Gold $3,000

The prices for gold and silver are on a tear. Gold topped $1,000 per ounce a few days ago. Silver is nibbling around $14.50 per ounce. The world’s currency markets and investors do not trust the politicians not to screw up the currency. Remember Weimar. Think of Zimbabwe. Could it ever get that bad in the U.S. or Canada or the rest of the developed world? We sure hope not, but as Ronald Reagan used to say, “Trust, but verify.” So watch the Federal Reserve. And buy some gold and silver.

In fact, the next issue of Outstanding Investments will include a new recommendation for a great South African gold mining company — except this one operates on three other continents as well as Africa. I’m bullish on gold. Actually, I think that gold could go to $3,000 per ounce in the next 30 months. Really bullish.

The stock markets are vicious. The markets are lower now than during the meltdown in October. But I think that the precious metals environment is healthy, especially for some elements of our portfolio. The exchange-traded fund named GLD is one way to buy gold without taking delivery. The ETF takes delivery, does the storage, deals with bookkeeping and security. You just benefit when the price of gold rises.

Many quality miners, including Goldcorp and Kinross Gold Corp. should benefit from rising gold and silver prices. If precious metals prices stay up for a while, these firms will be spinning cash by selling increasing output into a rising price environment. And the tradition in the mining business is that cash-rich firms pay dividends. I expect to see some great dividend increases in the next couple of years.

Tankers That Did Not Load Are Now Not Docking

As for oil, the price popped up by about 14% lately, to nearly $40 per barrel. It seems that the U.S. inventories were lower than expected, by a mere 3.1 million barrels (just kidding: 3.1 million is a lot of oil). And tanker landings are getting fewer. This means that the OPEC output cuts of December and January are finally kicking in. That is, all those tankers that did not load 45 days ago are now not docking.

Meanwhile, U.S. driving and fuel usage are up, despite the recession. So Economics 101 works. With lower fuel prices, people drive more. Imagine that. Thus, gasoline supplies are tightening, pricing is firming up and prices at the pump are rising a bit.

Is this the beginning of a turnaround for the oil firms and oil service companies? Well, seeing just one swallow does not mean that it’s spring.

Still, our “oil in the $30s” weeks may be coming to a close. Sure, we’ll still see volatility up and down. But as we close out the winter months, we may now be in for some “oil in the $40s” weeks, and by midspring, we’ll be seeing oil in the $50s. This should offer a small boost to the beaten-down service companies like Halliburton and Baker Hughes. But I don’t think that it’s time just yet to back up the truck and buy shares. Nibble, perhaps, at these fine companies. The world will need them over the long term. But don’t spend all your war chest of cash right now on oils or oil services.

Stock Market Casualties

Each stock has its own story. Each company has its merits, which is why it’s in the portfolio. But right now, GE is a getting killed by fears of its large amounts of debt on the books. Alcoa is hurting with evaporating demand for basic aluminum. McDermott got sucked under by the oil swoon (despite an astonishing order book for offshore systems and other power-generation investment).

Will we look back in a few years and smile sadly? Will we smack our heads and say, “Wow, I could have bought these guys for a song?” Maybe. But we may never know, because I’m not recommending you try to speculate at this point. Got that? Don’t try to time this. Don’t gamble.

If you hold these companies, then you have some stagnant money on your hands. I wish it were different. But that’s the hand of cards we’ve been dealt by the economic fates. It’ll take an economic recovery to get these guys moving again. But the good news is that the companies have immense technical talent. Each is an industry or sector leader in what it does.

Summary — The Little Bit of Good News

So the bottom line is that the little bit of good news out there comes from the mining camps of the world. In particular, the gold and silver miners. Hey, there’s no fever like gold fever. Right now, we are on the cusp of a great run-up in gold. I believe that there’s still time to get into some excellent stocks. The gold miners have room to grow. They should benefit from rising gold prices. And we might see higher dividends down the road.

Is there a caution? Always. Could gold prices tumble? Well, yes. That would hurt us. But for gold prices to tumble would take a lot of investor dishoarding. That is, people would have to hit the “sell” button en masse. And that would require some tectonic shifts in worldwide tax, fiscal and monetary policies by a host of socialist-leaning governments. For the moment, I think we’re safe from any counterrevolutionary antics like that. As Charles de Gaulle once noted, “People get the history that they deserve.”

Until we meet again,
Byron W. King

February 25, 2009

The Daily Reckoning