There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved.
-- Ludwig von Mises (1881-1973), philosopher, Austrian School economist
Many of us realize that a massive, worldwide "quantitative easing" of monetary policies is in progress and the spigots have been turned on for at least four years now.
The official U.S. National Debt, we are told, is nearing $16 trillion. That's what the federal government reports. According to The Institute for Truth in Accounting, the real National Debt is over $76 quadrillion dollars, and increasing daily.
To make that number, $76 quadrillion, a little more personal, that equates to over $247,000 for every man, woman and child in the U.S. So we're in the midst of a phenomenal, albeit stealth credit expansion that entails a mind-boggling expansion of incurable levels of debt.
No Wonder So Many Seem to Realize that Gold Will Skyrocket
The credit expansion and addiction to unquantifiable amounts of debt is contributing to the debasement of fiat paper currencies. This is especially true in Europe,The United Kingdom and The United States. Other nations whose currencies are being debased include Japan and China.
This week the Federal Reserve said it will continue a program called Operation Twist through the end of 2012. Under the program, the Fed has been selling $400 billion in short-term Treasury notes since September and buying longer-term Treasury bonds.
Dr. Bernanke said on June 20th the Fed will extend Operation Twist through December using $267 billion in securities. It's what he also said that should bode well for gold, silver and the producing companies in the months ahead. He stated that hiring (employment) has weakened and the economy needs more support.
He reiterated the plan to keep short-term rates at record lows until at least late 2014. And, most significantly, he reminded us that The Federal Reserve is "prepared to act further if the economy deteriorates." There is growing evidence that the economy is deteriorating, and that Fortune 500 companies are reporting lower quarterly earnings and lowering guidance for the next quarter.
Some economists worry about the Fed's seeming determination to stimulate growth over the past three years by purchasing more than $2 trillion in bonds. These "monetary realists" say the extra money injections into the banking system will eventually trigger inflation once the economy responds.
Currency debasement, monetary easing, credit expansion and the gradual destruction of the buying power of paper currencies is a recipe for gold's ascension as the "king of currencies" and the top hedge against inflation. So accumulating precious metals before economic crises explode and before the masses realize that inflation has ignited makes good sense.
In an interview today (Friday, June 22nd) with Frank Holmes the CEO and CIO at US Global Investors, I heard a frank discussion of this topic. Like myself, Mr. Holmes also likes a leveraged approach to precious metals investing.
This involves owning precious metals producers and the royalty-streaming companies. Especially those where insiders have some skin in the game and own a meaningful amount of shares themselves.
Mr. Holmes looks to companies that, when there's been a big correction in precious metals and stock prices (like on June 21st) their CEOs "seem to have a quickness that when stocks have a big correction, to go and have a board meeting for issuing stock options."
In other words, they want to have the chance to own more shares while the stock price is undervalued. He pointed to royalty-streaming companies Franco Nevada (NYSE:FNV) and Royal Gold Inc. (NASDAQ:RGLD) as examples of companies where there is high levels of insider ownership and the stock has done relatively well. When it comes to FNV, Mr. Holmes had some compelling comments as to why it's one of his favorite gold investments:
A few of the companies - those that have been able to show margin protection and margin expansion with the price of gold rising, have benefited in a better stock picking.
And that's one reason why at a company like Franco-Nevada we like because it has a monthly dividend, it has a high margin business, it has basically $300 million plus of cash flow, it has $1bn of cash, management is very, very frugal in how they make decisions, and they have a strong ownership... and they're growing!
Many of the well-known producers like Goldcorp (NYSE:GG) are headquartered in Canada, and it's more difficult to determine the amount of insider ownership these companies may have. Below is a comparison 12-month chart of FNV, RGLD and GG. It may indicate that GG doesn't have the same level of insiders investing.
Another company that Mr. Holmes' associate Brian Hicks indicated has a better-than-average amount of insider ownership is Allied Nevada (NYSEMKT:ANV). ANV Director Carl Pescio in his most recent declaration revealed that he owns 5,300,000 shares. As of the closing price of ANV stock on June 22nd at $28.11 that equals $148,983,000 worth of financial commitment. ANV insiders (including Director Robert Buchan who owns 2,214,800 shares) own at least 9% of the outstanding shares of the company.
U.S.(Colorado) based Newmont Mining (NYSE:NEM) has almost no quantitative amounts of insider ownership, although CEO and President Richard O'Brien reportedly owns 290,540 shares worth $13,945,920.
Let's look at a one-year comparative chart of ANV versus NEM:
One can't distinguish an advantage for ANV largely because they don't pay a dividend and NEM pays an impressive 2.8% dividend. It's not an "apples-to-apples" comparison, either. NEM is a major producer with a market cap of $23.77 billion selling at around 9 times forward earnings.
ANV is a smaller producer with a $2.53 billion market cap selling at a forward PE ratio of around 12. With $241 million in total cash, handsome profit and operating margins, and an astronomical quarterly earnings growth (year-over-year) of 6,567%, we may someday suddenly hear ANV is being acquired.
In the meantime, consider buying the profitable precious metals-oriented companies where insiders have their money where their mouth is in a big way.