Tips for Gold and Resource Stock Investing in 2011

Nice job here by guest author David Galland, who urges you to keep a level head when investing in resource stocks and companies.  Most importantly, he says, always know your goal for a trade or investment before you actually make it.  Solid advice that's all to easy to forget!
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Before You Shoot Your Next Arrow

By David Galland, Managing Director, Casey Research

While I have read certain works on the life and ponderings of Buddha, I claim no deep knowledge of his philosophy. Note I didn’t use the word “religion,” because Buddha himself claimed no supernatural powers and even begged his followers not to deify him after his death. Hardly had he drawn his last breath, however, when the deification began – though most Buddhists won’t claim it as such.

Even so, there are Buddhist practices I think useful in this hectic world of ours – practices that don’t involve dressing in robes and refusing to swat flies. For example, I rather like to meditate from time to time. Nothing too involved, just ten or fifteen minutes of quiet deep breathing as part of calming the mind and all that.

I also find a lot of wisdom in the training of the Zen archers, who seek to clear their minds of all internal dialogue not related to the simple process of releasing the arrow at the target. Simply, they strive for only one goal – perfect form. Thus they clear their minds of all others, even those that might be considered complementary to the task at hand – for example, getting a pat on the back from the instructor, or plopping the arrow closer to the bull’s-eye than the next person down the line.

Of course, as humans are wont to do, Buddha’s successors have taken the man’s simple approach to life and wrapped it in gaudy and self-important rituals, in the process turning it into a livelihood for predatory priests. But that’s another story and shouldn’t take away from Buddha’s core beliefs.

Especially the bit about simplifying and focusing your goals. That idea has always seemed to me to have relevance for a wide range of pursuits, from the putting green to the stock market.

Based on my many interactions with investors over the years, I have concluded that there are really just two sorts. There are those that have clear goals, and those who don’t. Those who do make the money. Those who don’t provide the money to those who do (investing in a zero-sum game – for every winner, there is a loser).

This thought was made more tangible to me in recent days, based on a personal experience. Long story short, I had invested in a pre-public company years ago. It wasn’t a big investment, and it took longer than anticipated to ultimately go public. When it did, it had a fairly good run, but as the reason I bought it in the first place was still ahead of it, I hung on. Well, as is so often the case, the company’s missed a hurdle and came tumbling back to earth. With the stock trading hardly at all, and for just a few pennies a share.

Lo and behold, the company’s management reinvented the company as targeting rare earths and managed to acquire a project of merit. The investment that I had written off as worthless soared on high volume.

Now, if there is one thing that anyone with experience in the small-cap resource stocks will tell you, is that the time to sell is when there is someone to sell to – because absent volume, getting out of a decent-sized position is not easy.

So, there was the dilemma – hold on in the hope that the surprise home run turns into the sort you bestow on your grandchildren? Or secure your gains by selling and moving on?

At the point of such a decision, the mind gets very un-Zen-like. Visions of untold riches dance in the head, followed by fits of fretting as the stock pulls back. Next thing you know, you are tossing and turning in the night, conflicting thoughts chasing each other around like cats.

In the final analysis, I recalled the old adage that pigs get fat but hogs get slaughtered. I sold enough to take my initial investment off the table, and a healthy profit – holding on to a modest position to enjoy any further upside. And, having done so, the internal dialogue came to an abrupt halt.

Now, the funny thing is that after a brief pause, the company is again moving up – but I have no intention of second guessing my decision to sell when I did. On a percentage basis, my returns were in the moon shot category – the sort that only the junior resource sector can produce – so it would be just plain churlish to gripe.

More to the point, the stock could just as easily have peaked and once again collapsed, in which case I would really feel like a dolt had I not taken an exit.

All of which delivers me to the point. Namely that it is very important, especially for the resource investors among you, that you actually have a firm goal in mind for each investment you make – and that you remain single-mindedly focused on that goal.

Do you own gold or silver as a protection against inflation? If so, then why even bother checking the price on a daily basis, let alone every few minutes?

Or do you own it as a speculation? If so, what is your specific profit target? Don’t have one? If not, then it seems to me a bit like setting off on a journey without knowing where you want to actually go.

Do you know exactly why you own the resource stocks you do? What hurdle are you betting they will clear next, and by doing so ratchet the price higher? Is your goal to get your original investment off the table on a double? Or do you have a specific price target in mind, at which point you will close the position entirely and move on to more fertile ground?

This idea of keeping an easily understood, single goal in mind for each of your investments is hugely important, because without it you are going to be susceptible to the fears, fantasies, and folly that ultimately cause investors to end up on the losing side of the equation… by selling good companies on pullbacks, holding on to positions well past the point of reasonableness or chasing stocks after they’ve spiked.

Probably the most successful investor I know – I won’t say his name, because he might not like my pointing out that he has tucked away close to a billion dollars, thanks primarily through investments in the resource sector – has a well-deserved reputation for selling too early.

While it is remarkable that he has made so much money in this sector, what is more remarkable is how he did it. Which I would sum up as follows…

• First and foremost, he follows a process – almost mechanically.

• He buys low, with a specific objective in mind. Both in terms of hurdles he expects the company to clear, but also in terms of the returns he expects to get on his investment.

• When his return objectives are met, he sells. Maybe enough to get his original investment off the table, maybe the entire position – depending on his reassessment of the company’s potential to clear the next hurdle. But he always sells at least enough to get his original investment off the table, no matter how much exciting news there is and how much optimism others may feel about the stock.

• He only buys on his own terms. If invited to participate in a private placement, he will do so only if he is completely comfortable with the terms. If the company is offering a warrant with a one-year expiration term and he thinks the development work will take two years, he’ll ask for a two-year warrant. If the company won’t budge, he moves on, confident in the knowledge that there will always be another deal coming down the pike.

• He’s careful with his money. As he likes to say, if you spend your dollars, they can’t mate and make you more dollars.

• He’s not afraid to concentrate investments, but again on his terms, and only when he has done the due diligence needed to be confident that the potential reward warrants the level of risk involved.

If those principles and practices sound simple, it is because they are. But following that process is also incredibly effective.

Interestingly, this process rhymes with the finely honed investment methodologies of the late great Benjamin Graham, author of The Intelligent Investor and mentor to a small cadre of close associates that included Warren Buffett, Jean-Marie Eveillard, William Ruane and Irving Kahn – all of whom used what they learned from Graham to become billionaires, or close to it.

Let that sink in for a moment. One man, Graham, developed a methodology for investing – and it’s actually a pretty simple methodology – that the people working with him were able to duplicate in building their own fortunes. Following a proven process works.

And while Graham wouldn’t have touched a junior resource stock with a twenty-foot pole – his methodology was focused on balance sheet analysis, not a strong point for junior exploration stocks that have no E in their P/E – the principle of following a specific process that mitigates the odds of a loss holds up well. The proof in the pudding is the success of my aforementioned friend, and many others I know who are similarly disciplined.

With all of that said, do you know why you own what you own? Do you have a clear goal in mind for each of your positions? Do you know how much of your portfolio is allocated to speculative resource plays, and are you comfortable with the idea that those stocks have historically suffered extreme sell-offs?

Warren Buffett, whose investment acumen is hard to argue with, likes to quip that the two most important rules for investment success are, Rule #1 – Never lose money. Rule #2 – Never forget rule No. 1.

While it is almost impossible not to lose money along the way while investing in resource shares, it is equally true that once you have scraped your original investment off the table, it is impossible to lose money. Sure, you can give back your profits – but you can’t lose money.

All of which is, I think, worth reflecting on as you aim your next arrow.

[And if you aim your arrows just right, small-cap resource stocks can give you great leverage to the underlying commodities – such as the precious metals. Louis James, senior editor of Casey’s International Speculator, is a master at market archery, beating the S&P 500 by an incredible 8.4x in 2010. Subscribe today and get $300 off the retail price… plus one full year of Casey’s Energy Report FREE. But hurry, this offer ends soon. More here.]

Ed. Note: I am a Casey International Speculator subscriber and affiliate.

What Renewable Energy Should You Invest In - And Profit From the Oil Spill?

While the oil spill may have been a real bummer - like true capitalists, it's our job to ferret out profits from the carnage!  So where should we look?  You'd expect renewables to get a nice boost - but which ones?  Our energy correspondent Charles Brant explores this question, and shares his favorite place to look for investment opportunities - and the pot is even sweeter after the spill...

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Who Will Profit from the Oil Spill?

By Charles S. Brant, Energy Correspondent, Casey’s Energy Opportunities

The disaster in the Gulf of Mexico may be the best thing that’s ever happened to green energy producers in the U.S – but the one that benefits the most will probably surprise you.

As the damaged Deepwater Horizon well continues to pump out 5,000 barrels of oil per day into the Gulf, all the major stakeholders are scrambling to find a way to contain the damage. Investors in BP, Anadarko, Transocean, and Halliburton have had a rough few weeks and should be nervous about the future. The growing political firestorm that’s accompanied this ecological disaster is drastically reshaping the energy landscape in the U.S. There’s huge money to be made from the biggest structural change to the energy markets in the past 50 years, if you know where to look.

The political and economic fallout from this accident is starting to take shape, with the executives from BP, Transocean, and Halliburton being paraded in front of Congress for a public chastising. Predictably, politicians are making stern promises of tighter regulations in the future.

At this point, it’s a guessing game as to what the new permanent regulations will be. So far, a temporary moratorium has been put in place on the issuance of new offshore oil and gas drilling permits. In addition, the Department of the Interior plans to restructure the federal Minerals Management Service (MMS) to eliminate the conflict of interest inherent in its role of monitoring safety, managing offshore leasing, and collecting royalty income.

The Department of the Interior has plans to make offshore drilling rig inspections much stricter. Interior Secretary Ken Salazar has also promised tighter environmental restrictions for onshore as well as offshore exploration and production. Lastly, in a knee-jerk reaction to the oil spill, the Senate Climate Bill gives states the right to veto offshore projects within 75 miles of shore.

Although these regulatory changes aren’t set in stone yet, it’s a foregone conclusion that any company involved in offshore drilling will feel some pain. Any exploration and production company that continues to operate offshore will face reduced margins from a higher-cost structure from increased taxes, regulation, and insurance.

Offshore production supplies a large amount of oil and gas to the U.S. The U.S. Energy Information Agency estimates that U.S. offshore reserves account for 17% of total U.S. proved reserves for crude oil, condensate, and natural gas liquids, as the illustration below shows.

Of the total known U.S. offshore reserves, the Gulf of Mexico accounts for 90%, with the rest found in California and Alaska. In 2009, BP produced nearly a quarter of all the Gulf’s oil and gas located in federal water. Shell and Chevron produced 12% and 11%, respectively.

The sheer size of offshore reserves guarantees exploration and production will never be completely abandoned in the U.S., but don’t expect any growth. In fact, the Gulf of Mexico disaster probably destroyed any hope of any future drilling in environmentally sensitive areas, like the Arctic National Wildlife Reserve.

The market has reacted strongly to the spill, punishing the stocks of every company involved in offshore drilling. Now many are suggesting it might be an overreaction that could benefit your investment portfolio if you dare buy in now. However, there are better ways to work this news to your benefit.

The oil spill will be a very expensive setback for all the players involved in offshore production; we’ve already seen that reflected in their stock prices. In the near term, offshore exploration and production companies and the oil services companies will show margin erosion as they digest higher costs. In the medium term, some companies will pull up stakes and move completely into non-U.S. offshore projects, as they’ll realize the cost of doing business in the U.S. outweighs any potential gains.

The market might be overreacting, but we’re not convinced these depressed stocks represent good value. While it’s possible there are some good bargains, it’s still too early to consider speculating in any offshore-related companies. Specifically, the threat of increased regulation, massive tax increases, and rising insurance costs will create a hostile environment for these companies going forward.

Instead of risking your capital on so many unknowns, a prudent alternative is to look at energy producers in the renewable energy sector. The oil spill has only strengthened the current administration’s resolve to make greener energies supply a larger chunk of America’s energy needs in lieu of traditional fossil fuels. Congress is doing its part by giving huge subsidies to companies in this field.

There are a lot of renewable options that will benefit from the subsidies and political wrangling, but our current favorite by a long shot is geothermal power.

Of all the renewables, we think geothermal has the best upside potential. Based on economics and efficiency alone – unlike wind and solar energy, geothermal is reliable for round-the-clock generation and is already price competitive with fossil fuels without any subsidies – geothermal outperforms competing renewable technologies.

Add the government subsidies on top of the existing good economics and the pot gets even sweeter in the short term. Once the spill is finally contained, attention will shift to previously low-key renewables, like geothermal, and soon after the market will recognize geothermal as the clear winner.

We’ve researched companies up and down the geothermal supply chain and we’re seeing value in a number of quality companies that we think are poised to outperform. With the coming flood of money and attention that will be focused on green energy, you’ll want to move quickly before these bargains go away.

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Want to know which geothermal 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 nuclear, geothermal and other renewable energies.

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. 
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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.

Oil Prices Get Rocked - Again!

It's been a tough couple of trading sessions for oil, as it's gotten walloped both days.  This is not a pretty chart towards the right, at least for oil bulls: 

Source: Barchart.com

Make no mistake, Peak Oil or not, the black goo has had a helluva run - from the $35, all the way up to $85 recently.  That's nothing to sneeze at, though less impressive when viewed with respect to it's freefall from $150.

If you believe that a severe stock market decline is on the horizon - as I do - then you probably also find oil's recent price action quite disconcerting.  It's gotten clobbered right along with equities.  If you're looking for a commodity that has held up fairly well, check out gold's recent performance.

PS: If you're not getting our Daily Investing Updates, you're missing out!  You can sign up for FREE here.  These updates are courtesy of our new blog that features Contrarian Investing News.