Wednesday, November 28, 2012

More Thoughts on Gold

With gold trading at nearly 1800 dollars an ounce, (with commission) I had a reader email me the other day and ask me about gold and some other vehicles for getting invested- primarily because he did not have 1800 bucks laying around to buy an ounce of gold every month.

I think the time is getting short. Two dollar gas is gone forever. So is 1200 dollar gold. In a hyper inflationary event, cash will be trash. It will not be worth going to work because the gas may cost more than you will earn that day. All that remains to be seen is a gold backed currency that people can trust in and buy again. When that currency arrives, the dollar will be declared officially dead.

I am going to make the most definitive and comprehensive case for owning gold via bullet points without a lot of explanation. After that, I am going to list some ways to wade into the gold market.

First off, let me say this. Banks are still in charge. *They sold 8000 contracts this a.m. on absolutely no news, with no bid, and drove the price down some 25 bucks in a minute or two. This happens with impunity. are the counter party to the long gold trade. That's ok. Every story has an antagonist. I am not an expert but I've been making money trading bullion throughout my life. Oddly, I have never traded mining stocks until recently. So let's take a look.
  • Worldwide derivative (debt) exposure has been estimated at 1.5 quadrillion. 
  • Japan, most of the Eurozone, and the United States are completely bankrupt. 
  • There is nothing backing these currencies. They are being counterfeited in large amounts.
  • The world is auditing, repatriating, and hoarding gold. Especially India and China.
  • The world is running out of new gold and silver production, new and rich ore bodies are  scarce or non existent.
  • Less than 1% of the world's population owns gold. It is still exceedingly rare.
  • Countries (China, Russia, Iran) are trading oil and other goods for gold to bypass dollar exchange rates. Gold is real money.
  • Gold in storage may be encumbered and missing. Nobody has even seen Fort Knox gold for 40 years. It is the U.S. Treasury's to sell... and they don't need your permission.
  • As gold becomes harder to find and produce, other precious metals will come into focus.
At prices north of 1800 dollars, cash rich miners will begin kicking tires, buying junior miners with promising claims or forming partnerships.
  • Gold and other precious metals are the only liquid way to preserve wealth in an inflationary storm.
  • Costs of production may soar.
  • Producers may quit selling their product. Think about that.
  • Any number of black swan events could trigger a mass exodus into gold. If you are not there when it happens, you will be shut out. 
  • Never have I seen such a perfect storm brewing, not even on a historical basis.
As I analyze all of the upside potential, I don't see anything limiting gold. Rather, I only see things that enlarge demand. I am even seeking exposure to other metals. Copper, nickel, lead.

Bullion is always the preferred method of precious metals ownership. But gold at 1800 is a lot of money. Buying smaller bars and gram weights subjects you to huge premiums. As a rule of thumb, never pay more than 5-8% in premiums to a bullion dealer.

I don't think it matters whether you buy the latest kookaburra or Johnson Mathey bars. Silver should have .999 purity, I want gold with ( 4-9) 999.9 purity.

If you only have hundreds or a thousand or two of disposable wealth to get into precious metals, I would suggest opening an account and buying shares of Eric Sprott's PHYS or PSLV. Those trusts have real metal, audited and accounted for. Shares are redeemable in metal.  Shares are also priced fractionally lower than the metal. Around 14 bucks currently- in each. You don't have to pay huge premiums or storage costs. I think they are perfect investment vehicles. 

If you want to speculate on miners, especially the ones who might get taken out on a bid, find ones with real producing claims that actually make money. Like Kinross. If you want junior miners, (miners kicking tires, looking for good assays, claims) make sure they have at least some potential. Mining is expensive. Most start ups can't afford to mine on their own. What you are really hoping to do is sell your claim to a bigger, well financed outfit at a premium. Be wary of very small pink sheet miners. Often, they are just a scam.

Use your own due diligence to analyze balance sheets, earnings, virtually everything a CEO says in a prospectus. Words come very cheap when selling stock. 

I use options to buy into producing miners. Think about that. Would you rather control 100 shares of Kinross when some suitor comes to buy them- or 10 contracts that control 1000 shares at a lesser price than the stock trades for? (I own Kinross calls) Of course you can lose some or all of your investment if the options are not sold or exercised in the money.

It makes a lot more sense to be a big miner looking to buy smaller miners than vice versa. So in that sense, Kinross makes more sense than Barrick. Although I have seen vice versa happen.

I don't trade futures. I don't like the idea of bankers manipulating paper and whipsawing investors. It's like sitting in a no limit poker game with 200 dollars when everyone else at the table has 5000 grand. The bankers have agreed to collude and carve up anyone entering the game. That's what they do and the CFTC simply turns a blind eye to it. If you look around and can't find the pigeon in any game- you're it.

So that's about it. I surf the Golden Truth, Harvey Organ, TF Metals, 321 Gold, FOFOA, and Zerohedge daily. I do a lot of research through my brokerage account and I now have a list of 60 miners which continues to grow. I watch all of them as well. I think 2013 is shaping up as one hell of a crazy year. Not in a good way either- unless you have backstopped yourself with a little gold and silver.

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