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Good Morning Readers.
I
was thinking yesterday about the asset I would least like to hold. All at
once it struck me; the U.S. Dollar. I had a nice chat with a young man who
just graduated from college with a B.S. in finance and we talked about how
best to invest. I of course gave him my customary one liner –
“Tips are for waiters.” We then continued our
conversation by my telling him that in my opinion that no matter what you
hear from Secretary Geithner, Dr, Bernanke or President Obama a key to this
administration’s fiscal policy is the devaluation of the dollar. Right
now we are in the middle of a “dead cat bounce” in the U.S.
Dollar. This has been caused by the Euro getting hammered by the Greek bail
out as well as the situations in Portugal and Ireland continuing to worsen. Can
Spain and Italy be far off?
It is
also being caused by the uncertainty in whether or not there will be an
implementation of QE3, in whatever form the Dr. Bernanke wants to call it and
the political uncertainty of raising the debt ceiling.
As I
write this there is a “Black Swan” swimming toward us. As
unfathomable as it may seem, the possibility of a U.S. default is a very real
possibility. In todays front page of the Wall Street
Journal, Secretary Geithner was quoted as saying that he wants a
vote to raise the $14.92 trillion debt ceiling "done and clean" by
July, weeks before the government could potentially default on its debts on
August 2. We will see if Speaker of the House, John Boehner, agrees with
Secretary Geithner. In an article in the Wall Street Journal yesterday
Speaker of the House John Boehner said that he conceded that the debt ceiling
would have to be raised but he insisted that any increase
to the debt limit include cuts in trillions. He went on to say that for every
dollar the debt ceiling is raised a dollar would have to be cut from the
federal budget. He went on to say that it would take 20 years to balance the
U.S. budget and 30 years after that to erase the nation's huge fiscal
deficit. That’s 50 years! I guess
that’s why they call them “Black Swans.”
So to
return to my opening premise, the asset I would least like to hold is the
dollar. This is why I would rather hold precious metals and mining stocks. I
would rather have real wealth in the ground that if not used today can always
be used tomorrow. This is why despite the severe sell off of the mining and
gold stocks I own I am content to watch my portfolio lose some of its
perceived value because I know that the stocks I own represent real value.
Gerald
Loeb teaches us that it is a purely human emotion to look at a bank statement
and see that we have more dollars than we did last month and to feel we are
doing better than last month. This however is folly. The true measure is what
the value of what we have is worth.
Let’s
face it we’ve had a pretty rough week if you look at things is a micro
view. Never mind that, it’s no fun watching your portfolio get crushed
in a micro or macro view. It is, however, at times like this that we must
remember that nothing lasts forever and that these are times to keep your
emotions in check and add to our positions at oversold prices. There is a
reason that commodities across the board sold off.
The
dollar had sold off from January 10th until May 6th.
It was a slow stead decline in the value of the dollar. When the dollar
weakens, other countries can buy our exports for lower prices. On the other
hand, when the dollar gains strength our exports become more expensive and
the stocks sell off to compensate for this. After two weeks of the dollar
gaining strength, yesterday the dollar turned over slightly and began to
weaken. This may explain why our mining stocks started to strengthen even
thought gold and silver were down modestly. I will monitor this situation
today to see if it is for real. Look at the chart below to confirm.
One of
my favorites is Ucore (UURAF). This stock is a 100% owner of the Bokan
Mountain in Alaska and it is one big mountain of Rare Earth Elements
(REE’s). It is in a mining friendly region of Alaska with no
residential or indigenous populations within proximity to the site. The basic
infrastructure is in place in that has a three mile road to a wharf that has
direct access to the Pacific Ocean. You will notice that this chart (see
below) shows the stock weakening as the dollar strengthens. This is a classic
pattern that we will see in all of our mining stocks. If the dollar is
stronger, it then costs more “value” to buy the stock. Therefore,
the stock price falls.
Here is
a chart of Avalon Metals (AVL). The same story applies to this chart as in
Ucore. The fundamentals of AVL have not changed. They are on track. As is the
case in Ucore what has changed is the relative value of the dollar causes the
stock price to adjust lower. At a lower price we are paying the same
“Value” for the stock.
Here is
another chart, General Moly (GMO) showing the exact same thing. As is the
case with all the mining stocks what has changed is the relative value of the
dollar which causes the stock price to adjust lower. At a lower price we are
paying the same “Value” for the stock.
One last
chart of Tasman Metals (TASXF) shows the exact same thing. As is the case
with all the mining stocks what has changed is the relative value of the
dollar which causes the stock price to adjust lower. At a lower price we are
paying the same “Value” for the stock.
Finally,
on a different track, I wanted to touch on The Silver ETF (SLV). The
chart shows that this stock has put in a level of support around $32.00.
There are a lot of very smart people who are saying that this stock wants to
go down to the 200 day Moving Average at $28.00. Since I realized a 66% gain
in the parabolic run from January to the end of April, I opened a small
position at $33.50 and I will wait and see how it plays out. See the
chart below.
In conclusion,
I think I have shown two important factors to be true. As Gerald Loeb teaches
us it is not how many dollars we have but what is the "value" of
the dollar that is important and as the dollar strengthens the prices of
commodities will adjust down to reflect the value of the dollar.
If you
believe, as I do, that a key for this administration is the devaluation of
the dollar then the pull back of pricing on our mining picks is not to be
feared but to be seen as an opportunity to buy these stocks at discounted
prices.
Today
promises to be a very interesting day as we will see if the pullback we saw
yesterday in the value of the dollar continues. If it continues to
gain strength then I will continue to add to my positions in these
mining stocks because I believe they represent real value.
Stay tuned
for any further updates.
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