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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Future Inflation Fears Fuel Price of Gold Shares and Warrants

Commodities / Options & Warrants Jun 23, 2009 - 01:48 AM GMT

By: Lorimer_Wilson

Commodities

Best Financial Markets Analysis ArticleThe 2008 stock market meltdown brought panic and forced liquidation to all market sectors and especially junior resource shares (- 58.2% on average) and their associated warrants (-80.1%). Shares of companies that had a solid foundation for development, production and growth were unceremoniously dumped along with those more numerous juniors that had little more than hopes centered on grass roots exploration prospects. As a result of this indiscriminate selling – this throwing out the baby with the bath water – extraordinary opportunities have emerged creating once-in-a-lifetime values for discerning investors.


In spite of major rallies in the GDM, HUI, SPTGD and CDNX indices year-to-date (see below) even greater increases are required for them just to match their 2008 highs i.e. 32%, 38%, 18% and 143% respectively. In the case of commodity related stocks with warrants and their associated warrants increases of 102% and 179%, respectively, are necessary to achieve their 2008 highs. As such, given the future expectations for inflation, the price of gold and the value of the U.S. dollar as discussed in last week’s article “Why Gold Mining Stocks and Warrants are Up so Dramatically”, major increases can be expected in the next few years for all commodity related stocks and their warrants and particularly those of gold and silver miners.

        Commodity Related Stock and Warrant Performance vs. Gold and Silver

 * All calculations are based on U.S. dollar equivalents
** Week ending June 19th, 2009
***CDNX is the symbol for the S&P/TSX Venture Composite Index consisting of 558 companies of which 44% are engaged in the mining, exploration and/or development of gold and/or silver and other mineral resources and 18% in oil or natural gas pursuits.
****HUI is the symbol of the AMEX Gold BUGS (Basket of Un-hedged Gold Stocks) Index and is a modified equal dollar-weighted index of 15 gold mining companies that do not hedge their gold beyond 1.5 years.
*****GDM is the symbol for the NYSE Arca Gold Miners Index and is a modified market capitalization weighted index of 31 gold and silver mining companies.
******SPTGD is the symbol for the S&P/TSX Global Gold Index and is a modified market capitalization index of 19 precious metals mining companies.

Future Inflation is Assured

Until this past October the growth in the supply of the monetary base (i.e. M0) in the U.S. over the previous 48 years had averaged 6% year-over-year (YoY) and had seldom exceeded 10% although it did grow to 15.8% YoY during the pre-Y2K period. Indeed, during the first half of 2008 it was actually trending lower averaging 1.2% growth before all hell broke loose.

In October, however, as a result of a number of major fiscal developments, the Fed took it upon itself to solve the major problems with the economy by expanding the M0. To say they didn’t act in half measure is putting it mildly – very mildly!  

As Adam Hamilton reports in a recent article, and his chart below depicts, the Fed increased the M0 by 25% (36.7% YoY) in October to more than twice the level seen in the previous five decades; by a further 27% in November (73% YoY) and another 15% in December to 98.9% thereby doubling the U.S. monetary base in just 4 months. Such action was unprecedented and put the country into unchartered inflation territory. But it didn’t stop there. In January the Fed increased the YoY monetary base to 106%, increased in yet again in February, and again in March, and again in April (the May numbers are not yet available) to an unbelievable YoY of 111.0%. That’s right. 111% when the norm over the previous 48 years had been just 6%!  Surely this monumental increase in America’s M0 will have a major affect on real prices.


The monetary base numbers are shown in red above and their YoY growth rates in blue.

As consumer spending recovers and bids on now-depleted inventories rebound prices will also rise for pure supply and demand reasons says Hamilton maintaining that “we’re probably facing a perfect storm of inflation.” I couldn’t agree more! As inflation becomes more obvious to the masses inflationary expectations will soar and investors will seek assets that thrive in inflationary times i.e. commodities in general and gold and silver in particular and their stocks and associated warrants.

Every Cloud has a Silver Lining

When the realization that inflation is upon us and the purchasing power of all the cash that is sitting on the sidelines is at major risk of being rapidly eroded “the flood into commodities and their producers’ stocks will be breathtaking” says Hamilton. I can hardly wait! This is where the silver lining comes into play. By ‘silver lining’ I mean that the rewards of investing now in the right stocks and/or warrants of specific gold and silver mining companies are going to be truly grand.

Warrants as well as stocks? Yes, most definitely, because warrants are the greatest benefactors of inflation, the higher the better. Warrants, as you probably know, give the holder the right, but not the obligation, to purchase the common shares of the company at a specific price within a specific time period after which, if not exercised, they expire worthless. As such, were stocks with warrants to escalate dramatically in price, as is expected, then the resultant leverage that many of their associated warrants should provide will be absolutely awesome. If one’s investment is in the carefully chosen warrant of the right company then returns (i.e. the leverage they create) could well turn out to be 2 to 3 times (and in rare cases as much as 5 times ) greater than investing in the company’s stock.  Leverage is what warrant investing is all about.

If one believes in the long term prospects of a company with warrants and, as such, its anticipated future stock price, if the warrant has a duration of at least 24 months (preferably 36 months or more), if the stated price (i.e. the strike or exercise price) and terms at which the warrant can be redeemed for the actual stock are favourable and if the trading volume and frequency makes the warrant sufficiently liquid, then owning such a warrant may well be the best way to maximize one’s returns on the dollars invested and particularly in an inflationary environment such as we expect in the next few years. With 50 of the 115 warrants associated with natural resource companies having duration periods of 24 months or more there are a large number of companies to choose from and, as such, ample time for many warrants to work their magic.

To better understand which warrants are best positioned to realize over-and-above (i.e. leveraged) gains vis-à-vis their associated stock a twenty dollar investment in the extensive database details and leverage calculations offered by preciousmetalswarrants.com should be seriously considered.

Lorimer Wilson (lorimer.wilson@live.com) is Director of Marketing and Contributing Editor of:

  • www.PreciousMetalsWarrants.com which provides an online subscription database for all warrants trading on mining and other natural resource companies in the United States and Canada and offers a free weekly email and
  •   www.InsidersInsights.com which alerts subscribers when corporate insiders of a limited number of junior mining and natural resource companies are buying and selling.

© 2009 Copyright Lorimer Wilson- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Lorimer Wilson Archive

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