By Kenneth J.Gerbino
Jun 21 2007 2:45PM
www.kengerbino.com
Precious metal stocks are undervalued based on current metal prices. This is not rocket science.
One takes the 2008 or 2009 production estimates which are usually reasonably accurate and then calculate costs and taxes and one comes up with a cash flow per share number.
If the price of a gold mining stock is selling at 10-12x expected cash flow then historically that mining company is probably undervalued (unless there are other unusual factors), as 20-30 times cash flow would be more in tune with a good metals market. This is where we are today. The shares may be saying that gold in the short term is going lower and cash flows will also be heading lower, hence the lower expected value.
If this is true, it will only be temporary.
My gut feeling, after 34 years in the gold share markets, is that the vast majority of investors and institutions who believe in inflation and all those who believe in an economic and monetary collapse have already invested in gold and silver. That’s it. All the believers are already “in the pool”. Until new investors show up, expect a sideways market possibly between $575 and $700 gold. Trading ranges are very common on Wall Street in any sector until events occur that change more investor’s minds. As readers of this piece most likely realize, there are plenty of reasons coming in the future that will bring on a huge new wave of investors and hoarders of gold and silver. Later I discuss a few new trends.
Let’s look at the precious metal prices.
Gold, silver, and base metals, are benefiting from world economic demand factors. This demand is buoyed by relatively low interest rates in the industrialized nations and progress in the developing nations. This may continue for another year but eventually an economic slowdown will likely be in the cards as inflation pushes interest rates higher. When inflation returns from the excess money created by most nations over the last 15 years, interest rates will have to rise.
Inflation will then drive the precious metals higher on a global scale regardless of higher interest rates.
Inflation and Interest Rates
In the U.S., the Fed will resist this interest rate rise to assist the real estate market and the banking establishment from suffering from the excess of debt that has been issued on home equity loans and sub par mortgages. At some point the market will take over and interest rates will follow inflation and they will naturally rise together. A recession should ensue. This follows past cycles. With inflation, the precious metals will become an inflation hedge and should outperform most other asset classes. Currently the metals have appreciated because of economic growth and jewelry demand. As inflation returns, investment demand will take over and move gold even higher. This will be a global phenomenon. Month after month, year after year of inflation will surely move the metals to much higher levels.
A slowdown in the U.S. economy will have less of a global impact than in the past since the U.S. is now only 22% of the global economy.
In the event of a worldwide economic contraction, nations can collectively bail themselves out with money and debt creation regardless of U.S. monetary policy. This would mean continuing strong precious metal demand and be bullish for gold as many world governments will lean toward printing money to solve economic problems.
Gold and Silver Prices
India (the largest precious metal consuming country) is now experiencing strong food price increases. The powerful Congress Party just lost heavily in two state elections because of inflation. This is an indicator to us that gold and silver buying in this country will continue for quite some time because inflation is not a short term economic phenomenon. Once it starts it lasts for years.
The U.S. Department of Agriculture is projecting the lowest inventory carryover of corn and soybeans in history, despite extremely good planting weather for the last 10 years.
Grain prices are going to rise because of these low inventories and the diversion of corn to energy use in ethanol. Cereal and meat and poultry prices are going up because grains are the main cost to fatten them up. Later in this report I discuss another agricultural factor that is also inflationary.
The gold price in the past was always influenced by the number of commodity contracts traded on the various commodity exchanges in the U.S. Large liquidations in these commodity contract positions by commercial players and commodity trading funds in the past always saw gold decline.
For the past year, there has been a counter force to this activity. Recently gold has gone up in the face of very large liquidations. This is telling us that there is massive physical buying of the metal beyond the usual players. Current gold demand is firm while global economic activity continues at a healthy pace. We believe this strong demand will likely increase as the debt and monetary excesses from the past decade start to manifest themselves.
Commodity Prices
The graph is telling an important story. This Commodity Research Bureau (CRB) graph shows what took place in the U.S. economy that at the time was almost 40% of the world’s GDP from 1962 to 1972. Commodity prices were in a historically low sideways range. Subsequently, the huge paper money increases from the 60’s and early 70’s finally took hold and prices of hundreds of basic goods exploded from 1972 -1982. This was also a good time to be in the precious metal stocks as gold increased from $100 to over $800 (in 1980).
The CRB today is now threatening to repeat a similar upward phenomenon in the next 5 -10 years for basic commodity goods.
The paper money increases of the 80’s and 90’s will most likely begin to effect the general price level just as past paper money increases in the 60’s affected prices in the 70’s. The new 800 pound gorilla in this economic equation is China and India.
The demand for resources from these two developing giants is going to be the major mega trend of the next 25 years that will affect all commodity resources.
Precious and base metal mining companies will certainly benefit from this trend.
The graph below shows that adjusted for inflation, the strong commodity bull market that started in 2001 has barely begun to catch up in real terms to the general price level of everyday goods and services in the 1960’s.
This graph implies that a doubling of commodity prices from 2006 levels would only take the index in real terms to the price levels of the 1960’s. Therefore commodity prices should continue to trend much higher over the next decade. This graph makes a strong case for investing in companies that own or produce natural resources especially precious and base metals.
With global liquidity increases at excessive levels the last ten years and below average capital investment by commodity producers from 1983 to 2003, all markets (Bonds, Stocks, and Commodities) in most countries will be affected by this coming mega-trend.
Bonds and most stocks will react negatively and commodities will stay in above average price ranges and trend higher.
New Inflation Trends
I’ve listed the “usual suspects” investors fear many times as critical reasons to invest in the precious metals; printing excess money, debt burdens at high levels, budget deficits, trade deficits and geo political unrest. The “usual suspects” are generally caused by politicians.
On the horizon are various new mega trends that are caused by Mother Nature and normal people. These new trends will also affect the price of gold and silver in the future. Since jewelry demand alone takes more gold off the market each year than mines produce, the “usual suspects” combined with the new reasons below should benefit the precious metals and our portfolio companies in the coming years.
The first new trend is the inexplicable near decimation of the world’s bee population over the last 24 months.
Don Coxe from the Bank of Montreal reports that 33% of the US diet comes from products that depend on bees for the crucial pollination of the producing plants. In the U.S. between 30-90% of the bee populations in various states have disappeared. This means food costs could go up dramatically in the U.S. as many crops (including fruits and alfalfa) that depend on bee pollination could face significant shortfalls.
Alfalfa is a crucial feed for cattle and dairy cows and hence the price of meat, poultry and dairy products should be affected.
The second new trend is Peak Oil,
defined as the peak in global oil output combined with increasing demand and therefore a supply shortage. It looks like this Peak is here right now or very close. Most oil fields hit peak production for only the first 3-5 years and then decline by 5-20% annually until the field becomes uneconomic. Over 75% of the oil fields that supply 80% of the world’s oil are all in unstoppable production declines. For every four barrels of oil we consume we only find one barrel to replace it. Consequently, energy prices are going to stay high or go even higher in years to come.
Food and energy are a big part of the inflation picture, therefore accelerating inflation is coming to the U.S. as the trends mentioned above are now joining the “usual suspects”.
Economist John Williams reports that of the top 20 largest central banks in the world, 18 of them are printing money at double digit rates. This alone is a good reason to expect more global inflation in the future.
Foreign central banks own trillions of dollars of U.S. Bonds.
In the coming years when they decide to sell just a portion of what they own, it will force the Fed to purchase this debt. The Fed can only accomplish this by creating new money and it will coincide, most likely, when the forces of inflation are already on the move.
The combination of these two events will propel gold, silver and other metal prices much higher. Even though we expect a much higher gold price, a gold price of just $500 (substantially below current levels) will still have positive implications for many of our portfolio companies.
Paper Money and the Developing Nations
Paper money increases always lead to inflation, inflation always leads to rising interest rates, rising interest rates always leads to a weak bond market and weak bond markets always lead to weak stock markets.
This is a simple road map based on the realty of the last 120 years. It means 20% in precious metal stocks as then other defensive investments (short term bonds, Swiss francs, 1-2 year duration US Treasuries) is a conservative posture recommended at this time.
Hangzhou, Changchun, and Chengdu are not well known cities, yet each have over 5.5 million people and are among the 50 largest cities in the world, 12 of which are located in China. These cities are facing an urban population expansion as China industrializes which has created huge demands for raw materials, especially metals.
The Chinese, Indian, and Russian populations will require more raw materials than the world has ever experienced. These governments are also mismanaging their economies with inflationary policies well beyond the danger point which should cause precious and base metal prices to persist at much higher price ranges than past economic cycles.
Our portfolio is strategically positioned to take advantage of new mines coming on stream in the next 1-2 years to supply these needed minerals as well as take advantage of an expected robust gold and silver market that will move the mid tier and larger mining companies to higher levels.
Summary
All global markets including the metals/mining stocks are experiencing unusual volatility.
This may continue for awhile longer. The mining stocks are currently oversold and undervalued versus the current price of gold and should have a strong 3rd and 4th quarter.
There are just too many factors that are on the horizon for precious metals not to respond to higher levels.
The mining sector lead by the gold and silver mining companies should be the premier investment sector for the next decade. Patient investors should be rewarded with above average returns while enjoying above average portfolio and monetary insurance as politicians globally ignore centuries old basic economic laws that clearly prove that printing money and creating high debt levels to solve short term political problems always ends up creating more economic problems.
Gold is the people’s choice for safety and lasting value.
I will speaking at what I think will be one of the great investment –political -economic conferences you could ever hope for.
My long time friend and world renowned economist Dr. Mark Skousen has assembled a great mix of notables to speak: Congressman Ron Paul, Doug Casey, Arthur Laffer, George Gilder, Frank Holmes and dozens of others. It will be July 5-7th at Bally’s Paris Resort in Las Vegas. You can register by toll free number: 866 266 5101 or go to the website www.freedomfest.com
For other articles on gold, precious metals and the stock market please visit our website commentary section. www.kengerbino.com
Ken Gerbino
21 June 2007
****
Kenneth J. Gerbino & Company 9595 Wilshire Boulevard, Suite 303 Beverly Hills, CA 90212 Telephone: (310) 550-6304 Facsimile: (310) 550-0814 E-mail: kjgco@att.
Friday, June 22, 2007
Your Cash is Trash, and So Are Most of Your Investments
June 14, 2007
www.KitcoCasey.com Email Article
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Your Cash is Trash, and So Are Most of Your InvestmentsBy Doug Casey, Editor, International Speculator
Almost everyone, probably including yourself, gets held back by inertia at one time or another. It can happen with anything, including investments.
Inertia weighs on an investor, trapping him in a state of paralysis and freezing his portfolio, almost forcing him to hold on to whatever he already owns – for no better reason than that he already owns it. He hopes that every one of his old shoes will go up, even if the reason for the purchase is long forgotten or the environment in which the investment might have prospered has vanished. People who substitute hope for cold-blooded analysis almost inevitably wind up losing money.
So, for the sake of argument, let’s look at where you might best put your money for the rest of the year 2007. To keep things simple, let’s assume you start by liquidating all the cats and dogs populating your portfolio, so that you have just a pile of cash. No, let’s not phrase it that way… because then you’re going to start wondering which of the securities you own really are cats and dogs. You might get bogged down. And then inertia will creep back in, and you’ll throw your hands up and do nothing. So let’s assume you sell everything, in true going-out-of-business style.
Now, what’s the smartest place to put that money?
Let’s look at the alternatives.
Bonds?
A disastrous sucker bet. Bonds, at the moment, are a triple threat to your capital. First, you have a huge risk with interest rates, which are still near historic lows; as they go up, the market value of your bonds drops proportionately. Second, no matter which of the fiat currencies you choose, you have a big currency risk; while the US dollar is on the fast train to zero, virtually every other currency in the world is being inflated along with it and is heading toward eventual oblivion. Third, you have credit risk; General Motors isn’t the only large company whose bonds may go into default.
Stocks?
The general market is yielding less than 2% in dividends, less than 1/3 of what you typically see at major market bottoms. And selling for more than 18 times earnings—more than 25% higher than its norm. Worse, for those who might be buyers, the bull market of the century started in 1982 and, in inflation-adjusted terms, ended in 2000. You might not want to hear it, but stocks are almost certainly early into a bear market that could last another 5 or 10 years. By all traditional measures, chances are much better that stocks will drop 50% from here than gain 50%.
Cash?
You could always just stay in T-bills. But they currently yield only 5%, before taxes. And inflation (notwithstanding the highly imaginary official figures) is probably running around 6% and likely to head higher.
Real Estate?
At the present, at least in the U.S., this is probably the worst choice of all. The speculative boom crested last year, and the market, burdened by an immense amount of debt and overleveraged speculation, is likely to head down for years to come. Of course, there are places in the world, two of our favorites being Argentina and Uruguay, where there isn’t much of a mortgage market, so the properties aren’t overleveraged and values are still available. But unless you are looking to pick up cheap land in undeveloped, exotic countries that have avoided the credit-driven bubble, real estate should be last on your list of investments.
Mutual funds?
Any mutual fund you’re likely to pick is just a way of buying one of the investments we’ve already dismissed. And paying all those fees and expenses that come with a mutual fund just makes the bet that much worse.
So What Should You Do?
Since 2001, we’ve been in a natural resources bull market. If you were one of the few who positioned yourself in gold, silver or pretty much any of the metals or energy commodities – either directly or through the shares in smaller resource companies, which is the preferred vehicle we have been recommending to subscribers of our International Speculator -- you’ve already made the easy money.
At least to us, before the bull market kicked off, the opportunity in the sector seemed obvious, with many resource companies selling for less than the cash they had in the bank. Few people even knew the sector existed, and most of them thought it was a dead duck after the 20-year-long bear market it had suffered since 1980.
The easy-money stage of the resource bull ended in 2003, at which time we entered the second stage, where the market climbs a “wall of worry.”
In even the most formidable of bull markets, this phase comes with inevitable corrections and scary downdrafts. Per its moniker, with each short-term setback in price, investors who were shrewd enough to get positioned early on into the long bull market fret that they might be wrong. Some are shaken out, but the smart ones buy even more on the dips.
But now, in my opinion, we are about to enter the third, and most important, stage of the classic bull market: the mania stage. This will resemble the tail-end of the Internet stock bull market. It’s hard to predict exactly what catalyst will set it off, but it will very likely be rising expectations for inflation. Fear will drive the foreigners who hold about $6 trillion to sell the greenback, and they’ll be joined by savvy Americans.
Some will buy other paper currencies, like the euro or the yen. But those units are just backed by U.S. dollars themselves, so they really aren’t much in the way of an escape pod. Inevitably, much of the money now sloshing through the world will try to get into gold. While no one can say with certainty, I expect the metal to hit $1,000 within the next 12 months and go much, much higher by the end of the decade.
Is this an unreasonable prediction? No.
Most casual investors mistakenly look at gold and think it’s been a leader in this bull market when, in actual fact, it’s a laggard compared to the industrial metals that have been bidden up to extraordinary highs by soaring demand from China, India and other emerging markets.
To give you just a few examples, in the last five years, copper has been up 330%, nickel 560%, uranium 1,150%, zinc up 460%, molybdenum up 450%, and even lowly lead, the most basic of base metals, is up 425%. By comparison, gold is up only 100%.
That will change, however, because although gold has many and growing industrial uses, it’s main use is as money. It will dawn on the herd that the world is drowning in a flood of increasingly worthless paper currency, and they’re going to stampede toward the high ground of gold.
The metal isn’t just going through the roof. It’s going to the moon.
Gold Good, Gold Shares Better
When gold really starts to move, the mining exploration stocks are going to howl. That’s because gold exploration stocks are not just highly leveraged plays on the price of gold. They are capable of providing you with triple-digit gains based on exploration success alone.
Case in point, the last mining share boom from 1993-96, which occurred at the tail-end of gold’s 20-year bear market and carried hundreds of stocks with it, was driven entirely by a handful of discoveries.
Since gold prices turned up, starting in 2001, a lot of money has been spent on exploration, and that work will inevitably lead to major discoveries and market excitement.
Several of the companies we follow in our International Speculator are already drilling into what look to be monster deposits. Confirmation of a major discovery could well ignite a mania in the market.
While most other investments, such as bonds, industrial stocks, real estate and broad mutual funds are likely to be serious losers over the coming years, the bull market in gold and gold exploration stocks has still barely entered the public’s consciousness.
Although the easy money has been made, the big money is waiting to be picked up.
Nothing in the investing world is ever a sure thing, but today the exploration stocks look to be as close as it gets. As for the inevitable corrections during this “wall of worry” phase, remember that the time to be timid is when everyone else is bold, and the time to be bold is when everyone else is timid. Sell-offs in the gold and gold mining sector are, to our way of thinking, gift-wrapped opportunities to buy.
Doug Casey is chairman of Casey Research, LLC., one of the nation’s oldest and most respected organizations dedicated to providing independent investors with unbiased research on opportunities to earn extraordinary profits by being just ahead of the crowd. BIG GOLD, new from Casey Research, provides subscribers with actionable research on the unfolding gold bull market and on profiting from the world’s best gold producers, near-producers, gold mutual funds, ETFs and more. You can try it without risk. To find out how, click here.
www.KitcoCasey.com Email Article
Printer Friendly
Your Cash is Trash, and So Are Most of Your InvestmentsBy Doug Casey, Editor, International Speculator
Almost everyone, probably including yourself, gets held back by inertia at one time or another. It can happen with anything, including investments.
Inertia weighs on an investor, trapping him in a state of paralysis and freezing his portfolio, almost forcing him to hold on to whatever he already owns – for no better reason than that he already owns it. He hopes that every one of his old shoes will go up, even if the reason for the purchase is long forgotten or the environment in which the investment might have prospered has vanished. People who substitute hope for cold-blooded analysis almost inevitably wind up losing money.
So, for the sake of argument, let’s look at where you might best put your money for the rest of the year 2007. To keep things simple, let’s assume you start by liquidating all the cats and dogs populating your portfolio, so that you have just a pile of cash. No, let’s not phrase it that way… because then you’re going to start wondering which of the securities you own really are cats and dogs. You might get bogged down. And then inertia will creep back in, and you’ll throw your hands up and do nothing. So let’s assume you sell everything, in true going-out-of-business style.
Now, what’s the smartest place to put that money?
Let’s look at the alternatives.
Bonds?
A disastrous sucker bet. Bonds, at the moment, are a triple threat to your capital. First, you have a huge risk with interest rates, which are still near historic lows; as they go up, the market value of your bonds drops proportionately. Second, no matter which of the fiat currencies you choose, you have a big currency risk; while the US dollar is on the fast train to zero, virtually every other currency in the world is being inflated along with it and is heading toward eventual oblivion. Third, you have credit risk; General Motors isn’t the only large company whose bonds may go into default.
Stocks?
The general market is yielding less than 2% in dividends, less than 1/3 of what you typically see at major market bottoms. And selling for more than 18 times earnings—more than 25% higher than its norm. Worse, for those who might be buyers, the bull market of the century started in 1982 and, in inflation-adjusted terms, ended in 2000. You might not want to hear it, but stocks are almost certainly early into a bear market that could last another 5 or 10 years. By all traditional measures, chances are much better that stocks will drop 50% from here than gain 50%.
Cash?
You could always just stay in T-bills. But they currently yield only 5%, before taxes. And inflation (notwithstanding the highly imaginary official figures) is probably running around 6% and likely to head higher.
Real Estate?
At the present, at least in the U.S., this is probably the worst choice of all. The speculative boom crested last year, and the market, burdened by an immense amount of debt and overleveraged speculation, is likely to head down for years to come. Of course, there are places in the world, two of our favorites being Argentina and Uruguay, where there isn’t much of a mortgage market, so the properties aren’t overleveraged and values are still available. But unless you are looking to pick up cheap land in undeveloped, exotic countries that have avoided the credit-driven bubble, real estate should be last on your list of investments.
Mutual funds?
Any mutual fund you’re likely to pick is just a way of buying one of the investments we’ve already dismissed. And paying all those fees and expenses that come with a mutual fund just makes the bet that much worse.
So What Should You Do?
Since 2001, we’ve been in a natural resources bull market. If you were one of the few who positioned yourself in gold, silver or pretty much any of the metals or energy commodities – either directly or through the shares in smaller resource companies, which is the preferred vehicle we have been recommending to subscribers of our International Speculator -- you’ve already made the easy money.
At least to us, before the bull market kicked off, the opportunity in the sector seemed obvious, with many resource companies selling for less than the cash they had in the bank. Few people even knew the sector existed, and most of them thought it was a dead duck after the 20-year-long bear market it had suffered since 1980.
The easy-money stage of the resource bull ended in 2003, at which time we entered the second stage, where the market climbs a “wall of worry.”
In even the most formidable of bull markets, this phase comes with inevitable corrections and scary downdrafts. Per its moniker, with each short-term setback in price, investors who were shrewd enough to get positioned early on into the long bull market fret that they might be wrong. Some are shaken out, but the smart ones buy even more on the dips.
But now, in my opinion, we are about to enter the third, and most important, stage of the classic bull market: the mania stage. This will resemble the tail-end of the Internet stock bull market. It’s hard to predict exactly what catalyst will set it off, but it will very likely be rising expectations for inflation. Fear will drive the foreigners who hold about $6 trillion to sell the greenback, and they’ll be joined by savvy Americans.
Some will buy other paper currencies, like the euro or the yen. But those units are just backed by U.S. dollars themselves, so they really aren’t much in the way of an escape pod. Inevitably, much of the money now sloshing through the world will try to get into gold. While no one can say with certainty, I expect the metal to hit $1,000 within the next 12 months and go much, much higher by the end of the decade.
Is this an unreasonable prediction? No.
Most casual investors mistakenly look at gold and think it’s been a leader in this bull market when, in actual fact, it’s a laggard compared to the industrial metals that have been bidden up to extraordinary highs by soaring demand from China, India and other emerging markets.
To give you just a few examples, in the last five years, copper has been up 330%, nickel 560%, uranium 1,150%, zinc up 460%, molybdenum up 450%, and even lowly lead, the most basic of base metals, is up 425%. By comparison, gold is up only 100%.
That will change, however, because although gold has many and growing industrial uses, it’s main use is as money. It will dawn on the herd that the world is drowning in a flood of increasingly worthless paper currency, and they’re going to stampede toward the high ground of gold.
The metal isn’t just going through the roof. It’s going to the moon.
Gold Good, Gold Shares Better
When gold really starts to move, the mining exploration stocks are going to howl. That’s because gold exploration stocks are not just highly leveraged plays on the price of gold. They are capable of providing you with triple-digit gains based on exploration success alone.
Case in point, the last mining share boom from 1993-96, which occurred at the tail-end of gold’s 20-year bear market and carried hundreds of stocks with it, was driven entirely by a handful of discoveries.
Since gold prices turned up, starting in 2001, a lot of money has been spent on exploration, and that work will inevitably lead to major discoveries and market excitement.
Several of the companies we follow in our International Speculator are already drilling into what look to be monster deposits. Confirmation of a major discovery could well ignite a mania in the market.
While most other investments, such as bonds, industrial stocks, real estate and broad mutual funds are likely to be serious losers over the coming years, the bull market in gold and gold exploration stocks has still barely entered the public’s consciousness.
Although the easy money has been made, the big money is waiting to be picked up.
Nothing in the investing world is ever a sure thing, but today the exploration stocks look to be as close as it gets. As for the inevitable corrections during this “wall of worry” phase, remember that the time to be timid is when everyone else is bold, and the time to be bold is when everyone else is timid. Sell-offs in the gold and gold mining sector are, to our way of thinking, gift-wrapped opportunities to buy.
Doug Casey is chairman of Casey Research, LLC., one of the nation’s oldest and most respected organizations dedicated to providing independent investors with unbiased research on opportunities to earn extraordinary profits by being just ahead of the crowd. BIG GOLD, new from Casey Research, provides subscribers with actionable research on the unfolding gold bull market and on profiting from the world’s best gold producers, near-producers, gold mutual funds, ETFs and more. You can try it without risk. To find out how, click here.
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