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Don't Worry about Future (Hyper)inflation: Just Prepare and Prosper

 

By Lorimer Wilson

Jul 7 2009 2:15PM
www.preciousmetalswarrants.com

   

As the table below depicts, commodity related stocks and their associated warrants are wasting no time recouping the major losses they incurred in 2008 (-53% and -80% respectively) and are already up 34% and 63%, respectively, YTD. What is so impressive is that this is being accomplished without inflation, without a rising gold price (only up 5.1% YTD and actually down the past few weeks) and without a declining U.S. dollar (actually up 5.3% vis-à-vis the Canadian dollar in which many of the commodity related stocks are denominated). In fact, commodity-related warrants have outperformed gold 14:1 and their associated stocks by 8:1 YTD!

 

Commodity Related Stock and Warrant Performance vs. Gold and Silver

 

 

Last Week's Performance*

 

 

vs. Prev. Week

vs. Prev. Month

YTD**

Warrants (+24mo.)

-2.8

-13.1

71.5

 

 

 

 

Stocks with Warrants

-1.8

-9.1

40.9

 

 

 

 

CDNX***

-2.1

-8.6

44.4

 

 

 

 

HUI****

-2.9

-6.8

13.3

 

 

 

 

GDM*****

-2.3

-7.3

13.1

 

 

 

 

SPTGD******

-1.8

-6.1

7.4

 

 

 

 

TSX

-1.4

-7.5

20.5

 

 

 

 

S&P 500

-2.4

-4.6

-0.8

 

 

 

 

Silver

-4.9

-12.3

18.5

 

 

 

 

Gold

-1.1

-2.6

5.1

 

 

 

 

 

* All calculations are based on U.S. dollar equivalents
** Week ending July 3rd, 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.

 

Inflation Will Bring Higher Commodity Prices

Future inflation is assured if the growth of the monetary base (i.e. M0) in the U.S. is any indication. Until this past October the growth of the M0 on a year-over-year (Y-o-Y) basis had averaged only 6% over the previous 48 years and had seldom exceeded 10% although it did grow to 15.8% YoY during the pre-Y2K period. During the first half of 2008, in fact, it was actually trending lower averaging 1.2% growth Y-o-Y.

That changed last October, however, when the Federal Reserve decided that the best way to solve the major problems with the economy was to expand the M0 which it did by more than doubling (111% Y-o-Y) it over the next 7 months! Surely such a monumental increase in America’s M0 will have a major affect on future inflation.

It is just a matter of time, as well, before consumer spending recovers and bids on now-depleted inventories rebound causing prices to rise for pure supply and demand reasons. When that occurs inflation will become obvious to everyone and begin to soar. Indeed, hyperinflation will not be beyond the realm of possibility under such circumstances.


Inflation Will Bring Higher Commodity Related Stock Prices

When bad things happen investors seek assets that thrive in inflationary times i.e. commodities in general and gold and silver in particular and their stocks and associated warrants. As such the rewards of investing now in the right stocks of the right gold and silver mining companies are going to be truly grand.

However, for those who are prudent enough to do their homework and buy the right warrants (i.e. securities that gives the holder the right, but not the obligation, to purchase common shares of a company at a specific price within a specific time period after which, if not exercised, they expires worthless) associated with the right gold and silver mining companies at today’s undervalued prices, their returns (i.e. leverage) could quite possibly be 2 to 3 times greater than had they invested in the stocks themselves. Why is that? Because warrants revel in an inflationary environment that drives the prices of their associated stocks up to the extent necessary to make their enhanced returns (i.e. leverage) that much greater than that of the stocks themselves.

And 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 reach its maximum potential; 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. If you need some help with these determinations feel free to contact me at the email address below.

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 to sign up for the free weekly newsletter on warrants) and, as such, ample time for many of their warrants to take advantage of rising gold and silver mining company stock prices.

So, in conclusion, why be afraid of the big bad wolf called inflation? Instead, do your homework now, invest in those securities that will benefit from inflation’s short term visit, sit back and wait to reap its benefits while everyone around you is bemoaning its onslaught i.e. prepare and prosper.

Disclosure: While no specific stocks or warrants are mentioned in this article but I want the record to show that I have taken my own advice and done the required research at preciousmetalswarrants.com to determine which are the right warrants of the right commodity-related stocks and bought accordingly (i.e. with both hands).

 

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.