The No. 1 Way to Buy Gold Now... It's NOT Gold Mining Stocks
By Dan Ferris, editor, Extreme Value
Monday, March 09, 2009
Real investors almost never buy gold stocks.
Mind you, I'm not talking about traders. I'm talking about investors. I'm talking about people who know the value of owning a great business for decades... people who have proven they can intelligently deploy capital and compound wealth at double-digit rates for a generation. Great investors like Warren Buffett, Charlie Munger, and Peter Lynch usually laugh at the thought of buying equity in a gold mining business.
Mining companies use enormous machines and armies of people to dig gigantic holes and pull tons of dirt and rocks out of them. They have relatively small amounts of cash on hand and lots of inventory, property, and equipment. They sell a commodity that can be produced by any of their competitors. There's no premium brand name in raw gold. All these attributes make mining a low-margin business with lots of risks.
Real investors avoid low-margin businesses. They avoid lots of risks. Real investors are drawn to businesses that require little up front investment and generate thick profit margins. Take Microsoft, a stock I've discussed in these pages before...
Microsoft is the premium brand in the high-margin business of computer software. Its net margin – the money left over after all expenses are taken out – is consistently greater than 25%. Microsoft doesn't have to invest in expensive new Caterpillar excavators or dump trucks. It's a terrific business with a lasting competitive advantage that real investors love.
But real investors should be buying gold stocks by the truckload right now – just not your typical gold mining stocks... If you want to make a fortune in the next few years, you should be buying "prospect generators."
Prospect generators don't take the risk of doing actual mining work. They don't spend money on expensive drilling. They find someone willing to take all the risk in exchange for the opportunity to earn their way into a project. Prospect generators just employ a few smart guys who know their geology. They find gold, get a partner – and hardly spend a penny of their own money.
And right now a lot of these little gold stocks are dirt cheap. Investors are panicked and selling every kind of stock there is, regardless of fundamental value.
The best ones are safer than most stocks, gold or otherwise. That's because a few of these prospect generators are selling for just a little bit over the value of the cash and securities they hold. Some days, they sell for less... which means you're getting the cash for a discount and the gold for free.
Buying a pile of cash AND a pile of gold, with more than a dozen chances of making several times your money, sounds like a much better idea to me than buying a gold ETF, or a big cap gold miner, or risky gold futures... or even gold coins, if you're trying to make as much money as you can, while keeping it as safe as possible.
It's hard to find a safer combination than cash and gold these days... and right now you can get both – along with tremendous upside – with a few select prospect generators.
Good investing,
Dan Ferris
P.S. As I mentioned, everyone is terrified of risk right now. They look ahead and see nothing but disaster for years to come. All they want is investment insurance: cash, gold bullion, and nothing else. They sure as hell don't want "risky" natural-resources stocks.
That's why the risk has been ironed out of the best ones. It's also why I think my most recent Extreme Value recommendation will safely make you a lot of money this year. Click here to read more about it.
P.P.S. My colleague Matt Badiali has written great stuff on prospect generators over the past few years. You can read some of it here and here. |
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NEW HIGHS OF NOTE LAST WEEK
AutoZone (AZO)... auto parts
O'Reilly (ORLY)... auto parts
Sturm, Ruger (RGR)... guns
Insmed (INSM)... biotech
Applied Signal Technology (APSG)... surveillance for Big Brother
U.S. dollar... 3-year high
NEW LOWS OF NOTE LAST WEEK
Aflac (AFL)... insurance
Allstate (ALL)... insurance
Kraft Foods (KFT)... food
Boeing (BA)... aerospace
Duke Energy (DUK)... utility
Merck (MRK)... Big Pharma
Eli Lilly (LLY)... Big Pharma
Novartis (NVS)... Big Pharma
Microsoft (MSFT)... software
Sysco (SYY)... food services
MGM Mirage (MGM)... casinos
Rayonier (RYN)... timber REIT
Lockheed Martin (LMT)... defense
Caterpillar (CAT)... heavy equipment
Citigroup (C)... breaks the buck
General Electric (GE)... breaks below $10
General Motors (GM)... just plain broke
Procter & Gamble (PG)... conglomerate
Johnson & Johnson (JNJ)... conglomerate
American Express (AXP)... credit cards
Norfolk Southern (NSC)... railroad
Burlington Northern (BNI)... railroad
Canadian National Railway (CNI)... railroad
T. Rowe Price (TROW)... asset manager
Lowe's (LOW)... home improvement
Harley-Davidson (HOG)... the losing side of the gold/hog ratio |
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Poor Warren Buffett. The world's most famous investor has gotten killed over the last year, losing about $35 billion on Berkshire's investment portfolio. It's getting worse too: Wells Fargo cut its dividend [on Friday], a move that will cost Berkshire $336 million in lost income each year.
And now Congress seems poised to pass a bill that will allow railroad customers to sue the railroads under anti-trust law. That surely means an end to the huge growth in freight rates that had powered the stocks since the late 1990s and led many hedge funds to buy huge positions in the stocks. Buffett has been buying Burlington Northern all the way down.
You have to wonder what will happen to these stocks if Congress does pass the legislation and the hedge funds all try to sell at the same time...
– Porter Stansberry
S&A Digest
Price-to-earnings ratios, a popular measure of how expensive stocks are by historical standards, have surpassed lows seen in recent recessions. But that's no guarantee they won't sink further.
"There's no doubt that people can look at market valuations and determine that stocks are relatively inexpensive – but that doesn't mean they're going to quit going down," said Michael Gibbs, director of equity strategy at Morgan Keegan & Co. in Memphis, Tenn.
The price-to-earnings ratio of stocks in the S&P 500 has sunk to 10.6 from nearly 17 at the end of 2007, says FactSet Research. That's based on the Thursday close of the S&P 500 compared to index members' past four quarters of operating earnings, or net income excluding what analysts consider to be extraordinary charges and gains.
– MarketWatch
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