The Average Joe's Take on Government Bailouts - and More

By Lorimer Wilson        Jun 25 2009 9:48AM www.preciousmetalswarrants.com

A story is making the rounds on the internet these days describing the practical interpretation the average Joe (and plain Jane, too) is putting on the way in which the U.S. government is dealing with the country’s current financial woes. I’ve done some editing and enhancing and present it below for your amusement and enlightenment and have added a segment with some insights and suggestions on how we can all potentially recoup the losses we incurred in 2008.

It is late June in a small sleepy town along the north shore of a beautiful lake in America. It is hot and muggy and mid-week. The town is deserted. Times are tough for all the locals. Many are unemployed, business is down, everybody is in debt and everybody is getting by on credit.

Suddenly a rich tourist comes into town – the first of the season. He enters the only hotel, lays a 100 dollar bill on the reception counter, and goes upstairs to inspect the rooms.

Seeing the 100 dollar bill laying there the hotel proprietor scoops it up and runs down the street to the butcher to pay his outstanding debt.

The butcher, in debt up to his eyeballs, takes the 100 dollar bill and runs to the local cattle rancher to pay off his debt.

The cattle rancher takes the 100 dollar bill and runs to his feed supplier to pay his long overdue debt.

The relieved feed supplier uses the 100 dollar bill to pay the balance owing on his debt to the travelling fuel salesman.

The fuel salesman returns to the hotel with the 100 dollar bill and pays his 2-night hotel bill that he would otherwise have not been able to pay.

The  hotel proprietor then lays the 100 dollar bill back on the counter so that the rich tourist will not suspect anything.

A few minutes later the rich tourist comes down from inspecting the rooms and, saying that he found nothing to his liking, takes back his 100 dollar bill and promptly leaves town.

It has been a day to remember thanks to that rich tourist. While no one actually earned anything the whole town is now without debt and is looking to the future with a great deal more optimism than when the day began.

And  that, to the average Joe, is how the United States Government is doing business today.

Unfortunately, this scheme of revolving credit will end badly when the pigeons come home to roost; when the piper has to be paid; when we find out that there is no such thing as a free lunch. It is just a matter of time before we (including the government) become the last of society’s ‘greater fools’ and, as such, are the ones required to pay the inevitable price of achieving future economic and financial stability.

It begs the question: What are the best investments to ride out and, indeed, take advantage of this economic turmoil and rampant inflation that is expected to befall us? Should we own gold and/or silver? Should we consider owning the right warrants associated with the right gold and silver mining stocks or perhaps just the stocks themselves?

With the YoY increase in America’s monetary supply up a monumental 111.0% (as of April) compared to just 6% over the previous 48 years it is likely we will experience significant inflation and perhaps even hyperinflation in the years to come.

Rampant inflation would cause major increases in the price of all commodities and gold and silver in particular. Higher prices received for the gold and/or silver produced would increase mining company profits substantially provided production costs could be kept under control. Increased profits would drive the price of company stock up dramatically. Such higher stock prices would make for very profitable investment returns in and of themselves. However, for those who were prudent enough to have done their homework and bought the right warrants associated with the right gold and silver mining companies at today’s undervalued prices, the returns (i.e. leverage) would be 2 to 3 times greater than investing in the stocks themselves.

What is a warrant, you ask? It is a security that gives the holder the right, but not the obligation, to purchase a common share of a company at a specific price within a specific time period after which, if not exercised, it expires worthless.

What constitutes the ‘right’ warrant? It is the determination that a) the long term potential (i.e. profits) of a company with warrants is so exceptional that one could reasonably expect the future stock price to go up dramatically as a result; b) the warrant has a duration of at least 24 months and preferably 36 months or more to provide enough time for the stock to go up dramatically in price; c) the strike or exercise price and terms at which the warrant is redeemable for the actual stock is favourable and d) the trading volume and frequency makes the warrant sufficiently liquid.

With 47 of the 112 warrants associated with natural resource companies having duration periods of 24 months or more there are a large number of companies to choose from (see preciousmetalswarrants.com for details) and, as such, ample time for many of their warrants to take advantage of rising gold and silver mining company stock prices.

Below is the performance of a variety of asset classes showing that companies with warrants have performed extremely well year-to-date (albeit down in the past week) in spite of unimpressive increases in the price of gold. This suggests that when gold and silver shoot up in price (i.e. go parabolic as they say) over the next few years we will see share prices of mining companies go up dramatically enabling the holders of the right warrants of the right companies to generate major financial returns.

Commodity Related Stock and Warrant Performance vs. Gold and Silver

* All calculations are based on U.S. dollar equivalents

** Week ending June 19th, 2009

***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.

****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.

******SPTGD is the symbol for the S&P/TSX Global Gold Index and is a modified market capitalization index of 19 precious metals mining companies.

Lorimer Wilson

****

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.