Einhorn Bets on Gold Mining Companies

Legendary hedge-fund manager David Einhorn has laid his cards on the table. He is betting that the gold mining companies will outperform gold bullion, reversing the trend from the last 6 months. It comforts me to know that Einhorn and I see eye to eye on this. 

Here is what he had to say during his recent conference call for his firm Greenlight Capital: 

“A substantial disconnect has developed between the price of gold and the mining companies. With gold at today’s price, the mining companies have the potential to generate double-digit free cash flow returns and offer attractive risk-adjusted returns even if gold does not advance further,” Einhorn said. “Since we believe gold will continue to rise, we expect gold stocks to do even better.” 

He also mentioned that in the third quarter he cut Greenlight

Capital's gold holdings and moved these funds into the

Market Vectors Gold Fund Miners ETF (GDX).

Are gold mining companies finally starting to narrow the gap

with gold bullion? Since the end of the 3rd quarter, gold

miners (GDX) are up close to 9% while gold bullion (GLD) is

up 7%.

It looks like Einhorn's timing could be spot on.

Personal Savings - Running on Empty

The plot thickens and it aint pretty. As noted in a recent post, consumer expectations for the economy are the lowest in 31 years. At the same time we see in retail sales reports that people are spending as if everything is hunky dory.  There is a very unusual and striking disconnect between consumer attitude and behavior. "I know things are ugly and going to get worse. Hey, check out at my new IPhone 4s. Cool, huh?!"


Well, now we can add another troubling piece. We are finding out that this robust spending is at the expense of personal savings (see chart below). 




The personal savings rate is now at it's lowest level since before the start of the financial crisis in 2008. As you can see, everyone tightened their financial belts for a few months and started saving more -- then gradually savings were chucked out the window. Now the savings rate is plunging. It's easy to predict that very soon there will be no personal savings to buy unnecessary stuff. Not exactly an encouraging picture for the economy at large.

Tap Dat A$$ET

Good candidate for official anthem of Occupy Wall Street. This one will get stuck in your head for the rest of the day. You are welcome.

Peak Consumer Schizophrenia

Typically when people feel positive about the economy in the near term, they go out and spend. On the other hand, if people's expectations for the economy are somewhat pessimistic, they normally cut back on spending. Makes sense.

 

Monthly economic reports show us that consumers confidence has been dropping rapidly and today's report shows that it is now at its lowest level since 1981 - over 3 decades ago. One could confidently assume then that people are cutting way back on spending. Not so fast. The opposite is happening. Retail sales are actually booming compared to last year.

Looking at the chart below, the high correlation between retail sales and consumer confidence is evident all the way until 2009. And then all of a sudden begins a sustained jaw dropping disconnect. We are spending as if we expect very good times ahead but our consensus expectations for the economy are at 31 year lows.

Can you say "peak consumer schizophrenia"?

Brent Cook - Top Picks

In less than a month, junior gold and silver mining companies continue to fall. GDXJ, a popular junior gold and silver mining ETF, is down a staggering 32%. Compare this to a 14% decrease in the price of gold for the same timeframe. For some it is now bargain hunting time in junior resource stocks - looking for gold nuggets in the rubble. 


In a recent interview on BNN, Brent Cook - a respected veteran geologist and junior resource stock newsletter writer - offers a few of his top picks and explains why he likes them.  To watch the 5 minute Top Picks video segment, click here.


One of Cook's top picks is Almaden Minerals (AAU), a prospect generator.

Almaden Minerals has "chances for a real home run out there in terms of a major discovery that someone buys. There are so few good sexy big systems and this is one of them." He is referring to Almaden's Ixtaca gold and silver project in Mexico. It was mentioned that Cook added to his position a little over $3.00. 

AAU closed today at $2.31. In full disclosure, I own AAU. Do your own due diligence.


The whole interview  is in 7 parts and well worth watching it in it's entirety. 

"Dr. Copper" Needs License Revoked

Is "Dr. Copper" giving lab results informing us that equity markets are headed into bear market territory, a decline of more than 20%? Market observers often rely on the price of copper (down almost 30% in last 2 months) as a predictor for the future direction of stock prices. If this is the case, the big down move in copper must be telling us that the stock market is going to be falling much further. Or is it? 


In looking at the historical data, there is no real evidence that extreme copper prices are a good predictor of future lower stock prices. Jason Goepfert of Sundial Capital Research sheds some light.

Jason Goepfert: Let's go over the past 25 years for which futures prices are available and look at how the S&P 500 fared after other times copper fell rapidly into a bear market. 

Out of the six instances, only one led to an imminent and dramatic fall in stock prices. The other occurrences were not so bearish. In fact, they were outright bullish for the S&P. By six months later, the index was up by more than +12% each time (in four out of the six occurences). 

 A doctor whose diagnosis is correct 2 out of 6 times is not one in which I would put much trust. In fact with such a record, Dr. Copper should have his license revoked. As Goepfert concludes, "perhaps this latest bear market in copper will be more predictive of a future failure in stocks . . . but its history has not been consistent." 

Rick Rule: Aggressively Buying Gold, Silver and Miners

The sharp correction in gold, silver and mining stocks continues. In just 3 weeks, here is where we stand:

                                        GLD:     -15%

                                        SLV:      -28%

                                        GDX:    -18%

                                        GDXJ:  -27%

It is not a pretty picture - to say the least! It takes a strong stomach to handle this volatility. 

What is Rick Rule, founder of Global Resource Investments, one of the most respected veteran resource investors and self-proclaimed contrarian investors doing with his own money right now? In an interview this week with King World News, Rick Rule answers this question and more. Good insights.

Rick Rule: What we are seeing in the markets right now is exactly the type of psychotic break, the type of non-fundamentally related volatility, that has over the last twenty or thirty years given us the entry points that have, in fact, built our track record.

The idea that 30 year US Treasuries are safe seems to me to be a widely held perception that’s wrong. . . . What I am doing by buying bullion is taking the back side on a trade of a widely held perception that I believe to be wrong.  I am further, if you will, taking that trade on steroids by buying the smaller market cap advanced stage developers or small producers. 

I think what’s causing the volatility in these markets in the very near-term is a constraint in credit.  The European banks, in particular, have been big providers of credit in the commodities business. The European banks have less availability of near-term credit themselves and so they are cutting back credit lines to their commodity related customers.

The set of circumstances you are seeing now in commodity markets, this extraordinary volatility, is a function, in the very, very near-term, of increasingly constrained credit markets and that is going to continue for a while.

I see a bit of a rebound this week as gold is oversold, and then the decline may resume, but I’m not sure I see gold settling on a daily basis below $1,500.  What’s important here, Eric, is that the action that we are seeing now isn’t fundamental action, it’s volatility.  

The junior producers, the sub $1 billion or sub $250 million stocks, are absolutely being decimated.  In particular, the stocks that are being decimated are in frontier markets in places like West Africa or South America or Asia.  So I’m going to be concentrating my efforts on the most decimated sectors in the precious metals markets.  Bullion markets are being decimated with people moving into long US dollar instruments.  I’d like to be on the other side of that trade, and I’m going to.

Disclosure: I am a client of Global Resource Investments 

Gold - Crash or Correction?

What a sharp and fast drop in the last week for gold.  As of mid morning on Monday, gold is down 12% (silver is down a whopping 30% !). Which brings up the question is this a crash or simply a typical correction in the decade long gold bull market? 


Taking a step back and looking at this move in the context of gold's longer term trend, John Roque provides some data and comments that puts this recent drop in perspective.

For every year from 2002 to 2010 gold has, at least, corrected to its 40-week moving average and been down, peak to trough on average 15.6% (see table).” He adds, so far gold is down 12% from its early September high. Support @ 1600 looks ok to us.  

Roque makes the observation that that in every year since 2001 when gold bottomed,

it has worked through consolidation phases. So far this recent sell off looks like it is in keeping with it's consolidation phase pattern.

Barry Ritholtz offers an additional technical explanation: 

When a trend channel has a parabolic breakout to the upside, the prudent thing to do is to peel off 10 or 20%. This sort of vertical spike works itself off by falling back to at least the prior channel.

We are solidly back in this upward channel with room to fall further before we break the lower channel line. In other words, long-term bullish technical indicators are in tact. 

Crash or correction? Looking at the last 10 years of gold's behavior, it sure looks more like a correction to me.

Hang Seng - What's Going Down?

The Hang Seng index has a tendency of being a leading indicator for the rest of the global markets - both on the downside and the upside. Often it gives us an early look at the global risk appetite. So what has the Hang Seng been doing lately?

Global Macro Monitor: While all eyes are focused on Europe the Hang Seng has been in a death spiral.  It is down 25 percent from its November peak and off 17.5  percent since its intraday high on August 1st, while the S&P500 is down around 9 percent.  It’s signaling something ain’t right and may — and we stress may — be a precursor to a big break in the markets.

       Keep it on your radar.

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Gold Stocks - Moving on Up

As I pointed out in my first blog post a few weeks ago (quoting John Hathaway of the Tocqueville Gold Fund), "gold stocks represent extraordinary value and extraordinary opportunity right now." In the last 6 weeks, $HUI (the AMEX Gold Bugs Index) is up 20% and is now flirting with hitting new highs. Fundamentally gold stocks are still cheap and have plenty more room to go, according to Chris Mayer, editor of Capital and Crisis.

Chris Mayer: Gold Stocks are fundamentally cheap based on cash flow. One of the most remarkably chart I've come across is the nearby one showing the collapse in the cash flow multiples of gold stocks. They've gone from 20 times in 2008 to about 10 times this August!

The last time gold stocks got this cheap, on this basis, was back in 1979, when the group touched 8.5 times cash flow. This preceded a parabolic move in gold stocks in which they ultimately ran up four-fold. The 1970s is an interesting period to look at because gold stocks also lagged the price of the metal all the way up. 

Check out the rest of the Chris Mayer's article which includes 3 reasons why the gold stocks have underperformed the gold price so far. He also provides a chart that shows how gold stocks performed (very well!) shortly after the last time gold stocks multiples were this cheap in the 1970's.

Marc Faber: Diversification Advise

Marc Faber, an international investor with a reputation for being a contrarian and making uncanny predictions, offered some straight-forward investment advise on Bloomberg recently. Notice how it is very similar portfolio allocation to the Permanent Portfolio - the major difference is he advises to have 25% in real estate instead of 25% in long term treasury bonds.

Marc Faber: well I think it is very important to maintain diversification, I would advise to be 25 to 30 percent in equities with a large portion in overseas equities in particular emerging economies, I would advise him to hold some gold 25 percent or so, where by I think that for the next 6 months gold would rather decline than go up and I would hold some cash and bonds and then I would own may be 25 percent in real estate.

Be Your Own Portfolio Manager: The Permanent Portfolio

I have heard comments like these in the last few years:

"Investing is too complicated to do it yourself, best to hire yourself a money manager." 
"Only active traders make money these days."
"Passive investing is dead."

Wait a minute, not so fast. If you are taking money seriously and you are not interested in active investing, take a look at a DIY passive investing strategy called the Permanent Portfolio. It has a long-term track record that even the most successful professional money managers would envy.


Going back to 1972, the Permanent Portfolio boasts an average annual return of nearly 10%. It's biggest down year in the last 40 years is just under 4%. You read that right - the worst year in a very tumultuous 40 years has been a loss of only 4%! Even in the stock market meltdown year of 2008, the Permanent Portfolio posted a positive return. 


The Permanent Portfolio allocation is simple but highly diversified:


25% Stocks (in a broad based index such as the S&P)
25% Long-Term Treasury Bonds
25% Gold Bullion
25% Cash


Want another reason to consider the Permanent Portfolio as your investment strategy? It is easy to implement and even easier to manage once it is setup. There is no forking over a fee to a money manager. 


Solid returns. Minimal drawdowns. Easy to DIY. Why don't more people know about this? Quite simply, there is no money in it for money managers and brokers (no fees nor big commissions). In fact, it is in their best interest to keep the Permanent Portfolio under wraps. Not so for those of us that take our money seriously. 

For a helpful explanation and insights in to the theory and application of the Permanent Portfolio, I would highly recommend visiting crawlingroad.com.