Today I wanted to talk about gold stocks (and silver stocks). To do it, I wanted to share with you a letter from one of our loyal subscribers. It arrived just before Independence Day, and I thought you’d enjoy it—and hopefully, my reply as well.
Dear Timothy,
I am very happy to renew my subscription to your great newsletter [Cabot Growth Investor]. I have fond memories of your father Carlton … such as calling in on his hotline. Just hearing his voice was reassuring. At one point, I was even plotting my own RP lines for stocks on my watch list with the kit he sent to us. I learned so much from him! I would have loved to meet him.
Carlton and my father (Gene W.) were born just one year apart. My dad was a navigator on a B-29 at the end of WWII. He passed away on the golf course in 1997. They were both definitely from the ‘greatest generation'—a designation that is altogether proper and fitting! God bless them both!
I also have a considerably larger stake in SIVR … a physical silver ETF and the last few days of June it also is bolting higher. With those two positions I feel like the dog that spends his life chasing cars … then, one day, catches one … and faces the question, “what do I do with it?”
And just so you don’t think I am a genius … I also have positions in corn and wheat ETFs that keep plumbing new depths … like they want to go underground … Does anyone on your staff there follow or comment on investing in commodities?
You have undoubtedly heard folks like Ron Paul, Peter Schiff and Jim Rogers saying, “Get ready for Armageddon!” Well. My dad, and undoubtedly Carlton also, told us to “think positive!”, and I swear Timothy, I do try to stay positive! But there are times—in fact, more and more over the last year or so—that I’m agreeing with the Schiffs and the Rogers of the world.
I truly believe that our nation’s $20T (twenty thousand billion!) debt is a ticking time bomb … and poses the single greatest threat to the security of our great nation. (Say what you want about ISIS, global warming, etc, etc.) But how many times do you hear our leaders, from either party, say anything about it?
We’ve been told that the market discounts out six months or so. Do you believe the market would start heading south six months prior to any severe trauma such as a catastrophic dollar collapse? Oh, how I wish we had our fathers back again … just for a few hours.
I don’t know about you though, but I don’t even get a Christmas card from my dad any more … (-;
I must sign off … I’m sorry I have taken so much of your time. But thank you for listening. I wish you all the best, great investing and have a wonderful and safe Independence Day! God bless America!! Thank you, sir, for your diligent work in keeping us all informed and making us better investors!
Rick J.
Kansas City, Missouri
Gold Stocks: Homesick Angels?
Dear Rick,
Thanks for writing, and giving me the opportunity to share my thoughts on these important topics with all my readers.
First is the question of your silver and gold stocks, a group that has been acting, as my father used to say, like “homesick angels.”
The important points are these: after a four-plus-years bear market, precious metals stocks are trending strongly upward.
You can try to work out the fundamental reasons for this shift if you like; but it’s really not necessary. The important thing is to recognize the trend, which you have done!
As to averaging up in these stocks, my father would applaud your initiative. He was a great proponent of averaging up in successful investments. His first big triumph using that technique came in Chrysler in 1962-1964, when we were living in France (which made communicating with his broker a bit of a challenge) and he used that success as a model for the rest of his life, often successfully, sometimes not.
Here’s a long-term chart of chart of Chrysler back then.
Note the 10-year downtrend in Chrysler that ended at the end of 1960. At that time, all the potential sellers of the stock had sold, and when the buyers finally took control, their buying lit a fire under the stock that lasted for more than two years.
I think silver and gold stocks are in a similar spot today. After an 80% multiyear drop, all the sellers are out, and every new buyer jumping on the trend sends the stocks higher.
Here’s a chart of your Randgold.
There have been no major corrections in the stock yet because the sellers are outweighed by the buyers, but a small correction did start just last Thursday. What my father would advise you to do—and I second it—is to average up in these investments now.
However, this doesn’t mean that you should double up; it means you should add a bit more, maybe 10% to 20% of your position. If that works out, add some more, etc. This could pay off big in the years ahead.
And if you want more recommendations of hot silver and gold stocks, take a look at Mike Cintolo’s Cabot Top Ten Trader, which has recommended several in the sector in recent weeks.
You can get more details here.
As to corn and wheat, I’m afraid we have no opinion at all. My one (admittedly uninformed) opinion on the sector is that the government should get out of the business of price supports/subsidies for farmers and let the free market rule—but now we’re getting into politics.
Lastly, moving on to the gloom and doom predictions of other investment advisors and economic commentators, I have these thoughts.
1. People who have made their fortune tend to put more energy into protecting it than making more. And as they become more conservative, they tend to notice risks more than opportunities.
2. Similarly, as people grow older they tend to get more conservative, and more risk-averse, for a variety of generally good reasons—though my father was an exception.
3. And some people who are trying to sell their financial expertise spread a message of fear because to investors concerned about preserving their wealth, fear sells better than greed. (I know, because I’ve done it, persuaded (reluctantly) by skilled marketers.)
But what about the reality of the $20 trillion debt, you ask? Won’t that bill eventually come due? To which I answer, the market is aware of the debt, as the market is aware of all the other fundamental factors. And right now, the market is telling you not to worry (much) about it.
Furthermore, today—in the wake of the Brexit decision—markets are once again signaling that the U.S. dollar is the safest currency in the world!
But to answer your question, if there is a catastrophic collapse of the dollar around the corner, will the markets signal it six months ahead of time? Generally, yes. In fact, it’s possible that the strength of your silver and gold stocks is one of those signals!
I hope that helps. Thanks for being a loyal subscriber.
Tim
Note: If you really want to worry about something, consider this.
Investing in a Deflationary Environment
For more than five years, investors have been anticipating the time when the Fed begins a series of interest rate hikes. But it hasn’t happened. The long-term trend of interest rates has been down since 1981, and it remains down today, so much so that many developed countries now have negative interest rates.
This is kind of hard to wrap your head around, particularly if you grew up in a world where inflation was a major concern. (I remember writing a high school paper on inflation.) But I believe that creative thinking about what could become a seriously deflationary environment will pay dividends—literally.
What to Avoid
In a deflationary environment, debt can be a killer, as incomes shrink while debt stays fixed. So minimizing debt is the no-brainer of investing in a deflationary environment—and that includes avoiding investing in companies that have excessive debt.
In the previous inflationary environment (1945-1981), housing was the investment that rewarded almost everyone who stuck with it. But looking ahead, if prices decline, housing might not pay at all, and if you borrow to acquire that housing, you might actually lose money in the long run. For this reason, I’m leery of the housing industry in general.
What to Buy
Real Estate Investment Trusts (REITS) are famous for their substantial dividends, and if the cash stream comes from a solid dependable business, a REIT investment can be much lower risk than housing. Just be sure you understand the tax implications of the REIT.
Utilities are generally considered safe, though there’s a risk that increasing reliance on renewable energy sources (solar and wind in particular) could begin to squeeze electric and natural gas utilities. When investing in utilities, check that the coverage ratio is solid.
Precious metals—generally gold and silver—are famous for being hedges against uncertainty, and as I wrote above, that’s one reason that gold stocks and silver stocks may be strong now. I wouldn’t fight this trend.
Last but not least are dividend stocks, which offer the promise of the best of both worlds—regular income plus the prospect of capital appreciation. These are my top recommendation for investors who need income in a world where interest rates are near zero. In fact, I think this sector has such great potential that I started a brand new investment advisory devoted to the sector over two and a half years ago.
Since then, Cabot Dividend Investor, designed and led by my daughter Chloe Lutts Jensen, has steered thousands of investors to low-risk steady gains in her three recommended portfolios.
Her High-Yield Tier of recommendations has an average yield of 5.1% and an average profit of 6%.
Her Safe Income Tier has an average yield of 3.4% and an average profit of 20%, including some eye-popping profits:
A 51% gain in a well-known electric utility
A 56% gain in a diversified utility
Her Dividend Growth Tier has an average yield of 2.5% and an average profit of 22%, including:
A 44% profit in a major warehouse retailer
An 88% profit in a major tobacco company
A 39% profit in a major credit rating company
Bottom line, if you’re looking for some regular income, Cabot Dividend Investor is a great place to start. You’ll not only get a clearly written and thorough guide to dividend investing, you’ll also get regular weekly updates, so you’re always in sync with Chloe’s latest thinking.
To find out how you can profit from the best dividend stocks, click here.
