Extraordinary Times Present Extraordinary Opportunities

By Lorimer Wilson        Jun 11 2009 11:05AM www.preciousmetalswarrants.com

The 2008 stock market meltdown brought panic and forced liquidation to all market sectors and especially junior resource shares (- 58.2% on average) and their associated warrants (-80.1%). This has created once-in-a-lifetime values for discerning investors. During this monumental sell-off shares of companies that had a solid foundation for development, production and growth were unceremoniously dumped along with those more numerous juniors that had little more than hopes centered on grass roots exploration prospects. As a result of this indiscriminate selling – this throwing out the baby with the bath water – extraordinary opportunities have emerged.

Excessive Selling in 2008 is Presenting Extraordinary Buying Opportunities in 2009

The market recognition of those resource stocks that really do have “the goods� has been dramatic for some with rallies in excess of 300% in the past six months. Year-to-date (June 5th, 2009) the Gold Miners Index (GDM) is up by 22.0%, the HUI up by 21.6%, the CDNX up by 58.1%, gold and silver mining companies with warrants up by 94.0% and the warrants themselves up a full 138.8%. (See table at end of article.)

In spite of the above mentioned increases, however, the GDM still needs to go up a further 23%, the HUI by 28% and the CDNX by 139% to match their 2008 highs. Such increases and the much, much greater ones that are expected to come would appear to be slam dunks given the future expectations for inflation (and the weakening American dollar and anticipated major increases in the price of gold as discussed in last week’s article “What a Week in the Wonderful World of Warrants�).

(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 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 gold and silver mining companies. CDNX is the symbol for the S&P/TSX Venture Composite Index consisting of 558 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.)

Future Inflation is Guaranteed

Until this past October the growth in the supply of the monetary base (i.e. M0) in the U.S. over the previous 48 years had averaged 6% year-over-year (YoY) and had seldom exceeded 10% although it did grow to 15.8% YoY during the pre-Y2K period. Indeed, during the first half of 2008 it was actually trending lower averaging 1.2% growth before all hell broke loose.

However, with the S&P 500 going down 27% in October, and as a result of a number of other major fiscal developments, the Fed took it upon themselves to solve the major problems with the economy by expanding the M0. To say they didn’t act in half measure is putting it mildly – very mildly!  

As Adam Hamilton reports in a recent article, and his chart below depicts, the Fed increased the M0 by 25% (36.7% YoY) in October to more than twice the level seen in the previous five decades; by a further 27% in November (73% YoY) and another 15% in December to 98.9% thereby doubling the U.S. monetary base in just 4 months. Such action was unprecedented and put the country into unchartered inflation territory. But it didn’t stop there. In January the Fed increased the YoY monetary base to 106%, increased in yet again in February, and again in March, and again in April (the May numbers are not yet available) to an unbelievable YoY of 111.0%. That’s right. 111% when the norm over the previous 48 years had been just 6%!  Surely this monumental increase in America’s M0 will have a major affect on real prices.

The monetary base numbers are shown in red above and their YoY growth rates in blue.

Exacerbating the situation, as consumer spending recovers and bids on now-depleted inventories rebound, prices will also rise for pure supply and demand reasons. Hamilton maintains that “we’re probably facing a perfect storm of inflation� and I couldn’t agree more. As inflation becomes more obvious to the masses inflationary expectations will soar and investors will seek assets that thrive in inflationary times i.e. commodities in general and gold and silver in particular.

Every Cloud has a Silver Lining

Because there is so much capital (cash) sitting on the sidelines today, when the realization that inflation is upon us and the purchasing power of said cash is at major risk of being rapidly eroded, “the flood into commodities and their producers’ stocks will be breathtaking� says Hamilton and I can hardly wait. This is where the silver lining comes into play. By ‘silver lining’ I mean that the rewards of investing now in the right warrants of specific gold and silver mining companies are going to be truly grand.

Warrants? Yes, most definitely, because they are the greatest benefactors of inflation, the higher the better. Warrants, as you probably know, give the holder the right, but not the obligation, to purchase the common shares of the company at a specific price within a specific time period after which, if not exercised, they expire worthless. As such, were stocks with warrants to escalate dramatically in price, as is expected, then the resultant leverage that many warrants should provide on well chosen stocks will be absolutely awesome. If one’s investment is in the carefully chosen warrant of the right company then returns (i.e. the leverage they create) could well turn out to be as much as 10 times (and in rare cases even more) greater than investing in the company’s stock.  Leverage is what warrant investing is all about.

If one believes in the long term prospects of a company with warrants and, as such, its anticipated future stock price, if the warrant has a duration of at least 24 months (preferably 36 months or more), if the stated price (i.e. the strike or exercise price) and terms at which the warrant can be redeemed for the actual stock are favourable and if the trading volume and frequency makes the warrant sufficiently liquid, then owning such a warrant may well be the best way to maximize one’s returns on the dollars invested and particularly in an inflationary environment such as we expect in the next few years. With 50 of the 115 warrants associated with natural resource companies having duration periods of 24 months or more there are a large number of companies to choose from and, as such, ample time for many warrants to work their magic.

To better understand which warrants are best positioned to realize over-and-above (i.e. leveraged) gains vis-à-vis their associated stock a twenty dollar investment in the extensive database details and leverage calculations offered by preciousmetalswarrants.com should be seriously considered.

Various Asset Class and Investment Vehicle Performance as of June 5th, 2009

* All calculations are based on U.S. Dollar Equivalents
** June 5th, 2009

Lorimer Wilson

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Lorimer Wilson (lorimer.wilson@live.com) is Director of Marketing and Contributing Editor of:

• www.PreciousMetalsWarrants.com which provides an online subscription database for all warrants trading on mining and other natural resource companies in the United States and Canada and offers a free weekly email and
•   www.InsidersInsights.com which alerts subscribers when corporate insiders of a limited number of junior mining and natural resource companies are buying and selling.