On April 5, 2001, the announcement that Dell computer would meet (reduced) expectations initiated the third greatest rally of the stock market in history. Oops, make that fourth greatest, following the Greenspan Spike. Now that's irrational exuberance!
Insider trading reports indicated that senior honchos at Dell announced their intention to dump 1,830,000 shares in March alone! What do they know that we don't know?
The 2001 recession has been called a classic inventory / overbuilding recession. Given that traffic carried over fiber-optic networks is an incredibly low 2.5% of capacity (Business Week, April 9, 2001) this is undoubtedly part of the story, but extreme debt levels, personal, corporate, and financial institutions, has to be the other part.
Larry Summers, America's recently retired Treasury secretary, suggested that this current cycle has similarities to that of Japan's in the late 1980's. However, Japan had a great current account surplus when their bubble burst whereas America has a great deficit. What will happen to the almighty dollar when foreign investors catch on, and how will this extend the recession?
The consensus of gold-eagle writers for a true market price for gold seems to be about $600/oz. Steve Forbes has suggested that gold priced at less than $350/oz. presages deflation, while a price greater than $350/oz. portends inflation. With gold in the $260-$270 price range, is this another sign of a Japanese style deflationary funk?
Of course, inflationary pressures are still with us. Canada has just released a three-cent coin. It's the size of a nickel, 92.5% silver, and coated with genuine 24-carat gold....yours for only about $50 Canadian or $32 U.S. Isn't that a great example of money debasement and inflation?
Mind you, it is a "limited edition" of only 90,000 copies. If this kind of investment turns you on have I got a deal for you...Genuine old silver dollars coated in genuine 24-carat gold for the same price. More silver, more gold, and I promise not to make more than 45,000 pieces, even if Barnum was right!
I am reminded of the story about the guy who complained to the farmer about the rising cost of his eggs. The farmer looked him in the eye and said "It's the same eggs sonny, it's the money that's changed".
A Canadian newspaper, " The Ottawa Citizen", noted that one company in that city has some dubious statistics for it's 301 employees:
These stats are actually for the 301 elected members of the Canadian Parliament. Who was it that said, " Don't vote, it only encourages them".
A number of gold-eagle writers have stated that a stash of silver dollars and a few bars of bullion should form part of everyone's contingency plans. Out of curiosity, I called a number of local bullion dealers for quotes. In addition to price variations of up to 30% from one dealer to another for silver coins (all higher than the rates quoted on the gold-eagle home page), all stated that they were having great difficulty getting silver bars. One dealer stated that they had stopped taking orders for 100 oz. bars as they had such a long waiting list. Is this a result of refiners holding back supply because of the current low prices, or is there a supply/demand problem building faster than we anticipated?
Was astounded to learn of the overwhelming influence of derivatives in gold trading...50 times the size of the physical gold market, and that a similar ratio exists in silver trading. Derivatives also play an even greater role in currency trading and could suddenly cause the dollar to head south, while gold and silver head in the opposite direction. Of course derivative players can be big losers...Barings, Long term Capital Management.....were these the dark clouds warning of the hurricane to come?
Now the exchanges are pushing for the ability to trade single-stock futures. Buying stocks on margin (50%) has proven disastrous for many. How would the excessive leverage on futures (5%) have compounded the pain? How many will be caught with their shorts down, er, up? The whole scene is becoming so Las Vegas.
Given the dubious recent ratings of stock analysts, perhaps their comments should be accompanied by a warning label (like cigarette packages). Perhaps it could read as follows:
" I'm really paid to hype stocks in which my company has a vested interest so my stock ratings should be interpreted as follows:
In researching gold mines with the best risk / reward ratio, the Goldcorp Inc. banner on the GOLD-EAGLE home page is worth a hit. It's rich Red Lake mine is expected to have a 2001 production of 400,000 oz. of gold at a cash cost of less than $75 an ounce. At a gold price of 260/oz. it projects 2001 cash flow of $70.3 million and earnings of $34.1 million ($0.42 / share). Goldcorp has zero debt, $30 million in the bank and short term securities, and they are now paying dividends. Is there a better bet for a traded gold stock?
An interesting, if speculative, future play will be Crystal Gold Inc. This is a private company and the writer holds a few shares. It has just started to put a small plant at a site in Nevada where ore graded 3.7 oz./ton silver, 1.9 oz platinum, 3.0 oz. palladium, and 4.8 oz. rhodium. However, this assay was not accompanied by a Registered Assayer seal. At another site on this property, ore (assayed by a Registered Assayer) graded 0.4 oz. gold, 3.8 oz. silver, 2.7 oz. platinum, 0.3 oz. palladium, and 0.3 oz. rhodium. This company will be using a proprietary, cost-effective, environmentally benign, concentrator instead of an acid leaching process. The operation is starting on a shoestring budget and is looking for an appropriate venture capital group with, initially, $500,000 available. Any ideas?
Robert Flett
Robert@flett.com
May 3, 2001