Daily Profit : gold stocks

How The Pros Analyze Gold Stocks: Part II

Ian Wyatt — Thu, 26 Apr 2012 15:41:00 GMT

Last week we published the first of two articles on how professionals are able to analyze gold stocks. This second installment comes from Tyler Laundon, one of my top research analysts with Small Cap Investor Pro.

-- Ian

Too many investors buy mining stocks with no idea what they are really worth. We're going to change that by giving you the tools to figure out if that exploration stock is a good buy or not.

Last Thursday I discussed the reasons behind regulation in the mining sector and described, at a high level, this regulatory framework.

Today I'll get into the nitty-gritty and outline the different classifications of gold and silver ounces in the ground, what each is worth and how you can tell if a mining stock is a good buy based on how the market values those ounces.

Admittedly, this isn't the most riveting material. But if you own even one share of a mining company you need to know how valuable 'your' ounces are, so this information is critical.

Since a mining company's exploration efforts take years, the regulatory framework of the Canadian Institute of Mining, Metallurgy & Petroleum (CIM) requires companies to incrementally gather and report the data to you in the form of scoping studies, prefeasibility studies and feasibility studies - and updated versions of any of the above.

This reporting format is a good thing. It provides transparency to the market on an ongoing basis, creates milestones that help a company seek funding, and tells you if a mining project is likely to be profitable - and thus make your shares of stock go up.

Without these checkpoints you'd be flying blind.

The CIM's framework outlines three main categories and two sub-categories for exploration-stage projects. The category each potential ounce falls into depends on the quality, quantity, detail, and interpretation of geological data, and ultimately the level of confidence in this data.

Typically, a miner's goal is to move ounces that fall into a 'lower confidence' category up to a higher confidence category by gathering more data (i.e. drilling) to increase confidence that the ounces can be profitably mined.

This hierarchy of categories creates intense motivation for mining companies to firm up their resource base because higher-confidence ounces typically receive a higher valuation by the market.

While all three main categories are deemed to have some economic value and are worth considering as part of a mining operation, it's the two sub-categories that include the “high value in ground ore.”

If there is one thing you take away from this article it should be this - the CIM's three main categories and two sub-categories, and their definitions, are as follows:

1) Measured Mineral Resource - These are the highest-confidence ounces based on reliable drilling and sampling data.

a. Proven Reserve - The economically mineable part of a Measured Resource that has a determined value as outlined in at least a Preliminary Feasibility Study.

2) Indicated Mineral Resource - There is enough data on grade and quality to conservatively estimate the value of these potential ounces, but there is still some uncertainty.

a. Probable Reserve - The economically mineable part of an Indicated Resource (and sometimes a Measured Resource) that has a determined value as outlined in at least a Preliminary Feasibility Study.

3) Inferred Mineral Resource - Data shows these ounces exist but you can't put an economic value on them without more drilling and sampling.

This couldn't be easier to understand, right? Well, not exactly. But as you evaluate mining stocks it'll make more sense. I adopted this figure from the CIM and I keep it on my desk for quick reference.

One of the things that make this framework confusing in practice is that companies are constantly updating their reports as they try to showcase the economic value. And some ounces can fall into two categories, such as Measured Resource and Proven Reserve, for instance.

This has led the industry to group categories together in a modified way to show a climb up the value chain from Inferred to Measured and Indicated (M&I), and ultimately to Proven and Probable (P&P).

The bottom line is as a company moves ounces up the value chain, they become worth more. And they should - because drilling is very expensive.

So how much are these ounces worth?

Generally speaking, the industry rule of thumb is that inferred ounces are worth $20 per ounce, Measured and Indicated are worth $30 per ounce, and Proven and Probable are worth $160 per ounce.

Now this is a huge generalization, and the law of averages suggests that in reality the values that a company gets for its in-ground ounces are all over the map.

This is where the modifying factors come in, and are often what differentiate an attractive miner from an unattractive one. These include things such as grade of the ore body, method (and associated cost) of the proposed mine, timeline to development, political risk and availability of capital, to name a few.

The easiest way to compare one mining stock to another is to look at a ratio called Enterprise Value per Ounce, or EVO. To calculate EVO, divide a company's ounces into its Enterprise Value (which is simply its market cap plus debt, minus cash and is available on most financial websites). Because market cap is determined by the share price (and thus the market) and the ratio includes cash and debt, the EVO ratio does a fairly good job of stating how valuable the market believes the company's ounces are.

You can do this for all ounces, or break them up into the various categories and industry averages I listed above; $20/oz. for Indicated, $30/oz. for M&I and $160/oz for P&P.

By comparing the values, you can get some sense of whether the stock is trading at a premium or a discount to its peers.

Now if you've read this far, I suspect you have the patience to go out and try this. I also suspect you'll be among the minority - and that's why you'll have an edge.

Take pride in the fact that you're figuring this out on your own. I guarantee that after you do it three times, it'll make a heck of a lot more sense. And you'll get a lot faster at evaluating new stocks as well as understanding new reports from the mining stocks you currently own.

You'll also have the confidence to know if that mining stock you want to buy is a good deal or a rip-off. As time goes on you'll be able to bring some of the modifying factors into the fold, and you'll likely be a much more successful mining investor.

Good Investing,

Tyler Laundon, MBA

Editors Note:

You can download the CIM's NI 43-101 Standards document here and print it out for future reference. You can also access a PDF of "CIM Definition Standards for Mineral Resources and Mineral Reserves" on the same webpage.

P.S. My colleague Ian Wyatt has recently added an interesting gold stock to his Top Stock Insights portfolio that has a sole focus of paying out dividends to shareholders and has been raising its dividend by 20% a year. Click here to find out the details on this stock he calls "Forever Gold".

Central Banks Seizing Gold

Ian Wyatt — Fri, 24 Feb 2012 17:44:00 GMT

This disconcerting story was brought to my attention by our resident commodities expert at Wyatt Investment Research, Kevin McElroy. It's been mostly buried by the main stream media but has substantial implications for exposing the hypocrasy of central bankers tellling us that gold isn't money and worse, that they will go to any means to get it. On a positive note, it means that gold will continue to be a safe asset for gold investors like us.

Kevin's politely allowed me to share with you his recent article on how central banks in Europe are eyeing up gold seizure to shore up sovereign debt problems.

Ian Wyatt

It's bad enough that Greeks are losing their sovereignty. When officials from Germany, Belgium and other north-European states can come in and tell Greeks how to run their government it's simply wrong.

And listen, I'm the last person who will defend the Greek state and its terribly indebted government. But that shouldn't make it okay for Greeks to lose their sovereignty to a group of unelected bankers.

But these Euro-states CAN'T let Greece default now. They've made a suicide pact to keep the Euro solvent and all member states as members forever.

And to seal the deal, lenders are now eyeing up the collateral they're willing to grab in the event that Greece gets any bright ideas about defaulting.

Top of my list of interesting "assets" is Greece's gold.

Yes - though many Greek citizens have no interest in accepting these loan terms, that's the deal now in place.

According to The New York Times, "Greece's lenders will have the right to seize the gold reserves in the Bank of Greece under the terms of the new deal."'

Remember though, Central Bankers have come out and vehemently denied that gold is money.

Moreover, this "new deal" does NOT reduce Greece's debt burden.

It increases it by 30% - only offering a longer loan repayment.

It's like the over-the-top used car salesman who tells you that he can put you in a car for $199 a month while obscuring the fact that you'll be paying $199 a month for the next 8 years.

And in the mix-up, lenders get access to Greek gold in the event that there is a default.

Amazing.

So, the next time you hear Ben Bernanke or a European Central Banker say that gold isn't money, ignore their words - and focus on their actions. These bankers are trying to transfer gold from sovereign entities into the coffers of central and private banks for the very simple reason that gold is money - and they know it.

At the same time, we also know that China is now the world's largest gold importer.

The Chinese are no dummies. They'll gladly continue to trade excess foreign reserves for gold.

And that's why you - as an individual - should do the same thing. Be like the Chinese, and ask yourself: do we want to hold dollars over the coming years, or do we want to hold gold?

Don't end up like Greek citizens - who are now at the beck and call of bankers who want to strip the company bare before letting it default from the Euro. Take action.

Good Investing,

Kevin McElroy
Editor
Resource Prospector Pro

Note: Kevin runs an amazing service called Resource Prospector Pro where he brings you the very best commodity investment ideas from the entire research team at Wyatt Investment Research. The best part is that for a limited time you can test drive a subscription for only $5 a month--that's less than what we'll soon be paying for a gallon of gas and a whole lot more profitable.

Click here to find out more about this unique service for just $5 a month.

Gold Approaches $1,800: A Very Easy Gold Investing Strategy

Ian Wyatt — Thu, 23 Feb 2012 21:26:00 GMT

With gold ramping over the past few days I've had a lot of reader questions about the best way to play this or even if now is the right time. One of my favorite ways to play gold is through the miners, particularly the junior miners demonstrating an ability to consitently grow production.

At the end of the day, there's one thing I look for in a mining company - production growth.

This is the key ingredient to a successful precious metals investing recipe. Grow production steadily and a lot of the other things - high profit margins, revenue growth and funding for exploration - fall into place.

But don't grow production and, well, I'm not too interested.

Take Endeavour Silver (NYSE:EXK) for example. In 2009 the company produced 2.6 million ounces of silver. With two mine expansions, production grew to 3.3 million ounces in 2010 and will likely hit 4.3 million in 2012. The share price has risen 210% since mid-2010. But those who bought when production just began in 2004 have seen their position grow 10-fold.

Because production growth is so important - and is likely to dictate which way a company's share price goes - you've got to understand where a mining company is along its life cycle before you jump in.

This is pretty easy to do because mining companies tend to follow a fairly distinct growth curve. In the early stages of life these companies are primarily explorers - they're out in the field looking to acquire and explore properties that may have valuable ore deposits. Canadian explorer ATAC Resources (ATC.V) falls into this category.

Explorers have no revenues and rely on the debt and equity markets for necessary capital. Some of these companies are attractive investments, and offer huge upside potential if they can get a property to development stage. They also can carry higher risks since they don't yet have cash flow, permits, and proven reserves.

On the opposite end of the life-cycle spectrum are established producing and silver streaming firms.

Companies in this category include Hecla Mining (NYSE: HL) and Silver Wheaton (NYSE: SLW).

These are relatively stable companies, but they don't have the same upside potential as the explorers. That's because it takes exponentially greater production and estimated reserve base to justify a big increase in share price.

In between the explorers and the producers are the developers. This is the sweet spot for investors.

These companies are developing productive assets and just starting to generate stable revenues from selling silver, gold, and other metals.

These are the best companies to buy because their risk-reward profile is so attractive. They are currently (or just about to) producing gold and silver so they have immediate leverage to precious metal prices now, not at some ambiguous point two or three years down the road.

They are generating revenues (or are about to) and are becoming profitable - two things the market loves.

These revenues also help emerging producers fund exploration of undeveloped properties. So the exploration upside is huge, but there is less risk than with a non-producing explorer.

The emerging producers have immediate, mid-term and long-term upside. But they also have some downside protection.

For me, this is about as good as it gets.

Fortuna Silver Mines (TSX: FVI) is one of my favorite emerging silver producers and a best pick for 2012. Silver production from the company's second mine - this one in Mexico - should be a major positive catalyst for the stock.

I've also recently recommended an emerging gold producer in Africa. I expect this stock to do as well as both Endeavour and Fortuna over the coming years because of its new production. I can't release the name because that wouldn't be fair to paying subscribers. But if you're interested in a great gold growth story and more about EXK then please click here for the full story.

My advice - keep it simple and focus on gold and silver miners that are growing production. These are the ones that can lead to life-changing gains.

How to Play the Irish Bailout

Ian Wyatt — Mon, 22 Nov 2010 17:37:00 GMT

*****How to Play the Irish Bailout
*****U.S. Dollar vs. euro
*****One Ounce Silver American Eagle

Fellow Investor,

It’s one of those situations in investing that often defies logic – and leads to big opportunities. When the majority of investors become convinced that a trade can only go one way, well, it often doesn’t.

And as I’ll show you, there can be easy gains to be had when you understand this.

For this example, I’m talking about the U.S. dollar.

You’ll probably recall the vicious downtrend the dollar entered in the two months leading up to Ben Bernanke’s second round of quantitative easing.

Investors were convinced that QE2 would pump a ton of cash into the system, thereby diluting (destroying) the dollar’s value. So, stocks and commodities started running higher, pricing in the dollar’s falling value.

Bonds also rallied.

But a funny thing happened on the way to the dollar de-basement. Once QE2 was announced, the dollar started to rally, and the long bond sold off.

The dollar was clearly not following the script. And what had been one-way trades – like gold, silver, bonds – started selling off.

******I’ve heard the situation likened to what happens when too many people move to one side of a boat at sea. The boat lists and may capsize. In investment terms we can understand this is what happens when there are no more buyers left to enter a position.

Gold, which had run to a new high above $1,430 an ounce fell 6%. The long bond, as measured by the iShares Barclay’s 20+ Year Treasury ETF (TLT), fell from $106 to $94.

Now, the dollar’s case is particularly interesting. Because the dollar is not valued in a vacuum, but rather against other currencies like the euro, it often takes some news event to catalyze the market’s predisposition.

And the currency market got that catalyst in the resumption of debt problems in Ireland. The euro started falling as investors started pricing in the possibility that the European Union could collapse.

Now, as an aside, I understand it may seem far-fetched that the EU could simply collapse. But Germany threatened it before the Greek bailout was finalized. And even in the latest case with Ireland, we heard that at least one EU member nation was none too happy about having to bail out a weaker member.

It’s not surprising that traders would trim their euro holdings. After all, you sure don’t want to be the one holding euros if the EU dissolves. That would be as embarrassing (and painful) as holding banks through the financial crisis.

It’s true, Wall Street often goes into “sell first, ask questions later” mode.

*****So anyway, the net result of this was a surprising rally for the U.S. dollar. Now, it’s certainly a worthy endeavor to discuss how particular situations seem to find a catalyst. In this case, Ireland’s debt problem weren’t unknown. And it’s probably more than simple irony that brought these issues to the fore right when the dollar was hitting support in extreme oversold territory.

In fact, the old saw that the market’s job is to make as many investors appear foolish as possible was coined to describe exactly this situation.

But we’ll have to save that discussion for later, because I told you there was a profit opportunity here, and I’m sure you’d like me to get to the point.

And the point is that any large macro trend will correct, or reverse, at times. But that doesn’t mean the trend is done. It’s simply washed out some longs and created an opportunity for new buyers.

In my opinion, that’s exactly what’s happening with the weak dollar trades right now. And chief among them is precious metals.

*****Now let’s turn our attention to the U.S. dollar-euro chart. It’s a 2-year look at the dollar. Daily Profit readers are familiar with this chart…

What we see here is that the dollar has rallied close to a support/resistance point. In fact, it’s already moved incrementally lower. And that move has coincided with a rebound for precious metals.

And we can see that the Gold ETF (GLD) is bouncing of its 50-day moving average...

So, if you’re looking for an entry point to catch the next rally for precious metals, this looks a good one.

*****Now, one more thing. Many investors may not know it, but silver prices are outperforming gold prices this by approximately 35%. There are several reasons for this, one of them being that silver has industrial uses (like solar panels) as well as “store of value” uses.

So for my money, silver is the place to be. And I’d like to tell you about a silver stock I’ve recommended in my Small Cap Investor PRO. I first recommended it at $3.45 per share in June. It’s been as high as $7 recently, but backed off to the $6 area when the dollar rallied.

I think it’s gearing up for a run to $9. That’s a 50% gain from current levels for investors getting in now.

Even better, I’m offering a brand new, 1 oz. Silver American Eagle coin to all new Small Cap Investor PRO subscribers who sign up today using the link below. So if you’re ready to profit from silver in two ways, please, CLICK HERE.

Until tomorrow,

Ian Wyatt
Editor
Daily Profit

P.S. The American Eagle one ounce silver coin offer for new subscribers to Small Cap Investor PRO ends today.

Click here now for yours.

Gold Not at Record High

Ian Wyatt — Thu, 11 Nov 2010 22:16:00 GMT

While most of the mainstream media readily announces new "highs" for the price of gold, The New York Times just published an article denouncing such statements.

From the story: "The actual record was set 30 years ago, when the price of gold, in today's dollars, hit $2,387, or 71 percent higher than it closed on Tuesday."

It's important to remember that gold's price has much further to run before it matches inflation adjusted highs set in 1980.

Many investors might be wondering if gold will meet or surpass that $2,387 number - but as The New York Times story points out, gold is "a hedge against a weak dollar, not a hedge against inflation."

As long as the U.S. dollar continues to fall, gold will continue to rise.

So as long as the Federal Government continues to print money in order to pay for its expenses, we can expect the dollar to continue its long term downward trend (the occasional up day notwithstanding) - and gold to continue to rise.

In order to profit from this trend, Ian Wyatt recently put together a special research report on his three favorite gold stock investments. Gold stocks tend to outperform price appreciation of the physical metal - typically returning 2-5 times more profit than gold alone.

You can read all about these investments right now.

CLICK HERE.

T. Rowe Price Analyst: “Silver usually lags…”

Ian Wyatt — Wed, 10 Nov 2010 14:32:00 GMT

Gold continued to make news yesterday and today, but most investors still don’t realize that it’s silver that has posted much better gains this year.

In fact, silver has more than doubled gold’s gains, year-to-date:

Rick de los Reyes, a metals and mining analyst at T. Rowe Price recently noted that when investors flock to gold, there’s a tendency for silver to fall behind, “silver usually lags [gold]...”

The fact that silver is outpacing gold to such a large degree is great news for many silver companies. These companies typically return 2-3 times more profit to their investors than silver alone. For the year to date period, silver has surged 56 percent while gold is up a respectable 26 percent. Stock prices for top tier silver miners are up as much as 130% for the year.

Ian Wyatt, the Chief Investment Strategist at Wyatt Research, is recommending one small silver company to his clients. In just the past four days this stock has marched 20% higher, but with silver making equally broad moves, there’s no telling how high it will go.

Click here to see the full details of this small silver company.

Gold, Silver and Fertilizer Stocks Lead Rally

Ian Wyatt — Fri, 05 Nov 2010 17:39:00 GMT

At $1,390 an ounce, gold prices are at an all time. Silver is at a 30-year high. Agricultural commodities like fertilizer are also moving toward new highs.

Economists are warning that these commodities could continue to move higher in price for several months. And the stocks of companies selling these commodities have been surging in the past few trading sessions.

That’s because commodities rise in price as the value of the U.S. dollar falls. And the Fed’s recently announced $900 billion Treasury buying program is expected to keep the downward pressure on the dollar for six months or more.

That may be bad news for consumers who will pay higher prices, but it’s great news for commodity investors, because commodities stocks will continue to rise.

“The place to be is in commodities, raw materials, natural resources,” said famed commodity investor Jim Rogers.

Individual investors are taking note, as indicated by trading volume surges and share price gains for top commodity stocks and ETFs (exchange traded funds).

Discover the top commodity ETFs attracting investor interest today, CLICK HERE.

Gold and Silver Surge on Fed News: Gold Stocks Paying Dividends

Ian Wyatt — Fri, 05 Nov 2010 17:06:00 GMT

Gold prices rose $45 an ounce today as investors flocked to the ultimate store of value after Fed Chief Ben Bernanke renewed his attack on the U.S. dollar with another round of quantitative easing.

Called QE2, the Fed will spend as much as $900 billion to buy U.S. Treasury bonds as a way to keep the dollar weak and boost corporate profits.

Of course, savvy investors understand the threat to the U.S. dollar. And they also understand that the Fed is inviting inflation, which will further impair the value of the dollar.

In order to protect and grow the value of their wealth, investors are piling back into gold.

Investor demand for high quality, authenticated gold has sent this stock's price up 103% this year. But with a trailing P/E of 7, another double is likely in the near term. What's more, this stock pays a 7.8% annual dividend.

For more on how you can earn 7.8% and potentially double your money as gold prices continue to run, please CLICK HERE.

Record $1,309 Spot Gold Price Sparks Gold Miner Buyouts, Bidding Wars, and Investor Profits

Ian Wyatt — Tue, 28 Sep 2010 19:59:00 GMT

Another day, another new high for gold. Today, gold hit a new high at $1,309 an ounce, as investors buy every dip in price for the precious metal.

The reason for gold's popularity are clear. A weak U.S. dollar, a promise of more monetary stimulus from the Fed and an uncertain outlook for the U.S. economy, along with currency weakening moves from Japan and England, have sent investors clamoring for an asset that can protect the value of their wealth.

Current conditions underlying gold's rise are not likely to end anytime soon. And now, gold mining companies are starting to acquire other miners to maximize their profits from high gold prices.

One gold mining stock is up 26% in two days after it rebuffed a buyout offer from a competitor. With a forward P/E of just 11, it's clear that the offer was too low. And investors agreed, sending the stock higher in anticipation of a higher bid.

Currently trading around $4.80 a share, a reasonable offer for this company, which has one of the lowest cost structures in the industry, could be as high as $6.50. That would represent another 35% gain for investors.

Click here to find out how you could make 35% in a few days on a bidding war for this undervalued gold stock.

World Banks Revealed to Be Hoarding Gold

Ian Wyatt — Tue, 28 Sep 2010 13:23:00 GMT

The Central banks and the International Monetary Fund (IMF) just reported sales of 94.5 metric tons of gold over the past year.

While that's about half of America's annual consumption, it sparked concerns in the gold community that Central Banks might be starting to hoard gold ahead of significant currency crises in Europe as well as the United States.

Canada's Central Bank Governor Mark Carney debated plans to raise interest rates at the same time that Federal Reserve Chairman Ben Bernanke discussed another round of "quantitative easing."

In any event the news has been extremely bullish for gold prices, as gold futures price hit $1,300 for the first time ever last week.

Investors looking to capitalize the trend need look no further than a single timely investment that tends to lag gains made in the price of gold.

That's according to Kevin McElroy, the editor of the Resource Prospector of Wyatt Investment Research. Mr. McElroy recently worked with Chief Investment Strategist Ian Wyatt to put together a detailed research report all about investing in commodity ETFs, one of them being a gold investment better than the more famous GLD. Investors can access a full write up on this report, which includes a gold investment that tracks some of the most profitable gold mining companies.

So far this year, this investment is up over 23% - while the S&P 500 is only up 3.5%.

With gold selling near $1,300 these companies are more profitable than ever.

Click here to read the full story.

Gold Hits New High

Ian Wyatt — Thu, 17 Jun 2010 19:25:00 GMT

Gold prices hit new all time highs late Thursday afternoon. Gold futures for August delivery hit $1,252.50 per ounce during the trading day. The precious metal closed the day at $1248.70. That set a new intraday and a new closing high for gold futures.

Investors of all stripes, concerned about the inflationary monetary policy and slowing momentum of global growth, have been relentlessly buying gold as a hedge against inflation and as protection against further economic weakness.

The latest economic data hasn't changed the perception that economic growth is not strong enough to boost employment or force the Fed to tighten interest rates. Witness the change to 472,000 new jobless from the 12,000 recently reported. These factors leave the economy vulnerable to shocks in the future, and that's why investors are increasingly seeking out the safe haven of gold.

But while gold prices are at new highs, gold mining stocks are following with a lag. And that's creating a timely opportunity for investors to buy gold mining stocks before they report blowout profits on record high gold prices.

To discover a little known gold mining stock that has as much as 128% upside potential based on its ultra-low forward P/E of just 7, click HERE.

Harvard Professor Reveals Giant Inevitable Federal Debt Problems

Ian Wyatt — Fri, 11 Jun 2010 19:55:00 GMT

What are the ramifications of "debt explosion" in the Western world today? That's the question that Niall Ferguson, Harvard Professor of History and Business Administration sought to answer recently.

His conclusion?

The United States is actually worse off than the PIGS (Portugal, Italy, Greece, and Spain)

He said that in the coming years, "debt-GDP ratio ...for the United States the equivalent figure is 450 percent. You don't need to have a PhD in economics to see that that's actually worse than all of the PIGS."

The illusion has been that the United States is something of the tallest midget in the room, but really, it's just the fattest midget in the room. It has debt problems at least as bad as the worst in Europe. The only reason we've been saved from default is -- as Professor Ferguson says, "we're not in a monetary union with the Germans, and we can therefore print our way out of this."

He goes on to say,

"Maybe one of the lessons of history is that periodically paper currency loses credibility so much that we have to revert to commodity standards, and I think that may well be happening. When you look at what's happening in the gold market, it's not so much fundamentals that are driving gold up from a $1,000 towards $2,000. It's a fact that more and more people feel that they should hold gold as perhaps 10 percent of their portfolios. If everybody thinks that, if that becomes a standard investment strategy, then gold is going to go a lot further than its present price. So I've really re-thought my attitude towards gold almost on that momentum basis."

Professor Ferguson happens to be in agreement with Ian Wyatt, Chief Investment Strategist of Wyatt Investment Research.

Ian recommends trading in your increasingly worthless dollars for profitable gold and oil companies. It's not just a hedge against failing currency - it's a way to vastly add to your net worth.

You can read about Ian's favorite gold stock right now by clicking here.

Reader Response: Gold or Silver with a Weakened Dollar?

Ian Wyatt — Mon, 16 Nov 2009 18:10:00 GMT

Your Daily Profit

November 16, 2009

*****A Good Christmas

*****Obama in China

*****Gold vs Silver

Fellow Investor,

The headline retail sales number for October came in better than expected, up 1.4%. Of course, sales were down more than expected in September, so a bounce isn’t a complete surprise.

Interestingly, it was mostly auto sales that drove the decline in September and the increase in October. Remove auto sales from the numbers and retail sales were up 0.4% in September and 0.2% in October.

Those aren’t big numbers and it’s easy to imagine that they could reverse if there are any new shocks to the U.S. economy. But retail sales numbers are a better measure of consumer confidence than polls like the Michigan Sentiment Survey, especially when people are making long-term commitments like car purchases.

I suspect we can attribute much of the bullish bias in the stock market to rising expectations for holiday spending.

*****President Obama is in China this week. I’m sure you’ll read plenty in the media about how Obama is there simply to reassure the Chinese about the U.S. dollar and our deficit. But it’s critical to remember just how inter-dependent the U.S. and China are.

China is an export economy. Without the U.S. consumer, their economy collapses. China will continue to buy U.S. Treasuries because it’s in their interest to do so.

Also remember that China has been pegging its currency to the U.S. dollar since last year. China knows full well that the U.S. dollar is weak against the euro and the yen. China is deliberately piggy-backing on the U.S. dollar to keep their exports competitive.

So why all the lip service about the relative strength of the U.S. dollar? It seems to me it’s just good old fashioned politickin’. We complain about their human rights and slap tariffs on Chinese tires and steel, they gripe about our currency and deficits. It’s pretty standard stuff…

*****I received an excellent question on Friday from a Daily Profit reader. Lee M. asked “Ian, would you purchase Silver and/or Gold now with the Dollar tanking or wait?”

The first thing to understand here is that gold and silver are up because the dollar is tanking, not in spite of it. On the most basic level, when the dollar falls in value, it takes more of them to buy something. And that’s especially true for commodities.

Demand has an impact on commodity prices, of course. If nobody wants copper, for instance, its price will fall regardless of the dollar. There can be no doubt that the weak dollar is part of the reason that oil prices have been steady in the $70’s.

Silver and gold are a special situation because these metals are perceived as having implicit value that will exist no matter the dollar’s value. Plus, in gold’s case, there is also an economic aspect – gold is considered to be a store of value in hard economic times. In other words, investors believe gold will hold its value when all other asset classes decline.

It’s no coincidence that gold started moving higher in the Fall of 2007 – right about the time that Meredith Whitney was articulating the growing fear that banks were in danger. It’s also no coincidence that, with the exception of the brief spike lower when Lehman Bros. went bankrupt, gold prices have held firm above $800 an ounce. (And as I write this, it’s around $1,130.)

An important thing to notice is that gold has made a new high this year. Silver has not. To me, that says gold is trading higher because of ongoing economic fears as well as the weak U.S. dollar.

Silver, on the other hand, is the pure play on the U.S. dollar. Now, let’s have a look at that US Dollar Index chart again…

I selected a 2-year chart because it shows the dollar index’s 2008 lows around 72. If the dollar returns to those levels we will see a new high for silver and gold. Gold, however, can continue to move higher so long as the dollar stays where it is, because investors remain concerned about the U.S. economic recovery.

The bottom line is that gold may be the more reliable trade right now, but silver has more upside if the dollar continues lower.

Now, this gets to the heart of the matter as to why I’ve been recommending gold miners. Gold doesn’t have to move significantly higher from current prices for gold miners to post huge gains in profitability because their costs are essentially fixed, meaning that profit margins expand as the price of gold moves up. So long as gold remains fairly stable, miners will be locking in gold sales at attractive prices.

A dollar rally might knock silver miners much lower, but that’s not necessarily true for gold miners. For investment purposes, the risk/reward scenario is better for gold miners. For trading purposes, there is more upside for silver if the U.S. dollar heads lower.

To get my top gold mining recommendations, Click HERE.

Until tomorrow,

Ian Wyatt

Editor

Daily Profit