Thoughts For Those Who Buy Or Bought The Precious Metals Thesis

by: Emmet Kodesh

Investors in PMs (precious metals) were not foolish to study and accept the thesis that PMs can hedge your wealth in an era of fudged stats, digital dazzle and de-valuation. This article will try to explain why the PM thesis remains intact, indeed, stronger than ever, but also why one must be cautious in investing in this sector, diversify within it and see the tendency of socio-economic trends.

PMs are partly a hedge against fiat currencies whose intrinsic nature is debt and loss of real wealth. The various socio-economic forms in which this imposed devaluation expresses itself lead some people toward traditional stores of value that cannot be photo-shopped or obscured with "lies, damned lies and statistics" as the proverb goes.

The fundamental appeals in PMs persist. Silver is a vital industrial commodity far more necessary to the world than most consumer goods or social media. Gold is essential to the monetary system and settling trades. Its importance in this area clearly is growing.

Those following the terrible action in PMs YTD and the past two months might not know that there is a high level of open interest in 2015 gold future contracts at $3000 / oz. Clearly, people with the ability to influence markets and read trends believe that the bullish case for PMs is very much alive. This coheres with the argument of Robin Griffiths of Cazenove Capital, discussed here, that by spring 2014 gold will approach $1900 / oz. and by next year's end, $2400/ oz. The Chinese are not buying all their own world-leading gold output and importing a hundred or more tons / month because of an atavistic interest in antiquities. Clearly we are moving toward a Yuan largely backed by gold that will play a prominent role in a triadic world system. Those who invest in PMs can see the steady development of this scenario: so can those who sent B-52s to overfly islands in the China sea. The 2000 ton gold-storage vault China has built in Shanghai also points to a new order in which PM investors will share.

Even a 2% inflation rate will cut real income by 50% in 35 years as Ronald Stoferle of Incrementum points out. The government has changed official measures of inflation two dozen times since 1980 to suppress COLA increases on social security (which impoverishes seniors and makes people work later in life, competing with younger workers). They use "hedonic" measures of value to register price increases as declines. The artificially lowered official inflation rates limit government pensions and benefit programs and makes GDP look far better than it is. We are in fact in a significant recession hidden by decades of corrupted terminology. As I often have suggested and specified here (with a list of 10 great companies to buy), actual inflation is about 10%/ year, near the level shown by John Williams at American Business Analytics here with a Nov. 21 post on an "imminent recession." This is why the indices set records why your neighbor can't get a job. There has been no organic recovery.

Moreover, John Lonski, Moody's Chief Economist states that growth will be challenged for decades and sees it, optimistically in my view, averaging 2.5% / year. Another salient point is that our economy and thinking have been crippled by the dogma of compliance rather than emphasis on innovation and growth. Compliance is the idiom of coercion, control and punishment (fines, fees, prohibitions and incarceration). It is the language of the modern State and a two-tier society: those who make the rules and their apologists and those who must obey the rules or else. As has become increasingly clear in the past 15-20 years, those who make the laws for most of us do not themselves abide by them: they have a separate system of perquisites and exemptions. That is, we already have a two-tier society. PMs also hedge against the consequences of this situation. The small but sharp drops in equities near the close the last two days may show up in more extended fashion before long.

Those who invest in PMs sense these dynamics and seek to defend against them and to separate themselves from them. Their inclination is not only sober but admirable and it is opposed by the enormous powers of the system's strong hands to distort true pricing in markets. This power is akin to the devaluing obsessions of civilization at this period in history. Those retail investors brave and canny enough to allocate a significant portion, suitable to their time horizon, risk tolerance and temperament to PMs play a healthy and heroic role against this tendency toward virtual values that, like fireworks collapse even as they are dazzlingly displayed. As it now stands, this civilization is not sustainable: PMs are.

Takeaways: The markets are overbought and riding on debt creation: what happened May 22 - June 24 showed that: so did the September 18 pop when the talking point of tapering was dismissed briefly. Yet these tragic markets will be driven higher and you must be in them unless your time horizon is less than six months in which case go largely to cash soon. Otherwise, wait for two red days at least to add more than a nibble to equities. John Lonski supports my view: it is best to wait for a 4%+ correction to add significantly to stocks. This edifice Rex towering over us could tumble at any time.

As for PMs, the sector is filled with deep value buys. Major producers Goldcorp (NYSE:GG), Barrick (NYSE:ABX) and Newmont (NYSE:NEM) are at or near secular lows. My views on ABX are collected in my focus articles here and also in frequent mentions throughout my writings. Compared to its two main peers, far lesser than it in reserves and low-cost sites, ABX has held well above its secular low of early July. Morgan Stanley just raised its price target to $20.80, 26% above the Nov. 26 close at $16.34. All three PM majors now invite investment. GG for several days has been touching its secular lows early in the day.

Prices in the entire sector regardless of relative company merits are mainly affected by bullion prices which repeatedly are hit before the NYSE open as happened again November 25-27. This being so, the ability of premier streamer Silver Wheaton (NYSE:SLW), debt-free, growing junior McEwen (NYSE:MUX), ably led by founder and long-time Chair and President of GG, Rob McEwen, and gold and energy royalty company Franco Nevada (NYSE:FNV) led by experienced and savvy Pierre Lassonde to remain well above the mid-year secular lows merits attention. The rich E&D sites of MUX in Nevada and Argentina in tandem with its controlled costs and profitability are particularly impressive. Premier, established, multi-site silver producers First Majestic (NYSE:AG) and Endeavour (NYSE:EXK) show excellent results in a pitiless financial context. They command attention and investment for those who invest in this sector. Yamana (NYSE:AUY) and Eldorado (NYSE:EGO), which sells straight into China's market and at its operations there benefits from very low production costs. These companies are at compelling prices and have ample and growing reserves and multiple global sites. AUY also was upgraded by Morgan Stanley to $12.50, 44% above its current price.

Note that volumes have been very light for weeks in PMs. Aside from shorting and retail investors breaking under the strain of a sustained trough, few will sell at these artificially low prices even though buying interest remains muted.

It also is prudent, one could say urgent that everyone, according to their means acquire some bullion at today's fire-sale prices. For those who want 200 coins or more, a good vendor is Colorado Gold. Sprott money in Toronto is reliable and offers rolls of twenty silver Eagles, Maple Leafs or Philharmonics among other issues. Gold and Silver online in Phoenix is helpful, offers prompt service and will sell any quantity.

Those who have bought the PM thesis have not erred and surely have learned a lot about their capacity to tolerate irrational action, abuse by strong hands and mockery from dominant narratives. As discussed in my previous piece, allocation to this sector which stands for many things that our virtual civilization cannot abide, notably, what is genuine, must suit your time horizon, risk tolerance and temperament more so than other assets. The PM thesis is intact and the fundamentals are strengthening every month. As the employment to population ratio keeps declining (among men it is at a 60-year low), fiat currencies devalue and ex-USD trading and exchange facilities increase, the upside for PMs grows. Given the nature of action in the sector, you must be ready to trim gains but you should be invested. Companies like AG, EGO and EXK have strong to excellent revenue growth, solid gross margin and in the case of AG, minuscule debt/equity: the others have small debt/equity and MUX and Fortuna (NYSE:FSM) are superbly managed and debt free.

Enjoy the beauty of the holiday and the blessings of life and the season. Consider what is genuine and does not change. Be in the PM sector according to your life-situation and ready to add to stalwart companies like those noted here and here in other sectors on a fall back of two days or down to S&P 1745 or below. Behind the dazzle of rising equities there is darkness for society: there also are genuine values that will shine more brightly as other lights dim.

Disclosure: I am long ABX, AG, EXK, GG, MUX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.