Posted: 23 Sep 2009 08:53 AM PDT
Learn how to turn this bull market into an absolute fortuneThe precious metals bull market is in full swing.
The gains in precious metals have been slow and solid. There are bouts of euphoric urgency and small corrections all along an upward trend. Those are the signs of a true bull market.
But I'm not here to regale you with the virtues of owning gold and silver and why you must have some gold and silver in your portfolio. We've been over it before. Today you'll learn how to turn this bull market into an absolute fortune.
You see, there will be a very great divide between the winners and the big winners. When it comes to true wealth, you've got to find the big winners. And there's no better place to do it than in a genuine bull market.
Because when the bubble does come, you'll be in place for quadruple-digit gains. I'm talking about the kind of gains that can turn a few small, well-diversified investments into true financial freedom. There's nothing like it.
Normally, to make the big scores, you have to take big risks. Some traders take big swings on volatile options where they're going to lose 100% or walk away with 300% or more. That's ok, but there's a lot more to be made here. This is a bull market and eventual bubble where true fortunes will be made. There will be winners and legendary winners. The best part is, the stocks where you'll make the most money in this run are actually some of the safest to own.
Premium valuations and premium returns
Not all gold stocks are created equal. There are three main groups. You have the majors, the mid-tiers, and the juniors.
The difference in profit-potential of each group comes from one of the oldest gold company valuation strategies simply doesn't use, but pays off very well in markets like this.
First are the majors. The major gold producers are the gold like Barrick Gold (NYSE: ABX), Goldcorp (NYSE: GG), and Kinross (NYSE: KGC).These companies have mines all over the world. They're all primarily gold mining companies and they mine millions of ounces of gold every year. They also produce a lot of silver, copper, and other metals.
They are also the ones that own and operate the largest gold mines in the world. Some of these mines take billions of dollars to start up and the only gold companies with that kind of cash are the majors.
They are also perceived as the safest gold stocks to own. They produce billions of dollars in free cash flow and always have one or two big mines in development.
Truth about safety
The thing is, the perception of safety actually makes them a bit riskier. Just take a look at what happened last year. Many of these "safe" gold stocks were hammered. Some fell 60% or 70% as gold slid 30% from its highs. Meanwhile, smaller and more speculative gold stocks were hit hard too. Many of them fell 80% or 90%.
Granted, the losses were greater in smaller stocks. But as Prosperity Dispatch readers are well aware, true safety comes from the right mix of risk and reward.
The reason the majors aren't really nearly as "safe" as they're perceived to be is because they fetch far greater premiums for the gold they do own. For instance, Goldcorp currently has reserves and resources (there's a technical difference between the two terms, but it doesn't matter too much in the big picture) of 67 million ounces of gold. Goldcorp has a market cap of $29 billion. That puts a valuation on the of about $430 per ounce of gold it owns.
That's very high. And when it comes to high valuations, the risk is greater and the reward smaller. That's why it's best to look for the stocks with greater values to capitalize on gold bull.
Less downside, more upside
You'll find those values in theother two groups of gold stocks – mid-tier and juniors. They offer far better potential upside than their larger counterparts.
While putting together my research for the next Prudent Investing recommendation, I found that some of the mid-tier gold stocks are at truly exceptional values.
There are dozens of examples. For example, Northern Dynasty Minerals (TSX: T.NDM) has made one of the largest gold discoveries in decades. The company has a market cap of about $680 million and almost 50 million ounces of gold reserves and resources. It works out to about $14 per ounce of gold in the ground.
There are a lot of other factors here too. Northern Dynasty's gold deposit was found in some of the harshest conditions of North America. On top of that, the gold is very, very deep. The odds of it ever becoming a mine are slim, but it has a lot of gold. And its gold is exceptionally cheap. It's tough to get much cheaper than $14 an ounce in the ground. Remember, Goldcorp was valued at more than $400 per ounce.
Also, there's other mid-tier gold companies like NovaGold (TSX: T.NG), which trades for about $55 per ounce of gold in the ground. Then there's Detour Gold (TSX: T.DGC) with a market cap of $470 million and a price per ounce of gold in the ground of $35.
Don't get me wrong, there are plenty of other considerations that come into play when valuing gold stocks. But the price per ounce in the ground has been one of the best indicators of value in gold stocks for decades. And when assets are undervalued, their downside risk is lower and upside potential even greater.
What I found for readers of our premium service is probably more exceptional. It's so undervalued investors getting in now should be set up for a three-bagger in the next two years. That's if gold does not move any higher. And if gold went to $1100 or higher, the upside potential is downright staggering. My biggest concern for that stock is actually not how high it could go, but how high it can go before one of the majors buys it out. That's the biggest risk facing investors in most of the undervalued mid-tier gold companies.
Then there are the juniors. You may be familiar with them. In many cases they'll trade for a few cents per share, own some gold exploration project in some far off land, generate no revenues, and live off its ability to print and sell new shares.
The way I've always looked at juniors is that you must have a bull market to make any decent money there. And what you really need is a euphoric bubble. Their time will come. But we'll probably need $1100 gold or more for the fireworks to really get started. Of course, value is value, wherever you find it. That's a topic for another day though.
Too hot, too cold, and just right
What we have going on here certainly looks like a bull market in gold.
The last year has not been kind to gold investors. The credit crunch, which was supposed to be gold's time to shine, didn't turn out so well for gold - initially. But the sharp recovery in gold proves the strength of demand for precious metals; demand that is only growing. Look at the credit crunch like the ultimate test of a bull market. If an asset made it through that, it clearly has the staying power.
With gold back at $1,000, it's fairly obvious it has passed the test.
If you're not already in, get in gold now. Understand though, we're in a bull market and there will be plenty of winners. As you know, a rising tide lifts all boats.
The really big gains, the kind that can create financial-independence, will be had by those investors willing to look for and demand exceptional value in their gold and precious metals stocks. Just take a look at our Free Gold Report that has returned 516% in three months. Just because the bull market is in gold doesn't mean there are different rules.
It's never different this time.
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