Saturday, April 27, 2013
Let me start today's essay with an admission...
I have no idea what the price of gold will be by the end of the year. Of course, neither does anyone else.
I've recommended owning gold and silver bullion for many years. My company began recommending it repeatedly in the early 2000s because we saw the government's efforts to weaken the dollar as a bullish sign for gold prices.
Then in 2006, I began to see that we were inevitably heading for a currency crisis. These weak-dollar policies had continued for far too long and were joined by huge increases to both public and private debts. That's when I began warning about the ultimate loss of our dollar's world reserve currency status, something I've called the "End of America."
So for nearly seven years, I've been telling people that, whether gold looked expensive or not, it was prudent... or even necessary... to own some as insurance. I still believe that's true. I personally own gold. I've never sold a single ounce.
I hold gold because I believe the entire global system of paper money and central banking is in the process of self-destructing. And I believe in a relatively short time – perhaps five or 10 years – the existing monetary system will collapse. During this period of turmoil, I expect gold and silver will maintain their purchasing power, while all forms of paper money will be rendered worthless.
I see gold as a form of savings... a universally recognized form of money that is no one else's liability. In that way, it is far superior to any other form of money currently available today.
At the same time... I am fully aware that as the public's awareness of the risks associated with our paper-money system grow, volatility in gold prices will spike. Worse, I knew that as the public began to invest in gold, the likelihood increased for a wicked bear market designed to separate the foolish, the leveraged, and the ignorant from their savings.
Just remember... nothing goes up for 12 years in a row. Nothing. When my driver in Baltimore asked me if he should buy some gold in 2011, I figured we had to be near the top. But... gold continued to rise.
I've never seen any other company or commodity go up for 12 straight years like gold has done. (That happened, by the way, not because anything about the gold market changed but because of incredibly stupid government policies.)
The Bank of Japan was the last major central bank to resist the inflationary policies embraced by the Federal Reserve and the European Central Bank. That changed with the election of new Prime Minister Shinzo Abe.
You would have thought that just as the last major central bank in the world (the Bank of Japan) had announced a policy of essentially unlimited money printing, the price of gold would soar. Japan's decision to inflate away its debts – along with the U.S. and Europe – means there's no major form of paper money left with any credibility at all.
The world has begun a "race to the bottom" – a race designed to rob creditors and wage earners. And so... why is gold collapsing? And why would the share prices of the highest-quality gold and silver companies – Newmont Mining (NEM), Freeport-McMoRan (NYSE: FCX), Silver Wheaton (NYSE: SLW), and Royal Gold (NASDAQ: RGLD) – be essentially in freefall?
When I look at the precious-metals complex – the commodity prices, the production companies, the collectibles, and the royalty companies – I see a huge boom over the past dozen years.
When a sector booms, a lot of interesting things happen. People who are suddenly making a lot of money come to believe they're smart. They inevitably start doing foolish things. And so I've watched as people began to sell regular bullion coins as collectibles from China... and took huge commissions to do so. I've seen investors mortgage their homes to buy gold. (Yes, really.)
I've watched well-run, conservative miners lose their footing, too. Many large mining companies have made horrendously expensive (and foolhardy) acquisitions over the past decade.
Stillwater Mining, for example, bought a $263 million mine in Argentina... a country not well-known for respecting the rule of law. As you may know, we recommended shares of Stillwater recently in my Investment Advisory. We did so because the stock was so cheap. Even after writing off Argentina completely, it still seemed attractive. But we were early. We stopped out of that position recently. (Likewise, we may still be proven wrong about our valuation of Newmont Mining, which seems incredibly cheap to us.)
And worst of all, in my view, were the many companies in the sector that replaced their conservative leadership and strategies to become far more aggressive. Silver Standard (NASDAQ: SSRI) is perhaps the best example. In 2006, it decided to abandon its carefully constructed strategy of buying and holding silver in the ground – a strategy it had followed successfully for decades. As I explained in my November 2006 issue (where I recommended closing out of the position)...
Silver Standard's business to date has been focused on acquiring high-quality silver properties in the ground. However, it recently announced it will put one of its mines into production... This makes me uncomfortable.
I didn't recommend the stock because I wanted to invest in a mine. I recommended the stock because I wanted to hold silver assets as a hedge against the dollar. We might be leaving a lot of money on the table here, but I've found that when your reason for buying a stock changes, you should sell.
My subscribers pocketed 15% gains in five months. And I was right when I said we might be leaving money on the table, too... A year later, shares had nearly doubled. But ultimately, my thesis was proven correct. Over the next five years, shares tumbled from more than $45 per share to less than $7, where they sit today.
My point is... a lot of precious-metals companies have gotten carried away. They've made bad decisions. As with any other sector of the market, a bear market will surely follow a bull market, just as sure as the sun rises and the sun sets.
I've tried to warn people along the way that precious metals are not immune to the iron laws of the market. And sadly, the sector seems to have more "true believers" than any other area of the market. That might be because, fundamentally, they are correct. There is no doubt that gold is the best and only reliable form of money. There is no doubt that the price of silver is a fantastic barometer of the overall health of the banking sector. But... the facts don't exempt the sector from bear markets.
Like I said... I don't know what the price of gold will be at the end of this year. Nor do I know what will happen to the share prices of the many high-quality stocks in the sector.
I've personally been "nibbling" at the highest-quality producers this year – unsuccessfully, so far. And so, I've told my analysts we won't recommend any more precious-metals companies until we see some significant signs of progress in the metals' prices.
I'm cautious here – not bullish. I'm cautious because with the world's central bankers printing faster than ever before, the price of gold should be rising. But it's not. That's troubling. It's a sign that the excesses in the sector are significant... and need to be corrected.
Remember what I said earlier... bear markets follow bull markets. We've seen a 12-year, raging bull market in gold. All the signs of excess and poor judgment have developed, just as they do in other sectors during wild bull markets. This is a time for caution. And that's why I'm not urging folks to buy gold stocks today, despite their low valuations.
The price of gold may well fall this year – even significantly. But the value of gold won't change at all. For gold investors who understand gold's most unusual feature – its timeless and unchanging utility – a bear market in the nominal price is a wonderful gift. But for most, it will bring heartache.
With the recent drop in gold prices, physical gold is flying off the shelves... The S&A mailbag was filled with subscribers writing in to tell us about their local coin dealers. Paid-up subscriber David Bennett said, "There's not a 1 ounce Maple Leaf to be found in Central Florida as of this whole past week! Really weird."
Another subscriber, William Chickering, sent us the following e-mail...
I live in Northern California, and I have steadily accumulated silver coins for a period of years, buying at times of weak prices. I view silver as a long-term store of wealth free from counterparty and confiscatory risk. But short-term market fluctuations can be quite interesting ...
Our local dealers have only a limited supply, and they complain of difficulty getting more. This has continued to be the case despite the recent general price decline. Half dollar coins have been particularly scarce.
The premium over melt value has jumped as well. A year ago, I could buy Canadian for slightly less than melt. Now it trades at a 10% or greater premium. The same is true for 40% U.S. silver. 90% silver U.S. coins can trade today with a premium of more than 30% versus perhaps 10% a year ago.
Folks interested in an unusual way to add to your silver position will want to watch this presentation from Doc Eifrig. He's found a way to walk into almost any FDIC-insured bank and walk out with "hold in your hand" silver. And you'll pay ZERO premium when you purchase this silver. It's a little-known strategy Doc discovered for his readers. To learn more, click here.
Date Range:4/18/2013 to 4/25/2013
Date Range:4/18/2013 to 4/25/2013