Golden Opportunities

Today I'd like to welcome John Rubino from Over the past few months I've come quite accustomed to checking out to get the latest breaking news on the stuff that REALLY moves the markets. John focuses on metals, the economy as whole, and yes the Dollar. Great site, take a look. He's also written a book talking directly about the collapse of the dollar, check it out here. Today I've asked John to talk about some interesting ways to take advantage of the markets recent implosion!


Golden Opportunities

The gold bugs are about to be proven right in a very big way. Most of them have placed their bets on the general proposition that the U.S. economy would implode in four distinct stages. First, the three-decade flood of easy money would cause a "crack-up" boom in which banks gave loans to pretty much anyone with a pulse and turned the resulting bad debts into toxic bonds and derivatives. Then, in Stage Two, the sheer weight of this misallocated capital would cause everything to fall apart (which happened this past month). Then (Stage Three) the world’s governments would panic, flooding the system with liquidity by lowering interest rates, bailing out banks and buying up pretty much any asset that threatened voters’ jobs or nest eggs.

With the passage of the U.S. bank bailout and similar plans in Europe, we’re clearly entering Stage Three. Now it’s time to start considering Stage Four, the credit bubble’s grand finale. This is when a critical mass of people notice that with government printing presses running flat-out, paper money is about to return to its intrinsic value--zero. The result: a global run on fiat currency, in which the dollar, euro, and yen all plunge, and the dollar price of real things like gold, silver, and oil soar.

It’s crucial to understand the role that precious metals play in this kind of currency crisis. They aren’t commodities like oil and wheat. They’re alternative forms of money that have functioned as a medium of exchange and store of value since the beginning of recorded history. After each failed experiment with fiat (i.e. government created and controlled) currency, these "sound" forms of money come back into style. Why? Because gold and silver can’t be created on a printing press. The only way to get more is to mine it from the ground, and historically we’ve found only about 2% more each year. This constrained supply means unscrupulous and/or panicked governments can’t simply legislate more money to buy votes. So gold and silver tend to hold their value. It takes about the same amount of gold to buy a bushel of wheat as it did in the Middle Ages. Today an ounce of gold buys the same ten or so gallons of oil as in the 1950s.

So as the world’s paper currencies are shredded into so much confetti, investors will swap their increasingly worthless paper for real money as fast as possible, at whatever price the market requires. Gold and silver will soar in dollar terms, and the market value of the companies that mine these metals will rise even further. Today, in short, is a once-in-a-generation chance to load up on precious metals miners. And the junior miners--the smaller companies that most people have never heard of--are especially interesting. They’ve been absolutely crushed by the recent credit troubles, as investors assume that they’ll be unable to attract the funds necessary to bring their newly-discovered reserves to market.

This is a classic case of throwing the baby out with the bathwater. Some junior miners are indeed in financial trouble, running out of cash and unlikely to find more. But many others raised capital before the credit crunch and have adequate cash to build their mines and start producing. When gold and silver take off, these stocks will go parabolic, putting up double-digit gains on a daily basis and tripling or better in a good month. There will be lots of good months. Here are three that fit the profile: Small, obscure, but with properties that have the potential to become highly-profitable mines. And more than enough cash on hand to see them through to the beginning of Stage Four, when the markets will shower them with capital.
Detour Gold (DGC.TO) is developing the Detour Lake deposit in Ontario, which contains more than 11 million ounces of gold, a huge resource by new-mine standards. On June 30, Detour had $65 million of cash and short-term investments and no debt. So it won’t need outside capital for at least the next two years. Claude Cormier, publisher of the Ormetal Report and an expert on Canadian juniors, really likes this one, and expects it to find more gold and eventually to be taken over by a senior miner for a big multiple of today’s price.
Andina Minerals (ADM.V) has a mine in Chile that Louis James, senior metals analyst with junior miner specialist Casey Research describes as “a genuine monster that is getting much bigger.” In its last financial report it listed $25 million in cash and no debt. Back in July, James referred to Andina’s $3.50 share price as “not cheap.” Since then it has fallen to around a buck.
Rubicon Minerals (RBY) in 2002 bought some land from a bankrupt miner in Canada’s Red Lake district, home to industry giant Goldcorp’s most productive mine. Since then Rubicon has found gold all over this property, both near the surface and far underground. The find looks like a true blockbuster. Rubicon has $22 million in cash and no debt, and its stock is down from a year-ago $2.25 to $1.40.
I’ll go out on a limb and predict that all three of these, plus about twenty other junior miners with similar profiles, will be ten baggers in the next few years. Golden opportunities indeed.

John Rubino runs the website and is co-author, with GoldMoney’s James Turk, of The Collapse of the Dollar and How to Profit From It (Doubleday, 2007). His previous books include How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street (Morrow, 1998).

9 thoughts on “Golden Opportunities

  1. Currencies will continue to be traded...all the way down. One month the dollar will be "strong" and the next month the yen will "rise". But it will all be against other paper currencies, which are generally falling in value as governments run the printing presses. Even historically sound currencies like the Swiss Franc will eventually fall because otherwise the Swiss economy would be unable to export to the weak currency countries.

    The only forms of money that can't be created by governments are gold and silver, so as paper falls, the metals will appear to rise. But they'll really just be holding their value while the unit of measurement changes. Once the process really gets going, expect panic buying of precious metals. Should be a wild ride.

  2. Hi SteveW,

    Thanks for your comment. I admit my reply may have seemed a little direct to you, though I am looking at the current situation from a number of fundamental facts.

    Even discounting any possibilities for shocks such as a serious incident for example between Iran and Israel, the impact of printing billions of US dollars will feed through to higher inflation.

    And this will mean that gold will rise in dollar terms, and in commodity market terms I guess that means a bull market.

    I am not able to say how high gold will go or when it can reach a peak. I would suggest you take a look at the video Adam did today (Is gold about to sky rocket?) Using the trade trianlgle technology, it shows the trajectory of spot gold going back to 2001 and where it may be heading from here.

    Lonely fx, thanks for your comment. I am no FX expert, but I dont think the currencies you mention, USD, Euro and Yen would have zero value. Each one may fall against another currency in a pair,as there is always a bull market in FX , so I understand.

    If the dollar is weakening against the Euro, then in the USD/Euro pair, there is a bullmarket for the Euro, or a bear market for the dollar.

    I feel you may well be right about the Swiss Franc. It has a well earned reputation as a strong currency, and especially in troubled times.

    So perhaps going long on Swiss Franc and gold?

  3. Hi David,

    Your response is well thought and valid in our current economic crisis. I'm not an economist but I have a ? for pointers.

    If as what brad mentioned, USD, Yen and Euro loses its value and become zero, does it also mean that Swiss franc becomes strong? I mean the Forex market will not disappear overnight so does it means any currency pair against Swiss franc (example USD/CHF) will fall?

    Time to do some investment in Gold and other precious metals....

  4. Hi David,

    Thanks your your well thought out response. I enjoy reading differing opinions and love to learn more about markets. I want to make clear that my analysis is not based on any fundamental data, as it states in the article in my blog post, I'm not an economist.

    My analysis is purely technical, and I'd love some comments, questions, or other input from a technical standpoint as well.

  5. This would be true if the economy doesn't go into a recession. Right now they economy is losing jobs and the unemployment rate is going up. Those are some bearish indications.

    Right now overlending and inflation has gotten us to where we are at. The rally in the dollar index (and rise in bank interest rates) is merely a correction for the significant amount of overlending in the market. Banks will continue to be stingy with credit so that they can get more good loans on the books to replace the bad ones. That will make the economy more recessionary, but it is totally nessecarry. It also reduces the money supply which creates deflationary pressures.

    It will be interesting to see what happens.

  6. This is a very interesting article by John Rubino, and I agree with his analysis of the four stages.

    Just this evening the IMF has said that the world economy is facing its most dangerous crisis for 70 years.

    It says the challenge facing all governments is to stabilise their economies and to keep a control of inflation.

    So, as John says, when inflation is set to surge then real assets are the safe haven. With governments looking as if they will have to keep printing money, paper oney will lose even more value.

    And if economic growth does stutter, then we could face the worst combination, a stagnant gloabl economy and rising inflation, that is the dreaded "S" word: Stagflation.

    Gold is a safe bet in these times, and I don't agree with SteveW above who would not buy until gold is over $1,000.

    The fundamentals are screaming BUY. How many trillions of extra dollars does the Fed have to print before you realise where gold is going?

    The Triangle colour is Green!

  7. this is a really interesting article, thanks for the post!

    Being a technical analyst, I had to take a look at some charts:

    From a technical standpoint, gold has some work to do in order for this to play out. It's not a HUGE amount of work, but some work.

    If gold can shoot up past about 940 on strong volume, it would signal that the current short term downward price pattern is a continuation pattern. There is still HUGE divergence in several indicators, so gold is going to have to make a huge move on strong volume to undo said divergence.

    I would look to get long gold once it breaks significantly above 1000 on strong volume. Until then, from a technical standpoint, today is not a good entry point

  8. DayTrader’s Dream – A Bull Market Either Way
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  9. I've been wondering about when to step into the safety of gold. but now days the timeing is everything, sence its a traders market rather than a investers market anymore. and if your wrong you get crushed. now I know were to put it. hopefully it will be a winner like the inverse sector E.T.F.'s have been of late..thanks david

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