Want a Reason to Like Gold? How About Five?

This is the perfect time to get into gold.  Here are five reasons why:

1.       Hedge books close.  Most major gold producers have closed their hedge books.  This implies they believe spot prices to rise, and for those prices to remain stable, or on an uptrend.

2.       The record deficit in the USA has just been increased by $1.2 trillion dollars.  That’s not the deficit…that’s the INCREASE in the DEFICIT. And with four Euro economies on the verge of bankruptcy, there is little choice for investors to run to anything other than gold.

3.       Four more banks have just closed in the USA. That’s 26 bank closures since January!  Furthermore, the US Federal Deposit Insurance Corporation (FDIC) has warned that the pace of bank failures is likely to pick up in coming months.

4.       China’s stimulus package is working.  And China is hedging against the US dollar.  The higher income of Chinese citizens, along with an exploding middle class will increase demand for gold for industrial and consumer applications.  The lower investment in US dollars will leave investment dollars that must be deployed somewhere.  Since they’ve already invested in their own country and partnered with oil rich nations the US has alienated, and given the recent instability in the Euro, the only place China can place all its dollars is in gold.

5.       US investor opinion is bearish on gold at the moment.  Dr. Steve Sjuggerud, of DailyWealth, recently wrote:

“Back in December, the "sentiment surveys" showed investors were at highs for the year. Now that has changed. Two weeks ago, public opinion hit its lowest level since last April (when gold was at its lows for 2009, below $900. Now THAT was a time to buy). That's what we want to see.

Investors have also fled gold stocks since December. For example, the Rydex Precious Metals Fund saw its assets fall by more than half from December to today (from over $350 million to $177 million now). Traders like to use Rydex funds to chase trends. They were bullish on gold stocks in December. Now they've given up on gold stocks. That's what we want to see.

Meanwhile, gold's "price action" is just great right now. The dollar has soared in recent weeks. But gold is soaring more. Also, investors who didn't want dollars now don't want euros either. They don't want paper currencies at all. They're buying gold. New highs are part of bull markets, and gold is now hitting all-time highs in terms of euros. That's what we want to see.

The bull market in gold is back!

Typically, I'll try to find a crafty way to get into an attractive asset. I try to find a way that has extraordinary upside with little downside risk.”

For all the reasons above, I agree with Dr. Sjuggerud.

It’s definitely time to pick up gold stocks.  But why not have an extra layer of protection? When buying gold stocks, the best stocks to buy are penny stocks.  And the best bet in pennystocks are those that will soon be promoted.

A favorite in the running is Source Gold Corp. (SRGL.OB).  It’s got great assay results, is in the right location and has recently come off in price along with investor sentiment in gold.  But as stated the penny stock jockey website, www.pennystockjockey.com, a site that prides itself on choosing stocks it believes are about to be promoted, SRGL has a long way to grow.

“We had a great run on SRGL.  Especially for those of us who got in early.  It’s still up 29% from our entry point.  And it’s got room to go.  A lot of room.  As you know, a stock can’t just keep going up.  It has to go back and fill in the gaps.  That’s what it’s doing today, and maybe tomorrow.  In the next month, I still believe a double is possible from this level.  The research report, available at the Rimini Investments website, www.RiminiInvestments.com, is estimating a short term Estimated Price Per Share Projection (EPPSP) of $1.64, and a two year EPPSP of $2.73.  I’m bidding the stock again at $0.78.”

The stock is trading today near historic lows and just may represent a great entry price into a great stock in an uptrending industry.  

 Definitely a crafty way to enter the market.

The Case for Gold

Gold. Everyone’s talking about it, and a lot of people are investing in gold and gold stocks. Even gold penny stocks are doing well. But is gold really a golden opportunity?

I think it is, and here’s why.

You have countries like India and Sri Lanka and China buying gold from the IMF like it is going out of style – it is not really, but much better than holding the alternative – the US dollar. India actually started the buying rally and is being hailed as a visionary as the price of gold has risen spectacularly since its initial buy.

Which brings me to my second point: the Fed. The US Fed is printing greenbacks like they’re free – which they might soon be – leaving gold as the only viable investment option for the conservative investor.

And lets face it, by historic, inflation adjusted prices, the price of gold is nowhere near its 1980’s high. Adjusted for inflation, the price of gold would have to hit $2300 per ounce to match it.

Also several major companies like Barrick and Newmont are eliminating their hedge positions in gold – a huge economic endorsement for the price of gold since it essentially means that the price of their stock will now reflect the price of gold. (No more hedging, get it?). For example, in the very recent past, Barrick was known as having the largest book on gold hedging. It did this to protect its cashflow from unseen fluctuations (read decreases) in the price of gold. So with a hedge, if the price of gold were to decrease, Barrick would already have received a higher profit by pre-selling. With a price increase, it would have lost extra profit, but the hedge would have ensured its profitability.

Now with no hedge, Barrick essentially is betting that the price of gold will rise. Without a hedge, as the price of gold rises, Barrick will capture higher profits since its expenses to mine gold are essentially unchanged. However, if the price of gold drops, it risks cutting into its margins and in a severe case could see losses.

In my opinion, however, large cap stocks are already priced with reserves and revenues fairly stable and estimates readily available. Further, they are followed by so many investors and institutions, that any new demand for their stock is likely to only have a negligible effect on stock price. A small discovery would also have a small effect on stock price due to the number of shares outstanding. They therefore provide no further opportunity to make outsized profits.

So while the world is buying gold, the Fed is printing money and ironically worried about inflation at the same time, the price of gold keeps rising.

The gold market is essentially just that, a market. And as a market, the price of gold is determined by supply and demand.

Gold production world-wide has decreased by nearly 8% since 2001, while the price of gold and gold producers has risen as much as 46% in 2009 alone.

The case for investing in gold stocks, naturally follows the same logic.

To find the current price of gold at any time, just visit www.kitco.com.

And to get our first penny stock pick for 2010, a gold pick no less, subscribe at www.pennystockjockey.com.

Penny Stocks - The Good, the Bad, the Ugly

Most Penny Stock companies start out the same way: An entrepreneur lists a company on a (usually) junior exchange to raise financing for a new venture. If they're competent, they know they'll want to promote the share price so that the stock is worth more than the company. In this way, management can sell its shares to investors and maintain as much control over the company as possible. Then using the capital, and incentivizing themselves with cheap options, management attempts to develop a profitable company whose share price is eventually worth the promoted share price…and hopefully much more.

Most actively traded Penny Stock companies also share most of the following characteristics:

• Marginal or no sales
  
• Marginal or no cash
  
• Non recourse debt owed to "friendly" shareholders without recourse or time for repayment
  
• Little or negative shareholders equity
  
• Few or no assets
  
• Some form of intangible debt or "goodwill"
  
• Few or no employees
  
• An "incredible story with insane potential" to either become massively profitable quickly or to change the world as we know it
  
• Sometimes, a talented CEO or other executive that has a reputation or blue chip experience
  

Before we ask how they can be categorized, we may want to ask...why should we? Because there are significant differences that allow the astute investor or speculator to determine which penny stocks to invest in, and which ones to stay away from.

Since they all look alike, you may ask how they can be classified. Most penny stock investors have been taught to look at management and structure of the company. The truth is, it always, always, always, depends on the promoter. The best company in the world without a competent promoter will not make a dime for anyone, including management and early shareholders.

So it logically follows that the companies we're looking at investing in can be categorized by categorizing the promoters. And these promoters fall into atleast five classes that I'm going to introduce you to in the next series of blog posts. Stay tuned. This will not only be informative and entertaining, but if you get it right, very profitable for you.

Or you can let me do all the work for you and subscribe to my stock picks at http://www.pennystockjockey.com/

Are All Penny Stocks Created Equal?

Amazingly enough, a number of American financial sector stocks were thrown into penny stock realm in the past two weeks. In the past few months, even bigger banks declared bankruptcy.

The SEC defines penny stocks as “low-priced (below $5), speculative securities of very small companies. While penny stocks generally are quoted over-the-counter, such as on the OTCBB [www.otcbb.com] or in the Pink Sheets [www.pinksheets.com], they may also trade on securities exchanges, including foreign securities exchanges. In addition, penny stocks include the securities of certain private companies with no active trading market.”

By this definition, the financial sector stocks – stocks like Citibank and Bank of America, are penny stocks.

Last fall, the SEC took the unprecedented action of banning short sales and calling for a short cover on financial sector stocks that had been beaten down by the shorts. It’s a lament that penny stock companies have been complaining of for years, but went unheeded.

And now these established, down-on-their-luck financial companies have convinced the American public that they are deserving of billions in taxpayer dollars because they are established companies and not traditional penny stocks as defined by the SEC.

So what have we really done for these behemoths? We’ve altered the definition of penny stocks to accommodate them. We’ve altered the level playing field by exempting them from short sellers. And now we’re giving them tax dollars like some government sponsored clinic while hard working entrepreneurs have to fight for their place in this shrinking economy.

Are these billion dollar bailout babies really that different from your traditionally defined penny stock?

Traditionally, risk characteristics attributed to penny stocks include:

1. Penny stock companies are usually start ups that lack of information about the company, its history and its management. I would argue that financial sector companies suffer from the same lack of transparency. After all, how could anyone not see the leverage and the misguided asset classifications and still invest in these behemoths? The derivatives are way too complicated for the layman to analyze…so we rely on the banks to tell us the truth, while they have a conflict.

2. Large control blocks. Penny stock company founders traditionally have a large block of stock (albeit restricted) to ensure their interests are aligned with the rest of the shareholders while ensuring they cannot sell their shares for a quick profit at the detriment of other shareholders. In the financial sector, these large blocks are held by fund managers – who similarly cannot sell their blocks quickly without lowering the market price and thereby impairing the return to themselves. What’s more, the CEO’s of the companies barely have any stock in their portfolios – eliminating the alignment with shareholder values. Instead, it’s become vogue to pay these CEO’s via stock options – giving them an incentive to show short term results and then cash out their options while the rest of the investing public holds shares that were sold by insiders.

This is done by using unwitting brokers, paid analysts and unquestioning media to tow the company line. And because the CEO’s and the companies have been held in high esteem, no one questions the use of these tools or their motives.

Penny stock companies often use similar tools – only with a penny stock it’s called stock promotion. And penny stock companies have better motives: without stock promotion, the best company in the world won’t be worth anything because no one would have heard of it – and therefore the enterprise would be hard pressed to raise money for growth. Promotion is a driving investment criterion for choosing a stock to invest in at www.pennystockjockey.com.

The issue with promotion is that the SEC often believes that stock promotion involving a penny stock needs more supervision than the promotion being conducted by billion dollar house hold names. Is there in fact an opportunity for fraud in the penny stock market? Of course there is.

But I contend that the risk is much higher with well established companies that have CEO’s holding stock options (big motive for early liquidation since options expire) rather than actual restricted stock (unsellable) for which they actually paid (as many penny stock companies experience). Empirical proof is offered by the billions lost in the financial sector right under the nose of, and with the blessing of the SEC and other regulatory bodies than has ever been lost on penny stocks.

3. Potential for fraud. Penny stocks are often used by scam artists who sell them through spam email or off-shore brokers. As the recent IRS/SEC probes have proven, many, many, many American CEO’s have offshore accounts making them no more honest or dishonest than the operators of penny stock companies.

Both traditional penny stock startups and the fallen as exemplified by the financial sector have the potential for growth and for fraud. Both are blighted by cash requirements, by short sellers and by image problems.

The difference is that the fallen companies have the government and SEC fighting for them while the typical startup penny stock company is vilified. The dichotomy is even more surprising when we stop to think that economists have long been telling us, and the American experience has long proved that the start-up is what drives the economy, diversifies the job base, creates the most jobs and is lean enough to take advantage of changing times.

So I ask you America: Are all Penny Stocks Created Equal?