 Ian's Insights Vol 3 | Issue 1
No Risk - No Reward!
Ian Gordon
Longwave Group
Posted Oct 20, 2010
I'm just saying that I've been thinking
about 'Risk' and specifically about risk in the securities markets.
What prompted that thought? Well it's because for my own account
since the beginning of the year 2000, all my investments have
been made in precious metals equities, most of which have been
in gold equities, and all of which have been in the junior category.
How's that for risk? Well I think most of you would answer to
that question, 'it's a stupid risk,' and more so if you knew
that I turned 58 years old in September 2000.
So what is risk? In investing, it is
the uncertainty of return on capital. So, all investment strategies
are risky, whether it is money invested in government bonds,
the shares of so-called blue chip companies or start-up companies.
In investing, as in life, there are no guarantees.
As an ex-stockbroker, I've always been
amused by the so-called risk profiles that clients must complete
when opening their brokerage accounts. You know the ones, where
you tick the box that guides your broker into suggesting the
appropriate investments as per your desired risk tolerance level.
The regulators think that by this means they can pigeon-hole
risk. That's a joke, but I suppose it saves them from lawsuits
based upon inappropriate investment advice contrary to a client's
desired risk tolerance level. I repeat that all investing is
risky. Three years ago, the sovereign debt obligations
of countries like Greece, Portugal, Ireland and Spain were, I
am sure, afforded the highest of credit ratings. So there you
have it, even countries can declare bankruptcy and before all
this Kondratieff Winter is over, I'm sure many will do just that.
In 2000, one of the darling stocks in
Canada and certainly one afforded a low risk profile was Nortel
Networks. I remember when Nortel's stock price peaked at (CAD)
$124.50 per share, it was still being snapped up by investors
who categorized it as a low risk. When the dot-com bubble burst,
Nortel's share price collapsed as well, falling, if I remember
correctly, all the way down to (CAD)$0.67 and with that drop
taking a lot of the wealth of the low-risk investors out of their
brokerage accounts. Eventually, that blue chip of all blue chip
companies expired, but only after its share price had rebounded
beyond $4.00 on the promise of a turn around.
Certainly, the highest risk designation
at most brokerage firms is afforded to 'speculative stocks.'
Please, can someone explain to me what are speculative stocks
and what are not speculative stocks? Since all investing is risky,
it stands to reason, therefore, that all investing is speculative.
One investment phrase, often used by
brokerage firms as a risk criterion is 'Preservation of Capital.'
There is absolutely no way and under no circumstances can anyone
provide a 100% guarantee for the preservation of capital. Even
if you were to hide your cash under your mattress, you wouldn't
be able to preserve its value, because of the insidious nature
of inflation that our central banks have been foisting upon us
for all our lives. Since its inception in 1913, the US Federal
Reserve has been responsible for a 95% depreciation in the value
of the US dollar.
However, let me tell you why in 2000,
I invested all my money in junior precious metals stocks (highly
speculative according to the 'Risk Tolerance' criteria at my
brokerage firm, and I suspect, at just about every other brokerage
firm, as well) ) and in so doing I was extremely confident that
I had minimized my exposure to risk. By the way, my investment
account has averaged an annual rate of return of about 75% over
the past ten years.
It boiled down to the fact that I was
absolutely confident that I knew exactly where we were positioned
in The Kondratieff Cycle. I knew that we were at the end of the
great autumn bull market in stocks (1982-2000). This determination
would herald the onset of winter. This is the deflationary/depression
season of the cycle, when debt is virtually expunged from the
economy. That process of debt elimination, I knew, would be very
painful to debtors and creditors alike and would cause severe
problems within the banking system. This, I also knew, would
be very bullish for gold. Moreover, I knew that following the
peak of the great autumn bull market in stocks, we would experience
a vicious winter bear market in equities. So, in early 2000 the
risk criteria should have been changed to reflect a gold bull
market and a stock bear market. Hence, investing in any gold
shares should now have been evaluated as 'low risk' and investing
in 'blue chip' stocks should have been considered very high risk.
As it turned out, these evaluations would have been appropriate.
Because of my understanding of the Kondratieff Cycle, that is
how I saw the markets unfolding and that is why I invested accordingly.
This considered 'High Risk' strategy was actually, for me, very
low risk. It has afforded me significant capital gains since
2000, despite the 2008 stock market debacle.
Reinforcing my conviction, there was
another metric that I was watching, which signaled we were at
the beginning of a huge bull market for gold and a devastating
bear market for stocks; that was the Dow/Gold ratio. (The Dow
Jones industrial Average divided by the price of an ounce of
gold). This ratio has always reached an extreme high, when stocks
performed well and gold performed poorly, such as in the Kondratieff
spring and autumn. Correspondingly, this ratio has always reached
an extreme low when the price of gold performs well, and stock
prices perform poorly, as in winter and summer. This ratio reached
a peak, much higher than any previous peak, as in 1929 and 1966,
at 43.85 in July 1999. That peak also, was a signal that stock
prices and the gold price were about to reverse direction; stocks
to the downside and gold to the upside. (See Ian's Insights Issue
1, Volume 1)
But why junior gold stocks? Wouldn't
the senior gold stocks perform just as well? Well, actually not.
If you can buy the right juniors at the right time, their price
will outperform their senior counterparts. (In an upcoming Winter
Warning, available only to subscribers, I will outline how I
manage my investment accounts and the criteria I use to select
specific junior companies). As the gold bull market got underway
you could buy junior gold mining companies with gold in the ground
assets for ridiculously low prices. Share prices of companies
such as Minefinders, Pelanagio, Nevsun and many others, all with
gold in the ground, increased tenfold or more. There are still
junior gold companies with significant gold in the ground assets
which can be purchased very cheaply today.
What now? I am still almost 100% fully
invested in junior gold mining shares. I have included a few
short positions in the portfolio through inverse ETFs because
the real monetary, economic and financial chaos brought about
by the greatest debt bubble in history still lies in the future.
When that chaos unfolds, the worldwide rush to own gold and gold
mining shares will take prices far beyond where they are today.
Owning these shares in such an environment is still, as I see
it, a very low risk. Oh, and another thing, the Dow/Gold ratio
is nowhere near its past lows, which has been 1. It is now about
8 having dropped from that 1999 high of 43.85 However,
I think the extreme low on the index will be around a quarter
to one; that is a quarter of an ounce of gold will buy the Dow
Jones Industrial Average. Investing in anything (stocks, long-term
bonds, real estate and commodities), other than gold bullion,
gold mining shares and preferably, junior gold mining shares
is, at this time, a very high risk investment strategy. Nonetheless,
we doubt that equity analysts and investment advisors will agree
with us.
###
Ian Gordon
website: www.longwavegroup.com
email: info@longwavegroup.com
Ian's Insights Issue 1
Vol 2 Lies, Manipulation and Deception - All for Naught
read
here [pdf] Aug 16, 2010
Vol 1 The Perpetual War - Gold vs Paper read
here [pdf] Jul 19, 2010
 Disclaimer: This information is
made available by Long Wave Analytics Inc. for information purposes
only. This information is not intended to be and should not to
be construed as investment advice, and any recommendations that
may be contained herein have not been based upon a consideration
of the investment objectives, financial situation or particular
needs of any specific reader. All readers must obtain expert investment
advice before making an investment. Readers must understand that
statements regarding future prospects may not be achieved. This
information should not be construed as an offer to sell, or solicitation
for, or an offer to buy, any securities. The opinions and conclusions
contained herein are those of Long Wave Analytics Inc. as of the
date hereof and are subject to change without notice. Long Wave
Analytics Inc. has made every effort to ensure that the contents
have been compiled or derived from sources believed reliable and
contain information and opinions, which are accurate and complete.
However, Long Wave Analytics Inc. makes no representation or warranty,
express or implied, in respect thereof, takes no responsibility
for any errors and omissions which may be contained herein, and
accepts no liability whatsoever for any loss arising from any
use of or reliance on this information. Long Wave Analytics Inc.
is under no obligation to update or keep current the information
contained herein. The information presented may not be discussed
or reproduced without prior written consent. Long Wave Analytics
Inc., its affiliates and/or their respective officers, directors
or employees may from time to time acquire, hold or sell securities
mentioned herein. In addition, the companies referred to herein
may pay a fee to Long Wave Analytics Inc. to be listed on www.longwavegroup.com.
Copyright ©2010
Longwave Group. All Rights Reserved.
321gold Ltd
|
