“History has shown us, time and again, that the greatest leverage to gold’s rising price is owning gold exploration/development junior mining stocks. Will mainstream investors eventually catch on to the fact they need to own gold and to own gold shares?”

Words: 696

So says Richard Mills (www.aheadoftheherd.com) in his most recent article* entitled “Dow/Gold & Summer Doldrums” currently being distributed to the various financial sites for posting consideration. Below are further reformatted and edited [..] excerpts from the article by Lorimer Wilson, editor of www.munKNEE.com, for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article reposting to avoid copyright infringement.) Mills goes on to say:

The Gold:Dow Ratio Tells it All
Back in 2000 at gold’s low of $260 and with the Dow at 10,900 in January of that year the Dow:Gold ratio was 41.9 (i.e. it took 41.9 ounces of gold to buy the Dow). Today, with the Dow in the neighbourhood of 10,700 and gold at $1200 or so, it takes only 8.9 ounces to buy the Dow.

This author believes that…investors are catching on to the fact they need to own [physical gold and silver as the recent escalation in their prices attests] and that the buying of shares in companies involved in the search for and development of gold projects will not be too far behind.

munKNEE.com Editor-in-Chief Lorimer Wilson Holding a Precious Gold Bar

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Use Summer Doldrums to get Ahead of the Herd
During the summer months investment demand for junior precious metal companies tends to be lethargic with volumes not picking up until after Labour Day [September 4th or so for you non-Canadian readers]. This slowdown happens almost every year – it’s just traditionally a slow period of time hence the old saw “Sell in May and Go Away” – and this year has been no exception with junior precious metal shares weakening in the spring/summer. If TSX.V volumes and precious metal equity prices, however, follow the traditional path they will strengthen again in the fall and as long as gold’s secular bull remains intact – remember gold outperforms most other asset classes in both deflationary or inflationary environments – then precious metal stocks will have their day in the sun.

History shows, time and again, that August can provide an excellent buying opportunity for precious metal juniors, especially when, like now:

• Gold and silver equities are already trading at a discount to metal prices
• Summer doldrums have further weakened share prices
• The gold/silver ratio, traditionally at 15:1, is at 65:1 today

Conclusion
Declining confidence in government, markets and paper money is pushing gold toward a front and center mainstream media position. As Don Coxe says,
“The gold story has been around for millennia, but is now attracting investment for thoroughly modern reasons. This month, we advance the thesis that none of the three major tradable currencies will regain its role as a prized store of value. Gold is moving from the shadows, where economists and politicians had consigned it, to center stage.”

Junior gold/silver companies reporting good to great results regarding project acquisitions, sampling results, drill assays and having experienced management with tightly held, low, outstanding share counts should do well for their investors. In my opinion now might very well be the perfect time to start accumulating select PM stocks – and this author has been a recent purchaser.

At the very least junior precious metal company’s should be on every investor’s radar screen. Are they on yours?

* http://www.aheadoftheherd.com/Newsletter/DowGold%20%20Summer%20Doldrums.htm (If you’re interested in learning more about specific junior gold/silver stocks and the junior resource market in general please come and visit us at www.aheadoftheherd.com. Membership is free, no credit card or personal information is asked for. I can be contacted at rick@aheadoftheherd.com)

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There has been a lot of investor interest in Van Eck Global’s Market Vectors Junior Gold Miners ETF (GDXJ) but the question is: will it live up to those lofty expectations? Words: 868

In further edited excerpts from the original article* Jeff Nielson (www.bullionbullscanada.com) goes on to say:

The GDXJ consists of 37 gold miners and prospectors with a weighted average market capitalization of only $850 million and a minimum cap of $150 million. The top 10 holdings, representing 46% in total, at its launch are:

Coeur d’Alene Mines (CDE), 6.6%
New Gold (NGD), 5.6%
Silver Standard Resources (SSRI), 5.4%
Hecla Mining (HL), 5.2%
Gammon Gold (GRS), 4.7%
Alamos Gold (AGI), 4.3%
Semafo (SMF.CN), 3.8%
Silvercorp Metals (SVM), 3.7%
European Goldfields (EGU), 3.4%
Golden Star Resources (GSS), 3.34%

Geographically, the portfolio is heavily tilted towarded Canadian-based companies at 62.6% with the U.S. and Australia far behind.

Here are some short-comings of the ETF:

1. Many Top-quality Gold Juniors do NOT Qualify for this Fund
The fund is not allowed to invest in any “junior” with a market cap of less than $150 million, with $200 million being the normal threshold. As such, thanks to the slaughter which these companies were subjected to in 2008/2009, dozens of top-quality gold juniors do not qualify for this fund – and this limits the selection available to the fund, although there are still many companies to choose from.

2. The Fund Invests in Mid-cap, NOT Small-cap Gold Miners
Also, contrary to the name of the fund, the fund will invest in mid-cap gold miners – with market caps in excess of $500 million. While there are some quality companies in this group, as well (with strong growth profiles), the inclusion of these larger companies will tend to reduce the up-side for this fund below what it would have been had the fund focused only on the small-caps.

3. Losses Can Exceed 100% of the Amount Invested
The “small print” in the prospectus also gives potential investors in this fund a good reason for worry: the intention of the fund to invest in “derivative” investments. This category of investments is described as “swaps, options, warrants, futures contracts, and currency forwards”. The prospectus warns that investments in these instruments could result in losses exceeding 100% of the amount invested!

4. Fund Overly Exposed to Derivatives
It gets worse. The fund intends to have at least 80% of its capital invested in the core assets around which the fund is based. However, this does not mean it will have at least 80% of those dollars invested in the shares of these companies. The company stated that these “derivatives” would be considered part of the core assets of this fund (meaning part of that 80% core). This means that theoretically the fund could hold 0% mining shares, and all derivative instruments. Obviously that is an extremely unlikely scenario. The point, however is that there is no possible excuse for deviating into these especially risky assets.

In Conclusion:
Apparently the people managing this fund don’t think that they can achieve a high enough return through investing in mining equities alone. This certainly suggests that this fund lacks the expertise to identify the best growth “stories” – and so wants to be able to attempt to “juice” returns through the same, Wall Street, Ponzi-like investments which have caused most of the problems in financial markets.

I had previously expressed personal interest in buying into this fund – as a relatively “safe” and diversified investment (within this sector). However, should the fund managers choose to invest heavily into derivative investments, the actual holdings of mining equities could be limited, and thus not offer an amount of diversification to justify experienced investors into putting money in this fund – and certainly the “safety” I had hoped for is also not present.

I would rather pick my own stocks one at a time, since I have no intention/desire to invest in the types of risky instruments in which this fund intends to dabble. I wish that I could be more enthusiastic in recommending this fund to investors.

“The devil is in the details,” goes the cliché – and certainly the managers of this fund have chosen to “make a deal with the devil.” People investing in precious metals are generally doing so to escape from the dubious (and often fraudulent) “exotic” financial products invented by the devious minds of Wall Street.

It would appear that this point is simply not understood by Van Eck. While the fund managers could choose to risk few of their investor dollars in derivative instruments, the fact that they will not commit themselves to more specific (and more responsible) guidelines for how and where they invest those dollars means that I have to reluctantly “pass” on investing in this fund.

For those investors who do buy in, I certainly wish you luck. However, I also advise you to keep a close watch on exactly what assets are held in this fund. Should the actual holdings in mining company shares not come very close to the 80% “core” in this fund, I would urge investors to seek other options for their precious metals investments.

*http://seekingalpha.com/article/172870-van-eck-s-new-junior-gold-miner-etf-a-preliminary-analysis

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In mining exploration, an “anomaly” is a geological formation that might attract a prospector’s interest. However, one rule of thumb is that you have to look at 1,000 anomalies to find one prospect and fewer than one prospect in a thousand turns into a mine. In other words, finding a mine is a million-to-one shot and that is one reason why junior mining stocks are highly speculative. Another reason is that it’s much easier to launch and promote one of these stocks than it is to build a profitable business. So junior mines attract more than their share of unscrupulous operators and stock promoters. Words: 504

In further edited excerpts from the original article* Pat McKeough (www.tsinetwork.ca) goes on to say:

There are ways to reduce your risk, however, and here are 9 “secrets” we use to pick junior mines which should help you find the gems among the rocks in this fast-changing industry:

1. Stay away from mining companies that operate in insecure and politically unstable regions like the Congo, Venezuela and Colombia. Also avoid those in countries with little respect for property rights and the rule of law, like Russia or Mongolia. That’s because mining is vulnerable to political instability. You can’t move the mine to another country, and local citizens sometimes believe that a foreign mining company is robbing them of their birthright, even though they need the foreign company’s capital and expertise to get any value out of the ground.

2. Look at environmental constraints where the junior mining companies are looking for minerals. In Europe and certain parts of the U.S., junior mines need a particularly rich find to justify the costs of overcoming environmentalists’ objections.

3. When looking at junior miners that only explore for minerals, give preference to those that operate in an area with geology that is similar to that of nearby producing mines.

4. Look for well-financed junior mining companies with no immediate need to sell shares at low prices. That’s because doing so would dilute existing investors’ interests. The best junior mining firms have a major partner who has agreed to pay for drilling, or other exploration or development, in exchange for an interest in the property.

5. Look for mining companies with strong balance sheets and low debt.

6. Look for positive cash flow, preferably even when commodity prices are low.

7. Even better, look for mining companies that have cash flow from an existing mine that is sufficient for, or at least contributes to, the cost of developing a second mine.

8. Look for mining firms with experienced management that has a proven ability to develop and finance similar projects by working with other junior-mining companies.

9. Avoid mining stocks that trade at unsustainably high prices because of broker hype or investor mania about the underlying commodity (such as gold). Instead, focus on reasonably priced mining stocks with favourable geology.

*www.tsinetwork.ca/daily/mining-stocks/discover-the-9-secrets-to-profiting-from-junior-mines/

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Why should you invest in the precious metals sector? How much of your investment dollars should you allocate to precious metals? Should it be invested in bullion, ETFs, mutual funds, individual mining/royalty stocks or warrants? Words: 1407

In further edited excerpts from the original article* Jeff Nielson (www.BullionBullsCanada.com) goes on to say:

Use the Gold:Silver Ratio to Determine your Mix
For those of you who would like a very simple means of allocating your precious metals dollars let the gold/silver ratio dictate where your dollars go by purchasing silver related investments in a percentage equal to the current ratio. With the current ratio ranging somewhere between 60:1 and 70:1, this would dictate putting 60% to 70% of new dollars into silver/silver mining stocks, and the remaining 30-40% into gold/gold mining stocks.

The next decision to make is in what form of precious metals holdings you should invest i.e. bullion, ETFs, mutual funds, individual mining stocks (and either producers, developmental or exploration), royalty stream companies or the warrants associated with each.

ETFs
For those who are adamant about using bullion-ETF’s rather than holding the “physical” metal directly, you must do your homework. Examine the prospectus carefully, and automatically shun any fund which does not hold/store all of its own bullion. Keep in mind that the “custodians” of the vast majority of ETF “bullion” are the same bullion-banks who are currently holding the largest short positions in gold and silver in history. Do you really think these bankers want to help small, retail investors enter this market (and undermine their massive “short” positions)?

Physical Bullion
Assuming investors allocate 100% of their precious metals dollars in real bullion or precious metals mining companies, the percentage to assign to those two categories is partially a function of risk-tolerance and partly an issue of time-horizon.

I can certainly understand after the events of 2008 that many investors are much more concerned with maximizing the safety of their investments, rather than simply seeking to maximize profits. I would not fault any investor for choosing to invest all of their precious metals capital into bullion. This is especially true for investors only wishing to focus a small part of their portfolio into this sector. For more elderly investors with a short investment horizon, it would also be prudent to focus on bullion, itself.

Precious Metals Mining Company Stock
For those investors who are wishing to invest 20%, or 25% (or even a greater percentage) into precious metals, I would strongly urge investors to put at least ¼ of those dollars into the stocks of quality precious metals miners. Even in the event of a complete breakdown in the global monetary system (which remains a distinct possibility), the worst-case scenario for holders of these equities is that they could become completely illiquid for an indefinite period.

However, with gold and silver as the best “stores of value” of any asset-class, clearly the companies that produce these hard assets would be favored above any other class of equity – and would thus be first to regain their value as markets returned to normal.

For more aggressive investors, or those with a longer investment horizon, I would suggest that at least 50% of their precious metals dollars be invested in the miners – since they will always outperform bullion over the course of any bull market in precious metals. As I have detailed previously, it is the “junior” miners (and especially junior producers) who provide the best risk/reward profiles amongst the mining companies.

Trading
Of course, placing your investments in this sector is literally only half of the task of managing your precious metals portfolio. Regular profit-taking is an essential part of any long-term investment strategy, so deciding how/when to take profits is a critical determinant in the long-term performance of your investments. As a firm believer in the KISS principle (“keep it simple, stupid”), again I would suggest a very basic strategy: do not sell any of your bullion holdings.

Given that the mining companies offer superior performance to bullion, itself, trading and profit-taking exclusively through buying and selling these shares provides ample opportunities to lock-in gains – with the greater volatility of the mining shares giving investors the best opportunities to re-invest their profits on the inevitable dips which occur in even the strongest sectors.

As for when to take profits, in this case precious metals are no different than any other asset class. Many investors strongly favor selling half their positions on a “double” (a 100% gain), so that your remaining investment represents “free shares” – already fully paid-for through profit-taking. Personally, I don’t like to be that rigid with my own buying and selling.

With my favorite holdings, I rarely sell more than ¼ at any time. On the other hand, with companies which I don’t regard quite as highly, I’m quite happy to sell 100% on any short-term spike – as there are no shortage of quality, under-valued companies to pick from. For those who are investing in the junior miners, do not allow yourself to “fall in love” with any of these companies.

Diversification
Seeing some of the spectacular gains which these companies have achieved just in this current rally, the temptation for novices to this sector is to look for a “home run” – and put most/all of their precious metals capital into one or two companies which they see as “can’t miss” prospects. Never forget that there is always risk with these companies, no matter how competent or conservative is the management team.

Accidents occur, governments change, and there are always the dreaded “Acts of God”. You must distribute your dollars into a basket of these companies. As I suggested earlier, for those only wanting to put a small portion of their capital into this sector, you are much better off to stick with buying bullion, rather than placing a “bet” on just one or two mining companies.

I personally have more than ¾ of my own portfolio concentrated in this sector – with that ratio having risen substantially due to the outperformance of this sector. I am fully conscious of the conventional wisdom of “diversifying” into many sectors/asset-classes under normal conditions, however, “this time it is different”.

This Time is Different
The last forty years is the first time in history that the entire, global financial system has been completely detached from a gold-standard. In every individual instance of purely “fiat” currencies (i.e. money backed by nothing), this banker-driven adventure has ended badly. Now, for the first time, the current system is facing the imminent risk of collapse.

As is always the case, the cause of this instability is the grossly excessive (and extremely unstable) mountains of debt (created by the bankers), combined with recklessly “easy” monetary policies (also courtesy of the bankers) which are fueling a rapid expansion of these mountains of debt. Unless an investor truly believes that you can “put out a fire with gasoline”, there is only one way this recklessness can end.

This doesn’t mean that everyone should put 100% of their investments into precious metals (or even close to it). What it does mean is that investors must be focused first and foremost on protecting their wealth – and only once that is accomplished do we have the luxury of seeking to maximize returns.

The precious metals sector is not the only place for people to make their investments, it’s simply the best sector. No other category of investment offers the combination of wealth preservation with superior up-side, investment potential. However, this does not mean that those investing in this sector can afford to be lazy or complacent.

The generational shifts taking place in our societies, economies, and markets means that we will see unprecedented volatility – and no shortage of “shocks” to markets. Because there are so many major stresses at work in the global economy (mostly derived from excessive debt/leverage), there are a near-infinite number of possible calamities ahead.

Focusing a significant portion of one’s portfolio into the precious metals sector provides a realistic strategy for small investors to protect themselves – versus the option of leaping from sector-to-sector as various crises unfold in the years ahead. As with all investment cycles, those who engage in such preparation first will be amongst those who benefit most from this strategy.

*http://www.gold-eagle.com/editorials_08/nielson120109.html

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When you’re talking to a gold bug it is much like arguing with a priest about religion — it is a daunting task but to my gold bug friends here again is why I’m not that big on gold. Words: 725

In further edited excerpts from his original article* Steve Christ (www.wealthdaily.com) goes on to say:

Being heavily ‘invested’ in gold has always represented something of an Armageddon trade to me because in order for you to really profit from it in the long term, things would have to fall apart and stay that way.

In that regard, I don’t know that I’ll ever be that pessimistic about the future — even though I understand the dangers of debt, the printing presses, and a devalued dollar. In fact, I’ve written about all of them.

What’s more, I’ve always wondered how the gold bugs planned to cash in on their big payday when it finally arrived. Personally, I would rather own 50 lb. bags of beans and rice.

I also never understood anyone who ever said that gold was a “can’t lose investment” because somehow it’s “real money,” not a fiat currency. You see, fiat is a word that the gold crowd loves to sprinkle on top of every argument, as if the dollars in my pocket are as illegitimate as crooked third-world dictator. Just because it sounds scary doesn’t make it so.

The truth is gold as an investment is as fraught with risk as any share of stock, bond, or piece of real estate. You can and will lose money on the shiny metal if you buy the highs and hold on to it. It’s just that simple.

If you doubt this fact, just ask anyone who bought gold at the peaks in last gold craze. Thirty years later, the price would have to reach around $2100 today for that person to break even on an inflation adjusted basis … and that’s not including the carrying costs. Keep in mind, gold is a static investment that produces no cash flow.

Here’s the real reason I prefer stocks to physical gold: stocks offer investors, a piece of a pie that grows, not one that will always remain the same size.

That’s the key difference for me — and why I would rather invest in a company with a bright future and dividend than a shiny piece of metal that might be the currency of the Apocalypse.

Now can stocks lose value? Of course they can. Over the course of the last 12 months, most of them have but I have 5,000 of them to choose from and if I do my homework, I’ll find more winners than losers over time — my portfolio proves this.

On top of that, I can spread my risk across several different sectors, limiting the downside in markets that aren’t correlated. This is the real point in writing this article. When I want to sell, the market is always liquid enough for me to make an exit — something that is much more difficult to do with “hard assets.”

I suppose if I were a gold guy … if I had to choose … I would rather own the miners than physical gold itself but, that being said, I do think gold can go higher here without question.

In the longer term … say the next 10 years … who knows but as I said earlier, gold really isn’t my thing and I wouldn’t go all-in on it. Nevertheless, this is a trade that bears keeping an eye on and if, and when, it develops, I would be more inclined to go long GDX — the Market Vectors Gold Miners ETF — or an individual miner.

*http://www.wealthdaily.com/articles/buffett-investing-gold/2119 (Where 6,723 brokers & analysts turn to for investment ideas. Sign up for their free Wealth Daily e-Letter.)

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The leverage of gold mining shares vis-a-vis the price performance of gold bullion plus the added leverage of the warrants of such companies vis-a-vis the performance of their associated stock supports the possibility of amazing gains for the right warrants of the right junior miners in the years ahead. Words: 1106

In further edited excerpts from the original article* Lorimer Wilson goes on to say:

The only bull market we can compare the current eight year rise in the price of gold to is the ten year rise in the 1970s. The Aden sisters, Mary Anne and Pamela, have extrapolated the future price of gold using the same growth rate as in the ‘70s and applied it to the current bull market.

They have determined that if one were to compare the bull market’s second rise from 1976 to 1980 to the current bull market we could see gold eventually reach $4,100 during the next run-up.

They further report that if one were to take the entire bull market gain in the 1970s at 2,300% and extrapolate it to today’s situation then $5,800 would be the equivalent upside target.

The Adens conclude that “with today’s bull market being far more global in scope compared to the 1970s, we could eventually see these much higher gold price targets realized. This is especially so factoring in that gold’s peak in 1980 at $850 is the equivalent of about $2,400 in current dollars. Gold has not even approached that level yet and the situation is far more serious now than it was then.”

What about silver? “Silver is more volatile than gold. It fell more than gold in 2008, and it rose more than gold in 2009. This makes sense because silver is both a precious and a base metal.

To foresee silver’s potential compared to gold, look to copper as a guide. Copper is a good barometer because it rises during times of global economic growth. That is, when you see both gold and copper rising together then silver will most likely be stronger than gold… If global growth remains on a positive track, we will continue to see silver outperform gold.” Indeed, such is holding true today.

The Advantage of Owning Precious Metals Mining/Royalty Stocks instead of the Bullion Itself: Leverage
If gold, for example, were to escalate considerably in price (i.e. to $2,000, $3,000, or even more) in the next few years it would have a significantly positive impact on the profitability of the companies who mine it and the royalty companies that buy it from marginal producers.

For example, with gold priced at $1,000/oz., and the cost of production at perhaps $600/oz. the gross profit margin of gold mining companies would be 40.0%. If 2 years from now, however, gold were to increase to $2,000 and the cost of production were to increase by only 20% to $720/oz. then the mining companies’ gross profit margins would have gone up from $400/oz. to $1280/oz. or 220%!

That’s called leverage and historically, in a rising market, the ratio for gold and silver mining/royalty shares vs. physical gold ranges from about 2.5:1 for large-cap gold and silver mining/royalty companies on average to as much as 5:1 for smaller cap gold and silver mining/royalty companies, on average, and even 10:1 in exceptional circumstances for certain truly outstanding performers.

All the more reason to do your due diligence to find and invest in those gold and silver mining and/or royalty companies with the right mix of capable management, strong financing, major resources and geographically and politically well-located properties to reap the major benefits a surge in the future price of gold and silver will present.

The Added Advantage of Owning the Right Warrants of the Right Precious Metals Mining/Royalty Companies: Leverage-on-Leverage
For those who buy the right long-term warrants associated with the right gold and silver mining and/or royalty companies at today’s still undervalued prices, your eventual returns would likely be 1.5 to 3 times greater on average than had you invested in their associated stocks.

For companies whose warrant prices go through the roof with extraordinary gains, in and of themselves, or from extremely depressed values, as experienced in 2008, that ratio could represent a ratio as high as 10 times greater than having invested in the metal itself.

Such over-and-above gains are referred to as leverage-on-leverage or doubling-up on the leverage factor. The catch is, however, that you have to know whether or not the warrant associated with the stock you are interested in buying is the right warrant i.e. has a leverage/time value sufficiently high enough to justify its purchase given the anticipated appreciation in the price of the associated stock.

Conclusion
If gold were, in fact, to increase from its current $1050 or so to $5,800 that would represent an increase of 452%. The current leverage exhibited by the component stocks of the HUI is 2.5:1 vis-à-vis gold. Were that leverage applied to future gold and silver mining/royalty company equity prices it would extrapolate into an average price increase of 1130% for such large-cap stocks.

Applying the current YTD performance of the Gold and Silver Warrants Index (GSWI), which is out-performing gold bullion by a 3.9:1 margin, one could anticipate an average increase of 1,760% (452×3.9) in the average stock price of gold and silver mining/royalty companies with warrants.

The component warrants in the GSWI have out-performed the price of gold by a margin of 5.9 to 1 YTD which would suggest that the average warrant could expect to increase by approximately 2,668% (452×5.9) were gold to escalate to $5800 – and that is on average!

Indeed, if the trend to date from their 52-week lows were to continue the projected 452% increase in gold would extrapolate into a 1989% (452×4.4) increase in the price of the average precious metals mining/royalty stock and an amazing 4,113% (452×9.1) in the price of the average warrant!

Certain junior mining/royalty companies will hit the mother-lode and experience dramatically greater increases in their stock prices than the average and the leverage-on-leverage benefit of warrants should cause some of the right warrants of the right mining/royalty companies to experience 5,000% or more.

So “What does Adens’ $5,800 Gold Projection Mean for Gold and Silver’s Junior Equities?” In some cases it is going to mean higher prices – much, much higher!

*http://www.kitco.com/ind/Wilson/oct282009.html

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
-