Taylor On The Markets & Gold
Financial Markets
Big Corporate Boppers Keep Bailing Out of Stocks
The big boys, the insiders of corporate America, continue to cash out of
the companies they manage, big time. Last week, "only" $33.30 was sold by
insiders for every dollar of stock they bought in the companies they
manage. Last week it was worse when on average, $46.20 of insider stock was
sold for every $1 that was purchased. The average for the past two weeks
was $37.67 of sales for every $1 purchased.
As you can see, Technology and Consumer Services were the two sectors where insiders dumped the most stock in exchange for cash. Almost $200 million of tech stocks were sold by insiders for every $1 bought. Consumer Services sold $237 million of stock compared to $3.4 million of purchases. One of the biggest sellers on a regular day by day basis has been Larry Ellison of Oracle Corp. Fairly common was the report for October 27th when he had trades of $12,398,000, $12,199,000 and $12,151,000. Mr. Ellison has been selling large blocks of stock like this now for several weeks.
The biggest ratio of sales to purchases was in the Consumer Durables, where
$322 of insider stock was sold for every $1 purchased. I'm thinking this
may be very significant because of the enormous importance the U.S.
consumer is, not only to the U.S. economy, but to the global economy.
China's economy depends on the U.S. consumer spending his collective fool
head off. And the Asian economies, and to a lesser extent, the European
economies, depend on Chinese imports which are driven in part by American
consumption. The Consumer Index shown below may indeed be foretelling of a global weakness and perhaps a recession in 2005. If the American consumer stops going into debt to buy more and more stuff, who is going to keep the demand side of the global economy propped up? Could this be the beginning of the Kondratieff winter deep freeze?
At the same time that executives have been selling their own personal
stock, they have been liquefying their corporate balance sheets at the
greatest clip in 35 years. Apparently these folks, who have the best
visibility of corporate America, are having a hard time getting optimistic
about the economic future of their companies, notwithstanding the
cheerleading we get daily from CNBC. The cheerleading function is required
to keep average folks buying stocks so the likes of the ruling elite can
exit into cash and leave you holding the bag. Investors of this newsletter
understand that cash is not trash. In fact, during the Kondratieff winter,
the only asset that will perform better than cash will be gold.
The transition from ownership of gold for protection against deflation, as
opposed to the most popular application of gold as an inflation hedge, will
likely be very tricky for most Americans who cannot envision deflation.
Indeed, it is entirely possible that when the forces of deflation begin to
overtake inflationary pressures, we could see some initial weakness in gold
and especially gold stocks, as people look to raise cash from any source
available to make sure they meet their mortgages and other essential
requirements. This move down John Exter's inverted liquidity pyramid will
scare the bejeebers out of many investors. But for those who have studied
history, they should remain confident in their gold holdings, especially
gold bullion and the strongest gold producers and those companies with gold
resources. I do think the "D" and "C" issues could be more problematic when
liquidity freezes up. The big question in my mind is whether these
companies will be able to easily raise capital to put drill holes down on
the basis of a geological concept.
QUESTION: How does one figure the price increase of a gold stock per $10
increase in gold? Is there a formula? Also I heard that the junior mining
companies move about 2 weeks after the seniors. Is this true? Thank you, H.
Shedd.
ANSWER: The closest correlation between the price of gold and gold shares can generally be found among the major gold mining firms. Although I have not examined this relationship recently, I generally expect a leverage
factor of something like 3 to 1 for the major mining firms. Thus, if the price of gold rises 10% I might expect Newmont Mining to see its shares rise by 30%. With the senior mining firms, the movement in the shares should be more or less immediate with changes in the gold price.
Junior gold mining firms, at least those that are successful in discovering
viable or potentially viable gold deposits, can see the value of their shares rise very dramatically by comparison, because as they increase the number of gold ounces in the ground, the additional intrinsic value relative to the current value of the company is so much more significant than the additional valued added by the same size discovery made by a senior mining firm.
For example, let's compare a company like Newmont Mining with one of our
favorite junior gold stocks, namely Pelangio Mines. Hypothetically, let's
suppose both companies are able to add 1 million ounces of gold to their gold resources by the end of 2004.
Newmont Mining Pelangio Mines
Shares 443,366,000 62,429,417
Price $48.00 $0.53
Market Cap $21 billion $33 million
1 million oz.
@ $425/oz. $425 million $425 million
Discovery Value/Market Cap +2.0% +11,878%
Of course this is a very superficial analysis. To try to determine the real
value of a new gold deposit is rarely possible at time of discovery because
all kinds of work and studies have to be carried out to determine the
economics of a project in a lengthy feasibility process. But this simple
example illustrates why I continue adding junior gold stocks like Pelangio that I think have a high probability of making gold discoveries into the
future. To be sure, these little companies are very risky compared to
Newmont, which is one reason why the payoff is so high when these firms are successful.
Now keep in mind that as the price of gold rises, the already large leverage noted above becomes even more profound. Therefore, junior gold mining firms enjoy far more leverage to the price of gold than senior mining firms do. If gold were selling at $600 rather than $425, the in-ground amount of an additional million ounces for Newmont would rise to +2.9% of market cap, while it would rise to a factor of 18.18 times, or 17,181% for Pelangio. Hence, junior mining firms enjoy far more leverage than senior mining firms. Because juniors are far more risky and because they are relatively unknown in the investment world, they never come close to adding market value anything like the intrinsic value numbers noted above. However, as a general rule, based on my historical experience, I anticipate junior mining firms enjoying a leverage to the gold price ranging from 5 times on the low side to 50 or even 100 times on the upside, depending on how extensive new discoveries are and, to a certain extent, on how effective the juniors are in getting their stories out to the investing public. Most of these companies never have CNBC working for them, while Newmont and the other big gold companies do, from time to time, gain national television exposure. But as this bull market in gold continues onward, we are going to see some very, very big gains among our junior gold stocks, which is one reason we have so many of them on our list and in our Model Portfolio, relative to the producers.
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TRADER ROG'S CORNER
ELECTION QUANDRY- MARKET REVERSALS-MONEY WORRIES
"The only way not to think about money is to have a great deal of it."
-Edith Wharton
My job just got a whole lot tougher as 10,000 lawyers are gearing for an
election count holocaust, and the U.S. dollar just hit support at .85 and
is readying for a reversal. The old, smart graybeards said the PPT boys and
the "authorities" would make one more assault on metals, and yes, they
have. A good trading friend reminded me these guys could buy the S&Ps as
much as necessary in the next few days to hold things together for the
President's re-election. I would plan on it.
Thankfully, I have thought ahead for just such an occurrence, and we are
doing some rearranging in this week's issue of Trader Tracks. Generally, I
am pretty happy with our trading and will now review what readers of J
Taylor's Gold & Technology Stocks might expect next.
MARKETS REVERSING
We had hoped for one more wave up in precious metals. Our charts told us a
few days ago this appeared to be the outcome. However, the major driver of
market reversal is the U.S. dollar, which has bottomed at .85. With this
move, gold and silver should prepare to sell off and the Canadian dollar
and Swiss franc should back-up as well.
Those holding senior gold and silver stocks for the long pull should hang
on and not sell. Understand, the metals stocks will move backward and chop
until mid-January 2005. If you are holding large metals stock profits and
it behooves you to exit for the year, I would do so immediately. Pay
attention to your tax situation and also your expenses on your trades.
Junior metals stocks will sell off more than seniors. Again, evaluate your
position, and if it makes sense, sell them out completely, or sell half the
position for profit taking. Keep in mind the juniors are more difficult to
exit due to low volume. You may not get your price while trying to get out.
When you sell, it is better to sell into strength before a top. I think we
are on a metals top right now.
If you are holding gold and silver stocks and futures options, exit the
positions. We have grain and cotton options on for next year, and those are
a hold. Our oil call options have done well, and we will sell some for profits to cover trade expenses and exit more as oil nears $60 per barrel. For now, oil is stuck at $55-56 and might sell off soon. For now, all energy products are long. Unleaded gasoline for next spring should be a very good long trade. We will be reviewing this trading idea in coming issues.
The present and upcoming bear rally in the Dow and other indexes will serve
to entice buyers into a fall sucker's rally, which will show a very small recovery, and then early next year, these buyers will get smashed. I am now
totally convinced of Jay Taylor's Theory of Deflation, and the chickens are
coming home to roost faster then many people think-even in China.
INDIA AND RUSSIAN CENTRAL BANKS DUMP DOLLARS
Last week, we mentioned how the Japanese were not buying as many Treasury Bonds and T-Bills at our auctions. This week both central banks in India and Russia said they are tired of losing money on our government investment paper and for now, will buy into their own paper or the Euro. I think this kind of talk, coupled with Asian non-buying, drove the dollar lower the past few days. It was dropping too fast, however, and some propitious and timely Asian buying from Japan saved the day, and now the dollar is on life support at .85. Because it bottomed at a key level, the dollar should begin to rally.
What Makes Gold Money, According to Aristotle
Doug Casey, one of the most refreshing free thinking, brilliant and outspoken newsletter writers on the gold show speaking circuit where your
editor also travels. I always enjoy listening to Doug speak because of his
blunt in your face but style. Doug will always tell you what he thinks
because his ego doesn't demand you like him. That's a characteristic I
admire and like in people.
Doug frequently mentions the following attributes of gold which he says
was first written about by Aristotle. These are the reasons gold is so well
suited for money and why people have always chosen gold as money whenever
dictators have not gotten in the way of that free market choice. This is
basic stuff but as Doug demonstrates time and time again, even at a gold
mining show, hardly anyone is able to answer the question. So it is worth
mentioning and keeping this in mind even if the ruling elite would rather
you remain ignorant about this topic.
- It is Durable - That's why we don't use wheat.
- It is Divisible - That's why we don't use diamonds.
- It is Convenient - That's why we don't use lead.
- It is Constant - That's why we don't use real estate.
- It has Intrinsic Value - That's why we don't use paper!
October 31, 2003
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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