..
Gold Stock
Alert:
Bulls hate
riders
Bob Moriarty
June 2, 2003
Two weeks ago,
over the weekend, I penned a piece I called, "Caution, Caution,
Caution" where I suggested gold was about to get creamed
along with the Canadian Peso and I suggested investors show caution
with gold shares. My timing was as close to perfect as you can
get, on May 19th, gold shot up over $10. You can't time things
any closer than that.
My accuracy left a little to be desired but timing was perfect.
I thought of checking into a detox center to get off the drugs
but I don't use drugs, (I even gave up smoking, for heavensakes!)
So I have been thinking of starting, obviously my reality distortion
field is somewhat out of balance. Actually Barbara yanked that
Caution piece off the home page sharpish, and buried it in the
editorial archives page, and sent me off to the coin shop, red-faced
- with a fiver.
I was getting
nervous about gold shares, they had barely moved on a good up
move in gold. Obviously there is a connection between the price
of gold and the price of gold shares. But at times there is a
disconnect. And that's where I think we are and I think I know
why now.
I was right
about the dollar hitting a temporary bottom. This appears to
have taken place. It is not a final bottom (not by a million
miles) but the proverbial "dead cat bounce." Likewise,
gold shares have been weak. But I was dead wrong on the short
term direction of gold. Indeed, gold shot up about $20 before
retreating.
Then I came
across a
piece by Tim Wood
about the Yandal mine in Australia. Essentially, when Newmont
bought Normandy, they picked up the Yandal mine in Australia
whose brilliant management had not only sold forward 3.6 million
ounces of gold, they did it in US dollars so when the dollar
got stronger, the hedge postition got weaker. And they only could
prove up 3.0 million ounces of gold anyway. But the hedges contained
an interesting feature. The counterparties could demand early
payment once the book went underwater but Yandal could effectively
tell them to pound sand. Newmont has no liability for the liabilities
of Yandal even though they own the mine.
So a counterparty
demanded payment and Newmont offered them $.50 on the dollar.
So far, so good. But the key issue here is that the counterparties
have to balance their books. And once it looked as if Yandal
might be forced into receivership, the counterparties would get
caught in a position that they were now short gold which was
not covered. So in the past two weeks, the $10 spikes in gold
may well have been the result of Yandal counterparties being
forced into the market to cover existing positions.
Naturally if
they accept the Newmont offer, they will just as promptly dump
the gold they have recently bought. They are faced with Hobson's
choice of either no nag at all or the nag closest to the door.
I suspect if they can count, they will take the $.50 on the dollar
and be counting their blessings. If not, they are going into
the gold business where they will soon learn that gold in the
ground is not the same as gold in the hand. One can only hope
Barrick will learn that lesson soon.
The bullish
consensus on gold is above 81%. When everyone is bullish and
spouting on about how gold is going above $400 next week, use
caution. It probably ain't so. But any doubt as to if we are
in a gold bull market should have been buried last week with
the relevation that the real national debt for future commitments
is in the neighborhood of $44 trillion dollars. If we reduced
the Federal government by 50% tomorrow, we would still face a
deficit. (Isn't that a wonderful thought?)
Some of the
sentences in the
testimony before Congress were terifying.
"The fiscal
imbalance grows by about $1.5 trillion each year between
2004 and 2008."
"the government
must make cuts or increase revenue totaling more than
$43.4 trillion in future years so that, when discounted
to today, the sum of those cuts and extra revenue equals $43.4
trillion."
In essence,
the United States of America is essentially broke and getting
another $1.5 trillion dollars in debt each year. And what do
we get from those bright sparks in Washington today? A tax cut.
How wonderful and thoughtful of them.
I'm 56. A snowball
in hell has a better chance of survival than I have of ever collecting
what I have put into Social Security. I'm really responsible
for myself and my family. If I don't provide, the government
sure as hell isn't going to be able to. So my retirement funds
are 100% in gold. There are times such as now where I will ease
out of positions since I believe prices on shares will be even
better in weeks to come but you either protect your future or
you had better be picking out a nice bridge to live under.
But what about
Real Estate? Aren't we in a roaring bull market in Real Estate?
Well, yes we are. As a matter of fact we are in yet another bubble.
No, make that two bubbles. As a result of all the excess liquidity
dumped onto the markets by 'Sir' Alan, Real Estate has evolved
into a bubble even more significant than the late stock market
bubble. Because everyone lives somewhere and when Real Estate
crashes, it will affect 100% of Americans. It's going to affect
even you. Unless you are already parked under a bridge.
How do I know?
Well, in the 1960s I got sent to an 8 week Army Intelligence
school at Fort Holibird in Baltimore, Maryland. The essence of
the course was that you should open your eyes and look around
and you really didn't have to believe stuff just because someone
told you something was true. If what you see with your own eyes
varies from what you are told, you should go with what you see.
Barbara and
I live in a fairly modest condo in Miami. In the last year prices
have gone up by 50%. That's pretty strong evidence of a bubble
to me. It takes 3-4 months to rent out a unit here but you can
sell one in a week. Our next door neighbor used to be a well-paid
programmer and had no problem at all finding a new job anytime
he wanted. Now he's a $25,000 a year Airport Nazi sorting though
ladies underwear trying to sniff out weapons of mass destruction.
If his family relied on his pay to afford a month's rent here,
the value of these places would be 1/3 of what it is now.
We are in a
housing bubble. It will break no later than the first time interest
rates go up. It may well break before then, the American consumer
is tapped out and zero percent down on cars doesn't work any
more to create demand. We are only a short time from the same
thing being true of Real Estate. All the fools who didn't give
all their money away in the stock market have lined up to place
their bets on Real Estate and want to crowd through the door
right at the top. Good luck to them.
And the other
pending bubble is the bond market. Few investors realize it but
the bond market is many times larger than the stock market. I
laugh everytime I hear some talk about the "impending gold
derivative time bomb." It's been "impending" for
five years now. So it isn't all that "impending." As
a matter of fact, if gold can jump from $252 to $390 and nothing
happens, it sure looks like the time bomb is a weapon of mass
distraction.
Gold derivatives
actually only represent 1/5th of 1% of all derivatives. So what's
the big deal on a time bomb? After all, total derivatives are
now around $150 trillion dollars and their sheer size guarantees
problems. Well, 89% of derivatives are interest rate related.
So when the bond market self-destructs (and that's on the cards
shortly) the entire derivatives market is going to melt down.
The bond market is a bubble. The US Federal Reserve is on the
verge of buying up the long bonds to lower interest rates. (Let
me see if I can understand this clearly. We are going to buy
up a bunch of funny looking but basically worthless bonds with
funny looking but basically worthless dollar bills. Why didn't
I think of that? Of course).
The dollar
is toast. When it is going down even against the Iraqi dinar,
you have a problem. Now and again, you will have violent counter
moves, that's where we are now. It's fun to watch the bouncing
cat, they do bounce good but a dead cat is still nothing more
than a dead cat. The dollar is a dead cat that Monica Lewinsky
couldn't suck start. But don't get caught on the up stoke. It's
due for a bounce.
Jay Taylor
says don't invest more than 5% of your money in any stock. That's
real good advice if you can afford it. You can't get hurt too
bad. Investing in gold stocks right now is about as difficult
as falling off a bike. The only thing which scares me is that
it's almost too obvious. But the American couch potato hasn't
even begun to buy so buying is as safe as it will ever be and
you will be making a lot more 10 bagger investments than you
have every seen in your life.
What stocks
do I like if they go lower?
1. Desert
Sun
(DSM) in the low $.80 range is pretty cheap. They brought in
more money when they were higher and are using it to advance
their Jacobina property in Brazil. I really like the idea of
a Canadian company working in Brazil. Brazil needs the jobs and
Canada isn't nearly as insane as the US.
2. Cardero and Ascot remain my favorite
silver stocks. 5 Ascot shares equals 1 Cadero share in value.
So anytime you can buy 5 AOT cheaper than 1 CDU, you are in effect
buying CDU at a discount. Right now it's about 35% discount.
Cardero is busy drilling their second best silver property. They
know they have excellent silver values but if they drill their
best property first, they may get a buyout offer at a lot cheaper
price than they think they are worth. If someone wants to be
a giant silver company, they will buy Cardero. At $5 or $6 silver,
CDU is going to glow like a 4th of July sparkler at midnight.
At $4.50 silver they will be profitable. They are a pure unlimited
option on the price of silver.
3. But if I
wasn't in love with Cardero, I'd be in love with IMA
Exploration.
(IMR) They stumbled, literally stumbled, onto one of the richest
silver properties I have ever heard of in Argentina. (Guess where
the name Argentina came from) Everyone in the mining industry
uses the term Bonanza. If someone finds a gold filled earing
on the ground, it's a Bonanza find. But IMA Resources has a bonanza
find for real. I talked about the stock when it was 25% lower,
it hit another yearly high at $1.07 on Friday and is still wholesale.
The company should be selling at twice what they are selling
for. That's until the first drill results come in. Then you can
fasten your seat belts.
4. Lakota
Resources
cut a up to $10 million US deal with Goldfields on their premier
property in Tanzania next to Barrick's Bulyanhulu mine. As usual
Barrick was a day late and a dollar short and may well wake up
one day to find a Goldfields mine right next to them. Lakota
hit a new yearly high of $5.25 a week ago on the news released
in an excellent story on them in the Northern Miner. Also the
company has begun to trade in Frankfurt. With a $65 million dollar
cap, the stock isn't the great gimmie it was 9 months ago at
$1.35.
5. If you could
only afford one gold stock or need a core gold position, it should
be Apollo
Gold.
APG is down 50% from its yearly high and it was absurdly cheap
then. These guys are run by the sharpest management team in the
business, they keep announcing exciting results and the market
just yawns. I'll bet the market won't be yawning when they are
up 300%. Apollo at $3 Canadian is like stealing candy from a
baby.
6. If you like
management teams and could combine that with a stock with twice
the leverage of the average small producer/exploration stock,
you have to love Endeavor
Mining Capital.
EDV is selling at a 33% discount to their yearly high and probably
a 40% discount to Net Asset Value. If that doesn't interest you,
EDV is loaded to the gills with warrants and shares of such companies
as Apollo, Wheaton River and Northern Orion. If gold goes up
10%, small golds should go up 60%, they have a 6-1 leverage.
But EDV has twice the leverage so they should be going up 120%
with a 10% move in gold. Don't believe me now, wait until they
are selling for a multiple of what they are now and then kick
yourself.
Bob Moriarty
Archives
Email bob@321gold.com
Jun 2, 2003
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