Friday, October 17th, 2008...8:49 am
A “Patton Speech” For Gold
Dubai, UAE
· VIX hits 81 – Wall Street’s “fear gauge” goes through the roof,
· Four days on the Dow Jones rollercoaster ride,
· Seeking safety in gold, how to grab a slice of the discount and more…
Joel Bowman, back in the City of Gold, reports…
After the worst week in the history of the Dow Jones Industrial Average, this week is shaping up to be equally as spectacular. Let’s take a quick look at the wild rollercoaster ride that has been the last four days:
Monday: The Dow rallies over 900 points to clock the largest single-day point gain in its history.
Tuesday: After Monday’s jubilation, the index kicks and bucks up and then down 400 points each way within the first few hours of trading, sending the volatility index (VIX) through the roof.
Wednesday: Economic fears reignite the selloff. The Dow plunges 733 points while the S&P dives 9%. The VIX – aka, Wall Street’s “fear gauge” – reaches an all time high of 81.
Thursday: The seesawing continues as the bulls make a final hour run to push the Dow up 400 points for the day.
“There’s a good reason for our shock,” wrote Eric Fry in yesterday’s Rude edition, “nothing quite like this has EVER happened before in the U.S. stock market.”
With no precedent, correlations breaking down all over the place, politicians jostling for position as international bankers and fear dominating the marketplace, it’s difficult to know where to turn. Even gold, historical safe haven that it is, has come under heavy fire this week. The ancient relic trades for below $800 as we write to you this morning.
Does this represent a screaming buying opportunity or a trap for petrified investors? We asked Byron King, editor of Outstanding Investments and Ed Bugos, editor of Gold & Options Trader for their take. In the offerings below, you’ll see where they think the price is headed and a few tips on how to best take advantage of the long-term trend. Please enjoy…
— When Fear = Profit: A Special Volatility Report —
On Thursday, October 16, the VIX Index hit an all time high of 81. Put simply, the markets are bucking and kicking like we’ve never seen before.
With such unpredictability, it is difficult to know where to invest, if at all.
There is, however, one man who has been relishing the recent whipsawing market conditions. Steve Sarnoff has been on an absolute tear lately. His last five picks have all more than doubled… and are sitting at cumulative highs of 1,222%.
Learn how to make fear in the markets work FOR you and check out Steve’s Options Hotline service right here
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A “Patton Speech” for Gold
By Byron King
Do you remember the 1970 Academy Award-winning movie Patton, starring George C. Scott? In the beginning of the movie, Scott – playing the iconic American Gen. George S. Patton – stands in full dress uniform, backed up by a gigantic American flag. Scott then rouses the troops (and the audience) with a stirring speech that follows the lines of the address the real Patton gave the Third Army on June 5, 1944, the eve of the invasion of France in World War II.
Patton’s original speech is considered by many to be one of the great motivational talks in all of military history. And actor Scott’s portrayal of Patton delivering the speech is one of the most memorable scenes in all cinema.
If you are a gold investor, something similar happened not too long ago. While the ups and downs of the precious metal markets may not be as momentous as the invasion of France in 1944, things have been tough for gold this past spring and summer. After a several-year climb to over $1,000 per ounce in March 2008, prices began to drift from that all-time high to recent lows near $750. Many gold mining shares fell in price by 50% and more.
So it was quite a moment in the world of gold investing when the CEO of Kinross Gold Corp. (KGC: NYSE), Tye Burt, addressed the Denver Gold Forum on Sept. 10, 2008. Burt just plain shook the rafters with his optimism about the prospects for gold and gold mining companies.
Burt stared into the faces of a roomful of analysts, institutional investors and mining peers. And he spoke plainly: “This is the gold business. It is cyclical.” In a direct reference to recent weakness in both gold prices and share prices for gold miners, Burt counseled, “Do not lose hope.”
Burt expanded on this theme:
The demand fundamentals are strong. The supply fundamentals have never been better for our metal… Not only are major mines in Peru, South Africa and the United States slowing; not only are new mines not coming into production whether they’re in Argentina, in Alaska, in Romania or in Venezuela; but it’s never been tougher to permit, build and finance a new gold mine.
Capital cost inflation is also taking a bite out of mine construction and operation. Overall, mining costs are rising by as much as 25% year to year. About 30% of the cost of running a mine is to pay rising bills for energy, whether from liquid fuel or electricity. And costs for steel and concrete are rising at double-digit rates, as well.
So Burt explained how, in his view, there is a looming long-term shortage in the gold supply. He looked back at previous years’ statistics and said that “Global mine production in gold has been in decline for the last nine or 10 years. We don’t see that stopping anytime soon… To me, that’s symptomatic of an industry that is going to be in severe supply constraint in the not-too-distant future.”
Burt allowed it is difficult “to explain the difference between Comex and physical demand today.” He was referring to the fact that while “paper gold” assets are easy to trade, there are spot shortages of physical gold out in the metal markets. Many dealers simply have no product to sell, at least at recent prices. Even the U.S. Mint has run out of gold with which to stamp out its wildly popular $50 Gold Eagles.
Burt was adamant that “It isn’t hard to look into the future and see a world of dramatically constrained gold production and gold supply.”
So Burt expanded on a point that he has made in numerous public appearances in recent months. That is, now is “the time to buy good stories… That’s the time to look at the discounts we see in our market today and say, ‘I can load up on a good story.’”
Burt has previously explained that Kinross is watching the share prices fall for many junior exploration companies and early-stage miners. So the environment is becoming more amenable for the large-capital players to pick up bargains via asset purchases, takeovers or joint ventures.
Using a phrase almost identical to that of Gen. Patton in 1944, Burt said, “It’s not the time to climb into a foxhole today.” Then he added, “These are markets where risk-takers are rewarded.”
Burt’s address to the assembled gold bugs was a beacon of optimism. Kind of like Gen. Patton’s speech, it made you want to go out, charge up a hill and plant a flag at the top.
Joel’s [extra long] Endnote: With gold down again (it’s around $785 as we write to you this morning) bargains abound. The question, as always, is how you can best play the discounted price. Strategies will vary from investor to investor depending on how much you have to allocate and what your ultimate goals are.
With that in mind, we asked our resident gold guru, Ed Bugos, where he reckons the best plays are.
“Try adding a few junior miners,” he advises us. “That’s my main business over at Gold & Options Trader. First off, let me direct you to look for takeover targets.
“The valuation gap between the majors and juniors is at historical extremes. The majors need to add reserves to justify expensive share values based on the market’s expectations of growth in production and cash flows. Usually, these takeover waves occur during corrections in the gold price.
“Junior miners, generally, do best when risk premiums fall, stocks rally and gold flies, or if a major metal or diamond discovery fuels an exploration boom. But there is also another time when they do well: When they have been so beaten up that their well-healed competition starts gobbling them up. Takeovers tend to channel liquidity from the big company’s treasuries into the hands of investors more interested in finding the next Fruta del Norte or Bruce Channel discovery than investing in something secure.
“My criteria are simple. Good management isn’t a prerequisite; it’s an obstacle to takeovers. The main thing:
“The asset has to be in a politically stable environment or have enough ounces proven to make the extra risk worthwhile. A minimum of 5 million ounces in a measured and indicated resource is another criterion. Open-pit deposits are preferable.
“My research tells me gold prices are set to double over the next year. My forecast is for gold to reach $1,200 by year-end and $2,000 by next summer. The time is nigh to take advantage of this opportunity.”
Although their strategies differ somewhat, both Ed and Byron recommend specific plays on gold to help their readers better invest in their favorite precious metal.
In his Outstanding Investments newsletter, Byron devotes about one quarter of his portfolio to precious metal stocks. You can pick up a one year subscription for about the price of dinner for two and it’s a great place to start if you’re interested in getting your feet wet in the gold markets. To learn more, check out his popular “Gold $2,000″ Report
For his part, Ed specializes entirely in gold. His research service, Gold & Options Trader, covers everything from options plays, junior miners, long- and short-term trend analysis as well as general commentary on the metal. His service is a bit more expensive and probably better suited to the more “hardcore” gold bugs. To learn more about Ed’s service, check out his special report on how to use “Vancouver Leapers” to supercharge your profit potential right here
As we said, your investment approach will depend on your own individual circumstances and goals. Byron’s Outstanding Investments and Ed’s Gold & Options Trader are just two tools you may wish to use to help you invest more wisely in gold. We hope you find something to your liking in either one or both of them.
Until next time…
Cheers,
Joel Bowman
The Rude Awakening
aussiejoel@the-rude-awakening.com
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