Wednesday, February 25, 2009
(Cont'd from above)...

Jim:       Now look, it takes more than President Obama making a speech where he loses the gloom and makes hopeful noises to fix our problems… until Tiny Tim Geithner, loses his fear of the cameras… where is he… I think I spotted him in the audience at last nights speech… and he comes out with a real plan to deal with the financials and to deal with housing… then I think that gold… remains your best bet… I want you to think of gold as the real play on Tim Geithner… the best play on the real Tim Geithner… it is a bet that he will get it wrong… just like he got Lehman wrong… if you want a bank play off of Geithner… I have got one for you too… it is the biggest depository of gold in the world… (he showed a clip of some movie)… that is right Fort Knox, that is one reason… plus the Euro is getting killed… as that currency falls apart I think gold becomes more attractive than the Euro… more people in Europe, which is surprisingly even worse off than we are, buy gold.

Hey, look… let’s talk about ways to buy it… the most attractive way for the vast majority of you is the ETF, SPDR Gold ETF (GLD)… that is the one… it has got a one on one to gold… I would buy the GLD in stages, starting with a quarter of a position tomorrow between $90 and $91... then I would buy a little more, maybe another quarter at $88... then the next quarter at $85... and then it finally gets to $82, then boom you are finished… although I do not know if it will go that far down… at least that is my GLD game plan.

Second, maybe you don’t like paper… okay, stocks are paper…. you can contact you broker and buy gold bouillon, the actual bars like Goldfinger was after at Fort Knox… now I sold a lot of those bars at Goldman Sachs when I was a broker… and I even sent it right to a depository bank for you so you didn’t have to worry about having it in your home… you would be buying the actual, physical gold… and that is probably the smartest way for people who don’t trust ETF’s… now, this method is usually only for larger investors who can afford to buy gold in bulk.

But third, I don’t mind buying gold coins… the US Mint issues them… you can go to www.usmint.gov, smaller investors might want to participate in the new American Eagle program… it is a redo of another program.

And then there are the stocks, now these are not as reliable as the actual metal… but, hey look, they remain among the most called about stocks we have so I am going to address them… I am going to explain why we like some more than other… I am going to explain gold stocks because they are not like buying normal stocks… see we typically like stocks here because they have low price to earnings multiple, because they pay good dividends, cause they are relatively cheap vs. all other stocks because they have great growth, and they are cheap… but gold has none of these… to paraphrase Cramer fave F. Scott Fitzgerald, the gold stocks are not like you or me… or other stocks.

So how do we rank them… this is a story about key metrics… production growth, cash costs, sensitivity of companies earnings to changes in gold price, and its price to net assets value… which that is like the price to earnings ratio for gold… that is how we decide which gold miner is best… after I tell you which is my favorite… you have to promise me that you will buy any gold stock in stages… because I have told you, it is going lower… you can buy gold lower… now, new to the business tonight we are evaluating the gold stocks based on their own key metrics… we prefer mid size to large producers, because they are diverse… now you know that my favorite gold stock has been Agnico-Eagle Mines Ltd. (AEM)… that is getting hammered… just like the rest of them.. but when you take a straight look thru the numbers, we get a new favorite… Eldorado Gold Corp. (EGO)… for all you home gamers… let me ask a question, how can you not like a stock with a symbol Eagle… I mean this one was made for me, I just hope our ego becomes swollen and oversized… although some of said that about me before… it doesn’t bother me though, because every since Barrons called me a genius 4 weeks ago… I have been totally immune from criticism from other fronts… thank you.

I want to give a shout out to the analysts at Thomas Wiesel partners… who published a periodical called “The Gold Standard”… that is where we get a lot of great stuff… if you want to get, go to Thomas Wiesel and you get the best stuff, and that is what helped me find EGO… now, in an environment where gold prices are high you want a gold stock that is growing gold production faster than others… they will be the ones to cash in… that is why I have been pushing the Agnico-Eagle, 344% production growth… that is why I liked the Yamana Gold in the first place, that is a company that let us down in the past, but it has got 56% production… see AEM has really got really big production… of the gold producers we looked at EGO and it came in 4th out of 7... 27% production growth… not shabby… better than a sharp gold pin in the eye… and then you need to look at cash costs… even if a company has limitless gold production capacity what good does it do if you are not making any money on it… EGO, cash costs $286.… if gold ever drops it is every bit as important as knowing where a company will be profitable… EGO has got the highest profitability… EGO is in a league of its own… next closest is Goldcorp Inc. (GG), at $397.… Yamana Gold Inc. (AUY) at $411... and then Agnico has one of the highest at $483, but their cash costs are coming down fast, the build is over… and we like the fact that this stock is down from $83 to $49... EGO is only $1.50 off of its high… it is not as low as I would like.

Now, we want to know about the sensitivity to these companies to changes to the price of gold because we said it is going lower… the earnings per share sensitivity of a company is the percent change in earnings for a 10% change in the price of gold… the less sensitive a company is the more control it has over its own control…. EGO 20.4%… Agnico-Eagle 22.4%… Yamana 24.2%… the most sensitive is Barrick Gold Corp. (ABX), that also has the slowest production growth of any of the large players… finally, how do we know if a gold stock is cheap… the price to earnings ratio does not tell us anything… so we like to look at the price to net asset value per share… it is the only one that is apples to apples… we want companies that are trading at the lowest net asset value multiple… this lets us factor not just the earnings but the value of gold producers holding, that is what really matters… the most expensive on a price to asset value is unfortunately is Agnico-Eagle, a 1.55 multiple… EGO somewhat cheaper, 1.12.… the cheapest is Newmont, .83 times its net asset value… half the valuation of Agnico, on this metric… you need to pay up for the more lucrative miners like EGO and AEM, that is okay… we like best of breed… this stuff is hard… I told you that is why these stocks are so difficult vs. say the GLD, or the gold bouillon, or the coins.

Here is the bottom line… 

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