The Small-Cap Investor’s Guide to Gold

A short guide sent to me by email. I thought I would share it.


With market volatility on the rise, scores of investors have been turning their sights to gold. Typically, gold and small-cap investing don’t have much overlap – but that’s not true when it comes to junior mining stocks. These tiny companies benefit from the price increases in gold, but they also offer the value-driven analysis of a typical small-cap. And right now could be the perfect time to buy shares in mining companies – here’s why…

When the proverbial fecal matter hit the fan during the week of May 3, one asset shined above all others. It was the humble yellow metal, gold, doing its part in times of panic and crisis. It held up. On May 7, gold closed above $1,200 for the first time in five months — up more than 2.5% during a week in which U.S. stocks endured a freefall. Just five days later, it hit an all-time high of $1,243.10. And the largest physical gold fund recorded its largest inflows since early 2009.

Of course, buying gold all the time is not really an investment strategy. If you bought gold in the 1980s and 1990s, your return was abysmal. So, as with all assets, there are times when gold is a really good buy and there are times when it is not. Sounds obvious, but many people seem to want to think that gold is an exception to the order of things. It isn’t.

But how do you know if gold is cheap? Well, intelligent people usually advance a couple of arguments.

One is that on an inflation-adjusted basis, gold is 30% less than its all-time high in 1980. Okay, that’s true, but it’s not particularly timely because by that measure gold has been cheap for three decades. And who’s to say that the 1980 gold price is a benchmark we should pay attention to, anyway? By that way of thinking, the NASDAQ is a bargain, too, because it trades at a big gap from its 2000 high. But is it? I think not.

Another point advanced by the “gold is cheap” crowd is the old monetary base argument — that gold’s price tends to track the monetary base over long periods. The monetary base is essentially bank deposits and currency. It’s like the seedlings of inflation.

This argument is a little more interesting. Yet, as the government has added huge piles to the monetary base in the last year or so, the gold price has responded in a muted way. This next chart shows what the gold price would have to be to “catch up” to the monetary base.

QB Partners, a New York-based hedge fund, really likes this argument. QB writes: “The graph shows visually how much U.S. dollar purchasing power has been lost. We think gold is cheap by a factor of almost 7 times.”

If a gold price of $7,000 an ounce doesn’t strike you as implausible or absurd, QB’s next comment might. QB says the chart “does not necessarily imply a target price for spot gold. The gold price could move higher than that if it experiences a blow off top, like all other bull markets tend to do before exhausting themselves.” So, $7,000 an ounce, you see, is just some kind of base case.

Maybe it’s not so implausible. Strange stuff happens all the time in markets. If I had told you on May 6 that Accenture — a $40 stock with a $29 billion market cap — would trade for a penny a share the next day, you would have thought I was nuts. Yet, on May 7 it did just that, if only for a second.

But the gold market is different because it’s so small. Even a small amount of interest in gold will send it up a lot. Just imagine if people decide a small sliver of that tall bar of financial assets should be in gold. We’re talking about some serious pressure on the gold price.

That’s a nice scenario, but I don’t invest in nice scenarios. I invest where I can find value. Speculative upside is a plus. Those kind of stocks give you that added juice on the price of gold. A cheap gold stock is even better – that’s why I’m recommending that my readers pick up gold miners, not just gold itself…

By Chris Mayer

Seasonal Slip for Gold

Yesterday was a bad day on the US markets and the price of PMs dropped as well. So far, today is not looking much better, but the Market has not opened yet as I am writing this. A Facebook friend asked, why the drop in PM prices? and was it a seasonal effect? I replied that I thought it was primarily due to the problems in Greece and the other PIIGS, which led to slide in the Euro and therefore, a relative increase in the strength of the dollar. As most of us know when the dollar is strong PM prices go down. Well, It may come to a suprise to most of you, but I do not know everything. I may have been partly wrong. According to an article on Forbes.com, Carl Gutierrez reported “the demand for gold has eased of late, but the cause may owe more to the calendar than the appetites of investors.”


Haytham Hodaly, senior precious metals analyst at Salman Partners, states that gold price is only returning to where gold typically rests this time of year, and assuming nothing else flares up, it should trade sideways to slightly lower, within a 5% range, until late-July. Demand is supposed to pick up again at that time from Asia, and as European countries seek to move out of the dollar and into hard assets. This seasonal relationship that has taken place 80% to 90% of the time over the last 20 years.

This seasonal phenomenon along with other factors such as a stronger dollar due to economic turmoil in Europe may be the cause of yesterdays drop in gold prices. I still believe that you should use the dip to stock up on PM's.  To read the Forbes.com article go here: http://www.forbes.com/2010/05/04/gold-metals-barrick-markets-equities-commodities-mining.html?feed=rss_markets

NIA: Introduction and Mining Stock Recommendation

The National Inflation Association (NIA) is an organization dedicated to preparing Americans for hyperinflation and helping Americans to survive and prosper in the upcoming hyperinflationary crisis. The U.S. government’s obligations include a $12.8 trillion national debt, $6.3 trillion in Fannie/Freddie debt and $60 trillion in unfunded obligations for programs such as Social Security, Medicare and Medicaid. The NIA believes that the United States for all intents and purposes is bankrupt and Americans need to take steps immediately to protect themselves from the potential loss of the purchasing power of their U.S. dollars.

NIA believes the largest financial crisis in history is ahead of us as a direct result of the U.S. government unwilling to accept a much needed recession. We are now at a point where our national debt is impossible to pay off. Due to rising interest payments on our national debt, it is unlikely the U.S. will be able to balance its budget ever again. Foreign countries will eventually stop lending the U.S. money and the Federal Reserve will most likely have to print the money to fund our deficit spending out of thin air.

The NIA’s ultimate goal is to help as many Americans as possible become aware of the disaster we are rapidly approaching. The NIA believes that the wealth of most Americans could get wiped out during the next decade, but it will be an opportunity for a small percentage of Americans to become wealthy by investing into companies that historically have prospered in an inflationary environment, such as gold and silver miners and agriculture producers.

Their website has extensive articles, news, reviews, stock suggestions, gold and silver seller reviews, and coin melt values. The articles are written by the staff of the NIA, and you can subscribe to the free NIA newsletter to have them emailed to you before they are posted online. You can check out their website at http://www.inflation.us/ and you can sign up for the newsletter on the same page. The NIA also has a Facebook group site that is open to the public.

Today, MIA announced a new stock suggestion, Coeur d’Alene Mines Corporation (CDE). Coeur d’Alene Mines Corporation is one of the world’s leading silver companies and is also a significant gold producer. In 2009, gold production increased 56% to 72,112 ounces. Coeur has a strong Latin American presence and will have its first full year of production in 2010 at its newest operation, the Palmarejo silver/gold mine in Mexico. The company also holds 100% operating interest and exploration rights at underground mines in southern Chile and Argentina and one surface mine in Nevada; and owns a non-operating interest in a low-cost mine in Australia. The Company is finalizing the construction at its Kensington gold project in Alaska, and conducts exploration activities in Argentina, Chile and Mexico. You can read the CDE profile at http://www.inflation.us/cde.html

As usual do not buy stock on my recommendation or anyone else’s. Always do your own DD.