Tony Lepage

In order to re-evaluate my stance on gold, I reviewed the reasons I decided to enter the market.

Dollar Debasing

If you aren’t aware of the current problems with the US debt burden, you’ve been living a sheltered life under a television. I am not the only person who thinks that the USD needs to fall significantly. The Organization for Economic Co-operation and Development has stated that the USD needs to fall 35-50% from its current value ($1.12 CAD). Even the US Government wants the dollar to fall, they want China to revalue the Renminbi upwards!

Housing Market

Although I don’t believe housing prices will drop over the next few years, I am afraid this market was allowed to become far too hot. It is extremely rare that a bubble results in a soft landing—in fact, I can’t even think of a bubble that did deflate softly. This does not mean that the average Joe will not be fooled. The resulting inflation caused by trying to prevent the market from collapsing will spark hyperinflation. This will confuse consumers and the markets.

Many investors, including myself, find it easy to confuse the consequences of a hyperinflation. A hyperinflation will cause the stock markets to rise. It will also cause home prices to rise. The more we see these assets rise, the greater the chance our currencies are being heavily debased. This can continue to go on for a long time. However, this does not mean you’ll be able to cash out that equity and enjoy it to its fullest. It really means everyone will be living with less. If the buying power of the dollar decreases, an increase in home prices or stock markets will not mean more money in our pockets. Remember how our grandparents told us they could purchase a loaf of bread for 5 cents and still get some change back? Just as the price of bread has risen about 25-fold, I’m sure that their home values have risen just the same. Are they any richer?

I’ve heard many say the US markets are going to rally and I agree that this is very likely. If I chose to invest in any market within the USA, it would be traditional large cap companies that provide essential products to consumers (Johnson & Johnson, etc).

However, I will be avoiding the US stock markets completely.

If I am correct, I will be accused of missing a major bull market in the US stock markets. If the USD drops 30% you can expect an equal gain in the stock markets themselves. This would negate any profits I could have made. As far as I’m concerned, the US market is a very risky investment.

Commodities

Commodities have been in a bull market until this past June. Investors have started to realize that a slowing economy means less demand for commodities and they have sold them heavily. This has dragged gold down but it will get to a price when it is so cheap it will break free of the commodity sell-off and become completely free moving.

If commodity prices continue to fall, this can signal deflation to the FED, who, under the leadership of Ben Bernanke, will flood the market with US dollars to keep prices from falling.

Entitlements

Entitlements are a $57, 000, 000, 000, 000 ticking time bomb.

Oil

Just looking at the energy sector will prove that investors aren’t living in a real world. Today Exxon-Mobil trades at a price-to-earnings ratio of 10. In 2003 Exxon-Mobil, Chevron-Texaco and Conoco-Phillips earned $33 billion combined. In 2004 those profits rose to $47 billion and in 2005 they made $64 billion. Those are stunning profits and even more astonishing earnings growth.

Look at the Exxon-Mobil homepage and you’ll see a ticker that says “Energy is Essential to Economic Progress All over the World.” They are 100% correct and as our economies continue to grow we’ll continue to need more and more energy. With the kind of profits they make off of oil, they won’t be promoting an alternative until they’ve made every last cent. If we were to assume there are 1 trillion barrels of oil remaining on earth (A figure many of the peak-oil-critics use. In reality I think there is a lot less.) with an expected price of $100 a barrel, do you think the oil companies would promote alternatives to oil if it’s going to cut into their in-the-bank profits? Based on these estimates, the industry is believed to be worth $100 trillion! Why scare us away when they’re earning more than they ever have.

Geo Politics

From Japan ending their role in the carry trade to continued tensions in the Middle East, it appears the “terror premium” will be here for many months, if not years, to come. War is not a pretty thing. The Iraq war only seems to be dragging on and on, keeping the USA spread thin while highlighting their foreign policy objectives and pissing many, many nations off.

Common Opinion

Sometimes I have to check whether common opinion agrees with me to make sure I’m not following a popular trend that would cause me to lose my shirt. If everyone was thinking like me, it would be impossible to sell my holdings when the market tops because everyone would be trying to do the same. Currently, I don’t have to worry about this. I have many reasons to remain confident in my opinions. The fundamentals that brought me into the gold market have not changed over the last year.

Conclusion

I am very happy with my current allocation and I feel that I’m well hedged against fiat currency devaluations. This protection has brought me a gain of 30% each of the last two years. While this is nowhere near modest, I plan a more aggressive set of holdings. I will be acquiring holdings in a set of gold and silver exploration companies over the coming weeks.

I have not determined my full distribution plan but I will be focusing on the following list of companies:

• MAD
• TNP.UN
• QC
• MMM
• ESI
• N
• WDO
• GPR
• FRA
• XAU

I won’t say that I will be investing in ANY of these stocks. They are a definite on my radar but I need to create a case for investing in them and plan a full strategy. I will be sure to list my selections here and I will explain the reasons behind any investments as well as price targets. I currently have no problem with divulging all holdings as long as I can continue to spread knowledge to those who wish to learn. This is how I learn.

Things are starting to get really exciting.

Side Notes:: If you are trying to solicit funds from me for your idea, hedge fund, or barber shop quartette, be sure to avoid insulting my intelligence. While I have frequently stated that I have no formal education in economics or investing, likening my trading skills to that of “George W. Bush using a computer to write software” will get you nothing. I may not have formal training, but I do have the motivation to heavily research any positions I take. I refuse to day trade and I will continue to invest for myself only. Who cares for your money more? You yourself, or some stranger? Additionally, I’ve made it personal rule to be weary of people who use the term “trust me.”

Does it really matter if the dot-com ‘geniuses’ made 200-2000% per year during the years leading up to the dot-com bust if they ended up losing it all when it collapsed?