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Gold as an investment--increasing the circle of competence


netnet
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I know some of you think that

  • Gold is a bubble
  • Gold is an anti-dote to fiat currencies
  • Gold is a barbarous relic.
  • The world is coming to an end so it doesn't matter anyway  ;)
     

 

For this thread, I wanted to ask two questions,

  • what are the best ways to increase one's circle of competence to include gold.
  • what are the best gold investments

 

I just bought Pierre Lassonde's book--which by the way set me back $200!!!!  It's out of print, etc.  After I finish it, I am willing to sell it for half price. Lassonde made an absolute fortune over the years, compounding at over 20% per year in up and down markets--in Franco Nevada, first incarnation.

 

In any case, for those who think that gold is in a bubble, I would say that 1) we have not had the explosion to the upside these types of markets usually have and 2) Marc Faber makes a pretty convincing case for a huge leg up in gold.

 

I don't see any royalty companies that look reasonable enough.  I do like Aberdeen International (AAB, Toronto) as a 50 cents dollar.

 

 

 

Netnet

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I think gold is like value investing (buying $1 for 50 cents). It either takes to you or doesnt.

 

This issue for me is what is it worth, when is it cheap, and when do you sell (when is it expensive)? I cant answer any of those questions. There are about 50 other commodities including oil and natural gas which have relatively easy answers. For that reason I am indifferent to gold and focus on other things.

 

If you could answer those questions then let me know.

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Hi netnet,

  I have been trying to follow the metals sector (mainly precious metals) for the past year or so. I attended the Hard Assets Investments conference in SFO last November and wished that I had attended earlier too. As I think you are in the Bay Area, you can attend it for free this November.

 

  As far as royalty companies go, I follow a company called Sandstorm Resources (SSL.V) fairly closely. It's a pretty new company with a model similar to Silver Wheaton. In fact, the CEO and CFO were among the first 5 employees or so at Silver Wheaton. I have not taken a position yet as I am not very sure about their incentives..they keep issuing options as well as regularly raise money. In fact, they just announced a big offering this week. But I do think they have made some pretty smart investments last year in 4 companies (Luna, Santa Fe Gold and Silvercrest have all started production recently). Disclosure: I have a pretty big position in Santa Fe Gold (SFEG.ob) as I think they are pretty conservative and flying under the radar currently. They are supposedly a very low cost producer of gold/silver.

 

  Another unique royalty company I came to know recently is Solitario Exploration & Royalty Corp. (XPL). You can listen to their latest presentation at the Denver Gold show last month. I think they are about 2-3 years away from receiving any meaningful cashflow from their investments. Disclosure: No position.

 

  One other tiny company is Bullion Monarch Mining (BULM.ob). Even though they seem to have pretty good assets, I don't have much confidence in their management. But they do get around 5-6 M a year from Newmont Mining and are involved in a lawsuit against them for additional royalties. They seem to take this cash flow and invest it in a speculative oil shale technology play. Disclosure: No position.

 

  A couple of other interesting plays out there are: Golden Predator Corp (GPD.TO) and Endeavour Mining Corp (EDV.TO). GPD is an interesting royalty and a core precious metal exploration play (mainly in Yukon). They have a huge land package in Yukon and are very early in their exploration cycle. They do get about 1M from royalties now and are expected to get a lot more in about 4-5 years timeframe. EDV has recently made some smart acquistions and sold one of them for a huge gain (about 80M in about 6-7 months timeframe). They recently changed their name (from Endeavour Financial) to highlight their new focus on being a gold company. Disclosure: No position.

 

If you are really interested in solid management and asset plays, I will recommend you to follow billionaire Rob McEwen. I feel that he is one of the smartest and most ethical guys out there in the resource sector. He was the former CEO of Goldcorp and a huge investor in his two companies US Gold (UXG) and Minera Andes (MNEAF.OB). Minera just about doubled in the last month. I really feel that he could be referred to as the Warren Buffett of the mining sector. I wish I had taken a position in these two companies early this year, but did not as I wanted to look at production plays or close to production plays. Also, Minera was involved in a huge dispute with their partner Hochschild till recently which got resolved finally. Goldcorp's recent announcement related to the takeover of Andean resources for about 3.5 billion is also a big reason for their stock rise.

 

One of the other great success stories I have followed is GORO. The Reid's are pretty unique in whatever they do and built a 1 billion dollar company without caring about Wall Street till recently. I believe their history is solid and are connected to Rob McEwen also. I really wish that I knew about them much earlier. I was very close to taking a position at around 10$ this year, but shied away.

 

  One other solid undervalued company (in my opinion) that I came to know recently is Andean American Gold (AAG.V). They have a solid asset in Peru which is expected to go into production in about a year's time. Their Invicta asset is a huge one in terms of the mind boggling economics. I have not yet taken a position, but regret every day for the past month or so for not getting in. It has been hitting highs on almost a weekly basis. It's just getting to be noticed and I think that it's going to be a huge multibagger like GORO was back in 2006.

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Guest broxburnboy

Having asked myself the same questions a few years back.. I don't believe the world is coming to an end.. but I do believe... that the world

is returning to its money of last resort... precious metals, as a reliable store of purchasing power at least as a means to settle international central bank

transactions (as indeed they have been.)

Fiat currencies will continue to circulate internationally as money, but on settlement dates, the market exchange rate to gold will determine the number of gold ozs.

that are exchanged. This means that all central banks and private banks can issue electronic goldgram credits as a form of electronic money. This also

means a decentralization of global banking, with no sovereign entity having the means to artificially supress or augment the exchange rates of their money.

They are free to inflate or deflate their currencies at will (just like they are doing now).

The investment implications of this thesis (and indeed I believe this transformation is an ongoing reality, that will be confirmed when China allows its currency to float

against other currencies) are many.

 

Current international cash flow negative countries and individuals will be most changed by the new regime.. global wages and prices need to equalize in the face of global free trade (without global money monopolies). In a nutshell, economies which have overconsumed will suffer, as current prices (in their respective currencies) will rise, at the same time wages will drop. This process is already ongoing.

 

But relative to investment in PM here are a few conclusions many others have reached:

 

Gold is money that will retain its purchasing power- save physical gold as a legacy or capital to be allocated at a future date. Don't buy guns as many

doomsayers recommend.. they are expensive to operate, produce no cash flow and occasionally put owners and family members into a negative age flow situation.

The best equity investments are in great companies which produce commodities or derive their income from relative shares in commodities. Apply the usual

valuation techniques.

Of particular interest are gold producing companies as they are in fact the new central bankers.. they are producing money and providing the only possible inflation to

the money supply.... but at a cost.  Further down the food chain are the junior exploration companies, whose valuations are highly speculative but still currently undervalued.. Mega due diligence is required if you want to play in this space but the rewards can be spectacular and the timing appears to be right.

Personally, I am a novice here.. but have had some good success. I hesitate to pass on any names, but I can recommend a few websites if you want a starting point.  321gold.com is a steady source of precious metal news, investment advice, cataclysmic predictions, reasoned analysis etc.  Metalaugmentor.com is a new site dedicated to analysing specific names on the junior/intermediate scene. It is still free, but plan to go to a subscription model. Stockchase.com, is a summary of "expert" opinions on various TSE and TSX names.

Hopes this helps.

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One other solid undervalued company (in my opinion) that I came to know recently is Andean American Gold (AAG.V). They have a solid asset in Peru which is expected to go into production in about a year's time. Their Invicta asset is a huge one in terms of the mind boggling economics. I have not yet taken a position, but regret every day for the past month or so for not getting in. It has been hitting highs on almost a weekly basis. It's just getting to be noticed and I think that it's going to be a huge multibagger like GORO was back in 2006.

 

I agree.  I am long AAG.V at $.71

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