A two day show, in 5000 words or less
Silver Stock Report
by Jason Hommel, June 20, 2007
I just got back from the gold show in Vancouver. The movers and shakers and market making newsletter writers in the industry gathered together with over 200 companies to share thoughts on where our market is headed, and why, and I’ve summarized what I could learn from everyone there. See the impressive speaker lineup.
http://goldshow.ca/ch_june2007.html#Speaker_Lineup
Enthusiasm for precious metals was subdued, both in speaker’s attitudes, and in audience attendance. After a year long period of price consolidation in the precious metals, where a price peaked in May, 2006, less enthusiasm was to be expected.
One thoughtful speaker asked the audience, “How many of you bought gold in the last year?” I estimate that less than one in 20 raised their hands. That response was pathetic, yet typical of price dips and consolidations. It was also a proof, and a reason, why gold prices are low.
My goal while attending the Vancouver show was to research a few copper stocks, and see what all the other speakers had to say about copper and thus learn about the opportunity I see developing in copper stocks. At some shows in the past, I spent most of my time at the company booths. But this time, I spent most of my time listening to the other speakers. (I can research the stocks anytime I want, from home, or via my online database of stocks which now has about as many companies as attended the show!)
The first presentation I caught was at 9:30AM on Sunday, by Mary Anne Aden & Pamela Aden.
I was especially eager to hear them, because of their comments in a recent article last week:
http://www.kitco.com/ind/Aden/jun152007.html
Their presentation echoed the article. The Aden Sisters make the very good point that we are in a typical commodity cycle that lasts about 20 years. But, this cycle is different in that China is participating to a great extent. Last time in the commodity boom 20 years ago, China was bogged down in the poverty from Communism.
The Aden sisters are not just listing “two reasons” why commodities will go up. But rather, these are two waves hitting at once, which are making a bigger, stronger wave!
This is a very insightful point, and I agree. So, yes, I hate to say it, but “this time, it’s different”.
Last time, copper prices rose 100%. This time, copper prices are up 500%. I’d say that’s different alright.
The third wave pointed out by the Aden sisters is the monetary inflation.
Shadow Stats shows that May M3 annualized inflation is running at 13.3% and the CPI (consumer price index) is really 10.3% inflation.
http://www.shadowstats.com
For more from the Aden sisters, see http://www.adenforecast.com/
Next up, I got to hear part of Rick Rule’s talk at 11AM.
Interestingly and surprisingly, Rick said that he would not invest in the Silver Valley in Idaho, and that he likes to go “where others are not”. He also does not like to invest in developing mines (such as Idaho General, Metalline, and Baja Mining), but rather, he likes the explorers more.
Rick also cautioned investors about following the markets into tops.
Rick Rule runs the largest brokerage house that is specifically designed to give advice to investors in mining stocks, Global Resource Investments Ltd. See:
http://www.gril.net/
For other stock brokers, see:
http://silverstockreport.com/brokers.html
The next speaker I was eager to hear was Paul Van Eden, which was at 1PM. Paul can usually present his ideas very clearly, but this time seemed to be the great exception. Paul explained that he was short copper, and that might explain it. He also said that there is no bull market in gold, but it’s the dollar that’s going lower. While I agree that the dollar is going lower, the bull market in gold is in all currencies.
Next, Paul mentioned the importance of the unwinding of the Yen Carry Trade. The Yen Carry Trade is where people borrow yen at 0%, and invest it into T-Bills at 5%, and pocket the difference. If the Yen goes down, that’s an added bonus, if the Yen goes up, it’s added pain. And now that the Yen is going up, it’s time to close out the trade and reverse it. But the problem is one of size. The size of this trade is huge, and the players are huge, and they all cannot exit at once without causing the dollar to go down further and faster. Therefore, some investors have bought up commodities across the board as a way to take advantage of the reversal of the Yen Carry Trade.
I caught up with Paul later, and asked him more directly about this. I said that the Treasury market is one of the largest in the world, and that it would not make sense for them, if they could not sell dollars, to buy commodities instead, since the commodity markets are even smaller. He replied that it could be other parties making these trades, in anticipation of the failure of other traders who will have to unwind the Yen Carry Trade.
Paul’s point was that due to too much money running into commodities, that commodity prices are unsustainable.
I agree that there is too much money, but that does not mean the commodity price rises are unsustainable, it means that the value of paper money is unsustainable!
For more from Paul, see http://www.paulvaneeden.com/
Next up at 1:30 were the Coffin brothers, David Coffin & Eric Coffin.
They mentioned that commodity prices are real, and that shortages in the industry are everywhere, from a shortage of drills, shortage of drillers, geologists, engineers, mining equipment, and even good projects, and stocks!
I took down the names of a few copper stocks that they had been looking at, (one I already owned) but neglected their uranium and diamond picks. I believe they mentioned that no matter where copper prices go in the short term, there should be good money made in copper stocks, and I agree.
You can see more from the very highly regarded Coffin brothers here:
http://www.hraadvisory.com/
On the next panel discussion, at 2PM, I heard the name of that same copper stock mentioned again, this time by Lawrence Roulston. (This stock was also highly rated recently at my online database of highly leveraged exploration stocks, and so I ended up buying about $140,000 of it on Monday.)
Next up were five workshops at 3PM. I could only choose one, so I chose to listen to Victor Adair, because I know he is a commodities trader who goes long or short on occasion, and had been short on copper a while back. It was a good presentation, filled with many of the things that leveraged traders who take short positions need to continually remind themselves so that they don’t get overextended or into trouble. I realized that I can save capital by not using leverage; and I can also save myself a lot of headaches and heartaches.
Victor reminds us that the public nearly always goes long, and rarely short, and when the public went into silver in May, 2006, it was quite predictable that it would fall. Victor also caught the prior silver peak of April, 2004, by buying Silver Puts, which was profitable for him. Another strategy that he recommended was to sell out of the money calls at such peaks, as they usually expire worthless.
However, I note that going short, or selling calls, can cost billions, as that’s what Apex Silver did with Zinc at about 50 cents per pound. Zinc may have seemed high at the time, but now that zinc is at $1.60, it can be seen to be a risky strategy as well. And during times of hyperinflation, locking in a dollar price in the future can be seen as selling the family farm for “magic beans”.
For more from Victor, see http://www.victoradair.com/
Next up, at 4:30, were another 5 workshops. I wanted to listen to both David Morgan (because he’s into silver), and also Lawrence Roulson (because he’s long been very bullish on China and copper), but knowing where they stand, I decided to seek out the wisdom of David Skarica, who has in the past thrown me a few good natured barbs about my narrow minded focus on silver.
David gave an excellent presentation with charts from his laptop (which had me starting to sweat, since I hadn’t written my speech up yet). I have now come to respect and admire young David more than ever. David’s most memorable point was a simple chart of the HUI, showing that we have seen 3 big rallies and 3 small dips or consolidations in the past 6-8 years, going back to either 1999 or 2001. Each time, we dip about 30-40%, and gain 140-170%. Each dip and rally lasts about a year. The current dip has lasted nearly a year, and is about over. We are about to go up again by about 150% or more.
David, philosophically, seems more of a technician who looks at charts and follows the wisdom of Jim Dines, but he also studies the fundamentals very well, better than me at times. (I guess I’d rather study more stocks more superficially.) And although I nearly despise technical analysis, I can’t help but note the charts when buying stock, and yes, I do know how to buy on the dips and sell on the peaks. We both own Baja Mining, and are both very bullish on the stock.
You can catch up with David here: http://www.addictedtoprofits.net/
Next, in the main Hall at 5pm was Doug Casey. Doug’s a legend in our industry, but I’ve heard his speech about 4 times now; some was the same, some was different, just like my own.
Doug was saying that he owns about 200 of the “dogs and cats through those doors” (probably through funds). He explained that while the easy money has already been made, the big money is still ahead of us.
But he also gave warnings. So, he pointed out that the story of mankind is a story of declining commodity prices, and that these mining stocks, we ought to remember, are like burning matches, because mines are depleting assets. He said that commodity prices could fall for at least 4 main reasons, ranging from space exploration to nanotech. I think he was being sarcastic, but it was a bit hard for me to tell.
He was bullish also on Cotton and Cattle and property in Argentina. When a man asked “How do you buy cotton?” Doug responded “On the futures exchanges”, and he said that “If you have to ask that question, you might not make money in cotton or cattle!”
While Doug is an atheist, I respect and admire his intellect and support of free markets and how he is a living example of the highest Christian principles put into action. He is a strong supporter of Ron Paul.
Catch up with the living legend here:
http://www.caseyresearch.com/
I wasn’t too interested in the 5:30 panel, walking out on it, and I kind of dozed off mentally for the next panel on political risk. While some said they would avoid investing in Russia, for example, I believe it may have been Frank Holmes who said they have up to a billion dollars invested in Russia, and are thus biased in favor of Russia.
Unfortunately, Frank Veneroso could not make it. I note that Frank was shorting copper while copper was $1.50/lb. and rising. Frank was calling for a top in the copper market way back then. And 6 months ago, he was calling for a collapse in China because their banks are ‘shaky’. Yes, but it appears that a short position in copper at $1.50 is what was shaky.
With that, my beautiful wife Shanna and I were headed off to dinner and wine with Bill Murphy & Chris Powell, and many others.
While we were waiting to meet them for dinner, I saw Lawrence Roulston of Resource Opportunities. I had to run to catch up with him; he was walking out the doors of the hotel, alone.
I’ve known that Lawrence has been bullish on China and base metals for years now, while I’ve been far more bullish on silver. (And now, copper has solidly outperformed.) I had to first congratulate Lawrence on his work. Second, admire him for “being there” before me in several of the copper stocks I’ve been buying lately, already having written reports on them. I asked him several pointed, quick questions.
“Do you think the world thinks that the copper price is headed back to $1.50, and can’t believe current prices?” He said yes.
“Do you think copper prices will go even as low as $2.00, or do you think that copper will more likely stay here or go higher?” He thinks copper will most likely stay here or go higher.
“Do you think copper stocks with forward P/E’s of 1, and payback of capital in less than 6 months goes to show we will make a killing in copper stocks of several hundred percent gains in the next 6 months to a year?” He thinks we will.
I asked Lawrence these questions because he has been the leading advocate for the base metals according to my understanding of all the speakers. You have to go to the guy who has called the market right. Thank you Lawrence!
You too, ought to run to catch up with Lawrence, here, (I started subscribing about a year ago, but I think I need to start paying more close attention):
http://www.resourceopportunities.com/s/Home.asp
On Monday, I started the morning off by trading; buying a copper stock that Lawrence had recently written up.
Then, I caught Ian Gordan in one of the workshops at 11AM.
Ian is also very well regarded; crowds flock to him. Ian’s presentation was that we are about to start into a winter of a Kondrateiff cycle, when there is a severe depression of economic activity, and that the GNP could be cut in half, down to $6 trillion from $12 trillion today. During such a time, commodity prices, such as the base metals and silver, could go down.
But Ian admitted that China appears to be in the Spring time of a Kondrateiff Cycle.
So the question then becomes, which force will predominate? China’s Spring, or the winter of the U.S.? I personally think China is dominating, and will dominate more.
China is having more of an effect on commodity prices than the U.S. China’s one year increase of copper demand is more copper than is used by the entire U.S. Housing market! China uses twice as much copper as does the U.S.!
Furthermore, the key characteristic of a Kondrateiff winter is deflation. We are not seeing deflation in the U.S. right now, M3 is not shrinking, it is increasing at 13%!
You can catch Ian’s views here:
http://www.thelongwaveanalyst.ca/
My own view is that the economic prosperity is directly related to the extent to which mankind obeys God’s economic principles. The depression of the 1930’s, in my opinion, was more of an effect of the shutdown of trade than some monetary cycle. Stopping trade is nothing more than mass theft. The gold confiscation was also mass theft. Trade was shut down because the world stopped using gold as money. A return to using gold as money will likely increase trade again, just as world trade levels were at historic highs prior to 1914 when the world was on a gold standard.
But I think Ian is essentially right, if trade is severely restricted, it will be bad for commodity investments, and good for gold investments.
But I also think that concerns of trade restrictions are exaggerated. Men today seem far more interested in promoting free trade, than not.
The most important point I can make about free trade is this: If it’s my money, then don’t I have the right to spend it on whatever I want, anywhere I want? And why would anyone else even think that they could or should even have a say in the matter over where and how I spend my money? Thus, trade restrictions are a theft of the use of my money. Since theft is wrong, then trade restrictions are wrong, and entirely unBiblical.
And let’s get this straight. China is not “stealing Jobs” from us.
First of all, there is an infinite amount of work to do in the world. Infinite. But we ought to focus on what is profitable, for us. Did the mechanical reaper cause poverty because it put farmers out of work? ( 70% of the U.S. population were farmers back in the mid 1800’s, which declined to 9% about 50 years later) No, job loss does not cause poverty. When free men are set free, free men can be more productive, and thank God for freedom.
Anything that will increase freedom and liberty will be more profitable and beneficial to mankind in the long run.
The other popular misconception regarding China is that they somehow have a trade advantage due to their cheap labor and cheap currency, and are winning some sort of trade war. But that’s the exact opposite. We, in the U.S. have the huge trade advantage! China works for us, cheaply! Think about it. If we tried to conquer China militarily, to make them all our slaves, their wages would rise as we’d have to pay them all $5/hour! They work for less than if we conquered them in a military victory!
Increasing economic freedom in China is the only thing that is helping to pull them out of their own economic depression which was caused by their own communism. China’s ascent out of poverty is a tremendous benefit for them, for us, and the world.
After that, Shanna and I went back up to the room to rest a bit until the next speakers at 1PM. Shanna and I both napped until about 3PM. We got back to the show in time to catch the GATA presentation, which was right before my own talk.
The GATA presentation was by three men, Ed Steer, Chris Powell, and Bill Murphy. Their presentation was excellent, but I don’t remember too much of it; mostly because I know the story so well, and because I was up next, and I had to prepare my thoughts.
More and more people seem to recognize GATA’s thesis that central banks have been selling gold in larger quantities than the banks admit, to cap the price. Years ago, Alan Greenspan admitted that “Central banks are willing to sell gold in increasing quantities if gold prices rise”. Central bankers admit to capping the gold price, or otherwise they would be “staring into the abyss” of the destruction of their paper currencies. They also seem to be able to manipulate not only the gold price, but the media as well, which refuses to acknowledge the facts.
GATA’s new focus is to use the Freedom of Information Act to get to the bottom of the status of official U.S. gold, which has not been audited since 1959. I fully support GATA in this mission. Even if they fail to get the facts, if the U.S. says that it’s a matter of “national security”, then we know there is a problem, and that we are right! Besides, who politically wants to come out and be against the disclosure of the truth of this matter?
Chris Powell gave me some kind remarks, and asked people to stay to listen to my presentation.
You can discover more of what GATA has to say here:
http://gata.org/
Finally, my own presentation went something like this:
I endorsed GATA’s work. Gold prices must rise, and GATA has shown that central banks have indeed likely sold just over half of their 33,000 tonnes of gold into the market, which has capped the price. It was claimed, back when gold prices were $300/oz., that gold should be about $600-$700 if not for the manipulation. And today, gold prices could well be about $2000 to $3000 if not for this selling.
But even if the U.S. dollar could be backed by U.S. gold, there is only enough for one ounce of gold for about every $45,000 worth of money in the banks in the form of M3. And if you include all bonds, then maybe only enough gold held by the U.S. government to back every $100,000 with an ounce of gold.
They cap the gold price by selling just slightly more than the market wants to buy; and especially selling gold hard on days when the news is very bad for gold, such as when oil prices rise, or when the dollar goes down, or when there is bad news about the war, or other economic bad news events, to keep the market’s interest in gold low.
Back when gold prices were openly fixed at $35 to $42 per ounce, in the early 1970’s, the final day of the manipulation was when the London Gold Pool sold 400 tonnes of gold into the market in one day. At that point, they could no longer cap gold by selling gold, because they knew they would run out of gold to sell.
Similarly, today’s 12,000 tonnes of remaining central bank gold could be sold in a single day.
Since gold is money, it is important to note how much money is out there, that can one day be spent on gold.
More “value” in paper money is created every year, than the value of all the gold mined in all of human history. M3 in the U.S. is about $12 trillion, and is increasing at 12% to 13% per year, that’s over $1 trillion. U.S. paper money is about 1/4 of all paper money in the world, and most other nations are creating paper money at even faster rates. Thus, about $4 trillion of false value of paper money is created every year.
All the gold mined in all of human history is about 155,000 tonnes, which is valued at $650/oz., at about $3.5 trillion. This is staggering. It’s just insane.
China could easily buy over 2500 tonnes of gold by a simple diversification of about 5% of their U.S. dollar reserves.
So I hope you can understand why I’m so very, super bullish on gold, and why it will likely soar past $3000/oz, past $45,000/oz., and on. And a very funny thing will happen as we get there. People become attracted to the returns, and it becomes a self-fulfilling feedback loop as people buy ever more gold. It’s unstoppable. Rising interest rates to 6%, when inflation is 13% is not going to convince gold holders, who are making 30% per year, to sell gold for the guaranteed loss of 7% less than inflation!
And as gold continues to rise, how high will bond yields, or rates, need to go to attract capital back to bonds? 50%? That’s crazy, and it won’t work.
So, the feedback loop can literally destroy the fraud of paper money, at which point, the only thing left to use for money is real money, which is silver, and gold.
But let me briefly show why I like silver so much more than gold. Most silver ever mined in all of human history has been consumed. Of about 45 billion ounces, maybe only 4 billion ounces are left, and most of that is in the form of silver jewelry. The world consumes more silver on an annual basis, about 900 million ounces, than is mined each year which is about 650 million ounces, the difference is made up through scrap recycling. There is no room left over for any investment demand.
I’ve been saying that for years. Finally, we saw in statistics from the CPM group, and the Silver Institute this spring, that there was no substantial new investment demand for silver in 2006 verses 2005; and both were very small, only about 40 million ounces. With no investor increase, silver prices increased from an average of $7/oz. to about $13/oz. Silver is taking off without any substantial investors on board.
So, if the small size of the gold market shows that the gold price will explode, what then about silver? The size of the silver market is super tiny relative to the amount of money out there, and silver will just skyrocket, much more than gold.
But let me talk now a bit about the opportunity in copper, and why I like this opportunity so much, and why I was investigating what men had to say about copper at the show.
Here’s my central thesis on copper and base metals.
Gold and silver are found with copper, zinc, and lead. As long as they continue to suppress the price of gold and silver, the byproduct will be less gold and silver mining. And with less gold and silver mining, there is less copper, zinc, and lead, the things the world needs to continue this economic boom.
Now, many copper projects are ridiculously undervalued. The price of copper stocks is still stagnant. Mines Management (MGN), has a copper and silver project, but the price of the stock is less than it was in 2004, when silver first boomed up to $8/oz.! MGN hit a high of about $10, but is now about $3.50/share. I don’t own it anymore, I own what I hope are better, more highly leveraged companies.
At current copper prices, many copper company’s projects today have forward P/E ratios of about 1 or less. They can pay back the capital to go to production in 1 year or less.
Even if copper prices dropped to $2/lb., they would have forward P/E ratios of from 1 to 2, and could pay back capital in 1-2 years.
The opportunity in copper stocks is simply amazing. But there are only a handful of good projects out there.
Some of them are very low grade huge copper/gold projects that will require raising $1-2 billion.
One of my favorites is Baja Mining, which is my largest holding, besides physical silver. I have about 183,000 ounces of silver, and 588,000 shares of Baja Mining. Baja has a forward P/E ratio of about 0.4. They have a Market Cap of about $300 million; that’s the fully diluted shares times the share price of $2.30 Cdn, which is the value to buy the company. They need to raise about $550 million to start mining, and they can make about $800 million a year. They have not only copper, but cobalt, zinc, and manganese too, and all of those other metals are in critical short supply. Cobalt and Manganese prices have both risen more than 10 times from the bottom less than 5 years ago.
When the world is properly using gold and silver as money, prices for the precious metals are high enough to make mining very profitable, which, in turn, creates the other metals in quantities that the world needs for better living.
I have learned about other copper stocks lately from my online database of mining stocks. I mentioned it to the crowd in Vancouver, since this database has just about nearly “gone viral”. Last week, it was tracking 200 companies. This week, 265. But I still am not ready to release it to the public, until we can get the leverage formula published within the program, so that you can see what the program is doing.
In essence, the program is now doing the drudgery of the work I used to do in my weekly silver stock reports that I did for a year and a half from late 2003 to early 2005, but better. The website is calculating the value of the resources in the ground, divided by the market cap and the capex minus the cash on hand (which gets applied to the capex).
Some of the most highly leveraged stocks in the resource world right now are the copper stocks and nickel stocks, and I believe we will make about 150% to 300% in these stocks this next year, especially as this consolidation ends, and the boom in natural resource stocks resumes.
I strongly suggest that you subscribe to the “look at my portfolio” for $50/month at silverstockreport.com. With that, you get access to my member’s forum. I have about 850 other paying members, who are very helpful, and who do fantastic research. The forum alone is a very valuable resource. Some of my members have made 100% in the last year during this consolidation, because of the stock tips at the forum. They have liked that this is available only to paying members, because only serious investors show up to post.
I use the money from paying subscribers, which is about $35,000/month, and I spend it on advertising. So, it’s kind of like I operate my email newsletter on a “non-profit” basis. But my real profits are in my portfolio, because I expect to make 100% in the next year at least, on my own portfolio which is valued at about $12.5 million now.
If you really want to know what a man really believes, you can watch where he puts his money. I’ve allocated about a year of my time, and $110,000 so far to my online database of mining stocks.
I can’t stand investment advisors who say that you shouldn’t try to tell the market what to do. Hello? If you are are an advisor, that’s your job to try to tell the market what to do! You ought to preach it! So, “Buy gold, but really buy silver, and pay particular attention to the opportunity in copper stocks right now!”
Thank you very much.
From the show, I learned what I needed to learn about copper, and I learned how to give a confident power-packed presentation with no notes. And I hope that you learned a lot from this report, too.
I must now get back to my work of researching copper stocks, and other stocks.
Please also see my article two weeks ago, on why the boom in copper stocks has not yet begun.
http://silverstockreport.com/2007/why_the_copper_boom.html
(Meanwhile, lead, the heaviest base metal, is making new highs at $1.10/lb., and is up about 5 fold from $.20/lb back in 2003.)