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Stocks worth owning in a gold correction

Bob Moriarty
September 15, 2003

Where are we? We are in a gold bull market. The bottom for gold was in August of 1999 and gold shares bottomed 15 months later. It is a bull market and will go higher, much higher.

But not necessarily today or tomorrow. As a matter of fact, even in a gold bull market there will be regular corrections. We are due for a major correction about now, people are getting far too bullish. That's always a good time to take some well-earned profits off the table.

Notice I am not telling anyone to sell all their gold stocks or even some of them. You need to have a plan and work within that plan. But I do want to point out that should there be (when is the only issue) a major stock market correction (crash) investors often throw out the baby with the bath water. Gold stocks could get creamed along with everything else. I suspect that later this fall or this winter we are going to have the mother of all stock market crashes.

I know it's going to happen. I just can't predict just when. But the big Kahuna is coming your way.

You need to work within your plan. If you have been coming to this site for the last two+ years, you have been given a lot of good stocks to choose and to profit from. If your plan is to buy and sit, then by all means, buy and sit.

For those who are not afraid to sell the tops and buy the bottoms, I expect better prices on a lot of 1st class stocks and I'm going to list some of my favorites.

For those of you who don't have a firm grasp on why gold is going up, the answer is simple. The President of the United States has declared a war on the dollar.

It's been unofficial government policy for 60 years since the Bretton Woods agreement that the US dollar would be the world's only reserve currency. Effectively this meant the US could print an unlimited number of dollars and the world had to eat them.

In 1887, Lord Acton of England wrote, "Power tends to corrupt and absolute power corrupts absolutely."

When you have a president who casts no shadow and leaves no tracks with anything he has ever done, and you add the unlimited power of high-speed printing presses, you have a problem. President Bush believes he can spend any amount of money on any military misadventure and there is not a price to pay.

There is a price to pay, first of all in the blood of American soldiers and second of all the economic carnage being handed down to our kids and grandkids who will have to pay the piper.

Those students of recent history may recall that President George "Top Gun" Bush actually was a deserter during the Vietnam war. I remember.

I was a Naval Aviator in Vietnam, a Marine pilot but a Naval Aviator.

Some flight surgeons wired up a few of the Navy pilots to determine the most stressful part of combat. (Marine fixed wing pilots didn't fly off carriers during Vietnam).

The US lost hundreds of pilots and planes attacking the Paul Domer bridge between Hanoi and Haiphong harbor. But that wasn't the most stressful part of combat in Vietnam.

I sat through an intelligence brief once with an A-6 crew. White faced, they staggered back in a few hours later, as I finished my debriefing after a mission of my own. It seems the North Vietnamese resented them flying overhead and fired a series of 22 SAMS at their aircraft. But having a SAM fired at your plane wasn't the most stressful part of combat.

For Navy pilots the most stressful part of combat were the night Carrier landings. More than having SAMs and triple-A fired at you, more than air-to-air combat. So I watched in shock and awe as the President of the United States flew onto an aircraft carrier this past May 1 only to swagger out of the aircraft to pronounce that combat was finished in Iraq.

Bush never landed on a carrier in his life, he was an Air National Guard pilot. But we live in such a make believe world in American politics that the typical American couch potato will believe about anything.

I shook my head as I wondered just how 69% of Americans could actually believe that Saddam Hussein had something to do with the events of 911. Saddam Hussein was a rat but he was our rat, we created him. His first paycheck came from the CIA. He had nothing at all to do with 9/11.

Saudi Arabia contributed 15 of the 19 hijackers but we didn't bomb them into submission under the guise of bringing Democracy to the poor ragheads. And Israel has more weapons of mass destruction than every other country in the middle east combined but we don't kill 50,000 of their children a year with an illegal blockade.

What's my point? Well, when you have all the dollar bills you can print, you start thinking you are the smartest guy on the block. You start thinking you can attack anyone at any time without fear of retribution. You donate the blood of your country's children without care. (Not the blood of your own children. God forbid that they actually be called upon to defend their country).

The President of the United States has declared war on the dollar along with war on the Constitution and the Bill of Rights. These battles he will win and the face of America will be forever changed.

You have choices. At least for now. You can act to protect yourself and your family and to preserve whatever money the government hasn't stolen from you yet. Buy some gold, buy some precious metals stocks while you can. If 69% of Americans are effectively brain dead and can't remember the events of 1929 or 1969 or even 1999, maybe you can. There is a crash coming your way. Take care.

These are stocks we like. We own many of them and others we have owned and sold for a profit and we hope to buy more at lower prices. We are biased, everyone has bias, why would we be any different?

Endeavour Mining Capital will go down in this gold bull market as the stock with the most unrealised potential to date.

I wrote them up last December and the stock doubled in a week. And came right back down. They are a merchant bank and do deals with mining companies. They provide financing and get paid in cash and shares. The stock is selling for $2.90 a share Canadian and the President of the company just announced earnings of $1.55 per share. If that doesn't make Endeavour Mining Capital (EDV.V, EDVMF OTCBB $2.90 Canadian Chart) a buy, maybe I am as crazy as an outhouse mouse because it looks like a buy to me. A P/E of 2? Are you kidding?

I don't own this next stock but I would be a buyer in the $.10-$.15 Canadian range and it will go there. It's a zinc play and if you like gold and silver, you have to love zinc. The company is Canadian Zinc (CZN.TO, CZICF OTCBB $.24 Canadian Chart) Go to their website and read the whole story. It's a good story and one day they will be in production and highly profitable. It's a perpetual call on zinc.

The price of zinc hit record lows mostly based on Chinese excess production and an overvalued currency. One day soon the Chinese will learn that it's foolish to ship real goods for fake money. When that day arrives, zinc will go up more than gold does.

If you like copper and who wouldn't, it's about to become a precious metal on its own behalf, you have to love Northern Orion (NNO.TO, NOOJF OTCBB, $1.87 Canadian Chart) and Northern Dynasty (NDM.V, NDMLF OTCBB $2.76 Canadian Chart).

Northern Orion was our top pick of all metals stocks three or four months ago. It's climbed a feeble 30% as the market continues to ignore their numbers. NNO owns 12.5% of the Alumbrera project in Chile. Their minority position in the producing copper and gold mine is going to bring in cash flow of over $40 million dollars a year. They have 22 million shares outstanding but a whopping 157 million fully diluted. But $.25 per share in cash flow is worth a lot more than a share price of $1.87.

And that totally ignores the wholly owned Agua Rica copper/gold deposit, which contains more than 10 million ounces of gold and 18 billion pounds of copper. 10 million ounces of gold should be worth over $350 million which puts a minimum value of $2 more per share.

So put me down on record as saying NNO is cheap now. It may get cheaper but the stock is undervalued by 50% in any market. The president of the company, Bob Cross, just came out with a comment so good it should become their logo, "If we get a copper-gold up cycle, this thing goes nuclear."

Well, we are in a copper-gold up cycle and it will go nuclear.

As will Northern Dynasty. When they began to advertise several months ago, the stock was selling for under $1 and their banner advertised gold at $1 an ounce. Well, the stock has gone up 200% and the price of gold in Northern Dynasty shares has rocketed all the way up to $3 an ounce. That's cheap, by the way.

The two Bobs of Hunter Dickinson have performed the same magic trick again and again. They buy a way undervalued asset, prove up more resources and sell it off at great profit for their shareholders. They have done it so many times they ought to franchise the concept, "Bobs-R-Us" or something similar. They are hard at work in Alaska on the absurdly undervalued Pebble deposit and once the gold/copper market heats up, expect to see an announcement one day that they have flogged the deposit at great profit.

Cardero is another favorite of mine which the market has abused to the point of pain to all its shareholders. Cardero (CDU.V, CUEAF OTCBB $1.20 Canadian Chart) has a massive silver deposit in Argentina. (Hint, what does Argentina mean in Spanish?).

Over the past year, Cardero has taken hundreds of chip samples at their two major silver projects, Providencia and Chingolo. The samples revealed major high grade silver deposits. But they got cocky as their stock rocketed up 400% and forgot the purpose of drilling is to actually prove up resources. Basically they screwed the pooch with their first drill results and the reports showed a big low grade deposit. The president of the company made an immediate and public apology and took responsibility: still the market has yet to forgive Cardero.

The stock went from $1.50 to $.55. I wrote a piece and said that I believed their story. For those those who had the courage of my convictions, the stock is up 150% from the low and has a long way to run.

It's a big deposit and subsequent drilling revealed that indeed the issue was as simple as them getting cocky and not paying attention to detail. They have a rich deposit at both Providencia and Chingolo. But the real secret with Cardero is their IOCG (Iron ore, copper and gold) deposits in Mexico that they will partner with Anglo American. Cardero has played down the relationship but it will have a major impact on the price of the stock.

Months ago when the stock was $1.50 I called the stock an easy 10 bagger. I didn't say anything about it happening the same day or even same week and it hasn't happened. But Cardero is the main holding in my IRA and at $1.20 the stock is a gimmie. If the price goes down more, I will like the stock even better.

There are two silver companies still way undervalued. If you follow the mainstream silver companies, CDU, HL, and PAAS, take a look at their charts. That is what you can expect to see at the top of a market, pure froth. The bigger silver companies are now discounting $7. But we don't have $7 silver and the COTs almost guarantee a major correction soon.

But a silver company, an almost pure play on the price of silver, still can be bought cheap. Sterling Mining (SRLM.PK $3.60 Chart) , bought the world class Sunshine Mine out of bankruptcy last June. The stock wobbled along until late July when the market finally understood the impact of a permitted mine with about 18 ounces of silver per share. The stock shot up from $.75 to $5 in less than a month before settling down to the $3.50-$3.80 area.

Any silver company at $.20 an ounce is cheap. The stock market values Western Silver at $.35 an ounce and it has no mines or equipment. The market values Silver Standard at $.90 an ounce with no mines or equipment and Pan American at a robust $1.06 with mines and equipment.

Going on to gold, Desert Sun Mining (DSM.TO, DSUNF $1.74 Canadian Chart) has been one of my favorite gold stocks for most of the last year. Desert Sun just announced completion of a feasibility study on their Jacobina property in Brazil and the stock was at a yearly high of $1.76 last week, up from the $.50 area only nine months ago.

With a market cap of a tiny $45 million Canadian for 3.5 million ounces in resources, Desert Sun has a lot of room for price appreciation. Their feasibility study showed a remarkable 39% IRR on production of 100,000 ounces a year at $350 gold.

Apollo Gold (APG.TO, AGT $2.40 Canadian Chart) is in production and expects to produce in the range of about 170,000 ounces of gold this year. The stock has been under almost constant attack from one Canadian-based mutual fund manager who has been quite caustic about the company.

I'm baffled at his comments and his tone. I've looked at the numbers. I've talked at length to management and I'll tell you right now, Apollo is on track to being one of the most profitable and successful junior mining companies. They have far better leverage to the POG than almost any other mining company. That's a disadvantage in a declining market and a tremendous advantage in a rising market.

But one mutual fund manager with a razor tongue bearing a grudge does nothing more than create opportunity for those willing to think for themselves. Do your own research, call the company and you are certainly going to conclude that Apollo offers great value. Apollo is where GoldCorp was three years ago and Queenstake was one year ago. It makes a wonderful core holding.

Speaking of Queenstake, it has been one of the roaring successes of this leg of the gold bull market, rocketing from $.17 in April to a high of $.98 Canadian a few weeks ago. Their basic strategy was to buy up undervalued existing mines from a large mining company when that mine no longer fit in their long term plans.

Queenstake vaulted into 300,000 ounces of production in six months and their shareholders have been richly rewarded. But some of the management team from Queenstake formed their own company with the same business model. Western Goldfields (WGDF.PK $2.00 US Chart) is buying the Mesquite gold mine in California from Newmont which will jump start Western Goldfields into 60,000 ounces of production per year at once.

Western Goldfields has 11 million shares fully diluted and sold on Friday at $2. With a market cap of $22 million, Western Goldfields offers a working gold mine for $22 an ounce in reserves, about a fifth of what it's worth. We believe Western Goldfields will be the new Queenstake when the next gold market bull leg commences.

Anyone who has been reading my commentaries on gold shares for the last two years probably understand by now that I favor the small junior mining and exploration stocks. The reason is the same as the reason Willie Sutton robbed banks. "That's where the money is."

But it's pretty much true only for small investors. The large mutual funds are such elephants that they can't move in and out of the tiny junior mining stocks.

Do you want to see a pig of a stock which hasn't moved in years? Look at a chart of Barrick. Do you want to see a well run mining company which hasn't moved much more? Look at GoldCorp. Big companies don't always move much even if they're well run.

That's why I love the juniors and the smaller they get, the better. So when I came across Vangold (VAN.V, VNGRF OTCBB $.60 Canadian Chart) a month or so ago, I liked it. Eric and David Coffin did a far better job of writing up the company than I could. They discovered it so they should get credit.

Vangold has a project in New Guinea which has home run potential called Feni. There is a gold deposit there and they will be assembling an exploration team for drilling shortly. Between now and maybe January, they will constantly be announcing new results. With 188 meters of almost 1.4 grams per ton, there is no doubt they have a major deposit. But they are swinging for the fence and the project has elephant potential.

And the other 25% of the project is in the hands of New Guinea Gold (NGG.V, NGUGF $.13 Canadian Chart) While VAN has the lion's share of the project, the fact they are paying NGG in shares and NGG retains 25% of the project makes New Guinea Gold an interesting play on the same project and some other interesting area plays in Papua New Guinea. With a market cap of under $4 million Canadian, the upside potential for NGG is the sky.

We invest in companies we like. Many of them are advertisers at 321gold but several are not. Of course we are biased but there is no quid pro quo. The companies listed have not paid a cent to be mentioned and most of the time I don't even discuss my editorials with them.

I am not an investment advisor. I am not suggesting you either buy or sell any shares mentioned. My opinion is that we are due for a gold/silver correction and my belief is that even the best of the stocks mentioned may well be cheaper in the next six weeks. The time to buy gold/silver shares is when no one wants them and the time to sell is when everyone wants them. So if you've made fat profits, consider taking some off the table.

Bob Moriarty
President: 321gold
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