Bullion and Beyond

Bullion and Beyond: Five Stunning Ways To Get Richer On The Epic Metals Boom Ahead!

After decades of dormancy, gold is back! Since 2000, the yellow metal has soared over 184% — taking gold mining stocks to the stratosphere.

But that’s just the beginning — because this boom is just getting warmed up. We’ve gathered a plethora of data showing this huge leg up in the yellow metal market is no accident. It is, instead, the beginnings of what will be the biggest gold price explosion in precious metals history.

In fact, gold could easily skyrocket to over $2,000 an ounce.

In a moment, I’ll share with you five strategies that will help you cash in on this unprecedented move. But first, let me show you why gold’s impressive run is still in its infancy…

A History of Value

Since ancient times, gold has been a safe haven for investors worried about market volatility and political uncertainty. Even the rise of paper currencies hasn’t managed to kill the idea of gold in people’s minds. That’s because gold is no one’s liability — currencies come and go, but gold remains the same.

For that reason alone, precious metals should always have a permanent place in your portfolio. It is the ultimate hedge.

But today holding gold is more important — and can be more profitable — than it’s been in years. That’s because we’re seeing a repeat of the same forces that pushed gold from $35 to over $800 between 1971 and 1980. I’m talking about things like a weakening dollar, easy monetary policies and geopolitical uncertainty.

Now, if you’ve watched the news, you know gold has already breached the $1,000 mark.   But there’s every reason to suspect this is only a pause Even after this tremendous run-up, we expect gold to head higher… much higher. That’s because gold’s “true” high is actually closer to $2,000!

Let me explain…

When people talk about the gold price, then tend to forget one thing — the dollar’s decreasing value over the years. So comparing yesterday’s gold price to today’s is like comparing apples to armadillos.

Adjusted for inflation, a $35 ounce of gold in 1971 would be worth $175.55 today. 1975 gold rockets to $697.02. In today’s dollars, 1980 gold, the peak year at $850, clocks in closer to $2,275.99.

So, in real terms, gold has a long way to go before it reaches its top. The question is, how likely is that?

The Trillion-Dollar Sinkhole

Its reason is pretty simple. The Fed knows regular cash and credit injections make everyone feel rich. The theory goes, when you’ve got cash and low-priced credit, companies borrow and expand. Consumers borrow and spend. Families borrow and buy homes.

But while that sounds good, there is a serious downside to this plan… debt.

Consumers are now weighed down with trillions in backbreaking outstanding credit — and every dollar needs to be paid back.

The U.S. government is also running $162 billion domestic deficits. And it’s about to get much worse. The first wave of baby boomers is set to retire between 2008-2010. Entitlement programs like Social Security and Medicare, in whatever form they exist, will start paying out larger sums of money relative to revenues.

Unfortunately, it doesn’t look like there’s anyway to reverse this trend. It can’t be from trade. The United States is currently importing over $800 billion more than it exports every year.

So instead, the government has tried another tactic to make up the shortfalls — by going deeper into debt. There are trillions of U.S. dollars now held outside of the United States. Since U.S. dollars are only legal tender within the United States, whether foreigners continue holding them depends on whether they have confidence in the dollar.

There is one final trick up the government’s sleeve. But this “solution” isn’t a solution at all…

How Can Push-Button Money Have Value?

Before becoming Fed Chairman, Ben Bernanke famously said in a speech at the National Economists Club in Washington, in November 2002…

Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), which allows it to produce as many U.S. dollars as it wishes at essentially no cost… We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

In other words, if you want to juice an economy… turn on the printing presses and make it easy to borrow money at a low rate of interest. The Fed won’t lose control, he says, until short-term rates go to zero. And maybe not even then.

The problem is, money can’t escape the natural law of supply and demand. When there’s too much of it floating around, each dollar is worth that much less relative to the whole. Suddenly, you’ve got price inflation. Suddenly, every dollar you have in the bank is worth less.

Hemingway called it the “first panacea of a mismanaged nation.”

Already this disastrous stance has plummeted the purchasing power of our dollars by a mind-blowing 96%. Today it’s worth just pennies compared to what it bought a century ago. Or even what it was worth the last time gold boomed, in the 1970s.

Flooding the market with easy money like this is more like burning your furniture to keep warm! We like to think an even smarter economist, Ludwig Von Mises, got it right…

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of further credit expansion… or later as a final and total catastrophe of the currency system involved.

Apparently, we’re not the only ones who think so…

Lost Confidence in the Dollar Is Spreading

China has loaded up and almost doubled their gold reserves to protect themselves from a dollar drop and to hedge some of the Trillions in US Treasury Bonds and Notes that they have purchased over the years.  This 76% increase in holdings since 2003 still has done little to hedge their position with only a couple of percent of reserves held in Gold compared to 10-15% for Western Central Banks.  Much more buying could be on the way.

Here’s how the London Telegraph puts it:

“China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact, and can cover their infrastructure for 50 years.”

And China is only one of many countries thinking the same thing.  Why hold worthless dollars when you can hold something of finite value, like gold.

Approaching “Peak Gold”

Just like the “peak oil” phenomenon, we’re headed for “peak gold.” It’s all about how much gold is left unprocessed underground. The more we take out, the harder it is to find more. And the harder it is to get to.

For instance, miners used to pan for gold in streams. Today, just to get enough gold for a wedding band, you need to crush up to 20 tons of rock.

And remember, gold isn’t just for jewelry, coins, or bars of bullion. Gold goes into computers, cell phones, and satellites. It’s used in medical lasers, industrial lasers, and in spacecrafts. It plays a major role in medical research. It’s even used for treating some diseases.

Tough new environmental laws and 20 years of low mining investment don’t help. But it’s really geology that’s conspiring against the miners most. Nobody can find the big gold deposits anymore. It looks like they’re all tapped out.

With gold prices up, miners are looking. More holes open up in the ground. More tons of rock go through the mills. But so far, the average quality of the gold they’re finding has gone down.

The low hanging fruit of the gold mining universe — the easy deposits and rich mines — have started to disappear. Gold’s already rare. But it’s getting more rare by the day.

This rarity is running into increasing demand. There isn’t a more fundamental argument for rising prices. And if the U.S. dollar continues to plummet there’ll be no stopping the yellow metal’s upward charge. Again, it’s economics at work. Gold is priced in dollars, so as the currency becomes less valuable, the metal naturally becomes more valuable.

You want to accumulate gold investments now, while prices are still relatively low. And today, owning gold is easier than ever before.

Nine Ways to Move Into Gold

Owning gold today is a little different than it was in the past, when holding gold meant hauling bars and coins around. You don’t need a house like Fort Knox to keep your gold safe. Gold has become a 21st-century investment — with enough options and oversight to ensure you’re protected.

There is no shortage of choices when it comes to investing in gold. Below, I’ve listed nine different instruments. Each one has different associated costs, benefits and risks. In general, however, as you read down the list, you will see that safety is replaced by opportunity.

Physical Gold: Bullion — whether in the form of bars, coins or ingots — is the ultimate financial lifeboat. Throughout the ages, princes and paupers have used it as money and turned to it for security. And it has withstood every test: war, revolution, hyperinflation and depression.

Investing in this type of gold, however, means keeping it in your house or paying someone to store it. The first way is dangerous, and means you’ll have to take your gold to a market to sell it. Storing it involves fees that bite into your returns.

It is also subject to widespread gaps between the bid and ask price — meaning you could find yourself paying more for your gold than the actual spot price.

If you’re interested in physical gold, bullion coins may be the best way to go. They are small, so they are easy to store. They can also be quite beautiful, giving an extrinsic worth beyond its monetary worth. The coins to look at are the 1-ounce South African Kruggerands, Canadian Maple Leafs or American Eagles.

Gold Certificates: The Perth Mint Certificate Program (PMCP) is operated by the international precious metals minting and trading company Goldcorp — and offers a secure and confidential way of investing directly in gold. The company is owned by the state of Western Australia and has received a government guarantee. Plus, all precious metals controlled by the group are insured by Lloyd’s of London (at the Perth Mint’s cost).

The downside is that U.S. investors need to make an initial investment of $10,000 and a minimum of $5,000 to add to the position. That’s a lot of change.

But there are some programs that are similar to Perth Mint Certificates that offer a lower entry price. We’ll explore some in a bit.

Gold shares: A unique way to play gold directly is with gold exchange-traded funds (ETFs), which operate just like stocks and are traded on several major stock exchanges. The shares are fairly liquid and can be bought and sold intraday like stocks. When you purchase shares of an ETF, a trust is created, giving you legal title to the metal. The shares can then be redeemed or traded. This is a terrific way to hold actual bullion without the trouble of storing, transporting or insuring the metal.

ETFs are a relatively new way of leveraging oneself to the current bull market in gold. One of the oldest ETFs, Australia’s Gold Bullion Securities, has been around since 2002. Stateside, there are only two gold ETFs available. You’ll discover our favorite a little later on…

Gold Mutual Funds: If you don’t want to own physical gold and don’t have the time or inclination to study individual stocks, a mutual fund is a terrific way to go. As with any mutual fund, performance is a reflection of management as much as industry.

The Outstanding Investments portfolio has a few gold funds. Our favorite is the American Century Global Gold (BGEIX). In the past six years, the total return for the American Century Global Gold fund has averaged over 20% per year. If you are bullish on the long-term prospects of the price of gold, then owning a gold-based mutual fund is a good way to participate in the market movement. Additionally, one or more of the companies in the portfolio are takeover candidates because the mining sector is consolidating in the near term. It is almost always the case in a rising market that the companies with decent reserves get taken out at a premium.

Rather than try to pick which ones will prove the biggest winners, you can just own them all. Of course, the gains won’t equal what you could see by pinpointing an individual potential winner.

Senior Gold Companies: In a bull market, senior gold stocks — large established gold mines with a history of success — are terrific investments. They offer pretty solid returns and let you sleep easy. The reason is pretty straightforward: Senior golds have the best management, technology and reserves. But just as a $10-per-barrel increase in the price of crude doesn’t have a large impact on the price of a multinational oil company, neither does a jump in gold prices manifest itself in blue chip producers the way it does in junior golds.

In a moment, you’ll discover two of the best of the big ones…

Foreign Gold Comapanies & ADRs: Huge fortunes were made in the 1970s and 1980s by astute investors who bought American Depositary Receipts (ADRs) of South African gold companies. An ADR is a certificate held by U.S. banks and represents a specific number of shares of a foreign stock. ADRs are traded on U.S. stock exchanges, are widely available and have a dollar-denominated price. And just like stocks, ADRs may pay dividends.

Junior gold stocks: These are smaller, usually less established gold and mineral companies. A few years back, they were pretty risky endeavors. Most pinned all their hopes on one or two undeveloped and sometimes unexplored properties. They were usually up to debt to they eyeballs… and some of them weren’t even producing gold! That doesn’t mean they were all necessarily bad investments — Outstanding Investments rode some for gains of 73%… 43%… even 108%. You just needed to be very selective.

Today, with the return of higher gold prices, a lot of these little gems are attracting more interest. But it’s still important to be careful and only bet on likely winners. We’ll have one for you in just a bit.

Gold Options: This is the line between investing and speculating. You can buy options on physical gold or gold stocks. Options can be a little bit complicated, however, and the odds are against option buyers (three out of every four options bought expire worthless).

The big enemy when you own an option is time. You have to reach your strike price by a specific date or your option expires worthless.

Still, options provide terrific leverage, and the most you can lose when you buy an option is the price you paid for it. Best of all, they give you an opportunity to earn home-run profits.

Gold futures: Only the most sophisticated, risk-tolerant investors play futures. For everyone else, it’s better to stay away. Sure, you could make a hefty profit, but it’s just as easy to lose your shirt. As far as we’re concerned, you’re better off staying far away from futures for now.

That covers the most well-known gold investments. But with a little digging, you can find some unique types of gold investments out there. One of our favorites is an investment that promises a good return — with all the convenience of a checking account.

The Easiest Way to Own Gold

A few minutes ago we told you about Gold Certificates offered by the Perth Mint. On the flip side, $10,000 may seem like a lot to shell out — and you might be wary of dealing with a foreign company.

Luckily, our friends at EverBank offer a cheaper solution closer to home. It’s called a Metals Select Account — a personal account made entirely of gold holdings. (You can also open a silver account, but silver is a story for another time.)

A Metals Select account offers the versatility of a brokerage account with the low cost and convenience of an ETF or mutual fund. Like a brokerage account, you can take physical possession of your gold holdings. You can also buy or sell ounces from your account without worrying about broker’s commission or fees. EverBank can even get you prices within 1% of the current gold spot price — a far cry from the 4–7% you’ll pay a broker. And certain accounts also let you specify whether you want to hold bars or coins.

There are two types of Metals Select accounts. A pooled account buys you into a shared stash of gold. Of course, you can add to or sell some of your position at any time. For additional fees, you can elect to take delivery fees. The drawback is that you cannot choose what kind of gold your fund contains — it could be coins, bars, etc. But to make up for that lack of choice, the minimum investment is just $5,000, and you don’t have to pay storage or maintenance fees.

For an opening balance of $7,500, you can open a Metals Select Holding Account. This kind of account gives you full control of designated gold — your choice of coins or bars, etc. You can even fill the account with IRA-eligible American Eagle coins. You’ll have to pay an annual storage fee, but you’ll find EverBank’s prices are quite competitive.

Either way, it’s one of the simplest and most cost-effective ways to add gold to your portfolio. And all you have to do is visit www.everbank.com/oi-metals to get started

(For full disclosure, Agora Financial have an ongoing business relationship with EverBank, so we may receive compensation if you open an account.)

The Stock Market’s Ticket to Easy Gold Ownership

If EverBank’s minimum investment seems too steep, or if you’d like the ability to quickly cash in on gold’s rise, you may want to consider StreetTracks Gold Shares (GLD: NYSE). It’s an exchange-traded fund, meaning it’s as easy to buy and sell as any other stock. Each share represents a fixed amount of gold held in a special bank account.

From the official description:

StreetTRACKS Gold Trust is an investment trust whose shares strive to reflect the performance of the price of gold bullion, less the trust’s expenses. The trust holds gold, and is expected to issue baskets in exchange for deposits of gold and to distribute gold in connection with redemptions of baskets. The gold held by the trust will only be sold on an as-needed basis to pay trust expenses, in the event the trust terminates and liquidates its assets or as otherwise required by law or regulation.

GLD is designed to reflect the price of gold on a fractional basis of 10%. So with gold at $800, you’d expect the shares to sell for around $80. A $10 move in the spot price of gold would thus correspond to a $1 move in GLD. If the spot price of gold fell to $600, GLD would fall to $60. If gold rose to $1,000, GLD would move to $1,000, and so on.

The price relationship between spot gold and GLD will not always correlate perfectly, but it will be very close. If prices ever got significantly out of line, arbitrageurs would be able to lock in a risk-free profit by playing the futures against the ETF and taking delivery if necessary; Wall Street has endless rows of supercomputers dedicated to exploiting spread movements when linked relationships get temporarily out of line.

In other words, you don’t have to worry too much about GLD’s net asset value, discounts or premiums. All you really care about is the price of bullion — and how many shares of GLD you own.

Also, keep in mind that owning the shares isn’t exactly like owning the gold. Unlike the Perth Certificates or even EverBank’s Metals Select Accounts, you cannot take possession of the gold. On the other hand, since GLD trades just like a stock, getting in and out couldn’t be easier — it’s just a matter of calling your broker or hitting a few keys online.

Action to take: Consider Buying StreetTracks Gold Shares (GLD: NYSE).

Run With the Big Boys

When it comes to the “senior” gold companies, there are only a few names that instantly spring to mind: Newmont Mining, Barrick Gold, AngloGold. But we think the best of the bunch is GoldCorp. (GG: NYSE).

GoldCorp has been around since 1994, and today it is the world’s lowest cost million-ounce gold producer. It’s sitting on 17.73 million proven ounces of gold spread across the globe. You can find its mines in Canada, the United States, Mexico, Brazil, Argentina and Australia. And at last count, it was producing that gold at a cash cost of less than $140 per ounce.

Let me say that again — it’s getting gold out of the ground for about $140 an ounce. With gold at $800 as of this writing and rising, that means it’s making $660 on every ounce it sells!

To put that into perspective, take a look at how GoldCorp’s costs compare to other big names in the industry:

Company Cost per Ounce
GoldCorp                      $140
AngloGold                    $357
Barrick                          $377
Newmont                     $388
Gold Fields                   $538
Harmony                      $572

As you can see, GoldCorp has a solid edge. This is pure profit to the company, from the time the whistle blows in the morning and the elevators take the workers down into the mines and pits.

And GoldCorp has put that money to good use, making some smart acquisitions. In early 2005, the company bought out Wheaton River Minerals — a move that added tremendously to the company’s balance sheets. In November 2006, it added Glamis Gold, which boosted the company’s silver reserves. And in 2008 it acquired Gold Eagle to boast its gold reserves even more.

Obviously Goldcorp’s profit margins will become even more attractive as gold prices rise. And the company has the reserves to keep the money train running for quite some time. So even with the tremendous run-up the stock has seen, we think it has further to go yet.

Action to take: Consider Buying GoldCorp (GG:NYSE)

Add Another Senior

Another big gold company that should be in your portfolio is Kinross Gold (KGC:NYSE)

Kinross is the world’s eighth largest primary gold producer, with the world’s fifth largest gold reserves, 45 million ounces. Kinross operates nine mines in five countries: the U.S., Canada, Russia, Brazil and Chile. All of these locales are considered “friendly” to mining (yes, even Russia). Kinross has three more projects in development.

Here is a breakdown of the Kinross gold reserve structure:

Kinross\' reserves are located in five countries that are favourable to mining

At the same time, Kinross trades for $231 of market capitalization per ounce of gold reserves, not including silver or copper resources, which is among the lowest premiums among major stock companies. Call it “cheap gold,” considering what you would have to pay for other stocks.

As is the case with all mining companies in these times, Kinross faces pressures from the rising costs of energy, labor, freight and transportation, equipment and consumables, plus, in some cases, unfavorable exchange rates. However, the company has a continuing focus on cost control as a core part of its culture. Kinross has one of the best growth profiles in the gold industry, with the above-noted three major projects in development, which will increase its output by 60% over the next two years. Here is a graphic that amplifies the Kinross story:


Kinross is trading in the range of $15 per share, with a market capitalization of $10.5 billion and a forward price-earnings ratio of 21. Some 59% of Kinross’ shares are held by institutions. Kinross’ profit margin is in excess of 15%, although the company pays no dividend.

Kinross will be opening new mine production in the next 18 months or so, selling even more gold output into a rising market. It is also attracting some of the best professional talent in the industry to its ranks. So we expect precious metals output and profitability to increase and earnings per share growth to accelerate.

We believe that Kinross, along with GoldCorp, is one of the best of the larger-cap gold mining value plays around.

Action to take: Consider Buying Kinross Gold Corp. (KGC: NYSE).

A Zero-Cost Gold Miner

One of the keys to successful investing is diversity. But that doesn’t just mean investing in different industries and sectors. It also means picking up different kinds of stocks within sectors. Goldcorp and Kinross Gold’s size gives you some stability and safety in gold. For a little more risk — and a chance at bigger profits — you should also take a look at smaller companies.

Yamana Gold (AUY: NYSE) — an aggressive Canadian intermediate traded on U.S., Canadian and London exchanges — looks a little like the Goldcorp of old, but with a twist: Its activities are focused on Latin America, and Brazil in particular.

In terms of mining focus, Brazil is excellent for a number of reasons:

  • Brazil has a stable and benign political climate. This stands in contrast to other Latin American countries, not to mention less civilized areas around the world. Better still, the Brazilian government maintains a favorable stance toward mining and a friendly regulatory environment
  • Mining operations in Brazil have reliable access to power — particularly hydropower. The country is rapidly developing its transport and logistics infrastructure, which also proves a boom
  • Brazilian exchange rates and labor costs are competitive, enabling a lower long-term cost of production than many other countries. A broad labor pool, widespread availability of ethanol and subsidized diesel also help keep mining costs low
  • Brazil has a lot of “latent geological potential.” In other words, there could be plenty of undiscovered gold — and copper — in them thar hills
  • As the 10th largest economy in the world, Brazil exports much besides metal, allowing it to sidestep “Dutch disease” and the problems associated with lopsided resource economies.

Yamana Gold was incorporated in 2003, specifically to pursue gold and copper opportunities in Brazil. As relative newcomers, these guys aren’t wasting any time… During the year ended December 31, 2008, total production from all mines totaled approximately one million gold equivalent ounces and they plan to ramp up to 2.2 million by 2012.

Thanks to smart financing and skillful acquisitions, Yamana is on track to reach that aggressive goal.

Yamana Gold currently has five operational mines, several development projects in Brazil and Argentina and significant land holdings. Rapid expansion is under way, and a tidal wave of production is coming online.

What do we mean by a “tidal wave”? Consider that Yamana Gold’s production was a mere 100,000 ounces in 2005… over 400,000 in 2006 and it’s projected to mine 620,000 ounces for 2007. And 2008 totaled right around 1,000,000 ounces.

But there’s an added benefit to Yamana. The company is also sitting on 2.3 billion pounds of copper — an excellent source of cash flow. Yamana Gold’s CEO, Peter Marrone, argues that the company’s cost of gold production is zero when proceeds from copper sales are taken into account. A gold miner with a 100% margin? You can’t beat that with a stick.

While remaining fully exposed to the upside of gold, Yamana’s management has wisely hedged its exposure to copper fluctuations. Yamana’s copper prices are essentially locked in for the next two years… so the red metal cash flow is safe, even if the global economy keels over.

There are certainly risks to consider. You don’t get astronomical upside potential without the possibility of setbacks and complications. But the potential rewards are so great, and the company’s position so strong, it’s hard to think of a more compelling buy than Yamana Gold right now.

Action to take: Consider Buying Yamana Gold (AUY: NYSE).

The Next Gold Rush

Governments have spent the better part of three decades trying to take gold down. But the yellow metal is too old and too ingrained in people’s memories to go down without a fight.

Between America’s systematic destruction of its currency, a growing global need for financial safety and security, and the age-old forces of basic supply and demand, the stage is set for an explosive blowout.

The recommendations in this report will give you a good foundation for riding these precious metals to the top. For Outstanding Investments latest, and most shocking report, simply click here.

The Daily Reckoning