Overview: Hang in there!
Silver Stock Report
by Jason Hommel, January 24, 2008
We feel so fortunate to be sitting on exploration, development and mining stocks that have recently lost only about 35%. Yes, some lost more, but that's about our recent average. Besides, I find it difficult to complain about a 35% dip, after having made about 1000% over the last few years, and especially not while I see those kinds of gains ahead, too.
Many of our stocks have forward P/E ratios of around 1 or 2. These are the kinds of opportunities that you typically cannot find, anywhere in history.
I have not read too much lately about the Dow to gold ratio, so I'd like to revisit the topic, to show how good we are sitting. Historically, the Dow to gold ratio returns to close to a one to one ratio when stocks bottom, and when gold tops out. When stocks bottom out, their P/E ratios, on average, are about 7. That's the bottom for stocks.
To buy stocks with forward-looking P/E ratios less than that, like we can in the mining industry, seems an unprecedented gift. So, why do we have this gift opportunity, and how much longer will it last to be able to take advantage of it?
I think we are so fortunate because most money in the world is "dumb money" run by investors who try to invest using the methods of communists. In other words, they pool their money together with other dumb investors, and sink or swim as a group, rather than doing the real work that the hardest and best job in the world requires in the most competitive arena in the world, the capital markets.
You see, big money is often concentrated in funds. The funds have "mandates" to invest in "sectors". These funds may have $100 million or more which is "required" to be invested in certain stocks. But when investors in these funds get skittish, they then sell their fund, and ask for redemptions, or with-drawls. But the investors know nothing about actual stock value, know nothing about stock spreads, know nothing about liquidity, and know nothing about patience, and may know nothing about the true bull market in commodities.
So, when a $100 million dollar fund gets a request to redeem $20 million, the entire fund can drop to $60-70 million in value as they sell stocks to raise the $20 million in cash, as the selling can push stock values ridiculously lower. This process can then cause further redemptions, further selling, and further panic among the short-sighted.
Meanwhile, as the masses exit the funds, there might only be about 3-5 individual investors (and one of those might be a fund) who are actually bidding on some of the tiny market cap mining and exploration stocks right now, all trying to "call the bottom", all within about 5-10% of each other. So it hardly matters whether you call the exact bottom within about 5-10%; because if you do, you're just getting lucky, and can hardly get your orders filled at the bottom anyway.
So, how long can it last, this opportunity to buy stocks with P/E ratios of about 1? Well, this means they can earn their entire market cap in about a year. Some of these stocks can get into production within 6-12 months. Therefore, in about 1-2 years, most of these stocks should see a rise of about 50% to 100%, minimum. After that, the big dumb funds will get jealous of our gains, and will try to re-enter the industry, and will probably push up the stocks to the point where we will see gains of from 200 to 300% in the next 1-3 years or so, as the forward P/E ratios return to the 5-7 range, which will still be "the bottom". Thus, there is a chance that we could see far greater returns in some of our stocks, in the event that P/E ratios hit a norm of 15-20 for the mining industry, and this could well happen as the commodity boom resumes.
Is there a danger of a depression like in 1929 that could derail this commodity boom? I don't think that's likely. I think the great depression was largely a result of trade wars and embargos. So unless trade with China is halted, or unless there is a sudden 50% tariff on imports from China, I think we are in the clear for great gains in the mining industry.
Furthermore, China has something going for it not frequently mentioned; they earn twice what we think as they trade with us. For every $1 that they earn from us, they seem to issue $1.18 worth of Yuan currency to their people, as Yuan currency creation is running at 18%. But the $1 is kept by the Chinese central bank, which then may be invested, too. So, they get two dollars for the price of one; "Yuan" to spend domestically, and the other dollar to spend buying bonds, or foreign commodities! This kind of artificial inflation is causing their economy to really boom, and can make up for a lot of leftover, uneconomic, Communistic legacies, and cause a bunch of new economic misallocations as well.
The worst kind of Communism here in the U.S. might be said to be the Public State pension funds. This money is managed in huge pools, such as CalPERS, which is the California State pension fund, which is about $260 billion. http://www.calpers.ca.gov/eip-docs/about/facts/investme.pdf
With so much money managed by so few people, it cannot be managed wisely at all. I would be surprised if they owned even a single ounce of silver, and they could hardly invest a meaningful 5% of their fund into silver, as that would be $13 billion dollars. That would be nearly a billion ounces of silver, and current annual silver investment demand (the so-called "surplus") is only about 50 million ounces, not a billion, which is 1000 million.
Clearly, these state money managers, running state pension funds, must have gone to state schools, which is why they probably can't do basic math, nor comprehand the implications. The teachers are not teaching the students well enough to provide for their own retirement, but it probably serves them right, as they are all Socialists. Yes, I suppose I'm calling them "inbred" society folk, but what else can explain their institutional idiocracy, and lack of basic thinking skills? Interestingly, the Federally funded colleges don't teach anyone anything at all about gold other than lies, which compounds their ignorance of investing basics.
Is there a risk of a currency deflation? Not likely. For a deflation to happen, currency would have to be destroyed. That could only happen if individual banks were allowed to go bankrupt and be liquidated. That doesn't happen much anymore; instead, the big bankrupt banks buy up the little bankrupt banks, and keep their customers.
Besides, the FDIC insurance would pay off depositors anyway, which would prevent any currency deflation.
Yes, we have deflation in the dollar price of common stocks, and housing, and bonds; the three major asset classes, all at once. But for them to go down, something else must go up, and that something else cannot be the currency when it is being inflated at about a rate of 15% per year. The only other major asset class is precious metals, thus precious metals must go up; along with the mining stocks.
It would be kind of exciting to actually see a major bankruptcy of a major institution that was not bailed out, in which case we might see infighting among the banks, and be more likely to see their houses fall even harder against gold and silver.
But then again, it would be better for the bull market in gold and silver to take place more slowly, perhaps over 15 years or so, so that the holders of gold and silver can take the time to learn the necessary political and business skills needed to run the world.
I have 2 major resources on mining stocks to offer to you.
First, look at www.miningpedia.com It is a FREE comprehensive database of mining stocks. Anyone can update or enter data, it's like wikipedia.com. Miningpedia has replaced the "silver stock report" in that it is doing the legwork on individual stock analysis that I used to do manually. This frees me up to do what I like best, which is to write commentary. My commentary retains the name, "Silver Stock Report", but for individual stocks, please see miningpedia.com.
Second, I offer a "look at my portfolio" for $50/month; where I share a
peek at which stocks I own, once a month. You can log in at any
time, repeatedly, and also see all my prior months.