Archive for the ‘Gold’ tag
Bear Comparison: Today’s Junior Resource Sector vs 2001’s Nasdaq
- Jesse Livermore, Reminiscences of a Stock Operator In October 2002, few stock traders doubted that technology was creating value and changing the face of the Earth. Even so, the Nasdaq was priced at 1/4 of the value of its March 2000 peak amid the rubble of the tech crash. Six years later in 2008, the Nasdaq has gained 100% from its 2002 bottom. Such a swing speaks to the short-term irrationality of the market. Today’s resource junior sector offered the same types of glowing promises as the technology startups did in early 2000. With record commodity prices and mining producers looking to replenish depleting reserves through acquisition, the value proposition of junior companies is clear. For the last few years, investors bought into junior mining companies for the elusive, 10-bagger discoveries. While there were some success stories, most junior mining investors have found disappointment so far. A glance at the TSX Venture Composite Index (junior resource index), shows that the index is trading at a nearly 3-year low, which begs the question: “what is going on?”
In the charts above, I have aligned the Nasdaq’s peak in March 2000 with the peak of the Venture Index in May 2006. You can see striking similarities in those two charts after the peaks. Technically, the Venture index just broke through the green consolidation range and is in its final bottoming phase. Fundamentally, junior companies without prospects are selling at or close to cash value. Those with real deposits are being acquired, as witnessed by recent $ billion+ takeover of Aurelian (by Kinross) and Gold Eagle (by Gold Corp). This picture reminds me exactly of where the Nasdaq was in late 2002, where companies were either trading at cash value or being bought out. I can’t say the bottom will be in August for sure, or that a surging rebound is around the corner. There are already casualties and many outfits won’t make it through this correction above water. For me, this is housecleaning time, there is no exact formula in what to sell, switch, and keep, and I oftentimes consult experienced brokers for some emotionally unattached advice. Wall Street can stay irrational longer than you can stay solvent. Regardless of when the rebound comes, I wouldn’t mortgage the house to buy junior stocks now, or ever. However, with the all the reasons for investing in the junior mining sector still intact, for those with pennies to spare, now is the time to average in. As Warren Buffett puts it: “You should be happy; the hamburger you want to buy just got cheaper.” |
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John Lee http://www.goldmau.com |
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jlee@goldmau.com 1.800.965.6404 View ArchivesJohn Lee is the lead contributor at and founder of Goldmau.com. Want to learn more about the Junior Mining sector? Don’t know how to tell the good stories from the dogs? At Goldmau, we’ve got all the resources you need. Click Here to sign up for our free Market Update mailing list, or better yet, Subscribe Now risk-free to John Lee’s Stock Chart of the Week. You’ll get in-depth technical stock analysis and insight on junior mining stocks that you can’t find anywhere else. |
Primer in Mining Equity Investment
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In the past paper, we talked about the vast performance disparity among metals, and offered our take on which metals to buy (Gold, Zinc) and which to avoid (Copper) going forward. Not all metals are created equal - metals review: In this paper, we will provide the rationale behind mining equity investment, how to choose between metals futures or metals miners, and conclude with which mining sectors to buy and which to avoid. Rationale behind mining equity investment: The key to investing in mining equity is leverage. Suppose a copper miner’s break-even point is 70 cents a pound. The company wouldn’t have been worth much when copper was 70 cents as it couldn’t turn a profit. At a $1.00 copper price, however, the company will make 30 cents per pound of copper produced. And at $4.00 copper, its earnings will go up eleven times over to $3.30 cash earnings per pound. Mining vs direct commodity investment So the theory is that if copper prices go up 4-fold, copper mining stocks would go up 11-fold. In fact, this is pretty much what has happened since 2002. As copper went from 70 cents to $4.00, giant copper miners such as BHP went from $8 to $90. BHP
If BHP’s case were universal to miners, would all investors jump on the mining bandwagon to take advantage of booming commodity prices? Only if the case is so clear cut; indeed, if we look at Oil and Gold mining equities, a different picture emerges. Crude went from $22/barrel post-Iraq War to now over $130/barrel, yet Exxon Mobil has merely doubled from $40 to $80. Exxon Mobil:
Gold went from $250/oz in 2001 to $970/oz today, yet Barrick, world’s largest gold miner, has merely tripled from $15 to $45. Barrick Gold:
So why have gold miners and oil companies underperformed relative to gold and oil respectively? We can only speculate:
The point here is that the success of BHP, while not unique, is not the standard throughout the entire mining universe. Junior Mining Sector in the dog house If one looks for the speculative extreme in mining equities, the junior mining sector, a dire case could be made against investing in mining. The sector has utterly failed to live up to the expectations of investors. Junior resource equities are supposed to provide greater leverage than major mining producers. However, the nature of the business requires a constant injection of capital to discover and develop deposits before the eventual handsome operating cashflow is realized. This model is vulnerable to sudden and occasional credit/liquidity crunches like the one we’re experiencing now. The Toronto Stock Exchange Ventures Index, which is a proxy to junior stocks, merely doubled from the bottom of 1,000 to trade at 2,300.
Cash is king in uncertain times, and we like cash in gold. We live in uncertain times. GSE’s (Freddie Mac and Fannie Mae) are on life support with the Federal Reserve Bank of New York. All together, GSE’s back $5 trillion US of low yield (5%-7%) assets. You have to wonder what the global asset managers holding those debts are going to do. Real estate is cooling off worldwide now, from Singapore and Thailand to Vancouver. I am not seeing, nor do I think that housing will crash, though. The Asians are running in a mad panic over inflation and yet we have interest rates at 2-3% from Hong Kong to Singapore, Thailand to Japan, Korea to Taiwan. On top of that, we have global equity indices rotting with most down by double-digit percentages, with some, such as Vietnam’s down some 70% this year. The point is there’s nothing stronger to invest in at the moment than gold. We are now seeing a nice gold run as interest rates begin to trend up. Conclusion: This four-page paper is no means exhaustive, I hope however it served as a high-level overview on mining. The Barrick and junior resource camp may be glad to know 10-bagger success does happen to miners, as BHP demonstrated. The BHP camp might take caution in that mining isn’t all risk-free glorious business. We didn’t have the foresight to put all our money in BHP, and instead we focused on juniors exploring for gold in exotic locations such as Africa. Being a Feng Shui student, I learn that every dog has its day, and perhaps finally it’s time for the past dogs of Barrick and other gold miners to shine? |
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John Lee http://www.goldmau.com |
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Money, inflation, deflation, and gold
Money, inflation, deflation, and gold
by John Lee, CFA
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05/02/2008
Money serves as a medium of exchange and store of value. Price provides an important clearing mechanism in a society. Here we are going to explore the interesting dynamics between money and price.
In a free market, when the quantity of money is fixed, the fact that the price of an apple is $1 and that of a Parker pen is $2 has tremendous implications. It takes knowledge, ingredients and time to grow an apple while it involves branding, material, and capital to produce a Parker pen. What the market says here is that the total efforts put into producing the pen are worth twice as much as the efforts of growing the apple. There are thousands of valuations communicated through the market by this simple exchange. Over time, with advances in technology, it takes fewer efforts to produce more goods. The same farm that used to grow 10,000 apples can now grow 20,000 in half the time. While the ratio of exchange between apples and pens might still be 2 to 1, since it also takes less to produce a pen, in a world where the quantity of money is fixed the price of both apples and pens should decrease (i.e. 80 cents for an apple, and $1.60 for a pen).
The decrease in the price level of goods represents an economic advance and an increase in the value of money. As the human race progresses and wealth is being accumulated, shouldn’t people be able to buy more with less money? Shouldn’t people be rewarded for their savings over time with increased purchasing power of their money? Obviously, the exact opposite is taking place in this world. What’s going on?
A picture is worth a thousand words and the chart above is no different. There is 1,500% more
paper money today than there was in 1970.
Oil Price Since 1960
Hey, where did all this money come from? Doesn’t more money mean more economic progress?
The huge increase in the paper money supply is from borrowing at all levels from consumers, corporations, and government. Every dollar borrowed is a dollar created out of thin air by the banks. The process is legitimized by “the fractional reserve system”, as the bank literally prints dollars in its computer and writes a check to you upon your loan approval.
To answer the second part of the question - there is no positive correlation between the money
supply growth and real economic growth. As we explained, the world can function and advance
with a fixed money stock.
What’s wrong with more money? It stimulates consumer spending, creates more interest-income for savings and promotes higher housing and stock prices. More of everything is a good thing!
To that argument, I say: What if the Fed through its ingenuity and generosity, doubles everyone’s savings account balance? Does that create progress? By the same token, to combat price increases, did Venezuela fix anything fundamentally by issuing a new currency, “Strong Bolivar”, that essentially chops a zero off the old Bolivar? Here are 4 more points to consider:
1. Fairness – Arbitrarily, some are allowed to borrow more than others. Does it make sense for a government to have unlimited borrowing power while it hardly produces anything? And what is so special about a banker in that he can lend to whomever, for however much he wants, with the money that’s not even his?
2. Price Distortion – Since new money is not distributed evenly, the prices of various goods and services increase in a cascading fashion, depending on who gets the money first (like a ripple effect). Think of a lottery winner. He is likely to outbid others for the things he wants, thus causing prices of his desired items to go up first. Let us be clear: The random introduction of new money impairs the role of price as a proper clearing mechanism.
3. Bad store of value – With online banking and credit cards, today’s money is a great medium of exchange. However, the ever-increasing quantity of paper money makes it a terrible store of
value. Remember: Every time someone borrows, new money is brought into existence, diluting the money you and I have meticulously accumulated. Should a retiree rely on the risky stock market to retain his wealth?
4. Moral Hazards – How is it fair that bankers can borrow billions of dollars to spend and invest? And when banks and companies become too indebted but are too big to fail, they are bailed out. How does that serve as an incentive for those who make cars, sew clothes, and plant trees to save?
When unfairness, price distortion, corruption, and loss of true wealth reach the extreme, the result is a loss of confidence in the paper-money system.
I quote John Keynes from 1919:
“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. ”
Paul Volker was right when he said in 2000:
“Inflation is related to monetary policy. It’s related to the issue of money. The issue of money is a governmental responsibility predominantly, and to use that authority in a way that leads to inflation is a system that fools a lot of people, and to keep fooling them you have to do it more and more; [that] is a moral issue. I put myself in that camp. “
And Bill Gates said at Davos world economic forum in January 2005:
“I’m short the dollar. The ol’ dollar, it’s gonna go down.
We’re in uncharted territory when the world’s reserve currency has so much outstanding debt. It is a bit scary.”
How do you short the dollar? With ECB printing Euros no slower than the Fed printing dollars, it’s clear that gold is the only refuge of savings. Gold has raced from $428 to $850 today since Bill spoke in 2005. Is it too late to join gold? The right price for gold today is a long topic that’s best be left for another day. However, judging by how oil rocketed from $10 to $100 within the past decade, gold has not nearly reached its potential. We manage a gold fund and have written much about gold and currencies at www.goldmau.com I invite you to read up.
John Lee, CFA
johnlee@goldmau.com
+1.800.965.6404
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