Before You Shoot Your Next Arrow

David Galland, Partner, Casey Research

Dear Reader,

While I have read certain works on the life and ponderings of Buddha, I claim no deep knowledge of his philosophy. Note I didn’t use the word “religion,” because Buddha himself claimed no supernatural powers and even begged his followers not to deify him after his death. Hardly had he drawn his last breath, however, when the deification began – though most Buddhists won’t claim it as such.

Even so, there are Buddhist practices I think useful in this hectic world of ours – practices that don’t involve dressing in robes and refusing to swat flies. For example, I rather like to meditate from time to time. Nothing too involved, just ten or fifteen minutes of quiet deep breathing as part of calming the mind and all that.

I also find a lot of wisdom in the training of the Zen archers, who seek to clear their minds of all internal dialogue not related to the simple process of releasing the arrow at the target. Simply, they strive for only one goal – perfect form. Thus they clear their minds of all others, even those that might be considered complementary to the task at hand – for example, getting a pat on the back from the instructor, or plopping the arrow closer to the bull’s-eye than the next person down the line. 

Why, even if the attractive maiden serving tea pauses from her morning exertions to admire your shooting, it is verboten to entertain even the slightest thought of trying to impress her with your skills – because having more than one goal divides the mind’s focus and will put you off your mark.

Of course, as humans are wont to do, Buddha’s successors have taken the man’s simple approach to life and wrapped it in gaudy and self-important rituals, in the process turning it into a livelihood for predatory priests. But that’s another story and shouldn’t take away from Buddha’s core beliefs.  

Especially the bit about simplifying and focusing your goals. That idea has always seemed to me to have relevance for a wide range of pursuits, from the putting green to the stock market.

It is, however, something I personally struggle with. Just this morning, for example, I arose to help the kids with breakfast, but despite being in the room, my mind had already turned to studying the piano (a goal for 2011), while simultaneously wondering how and when to squeeze in at least 30 minutes of studying Spanish (an ongoing goal). Were that all my brain was juggling, I could manage, albeit not in Zen-like form. But, alas, my mind jumped like a frog on hot pavement to the fact that Friday is also an exercise day for me, then hopped again to the writing of this missive, and other pressing work to be done.

So there I sat, bowl of cereal in front, flanked on either side by my children, while my brain was AWOL, spastically leaping from the piano, to Spanish, to exercise, to writing and other work – all a pleasure to me, and all important to me. However, the result of all of these goals trying to simultaneously crowd into the cranium is the equivalent of a mental Mixmaster.

And so, recognizing the simple reality that it is impossible to actually pursue more than one goal at a time – at least with any competence – I took a deep breath, picked the one activity to start the morning with (the piano), and moved on.

The purpose of mentioning all this, however, is not to reveal your correspondent as a schizoid multi-tasker, but rather to provide what I hope will be some useful perspective on the matter of investing.

Based on my many interactions with investors over the years, I have concluded that there are really just two sorts. There are those that have clear goals, and those who don’t. Those who do make the money. Those who don’t provide the money to those who do (investing in a zero-sum game – for every winner, there is a loser).

This thought was made more tangible to me in recent days, based on a personal experience. Long story short, I had invested in a pre-public company years ago. It wasn’t a big investment, and it took longer than anticipated to ultimately go public. When it did, it had a fairly good run, but as the reason I bought it in the first place was still ahead of it, I hung on. Well, as is so often the case, the company’s missed a hurdle and came tumbling back to earth. With the stock trading hardly at all, and for just a few pennies a share.

Lo and behold, the company’s management reinvented the company as targeting rare earths and managed to acquire a project of merit. The investment that I had written off as worthless soared on high volume.

Now, if there is one thing that anyone with experience in the small-cap resource stocks will tell you, is that the time to sell is when there is someone to sell to – because absent volume, getting out of a decent-sized position is not easy.

So, there was the dilemma – hold on in the hope that the surprise home run turns into the sort you bestow on your grandchildren? Or secure your gains by selling and moving on?

At the point of such a decision, the mind gets very un-Zen-like. Visions of untold riches dance in the head, followed by fits of fretting as the stock pulls back. Next thing you know, you are tossing and turning in the night, conflicting thoughts chasing each other around like cats.

In the final analysis, I recalled the old adage that pigs get fat but hogs get slaughtered. I sold enough to take my initial investment off the table, and a healthy profit – holding on to a modest position to enjoy any further upside. And, having done so, the internal dialogue came to an abrupt halt.

Now, the funny thing is that after a brief pause, the company is again moving up – but I have no intention of second guessing my decision to sell when I did. On a percentage basis, my returns were in the moon shot category – the sort that only the junior resource sector can produce – so it would be just plain churlish to gripe.

More to the point, the stock could just as easily have peaked and once again collapsed, in which case I would really feel like a dolt had I not taken an exit.

All of which delivers me to the point. Namely that it is very important, especially for the resource investors among you, that you actually have a firm goal in mind for each investment you make – and that you remain single-mindedly focused on that goal.

Do you own gold or silver as a protection against inflation? If so, then why even bother checking the price on a daily basis, let alone every few minutes?

Or do you own it as a speculation? If so, what is your specific profit target? Don’t have one? If not, then it seems to me a bit like setting off on a journey without knowing where you want to actually go.

Do you know exactly why you own the resource stocks you do? What hurdle are you betting they will clear next, and by doing so ratchet the price higher? Is your goal to get your original investment off the table on a double? Or do you have a specific price target in mind, at which point you will close the position entirely and move on to more fertile ground?

This idea of keeping an easily understood, single goal in mind for each of your investments is hugely important, because without it you are going to be susceptible to the fears, fantasies, and folly that ultimately cause investors to end up on the losing side of the equation… by selling good companies on pullbacks, holding on to positions well past the point of reasonableness or chasing stocks after they’ve spiked.

Probably the most successful investor I know – I won’t say his name, because he might not like my pointing out that he has tucked away close to a billion dollars, thanks primarily through investments in the resource sector – has a well-deserved reputation for selling too early.

While it is remarkable that he has made so much money in this sector, what is more remarkable is how he did it. Which I would sum up as follows…

  • First and foremost, he follows a process – almost mechanically.
  • He buys low, with a specific objective in mind. Both in terms of hurdles he expects the company to clear, but also in terms of the returns he expects to get on his investment.
  • When his return objectives are met, he sells. Maybe enough to get his original investment off the table, maybe the entire position – depending on his reassessment of the company’s potential to clear the next hurdle. But he always sells at least enough to get his original investment off the table, no matter how much exciting news there is and how much optimism others may feel about the stock.
  • He only buys on his own terms. If invited to participate in a private placement, he will do so only if he is completely comfortable with the terms. If the company is offering a warrant with a one-year expiration term and he thinks the development work will take two years, he’ll ask for a two-year warrant. If the company won’t budge, he moves on, confident in the knowledge that there will always be another deal coming down the pike.
  • He’s careful with his money. As he likes to say, if you spend your dollars, they can’t mate and make you more dollars.
  • He’s not afraid to concentrate investments, but again on his terms, and only when he has done the due diligence needed to be confident that the potential reward warrants the level of risk involved.

If those principles and practices sound simple, it is because they are. But following that process is also incredibly effective.

Interestingly, this process rhymes with the finely honed investment methodologies of the late great Benjamin Graham, author of The Intelligent Investor and mentor to a small cadre of close associates that included Warren Buffett, Jean-Marie Eveillard, William Ruane and Irving Kahn – all of whom used what they learned from Graham to become billionaires, or close to it.

Let that sink in for a moment. One man, Graham, developed a methodology for investing – and it’s actually a pretty simple methodology – that the people working with him were able to duplicate in building their own fortunes. Following a proven process works.

And while Graham wouldn’t have touched a junior resource stock with a twenty-foot pole – his methodology was focused on balance sheet analysis, not a strong point for junior exploration stocks that have no E in their P/E – the principle of following a specific process that mitigates the odds of a loss holds up well. The proof in the pudding is the success of my aforementioned friend, and many others I know who are similarly disciplined. (Our own Marin Katusa, to name just one.)

With all of that said, do you know why you own what you own? Do you have a clear goal in mind for each of your positions? Do you know how much of your portfolio is allocated to speculative resource plays, and are you comfortable with the idea that those stocks have historically suffered extreme sell-offs?

Warren Buffett, whose investment acumen is hard to argue with, likes to quip that the two most important rules for investment success are, Rule #1 – Never lose money. Rule #2 – Never forget rule No. 1.

While it is almost impossible not to lose money along the way while investing in resource shares, it is equally true that once you have scraped your original investment off the table, it is impossible to lose money. Sure, you can give back your profits – but you can’t lose money.

 All of which is, I think, worth reflecting on as you aim your next arrow.

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An Interesting Read

One of the memes among the sound-money community is that one day things will get so bad that the public will come to its senses and throw the bums out, and then things will get better. Recently I came across an article by Daniel Amerman on GoldSeek offering an alternative perspective. He also discusses a very plausible threat to gold investors, stemming from a possible government action to outlaw cash – a topic I have written fairly extensively on.

Amerman’s basic thesis is that either gold will again be used as cash, in which case the gold you own will skate by tax free, or cash itself will be outlawed, in which case gold owners could be severely disadvantaged.

Here’s a quote:

For this illustration/exploration of possible futures, we will assume that there will be a deadline date when all cash must be deposited and converted to electronic form, and after that date – any payment with cash that can't be electronically tracked will be a felony. This would, of course, include any payment made with gold or silver as well, meaning spending a silver coin in a manner that didn't generate an electronic tracking report would be an automatic felony.

    And here’s a link to the full article.

    Please note that I have done no diligence on Amerman and have no idea if the products he actively touts are worthwhile, but I do believe his thinking offers an important perspective. Gold is a better form of money than the paper/electronic sort so casually ginned up by sovereign issuers these days, but it is not immune from deleterious actions taken by those same sovereignties. They have the guns (figuratively and literally) and so get to make the rules.

    Underscoring the point, I recently came across this potent reminder that things can change, and be changed, almost overnight.


    As you will note in the large type at the bottom of the notice, the fine for failure to turn in your gold was $10,000, or 10 years in prison – or both. For the record, in today’s dollars, that fine would amount to about $165,000. That, and the potential for ten years in prison, might make you think twice about squirreling away some coins or trying to trade them “off the grid” for some product or service, eh?

    Now, please don’t get me wrong. In the current circumstance, with monetary inflation (quantitative easing) raging, not having a healthy allocation to gold and/or silver would be an act of insanity.

    But it is essential, in my view, that you keep things in perspective. There are other ways to diversify out of the way of inflation worth considering. In the hyperinflation of Weimar Germany, simply owning the currencies of your neighboring countries – the British pound, French or Swiss francs – would have completely preserved your wealth. And, in fact, given you some serious purchasing power; as the inflation in Germany raged, people from France would drive across the border and buy heirloom antiques for the equivalent of pocket change.

    Buying foreign real estate is another choice, or even shares of solid foreign companies.

    Again, it is not my purpose to talk down the precious metals, but rather to broaden the discussion so that you will at least entertain the idea that even something as relatively simple as banning cash, something the government could do in the blink of the proverbial eye “for the public good,” could be a game changer.

    Would anyone really care if the government banned cash? Sure, but not many. As Amerman points out, and as is consistent with my own experience, entire weeks go by where I carry no cash at all in my wallet.

    I don’t perceive any immediate threat to cash – and by extension gold – but this is definitely something to set your radar to.

    In the meantime, the precious metals remain a very important tool in wealth preservation (though it may not seem that way if you are new to the market and have experienced pain from the current pullback).

    Moderation in all things, including your allocation to precious metals.

    Since we’re on the topic of precious metals, I will turn the stage over to Jeff Clark of our BIG GOLD service, with some insights on recent reports of bullion shortages…

    Bottleneck or Supply Deficit?

    Jeff Clark, BIG GOLD

    There have been numerous reports of bullion shortages in many parts around the world, along with rising premiums. And the two explanations – we’re running out of gold! and, it’s just a manufacturing bottleneck – are at odds with one another. So, who’s right?

    First, the data. The following has been reported since New Year’s eve horn-blowers were put away:

    1. Report from China: “…premiums for gold bars jumped to their highest level in two years.”
    2. A director at Cheong Gold Dealers in Hong Kong: "I don't have any gold. Premiums are very high. Some say they have no stocks on hand."
    3. A dealer in Singapore: "There's a sudden surge in demand. Demand from China is very strong and they are paying very high premiums. Refiners can't meet the demand.”
    4. World Gold Council report: “…gold imports by India likely reached a record last year due to increased investment demand. Imports will probably be the highest for India in its history.”
    5. Nigel Moffatt, treasurer of the Perth Mint: “…demand for gold bullion has been unrelenting since gold dropped below $1,400 an ounce. At the moment demand is such that we cannot meet all the enquiries we are getting. Demand for our coins and medallions is strong, but the biggest demand is coming from banks and traders looking for kilo bars.”
    6. Eric Sprott, chief investment officer of Sprott Asset Management, after having difficulty locating enough bullion for their new silver fund: "Frankly, we are concerned about the illiquidity in the physical silver market. We believe the delays involved in the delivery of physical silver to the Trust highlight the disconnect that exists between the paper and physical markets for silver."
    7. 2010 gold Buffalo coins are largely unavailable from dealers.
    8. Sales of silver Eagles set a new record in January – by the 19th of the month. Already, 4.6 million coins have been sold, an all-time monthly high since the coin's release in 1986.

    Based on this data alone, you might come to the conclusion that yes, we’re running low on bullion supply. But most industry execs I spoke to insist this is a “bottleneck” issue: current demand is greater than current stock on hand, or is coming in faster than mints can produce. In other words, it’s a fabrication issue, not a supply deficit. A Treasury rep said as much.

    You’ll recall from 2008 how supply was difficult to come by and premiums were roughly double what they are now. Some think it will be “lesson learned” this time around; mints now know how to prepare for another spike in demand. Many have added workers, shifts, and facilities. The U.S. Mint stopped producing the less popular coins and now focuses on those that are most in demand.

    To a large extent, I believe the bottleneck argument is exactly what’s happening. It’s no different than the store that sells old-fashioned wooden rocking chairs suddenly getting swamped with customers when an antique dealer declares they’ll be valuable collectibles in the future. Collectors rush to buy, and the store doesn’t have enough rocking chairs in its warehouse. But they’re not running out of wood. And they’ll likely be better prepared when they hear the dealer is coming out with a book.

    It’s true there’s only so much gold coming to market every year (total 2010 supply is estimated to have been about 115 million ounces), but in the big picture, there’s been enough. It’s also true that orders from the 2008 rush were eventually filled. However, I think the “bottleneck” and “we’re running out” arguments miss the point, because they both focus on supply.

    Demand is what I’m concerned about. Now try this data:

    1. According to International Strategy and Investment Group, gold ownership currently represents 0.6% of total financial assets. If it rose to just 1.2% - still less than half its 1980 level – it would require an additional 917.1 million ounces, or 16% of aggregate gold worldwide. This amount is equal to about 10 years of current global production.
    2. Investment demand represented 53% of all gold demand in 1979; today, it represents just 32%. Coin demand represented 37% of all demand in 1979; today it’s less than 14%.
    3. Gold and gold mining stocks represented 26% of all global assets in 1981 (high inflation), and 20% in 1932 (high deflation). Today, gold and gold mining shares represent about 1% of global assets.
    4. The market cap of the entire gold industry is about the size of Microsoft, is less than Exxon Mobil, and is 10 times smaller than the banking industry. The whole of the silver industry is smaller than Starbucks.
    5. Silver mine production is insufficient to meet current demand. The only way silver needs are fulfilled is from scrap coming to market. Miners don’t produce enough on their own.
    6. There are approximately 40% more earthlings right now than there are ounces of gold that have ever been mined. That includes every ounce used in jewelry, electronics, and dental. Further, if every ounce of supply last year were made into coins and bars for investment purchase, it would amount to less than two one-hundredths of an ounce, or about half a gram, for every man, woman, and child on earth. This means 0.018% of the global population – about one in every 55 people – could buy a one-ounce gold coin this year.

    Yes, there is a bottleneck. But with this recent spike in demand, it appears some mints still aren’t equipped to keep up. Are we nearing a tipping point where in spite of the increased efficiency and preparedness, requests from buyers will outweigh available supply? Imagine demand continuing to accelerate, and you can see where this might be headed. I think this is the side of the equation to watch.

    Andy Schectman of bullion dealer Miles Franklin told me last summer that, “Based on what I know, it’s my opinion that if 5% of this country put 5% of their money into gold, there would be nothing left tomorrow morning.” In other words, even if supply is sufficient at present, what happens if demand, say, doubles, as the above data show is possible?

    Right now in North America you can still get bullion, but we’re clearly on a path where demand could overwhelm the system, making purchases very difficult. When that point arrives, many investors will wish they hadn’t worried so much about price.

    Imagine Doug Casey is right about the future value of the dollar: zero. Imagine how high inflation would rocket in such a scenario. 

    Bottleneck, meet desperation.

    [Our recommended dealers haven’t raised their premiums on gold bullion and report no shortages. Find out who they are, along with our newly released 4th annual gold forecast survey in BIG GOLD, a packed issue of 17 interviews with gold experts, economists, and authors, plus Doug Casey, who tell us what to expect in 2011 and how to invest. If you subscribe today at $79 per year, you’ll also get 12 monthly issues of Casey’s Energy Opportunities absolutely FREE. But hurry, this is a limited-time offer. Details here.]

    Friday Funnies

    For today’s Friday Funnies, we are going to do something of a film festival. So, grab the popcorn, have a seat, and enjoy!

    My Blackberry Is Not Working

    First up is a classic of British humor, aimed at the naming conventions used by so many technology companies these days. (In case the reference eludes, “Orange” is a European mobile phone company.)

    Here’s the link…

    Hu Jintao Jets into Washington

    There is a firm out of Taiwan, I think, that does these great video animations of current news events – and I think they did this one as well, though clearly as satire. It is a hilarious take on Hu Jintao’s visit to Washington.  (Thanks to Jeff at for bringing this to my attention!)

    In the “They All Look Alike” Department

    Speaking of Jintao’s visit, did you see that the chief exec of Coca-Cola toasted the Chinese president in Japanese? Here’s the snippet out of Bloomberg…

    Coca-Cola Co. Chief Executive Officer Muhtar Kent found a memorable way to toast Chinese President Hu Jintao: in Japanese.

    Kent, chairman of the Washington-based U.S.-China Business Council, was warming up the crowded ballroom at Washington’s Wardman Park Marriott Hotel yesterday for Hu’s only policy address during his four-day trip to the U.S., which ends today.

    “In honor of this very historic moment, I would like to propose a toast to President Hu and also to his esteemed delegation -- kanpai,” Kent said.

      Here’s the full story.

      As these corporate suits never write their own material, you can bet that some less-than-attentive speech writer has just caused the unemployment rate to tick up by one.

      Recommended Weekend Reads

      From Doug Casey, “I've been of the opinion that U.S. real estate is a dead asset class for a very long time...” Article on states running out of homebuyers, here.

      From Bud Conrad, “The world economists will be meeting in Davos. They will read a report by McKinsey that the world will need $100 trillion more credit. This is continuing the inflation so the deflation view is toast, in my opinion.”  Article here.

      From Olivier Garret, “This is very big to have this article in the NYT, I think we are in for a big (unpleasant) bang.“ Read article on behind-the-scenes policy discussions to clear the way for states to declare bankruptcy, here.

      From Rene, a dear reader. “The end of Swiss privacy laws?? Swiss judge erodes confidence on discretion by fining Elmer with 7.200 CHF only!! After this, no digital info in CH is secure anymore. Back to producing chocolate and cuckoo clocks.” Here’s the article on the slap on Swiss Banker Rudolf Elmer Convicted Over WikiLeaks Publications.

      That’s It for This Week!

      In case you missed my note in Wednesday’s edition on coming events, here again are some that are coming up in Casey Research world….

      Harvest Celebration, La Estancia de Cafayate, Argentina, March 15 – 20. Each March the quaint town of Cafayate comes alive with the annual wine grape harvest and a celebration thrown by La Estancia de Cafayate that draws participants from around the world.

      As has become a tradition, Casey Research will again host a half-day conference, with this edition featuring Doug Casey, Marin Katusa, currency expert Frank Trotter of EverBank, and Dr. Ted Harrison on the topic of Rethinking Thin.

      Terry Coxon is a late addition to the program – he’ll be on hand to discuss the most effective ways to internationally diversify your assets. As this event is always a sell-out, if you’re interested in participating, it is strongly advised that you contact Dave Norden of La Estancia ASAP. By return email, he’ll send you the full program and connect you with someone to help you make your plans. Dave’s email is

      Casey Youth Conference on Liberty and Entrepreneurship (CYCLE) San Diego, March 31 – April 3. For some years now we have been the lead sponsors for a camp in Eastern Europe that helps to expose young people, 17 to 29 years old, to the core concepts of finding personal freedom through financial freedom. Given the dearth of good programs here in the U.S., we have decided to hold an edition of CYCLE here. The program so far includes Rick Rule, Louis James, Alex Daley, Doug Casey, yours truly, and others. If you have a child or grandchild that you think would benefit from an intensive camp on money, free markets, starting a successful business and more – drop us a note at and we’ll make sure you get the program information as it becomes available.

      Casey Research Summit, Waldorf Astoria, Boca Raton, April 29 – May 1. We are happy to announce the latest in our successful series of Casey Research Summits. In beautiful Boca Raton, Florida, we’ll escape from the tail-end of winter and gather for an timely and important update on where we are in the unfolding crisis.

      In addition to a blue-ribbon faculty addressing the big picture, including how to internationalize your assets and your life, the Summit will focus on the best of the best micro-cap companies operating in the natural resource sector (gold, silver, energy, rare earths, agriculture), technology, and more. This will be our premier Casey Research Summit for the year, held in a stunning facility on the beach at Boca Raton. More details will be available soon – for now, be sure to mark the dates of April 29 – May 1.

      Until next week, thank you for reading and for being a subscriber to a Casey Research service!

      David Galland
      Managing Director
      Casey Research

      Jan 21, 2011