The advice below comes from Ken Gerbino, head of Kenneth J. Gerbino & Company, which manages portfolios for individuals, pensions, trusts and corporations. The company manages private equity accounts as well as the Gerbino Gold Group, LLC, a private fund that invests in precious metal mining stocks.
Ken is also the precious metal mining consultant to $2 billion ICM Capital Management. Ken was the Founder and Chairman of the American Economic Council [AEC], a nationwide economic reform group that was credited with the passage of the United States Gold Coin Act of 1984, which established the United States Gold Eagle coin. His views have appeared in such publications as The Wall Street Journal, Worth Magazine, Investor’s Business Daily, The Asian Wall Street Journal, Money Magazine, The New York Times, USA Today, The Chicago Tribune and many others.
When you start worrying about your portfolio, please remember these simple data points that make precious metal stocks good investments:
- Oil is now over $130. Of course there has to be some speculation here, but there are many commodities that are also at sky high prices and these do not trade on exchanges just producer to industrial end user, meaning there are no speculators or hedge funds involved. The list is so long I won’t include it here. The key thing to remember is that if these commodities are also in very strong bull markets it confirms that the general trend in almost all commodities is higher due to economic basics. These basics are: a) the supply demand impact of a new world (China, India, Russia, Brazil, etc.), b) a decade or more of global paper money increases well above normal, creating inflation and c) the normal 20-25 year commodity up cycle that just started in 2001
- Politicians are out of control and have no intention of dealing with deficits, debt levels or reckless monetary policies. The only solution they understand is more paper money to keep financial and political promises that will be impossible to deliver to the electorates of their countries.
- One of the smartest and respected Wall Street firms, Bear Stearns went under and was bailed out by the Fed (an unprecedented bailout as the Fed is suppose to deal only with the banking system not investment banks). There are probably more institutions with similar problems that will require more paper money or created credit. Even worse is the fact that if the Fed can bail out Bear Stearns, it gives a green light to Congress to bail out anyone and everyone else in trouble. The Senate Banking Committee just approved such a bailout bill for housing speculators. This will lead to more paper money and more inflation.
- Gold and silver are commodities and will respond like other commodities in the coming grand cycle commodity bull market. But these metals are also possible currency substitutes that cannot be wiped out by a bank run or a printing press. This will have increased appeal as we move further into more of a paper money crazed world.
- Precious metal stocks with the resources already in the ground are solid investments. Mining companies with only land packages and drill rigs are highly speculative and will not participate in the coming bull market if they do not find economic deposits (which is very hard to do). Best to put most of your money in companies with solid resources in the ground.
The vast majority of establishment money managers are still suffering from intellectual confusions on sound macroeconomic concepts. Most of the people managing trillions of dollars from London to NYC to Tokyo actually think their respective Central Banks and Treasury Departments are doing a decent job by printing money when needed, interfering with exchange rates, and manipulating interest rates by decree and policy.
These are insane and unworkable policies. They are also unethical, as these actions rob from the poor working and middle classes and eventually redistribute wealth to the big and the powerful. This is why socialists are still around today. Socialists are clueless on economic truths but they look around at the rich getting richer and the poor getting poorer and they question “capitalism” and “free enterprise” because they are too stupid to realize that capitalism and free enterprise have been infected with insane monetary policies and that is why the poor are getting poorer. Their answer - tax the rich and productive, tax the corporations, tax everyone. Paper money policies will promote socialist power in the future. A sad conclusion.
Our Elite Fed and Treasury at Work
Printing money creates inflation which lowers the standard of living of every working man. Lowering interest rates artificially makes retirees and savers get 1-2% interest on their hard earned savings when the free market for interest rates should be much higher. They are robbed of economic security and forced to speculate in the stock market or real estate. Exchange rate manipulations create mayhem in global trade. These three government interventions by these powers to the free market are destructive. Free markets are as valuable to mankind as free men and women are to personal happiness.
The Worse is Yet to Come
The main stream establishment money managers who control so much investment capital have no idea what is coming. With inflation coming on stream in the U.S. and elsewhere, interest rates will begin to rise and the stock market will begin to head south. Long term bonds will become bad investments. If a recession develops, then lower productivity and high inflation together will make things even worse. The Fed cannot stop inflation. Once all the new money floating around is in the system prices go up regardless of interest rate hikes.
When these confused Keynesian thinking money managers realize that their economic premises are totally wrong, it will lead them to stampede into the precious metals and the mining stocks. They will be a huge force pushing up prices to levels that will be unreal to even the gold bug crowd.
Valuations of Mining Stocks
Mining stocks are dependent on the price of metals for profitability and valuation. We always invest for our clients in companies that have strong growth profiles and low cost production projects which should negate even substantial metal price weaknesses. These are the types of profiles that you should embrace also. Over time, the future cash flow from companies will determine the value assigned to their stock prices.
We expect these types of stocks to be more profitable as new mines come on stream. We are still using $550 gold as our baseline for our value expectations. This is a conservative parameter in a world where we also expect gold to go much higher. When doing your homework use a conservative price of gold and then see how the stock’s value pencil’s out. If you can see a cash flow per share multiple of only 5-8 times with $550 gold within a 1-2 year period, you should have a winner (assuming all the other key facts are in order).
Weekly share price fluctuations have little to do with the final value outcomes of your gold stock portfolio and everything to do with nervous and uninformed investors, traders, brokers and speculators. Given time, good mining projects analyzed properly with conservative parameters usually become very profitable investments.
The Writing is on the Wall
In a world besieged by politicians and central banks that continuously print money and populations that are becoming more and more in debt and dependent on their governments to help them survive, inflation is destined for the future. There is no other way out.
Since there is some actual global economic progress that will create increases in demand for raw materials, mining stocks should be one of the best sectors to take advantage of these trends.
Warren Buffet had some wise advice for the recent Berkshire Hathaway annual meeting: “I’m willing to bet the dollar will weaken against other currencies over the longer term”. This sounds logical to me and more reason to own precious metal mining stocks.
More Inflation Coming
The United States imports $2.4 trillion of goods or roughly 17% of our GDP annually. As prices go up in foreign lands, prices of our imports will follow as will our inflation rates. Food shortages and price increases are creating an inflationary future in many parts of the world. According to the United Nations, food riots have erupted in Mexico, Morocco, Uzbekistan, Senegal, Guinea and Mauritania. Egypt has banned rice exports to keep the food at home and China has put price controls on meat, grain, milk and eggs. Food inflation in the United States is at its highest level in 30 years. Oil is now over $130 a barrel. It is the end of an era of cheap goods from overseas. Import prices from China have risen in price for 8 consecutive months.
The time for the gold mining stocks is now. A recent Financial Times of London featured editorial was titled, “Gold is the new global currency.” We couldn’t agree more. The article quite correctly concluded that printed money is indeed the barbaric relic. In 2007, the U.S. Government debt increased by $500.2 billion. Even worse news is this recent statement from the U.S. Comptroller General:
These are big numbers that make us very secure in holding well thought out gold mining stocks.
The federal government’s fiscal exposure of direct and indirect debt increased by $2 trillion in 2007. Direct and indirect debt obligations totaled approximately $53 trillion as of September, 2007 …. an increase of more than $32 trillion from September 2000. [emphasis ours]