-- Posted Wednesday, 15 August 2007 | Digg This Article
Lessons from History: The Simple Path to Resource Riches
By David Galland
Managing Editor, Doug Casey’s International Speculator
At the risk of sounding like I’m on happy pills, I’m going to use four charts to demonstrate a simple path you can use to make a lot of money with only modest effort and capital.
How much money?
Would it seem out of the question that, with only four trades, one about every ten years, you could turn $35 into $100,000? Well, you could have…
Step #1: Be sure the trend is your friend
Global investment markets are extremely complex. However, if you take a hard, invariably contrarian, look at the bigger picture, there are times when you can spot larger trends in motion that are likely to stay in motion.
Casey Research Chief Economist Bud Conrad compiled the chart below that shows being directionally correct on a mega-trend is exceptionally profitable. String together a few of these mega-trends and there is a private plane and mansion in your future.
Of course, the odds are microscopic – but not impossible – that anyone made those exact trades at exactly the right time, but the lesson holds water nonetheless: catching big trends early can pay off in a very big way.
Step #2: Be sure you are right, then go ahead
Davy Crockett, in the War of 1812, was heard to say “Be sure you are right, then go ahead.” Important words indeed, with special relevance for investors looking to make extraordinary returns. After all, once you have settled on the trend to play, it will do you no good if you don’t take action.
But what is the current trend?
In today’s economic environment, the big money is being made in the natural resource sector with a focus on the junior gold stocks.
But isn’t the bull trend in gold a bit long in the tooth?
Certainly, the easy money was made by those who invested in the gold stocks before 2000. It was during this time that my partner Doug Casey, in the pages of the International Speculator, was a lonesome voice urging his readers to back up the truck on the quality gold plays. The following is from the November 30, 1999 edition of that letter (the lead article of which was devoted to urging readers to dump their over-appreciated dot.com stocks):
“The price of gold has drifted down somewhat, resting at $292 at the moment - about halfway between its low of $252 and high of $325. Was the move a flash in the pan or the start of something big? I remain a steadfast bull. Nobody knows what gold is going to do tomorrow; but I'm betting that in this cycle it's not just going through the roof, but to the moon.”
Since 2000, of course, gold has better than doubled, but the quality gold stocks have gone up much more… 400%, 1,000% or more (we just closed out one position, recommended in August, 2001 with a 4,329% gain). So, that was the easy money.
But we remain convinced that the big money in the gold bull trend is still ahead. Take a look, for instance, at the chart just below. As you’ll see, over the last 137 years the shortest gold bull market has lasted 10 years. By that measure we are only about halfway there.
And, for reasons I’ll touch on now, we don’t think this bull trend will be among the shortest… but very well could be among the longest… and strongest.
Why the Gold Trend Is Well Intact
There are many compelling reasons for this gold trend to surprise everyone with its persistent strength. But, in the interest of space and time, let’s cut to the chase.
The only real reason for gold to go higher is if investors feel that it will hold its value better than other forms of money. For instance, if you lived in Zimbabwe today and were offered an ounce of gold or a brown paper bag of rapidly depreciating Zimbabwean dollars, what would you take? (Hint: take the gold; inflation in Zimbabwe is so bad that a roll of toilet paper now costs over $200,000.)
But the world doesn’t trade off the back of the Zimbabwean currency unit. That honor belongs to the U.S. dollar which, as you are no doubt aware, has evolved into the de facto reserve asset of virtually every central bank in the world today.
That the unbacked currency of one country is now the core holding of all the countries in the world is unprecedented in the history of the world.
Books have been written about how it happened. The short version of this fascinating story is that it came about as a direct result of the U.S. being the “last man standing” after World War II. In 1944, as the war wound down, delegates from 44 war-battered countries gathered at Bretton Woods, New Hampshire, and after some arm twisting, agreed to accept the role of the U.S. dollar as the currency of global commerce. The decision to make the greenback the supreme currency was made easier because, as a component of the agreement, the U.S. agreed to make it always redeemable for gold.
Unfortunately, when dealing with politicians, “always” has a different meaning than to regular folks; in 1971, when faced with a run out of dollars, Richard Nixon unilaterally canceled the dollar’s gold convertibility. From that moment on, the U.S. dollar became an abstraction, backed by nothing at all… and unrestrained by anything other than political whim.
As you can see from Chart Three below, the creation of dollars since Nixon ended convertibility has been stunning.
There are many implications attached to this global flood of unbacked money. But the primary thing to ponder while looking at the chart is the definition of inflation. It is not the increase in the price of consumer goods, but rather an increase in the number of currency units. Of course, in time, consumer prices rise as a consequence of too many dollars chasing too few “things.”
And don’t forget that we have already seen some of the impact of all these dollars… in the dot.com bubble, in real estate, in oil and other commodity prices. Soon, once the Chinese and other emerging market companies stop selling the U.S. cheap goods – as the Japanese had done before them – we’ll see consumer prices rising too.
There is, in the chart above, an extremely important nuance, one that you can ignore to your peril, or understand to the core of your DNA and profit from the gold trend. Namely, the underlying reason for all that growth in money. Simply put, it is due to the nature of democratic politics. Expressed as a motto, it would be “He who promises the most money, gets the most votes.”
Since the end of gold convertibility, there have been no limits on what the politicians can promise or what they can spend. A fresh example is provided by the sub-prime credit crisis, in response to which the government has gone on record stating they would provide “unlimited” credit to banks.
Monster chickens, the product of decades of proliferate spending, will eventually come home to roost on a shaky house of cards. The monetary crisis that will follow will eliminate the U.S. dollar as a serious competitor to gold… the only asset that has withstood the test of time as money. And we are not talking decades, but millennia.
Step #3: Be timid when others are bold… bold when others are timid
Any number of the investors who entered the gold trend early look at the price action of the yellow metal over the last year – which has been flat to slightly down – and worry that this is a sign that this gold bull market is over and are stepping aside from the gold shares.
What they are doing is letting their emotions run their investment portfolio, a classic reaction during the “Wall of Worry” stage of any bull trend. They have made big money in gold shares, they understand the fundamental arguments, yet declining prices or volatility in the shares (which is especially prevalent in the summer months) gets them to thinking, then worrying, then selling.
Big mistake. Look at the chart below. It is the price of gold during the height of the last major gold bull market. Notice the long, almost two year, decline right in the heart of the trend.
That is what we are looking at now… a very normal, to-be-expected consolidation phase — understanding that fact opens the door to big profits. Right now you have the unique opportunity to buy the very best junior gold companies at a Wall of Worry discount, in essence taking an extraordinarily profitable, time machine trip back to an earlier point in this long trend.
Step #4: Buy right, sit tight
Most importantly a decision point arrives concerning what stocks to buy in order to make the most of this trend. And here we have two paths from which to choose.
The first, more conservative path, is to choose from among the big gold stocks – the larger producers that will find favor with the big money institutional players and hedge funds. These giant mining concerns will, when things get rolling, offer you solid double- and even triple-digit returns. In the last resource share bull market, triggered by a series of major discoveries in the mid-90s, for instance, Kinross went up 197% over a two year period; Barrick went up 57%; and Newmont 74%. Nothing to sneeze at when compared to “traditional” investment sectors.
The second, and most exciting path, however, is the one referenced earlier – the better quality junior exploration stocks. These are the junior Canadian stocks overseen by seasoned exploration geologists – many of whom used to work for a major – who use their knowledge and investor capital to find prospective new geology. When they find something, they typically joint venture it to a major company who spends the high-risk money on follow up drill programs. Or, they will sell their projects, or even companies, lock and stock for a barrel of money from the majors.
Returning again to the mid-90s resource stock bull market provides a measure of the potential of the junior exploration companies: Cartaway, up 26,040%; Arequipa Resources, up 5,692%; Francisco Gold, up 3,350%.
Over the last few years, a record amount of money has gone into exploration programs around the globe, money which will start coming back in the form of major discoveries in the next year or two. Pick up your shares now, then plan on holding them as this gold bull trend regains momentum. In other words, buy right, sit tight… and you’ll come out a whole lot better than just alright.
So, there you have it; an easy four-step way to turn a little money into a lot, with relatively little work.
In fact, if you agree with me on the trend and how to best profit from it, then all that’s required is for you to take the time to learn more about the junior gold exploration companies. Although it will take some dedicated time before work in the morning, or after you get home in the evening… the pay-off can be breathtaking.
Furthermore, given the financial turmoil gripping the world just now, gold related investments provide extremely important diversification of risk. In times of crisis, gold shines particularly bright.
But don’t put off getting on board this trend; the slow summer months, with Wall of Worry concerns helping to push great companies down, make this the right time to build a portfolio that makes the most out of this trend… a trend we expect to remain in motion for at least 5 more years, and maybe longer.
That spells opportunity of a very rare sort. Don’t miss it.
David Galland is the Managing Editor of Doug Casey’s International Speculator, now in its 27th year of helping investors earn spectacular returns through carefully researched and thoroughly unbiased recommendations on investments with the very real potential to provide a 100% or better return over a 12 month horizon. Today, it is following over 30 high quality resource stocks on behalf of subscribers, with new buy and sell recommendations monthly. To learn more about a no-risk, no obligation three month trial, click here now.
-- Posted Wednesday, 15 August 2007 | Digg This Article