Hi Al and Rog,
I’m curious, I know you guys have been talking about $1600 and ounce gold in 2011, but given the latest debacle of gold prices down to $1326 I don’t understand what’s going to take place to all of a sudden turn this around. I am new to gold investing and I have all my money in a fidelity gold fund which has lost almost all the gains that it made last year. I guess I just don’t know what is going to take place that is going to get everyone buying gold and drive the price up $300 an ounce. Any thoughts? Thanks Tom

To Tom,

Should Roger not get around to your question on air, I certainly have my own opinion which I’d hazard to guess might echo our that of our esteemed hosts. Gold is a disaster-hedge for many of us, hence a 10% core position in your portfolio is recommended. I grew up in the recessions of 1979-1981, and remember well the hows and why gold and silver spiked. The “disaster” case for gold is that rampant deficits in the budgets of various nations are unresolvable (at least in a desirable and controlled way). Gold, it seems to many of us who like it, will again seem like a last resort when nations find they cannot easily borrow funds (if at all).

Just today, the non-partisan CBO announced the US budget deficit for 2011 will be $1.5 trillion. Municipalities in CA, IL, NJ and the like cannot fund their budgets because no one wants to buy their bonds. This isn’t just a US phenomena. In my small consulting business, I’ve had the enlightening experience of studying the economies of most developed nations around the world. The United States is about middle of the pack in terms of debt-to-GDP and trade deficits.

Sorry for the diatribe, but the reason I wanted to get into that is to demonstrate the systemic and global nature of financial deficits. This is the trigger push gold (and other hard assets) up in price. As you can guess, it will take for this to unfold. Governments around the world, from Greece and Ireland, to lesser understood ones such as Belgium and even Germany, are fighting back. Despite the horrendous budget deficits here in the US, just the talk of cutting back will probably have the effect of bolstering the US dollar for a few more months. Issues like this will always make short-term trades in gold dicey, but in the 2 to 5 year time frame, there really only seems to be one path.

As for Fidelity’s own fund, be careful. What does that fund invest in? The fact you said “i have all my money” in this fund which “lost almost all the gains it made last year” is troubling. Gold has only made a small and quite reasonable 7% correction. I don’t think I’d be alone in suggesting:

1. Diversify into other forms of hard assets. Al’s website, despite his constant reminders to due your own due diligence, is truly full of great mining companies. I personally prefer silver mining companies and rare earths. If you listen Weigand, Fulp, Rouston, the Coffins and really all of Al’s regular guests, it won’t take long for you to get some great ideas.

2. In the short term (2 yrs), gold is going to be somewhat volatile. There are many people who don’t like (or don’t want) gold to go up in price. Occasionally, they’ll win a battle or two. Expect that. Remember too that it’s often the value of the dollar falling, rather than gold actually going up in price.

3. Find out what your gold fund is actually investing in. Though I think in the long term it has a good chance of improving it’s returns, funds simplify investing but at the cost of smoothing out your potential returns. Stock picking — especially in mining stocks — isn’t for everyone. But you have some great guidance here on KER. It might be worth your while to divert some % of your portfolio to the things being talked about.

Today, in 2011, the US government must borrow 40 cents for every dollar it spends, and baby-boomer social security entitlements are just getting ready to ramp up. As people adjust their attitudes to these facts as their effects become realities, I think you’ll see gold, silver and other commodities continue to rise. In June, when states often have to finalize their budgets, I think this will be one of the defining times of 2011 where more people start to recognize deficits as a systemic problem that isn’t going away. For those reasons, I think Roger’s prognostication of $1600 gold by calendar year end 2011 (Dec futures, to be more precise) is quite plausible…low in fact. $1800/oz would not be unreasonable.

Thank you John for your well thought out reply. I appreciate you taking the time to give me a bit of an education. The reason I like gold is because, ultimately I do feel that our current economy is going to collapse or at least suffer some devastating blows. I’m just not savvy enough to be able to put all the pieces of the puzzle together like you and others can. Therefore I’m rather shaken by these wild swings even though my gut tells me that gold is good. I have begun to think about investing in some of the companies that are talked about here only because I trust what Al and Rog and some other folk around here suggest as good investments, not because I know how to do analysis on the companies. So I may pick a few of the companies and put some money in them. What would you suggest as a rational split of percents among the mining companies, mutual funds and ETF’s like SLV and GLD? Can you suggest any of the companies listed on this website as possible candidates? Thanks again, Tom

Hey John,

My thanks also. I could not have said it better myself.

Best,

Big Al

Tom,

Thank you for your gracious response (and you too Al). I can certainly tell you what I would do, although I have both the tendency for longer term investments as well as shorter term trading, based on stock fundamentals, technicals and momentum. I wouldn’t want to try turning you into a certain type of investor if that doesn’t meet your comfort level. But I think I still have a sense of where you are (it sounds like me 10 years ago!)

To both hedge against my belief of a weakening US dollar, and to take part in absolute returns on certain commodities, I’m currently around 20% of actual, physical silver coins (purchased in the early 2000’s as it seemed ridiculously cheap), and I trade into/out of SLV or RES (Rare Element Resources) at around another 20%. The other 60% has been in cash, partly because of my uncertainty of the markets and partly to allow some funds to buy other companies as opportunity allows. Avalon AVL is another nice, AMEX traded rare earth play. Fidelity, where I also have a brokerage account, recently allowed international trading. Though I haven’t used that feature, I really like Greenland Minerals GGG which trades on Australia’s All Ordinaries. Also (and these names will look familiar), I like metals companies like South American (SAC – Toronto), or Extorre (XG – Toronto), Nova Gold NG, and for uranium, Strathmore (STM – Toronto) and various others. Notice that many of these do not trade on a US exchange. Also notice that uranium and rare earths are moving now more on momentum and expectations, and not real earnings. Many of these companies will take years to actually start producing product.

If you’d like a more established group, FCX, GG and MCP are heavily traded on US exchanges, and since August 2010, have made large moves given the size of these companies. However, even these established companies are trading a bit “rich” right now, and as several comments and Roger and Al’s guests have mentioned, if (when) the stock markets decline, many of us feel that these resource stocks will initially go down too, before their hedging value is recognized or appreciated. As such, I’m not sure I’d jump into these companies right now. That could be a mistake, but I think there’s a good chance they will be cheaper in the summer doldrums of 2011.

There are so many more good companies. Al can’t say this, but I can: After researching many of the sponsoring companies here on KER, or hearing Roger or Mickey Fulp talk, you almost (with some caution here) can’t go wrong. The reason I say that is the exploratory companies are delivering decent drill results (more than 1 gram of gold per ton is my personal comfort zone), and the ones actually mining are selling into high prices.

In the past, mining stocks have been the worst of the worst investment categories. My apologies to those in the industry, but my father had worked as an attorney in Vancouver in the 1980’s and 90’s for several companies. Let’s just say there’s a lot of companies that burn cash and don’t accomplish much else. The ones you read about on Al’s website undergo greater scrutiny, and seem to have survived that process better than most.

Tom, I truly wish you the best of good fortune. The stock market has changed a lot in only 10 years. Computer based trading, plunge protection teams and certain very large brokerage houses that have the word “Goldman” in their names have made the market quite unpredictable at times. And if the major economies of the world were not in such irreversible debt right, at the time their baby-boomer peak spending trends have come to an end, I’d probably just recommend what Prof. Benjamin Graham would have: Buy the S&P500 index, and a few bonds. But I personally feel that, at least until 2020, that would be a loosing bet. Buying the stocks of companies that produce commodities seems to be the safest place to invest, but even those companies will see their ups and downs. Be patient and buy wisely!