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Crisis Investing: Tactics for Today

03/25/2009

by Louis James, Senior Editor Metals Division, Casey Research

The storm we have so long tried to help readers prepare for is upon us. We’ve been calling for crisis for years now, detailing our case for its imminence with increasing urgency over the last two years, urging people to “rig for stormy weather.” And now, as people around the world are so painfully aware, it’s here.

We’ve been sounding the alarm at least as far back as August of 2005, with our “Profit from the Collapse of Western Civilization” issue of the International Speculator. We wish more people had taken us seriously back then, and during subsequent warnings and financial calls to action.

As we watch the debacle unfold and people who should know better take huge losses, we are often beside ourselves with exasperation. Did people think we were kidding? Exaggerating? Well, maybe they did, or maybe they thought we might be on to something, but the magnitude of the problems we were predicting just seemed too great to take seriously. In all fairness, who would have believed back in 2005 that in 2008 the U.S. would see cascading bank failures and de facto nationalization of major financial institutions?

Well, we did. And those who listened then have profited. But even newcomers should remember that a genuine crisis won’t be easy for anyone, not even us. The bailout plans, for example, are worse than robbing Peter to pay Paul, they’re robbing Peter to pay Peter – with a hefty transaction fee for the service. Faced with such lose-lose propositions, you have to batten down the hatches, plug all the leaks, and hold on tight.

And holding on to – or backing up the truck on – gold and gold stocks is definitely the right thing to do at this time.

Homestake Mining Company (now part of mining giant Barrick Gold, NYSE.ABX) demonstrated this during the Great Depression. For more than 100 years, the company operated the Homestake mine in South Dakota (ever watch the “Deadwood” TV series?). In 1935, right in the middle of the Great Depression, Homestake recovered enough gold to make $11.39 million in net income, a record that stood for nearly 40 years – and that was at a time when the U.S. Government had set the price of gold at $35 per ounce.
Homestake shares showed some volatility, but weathered the great stock market crash of 1929, ending the year slightly up. From 1926 to the end of 1935, they went ten-to-one, soaring from $50 to $500. With fluctuations as you’d expect, they held on to those gains until taking off again during the 1970s bull market for gold. We have companies in our portfolio now that could do the same thing.

And remember, gold is the ultimate financial safe haven.

The dollar is being debased at a mind-boggling pace. The economic fallout is affecting the EU and could cause the euro to bust apart at the seams as well. At a time when serious market malaise has people fleeing to cash, cash has become a minefield. Even money market funds are “breaking the buck,” delivering losses on the one refuge seen by many investors as a “sure thing.” Anyone who thinks about it can see what that must mean for gold and gold stocks.

What to Do

The gold price has recovered considerably in the last few months, lighting a fire under our whole sector. We would not want to be caught short of any great stocks that are positioned to maximize returns during the Mania phase of this market – or interim bull rallies that can charge upward at any time.

Our essential stock recommendation:

• If your cash for speculative investments is fully committed, make sure you are in the best of the best companies, and then sit tight.


• If your cash for speculative investments is not fully committed, back up the truck for the spectacular deals still available right now.

We’d liquidate any mainstream investments that leave you exposed to the current financial crunch or that can be expected to do poorly in a weakening economy. It also wouldn’t hurt, and just might save you a great deal of discomfort, to keep enough cash at home (or some other safe place that’s not a bank) for you to cover your living expenses for a month or two.

And buy gold.

We’re recommending that you rebalance your portfolio to 33.3% physical gold (or very solid proxy for larger amounts, like Perth Mint Certificates), 33.3% cash, and 33.3% gold-related stocks – from major gold producers, as featured in our BIG GOLD newsletter, to junior gold explorers, as recommended in International Speculator -- undervalued energy stocks, select agricultural investments, inverse financials, and similar things that can reasonably be expected to do well through the crisis.

Neither we nor anyone else can tell you exactly when the dollar will go up in smoke, but anyone can see that it’s smoldering. The current crisis could take it a long way towards its intrinsic value (zero) in very short order. If you bought gold at $800 the last time we said this, you should be a happy camper, but don’t let that stop you from beefing up your gold position.

At over $900, gold is still relatively cheap – it’s only $338.50 in 1980 dollars (using the U.S. Government’s much understated CPI stats). It has a long way up to go, but that’s not the only reason to own it.

Gold is the one asset you can own that – no matter what else happens – won't go to zero. The same is true to varying degrees for other metals and commodities, but especially true of gold. Anything else is paper, whether it’s dollars, futures, or even gold stocks – it’s still paper, and all paper can go to zero.

In times like these, the speculative upside of owning physical gold is spectacular – but the ability to sleep sounder at night knowing you own a significant chunk of something with intrinsic value is priceless.

What happens if other asset classes do drop close to zero? Why, we cash in and buy with both hands, of course. Blue chips for pennies on the dollar would get our attention, as would prime commercial real estate and many other investments that should be near bottom even as gold nears its top.

We’ve warned repeatedly for investors to hold on to their hats. We now think we’ve underestimated how very rough this ride is going to be. Never mind the hats; hold on for your financial life.


This may be the financial roller coaster ride of your life, but if you make the right choices and go with the flow, you can still come out ahead. The International Speculator shows you how, with handpicked, top-quality junior exploration stocks… stocks that have already started to move up, following the rising gold price. If you are ready to assume higher risk for exceptional returns, click here to learn more. Or, if you’re a more conservative investor whose primary goal is to keep your assets safe and achieve moderate returns, check out BIG GOLD -- click here for more.

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