Beer Garden PM and Market Analysis

November 12, 2002

I have had numerous ideas floating in terms of another GOLD-EAGLE.com contribution over the past fortnight, however they were not sufficient to get the project over the line in terms of creating an article that may be able to add some value to the readers of this site. As the usual process of deleting all those wonderful offers of cheap ink cartridges, dates for both my wife and I with eligible US singles, gathered momentum I came across a reply, which may have been relevant to my prior article "Through The Eyes Of An Australian". The 11-year old looked at the email, and immediately loaded up an online search engine, and discovered it was probable that the sender lived in our suburb as no other matches were shown in Australian capital cities. I thought for something different instead of sending a reasonable reply, I would request a face-to-face meeting so the article and other issues could be discussed. The meeting was more than enough to inspire another article, and the major difficulty will be based on not incorporating the colourful language that was used throughout the meeting.

PREPARATION & INTRODUCTION

Once the venue and time were established I put together a mini propaganda package which included, one annual report, one 15-year chart of that company's performance, a new silver IPO prospectus, three sheets of blank of A4 paper, one pen that was a low risk proposition for stalling at a critical time and a sealed envelope of account opening forms. The weather was fine and hot, so shorts and colourful shirt would suffice but they didn't seem to match the black briefcase. After contact was established, the first call to break the ice was, "Can I get you a beer?"

LESSONS FROM THE NASDAQ BOOM/CRASH

It is always a touchy subject to discuss previous performance in the stock market with a total stranger at the best of times, however I was somewhat shocked in terms of his honesty based on some nasty experiences in terms of entering the market at the height of the boom whilst being relatively green in terms of equity investments. He was able to accept the fact that the money lost was not going to miraculously reappear through a major spike and that it was time to effectively look towards the next boom and too learn from past mistakes. One issue raised was based on how friends were tipped certain stocks, and feelings of sheer guilt were evoked as the share prices retreated quickly in a southerly direction. It is apparent that those that are able to accept their losses and move on will be able to eventually prosper, whilst those that refuse to liquidate fallen angels will find themselves entering PM's at the wrong stage of the cycle and are lining up for a similar fall from grace.

LOOKING AT A PORTFOLIO

Once I felt comfortable to move on, I removed the documents from my bag and started to jot down some individual stock ideas. I then asked him had he followed a certain stock, and handed over a copy of their annual report. I then produced the 15-year chart, and highlighted periods of growth, which coincided with spikes in the POG from 1987. I then explained the company had been in operation for 54 years, produced gold continuously for 13, and was able to pay dividends to shareholders over 6 years. I then explained why the price was in the mid 40's, and the market had failed to pick it up as a "pre-emptive strike", however I was to learn that trying to decipher incoming questions was a pointless exercise. I then moved on to the silver story, and he was well versed in terms of the short positions, Buffet/Gates/Soros investments, the looming exhaustion of the US stockpile and calls that "Silver was ready to explode". I then produced the prospectus and explained that the issue was very well received by a number of silver bulls, resource funds, however it was struggling to attain minimum shareholder levels through the retail issue. Rather than viewing this as a negative, I elected to draw his attention to the positive aspects related to it, and how once the silver story started to spread there would be only a handful of investment opportunities in Australia and these were well under 50c. We then agreed on a simple formula,

Excessive Demand + Limited Supply + Reduced Competition + Market Stupidity= A Multiple Share Price Increase

The first two stocks I referred to as my "ATM" specials (Automatic Teller Machine), where if money is required down the track small amounts of these stocks could be sold off readily. It is always handy in difficult market conditions to have at least one ATM special, where the share price is comfortably above the purchase price and once the kennel of dogs has been effectively liquidated these make for painless and satisfying sales.

I then looked at the second liners and how they were attracting minimal market interest, but had the ability to transform fairly quickly in the right environment. I then went for broke and provided some "rank punts", and gave a few pointers on how these stocks had the uncanny ability to put on a few hundred percent every 3-4 years before walking back into their kennel with their tale firmly between their legs.

A number of other stocks were discussed in terms of fundamentals, attending mining seminars, Directors of a number of listed companies, and why we reached the conclusion of back the top shelf managers and play the promoters.

TECHNICAL ANALYSIS

This is one area where I am forced to tread warily in terms of putting forward my two cents worth. I have little time for technical analysis and view at as nothing more than "noise" on my way to the ultimate destination. In no way would I let a chartists call change my view of the situation even though the metal failed by 50c to break a key resistance level. The fundamentals are too compelling, and as far as I am concerned I will be buying when the panic merchants dump because a key level was breached, and gradually feeding into a rising market where the charts are painting pretty blue skies like they are going out of fashion. After ducking and weaving we reached a number of conclusions and one of these was based on the fact that, "Everyone can see $330 as being a critical point, why not load up prior and see where the spike takes us". We also asked the question, "If charting provided you with the edge, how come everyone these days seems to be doing it?" I guess after a serious discussion we agreed that we would "Treat the market as a war rather than an exact science".

BROKERS AND DRILLING RESULTS

I have noticed that there seems to be a lack of knowledge in terms of reading drilling results with reference to g/t. When CRS bought out some exciting drill results I was asked, "Is 7m at 67 g/t a good result?" I replied that it was indeed a very exciting result and the market could well add another $12-15m to the company's market capitalisation. The same person then asked me if HER's hit of 0.42m at 1017 g/t was a reasonable result. This is one heck of a positive, and once the hype starts to gain momentum I guess everyone will be getting his or her Geo wings out of a packet of Wheat Bix.

INTERNET FORUMS

Despite the fact that they are still fairly popular, the majority have now transformed into religious/political sites where the only stocks pushed are falling angels where the majority are full to the brim and desperate for an exit. We discussed a number of posters that have attracted attention, identified the handful of true gold/silver believers and those that continually peddle their rubbish to the dwindling masses.

JPM AND ALTERNATIVE COLA

The JPM rumour that has been featured and analysed on GOLD-EAGLE is starting to infiltrate the mainstream, with December the most likely crunch time. The share price recovery was more or less in line with the Dow's bear market rally, however judging from the activity over CY2002 the cracks are not that recent. We discussed the ramifications for banking stocks worldwide, the potential "flight to quality", and strategies on how we could capitalise on both the long and the short side. The conservation then swung to Middle Eastern Cola, and how Coke's sales were decreasing in certain markets, as alternatives were being produced. The next obvious topic of discussion was the growth in both China and India and how they provided both threats and opportunities in terms of investment.

$3,000 GOLD, 3000 DOW, $50 SILVER

These levels were discussed in terms of some recent predictions, the actions of the Hunts in the silver market, and how the main street we were looking over could well be patrolled by persons carrying automatic weapons if gold were to get to the $3,000 level. Maybe this is an exaggeration and a product of too many beers on a hot day, however we came to the conclusion that those seated around us would not know what hit them in terms of their everyday lives, mortgages and debt positions. It seemed that everyone is oblivious to the potential events that could unfold, much like the broker that took a walk down Hay St Mall during the 1987 crash and was amazed at the normality of the situation. We discussed a host of investment gurus, newsletters and accepted the fact that once a silver bar made the front page of a mainstream publication exit doors that may even be behind you were to be sounded out, but sliding down the inflatable slide was still a little while off yet. I was amazed that AJC didn't even make into the conversation, although I was tempted to change tact for some humour value.

Whilst no amount was discussed directly, it was agreed that at some stage owning physical gold and silver would be far more beneficial than a Chess statement of equity holdings.

IGNORE THE "NOISE" AND WAIT

Whilst short-term dips on low volume lower your confidence, and create red ink for your spreadsheet it was best to either hold out, or where possible top up (average down) quality positions. Stale bull selling would also creep in, however accepting the fact that many would have to "fall out of the tree" before the speculative "blow off" could begin in earnest was half the battle won.

WHAT IF WE WERE WRONG?

It is always fascinating to look at what could happen if the Dow did indeed rally to 13000, the POG fell to $100 and the NAB went through $60. After some deliberation all the evidence we could gather suggested otherwise. I guess to an extent If we were indeed off the market I would be partaking in small equity placements to ensure a number of juniors could afford the listing fees, coffee, biscuits and tickets to mining seminars (wakes).

CONCLUSIONS AND QUESTIONS

  • The majority will and always be wrong in the end.
  • If the market learnt from previous booms/busts, how come we had Bre-X and the NASDAQ booms 360 years+ after the tulips and viruses that gave them those flame designs?
  • The risk/reward in gold and silver is attractive at current levels.
  • The gold/silver and gold/Dow ratios are so far out of kilter it is beyond funny.
  • You should be telling your friends and family now about the emerging opportunities rather than waiting until the boom is in its mature stages.
  • The majority of investments gurus have NFI.
  • The pension fund problem is not due for a front-page appearance until it is too late.
  • Does that Cola really stack up to the real thing?
  • What if Richard Russell is right with his latest call?
  • Why is all that gold and silver moving to the Middle East?
  • Does the latest JPM rumour have any substance?
  • Just because the public doesn't yet find the company attractive it does not mean that they never will. It could be a bit like finding a member of the opposite sex that needs a Maurice Meade makeover rather than copious amounts of plastic.
  • When we will have stockpiles of Crown Lager at home, rather than paying up to $7 for the pleasure?
  • Holding a gold nugget and gauging others opinions could be far more beneficial than drawing pretty lines on a chart where anyone can pick up a bargain bin textbook for under $10.
  • The gap between bulls, bears and even between some gold bugs is stretched to the limit. TSIGTHTF somewhere shortly.
  • The rampant real estate and credit bubbles will ensure the ending will mimic the sheer stupidity that took us there in the first place.
  • Casinos are open 24/7, if you want to gamble fortunes can be won and lost at anytime (take your own watch and sunglasses)
  • Will the world be a different place in 12 months time?

Buy quality juniors with solid management that care about their shareholders and accept the fact that idiots at times will enter the fray and push your stock to the extreme in both directions. Back a company from the ground floor rather than buying something at 10c and chucking it away at 11c, as it is these situations that can have a material impact on your standard of living not churning promoter's garbage trying to scrape together the minimum wage.

I must say it was a worthwhile exercise, and I was surprised at the level of knowledge that was exchanged without turning the event in a dull and boring affair. The ramifications of the word spreading would rival the worlds largest pyramid marketing schemes and I guess the rewards await for those that had the courage to swim against that nasty rip that threatens to convert any unsuspecting gold and silver bug into a babbling supporter of high P/E's and an accumulator of pineappled tech issues as the next NASDAQ boom is always just around the corner.

10 karat gold is 41.7% pure gold.