Shutdowns, Smackdowns, and Touchdowns
Louis James, Chief Metals & Mining Investment Strategist
October 14, 2013 3:45Let's start by calling a spade a spade: the so-called US government shutdown is anything but. As Doug Casey told me in a recent interview:
"It's Orwellian doublespeak to call it a 'shutdown,' when all they do is furlough a few nonessential personnel and then hire many of them back again the next week—with pay for the time off.
"The so-called shutdown is nothing more than a paid holiday for many federal employees. It's business as usual in Washington, DC. They close the Washington Monument and actually go out of their way to prevent people from even seeing Mt. Rushmore from the highway. It's strange that there still seem to be plenty of park police around to arrest you if you disregard the signs they posted saying everything is closed."
Even smart people who understand this may regard the impending "debt ceiling" deadline with some alarm. Congress itself seems to take the matter more seriously than the phony shutdown.
However, the reality is that none of these theatrics matters in the least; the deficit remains over $1 trillion, and neither party in Washington is even considering the drastic spending cuts needed for the government to live within its means. The nomination of Yellen to chair the Federal Reserve is certainly evidence of this. Whatever compromise the politicians come up with, it will simply be one variation or another on the theme of "more of the same."
Don't be distracted by the fiery rhetoric generated by the Obamacare debate—it's like the Wizard of Oz saying, "Pay no attention to the man behind the curtain." Mind you, I'm no fan of Obamacare, which has just forced me to make changes in my own health insurance coverage that I did not want.
The point is that the debate makes it appear as if the two faces of our one-party system have deep and far-reaching differences. The reality is that one is the "tax and spend party," while the other is the "spend and tax party."
In practical terms, what this means is that regardless of whatever minor tinkering around the edges the politicians in Washington achieve, the government will continue spending with abandon, with ruinous consequences for the economy.
What's the alternative? The US has painted itself into a corner from which there is no way out that doesn't involve serious economic pain. Doug's suggestion is that the US should default:
"What should happen is an orderly unwinding, including an auction of government assets to pay for the necessary transition. As we've discussed before, I'd start with defaulting on the national debt. This would punish those who enabled it, free younger generations from indentured servitude and make it impossible for the state to borrow more.
"We could move forward from there, seeing how much of the useless and counterproductive superstructure in Washington we can dismantle, while the market moves in to supply those services that people actually want and are willing to pay for. It would cause a financial collapse, but most of the real wealth—buildings, fields, technologies, skills—would still be there."
That's not going to happen; it's a political impossibility for the US to embrace the pain from such a controlled self-demolition. Of course, the logical alternative to a controlled demolition of structures that no longer work is an unplanned crash and much ensuing chaos.
This all sounds pretty grim. The cost in human suffering I see along the path today's world "leaders" are following boggles the imagination. It's unthinkable— so most people don't. But if you do think about it, face the future with your eyes wide open, and see what's coming, you can prepare for it, survive it, and even profit from it.
That may seem unethical, but someone needs to be left standing to help pick up the pieces. It may not be necessary to retreat from the world to a Galt's Gulch, but it will be necessary to have the resources to make a difference after the crash—or at least to help by not being part of the problem. Far from being heartless profiteers, successful speculators in the years ahead will be the foundations of a better future.
In my view, this is nothing less than heroic.
The Smackdowns
Enough philosophy. An interesting aspect of the current shutdown shenanigans are the gold smackdowns we've seen this year, including very recently during the budget debates. The last time the US government was about to smash through its debt ceiling, gold shot up $300 in a month, to reach its nominal peak of over $1,900 an ounce in September of 2011. This time, gold is selling off.
Based on fundamentals, the situation for gold and silver is more bullish than ever; major governments around the world continue debasing their currencies in panicked attempts to revive their faltering economies, and the commodity supercycle has years to run.
This prompts many gold enthusiasts to embrace theories of market manipulation. There certainly have been days this year when some entities dumped large amounts of gold onto the market with clear disregard for getting a good selling price. It's hard to see that as normal market behavior, but it does not prove that governments are suppressing the price of gold; it's just as plausible that major players with short positions acted to profit from the ensuing extreme fluctuations.
We may never know the true motives of the parties involved in gold's big selloffs this year, but we do know that bearish sentiment has set in—hard.
Mainstream analysts say that gold peaked in 2011 and that the bull cycle is over. Even many diehard gold enthusiasts who see the current correction as something to endure, like the deep correction in the middle of the great 1970s' bull market for gold, are growing disgusted with the gold stocks.
And no wonder:
- Governments around the world—even in the best mining jurisdictions—are raising taxes and regulatory burdens on extractive industries.
- Metals producers are experiencing high costs and lower profits than forecast.
- The difficulty of obtaining project financing has slowed or stopped development on many projects.
- Many small companies have run out of cash and are close to becoming shell companies or simply going bankrupt.
We can't blame investors for their concerns, and even pessimism, given these realities. But they shouldn't lose sight of the bigger picture; mining has always been a lousy business—risky, dangerous, and subject to unpredictable fluctuations such that Messrs. Graham and Dodd would never have touched these stocks.
On the other hand, our civilization is built on metals, and when you go from having nothing but a geological theory and an obligation to pour money into holes in the ground to having a deposit with bankable mining reserves, the difference in value is literally infinite. Getting ahead of market revaluations when such changes occur is how sharp speculators make spectacular gains.
Similarly, the change in value from a company that has made a mineral discovery to a company producing cash flow from a profitable mine is similarly huge. There's a lot of value added along the way.
None of this matters if gold and the larger commodity supercycle have in fact peaked. For gold at least, this is the mainstream view, and that's certainly a major driver for the pervasive bearishness in the sector today. If these people are right, it's time to bail on gold and go buy Wall Street.
Here at Casey Research, we take the opposite view. We've seen this kind of correction before; it's just a fluctuation in a much larger megatrend that still has years to run. That makes our current market circumstances a terrific buying opportunity—perhaps the best chance to "buy low" since the beginning of the cycle back around the year 2000.
The Touchdowns
As I said above, I do see the current situation in the metals and mining markets around the world as a huge opportunity. Whatever happens to the global economy in the near term, the world population continues to grow, and growing affluence in emerging economies has already created a large global middle class approximately two billion strong.
That trend shows no signs of abating, and it's extremely bullish for all commodities.
With precious metals, which are commodities as well as unique financial instruments, you get the added benefit of an investable asset class that has intrinsic value and is not some counterparty's liability. This is particularly important at a time when Chinese officials, Russians, and many others around the world are calling for an end of the US dollar as the world's reserve currency. This is all extremely bullish for assets of tangible value in general, and precious metals in particular.
Now for the touchdowns. Here's the key: our markets have become so bearish that even companies with extraordinarily rich discoveries are sitting neglected on the same bargain discount shelf where you normally find the dreck that has nothing and never will.
- One company has the biggest bonanza-grade deposit in the world, outside of kleptocratic banana republics—and it's on sale for less than before it made its discovery, even lower than at its IPO.
- Several companies that have made world-class discoveries are currently selling at market valuations lower than companies with absolutely nothing in hand reselling in early 2011.
- Companies with top management and good projects are selling for less than cash in the bank.
In short, the extreme bearishness in the precious metals sector has made it possible for speculators to pick up companies that have already made touchdowns on the field of mineral exploration at prices similar to those paid recently for companies that had barely begun to play.
It's like being able to go back in time and buy Apple before the invention of the iPod or iPhone—not on a guess, but knowing the value already achieved.
Such companies, as long as they have the cash in hand to see the current correction through, offer both terrific potential gains and an unusually high degree of certainty regarding the outcome of the investment. This is an opportunity we very rarely see in our infamously volatile market sector.
Of course, I like to think that Doug and I have a talent for separating the truly undervalued companies from those that deserve to be on the discount rack, but any sufficiently diligent investor can search for and find these opportunities on his or her own.
But you do need to take action now:
- First, assess the global political and economic situation—and yourself. Make sure you believe that the commodity supercycle is indeed far from over and that precious metals offer excellent leverage to government stupidity today. If you don't feel fully confident of this view, then it's better to step aside. You won't have the stomach to buy what's on sale, and buy more if prices go lower.
- Second, if you do believe that precious metals still have far to go, you should then take the time to educate yourself about our market sector. Read our free offerings in this weekly column and the other free resources available on the Casey Research website, or take matters in your own hand and search online—there's plenty of material out there.
- Third, don't be fooled by stories of elephant deposits that lack the grade to be economic with today's high mining costs. Be equally suspicious of exciting, high-grade numbers from projects in remote or expensive-to-work-in places, or that are located in inhospitable mining jurisdictions where investors are more likely to be plundered than to see profits.
The key is not grade, but margin. You want to look for the highest-margin projects you can find in the most mining-friendly jurisdictions you can find. This applies equally to exploration-stage companies, development companies building mines, and production companies pouring gold, silver, and platinum.
That's what I'm doing. And for the record, yes, I've been putting my money where my mouth is and have been buying during this downturn. I just made three of my largest stock speculations ever last week.
If you follow the steps that I've outlined above, you have a good chance to become a successful resource speculator.
Remember: fortune favors the bold.
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