“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”- Sir Winston Churchill – November 1942

I have studied the evolution of the graphite market for the past 15 months. It is fair to say that Sir Winston Churchill’s words are as true in 2012 as they were 70 years ago. We have just returned from a world tour of speaking engagements in Germany, Canada, and the US. Graphite was the topic du jour. There is a great deal of “graphite curiosity” around the world, about how to take advantage of its exploding interest. This desire for education has been responsible for the near-parabolic rise in the share prices of junior mining companies now exploring for graphite.

We have constructed a proprietary market capitalization-weighted index of junior mining companies involved in graphite exploration. The chart speaks for itself:

Source: Bloomberg

We are strongly of the opinion that while Discovery Investors can still profit from the interest in graphite, the initial move, “Phase I,” is over. We caution selectivity as the order of the day in the graphite space. The chart above seems to confirm our belief. Graphite topped out in early April 2012.

By Phase I, we refer to the initial phase of the lifecycle of most junior mining companies where the interest, a function of the “mystery” surrounding a new mineral or metal, serves as a powerful force to bid share prices higher. This occurs till these “mysteries” are understood. As a project moves from the exploration to the development phase, the share price often “goes sideways” as early investors take profits and sit on the sideline as a company evolves towards a production decision.

What Got Us Here?

The lifecycle of a junior miner exploring for graphite is no different. It has been interesting to watch this market develop. It seems to have developed incredibly quickly relative to some of graphite’s young cousins like rare earth elements. We believe there are still profits to be had here as the macro themes which brought graphite to the fore initially are very much intact.

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Eric Coffin Eric Coffin, editor and publisher of the Hard Rock Analyst newsletter, has never heard so much negativity from investors. “Everybody thinks the world is coming to an end,” he tells The Gold Report. As a contrarian, all the doom and gloom tells him the market is about to pull out of its tailspin. In this exclusive interview, Coffin talks about the hard-hit juniors in the Yukon and why it’s an area play he still believes in.

Companies Mentioned: ATAC Resources Ltd. – Bear Creek Mining Corp. – Columbus Gold Corp. – Ethos Gold Corp. – Kaminak Gold Corp. – Majescor Resources Inc. – Precipitate Gold Corp. – Prosperity Goldfields Corp. – Riverstone Resources Inc. – Silver Range Resources Ltd. – Smash Minerals Corp. – Strategic Metals Ltd.

The Gold Report: Eric, the gold bears recently outnumbered the gold bulls in Bloomberg’s weekly Gold Bull/Gold Bear Sentiment Survey for the fourth time in a year. Are you a bull or a bear?

Eric Coffin: I think the gold price is going to end the year higher, so I guess that makes me bullish, but I think of myself as agnostic.

There needs to be a return of calm to Europe for the gold price to move much higher. The currency pair trade between the euro and the dollar is going to be a big determinant to the gold price. There’s been more noise about the EU providing stimulus funds to offset all the government budget cuts in Europe. All of those countries have to deal with their debt loads. But it’s not realistic to think that they can cut their deficit and 3% off their gross domestic product year after year and realistically get any net growth.

The other side of that equation is that the U.S. has slowed down. That’ll help the gold price because a lot of goldbugs are riding on there being another round of quantitative easing. I’m not sure it’s going to happen. But as long as Federal Reserve Chairman Ben Bernanke keeps saying it might happen, that’s good enough.

TGR: Stagnant gold prices are translating to equities. Canaccord reports that “sector weakness in the gold equities over the last six years has typically ended with ‘V’-shaped corrections to the upside.” Do you believe that’s what will happen this time?

EC: I sure hope so because I’m on the buy side, not the sell side. I’m going to feel pretty dumb if it doesn’t happen. We’re still in a bull market for gold. In a secular bull market, generally speaking, coming out of a dip tends to be an impressive move.

TGR: Many Yukon junior mining companies are starting their 2012 exploration programs after completing off-season financing on buyers’ terms. What types of companies are getting financing?

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Dear Readers,

Your metals team has just returned from the Casey Research Recovery Reality Check conference in Weston, Florida. I think the quality of the speakers was perhaps the best ever. There were clever tales and insights aplenty, but I’ll cut to the chase for investors in the metals and mining sector: The correction we’ve been experiencing was discussed at length, and while no one is sure when it will bottom, legendary investors in our sector are buying now.

Some say my calls to buy the best of the best mining stocks in the midst of a continuing share-price decline evoke a fear akin to what one feels trying to catch a falling safe. It may help to know that investors today are buying alongside Rick Rule of Sprott Global, John Hathaway of the Tocqueville Fund, and Doug Casey, of course – among other legendary resource investors.

I interviewed Rick in Florida, as you may have seen in last week’s Conversations with Casey. We both have a sense that the meltdown in our sector may well get worse before things get better. The “sell in May” conventional wisdom could collide with an already bearish sentiment and truly rustle the whole resource-sector herd to the share-price slaughterhouse.

We Should Be So Lucky

I’ve said that before: we should be so lucky as to get another 2008-style buying opportunity – and that’s what we’d have if the market melts down from this low point.

I’ve also said “buy low and sell high” so often, it’s starting to sound like I’m stuttering. It sounds easy, but it’s not – if it were, everyone would do it, and there’d be no profit in it. Contrarianism 101: You have to buy when others are panicking and there’s blood in the streets. That means you have to master the fear and do the opposite of what everyone else is doing.

Email from some unhappy readers whose recent share purchases are down have made me wonder if they thought we were joking or merely being rhetorical about this. The whole idea behind the tranche buying system we advocate is to take advantage of downward volatility, and the objective of placing stink bids is to capture “stupid” prices. I meant exactly what I said: we offered guidance on lower prices because we believed a major correction was a distinct probability. Well, here it is.

I see the buying opportunities shaping up with fear and excitement. My fear is not that our speculations won’t work out: rather, it’s that – as happened in 2008 – too few investors will have the courage to follow through on their contrarian ideals. The excitement, of course, is that we face truly spectacular contrarian opportunities.

“When Will the Pain Stop?”

A friend, reader, and fellow speculator who attended our conference asked me half-jokingly when the market would bottom. He knows I don’t have a crystal ball, but the way he phrased it was interesting: “When will the pain stop?” It was delivered with a smile that showed he understood the long-term trend we’re betting on remains solid; when you believe in a better future but suffer pain in the present, you don’t want your life to end – you want the pain to stop.

I said I saw the slaughterhouse potential mentioned above, and that I was hoping for a chance at phenomenally stupid prices on great companies. However, any number of factors could reverse the market’s current fear-dominant sentiment back to being greed-dominant again. Scary news on the geopolitical front – just one potential black swan among many – could send gold shooting north in short order. With many gold companies severely undervalued, that could bring greed back to the forefront with a vengeance.

I also interviewed John Hathaway (coming soon to an inbox near you), who said he thinks we’re close to the bottom now. Gold stocks are already undervalued and he’s buying.

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A “paralyzed” Federal Reserve Bank, in its “final days,” held hostage by Wall Street “robots” trading in markets that are “artificially medicated” are just a few of the bleak observations shared by David Stockman, former Republican U.S. Congressman and director of the Office of Management and Budget. He is also a founding partner of Heartland Industrial Partners and the author of The Triumph of Politics: Why Reagan’s Revolution Failed and the soon-to-be released The Great Deformation: How Crony Capitalism Corrupts Free Markets and Democracy. The Gold Report caught up with Stockman for this exclusive interview at the recent Recovery Reality Check conference.

The Gold Report: David, you have talked and written about the effect of government-funded, debt-fueled spending on the stock market. What will be the real impact of quantitative easing?

David Stockman: We are in the last innings of a very bad ball game. We are coping with the crash of a 30-year–long debt super-cycle and the aftermath of an unsustainable bubble.

Quantitative easing is making it worse by facilitating more public-sector borrowing and preventing debt liquidation in the private sector—both erroneous steps in my view. The federal government is not getting its financial house in order. We are on the edge of a crisis in the bond markets. It has already happened in Europe and will be coming to our neighborhood soon.

TGR: What should the role of the Federal Reserve be?

DS: To get out of the way and not act like it is the central monetary planner of a $15 trillion economy. It cannot and should not be done.

The Fed is destroying the capital market by pegging and manipulating the price of money and debt capital. Interest rates signal nothing anymore because they are zero. The yield curve signals nothing anymore because it is totally manipulated by the Fed. The very idea of “Operation Twist” is an abomination.

Capital markets are at the heart of capitalism and they are not working. Savers are being crushed when we desperately need savings. The federal government is borrowing when it is broke. Wall Street is arbitraging the Fed’s monetary policy by borrowing overnight money at 10 basis points and investing it in 10-year treasuries at a yield of 200 basis points, capturing the profit and laughing all the way to the bank. The Fed has become a captive of the traders and robots on Wall Street.

TGR: If we are in the final innings of a debt super-cycle, what is the catalyst that will end the game?

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“We’re all set up to go to the upside…and it just remains to be seen how far and how fast JPMorgan et al will allow prices to rise.”

¤ YESTERDAY IN GOLD AND SILVER

The Kitco website went down for scheduled maintenance for about two and a half hours in the wee hours of Friday morning…and did not come back on line until after I’d hit the ‘send’ button on Friday’s column.

During that time, the low price print for gold was in for the day…and maybe even for this move down.

Once that low was in, which came shortly before 10:00 a.m. in London, gold began to rally.  It really took off once the jobs numbers were released at 8:30…and the price got hit the moment that happened.

But the gold price continued to rally until an amazing out-of-the-blue rally in the dollar index showed up around the London p.m. gold fix…and that put a temporary kibosh on the gold rally. Once the dollar rally burned itself out, the gold price began to rally anew, but never made it back to it’s earlier high…and once Comex trading ended at 1:30 p.m. in New York, the gold price got sold off a few dollars in the close of electronic trading.

The low for the day in morning trading in London came in around the $1,625 spot mark…and the New York high [$1,648.50 spot] came about 9:50 a.m. Eastern.

The gold price closed up $6.30 on the day.  Net volume was pretty healthy at around 132,000 contracts…so it’s a good bet that JPMorgan et al had to use some heavy lumber on the gold price yesterday morning in New York to prevent it from getting away on them.

Silver’s price path was mostly same, except the low of the day came about 11:15 a.m. in London…quite a bit later than the low in gold.  After that the silver price followed the gold price very closely.

The silver price closed at $30.34 spot…up 27 cents from Thursday’s close.  Net volume was pretty heavy at 39,000 contracts.

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