Blog Archives

New Price Target For Oil

8/29/2013

COMMODITIES CORNER

A lot of so called experts had actually told me that oil wasn't going anywhere and would be stagnant for the next quarter or so. The more those fools talked the more I increased my exposures on my MLP and PSX positions and boy how it has paid off. Are people that naive? These fossil fuel companies are in
it to win it all. I am banking on their greed until 2018. I believe that will be the time when we will see new energy technologies really start to emerge and take real form. By the way, these technologies have already been developed
or acquired by the same fossil fuel energy giants and are collecting dust on a shelf somewhere probably in Texas.

Troublemakers in Egypt and Syria – and some saber-rattling American politicians – helped send oil to a new high this week.

The price of oil has broken out to the upside of the "double top" pattern I showed you a few weeks ago. So instead of a quick profit off an oil breakdown, anyone who shorted shares of the United States Oil Fund (USO) should have stopped out of the trade for a tiny loss.

Now with a new set of circumstances – and a new chart pattern – it's time to take another look at oil and see what the next trade setup might look like.

Here's a chart of West Texas Intermediate (WTI) crude, the benchmark U.S. oil price...

As you can see in the chart above, the difference between oil's recent support and resistance levels is about five points. So if we add five points to the breakout level of $108, we get a target price for oil of $113. That target price lines up well with the resistance of oil's former high price in 2011. Take a look at this longer-term chart below.

But there are still several reasons to be bearish on oil. Oil inventories are higher than average for this time of year and it has a seasonal tendency to decline in September. Also, demand for oil has been declining due to sluggish economic growth.

The big reason to be bullish right now is the impending U.S. military action in Syria. That possibility trumps the supply/demand concerns. It has pushed oil to its highest price in two years. And it'll likely push prices a bit higher. But as the price of oil approaches the $113 target level and the threat of military action runs its course, oil is likely to form an important intermediate-term top.

That will be the time for traders to take another shot at a short sale in the oil market.

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GOLD BEGINS TO RALLY AGAINST OIL

8/22/2013

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COMMODITIES CORNER

As we expected, the "gold-to-oil" ratio is working in gold's favor. Back on July 26, we noted how the "gold-to-oil" ratio was ready to snap back in gold's favor. At the time, we reminded you how this kind of "ratio trade" isn't a conventional "buy a stock and hope it goes up" trade.

"Ratio trades" involve trading one asset against another asset. For example, one of the most important ratios in this group is the "gold-to-oil" ratio. Since they are both commodities that have intrinsic value, gold and oil can be affected by the same buying and selling pressure in the market. But their values can get "out of whack."

When this happens, traders can step in to sell gold and buy oil. or buy gold and sell oil. The profit on these trades depends on how the two assets move against each other. We used this analysis to time – almost to the day – the epic 2008 bottom in crude oil. From late 2012 through last month, the gold-to-oil ratio fell from 20 to 12.

This means gold collapsed in value relative to oil. In our July note, we pointed out that this decline left gold and oil in an extreme position. Hedge funds held extreme bearish bets on gold and extreme bullish bets on oil. As you can see from the chart below, our note was well-timed. The gold-to-oil ratio has bottomed and just staged a short-term breakout in gold's favor. This rally will continue.

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The World's Safest Gold Stocks

8/21/2013

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COMMODITIES CORNER

Has gold bottomed out or it it in a rally? If not, when will it rally? Regardless of how the precious metal performs, gold analyst Mat Badiali, explains that you need a safeguard and profitable position that can weather the storm.

By Matt Badiali

As I expected would happen in late June, gold stocks have put in a bottom and staged a huge rally. The benchmark gold index is up 36% off its lows. I expect gold stocks will work higher over the longer-term. Of course, there will be corrections along the way, which is why you should stick to some of the world's safest gold stocks.

The key to safety is to focus on "all-in" costs. This is the total cost of an ounce of gold production. It includes the cost of mining at each mine the company owns, plus the costs of running the company. It is a way to look at gold-mining companies as businesses, instead of simply a way to play rising gold prices. It's a critical idea for making money in the gold-stock sector.

In my most recent issue of the S&A Resource Report, I presented a proprietary, in-depth analysis of the gold sector. I showed readers a selection of the best companies from the gold sector with our estimated "all-in" costs. It's important to understand that we did not try to figure out the industry's "all-in sustaining cost" that we see companies reporting today. We used some assumptions that the industry wouldn’t want.
For example, I assumed unprofitable mines were closed.

In the table below, I compared the all-in cost and the price of gold at the top of the column. If the costs are higher than the gold price, the company will lose money. We sorted the list by operating costs with gold at $1,200 an ounce, the recent low.

All but Agnico Eagle are profitable with gold at $1,200 per ounce. If gold suffers another big move down, however, a lot of these businesses will struggle. You can see what I mean in the table below. It shows how much money each company will earn at a given gold price.

These numbers are the profit per ounce multiplied by the volume of gold produced per year. We sorted the table by earnings at $1,200 an ounce.

At $800 per ounce of gold, our model estimates that nine companies will not be profitable. On the other hand, we see companies like Barrick, Iamgold, Randgold, and New Gold should be profitable. Now, I'm not saying gold will go down to $800 an ounce or even $1,200 an ounce.

But if you're interested in gold companies that will stay profitable if gold doesn't soar from its current levels, consider owning the companies with the low "all-in" costs. These are the safest gold companies on the market. And they're the ones I'm encouraging my readers to own.

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How to Trade the Silver Rally

8/20/2013

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COMMODITIES CORNER

I bought a lot of silver and gold royalty companies. That strategy should give us a significant profit through dividend returns not to mention a nice market hedge. We mostly held gold royalties but started buying four specific commodities (gold, silver iron ore and copper) as the market tanked. We picked up a majority of the silver and copper positions once things bottomed out.

By Jeff Clark

Last week, my two analysts showed you that silver was poised to rally because of an extreme condition in the market. A giant "blowout" in silver over the last 10 months had put investor sentiment toward silver in extreme territory. And after a short series of "higher lows" and "higher highs," silver looked to be in the start of an uptrend. They said If silver keeps moving higher, the speculative funds that are now massively short the metal will rush in to buy in order to cover their short positions. That will drive prices higher. They nailed it. Not only did silver pop 14% higher, it also exploded above its 50-day moving average (DMA). Take a look.

The 50-DMA has been resistance for the price of silver since the chart dropped below the line last December. So the breakout above the line is a big deal. It signals the trend has changed from bearish to bullish. And it points to higher prices over the coming weeks and months. If you jumped into the trade congratulations, you're sitting on solid profits. If you missed it, here's how you can get in on it today.

Right now, silver is bumping into resistance just above $23 per ounce. If it can break above that level, the next target is $28. I expect we'll get there over the next few months. For the short term, though, silver is extended. It's overbought and is hitting resistance. So a short-term pullback is likely. Traders should use that pullback as a chance to buy.

Following a big breakout above the 50-DMA, it's common for a chart to come back down and retest the line from above. It's also common to retrace about half the gains of a big breakout move. All of this lines up well with the support line just below $21.

If you own silver, hang onto it. You might have to suffer through some weakness in the short term, but the potential gains over the next few months are huge. If you're not in the silver trade yet, give the metal a chance to pull back and work off its current overbought condition. Then start buying on any move near $21 per ounce.

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All Eyes Are on Gold...Everyone Is Missing the Rally Here

8/13/2013

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COMMODITIES CORNER

All eyes are on gold stocks right now as they should be. Gold stocks are ripping higher. The rally I told you about in the gold sector is well underway.

The Market Vectors Gold Miners Fund (GDX) is up 16% in just the past three trading days. It's trading above its 50-day moving average (DMA). Over time, GDX should move up toward its 200-DMA, near $35. But it's not just the stocks of companies mining the shiny yellow metal that are on a tear. Coal stocks are rallying, too. Take a look at this chart of the Market Vectors Coal Fund (KOL).

Just like the gold sector, coal stocks have been under heavy selling pressure all year. KOL bottomed six weeks ago, down about 35% for 2013. But now the chart has formed a double bottom (or "W" pattern) – a bullish sign. A "W" pattern is the opposite of the "M" pattern I showed you last week.

It occurs at the end of a downtrend and often signals the beginning of a longer-term uptrend. KOL has also popped above its 50-DMA (the down-sloping blue line) which had been resistance for the stock all year.

Remember, most technical analysts view the 50-DMA as the line in the sand separating intermediate-term uptrends from intermediate-term downtrends. So stocks trading above the 50-DMA are considered to be in bull mode. KOL should be able to work its way up toward its 200-DMA, near $22, over time.

The sector is a bit extended in the short term. That's normal, given the 10% rally over the past three trading days. So traders can look to buy into the coal sector on any pullback toward the 50-DMA , which should now serve as support.

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A Low-Risk, High-Reward Precious-Metals Trade

8/12/2013

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COMMODITIES CORNER

After months of watching prices fall, silver bulls at last have some good news. They finally have an "extreme" condition working in their favor.

Every trader needs to become a "connoisseur of extremes." This means monitoring the market for extreme situations where valuations, technical readings, and sentiment are badly out of whack. These extreme, "out of whack" situations often precede big price moves. Right now, we have such an extreme in the silver market.

This extreme was created by a giant "blowout" in silver over the last 10 months. In September 2012, silver was trading over $34 an ounce. Earlier this summer, it dropped below $19. In other words, silver lost nearly 50% of its value. (Gold lost "only" 33%.) That massive drop has put investor sentiment toward silver in extreme territory.

Speculative trading funds hold historically low net-long positions in the metal. (Producers and consumers, on the other hand, are massively long.) At market extremes, speculative funds often lean heavily toward one side of the market... and it's a good idea to bet against them. In the 10-year chart below, you can see that speculative trading funds hold the lowest amount of bullish bets in 10 years.

Now take a look at the next chart. It shows the last 12 months of trading in silver. Since bottoming around $18.50 in June, silver has dug in a "toehold" in the $19-$20 range. It's strung together a short series of "higher lows" and "higher highs." It's likely the start of an uptrend.

If silver keeps moving higher, the speculative funds that are now massively short the metal will rush in to buy in order to cover their short positions. That will drive prices higher. A rally back to $28 per ounce isn't out of the question.

Since silver is just off its recent lows, there's a compelling risk/reward trade right here. Traders can consider buying silver or the silver fund (SLV) and setting a stop near the recent lows. Silver has been through a "blowout" bear market. Sentiment toward the metal is terrible. The price is moving higher. This makes for a low-risk, high-reward trade.

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This Is One Bet I'll Take All Day

8/10/2013

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COMMODITIES CORNER

Gold stocks appear to be turning the corner. Barrick Gold, the world's largest gold miner, announced an $8.7 billion write-down on its Pascua-Lama project in the Andes. The company also cut its quarterly dividend. But the stock barely budged. It's been a brutal drop this year – both for gold stocks and the metal itself. The price of gold is down from $1,675 an ounce to $1,300 an ounce this year.

The Market Vectors Gold Miners Fund (GDX), which holds a basket of gold miners, is down nearly 50% year-to-date. Matt Badiali, a precious-metals expert, noted an important ratio in the gold market is at a 12-year low and it's bullish for gold stocks. Matt is simply talking about the price of gold stocks compared with the price of gold. When the ratio is at extremes, big moves happen.

Right now, gold stocks are the most undervalued they've been compared with the price of gold since January 2001. One measure of value for gold stocks is the gold-stocks-to-gold ratio. This is a simple measure of the ratio of the price of gold stocks to the price of gold. When it gets badly out of whack, big moves happen in gold stocks.

For example, the chart below shows the ratio of the value of the iconic AMEX Gold Bugs Index ("HUI") to the price of gold. When the ratio is very high, it means gold stocks are expensive relative to gold. When the ratio is very low, it means gold stocks are cheap relative to gold.

The ratio was at its most extreme in November 2000. After that ratio was reached, gold miners soared 435%. In 2008, another extreme point was reached. Gold miners soared more than 150% in the next 12 months. We can't know for certain where gold prices will go from here.

But the setup for gold stocks is attractive today. It's what's called an "asymmetrical" profit opportunity. Let's say gold stocks have the potential to fall another 25% (which is highly unlikely, considering how oversold the sector already is). That means by investing in gold stocks, you're risking an unlikely loss of 25% for the potential to make 100%-plus gains. So your upside is four times greater than your downside. That's a bet we'll take all day.

On Thursday, gold stocks soared. The price of gold jumped more than 2% to $1,312 an ounce. GDX jumped more than 8%. The Market Vectors Junior Gold Miners Fund (GDXJ), which focuses on more volatile small-cap miners, was up 9%. The big money is made when things go from "bad to less bad" and that's starting to happen in gold stocks.

If gold holds steady at these levels, gold stocks could easily rally 50%-100%.

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It's Time To Buy This Fallen Mining Giant

8/10/2013

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COMMODITIES CORNER

PROFILED: Freeport-McMoRan (NYSE: FCX)

Over the past few years, the notion of Murphy's law comes to mind for Freeport-McMoRan (NYSE: FCX), the world's largest copper miner. In that time, the company has witnessed:

A sharp drop in copper prices as China worked off overbuilt stockpiles

A similar plunge in gold prices (which accounts for roughly a fourth of the company's revenues)

A mining accident that took 28 lives in Indonesia

A pair of major acquisitions in the oil and gas industry that were greeted by a chorus of boos from shareholders and analysts

A rapid spike in the debt load to above $20 billion that raised alarms at a time when revenue and cash flow forecasts were being trimmed

The net result, this stock has lost nearly 40% of its value over the past 2 1/2 years, even as the S&P 500 has moved higher by a similar amount.

The fact that this stock recently tested support at $27, held its own and has drifted closer to the $30 mark in recent weeks implies that the "everything that can go wrong will go wrong" phase of this company's life cycle may have passed.

Indeed a brighter picture is slowly beginning to emerge, and as the pendulum swings back the other way, shares should start to reverse course. In fact, several headwinds could become tailwinds in just the next few months, making this a timely trade as well as a solid long-term investment. The shift backs toward bullishness could be seen a recent $29 million purchase of company stock (at a price just under $30) by Chairman James Moffatt.

With this company, it all starts with copper prices. Freeport-McMoRan produces nearly 4 billion pounds of the metal every year. So a downward move from $4.50 a pound in the summer of 2011 to a recent $3.15 a pound has hurt results. China, which accounts for 40% of global copper demand, is the key culprit. Not only did China sharply slow its purchases of copper this year to reduce stockpiles, but deeper economic weakness in the world’s second-largest economy threatened to make matters worse.

Yet a glimmer of good news has just appeared. A fresh economic report out of China highlighted a stabilizing economy, which gave a modest boost to copper prices. Every 10-cent-per-pound swing in copper prices impacts FCX’s annual EBITDA (earnings before interest, taxes, depreciation and amortization) by $470 million, according to UBS.

Yet even assuming that copper prices merely remain in the current range and don't fall any further, a series of mine expansions should sharply increase Freeport-McMoRan's output by roughly 50% by 2016, according to management.

Notably, management plans to meet that production goal even as it brings much greater discipline to its capital spending programs. Roughly $1.9 billion has been trimmed from the company's annual capital expenditures. How does output go up even as spending goes down? Part of the projected increase will come from greater productivity at a pair of existing major Indonesian mines that had been beset by work stoppages. Freeport-McMoRan is now negotiating with workers in that country, and a "positive resolution would be a major catalyst for shares, in our view," note analysts at Merrill Lynch.

The other looming catalyst for this stock: a change in perception about cash flow. In the past few years, investors have fretted that falling copper prices, undisciplined capital spending, and the purchase of Plains Exploration and McMoRan Exploration were all contributing to downward cash flow projections. Yet FCX's cash flow outlook is a lot more robust than the flagging stock price may indicate. To be sure, 2013 is a "kitchen sink" year as free cash flow will dip to just $600 million (down from $3.9 billion in 2010). Yet that figure should steadily rise to $7 billion per year by 2016, according to analysts at Merrill Lynch. That forecast assumes that copper prices will rise around 5%, and that gold and oil prices will remain near current levels.

What does robust free cash flow lead to? A rising dividend. FCX currently pays $1.25 a share, equating to a 4.3% yield. That figure could move up to $2 a share, or 60%, by 2016, even as the payout ratio returns to its long-term 40% rate. Strong free cash flow also leads to diminished concerns about the company's still high debt load, which has been a key overhang on the stock. Management expects to reduce debt to by $9 billion by 2016, to around $12 billion.

That debt pay down will also come from selected sales of non-core energy fields. "We believe the market will focus on these savings and on the potential asset sales" as an investment positive, note analysts at UBS, which recently boosted its price target from $33 to $35.

Yet even that price target will look too conservative once investors start to shift their focus away from the recent bad news and pivot to better news ahead. When that happens, they'll start to appreciate that the estimated replacement value of Freeport-McMoRan's mining and drilling assets is worth roughly $49 a share, according to Merrill Lynch.

By as soon as the next series of quarterly results, slated for October, look for Freeport-McMoRan to announce certain asset sales, and equally important, maintain or even boost sales and cash flow guidance, now that the company has lowered guidance to very achievable levels. Barring a complete collapse in copper prices, this stock should start working back to the $40 mark or higher.

Action to Take -->

-- Buy FCX at prices up to $34.

-- Set stop-loss at $27.

-- Set initial price target at $40 for a potential 38% gain in 12 weeks.

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Rick Rule’s Reasons to Buy Gold and Select Gold Stocks

8/2/2013

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COMMODITIES CORNER

Mr. Rule has dedicated his entire adult life to many aspects of natural resource securities investing. In addition to the knowledge and experience gained in a long, successful and focused career, he has a worldwide network of contacts in the natural resource and finance worlds. As Chairman of Sprott US Holdings, Mr. Rule leads a highly skilled team of earth science and finance professionals who enjoy a worldwide reputation for resource investment management.

Mr. Rule is a frequent speaker at industry conferences, and is interviewed for numerous radio, television, print and online media outlets concerning natural resource investment and industry topics. He is frequently quoted and referred by prominent natural resource oriented newsletters and advisories. Mr. Rule and his team have long experience in many resource sectors including agriculture, alternative energy, forestry, oil and gas, mining and water.

Sprott US Holdings is active in securities brokerage, segregated account money management and investment partnership management involving both equity and debt instruments, across
the entire spectrum of the natural resource industry.

Interviewed by Jeff Clark, Senior Precious Metals Analyst

Jeff Clark: First, Rick, what's your basic explanation as to why gold crashed a few weeks ago?

Rick Rule: I think there are two parts to the answer, maybe three. First, the gold market was technically weak. The second thing is that there were a lot of institutional players long gold on leverage, using capital that was borrowed rather than their own, so when the price crashed they had to unwind very rapidly.

The fact that there was a very large futures player who attempted to come out of the market all at once during a period in time when the market was extremely illiquid is, of course, also very suspect. I know that most Internet articles are focused on the one large 400-tonne sale at a very odd point in time, and I would certainly agree with the suspicion that if I were a holder of that size and I was looking to sell or had to sell, I probably wouldn't have chosen to do it all at once or in a very illiquid time in the market.

I think that one of the things you have to look at in the gold market is that we are changing the nature of ownership, from institutional momentum holders who are leveraged, which is a long way of saying "weak hands," to physical individual buyers on a global basis, which is a different way of saying "strong hands." So one of the things that happened in the gold smackdown is that gold did what many things do in bear markets: it went from weak hands to strong hands.

Jeff: I saw a BNN video where you said the capitulation process isn't over. What makes you say that?

Rick: I don't know if I have an opinion regarding the capitulation process in gold and silver, but I certainly think that the lows are yet to come for the junior mining equities. My experience in 35 years in junior equity markets is that bull markets end in an upside blowout, and bear markets end in a downside puke. I think we were partway through that a couple weeks ago, but I think it got interrupted. I haven't seen the sort of cataclysmic capitulation selling that usually marks a bear market bottom. It doesn't mean that just because it has always happened that way that it will happen this way again, but I haven't seen the capitulation selling. What I have seen, for example, is mutual funds being forced to sell to meet redemptions – but I haven't seen the no-bid market that usually marks the cataclysmic bear market bottom.

Jeff: And the point is that you expect that.

Rick: I do.

Jeff: That was a record selloff a few weeks back.

Rick: It didn't have the duration that one would have expected. These things are usually two or three week long sell-fests. I forget what month it was in the year 2000, but there was an absolutely comical selloff. People who were on margin didn't find it funny at all, but because I was cashed up and I was extremely experienced, it was just an absurd theater that I took advantage of. There were a bunch of people who didn't know much about these stocks that bought them in 1996, and that same group of morons that knew nothing about what they owned or why they owned them and so puked them out in 2000. Your job as a speculator is to be on the other side of both of those trades.

Jeff: This implies that gold returning to the $1,900 level and going higher could be a couple of years away.

Rick: I have no opinion on that. It's important to note that most of the juniors are nonviable at any gold price. When people ask me what would happen to the price of Amalgamated Moose Pasture if gold went to $2,000, I'm forced to say to them, "Well, it really shouldn't matter. Amalgamated Moose Pasture doesn't have any gold. They are looking for gold, and if the price of something that you don't have any of goes up, it shouldn't make any intrinsic difference."

The truth is, we need to unwind the excesses of the last decade in the junior market. We've done a pretty good job of that, but we need to finish it.

Don't get me wrong, I'm a gold bug. But if you think gold is going higher, buy gold. If you are going to buy gold stocks, buy them because there is some internal reason to own that company and why it is becoming more valuable. Never confuse the two.

Jeff: Good point. What do you make of the record insider buying in the junior market?

Rick: I think there are two things to consider there. The first is that the high-quality gold juniors are very cheap. We believe, statistically, that the high-quality gold juniors are the cheapest they've ever been since 1992. So you are seeing very sophisticated buying of the gold juniors to match the selling from other places.

The other thing you're seeing with insider buying are financings where they issue God knows how many millions of shares at a nickel to raise $300-400K, which are basically going to pay insiders' salaries. These people are basically putting the money from one pocket into another pocket, and issuing themselves 10 or 11 million shares in the process. There are hopefully 500 or 600 companies headed to extinction.

Both of those things are happening. One of them is bullish, and the other is just the way these junior markets work.

Jeff: A lot of analysts, especially the CNBC types, claim the gold bull market is over, that we've entered a bear market and it's time to get out.

Rick: I disagree with that on many levels. The narrative associated with gold and the narrative associated with the resource story hasn't changed. How many of your readers – in fact, how many listeners to CNBC or CNN – believe that the Western world's financial crisis is over? How many believe that any of the G20 nations can balance their budget? How many believe that central bank liquidity is a substitute for solvency, owing more than you can pay back? How many people would deny that physical gold demand has been strong?

The point is that the narrative that drove the gold market in 2006 and 2010 is very much intact. Nothing, in fact, has changed. The only thing that has changed is the perception and the price, both of which are lower, which is better. So yes, I am absolutely a gold bug, particularly when you compare it with the alternative, the US 10- or 30-year Treasury, which Jim Grant famously describes as "return-free risk." Does return-free risk sound attractive to you? It doesn't to me.

Jeff: Right.

Rick: I also need to say that my 30-year track record and Eric Sprott's 30-year track record are a function of being extremely aggressive buyers in very bad markets. The $10 billion business that is now Sprott, Inc., is really a consequence of aggressive investing during bear markets. In periods like the 1990 bear market and the year 2000 bear market, it is precisely markets like these, when we have taken pain but have also taken aggressive action. And the rebound coming back out of markets like these can be very violent. You don't have the ability to reap the rewards of those upturns if you are not an aggressive investor in downturns like these.

Jeff: I've heard you say that you've made the biggest part of your wealth during big selloffs. This has been one for the record books, so are you viewing this as being another one of those opportunities?

Rick: Absolutely, Jeff. Let's face it, I'm 60 years old. This is probably my last major market cycle. I'm going to make the most of it. I can tell you that I'm having the most fun I've had in my career for 13 years. I have spent all my life honing my skills, building up the capital, building up the client base – this is tailor-made for me. I realize this period is unpleasant for some people, but the market doesn't care if it's unpleasant. The market doesn't care if it's inconvenient. You take what the market gives you – and this market is giving me a gigantic sale on assets I want to own.

Jeff: It's very exciting from that perspective. It begs the question, though: how do investors know when to reenter the market? How do we know when to buy?

Rick: You know, Jeff, I'm always early. Your friend Doug Casey will tell you that about me. I have a very logical mind. I believe if A is true, B is true, and C is true, then X will be the result. And when I reach that conclusion, I often confuse imminent with inevitable. So I don't know the answer to that.

What I do know is that my own net worth seems to go up fivefold coming out of a bear market and going into a bull market. Suppose it took 18 months longer than I had hoped; does that really matter, given the magnitude of the outcome? When there is a sale at a store for goods that you want, do you really worry too much about the fact that there might be another sale two weeks from now? I don't think you do. When goods that you want to own are attractively priced, you buy them.

Jeff: What about the investor who has already built a full position in a high-quality company; how does someone take advantage of what you're essentially calling a lifetime buying opportunity?

Rick: I think a key part of the answer has to do with "high-quality company." Most investors, particularly in the junior sector, are very bad at stock selection, and they don't have a good sense of what constitutes a high-quality company. If, in fact, I am to answer the question precisely as you asked it – what does a person do if they already have a full position in a high-quality company – then the answer is easy: relax. But if the question goes to somebody who has a laundry list of 20 companies and doesn't really remember why he or she bought the companies and is not aware of the fundamentals of the company and hasn't bothered to benchmark those companies against other companies that exhibit similar characteristics, that's a very different question.

In bull markets and in bear markets, one must continue to high-grade one's portfolio. One must make oneself at least once a year sell at least 20% of the portfolio. If you have 20 names in the portfolio, you have to make yourself sell four or five of them, and increase your positions in your best names. And you don't just do that in bull markets, you do it in bear markets, too.

Jeff: It's critical to be selective with stock picking.

Rick: It is absolutely critical. You've heard me say this before: if you merged every junior exploration company in the world into one company, that company would lose somewhere between $2 billion and $5 billion a year. So how do you price the industry… do you price it at five times losses? Ten times losses? The question, of course, is apocryphal.

What you need to remember is that all of the performance that gives the sector its occasional luster is concentrated in the top 10% of companies. People who are going to participate in the sector need to either spend the time or spend the money to have their portfolio selectively high-graded on a consistent basis. It's all about stock selection. If you want the extra leverage inherent in equities, do securities analysis and pay attention to those equities.

Jeff: Someone wrote to me recently saying, "I thought I was going to get rich in gold stocks, and here they are plummeting." What is your response to the investor who makes that kind of comment?

Rick: That's easy. Natural resource businesses and precious metals businesses are capital intensive and extraordinarily cyclical. Somebody in the sector must always remember, you are either a contrarian or you will be a victim. It's funny; people only want to be contrarians when it's popular. The fact that the narrative hasn't changed, the fact that the facts haven’t changed, the fact that nothing has changed except the TSX.V being off by 60%, means that the same goods that appeared attractive to people at twice current prices must be more attractive now.

The gentleman or the lady who wrote to you is probably somebody who only believed in the narrative when it was being reinforced by the market. That's not being a contrarian, that's being a victim. If you came into a market when it was popular in 2010 and then you exit the market when it's unpopular in 2013, that's a classic example of buying high and selling low, a silly thing to do.

Remember the take-home phrase: you are either a contrarian or you are a victim. To buy low, you have to buy in markets that don't have competition. To sell high, you have to be a seller in markets where other people are greedy. It's that simple.

Jeff: Are there any specific catalysts you're looking for to turn the gold market around, as well as gold stocks?

Rick: There are three catalysts in every market. First, markets work, and the cure for low prices is simple: low prices. Bear market pricing causes bull market pricing. And the overvaluations of bull markets cause bear markets.

With regard to gold itself, I think the real catalyst will be the fact that on a global basis, people are mistaking liquidity – counterfeiting, if you will – with solvency. The truth is that the Western world has lived beyond its means for some substantial period of time, and they are attempting to engineer a default by depreciating the purchasing power of the denominator – the currency – so I think that's the ultimate catalyst for gold.

With regard to the stocks, which are a very different set of circumstances, I would suggest that one catalyst may be an increase in the gold price, but a much more important catalyst is the fact that high-quality gold companies, in our opinion, are selling at the best price they have sold at for 20 years. They are simply too cheap. It won't be immediate, but it will cause some of the higher-quality names to be taken over, because it's cheaper to buy gold than it is to go find gold.

And the third thing that's really going to surprise people in the juniors is that we are slowly coming into a discovery cycle. There is nothing that adds hope and liquidity like a discovery. People talk about what a pathetic market we had last year, but if you happened to own Reservoir Minerals before its discovery, the stock went from $0.26 to $3.50. Africa Oil went from $0.80 to $10. This is a market that will reward performance, but it's a market that has been starved for performance, too.

Jeff: Okay, last question. I'm a planner, so I want to write down in my calendar what year I'm going to be sitting on a beach sipping a mai tai with you after we've sold our junior stocks for 10 or maybe even 100 times our original investment. What year should I write in my calendar?

Rick: I suspect it will be in the epicenter of a bull market five years from now. It might be sooner, frankly, but I've found that these cycles take four or five years, and we're sort of two and half years into the cycle.

First, though, we need a cataclysmic selloff to mark the bottom. Then we'll go sideways for a while. I certainly think that people who are involved in the gold stocks that don't have a two- or three-year time horizon are delusional.

Jeff: Okay, it's in my calendar. Thanks for the insights, Rick.

Rick: It's an enormous pleasure for us, Jeff. We have done this for 30 years in the Sprott organization, and this is our third big decline. And as I said, the fact that we manage $10 billion is due to bear markets, and your speculative readers need to remember that.

Jeff: Good point. Where can readers go if they want to learn more about Sprott?

Rick: We would love for people to come visit us at Sprott Global. We encourage them to sign up for our daily Sprott commentary by hitting the subscribe button at Sprott's Thoughts on the website.

Jeff: Very good. Thanks again, Rick.

Rick: Always a pleasure, Jeff.

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The Next Leg of the Natural Gas Boom Is Here

8/2/2013

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COMMODITIES CORNER

PROFILED: KBR (KBR)
Chicago Bridge and Iron (CBI)

By Frank Curzio,

On May 17, the Department of Energy kicked off the next leg of the natural gas boom...

It approved the first natural gas export facility in two years. That's huge news. You see, the natural gas market isn't a typical "global" market, like the ones for iron ore, copper, or crude oil. All those commodities are easy to ship around the globe. So for example, copper prices in one part of the world are usually pretty close to copper prices in another part of the world but natural gas isn't so easy to ship. Prices can be very low in one country and very high in another. In India, Europe, and Asia, for example, natural gas averaged around $11-$16 per million British thermal units (BTUs) last year. That's roughly 150%-300% higher than U.S. prices.

As I've showed you in previous essays, that big "spread" has created a tremendous opportunity for folks who own and build the infrastructure needed to export natural gas. And with the government finally ready to grant approval for new export facilities, this bull market could get another boost. This move should come as no surprise to Growth Stock Wire readers. In February, I said it was just a matter of time before our government approved these liquefied natural gas (LNG) export facilities.

The government gave permission to LNG terminal operator Freeport LNG to export natural gas from its Quintana Island, Texas facility. It will cost $10 billion to construct the terminal. Once operational in four to five years, this facility will be capable of sending massive amounts of our cheap natural gas to starving nations all over the world. It's only the second natural gas export terminal in the country to gain approval. And it's just the beginning.

You see, over the past two years, energy giants like ExxonMobil, BP, and Chevron partnered up with some of the largest state-owned energy giants to build LNG export facilities in America. There are about 19 projects in the pipeline waiting for government approval. These projects didn't get approved in 2012 because it was an election year. Neither party would risk votes by approving such a measure – as widespread LNG exports will bring higher domestic gas prices in time.

However, with the election in the rearview mirror, the government ran out of excuses not to approve these LNG terminals. And studies commissioned by the government and released in January showed the huge economic benefits of building these LNG facilities. I expect our government to approve at least six of these exporting terminals over the next 12-18 months.

Natural gas won't start to flow abroad right away. These export terminals are extremely expensive and extremely complex. They can take up to seven years to build. But a lot of companies will start to see the benefits of these approvals almost immediately, including LNG infrastructure companies like KBR (KBR) and Chicago Bridge and Iron (CBI). Almost 40% of KBR's revenue comes from LNG projects. CBI receives more than 30% from LNG infrastructure.

Whenever the government approves a new facility, these two companies are likely to sign contracts to build them. Both stocks have seen big runs higher. But even now, they're cheap. KBR is trading at 11 times forward earnings. That's a huge discount to the average S&P 500 company, at 15 times forward earnings. KBR also has a strong balance sheet and is expected to grow earnings north of 20% annually over the next two years. CBI is also cheap trading at 12 times forward earnings. And the company is expected to grow its earnings more than 30% annually over the next two years. That's four times faster than the average S&P 500 company. Plus, superinvestor Warren Buffett's Berkshire Hathaway just purchased $360 million worth of CBI last quarter. That was Buffett's only addition to his portfolio in the past three months.

I suggest buying these names on a pullback. As more LNG export facilities receive government approval, KBR and CBI will likely receive huge contracts to construct them. In short, you have a chance to buy two cheap companies with massive long-term growth potential in the natural gas boom.

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