Oldtent Archives 2007 - 2008

Since I’m a single (divorced) old guy and the boys will

be 18 in 3 years the Mennonite hut sounds kinda

good. Whats Jesse say? “Want less, Love more”?

I’ve got the want less covered.

Auric

Gold Stock Underperformance – Will it Change?

Certainly it did not in 2007, easily my worst year of the Precious Metals bull market since I started investing in 2002. The good news is that gold is up 27% for the year, while the HUI and XAU indices are both up approximately 18%. However, these indices represent the largest, most liquid names in the Precious Metals universe (Newmont, Goldcorp, and Barrick, for example), and thus not reflective of the performance of the average gold/silver stock, which by my guesstimate has a market cap closer to around $50 million (there are currently around 1,000 Precious Metal mining stocks). The lack of understanding of this sector has caused nearly all new investments to go into the few big-cap stocks, as well as GDX, an ETF holding mostly large cap miners such as the aforementioned. This group has risen this year, but even so heavily underperformed gold and silver prices. Moreover, just as the Dow (up 8%) does not reflect the experience of the average stock this year (down), the main gold indices could not be less indicative of how the average mining stock has fared.

A better representation of how Precious Metal investors have done in 2008 is the TSX Venture Exchange ($CDNX on stockcharts.com), an index of smaller, more speculative companies, the majority of which are in the mining industry. This index is down about 6% for the year, and if you stripped out the non-mining stocks, I’d bet the number is closer to down 20%+. In fact, literally dozens of such stocks are down 50% or more, in many cases without any significant “bad news” occurring within the underlying companies.

By my experience, this is the third such period of stock underperformance since the bull market began seven (next week eight!) years ago, the other two instances being mid-2002 to late-2002 and early 2004 to mid-2005. However, this period of underperformance, which started in mid-2006 and accelerated in the spring of this year, is approaching the longest time, in duration, of the three. Also unique is the fact that gold and silver have actually risen considerably during this latest period of stock underperformance, unlike the mid-2002 to late-2002 and early- 2004 to mid-2005 periods, when gold and silver did essentially nothing while the Precious Metal mining stocks got trounced.

So what is different about the current period, and as the title of this message asks, (when) will it change?

As you all know, the reason I left the relative safety of the oil sector was the superior returns offered by the Precious Metals market over the next decade, in my view (off topic, it’s funny to call that sector safe given the volatility that plagued it from 1995-2005). The Oil bull market has many years to go, in my opinion, but is probably in the fifth inning by now compared to the second inning that the PM bull market is currently in (amazing, since we are nearly eight years into this bull market). Moreover, the oil sector is not likely to have the internet-type mania that I foresee in the not so distant future for Precious Metals, as the forces of fear, greed, and liquidity converge on one of the market’s smallest, most misunderstood, and most unloved sectors.

However, the flip side of this trade-off is the NON-STOP battle that the U.S. government (among others) is waging against the gold and silver to mask their traditional roles as inflation barometer, harbinger of poor financial times, and, most importantly, REAL MONEY. Don’t kid yourself, it is a 24/7 coordinated effort to keep the metals and mining stocks in check, so as to prevent the masses from worrying too much about the accelerating inflation and declining economic growth that are currently worsening. As a result, we have seen gold and silver prices underperform the meteoric growth in the CRB Commodity Index, which yesterday hit a new all-time high. By the way, if you’re wondering why the cost of living is rising so much, take a look at some of the other, non-manipulated commodities, including oil and agricultural products such as wheat, rice, corn, and soybeans. Then take a gander at your tuition, insurance, healthcare, and taxation increases, as well as the surge of unexpected fees, levies, and surcharges that are popping up everywhere, from private businesses to governments. And if you think your property taxes will be lowered due to falling houses prices, I’ve got a bridge in Brooklyn to sell you.

However, the problem with the manipulative “game” that the Central Banks are playing with the gold and silver markets is that a) they are running out of ammunition to keep the ruse going, b) other Central Banks of the world, particularly in China, India, Russia, and the Middle East, are becoming significant buyers of physical gold and silver, and c) the inflationary spike in mining costs is causing a MASSIVE decline in gold and silver production, particularly gold where production peaked in 2004 and is starting to really plummet. I would not be surprised to see gold production fall by 5%-10% next year, and perhaps 2009 as well if prices do not spike dramatically and soon (drawing a surge of much-needed investment capital into the sector).

The recent high profile blow-ups of mine costs at Novagold and Gammon Lake are poster children of this trend, but unfortunately are more representative of the rule than the exception. Nearly every mining company is experiencing the same problem these days, making industry returns on investment close to 0% even with gold at $800/oz. Capital has been strangled from the sector this year, making it likely that even more mine projects will be shelved, and thus the vicious circle will continue until gold is a MUCH higher price. Let me get this straight - $800 IS NOT A GREAT GOLD PRICE! In 1980, when the U.S. money supply was roughly 15% what it was today (not including massive growth in other worldwide currencies), $800 was a good, if not great price. But in today’s world, $800 is the equivalent of roughly $30 oil (oil is currently $95/barrel), in other words a price level where few, if any projects have any chance at material profitability. And, as investors know, stocks do not go up when an industry cannot operate profitably.

Now for the good news. In my view, much (if not all) of this negativity is discounted into the mining stocks as we speak. Despite $800 gold and $14.50 silver, on a scale of 1-10 I’d rate sentiment in the gold sector at around a 2. Plus, the December plunge in the TSX-Venture Exchange likely reflects a significant bout of tax-loss related selling which will end this week as we head into the New Year. Oil just had a healthy 10% correction which is now turning back up, the dollar had a dead-cat 5% bounce which is now turning heavily overbought and starting to roll over, and even the significant base metals correction of the past few months appears to be ending. These are all positives for the Precious Metals sector, which itself is very heavily oversold at a time when the fundamentals for it and other commodities are surging.

To conclude, it is my view that the Cartel “game” of holding the sector down has now intruded too much into the real world. In other words the constant pounding of the gold, silver, and mining stock prices has caused severe dislocations in profitability, capital flows, and, ultimately, gold and silver production at a time when gold and silver demand are exploding worldwide (check any anecdotal or empirical data). Given these real-life (non-financial market) issues, as well as the aforementioned bullish technical states of oil, the dollar, base metals, and gold and silver themselves, I think the time for the next major surge in gold and silver prices is upon us.

And given the mining stocks’ SEVERE underperformance over the past year, the aforementioned dramatic improvement in the fundamentals for gold and silver prices, the incredibly weak sentiment in the sector, and the massive undervaluation caused by recent tax-loss selling activity, I think an even more impressive run in the mining stocks (particularly the smaller ones) is about to commence.

Have a great holiday and a wonderful New Year. I, for one, am really, really looking forward to 2008!

Andy

If ya build your house on pilings a few feet up

(which I think is common in tropical areas) then

the creepy/crawlies can’t get ta ya.

Auric

80 bucks sans land .. so i would think 50 60 .. 2000 square ,, 120,000 i would drink to that ..

in FACt lattes would be on me … .. three bedrooms two bath,, generator ,, on the electric grid.. septic tank,, lots of fresh fruit ,, whats the water system like … do they have wells ,, flies ticks .. bugs .. or does the sweet ocean current wash them all away

Inflation

Deflation

It just depends on what your money is made of.

The ‘03 Columbia Crest Semillon Chardonnay

made me say that.

Auric

Re : Building  in Belize..

about $20,000 for a very basic, very small Mennonite shack..(Like the clinic)

otherwise about $80 bucks per sq foot for more bells and whistles so I have been told but that seems kinda high to me..Best to send some contractors down there (Sinbad) and do it ourselves.. I am not a contractor but I have developed a small subdivison, built a few homes and have done a couple complete renovations. So, putting together something like this in Belize interests me also… 

But I’m waiting for Irish to get the 5 buck beachfront lots  ..I got second dibs on them.

Happy Holidays to you. Wow, you’ve got a great memory.

yes i’ll have to find out the details on these ‘plots’ at 5 belizian bucks a year. sure got my interest. and the music too. wj

ps: inside plumbing and hot and cold running belly dancers. [g]

Yeah, I was surprised myself. There is a lot to learn about Belize and there are a lot of YouTube videos on Belize. I may have to check out that place after all. It’s starting to grow on me. Irish may be onto something .

JBI

PS - This may be better than Women’s Beach Volleyball - Best from Belize! > tinyurl.com/yspbxs

interesting what the cost per sq foot to build in belize .. trade a couple rolls of toilet paper .AND SOME GOLD coins for a contractor

wowser that is some ‘fiery’ middle eastern musical strains..
dumbec_oud_kannoon_violin_clay pot etc. and m-e toxiems.
i was of the thought belize was of spanish origin?
did irish open the door to desert music! enjoyable. wj

the problem is that in 1930 deflation was possible because of the gold clause and gold in contracts and backing money,,,

this is not so today..

so many step on metal.. as per the boys in the band. wrong for 6 yrears ..

sure he belives in a deflation.. but what does that have to do with the price of tea in china today.

how can so many elliott wave guys be so wrong and others so right

gold will deflate then were dead lol

don’t buy it.. how many pronouce that .. at the top of the power structure ..

put a dang finger in the wind … slow the march of gold up.. as your agreement in the yale bones club for which you have a national spotlight .. is just that it is hard to prove .. watch my lips no new taxes .. lol i did not have sex with that women … wmd on iraq.. .. ..

…..Dr Ron Paul…..on Meet the Press….one on one……with Tim Russert…….10:00 AM EDT…full hour….on NBC….tomorrow.

JBI

…are you on the locator?

…..GET A LIFE ……