The Rant
Welcome to the Future
Yet another rather remarkable week passes as we work our way through this Clockwork Orange-esque summer of 2011. I am holding to our June 19th EI Rant which laid out a rather negative global economic scenario but, to be honest, the wilder and more irrational the markets and world become, the more important it seems to focus on the fundamentals of our investments in this letter—the things we can know. That means geology and the economics of Turning Rocks into Money™.
Of the few things that are crystal clear to me, the first is that, despite Dick Cheney’s oft forgotten statement in 2004 that, “Reagan proved deficits don’t matter�, deficits do in fact matter. To a large degree, government and private debt fueled the US economic boom that was kicked off in the early 1980’s (with a 206% debt increase during the Reagan presidency). As the chart below illustrates, successive US administrations continued to borrow from the future to fund their spending excesses and political aspirations.

(Fig. 1- US debt by President, Roosevelt to Obama)
Well, Welcome to the future
With last week’s S&P downgrade of US debt to AA+, the increase in the US debt ceiling to somewhere beyond $16 trillion (plus ~$62 trillion in unfunded liabilities), and the Fed’s remarkable decision to hold the Fed fund rate at near zero through mid-2013, the odds of the US growing its way out of this problem are slim to nil. The US debt is a long-term predicament that will require a long-term plan, ultimately resulting in a lowered standard of living through government and private austerity measures or, currency devaluations. More succinctly, the future is either deflation or inflation, neither of which any politician with aspirations of being (re)elected is willing to publically acknowledge. That, I’m afraid, is the downside of democracyThe other crystal clear fact is that gold has increased $377 (28%) for the year and, through all the gyrations of the past two weeks, has gained about $122 (7%). It is currently selling for ~$1,747 an ounce. Needless to say, this is a very profitable gold price (as is $1,500, or $1,300, for that matter) for anyone producing gold, and provides plenty of incentive for those companies hoping to find gold. Surprisingly, copper has also held up reasonably well during the past few weeks. It is off about 10% from its recent highs but still sells for nearly $4.00/lb. At these prices, copper miners stand to make good money, as do successful copper exploration companies that can discover economic deposits to replace the miners’ depleting reserves.
Although copper’s fortunes are subject to a slowing global economy, I have a hard time putting forth a strong line of reasoning for a prolonged decline in the gold price. You will note that our portfolio contains only one pure copper play, reflecting my unease with the direction of the global economy and possibly base metal prices.
As for gold, it appears its historical relationship to the US dollar is now more closely tied to the direction of the US economy and debt, both of which appear headed in the opposite direction of gold—down vs. up. Until that changes, the trend is your friend.

(Can you spot the trend?)
That’s the way I see it.
Brent Cook
www.explorationinsights.com
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Brent Cook is an independent exploration analyst and advisor. He currently serves on the Advisory Board of several junior exploration companies and acts as a consultant to several institutional investors. Brent Cook produces the weekly investment newsletter Exploration Insights. For more information on Brent’s letter please visit www.exporationinsights.com
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