by Travis Johnson, Stock Gumshoe | September 28, 2009 12:13 pm
Today’s wee tease is from a guy who is most known as a commodity and oil super-bull in recent years — and his picks today follow that theme quite nicely.
Leeb’s top pick in the annals of Gumshoedom is actually unrelated to gold, oil or other commodities — his top pick on our tracking spreadsheets has been Western Digital, which he touted back in January, at a time when apparently a large number of people thought no more computers with hard drives would ever be built. But most of the stuff we see from Leeb is about hyperinflation, peak oil, and the fairly widely-held “commodities to the rescue” theme for those who are afraid of a debased dollar.
So what is it today? Today we’re looking at an ad for Leeb’s Real World Investing, which is a commodity-focused advisory … a subscription will run you $997 at the current “sale” price.
Here’s the excerpt where he lays out the argument for inflation:
“As the Treasury prints boatloads more money,the value of the U.S. dollar is going to go down and the price of most everything you can think of is going to go up!
“Inflation is likely to hit 10% by the end of 2010 and perhaps as high as 15% or even 25% by 2012! Its effect on the stock market and upon your life will be profound.
“Why are my figures so much higher than other well-known economists? Because they don’t like to write about things that tie their stomachs in knots, and for which they have no solutions. I’ve got answers, so I’m not intimidated by the major inflationary factors that—even if they’re only half as bad as my projections — are about to wreck havoc with our economy.
“Here’s why imminent inflation will be every bit as painful, if not worse than that of the 1970s:
“1. We’re now playing on a much bigger world stage. The two billion, increasingly-affluent people of India, China, and other Eastern and Middle Eastern nations are now competing with us for the commodities needed to support their middle-class lifestyle.
“2. We’re squandering billions of our capital on a rapidly diminishing supply of increasingly-more-expensive fossil fuel … and the world is running out of cheap oil, as well as a dozen critical metals. And don’t kid yourself, alternative energies are not going to replace fossil fuel soon enough to save us.Are you getting our free Daily Update
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“3. Our balance of trade is out of control and about to catch up with us. The Chinese especially are tired of using their trade surplus to buy ever-bigger stacks of U.S. T-bonds. That game cannot go on forever. When the dollar gets weak enough, the Arabs and others will stop using it as the world’s reserve currency. The Russians are already lobbying for a switch. That would put us on the outside of the world’s economic system, looking in.
“4. Our very expensive standard of living makes it impossible for U.S. manufacturers to compete with many of our trading partners. I mean, who would ever have thought that General Motors, an American icon, would go belly up? It’s not just the unions either. An overpaid bureaucracy, a legion of lawyers and millionaire CEOs have all been feasting at the consumer’s expense.
“5. Americans are now way over their heads in debt. The equity in their homes has suddenly vanished. Tens of millions of home owners are watching the American dream turn into a nightmare. We’ve been saving less than 1% of our income and we have $11 Trillion in personal debt. Meanwhile, Indian families save a governmen-aided 28% a year and Chinese families, 42%. They might wind up owning the joint.
“6. Global warming—real or not—along with healthcare, will continue to consume every spare cent in the national budget.”
And based on that argument, he essentially says the only recourse is to own the stuff the world will still need — grains, metals, oil, etc. — to avoid losing your purchasing power.
“You may be thinking that, because $70-a-barrel crude is down from last year’s high, that inflation is not a threat. You may be tempted to think that because gold is down a bit from its recent high that the trend is down. But I’m sorry to say that you need to brace yourself for a patch of 70s-style heavy duty, across-the-board inflation! It’s going to happen again, in spades! Only this time, it could be even worse because we are now in a time of convergence of multiple exponential curves: energy, food, water, population growth, mineral and energy depletion are ganging up to create the perfect storm….
“The good news is—it’s not too late to jump on the commodities band wagon and not only protect the buying power of your nest egg, but grow it by five fold as well! Yes, crude oil is up 100% from its recent low, but if you accept that crude will be trading back at its 2008 high before very long, that represents a potential double on your money!”
He then goes on to reassure you, however, that it’s not as easy as it sounds — you can’t just invest in commodities willy-nilly (my words, not his), you have to pick the right stocks of commodity producers. And who can help you do that? Why, Leeb’s Real World Investing, of course!
And after a long discourse on buying things the world needs and fighting inflation with the commodities that are in limited supply, he then takes a bit of a turn and goes on to talk about his favorite … gold stocks. Gold has sometimes been an effective safe haven for inflation spikes, but it’s not really an industrial commodity. No one needs gold (well, almost no one), and it is primarily driven by demand for savings and investment, particularly as a store of wealth. It’s not a currency, since you can’t really buy anything with it, but it is, according to most gold fans, the only “real” money.
But anyway, if the dollar’s going to return to its downward trend of the last decade or so, as he says, and break off the recent “flight to safety” recovery it enjoyed during the financial crisis, it’s probably safe to say that the price of gold in dollars will go up. Which would help gold miners. Which gets us to his specific teases for today:
“Don’t Stop at ‘JUST owing gold!’ Supercharge Your Gold Profits With Our #1 Gold Play!
“We’re firm believers in owning a portfolio mix of established gold mining companies along with promising, smaller outfits that offer the potential for outsized gains though organic reserve additions. We’ve found a Vancouver, BC-based company that’s going to the far ends of the earth in search of minerals deposits.
“The company’s primary focus is on the Oyu Tolgoi copper and gold deposit in Mongolia’s Gobi dessert one of the world’s largest undeveloped copper and gold resources. The Oyu Tolgoi tend is actually a series of deposits that stretches for 20 kilometers (more than 12 miles). All told, the trend contains nearly 21 million ounces of gold (do the math, that’s about $21 billion worth of gold) measured and indicated as well as nearly 40.7 billion pounds of copper.
“The stock has come under selling pressure during the last month on concerns that Mongolia’s new President may attempt to alter a draft agreement to proceed with the project. The recent change in government has long-distance investors worried that the new administration will exact a higher share of the wealth from the project.
“But western investors are overly concerned. While the new leader may want to foster change, the role of president is largely ceremonial in Mongolia and the opposition in parliament is still quite powerful. We expect a resolution on the investment agreement shortly which will lead to a big jump in share price.”
OK, so this is, at least, a copper and gold mine, so we’re looking at the world’s key industrial economy as well as gold. And this is perhaps not the most terribly hidden teaser company, since there aren’t many miners in Mongolia, but with these clues we’re talking about …
Ivanhoe Mines (IVN)
Ivanhoe and their partner, Rio Tinto, have been working at developing the Oyu Tolgoi copper/gold mine, which is a huge prospective deposit about 50 miles north of the Chinese border, for years, and it has recently come back into favor with investors as the Mongolian government has lifted some of the burden that was slowing down the mine. Originally the plan had been for production to start in 2008, but several years ago a windfall profit tax was passed in Mongolia that caused Ivanhoe and Rio to essentially put the project in “park” for a while — the government has repealed that tax and, more recently, said nice things about foreign investors at the latest UN General Assembly in what sounds like a desperate bid to kick-start development on this and other resource projects, so folks are feeling warm and fuzzy about them again — they even got a mention in Barron’s over the weekend.
Rio is essentially financing Ivanhoe’s mining efforts, so at the end of the day it’s possible that they could end up owning close to half of the company, but the deposit is very large, and is now planned for mining to begin in 2013, so if demand remains high this is a large copper and gold deposit that’s just down the road from what will probably be, in four years when they start production, the world’s largest gold and copper buyer. And there will probably be other investors coming on line as well, the latest announcement that they’re hoping for an “investment agreement” with the Mongolian government notes also that there is potential for other sub-10% investments from sovereign wealth funds who have shown interest. So it seems likely that although Ivanhoe is already a $5 billion company, they’re going to keep diluting and raising cash to develop this large resource that has an expected mine operating life of at least 40 years. Since we’re still a ways from production I imagine the stock could easily move around quite a bit based on additional fundraising, changes in political wind, and adjustments to expected future commodity prices, as it has over the last few years — Ivanhoe owns some other exploration concessions in Mongolia for coal and other commodities, and a few other assets in Australia, Kazakhstan, and Northern China, but the key asset is this Oyu Tolgoi project.
Personally, I hold some gold and some exposure to gold miners, but it’s not a huge part of my portfolio — I continue to think of physical gold as a way to preserve savings, not as an investment, but miners can certainly be a compounding investment and give you good leverage to rising commodity prices … if you pick the right ones. If I were investing with an eye to leveraged returns in a commodity recovery, I’d probably go with silver instead of gold, in part because silver has lagged and in part because there is real industrial demand for silver … but that’s just me (I do have some call options on silver miners, but that’s also a small and speculative part of my portfolio).
Ivanhoe in recent years has largely moved along with the large gold miners, as represented by the GDX ETF, and going with a basket of miners like that is certainly a safer choice, but it’s also true that it limits your chances at really “game changing” returns. Ivanhoe, with the regulatory hurdles seemingly shrinking, has performed significantly better than the GDX over the last two or three months of gold price appreciation even as they remain years away from profitability — but the reverse is also true … when things were bleak last November and December, Ivanhoe fell much further than that gold mining ETF. Leeb’s other gold pick that I’ve written about this space, NovaGold, which he touted pretty heavily back in May, has likewise been extremely volatile.
So … what do you think? Are you on board with Ivanhoe as they aim to develop this big ‘ol Mongolian mine? Have other favorite gold or commodity stocks, or other favorite ways to protect yourself from inflation? Let us know. And if you’ve had the pleasure or pain of subscribing to one of Stephen Leeb’s newsletters, please click here to review it for us — thanks!
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