Advice on Commodities

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Advice on Commodities: Uranium Stocks, Gold, and Why “Buy and Hold” in these Markets is Risky Business

By Dr. Mark Skousen, Investment U Advisory Panelist
Thursday, September 15, 2005: Issue #469

There I was, flying into Sin City last week, all alone – no wife, no kids, no priest to confess to. “What happens in Vegas stays in Vegas,” the sign reminded me as I got off the plane.

I was fancy-free to play blackjack, craps or Texas Hold’em into the night… see a late night show headlined by Jerry Seinfeld or Elton John… have an elegant dinner at Steve Wynn’s new towering hotel or even take a ride on the world’s scariest roller coaster at New York, New York.

But none of that appealed to me. After checking into the Mirage Hotel & Casino, I quickly changed and headed down the elevator. Within 10 minutes, I was at a special kind of “gentleman’s club” that was open all day long – and not just to gentlemen. I entered into a large room crowded with several hundred men all dressed in business suits, surrounded by a select number of beautiful women. I was in heaven…

The Las Vegas Gold Show!

I go every year to the Vegas Gold Show hoping to find a “diamond in the rough,” perhaps a little known mining stock that could turn a small claim into a millionaire’s dream.

You know, one of those penny stocks that could make you 10,000% in a year or two. To strike it rich is every investor’s dream, including mine.

But Vegas is always risky business. It’s dangerous to bring too much cash into a Vegas casino or a gold show. You might end up gambling too much and losing your shirt.

Perhaps there is no better gamer around today than Jim Dines, editor of The Dines Letter. He has a great track record in riding the waves of speculations in gold, platinum, Internet and Asian stocks.

What’s his advice on commoditiesand, more specifically, the next big move? Surrounded by four tall ladies hired from a modeling agency (his trademark), Mr. Dines smiled and declared without hesitation that at the top of his list of commodities recommendations are uranium stocks, which could be even “more profitable” than the Internet stocks of the ’90s.

He and Doug Casey, editor of the International Speculator, led a panel at noon last Thursday, telling a packed crowd of speculators that uranium stocks would go to the moon. Everyone was drooling with greed.

But then I saw a chart that stopped me cold: Cameco (NYSE: CCJ), the world’s largest uranium producer, has risen more than 3,000% in the past 10 years. (See the chart on Cameco’s stock price and volume movement below.)Could this be the top of a market?

Advice on Commodities: Cameco Uranium Stock Prices and Volume

Cameco Since 1996

Rick Rule, president of Global Resource Investments, was more sanguine than Dines or Casey, noting that suddenly there are several hundred uranium penny stocks out there. “I’ve been a bull for some time, and uranium is still probably headed higher, but right now the uranium market looks frothy,” he warned. I tend to agree.

While I toured the exhibit floor at the gold show, more than one promoter came up to me and whispered in my ear about his uranium play. I had moved from Texas Hold’em to “Fantasy Island.”

Commodities Advice on Gold and Uranium – Some Serious Roller Coasters

On the closing “Bull vs. Bear” panel, five of us were asked if the commodities bull market of recent years was a “secular” or “cyclical” trend:

A secular trend means that prices are likely to head higher and higher over the long run. An upward secular trend is great news for “buy and hold” investors; they can buy on dips and dollar-cost average without the fear of losing money.
A cyclical trend means that prices will fluctuate up and down without any long-term trend. Thus, investors who buy into a cyclical market can lose a fortune if they buy at or near the top. “Buy and hold’em” can be a disaster in Texas or elsewhere, as we all learned with the Internet bubble that collapsed in 2000-01.

I was the only one on the panel who argued that the uranium and gold markets are inherently “cyclical,” that what goes up can also come down, sometimes hard. As an economist, I pointed out that commodities are inherently volatile because they are farthest away from final consumption. The same holds true for housing and tech stocks, all of which are “early-stage” producers and well known as “cyclical” performers.

The history of Newmont Mining (NYSE: NEM) proves my point. While the Dow and S&P 500 have grown pretty steadily since 1985, Newmont Mining has gone from $3 to $40, back down to $20, then up to $60, fell to $18, and is now around $44. Yes, you could have “bought and held” Newmont for 20 years and made 1,367% on your money, but how many of you would have had the fortitude to hang in there when Newmont lost 50-70% along the way?

Advice on Commodities: Newmont Mining Stock Chart

Newmont and the S&P (^GSPC) from 1985

In short, virtually all gold and commodity stocks are far more volatile than consumer/industrial shares, as reflected in the S&P 500 or Dow Jones Industrial Average.

The sum advice: “Buy and hold” is not a good strategy for gold shares or uranium shares. You would be wise to buy when commodities are in an uptrend and use protective stops to lock in profits, or minimize your losses. Both my newsletter, Forecasts & Strategies, and The Oxford Club use stop loss orders regularly for this purpose. This essential technique has made huge profits for us, while protecting us in a bear market.

Right now, the trend is still upward for gold, uranium and energy stocks. We are living in a period of rising inflation, and that’s bullish for commodities. But someday the music is going to stop. When it does, our stop orders will protect us, while those gold bugs who believe in an eternal bull market for commodities are going to be deeply hurt… in their pocketbooks.

Don’t let it happen to you. Otherwise, you may be like one of those high-rollers in Vegas who goes home penniless and drunk… and facing an angry spouse. Because in investing, like everything else in life, what happens in Vegas does not stay in Vegas.

Good trading, AEIOU,

Mark

Today’s Investment U Cribsheet

To get daily prices for all of the base metals, visit http://www.kitcometals.com and for gold spot pricing, see http://www.kitco.com/market.
For additional reading, insight and investment advice, try out my newsletter, Forecasts & Strategies or The Oxford Club’s newsletter, The Oxford Club Communiqué..