PDF The Doug Casey Method to Investing in Gold Stocks

[Pages:63]The Doug Casey Method to Investing in Gold Stocks

BY LOUIS JAMES AND THE CASEY RESOURCE TEAM

International Speculator THE DOUG CASEY METHOD TO INVESTING IN GOLD STOCKS

Part I

? Introduction ? It's Time to Invest in "the Most Volatile Stocks on Earth" ? Our Key Advice on Buying Gold Stocks ? Nine Simple Steps for Finding the World's Best Gold Stocks ? How to Choose the Right Canadian Broker ? Why You Should Also Own Physical Gold Today ? Important Closing Tips for Buying and Selling Gold Stocks ? Conclusion

Part II

? The Nine Essential Gold Stocks to Buy Now

Part III

? The Buy List

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International Speculator THE DOUG CASEY METHOD TO INVESTING IN GOLD STOCKS

Introduction

The first time Doug Casey and I walked the mean streets of Vancouver's business district, I had no idea what to expect. Doug is so affable. It was hard to imagine him browbeating the truth out of the con men and incompetents who infest the place. In one meeting, the CEO was droning through his corporate presentation. Doug was quiet. I asked newbie questions. And then the guy started rattling off drill results the company was getting in one zone. I don't remember the details (X grams per tonne of gold, Y percent copper, etc.). I do remember Doug sitting up and saying: "That's $300 rock. Drill off enough of that and you've really got a shot here." Doug had done the math in his head, estimating the value of the metal contained in the rock the company was drilling, based on current spot prices. This was back in 2004. "$300 rock" was very rich back then. It still is, but was even more so all those years ago. Doug had, in a few words and even fewer seconds, summed up the entire speculation. I was impressed by the precise, efficient way Doug's mind tallied the critical numbers and brought the potential investment into focus. I realized that it would be easy for people to underestimate him--which would be to his advantage. But Doug doesn't suffer fools lightly. He's easygoing until you waste his time. I wasn't there, but I heard firsthand the story of another meeting that didn't go so well. The Casey team at the time was sitting through a pitch. Suddenly, Doug stands up and says, "Let's go." In the shocked silence that followed, Doug elaborated: "It says in this handout that management doesn't own any shares--I'm not buying this stock if they don't have any skin in the game." And walk out he did. The point of these stories is that if you know what you're looking for, you can find unrecognized value and bag tremendous gains, but if you don't, you can lose your shirt to the crooks and fools who are out there. In this report, I summarize all that Doug Casey has taught me over the years. It's a beginner's handbook of sorts. Speculation 101. I wish I'd had it when I started out. I'm glad to make it available to you, without further ado...

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International Speculator THE DOUG CASEY METHOD TO INVESTING IN GOLD STOCKS

It's Time to Invest in "the Most Volatile Stocks on Earth"

Anyone who thinks mainstream investing is safe today is kidding him- or herself. We are all speculators now. The difference is that some of us know it. If you have the courage, the following pages will show you how to play to win...

If you want maximum returns in the market right now and are willing to take the necessary risks, the junior gold space is the place to focus. A junior resource company is simply a very small resource company. Most are exploration companies, looking to discover a rich deposit of oil, gold, freshwater, etc. The term also covers small producers: companies that have already discovered a resource and are extracting it or tapping into it, but are still small. Juniors often have market valuations of less than $10 million for the whole company. Most have no net income and no meaningful asset value. When the market is way down, some juniors trade for less than cash in the bank. That means that the total price of the company's shares is less than the company's cash on hand. Mainstream investors dismiss juniors as "penny stocks." They think they're too volatile to touch. To a degree, that's true. Some juniors do trade for pennies. And all of them, even the ones that trade for several dollars a share, are extremely volatile. Doug Casey calls them "the most volatile stocks on earth." He's not joking, nor exaggerating. But this is a good thing--if you know how to make volatility your friend. We'll get to that in a moment. First, let me explain...

Why Invest in Juniors?

Imagine a typical exploration junior. It has no income. It has no measurable assets. Even the cash it has in the bank isn't really an asset; it's an obligation. The junior will use that cash to drill holes in the ground, hoping to make a big discovery. Now, what is this company worth? The answer can only be zero. But what happens if it hits pay dirt? The stock will soar, of course.

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International Speculator THE DOUG CASEY METHOD TO INVESTING IN GOLD STOCKS

At this stage, it's impossible to put an accurate value on a mineral discovery... How big is it? How deep does it go? How stable is the rock? How hard will it be to get metal out of the ore? No one can answer these questions from just one drill hole. Any market valuation at this point would overvalue the discovery. However, if the discovery does have economic value, that value will be greater than zero. And any value at all is infinitely greater than zero--so the change in value for a junior that makes a discovery is enormous. Share prices leap. That's why we speculate on juniors. They have the potential to "go vertical" like nothing else...

Going Vertical

The junior sector is 10-bagger hunting ground. A 10-bagger is a stock that goes up 1,000%, or more. It sounds mythical, but they are real. We've bagged quite a few over the years. This is why some see buying juniors as just gambling. In a way, it's not a bad idea to think of the junior resource sector as a giant casino. It puts you on guard. And it prepares you for the losses you'll suffer on your way to big wins. There is, however, a huge difference between gambling and rational speculation. A gamble is essentially a game of chance. Sure, professional gamblers learn how to play the other players. But unless they cheat, the heart of the gamble remains random chance. You toss the dice. You win or lose. A rational speculator does everything possible to stack the odds in his or her favor. This is not cheating. It's research. It's experience. It's looking at trends. It's looking at investments that should benefit from those trends, and picking the best. All speculators take risks. But rational speculators use their intelligence and energy to minimize those risks. Gambling is a game of chance. Speculation is an investment strategy that depends upon observation and intelligent planning. Chance can enhance or hinder it, but it doesn't define it. That's why we're here: we observe, strategize, and hunt for 10-baggers.

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International Speculator THE DOUG CASEY METHOD TO INVESTING IN GOLD STOCKS

Where Can You Find the Best Juniors?

The best hunting ground for 10-baggers is the Toronto Stock Exchange and its venture division, the TSX-V. London's alternative market, the AIM, and the Australian Stock Exchange, the ASX, are also friendly to junior resource companies. Some juniors list in the countries where they operate, such as Peru. The lion's share, however, goes to Toronto. The chart below shows the number of mining juniors listed in Canada and other countries.

Many successful juniors do seek U.S. listings. But the requirements are too steep for most juniors, even on the lower rungs of the NYSE. By the time a successful exploration company gets a U.S. listing, it's no longer quite so junior. (You can find out how to trade on the Canadian exchanges--and find the right broker for you--in the quick primer below.)

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International Speculator THE DOUG CASEY METHOD TO INVESTING IN GOLD STOCKS

Our Key Advice on Buying Gold Stocks

Here's how to make volatility your friend: buy low and sell high.

That's easier said than done.

To make it work, you have to be a contrarian investor. That means backing up the truck for stuff no one else wants.

It may be a clich?, but it's true: the best time to buy is when there's blood in the streets. And the time to sell is when everyone else piles in to the market you knew would go up.

Of course, this only applies to investments that have value. Buying after the pet rock market crashed in the 1970s was not a great move. But buying copper when it fell below the cost of production in 2001 was. The world still needed copper then, needs it now, and will need it in the future.

In an ideal world--or at least one in which we are immortal--disciplined contrarians could amass limitless fortunes. All they'd have to do is buy necessary goods after total market meltdowns and sell when the masses pile in.

Unfortunately, these cycles can last ten or twenty years. That's well beyond the patience of most investors.

Enter our friend: market volatility.

Economists like to imagine that markets are rational. Experience tells us otherwise. Markets are often more volatile than pure theory predicts. Resource markets, and precious metals markets in particular, are among the most volatile.

Markets are made of masses of individuals, each with his or her own beliefs, fears, and needs. They don't always make the same decisions, but sometimes large groups fail to value assets accurately. Frequently, painful experiences cause investors to exit an asset class en masse. This results in an oversold market. That means that the average company in that market is selling for less than it's worth. The opposite is true in an overbought market.

Such market momentum is, frankly, stupid. But it's real. And it often happens many times within larger mega-cycles. Whenever it appears, it's an opportunity for contrarians.

But even such intra-cycle momentum can last years.

Enter our best friend: extreme volatility.

Most juniors trade on very little volume. When a company has fewer than 50 million shares outstanding, the stock might trade fewer than 100,000 shares each day. Some companies trade fewer than 10,000 shares a day.

The low volume results in frequent extreme volatility. That creates frequent contrarian opportunities...

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International Speculator THE DOUG CASEY METHOD TO INVESTING IN GOLD STOCKS

It's gut wrenching until you get used to it. Shares in a solid junior with great management, cash in the bank, and a major new discovery unfolding can drop 20?30% just because a large shareholder facing a margin call is forced to sell. They can also soar 20?30% because of a spectacular drill hole.

If you missed the bottom of a mega-cycle, or even the current market momentum trend, don't worry. The extreme volatility of juniors often creates last-minute buying opportunities for the savvy speculator.

This is great news for investors late to the game. It's even better news for those who've been paying attention and have a shopping list of great stocks ready. There's always a contrarian opportunity somewhere, whether it's long or short.

When to Buy Juniors?

Obviously, the best time to buy junior gold stocks is when nobody else wants them...but there's more to it than that.

Start by asking yourself what kind of speculator you are. Then pinpoint the market trends you truly believe in.

These may seem like abstract ideas, but they are absolutely essential.

Consider...

If you are cautious by nature, but you believe that gold will rise over the coming years, then focusing on profitable producers is your sweet spot.

If you're keen to maximize gains and willing to take higher risks, early-stage gold explorers are the way to go.

If you're somewhere in between, like most people, advanced explorers moving known discoveries towards production offer high returns with reasonable risk.

If you think silver has more upside than gold, replace "gold" with "silver" in the checklist above.

Even the largest and most stable mining companies in the world are more volatile than most investors are used to. The underlying commodities themselves are so variable that standard securities analysis just doesn't apply.

You need to understand why you place the bets you do. If the stock drops despite the company delivering the goods, you need to be so sure of your premise that you don't panic and sell (at exactly the wrong time).

This level of discipline is only possible if you are certain in your reasoning and your picks are sound. Even then, it's hard. If it were easy, everyone would do it and there'd be no profit in it. That's why you have to start with a little soul-searching.

Clarity brings confidence. Confidence enables discipline. Discipline is essential for success as a speculator.

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