"Several Important Questions": Reader Question And Answer

I'm honored to have a reader leave a comment with a bunch of questions. Here's the questions (italics) with my responses in bold.

Hello,

I have several important questions for you:

1. Do you believe that gold stocks will tank in May this year? by that i mean that you must sell all your gold stocks because the gold price in May, June, July and August will decline immense?

A: Well, I'm really honored to have you ask me these questions. Anyone listening to me should consider that I'm just a software engineer who has been trying hard to figure out this investing thing. In the year leading up to July 2007 I made 3 million$ in Jr base metal mining stocks (nearly a triple) which has subsequently evaporated from holding too long and then moving to Jr gold producers as a safe have (which turned out to not be safe). So, I tend to go with what I believe in "all out" which results in very high volatility. I'm willing to take these risks because I consider myself diversified by having a lucrative, fairly secure day-job and by having a substantial, paid-off house. 

So, firstly, you don't want to invest like me. You really need to form your own convictions and take responsibility for your own investment decisions.

You ask if I think gold stocks will tank in May this year. My answer is: I really don't know, but the stocks I hold should be able to print money if gold holds above $800. I expect to dump if I reach the conclusion that gold looks like it will drop below $800. I think the basic fundamentals for gold are really strong, with quantitative easing eventually leading to significant inflation and with big chances of other investments going to zero in the mean time. Finally, I like the fact that Asian buying (India, Vietnam, China) seems like its beginning to kick in and support a gold price of $880. Still, there's definitely a chance of a breakdown and I'm not going down with the ship, so I'm watching really, really carefully.  

2. I hear everywhere that when inflation kicks in gold stocks will be worthless because the capital cost of gold mining will be huge and therefore the profits of these gold miners will be minimal.

Hard to know what will happen when inflation kicks in, but at $800 gold my gold mining Jrs should be able to print money. I think inflation drives inflation hedges like gold faster than gold mining costs (chief of which is salaries, secondarily crude oil). Anyway, look at Inca Kola's piece on gold mining vs gold (click here). His clear conclusion is that mining stocks are leveraged to the price of gold, so a rising price of gold (even if triggered by inflation) should be really good for the stocks I'm holding. 

3. They say that there is now deflation, accroding to Jay Taylor gold stocks do extremely well in a deflationary environment. When will this deflationary influence end in the gold stock market.

I've heard Jay Taylor on gold stocks and deflation and the only data point I've seen is the Homestake Mining stock chart. That's just a data point. Homestake had a huge find that was barely economic at the start of the depression and that benefitted from falling mining prices. I consider it to be just a data point. But... my Jr mining stocks should be able to print money at $800 gold, so I'm holding as long as that seems like a good bet.

But really, you ask "when will deflation... end". That's the five dollar question that nobody really knows the answer to. My plan is to hold stocks that are making a tonne of money at current gold prices and to bail should the price of gold soften "too much".

4. Is it smart to sell your gold stocks end of April and buy back these same gold stocks in May, June, July and August because prices of these stocks will be low and cheap again.

Hard to say, but the stocks I'm holding are very illiquid and I expect to take a 5 to 10% hit every time I trade in and out, so I try not to do that. I'm really watching the gold chart carefully and if I think support has broken, I'm bailing and I don't know what I'll do next.

Beneath i have some gold stocks of which i am thinking to take also a position, i hope you can advice which stocks you think are worth taking a position in.

1. Pediment Exploration, PEZ
2. Castle Gold, CSG - Got a bunch of this and I like it.
3. Alexis Minerals, AMC
4. Allied Nevada Gold, ANV
5. Starcore International Mines, SAM - Risky play. They have a crappy, marginal mine and have had trouble getting it profitable. They are not big enough that they will ever be taken over. I recall some cases where it seemed to me that management cared more about themselves than stockholders.
6. Romarco Minerals, R
7. Hawthorne Gold, HGC
8. Sangold, SGR - Great rocks. Who knows how many oz though? Everybody and their brother is following it and is in already. Plus, have you visited the stockhouse board? What a swamp pit! I have stayed away (when I could have made money) because I just don't see how I have an edge. With this one, I woulda, coulda, shoulda.
9. New Guinea Gold, NGG - Terribly undervalued if they can get their starter mine working, but they keeping failing to do so. I've trimmed my holdings down to where I don't really mind if they go to zero. Production results for Q1 are due this week. If they are at 3500 oz or higher for the quarter then my confidence rises some. 
10. AuEx Ventures, XAU
11. Animas Resources, ANI
12. Vista Gold, VGZ
13. Wesdome Gold, WDO
14. Eastmain resources, ER
15. Clifton Star, CFO
16. Canplats, CPQ
17. Premier Gold, PG
18. Rubicon Minerals, RMX
19. Andean Resources, AND
20. Lydian International, LYD
21. PDX Resources, PLG

Don't know anything about the rest of these. Other gold stocks I'm long on include: Gold Resource Corp, Dynasty Metals and Mining, Semafo, Troy Resources, Oceana Gold Corporation, La Mancha Resources and CGA Mining. I also hold some Impact Silver just because I really admire their management.

I want to thank you in advance.

I'm honored to have you ask my opinion, but one thing I realized about 5 years ago: Nobody cares about your money the way you do. I made a decision to take responsibility for my own investing decisions.

I sincerely would like your opinions.

Best of luck Ruud

I'll use this post as an excuse to put up my gold Jr fundamentals chart. The first chart is the stocks that I consider reference stocks to compare the others with (black), the second chart is my "less risky" favorites (blue, which are all probably too risky for a typical investor), followed by my "risky" favorites (green), followed by others that I've done in-depth due-diligence upon, but do not currently have large holdings of (dark red). All estimates are for 2010 and the price to operating cash flow is based on $800 gold.

Best wishes,

MontyHigh, www.worldofwallstreet.us 

Comments

[Melrune]

Hello Doug,

I`m a fellow software engineer that has taken an interest in the stock market in general. I was not too knowledgeable with gold or mineral related junior companies but I`ve learned quite a bit from your post.

I've recently taken an interest in a relatively new and small company in the gold sector name Gold Wheaton. It is modeled on the successful Silver Wheaton company and seems to have interesting prospect.

Cash flow in 2010 should be equal to 4 times current market value (but now they have about 125M USD in cash to make other royalties deal that is not included in the current cashflow forecast). This compare quite well to other royalties base type of company. Peer include Franco-Nevada at 15+ CF, Royal Gold at 20+ CF, Silver Wheaton at 11+ CF and Silverstone Resources at 4 time Cash Flow value.

Interestingly enough, the only other peer company trading at a similar cash flow level "Silverstone Resource" was recently acquired by Silver Wheaton.

Since I`m not a specialist at putting a fair value on this, I can only speculate that their next gold royalty acquisition should add about at least 20M USD of cash flow and would then bring the cash flow ratio for 2010 to (total of 80M USD Cash Flow) 3 which then compare quite well to many of your Junior Cash flow table above.

On the risk level, since this cash flow would come from a diversified sources of company (well maybe 3), risk should be considered lower than most of the current junior miner of your list.

Please let me know what you think, I would really appreciate to get another point of view on this company.

Regards,

Melrune

[Ruud]

Hello Doug,

I want to thank you enormously for your time and your clear explanation to the questions that i asked you.

Looks like the gold price is ready to rumble this morning. :)
Go gold go gold!!

Kind Regards,

Ruud from The Netherlands

[Gold Stock Strategist]

Doug,

This is a great post! Comments I strongly agree with include, "So, firstly, you don't want to invest like me." and "Nobody cares about your money the way you do." Self-directed investing is a personal journey, with gains and losses along the way as we learn. And investments that may be right for one person and their financial situation may not be right for another person. I really like the way your junior gold miners list is expanding and introducing those of us interested in the sector to new companies and different perspectives. Thanks! Best. Scott