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Latecomer Gold Plays

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October 07, 2010 – Comments (8) | RELATED TICKERS: AUY

For those who may finally be regretting a lack of exposure to gold, the value plays continue to offer safe entry into the space.

Do Fools fully grasp the incredible lack of downside risk in shares of Yamana Gold?

The stock finally began to move during this breakout after countless months of being frozen within a ridiculously narrow range. Above $1,200 gold, worst case scenario for the stock is $10. Above $1,000 gold, which I have said will hold as a new long-term floor under gold for the remainder of the bull run, worst case scenario for the stock is $9. So max downside risk IMO is $2.38/sh., for potential upside during this decade of $50 to $100 per share.

Not bad odds when you can find them.

Oh, and in case you had any doubts about where the macroeconomic picture is heading:

http://www.reuters.com/article/idUSTRE6964O020101007

(Reuters) - The Federal Reserve is running short of tools to tackle uncomfortably low inflation, and officials are now mulling whether it might help to shoot for inflation above their informal target.

Two top Fed officials, including the influential vice chairman of the central bank's policy panel, have suggested the Fed consider making up for inflation shortfalls now by aiming for higher inflation later.

 

8 Comments – Post Your Own

#1) On October 07, 2010 at 4:33 PM, BillyTG (29.18) wrote:

Have you any guesses on what the Fed has left in the toolbox?

I've read that Bernanke has talked about some kind of super nuclear option, maybe QE that goes on forever? I've seen commentary about some kind ofmoney decoupling then retachment to gold? I've read that the Fed will be buying up real estate and equities and lots of other stuff.

My fear is that the government has some super secret, no holds barred scheme that none of us have thought of, that will be like winning the lottery for some, and destroy others, all in an attempt to save the economy.

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#2) On October 07, 2010 at 4:44 PM, mtf00l (48.04) wrote:

Let's see...

If Bernanke is Chief at the Fed...

If the Fed owns everything and is owed interest on it...

I guess it's good to be king! =)

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#3) On October 07, 2010 at 6:15 PM, silverminer (30.49) wrote:

BillyTG,

Sure ... here's what I overheard ole Ben saying in Jackson Hole last month:

http://www.fool.com/investing/general/2010/08/30/decode-bernankes-pivotal-message-to-financial-mark.aspx

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#4) On October 07, 2010 at 7:06 PM, outoffocus (23.24) wrote:

Wow. Congrats on you first blog silverminer. ;-)

lol

I originally bought  AUY in the 9s. With its ok earnings and balance sheet I'm kinda surprised at its narrow trading range.  But its done well so far in the recent jump.  But it appears CEF outpeformed AUY in its recent runup. Hopefully AUY will pick up steam soon.

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#5) On October 08, 2010 at 8:12 AM, silverminer (30.49) wrote:

outoffocus

When this one finally runs, it will sprint to play catch-up ... Great Panther style. :)

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#6) On October 12, 2010 at 6:07 PM, skimonkee (< 20) wrote:

A "bit" off topic but not sure how else to get a message to you.  I've been reading your articles for awhile and understanding/agreeing with your reasons for liking SLW, I was wondering if RGLD is an SLW equivalent within the gold mining sector?  It seems like their royalty-based model is very similar.

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#7) On November 05, 2010 at 1:18 PM, metoo105 (28.73) wrote:

I know what the Fed's nuclear option.

Basically, Bernanke has been pitching an idea around about what might happen if the Fed were to continue the whole QE2 experiment so much that it were to create a shortage of paper. That is, he's actually thinking about cornering the market on long term debt!! Then once the shortage is understood and panicky demand sends prices soaring, he'd unload all of that paper onto the markets. He'd take all of those profits and be buying gold all the while, sending the world back onto a gold standard with the US the top dog.

I've heard that he's also considering the same idea in which all US citizens would take rockets ships to the moon so that we could enjoy our gold away from the needs and wants of others. However, right now, that piece is still in the planning stage.

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#8) On November 05, 2010 at 1:35 PM, BillyTG (29.18) wrote:

@metoo105, I think your idea has merit.

Check out what Charles Hugh Smith says about the "grand strategy of the elite" (the actual strategy is at the very bottom, but the rest of the article is great, too!).  His comment on gold was confusing to some, and he answered some questions about it a few days later on another page, but he basically says to hold onto gold during any commodities crash, even though others will be dumping.

2. I would engineer a global recession that implodes all the asset bubbles around the world--Chinese real estate, commodities, emerging market equities, etc., as demand collapsed and supply was suddenly revealed as overly abundant. (Please see my oil "head-fake" entries for how this works: Oil: One Last Head-Fake? (May 9, 2008)This would create a mad dash for dollars and other cash to pay down debt taken on in the "easy money"/ZIRP era (i.e. 2008-2010), and lead to wholesale dumping of all assets which still have value. The higher the value (i.e. gold) the quicker they will be unloaded for cash: for instance, oil and energy-based equities.

3. I would sit on my hoard of cash while the selling created a positive feedback loop and prices plummeted in a downward panic spiral.

4. As net worth vanished in the tens of trillions of dollars/yen/yuan/euros, interest rates would rise dramatically as those desperate for funds compete for dwindling free cash. Revenues of oil exporters and other exporters crash, drying up a once-reliable source of cash.

5. When premium real estate properties and equities are selling for 10%-20% of their pre-crash valuations, I will begin buying. I won't buy long-term bonds until the yields skyrocket; then I will jump in with all four feet.

6. As the long-term shortage of commodities eventually re-asserts itself, then I (and my other Financial Power Elites cohort) will own most of what the world needs to function, including the Central State tax revenues which will increasingly be directed to making interest payments.

7. I will be a strong supporter of food stamps and other low-cost rebellion-reduction programs, and "soft" and "hard" power to enforce my ownership of assets which I purchased.

8. As interest rates rise, the U.S. dollar will strengthen, further increasing my purchasing power.

9. I will oppose inflationary policies as needless reductions in my purchasing power. I don't owe debt, I own debt as an asset.

Bottom line: expect a crash in commodity prices and other asset bubbles, a much stronger dollar and rapidly rising interest rates. I am playing it as it lays, and this is precisely what I expect to unfold between 2010 and 2014.

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