Agora Financial’s Rude Awakening

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Hoi An, Viet Nam

· How to jack up your gold profits with a real currency kicker,

· Stocks start the day from a 12-year low,

· Cashing in with Chris Mayer’s Paycheck Portfolio and plenty more…

Joel Bowman, reporting from Hoi An, Viet Nam…

Your editors would like to offer a brief apology by way of a preamble to today’s column. We are sorry if gold bores you. We are sorry if our constant ranting and rambling seems a bit much sometimes…even to the point of an ill-disguised obsession.

But really, you can’t argue with the numbers.

Gold is a faint breath from the $1,000 mark this morning and fast closing in on it’s 1-year high. Stocks will begin trading today from lows not seen for almost 12 years.

And so, at the risk of nauseating repetition, we offer another gold column…and this time, we REALLY mean it. Please enjoy Rude favorite, Chris Mayer’s latest thoughts…

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In 2002, the same royalty “paycheck program” that paid out $50 for every $1 invested… decided to shut the door to new “members.”

In 2008, that door is open again… and it just got easier than ever to “make money while you sleep”…

But there’s no telling when it could close again…So you’d better collect your own “Chaffee Royalties” right NOW! Apply Here

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Buy Gold…We Really Mean it This Time
By Chris Mayer

His name was Dick Baker. Mark Twain called him an old friend and wrote about him in Roughing It (1872). He was the pocket miner of Dead Horse Gulch.

Twain and Baker would wander up in the hills of California, panning for gold. Pocket mining was a specific method in which miners hoped to zero in on the richest deposits “whose vagrant grains of gold have escaped and been washed down the hill,” as Twain wrote, “spreading farther and farther apart as they wandered.”

Sometimes all you needed was to find one spade’s worth of gold. That alone might pay $500 back then. “Sometimes the nest contains $10,000,” Twain relates, “and it takes you three or four days to get it all out.” The pocket miners told tales of finding $60,000… even $120,000 worth of gold, a fortune in those days.

Investing in 2009 is a little like pocket mining: A lot of panning around looking for that worthy payoff. But for the first time in a couple of years, the business of gold mining itself looks attractive, for two important reasons. One has to do with the big picture. The other involves the underlying economics of gold mining, which are attractive even if the price of gold goes nowhere.

As to the first, I’ll be brief, because it’s not the most compelling reason to buy gold stocks in my opinion, yet it’s the one most everyone spends most of their time talking about. It’s that the U.S. government is spending money like there is no tomorrow, which is bound to lead to printing a lot of money (read: inflation) and hence a rising gold price. It’s true, though: You couldn’t draw up a better scenario for gold than what’s going on right now.

Even some sharp-eyed value types – usually buried in the footnotes of their favorite companies, rather than speculating on the price of gold – find themselves drawn to the yellow metal. Indeed, some even seem apologetic about it. “We never thought we would ever buy gold or gold stocks,” writes David Einhorn in his latest quarterly letter to shareholders of his Greenlight Capital.

He talks about his grandfather, who was a gold bug and for the last 30 years of his life bought only gold and gold stocks. Since the age of 10, Einhorn heard warnings from his grandfather about the ravages of inflation and the dangers of the government’s printing press. And of course, for most of those 30 years, gold was a lousy investment. “Being patient is one thing,” Einhorn writes. “Being ‘wrong’ for three decades is quite another.”

Today, Einhorn admits to seeing old Grandpa’s ideas playing out. He’s buying gold and call options on a basket of gold miners.

Behind the bigger picture, though, there’s a more compelling reason to buy gold stocks today. First: The price of gold miners as a group is off more than 20% in the last year, even though the price of gold has held firm. Add to that mix falling mining costs in 2009 and you have a recipe for explosive earnings.

As gold analyst John Doody points out, oil accounts for about 25% of the costs of running a mine. Gold miners use a lot of energy to power big shovels and dump trucks and to haul ore. The price of oil, as you need not reminder, has collapsed. It’s down more than 70% from its high in July. For the first three quarters of 2008, gold miners had to contend with an average oil price around $118 a barrel. Barring a huge rally in oil, gold miners will reap a windfall in lower oil costs oil since then. As I write, oil is $36 a barrel.

Not only will gold miners get the benefit of lower oil costs, the currencies of the gold-producing countries have all fallen against the dollar. This means their costs are lower today in dollar terms. Consider, for a moment, where the gold comes from. In the mid-1990s, four countries dominated gold production and made up more than half of global production. They were Canada, Australia, South Africa and the U.S. But by 2006, these four producers made up only about one-third of global production. Today, you see China produce a lot of gold, as well as Peru, Mexico, Chile and countries in Africa. (This according to Frank Holmes’ book The Goldwatcher. The book, by the way, is a must-have manual for gold investors. Part II, in particular, has a wealth of gold investing strategies and insights.)

Many gold mining stocks today have assets in countries where the currency is falling against the dollar. As Doody says, “All the commodity nation currencies – the Canadian dollar, the Australian dollar, the South African rand, the Brazilian real, the Mexican peso – they’re all down 20-40%. When your mining costs in those countries are translated back into U.S. dollars, they’ll be 20-40% lower.”

Those two factors – lower oil costs and currency effects – mean gold profits should be higher in 2009 than in 2008 even if the price of gold goes nowhere.

I’ll add one other reason to like gold stocks here: They did pretty well in Great Depression I. And history may repeat. Even at their lowest prices in 1933, the stocks of Alaska Juneau Gold Mining and Homestake Mining were still well above their 1929 highs. At their highest prices, they were 230% and 300% higher, respectively.

Old Bernard Baruch was a principal stockholder in Alaska Juneau. It was his largest holding in 1931. Baruch was a savvy old trader and investor. He knew where the soup would stick to the spoon after Roosevelt’s New Deal policies. It would mean a devaluation of the dollar and a rise in the gold price.

Eventually, gold did surge, and so did gold stocks. “Baruch reaped an especially large profit,” his biographer James Grant writes, “for he had been buying stock and bullion.”

Obama’s stimulus plan smells a lot like Roosevelt’s New Deal. And if this is the greatest financial test we’ve faced since the Great Depression – as I believe it will ultimately be – then gold stocks may also be among of the few stocks to make new all-time highs in 2009.

If Twain were still kicking, I think he’d go look for his old friend Dick Baker, the pocket miner of Dead Horse Gulch, and head for those California hills.

Joel’s Note: We know for a fact that Chris has just added a smart few gold plays to his Mayer’s Special Situations portfolio. One, a tiny Mexican producer, is up some 61% in the past few months alone, and there’s plenty of juice left in his Brazilian play, added just a few days back. If you want to learn more about Mayer’s Special Situations, read on here.

— A Special Report from Capital & Crisis Research —

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NEXT “PAYDAY”: FEBRUARY 15, 2009 – Apply Here

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[Rude Endnote: We’re now taking bets on the time gold goes over $1,000. Do we hear 3pm today? Next Wednesday morning? Sometime 2014?

Let us know when (and why) at the address below.

Until next time…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com