 | | The Daily Reckoning | Thursday, September 15, 2011 |
- Reevaluating the large price disparity between gold and silver...
- The looming uranium shortage...and how to play it,
- Plus, Bill Bonner wonders, “What if everything you know about investing isn’t so?”
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|  | | | Way-Too-Cheap | | Awaiting the Inevitable Correction in the Silver Price | |  | | Eric Fry |
Reporting from Laguna Beach, California...
The International Can-Kicking Team is busy again today, as the European Central Bank, US Federal Reserve and three other central banks linked arms to kick the European debt crisis down the road until the end of the year.
Specifically, the Can-Kickers announced that they would provide three-month US dollar loans to European banks to insure that the banks have enough liquidity to make it to the end of the year.
If past scams of this nature are any guide, the “short-term” assistance will somehow morph into long-term or permanent assistance, funded by taxpayers. The markets are rallying because this scam “sends a powerful message,” according to one financial news source.
Message received: When all else fails, launch a massive bailout.
The markets will probably continue rallying a while longer, and the gold price will probably continue to retreat (just as Bill Bonner has been predicating). But the longer these counter-trend moves proceed — i.e. stocks up, gold down — the better the opportunities for forward-looking investors to re-weight their portfolios.
The recent selloff in gold, for example, is providing a glittering opportunity to add a little more weight to the precious metal sector. And as we mentioned in yesterday’s edition of The Daily Reckoning, gold stocks, rather than gold itself, seem particularly compelling at the moment.
Following up on this theme, we present the nearby chart for your consideration. First, the conclusion: Gold stocks are as cheap as they have been in a decade. Now the details: The chart below shows the price-to-EBITDA ratio of the XAU Index of stocks, both in absolute terms and in comparison to the price-to-EBITDA ratio of the S&P 500 Index. This ratio is a measure of price-to-cash-flow and tends to illustrate valuation more accurately than the more familiar price-to-earnings (PE) ratio.
In absolute terms the price-to-EBITDA of the XAU Index is currently around 7.5 times, which is only about 10% higher than the price-to- EBITDA of the S&P 500 Index. Both of these metrics are as low as they have been in a decade.
Obviously, however, “cheap” does not mean “buy.” Cheap stocks have a tendency to get cheaper, on the way to becoming way-too-cheap. Gold stocks are cheap, but they could still fall to way-too-cheap. Silver stocks, on the other hand, may already be way-too-cheap.
A Daily Reckoning reader named Kyle Sorgel makes the argument:
Within the precious metals sector, silver mining stocks may be the very best bet...
A consensus estimate of the total amount of silver mined from 3000 BC to now is about 44.4 billion ounces and for gold is about 4.25 billion ounces. This yields a gold-to-silver ratio of about 10.44, a far cry from the current gold-to-silver ratio of 45. In modern times, mines are pulling less silver out of the ground, relative to gold, than they did in ancient times. Total annual mine production of silver is only 8.6 times greater than total gold production. Furthermore, and most importantly, 53% of the total silver demand is used in industrial processes versus gold’s 11%. This means that every year 53% of the total supply of silver is USED UP, meaning it’s gone, vanished, disappeared.
Silver is an extremely versatile metal and as time has progressed science has found multiple uses in which silver provides a benefit that no other metal can provide (even gold). And since the silver is used in such trace amounts, most of it can’t be recovered.
Based on these facts, it seems inevitable that the large price disparity between gold and silver should narrow over time. Mr. Sorgel’s argument is compelling. But please remember, dear reader, inevitable is not the same thing as imminent.
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| | The Daily Reckoning Presents | | Looking at Uranium...Again | |  | | Byron King |
Uranium is still a “Buy”...maybe now more than ever.
The disaster in Japan slammed the uranium sector...and it still has not recovered. But this washout looks like a buying opportunity, as long as you’re not in a hurry to make a big gain.
I won’t go into the Japan-specific details, but for our purposes, it’s a safe bet that the Japan disaster means that we may not see a large-scale “nuclear renaissance” during the next generation.
Why not? Well, just consider the ability of people to mobilize opposition to large-scale energy development — especially something with the media-driven fear factor of nuclear power. Looking ahead, it’ll be hard for any new nuclear program, anywhere, to make headway. Yes, we’ll see developments here and there — more in China, say, than in the US. But we probably won’t see a global breakout into the nuclear power space.
Still, the fact is that the world has an installed base of over 400 nuclear power reactors, and these systems generate almost 20% of the world’s electricity. The problem is there’s not enough new uranium coming out of the mines and mills of the world to keep these plants running. One key source of nuclear fuel for the past decade has been decommissioned atomic warheads from the Cold War era. But that source is soon about to dry up — in 2013, to be precise.
The investment point is there’s a looming uranium shortage, within the next two years. Two years? That may as well be tomorrow in terms of finding new sources of industrial supply. Two years really means “now,” as in today. This means that the existing players have to step up the pace. It also means that there’s room for new players and growth within the primary uranium and yellowcake spaces.
In my investment letter, Oustanding Investments, I recommended Cameco Corp. (NYSE:CCJ) early in 2006. The stock is down 40% since then! You see, even the nation’s #1-rated investment letter misfires from time to time. Usually, I would suggest cutting losses long before a stock had fallen this much. But I think Cameco is an exception. It is a blue chip company that has faced some very bad luck.
Canada-based Cameco is one of the world’s largest uranium producers. Its shares were trading at over $42 each early in 2011, but crashed to below $30 after the Japan disaster in March. Then, over the past summer, Cameco shares have continued drifting lower. Today, they trade for $21.75.
Last week, Cameco launched a $520 million hostile takeover bid for a much smaller uranium firm named Hathor Exploration. Cameco wants to get hold of Hathor’s high-grade “Roughrider” deposit in Saskatchewan’s prolific Athabasca Basin. Whatever the technical merits of the transaction, this news just dropped Cameco shares to near $20.
At the current share price, Cameco has a price-earnings ratio of 18, with a dividend yield of 1.9%. Yet if uranium pricing firms up over the next year — leading up to the post-2013 looming shortage — Cameco’s earnings could and should increase strongly. So here’s a large company whose shares, on the fundamentals, are poised for a recovery.
Yes, there’s a downside with Cameco from here. But in my view, there’s a strong upside to Cameco as well. Indeed, I think the chances of Cameco going to $30 are better than the chances the share price will drift too far below $20. Cameco is a buy.
Regards,
Byron King
for The Daily Reckoning
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| | | | Bill Bonner | | Catastrophe Insurance | |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
“Retail Sales in US Unexpectedly Stagnate,” says a Bloomberg headline.
Unexpectedly? Guess they don’t read The Daily Reckoning. Stagnating sales are what you get in a Great Correction. We’ve been saying so for the last 4 years.
In an expansion, well...everything expands. Why make it complicated?
In a contraction...everything contracts. What do you expect? That’s what it’s all about. That’s how it works.
And when you have a consumer economy, what contracts most? Consumer spending, of course. Simple, huh?
And when consumer spending contracts, business sales go down. Eventually profits go down. And eventually investors realize that holding stocks is not going to be profitable. Then, stocks go down too.
And here’s another Bloomberg headline:
Wholesale Prices in US Are Little Changed as Energy, Vehicle Costs Drop Surprise, surprise! The feds pump in trillions in cash and credit. Still, they can’t get prices to go up significantly
Contractions are deflationary.
That’s why we don’t expect the price of gold to rise.
And now that Germany and France have gotten together with China and all have agreed that they aren’t going to throw poor little Greece off the Euro-Bus...gold has nothing to do but go down. No crises on the horizon. No inflation either.
So who needs gold?
Well... We all will. But maybe not just yet...
“Gold fulfills the functions for which money is used better than any other type of money,” wrote Lord Rees-Mogg in his introduction to “The Case for Gold” — a three volume tome rehearsing the history of the yellow metal.
But if gold is the best money, how come we don’t use it rather than dollars?
Lord Rees-Mogg explains: “The problem for gold is not that it doesn’t work, but that it works too well...it imposes limits on human behaviour, and those limits can be resented and rejected. Indeed, it can become impossible for a government to maintain the discipline of gold...”
Ah yes...
Limits. There are always limits. You can ignore limits. You can reject limits. You can pretend they don’t exist. But you can’t ignore the consequences of ignoring the limits.
Right now, the economy is in a major contraction. As long as this phase continues, you only need gold as insurance against a catastrophe. But what would cause a catastrophe? The feds, of course.
In a contraction, the market itself imposes limits. It forces asset prices down. It undermines businesses. And it drives debtors and creditors into bankruptcy.
The feds don’t like limits. And they don’t like contractions. Especially not when an election is coming up. Maybe they’ll keep their nerve. Maybe they won’t. They could do something reckless and desperate...in an effort to overcome natural limits. That’s when the merde will really hit the fan... That’s when you’ll need your gold.
And more thoughts...
Here’s an interesting item.
In July, consumer credit rose. This was much applauded and much discussed. Analysts said that the $12 billion increase proved that the credit expansion of the last 60 years was not over. They thought it meant that recovery was just around the corner. Consumers were borrowing again they said...so they must be spending too.
But it turned out it wasn’t exactly consumers who were doing the borrowing. It was students. And they weren’t borrowing to spend. They were borrowing to pay the high costs of education.
Real consumer credit went down, as expected. Credit card debt, for example, fell some $4 billion.
And guess what else. Many of them will never pay the money back.
Government-backed student loans have risen from less than $100 billion in ’08 to about $400 billion today. We don’t know why. But we smell a zombie.
The default rate is rising. And we suspect that many ‘students’ are actually people marking time in universities because they can’t find a good job in the outside world.
Speaking of which... Senate GOP leader Mitch McConnell describes Obama’s jobs plan as a “re-election plan, not a jobs plan.”
But it’s so easy to criticize! Give the prez credit. At least he’s trying.
At least, he’s trying to get re-elected, that is.
*** Yesterday’s subject was intriguing — at least to us. We’ll stick with it.
What if everything you thought you knew about investing wasn’t so? Or, to put it another way...what if everything you learned about investing was learned in an unusual period in investment history? A period that won’t be repeated in our lifetimes?
You’re used to stocks going up, right? But they don’t always go up. They only go up — in general — when the economy grows.
But economies always grow, right?
Well, maybe not. How much did the economy grow in 2011 BC? Nobody knows, right? But we’ll take a guess. It didn’t grow at all.
And guess how the real economy in the US is growing this year? Probably about as much as it did 4,000 years ago.
No, we’re not kidding. The numbers are all over the place. But they’re all near zero. Even the feds say the economy is “barely” growing...or that the ‘recovery is very fragile.’
Guess how many jobs the economy added in 2011BC? We don’t know that either, but we’ll take another guess: zero.
Okay... You see where we’re going with this. This economy sucks, right?
But here’s the thing. You think the suckiness of this economy is a temporary thing. You think the economy USUALLY does okay. You think that there is something inherent in technology...that it is always finding new and better ways to do things...and that as a result we all get richer all the time, right?
Well, what if you’re wrong?
What’s the measure of wealth? Here’s one way to look at it. It’s how much output you can get from a unit of time. You take your bare hands...you try to dig a ditch. Your output is very limited. So, in a remarkable breakthrough, someone invents a spade! The first ones are made of wood. But they get better and better. Now, with a steel spade in his hands a man can dig much more hole in the same amount of time. He is richer. He can produce more. He can improve his standard of living just by using the tools he has available to him.
But then what? Then...maybe 5,000 years after the invention of the first hoe, a man invents a machine to do the digging...a backhoe. Now he’s really smoking. With a backhoe he can dig 10...20...times faster than a man with a regular hoe.
The first mechanical diggers are clumsy. Steam-powered. But gradually they get better. Now, they’re so smooth and responsive a good backhoe operator can use them to light a man’s cigarette for him. No kidding, it’s included in backhoe rodeo contests.
Mechanical diggers have been around for 100 years. They’ve gotten bigger and better. Presumably, each new generation of machines pays off. But not like they used to. The first backhoes produced huge new gains in productivity. The last produced only marginal gains.
Meanwhile, the energy needed to run the machines becomes more expensive. At 15 cents a gallon, the investment in fuel and machinery was almost sure to be worth it. Now, at $4 a gallon, a man has to think twice. If he has a small hole to dig, he might be better off digging it with a spade!
The energy revolution may have peaked. Growth may be a thing of the past.
Regards,
Bill Bonner
for The Daily Reckoning |
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