Longtime commodities guru Peter Krauth touched off a real media buzz earlier this year when he publicly predicted that gold would hit $5,000 an ounce in the next few years - a projection he stands behind.
But here's the irony.
While Krauth's prediction would represent a total return of about 320% over that multi-year span, he says the potential returns on some of the near-term profit plays he's looking at are even bigger.
"These near-term opportunities are significant because the companies that explore and/or produce gold are leveraged to the price of gold," Krauth said in an interview with Money Morning. "So a 10% to 20% rise in gold's price could cause the share prices of some of these firms to gain 20% to 60% - or more - in a matter of months."
But here's the irony.
While Krauth's prediction would represent a total return of about 320% over that multi-year span, he says the potential returns on some of the near-term profit plays he's looking at are even bigger.
"These near-term opportunities are significant because the companies that explore and/or produce gold are leveraged to the price of gold," Krauth said in an interview with Money Morning. "So a 10% to 20% rise in gold's price could cause the share prices of some of these firms to gain 20% to 60% - or more - in a matter of months."
In that interview with Money Morning , Krauth - the editor of the Global Resource Alert private advisory service - also said:
William Patalon III (Q): Earlier this year, you publicly stated that gold could go to $5,000 an ounce, long-term. Do you still feel that way? What are the catalysts that will make that forecast come true?
Peter Krauth: I feel even stronger about my forecast now. There are a few catalysts I expect will bring about a major rise in the price of gold. I'm firmly in the inflation camp. Inflation may not be an obvious threat right now, but it's the only logical outcome, given the recent actions of spendthrift governments. Also, investment demand for gold has been robust, recently pushing the SPDR Gold Trust ETF (NYSE: GLD) past the $50 billion-in-holdings mark. And despite a 10-year secular bull market - which has seen gold close higher in each calendar year than it did the year before - we've yet to reach the "mania" stage, where prices really soar ... so far.
(Q): Even with this bullish long-term forecast for gold, you've said that some of the near-term profit opportunities may be even more significant. How significant are these profit opportunities and what are the catalysts that can cause gold to spike in the near term?
Krauth: These near-term opportunities are significant because the companies that explore and/or produce gold are leveraged to the price of gold. So a 10% to 20% rise in gold's price could cause the share prices of some of these firms to gain 20% to 60% - or more - in a matter of months.
As for catalysts, I think t he risk of pending-sovereign-debt implosions - as Iceland, Dubai and Greece have demonstrated - could manifest themselves elsewhere, particularly in Southern Europe. After all, how many trillion-dollar bailouts can the European Union (EU) or United States possibly afford? I also expect that ! we could see central banks continue to be net buyers of gold in 2010 (and for many years going forward) - just as we saw in 2009, which was the first time that happened in 20 years. That could help push gold to $1,500 by late this year or early next. [Editor's Note: Check out the accompanying info-graphic, "The Great Commodities Grab," which shows how much Wall Street is expecting commodity prices to escalate.]
Krauth: Well, since the financial crisis, some of the largest U.S. investment banks have converted into bank holding companies. That means they must file quarterly reports on their holdings, including gold and other commodities. What I've repeatedly noticed is that, for a certain amount of time before, during and after these quarterly reporting dates, gold has moved up significantly.
(Q): So exactly what is your "Gold Spike Indicator" saying right now ... or what do you expect it to say? How long will this window be open this time around?
Krauth: This window is usually open for about three to four weeks. That's not a long time. It's important to ensure you're properly positioned in time to benefit. This time around, I'm expecting the GSI to indicate that the next two to four weeks are likely the best time to get positioned in both gold and silver, as both those metals could begin to spike soon after that.
As you know, the fall tends to be the strongest period of the year for precious metals prices. What's interesting this time around - because GSI provides a signal four times a year - is that precious metals go through their weakest period in the summer months of June, July and August. That means we could be setting up for an even bigger spike this time around. And that's really exciting.
(Q): You've written extensively about the bullish, long-term prospects for commodities. As part of that, you've uncovered a promising new development in the resource! s area: It involves banks - especially big investment banks - taking physical control of commodities. Just what is it that we're seeing here? And isn't this an element of your "Gold Spike Indicator?"
Krauth: That's correct - this is part of the GSI. Keep in mind that a large chunk of profits that big banks report these days come from trading. But much of that trading isn't even that risky, it's just leveraged so highly it pays off very, very well. As we know, banks can borrow pretty cheaply these days with interest rates at microscopic levels. But it goes deeper than that. These banks have made strategic moves to "control" many of the commodities they trade.
What I mean by this is that they are no longer just "paper trading" commodities through futures contracts. This began a couple of years ago with the creation of exchange-traded funds (ETFs) that were physically backed with such commodities as gold, copper or silver, to name just a few.
JPMorgan Chase & Co. (NYSE: JPM) and Goldman Sachs Group Inc. (NYSE: GS) have begun taking physical delivery of gold when their futures contracts mature. Last August, Morgan Stanley got the okay to trade with Dubai Gold Securities, which will allow it to take physical possession of the gold.
Earlier this year, Goldman and JPMorgan each bought established metals-warehousing facilities. Goldman purchased Metro International of Detroit for $550 million, and JPMorgan bought Henry Bath of the United Kingdom as part of a larger $1.7 billion acquisition. According to industry insiders both deals were done at a premium. These guys aren't paying premiums unless they foresee higher prices.
Another consideration is the exponential growth of physically backed commodity ETFs, like the SPDR Gold Trust ETF (NYSE: GLD), which means gold supplies are being physically taken off the market while soaking up supply! ... that can't help but affect market prices.
(Q): Why are banks grabbing up global commodity supplies?
Krauth: Banks understand that ... long-term ... we're in a spectacular global bull market for natural resources. And they understand that the end of this "bull run" is nowhere in sight. These big banks have more than $4 trillion riding on commodities, so they're making sure that these trades go their way. How better to influence the price of a commodity than to control its supply - or at least enough of it to have a measurable impact? That's why they're taking steps to gain physical control.
By taking physical commodities off the market while demand is on the rise, they're only going to exacerbate supply shortages. But let me put it another way so that I'm being perfectly clear: The physical-commodities strategies now being employed by banks can only elevate the pressure beyond anything we've seen before .
(Q): Are banks, in effect, "gaming" the financial system?
Krauth: Yes, I believe what they are doing is skewing the game in their favor. When you look at the kinds of forecasts the banks are making, despite all the economic risks on the horizon, their level of conviction is very telling. For instance, you've got Goldman Sachs calling for gold to rise by $150 an ounce, or about 13%, this year alone. And Bank of America Corp. (NYSE: BAC) expects oil to hit $150 a barrel within four years, which would represent a gain of about 90% from Thursday's closing price.
(Q): So many gold bugs go in for sophisticated investment strategies - options, futures, and the like. But you prefer to keep it simple. In fact, you've often cited an old market adage that that says: "The best place to look for gold is in a gold mine."
Krauth: While some traders use futures or options to play the commodity markets, I prefer to keep my strat! egies si mple and go directly to the source: That's why I believe that the shares of the companies that get the gold out of the ground offer the biggest payoffs at the lowest levels of risk. Companies that do a good job of controlling costs and growing production through resource expansion or sound acquisitions make the best candidates. The important part is to try and avoid overpaying. I pay particular attention to smaller and mid-tier candidates, as they are more likely to manifest outsized growth, or become takeover targets.
If you really think about it, this strategy makes the most sense: Investors stand to maximize their profits when they buy into a well-run company that controls sizeable amounts of a rare mineral that happens to be one of the world's most-sought-after natural resources.
That means it's time to buy gold-mining stocks. But only certain ones.
(Q): For retail investors, what are some of the best ways to profit from this trend?
Krauth: I like some of the junior-resource/junior-mining companies. With the junior explorers or developers, those returns can be particularly explosive: A "junior" with discovery potential can sometimes return 10 times to 15 times an investors original outlay in as little as one to two years (12 months to 24 months). Who needs leverage or options, or to worry about expiry dates? Owning shares in these types of companies is akin to holding permanent "calls" on the underlying resource. The inherent leverage can be explosive.
(Q): That leads us to the big question, the one that investors reading this will most likely want the answer to: What kinds of returns are possible from these investments, over what time period, and why?
Krauth: Many of these resources companies are way undervalued for the quantity of resources they own. So, as the price of the underlying commodity goes up, the shares of the companies will skyro! cket eve n more because they can sell their output at higher prices, thereby expanding their profit margins handsomely. As for their in-ground resources, the market accepts higher prices and gradually revalues them accordingly.
And all of this happens even before the company extracts the resources. Plus, there aren't even storage costs to worry about; Mother Nature takes care of that.
In my view, it's not unrealistic to expect many of these companies to return anywhere from 10 times to 15 times your money. If you look back on the gains made in shares of some of the biggest names in commodities, that's already happened over the past seven or eight years.
(Q): I'd be remiss if I didn't at least mention China and India. How does China factor into this? India? In addition to the commodities themselves, should we be investing in these countries? How does your view of the future fit into the broader commodities boom that we're projecting?
Krauth: The emergence of China, India and the remainder of Greater Asia is unprecedented, so the demand for commodities - from a fundamental standpoint - is rock solid. But I also think we'll need to deal with further financial crises along the way, so gold in some form is a must for all investors, regardless of age.
I mean, just think about it: With 40% of the world's entire population living in just these two countries combined, astute investors understand it's impossible to ignore the impact of their fast growth rates. Both countries are modernizing at a dizzying pace, which naturally translates into massive escalations in the demand for natural resources, precious metals and agricultural commodities. I believe that gold, oil, and many of the base metals and even agricultural commodities could double or triple within three to five years.
But given my preference for "simple" strategies, I prefer to invest in the companies producing the raw materials China and India need or want -! no matt er where they happen to be headquartered. That gives me more latitude, and becomes an effective-risk-management tool, as well.
Add these into the commodities mix that already contains the market-manipulation strategy investment banks are brewing, and investors are looking at one strong profit elixir. I'll repeat again here what I said earlier: The physical-commodities strategies now being employed by banks can only elevate pricing pressures beyond anything we've seen before .
Gold - and oil - figure to huge beneficiaries.
(Q): Given the looming signal you're expecting from your gold indicator in the days to come, let's focus on gold. To better illustrate some of the points you've made here, can you talk about some of the specific profit opportunities that you've either looked at, or acted upon, of late?
Krauth: Sure. I've been looking at a few mid-tier gold producers that are completely un-hedged to the price of gold. One, in particular, is profitable, and is trading at only three times cash flow. Its price could double or triple just to reach the same valuation that its peers enjoy. My Global Resource Alert subscribers own a mid-tier gold-and-silver producer. This company's flagship project boasts a net-present value (NPV) of more than $800 million with gold at less than $700 an ounce, and silver at $13 an ounce. That doesn't even include the company's other projects or significant discovery potential. The entire company's market value is less than $600 million. I think we could easily see a double or triple in 12 to 18 months.
We've also recently added a precious-metals-explorer "junior" that already has several million ounces of "gold equivalent," millions in cash, no debt, a land package in a promising precious-metals belt, and an aggressive drilling program designed to define more ounces. This company has already attracted interest from an established major miner, so! this is a story that investors will want to stay tuned into.
(Q): Thanks for sitting down with us, Peter.
Krauth: My pleasure.
[Editor's Note: Peter Krauth, a frequent contributor to Money Morning, is the editor of the Global Resource Alert, a private advisory service that focuses on precious metals, energy resources and other natural-resource-related commodities. Krauth spent two decades as a market analyst and portfolio advisor, and has covered all the commodities sectors, including gold, silver, coal, alternative energy and agriculture.
All that research led Krauth to the discovery of the "Gold Spike Indicator," or GSI, which signals the near-term direction of key commodity prices, including gold.
However, because it's tied to quarterly disclosure data, the GSI is available only four times a year, meaning it offers investors only a short time to act. If you want to find out more about this before this "profit window" closes, please click here.]
- That the giant Wall Street investment banks are making billions in profits by trading commodities. Expect that to continue. In fact, with the ready access to capital banks enjoy in the current zero-interest-rate environment, these financial behemoths will be able to make sure that trend continues - meaning the prices of gold and other commodities will only head higher.
- The outlook for gold, oil and other commodities is bullish in both the near term and the long term.
- That simpler investment strategies - direct investments in gold-miners, for instance - are both less-risky and more lucrative than more-esoteric investments such as options and futures, especially at present.
- That junior-resource/junior-mining companies can be "particularly explosive" profit plays right now.
- And that he expects his proprietary "Gold Spike Indicator" to issue a "Strong Buy" signal! for gol d sometime in the next several weeks.
William Patalon III (Q): Earlier this year, you publicly stated that gold could go to $5,000 an ounce, long-term. Do you still feel that way? What are the catalysts that will make that forecast come true?
Peter Krauth: I feel even stronger about my forecast now. There are a few catalysts I expect will bring about a major rise in the price of gold. I'm firmly in the inflation camp. Inflation may not be an obvious threat right now, but it's the only logical outcome, given the recent actions of spendthrift governments. Also, investment demand for gold has been robust, recently pushing the SPDR Gold Trust ETF (NYSE: GLD) past the $50 billion-in-holdings mark. And despite a 10-year secular bull market - which has seen gold close higher in each calendar year than it did the year before - we've yet to reach the "mania" stage, where prices really soar ... so far.
(Q): Even with this bullish long-term forecast for gold, you've said that some of the near-term profit opportunities may be even more significant. How significant are these profit opportunities and what are the catalysts that can cause gold to spike in the near term?
Krauth: These near-term opportunities are significant because the companies that explore and/or produce gold are leveraged to the price of gold. So a 10% to 20% rise in gold's price could cause the share prices of some of these firms to gain 20% to 60% - or more - in a matter of months.
As for catalysts, I think t he risk of pending-sovereign-debt implosions - as Iceland, Dubai and Greece have demonstrated - could manifest themselves elsewhere, particularly in Southern Europe. After all, how many trillion-dollar bailouts can the European Union (EU) or United States possibly afford? I also expect that ! we could see central banks continue to be net buyers of gold in 2010 (and for many years going forward) - just as we saw in 2009, which was the first time that happened in 20 years. That could help push gold to $1,500 by late this year or early next. [Editor's Note: Check out the accompanying info-graphic, "The Great Commodities Grab," which shows how much Wall Street is expecting commodity prices to escalate.]
Krauth: Well, since the financial crisis, some of the largest U.S. investment banks have converted into bank holding companies. That means they must file quarterly reports on their holdings, including gold and other commodities. What I've repeatedly noticed is that, for a certain amount of time before, during and after these quarterly reporting dates, gold has moved up significantly.
(Q): So exactly what is your "Gold Spike Indicator" saying right now ... or what do you expect it to say? How long will this window be open this time around?
Krauth: This window is usually open for about three to four weeks. That's not a long time. It's important to ensure you're properly positioned in time to benefit. This time around, I'm expecting the GSI to indicate that the next two to four weeks are likely the best time to get positioned in both gold and silver, as both those metals could begin to spike soon after that.
As you know, the fall tends to be the strongest period of the year for precious metals prices. What's interesting this time around - because GSI provides a signal four times a year - is that precious metals go through their weakest period in the summer months of June, July and August. That means we could be setting up for an even bigger spike this time around. And that's really exciting.
(Q): You've written extensively about the bullish, long-term prospects for commodities. As part of that, you've uncovered a promising new development in the resource! s area: It involves banks - especially big investment banks - taking physical control of commodities. Just what is it that we're seeing here? And isn't this an element of your "Gold Spike Indicator?"
Krauth: That's correct - this is part of the GSI. Keep in mind that a large chunk of profits that big banks report these days come from trading. But much of that trading isn't even that risky, it's just leveraged so highly it pays off very, very well. As we know, banks can borrow pretty cheaply these days with interest rates at microscopic levels. But it goes deeper than that. These banks have made strategic moves to "control" many of the commodities they trade.
What I mean by this is that they are no longer just "paper trading" commodities through futures contracts. This began a couple of years ago with the creation of exchange-traded funds (ETFs) that were physically backed with such commodities as gold, copper or silver, to name just a few.
JPMorgan Chase & Co. (NYSE: JPM) and Goldman Sachs Group Inc. (NYSE: GS) have begun taking physical delivery of gold when their futures contracts mature. Last August, Morgan Stanley got the okay to trade with Dubai Gold Securities, which will allow it to take physical possession of the gold.
Earlier this year, Goldman and JPMorgan each bought established metals-warehousing facilities. Goldman purchased Metro International of Detroit for $550 million, and JPMorgan bought Henry Bath of the United Kingdom as part of a larger $1.7 billion acquisition. According to industry insiders both deals were done at a premium. These guys aren't paying premiums unless they foresee higher prices.
Another consideration is the exponential growth of physically backed commodity ETFs, like the SPDR Gold Trust ETF (NYSE: GLD), which means gold supplies are being physically taken off the market while soaking up supply! ... that can't help but affect market prices.
(Q): Why are banks grabbing up global commodity supplies?
Krauth: Banks understand that ... long-term ... we're in a spectacular global bull market for natural resources. And they understand that the end of this "bull run" is nowhere in sight. These big banks have more than $4 trillion riding on commodities, so they're making sure that these trades go their way. How better to influence the price of a commodity than to control its supply - or at least enough of it to have a measurable impact? That's why they're taking steps to gain physical control.
By taking physical commodities off the market while demand is on the rise, they're only going to exacerbate supply shortages. But let me put it another way so that I'm being perfectly clear: The physical-commodities strategies now being employed by banks can only elevate the pressure beyond anything we've seen before .
(Q): Are banks, in effect, "gaming" the financial system?
Krauth: Yes, I believe what they are doing is skewing the game in their favor. When you look at the kinds of forecasts the banks are making, despite all the economic risks on the horizon, their level of conviction is very telling. For instance, you've got Goldman Sachs calling for gold to rise by $150 an ounce, or about 13%, this year alone. And Bank of America Corp. (NYSE: BAC) expects oil to hit $150 a barrel within four years, which would represent a gain of about 90% from Thursday's closing price.
(Q): So many gold bugs go in for sophisticated investment strategies - options, futures, and the like. But you prefer to keep it simple. In fact, you've often cited an old market adage that that says: "The best place to look for gold is in a gold mine."
Krauth: While some traders use futures or options to play the commodity markets, I prefer to keep my strat! egies si mple and go directly to the source: That's why I believe that the shares of the companies that get the gold out of the ground offer the biggest payoffs at the lowest levels of risk. Companies that do a good job of controlling costs and growing production through resource expansion or sound acquisitions make the best candidates. The important part is to try and avoid overpaying. I pay particular attention to smaller and mid-tier candidates, as they are more likely to manifest outsized growth, or become takeover targets.
If you really think about it, this strategy makes the most sense: Investors stand to maximize their profits when they buy into a well-run company that controls sizeable amounts of a rare mineral that happens to be one of the world's most-sought-after natural resources.
That means it's time to buy gold-mining stocks. But only certain ones.
(Q): For retail investors, what are some of the best ways to profit from this trend?
Krauth: I like some of the junior-resource/junior-mining companies. With the junior explorers or developers, those returns can be particularly explosive: A "junior" with discovery potential can sometimes return 10 times to 15 times an investors original outlay in as little as one to two years (12 months to 24 months). Who needs leverage or options, or to worry about expiry dates? Owning shares in these types of companies is akin to holding permanent "calls" on the underlying resource. The inherent leverage can be explosive.
(Q): That leads us to the big question, the one that investors reading this will most likely want the answer to: What kinds of returns are possible from these investments, over what time period, and why?
Krauth: Many of these resources companies are way undervalued for the quantity of resources they own. So, as the price of the underlying commodity goes up, the shares of the companies will skyro! cket eve n more because they can sell their output at higher prices, thereby expanding their profit margins handsomely. As for their in-ground resources, the market accepts higher prices and gradually revalues them accordingly.
And all of this happens even before the company extracts the resources. Plus, there aren't even storage costs to worry about; Mother Nature takes care of that.
In my view, it's not unrealistic to expect many of these companies to return anywhere from 10 times to 15 times your money. If you look back on the gains made in shares of some of the biggest names in commodities, that's already happened over the past seven or eight years.
(Q): I'd be remiss if I didn't at least mention China and India. How does China factor into this? India? In addition to the commodities themselves, should we be investing in these countries? How does your view of the future fit into the broader commodities boom that we're projecting?
Krauth: The emergence of China, India and the remainder of Greater Asia is unprecedented, so the demand for commodities - from a fundamental standpoint - is rock solid. But I also think we'll need to deal with further financial crises along the way, so gold in some form is a must for all investors, regardless of age.
I mean, just think about it: With 40% of the world's entire population living in just these two countries combined, astute investors understand it's impossible to ignore the impact of their fast growth rates. Both countries are modernizing at a dizzying pace, which naturally translates into massive escalations in the demand for natural resources, precious metals and agricultural commodities. I believe that gold, oil, and many of the base metals and even agricultural commodities could double or triple within three to five years.
But given my preference for "simple" strategies, I prefer to invest in the companies producing the raw materials China and India need or want -! no matt er where they happen to be headquartered. That gives me more latitude, and becomes an effective-risk-management tool, as well.
Add these into the commodities mix that already contains the market-manipulation strategy investment banks are brewing, and investors are looking at one strong profit elixir. I'll repeat again here what I said earlier: The physical-commodities strategies now being employed by banks can only elevate pricing pressures beyond anything we've seen before .
Gold - and oil - figure to huge beneficiaries.
(Q): Given the looming signal you're expecting from your gold indicator in the days to come, let's focus on gold. To better illustrate some of the points you've made here, can you talk about some of the specific profit opportunities that you've either looked at, or acted upon, of late?
Krauth: Sure. I've been looking at a few mid-tier gold producers that are completely un-hedged to the price of gold. One, in particular, is profitable, and is trading at only three times cash flow. Its price could double or triple just to reach the same valuation that its peers enjoy. My Global Resource Alert subscribers own a mid-tier gold-and-silver producer. This company's flagship project boasts a net-present value (NPV) of more than $800 million with gold at less than $700 an ounce, and silver at $13 an ounce. That doesn't even include the company's other projects or significant discovery potential. The entire company's market value is less than $600 million. I think we could easily see a double or triple in 12 to 18 months.
We've also recently added a precious-metals-explorer "junior" that already has several million ounces of "gold equivalent," millions in cash, no debt, a land package in a promising precious-metals belt, and an aggressive drilling program designed to define more ounces. This company has already attracted interest from an established major miner, so! this is a story that investors will want to stay tuned into.
(Q): Thanks for sitting down with us, Peter.
Krauth: My pleasure.
[Editor's Note: Peter Krauth, a frequent contributor to Money Morning, is the editor of the Global Resource Alert, a private advisory service that focuses on precious metals, energy resources and other natural-resource-related commodities. Krauth spent two decades as a market analyst and portfolio advisor, and has covered all the commodities sectors, including gold, silver, coal, alternative energy and agriculture.
All that research led Krauth to the discovery of the "Gold Spike Indicator," or GSI, which signals the near-term direction of key commodity prices, including gold.
However, because it's tied to quarterly disclosure data, the GSI is available only four times a year, meaning it offers investors only a short time to act. If you want to find out more about this before this "profit window" closes, please click here.]
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