Gold Stock Bull

I was about a week too early in predicting the sell-off in precious metals, but it certainly materialized as we witnessed gold lose $100 (10%) and silver lose $3.50 (17%) in just 48 hours. It looked like a manufactured event by commercial traders (mostly big banks) to take advantage of technical investors, liquidate their short positions and go long again by buying the cheap gold that weak hands and technical traders were dumping into the market. Ted Butler wrote a good article about how this works, for anyone interested in reading more.

At the beginning of the year, I wrote an article with my 10 Predictions for 2008. So far, 8 of those 10 predictions have come true. One of the predictions was that corrections in the gold market would become increasingly violent, but also increasingly short in duration. After falling below their 50-day moving averages and looking like a huge drop was approaching, gold and silver both rebounded in the last two days and recaptured about 30% of their devastating 2-day loss. The metals rebounded in the first day to rest on their respective support lines ($935 for gold and $18 for silver) and then continued decisively upward today.

Technically speaking, any drop back below $935 and then below $900 could see the gold price freefall as low as $800. There is simply no support below $900. But as long as precious metals can hold the current support levels, it is safe to assume the correction is over. Fundamentals still point to much higher prices and I believe we will see gold hit $1,000 again before it hits $900.

The next upleg should see silver outpace gold by a significant margin and see junior producers finally join in the fun. There have been a number of recent articles exposing how the silver market is experiencing a significant shortage and customers are being asked to wait for months in order to receive their silver due to dealers running out. Silver breaking the $20 level got the attention of investors and if the supply/demand situation is truly as bad as it seems and even a small amount of investment dollars begin to flow into silver, we could see the price spike to $50 or more. Investors would be wise to take a position ahead of such developments, as silver anywhere under $20 will soon be a thing of the past.

Silver mining companies bring additional leverage to the equation and could go ballistic if silver breaks out as anticipated. There are obvious choices such as Coeur d’Alene Mines Corp. (CDE), Silver Wheaton (SLW), Pan American Silver (PAAS) or Silver Standard Resources Inc. (SSRI). But I believe the best returns will be offered from smaller producers or miners that are just beginning to bring their properties online and just starting to get attention from silver investors. I will be highlighting a few of these companies in the April 1st edition of the newsletter (Road Less Traveled) and have recently added a new silver company to the Gold Stock Bull Portfolio.

The general markets ended their two-day rally today, with the S&P down (0.8%) and the Nasdaq off (0.7%). The financial and real estate sectors also ended their mini-rally and crashed hard today helping our market shorts gain 6.8% and 5.3%, respectively. We might see more gains in the broader market, but I don’t anticipate it to last more than a week or two and will be maintaining these short positions in the GSB portfolio in expectation of further downside.

Alternative energy stocks and solar stocks in particular have come to life in the past few days after 3 months of getting pounded. Some stocks have gained as much as 25% in a few days, after having lost 50% or more of their market cap since the start of the year. This sector is not for the faint of heart, but it is hard to deny the role that solar, wind and geothermal energy will have in our future. While the stocks became clearly overheated and overvalued towards the end of 2007, today’s levels are much more reasonable. I have increased my exposure to solar stocks in the past week, but have set tight stops and will keep a close eye on the effect the overall market downturn has on alternative energy shares.

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Most investors have some sort of trading strategy, whether it be complicated transactions involving swaps and straddles, computerized technical set ups or simply following the whatever Jim Cramer has to say in a particular day. Speaking of the madman, did everyone catch his latest advice to “stay with Bear Stearns” right before the stock collapsed and investors lost hundreds of millions of dollars. He then back-pedaled and said that he meant to keep your money in Bear Stearns bank, not their common stock. Well, whatever his intent, his horrendous advice and then attempted cover-up is causing quite a firestorm in the investment community.

I am going to go out on a limb and suggest that you would be much better off to pay attention to the views of Jim Rogers than those of Jim Cramer. In his latest interview on CNBC, Jim Rogers asks some potent questions that are rarely brought up on the mainstream media and expose just how ridiculous and dangerous the Federal Reserve is acting.

Why is it the end of the end of the world if an investment bank goes bankrupt? If XYZ bank needs to go bankrupt, let them.

Where is it the Federal Reserve’s mandate to bail out investment banks? This is not capitalism but socialism for the rich.

Why should 300 million Americans suffer so that we can bail out 2 or 3 investment banks on Wall Street? So that they can all ride around in Maseratis? Why do we need to bail these guys out?

What is so wrong with a recession? They are necessary to clean out market excesses and besides, it costs more to try to prevent it than to let is occur.

He further suggests that the commodities bull will continue due to fundamental supply and demand issues. The debasing of the dollar is just icing on the cake. But my favorite part of the video is when he is asked what would be the first two things he would do if he were in Ben Bernanke’s seat tomorrow morning…

“I would abolish the Federal Reserve and I would resign.” Amen.

Now back to investment strategies and specific ways to protect your portfolio and profit during the current crisis. It comes down to the simple advice in the title of this article and has proven extremely profitable with every move that the market has made. Buy gold on dips and sell stocks on rallies. More specifically, but an equal allocation of gold, silver, energy and agriculture on any dips and go short the general market, real estate and financial sectors every time they rally on the back of another rate cut or bailout plan.

For example, you would have done very well to short financials yesterday during their huge rally, as they turned right around today and gave up the bulk of those gains. Buying commodities on dips can be a bit more challenging, as you never really know how far the dip will go. I respond by averaging in my new positions and continuing to buy in greater increments as the dip continues. Gold will certainly have periods of corrections, but I am convinced we are on a trajectory to $2,000, so am not too concerned about “catching a falling knife.” You can keep things simple by using just a handful of ETFs that cover each sector.

I only employ this trading strategy with a portion of my portfolio and leave the remainder invested in the long term bull market in gold, silver and energy. We are entering very interesting times. Having the correct information and the foresight to use that information to protect your investments will help you weather the coming storm. And for all those thinking we have hit a bottom, please notice my use of “coming storm.” We have only seen the sky turn gray at this juncture, as the eye of the storm is still on the horizon and approaching rapidly. Subscribers are given access to view my portfolio and receive frequent updates whenever I am adding to or reducing positions throughout the month. Subscribe now or read more about becoming a subscriber.

It was a glorious thing to behold gold breaking into 4-digit territory. But this glory was tempered by the unsettling feeling of watching the stock market tank and the dollar continue to spiral into the abyss of worthlessness. Gold investors will weather the storm, but it will be painful to watch the middle-class get squeezed, while the poor and elderly suffer as they rapidly lose purchasing power. I have been warning people around me to get out of their company-sponsored 401k “growth funds” or IRAs and have been receiving a range of reactions from indifference to genuine concern.

Commodities are the obvious inflation hedge and have historically appreciated during economic downturns. But we have never seen the world’s reserve currency quite this sick or stagflation quite this threatening. In fact, stagflation wasn’t even believed to be possible by most economists prior to the 1970s. One of the many flaws in the Keynesian school of macroeconomics was to assume that inflation and stagnation would not occur together. Printing more money was the easy cure to a slowing economy and contracting the money supply would take care of inflation. But what happens when dumping boatloads of dollars into the economy does not stimulate growth? Stagflation is the name of the dilemma which exists wherein the central bank has rendered itself powerless to fix either inflation or stagnation. We need only look back to the 1970s to get an idea. The global stagflation of the 1970s was largely started by a huge rise in oil prices, but then continued as central banks used excessively stimulative monetary policy to try to avoid the resulting recession (stagnation), causing a runaway wage-price spiral. Sound familiar?

So with stagflation on the horizon, the logical question for investors is…

“How do I shield my assets and profit during the coming collapse of the dollar and the stock market?”

The short answer is to invest in commodities and short the stock market or particular sectors that are the most overvalued. But it is important to consider that any gains you might realize in U.S. stocks will be diluted by the force of inflation. After all, if your portfolio of U.S. stocks goes up by 12% in a year and the dollar loses 15% of its value in that same year, you just realized a 3% loss. The reality is far grimmer, as most investors have lost between 10-20% of their portfolio value over the last year. Add in the 15% inflation and many Americans have lost over 30% of their 401k, IRA or investment portfolio in the past year and are probably oblivious to the fact.

You can avoid the inflation issue by holding physical gold and there are certainly many hardcore goldbugs who advocate holding only physical metal. After all, paper is paper and if the system comes crumbling down, you want to hold something tangible. While I share this concern, my position is a bit more moderate. I prefer to take advantage of the leverage offered by precious metals stocks and periodically convert a percentage of my profits into the physical metal. The approach captures the best of both worlds by maximizing returns and then using those returns to secure actual gold and silver, albeit at slightly higher prices.

The key is to overcome the inflation rate and find quality miners that are undervalued by the market. It takes a bit of grunt work, researching websites, digging through financial statements, evaluating feasibility reports and running comparative valuations. But the reward is well worth the effort and pays for itself many times over.

I recently came across a Nevada-based company that I think is one of the most undervalued and potentially explosive gold mining stocks available. The company is pathetically under-promoted, to the point that most gold investors, myself included until last week, have never heard of them. Their name has no reference to gold or mining and I am hard-pressed to find any investment sites mentioning them. But they have recently hired a well-known investor relations firm and have a very compelling story to tell.

The company acquired their properties just before the gold bull started kicking back in early 2002, when prices were still hovering around $300. They have since put together a solid management and operations team and recently completed feasibility studies on their two main properties. The results are extremely impressive for a company valued at just $10 million dollars and more in line with companies whose valuations are in the $100 - $200 million range.

They are currently securing financing and aiming at production before the end of 2008. I have spent a considerable amount of time performing due diligence and trying to punch holes in their story, but have failed to come up with an explanation for why they are so undervalued. It appears to simply fly under the radar of most investors, largely due to their lack of marketing skills. With the following feasibility results and the hiring of one of the top investment relations firms, I believe the market will take notice and this stock will soon be worth 10 to 20 times the current value. I know that sounds sensationalist, but let’s take a look at the actual numbers.

Between their two properties, the company has 3.5 million ounces of gold and 8.8 million ounces of silver (measured and indicated). The feasibility study estimates annual production of 100,000 ounces of gold at a cost of $260 per ounce, plus 126,000 ounces of silver. Assuming gold holds around $1,000 and silver around $20, this company will have revenues during the first year of production that are more than 10 times their entire market cap. This is all contingent on them being able to secure the necessary financing to put the projects into production, but with returns of this magnitude, I am sure they will have suitors. Speaking of suitors, they look like a really cheap takeover target for one of the major producers which already have mines on both sides of their properties.

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Peace & Prosperity