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Money - What is Money?

To make money, we have to understand what it is. Looking up the definition of "money" at American Heritage Dictionary at http://www.yourdictionary.com/ahd/m/m0384100.html, money is:

A medium that can be exchanged for goods and services and is used as a measure of their values on the market, including among its forms a commodity such as gold, an officially issued coin or note, or a deposit in a checking account or other readily liquifiable account.

So what makes up good money? Well, we hear that people save money for retirement, therefore we would think that money itself should be a good store of value that is worth saving.

We, people of the globe, now typically equate good money to US dollars. Is that a fair equation? The inflation of the dollar runs at an average of 5% a year since 1960's, and to the tune of 10% a year in the last few years. The percentage means little until you put it in perspective.

You are looking at a postcard to UK from the US in 1953. The postage was 2 cents. (http://www.usps.com/history/history/his4_5.htm#DOM) Now it's 70 cents to the UK (23 cents for domestic).

Can you now guess what postcard postage will be in 2020? $1 domestic and $3 international will be about right. Now ask your little 10-year-old boy who will be 60 in 2050, how much money in 2050 would be the same as $1 million today? The answer is $10 million.

Grant Noble of The Trader's Edge put out a chart of the Dow divided by CPI (measuring Dow in constant dollar) on page 153. The Dow is shown to have been trading sideways for as long as data is available (1925 onwards).

What really is happening on a grand scale, paper money is being created faster than goods being produced, causing prices of ALL tangible assets to rise. Dow stocks, ownerships of companies, are no exception.

So what is good money? In today's world where perception of value changes quickly and capital flows more freely than ever, it's always a good idea to spread your wealth in a few good candidates. Now it's your turn to research the candidates.

Gold for Oil?

There has been the talk about OPEC's switching to gold for oil and how gold will go to the moon.

We like to provoke our readers to think for themselves. If you are OPEC and you don't like USD, call your treasurer and convert your revenue to euro, or gold, or whatever you like.

What's next, have Toyota accept gold for their Camry?

We believe the price of gold and price of oil already reflected such asset diversification. One thing to note Saudi Royals have estimated $400- $600bil investment in America.

Washington Accord

Washington Accord is another hot topic. Would there be an accord renewal in 2005 which limits European central bank gold sales? Consider Asian central banks in aggregate have over $1.5 trillion of US Treasuries, enough to buy every drop of gold above ground, any sales of gold in volume will quickly be transferred to the coffins of the Chinese and Japanese. There is roughly $60 trillion invest-able dollar equivalent capital, much of which is in US dollars. Things were fine until 2002 when the dollar started its vicious bear market. But now the Asian central banks are having a tough time diversify their assets. They could buy ExxonMoil (270b), Microsoft (300b), Cisco(180b), Boeing (30b), Walmart (240b), GE (340b) and still have change.

Gold and the dollar are polar opposites. The big money know they need to get into gold, but they don't know how to do it vastly and without causing price to rise $50 at a time. The need is becoming urgent and that's why we should see a gradually accelerated rise in gold.


Jesse Livermore was quoted saying:

They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side.

Often times we try to "prove" that we were right while the market was wrong. In the end, the market is the judge and we lose in our pocketbook. More-over, we expand so much energy in a segment of the market which we believe the market was wrong that we miss out great opportunities in other segments where profits were made in multitudes. In 2003, we found ourselves spending time analysing Dow and S&P movements and missed out on some great commodity plays. We suspect the great folks at www.zealllc.com did the same.

Focus on what is happening and leave what is not!

Market runs on its own timing and we must respect that. Market can run irrationally longer than we can solvent. We must pace ourselves with the market in order to profit.

Another favourite of ours from Mr. Livermore:

It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!

Then we hear those who say:

Don't be a pig!

In the end, we let simple 50 day and 200 day moving average be the guide. It has worked well for us in entry and exit points. We shall expand on this next time.

We closed the subject on Washington Accord then this came in.

Japan to cautiously consider gold in reserves http://www.reuters.com/financeArticle.jhtml?storyID=4227455&newsType=usGoldRpt&menuType=markets
TOKYO, Jan 28 (Reuters) - Japanese Finance Minister Sadakazu Tanigaki said on Wednesday he wanted to carefully consider whether to change the weighting of gold in Japan's foreign reserves.

Market Watch

S&P and Dow. Amazingly, despite lacklustre GDP numbers, Dow has still not yet closed 1% down for two consecutive days. There is not much more to say. Remain sidelines until Dow breaks 50 dma, followed by breakdown of 200 dma. Don't fight the tide.

Gold and Gold Stocks.

US dollar gold price is consolidating at $400. We don't know if it will retest $390. We said during last issue

First break of gold above $435 without $1.3+ to the euro will confirm the next bullish phase of gold.

We really mean to say is decisive break out of Euro gold price of 340.

Much of HUI's rise has been attributed to copper and silver stocks such as FCX, CDE, and HL. One-time small caps such as BGO and GSS were weighted the same as AEM and MDG therefore capital shift from the later to the former actually resulted in rise in HUI. XAU is a better measure for gold stocks however it has its own issue with hedgers.

Looking at XAU in euro you could barely notice any bullish trend. This tells us the action in gold shares is really only mildly bullish and the best is yet to come. XAU is currently testing June 02 peak of 90 in USD and 200dma of 76 in euro. We think stocks like KGC and MRB present good entry point at this stage. When the two-year consolidation period ends, we expect gold shares to advance quickly in a very narrow time frame.

Stock Update

Here is our model portfolio. We own all the stocks listed below. Price is in USD

Name # of shares Date in Entry Price Current Price Planned Exit Price
(only for some)
kgc 1430 1/30 6.99 6.99 9.2 10k
hmy 654 1/30 15.27 15.27 26 10k
mrb 6250 1/30 1.6 1.6   10k
dsm 9356 1/30 1.07 1.07 1.7 10k
arq 4065 1/30 2.46 2.46   10k
wtz 1838 1/30 5.44 5.44   10k
ndm 1626 1/30 6.15 6.15   10k
ng 2008 1/30 4.98 4.98   10k
als 4405 1/30 2.27 2.27   10k
dni 24390 1/30 0.41 0.41   10k
Total 100k.

We feel very comfortable committing most capital at this juncture. As mentioned previously, at gold price of $400, producers are producing profits which help cushion corrections. Would-be producer should see valuation re-adjusted upwards as production date nears.

We picked a basket of producers (KGC, HMY), would-be (with in 12month) producers (DSM, MRB), distant producers with large defined resource (NG, WTZ, ARQ, NDM), and explorers (ALS, DNI). We also diversified nicely into silver (WTZ, DNI, MRB), Platinum (ARQ), and Copper (NDM). Here is the rundown.

KGC - Pro: Loyal following, high liquidity, positive cash flow, technically attractive. Cons: Reserve of only 13mil oz.

HMY - Pro: Huge Resource, solid management. Cons: Rand is unstable, low margin.

MRB - Pro: Gold, Silver, Copper, producing in 2005. Cons: Minimal following, medium attractive valuation

DSM - Pro: Large land package, Brazil mining friendly. Cons: Lack of US listing.

ARQ - Pro: Huge platinum resource, Platinum = $800. Cons: South Africa. ARQ is now close to $500mil.

WTZ - Pro: Large resource, discounted compared to its silver peers. Cons: feasibility doubted by some.

NDM - Pro: Large resource of gold and copper. Cons: low grade.

NG - Pro: Large resource, new AMEX listing. Cons: Not producing until 2006.

ALS - Pro: Multiple projects, Nickel royalty. Cons: high valuation for an explorer.

DNI - Pro: Active management. Exploring Clifton's silver property. Cons: valuation getting high.

We removed TKO mentioned in the last issue due to relatively high valuation.

Let us stress again that this is our model portfolio. We issue no recommendation to making it yours. We appreciate the great feedback over the past two weeks. Subscribers can expect next issue on Feb 22.

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