MoneyWeek roundup: the three golden rules of mining investment
James McKeigue Oct 06, 2012
Both Britain and America's central banks are printing money like mad. But prospects look a lot better for the US than for the UK, says John Stepek in Tuesday's Money Morning.
Why? America's big advantage is quite simple, says John - it's all about "the state of the housing market”.
The US housing market doesn’t actually need central bank money-printing (quantitative easing – QE) to prop it up, because American mortgages are already cheap. “The average rate on a 30-year fix (they have those in the US) hit a record low of 3.4% this week.”
So even if banks just use the Fed's $40bn-a-month purchases of mortgage-backed bonds to boost their own profits, it doesn't matter. Because on top of that, US house prices are also low.
“By most measures, prices are now at or below fair value. So the US housing market is already well-positioned for a recovery. It doesn’t actually need ‘QE infinity’ to recover. There may not be a fresh housing boom any time soon, but nor is a second devastating crash a huge threat.”
That isn’t just good for anyone looking to buy a home. It also means that US banks can use the lower borrowing costs created by QE to boost their balance sheets. That will make them healthier and, in the long run, perhaps even more willing to lend to consumers, says John.
“In Britain on the other hand, the only thing that’s keeping the housing market afloat is the constant intervention of politicians and the Bank of England.”
That’s bad because it leaves banks in a state of limbo. They “don’t want to call in bad debts, because that would trash their balance sheets. But they don’t want to do more lending, because they know they have all this potential trouble stored up”.
All in all it means that the US economy looks like it’s going to outperform Britain for the next few years. John’s come up with some ways to play this trend.
The three golden rules of mining investment
Another ‘currency’ that we think will do well is gold. The gold price has been on a tear since August but one of our newest investment writers, Simon Popple, thinks it still has much further to go.
In the first issue of his new Metals and Miners newsletter, Simon explains his secrets of how to invest in the yellow metal. He breaks it down to three golden rules.
Rule 1: Only invest in producers – miners that are actually getting the stuff out of the ground. “They’ve found the precious metal, raised the capital, put the infrastructure in place and are now getting it out of the ground”, says Simon.
“If the capital markets dry up they can mothball their exploration projects and potentially pick up others on the cheap. You want a share that can generate serious cashflow.”
Rule 2: Only invest in deeply undervalued opportunities. “I believe that too many investors pay over the odds for a decent gold producer. They only invest in the biggest stocks. But that’s crazy when there are so many seriously cheap gold miners right now.”
Rule 3: Only invest in companies with great exploration potential.
Those might sound like stringent criteria – and they are. But Simon has already found a few shares that fit the bill. Indeed, the early tips he gave in a MoneyWeek cover story and in a special report have all performed strongly.
But Simon thinks this is only the start.
“Gold producers have lagged the price of gold for too long now”, says Simon. “I will be building up a portfolio of these deeply undervalued gold producers – the ‘Supply Kings’, as I call them. Because as long as we live in a world of negative interest rates and wild money printing, these stocks will be the best place for your money.”
It’s a compelling logic, made even more convincing by the fact that Simon’s invested half of his personal wealth in gold. To find out more about Simon’s stock-picking selection, and why he’s so convinced about the yellow metal, take a look at Simon’s report here.
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Natural gas is heading higher
Gold isn’t the only commodity that could be on its way up. In last week’s edition of The Fleet Street Letter, David Stevenson explains why he’s a fan of natural gas.
“Natural gas [NG] is one of The Fleet Street Letter’s favourite investment themes”, explains David. “We believe that as a global energy source, it has a great long-term future”. Moreover David thinks that now is a great time to buy in.
Gas has its detractors , says David, but the fact is no fuel is perfect. And “NG has many plus points. It’s colourless, odourless and non-toxic, which makes it the cleanest-burning fossil fuel.”
Of course the gas market has been completely shaken up by the shale gas revolution in the US, says David. “Over the past decade, new drilling methods and hydraulic fracturing – known as ‘fracking’, which uses a mix of water, sand and chemicals to crack underground rocks and free the gas – have enabled US producers to access vast volumes of shale gas that had been uneconomic to extract.”
That’s been a great boon for the US. All of a sudden, it’s become almost self-sufficient in gas. The glut of supply has suppressed prices and given consumers and businesses a much-needed boost. Indeed the only losers in all of this have been America’s gas drillers. As gas prices have fallen, so have their profits.
But David thinks the fall of the gas producers is a great buying opportunity. “This surplus supply of NG may not last too much longer. Sure, once gas-drilling rigs are set up on site, it takes time to turn off the taps again. But the industry reports that real curbs in US output are now underway.”
“Gas prices are volatile. But they’ve already enjoyed a decent bounce from their early summer lows. And US natural gas producer Ultra Petroleum has just said that it believes NG prices are on the verge of a recovery driven by more industry-wide supply cutbacks. If temperatures are normal this winter, reckons Ultra, we can expect further upward progress next year.”
David has found a great way to play the rebound in the natural gas prices. I can’t gave away his tips here, but there is something I can give you - David’s latest report. It explains a little-known strategy he uses to get twice as much dividend yield as a normal punter who owns exactly the same shares. It’s a useful tip and completely free: click here to find out more.
The government’s latest pension wheeze
Another freebie that’s well worth a look is Tim Bennett’s latest video tutorial. Last week Tim notched up the milestone of a million views, so he must be doing something right. This week Tim takes a look at the government’s new workplace pension scheme and, in jargon-free language, he explains what it is and why it’s been brought in.
Japan inc is coughing up
Finally, before I go, you should take a look at Merryn’s latest blogs. This week she’s been banging the drum for long-term MoneyWeek favourite, Japan. In particular she highlights research – from asset manager Lindsell Train - that shows Japan could make sense for income-seekers.
“The average dividend has risen 5% a year and the median by 9%. That’s not bad – if a company has been growing its dividend by 9% a year for 20 years, its dividend has risen five and a half times.
“And it is particularly not bad given that it has happened not only in an economy considered to be entirely stagnant, but one in which there has been almost zero inflation.”
One of the real standout firms is Kao, which was the largest holding in the fund. “It turns out that with CPI in Japan at around 0.5% over the period, Kao’s real dividend growth has been 9.3% a year”, says Merryn.
“Note that the comparable numbers for Unilever and Procter & Gamble (both considered to be solid defensive dividend payers) are 7% and 8.3%. Just one more reason not to dismiss Japanese equities as low-yielding wastes of time.”
Judging from the comments below the piece, it seems that when it comes to investing in Japan, people either love it or hate it.
‘Young Investor’ agreed with Merryn: “They've made some mistakes - the ones that we are now making - but they're not incompetent, they're not bust and their stocks appear to be cheap. Technologically they've got the lead on others in many areas too.”
However, ‘Shinsei1967’ was far more sceptical. “The trouble with Japan is that there is no growth. The population is ageing and shrinking. Do a simple dividend discount model and the market doesn't look cheap because the growth is negative.”
Meanwhile ‘DrD’ is worried about Japan’s “big, powerful and not too friendly neighbour. China is bound to get more shirty as this century continues. I'm reminded of what happened to Belgium at the beginning of the WWII...”
If you haven’t read the piece yet, click here and have your say on Japan.
• This article is taken from the free investment email Money Morning.
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