Gold News

Trash, cash & the coming gold mania

Why gold's bull market is set to reach Stage III very soon...

ALMOST EVERY ONE of us gets held back by inertia at one time or another. It can happen with anything, including our investments.

   Inertia weighs on us, trapping us in a state of paralysis and freezing our portfolios, almost forcing us to hold on to whatever we already own – for no better reason than we already owns it.

   The investor hopes that every one of his old stocks will go up, even if the reason why he bought them is long forgotten or the environment in which the investment made sense has vanished. People who substitute hope for cold-blooded analysis almost inevitably wind up losing money.

   For the sake of argument, therefore, let’s look at where you might best put your money for the rest of this year, 2007.

   To keep things simple, let’s assume you start by liquidating all the cats and dogs populating your portfolio, so that you have just a pile of cash. No, let’s not phrase it that way...because then you’ll start wondering which of the securities you own really are cats and dogs. You might get bogged down. And then inertia will creep back in, and you’ll throw your hands up and do nothing.

   So let’s assume you sell everything, in true going-out-of-business style. Now, where's the smartest place to put the money you raise? Let’s look at the alternatives.

Bonds? A disastrous sucker bet...
Fixed-income securities like bonds, at the moment, are a triple threat to your capital.

  • You have a huge risk with interest rates, which are still near historic lows; as they go up, the market value of your bonds drops proportionately.
  • No matter which of the fiat currencies you choose, you have a big currency risk; while the US Dollar is on the fast train to zero, virtually every other currency in the world is being inflated along with it and is heading toward eventual oblivion.
  • You also face credit risk; General Motors isn’t the only large company whose bonds may go into default.

Stocks? Over-priced, under-performing
The general stock market is yielding below 2% in dividends, less than one-third of what you typically see at major market bottoms. And it's selling for more than 18 times earnings – more than 25% above its norm.

   Worse, for those who might be buyers, the bull market of the century started in 1982 and, in inflation-adjusted terms, ended in 2000. You might not want to hear it, but stocks are almost certainly early into a bear market that could last another 5 or 10 years. By all traditional measures, chances are much better that stocks will drop 50% from here than gain 50%.

Cash? It's lagging inflation
You could always just stay in T-bills. But they currently yield only 5%, before taxes. And inflation – notwithstanding the highly imaginary official CPI figures – is probably running around 6% and likely to head higher.

Real Estate? The worst choice of all
Certainly in the US, the speculative boom crested last year. Now the market, burdened by an immense amount of debt and overleveraged speculation, is likely to head down for years to come.

   Of course, there are places in the world, two of our favorites being Argentina and Uruguay, where there isn’t much of a mortgage market, so the properties aren’t overleveraged and values are still available. But unless you are looking to pick up cheap land in undeveloped, exotic countries that have avoided the credit-driven bubble, real estate should be last on your list of investments.

   Finally, there's the mutual fund industry. But any mutual fund you’re likely to pick is just a way of buying one of the investments we’ve already dismissed. And paying all those fees and expenses that come with a mutual fund just makes your bet that much worse.

So What Should You Do?

   Since 2001, we’ve been in a natural resources bull market. If you were one of the few people who positioned themselves in gold, silver or pretty much any of the metals or energy commodities – either directly or through the shares in smaller resource companies, which is the preferred vehicle we have been recommending to subscribers of our International Speculator – you’ve already made the easy money.

   At least to us, before this bull market kicked off, the opportunity in the sector seemed obvious, with many resource companies selling for less than the cash they had in the bank. Few people even knew the sector existed, and most of them thought it was a dead duck after the 20-year-long bear market it had suffered since 1980.

   The easy-money stage of the resource bull ended in 2003, at which time we entered the second stage, where the market climbs a “wall of worry”. In even the most formidable of bull markets, this phase comes with inevitable corrections and scary downdrafts. Per its moniker, with each short-term setback in price, investors who were shrewd enough to get positioned early on into the long bull market fret that they might be wrong. Some are shaken out, but the smart ones buy even more on the dips.

   But now, in my opinion, we are about to enter the third, and most important, stage of the classic bull market: the mania stage. This will resemble the tail-end of the internet stock bull market. It’s hard to predict exactly what catalyst will set it off, but it will very likely be rising expectations for inflation. Fear will drive the foreigners who hold about $6 trillion to sell the US Dollar, and they’ll be joined by savvy Americans. Some will buy other paper currencies, like the Euro or the Yen. But those units are just backed by US Dollars themselves, so they really aren’t much in the way of an escape pod.

   Inevitably, much of the money now sloshing through the world will try to get into gold. While no one can say with certainty, I expect the metal to hit $1,000 within the next 12 months and go much, much higher by the end of the decade.

   Is this an unreasonable prediction? Most casual investors mistakenly look at gold and think it’s been a leader in this bull market when, in actual fact, it’s a laggard compared to the industrial metals. They've been bid up to extraordinary heights by soaring demand from China, India and other emerging markets.

   To give you just a few examples, in the last five years, copper has been up 330%, nickel 560%, uranium 1,150%, zinc up 460%, molybdenum up 450%, and even lowly lead, the most basic of base metals, is up 425%.

   By comparison, gold is up only 100%, but that will change – because although gold has many and growing industrial uses, it’s main use is as money. It will dawn on the herd that the world is drowning in a flood of increasingly worthless paper currency, and they’re going to stampede toward the high ground of gold.

   The metal isn’t just going through the roof. It’s going to the moon.

   And if you can bear extra risk, then when gold really starts to move, the mining exploration stocks are going to howl. That’s because gold exploration stocks are not just highly leveraged plays on the price of gold. They are also capable of providing you with triple-digit gains based on exploration success alone.

   Hitting that exploration success is the risk factor that can cost the unwary dear. But the last mining share boom – from 1993-96, right at the tail-end of gold’s 20-year bear market – carried hundreds of stocks with it. The boom was driven entirely by a handful of discoveries.

   Since gold prices turned up, starting in 2001, a lot of money has been spent on exploration, and that work – we think – will inevitably lead to major discoveries and market excitement. Several of the companies we follow in our International Speculator are already drilling into what look to be monster deposits. Confirmation of a major discovery could well ignite a mania in the market.

   While most other investments, such as bonds, industrial stocks, real estate and broad mutual funds are likely to be serious losers over the coming years, the bull market in physical gold bullion – and for leverage with increased risk, gold exploration stocks – has still barely entered the public’s consciousness.

   Although the easy money has been made, the big money is waiting to be picked up.

   Nothing in the investing world is ever a sure thing, but today the exploration stocks look to be as close as it gets. As for the inevitable corrections during this “wall of worry” phase, remember that the time to be timid is when everyone else is bold, and the time to be bold is when everyone else is timid. Sell-offs in the gold and gold mining sector are, to our way of thinking, gift-wrapped opportunities to buy.

   To learn more about the coming boom in gold mining exploration shares,why not consider a free trial to BIG GOLD, our new gold and gold-mining newsletter advisory...?

Doug Casey is a world-renowned investor and author, whose book Crisis Investing was #1 on the New York Times bestseller list for 29 consecutive weeks, a record at the time.

He has been a featured guest on hundreds of radio and TV shows, including David Letterman, Merv Griffin, Charlie Rose, Phil Donahue, Regis Philbin, NBC News, and CNN; and has been the topic of numerous features in periodicals such as Time, Forbes, People and the Washington Post.

His firm, Casey Research, LLC., publishes a variety of newsletters and web sites with a combined weekly audience in excess of 200,000, largely high net worth investors with an interest in resource development and international real estate.

See full archive of Doug Casey articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

Follow Us

Facebook Youtube Twitter LinkedIn

 

 

Market Fundamentals