Thursday, March 05, 2009

A Letter to a Friend

5 March 2009

I have mentioned before that this is a very busy time of year in my work schedule, so I have had little time to blog. However, I wrote a letter to a friend today that sums up my views of where and how to invest in 2009.

As I don't have much time to say more, I'll just print the letter below in its original form:

Well, I've been right about gold since 2003, when I began investing in that sector.

However, I was not expecting gold mining stocks to fall with everything else as they did last year. That was a big setback for us.

Gold has climbed from the $250 range to its present $900-1000 range during that period, and can easily go much higher.

The problem with the miners is that their production costs have been rising quite a lot, and they have to access large amounts of capital, so they are vulnerable to the credit freeze also.

That being said, gold stocks have well outperformed other sectors this year, and if gold keeps climbing, the gold stocks could do very well. For example, gold stocks outperformed during the great depression, even though gold ownership was outlawed.

The reason gold is a good investment is that governments around the world are literally printing money to bail out everything. That makes money worth less, and gold worth more. For example, at the turn of the millennium, there were about $4 trillion US dollars in circulation. That figure has now gone to $15 trillion. The US government now owes about $30 trillion, and it is more bankrupt than General Motors – only high inflation will make current government debts payable.

I follow an advisor named John Doody who identifies the gold stocks he thinks will do best. Some of the bigger names on his list are Goldcorp (their main mine is very near where we live), Royal Gold, Franco Nevada and Yamana Gold. Any of these will do well over the next several years.

An exploration company I like is called Rubicon Minerals, because it has good exploration finds in Red Lake, near our local Goldcorp Red Lake Mine, and the primary investor (Rob McEwen) has very deep pockets.

In the silver sector, Pan American Silver is the big name. Two companies with very large undeveloped silver deposits are Mines Management, which I mentioned to you earlier, and First Majestic. Silver usually lags gold in the early stages, as is occurring now, then overtakes and outperforms gold, as it is a smaller market.

For market analysis, I think the best overall newsletter is written by Pamela and Mary Ann Aden. Doody’s “Gold Stock Analyst” is the best gold mining advisory. For daily market analysis, look at Bill Fleckenstein. You can find any of these with a quick Google search. You have to pay several hundred dollars per year for these advisories. Fleckenstein is cheapest, and Doody most expensive.

As far as timing, the Adens describe four cycles in the gold price. The gold price is presently in what they consider a “modest” down cycle. This modest weakness is usually followed after a few weeks or a couple of months by gold’s strongest rise, which may run for several months. The question this year is whether gold goes to $1200 or $1300 or higher. My own bias is actually slightly higher - in the $1600 range, though I am thinking in terms of 2010 to see that kind of figure. That move will drive the gold stocks quite powerfully. After their (irrational) weakness last year, gold stocks should be this year’s best performing sector. The best time to buy would have been at the bottom in November 2008. However, the present period, including likely the next few weeks, should also be a good time to buy at lower prices.

I find timing the most difficult aspect of investing, and I don't think anybody is on top of how to do that. It’s always a guess as to when is the best time to buy or sell. However, it is possible – not certain – that gold stocks might do very well this year in particular.


  1. Care to discuss the advantages/disadvantages of investing in the bullion as opposed to the miners ? And what is the relative performance of the two ? And what factors favor one over the other ?

  2. I would not be the first to comment on this well-discussed topic.

    In the present environment, I favour the miners, in part because gold has outperformed about as much as it can. Bullion has certainly been the best choice since May 2006.

    With mining costs coming down and capital flowing surprisingly well, the miners have become banks with real assets (gold in the ground and the means to extract and refine it).

    That is how we should really understand the miners at this juncture in history. The gold miners are the new banks. The shareholders are the "depositors" so to speak!

    The explorers must still be viewed as speculative, though I believe that investor psychology will well-reward the most successful explorers over the next few years.

    It shouldn't be a particularly long wait from here, though the more drawn-out the gold bull market, the stronger it will prove in the end.

  3. Well, the wait for recognition of the value of the miners has turned out to be far longer than I anticipated. We are in the 9th year of the gold bull market, and there is still only modest interest in all but the most prominent gold miners. At some point, that will turn dramatically. Despite currently still-depressed gold mining stock prices, gold miners have in fact outperformed physical gold since October 2008. It still looks to be up from here, based on the HUI:GOLD ratio. So I'd advise - hold on to those mining stocks!