 The
Casey Files
Mining and The Markets
Doug Casey
The
International Speculator
Nov 14, 2006
Even though the natural
resource bull market is now in full swing, the lumpeninvestoriat
still hasn't caught on to this trend. Doug Casey explains why
you should jump on the resource train before everybody else does...
Our concentration in the International
Speculator, at the moment, is mining. It hasn't always been
that way, nor will it be in the future. But it's been the best
possible place to be for the last five years, and I expect that
will remain the case for about the same time going forward. Simply,
the trend is our friend, for a number of reasons. Among those
is the well-established progression of market phases: Stealth,
Wall of Worry, and Mania.
The mining market was in a
stealth bull market from about 2000 to 2003, a time when nobody
but the pros (and readers of the International Speculator and
a few similar publications) even knew, much less cared, that
the sector even existed. The stealth phase is when the easy and
lower-risk profits are made; in those days a good number of companies
we recommended were selling for less than cash, giving us all
their other assets for free. Back at the time, there were very
few people who had the knowledge, or courage, to buy shares in
an industry that had been in a generation-long bear market.
We transitioned into the Wall
of Worry stage in 2003. At that point, metals prices were perking
up, and some observers realized that early investors had already
made a killing. As is typical for this stage, over the past few
years we have seen a smattering of reports out of major brokerage
firms talking about the sector from a "pros and cons"
point of view that run something like this:
The metals are going higher
because of demand pressures from China and India and supply constraints
from the dearth of exploration for a generation... No, they're
going lower because their prices have gone too far, and they're
selling way above production costs - and China could blow up
even while U.S. demand sags with a recession.
But wait, maybe the increasing
atmosphere of war will increase both supply bottlenecks and demand.
Yes, but this war won't be material intensive, with lots of tanks
and planes... OK, but massive inflation is in the cards, and
the smart money will run to raw materials. No, there's a chance
of a credit collapse, and it would crush pricey commodities.
Besides, it's mostly recent hedge fund buying that has driven
them up... Well, maybe to some degree, but the fact is that world
inventories are at historic lows... blah, blah, blah.
You've heard the arguments.
But all the while, the mining stocks keep moving higher. And
because of their immense internal leverage, many are quite underpriced
relative to the metals they produce (or hope to produce). So,
we're still in the Wall of Worry phase. When will it end? Hard
to say. But my guess is fairly soon. Then we should enter the
Mania phase.
All great bull markets end
in a mania. It's interesting to contemplate why this is; books
have been written on it. In essence, however, it's a matter of
psychology and economics. Psychologically, when people see others
making a killing, they can't help but join the party. Especially
if there's a credible reason why it's a good idea. The nice thing
about this gold bull market is that the story of why gold is
going up not only tells very well, but very few investors (in
today's world) have actually heard it. That means almost nobody
owns gold. And that's good, because it means the only thing they
can do is buy it.
The coming mania for gold stocks
will, I suspect, be extraordinary for a number of reasons. One
is that, due to the huge bull market in common stocks from 1982
to 2000, absolutely everyone who has any spare capital at all
has opened a brokerage account. They all got involved in the
Internet and tech frenzy and saw that it was possible to make
money in the stock market (even though very few actually did).
They're primed for another go at getting rich quick.
Meanwhile, economically, the
conditions are right for a mania in gold stocks. The government
has no option but to continue a massive inflation of the dollar.
And inflation inevitably does two things, among others: 1) create
a speculative psychology among the public, as they search for
some way to beat the debasement of the currency, and 2) direct
people's attention towards hard assets. And in terms of market
value today, most mining stocks aren't even micro-caps. They're
nano-caps.
The world's total market valuation
of publicly traded gold equities adds up to only about $150 billion,
or just .0033 of the $45 trillion combined value of the world's
equities.
When - not if - even a fraction
of the bigger investment pie starts to shift toward gold stocks,
these stocks should move at least as explosively as the tech
stocks did. My feeling is that what we'll see in mining stocks
over the next few years will be something for the record books.
Regards,
Doug Casey
for the Daily Reckoning
Editor's Note: Best-selling author and legendary speculator
Doug Casey focuses entirely on investments with the very real
potential to produce 100% or better returns over the coming 12
month period. Since 2000, Doug has been urging subscribers to
his International Speculator newsletter to "back
up the truck" on deeply undervalued junior gold and silver
exploration companies, literally making readers fortunes as a
result.
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-Doug Casey
The International Speculator
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