Stock Market Investing, Investment Strategy, Precious Metals Thesis, IMF Sells Gold to India, Conversation with Gary Rosenthal

Stock Market Investing: The equity averages continue to languish, however, as anticipated, the relative strength of precious metals investments soars. The Dow, S&P500 and the NASD all sit at or near their respective lows of the last two weeks while Gold hits a new high for the year at $1,085.65 and Silver crosses $17.

Investment Strategy: We have used the weakness of the last 2 weeks as opportunity and increased our precious metals exposure, focusing on the mining stocks. We used the 50-day moving average and weekly uptrend lines as our areas of accumulation.

As for our market shorts, the inverse ETFs have performed admirably. I would like to note that these trades, by their very nature, are short term oriented with the goal of defending our other positions when deemed necessary. How often we use these positions and the duration of each trade will not be discussed in this blog. Of course, if you are a client of RCM or a partner in the Fortune's Favor Family of Funds, feel free to come behind the curtain at any time, we would be happy to speak with you.

I would like to spend some time today augmenting our precious metals investment thesis. To begin, please review the story below...

IMF Sells Gold to India, First Sale in Nine Years

Nov. 3 (Bloomberg) -- The International Monetary Fund sold 200 metric tons of gold to the Reserve Bank of India for about $6.7 billion, its first such sale in nine years.

The transaction, equivalent to 8 percent of global annual mine production, involved daily sales from Oct. 19-30 at market prices and is in the process of being settled, the IMF said in a statement yesterday. The average price to India, the biggest consumer, was about $1,045 an ounce, an IMF official said on a conference call.

“The fall in the U.S. dollar seems to be pushing all the central banks to strengthen their portfolio with gold,” said N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy in New Delhi. “Gold is a safe store of value compared to the U.S. dollar.” Read More

...The key to this story: 200 metric tons were sold over 10 business days at an average price of $1,045. This sale price was only 2.7% below the recent high!

Now, I invite you to step into our war room and share a conversation I had with the head of our research department. The department head, Gary Rosenthal, a.k.a Dad, has over 43 years of professional Wall St. experience. He has witnessed and profited from all sorts of investment environments and we can safely say not much surprises him. History repeats and for those awake opportunity abounds. So sit back, relax and enjoy the synopsis of this little tete a tete...

BBR: Dad (GSR), what did you think about the IMF Gold sales to India's central bank?

GSR: ...Not surprising; India's purchase is just another example of central banks around the world replacing fiat currency reserves with Gold. China and Russia are two countries that are at the forefront of this trend....

BBR: The IMF still has another 200 metric tons for sale, correct?

GSR: Yes, and I would not be a bit surprised to see China as the taker.

BBR: Dad, I've been writing about our investment strategy with regards to precious metals for quite some time. I have tried to impart the understanding that hyperinflation is a currency event not an economic event. And I've explained that Gold and Silver will be major beneficiaries of US$ weakness. Today, we see Gold marking a new high for the year above $1,085. Do you feel that this investment strategy is reaching a new stage of maturity?

GSR: Son, the simple answer is, yes. In fact, this past week the price action of Gold illustrates a development I have long anticipated. You may recall my comments earlier this year that an inflection point in the Gold price would come when Gold prices rise even as the US$ rallies. Well, the US$ is up about 2.5% in the last 9 trading days and yet Gold reaches another new high today up 3.3% during the same 9 days.

BBR: In light of these developments, are there any changes to our investment strategy you would like to discuss?

GSR: I believe the time is right for us to prepare for the speculative phase of the Gold bull market.

BBR: Can you elaborate on that thought?

GSR: I anticipate an acquisition wave to hit the industry as the rising share values of the larger companies become currencies to takeover the junior companies with successful exploration programs. I have seen this wave hit many times in different industries backed by real assets (real estate, energy, metals) during my life.

It is always cheaper to purchase reserves in the ground during a rising price cycle than to undergo greenfields exploration. The precious metals miners can takes up to 10 years to go from exploration to production, this time cycle can be greatly accelerated through the acquisition route. It takes more than $1 billion and 8 - 10 years to bring on a single million ounce Gold mine.

The last industrial metals bull market culminated with an explosive takeover cycle back in the 1st half of 2008. Don't you remember the BHP Billiton (BHP) for Rio Tinto (RTP) fight? How about the bull market in oil during the late '70s that didn't end before an explosive takeover phase? With global gold production declining this particular asset bull market may be one of the strongest.

The key is to identify a basket of attractive takeover candidates now, place them into the portfolio and wait for the explosive takeover phase to begin. If our research capability is intelligent and we are patient, we are very likely to hit several 5-10 baggers.