The Only Asset Worth Betting on—You Guessed It! This Story’s Just Getting Started

If this is the decade of the commodity, then the single most attractive area for equity speculators remains the gold-mining business. The entire industry is swimming in cash, while spot prices and physical demand for precious metals remain strong. Gold, silver and copper have been holding up exceedingly well, as the rest of the stock market corrects. And it isn’t just the store of value argument or the so-called haven status of gold; the fact of the matter is that the global supply of the commodity is relatively unchanged, while demand (particularly from India and China) is going up.

If I had to choose one stock market sector to focus on as an analyst and investor, it would be precious metals—gold in particular. It’s one of the few global industries with improving fundamentals and, because there is always demand for physical precious metals (even if economies are in recession), there are always companies out there worth speculating on.

Right now, the rest of the stock market is in significant turmoil and there’s a lot of fear driving the share price action. But gold shares have been outperforming the market not only because the spot price is hitting new records, but also because gold-mining companies are now consistently reporting record financial results.

It can be difficult stock picking in the mining universe. There’s nowhere near the number of fly-by-night gold miners as there used to be. Standards for drilling results and feasibility studies are now quite stringent and I would argue that a Street analyst is likely to be more accurate in predicting the cash flow from a modern mining operation than just about any other kind of business.

There are basically two kinds of mining opportunities for equity speculators. There’s picking an established producer with a forecast of cash costs and expected production. Then there’s the pure-play venture capital opportunity, which is a company with a property and some cash in the bank to go drilling for metal. Either way, you have to do your homework or you’re just throwing darts at a board.

In the current environment, I would weight a speculative, pure risk-capital equity portfolio somewhere close to 50% in gold-related investments. From my perspective, it’s the only industry that’s generating meaningful growth and it’s the only way for speculators to beat the current volatility in the broader stock market. Investing in gold is something that not all people are comfortable with. The business is tied to a commodity and, by their very nature, commodity prices are risky, unpredictable instruments. But with the general economy stalled and the stock market in the doldrums, gold mining is one of the few booming industries with strong expectations.
Gold Stock Market

Guess Which Industry Is Reporting Outstanding Financial Results?

Gold miners are reporting their second-quarter earnings right now and, for the most part, they are awesome. If it’s one thing that gold-producing businesses have learned over the last few years, it’s that there’s no need to hedge the price at which they sell their gold. The outlook for the spot price of gold has been so uniformly strong that virtually no mining company engages in a major hedging program to protect their profits. There hasn’t been any need, especially with the spot price hitting new records all the time.

One benchmark company that’s a good indicator as to the health of the gold mining industry is Yamana Gold Inc. (NYSE/AUY). The company is currently worth about $10.0 billion in stock market capitalization and I refer to as one of the top mid-cap gold miners within the industry. The stock is highly liquid and is well followed by the Street.

Yamana is a Canadian gold mining company with significant gold production and development properties in Brazil, Argentina, Chile, Mexico, and Central America. The company is producing gold and other precious metals at intermediate-company production levels, in addition to a significant amount of copper. Recently, the company reported record financial results for its second quarter. New records were achieved in revenues, cash flow, and earnings.

According to the company, its revenues grew to $573.3 million in the second quarter on the sale of 220,376 ounces of gold (excluding its Alumbrera operations), 2.1 million ounces of silver, and 41.6 million pounds of copper. This compares with revenues of $351.4 million generated in the same quarter last year on the sale of 186,921 ounces of gold (excluding Alumbrera), 2.6 million ounces of silver and 31.6 million pounds of copper (excluding Alumbrera). Any way you cut it, this is excellent growth.

Yamana generated record net earnings of $194.7 million during the latest quarter, representing an increase of 178% compared to earnings of $70.1 million generated in the second quarter of 2010. Earnings per share increased 189% to $0.26 on a basic and diluted basis. Cash flow generated from operations (before changes in working capital) grew to $331.0 million, or $0.44 per share, compared to $194.3 million, or $0.26 per share, for the second quarter of 2010.

Company management cited that its financial success was due to strong cost controls, an increase in gold, silver and copper volumes, and higher prices for all commodities. Yamana finished the second quarter with $520.9 million in cash, representing an increase of $190.4 million since December 31, 2010.

Even the technology sector can’t seem to touch the growth rates currently being achieved in the gold-mining business. It’s the one industry now that seems flush with cash and great prospects for the future. Right now, the big investment banks are saying that investors should be buying gold. In fact, equity investors should have been buying gold years ago. With the age of austerity upon us, a weaker dollar and inflationary pressures revealing themselves, gold should be one of the top outperformers over the next few years.
Gold Stock Market

Debt Crisis in Europe Highlights Continued Strong Fundamentals for Gold

It’s pretty difficult to get enthusiastic about the stock market with sentiment so focused on the sovereign debt situation inGreece. Even in the face of solid earnings expectations for the third quarter, investors are looking into the future and seeing slow economic growth, translating into slower earnings. It’s the perfect storm for equities and it makes choices for equity investors very limited.

The one sector that continues to stand out in my mind as offering the best risk-versus-reward scenario is precious metals, especially gold and silver. Both these commodities are experiencing a well-deserved correction and the fundamentals for higher spot prices remain intact. With investment risk very high in the equity market and so much uncertainty surrounding European banks and the euro currency, gold is going to be a key asset over the next several years.

And, even without all the turmoil surrounding sovereign debt in Europe, the fundamentals for gold are strong in the face of a huge increase in the U.S. money supply, inflationary pressures, and central bank demand for gold bars.

And don’t tell me that inflation isn’t an issue. The last time I checked, prices for things weren’t going down. Inflation jumped to three percent in the month of September in the 17 countries that use the euro currency, which was the highest inflation rate since October of 2008. And this is happening in a slow growth environment. I understand reduced expectations for global economic growth, but with the world awash in debt and countries stimulating their economies with increased money supplies, inflation is a very real threat and potential wealth destroyer over the next several years.

In any case, gold investments are one of the few asset classes that should outperform over the medium term and gold stocks should be on every investor’s radar screen.

The stock market is going through a tumultuous time right now, and has been doing so since the end of July. The S&P 500 Index just recently broke through its 25-day moving average and does not look healthy from a technical perspective. I wouldn’t be surprised at all if the Index hits 1,050 or even 1,000.

The saving grace over the near term should be third-quarter earnings, but any good news from corporations will be usurped by the debt crisis in Europe. Accordingly, equity investors will be well served by keeping a close eye on the spot price of gold and the opportunity for a new entry point. If everything comes apart in Europe, cash, gold and the U.S. dollar will be the marketplace’s only friends.
Strong Fundamentals for Gold Stock

Precious Metals Winners—Three Excellent Wealth-creating Stocks

One of the best things you can do as a serious equity investor is to review big stock market winners, even if you didn’t own them. It’s the same thing that professional athletes do. A golfer will review past golf tournaments. A race car driver will watch old races. The goal of the process is to improve your own game by seeing what has worked the best in the past. In the case of stocks, reviewing past winners helps an investor to hone his or her stock picking skills by helping him/her become familiar with what a big winner looks like and discover how it all came to be. It takes time and it takes effort, but then again, money doesn’t grow on trees.

Here’s a standout stock market performer: Silver Wheaton Corp. (NYSE/SLW). This is a silver company that’s benefitted from the huge price move in the underlying commodity. The stock is up well over tenfold since the market’s low set in March 2009 and the company continues to report record financial results.

Or, consider Allied Nevada Gold Corp. (AMEX/ANV). This stock has appreciated from just under $15.00 a share in early 2010 to its current level of just over $40.00 a share. The company’s earnings growth has been consistent. If you pull up a stock chart, you’ll also notice a strong consistency to its share price appreciation.

Then there’s Extorre Gold Mines Limited (TSX/XG). This stock has almost tripled since the beginning of this year. This junior gold miner has been increasing its estimated gold find at its main property in Argentina. The stock’s been on a tear while the broader market has slowly come apart.

These three stocks represent only a handful of excellent wealth creators in the stock market in recent history. You’ll notice that all three operate in the precious metals business, and this is no coincidence. Gold investments remain the most attractive for equity speculators and this trend is here to stay for the near future.

Most precious metal producers are happy with a spot price of gold of just over $1,000. This level is kind of like a threshold in terms of making good money extracting gold from the ground. But, imagine how the business model improves with the spot price of gold trading over $1,800 an ounce. That extra $800.00 is pure gravy. All of a sudden, your bottom line just got better by 80%.

Gold stocks are hot right now on a relative basis. They would be a lot hotter if the broader market weren’t stuck in the doldrums. Over the next 18 months, I think it’s fair to assume there will be a major consolidation within the gold mining industry, as producers bulk up on production in a world with very few new discoveries. There will be good money to be made speculating in gold shares. There’s going to be mergers and acquisitions and there’s going to be all kinds of companies reporting record financial results going forward.

It really is a great time to be in this industry. No other industry is drowning in cash like gold mining.
Gold stock market

The Debt Crisis Continues—It’s Like a Credit Card Shopping Spree After Losing Your Job

The spot price of gold is now well above $1,800 an ounce and gold stocks are reaping the benefits. Right now, the stock market is experiencing a crisis of confidence—not in the ability of corporations to generate earnings, but in the macro sense of country economies, debt and deficits. The global debt crisis is just that—a crisis—and it’s been building up for years.

When you have solid economic growth, an economy can support more debt, because it’s easier to service the interest payments. This is why investors weren’t selling on news of higher deficits and national debts. Traditionally, a central bank would partake in a combination of money-supply growth and cite economic growth as a way to keep dealing with rising debts. Now that the economic growth equation is out of the picture (as virtually all Western countries are experiencing little to no GDP expansion), the problem is growing by the day. It’s the same thing as being able to service a credit card with a large outstanding balance. As soon as the ability to service this debt comes into question, the problem starts to get worse exponentially.

So we have the European sovereign debt issue that the marketplace is worried about. Domestic economic news is negatively affecting sentiment and there is a lingering wariness about the possibility that we aren’t going to get out of the current malaise for quite some time. All this has sapped most of the positive investor sentiment in the marketplace.

My view is that this lackluster scenario (and expectations) will be with us for several months more and, in doing so, will create very good value in the stock market. But, very good values in stocks are meaningless if there’s no prospect for those values to get recognized. Stocks can’t advance in a meaningful way in my view without some sort of capitulation on the part of investors. Only then can the stage be set for a new advance.

Of course, the gold sector is flourishing with all this turmoil. I would say that gold stocks would be even higher today if we were in a bull market, but the top stocks for speculators in this kind of market are almost exclusively with gold. There just isn’t the growth out there in the rest of the economy.

Everything has broken down in this market since the sovereign downgrade of U.S.debt. The railroads corrected significantly and so have technology shares. It’s an across-the-board correction the trading action of which is very similar to what happened the same time last year. The stock market was able to recover from last year’s correction based on the expectation for decent corporate earnings. I think we have about one quarter left of a positive outlook on earnings. Without GDP growth, positive trading action in the fourth quarter is vulnerable.
Gold Stock

The Smartest Dictator of Them All Seizes All the Gold

You’ve got to love this guy, Hugo Chavez.

The President of Venezuela had already nationalized the banks and the oil industry. Now he’s going after the gold.

Chavez took to state television yesterday to tell his people that the gold industry is “run by the mafia,” so “We’re going to nationalize gold. We can’t keep allowing them to take it away.”

The Venezuelan leader said he would nationalize gold through a decree that he will issue in the next few days. Chavez said, “We’re going to convert it (gold)…into international reserves because gold continues to increase in value.”

Venezuela has large gold deposits. Gold mining in the country accounts for the production of about four tonnes of gold per year. Last year, Chavez told gold-mining companies that they could export 50% of the gold they produce, with the other 50% going to Venezuela’s central bank. Now he’s taking it all.

My simple interpretation of Chavez’s actions is as simple as Chavez himself: he has witnessed the value of the U.S. dollar plummeting against other world currencies since early 2009. He has also been witness to an outstanding rise in the national debt of the U.S., the downgrading of the U.S. credit rating, and the spectacular rise in the price of gold. He thinks he sees the writing on the wall. He may be right this time.

Michael’s Personal Notes:

Boy, was he ever wrong!

I’m talking about George Soros. His Soros Fund Management LLC sold 99% of its gold holdings in the first quarter of this year, as Soros was calling gold at that time “the ultimate asset bubble.” He was very wrong. Gold bullion has risen more than $400.00 an ounce, or 30%, since March 31, 2011.

I can understand Soros’ concern. Speculators are getting into the action big time. Options on the Comex to buy gold in the future at higher prices are the most popular and widely held. Since speculators often catch the tail end of a move, so much interest in gold call options is unsettling.

But let’s face the facts, after such a great year for gold bullion prices so far, I don’t think any of my readers would be disappointed to see a major correction start. I hope they would use that opportunity to average down their gold investments, as I would.

On the positive side, in respect to real demand, fear about Europe’s banking system with sovereign debt issues persisting is resulting in real demand for gold. Rand Refinery Ltd., which runs the world’s biggest gold refining operation pumping out the world-famous Krugerrands, can’t make the coins fast enough to supply demand.

Yes, speculators are in the options pits big-time betting that gold will go higher, which is worrisome. And demand for gold coins is also rapid.

Like all healthy bull markets, a good correction once in a while is needed to take the speculators out of the market. But don’t let a pull-back or correction in this long-running gold bull market deter you from looking at the glass as being half full, not half empty.

Where the Market Stands; Where it’s Headed:

We started the month with some big 400- to 500-point drops on the Dow Jones Industrial Average and with Standard and Poor’s downgrading of the U.S.’s credit rating. Investors got nervous and dumped their equity funds. And, just halfway through the month, stocks have almost recovered to almost breakeven for 2011. Another lesson in the risks of following the herd.

I continue to believe that we are in a bear market rally in stocks that started in March of 2009. That bear market rally is long in the tooth, but still has life left in it to drive stock prices higher in the immediate term.

What He Said:

“The conversation at parties is no longer about the stock market; it’s about real estate. ‘Our home has gone up this much’ or ‘Our country home has doubled in price.’ Looking around today, it would be very difficult to find people who believe that one day it could be out of vogue to own real estate because properties would be such a bad investment. Those investors who believe a dark day will never come for the property market are just fooling themselves.” Michael Lombardi in PROFIT CONFIDENTIAL, June 6, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.
All The Gold Stock

The Smartest Dictator of Them All Seizes All the Gold

You’ve got to love this guy, Hugo Chavez.

The President of Venezuela had already nationalized the banks and the oil industry. Now he’s going after the gold.

Chavez took to state television yesterday to tell his people that the gold industry is “run by the mafia,” so “We’re going to nationalize gold. We can’t keep allowing them to take it away.”

The Venezuelan leader said he would nationalize gold through a decree that he will issue in the next few days. Chavez said, “We’re going to convert it (gold)…into international reserves because gold continues to increase in value.”

Venezuela has large gold deposits. Gold mining in the country accounts for the production of about four tonnes of gold per year. Last year, Chavez told gold-mining companies that they could export 50% of the gold they produce, with the other 50% going to Venezuela’s central bank. Now he’s taking it all.

My simple interpretation of Chavez’s actions is as simple as Chavez himself: he has witnessed the value of the U.S. dollar plummeting against other world currencies since early 2009. He has also been witness to an outstanding rise in the national debt of the U.S., the downgrading of the U.S. credit rating, and the spectacular rise in the price of gold. He thinks he sees the writing on the wall. He may be right this time.

Michael’s Personal Notes:

Boy, was he ever wrong!

I’m talking about George Soros. His Soros Fund Management LLC sold 99% of its gold holdings in the first quarter of this year, as Soros was calling gold at that time “the ultimate asset bubble.” He was very wrong. Gold bullion has risen more than $400.00 an ounce, or 30%, since March 31, 2011.

I can understand Soros’ concern. Speculators are getting into the action big time. Options on the Comex to buy gold in the future at higher prices are the most popular and widely held. Since speculators often catch the tail end of a move, so much interest in gold call options is unsettling.

But let’s face the facts, after such a great year for gold bullion prices so far, I don’t think any of my readers would be disappointed to see a major correction start. I hope they would use that opportunity to average down their gold investments, as I would.

On the positive side, in respect to real demand, fear about Europe’s banking system with sovereign debt issues persisting is resulting in real demand for gold. Rand Refinery Ltd., which runs the world’s biggest gold refining operation pumping out the world-famous Krugerrands, can’t make the coins fast enough to supply demand.

Yes, speculators are in the options pits big-time betting that gold will go higher, which is worrisome. And demand for gold coins is also rapid.

Like all healthy bull markets, a good correction once in a while is needed to take the speculators out of the market. But don’t let a pull-back or correction in this long-running gold bull market deter you from looking at the glass as being half full, not half empty.

Where the Market Stands; Where it’s Headed:

We started the month with some big 400- to 500-point drops on the Dow Jones Industrial Average and with Standard and Poor’s downgrading of the U.S.’s credit rating. Investors got nervous and dumped their equity funds. And, just halfway through the month, stocks have almost recovered to almost breakeven for 2011. Another lesson in the risks of following the herd.

I continue to believe that we are in a bear market rally in stocks that started in March of 2009. That bear market rally is long in the tooth, but still has life left in it to drive stock prices higher in the immediate term.

What He Said:

“The conversation at parties is no longer about the stock market; it’s about real estate. ‘Our home has gone up this much’ or ‘Our country home has doubled in price.’ Looking around today, it would be very difficult to find people who believe that one day it could be out of vogue to own real estate because properties would be such a bad investment. Those investors who believe a dark day will never come for the property market are just fooling themselves.” Michael Lombardi in PROFIT CONFIDENTIAL, June 6, 2005. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.
All the Gold