The Basics Many investors are unaware of the market, what’s driving it, and are still trying to understand the basics of the geology, metallurgy and market’s dynamics. Before we get to the exciting stuff, let’s quickly review the basics …

Graphite is a naturally occurring form of carbon (C) with wide-ranging and unique physical properties. Carbon is nonmetallic, and while it is considered to be the sixth most common element in the universe and the basis of life on planet earth, its supply in the form of high-purity graphite is limited. Demand has been growing, as new and expanded uses for graphite develop. This has pushed pricing significantly higher over the past decade. Both graphite and diamonds are made from carbon, but have very different characteristics given their different crystalline structures.

Graphite's uses are everywhere, from the “lead” in pencils, steel production, crucibles and refractories to nextgeneration uses in battery technologies and fuel cells. Demand has been increasing as new uses emerge which has helped push prices significantly higher over the past 10 years. Graphite has a critical role to play in multiple industries which is expected to continue, suggesting a continuous and steady demand.

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Super-Substance set to Revolutionize Technology

Export Development Canada Economics is forecasting an 18% surge in Canadian exports of metals ores and metal manufactured production in 2013 before declining to 4% growth in 2014.

“Years of high metal prices have spurred major investments which will deliver a surge of new production in 2013.” Said EDC’s latest Global Export Forecast.

“The strong outlook for the ores subsector in 2013 will be driven by iron ore shipments and copper output,” said the report. “Despite the postponement of the Bloom Lake Phase II expansion and the idling of the Pointe Noire pellet plant, Canada is on track to see a near doubling of output over the next five years.”

The copper production outlook “is very strong with several big project ramp-ups, including Copper Mountain and Gibraltar, pushing production increases well into double digits this year before falling back to more moderate growth in 2014,” said EDC.

“The metals outlook continues to be dominated by gold mines in overdrive, and production increases in the range of 20% are expected this year and next, however, softening gold prices over the forecast horizon will reduce revenue,” EDC predicted.

“Ontario’s exports will get a huge boost this year, thanks to a double-digit surge in metal exports,” said EDC’s Chief Economist Peter Hall Wednesday. The industrial goods sector, which includes ores, minerals and metal exports, accounts for 34% of Ontario’s exports. EDC’s forecast for this sector calls for 15% export growth in 2013 and 2% in 2014.

“Ontario mineral producers can expect to ship a lot more volume in 2013, which will help to offset lower base metal prices,” Hall said. “Metals and mining will be the star performer on Ontario’s export stage this year.”

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Iron Ore, Copper, Gold, Potash to Drive Canadian 2013 Exports

1. Huge rallies begin from these conditions

Below is the NYSE Gold Miners Index which is tracked by the GDX ETF. Look at the RSI. Not only did it reach a multi-decade low but it has remained oversold far longer than during the comparable periods. In the four previous periods, the market rebounded suddenly and strongly in percentage terms. Meanwhile, the bullish percent index, a breath indicator is more oversold than in 2008. We plot the indicator with a 10-week moving average that shows it as far more oversold than in 2008. While this indicator does not go back that far, odds are it is likely at a 13-year low.

2. Springtime is usually a turning point for gold stocks.

According to seasonal analysis, precious metals usually peak in the late spring. However, a study of the past 12 years shows that its more apt to say that spring is a turning point. In the above chart we mark the tops or bottoms that occurred in April or May. Assuming we are presently at a bottom then spring will have marked a turning point in gold stocks during 11 of the past 13 years.

3. A selling climax already occurred and the recent low is a false breakdown.

The selling climax occurred in April when GDX declined 24% in only six days. The 20-day volume average peaked days later at 30 million shares. The previous high was 21.5 million shares in June 2012. GDX has also formed a bullish RSI divergence and Monday reversed on record up volume. Prior to Monday, recent weakness was on average volume which was substantially less than during the selling climax. This is a subjective thought but this potential bear trap and false breakdown could be the retest. When you get a failed retest that is a trap or false move it can result in a V bottom. Look for a potential head and shoulders bottom or a V bottom. Finally, if the RSI pushes above 50 then that is a good sign.

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6 Reasons why Gold Stocks will Begin a Big Rally

The Gold Report: Maria, in April Eric Sprott sold more than $45 million ($45M) worth of units in the Sprott Silver Physical Trust. A spokesperson told Canada's Globe and Mail that the sale was needed to cover charitable obligations and to buy shares in silver mining companies because Mr. Sprott believes silver equities will outperform the metal in the next rally. Can you fill in the details on that thesis?

Maria Smirnova: We believe in the equities—for any commodity—for several reasons. Equities represent a leverage play on the underlying commodity. To use a simple example: Assume Company X can earn $5 when the silver price is $25/ounce ($25/oz). If the silver price increases 20% to $30, that extra $5 goes directly to the bottom line. This doubles the company's profits from $5 to $10. The silver price increases 20%; the profits rise nearly 100%—that is what I call leverage.

In addition, mining companies benefit from production growth through exploration or acquisition. We look for companies that can find millions of ounces of silver or gold.

TGR: Precious metals have certainly had their detractors of late. Why does Sprott Asset Management remain committed to precious metals?

MS: Governments are trying many maneuvers to fix the economic situation, printing money, for example. None of their actions are actually fixing the underlying economic issues. We remain committed to the precious metals because they are hard assets.

In addition, the financial market has become disconnected from the physical market. Especially since April's two-day selloff in silver and gold, purchases of the physical metals have surged.

For example, sales of the U.S. Mint's silver coins jumped 57% year-to-date compared to last year (as of April). Sales increased 169% in April alone. We have heard stories of people lining up to buy silver in Canada and Australia. Demand is up in China as well. Chinese jewelry sales grew 72% in April compared to 2012.

If you look at the exchange-traded funds (ETFs), silver ETFs have not had a large selloff.

The buyers are there, the physical demand is there, but the price is just not reflecting that. It is a bit frustrating, but from my perspective, it is comforting to see the numbers show that people want to own silver and are buying more of it.

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Sprott Is Bullish on Silver—and Gold—Equities

Graphite is a naturally occurring form of carbon (C) with wide-ranging and unique physical properties. Carbon is nonmetallic, and while it is considered to be the sixth most common element in the universe and the basis of life on planet earth, its supply in the form of high-purity graphite is limited. Demand has been growing, as new and expanded uses for graphite develop. This has pushed pricing significantly higher over the past decade. Both graphite and diamonds are made from carbon, but have very different characteristics given their different crystalline structures.

• Graphene, another form of graphite, has also been gaining recognition as a possible “super material” of the future.
• Graphene is one of the strongest and lightest known substances. Graphene is also an excellent conductor of heat and electricity and has outstanding lubrication properties and is very resistant to chemical corrosion.

The scientific work which discovered graphene in 2004, won the scientists the 2010 Nobel Prize in Physics. While the industrial development of graphene is at an early stage, over 7,000 graphene related patents have been filed. The material is expected to make existing materials stronger and more durable and even possibly become integral in expensive electronic components such as semi-conductors. Demand for graphene is expected to grow substantially over the coming years.

Graphite Uses:

Graphite's uses are everywhere, from the “lead” in pencils, steel production, crucibles and refractories to next-generation uses in battery technologies and fuel cells. Demand has been increasing as new uses emerge which has helped push prices significantly higher over the past 10 years. Graphite has a critical role to play in multiple industries and anticipated to continue, suggesting a continuous steady graphite demand.

Graphite Market:

The graphite industry is divided into two parts: synthetic and natural. The world market is approximately worth $9 billion per year, of which $8 billion is synthetic graphite and $1 billion is natural graphite. Synthetic graphite is a man-made substance manufactured product made by high-temperature treatment of amorphous carbon materials. Carbon purity of natural graphite can range from 70.0% to 99.0% and above, whereas the purity of synthetic graphite is usually greater than 99.0%. Synthetic graphite is expensive to produce, and commands the highest market prices due to its purity.

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Graphite Market Resource Report

The Metals Report: In April, a landslide shut down operations at one of the largest copper mines in the world, Rio Tinto Plc's (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK) Bingham Canyon mine. Thankfully, no one was injured. Are landslides always a threat at large, open-pit mines? Will this change the standards for how mines are built and their size?

Brent Cook: Landslides and rock falls are always an issue in open pits, and companies put a lot of effort into understanding the rock mechanics in order to build these mines and pits properly. They generally are not a major problem if sufficient upfront studies are done. The Bingham pit was opened in the early 1900s and has been expanding since then. While the slide is a major event, I do not think it will change how anyone builds mines per se.

TMR: Rio Tinto was looking at another expansion there. Will this make it tougher for that mine, or another of similar size, to expand?

BC: What happened at Bingham should not affect other mines of that size. I imagine the company is going through a lot of engineering analysis and trade-off studies to figure out what exactly it has to do at Bingham this year and over the next decade.

TMR: You think it will go underground instead of expanding the open pit?

BC: No, the underground mine was to be sequenced in and the open pit continued or expanded. But now that has to be one of the options being considered.

TMR: I understand that mine produced 25% of U.S. total supply. How will that affect the copper market dynamics?

BC: Not all that much, really. There is a lot of copper sitting in Chinese and London Metal Exchange warehouses. In terms of the global copper market, this mine represents only about 1%, but close to 25% of the U.S. market.

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Tips for Diversifying Beyond Gold from Brent Cook

Consulting Group Wood Mackenzie predicts spending on upstream gas will reach $48 billion this year and $50 billion in 2014, accounting for about half of all resources investment in Australia over two years.

This will be followed by iron ore which is expected to make up 25 per cent of spending and coal which is likely to account for 10 per cent.

Wood Mackenzie predicts iron ore investment will peak this year at $22 billion while coal will remain subdued for the next few years due to lower prices.

Head of Australasia Upstream Research for Wood Mackenzie Chris Graham said the unprecedented level of oil and gas investment over the past few years would continue.

"The outlook for the next three years confirms the strength of the Australian resource sector, as we see investments being made based on decisions taken during the boom years," Mr Graham said.

But he said more major gas and iron ore projects were needed to maintain investment levels in the longer-term.

Head of Global Metals and Mining Supply Research Gero Farruggio said the Australian iron ore sector had invested heavily over the past five years, lifting Australia's share of global seaborne trade from 35 per cent in 2007 to 44 per cent in 2012.

"Capital investment in the Australian iron ore sector will reach a peak in 2013 as infrastructure construction and mine expansions are completed by the majors, and Chinese steel production growth moderates," Mr Farruggio said.

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Resources Investment to Peak at $85bn

That’s why I often say to anticipate before you participate, because gold stocks are historically twice as volatile as U.S. stocks. As of March 31, 2013, using 10-year data, the NYSE Arca Gold BUGS Index (HUI) had a rolling one-year standard deviation of nearly 35 percent. The S&P 500’s was just under 15 percent.

I believe the drivers for the yellow metal remain intact, so for investors who can tolerate the ups and downs, gold stocks are a compelling buy. Here are three reasons:

1. Gold Companies are Cheap.

According to research from RBC Capital Markets, Tier I and Tier II producers are inexpensive on historical measures. Based on a price-to-earnings basis, RBC finds that “shares are currently trading not far from the recent trough valuations observed during the 2008 global financial crisis.”

And on a price-to-cash-flow basis, gold stocks are trading at bargain basement prices. The chart below shows that average annual cash flow multiples for North American Tier I gold companies have fallen to lows we haven’t seen in years. Since January 2000, forward price-to-cash-flow multiples have climbed as high as 26 times. This year, we see multiples at the high end that are less than half of that. On the low end, today’s price-to-cash-flow of 6.5 times hasn’t been seen since 2001.

Tier I and Tier II companies “offer investors an attractive entry point from an absolute valuation perspective with respect to the broader market,” says RBC.

2. Gold companies are increasing their dividends.

With the Federal Reserve suppressing interest rates, investors have had to adapt and reallocate investments to generate more income.

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Three Reasons to Buy Gold Equities Today

The Gold Report: In a recent edition of Resource Opportunities, you wrote, "This time is different from every previous bust." How so?

Lawrence Roulston: Some people described the late 1990s as a nuclear winter of the mining industry. Demand for metals was low, and a lot of new production had come onstream. Copper was trading at the lowest price ever in real terms. Today, we don't have that surplus. We have serious constraints on supply at a time when demand for metals is increasing. Half the planet's population is undergoing a process of modernization and industrialization. Billions of people are becoming consumers, buying cellphones and looking at refrigerators, cars and every other consumer product.

TGR: Does that include gold? It doesn't have an industrial purpose per se, and we saw a massive sell-off in gold mid-April.

LR: Yes. The selling came largely from the exchange-traded funds (ETFs) and was triggered by the short signals from a couple of the big New York brokerage firms. The ETFs were being sold on a panic level, but buyers around the world were literally lining up to buy physical gold. The price has already stabilized.

TGR: Are you saying you don't expect further weakness in the gold price between now and fall 2013?

LR: There will be a lot of short-term volatility. But people's desire to own gold on the physical level is not going away, whether people are buying gold jewelry in China or India or Europe or buying bars and coins—gold will act as a safe haven, as a currency hedge.

There will probably be further events such as what recently happened. I don't want to get into the whole conspiracy theory, but it seems clear that the brokerage firms involved in this had a phenomenal short position before making the calls to short gold. It was extremely profitable for them. If they've done it once, they're likely to do it again.

TGR: Anybody who's still in this space has lost money. Investors in the junior mining space want to know what the path is to making money again.

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The Real Reason Gold Fell—and Why It Has Already Stabilized: Lawrence Roulston

The global economy has already entered into stagflation with a growth rate of 2 percent and inflation at 3 percent. The inflation rate is likely to rise above 4 percent in 18 months while the growth rate will remain stuck in the same range. With inflation twice as high as the growth rate, the global economy will slip deeper into stagflation.

The recent decline in commodity prices does not signal a reversal in the inflationary trend. It is a onetime redistribution of mining income to consumer purchasing power. The prevailing negative real interest rate channels monetary growth above economic growth into inflation wherever there is shortage. Manual labor in emerging economies, skilled labor in the developed economies, agricultural commodities, rent, healthcare, education, etc., are leading the inflationary trend.

Inflation expectations are already a self-reinforcing influence on emerging economies such as India. It will take root in developed economies. When this occurs, the global economy will run into an inflationary crisis as a result of wrong-headed policies used to deal with the financial crisis.

Multinational companies remain the biggest beneficiaries of the current global environment. The macro instabilities give them opportunities to arbitrage the frequent fluctuations in demand and production costs across the globe. The negative real interest rate has boosted their profits significantly, too.

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The Enduring Glow of Gold