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).