smart-money-report.com Blog

The bottom line:

The bottom line is gold miners are finding it more challenging than ever to bring new gold mines into production and obtain the stellar profits leverage that many thought possible at the beginning of this gold bull. Controlling costs and dealing with an increasingly hostile environment on the geopolitical front has certainly given the miners a hefty challenge in keeping up with increasing global demand.

As gold stock investors it is very important to have at least a loose grasp on the intricacies of the gold mining industry. This will allow us to better understand how these companies operate and handicap their performance relative to gold. As gold continues to rise, we should see earnings grow in line with expectations and these companies should eventually be wildly profitable.

“The days of cheap grain are gone,” says Dan Basse, president of AgResource Co., a Chicago commodity forecasting concern.

The dollar has gone fishing …er… diving.

The S&P 500 index has been down only two of the past 15 years in the fourth quarter (-0.74% in 1994 and -8.09% in 2000).

PowerShares has decided to leverage three of its commodity ETFs to provide 200 percent of the daily return of the underlying indexes:

PowerShares DB Precious Metals Fund (DBP)
PowerShares DB Gold Fund (DGL)
PowerShares DB Silver Fund (DBS)

…well, not exactly. But the point is well taken:

How to Make a lot of Money in Five Easy Steps:

Step #1: Sell everything you own. Sell it all. Stocks, bonds, real estate. eBay your couch, you dog. Everything.

Step #2: Then convert it all into pre-1982 copper pennies.

Step #3: Meltdown the pennies.

Step #4: Sell the copper.

Step #5: Now use your proceeds to buy back all the stuff you sold. You’ll have more than enough left over.

The material in a pre-1982 penny is currently worth about 2-1/2 cents.

Update: It’s not exactly legal.

Ted Butler comments that the Commitments of Traders report for gold is showing a growing net short position on the part of commercial traders. He thinks it may lead to another selloff in gold (I don’t disagree).  And even though the same thing is not happening in silver, it could  drag  down  the  white  metal  as  well.  But  here’s  the  bottom  line:

The main point to remember is that if we do get a silver sell-off, it will have nothing to do with legitimate real world supply/demand fundamentals. It never does. It will have everything to do, as it always does, with the big silver shorts attempting to cover as many of their short contracts as possible. Such a potential silver sell-off, should it occur, may provide the very last buying opportunity before the final lift-off.

David Merkel hits the nail on the head when he says that people misunderstand contrarianism. It’s not what people think that’s important, it’s what they do with their money:

There is a misunderstanding about contrarianism – that somehow if a lot of people think something, it must be wrong, so you should take the other side of the trade.  We can make an exception here for some financial journalists – they are often late to catch onto a story, and therefore the magazine cover indicator does often work.

My point here is that intelligent contrarianism does not work off of what market players think, but how much they have invested relative to their investment policy limits, and the capital that they have available to carry the trade. When there are many investors that have gone maximum long on a given company, that is a situation to either avoid or short, because unless new longs show up, the current longs have no more buying power — it is a crowded trade.

Unless you were of adult age in the 1970s you probably don’t know much about “stagflation.” And if you do remember what it was like, you may need a review. Kevin Depew has a good one.

Thomas Tan on gold’s relationship with various benchmarks. I focus on this one:

Besides CPI and M3, there are several other indexes people compare with gold. One of them is DJIA vs. Gold, a favorite ratio for Newmont’s former President and Vice Chairman, Pierre Lassonde. If we use DJIA to represent paper assets, and gold for hard assets, Mr. Lassonde noticed that in last 100 years, DJIA/Gold has reached between 1-3 five times, so he thinks that sometimes in the future, the ratio could drop back to the same range.

I don’t know at that time what the DJIA level would be, but if during a bear market DJIA dropped half of its value, landed at 7,000, and we conservatively used the ratio of 3, gold would still be over $2,000. As Mr. Lassonde famously said, he expects that gold will have 3 zeroes after its 1st digit, and it is just a matter of what the 1st digit is.

Actually, for a brief moment, gold was at parity with the Dow in 1980.