To start, here’s something that will make you better informed than the typical traditional broker: take a look at where gold is currently being dug up around the world.

Tally it up, and North America accounts for only 16.3% of total global gold production. In other words, 83.7% of all the new gold every year comes from outside our continent.

Further, of the 15 largest gold deposits in the world, only five are in the U.S., Canada, or Mexico. Meaning, two-thirds are in regions where you don’t get cell phone coverage and the natives don’t speak your language.

The picture gets even sharper when you see the regions where production is increasing, vs. areas where it’s declining.

Several countries where gold has been traditionally mined, such as South Africa, Australia, and the U.S., are suffering production declines, while other areas, like China and South America, are just now starting to rev up.

In other words, not only is more gold being dug up outside our borders, more is being found there, too.

This has obvious implications for the gold stock investor who recognizes that the momentum is clearly behind the emerging countries. One geologist told me that some of these prospects are like Nevada was 100 years ago; wide open and full of gold deposits just waiting to be discovered.

Yes, there is risk, but the political winds are shifting in a more pro-mining direction here as well. In the U.S., for example, some members of Congress continue to promote a bill that could dramatically harm mining in the states, while China and many parts of South America are opening their doors to foreign companies. What would you rather invest in – a country trying to woo your investment dollars or one that is scheming to find new ways to take more of them away from you?

Gaia the Earth Goddess didn’t ask where we wanted our gold and silver deposited. And it is the underexplored – and in some cases the unexplored – regions that offer the most potential for new discoveries, greater production, and thus, higher investment returns.

Regards,
Jeff Clark
Editor of Casey’s Gold & Resource Report

February 17, 2010

Sooner or Later, You’ll Invest Abroad was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

So, what was his reasoning: technical analysis of wave counts? falling demand? a telling ratio? sun spots? No, he noted that upscale department store Harrods in London began selling gold bullion and coins “over the counter,” ergo, the top was in. Nice try, “Bert,” but this is amateurish. You really shouldn’t be playing with the big boys if that’s the basis of your call.

Yes, gold will someday put in a top, and since the gold price is largely determined by psychology, the end of the bull run will be marked by behavioral types of signals. But calling a top in gold now is like declaring that WWII was over because the Allies won a small skirmish in early 1942. To have made such a statement, based on a small, isolated event, ignored the greater forces that had yet to play out and would have made any journalist or military strategist look foolish indeed.

And here’s why Bert looks equally silly today…

If the top were in, we’d be in the midst of an all-out Mania. Are we? Do you get the impression there’s a rush into gold by the greater public right now? Are headlines blazing the covers of major magazines pronouncing gold as the new investment king? Has Wall Street gone gaga over gold and silver? I ask because these are the true signs that a trend has entered its final blow-off top and would signal it’s time to get out.

I decided to put Bert’s prognostication to the test, and I invite you to play along.

First, I struck up casual conversations with my friends, neighbors, relatives, acquaintances, my wife’s co-workers – heck, even my seatmates on airplanes – angling to learn how much gold they were hoarding, about the killing they were making in gold stocks, and how they were getting rich from all their precious metal investments. (In fairness, I had to exclude my dad, who is an award-winning gold panner, but he’s the only one.)

I found no one – not one person – who is actively investing in anything gold or silver, let alone rushing to buy or hoard the stuff. I had two people who confided that they did own gold, but in both cases it was inherited. A few were curious how they would go about doing such a thing, and fewer asked if I thought they should. Most everyone looked at me blankly when I asked; they didn’t seem to know what I was talking about. When I got a reaction like that, it was pointless to ask about gold stocks. Of the handful I did ask, most had never heard of Barrick Gold, the world’s largest gold producer.

Now ask yourself the same thing: how many of your family, friends, neighbors, and co-workers are buying gold and silver coins? Are any of them giving you hot stock tips about a fantastic gold producer, or telling you about the latest gold discovery made by a company in China? Have any fellow investors told you they’re dumping their brokers because they can select gold stocks better on their own? Anyone telling you they’re going to night school to learn the gold mining business?

Next, I surveyed a large sampling of print media looking for some of these signals that Bert surely had spotted. Over the past couple weeks, not one of the major business magazines I reviewed had anything on the cover about gold or silver. Further, there were no articles on precious metals, such as the best ways to buy or store all this gold everyone is buying.

One magazine ran an article about ways to prepare for inflation, and gold wasn’t even mentioned! I did see an ad from the U.S. Mint in another, along with a couple small ads in the back that said they had the best prices on bullion (right beside the teasers for buying a Russian wife), but that was it. Even the portfolio allocation models recommended in the articles I read made no specific mention of precious metals (one recommended a “resource” fund, but their discussion of it was centered around energy investments).

Other than the articles you seek out, how many mainstream magazines do you see extolling the virtues of gold and silver on their cover? How many bestsellers are prominently displayed at your nearest bookstore that scream at you to buy gold stocks? Are you getting fed up with all the junk mail you get about gold and silver?

Last, I went out of my way to look for stories on gold and silver on TV and radio. About all I could find were the same ads that popped up after last year’s Super Bowl commercial by Cash4Gold. A couple programs quote metals prices, and I was able to find another that actually used the word “gold” in a sentence. It might just be me, Bert, but I can’t find any news anchors talking about the latest gold discovery or that “must own” gold stock. No in-depth special reports from investigative journalists on the hot Canadian junior mining sector. Nothing on my radio about the best ways to store all the silver every smart investor has been buying.

How about you – are you feeling bombarded by TV and radio ads and segments on precious metals? Do you have the clear impression gold and silver are the hot new investing trend around the world? Are you Tivo-ing certain TV shows because of all the great info they provide about picking the next great gold stock?

If we were in a Mania, Bert, all of this would be happening. But it’s not. Those who buy gold coins in the U.S. are still largely viewed as members of a fringe group. There is no public discussion on gold, no insider tips on the latest hot gold stock, no special reports on how to store all the bullion you’ve collected. The psychology isn’t on our side yet. One signal does not a Mania make.

Last and perhaps most important, Bert, are you sure the dollar is done falling? You’re absolutely convinced we won’t see price inflation? Our current debt load won’t pose any future problems? No more worries about foreigners buying all that debt? Obama and Bernanke really have saved the day?

Bert, send me your shorted gold positions, I’ll buy them from you. And although the gold price could see a correction in the near term, and several more along its journey to “the top,” remember that battle in early1942 and all that had yet to occur before the war was over.

And one more thing: when you finally become breathless to buy gold stocks, I just might be ready to sell them to you.

Regards,
Jeff Clark

November 6, 2009

Why Gold Has a Long Way to Go was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

In English, please? The bulls got suckered.

Gold prices fell through their $850 May low now, which means that I was wrong to think that the market had discounted a reversal in oil and the dollar, both of which we fully expected.

But could the market be setting up the bears here?

The last time that we saw two false signals in a row was in 2004, when a marginal new high reversed sharply and turned down to break a key support level, trapping the bears before turning up for good. Interestingly, this happened when Greenspan started his tightening campaign.

It is significant that he didn’t have to deal with a financial and economic crisis, and that his gradual rate increases didn’t do anything to gold, anyway — though they were enough to derail the housing boom.

Today’s Fed is constrained from even a small tightening by the condition of the economy.

Of course, we’ve already had two false signals in the chart, so if this is a bear trap it’ll be the third, which would make it different than in 2004, or at any other juncture in this bull so far.

The gold stock charts tell a more bearish story.

Now, you must keep in mind that while deceptive moves have been rare in gold itself over the course of this bull market, bear traps have been common in the gold share averages — especially the Amex Gold Bugs Index below. For the record, a bear trap is a move, like a breakdown, that suckers the shorts; a bull trap is a move that suckers the bulls:

A bear trap has occurred as a false breakdown in the chart on at least three noticeably separate occasions — 2001, 2005 and 2007. In each case, a bullish move followed immediately. I don’t know if history will repeat itself, but the record says breakdowns in the HUI are a buy.

For the Love of Gold

I keep telling you, gold is next! No one believes it yet. Who can blame them?

We all would have done better owning oil stocks, at least after 2004. In fact, you would think the only reason gold ever went up is because of oil. But you’ll find some truth in every lie.

Undoubtedly, energy is vitally important to the economic engine of growth.

It’s used in every imaginable process. Oil is important only because it is the most convenient source of this energy, but tomorrow, it might be something else that does this job. Gold, of course, is jewelry. It’s not technically money, except in select circles. But I want to draw your attention to the need for money…it is just as vital to the economic engine as energy.

Given the record of fiat money, invariably the debate will shift to the best kind of money in the same way that it currently revolves around the best kind of energy.

So what would it take to see the same love in gold that we saw in tech stocks in 1999, the housing market in 2003-05 or oil recently? The answer is simple: More of the same…

You will see it in gold when all the usual anti-gold arguments fall flat on their faces… when people no longer believe that the “modern-day” central bank has a handle on inflation and interest rates; that inflation is “caused” by oil, growth or a shortage of goods; or that prices will one day come down.

You will see it when people realize that the bubble in commodities is really a destruction of confidence in the medium of exchange. Yes, this can get overdone, like anything else in the market. But unlike a specific bubble, it will repeat itself generally, against some other asset, commodity or maybe all goods.

Why?

Simply because the central bank and government are afraid to address the root cause.

All that the central banks have to do is abandon the boom by letting the market determine the proper interest rate level. This is the only lasting solution to the current inflationary quagmire.

They won’t do it. The short-term costs are too high, and rise with each new asset bubble.

No, the bull market in gold is not over.

The best is yet to come.

Top 10 Reasons to End Cheap Gold

I can understand why investors are selling their large-cap gold stocks. They aren’t making any money — at $900 gold! And they’re trading at 20-50 times earnings. Still, while the rising cost of producing gold is trouble for gold stocks, it is also one of the most bullish factors underpinning gold values.

Effectively, $700 gold would be as catastrophic for the industry today as $300 gold was in 1999.

With jewelry demand alone, the supply side is already tighter than it is in oil.

As I went through my 18-point model, I was looking for reasons to buy gold that have not been widely discounted, aside from the big one above — i.e., in which the masses wake up and fall in love with gold:

• Cost inflation slowing down development pipeline, hence future production growth
• Political risks in frontier countries also shrinking available supplies
• Faltering global economy persuading central bankers to abandon tightening plans
• Soaring government deficits
• Saber rattling between Iran and Israel and other geopolitical tensions heating up
• Another GLD ETF just listed on Hong Kong Exchange
• Some countries already experiencing crackup and heightened gold demand
• Shrinking official gold supply
• Seasonal trends turning bullish again into the new year
• Large producer Anglo has yet to cover all its hedges.

Regards,
Ed Bugos
September 2, 2008

The Gold Market was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

You tell yourself that these things are not fundamentally bearish for gold prices. One of them is even bullish. But you know that gold is probably due for a correction anyway, and any one of these, or other factors, is just as good an excuse as any fundamental when confronting a risk-averse crowd.

What do you do? You could weather the storm. You’re in for the long term, right? The trouble is gold stocks can fall a lot during even a typical correction.

Most everyone already knows that markets do not go straight up. If every dip led to higher and higher highs, nobody would ever lose sleep over it. Trouble is, the company could always screw up, or one of those dips could turn into a bear market. I have seen the conviction behind many buy/hold strategies melt at the tail end of a normal correction, just because it corrected invariably worse than expected.

In my observations, investors are more likely to get bucked off a bull market because one of the corrections discourages them than because they took some profits by selling into strength.

Goldcorp, one of the world’s largest miners today, has already seen three corrections of 40-50% on the way up to $45 from its $3 (split-adjusted) share price back in early 2001. That’s a 15-bagger! And it’s not over. Goldcorp will see a few more like corrections, and maybe one that’s even larger, on its way to $150. Hardly anyone who bought at $3 will still be aboard, and even fewer will sell the top:

However, there are ways to improve your long-term returns and reduce the impact of market volatility on your portfolio without ever having to trade in and out of your shares and risk getting bucked off the bull too early. Options! Options allow investors to take advantage of leverage and limit their risk.

They represent a way to benefit from most of the change in the value of the underlying property or shares without ever having to buy. Due to this leverage, they can sometimes increase hundreds and thousands of percent in the space of a week, or even a day, as in the case of Bear Stearns put options when the stock halved that fateful Friday before last. Consequently, they don’t draw only speculators; they draw gamblers ready to stake the farm on getting rich quick by abusing the available leverage.

But gambling is in the method. If you don’t know what you’re doing, you’re gambling. Otherwise, you are speculating, hedging or investing.

Today, I am going to show you how to “insure” a portfolio of gold stocks emulating the Amex Gold Bugs Index (HUI) against an intermediate correction using a few basic option strategies. “Intermediate” just means like any of the other four-five corrections that are most evident in a chart of the seven-year bull market to date.

They averaged 10-15% prior to 2005, but with the accelerated rallies post-2005, they are more likely to look like the 27% correction in 2006 from now on. A correction in the primary (seven-year) sequence would be more like 40-50% or more, which I’ve judged a low-probability event from these levels.

In any case, the first thing to do is nail down a few scenarios you think are likely. That is, try to quantify the risks. Let me walk you through some scenarios.

If last week’s sell-off is the beginning of an intermediate correction in gold prices, which is possible, gold could fall back into the $700-800 range and/or remain range bound until next year.

The “tape” is telling us this IS the likely scenario. The gold stocks traded up with gold, but they lagged it, as if they were tired. And not all of them participated. Many of the juniors sat out the last $300-400 gain in gold. The breadth of the advance was thus narrow and the leadership extended. And the way gold prices came off their peak is itself often a bearish marker, indicating more of the same to come.

I’m assigning this scenario a 35% likelihood and a 10% chance of something worse. The most likely (55%) scenario, in my outlook, is that the bulls will hold the line at the $850-900 level for a few weeks and then continue their unfinished business — i.e., developing a real top well above the $1,000 barrier.

But that analysis goes beyond the purpose of this article.

If you think the likely scenario is an intermediate correction, or worse, the easiest option strategy is to “write” (or short) a call. Writing calls is effectively the same as shorting them, except that options are contracts representing but a “right,” so the short seller is technically the underwriter of the contract. If the underlying asset goes up, he will have to either buy the calls back higher or deliver the asset(s).

If you don’t own the asset, it’s a naked short, and the theoretical risk is unlimited. If you own the asset, your risk manifests in the form of reducing or limiting your profit on the underlying position. Since we are talking about insuring a portfolio of gold stocks against a correction, we are talking about the latter.

In our hypothetical scenario, with gold falling to $700-800, the HUI might fall to the 350 level, plus or minus 25 points — which is about 90 points (or 20%) below the current level of about 440.

A note of caution: In this example, I am assuming that your portfolio of gold stocks mirrors the HUI; if it does not, you are better off writing those calls on the specifically optionable stocks in your portfolio.

Otherwise, there can be no assurance that your risk will be limited.

Last week’s bid on the Amex Gold Bugs Index (HUI) 375 September 2008 call was around $8,960 per contract — or $89.60 per each hypothetical index share. This means that if the gold share index falls below 375 before the option expires in September, you can pocket that entire amount less commission and time value. You start losing money on your underlying position only if the HUI falls below about 350:

439.05 – 89.60 = 349.45 (or approximately 350)

If the index falls less than expected, say to about 400, you might make between $20-60 points per hypothetical index share, depending on days left to expiry, which would likely cover the correction.

The downside is that gold shares brush this correction off and continue to truck higher, in which case you do not participate in any of those gains until and unless you close out your short call position.

It would not be advisable to buy puts in this situation, because premiums are too high to protect you against an intermediate drop, at least in the index. The September 2008 HUI 435 put was offered at $54 on March 20, which means it would cost you about 13% to protect your portfolio from a 15% correction.

It only makes sense to buy a put to protect your portfolio from a much larger correction. If you thought the gold share averages were in for a nasty 40% or more decline, then it would make sense. Effectively, it would protect your portfolio against any losses that exceeded a 20-25% correction.

The nice thing about options is that they are flexible. There is a myriad of strategies available to suit almost any situation. You could write the September 2008 375 call and buy the September 2008 375 put, which would net about $5,900 per contract and cover most of your downside, but eat into your gains more.

Alternatively, if you’re not so bearish, you could write an out-of-the-money put…

Regards,
Ed Bugos
March 26, 2008

Investing in Gold Options was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.