In an earlierarticle, we have established a robust outlook for precious metals’ demand in the long term. With the outlook on demand remaining upbeat, an analysis of the supply side will complete a fundamental study of the metals space. Generally, oversupply kills any optimism that strong demand creates. What is of more importance to investors is the demand supply gap rather than demand alone, as this is the prime determinant of long term prices.

Supply is more influential in determining precious metals’ prices than any other commodity because of its scarcity. Simply put, gold is extremely rare to find and also whenever found, extraction and mining comes with significant costs. Global gold reserves (in the form of a natural resource) are constantly on the decline. The spike in mining activity over the past years has also led to the possibility of further supply deficit.

Interestingly, gold mined since 1900 accounts for over 80% of all-time gold production. Two-thirds of that volume of production has been in effect in the past 50 years alone. Demand for gold has been skyrocketing with the advent of newer investment instruments such as ETFs and derivatives. On the other hand, the supply side is starting to show signs of plateau-ing – a big boost for the long term prospects of gold as an investment avenue.

Our study of the supply side supports the bullish view of precious metals that is apparent from healthy demand. Current trends portend a flat supply for gold and silver compared to the past few years. Production of platinum and palladium will likely plummet further from current levels, creating a significant gap between demand and supply.

Palpable decline in gold production despite China’s highs

Declining mine production has been the primary concern for the precious metals

….read much more & view charts HERE

It’s been an exciting month. Gold rose, surging well above the $1300 level. Silver and gold shares soared even more.

As the excitement surrounding the $3.6 billion buyout of tiny Andean Resources by Goldcorp Inc. (GG) subsides, investors are wondering who’s up for grabs next among Argentina’s other emerging success stories.

The task has been simplified by the fact that only two gold juniors have, to date, made sufficiently impressive gold discoveries to attract takeover speculation. One is Mansfield Minerals (MFMNF.PK), which has been quietly developing its Lindero gold discovery since as far back as 1999.

The other is Extorre Gold Mines (EXGMF.PK), which burst onto the mining scene just over six months ago after it was spun-off from high-flying Exeter Resource Corp. (XRA). Extorre inherited the high-grade Cerro Moro deposit from its parent company. However, only a hostile takeover could wrestle Cerro Moro from Extorre any time soon, according to the company’s management.

Having just completed a $40 million equity financing, Extorre says it’s committed to building considerably more value into the project by way of drill-defining plenty more high grade gold and silver. To date, a total of 612,000 ‘indicated’ ounces of gold equivalent (gold and silver combined) have been found in just one of the deposit’s many veins. All told, Extorre is targeting a two-million ounce resource in the same proximity and geological environment as Andean’s richly mineralized Cerro Negro deposit.

A third company worth mentioning is Australia-based Troy Resources NL (TRYRF.PK), which is an existing gold miner in Australia and Brazil. Troy is gearing up for its first gold pour this autumn at its low-cost, high-grade Casposo gold/silver project in Argentina’s mining-friendly San Juan Province.

This new mine is now fully funded and is therefore not for sale, according to Troy’s president Paul Benson – at least not for now. With 70 more drill targets, there’s plenty more upside potential for the discovery of significant additional ounces in the ground, he says. Furthermore, with a current reserve base of only 341,400 ounces of gold and 11.2 million silver ounces, it almost certainly does not meet the minimum size threshold to interest much bigger gold miners at this time.

That leaves Mansfield Minerals sitting pretty. The company has long groomed its ‘company-maker’ Lindero deposit for the right suitor. With gold prices vaulting to record highs, the timing is excellent, according to Mansfield’s president, Gordon Leask. This is why a bankable feasibility study (a final blueprint for a mine) is underway.

However, the company has already published key independently-assessed financial projections by way of a pre-feasibility study. One that unequivocally attests to the viability of a future gold mine based on current reserves of 1.9 million ounces. There’s also a further drill ‘inferred’ resource of one million ounces. This needs to be more clearly defined by way of additional in-fill drilling to be considered completely reliable.

Hence, “advanced talks” with one or more sizeable, expansion-minded gold mining companies are making headway, according to Leask. This surely comes as no surprise to the various mining analysts who have been covering this low-key gold story for nearly a decade.

Among the more recent enthusiasts is Joe Mazumdar, a mining analyst for the Canadian stock brokerage firm Haywood Securities Inc. After having crunched the key metrics in Mansfield’s pre-feasibility study, Mazumdar wrote a research report last April on the company encouragingly entitled: “Low Hanging Fruit.”

“The quality of the asset has been underpinned by its simplicity and low technical risk. It is the equivalent of a ‘mine on training wheels,’” he asserted in a 39-page report. Hence, his conclusion that Mansfield is “a prime candidate for takeover” and that the company could fetch “premiums of up to 250 per cent from its current price” in a takeover scenario.

But Lindero’s allure hasn’t gone unnoticed by a number of gold-hungry producers, according to Leask, who declines to elaborate. But he notes that there’s a scarcity of bargains in the junior gold space.

At least seven potential suitors, including Yamana Gold Inc. (AUY) and Eldorado Gold Corp. (EGO), have been identified by Haywood Securities among the world’s relative few mid-tier gold miners. (Notably, Eldorado just lost out in the takeover battle for Andean Resources after its US $3.4 billion proposal was outbid by Goldcorp).

So what is it about Lindero’s economic modeling that gives it so much credibility? Apparently, the deposit can produce around 160,000 ounces per annum in the first few years at a modest cost of US $373 an ounce. This is because much of the high-grade mineralization is near surface. And this scenario would offer an anticipated payback on capital costs within two years, based on minimum gold prices of US $1,100.

Furthermore, the deposit also benefits from being well suited to an open pit (quarry-like) heap leach (low extraction cost) mining operation. All told, a minimum 9.5-year mine life will translate into average annual yields of around 150,000 gold ounces for the bulk of the mine’s life – and at an average cash cost of US $407 per ounce.

Additionally, the renowned engineering firm that conducted the company’s pre-feasibility study, AMEC Americas Ltd., calculated a pre-tax net present value of US $490 million for the Lindero deposit, assuming US $1,100 gold prices. (NPV is a pivotal decision-making metric that is defined as the risk adjusted value of the deposit once all the borrowed capital costs are repaid).

Another Canadian investment bank, Paradigm Capital Inc., also views Mansfield as an obvious takeover candidate. In a research paper discussing the company’s pre-feasibility study, senior mining analyst Don MacLean made a good case for a likely takeover.

The Paradigm report, which was published last March, noted that Mansfield only has approximately 44 million shares outstanding and a low market capitalization. The report’s takeover conjecture comes into clearer focus when considering the fact that Paradigm assigned an after-tax net present value (NPV) of US $242 million to Lindero, based on US $1,100 gold prices. By using a much more cautious after-tax evaluation than the pre-tax version assigned by AMEC, Paradigm still was able to deduce that Lindero is worth more than three times the actual value of Mansfield, itself.

The Haywood research report also points to the fact that geopolitical considerations also weigh in Lindero’s favor. In particular the project is located in a remote, economically underdeveloped region of Salta Province that is actively soliciting foreign investment. Hence, Salta’s pro-mining government is actively soliciting foreign investment and is therefore supportive of Lindero, according to Leask. Similarly, the federal government is also onside, he adds.

This favorable situation, along with the absence of any environmental challenges, explains why Leask expects a mining permit to be issued before year’s end.

Mansfield Minerals, Extorre Gold Mines and Troy Resources may be well ahead of the pack towards producer status. But a growing number of other ambitious gold explorers are aggressively working to validate their own gold discoveries in Argentina. All of which have a shot at becoming the next ‘home run’ takeover success story.

Marc Davis is the publisher of www.Top40goldstocks.com, a performance-oriented table for Who’s Who of junior gold stocks. This web site also offers plenty of data, analysis and news about top-performing gold stocks.

Marc has nearly a quarter of a century’s experience in the mining-oriented venture capital marketplace as a former professional trader and as a research analyst and journalist. He also currently manages www.BNWnews.ca

YOU PROBABLY don’t need me to tell you that it’s pretty risky out there, says Brad Zigler at Hard Assets Investor.

The market, I mean. Which market, you may ask? Increasingly, it doesn’t matter.

The zag of the gold market has come to look very much like the stock market’s zig. Over the past month, the correlation between the S&P 500 and gold has shot up 60 percentage points. The fact that the coefficient is now at 38% should tell you that it’s gone from a risk-neutralizing negative value to a tag-along positive.

The turnaround, too, followed a near-vertical trajectory. Not that this hasn’t happened before. Over the past two years, the correlation coefficient has dropped with equal velocity, but not risen.

“Britain under its new leadership is going the austerity route. Chancellor Osborne set plans for 81 million pounds sterling of spending cuts, all in an effort to erase Britain’s deficit by 2015. Osborne’s plan will entail the loss of 500,000 jobs in Britain’s biggest austerity push since World War II. Osborrn will require larger pension contributions, and higher retirement age, Conservatives in Parliament cheered Osborn, crying “More, more” as the word of the new austerity program emerged. There was no sense of panic on the part of the British public, perhaps because Brits remember the austerity and pain they lived through during the dark and horrific days of World War II.

Ed Miliband, leader of the British Labour Party opposition, called the austerity plan “The biggest gamble in a generation. — a gamble with people’s jobs and livelihoods. No other leading economy is trying anything like it.”

Mr. Osborne may have the nation behind him now, but in a year with unemployment climbing and living standards falling, sentiments may be a lot different. Osborne claims that the drastic cuts have removed Britain from the “danger zone” that once occupied along side of Greece and Ireland. Osborne told the MPs, “It’s a hard road, but it leads to a better future. Today’s the day when Britain steps back from the brink.”

But it’s very different in Greece and France, neither country known for their work ethic. In both countries, riots have broken out over austerity plans. When the age of retirement was increased in France from 60 to 62, literally the whole nation went on strike. The French famously don’t like to work, they love their vacations and their short work-hour weeks.

With Britain setting the tone, it won’t be too long before the austerity route hits the US. The American folks at home never suffered terribly during WW II, nor have they suffered through Korea, Vietnam, Iraq or Afghanistan. This will change drastically in the years ahead as the full force of the deficits hits Americans since the year 1939, Americans have enjoyed one long party, due to inflation, over-spending, borrowing and leveraging. In my opinion, the party’s about over. And Britain is leading the way for the English-speaking nations.”

Richard Russell Note — I think Britain’s new austerity is going to rub off on the US. This could be one of the reasons why gold is correcting. Gold may be looking ahead to the time when the US will cut out all the QE and stimulus stuff and start facing the pain of its disastrous deficits. Hard to believe that the US could actually choose austerity, but I think Britain is leading the way.

Richard Russell One of the best values anywhere in the financial world at only a $300 a year,  to get his DAILY Dow Theory Letters subscription HERE