Sunday, January 10, 2010

New College Alumni Investment Forum

10 January 2010

I am an alumnus of New College of Florida. In brief, this was and still is an awesome school.

It just occurred to me to start an investment forum on our alumni website. (Sorry, you have to be an alumnus to go there, but perhaps some of you are, so here is the link.)

This is what I had to say:

As the 50th anniversary of my own admission to New College approaches, I have begun to think increasingly of retirement (and I note that many of my peers are already there). For most of us, retirement means either that we have simplified our lives to a level that would make Helen and Scott Nearing and Ivan Illich smile down on us from wherever they are now, or that we have saved enough to keep paying the bills.

My own plan is perhaps midway between, as I live off the grid in Canada, use solar power, and have dreams of greenhouse-building and extensive reading and writing in my retirement years. However, I also have bills to pay, like to travel and prefer to drive a BMW (OK, perhaps you may find some contradictions in that, but obviously we each have our own choices to make).

It occurred to me that Sam Sapp is the only alumnus with whom I have discussed investment ideas. So why not look at investment in a New College kind of way (that is unimaginably diverse and unexpected)?

My own philosophy is to examine secular (over-riding multi-decade) trends (here I am informed by Marc Faber's book, "Tomorrow's Gold") and to try to position my investments to benefit by these powerful forces. Just to get started, I view the following as the significant investment-related trends of our time:

1. This has been an era of investor exploitation. Investors are being ripped off to compensate greedy executives, avaricious board members and in many cases short-sighted employees. That is, it is an ugly time to be an investor, at least in North America. You are likely to be taken to the cleaners by most blue chip companies. Then government agents will feed on your entrails.

2. Government spending and money creation has now levitated beyond realistic limits. Even our great grandchildren won't be able to pay down current government deficits. Thus, central banks around the world are going crazy printing money (now primarily a digital phenomenon), and giving no thought to the morrow. We are punishing savers with the instrument of ultra-low interest rates and bailing out the reckless and the avaricious with the tax contributions of the prudent. This is unsettling if not terrifying.

3. Other parts of the world are now smarter than we about matters of money. Asian leaders are making better decisions that our own leaders, and their economies are benefiting as a consequence. If the US doesn't cause the entire global economy to crash and burn, it will be because of the superior long-term view of Asian government leaders and economic planners.

4. Sustainability of the conditions necessary to the life and health of all the flora and fauna of our planet has become an increasing concern. Perhaps we are more interested in this issue than the Asians, and this could prove to be to our long-term benefit.

5. No matter what the trend(s), investors can benefit by observing where productive capital investment is in decline, and where it is in ascendancy. I have some of my own thoughts on the matter, which I will share here. Further, I often write about these questions on my blog, which is here.

I am particularly interested in the thoughts of Novo Collegians on this topic, as no matter what I presently believe, I'm sure I will be startled and enlightened by the insights of my fellow alums!

Here is my first post on the forum:

Why Precious Metals?

I actually believe that precious metals are the only safe investment sector at this very moment in history.

Why?There has been an explosion of deficit spending and debt creation all around the globe. Governments everywhere are funding the madness through increases in the money supply of their respective countries. We last saw this at such times and places as Argentina 2-3 decades ago, our own country in the 1970s, Weimar Germany, the South Sea Bubble, and the Tulip Mania. Based on the fundamental economic principle of supply and demand, if there is too much money in circulation, it will lose its value.

In such circumstances, things that are real preserve value best, and the precious metals (gold, silver, etc.) are the most efficient means of investing in such tangible assets (you get a lot of value in a small amount of volume due to the physical principle of mass and to the economic principle of scarcity).

In Canada, we cannot hold gold or silver in a registered retirement savings account, so I invest in companies that explore for and mine gold and silver.

I wish I could say my investment strategy is more complicated than this, but it isn't. I do watch market trends and cycles, and make some effort to buy when prices are low, and to take some profits when prices are high (though of course just about everybody else is doing that too, which makes it complicated enough for a room full of MIT math professors).

For example, in the gold market, cyclical lows tend to occur about every 8 years. Guess what? The last cyclical low in gold was in October-November 2008. So in my view, now is a good time to buy gold, despite its dramatic recent run! I will probably take some short-term profits this spring, though I'm going to wait and see what is actually happening at that time before I decide.

Curious about these ideas? Then visit my blog here.

More later....

Thursday, January 07, 2010

Gold Tsunami VIII: Gold Mining Stocks Now Participating

23 November, 2 & 25 December 2009; 7 January, 14 February & 16 April 2010, 23 April 2012

Hmmm.... Animal spirits continue to be detectable in the gold sector, this time in gold mining stocks.

It took a while, but gold mining stocks are now being caught up in the golden tsunami.

This time, the HUI unhedged gold miners index was due for a rest. But it broke out today.

This recapitulates gold's action earlier.

Animal spirits are clearly at work.

On the charts, this will show the HUI:Gold ratio continuing to move up from deeply oversold levels.

The best ratio charts can be found at Adam Hamilton's Zeal Intelligence site.

The longer-term chart (easily created at Stockcharts) should now continue up from its deeply oversold levels.

This will take a while, so don't jump off the train prematurely!

Note: I just happened to notice that CNBC is now carrying the gold story with some degree of enthusiasm.

If you have even a single contrarian bone in your body, you will probably perceive, and I think rightly so, that this is a probable indicator of an interim top in the gold market. (That is, the savvy gold traders - not the long-term investors, of course - will probably sell to the CNBC watchers as the gold price declines to test its interim support levels.)

Further, the decline will probably last long enough, and be steep enough, to shake out the CNBC crowd prior to the next surge of the gold tsunami.

For myself, I don't have a lot of time for this kind of trading, so I will probably just hold on and wait patiently for the surge to resume. I can aver here and now that while gold will probably revisit lower levels for a while, it will resume its upward climb on the storied wall of worry soon enough.

Given the presence of the animal spirits in the market, my best guess is that when gold, together with gold stocks, begins to bounce back, both will take off like a rocket, signalling the second wave of the tsunami.

How many waves will this tsunami have?

I don't know. We'll just have to wait and see.

Regarding today's strength in the gold mining sector, what I do expect to see for the next little while is strength in the gold mining stocks relative to gold itself. Silver should also fare comparatively well in the interim.

On the selling side, watch for the "premature eradicators." I'd guess we're at about that stage now, as the bottom feeders have certainly had their fill, the bargain hunters are well stocked-up, and the momentum players began to pile in some while ago.

That is, with respect to gold's current surge, we are now playing in the very broad terrain of "something like halfway there." Believe me, the glass is half full, not half empty.

2 December 2009:

This seems to be significant. After being stuck below the 390.93 level since May 2006 (3-1/2 years ago!), the SPTGD Toronto Gold Miners' Index has finally reached upwards to a higher level. The breakthrough is probably still too tentative to be called a breakout, but it is a new high in an index that had to revisit its 2001 levels (151.52) as recently as late last year.

So yes, the SPTGD has been a horrible chart, as Canadian gold miners have been unable to ride the coattails of soaring gold prices for years now. If not now, then sometime in the next 2-3 months, I expect to see the SPTGD climb to higher levels - finally!

It's about time that the gold tsunami lifted the values of Canadian gold mining stocks to new levels!

25 December 2009:

Hmmm. I hate being right. Obviously the enthusiasm for the gold sector that was playing out on CNBC in late November was indeed a signal of an interim top. And the high in the SPTGD Toronto Gold Stock Index that I pointed out on December 2, 2009 was indeed the high for the move, a breakthrough and not a breakout.

However, animal spirits remain at work. While gold has retreated to below the $1100 US level and the gold stock indices are well off their recent highs, animal spirits continue to be detectable in the gold mining investment sector. Many small cap miners, early stage developers and explorers are moving to new highs even as the gold stock indices are pulling back far more than gold itself (as has been the case for years now).

In my own portfolio and watch list, I am recording new highs (or near high positions) for such junior gold sector companies as Benton Resources, Premier Gold Mines, Rubicon Minerals, Miranda Gold, Alexco Resource, Guyana Goldfields, Claude Resources Warrants, Terrane Metals, ATAC Resources, Red Back Mining, Jaguar Mining, Jinshan Gold Mines, First Majestic and Mines Management.

In other words, there is much activity "beneath the surface," a hallmark characteristic of bull market surges that are alive and well. Here for example is the chart of ATAC Resources, which Susan bough at 8 cents per share about a year ago. This happens to be the best performing stock ever in our joint portfolio. (ATAC has a massive gold find in the Yukon Keno Hill District - at the company's Rau property - and the market has gradually come to recognize the significance of the massive deposits now being revealed through exploration activities.)

So was the $1226.40 top in the gold price on Dec 3, 2009 the end of the golden tsunami run?

I don't think so. It's just that tsunamis make massive surges (rather than "waves"), so there are big pullbacks also.

As I have noted previously, the biggest pullbacks follow the strongest rises. So yes, this is a larger than average pullback in the gold price, and in the share prices of gold miners and explorers (see chart below), but it follows a stronger than average run - which in my view is unequivocally not done yet.

The following chart is courtesy of Pamela and Mary Anne Aden, and I recommend that you subscribe to their excellent service, as I do. Note that while gold has pulled back sharply, it remains above support, and the leading indicator (lower graph) has room to rise further:

The gold tsunami continues to surge.

Gold price breakouts over the past few years have generally run for about 7 months. The present breakout launched in early September 2009, so it is likely to persist through March 2010.

Will March 2010 thus see the end of the gold tsunami?

My guess is that the March 2010 surge will be the last big wave for a while (this could happen as late as May 2010, by the way). However, given the dramatic October 2008 pullback to $681 in the gold price, the current recovery run could show strength beyond the typical 7 months.

That is, the late March 2010 pullback which I expect may not necessarily lead to the type of lengthy 9-18 month retrenchments in the gold price to which we have grown accustomed over the past 6 years. That is, next year's move may show some parallels to the early 2001 to early 2004 3-year run in the gold price where retrenchments did not exceed 6-8 months, and gold basically climbed steadily from $255 to as high as $433 over a 3-year period.

Revisiting another theme, I note that the commercial short position on the Comex gold exchange has run higher still while gold has been moving above the $1000 level. It is no secret that the deep-pocketed commercial shorts (mainly large US banks) are usually on the right side of the trade, despite gold's record bull run of the past 8 years. Why? They buy at technical tops and wait patiently for the gold price to pull back, as it always does. They then sell at lower prices than when they took out their short positions.

The lore in the investment community is that you simply can't bet against the big commercial shorts, as they always win (this argument of course neglects to account for the collapse of the US investment banking sector in 2008). The following Comex Commitment of Traders (COT) chart is courtesy of Clive Maund, a brilliant analyst in the precious metals field:

My contrary argument is that gold tsunamis don't happen often. I suspect that the commercial shorts who don't sell soon will be buying back gold at higher, not lower prices, thus contributing to rather than diminishing the strength in the gold price.

We shall see if I'm right or wrong on this one, but I assert that the present gold price run is not of your common to garden variety, and many savvy players will get tricked by gold this time. I have maintained since 2003 that "gold will do whatever it wants to do." If it wants to give the commercial shorts a turn in the dust in the bull ring, it will simply do so.

My advice, get out your surfboards, and prepare to ride a multi-year tsunami. If this one runs for another 3 years, we could see continuing surges in the gold price through the end of 2011 (assuming a start of the current run in October 2008).

7 January 2010: The gold sector seems to be launching its next recovery from a period of retrenchment which pervaded the month of December 2009 - though note that the recent 4-week episode of weakness follows record highs in the US dollar gold price logged during the first three trading days of that month. Gold reached a price of $1226.40 US on December 3, 2009 and then plummeted to $1075.00 on December 22, 2009.

However, and this has been my main point recently, many gold stocks - particularly those populating the long out of favour small capitalization sector - have been acting quite lively throughout this period of weakness. Let me present a few examples from our own portfolio (and I apologize for the many more that I have missed).

I have long held an affinity for Canadian Zinc, the Canadian junior mining company that had the foresight to acquire the legendary Hunt Brothers (Prairie Creek) Silver Mine in the Northwest Territories. Bear in mind - the infrastructure was put in place as silver was spiking to a fabulous but temporary high of $50 in 1980. The Hunt Brothers were then forced into bankruptcy by government intervention. To this day, the mine has never been completed. Jason Hommel has noted that the Prairie Creek site contains the richest mineral deposits of any mining site he has researched (12% zinc, 10% lead, and over 6 ounces of silver per ton over 11 million tonnes in "zone 3" of 12 zones). After peaking at a share price of $2.04 in early 2004, Canadian Zinc has languished in the backwaters, enduring a 6-year downhill run. However, only yesterday, the share price spiked 28% on no news. This mine site has been on care and maintenance over the past year due to an overtly hostile climate in the mining investment sector. Now, suddenly, the picture is changing for Canadian Zinc....

Terrane Metals began to levitate in mid-September. We gained an interest in this small Canadian company's Mount Milligan project when John Doody, the Gold Stock Analyst, pointed out Goldcorp's 60% interest in the company and a January 8, 2010 preferred share conversion date. Mt. Milligan has an open pit reserve of 2.1 billion pounds contained copper and 6.0 million ounces contained gold. Upon development the project will have an average annual production of 262,100 oz gold and 89 million lb copper for the first six years of a 22.1 year mine life.

It now appears that Goldcorp will not be converting its preferred shares or buying out the company, at least no announcement has been made to date, and the option expires tomorrow. However, attention to the project's rich assets has resulted in a 5 to 8-fold increase in the share price over the past 4 months. Though the share price is now in descent due to Goldcorp's inaction on tomorrow's option expiry, the extensive run in Terrane's share price is an indicator of the market's willingness to revalue junior gold mining companies with positive prospects.

Only this week, I returned attention to the very interesting Copper Canyon Resources project adjacent to NovaGold and Teck Resources' joint venture at Galore Creek in the British Columbia interior. Mostly by chance, I substantially increased my position in the company on Monday, January 4, 2010. The Galore Creek project is highly capital intensive, and the original mine plan failed to win approval in November 2007, contributing to a 95% collapse in NovaGold's share price, and to a 90% decline in that of Teck Resources.

The shares of Copper Canyon Resources fared no better than those of NovaGold, falling from $1.62 at their high to only 6 cents at their December 2008 low.

The interesting thing about Copper Canyon's property, however, is that it contains 20% of the total mineral resources on the site - and it is a richly-mineralized zone, with 10 million ounces of gold on the joint Galore Creek and Copper Canyon properties, and also including extensive copper and silver assets. It is virtually a foregone conclusion that Copper Canyon will be sold for approximately $2 per share when NovaGold and Teck Resources develop the capital-intensive Galore Creek property (NovaGold already owns 60% of the Copper Canyon project). This will value the company at about $100 million dollars, against a raw resource value on site of about $3 billion (that represents Copper Canyon Resources' 40% share of the mineral claim).

At this point, the companies don't have the money to build the mine, and it is only about number three on Teck's announced priorities list. However, Galore Creek is either NovaGold's first or second priority (the other being their richer and costlier-still Donlin Creek property in Alaska). What is interesting is that on Tuesday, January 5, 2010, the two companies announced after business hours that they will deliver a new mining plan for the Galore Creek project by the end of this quarter.

With only that news, the Copper Canyon Resources share price jumped by almost 75% yesterday (January 6, 2010). The obvious implication is that if the Galore Creek project proceeds, NovaGold and/or Teck Resources will choose to purchase Copper Canyon's critical on-site assets. I think it is a certainty that the Galore Creek mine will be built, and that Copper Canyon Resources' interest will be bought out. The question now, as for the past decade, remains one of when that will be. The present market is clearly willing to consider that the construction date might be sooner rather than later.

My point here is not so much that small cap gold miners are "a good buy right here, right now," but that a market that has neglected these companies and their properties for the past 6 years or longer is now - at long last - showing signs of according them renewed interest.

As any seasoned investor is aware, major market moves are signalled at first by small signs. The present lesson? Observe the signs, they are here. Animal spirits are now at work in the small capitalization gold mining sector - spirits which have been in hibernation for the past 6 years!

14 February 2010: While animal spirits are indeed detectable in the junior gold mining and exploration sector, and gold stocks remain buoyant relative to the gold price, it is now no secret that the gold price itself has taken another holiday. In my mind, the surest predictor is that the gold price will retreat whenever CNBC begins to accord a modicum of credibility to gold investing....

As always, sell-offs in this bullish sector are rapid and steep, and one must be alert to such signs. But I have to tell you, we have not seen the crest of the gold tsunami. The next wave will roll in once it is clear that CNBC has set its sites elsewhere!

For those seeking expert opinion as to short-term as well as long-term movements in the gold price, there is no wiser analyst today than
P. Radomski. So if you want to know what is really going on with very regular commentary, you need look no further than Mr. Radomski's site (click here).

In fact, the immediate short-term direction for the gold market appears to be looking upwards again. Perhaps CNBC has now averted its gaze - once more - from the gold sector! Let me tell you, despite a decade-long bull market, the mainstream media have not yet tuned in to the fact that the precious metals sector remains the strongest and most secure vehicle for safeguarding our savings in these early years of the third millennium.

16 April 2010: I believe I have already acknowledged that I was unprepared for the December 2009 - February 2010 pullback in the gold price. However, the setback has turned out to be less steep than most primary reversals in the gold price, and gold is again showing signs of strength.

Interestingly, the positive momentum in gold stocks is holding up too. Since February 1, 2010, they have shown their best trend performance relative to the gold price since the March-December 2009 period.

It seems that the tsunami is continuing, and animal spirits are still at work in the background in gold mining and exploration stocks. The gyrations of the market should not distract us from this fundamental fact.

I had originally believed that the current surge in the gold price could run through March to May 2010. What gold has done by retreating during the December 2009 - February 2010 period is buy more time. The May target date now looks good, and a $1300 gold price level at that time now appears conservative from here (the chart below is from Pamela and Mary Anne Aden, and I encourage you to subscribe to their commendable advisory service).

While gold is unlikely to exceed the $1400 mark in the near future, the Aden sisters are now feeling bold enough to suggest that the gold price could well be topping the $2000 level by February 2012. And they do not rule out a price point above the $2000 amount at that time. My advice: Don't count the Aden sisters out. It would not be the first time that a somewhat shocking prediction on their part had come to pass!

22 April 2012: The presently linked article by Stephen Bogner is truly definitive on the topic of where the gold price has been and where it is going.

Note that the Adens' prediction for a February 2012 gold price of $2000 (see above note) was instead met earlier than predicted with a $1923 gold price in September 2011. (They were not far off the mark at all.) While the gold price has retreated since, I can assure you that the current retreat is temporary, though I cannot provide exact dates in the absence of a crystal ball.

Mr. Bogner, in his more recent article, gives full consideration to the SGS inflation estimates, which I have often cited. Mr. Bogner believes we are now on the verge of the most significant upward breakout yet in the gold price, and his arguments are compelling. In brief, this is a very important and very recent article. Read "The Gold Megatrend" here.

LinkNote that another year has passed, and we are now looking at a previous inflation-adjusted 1980 high gold price of $9000 per ounce. It seems that the only remaining question is whether we are facing escalating inflation that can be contained by policies similar to those used by Paul Volcker in 1980, or whether we are on the eve of hyperinflation, in which case a $9000 gold price would be meaningless (it would rise much, much higher, but in this case, because of the final destruction of the currency in which it is valued).

As to the theme of this article, a return of animal spirits to gold and resource stocks, obviously such a trend has not been in evidence since the spring of 2011! However, Mr. Bogner remains optimistic on this topic also. Click here for his analysis of prospects for resource stocks, subsequent to the current retrenchment....

The gold tsunami is here, and it is advancing in multiple waves. The next advance is near.... and it looks likely to be the most powerful move in gold and gold stocks yet.

My gold tsunami posts are as follows:

There Is a Tsunami Coming in Gold

Gold Tsunami II: Anthropomorphizing Gold

Gold: Safe Haven in the Approaching Perfect Storm

Gold Tsunami III: James Kunstler's Use of the Analogy

Bond Prices: The Seismic Shift That Triggers the Gold Tsunami (IV)

Gold Tsunami V: The $23 Trillion Bailout... and Counting

Gold Tsunami VI: Looking for Patterns in Gold Price Advances

Gold Tsunami VII: This Is It

Gold Tsunami VIII: Gold Mining Stocks Now Participating