Gold Report 2010

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How to Profit From The Precious Metals Bull Market
By Chris Weber
In 2001, I identified precious metals as starting what I think will be a huge bull market. Today, in 2010, I think we have many more years for it to run. The easy thing to say is, "The bull market will last until you go to parties and hear everybody talking about how much they made in the gold market". Or until you hear stories of people with gold teeth selling them. Or until your pool-cleaner gives you tips on gold stocks. None of these things has happened yet; I think we are years away from having them happen. Every bull market announces itself quietly, so quietly that few listen. But before this bull market is over—and I see it lasting well into the next decade, the 'Teens—it would not surprise me to see gold at $3,000 and silver at $187.50. For silver, this would require a 992% increase, versus a 167% increase for gold. Selected precious metals stocks should do even better than this. To me, it is clear that gold is still in a bull market. All the signs are there… First, the fundamentals . . . Central banks around the world are pumping out paper money to ward off deflation, and to bail out their economies from the credit mess they now find themselves in. The ultimate beneficiary will be gold. It is not easy to find and mine new gold, not nearly as easy as creating more money and credit. It is only a matter of time, I think, before gold really takes off. Second, when you see chart after chart, many gold stocks are already in nice bull patterns. If they fall, they never fall below the previous lows. Third, most people are not paying attention to them, and if they are, most of them do not believe they are in a Bull market. In this report, I'll show you the four best ways to take advantage of this trend in precious metals that I believe should last until 2020.

Two of the investments I'll show you are silver-related. The other two are gold related -and one of those is one of my favorite ways to hold actual gold -- through gold coins (this particular coin, in fact, was one of the very first investments I ever made. It's still an excellent store of value... and as you’ll see, this coin is truly a work of art.). But first, for those of you who are new readers, it's important to understand where we are now in this bull market... and what to expect.

After a Good, Long Run, You Have to Rest
First, I want to tell you a story. (I do so with trepidation, since everyone who knows me tells me that I am the world's worst storyteller.) So please bear with me, as I think this one is really important. The decade of the 1970s was awful for most every investment class. Stocks and bonds either did nothing or took sickening plunges. It is no wonder that when the 1980s began there were very few investors who wanted to own either of them. It was in August 1981, I believe, when the famous Business Week cover came out: “The Death of Equities.” And they were simply reporting what most people felt. But there were a few bright spots during the 1970s. Gold bolted up over 2,000%, from $35 to $800 per ounce. But silver was the true star of the decade. Looking back now, we can see that it went from a low of $1.288 per ounce on November 2, 1971, to a high of $48 on January 22, 1980. That is a rise of 3,621%. So of course you would think that silver holders during that decade were continually happy campers. Not at all, and I can tell you this from personal experience. Because by lucky coincidence, I found myself smack in "Silver Central" during most of these years. In 1970, a man named Jerome Smith wrote a book called Silver Profits in the Seventies. I read it the next year, and was very impressed. In July 1974, three years after that, at age 19, I flew up to Vancouver, British Columbia, where Smith's company then was, and starting working for and with him. And I was with him at a conference in Palm Springs on that day in January 1980 when silver briefly touched $50 per ounce, and closed at $48. Smith's company was called Economic Research Corporation, or ERC. The part of the company I was with was concerned with the research and writing of a newsletter, World Market Perspective, that tried to follow, analyze, and forecast movements in the currency, gold and (of course) especially silver markets. The other part of the company consisted of "Councilors,” brokers really, who helped North Americans best own these assets.

So between November 1971 and January 1980, silver went up an astounding 3,621%, at a time when stocks and bonds were performing horribly. At the same time, it is startling to realize that for most of this time silver itself was in a frustrating holding pattern. In fact, all of silver's moves took place in two bursts of relative short periods of time. Between November 2, 1971 and the end of February 1974, silver saw a big rise of 419%, up to $6.70, and excited all of the silver holders. As a group, they expected "onwards and upwards" from there. But after silver closed out February 1974, it would not again touch and surpass that $6.70 price until late January 1979. Nearly Five Years Later. Especially hard for silver bulls were the years from mid-1974 to mid-1978. Silver kept in a narrow range of $4 to $5. Several times it would look like the price would break out of that $5 ceiling, but it never did, and always drifted back, over the months, to the $4 floor. Think of what it was like to be an ERC Councilor and show up at work each day for those four years. That is to say, to be on the phones to clients holding their hands during the 48 months, or 208 weeks, or 1,040 days that make up four years. For silver holders who watched the price obsessively each and every day—and there were many—these years were wearying. For the Councilors who spoke to them all day, every day, it was even worse. I saw not a few men grow old and gray during those four years, and seem to shrink up before my eyes. I was very lucky during this time. Much of the time I was traveling the world for Jerome and ERC. But whenever I would come back to Vancouver to visit or live during this fouryear period I saw what was happening to the Councilors, and it was not pretty. Of course, by the end of 1978 silver was on the move again. During the next year or so, from late 1978 to early 1980, silver soared by another 1,000%. In short, it is one thing to look back at a chart to see that over a period of "only" eight years, two months and three weeks, the one investment you could have had the most of soared by 3,621% (and even more for patient margin holders). But it is another thing entirely to remember that five-year period within that period of eight-plus years, when, after hitting a high in early 1974, it took until early 1979 for it to be surpassed.

The moral of this story?
I have never forgotten the lessons from that long period of—what do you call it?— consolidation, correction, or just years of frustrating waiting, all taking place within one of the most dramatic bull markets of our modern age.

The first lesson is that these "down periods" are going to happen. No price goes in one direction forever without stop. The second lesson is that they can last far longer that most anyone thinks possible. The third lesson is to psychologically or physically remove yourself from the game during these times, keeping at most one eye on a bull market marking time. You don't have to careen around the world partying—you can take up gardening, or scuba diving, or mid-19th-century Italian opera, or Ming Dynasty ceramics, or read the collected works of great authors, or any one of a thousand things so that you don't fall into the trap of obsessively and daily watching frustratingly tight trading ranges that last for years. But by all means, remember that after a period of frantic price rises, a rest will follow as surely as you yourself have to rest after a good, strong sprint. That’s why right now is a great time to start accumulating.

Right now is the best time to buy, if you haven't already
To anyone who asks me if it is too late to buy, I say this: I think everyone should have some gold and silver, and some mining stocks. But that exact percentage will and must differ with each individual. You should not have so much of it that you won't be able to sleep at night when they plunge and stay low for a year or more. Notice that I said "when" they plunge and not "if". Silver especially has been and will continue to be a volatile rollercoaster. Times will come when it almost certainly will plunge by 25% in a few days. If you have too much, you will be prone to panic and sell. It's possible we will see price plunges of 50% over a very short time. Only you can decide how much of your total investments should be in the precious metals area. I would say at least 10% should be. But you must be comfortable with whatever percentage you choose. Not too small that you don't profit, but not so large that you panic along the way. Of that 10% (or whatever percentage is right for you) of your portfolio allocated to gold and silver, first, have the accent be on the actual metals. Ideally, you should own a number of ounces in your own name at a safe bank (I’ll get to the details of my gold coin recommendation in a moment). But if you cannot do this, then what I recommend you do instead is buy a physical gold ETF.

The Physical Swiss Gold ETF (NYSE: SGOL) has become the one to choose. SGOL stores its gold in Switzerland, and it tracks the actual price of gold far closer than the popular GLD ever did. An acceptable alternative to SGOL is The Central Gold Trust of Canada (AMEX:GTU); here, the metals are stored in Canada. However, keep in mind that GTU is a closed-end fund that can trade at a steep premium to its Net Asset Value. In fact, it did do so during most of 2009; over the year it returned only half the actual advance that gold made. I continue to recommend not buying it unless you can buy it at a premium of less than 5% over NAV. I think SGOL is a better vehicle. You can buy SGOL and GTU through your regular broker. Only after this, you should have some metals stocks. Have a number of them if possible. If you’re at all familiar with the history of gold and silver mining companies, then you know that your biggest investment gains can come from this sector of the precious metals market.

The Two Best Gold Investments Right Now
If I had to recommend you buy just one of the gold stocks in our current recommended portfolio, it would be Goldcorp (GG). No gold mining stock has done better for us than GG. This is partly because it bought several of the other stocks we owned at great premiums. Adjusting for this, our entry price on GG was $3.29, also back in August of 2003. It rose 25.27% in 2009:

It has returned a nice 1,101%, with dividends, since recommended. However, please remember that it is still down from its highs of 2008, when it reached the $50 mark:

The fact that this great stock has not been able to make new highs, even though gold itself made new highs in 2009, is a cause for concern, and one that I share with metals stocks in general. Still, I think this stock will have much more upside in the coming years, and it is the one I would recommend buying if you don’t have any individual metals stocks at all. My second favorite gold investment isn’t a gold stock at all. It’s actually one of the first investments I ever made… For me, the most beautiful coin in the world is the Mexican 20 Aztec peso coin. This half-ounce gold coin (actually it contains .482 oz.) was minted and circulated as money in Mexico from 1916 to 1921. However, it was restruck by the Mexican government in 1959 and these are the coins I speak of. This is because they were never circulated and retain their brilliance. And this is particularly important since on one side it has the Aztec calendar. It is hard to describe it without actually seeing it and holding it in your hands, but it is a very beautiful coin and for me, it’s a piece of art.

Quite apart from the lore of the Aztecs -- a story in itself -- this coin has deep personal connections to me. It was the second gold coin I bought as a 16 year old, back in 1971-2. The first was the Old British Sovereign and while this is of course quite historical, it looks like an ugly duckling compared to the Mex 20. At that time, remember, it was illegal for Americans to own gold, but you could own old coins, or even more recent restrikes of old coins. I started with the Sovereigns because they were the lowest priced: they only contain .2354 oz or less than a quarter ounce of gold. They were about $12 a coin then, and you could buy them on 4 to 1 margin, so the $600 I had saved, fully margined bought me 200 Sovereigns. As the price rose and I grew richer I "traded up" to the Mex 20 since I could then afford to buy half ounce gold coins. But this coin's sheer beauty grabbed me like no other and I've always kept it in my memory. This paid off in a funny way about 15 years ago. I was in Iowa, at Drake University, at a gathering listening to some supposed bigwig bloviate on something or other. Feeling vastly superior to everyone else, he showed us something he had and said, "I'll pay $1,000 to anyone who can tell me what this is". Well, it was the Aztec calendar and I'll never forget the look he gave me when I spoke up. (He paid up.) But years later this coin can now pay off for you too. If you want to own a lovely half ounce gold coin for not much more than its basic gold content you cannot do better than the Mexican 20 peso coin. Be sure to ask for the BU (brilliant uncirculated). One thing: there is not a huge amount of these floating around. People who own them love them and tend to hold them. So sometimes you may not be able to buy all you want at the time you want them. I'd be comfortable paying no more than about a 6% premium over the gold spot price on gold coins right now. Of course, obviously you'd want to try to go as much as possible below that.

Fortunately, you can do this these days, especially if you shop around. Some dealers feature better premiums than others, always depending on the coin, and the cost to ship to you. Ideally, the price should include free shipping. And although this information concerns the US coin dealers, you can make the general percentage calculations to the banks and dealers of other countries. I've been informally canvassing some US coin dealers and gotten some input from readers with experience with the companies. As of this writing, Gainesville Coin in Florida (www.gainsvillecoins.com, ph. 1-352-6533009) was charging a low 2.1% premium over spot gold on the Mexican 50 Peso. This is a lovely coin, and perhaps the largest of the normally traded gold coin. It contains about 20% more gold than the one-ounce coin (specifically, 37.5 grams or 1.2057 troy ounces). At a spot price of $975, a 2.1% premium would be $1,175.50. Am unsure whether this price includes shipping. Remembering that we are talking about a coin weighing 1.2057 ounces, it is good to know you can buy a nice gold coin for about 20$ an ounce over spot gold price content. That's well below the $60 dollars I find acceptable. (On the same day, Camino was offering this coin for 4.25% premiums, but that can change, so shop around.) (www.caminocompany.com, ph. 1-800-348-8001). For the beautiful half ounce Mexican 20 coin, or the Aztec, Gainesville was charging 3.3%, Camino 5.5%.

How to Buy Gold for your Tax-Deferred IRA
American readers have asked which coins they can put into their tax-deferred IRAs. These would be in the American Eagle coins. (Canadian Maple Leafs perform this task in Canada.) American Eagle coins always carry a higher premium, which for many is fine, if they can put them into the tax advantaged retirement accounts. Gainesville Coin premium 5%-6%. At a spot price of $975, even a 6% premium would mean a price of $58.5%. That's just under the $60 per coin premium I find acceptable these days. Also try APMEX (www.apmex.com, ph. 1-800-375-9006). On the day I checked, they were charging 3.1% premiums on Mexican 50s. Wherever you live, shop around, ask for the premium over spot gold content, have a calculator ready, and don't pay more than $60 per coin over one-ounce spot prices for gold.

The Ratio: Gold at $3,000 Equals Silver at $187.50
As is often the case, when gold rises, silver rises even more. Silver has been cheap relative to gold for years; now it is busy making up the distance. Throughout the last several centuries, a ratio of silver's value to gold's has always

seemed to come back to the 16:1 area, where about 16 ounces of silver equals one gold ounce. Now I want to show you a fascinating chart. It is the gold/silver ratio in terms of the US dollar, from 2000 to the start of 2010.

As you can see, the closest the ratio has been to 16 was just under 45 in early 2006. In fact, we last saw the 16:1 ratio area in early 1980, when both gold and silver peaked. At that peak, the ratio was 17 ($850 gold and $50 silver). No one can know the future, but I think in this bull market silver has the great possibility to continue to rise even faster than gold. The ratios will most likely narrow, if not to 16, then at least lower than the current 61. But the ratio is moving in the right direction: not long ago it was 75-to-1. The past five years have been very good. And I think that the future decade or so will be great for them as well.

Before this bull market is over, I would not be surprised to see silver trading at $187.50 per ounce. How do I get this figure? If gold trades at $3,000 and the 16-to-1 ratio is once again achieved, then we arrive at this. It will not happen anytime soon. It may not happen until well into the next decade. But if things go on as they have been, I think it will happen. This would represent a rise of 992% from current levels. The problem is that silver is much, much more volatile than gold is. Since even gold makes the average investor nervous, silver can cause outright nervous breakdowns. The way to buy silver is the way Warren Buffett has done it. In 1997, Buffett became convinced that silver was extremely cheap -- it was then $4.40 -- and bought 100 million ounces. As he did, however, the price soared to a high of $7.31 in early 1998. Later of course, the price fell back. By November, 2001 it reached $4.07. Buffett held fast and has been amply rewarded, as he usually is when he invests. Many people buying some silver near $7.31 and watching it fall by 44% over the next nearly four years would likely bail out. Especially when so much else was soaring from 1998 to 2000. This is the way to invest in silver, as Buffett has. You become convinced that something is cheap – and silver is historically cheap right now – and you take a big position: big for you at any rate. Then you wait. You snore. And when you see everyone else trying to get in, you sell. If you decide to buy the actual metal, I recommend that you buy enough silver that you can afford to simply put it away and forget about it. Ideally, you should not even know how many ounces you have unless you go out of your way to look it up...which I don't recommend that you do. The worst thing for your nerves would be to try to follow the silver price each day.

So how much silver should you own? Some will find that 5% of their net worth in this area is the amount that will allow them to sleep calmly through any correction. For others, with more cast-iron stomachs who are prepared to ride anything out, it could be 50%. There are as many situations and personalities out there as there are investors. But you only have to know and be comfortable with your own. No matter what kind of investor you are, silver may give you much more profit than gold once again, but be prepared for much more volatility and frustration as well. Please keep this in mind when deciding how much of your total metals position you should devote to silver. If you are comfortable with only 5% or less, go ahead. The important thing is for you to be able to sleep at night.

The Two Best Silver Investments Right Now
The number of pure silver plays is much smaller than the number of gold companies out there. There are very few pure silver mines, and most silver is mined as a byproduct of copper, lead, and zinc. Nonetheless, I believe the best two silver stocks you can buy right now are both in our recommended portfolio. Silver Standard (SSRI) owns the Burden Silver mine in Australia, the Shafter project in Texas, and big chunks of two silver producers in Argentina. It recently made a silver discovery in Durango, Mexico, and has stakes in several other secondary silver projects. Silver Standard is also a pure-play silver company.

Our other silver-stock recommendation is Pan American Silver (PAAS), which operates three mines: two in Peru and one in Mexico. Pan American Silver had a good year. This is up 39.5% over 2009, and up 178.5% since recommended in August, 2003. Silver Standard (Nasdaq: SSRI), also had a good year, up 37.2%. As good as this is, we must note that just holding pure silver has been a better investment during this time. Silver was $5.02 per ounce the day we recommended silver stocks like SSRI and PAAS. It closed 2009 at $16.84, for a gain of 235.5% since then. Thus, the actual silver metal has done better than most of the stocks of companies which mine it. This is something to keep in mind. That said, just like our Goldcorp recommendation, these two stocks, I believe, have the potential to go up a lot more. And because these companies are pure-plays on silver, and both quite liquid, these are the silver stocks that the masses will pile into, around the time someone at a cocktail party gives you a great silver stock “tip.”

A final word on the metals bull market
To expect a bull market to simply rise without long periods of rest is unrealistic. During the huge bull market of the 1970s, there was a three-year period that separated the first bull leg up from the second one. Each of these bull legs was huge. They took assets up by hundreds if not even thousands of percent. But the period from roughly late 1974 to late 1977 saw corrections, dead markets, and very frustrated investors. By the end of this time, many had thrown in the towel. They missed the second huge bull leg that took silver, for example, from $4 to $50 in the next three years. Will there be a correction again? When will a new bull leg begin? It is out of your control. The exact time is unknown. All you can do is to prepare yourself, accumulate, and hold ounces of metals, and then be patient. For current income, have enough money in cash throwing off interest as you need. This strategy, while simple, is not easy to follow. Investors (or rather those amateurs who call themselves investors) generally like to be active. They want and expect things to always happen "NOW." In this expectation, they are encouraged by the average broker or banker. These professionals don't make much money off of you in commissions if you simply buy Treasury bills, gold, and silver and just hold them (rolling over the T-bills). So be calm and patient. Don't be frustrated. If you have profited from the huge rise in

the metals from 2001 to last year, then you know that the precious metals bull market always takes a rest. If you have come to the game more recently, this is a time to patiently accumulate gold and silver.

FURTHER READING For a more detailed analysis of the Silver bull market – now and historically – please see the following back issue of the Weber Global Opportunities Report: http://www.weberglobal.net/members/Weber17apr06.pdf For Gold, please see: http://www.weberglobal.net/members/Weber011005.pdf

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