Wednesday, March 23, 2011

Miner Leagues

In the unending search for relative investment value in this overpriced neighborhood we call today's markets, yours truly has, following some indecision, to sink some real money into certain gold mining stocks. Criteria I have used include standard criteria that would apply to any company, such as rising profits and free cash flow, and preferably dividends. Just having gold in the ground is not good enough for me to invest in a company.

I also like to see good, or better than good, relative strength of the stock compared to its peers. In other words, I like to see that Mr. Market has been on my side. I also need to be absolutely convinced that a reasonable base case provides for adequate total return in a defined time frame.

Why is it worth the trouble to risk capital and spend time in these matters, given how picked over the stock market is by people smarter and better informed than I, and who work with the aid of immense computing power, inside information and other advantages? (I am talking large cap investing here.)

The answer comes from having an economic philosophy that the market has not priced in.

The many insights of the Austrian school of economics, which I recognize as at base simple common sense, have not been accepted by the investment mainstream. Thus when I invest in gold (unhappily, given that gold is the anti-dollar and I am a loyal American), I feel that no matter what surges its price has, I can see that the miners are themselves buffeted by rapidly rising costs of mine development, so I know that there is reality behind the nominal price of gold. This would change if the authorities in Washington either lost power or pursued policies of decades ago (not to mention those of the post-Civil War era).

Much more speculative than large cap dividend paying stocks are the junior miners and yet more speculative are the explorers. My sense is that at some point, "the Bernank" will have a "von Havenstein moment (lite, I hope)" and this (prolonged) moment will be associated with huge moves in said speculative stocks, mirroring the NASDAQ of the late 1990s. I fervently hope that this does not come to pass, but since hope is not an investment strategy, I will disclose that I own some of these highly speculative securities as well. Not enough to get hurt if they revert to what may be a lower fair value, but enough to provide some juice should things explode upward.

Large caps meeting my criteria include ABX, GG, and FNNVF. The GDXJ and GLDX funds are good enough for me right now, as they respectively cover junior (producing) gold mining companies and exploration (non-producing) companies, with some silver exposure included.

Copyright (C) Long Lake LLC 2011

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