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Rule:  “One of the interesting things we have been seeing in the markets is relatively stable metals prices in the face of very weak demand.  We are in this so-called recovery, Eric, but it is certainly a recovery with no capital investment and no jobs....

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“This so-called recovery has been driven by low interest rates and stimulus.  But it’s interesting that in the face of very tepid demand from Japan, western Europe, and North America, that commodity prices have held steady or even risen.  Why have commodity prices held stable or risen?  It’s simple: because we’ve had supply constraints too.  Although demand has been moderated, supply has been much less than anybody had anticipated. 

It’s also interesting that despite major merger and acquisition activity in the mining business over the last 10 years, and major exploration activity over the last 15 years, production of all the major commodities, particularly gold and silver, has stayed flat.

This tells us that the exploration and the merger and acquisition efforts we have seen thus far have not done well.  It’s also important, particularly in the gold and silver sectors, that even though prices are high on a historic basis, the margins enjoyed by gold and silver producers keeps deteriorating.

The move we witnessed in the decade from 2001 to 2011, where gold moved from $250 an ounce to $1,950 an ounce, was not accompanied by an uptick in producer margins, particularly on a per-share basis.  What does all this mean?  It means that the major mining companies need to restock their inventories.  The mines they are generating their cash flows from are old.  So any successful discoveries will be well-supported by the market.

The market has already proven this.  The little Australian nickel explorer, Sirius Resources, was up 1,200% on their discovery.  Reservoir Minerals was up from 22 cents to $7.  Africa Oil was up from 80 cents to $12.  We now are in a market that will reward discoveries.  There won’t be many discoveries, but the ones we see will reward us the same way the market rewarded us in 1994 and 2004.

When it comes to gold and silver, we’ve already had a nice bounce in the metals, albeit from pretty oversold levels.  Eric, I expect these things to go higher, but it will be an incredibly volatile ride.  We may see a saucer-shaped bottom, rather than a V-shaped bottom.  My suspicion is that the worst is past, but we may see many 20 percent increases in stocks as well as 20 percent declines.

So expect lots of volatility, but also a market with an upward bias to it.  To be sure, we will eventually enter into a ferocious bull market, but that bull market may be many, many months away.  In the interim, stock pickers will do extraordinarily well.”

Rule added:  “Eric, we were commenting prior to the interview about the fact that this mining share market hasn’t reacted the way other markets normally would.  Typically the majors would move higher first, followed by the mid-tiers, then the juniors would see a big move.

What’s happened this time is the juniors have moved in anticipation of the majors.  That’s exactly what happened in the second part of 2000.  The reason for this unusual action is because of the severity of the bear market.  This literally exhausted sellers in the juniors.

So we have seen pretty dramatic increases in share prices, albeit on tiny volumes and in small companies. This is completely consistent with the market bottom that we saw in 2000.  My suggestion is that, just as in 2000, we are going to head into a stock pickers’ market with the small-cap stocks that will last 18 months.  Then we will have a move that is led by gold that goes to the larger producers, very much like what we we saw in 2003.  But what we have witnessed so far is exactly what you would expect to see coming out of a grossly oversold bear market.”

IMPORTANT - KWN has more interviews being released today.

© 2014 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

The audio interviews with Egon von Greyerz, Eric Sprott, David Stockman, Michael Pento, Gerald Celente, Bill Fleckenstein, Dr. Paul Craig Roberts, Grant Williams, Andrew Huszar, Art Cashin, John Mauldin and Dr. Marc Faber are available now. Other recent KWN interviews include Jim Grant and Felix Zulauf -- to listen CLICK HERE.

Eric King

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