NOTE: Originally published for Metal Augmentor subscribers on January 8, 2010 at 4:16PM EST.
We will soon be opening up the service for Founding Memberships again so if you are interested in actionable wisdom about silver and the metals markets please consider signing up for the waiting/mailing list at the Metal Augmentor website. We just took profits on 4 positions with gains of anywhere between 30% to over 100% (including a 92% gain in about 2 months on a stock that was trading under its cash in early November when we profiled the company and noted that it might be a good place to store some dry powder). We are now in the process of putting on some new speculations that could duplicate these results.
In addition, we have created a proprietary database of mid-tier gold mining companies that provides real-time company valuation down to the project level. The database took almost 1000 man hours to create and we are now adding the silver mining companies to it (from biggest to smallest). Frankly we are pretty stupid not charging more for this; it comes free with a Founding Membership, which we are planning to offer for US$107 based on annual renewal (and that rate is locked in for life). This is still a great deal even though the original Founding Members pay only US$87, with the main point being that we appear to be on a slow train to Wising Up. Eventually we might even start charging a reasonable price for the Metal Augmentor.
And oh yeah, did I mention that if our portfolio does not outperform gold and silver then even this tiny subscription fee will be waived at renewal? Or that the “teaser stock” we featured last June, Golden Minerals, is up something like 500%? Sure we took our 100-200% no-brainer gains and never looked back but some of our subscribers (we hesitate to call them less disciplined given the profits they are sitting on) have held on. As for those additional two teaser stocks in the second report that we did not reveal? Chesapeake Gold and Taseko be thy names. You can check the charts for subsequent performance. And while you’re at it, you might also look into Bear Creek Mining and Detour Gold, which came shortly thereafter.
Okay, enough beating of chests, many of you are probably starting to get an idea of what you might be missing, so let’s get to our latest commentary.
We started talking about the upcoming crash in China this past summer and the upcoming crash in copper prices this past December. We said China might start showing crisis signs as early as November 2009 and copper could start a serious decline in weeks (January 2010). But now with the prominent publication of two reports by or about noted market contrarians, we are forced to re-evaluate the situation and place additional weight on the possibility that we might be early (perhaps way early) on these calls. The first commentary is from Adam Hamilton of Zeal LLC, who argues that a Copper Correction is imminent based on both technical and fundamental factors. The second is from the New York Times, reporting in Contrarian Investor Sees Economic Crash in China that hedge fund manager James S. Chanos is making short bets on the Chinese economic “miracle”. We are in strong agreement with many of the contrarian points being made in these reports and frankly it is about time that contrarian voices start adding to the debate.
At the same time, however, we are becoming increasingly leery of the timing. For example, Mr. Hamilton seems to fall into the same trap we often find ourselves in, that prices are about to drop simply because they are driven purely by speculation with little fundamental support and eroding technicals. In reality, prices often seem to rise the strongest and for much longer than any “expert” predicts under precisely such conditions of excessive speculation and few fundamentals. There is simply no way to arbitrarily pick a speculative top and whenever the top does arrive, it is usually obvious only long after the fact. Our ability to pick the drop in copper in late 2008 as a “once in a lifetime trade” was only made possible because the red metal refused to give up the ghost even while most commodities were already entering free fall mode and the economic crisis was in full swing. Unfortunately, this time around copper is probably not going to play the laggard. Instead, it might actually lead the parade on the basis of its supposed “economic doctor” credentials. If so, perhaps it might be a good idea to look for contemporary laggards instead of speculating directly on a drop in copper prices. That said, copper can offer tremendous leverage so it might still be an attractive speculation, it’s just that we might want to scale into positions much less aggressively.
Moreover, if we are going to speculate on a drop in copper producers such as Southern Copper or base metal and commodity proxies such as Teck Resources, we might want to wait until the fourth quarter 2009 earnings are released since they are likely to be very good and as a result we may still see new highs in these stocks even if the top in copper is already in. Perhaps the producers themselves might be the laggards we are looking for?
On the topic of China, we need to consider that a centrally-planned, autocratic economy can probably be propped up much longer than a predominantly free market economy. In effect, initial cracks in China’s miracle growth have been plastered over with hardly anybody noticing. Even serious gaps are likely to be sealed and hidden from view at least temporarily. There is no reason to believe the determined Chinese cannot be successful in extending their gambit of export-driven growth for a while longer, perhaps even several years. If such is the case, the final end will be that much more catastrophic and surprising. Thus, our prediction that a Chinese-led crisis will not be as serious as the American-led crisis of 2008 could very well turn out to be incorrect. We hope that the Chinese planners return to reality sooner rather than later because that would minimize the pain for the global economy. At the same time, we are prepared to profit from the sudden slam-down that is sure to take place if China continues to go for broke.
For now, the two contrarian reports from Adam Hamilton and James Chanos are enough to make us rethink the timing of some speculative strategies we have been contemplating simply because these types of reports almost never get released at the very top right before a crash. Some of the other possibilities we need to consider are that instead of a crash we will get a grinding and long-lasting run down in prices (in which case put options would be an inappropriate strategy) or that there is significant upside remaining before the crash does finally come. In the case of copper, for example, our previous thinking was that a high in the $3.70 to $3.80 range would mark the top in the weeks ahead but now we are opening up to the possibility that copper prices could potentially race to new highs, even spiking to the $5 range in the months ahead before finally coming back down to earth. Crazy, huh? Maybe not so much given that such is the nature of markets driven by speculation with little fundamental support.
silverax Windbag Wisdom
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