Yesterday, we discussed the workings of the carry trade and how it is both a cause and effect of market volatility. We also gave a very brief view of the supply and demand situation for gold. So what does this all mean going forward?

Beyond the notion that the price of gold is rising in all global currencies, I would like to focus on one other simple notion. As previously mentioned, the carry trade is both a cause, and is a result of market volatility in the past and will continue to be so going forward.

As the mess in the equities market continues to rear its ugly head, and the ugliest is yet to come, investors will turn to gold (not bonds) as a flight to safety. This is because eventually, the general public will realize that with a M3 money supply growing at over 10% per annum, T-bills have a negative return of approximately 5%.

What will this public revelation look like? My mentor, a man by the name of Ron Polomny, was born a gold bug with an uncanny ability to foresee future economic happenings. Ron believes that the bear market in equities signifies only the beginning of the gold bull.

He feels that the ultimate peak of the gold bull market will be a panic as a result of the complete loss of confidence in the U.S. dollar in climactic fashion. It is his belief, that in a time frame of around one week, the public masses will rush out of the U.S. dollar and into tangible assets.

The problem is that these goods are not unlimited in supply like a fiat currency. Ron expects that there will not be enough gold in circulation to meet both public and commercial demand. You can imagine what will happen to the spot price of gold at this point.

Here’s a chart from Adam Hamilton at www.zealllc.com that shows that how we can expect gold to perform amidst an equities bear market:

So if you’re like me and you expect the unwinding of the carry trade, among credit and subprime concerns, to be the equivalent of throwing gas on an already burning equities market, then gold and gold stocks are the way to go…

One small-cap company with tremendous potential to profit in the coming gold bull is U.S. Gold (AMEX: UXG).

U.S. Gold is located in Nevada with its property sandwiched between Barrick Gold and Newmont Mining, which happen to be the number one and number two gold mining companies, respectively, in the world. They have produced a combined $44.5 billion dollars of gold in this region.

UXG has recently acquired three other juniors in this region increasing their land holdings to 170 square miles.

Their current CEO and the former CEO of Goldcorp, Rob McEwen, is a man who is greatly respected in the mining world. He raised Goldcorp from a junior to one of the most profitable gold mining companies in the world.

Because of a keynote presentation he gave at a Colorado gold conference, McEwen was banned from further conferences. During his speech, he bluntly called out other CEOs and managements for not taking significant stakes in the companies they operate. I can’t think of a more positive sign in a company’s CEO.

U.S. Gold, under the leadership of Robert McEwen, has potential to become a major gold producer. It’s certainly something to watch…

Sincerely,
Nick Jones
August 14, 2007

P.S.: My fellow Agora Financial editor, Chris Mayer, would consider this a “special situation.” That’s what he calls any company that can leverage itself from a hidden asset, an industry breakout, or something else…in this case, the rising price of gold. The reason I bring this up is because his premier newsletter, Mayer’s Special Situations, is about to double in price.

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