It was a glorious thing to behold gold breaking into 4-digit territory. But this glory was tempered by the unsettling feeling of watching the stock market tank and the dollar continue to spiral into the abyss of worthlessness. Gold investors will weather the storm, but it will be painful to watch the middle-class get squeezed, while the poor and elderly suffer as they rapidly lose purchasing power. I have been warning people around me to get out of their company-sponsored 401k “growth funds” or IRAs and have been receiving a range of reactions from indifference to genuine concern.
Commodities are the obvious inflation hedge and have historically appreciated during economic downturns. But we have never seen the world’s reserve currency quite this sick or stagflation quite this threatening. In fact, stagflation wasn’t even believed to be possible by most economists prior to the 1970s. One of the many flaws in the Keynesian school of macroeconomics was to assume that inflation and stagnation would not occur together. Printing more money was the easy cure to a slowing economy and contracting the money supply would take care of inflation. But what happens when dumping boatloads of dollars into the economy does not stimulate growth? Stagflation is the name of the dilemma which exists wherein the central bank has rendered itself powerless to fix either inflation or stagnation. We need only look back to the 1970s to get an idea. The global stagflation of the 1970s was largely started by a huge rise in oil prices, but then continued as central banks used excessively stimulative monetary policy to try to avoid the resulting recession (stagnation), causing a runaway wage-price spiral. Sound familiar?
So with stagflation on the horizon, the logical question for investors is…
“How do I shield my assets and profit during the coming collapse of the dollar and the stock market?”
The short answer is to invest in commodities and short the stock market or particular sectors that are the most overvalued. But it is important to consider that any gains you might realize in U.S. stocks will be diluted by the force of inflation. After all, if your portfolio of U.S. stocks goes up by 12% in a year and the dollar loses 15% of its value in that same year, you just realized a 3% loss. The reality is far grimmer, as most investors have lost between 10-20% of their portfolio value over the last year. Add in the 15% inflation and many Americans have lost over 30% of their 401k, IRA or investment portfolio in the past year and are probably oblivious to the fact.
You can avoid the inflation issue by holding physical gold and there are certainly many hardcore goldbugs who advocate holding only physical metal. After all, paper is paper and if the system comes crumbling down, you want to hold something tangible. While I share this concern, my position is a bit more moderate. I prefer to take advantage of the leverage offered by precious metals stocks and periodically convert a percentage of my profits into the physical metal. The approach captures the best of both worlds by maximizing returns and then using those returns to secure actual gold and silver, albeit at slightly higher prices.
The key is to overcome the inflation rate and find quality miners that are undervalued by the market. It takes a bit of grunt work, researching websites, digging through financial statements, evaluating feasibility reports and running comparative valuations. But the reward is well worth the effort and pays for itself many times over.
I recently came across a Nevada-based company that I think is one of the most undervalued and potentially explosive gold mining stocks available. The company is pathetically under-promoted, to the point that most gold investors, myself included until last week, have never heard of them. Their name has no reference to gold or mining and I am hard-pressed to find any investment sites mentioning them. But they have recently hired a well-known investor relations firm and have a very compelling story to tell.
The company acquired their properties just before the gold bull started kicking back in early 2002, when prices were still hovering around $300. They have since put together a solid management and operations team and recently completed feasibility studies on their two main properties. The results are extremely impressive for a company valued at just $10 million dollars and more in line with companies whose valuations are in the $100 – $200 million range.
They are currently securing financing and aiming at production before the end of 2008. I have spent a considerable amount of time performing due diligence and trying to punch holes in their story, but have failed to come up with an explanation for why they are so undervalued. It appears to simply fly under the radar of most investors, largely due to their lack of marketing skills. With the following feasibility results and the hiring of one of the top investment relations firms, I believe the market will take notice and this stock will soon be worth 10 to 20 times the current value. I know that sounds sensationalist, but let’s take a look at the actual numbers.
Between their two properties, the company has 3.5 million ounces of gold and 8.8 million ounces of silver (measured and indicated). The feasibility study estimates annual production of 100,000 ounces of gold at a cost of $260 per ounce, plus 126,000 ounces of silver. Assuming gold holds around $1,000 and silver around $20, this company will have revenues during the first year of production that are more than 10 times their entire market cap. This is all contingent on them being able to secure the necessary financing to put the projects into production, but with returns of this magnitude, I am sure they will have suitors. Speaking of suitors, they look like a really cheap takeover target for one of the major producers which already have mines on both sides of their properties.
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