As the table below depicts, commodity related stocks and their associated warrants are wasting little time recouping the major losses they incurred in 2008 and are already up 30% and 74%, respectively, YTD, even though they are currently suffering from the summer doldrums.
What is most impressive is that all this is being accomplished without inflation (we are presently experiencing marginal deflation), without a major increase in the price of gold (it is only up 3% YTD and down 4% over the past month) or other commodities and without a declining U.S. dollar In fact, the USD is actually up 5.3% YTD vis-à-vis the Canadian dollar in which many of the commodity related stocks are denominated.
Last Week's Performance* Vs. Prev.
Week (%)Vs. Prev.
Month (%)YTD**
(%)Warrants (+24 mos.) -9.5 -18.2 73.9 Stocks with Warrants -8.4 -14.8 29.6 CDNX*** -4.4 -12.9 38.1 HUI**** -8.4 -10.2 3.8 GDM***** -8.3 -11.1 3.7 SPTGD****** -7.3 -7.7 -0.5 TSX -5.3 -11.9 14.1 S&P 500 -1.9 -7.1 -2.7 Silver -4.1 -16.4 13.8 Gold -1.8 -4.3 3.2 * All calculations are based on U.S. dollar equivalents
** Week ending July 10th, 2009
***CDNX is the symbol for the S&P/TSX Venture Composite Index consisting of 558 micro/nano cap 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 large/mid cap 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 large/mid/small cap 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 large/mid cap precious metals mining companies.
Major Increase in Money Supply Will Depreciate USD and Cause Inflation
Future inflation is assured if the growth of the monetary base (i.e. M0) in the U.S. is any indication. Until this past October the growth of the M0 on a year-over-year (Y-o-Y) basis had averaged only 6% over the previous 48 years and had seldom exceeded 10%. During the first half of 2008, in fact, it was actually trending lower averaging 1.2% growth Y-o-Y. That changed last October when the Federal Reserve undertook to solve the major problems with the economy by increasing the M0 by 111% Y-o-Y over the next 7 months! Such a monumental increase is bound to have a major affect on future inflation.
It is just a matter of time, as well, before consumer spending recovers and bids on now-depleted inventories rebound causing prices to rise for pure supply and demand reasons. When that occurs inflation will become obvious to everyone and begin to soar. Indeed, hyperinflation will not be beyond the realm of possibility under such circumstances. This looming prospect of such rampant inflation in the U.S. will severely debase the greenback over the next few years.
Rampant Inflation Will Cause USD Priced Commodities to Rise
Historically the U.S. dollar has moved opposite to commodities in general and gold in particular when the global investment community has realized that such a store of value is necessary as a safe haven replacement for a discredited U.S. dollar. With this expected to happen again the price of gold will be exacerbated by burgeoning demand outstripping annual global output.
Increases in Price of Commodities Will Increase Profits of Commodity Based Companies
Such major increases in demand will see the price of commodities such as gold, for example, escalate considerably in price (i.e. to $1,600, $2500, $5,000 or even more) in the next few years and perhaps as early as next year. This will have a significantly positive impact on the profitability of gold mining companies. For example, if gold were priced at $950/oz., and the cost of production was $400/oz., and two years later gold had risen to $1600/oz., and the cost of production had escalated by 20% to $480/oz. then the mining company's profit margin would have gone up from $550/oz. to $1120/oz. (i.e. from 57.9% to 70.0%).
Increases in Profits of Commodity Based Companies Will Increase Their Share Prices
With the cash flow of a commodity-related company going up dramatically, with the size of the resource and the value of such a company going up dramatically, with demand for their production going up dramatically, with a shortage of product, with dramatically higher prices for their production and with the resultant dramatic increase in their operational profits, one could reasonably expect the share price of such a company's stock to go up dramatically too. Since most gold and silver based stocks are still significantly below what they were at their highs back in 2007 even though the price of gold and silver is higher and, with the major drop in other commodity prices such as oil and steel, the cost of mining is lower such stocks are seeing their profits rise more and more with major prospects as the events above rapidly unfold.
Increase in Popularity of Commodity Based Stocks and Warrants Will Increase Demand
Those investors understanding this relationship between money supply, inflation, rising commodity prices, increasing company profits, increasing share prices and demand outstripping supply have begun aggressively buying such stocks at their still depressed prices. This has had the effect of driving their prices up even more as reflected by the 38% YTD increase in the micro/nano cap CDNX and 30% YTD increase in the wider spectrum of commodity-related stocks with associated warrants.
Increases in Share Prices Will Increase Leveraged Returns of Certain Associated Warrants
However, for those who are prudent enough to do their homework and buy the right warrants associated with the right gold and silver mining and other commodity related companies at today's undervalued prices, their returns (i.e. leverage) could quite possibly be 2 to 3 times greater than had they invested in the stocks themselves. Why is that? Because warrants revel in an inflationary environment that drives the prices of their associated stocks up to the extent necessary to make their enhanced returns (i.e. leverage) that much greater than that of the stocks themselves.
With 47 of the 112 warrants associated with natural resource companies having duration periods of 24 months or more there are a large number of companies to choose from (see preciousmetalswarrants.com for details and to sign up for their free weekly newsletter) and, as such, ample time for many of their warrants to take advantage of rising commodity-related company stock prices.
Don't Worry. Just Prepare and Prosper from the Advent of Inflation
The next major up-leg in the secular bull market for gold and silver is not far off. It has merely been delayed by the seasonal weakness that occurs every summer, the continuing strength of the U.S. dollar and Wall Street's best efforts to promote the abundance of "green shoots" and the beginning of a 'new' bull market. As sure as autumn follows summer, however, the U.S. dollar will fall, inflation will rise, safe-haven money will flow into gold and the share and warrant prices of commodity-related companies will skyrocket.
So, in conclusion, don't be afraid of the big bad wolf called inflation? Instead, do your homework now, invest in those securities that will benefit from inflation's short term visit, sit back and wait to reap its benefits while everyone around you is bemoaning its onslaught i.e. prepare and prosper.
Disclosure: While no specific assets are mentioned in this article I do own commodity-related stocks, warrants, gold and silver.
