This report was sent to subscribers on September 8, 2010.  Join our free mailing list to receive this actionable info 48 hours before the public…

EXECUTIVE SUMMARY:

• Retail and institutional investors are losing faith in fiat currencies.

• Additional stimulus programs and liquidity injections are further eroding confidence in traditional wealth storage vehicles.

• A “flight to safety” mentality is driving interest in gold and other precious metal investments.

• Three gold mining companies offer potential for significant investment gains based on the rising value of their precious metal reserves:

• Allied Nevada Gold Corp. (ANV)
• US Gold (UXG)
• New Gold Inc. (NGD)

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As world governments struggle to reignite economic growth and pull their respective economies out of the deepest recession this generation has seen, investors and savers across the globe are slowly losing confidence in fiat currencies.  Countries such as the US, who are able to easily print additional currency or otherwise “monetize” debt, risk devaluation, while many European countries struggle under massive debt loads and must look to the ECB or IMF for assistance.

Austerity programs will almost certainly crimp growth, if not strangle it, while at the same time holding little hope for solving the mounting debt-without-growth issue.  The other side of the austerity coin is to embrace stimulus programs aimed at injecting liquidity into struggling industry.  But many of these capital injections appear to be backfiring – leading to even more fear over the long run value of the US dollar as well as other established “reserve currencies.”

The concern extends well beyond main street, with many institutional investors such as pension fund managers, sovereign wealth funds, and macro hedge funds increasing their allocation to precious metals.

The trend can be classified as a “flight to safety” with institutions perceiving precious metal holdings as being a stable storage of value – rather than holding paper assets denominated in dollars, yen or euros.

Over the past two years, the spot price of gold has increased more than 75% (denominated in US dollars) and may continue to rally as the acceptance of the precious metal asset class appears to be accelerating rather than losing momentum.  A number of credible analysts are calling for gold prices near $2,500 per ounce and if there is another shock to the system or an unexpected policy movement we could easily see that price spike much higher.

While there are many vehicles available to investors which allow participation in the price movement of commodities like gold or silver, some of the best opportunities are likely to be investments in the producers of these commodities, as relatively fixed production costs compare favorably to end selling prices.  Additionally, miners with resource-rich properties will see the value of underground assets appreciate as the spot price of precious metals remains in a bull market.

Three mining companies appear to be attractively situated to offer significant price appreciation in the current environment.  While the stocks have a tendency to become short-term overextended during bullish periods for gold and silver, appropriate entry points and proper risk management can allow traders to participate in significant gains in these high-velocity vehicles…

Allied Nevada Gold Corp. (ANV)

• Resource-rich Hycroft mine has 2.4 million ounces of proven resources and 5 times more in proven, measured & indicated, and inferred categories.

• Low cost of production allows for maximum profitability as gold prices increase.

• US-based resources offer less geopolitical risks than competitors in more unstable regions.

• Strong balance sheet with no debt and healthy cash balance.

Allied Nevada has seen its share price rise dramatically over the last several months.  This year analysts expect the company to grow earnings by roughly 230% over last year – with earnings pegged at 43 cents per share.  However, the big news is not the amount of earnings expected to be generated, but the value of resources that has investors in a buying mood.

The majority of the company’s reserves are represented at the Hycroft mine, located in northwestern Nevada.  In May of 2007, enough research had been done to determine that there was roughly 1.5 million ounces of “Measured & Indicated” resources or “Inferred Resources.”

Over the past three years, the company has developed the mine to the point where there is now 2.4 million ounces of “Proven and Probable” resources – the most conservative measurement of available resources – along with more than 10 million additional ounces in the “Measured & Indicated” and “Inferred Resource” categories.

On top of the gold resources, Hycroft also features more than 500 million ounces of “byproduct” silver which are produced alongside the gold mining process.  As a byproduct, these silver resources do not have an associated cost attached to production and are financially considered to be an attractive addition to the core business of gold mining.

Allied is currently producing gold at a cost of roughly $400 per ounce, which leaves a significant profit cushion considering the spot market for gold is roughly $1,250 as of this writing.

In the coming years, ANV may see its production costs rise along with an aggressive production schedule, but at a peak level of $500 per ounce, it is unlikely that these costs will have a negative effect on the long-term profitability of the company.

Conservatively estimating that only half of the unproven reserves actually materialize – while holding the price of gold steady at $1,250 per ounce – and assuming a conservative double cost of production, Allied Nevada’s stock still only represents half of the value of reserves at the Hycroft mine.  And for every $100 increase in the price of gold, an additional 30% could be added to the present value of ANV stock.

The company is also developing four additional mines with potential to add to the company’s valuable reserves:

• Mountain View in northwest Nevada
• Wildcat in northwest Nevada
• Maverick Springs in eastern Nevada
• Hasbrouck / Three Hills in southern Nevada

As these projects come online and begin producing gold in the coming years, expect ANV to continue to rise as investors have more visibility into the long-term value of this quality gold producer.  Using just the value of the Hycroft assets, one could easily argue for a $50 stock.  Tack on the additional opportunities in the four other projects, coupled with a rise in the price of gold and ANV could eclipse $100 over the next several quarters.

US Gold (UXG)

• Recent gold discoveries along with better reserve visibility is creating confidence for investors.

• Attractive mix of organic growth along with acquisition opportunities.

• Significant investment by management team aligns team with shareholders.

• No debt and significant cash and bullion reserves.

This small-cap gold miner has come into its own over the past two years.   Little more than a penny stock during the financial crisis, US Gold has developed into a North American gold mining leader with respectable production and solid resource growth.

The company is still reporting accounting losses on a quarter by quarter basis as exploration and development costs outweigh production.  But similar to Allied Nevada, the true value for UXG shareholders is in the reserves not yet brought out of the mines.  Recent discoveries in Mexico and Nevada are currently being analyzed and appear to have very attractive gold and silver qualities:

• Gold Bar development in NV holds 57,000 gold ounces
• El Gallo development in Mexico holds 35,000 gold ounces
• El Gallo also represents 5 million to 10 million silver ounces

US Gold has been active on the acquisition front – purchasing properties that have been analyzed as “promising” and then performing the necessary development to be able to claim true “proven reserves.”  This action is not without risks, but the UXG management team has proven their ability to negotiate attractive deals and secure rights to some very attractive parcels in both Nevada and Mexico.

There is a growing consensus that junior gold miners (small and mid-cap mining companies) may actually be in a more attractive trading environment than their larger counterparts.  This is because the large gold producers are looking for new resources and have shown a willingness to make attractive takeover offers.  Since UXG still represents a relatively small market cap, it is not unlikely that the company will receive takeover proposals from larger miners such as Newmont Mining (NEM) or Barrick Gold (ABX).

A buyout offer may or may not be well received by the current management team, which owns more than 20% of the outstanding stock.  The team has a published goal of driving organic production to 100,000 gold ounces and 5 to 10 million silver ounces and will likely attempt to keep control of the company until those objectives are reached.  But with much to gain from an attractive offer, the team has every incentive to either operate a profitable and growing mining operation, or to sell at an attractive price.

The stock is in a holding pattern as of this writing — just over $5.00 per share — and has been trending higher along with the broad industry.  Given the value of under-ground resources along with a strong trend in the spot price of gold, UXG may very well be well over $10 per share before this time next year.

New Gold Inc. (NGD)

• Strong organic growth in proven and probable gold reserves with diversified portfolio of mining operations.

• Production costs have been decreasing as efficiencies kick in.

• Attractive production of by-products such as silver and copper add to revenue stream.

• Healthy financial condition with large cash balance and flexibility for future investments.

New Gold has three producing mines in the US, Mexico and Austrlia; and finds itself in the enviable position of increasing production levels at decreasing cash costs.  From 2008 to 2009, the company actually increased its reserves by 10% while still pulling roughly 500,000 ounces of gold out of its diversified portfolio of mines.

As of the end of last year, NGD was sitting on 8.2 million ounces of proven and probable gold reserves, and has another 12.3 million ounces in measured and inferred resources.  In addition to the gold production, the company also has significant silver and copper production.  For accounting purposes, these products are sold and the revenue offsets the cash costs of gold production — bringing estimated net production costs close to an expected $400 per ounce for 2010.

The management team has done a great job of finding efficiencies in its production process and has systematically reduced production costs over the last two years.

In 2008, the cost of producing an ounce of gold was near $566.  Management guidance for 2009 was for a reduction to a range of $470 to $490 per ounce and the company beat that goal with a final cost figure of $465.

This year management has set the range at $445 to $465 per ounce, and whether they actually beat the number or not, the reduced costs is allowing NGD to realize healthier profits and giving management the financial flexibility to invest in new projects.

The company’s financial position is very strong with a cash balance near $344 million compared to total debt of $218 million.  Robust cash reserves gives the company flexibility to pursue growth opportunities such as the New Afton mine in Canada with over 1 million ounces of proven reserves and the a minority interest in the El Morro mine in Chile which accounts for more than 2 million ounces of gold reserves (the 2 million ounces is NGD’s portion of the project)

The stock has recently run into resistance near the $6.50 level after rallying 20% from its swing low in July.  Based on the growing level of proven reserves, the potential for mining measured and inferred reserves, a healthy cost structure and robust trade in the gold spot market – NGD will likely continue to trade higher and grow its market capitalization.

Assuming half of the measured and inferred resources turn out to be a disappointment, and assuming a $450 per ounce production cost for the remaining M&I reserves and the proven reserves, NGD could easily be trading at $29.50 per share to match the asset value of reserves.  Additional discoveries and the ramping of production in the mines in Canada and Chile only add to that picture.  And finally, any increase in the spot price of gold only accentuates the value of reserves.

Purchasing the stock on a break above resistance could offer traders an opportunity to build exposure in a trend that could continue for a long time period and cover a significant price range.