 The
Casey Files
Precious Metals: The Speculation
of a Lifetime
David Galland
Managing Director
Casey Research, LLC.
Feb 5, 2007
Here at Casey
Research we come across three types of investors.
By far the largest group would
identify with the phrase "go along to get along." They
invest in "ideas" from their broker and mainstream
financial rags. If feeling adventurous, they tune in to Cramer's
Mad Money for a hot tip.
There is, in our view, much
wrong with that approach. For starters, a broker is paid to move
stock and generate commissions, a built-in conflict of interest.
And once a stock gets written up in Forbes or shouted
up by Cramer, it is the exact opposite of a "hot" story.
The second group are the dice-rollers.
They buy touts from telephone salespeople and haunt the financial
chat rooms looking for "home runs." In their youth,
they were the "opportunity seekers" who sent away for
the kit guaranteeing a six-figure income from the comfort of
a living-room chair. There isn't much one can do for them. They
will either learn their lesson on the cheap and reform, or lose
all or most of what they have.
The third type is the rational
speculator. This rare breed understands the key tenets of serious
investment success. In no particular order:
- You rarely get hurt paying
less for an asset than it is worth... and just because no one
seems to want it at the moment doesn't mean it's worthless.
- Risk and reward are linked.
While not all risky ventures hold the promise of high returns
(e.g., sending money to a Nigerian bank in the hope of receiving
a fortune is all risk and no potential return), all investments
offering high returns carry higher risk.
Understanding this link, savvy speculators do their homework
to understand the risk side and, where possible, reduce it.
- Think contrarian. That is
the polar opposite of getting your investment advice from mainstream
media. When Doug Casey first spotted the spectacular upside for
uranium stocks in 1998, nuclear power was being universally shunned.
But Doug saw what others didn't -- that (A) nuclear was the only
practical mass power alternative, (B) uranium had fallen so out
of favor, and its price beaten down so low, almost no exploration
was being undertaken, even though (C) supplies were being drawn
down to critical levels.
In hindsight, spotting that speculative opportunity seems a no-brainer.
And, if you had been thinking like a contrarian and avidly studying
out-of-favor markets, it would have been.
There is one final tenet to
keep in mind about speculation.
Most people invest 100% of
their money in the hope of earning a 10% return. A rational speculator,
on the other hand, looks to invest just 10% to 20% of their money
in investments that hold the potential for a 100% or better return.
Over the last two weeks, I've
heard from two old acquaintances whose retirement nest eggs -
millions in all - were wiped out by a series of bad trades in
traditional stocks recommended by their mainstream brokers. A
rational speculator, even after a complete wipe-out, would still
have 80% to 90% of his money to start over with.
Now let me bring all these
points together in a way that could hand you returns most investors
would consider outlandish. In fact, it may be the best contrarian
speculation of your lifetime. It starts by answering a simple
question...
Will Precious Metals Continue to Soar?
When asked about the outlook
for the economy, most investors will answer something to the
effect of... "My broker at XYZ Securities thinks the broad
U.S. stock market still has a good run ahead of it." In
other words, they leave their thinking about the future to their
brokers, the individuals who tend the myth of the permanent bull
market (perhaps gently interrupted by occasional "soft"
landings).
Which brings me to the speculative
opportunity.
Simply and for some good reasons,
take the contrarian side of the mainstream broker's trade by
investing in the sector that historically does best when the
economy does worst: precious metals and, for serious leverage,
carefully selected precious metals stocks.
Remember, the potential is
so great that no more than 10% to 20% of your portfolio is required.
Here's what you'll be betting
on.
- That the Fed won't be able
to juggle the Mt. Everest of debt, the deflating housing bubble
and the potential stampede out of the U.S. dollar by foreigners.
Something has to give, and we think it will be the dollar...
inevitably good for precious metals.
.
- That because -- for the first
time in history -- the unbacked currency of one nation (the U.S.)
is the de-facto reserve currency of all the world's central banks,
a collapsing dollar will lead to a global monetary crisis.
.
- That the current war in the
Middle East will have serious and long-lasting consequences that
require massive new infusions of money on top of already out-of-control
government spending. And the fighting may trigger a larger conflagration
that sends oil over $100... a highly inflationary outcome.
There are more reasons to make
your contrarian bet on precious metals just now, but those should
suffice, given the space available here.
But There's More...
Your contrarian bet gets even
more compelling when you consider that, historically, gold bull
markets last a minimum of ten years. Gold bottomed in 2001, so
we are just a bit over 5 years into the current bull market.
And, based on the historic dislocations in the global economy,
we don't think that this bull market will be anything close to
"average."
One important early result
of the bull market in gold and silver is that the junior exploration
sector has been energized by an infusion of new capital. Serious
exploration and drilling programs are already running on serious
targets.
It has taken time and patience,
but that patience is about to be rewarded, as exploration programs
head into their advanced stages - where we can actually see which
companies have found deposits big enough and rich enough to be
mines. In that regard, 2007 should be a banner year... and you
definitely want to place your contrarian bets before the newest
crop of discoveries are announced in the weeks and months just
ahead.
Historically, when you match
up a bull market in precious metals with major mining discoveries,
you get the kind of roar that can turn your speculation into
a fortune.
The mere fact that you are
reading this hints that you are thinking about jumping on the
precious meals bandwagon -- but don't stop thinking like a contrarian.
Keep this most important point in mind: not one in ten U.S. investors
currently owns a single gold stock. They know nothing about them,
but they do have brokerage accounts and they do like a good story.
As the U.S. dollar comes under
pressure - as it must - the story of gold and silver as alternative
stores of wealth will begin to make the rounds, and it will be
a story that tells very well. At that point, public interest
will soar, and the contrarian bet you make today will start flying
on afterburners.
Early pays. Early pays big.
So the time to act is now, before the stocks get pricey -- not
when you are hearing about junior precious metals explorers in
Forbes or from the mouth of Jim Cramer on Mad Money.
At that point, the tide will already be cresting, and we'll be
cashing in on what now is shaping up to be the speculation of
a lifetime.
David Galland is the Managing
Director of Casey Research, LLC., publishers of Doug Casey's
International
Speculator, one of the nation's oldest and most respected
publications dedicated to identifying rational speculations with
the very real potential to earn 100% or more in a year or less.
Do you have what it takes to
be a rational speculator? Learn more about a risk-free 30-day trial
subscription to the
International Speculator - click
here now.
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