For much of the past couple years the folks at Casey Research have teased a “secret” kind of gold investment, often calling them “Gold Placements” or “Q Shares,” and I covered one of those pitches that we saw in late 2019, back when E.B. Tucker was still editing this Strategic Trader newsletter… but now we’ve got an updated version, under the byline of David Forest, and the tease is a little different, so I’m taking another look.
Here’s the intro that got investors excited this time around:
“After seeing gold gains as high as 2,450%… 3,922%… 5,509%… 6,200%… one of the world’s top resource investors is finally revealing…
“YOU can use this secret investment for the chance to turn every $3,000 into $31,251 starting February 23, 2021
‘These little-known securities have always been one of my favorite ways to
play gold… But they aren’t stocks, bonds, ETFs, options or bullion itself.’
– Doug Casey”
What’s not to like, right? We all enjoy daydreaming about 10X returns. So what are they hinting at to get you to part with $2,000 (nonrefundable) for Strategic Trader?
“Gold Placements are a much BETTER way to profit off the rise in gold..
- They are up to 99% cheaper than buying stocks…
- They’re safer because you risk less capital…
- And they have the potential for 100 times more upside…
“I’m willing to bet…
“Once you see how these placements work, you’ll never want to invest in the ‘normal’ stock market again.”
So yes, the short answer is still “warrants,” as it was last time around… but the actual ideas hinted at are probably different (warrants expire and new ones are born all the time)… let’s dig in and see what they’re pitching. But first, a little explanation about warrants, in case that word is new to you — they’ve become dramatically more popular in the past year with the explosion in SPACs, but plenty of folks have still never heard of them. Here’s how Forest describes the “double leverage” they can provide:
“A good mining or royalty stock is a leveraged way to play gold.
“A gold placement is a leveraged way to play the mining or royalty stock.
“As long as the underlying stock is a solid bet, the gold placement is the absolute best way to turn a small sum into big bucks fast.”
Warrants are similar to call options, and are generally given to investors as an inducement for them to buy into an equity offering. Most commonly these days they are a part of “blank check” financings, just about every special purpose acquisition corporation (SPAC) is initially created with some sort of warrant bundled in as a reward for investors who tie up their money in the “capital pool” without knowing when or how it will be invested… but warrants have also been very common in the natural resource space for decades, as a way to reward investors who are willing to risk their money on mining stocks, often very small ones who might otherwise have trouble raising money at reasonable prices.
I confess to having a certain fondness for warrants — I sometimes dabble in SPAC warrants, since those are usually the only “mainstream” stocks that have warrants attached, and while most of those don’t go anywhere we do get a shining star every now and again, including Virgin Galactic (SPCE) and DraftKings (DKNG) in 2020 and Hostess Brands (TWNK) a few years ago, just to pull some names from the hat.
And I agree with one of Forest’s main assertions, that the models used by analysts, particularly the Black-Scholes pricing model, tend to understate the value of long-term warrants… though every warrant is a little bit different, and it’s also true that a lot of warrants, particularly SPAC warrants on hot technology ideas, have gotten wildly overpriced, too.
If you don’t know what warrants are, just think of it this way — they trade like stocks, but they are mostly like individual options contracts (just without the standardized terms of options). A warrant, like a call option, gives you the right to buy a stock at a set price (the “strike” price), at any point before the expiration date. If you want to do that, you would “exercise” the warrant — though often people don’t bother to exercise their warrants, which takes some communication with the broker and sometimes a fee, they just sell them before the expiration date (hopefully at a profit).
Do note that warrants can expire even if the stock is trading above the exercise price — brokers won’t automatically exercise them for you like most brokers will with options contracts, so don’t forget to take action (sell or exercise if it’s “in the money”) before the expiration date. Having an in-the-money warrant expire and become worthless just because you forgot would definitely be a bummer.
Companies sometimes have more than one tranche of warrants, in which case they might give them letters (Warrant A, Warrant B),