The most important quality of the world’s top investors is, arguably, the ability to “see around the corner” – to know with as high a degree of certainty as possible what will transpire in the financial markets during a defined time period so that assets can be appropriately positioned to take advantage of upcoming developments, yet in such a way that if one happens to be wrong, the amount of money lost is both limited and manageable.
     If you have been reading The Contact Comment for any length of time, you will already know that our take on the global world of money begins with an assessment of “macro” factors such as interest rate and currency trends, as these are the drivers, the “top line” if you will, whose movements eventually filter down to the bottom line – the prices of individual assets such as stocks, bonds and real estate that the average person might own. The macro stuff is the key to seeing around the corner.
     The current state of the world is characterized by one of the most fascinating, and perplexing, macroeconomic backdrops ever, and understanding it is important not only to the investor in stocks, but also to the man on street, as the prices of everyday items and basics such as shelter are starting to change dramatically.  If they have not already been made, lifestyle adjustments are in store for the vast majority of people.  It would be nice not to be caught off guard, so let’s have a look at what we are talking about, with an eye to figuring out where things are going and how best to prepare.
     Leading up to the June 25 Federal Reserve pronouncement on interest rates, we fielded numerous inquiries with regard to our opinion on the likely decision.  We certainly knew what made most sense to us, and it is exactly what happened – no change in rates.
     Why this made sense, however, is the real point of this discussion, as it illustrates a conundrum for central banks, governments and investors that will be difficult to solve.  Let us look at the two changes the Fed could have made and the domino effect the respective decisions would likely have brought about.
     Had the Fed lowered interest rates, the dollar would have collapsed, setting a new all-time low against the euro.  This, in turn, would have sent oil prices skyrocketing, and the stock market, given its current fixation with energy prices and knock-on inflation, breaking down through technical support to new lows for the year.
     On the other hand, had the Fed raised interest rates, future expectations of economic growth would have ratcheted downward, thus pressuring rates at the longer end of the yield curve.  With short-term rates up following the Fed’s decision, the end result would have been a flatter yield curve.  Banks benefit from a steep yield curve, as they borrow short-term money and lend long-term money.  As the yield curve flattens, then, their margins get squeezed.  With the financial sector already on the brink, bank stocks would have reacted negatively and taken the rest of the market down with them.
    You can imagine our relief when the Fed decided to leave rates unchanged.  But the scenario just presented is one in which the U.S. central bank is completely hemmed in until either oil prices moderate or the financial sector recovers.  Cut rates and inflation will get completely out of control.  Raise rates and you hamper profit margins in a variety of sectors that may not be able to withstand the additional cost.  Of all the indicators out there, then, what should an investor pay closest attention to next?
     For our money, it is all about the direction of the EUR/USD exchange rate and the influence its movement has on commodity prices, the reason being that the market is terrified of inflation getting out of hand.  When Dow Chemical announced in June that it was going to raise prices on its products by up to 25% (an increase that will come on top of hikes of up to 20% that went into effect earlier that month), it drove home the fact that inflation is a big threat, to consumer spending, to corporate profit margins, to national treasuries, to the global economy in general.  Take a moment to look around you and try to find an item outside of plants and food that did not require the use of a chemical in its manufacture.  It is almost impossible.  Bottom line: everything is about to become more expensive.  Second bottom line: something absolutely has to be done about it.
     The daily chart of the EUR/USD is fascinating and difficult to read, the only certainty being that it is at a critical point.  After putting in a double bottom around 1.53 over the past two months, the euro has rallied to just beyond the top of its medium-term range and must now decide whether it wants to break further past 1.58 and take another shot at clearing 1.60, or if it wants to turn around, work its way back down the range and test 1.53 again.  This is a very difficult move to call indeed.  It is in few countries’ best interests to see the dollar weaken further, much less break to new lows, as oil will move quickly higher in response and smother global growth.  One has to believe that governments would rather see the euro weaken.
     The euro’s reaction to economic data in the early part of this week has also been fascinating and difficult to read.  Eurozone inflation was announced earlier at an eye-opening 4%, and with a European Central Bank meeting scheduled for July 3, one would have expected the euro to fly based on anticipation that the ECB would lift interest rates a few days hence.  What happened, however, was that the euro retreated slightly, although going into the ECB announcement it has finally started to appreciate.
     Hmmm…either the market is going to react in lagging fashion (often the case) or a fundamental shift is afoot.  The obvious conclusions are that either currency traders are not convinced the ECB is going to raise rates or they believe that even if it does, the euro will not take it well.  This latter theory actually makes some sense in terms of the secondary reaction the market would have to a rate hike, although we firmly believe that the ECB should stand pat.
     Although a rate hike by the ECB so soon after the Fed left U.S. rates unchanged would widen the interest rate differential, thus favouring the euro, economic indicators in Europe are already evidencing a noticeable slowing.  Higher rates would only exacerbate this problem, and eventually bring about the necessity of cutting rates aggressively.  The ECB must also realize that if they raise rates in the hope that they contain inflation, the rise in oil prices caused by their decision would more than make up for any minor influence on domestic demand for goods and services.  So…despite the high inflation number, it makes sense at this point for the ECB to follow the Fed’s lead and do nothing.
     As a matter of fact, the muted movement in the euro raises the possibility that we are nearing, or at, an important turning point.  The argument can be made that the U.S., despite serious problems with its housing market and wounded financial sector, is ahead of the eurozone in dealing with these issues via rate reductions and other actions designed to buttress particular sectors of its economy.
     The eurozone, with its relatively high rates, U.S. subprime mortgage-related financial problems and slowing economies, presumably will have to begin lowering rates itself in the future in order to encourage growth.  Given how far the euro has run against the dollar since 2002, if sentiment turns and traders begin to believe that the interest rate spread is about to head in the opposite direction, the euro will suffer a substantial correction.
     Oil would almost surely react by falling in price and that would be good for stocks, as it would remove some of the terrible inflationary pressures buffeting the global economy.  Interestingly, a number of sources have proclaimed recently that the oil market is currently very well supplied, with some oil at times going begging for buyers.  If that is actually the case, then why on earth is spot oil so highly priced?  The only explanation is concern that near-term military action in the Middle East is probable. It is not as if buyers can stash the oil away and sell it 10 years from now at some presumably nutty price.
     It is also quite humorous to hear pundits claim that speculation has little to do with the increase in the price of oil.  Spend some time watching how oil moves throughout the course of a day and you’ll see that much of the price action is based on technical analysis, comments made on television and other such inputs that are the bread and butter of speculators.
     The theory that the currency market is trying to tell us something is further buttressed by the fact that the Canadian dollar weakened into the end of June.  Gold is up, oil is up, the United States did not raise rates, Canada’s central bank has named inflation as its main concern…and the Canadian dollar drops…?
     If we are completely off base here, the ECB raises rates and traders, focusing purely on the rate spread, drive the euro higher, stocks will have a real problem.  Oil will rise, stocks will fall and an investor had better hope that there is some gold exposure in their portfolio. Whew, this is heavy stuff!
     That was quite a fundamental overview to digest, we know, so let’s change gears a have look at some charts before wrapping up our opening commentary for the month.  We went to great lengths to explain at the beginning of June why we thought the S&P 500 was about to break down, and obviously it was worth it, as the main barometer of U.S. stocks went south in violent fashion for four straight weeks.
     Let’s see what the technicals tell us this month, starting with the S&P 500.  Pretty clearly, 1,275, near where the index currently sits, is an important point, as it matches the spring low set by the market at the height of the subprime panic.  Again, it is the euro that will largely determine whether the S&P holds around this important level and uses it as the base for a rally, or if it breaks below 1,275 with force, in which case it will blow past 1,250, and probably 1,225, seeking the comfortably round number of 1,200, the October 2006 low, as its next potential support level.  Hard to call the direction here, but the important thing to understand is that the S&P is at a very critical and delicate point ahead of the ECB announcement.
     The other chart that grabs our attention, aside from indices that mirror the S&P, is that for copper.  We have pointed out before that copper has remained strong, resisting the frightening price collapses that so many other commodities have succumbed to, for quite some time.  If this metal does not break to new highs and establish a new trading range for itself we will be surprised.  This is one chart that has “strength” written all over it, and the shorter-term fundamental supply/demand story to back it up.
     Well, that about does it for our opening commentary this month.  Again, the ECB decision and the direction of the euro is everything, in our opinion.  Rate hike = higher euro (probably) = higher oil prices = higher inflation = lower stock prices.  The ECB should hold rates where they are and release a statement to the effect that while it will remain vigilant about inflation, it also has its eye on the health of regional economies and will act appropriately to deal with both issues…change the language a bit and introduce some doubt into the mind of the trading community.  It’s pretty simple.  Come on ECB – do the right thing!

     While natural resource prices have generally been strong over the past several years, there has been an amazing degree of variability inside the sector, with base metals taking the spotlight for a time, only to be outshone by consistently robust gold prices, and now coal battles potash for the title of “King of the Hill.”  What on earth is an investor to do?
     Alix Resources makes that decision an easy one thanks to a diverse portfolio of high-quality projects that spans copper, zinc, gold, silver, coal and potash.  What’s more, all of the projects are in North America, which means political stability and reliable infrastructure.  Bottom line: no political surprises and lots of news flow thanks to an active exploration calendar…an investor’s dream.
     Alix has a lot going on so we’ll offer brief overviews of its main projects.  Before doing so, however, let us point out that we very much like Alix’s strategy of being involved largely in joint ventures with closely associated partners, as this reduces exploration risk and prevents Alix from having to overtax its treasury when it wants to move quickly forward on multiple properties.
     To begin our tour, let’s look at the Arcadia property.  Located on the Arctic Ocean in Canada's Nunavut territory, west of Bathurst Inlet and 140km west of Miramar Mining's Hope Bay greenstone belt, Arcadia has historic resource estimates of 640,650 tonnes averaging 7.2 grams per tonne gold in the north-central vein and 139,524 tonnes averaging 8.6 grams per tonne gold in the Fred vein.  While these estimates were completed prior to 2001, without a compliant technical report and in a manner inconsistent with National Instrument 43-101 and other disclosure requirements, they give an idea of the quality of project Arcadia represents.
     These are good numbers to be sure and Alix initiated drilling approximately one month ago to prove up and expand the resource.  The company has finished five holes and they are now in the lab, so assays should be available before long.  Bolero Resources has the right to earn 50% of the project.
     Next up is the Divide project near Nome, Alaska.  Alix, along with partner Millrock Resources, recently announced commencement of the 2008 exploration program at Divide, which the partners feel offers an excellent opportunity to develop a gold resource that is both high-grade and near-surface.  The aggressive program of trenching and drilling will focus on determining whether zones with structures that intersect rock units conducive to formation of large vein systems and stockworks are present, as these are seen as key to identifying an economically viable deposit.  Millrock can earn a 50% interest in the project from Alix.
    On the copper side of the portfolio is Alix’s 100% owned Chloride property in Arizona, where drilling was recently initiated.  Importantly, Chloride is located just 3km from Mercator Mineral’s Mineral Park copper-molybdenum mine.  The company has completed nine holes within a previously identified mineralized corridor that trends northwesterly across the property for approximately 4km and is up to 200m wide.  Assays are pending.
     In slightly earlier stages are Alix’s coal and potash projects.  On the coal side, Alix has received a comfort letter from the government of Saskatchewan, indicating that the company is first in line for permits on approximately 91,054 acres adjoining North American Gem’s acquisition west of Hudson Bay, Saskatchewan.  This highly prospective area is highlighted by the recent discovery by Goldsource Mines Inc. in western Saskatchewan and now the discovery of a 4m coal intercept by private company Adamas Minerals Corp.
     In addition, Alix and Geo Minerals have signed an agreement with General Resources Inc., a private Saskatchewan company, to obtain the exclusive potash rights to a total of 84 assorted locations of freehold minerals in highly prospective potash areas of Saskatchewan. These properties total approximately 14,000 acres.  Included in the package are some 4,200 acres of land located 20km west of the town of Esterhazy, and about 25km westof the operating Esterhazy K1 and K2 underground potash mines owned by Mosaic Potash Esterhazy.
     Share structure is another strong point for Alix, as there are just 24.7 million shares issued and outstanding.  Despite the relatively low count, this is a name that trades plenty of volume, so establishing a position is easier than with most stocks, as is lightening up if you so decide.
     As with a previously feature company that delivered Comment readers a big win, Geo Minerals, the Alix team is headed by Mike England, a financial market veteran (24 years of experience) with proven management acumen.  David Hedderley-Smith (Ph.D., P.Geo) has over 35 years of experience at both major mining companies and junior explorers.  He also worked for the Alaskan government, including a three-year stint as deputy director for minerals in the state’s Department of Natural Resources.  David Lajack (B.S.) brings a similarly impressive pedigree, having worked in lode mineral exploration since the early 1980s and being the founder of prospecting syndicate Lajack and Associates.
     Seasoned investors understand that a junior explorer has to keep its story fresh with a steady flow of information that evidences corporate progress in order to maintain a firm stock price.  Alix brings a diverse project portfolio, good share structure, strong management, deep liquidity and the promise of lots of news.
     We hasten to add that even if Alix did not have the coal or potash projects in its portfolio, it would still be a company with clear investment merit.  The fact that it has exposure to both of these minerals, and in red-hot Saskatchewan no less, makes its story even more compelling…and worth serious consideration for Comment readers.

• June 13: AIX announces that, together with Geo Minerals Ltd., it has signed an agreement with General Resources Inc., a private Saskatchewan company, to obtain the exclusive potash rights to a total of 84 assorted locations of freehold minerals in highly prospective potash areas of Saskatchewan. These properties total approximately 14,000 acres.  Included are about 4,200 acres of land located 20km west of the town of Esterhazy, and approximately 25km west of the operating Esterhazy K1 and K2 underground potash mines owned by Mosaic Potash Esterhazy.
• June 16: AIX and Geo Minerals Ltd., along with its partner Millrock Resources Inc., announce commencement of the 2008 exploration program at the Divide Project near Nome, Alaska. The program will consist of lithological and structural mapping, reverse circulation drilling of 3,600m in 25 to 30 holes, trenching and channel sampling.
• June 25: AIX says it has received a comfort letter from Saskatchewan Energy and Resources for coal disposition applications filed in mid-May that are confirmed first priority for 36,864 hectares.  The lands are situated adjacent to the North of the Adamas sub-bitumnious grade A coal intercept of North American Gem, announced by North American Gem in May.

• June 13: AEX announces that it has discovered epithermal quartz veining during ongoing excavator trenching at its Dora epithermal gold property, part of its Spences Bridge Gold Project, south of Merritt, B.C.  Trench DO-08-12 at anomaly G1 north unearthed a series of five parallel chalcedonic quartz veins across a width of 18m. The individual veins range in width from 0.5m to 2.1m.  Trenching is expected to be completed by the end of June.  It is anticipated that high-priority targets generated in 2007, as well as those generated from the 2008 trenching program, will be drill-tested in the fall.

• June 23: FV says shareholders approved, at a Special Meeting, the plan of arrangement whereby FV will spin out its Sonora Gulch, Chopin and Alberta Sun properties to Northern Tiger Resources Inc.
• June 27: FV and Northern Tiger Resources Inc. announce that the plan of arrangement has been completed and Northern Tiger has closed its private placement and completed its acquisition agreement with Sherwood Copper Corporation's wholly owned subsidiary Minto Explorations Ltd. as announced June 23, 2008 and before.

• June 9: GM says it has received a “Comfort letter” from Saskatchewan Energy and Resources stating that of the coal permit applications processed to date, on behalf of Geo Minerals Ltd.,  68,290 acres of issued Coal Prospecting Permits (CPP) will be given priority sequence. These Coal Prospecting Permits are in the area of interest in proximity to Goldsource Mines Inc.’s discovery. GM has filed and fully paid for 72 Coal Disposition applications to date.
• June 13: GM says it has signed an agreement with General Resources Inc., a private Saskatchewan company, to obtain the exclusive potash rights, along with Alix Resources Corp., to a total of 84 assorted locations of freehold minerals in highly prospective potash areas of Saskatchewan.  These properties total approximately 14,000 acres.  Included are about 4,200 acres of land located 20km west of the town of Esterhazy, and approximately 25km westof the operating Esterhazy K1 and K2 underground potash mines owned by Mosaic Potash Esterhazy.
• June 17: GM announces that drilling has commenced on the Middle Mountain property near Florence, Arizona.  The target at Middle Mountain is a dismembered and tilted porphyry copper system buried beneath shallow gravel cover. The initial program will consist of a series of short drill holes designed to penetrate the 25-100m of gravel cover and test underlying bedrock exposures throughout the area. Eighteen drill sites have been permitted across the target area.

Helio Resource (HRC)

• June 23: HRC reports the first diamond drill results from the 11 hole (1,800m+) program at the Porcupine target, part of the ongoing 20,000m+ drill program at the SMP Gold Project, SW Tanzania.  Results have been received for two of the first five of the planned holes.  The best hole, GPD-1, intersected 42.3m grading 4.0 grams per tonne gold from 16.6m (including 0.9m grading 43.6 grams per tonne gold from 53.4m and 0.45m grading 105 grams per tonne gold from 57.7m).  Hole GPD-2 intersected 49.8m grading 1.7 grams per tonne gold from 23.1m.

MAG Silver (MAG)

• June 18: MAG releases a resource estimate from the Juanicipio Joint Venture located in Zacatecas State, Mexico. The operator of the Joint Venture, Fresnillo plc, has provided MAG with a resource estimate for the Valdecañas Vein.  The total inferred resource estimate is 237.8 million ounces of silver, of which MAG's 44% interest equates to 104.5 million ounces and Fresnillo's 56% interest equates to 133.2 million ounces.  In addition to the silver, the resource estimate also contains inferred resources of 480,000 ounces of gold and almost 1 billion pounds of combined lead and zinc (457,700 tonnes).
• June 19: MAG, on behalf of Minera Juanicipio SA (a joint venture between Fresnillo plc (56%) and MAG (44%), announces assay results from the Valdecañas Vein on the companies’ Juanicipio property for Holes QE and QD.  Hole QE intersected 1,198 grams per tonne silver, 0.24 grams per tonne gold, 2.75% lead and 5.15% zinc over 4.70m (true width).  This includes a higher grade intercept of 1,820 grams per tonne silver, 0.16 grams per tonne gold, 4.01% lead and 6.74% zinc over 2.82m (true width).  Hole QD reports an intersection of 200 grams per tonne silver, 0.58 grams per tonne gold, 0.03% lead and 0.01% zinc over 0.69m (true width).

• June 9: MXR says it entered into separate option agreements with Eastfield Resources Ltd. whereby it can earn up to a 60% interest in two exploration properties located in British Columbia.  The Indata Gold/Copper Property encompasses 3,060 hectares north of Fort St. James in North Central B.C.  There are two exploration targets on the property – one is structurally controlled precious metal veins and the second is porphyry copper.  The Howell Gold Project is comprised of 4,376 hectares in Southeast B.C., one hour south of Sparwood.
• June 16: MXR reports that it has engaged Gateway Securities Inc. as corporate finance advisor, on a non-exclusive basis, subject to acceptance for filing by the TSX Venture Exchange.  Gateway has been retained for a 12 month period at $5,000 per month plus reimbursement of approved expenses.  MXR also agreed to issue 250,000 non-transferable warrants to Gateway, with each warrant exercisable to purchase one common share of the Company at an exercise price of $0.40 for a two year period, subject to monthly vesting over a one year period.
• June 17: MXR announces that drilling has commenced at Gold Hill in Alaska, following up on a five-hole drill program the company conducted in 2007 that intersected significant molybdenum mineralization over long intervals starting at surface and ending in mineralization at depth in four of the holes.

• June 11: NKW says it welcomes the release the same day of B.C. Hydro’s Clean Power Call Request for Proposals (“RFP”), which underscores the province’s commitment to meeting B.C.’s growing energy needs with clean, renewable power sources.  NaiKun’s project is in line with many of the priorities identified in the Call, including the need for clean, renewable energy using proven technologies, as offshore wind generates renewable energy with no emissions and utilizes proven, world-class technology.

Northern Lion (NL)

• June 17: NL announces that it has entered into an option agreement with Katla Exploration Ltd. to acquire a 90% interest in an exploration permit covering a 312 hectare area near the villages of Pano Panayia and Asproyia in the Paphos district of the Republic of Cyprus.  Katla has also, on NL's behalf, submitted an application to the Department of Mines for an additional seven exploration permits in Greek-Cyprus covering an aggregate 3,190 hectares.  NL will hold a 95% interest in the additional property, subject only to reimbursement of Katla for its expenses.  During management's initial visit to the area, six grab samples were collected from within the new application areas.  Highlights include one sample which returned 4.1% copper, and another sample which returned 7.3 grams per tonne gold and 17.6 grams per tonne silver.

Puget Ventures (PVS)

• June 11: PVS says it has entered into a contract for an initial 2000m of drilling on the Trout Bay Property in Red Lake, Ontario. The pre-drill program will commence immediately, with drilling expected to begin during the week of June 16.  The Trout Bay summer program has three initial targets 1) three to four holes, ranging in depth from 75-150m, targeting the High Grade Lake zone, aimed at upgrading the historic resources and testing the zone to depth, 2) one to two holes, approximately 200m in depth, targeting the Zinc Pit area, and 3) three to four holes targeting various high priority nickel-PGE targets ranging from 200-325m in depth, revealed by last year’s Aeroquest magnetic survey work and various data compilation undertaken this spring by PVS.

Strongbow Exploration (SBW)

• June 12: SBW provides an update on exploration drilling at its wholly owned Nickel King property in southern Northwest Territories, including assay results for an additional 11 drill holes. A total of 36 drill holes (7,950m) have been completed on the property so far in 2007, including 26 within the Main Zone.  Highlights include 14.85m grading 1.00% nickel from the Lower Sill in drill hole NK08-33A and 9.00m grading 1.02% nickel from the Upper Sill in drill hole NK08-26.
• June 25: SBW releases an update on exploration activities at its wholly owned Nickel King and Snowbird Nickel projects in southern Northwest Territories and northern Saskatchewan. Key points of this update include 1) exploration drilling at Nickel King is complete.  A total of 44 drill holes (9,200m) have tested the Main Zone, the Koona and South Ring prospects, as well as seven additional target areas within the property; 2) Drill hole NK08-35 has returned 51.58m grading 0.67% nickel, including 4.00m grading 1.47% nickel, 0.30% copper and 0.061% cobalt; and 3) Drill hole NK08-36 has returned 33.50m grading 0.68% nickel including 12.00m grading 1.13% nickel, 0.23% copper and 0.046% cobalt.

For more information on companies mentioned in The Contact Comment, please visit the Web sites listed below or call 604-689-7422/1-877-689-7411.