We've seen this set-up before...
All through 2006 and 2007, I heard some of the smartest minds in the investment game warning about the massive housing bubble that was about to pop. For a long time, these smart folks looked wrong, as housing prices kept going up and up.
Then things changed in a hurry, and we suffered through the worst credit crisis in our country's history and a housing bubble collapse. Anyone that didn't heed the warnings got crushed.
I see the same thing happening today. There have been warnings that we could be in for severe inflation ever since the Federal Reserve rolled out the printing presses back in 2008 with its "quantitative easing" program.
So far, not much has happened. However, similar to the housing bubble, that "nothing" could turn into something very quickly.
After years of easy money policy by countries around the globe, the inflation pump could be primed.
As prices begin their steady incline and wages stay stagnant, our dollar value could plummet. In addition, if interest rates drop lower than inflation, then negative real interest rates will slowly bleed millions of savers dry.
In other words, inflation could push the U.S. into another recession, or at the very least cut golden years short and push retirement dates back further and further.
Now several great investors believe that the biggest risk to their portfolios today is a rapid increase in the rate of inflation.
For example, Stephen Leuthold (CEO of Leuthold Strategic) is known as the contrarian’s contrarian and has been in the investment business for 45 years. He built the Leuthold Group from nothing to a $5 billion asset manager. In a recent interview with Liz Claman from Fox Business News, Leuthold was asked if he could choose only one investment today, what would it be.
His answer? An inflation hedge.
At this same interview, Hedgeye senior macro analyst Darius Dale also reconfirmed the need for protection against inflation. In fact, he made a strategic case for how he's combating this emerging financial threat. More on that in a moment.
Leuthold and Dale aren't alone. Jim Grant, an inductee into the Fixed Income Analyst Society Hall of Fame, believes that the easy money policy has set the stage for what could be painful inflation.
Grant has a long and distinguished track record for making great macro investment calls. He steered investors away from the technology bubble in the late nineties and predicted the collapse of the housing market. He was also featured in the documentary "The Bubble" alongside over a dozen of renowned economists, investors and business leaders.
In an interview with Forbes Media Chairman, Steve Forbes, he asserts that the Federal Reserve has accelerated inflation by going way too far in its massive stimulus program. He warns, "First and foremost the patient is overmedicated -- that is, the economic patient."
It’s hard to ignore these warnings from renowned investors and strategists. But what can we do about it?
Leuthold, Dale and Grant all own -- and recommend having exposure to -- gold.
In an appearance on Hedge TV last month, Jim Grant exclaimed "Gold to me is an example of an opportunity. Gold and mining shares are very, very cheap… but nobody even bothers to poke them with a stick."
To me that screams that it's time to make a contrarian play...
One gold stock that recently caught my attention is Pershing Gold (OTC: PGLC), a gold-focused royalty company, run by Stephen Alfers.
In accepting the job as CEO, Alfers gave up a very high-ranking position (Chief of U.S. Operations) at the multi-billion dollar Franco-Nevada Corporation (NYSE: FNV). With 30 years of mining industry experience under his belt, he has made extensive progress in getting this company on the right course.
For example, at a time when gold companies are struggling to raise capital, Pershing recently raised over $9 million. Furthermore, the company remains debt-free and unhedged.
Pershing acquired its main property in August 2011 with the opportunistic purchase of the Relief Canyon Mine property located in Pershing County Nevada.
Since acquiring Relief Canyon, Pershing third party resource estimates of gold in place at Relief Canyon have skyrocketed from a starting point of 155,000 oz on June 2010 to 717,000 oz as of March 2014.
And the company estimates that less than 10% of their current acreage has been explored leaving room for significant future resource expansion.
If that isn't enough, in the June corporate update, a new gold/silver zone was revealed just 2 miles north of Relief Canyon. This site among others has lead analysts to predict an annual yield of 80k ounces as soon as 2016 from Pershing Gold's land.
Keeping in mind that the current gold price per ounce is over $1,300, 80k ounces a year is pretty impressive. If these estimates are correct, Pershing Gold could generate over $100 million dollars in pure gold revenue -- per year.
And the stock is starting to get noticed.
Cantor Fitzgerald initiated coverage on Pershing on May 28, 2014 and established a $0.55 per share price target which is a 1.0x multiple to Cantor’s net asset valuation.
That is roughly a 60% upside from the recent share price and assumes a long term gold price of $1,300/oz. If the price of gold goes higher, that valuation is going to prove extremely conservative.
Cantor also notes that this valuation does not assume any future resource expansions. I expect that is another conservative assessment, given Pershing’s recent track record of resource growth and company expectations. That growth keeps continuing as they drill up their 25,000 acres.
Keep in mind that Pershing Gold is a development stage mining company. This is a risky business, not a blue chip cash flow machine.
But as far as development stage mining companies go, Pershing Gold is as solid as they come. I like Pershing on its own merit. The fact that it helps provide an inflation hedge (that Leuthold and Grant insist upon) makes it even more promising.
Actions to take -- Buy shares of Pershing Gold, which provides direct exposure to both gold and the value creating abilities of its management team.
- Potential cost inflation from the service industry
- Potential for cost overruns bringing the project to completion
- Reliance on the capital markets for financing
Any bet on a commodity producer is a bet on a commodity; that makes the company very leveraged to both declines and rises in that commodity price
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