The market recovered to new highs...

The market recovered to new highs... But this sector is still floundering... What smart miners are doing today... Alliance presenters are bullish on commodities... What one of the world's best real estate investors is doing today... A potential double in foreign real estate...
 

 From September 19 to October 15, the S&P 500 fell from 2,019 to 1,820 (using intraday figures – the chart below uses closing numbers)... a drop of 9.86%.

 

But we still haven't had an official correction – defined as a 10%-plus pullback – in three years.

 

 And since October 15, the stock market has roared back to all-time highs. But not all sectors are performing as well...

 

Gold miners – as represented by the Market Vectors Gold Miners Fund (GDX) – were down as much as 27.5% with the broad market selloff. They're still down 20% today. Small-cap mining stocks – as represented by the Market Vectors Junior Gold Miners Fund (GDXJ) – fell even farther... down 40% at their lowest point and still down 30% today...

 

 

 As we've noted in previous Digests, a strong dollar and weak precious-metals prices are killing miners today. From the September 30 Digest...

 

The dollar is advancing because the market expects the Federal Reserve to start raising interest rates soon – a sign of an improving U.S. economy.   Meanwhile, other global economies – namely the European Union – are in shambles. There's no interest-rate hike on the horizon. Money flows to where it's treated best... Today, that's the U.S.

 

 Mining-stock prices reflect the difficult conditions in the sector. Simply put, most miners can't make money at today's prices. Production costs for major developers are more than $1,400 an ounce today... But gold is trading around $1,160 an ounce.

 

As our friend and resource-investing legend Rick Rule likes to say, they're losing money on every ounce of gold they sell... and trying to make it up in volume. Of course, that strategy doesn't last long.

 

 This dilemma is causing some gold miners to cannibalize their projects today. As S&A Resource Report editor Matt Badiali explained in the October 30 Digest...

 

In addition to cutting exploration, mining companies are only producing their highest-grade deposits, known as "high grading."   A typical mine has high- and low-grade deposits. The producers plan to mine the entire project and blend all the resources into an average grade. This production mix adds years of production and loads of extra reserves to a project.   But the miners can't afford to mine the whole thing today, so they're just taking the best rock and leaving a shell of a project with a bunch of low-grade gold that won't be economic until gold prices move much, much higher.

 

 That's one reason mining stocks are still down in the dumps. Many of these companies won't survive. But the smart companies are getting lean right now...

 

For instance, AngloGold Ashanti (AU), the third-largest gold producer in the world, is looking to sell off some of its gold mines and is seeking joint-venture partners on various projects.

 

The effort is part of a plan to cut debt after the company was unsuccessful in raising enough financing to split off the company's South African mining projects.

 

South African mining has been plagued by strikes and other labor problems in the past year. And the falling price of gold has helped send AngloGold shares down 40% since mid-September...

 

 

 AngloGold's plight illustrates the tough road ahead for miners.

 

As the price of gold continues to fall, driving their bottom line even lower, more gold companies are going to have to get creative to service their debt burdens.

 

Some will eventually be forced to shutter operations... which will lead to lower gold production... which will lead to less supply... and ultimately, higher gold prices. The commodity cycle continues...

 

 On the topic of commodities, we just returned from our annual Alliance conference in the Dominican Republic. In addition to our analysts, the small audience heard from investing legend Jim Rogers, currency expert Jim Rickards, and political satirist P.J. O'Rourke.

 

I can't share the details of the conference with you today. (After all, this is an exclusive event for our top subscribers.) But I will say, our analysts are licking their chops over commodity stocks today. Both Extreme Value editor Dan Ferris and True Wealth editor Steve Sjuggerud recommended different ways to profit from commodities today.

 

 In Monday's Digest, we told you about all the additional private-equity and sovereign-wealth money flowing into the commercial real estate market.

 

One of the world's largest real estate investors – Extreme Value recommendation Brookfield Asset Management (BAM) – is benefiting from the trend. The stock is trading near all-time highs.

 

 Brookfield manages a global portfolio of assets, $105 billion of which is in real estate.

 

Extreme Value research analyst Mike Barrett had this to say about Brookfield Asset Management...

 

Brookfield manages $200 billion in real, cash-generating assets around the globe. The company has more than a century of experience owning and operating the high-quality assets that are the backbone of the global economy.   On a conference call last week, CEO Bruce Flatt confirmed what was reported in the Digest on Monday – global institutions and sovereign funds are in fact accelerating their allocations to the kinds of real assets Brookfield specializes in. Why? The most obvious reason is Brookfield can offer 8%-plus yields with moderate risk.   Brookfield likes to invest with the expectation that it will own an asset forever. It also prefers to buy below replacement cost, then finance it prudently to survive downturns. We take a similar approach in the selection of Extreme Value stocks.   In 2009, Brookfield deployed most of its capital to developed markets like the U.S. Deals were abundant back then and there was little competition. Today, Flatt says a similar deal would probably attract 30 to 50 bidders, so they aren't interested. Instead, Brookfield is more focused on markets like Brazil, China, and India where capital is presently scarce but transactions completed during better times must now be recapitalized.   Over the past 20 years, being a patient BAM shareholder has worked out well. Since 1994, the shares have returned more than 20% annually. That's more than double the S&P 500's return of 7.5%. Given its focus on capital scarcity, we won't be one bit surprised if BAM continues outperforming the broader market over the next 20 years.

 

 Extreme Value subscribers are up 64% in a little more than two-and-a-half years.

 

There are currently nine high-quality companies in the Extreme Value portfolio trading below their "buy-up-to prices." If you're looking to put money to work in the market today, you'd be hard-pressed to find safer starting points.

 

One is a way to invest in foreign real estate in a country whose government is actively pursuing foreign investors. As a result, investment into the country's stock market can explode in the upcoming months. Dan told subscribers about this opportunity back in the April issue...

 

The company I went to visit is a relative newcomer to the real estate business. It's a simple business with lots of cash and a stellar management team. It owns two valuable parcels of land. It's dirt-cheap. And you could safely make 50%-100% in the next year or two...

 

 This company owns two parcels of land in a major city. And it's absurdly undervalued. He continued...

 

Together, these parcels are likely worth hundreds of millions of dollars. That could prove a conservative estimate... A slightly smaller parcel just 10 miles south of these lands recently sold for $2.21 billion. That's a great vote of confidence in the region.   Yet the stock market is valuing the land at about zero right now. Getting extremely valuable land for almost nothing is either a great deal or too good to be true.

 

 Despite the value of the land this company owns, its entire market value is less than $250 million... And this stock trades on U.S. exchanges, which means you can buy with the click of a mouse.

 

Extreme Value subscribers can find the name of the company and all of the details in the April issue. If you would like to learn more about a subscription to Extreme Value – which will give you immediate access to this company – click here.

 

 New 52-week highs (as of 11/11/14): Apple (AAPL), Deutsche X-trackers Harvest China A-Shares Fund (ASHR), Brookfield Property Partners (BPY), CDK Global (CDK), CME Group (CME), CVS Health (CVS), Discover Financial Services (DFS), Dollar General (DG), Fidelity Select Medical Equipment & Systems (FSMEX), Medtronic (MDT), Procter & Gamble (PG), PowerShares QQQ Fund (QQQ), ProShares Ultra Health Care Fund (RXL), ProShares Ultra S&P 500 Fund (SSO), and Union Pacific (UNP).

 

 "You guys have been pushing gold and silver for a long time now and anyone who followed your advice would have lost their shirt. I guess if you throw enough sh*t against the wall, eventually something will stick." – Paid-up subscriber Mark Cipolloni

 

Goldsmith comment: Did our advice to buy gold in 2003 "stick"? The metal was trading between $300 and $400 an ounce then. I'd guess folks who bought gold on that advice are happy we wrote that. How about when we recommended buying it in 2006, when it was trading between $550 and $750? Did that stick? Or when we advised folks to own gold in 2008, 2009, 2010...?

 

As you say, we have been urging folks to own gold for a long time... a lot longer than two years. More like 11 years. But yes, if you bought in the past couple years, the value of your gold holding has declined. After a run from around $250 an ounce in 2001 to more than $1,900 an ounce in 2012, it was only reasonable to expect a correction. And we got one. Peak to trough, gold is down nearly 40%. No asset can go straight up forever. Plus, Porter has consistently said that he expected a pullback in gold and that he would likely buy more at prices below $1,200 an ounce.

 

 

But remember, we don't trade physical gold. We recommend gold as financial insurance. You buy it and hope to never have to use it. We advise readers to put a portion of their wealth in gold and silver bullion... to actually take possession and lock it in a basement vault. As we've said many times, gold is real money. It has been real money for thousands of years. Unlike paper money, gold can't be inflated into worthlessness, and it's no one else's liability. And as governments around the world print more and more money... the value of precious metals will inevitably rise regardless of occasional fluctuations. We think this advice sticks pretty well.

 

 "I have been a subscriber to Porter's newsletter for almost two years. In that time, I've never seen him address the risk column on the far right of his portfolio page. I believe somewhere I saw where the value can range from 1 to 10 with 10 representing the riskiest investments. To date, I've only seen risk assignments of either 2, 3 or 5 on his recommendations. I don't believe this column adds any value to the reader, and in some cases it contradicts information presented in the text of the newsletter.

 

"In particular, I can remember at least one instance where a recommendation was rightly described as 'speculative' in the report yet received a risk assignment of 3. Also, I contend selling stocks short is a risky venture and warrants a risk factor greater than 5. My suggestion is to either be more diligent in assigning an appropriate risk value to individual recommendations or drop the column from the report." – Paid-up subscriber DJ

 

Goldsmith comment: The risk assessment Porter includes in the portfolio runs from 1-5. He assigns a "1" to his safest ideas. A "5" represents the riskiest. You shouldn't be surprised that Porter and his team rarely recommend stocks with a "5" rating. We generally want you to avoid risk.

 

Regards,

 

Sean Goldsmith

November 12, 2014