Doug Casey believes the current gold correction has bottomed. Speaking to me a few days ago, he said: “With rare exceptions—that are mainly luck—only liars buy at the exact bottom and sell at the exact top. Purchase of precious metals remains the most prudent thing you can do to protect your wealth, and a very reasonable speculation at this point. Gold is not the giveaway it was at $250 back in 2001, but it's very reasonable near $1,400 now.
“I think mining stocks have also bottomed at this point, and there are several great speculations available today. All the so-called quantitative easing—money printing—by governments around the world has created a glut of freshly printed money. This glut has yet to work its way through the global economic system. As it does, it will create a bubble in gold and a super-bubble in gold stocks. This remains in the future; what we've seen so far is just foreshadowing.”
Note that in Doug's view, it doesn't really matter whether gold has bottomed or not; what matters is that opportunities now exist to buy low in order to later sell high.
Consider this chart of the price of gold and a junior gold miners ETF, over the last year:
Several things are evident in this chart. The first is that—as has been well established over decades of observation—gold stocks are much more volatile than gold itself. Note that this is true on the upside as well as on the downside. It reinforces Doug's edict that while the reason to own gold is prudence, the way to speculate for profit on upward movements in gold is to buy stock in the right gold companies.
This also highlights the second compelling thing about this chart: Gold stocks have lost much more ground than gold itself and now offer much more imminent upside, if Doug is right about where gold is going next.
There's no need to reiterate all that we've said about the runaway global money printing and its inevitable consequences for gold. Please see previous Conversations with Casey and articles in this column for more on this. Assuming you're on board with the premise, the question is what to do if Doug is right about the market bottoming.
The answer is obvious: It's time to buy.
However, as Doug likes to say, speculation is not a synonym for gambling; you want a good speculation to be as safe a bet as possible.
While we do expect gold to rise in the near term, it may dip again before jumping up to new highs and exploding into the Mania Phase of this bull cycle—so right now we're focusing on companies that have major deliverables in the near term.
Imminent Push, as we call it, dictates where we place our chips today.
In the current issue of the International Speculator we're summarizing Doug Casey's current top 3 junior gold stock picks, all of which have major news pending.
#1: The Explorer-Turned-Producer
Normally, we're skeptical when an explorer aspires to become a producer, as exploration and production are two completely different businesses requiring two completely different skill sets. However, this company was founded and is run by a mining engineer, and its two current projects have an unusually short path to production.
The first project is relatively small but high grade, and required very little capital to build the mine and plant. Production is scheduled to start by the end of this month. The question at this point is not whether it can be done or will be done, but whether operations will be as profitable as projected.
Those projections were exceptional: The company should be able to pay back the initial $6 million investment within two months, followed by another $40 million or so in free cash flow.
Since publication of these projections, the company has drilled into more high-grade gold beside and below the current deposits being worked. This gives us two ways to win on this play in the near term: If the cash starts flowing next quarter (as we think it will), the shares should soar; and if the company keeps making this little project bigger, that can only add to the upside.
However, the best part of this story is the company's second project, which is already much larger and high grade—this one is showing world-class potential. And with cash flowing from the first project, the value in the second one could be brought to market with little or no dilution for shareholders.
That gives the stock what we call “ten-bagger” potential (meaning share prices could rise 1,000% or more), and it'll start happening in the weeks and months ahead.
#2: The Takeover Candidate
Doug Casey's second top pick for today is a company that is almost certainly on the verge of being bought out by a larger company, at a hefty premium for current shareholders.
The story may not have ten-bagger potential, as larger companies rarely offer more than a 100% premium—that is to say, more than double the average of recent share prices. But such rapid gains overnight, combined with the very high probability of their occurring in the near term, make the stock an outstanding speculation.
How can we be so sure this will happen?
Pick #2 owns the mineral rights to a property that is completely surrounded by the property of another company that has made a multimillion-ounce gold discovery in one of Canada's best mining jurisdictions. It's not just a matter of location, either—our little company has already demonstrated that the gold mineralization continues onto its neighbor's land, including some exceptionally thick and high-grade intersections.
The only reason this opportunity even exists is that many mining executives were nervous about making acquisitions during gold's recent downturn, so the larger neighbor's management probably thought that they had all the time in the world to take over our pick. And they were right; no one else has bought it yet.
However, an intermediate producer has just bought our little company's neighbor, and there's no reason to believe that this larger buyer will leave our company's gold in the ground, just across the property line.
There are no sure things in junior mining speculation, but this takeover is as close as it gets—and we expect it to happen before the end of this year.
#3: The Holy Grail of Exploration
Doug's third pick for today's market is a relatively straightforward value-adding proposition.
One can make money mining gold, even on a small scale, if the grade is high enough. One can also make money mining low-grade gold, if its characteristics are amenable to low-cost production methods and the deposit is large enough to allow economies of scale.
The best of both worlds, obviously, is to find a deposit that is both large and high grade.
That's extremely rare, of course. Many of those discoveries are in basket-case countries that are either too dangerous to work in or where the government is likely to steal your mine if you build it. Large, high-grade discoveries with little political risk are the holy grail of mineral exploration.
This company has just such a deposit in one of the more pro-business jurisdictions of Latin America, and its current drilling campaign will both upgrade the current resource estimate and make it larger—potentially much larger.
The drilling now under way has already returned spectacular results of the sort that move share prices sharply upward, especially when the sector itself is up. So if Doug is right about where gold is headed, we should see these shares rise faster than gold in the months ahead—and a big leap is likely when the company issues a new resource estimate calculation.
We're confident this one's getting bigger and better, and it has a short fuse.
I apologize for the secrecy, but it simply wouldn't be fair to existing International Speculator subscribers to just give these companies' names away. Two of them have market caps in the $20-million range, and announcing their names in this space could drive up their share prices considerably. You'll find an article with the names and stories of all 3 of our “recovery picks” in our just-released September issue.
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