Gold stocks: We told you so...
Editor's note: Sean Goldsmith will be with The Atlas 400 in Africa – without Internet access – for the next two weeks. S&A Editor in Chief Brian Hunt will fill in during his absence... along with Dan's and Porter's regular contributions.
The big gold stock rally we've been predicting is here. We hope you're on board...
About three months ago, Stansberry & Associates began pointing out how gold stocks had become extremely cheap relative to the price of gold... a "divergence" we expected would be resolved by gold stocks moving higher. Here's how Steve Sjuggerud put it in the June 15 DailyWealth...
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[Gold stock expert] John Doody has determined the "fair value" of [gold production and gold reserves] for his universe of gold stocks, relative to the price of gold. When investors get too excited about gold stocks, they trade at a premium to John's fair value. When investors are down on gold stocks, they trade at a discount to John's fair value. And the indicator works... |
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Gold stocks last traded at a big premium to John's fair value in October 2007. The indicator was right: Gold stocks fell 50% over the next year. |
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By October 2008, gold stocks were cheap by John's indicator... And they more than doubled in seven months. Right again. (The previous time gold stocks were particularly cheap by John's indicator was back in March 2003... Gold stocks doubled in eight months.). Last week, I saw John Doody at a conference in Pennsylvania. He told me gold stocks are darn cheap once again relative to their fair value… |
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... the third-cheapest they've been since 2003. The other two times gold stocks got cheap like this, they doubled in eight months or less. |
One look at the stocks hitting new 52-week highs tells us our expected rally is here. Since Steve's piece, gold mining giant Newmont Mining climbed from $52 to $70 per share and reached a new high this week. Randgold Resources, IAMGOLD, Richmont Mines, and Allied Nevada also reached new 52-week highs this week. Gold majors Barrick Gold and Goldcorp are poised to break out to new highs as well.
And don't forget one of our favorite royalty companies, Royal Gold. The stock has gained 43% since Steve's piece. Make sure to read why Steve believes this stock could easily rise hundreds of percent over the coming years here.
What's good for global chaos is good for gold and gold stocks. Hedge-fund legend and famed short-seller Jim Chanos recently offered his latest bearish take on the coming chaos he sees ahead for China.
We've covered Chanos' take on China in previous Digests. Chanos, the brilliant "forensic accountant" who nailed the Enron and Worldcom frauds, believes the country is headed for a huge real estate bust... one that will send the prices of Chinese banks, real estate developers, and commodity producers much lower. Chanos just told Bloomberg…
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The property market is hitting the wall right now and things are decelerating. The CEO of Komatsu said last week that he is having trouble getting paid for his excavator sales in China. Developers are being squeezed. They're turning to the black market for lending, this shadow banking system that is growing by leaps and bounds like everything in China. |
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Regulators over there are really trying to get their hands around the problem. In the meantime, local governments have every incentive to just keep the game going. So they will continue with these projects, continuing to borrow as the central government tries to rein it in. |
In 2008, Americans learned the hard way what happens when a mania in rampant lending, real estate speculation, and shady banking practices hits a wall. When Chanos is proven right on China, it's going to be ugly.
We're starting to see market confirmation of Chanos' thesis. Mega base-metal miners Teck Cominco and Freeport McMoRan struck major 2011 lows this week. Chanos has also pegged Brazilian iron ore producer Vale as vulnerable to a China bust. More than one-third of the company's production goes to China.
Vale enjoyed a huge rally off its 2009 lows. Shares jumped from less than $10 to $36 early this year. As you can see from the chart below, if Chanos' expected China bust arrives, this stock could easily lose 25%-50% on the way back down.
Once again, we remind you that China isn't our biggest near-term worry. That mantle remains with the slow-motion financial train wreck taking place in Europe.
The latest news on this disaster comes in the form of the International Monetary Fund's estimate that European banks have more than $400 billion in credit risk. Again, from Bloomberg…
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The European debt crisis has generated as much as 300 billion euros ($410 billion) in credit risk for European banks, the International Monetary Fund said, calling for capital injections to reassure investors and support lending. |
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Political squabbling in Europe over ways to fight contagion and delays in implementing agreed measures are raising concerns about the risk of defaults by governments, the IMF said. Banks in turn face "funding challenges" because of investor concern about their potential losses from government bonds they hold, with some relying heavily on the European Central Bank for liquidity, it said. |
Whatever the politicians do or say, you only need to know that Europe is in a "no way out" situation. The only possible outcome is more money-printing to "paper over" the giant debts countries like Italy and Greece have piled up over the years.
As we mentioned yesterday, Porter has provided risk-averse investors with a simple way to protect themselves and prosper during this type of currency debasement. It's a strategy that has returned more than 30% in the past 18 months. Make sure to read today's DailyWealth for more on the "50/50 portfolio."
Lastly, we leave you with one of the ugliest charts in all of finance... and a brief "we told you so" that will enflame thousands.
The chart below shows trading in solar giant First Solar over the past year. Regular readers know Porter's take on the solar industry – it's a hopeless money-loser thanks to the Second Law of Thermodynamics. Porter's commentary on the solar industry regularly generates the angriest feedback we receive.
While Porter has noted for years that almost all solar stocks are disasters waiting to happen, he singled out First Solar as his short-selling candidate. The chart below speaks a thousand words...
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New 52-week highs (as of 9/21/11): SPDR Utilities Select Sector Fund (XLU), Dominion Resources (D), IAMGOLD (IAG).
Still bullish on solar energy? Tell us all the ways we're wrong at feedback@stansberryresearch.com.
"We are paid-up subscribers who do not pay for electricity. We are on SOLAR and it works for us. I also have a Hangar that is completely off of the grid and is on solar with generator backup. I very seldom have to use the generator. you really should get YOUR facts straight on solar." – Paid-up subscriber Monte
Porter comment: No, you should. It works fine for local applications... as it has for all of the Earth's history. The question is, will it work for widely distributed power grids? And the answer is clearly... no.
"No need to disagree about the economics of solar power, but why drag in the Second Law of Thermodynamics? Solar power is uneconomical because the energy density and variability of solar radiation received on this planet are such that the amount of 'stuff' required to harvest it is out of proportion. It's not theoretically impossible that an economical system could be developed – just highly unlikely." -Paid-up subscriber L.O.
Porter comment: Nope. It's impossible.
Regards,
Brian Hunt
Baltimore, Maryland
September 21, 2011
Gold stocks: We told you so… Royalties: We told you so… Solar stocks: We told you so… The latest from the brilliant Jim Chanos...