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CAPS portfolio update

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April 22, 2008 – Comments (3) | RELATED TICKERS: ABX

I ended all my "subprime" gold and silver picks (at least, I ended all the ones I saw that were <4 stars, as well as Barrick, about which I read something unflattering on dwot's blog). I have always believed that gold and silver companies are, by and large, some of the worst-run companies, even worse than airlines. However, I think that we are about to experience superinflation in the U.S. making gold and silver increase even more than inflation as panicky investors try to find a way to protect the value of their assets, and that even the worst gold and silver mining stocks would find their way up in the great inflated helium blimp that is this economy.

Some companies are jumping out of the blimp to their deaths by using gold and silver hedges. This is supposed to protect them against the potential of falling gold and silver prices by guaranteeing they will sell gold and silver at particular prices above yesterday's mining costs. The problem is, mining costs are rising because of (guess what?) inflation. (Duh!) The very thing that would make a savvy gold or silver miner very rich is bankrupting or at least debilitating the dumber ones, and Mr. Market might pick up on this at any time, dazzled though he might be by skyrocketing gold and silver prices.

If you don't know your company's hedging policy, don't invest. You can use DGP instead, which leverages to give twice the return of gold price changes, plus a CD-like yield, minus expenses. I think this is a good time to buy DGP.

3 Comments – Post Your Own

#1) On April 22, 2008 at 12:53 PM, bridgeboy0 (33.87) wrote:

What do you think of SLW?  They make deals with miners that typically entail: SLW gives the miner a big chunk of cash up front, they agree to purchase the miner's silver at a set price (typically 3.90/oz) with at most a 1%/year inflation bump for a period of several years.  For SLW, if the cost of mining goes up then they don't care because they already have a contract exclusive of cost. 

They usually make these deals with NON silver miners.  The companies they deal with are mining for other metals and get a certain amount of silver as part of the process.  What do you think of this model in your projected super-inflation scenario?

As far as disclosure, I don't currently have a position in SLW but I have owned the stock previously.

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#2) On April 22, 2008 at 1:20 PM, bridgeboy0 (33.87) wrote:

What do you think of SLW?  They make deals with miners that typically entail: SLW gives the miner a big chunk of cash up front, they agree to purchase the miner's silver at a set price (typically 3.90/oz) with at most a 1%/year inflation bump for a period of several years.  For SLW, if the cost of mining goes up then they don't care because they already have a contract exclusive of cost. 

They usually make these deals with NON silver miners.  The companies they deal with are mining for other metals and get a certain amount of silver as part of the process.  What do you think of this model in your projected super-inflation scenario?

As far as disclosure, I don't currently have a position in SLW but I have owned the stock previously.

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#3) On April 22, 2008 at 2:47 PM, FleaBagger (28.77) wrote:

bridgeboy0 -

You obviously know more about SLW (Silver Wheaton, right?)than I do, but based on your info, I would say that is beyond awesome. It is super-awesome.

You may have noticed that I did not cancel SLW, though I may have forgotten to pick it in the first place.

There is more I would like to know. For how much are they selling this silver that they obtain for $3.90/oz? What are their other expenses? (I know they have costs associated with this, because otherwise companies would be lining up to give their suppliers $5/oz, $6/oz, $9/oz or what have you for their silver.)

Still, it sounds really good.

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