In either case the price objective as measured by the blue arrows, and which I call an impulse measurement vs the breakout to breakout method, still has a price objective down to 18.64 which is still very close to the actual bottom. So we had a halfway pattern that nailed the top of the bull market at 50 and now it’s looking like we have another halfway pattern that maybe telling the bottom is in. I still have a couple of more chart to make the case that silver has indeed made an important bottom.

We started out by looking at some daily charts for silver that showed the red rectangle reversal pattern that was made at the bottom of this three year decline. We’ve looked at the blue 8 point Diamond consolidation pattern that gave us a price objective down to the 18 area. The red Diamond has 7 reversal points making it a reversal pattern to the upside that has formed at the price objective of the blue 8 point Diamond halfway consolidation pattern at eighteen or so. Now I would like to show you a couple of very long term charts for silver that I think will seal the fate for the bottom being in place.

Below is a very long term Quarterly line chart for silver (in Log Scale) that goes all the way back to 1970. Keep in mind the price objectives that I showed you on the charts above that show how the 18 area could be the bottom. This chart doesn’t need any more explanation as you can see why 18 is such an important number.

This last chart is the same chart above but this time I’m showing it as a bar chart. When we shorted the precious metals complex starting in December of 2012 there was one thing I kept repeating as we went lower. I kept saying, look for reverse symmetry. What this means is how a stock goes up, especially in fast moving market, they will reverse symmetry back down through that same area when they finally top out. That helped us out immensely during the PM crash last year. We knew where we were in the big picture which is very important to know. This long term chart for silver, that goes all the way back to 1970, shows how silver’s bull market has reversed symmetry back up vs how it went down in the early 1980′s. You can see three distinct H&S bottom patterns where each had a breakout with a backtest. Next I would like to focus your attention to neckline #3. Is this just a coincidence that the backtest is taking place at the 18 area after all the reasons I’ve shown you from all the charts above? I don’t know about you but this sure looks like a good low risk entry point if one wanted to buy some silver.

Gold lovers’ hearts are beating faster this week, as the metal rose above $1,300 an ounce for the first time since November. The precious metal also climbed above its 200-day moving average, which hasn’t happened in about a year.

ISI’s John Mendelson noted earlier this week that the generic gold future “rallied off its mid-December low and has decisively broken out above its downtrend line connecting the descending tops from late August, a near-term positive.” The next price he’s targeting is $1,350, the price gold was at in late October.

So while gold may correct over the next several months as the metal enters its seasonally weak period of the year, this looks promising for gold investors.

Here are a few more gold charts that just might have your heart beating faster:

1. The Love Trade Endures in the East
In January, 246 tons of gold were withdrawn from the Shanghai Gold Exchange, as China continues expressing its love for the precious metal. This marks a record level of gold deliveries on the exchange as well as a significant increase over the same time last year.

In addition, you can see on the chart below that January’s total also exceeds world mining production for the month.

As Ralph Aldis, portfolio manager of the Gold and Precious Metals Fund and the World Precious Minerals Fund, says, “Once the metal moves from the West and goes into China, we won’t get that gold back very easily.”

2. Money Supply Grew Faster in January
In the first month of 2014, the M2 money supply, which is a measure of money supply that includes cash, savings and checking deposits, grew faster than the previous two years. In 2012, M2 grew 7.6 percent and in 2013, money supply rose 4.7 percent; at an annualized rate, January’s money supply growth “reached an annualized rate of increase of 8.75 percent,” according to Bloomberg’s Precious Metal Mining team.

This may mean “the U.S. Federal Reserve is trying to resurrect inflation, thus increasing the appeal of gold, the supply of which can only increase about 1.5 percent to 2.5 percent annually,” says Bloomberg.

Last year, gold started to take it on the chin when the real rate of return went from a negative 0.62 percent in March to a positive 0.54 percent by December. Like I told Jim Goddard from HoweStreet, a positive real rate of return is typically a major headwind for gold.

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Between March and December of 2013, two things happened: 1) Yields rose in anticipation that the Federal Reserve would begin tapering its bond purchases, and 2) the consumer price index declined. However, going forward, I anticipate that CPI will increase, and, given the modest economic growth we’ve been seeing in the U.S. economy, interest rates won’t be able to rise too quickly.

3. Gold Stocks Poised to Rebound After Rare 3-Year Loss
What I think is tremendously powerful for gold stock investors is this chart. At the beginning of January, we took a look back at the annual returns for the Philadelphia Gold & Silver Index. In three decades, there were only three times that gold stocks only saw a consecutive 3-year loss.

These aren’t the only gold charts to love. See more in my latest presentation from the World Money Show.