Friday, May 25, 2007

investing in gold

About seven months ago I posted about a company I had just invested in: Vonage. Three months later I sold my stock having lost 20% of it. One month later, Vonage stock had dropped another 40%.

Just like that, through my teary eyes, I watched my credibility as a stock blogging analyst descend into the sort of bear market that stock blogging analysts don't wake up from. As far as I can tell, when they talk about bear markets, they mean hibernation.

If my credibility was a bear, I don't think he's sleeping. And most bears don't recover from becoming bear skin rugs.

It figures that I decided to write about the only one of my stock picks that completely bombed.

Anyway, I've enjoyed thinking and learning about stock investments so much over the past eight months that I'm going to have to write about it again. However, this is not Pocahontas. The dead bear's spirit will not be resurrecting to join the eternally living collective bear spirit. Nor will Elton John be singing the Circle of Life.

This is a reconciliation with reality. If the poor bear is dead, we might as well stretch out on the floor and enjoy the rug.

Even stretch out naked since it's a bear rug and bears are so soft. End of analogy.

As of right now I'm invested in six places: two gold companies, Pepsi, Exxon, a small company that has to do with windmills and hybrid city buses, and a volatile mutual fund that invests in pacific rim markets, mostly Taiwan, China and Japan.

This post is about gold.

Kinross Gold Company (KGC) and Goldcorp (GG):

Both of these companies are in the process of transitioning through acquisitions of other gold companies. That was the main reason I bought KGC in the first place in November. Over the course of four months it gained 28% for me. I almost sold, but after reading some more I decided that it still had a huge amount of room to grow. Since then the stock has dropped almost 20%. And I'm not afraid.

At the same time that I decided to stick with KGC, I added GG. A year back, after GG acquired a company called Glamis Gold(hence the GG symbol with a Goldcorp name), they became one of the biggest gold mining companies in the nation. Investors quickly jumped on the stock and sent it soaring to almost $40. I bought it after it had fallen and then risen back to around $29. I made a big mistake buying it when I did. I should have known better. It then dropped back down another 20% to around $22. At that point I doubled the amount of stock and cut my losses to only 10% of total invested. That's where things stand now.

The reason these stocks have been falling, from what I can tell, is because of the price of gold. Earning growth expectations for the companies have been met or exceded. Last summer, when these stocks were merging, the price of gold was at an all time high of $725 an ounce. That price has been sliding ever since. Hence the immediate buy up of all the stock and then the slow selling off. I don't think the bulk of investors expect the price of gold to go back up high like that for a long time.

There have been very recent reports lately that would suggest otherwise. Multiple gold market analysts have recently said that they see the price of gold rising over the next year, well beyond the record from last summer. One analyst said it could rise as much as 30%. If gold rises that much, I don't need to tell you what kind of miracle that would be for the profits of gold companies... especially for gold companies who have just acquired bigger slices of a gold mining world that isn't expanding as quickly as demand for gold is.

Another huge factor comes from China. Supposedly there's a good chance they'll be trying to convert some of they're huge stores of cash into gold stashes. They have considerably less gold than most countries their size. Cash = more liquid, gold = more stable. At least, I think that's how it goes. And China needs stable.

If giving me huge returns on gold company stock is what it will take to make China stable, I'm willing. But even better than creating stability across 10% of the earth's geographic spread, such a gift would allow me to personally conquer the Japanese, at least the one of them who has a significant lead on me in our stock returns competition. Something just doesn't feel right about being beat by a Japanese roommate on the American stock market.


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