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Blog September 20, 2014: A Rant about the Fallout if Goldman Sachs gets what it wants


(On September 19, 2014 I sent an email to KRO Members notifying them about new Special Interest Comment, Platina's Owendale scandium deposit attracts attention from Bloom's Chinese scandium suppliers, which will be behind a paywall for 30 days. The email included a rant that was supposed to be for the entertainment of paying subscribers, but some of them enjoyed it so much they asked if they can rebroadcast it, perhaps hoping that this is what's needed to launch gold into an uptrend. Since its message will be part of what I am talking about in St John's and Toronto next week anyways, I have decided to repost it as a blog.)

The Goldman Sachs drumbeat for $1,000 gold is taking its toll on the resource sector whether or not a company is connected with gold. The narrative is simple. Global economic growth is weakening, but the US economy is limping along sufficiently to justify the end of QE and the start of gradually rising interest rates, none of which is helpful in the short term for global economic growth, but bound to drive up the US dollar with the added benefit of further dampening inflation in the cost of imported goods, though ultimately setting the stage for another global recession, which is neither good for raw material demand nor gold demand. Once gold drops through $1,180 it will unleash the final capitulation within the junior resource sector as shareholders totally disgusted with the conventional ideologically tainted gold bug narrative liquidate every resource junior still in their accounts.

In a sense this will be liberating, because it will rid the market of its obsession with advanced gold projects whose ounces in the ground are supposed to become very valuable when gold charges back above $1,500. I think the conventional gold bug narrative is absolute garbage, and I think it will in the next couple years be replaced by my alternative narrative which sees gold at $2,000 in real terms by 2020, provided we avoid descending into the global depression the Austerians so desperately crave in their delusion that it will be others licking their boots rather than they licking the boots of those who understand how unfettered "free markets" really work.

I suspect the latter will not let it come to that, but we may be stuck with several years of weak gold prices, for it feels very much like late 1999 when the non-resource equities were doing so well they were supposed to collapse, but went on to go exponential until the March 2000 flameout that ushered in a global recession that left gold and other metals in the doldrums for several more years until the rise of China bailed us out. This time there is no obvious China to bail us out; it requires a distributed global economic expansion which everything seems currently geared to stymie.

If gold does crap out, it will be liberating because then the audience that watches the resource juniors can get back to the model of the eighties and nineties when metal prices were assumed to be static and money was made by betting on a junior which made a discovery that worked very well at the prevailing metal prices. The ounces in the ground juniors will be quietly accumulated by the smart money, but the hot money will forage for good exploration stories, jumping on them when they erupt out of nowhere. We are admittedly in a poor situation for this to happen, because it is very hard to raise money for exploration, and those who have money are loathe to spend it until it is clear that it can be replaced at a higher stock price.

But none of this is the purpose of this comment, whose purpose is to remind KRO Members of my big hedge against this scenario, namely the emergence of scandium as a transformational metal for the aluminum industry that reaches into many positive visions about the future. EMC Metals Corp (EMC-T: $0.085) has now raised $1.8 million toward its $3 million target needed to force conversion of the US $2.5 million loan into a 20% interest in Nyngan and Honeybugle, appointed Jim Rothwell to its board, and announced that it will crank out a PEA within the next couple months prior to completing a feasibility study by the end of 2015. The importance of the PEA is that the market will no longer need to rely on my speculative DCF to get a sense of the value potential of Nyngan. It will also give the market the means to develop models that scale production to accommodate rising scandium demand, for this story is not so much about some junior producing $50-$100 million worth of some obscure metal. It is much more about building the stepping stone for the creation of a $1 billion annual market for scandium oxide with EMC as the prime mover.

By now you are presuming that I have just published a wonderful new piece about EMC. In fact, I have not, for the piece I have posted to KRO today and which also shows up in the KRO Daily Report is about ASX-listed Platina Resources Ltd (PGM-ASX: $0.13), owner of the Owendale deposit in New South Wales which is bigger and somewhat richer than EMC's Nyngan deposit. Owendale has attracted the attention of the Chinese, and behind these Chinese lurks Bloom Energy. My Special Interest Comment about Platina is a detailed analysis of this emerging relationship and the dysfunctionality it promises for Platina. I do not think that Platina's management will fall into the Chinese trap, but you never know. Although EMC's George Putnam cringes when I say it, I think it would be bad for EMC if Platina boxes itself into a corner.

The Special Interest Comment is a long and difficult piece, but it also makes clear why EMC is the superior bet for anybody who believes that scandium will indeed become a billion dollar annual market that revolutionizes the aluminum industry. The main takeaway from my lengthy comment is that the Chinese are now aware of what has been found in Australia, and China needs scandium more than any other country.

I've also started fixing up the Scandium Resource Center where we are now parking links to external news items or articles we deem relevant to scandium .

You can also find the link on the home page, where you will also find links to the conferences where I will be presenting next week, the Resource Investors Forum on Sept 23 in St John's Newfoundland, and on Sept 25 in Toronto at the Cambridge Show.

Difficult times in the junior resource sector are about to get horrific, but scandium and EMC are a narrative that stands alone and will flourish no matter how bad the market or economy because the world needs a scaleable supply of scandium.

*JK owns shares of EMC

 
 

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