Gold and Silver Prices Will Begin to Shine

Although it's not a great consolation, if you've seen your investment accounts implode and your net worth wilt like a rosebud in a desert sun, you can be comforted by the fact that you are not the only one.

Even the great Warren Buffett has seen his "mother lode", Berkshire Hathaway (BRK.A) decline from a 52-week high of $151,650 down to $74,100 a share. It has "recovered" to a recent price of $94,000, still 38% off its high.

Dorothy Kosich, covering the Northwest Mining Association conference on Wednesday in Reno, Nevada, filed the following report with comments from one of the top executives in that industry.

His words reflect the magnitude of the meltdown we have all experienced.

"Never has there been so much money lost in such a short period of time," Franco Nevada (Toronto: FNV.TO) President and CEO David Harquail told an audience at the Northwest Mining Association conference Wednesday.

Nevertheless, Harquail declared," We're expecting gold to go into the thousands" as a monetary expansion generates the "next gold bull market."

The former president of Newmont Capital, Harquail advised that when gold gets re-inflated, expect other commodities to follow.

In his luncheon address to the Northwest Mining Association conference in Reno, Harquail admitted witnessing shock and fear last month in London among the fund managers who had heavily invested in precious metals mining. At the time mining shares were down an average of 72%, major mining companies had been placed on Credit Watch, and mining M&A bids were collapsing.

Molybdenum alone had dropped from $31 to $11 in only two weeks.

Ironically, the earlier timing of when the global economic crisis hit the mining sector and other resource industries could eventually reap some benefit for mining, Harquail suggested. In the meantime, since mining companies could not borrow as heavily as other industries, it may also help the sector's recovery.

Harquail says major mining companies, junior companies and gold are looking better. But, mining exploration may pay the price for the industry's past six months of freefall. [Thursday, companies like Newmont Mining (NEM) and Yamana Gold (AUY) were experiencing a mainly positive day.]

Mining companies with sufficient cash reserves would now rather buy other companies rather than continue to explore or develop new mines. Some are taking advantage of their low share prices to use their cash to buy back their own shares.

And, Harquail noted, some miners are choosing to go private.

Harquail explained that companies without dollars are now operating in survival mode or are actually facing extinction. He referenced examples of as many as six smaller companies considering mergers into a single company.

As a result, Harquail is fearful "that a lot of companies will get out of the exploration business."

Meanwhile, he noted a number of mining and exploration companies won't be able to raise financing for another 18 months.

Nevertheless, Harquail sees a good long-term outlook for a mining industry which has grown accustomed to planning to weather mining's cycles.

Mining's improved stewardship practices have enhanced the reputation of the industry as an investment destination, he said.

Companies also have learned to be able to build cash and diversify. [keep an eye on bell-wether companies like Barrick Gold (ABX) and Goldcorp (GG), as well as Anglogold Ashanti (AU) to see how the most successful companies raise capital, pay off debt, build cash and diversify their operations].

Have you seen the one-year chart of the Market Vectors Goldminers ETF (GDX)? If you are a technical chartist it does appear to have put in a double bottom

However, Harquail is not happy with a U.S. system that has "let a form of casino capitalism" take the domestic mining industry hostage, especially through hedge fund investment. He also joked that the gold mining sector is "overdue for a 15-30 million ounces discovery."

This author isn't convinced that the gold and silver mining industry stock correction is finished yet. However, when we see royalty trusts and "middle men" like Royal Gold (RGLD) and Silver Wheaton (SLW) are trading at prices at the opposite ends of their respective 52-week ranges, one realizes that there is a great deal of confusion and uncertainty over the short term prospects.

I for one will be patient, and hope to pick up more shares of the "best-of-breed" companies whenever they test their recent lows. Without a crystal ball or compelling evidence, it seems foolish to bet too much on a short-term rally with all the current signs of temporary deflation (did you see oil tumble below $43 Thursday?).

It seems prudent to keep enough cash on the sidelines to buy the inevitable dips. Yet I haven't forgotten how far these stocks have fallen already, and that this is the season where gold and silver prices begin to shine.

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