Financial Sense Junior Gold Mining Index Review by Frank Barbera 02/20/2008

General Comments

Volatility remained the watch-word of the day for Financial markets, as prices remained disparate across a wide front. For the stock markets, the week produced a return to some stability, with the S&P 500 gaining 1.35% to close at 1349.99, recovering from the previous weeks shellacking which saw the S&P slump from 4.58%, one of its worst weekly losses in several years. At the same time, metals markets had a widely varied tone, with physical gold edging lower to close at $902.10, down 20.70/oz or 2.24% from the prior weeks spot close of $922.80. The downward move was echoed by spot Silver, which eased by .70% or $.13/oz. to close at $17.03 in the process ending a three week winning streak. Over the last 7 weeks, Silver prices have closed higher 6 of the last 7 weeks and gained nearly 21.4%, from a low near $14.00. Silver has asserted itself with solid relative strength over this time, with the Gold to Silver ratio narrowing from the 57.27 value on 12/18/07 to a close this week near $52.97, back below the 200 day moving average. Of course, none of this weakness affected the red hot Platinum market which continue to soar into the stratosphere this week with a gain of $191/oz to close at $2078.00 on the spot price, -- the first weekly close above $2,000 in history for Platinum. On the week, the metal gained 10.12% as reports that South Africa’s reduced electricity output could lower mine production by nearly 20%, with Platinum ending 2008 with a deficit near 500,000 ounces. South Africa produces nearly 80% of the world’s Platinum supply, with emission control devices in diesel engines using a very large portion of platinum in their processes. Quoting Mineweb.com from earlier this week,

“Most of South Africa's mined platinum comes from relatively deep underground mines, and as has been pointed out here in relation to the effects on South African gold mines, a cutback to 90 percent of power supplied does not tend to mean a corresponding 10 percent cut in metal output, but rather more than this,-- as the first 50 percent, or thereabouts, of power supplied to a deep underground mining operation is just being used to keep basic services going like hoisting, ventilation, pumping etc. The 10 percent power cut has to come from the remaining 50 percent of power being utilized by the mine which means the initial effect of a 10 percent power supply reduction suggests a loss of around 20 percent in metal production.”

As a result, most analysts continue to expect Platinum prices to remain at lofty levels for some time, with the metal now up 33.54% in just the last four weeks. Through this Friday’s close, platinum was up 9 weeks in a row, with this past week producing the single largest percentage gain.

Elsewhere on the stock side of things, the XAU and other large cap mining indices lost ground on the week with both the XAU and the HUI closing lower for the 3rd week in a row. On the week, the XAU ended down by 3.94 index points or 2.17% to finish at 177.32, down from last weeks close of 181.26. This weeks loss of 2.17% comes on the heals of a 1.81% loss the prior week, and a decline of 1% the week before that. For the HUI, the week also generated a loss of 1.8%. Over the last three weeks, the XAU is now down a total of 4.43%, while the HUI is down by 5.74%. With large cap indices ending lower, it was no big shock that the small cap indices also moved lower, but to there credit, the small caps showed reasonable relative strength by declining less then would have been expected. On the week, the FSO Mining Index of 40 small cap stocks, ended with a close of 255.06, down from 256.41, for a loss of 1.35 index points. On Friday, the index closed below its 50 day average at 267.46, and below the 200 day average at 283.75. As can be seen in the chart below, the trend in small cap miners has been largely ‘giant sideways’ over the last 10 months, going back to the highs on the FSO Index last March in the 330 zone. YTD for 2008 the FSO Index is down a very modest 6.36% while the XAU is up .5%, with physical bullion up 11.75%, -- leading us to point out we have quite the divergence among the various asset classes.