Thursday, May 27, 2010

When Should You Short the S&P 500? Some Recommended Price Targets

And when I say short term, I mean VERY short term!

We're in the midst of an overdue rally that was needed to relive this oversold condition...nothing strange at all about it.  Question is, how high can it go?

We explored this on our sister site ContraryInvesting.com, in an effort to figure out when it will be safe to short the S&P 500 again:
I did a quick back-of-the-envelope calculation – because markets are probabilistic, after all – to see where this retracement may end. For my calculations, I’m saying that this decline began at 1173 on the S&P, and ended at the intra-day low of 1040:
The magical retracement range you always hear about is approximately 38-62% of the previous move. This would put us somewhere in between 1091 and 1123.

Source: StockCharts.com 
We hit an intra-day high today of 1098, and we sit just a point below this as I type. So the next turn down could complete this move.
Let’s sit back and see what tomorrow’s trading brings. If we do indeed get a rally towards the top end of my 1091-1123 range – or better yet, all the way up to Clark’s 1130 target, we’ll be looking to re-initiate our short position, for what we anticipate could be a doozy of a next leg down.
Interested in shorting the S&P 500 too?  Here's our thought process and recommendations:

Tuesday, May 25, 2010

Geothermal vs Wind Energy: Pros and Cons

Search engine giant Google has made a very large investment in wind energy.  Smart play - or should Google stick to Search and Web Apps?

According to our energy guru Marin Katusa, Google may have been better served if they'd considered Geothermal Energy instead.  That's the energy play that Marin loves for investors - read on to see his comparison of wind energy vs. geothermal...


Why Google Should Subscribe to Casey Research


By Marin Katusa, Chief Investment Strategist, Casey Research Energy Division
What do search engines and wind energy have in common? That’s the question a lot of investors were asking earlier this month, when Google made an almost US$40 million investment into NextEra Energy Resources, a North Dakota wind energy firm. The simple answer: more than you think.
It’s not surprising that the Internet search-engine superstar needs energy. Companies like Google own massive computer frameworks, known as server farms, to store all that digital data floating around in cyberspace. While Google is quite hush-hush about how many computers it owns, estimates put it at about 1,000,000 servers (almost 2% of the world total), and an enormous amount of power is needed to keep them running constantly. And as cyber-information grows – almost 24 hours of video footage is uploaded onto YouTube every minute – more and more computers are required to store and distribute it.
But where does their power come from? Most server farms are located near coal-fired generating plants. Good for efficiency, but that adds up to a pretty big carbon footprint. Naturally, this has environmental groups fuming and lobbying the corporations for clean energy alternatives. Given Google’s avowed sensitivity on this issue, investing in wind turbines in North Dakota makes good public relations sense.
However, it is usually the company’s philanthropic arm, Google.org, that handles such good-citizen initiatives. Thus the unprecedented move to make a first-time direct investment into NextEra Energy suggests that Google is expecting something further.
It seems logical to assume that the company’s motivation also involves saving money by slashing its dependence on coal-fired generators. After all, when your electric bills approach that of a small country, it’s hard not to jump on a company that could potentially produce enough power to light up 55,000 homes.
But if this is, in part, an exercise in cost-cutting, Google made a big mistake: it chose the wrong renewable energy.
Wind Farms vs. Geothermal Power
The main problem with wind farms: they don’t work when it’s not windy.
But that’s not all. Wind energy is plagued by high capital costs, a weak power transmission system, and low output, making its success heavily dependent on government subsidies. Load factors for wind energy – that is, the difference between how much power a generator can produce and how much it actually produces, which determines how much money a utility will make – are also quite low. The large physical footprint – the amount of land required to build wind farms – is another downside, as is the threat they pose to birds and the noise pollution they generate.
Add this all up and you’ve got the biggest loser when it comes to going green. In reality, the best renewable energy bet Google could make, especially in the United States, is on geothermal. Leaving everything else aside, geothermal beats wind energy on the most important factor: it is not dependent on weather. That means there is no need for backup power generation facilities, something wind farms must have for the days when the turbines won’t turn. Nor are government subsidies absolutely necessary for geothermal energy; they’re more of an added bonus. And geothermal power plants require the least amount of land: they can hum away contentedly even in the middle of farmland or a park.
Geothermal also wins on the numbers, with the highest load factor of all renewable energies and the biggest profit margin. Take a look at the cost breakdown of renewable generating technologies in the U.S. – it’s clear that geothermal is miles ahead:


Generating Technology*
Load Factors
Revenues per plant (US$0.10/kWh electricity)
Costs of Operations** (US$)
Profit From Operations (US$)
Capital Costs 2009 
(US$ per KWH)
Geothermal
90%
$39,420,000.00
$8,416,500
$31,003,500
$1,749.00
Hydroelectricity
45%
$19,710,000.00
$696,500
$19,013,500
$2,900.00
Wind - Onshore
25%
$10,950,000.00
$1,549,000
$9,401,000
$1,966.00
Wind - Offshore
40%
$17,520,000.00
$4,346,000
$13,174,000
$3,937.00
Biomass
90%
$39,420,000.00
$30,336,620
$9,083,380
$3,849.00
Photovoltaic
25%
$10,950,000.00
$597,000
$10,353,000
$6,171.00
Solar - Thermal
15%
$6,570,000.00
$2,902,500
$3,667,500
$5,132.00
* Numbers are on a comparable per-plant basis   ** Costs are exclusive of subsidies.
Once Bitten, Twice Shy
Perhaps the reason Google decided to go with wind energy this time is because it gave geothermal a chance in the past. Two years ago, through Google.org, the company became the biggest investor in enhanced geothermal research, beating even the United States government. Unfortunately, that time around, Google picked the wrong company.
Google invested US$6.25 million into AltaRock Energy in August 2008, to help the company make a success of its promising Geysers project in northern California. AltaRock was using the latest technology – Enhanced Geothermal Systems (EGS) – in an attempt to harness some of the energy locked far beneath the earth’s surface. As Google discovered, though, making a sound investment is not as simple as picking a company just because it has a great project location and the finest in tech. A host of pitfalls faces any geothermal developer – including inexperienced crews, insufficient financial backing, and the lack of a good power purchasing agreement.
But most formidable of all are the challenges of very deep drilling. While EGS represents a breakthrough, it’s still new, and it’s tricky to use. To properly exploit its potential, companies need to learn how to drill that deep, and to do so despite the hot corrosive fluids and unfriendly intervening layers of rock that can ruin a well in short order. And as if that weren’t enough, users have to work extra cautiously. Geothermal activity is generally found around seismic fault lines, and fracturing deep rocks using hydraulic pressure has linked EGS to earthquakes.
As AltaRock Energy (and its investors) found out, it’s going to take more than just fat corporate and government checks and tweaks to conventional techniques for EGS projects to work. The Geysers project came to an abrupt halt just over a year after drilling began. Barely a third of the well’s planned 12,000 ft depth had been reached before drillers encountered a layer of fibrous rock that caused the holes to collapse.
Getting on the (Right) Green Bandwagon
Renewable energy is essentially still in its infancy, with plenty of barriers to surmount. At the same time, there’s no mistaking politicians’ growing desire to climb onto the bandwagon. Which means more and more companies are jumping at the chance to join in. But this is still relatively unexplored territory, and the market has some hard lessons yet to teach. Not every company... or idea... is cut out for this.
It would be wrong to say wind energy doesn’t have a future, because it does – a very distant and windy one. One that won’t be materializing anytime soon, at least not until the capital costs of wind development drop and transmission techniques improve.
Geothermal isn’t easy. The Geysers failure demonstrates that. But it’s proven, it’s cost effective, and it runs 24/7... so for now, it’s our favorite renewable energy.
Our research is focused on finding the best geothermal companies out there and, because Google is our favourite search engine, we’ll be happy to share that research with CEO Eric Schmidt and his band of merry men. So come on Google, feel lucky and click here – we’ll give you a free three-month trial with our Energy newsletter, including our #1 geothermal recommendation.

---
Not just for Google, you too can get access to Casey’s Energy Report today and start profiting from the green energy movement, as well as from oil, gas, and other energy trends.  Start your 3 month risk free trial today.

Monday, May 24, 2010

Should You Invest in Silver Now?

Silver's gotten whacked over the past several weeks.  For silver bulls, the question now is - how much lower can you expect silver to go, if the bear market resumes?

Guest author Jeff Clark looks at the historical price action of silver, the "other" precious metal, to see where appropriate buying points may be had for those who believe that eventual inflation is inevitable...

***

How Low Will Silver Go?

-Jeff Clark, Casey’s Gold & Resource Report

We released our 2010 Silver Buying Guide last week and the silver price promptly cratered. So does this change our view of gold’s shiny cousin? Hardly.

While industrial uses comprise about half (53%, according to GFMS) of silver’s demand, making it susceptible to bigger falls than gold in a weak economy, it is equally clear silver also responds well to inflation, as well as serious financial “dislocations” (to put it nicely).

There are many examples of this, perhaps the best being the late 1970s. The economy in the middle of that decade was going nowhere, so some investors dumped their silver holdings because demand would supposedly be weak. A big mistake, as we now know, because silver’s greatest advance occurred at a time industrial demand was, at best, flat. Instead, silver rose due to monetary concerns and rampant inflation, giving investors 500%+ returns in the latter part of that decade, with an easy chance for even higher gains.

So if you’re buying silver to protect yourself against inflation and out-of-control government spending, then – as Doug Casey is fond of saying – sit tight and be right.

Still, it might be useful to contemplate how far silver could fall, particularly if you don’t own enough and are looking to add to your holdings.

The following chart examines all the major corrections in the price of silver in the current bull market (2001 to present). I only included corrections greater than 10%, many of which were big and sudden, much like we’re experiencing now.



You can easily see how volatile silver has been. Yet amidst all that volatility, the price has risen 334% from its 11-21-01 low (as of May 21).

Based on this data, we can make some projections. Our recent high in silver was $19.64. Therefore...


  • A correction matching the smallest decline of 10.3% would equal a silver price of $17.61. Silver closed at $17.64 on May 21, a correction of 10.1%.
  • The average correction in the chart is 19.7%. You’ll notice this is almost exactly what we experienced earlier this year. An average correction from the May 20 high would give us a silver price of $15.77.
  • The two nasty corrections of 33.7% and 34.9%, when averaged together, would give us a price of $12.90.
  • The 53.9% cliff drop would take us as low as $9.05.


These projections cast a wide net, to be sure, but there are still some conclusions we can draw:

1) The current correction in silver, as sharp as it is, is not out of the ordinary. Nothing is happening to the silver price right now that hasn’t occurred before.

Diagnosis? Normal.

2) If you agree with our analysis that says inflation is inevitable and that fiat currencies will sooner or later be taken off life support, then scary drops become great buying opportunities. Imagine if you had bought during that waterfall decline in 2008; you could’ve paid less than $9 for an ounce of silver. That would make the current correction less worrisome. By extension, buying during today’s big downdrafts will give you peace of mind tomorrow when we see another correction at higher levels.

Treatment regimen? Buy the big corrections.

3) Adjusted for inflation, silver’s peak in 1980 would exceed $100 today (and that’s based on distorted government CPI numbers).

Prognosis? Excellent.

Since we don’t know where the next bottom is, one effective way to handle purchases is to buy in tranches. You could place limit orders at a couple different levels.

But we might save the Big Purchase for a true fire-sale price, something greater than the average sell-off. There won’t be a big flashing light that says “Buy Now!” when the bottom forms, but the bigger the drop, the easier it will become to ease into the market.

Easy? Yes, if you have lots of cash (we currently recommend in Casey’s Gold & Resource Report that one-third of assets be in cash). That big stash is going to give you the ability to load up on the cheap.

If you don’t have a significant amount of Federal Reserve notes saved, it’s not too late to start. And I’ll bet you a six-pack on a Tahitian beach you’ll feel differently about this sell-off if you have a big pile of cash waiting to deploy.

The big SALE! may very well be on its way. I hope you’re getting ready for it.

What silver investments are we buying on the corrections? Check out our 2010 Silver Buying Guide, which includes a list of the dealers with the cheapest prices on all forms of physical silver, a brand new silver ETF recommendation, and the two best silver stocks in the world. You’ve got nothing to lose – a one-year subscription to Casey’s Gold & Resource Report is only $39, and you can try it risk-free for 3 months here.

Ed. note: I am a Casey Research affiliate and subscriber to their Gold & Resource Report.

Saturday, May 22, 2010

Latest Stock Market Outlook from Jim Rogers, Marc Faber, Richard Russell & More!

With the markets looking as turbulent as they've been in the past 15+ months, the financial gurus are out in full force. We've got links below to the latest commentary from our favorites - Jim Rogers, Marc Faber, Richard Russell, Bob Prechter, and more.

Also below are links to important investment trends that you should be keeping an eye on!

Richard Russell: Expect Downside Action in Stocks
If the May 7 lows are violated, look out below!

Why We Shorted the S&P 500 This Week
An update on our latest trade

Robert Prechter: These Technical Indicators Have Me Worried
These 8 "rarely" line up on the same side of the trade

Marc Faber's Outlook on China
There's a crash coming!

David Rosenberg's Latest on the Money Supply
What inflation? Wake me up in a few years.


Excellent Economic Outlook Analysis for US
David Galland Separates Economic Fact From Fiction


Gold Vending Machines in Abu Dhabi
More signs of a top!


Deflation is Alive and Well
So says the US dollar

The Outlook for Crude Oil
What do the technical indicators reveal?

Jim Rogers' Latest Thoughts on Euro and European Bailouts
Why he'd look at silver right now, too

Latest CPI Numbers
Still no inflation to be seen

Germany to Ban Naked Short Selling
Revealing charts on how that worked out for US, Australia

Marc Faber's 3 Favorite Commodity Picks
These picks may be tracing out a "historic low"

Wednesday, May 19, 2010

Investing in Nuclear Energy and Uranium: Areas to Consider

How is the nuclear energy and uranium landscape affected by the Obama administrations new package?  Our energy guru Marin Katusa explores this - and shares how you should think about investing.  Read on to learn ways Marin thinks you can profit in this sector...




The Nuclear Option



By Marin Katusa, Chief Investment Strategist, Casey Energy Opportunities

Earlier this year, the Obama administration announced large new federal loan guarantees for the nuclear energy industry – totaling about $54 billion, or more than triple the current level of funding. Philosophically, we abhor government subsidies to any industry, but we also recognize that they’re a fact of life these days, with an inordinate influence on markets. So even though we’d prefer the government didn’t pick industry winners and losers, we must be mindful of what Washington is doing if we expect to reap profits as investors. 

In this instance, the ramping up of government support means boom times are coming for the nuclear energy industry, which is about to awaken from a three-decade long sleep. And if you correctly position your energy investment portfolio, you can benefit from a comeback that’s baked in the cake. 

Power is all about the numbers. Consider the illustration below, which shows how current electricity generation technologies stack up when it comes to producing energy (cost is in dollars per megawatt hour). Solar and wind generators are not cheap and don’t work when it’s dark or calm. They’re competitive only with heavy government subsidies and even then, will never contribute much juice to the grid. 



Source: EIA. Adapted from http://www.investingdaily.com/tes/17201/sell-wind-and-solar-energy-stocks.html 

Hydro, biomass, and geothermal fare much better, easily competing with more traditional technologies, and there are good investment opportunities among them that we’re following. But again, in the larger picture they’re minor players. 

In terms of bang for the buck, it still comes down to coal, gas and nuclear, and Washington realizes we’re going to need all three to meet our future energy needs, especially as electric vehicles begin to replace those that run on gasoline. 

The Obama administration is all for going as “green” as possible, but realizes that wind and solar are not going to cut it. Thus, after thirty years in the doghouse, the nuclear option has regained the respectability in America that it enjoys among nations such as China, where ten new plants per year are proposed (our last new construction project broke ground in 1977). 

Despite lingering doubts among those who remember Three Mile Island, uranium has been dusted off and presented to the public as a safe, environmentally friendly, cost-effective source of power. And the new generation of plants is all of those things, compared with the dinosaurs of the 1970s. 

Even bureaucrats can understand that. Thus there’s been a major policy shift in D.C., and a powerful new trend has been set in motion. That’s clear. But how to profit from it? 

First off, companies that build new nuclear power plants will see an uptick in demand for their services. The problem there is that companies operating in this sector are huge conglomerates with diverse business lines. So an increase in revenues from the unit that constructs nuclear power plants could easily be offset by a corporate decline elsewhere that has nothing to do with nuclear energy. 

Investing in conglomerates generally means an expectation of modest gains. That may be sufficient for some investors, but not for us as speculators. We prefer to look for opportunities to double our investment, or better, letting us put less money at risk for potentially greater returns. So, we want exposure to companies that will benefit from this new policy in a bigger way, those that are more of a pure play. 

For one, that means uranium producers. An increase in the number of nuclear power plants will drive higher demand for the mineral, bullish both for those who pull it from the ground and those who reprocess spent fuel. 

The price of uranium is not going to skyrocket overnight. What with regulatory hurdles and long lead times, new construction in the U.S. will take a while. But permits will be issued, and in the interim, everyone else is forging ahead, with some 60 plants currently going up worldwide. Demand will steadily increase. 

On the supply side, keep in mind that the U.S. and Russian governments have their own strategic nuclear fuel reserves, in the form of nuclear warheads. At present, half of all U.S. nuclear electricity comes from reprocessed fuel from Russian bombs, through the “Megatons to Megawatts” agreement. That has acted as a ceiling on the price of uranium in recent years. However, in 2013, Megatons to Megawatts will end, and American utilities will have to secure fuel through alternative means. 

A few enterprising Western utilities see the writing on the wall and have been proactively securing their cheap supply of uranium through long-term contracts. But the rest will be forced to pay more on the open market, squeezing their already razor-thin margins. The utilities whose management had the foresight to lock in their supply at good prices will have an edge over their competitors that will be reflected in their stock price. 

The miners are looking good, as well. If you add demand growth to the termination of the Russian pipeline, you get steadily rising prices for their product. And that will translate into fattening bottom lines. 

As an investor, you’ll want your money in the savviest utilities, along with select uranium mining companies that are poised to prosper. Then you’ll be on your way to profiting handsomely. 
__________________________________________________________________________________
Want to know which uranium mining and utility stocks are set to explode to the upside? Try Casey’s Energy Opportunities risk-free for 3 months today and gain access to one of the best energy analysts of our day, Marin Katusa. Marin and his energy team know all the inside details and have prepared a shortlist of the best companies to own. For only $39 per year, they will keep you in the loop on oil, gas, nuclear, and renewable energies. Click here for more.

Monday, May 17, 2010

Jim Rogers' Latest Outlook on the Euro and European Bailouts

Jim Rogers was interviewed on GoldSeek Radio over the weekend.  You can catch the full interview here - it starts around the 1 hour 20 minute mark.

Jim is not thrilled with the European bailout - as you'd expect.  He's not as bearish on the Euro in the near term as other pundits are, as he believes that sentiment against the Euro is at an extreme right now.

And Rogers still loves commodities, since the European bailout implies that fiat currency will continue to be debased.  He says "if he were looking at precious metals, he'd look at silver."

In case you missed Jim Rogers' recent interview on CNBC's Squawk Box, you can check that out here.


And Rogers fans may also enjoy this Marc Faber interview about why he believes China is set to crash.

Marc Faber's 3 Favorite Commodity Picks Right Now

Last night, we posted a Marc Faber interview over at our sister site, The Contrary Investing Report.  Most of the interview focused on Faber's outlook for China - he believes a crash is coming within the next 12 months.

For us commodity traders, Faber dropped a very nice tip right at the end of the interview.  He thinks agriculture is getting real cheap - perhaps making a major bottom - and specifically said that corn, wheat, and soybeans could be interesting plays.

As you can see, the grains (represented below by ETF DBA) have not "reflated" much over the past year - they've been largely left behind:

Are the grains forming a major bottom? (Source: StockCharts.com)

In my experience trading the grains, I've found that it's best to wait for them to make a move, before piling in. Major breakouts are often excellent times to buy.  

So we'll be keeping an eye on this developing story, and my interest is certainly piqued after Faber's comment.

Recommended reading:

Tuesday, May 11, 2010

How to Diversify Your Gold Stock Exposure - 3 Quick Steps


Are you leveraged up to your ears in gold stocks, waiting for the Greece Bailout Plan to ignite a wave of money printing and hyperinflation?
It's a fair position to have.  But before you buy another junior miner with development in Nevada, or Argentina, or wherever, how about a quick once over your portfolio to make sure your gold stock holdings are geographically diversified?
For 3 key tips on how to do this, we turn to our Gold Stock Guru, Jeff Clark...

***
By Jeff Clark, Senior Editor, Casey’s Gold & Resource Report and author of this new FREE Special Report: ‘When Is the Right Time to Buy Gold?

Jerry’s broker wrinkled his nose in disapproval.

“I don’t like it, Jerry,” he said in a grave tone, as if scolding a misbehaving child. “Why don’t you invest in the gold company I told you about?”

Jerry thought this might happen. His broker was traditional, conventional, and only pushed company products. And the man knew embarrassingly little about gold stocks.

“Because I want to diversify my gold stocks. There’s a lot of gold around the world. And this company is capitalizing on that.”

The broker was shaking his head. “The company I recommend is right here in North America, Jerry. There’s no need to buy one with mines halfway around the world. Besides, we don’t know what the politics are over there.”

Disappointed with the mainstream advice, Jerry left and called another broker. This one specialized in resource stocks.

Jerry explained his reasoning for wanting to buy this particular gold stock. The broker listened patiently, but was so quiet Jerry thought maybe he was cool on the idea.

“Politics in general are somewhat unpredictable there, but less so for mining,” the broker explained. “In fact, they just lowered their tax rate on mining companies. The company he’s recommending is well run, but it’s already a mature producer with a huge market cap, and has no exposure to these other parts of the world you’re looking at.”

Jerry felt comfortable with his original hunch after finishing his discussion with the new broker. He put some of his money into the stock of the younger gold producer, with assets on the other side of the globe.

A year later, Jerry ran into his old broker at a local bar. The man smirked when he spotted Jerry. He was obviously unhappy about losing Jerry’s account and apparently wanted to rub it in.

“You should’ve bought that gold stock I recommended last year,” the broker said smugly. “It’s up 43%.”

“Good for you,” Jerry replied, “But that stock I told you about is up 75%.”

The broker’s smile wilted, and confusion clouded his expression. He spoke tentatively, not sure he wanted to hear the answer. “How’d you know to look at companies there?”

“Lots of reasons,” Jerry replied. “But for starters, there’s lots of gold over there.”

Gold Around the Globe

The keyword is geographical diversification. And while no single investment variable can guarantee profits, geographical diversification does add a layer of safety and enhanced profit potential that investing solely in companies located in one country or region cannot offer.
Jerry’s broker, like many in the U.S. who don’t know much about the gold industry, are uncomfortable investing in smaller producers or in faraway regions. And yet, most of the gold is currently being dug up in Africa, South America, China, and Oceania. North America accounts for only 16.3% of total gold production.

Further, of the 15 largest gold deposits in the world, only five are in the U.S., Canada, or Mexico. Many countries where gold has been traditionally mined, such as South Africa and the U.S., are experiencing production declines, while other areas, like South America and China, are just now starting to rev up.

First Step to Geographical Diversification: Make sure you have global exposure. If you’re only investing in companies that have deposits where you have cell phone coverage, you’re greatly limiting your profit potential. Don’t ignore a region just because it’s an unfamiliar culture or doesn’t speak your language.

“Can We Tax That?”

Don’t get me started on politicians and NGO’s [Non-Governmental Organizations] monkey-wrenching the free market’s wheels. Hey, I want mining companies to keep cyanide out of the drinking water and for local communities to see some economic benefits as much as the next guy. In point of fact, most modern mining efforts run clean operations and provide good-paying jobs to local residents. But more often than not, greed is the motivation behind the politics – governments want revenue, and mining companies can be an easy target.

As gold and silver mining stock investors, it is imperative we understand and monitor the politics of any region where our companies operate. And not just the federal or provincial authorities; we must be alert to local community sentiment towards mining as well. Just because federal or state regulations are supportive doesn’t prevent a local group from agitating against a development.

And laws affecting miners can change at any time, and suddenly, making the political climate tricky to judge and planning for mining companies and investors difficult. Would it be safe for me to assume, for example, that your tax planning of 10 years ago has had to be modified? The same applies with mining.

A stable political jurisdiction today can be tomorrow’s iffy hot bed of discontent. For example, the U.S. is consistently rated one of the lowest-risk countries in Resource Stocks’ yearly World Risk Survey. Yet, Washington politicians have drafted a bill that, if passed, would adversely affect mining in the U.S. While nothing is imminent, and we don’t expect it would pass in its current form, we can’t say that mining in the U.S. will never have any risk, and it is something we have to keep an eye on at all times.

On the other hand, eight of the world’s 10 highest-risk jurisdictions are in Africa, where Randgold has all of its operations. However, they mostly operate in countries where the politics are more stable, reducing their political risk to a tolerable and more predictable level.


The lesson: we cannot make assumptions about politics and mining based on geography.

So what’s the solution?

►Second Step to Geographical Diversification: Don’t be overexposed to any single government. 
In today’s political climate, and for the foreseeable future, there is no such thing as a 100% risk-free country. Politicians and political whims come and go, so risk will always be fluid. And we think gold mining could become an increasingly attractive target as the gold price rises and international economies struggle.


Of course, there are areas we’d simply avoid. Of the 15 largest gold deposits mentioned above, we wouldn’t consider investing in six of them solely because of the host country’s politics. We want diversification but not at the expense of unnecessary risk.

The One-Company Rule

Okay, perfect politics is a fairytale, so is there a way to minimize a downdraft in your portfolio if a government makes a negative move against one of your company’s mines, or mining in general?


There is.

Third Step to Geographical Diversification: Own a sufficient number of companies. Having several eggs in many baskets will prevent your portfolio from suffering a Humpty Dumpty event if the government where your mining stocks are concentrated decides to follow, for example, Venezuela’s lead. Country risk can be offset with the right mix of stocks. That’s why we don’t just buy Barrick and say, “We’re diversified!”

So... is your gold stock portfolio globalized? Do you have too much exposure to any one government? And do you own enough gold stocks so that bad news with any one company doesn’t sink your portfolio?

The easiest way to diversify, of course, is to buy a mutual fund (see the table below for our top picks). But we think the mining stocks with the greatest profit potential are those newer producers with operations in regions seeing increasing production and greater exploration prospects.

“Buy low, sell high” is easier said than done. Is there a particularly good time to buy gold? Are there patterns in gold’s market fluctuations? Find out everything you need to know in our FREE Special Report How Do I Know When to Buy? 
Click here to read it right now.


***

Monday, May 10, 2010

Crude Oil Looks Gassed - Another Bearish Sign?

Crude oil is looking gassed - is it in the process of topping?

Over on our sister site, we explore what's happening to crude - and why this may be bearish for oil prices.

Does crude oil have anything left in the tank?  (Source: StockCharts.com)

Why Robert Prechter Sees a Major Market Top Right Here

Spent part of my weekend reading Bob Prechter's latest newsletter, which is always thought provoking.  The folks on his team were kind enough to allow us to republish this article from the April issue of Bob's Elliott Wave Theorist.

In terms of technical and sentiment analysis, I think Prechter is second to none.  He's been bearish for some time no doubt - it looks like his previous warnings and premonitions are coming to roost now.

What Do These 8 Technical Indicators Mean for the Markets?
May 10, 2010

Editor's Note:    The following article is excerpted from Robert Prechter's April 2010 issue of the Elliott Wave Theorist. For a limited time, you can visit Elliott Wave International to download the full 10-page issue, free.

By Robert Prechter, CMT

Technical Indicators

It is rare to have technical indicators all lined up on one side of the ledger. They were lined up this way—on the bullish side—in late February-early March of 2009. Today they are just as aligned but on the bearish side. Consider this short list:
  1. The latest report shows only 3.5% cash on average in mutual funds. This figure matches the all-time low, which occurred in July 2007, the month when the Dow Industrials-plus-Transports combination made its all-time high. But wait. The latest report pertains only through February. In March, the market rose virtually every day, so there is little doubt that the percentage of cash in mutual funds is now at an all-time low, lower than in 2000, lower than in 2007! We will know for sure when the next report comes out in early May. Regardless, the confidence that mutual fund managers and investors express today for a continuation of the uptrend rivals their optimism of 2000 and 2007, times of the two most extreme expressions of stock-market optimism ever.
  2. The 10-day moving average of the CBOE Equity Put/Call Ratio has fallen to 0.45, which means that the volume of trading in calls has been more than twice that in puts. So, investors are interested primarily in betting on further rising prices, not falling prices, and that’s bearish. The current reading is less than half the level it was thirteen months ago and its lowest level since the all-time peak of stock market optimism from January 1999 to September 2000, the month that the NYSE Composite Index made its orthodox top. The 30-day average stands at 0.50, the lowest reading since October 2000. It took years of relentless rise following the 1987 crash for investors to get that bullish. This time, it’s taken only 13 months.
  3. The VIX, a measure of volatility based on options premiums, has been sitting at its lowest level since May 2008, when wave (2) of ((1)) peaked out and led to a Dow loss of 50% over the next ten months. Low premiums indicate complacency among options writers. The quants who designed the trading systems that blew up in 2008 generally assumed that low volatility meant that the market was safe, so at such times they would advise hedge funds to raise their leverage multiples. But low volatility is actually the opposite, a warning that things are about to change. The fact that the options market gets things backward is a boon to speculators. Whenever options writers are selling options cheap, the market is likely to move in a big way. Combined with the readings on the Equity Put/Call Ratio, puts right now are a bargain.
  4. In October 2008 at the bottom of wave 3 of (3) of ((1)), the Investors Intelligence poll of advisors (which has categories of bullish, bearish and neutral), reported that more than half of advisors were bearish. In December 2009, it reported only 15.6% bears. This reading was the lowest percentage since April 1987, 23 years ago! As happens going into every market top, the ratio has moderated a bit, to 18.9% bears. In 1987, the market also rallied four months past the extreme in advisor sentiment. Then it crashed. The bull/bear ratio in October 2008 was 0.4. In the past five months, it has been as high as 3.4.
  5. The Daily Sentiment Index, a poll conducted by Trade-Futures.com, reports the percentage of traders who are bullish on the S&P. The reading has been registering highs in the 86-92% range ever since last September. Prior to recent months, the last time the DSI saw even a single day’s reading at 90% was June 2007. At the March 2009 bottom, only 2% of traders were bullish, so today’s readings make quite a contrast in a short period of time.
  6. The Dow’s dividend yield is 2.5%. The only market tops of the past century at which this figure was lower are those of 2000 and 2007, when it was 1.4% and 2.1%, respectively. At the 1929 high, it was 2.9%.
  7. The price/earnings ratio, using four-quarter trailing real earnings, has improved tremendously, from 122 to 23. But 23 is in the area of the peak levels of P/E throughout the 20th century. Ratios of 6 or 7 occurred at major stock market bottoms during that time. P/E was infinite during the final quarter of 2008, when E was negative. We will see quite a few quarters of infinite P/E from 2010 to 2017.
  8. The Trading Index (TRIN) is a measure of how much volume it takes to move rising stocks vs. falling stocks on the NYSE. The 30-day moving average of daily closing TRIN readings has been sitting at 0.90, the lowest level since June 2007. This means that it has taken a lot of volume to make rising stocks go up vs. making falling stocks go down over the past 30-plus trading days. It means that buyers of rising stocks are expending more money to get the same result that sellers of declining stocks are getting. Usually long periods of low TRIN exhaust buying power.
For more market analysis and forecasts from Robert Prechter, download the rest of this 10-page issue of the Elliott Wave Theorist free from Elliott Wave International. Learn more here.

Robert Prechter, Chartered Market Technician, is the world's foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

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