- Confession: We have no idea why gold went up today…
- … and it doesn’t matter. But there’s something else that does
- Short-term pain, long-term gain: Anatomy of a gold stock takeover
- It’s not just the precious metals showing signs of life
- The fabulous future of hotels
- The smart way to use Rickards’ Gold Speculator… a possible “look East” future for Britain… longtime reader seeks to school the new ones… and more!
Hey, whaddya know? Gold’s staging a modest comeback today because Jennifer Aniston just denied a tabloid rumor that she’s pregnant.
Again for the benefit of the many new readers who are joining us this week, we should explain ourselves: Every so often, we’ll mention some minor day-to-day movement in the markets and attribute it to a totally nonsensical catalyst. It’s our way of mocking the establishment media’s habit of looking for a “cause” behind every squiggle on a chart.
So while Ms. Aniston does not appear in this Reuters story, the rationale appears to be just as much of a stretch: “Gold rose on Wednesday, recovering from its lowest in nearly two weeks, as prospects for further economic stimulus helped to bolster investor appetite…”
Did a central banker somewhere announce some new easing policy? Not that we see from reading the story. Not from anything else on our radar this morning, either.
Essentially, “prospects for further economic stimulus” is something Reuters editors extracted from their collective posterior — simply because they felt compelled to fill space and meet an arbitrary deadline.
Not pregnant, and not the reason gold is rallying today…
[Wikimedia Commons photo by Angela George]
Fact is, many day-to-day market movements are random noise. More significant, we think, is that gold is rallying today — $1,340 at last check — even though the dollar is holding its own, relative to other major currencies.
Typically, gold rises as the dollar falls, and vice versa. But the U.S. dollar index is more or less flat today at 96.2.
This has been a pattern much of 2016. The usual inverse action between the dollar and gold has broken down this year. The dollar has weakened modestly, but gold is up big…
As Jim Rickards has pointed out here, this development is enormously bullish for gold. It represents a breakdown of confidence in the system. Gold is no longer acting like a commodity. It’s reverting to its historical role as money.
And there’s nothing like a rising gold price to fuel merger-and-acquisition activity among gold miners — to the immense benefit of people who own shares of “buyout bait” companies.
Byron King — our resident geologist who does the company-level research for Rickards’ Gold Speculator — is back today with more insight into gold-mining takeovers.
“Most takeovers occur when one company uses shares to buy another company, as opposed to paying out raw cash,” he tells us. “That is, company shares are a form of ‘currency.’ Indeed, companies would almost always prefer to use cash for operations and working capital, versus pay it out to total strangers in a takeover.
“In fact, a company may or may not have a lot of cash in the bank. But if the company has a strong share price, then we can see substantial deals with very little cash on the table. The recent rise in gold-silver prices has strengthened the share price (i.e., the ‘currency’) of many large mining companies.
“These firms are now in a stronger position to buy smaller fries.”
Case in point: Nevsun Resources’ recent takeover of Reservoir Minerals. “The original takeover deal was two shares of Nevsun for every share of Reservoir,” says Byron, “and minor cash out of Nevsun’s kitty.” But in the end, Nevsun had to throw in much more cash to seal the deal — $75 million.
Great news for Reservoir shareholders, especially if they’d been holding on for a long time. But since approval of the deal on June 17, Nevsun has taken a hit — certainly relative to the gold price.
Was $75 million too high a price? Maybe, but “that $75 million also ensured that Nevsun would control one of the world’s greatest new copper-gold plays,” says Byron.
The problem is that “one of the world’s greatest new copper-gold plays” is not yet a producing mine generating revenue for Nevsun’s top line. “This entire play will require three or more years of serious capital investment by Nevsun in Serbia — starting tomorrow morning, if not sooner — before the Reservoir property yields a single dollar from sale of copper-gold.”
Understand there’s nothing wrong with Nevsun. Longer term, it now owns a fantastic property in Serbia, in addition to a producing mine in Eritrea. And shorter term, that makes Nevsun itself a takeover target. The “Pac-Man” effect, longtime observers of the gold market call it — as companies keep getting gobbled up.
“Clearly, a great exploration or development play is worth holding,” says Byron — “they can get bought out at any time.
“We also want to find smaller-scale producers, too. These guys are in business, up and running, moving rock, processing ore and selling gold-silver! They offer company buyers a quick road to increasing production, cash flow and profitability and possibly even lowering the average cost per ounce.”
Byron has assembled a diversified portfolio of 15 smaller companies — explorers, developers and producers. The average play is up 61%. Not bad for a service that’s been up and running barely two months.
Tomorrow he unveils his latest pick — the fruits of an on-site visit to a mine in Canada’s legendary Yukon territory. (“Stayed at an old mining hotel, right out of Gunsmoke. My room was right above the bar.”)
Boots on the ground…
Jim Rickards has so much conviction behind Byron’s picks for Rickards’ Gold Speculator, especially this new one coming tomorrow, that he’s doubling up on an extraordinary offer — revealed only at this link.
The major U.S. stock indexes are “digesting their gains” of recent days, as the saying goes — retreating from yesterday’s record-high closes. As we write, the Dow is slightly in the red at 18,339. Ditto the S&P 500 at 2,148.
Treasury yields are climbing down a bit, the 10-year at 1.48%. Because yields move inversely to prices, that means demand for Uncle Sam’s debt is up. Not coincidentally, the yield on 10-year German government debt went negative for the first time today; negative rates overseas only make Treasuries more attractive.
Crude’s gotten whacked hard — which may or may not have something to do with the latest weekly inventory report from the Energy Department. A barrel of West Texas Intermediate has retreated nearly 4%, back below $45.
But check out the action in base metals: “Copper is quietly ripping to two-month highs this morning,” says Greg Guenthner of our trading desk…
“Copper has endured a painful downtrend for years. But if it can build a solid base here, we could be treated to explosive gains. The next leg of the base metals rally starts now.”
Who says hotels are dinosaurs in the age of Airbnb? Not our income specialist Zach Scheidt.
While Westerners on the go might opt to sleep on a stranger’s couch to save a few bucks, that’s not the case in the developing world. “We sometimes forget it here in the United States,” says Zach, “but the luxuries of travel and hotel accommodation that we have long enjoyed are still new to the vast majority of the world. That is changing… rapidly.
“The sheer number of middle-class people is going to grow quickly. Over the last 20 years, the global middle class grew by 1 billion people. Over the next 20 years, it is going to grow by 3 billion. With this expanded middle class, there are going to be more people travelling.” Indeed, one major hotel chain projects by 2030, global tourist arrivals will nearly double from 2010 levels.
What’s more, “the number of hotel rooms in the world’s most populous countries is a fraction of what we have here in the United States. These countries in Asia and Latin America are where travel and hotel stays are going to be increasing.” Zach has identified a bargain-priced way to play the phenomenon — with potential for huge dividend growth — in Lifetime Income Report.
“I was surprised,” begins today’s mailbag, “by the reader’s comment on Tuesday that Rickards’ Gold Speculator had had a ‘long dry spell’ without a recommendation. The service just started in May and opened with around 15 recommendations.
“This is not a trading service; it is a focused, long-term investing service. And it makes recommendations in the junior mining space, where big chunks of a brokerage account can disappear in a hurry investing in your ‘typical’ company.
“The original picks were clearly chosen after carefully scanning the entire market. I expect that any future recommendations will be vetted to the same high standard, without any forced recommendations. There is just too much garbage in the junior mining space to do other than let the buys come to us.
“My recommendation to subscribers that have money coming in that they want to invest in junior mining stocks is to either hold the cash for the next recommendation — whenever a new stock comes up that is up to snuff — or to top up investments in existing recommendations that are under their recommended buy-up-to prices. The latter would actually continually rebalance the portfolio to the recommended allocations, since those positions that have shot above the buy-up-to prices will become overweight in one’s portfolio without rebalancing.”
The 5: We couldn’t have said it better ourselves.
But again, current subscribers should note that Byron King is releasing a new recommendation tomorrow. And folks who aren’t current subscribers should note that Jim Rickards is going the extra mile to make it worth your while to sign up.
“If I were Great Britain right now,” a reader muses…
“‘Hmmm, let’s see… break away from the euro.
“‘If I am going to lose my place as a banking clearinghouse for the euro… but a year ago March, I signed up to the new Chinese banking system…
“‘Why don’t I divert my banking resources to support the new Chinese bank and try to remodel myself after Singapore?? Financial independence. The East can gain ground on my English credibility — win-win.”
The 5: Interesting.
As you point out, and as we documented while it was happening last year, Britain was among nearly 60 countries to join the Asian Infrastructure Investment Bank — China’s effort to set up a rival to the World Bank. Really, the only major countries that didn’t join up were the United States, Canada and Japan.
The Obama administration issued a huffy statement about Britain’s “constant accommodation” of China. “Special relationship”? What’s that?
Couple developments like these with signs that America’s European allies are demonstrating signs of foreign-policy independence — the German foreign minister recently called Washington’s hostile posturing toward Russia “warmongering” — and the mighty American empire is looking increasingly hollow…
“Who are these deep-thinking types who actually believe that The 5 is provided free of charge yet is supposed to be chock-full of investment recommendations?” writes a longtime reader in reply to a new arrival who sounded off here yesterday. “Do these folks have investment advisers that work for free?
“I have always considered this newsletter to be a guide for keeping abreast of the economic issues of the day, assisting me through economic land mines and for general knowledge to be put to use when doing my due diligence on actionable investment ideas, and it continues to deliver in a big way!
“But never once have I expected you guys and gals to start giving out freebies. In the real world, individual recommendations are a commodity best accessed by opening one’s wallet.
“Unless you want to spend some time in the bizarre netherworld of the internet. There are plenty of cranks, half-wits and goofballs tossing out free ‘investment opportunities.’ Give ’em a go – then come back and let me know how it worked out.”
The 5: Ah, we knew the 5 faithful would rise to our defense. And be more brutal and less understanding with the new folks than we ourselves would be… heh.
And our final correspondent: “You probably won’t print this, and I really like The 5, BUUUUT… the tapirs and feral hogs think it takes longer than five minutes to read.
“Did I leave anything out?”
The 5: Oh man, that’s way too many inside jokes to throw at the new arrivals all at once!
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