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Small is Beautiful

Bob Moriarty
May 14, 2001

I went to the Investing in the Americas Conference held in Bal Harbour, Florida three weeks ago. For months I have been searching for some sign that we've seen the bottom for the precious metals. I am a contrarian investor. I want to invest when no one else sees opportunity.

A piece on CNN convinced me the top was at hand for the stock market. In March of last year, CNN did a story on a group of prisoners in a jail cell in Maryland who were holding stock picking contests. When inmates finally become stock investors, believe me, you have everyone invested who could possibly be investors and the top is here.

The precious metals stocks are as nearly the opposite as can be found. The precious metals stocks just couldn't go down much further from here. Many small gold stocks don't have 10 trades a day. That's not slow, that's dead. Some small stocks go several days without a trade at all. How could you possibly have fewer people interested?

The conference was an eye opener. There may have been a few hundred people attending. Most were elderly women who go to every free conference they can to scarf up on the free food and goodies. Lots of people sat in on the speakers but when I walked into the hall with the booths of the mining companies, you could have heard a pin drop. You could have hurled a bowling ball down every row and never worried about hitting anyone. When you walked by a booth, the occupants practically mugged you just to have someone to speak to. It couldn't possibly get deader than this. No one is interested in mining companies today and that's the time to buy.

It would probably come as a great surprise to most gold investors to learn that gold stocks have been in a screaming bull market since November of last year but it's true. A basket of metals stocks called the Philadelphia Gold & Silver Index (XAU) bottomed at 41.61 back then and as of May 1st, 2001 had jumped 36% to 56.72.

The XAU contains the big boys, Newmont, Barrick and the like. While we like most of those stocks, the real action in gold stocks is in the small gold stocks. The exploration and development stocks can move 25% in a day regardless of what the price of gold (POG) is doing. For years these small stocks have had a variety of people reviewing them but since they headed south two years ago both sources of information and stock volume have dropped to near zero. If you sat and watched as some of these stocks dropped 95% it's been a harrowing ride down. But we know of no class of investment which appears to offer such a marvelous risk/reward ratio as do the small gold stocks at this time. Don't worry about them crashing, they have already crashed.

Many former touts of these stocks have wandered off to greener pastures. In a way it makes sense. If you suggest investing in a stock makes sense when gold is $265 only to watch it get sliced in half as gold doesn't move at all, it can be rather disconcerting. So many of the sources of information which were available in years past have either disappeared or spend all their time moaning and groaning about some mysterious conspiracy to hold the price of gold down.

All classes of investments move in a pendulum from being absurdly overpriced (as silver was in 1980 and the Nasdaq in March of 2000 to being insanely cheap). In both real and nominal terms, the price of gold and the price of silver are cheaper than any point in the last 100 years. We can't predict the bottom of any market and don't know anyone who can. But silver and gold are cheap. And gold stocks are far cheaper than they were in the summer of 1999 when gold was cheaper in nominal terms than today.

Since there seems to be few sources of information about the small gold stocks, we are going to highlight some companies we like. These are companies we own stock in. It seems absurd to me to suggest others buy stocks I wouldn't own but it's common practice on Wall Street. But these are stocks we looked at and determined had a favorable risk/reward basis for us. Your investments are your responsibility and we are not offering to either buy or sell any stocks mentioned. This is only our opinion and you remain responsible for whatever action you take regarding any investment.

Small gold stocks are risky under any circumstances. They can rise 25% in a day and drop 25% in a day. Often the price of a particular stock seems to have no relationship whatsoever to the price of gold. One can rocket while the other plummets. And often small golds are so poorly financed that a small money problem can cause giant repercussions. Some of the companies are so tiny that the death of one of the members of management can have a disastrous impact. For that and many other reasons, in our own accounts, we invest in a wide variety of mining stocks hoping that a disaster in one will be offset by wonderful news in another. I personally believe a dozen or more stocks should be owned to spread the very real risk across a variety of companies. With some of these stocks selling for literally pennies, it is possible to buy thousands of shares for a relatively small amount.

Different investors invest in different ways. In years past it was possible to trade the small golds for a short periods of time and get a reasonable return. Due to the extreme lack of liquidity of these stocks at present, you are pretty much stuck with a buy and hold plan. But we believe even a small investment in some of these stocks could return 1000% and more with any higher price of gold. We know of no time in history when a group of stocks looked as attractive. They have gone down so far that going up is pretty much the only alternative.

Bob Moriarty
May 14, 2001

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