Canada's next Gold Rush

Vancouver is home to many of North America's newest and brightest mining companies, and at last  weekend's Stocks 2011 Conference, mining companies were well represented.

Talk to anyone about mining in Canada, and inevitably the conversation will turn toward the excitement about Canada's Yukon territory, which some say will spark the next great gold rush.

The Yukon Territory is, many believe, the location of a massive Carlin-type gold discovery.  Traditionally, hard-rock miners looked for veins of quartz or minerals that can indicate the presence of gold.  In contrast, a carlin-type deposit is composed of extremely fine-grained particles of gold, stuck to other minerals (such as pyrite) and spread deeply throughout a large area.  Carlin-type gold can be mined cheaply by large open-pit mines.

Kaminak Gold (TSX: KAM), for example, has hit upon a large area of mineralization (trendily dubbed the "coffee project") with mind-blowing numbers, ranging from 1.08 to 17.1 grammes per tonne over an area 14 kilometres long.

Companies like Kaminak Gold, Northern Tiger, Golden Predator, ATAC, and Ryan Gold are all generating excitement, sitting within the Carlin-zone.  This December to January, soil sample results from last summer's prospecting will start rolling in.  If results are as good as expected, the whole area (and all the junior miners in it) could be caught in a speculative frenzy.

Make no mistake - junior gold investments are really educated gambles.  But, when the risk-reward ratio is in your favor, gambling is sensible.  As always with speculative investing, risk not a penny more than you can comfortably afford to lose.

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"It is in men, as in soils, where sometimes there is a vein of gold which the owner knows not of, and in your nature, there lies hidden rich mines of thought and purpose awaiting your development."

Jonathan Swift

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See also:
http://www.kaminak.com/

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Disclosure

Do not buy stocks, or take this or any other financial advice without doing your own analysis; including, but not limited to: reviewing business models, financial statements, management style and philosophy, recent developments, market macroeconomic analysis, and chart analysis. If you do not know how to do these things, you shouldn't be buying stocks in the first place. Seek the advice of professionals, as appropriate.

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The Canadian Housing Market

The bubble is back.

Not content with a single housing bubble, Canadians have apparently decided to ignore reality and give it a second go, especially in Vancouver. Just a few days ago, my mortgage broker confirmed that, just like in the bubble years, multiple bids on properties are back with a vengeance. A typical, two-bedroom bungalow/rancher in the West Side is now priced at 1.3 million dollars, right back to where it was at the peak in 2008.

A few different factors are responsible for this brutal overpricing. First is the typical Vancouverite’s belief that theirs is the greatest city in the world. Granted, Vancouver is a nice place. But, everyone seems to believe the city is so spectacular that Olympic visitors will return to London, Paris, Tokyo etc. and immediately put their homes up for sale so they can move to Vancouver.

Second and more important is the Asian factor. In Vancouver a substantial number of immigrants, mostly from China, are buying residences primarily or completely in cash. Cash purchases are a big factor in propping up high prices; however, they are an even bigger factor in the decision making process for local buyers. Vancouverites are convinced that because of immigration, prices cannot drop; therefore, any price is justifiable, as one will always find a buyer at that new higher price (in economics, this is known as “greater fool theory.”)

Finally, the average Canadian is making a mistake typical for those who know little about finance: they are concentrating on monthly payment amount instead of amount of debt owed. To the financially naive, owing $500,000 at a 2.25% variable interest rate with a monthly payment of $1718 is better than owing $400,000 at a fixed rate of 4% with monthly payments of $1763. More importantly, people are not aware that today's 2.25% variable interest rate, and the resulting barely-affordable monthly payment, will soon be going up.

The governor of the Bank of Canada, Mark Carney, is trying his best to send out the warning ("It is the responsibility of households now to ensure that in the future, when the recovery takes hold and extraordinary measures are unwound, they can service their debts”), but it’s largely falling on deaf ears. While Americans have spent the last two years paying down their credit card and mortgage debt, Canadians have been busy racking it up. The Bank of Canada estimates that by the 4rth quarter of 2011, Canadian personal debt payments will reach record-breaking levels (shattering the previous record set in 2000).

Of course, after the housing bubble bursts for the second time, we’ll probably hear a chorus of, “It’s the fault of the banks. They shouldn’t be approving these loans in the first place!” As a banker, I can say without hesitation that trying to tell a customer they can’t afford to buy their dream home is like telling a child they can’t have ice cream: they throw a tantrum, threaten to run away (take their business elsewhere), and frequently do exactly that. If the next bank doesn’t approve them, they will keep trying until someone does, eventually lying about their assets or income if necessary. People don’t seem to realize that when your banker (who wants to give out loans) tells you that you can’t afford it, maybe you should listen.

And so, the bubble grows…