Sprott: Bullish on metals... 'We're running out of silver'... Jeff Clark on gold stocks... Frank Curzio: The best junior gold stock to own right now... A quick lesson on 'WDDGs'...
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Eric Sprott is the most important investor you've probably never heard of... He is the billionaire founder and CEO of Sprott Asset Management. And he's considered one of the best natural resource investors in the world.
In the past few years, Sprott has made headlines with his bullish calls on gold and silver... And how he believes the markets are being manipulated.
Last weekend, he gave an interview to Silver Doctors, a precious-metals focused website, about his current views on the gold and silver markets. Sprott is worried about the ongoing debt crisis in Europe. He believes the problems in the financial system will cost hundreds of billions of dollars to fix (at least temporarily). But the coming wall of liquidity that cash infusion will create is hugely bullish for precious metals...
Like us, Sprott says the 100 billion euros the European Union granted Spanish banks last weekend is just the beginning...
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The problem is WAY BIGGER than central banks can deal with, and its way bigger than governments can deal with – the whole banking community is massively larger than countries. The countries of course have no excess funds anyways because they're all running deficits, so it's very difficult for the countries to lean in there and bail them out when their own credit is under attack! |
With the continued European bailouts and strong demand for precious metals, gold and silver prices should soar. But lately, prices have floundered. This leads Sprott to believe central banks are controlling the prices of precious metals. After all, the gold price is a check for central bankers... The higher the gold price, the worse they're doing at their job. Sprott said...
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All of the data is incredibly positive for precious metals. I focus on gold because the silver data is so poor that we get, but when you see China buying 100 tons of gold in April, Iran's buying, Turkey's buying... Kazakhstan announces they're going to go from 12% of reserves in gold to 15% – all of the data speaks to HUGE VOLUMES OF PHYSICAL GOLD BEING CONSUMED... way beyond the ability of the miners to provide that gold. Which makes me think the central banks are continuing to lease or to supply the gold into the market somehow. |
In addition to ongoing problems with Europe's financial system and growing demand for metals, there's another reason metals (in particular, silver) will soar. We covered this in the February 24, 2011 Digest:
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In short, the world is out of silver. Sprott says aggregate investment demand for silver between 2000 and 2009 was 293.8 million ounces (according to the GFMS, the world's foremost precious metals consultancy). Using his own numbers, Sprott compiles the silver holdings for seven large investors, including himself, iShares Silver Trust, ZKB, GoldMoney, etc. Just those seven entities own 519.6 million ounces of silver... That's 225.8 million missing ounces. And again... That's only seven investors. It doesn't include central banks, individuals, hedge funds, etc. |
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It's obvious, as Sprott notes, silver data have been "very, very misstated." Sprott ends his speech saying, "There's $22 billion of silver available in the world, of which the ETFs already own half, and between you guys and us we probably own the other half... Which means there's nothing left." |
In his recent interview, Sprott says the world's silver supply would be gone "in a nanosecond" once the people realize there isn't as much metal as we believe "because it's a very small amount of money." He also says there's a shortfall in the world's gold supply.
We believe that over the long term, gold will march higher... And the increase in gold prices will boost prices of gold-mining stocks. Gold stocks have been crushed in the past year (a trend we've followed closely). Since its high in September 2011, the Market Vectors Gold Miners Fund (GDX) – an exchange-traded fund that holds a basket of the world's major gold stocks – has fallen as much as 42%... But it just started rallying last month.
But there's still an opportunity to buy gold stocks... Jeff Clark declared it was time to buy gold stocks on May 24. In that day's Digest, we wrote, "The gold stock rally we've been waiting for is officially here... That's what Jeff Clark... told Growth Stock Wire readers this morning."
As evidence, Jeff cited the performance of gold stocks – as measured by GDX – compared with the metal itself and the broad market. At that point, gold stocks had rallied 8% over the preceding week and 4% the day before... Meanwhile, both gold and the general stock market fell.
Below is an updated version of the chart that accompanied our analysis... Jeff described it this way...
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A falling line on the chart shows gold stocks are lagging the metal. A rising chart would indicate gold stocks were outperforming the action in the metal. As you can see, gold stocks have lagged the metal all year. The underperformance became even more extreme over the past three months. |
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But notice the pattern has finally broken above its recent series of lower highs. Yes, it is just a tiny breakout for now... But it is the first ray of sunshine we've seen in the sector in over a year. |
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The best time to own gold-mining stocks is when the stocks are outperforming the metal. |
As you can see, the trend has intensified in the last three weeks...
As Jeff said, the best time to own gold stocks is when stocks are outperforming the metal. Today, on continued European fears, GDX is up more than 2%. Gold is up less than 1%. Stocks are clearly outperforming the metal. And we think this trend will continue...
You could buy GDX and make solid gains. As we said, the fund holds a collection of the largest mining stocks in the world. But for truly outstanding gains... another type of mining stock could soar hundreds of percent when the big gold-stock rally hits. I'm talking about junior mining stocks...
To give you an example of what I'm talking about... the best-returning stock recommendation in the history of Stansberry & Associates is a junior miner. Steve Sjuggerud helped his subscribers make as much as 995% by recommending Seabridge Gold in July 2005.
In fact, if you look at the S&A Hall of Fame, which we publish at the bottom of every Digest, you'll see four of the top 10 all-time winners in our company's history are junior miners...
Matt Badiali's recommendation of ATAC Resources helped readers to a 597% gain... Subscribers could have made 339% following his recommendation of Jinshan Gold Mines. You get the idea... When junior gold-mining stocks rally, they soar hundreds (and sometimes thousands) of percent.
We think we're approaching one of those times. Despite the 100 billion-euro Spanish bailout, European sovereign yields are still rising... The yield on Spanish 10-year debt was over 6.8% today – a euro-era high. We will see hundreds of billions more dollars created to paper over the European problem. And it will send gold stocks soaring.
Phase 1 Investor editor Frank Curzio recently prepared a report on what we think is the best junior gold-mining stock to own today... One of the best gold investors in the world brought this stock to our attention. And we think it's about to be taken over by one of the world's largest gold producers.
The stock Frank discovered has zero debt, which makes it incredibly attractive as a takeover candidate. And its operations are right next to mines run by a global mining giant. Finally, three prominent investors just bought a combined $20 million in this small gold stock...
The last time the potential acquirer (the large gold producer) bought a smaller gold mine, one of these investors was also a large shareholder in the acquired company. Frank says the opportunity is similar to the one subscribers had with Gold Standard Ventures... both stocks fell along with the sector, own property in one of the world's richest gold-producing regions, and have great management teams. Gold Standard Ventures is up nearly 300% in five months for Phase 1 subscribers.
But even if Frank's gold-mining company isn't acquired, we still think you could make money. As I said, this company has no debt, and it's mining in one of the richest gold areas in the world. However, we think the takeover is likely, and it could help shareholders double their money fast. To read more about this tiny gold stock, which we think will at least double in value, click here...
Or if you'd like to subscribe to Frank's Phase 1 Investor newsletter and immediately gain access to the stock we've described (without watching a long promotional video), click here.
New 52-week highs (as of 6/11/12): Altria Group (MO).
In today's mailbag... two subscribers describe their successes using our recommended investing strategies... and one gets Dan started on his favorite topic... Send your e-mail to feedback@stansberryresearch.com.
"Thank you for sharing these gems. In these days of sound bites, it's nice to devote a few minutes to entertaining and enlightening knowledge. Time well spent I hope it's OK, but I shared each of them with friends. I'm anxious to sink my mind into next weekend's articles." – Paid-up subscriber Clive
Goldsmith comment: Normally, we don't allow you to share our publications with friends. Doing so undermines our business as publishers. However, we think the essays in our Masters Series are timeless, important lessons for everyone to learn. And we encourage you to forward these weekend publications to anyone who will benefit. If you haven't yet read our first set of Masters Series essays, you can do so here and here.
"For those not convinced that properly executed options can reduce investment risk, I have the following example. In this month's PSIA, Porter stopped out of Bank of America with a 24% loss. As Porter described, he still believes in the profitability of banks going forward, but the timing was not right (he's early sometimes). He booked a cost of $9.17 on April 12 and was recently stopped out at $6.90.
"At the time of the recommendation, instead of buying the stock, I sold a $9 naked put with a Jun 15 expiration date and $0.75 premium. [Note: Porter doesn't do options in PSIA, so don't blame him for not recommending this strategy. He has, however, recommended the selling of naked puts several times in the Digest.] I expect to be put the stock on Friday for a net cost of $8.25. Based on that cost, my stop limit is $6.18. The stock is trading today (Monday) around $7.25, so I'm still in the position. As soon as I am put the stock I will begin to watch for a good time to sell a covered call. I expect to get my net cost below $8 per share with the first call.
"So if Porter's general thesis is correct and banks are poised to do well, I am poised to share in the profits. Even in the short term, I expect this investment to turn profitable after one or two covered call trades. If you can't see how this strategy reduces risk, just quit now." – Paid-up subscriber J. Johnson
"I am a retired physician with a two million dollar IRA/pension fund that I manage personally. I am a cross between your 'investor' and 'trader' personalities. I have a significant portion of my funds in the WDDG stocks of Doc Eifrig and follow closely many of the recommendations of you and others of your staff. I am either unable or unwilling to do much of my own research so I choose to pay for most of my research through my subscriptions, weigh the facts presented, and buy some of the recommendations.
"Since using some, but not all, of your investing principals, I have done pretty well. I scan or read all of the material your advisory sends and select the ones that make most sense to me. I read the missives from your critics and marvel at their inability to understand your tenets, many of which I agree with fully. Keep up the critical good work." – Paid-up subscriber DPB
Ferris comment: It's great to hear how happy you are with Doc's work in Retirement Millionaire. He's a smart guy, who has taught me a lot. But "World Dominating Dividend Growers" (WDDG) is a term I coined a couple years ago, shortly after taking over The 12% Letter. Doc told me recently he never uses the term "WDDG"... even though his focus on high-quality, dividend-paying stocks leads him to recommend similar stocks to the ones I've loaded into my model portfolio.
"WDDG" is one of the most frequently used terms in our reader feedback. It refers to stocks like Wal-Mart, McDonald's, Coca-Cola, and Johnson & Johnson, among others. WDDG stocks share certain characteristics: Each one is the No. 1 company in its industry. Wal-Mart is the No. 1 retailer. McDonald's is the No. 1 fast-food restaurant company. Coca-Cola is the No. 1 beverage company. And Johnson & Johnson gets 70% of its revenues from products that are No. 1 or No. 2 in their category.
These companies are consistently profitable year after year. They have huge advantages that allow them to beat the competition year after year. They have excellent balance sheets, so there's little to no financial risk in owning them. And they pay higher dividends at inflation-beating rates every year, like clockwork, for decades on end.
There is one and only one place to get our list of WDDG stocks, and that is in The 12% Letter. My newsletter is focused on helping subscribers find the safest, steadiest, and most consistently growing income in the stock market. I started covering WDDG stocks in late 2006. I've written about them much longer and recommended them more often than any other S&A editor. I expect to keep doing this for two reasons...
One... I predicted in November 2009 that the stock market would continue to trade sideways (as it has done since early 2000), ratcheting up and down and going nowhere for five to 10 more years. Though stock prices overall would go nowhere, earnings would keep growing. So stocks would get cheaper and cheaper during that time in relation to those earnings. Investors who buy the best stocks with the most consistent earnings – like WDDGs – will make money, while most investors continue to lose it.
Two, as a recent paper by money-management firm GMO demonstrates, investors usually underpay for the advantages of high-quality, consistently profitable stocks like those in my WDDG list... even though they're a better investment than just about every other stock in existence. Most investors would rather chase "hot" momentum stocks like Facebook and the other social-media companies (many of which are way down since going public) than buy Wal-Mart (which has returned 15% this year). So high-quality WDDG stocks are cheap a lot more often than they should be. That means investors who understand them will have many opportunities over the years to build a large position in WDDG stocks.
So due to the sideways market and the persistent undervaluation of WDDGs, I believe I'll continue to recommend them, adding new ones to the list here and there for the next five to 10 years. And because the sideways market will be brutally unforgiving on lower-quality businesses with less persistent profitability, if you don't buy WDDGs starting now, it's unlikely you'll make any money in stocks for a decade or more.
WDDGs will be the safest, easiest money in the stock market for many years to come.
Some investors will give their WDDG portfolios an extra boost by learning to sell options. But if they're selling options on anything but high-quality WDDG stocks, again, I believe they're more likely to lose money than make it.
Simply put, buying WDDG stocks is now and will remain for the next several years the best strategy for stock market success. If you have yet to discover WDDGs... it'll open your eyes to a brand new, low-risk, highly certain reward strategy that consistently outperforms most other strategies.
Fortunately, The 12% Letter is not expensive. We're serious about introducing WDDG stocks to as many people as possible. Not charging much for The 12% Letter helps us do that. It's so inexpensive, we suggest you buy a subscription for yourself and one as a gift, perhaps for a high school or college grad who you'd like to teach about wealth creation.
The 12% Letter is just $39 a year, and you can cancel for a full refund within four months if you're unhappy. That's 120 days of risk-free information and recommendations on the safest, most certain stock market strategy out there. We want you to be happy with our work. That's the only way we'll do business. If you want to get access to the one and only list of WDDG stocks, click here to subscribe to The 12% Letter (without watching a long promotional video). Also, when you sign up, you'll get immediate access to three special reports about income investing that I recently completed.
Sean Goldsmith and Dan Ferris
New York, New York and Medford, Oregon
June 12, 2012