The Triumph of Skeptics

Last Monday, when silver started jumping, I told you gold would be the next to take off.

Now, sure enough, both metals are leapfrogging each other, driving mining shares to much higher price levels.

In the silver market, the immediate impetus for the surge is the anticipated jump in demand when the silver exchange-traded fund (ETF) hits the market.

Like the streetTRACKS Gold Trust the gold-based ETF weve been telling readers about since its launch the silver ETF will make it much easier for investors to buy silver.

They wont have to worry about hoarding silver coins or dealing with silver bullion dealers. They wont have to pay storage and insurance costs. Theyll just be able to call their broker or click on a mouse to buy the silver ETF like any other actively traded security.

Thats going to be a huge boon to investors and to the silver market.

Initially, though, when the news first came out about the silver ETF, there were quite a few people who were opposed.

Some were apparently bullion dealers. They didnt want to lose turf to Wall Street brokers. And they tried to make the argument that the silver ETF wouldnt fly … that the market wasnt liquid enough to handle it … or that it would somehow be bad for the public.

My response: Baloney! I believe a silver ETF gives the average investor a much fairer vehicle than any silver investment vehicle ever conceived.

Last week, the SEC made a landmark decision in favor of the silver ETF, approving rule changes that allow the American Stock Exchange to list shares in the silver ETF proposed by Barclays the iShares Silver Trust.

Immediately, a new wave of investors poured into silver, and the market went berserk … jumping by nearly 25 cents per ounce at the opening bell on Tuesday … holding firmly in the $10.50 area on Wednesday and Thursday … and then jumping almost another quarter on Friday.

Meanwhile …

Golds Jump on
Friday Breaks the Ice
For a New Blast-Off

Until Friday, while silver was zooming, gold was zigzagging. Then, gold suddenly took off, and it now appears to be on its way to a new 25-year high.

But in the gold market, the immediate impetus for higher prices stems from an entirely different dynamic:

Instead of anticipation of a new ETF in the U.S., its the fear of a new crisis in the Persian Gulf.

Smart investors everywhere, especially in the Middle East, are vividly aware of the dangers.

They see the situation in Iraq unraveling. They see the looming conflict with Iran. They know that nearly the entire Muslim world stretching from Western Sahara in Africa to the island of Mindanao in the Philippines is on the verge of turmoil.

So theyre pulling out.

Thats why Middle Eastern stock markets until recently the shining stars among emerging markets have suddenly crashed. And thats also a key factor behind the latest rise in gold.

No Big Fanfare!

Whats so remarkable about the rise in silver and gold, however, is neither its speed nor the reasons behind it. Its the fact that so few mainstream investors are paying attention.

Why?

Perhaps its because Wall Street brokers generally see gold as the antithesis of investing.

They realize that the big forces driving gold higher inflation and fear could ultimately smack down the investments they want you to buy: U.S. blue chips … big-name tech stocks … muni bonds … Ginnie Maes … and Fannie Maes.

So they dont want to see gold going up. They use every opportunity to herald its demise … and every gimmick to pooh-pooh its rise.

Their favorite tactic: Neglect. So when the Dow makes new 5- or 6-year highs, its trumpeted with great fanfare and big headlines. But when gold makes new 25-year highs, analysts give it the silent treatment, and the story is buried at the bottom of page 23 in the Wall Street Journal.

For investors like you, this actually works in your favor for two reasons:

First, it gives you the opportunity to invest before the crowd. (Yes, some smart investors have already been moving into silver and gold. But the overwhelming bulk of investors are still snubbing the precious metals.)

Second, because this kind of prejudice against gold and silver has historically been the precursor to some of the most profitable times of all.

Join me for a brief journey back in time, and youll see exactly what Im talking about.

Our First Stop
The Year: 1931
The Place: New York

Drown out any loud voices or distracting thoughts around you. Then focus your mind on the sights and sounds of downtown Manhattan in early 1931.

The streets are still busy with motorcar traffic as commuters and delivery boys on bicycles weave in and out with bravado.

But nearby, on Broad Street, the stocks traded on the New York Stock Exchange have suffered their worst bear market in U.S. history.

Millions of middle- and even high-class citizens are now paupers. Investing in stocks, bonds or anything for that matter, is considered high risk.

Today, though, were here to visit one of the few independent research firms on Wall Street, the International Economic Research Bureau.

Thats where my father, Irving Weiss, works as a freelance junior analyst, while holding down another job at a nearby brokerage firm.

Hes been on Wall Street since he was 16, when he worked in Western Unions Unpack Department, sorting through cables from overseas. Now, hes 23, writing research reports on silver, gold and mining shares.

His publisher, William Baxter, wants him to find out whats going on with the yellow metal. Baxter is especially interested in senior mining companies like Homestake and Dome Mining. But he also wants to know about some of the juniors.

In response, Dad enlists the help of his older brother, Al. And together, they contact some of the gold experts of the day.

They call Bernard Baruch, the adviser to several presidents and an investor whos famous for having made a fortune during the crash.

They call Tom Bragg and Ben Smith, floor traders specializing in gold stocks.

And they talk about gold.

All of them are accumulating gold coins and gold shares. But they are among the very few. Most investors have little interest, and very few people are buying the gold pieces.

For over a hundred years, the price of gold has been steady at around $20. So people dont even view it as an investment. Even mainstream stocks are considered a wild gamble. Gold and gold shares are shunned like the plague.

But Baxter, Irving Weiss and the gold bugs of the day dont care what other people think. They just walk up to the bank tellers and ask for $20 gold pieces. The tellers then give them as many as they want, no questions asked.

When it comes to the mining shares, they invest in bigger amounts. They believe the shares are grossly undervalued because theyre consistently snubbed by most of Wall Street.

Indeed, gold shares have a very bad reputation. Earlier in the century, a bunch of shady characters roamed the countryside peddling the shares in mining ventures which went belly up. So by the 1930s, investors have learned to give mining companies a wide berth.

But Dad and his associates figure they cant go wrong if they concentrate on the biggest companies like Homestake, plus a couple of large Canadian companies.

Soon, they have very respectable paper profits, and some of the men are itching to get out. With the 1929 stock market crash still fresh in their memories, you cant blame them for being nervous.

Dad calls a meeting at Baxters office.

Bernard Baruch is there, and so are Ben Smith and Tom Bragg. One of them alludes to the possibility of some big selling which could hit at almost any time. Their urgent question: Whos going to do the selling and how much?

Dad suggests they get the facts with a survey. He and his brother get a hold of the stockholder lists of some of the big mining companies, and they have a phone staff call about 400 people at random, asking a simple series of questions:

When did you buy your gold shares?

How much do you own?

What do you plan to do with them?

Later, in his report summarizing the results, Dad writes:

We never got past the second question! About half the stockholders in mining companies didnt even know they owned the shares. The rest said they had the shares stashed away in their attic or in a vault somewhere. None of the people had plans to sell the shares.

So he calls another meeting and tells his associates: The only big source of selling would have to be from someone right here in this room. They all breathe a sigh of relief. They hold on to their mining shares and double their profits.

But its just the beginning.

Homestake, which bottomed at $65 per share after the crash, surges to $130 and change in 1931. From there, it doubles again to more than $350 a share by 1933.

By the time it peaks in 1936, it reaches $540 a share an astronomical gain of more than $470 per share, or a 7 fold increase.

In the meantime, the dividends also double, redouble and double again reaching $56 per share in 1935. The dividends earned in one year alone almost pay back the entire purchase price of the stock.

And Homestake is not an isolated example. Dome, another large gold producer, does even better. You could have bought Dome for as little as $6 a share after the crash. But in the next 7 years, it pays $16.60 in dividends. The dividends alone are equal to more than two and half times the cost of the stock.

Meanwhile, the price of Dome rises to $61 a share. Anyone investing $10,000 in Dome walks away with more than $100,000 while nearly every other investment remains depressed.

Tom Bragg reaps the biggest benefit. Hes the largest holder of Newmont Mining. Then he leaves Wall Street to become a major executive in the company and stays with gold for the big rise in subsequent years. The others also make huge profits.

Our Second Stop
The Year: 1936
The Place: Palm Beach

Were at the Kennedy home, where Dad is visiting with Joe Kennedy, Baxters largest client.

The kids are playing touch football on the front lawn, while Dad, meeting with Joe Kennedy in his study inside, is trying to convince him to buy silver.

The metal has been as low as a meager 17 cents per ounce, which is extremely cheap. But industrial demand, he says, is about to take off.

Were about to release a special report on silver bullion with all the details, Dad says. But before we do, we want you to take a look. Kennedy expresses deep interest.

But later, after Dad has returned to New York, Kennedy calls, saying hes decided against it. His advisers tell him its too much of a long shot, too far off the beaten path.

Later, Dad writes:

Kennedy had a fortune. But with that one decision, he missed the opportunity to make still another fortune.

I personally bought silver at around 17 cents, but I didnt ride it up to $50. I wish I had. I got out of silver in the 1950s, having multiplied my money several times over. I thought I was smart to take a profit like that. If I had stashed away a few dozen bars in a trunk and thrown away the key, Id have made more money than I did with all my other silver trades large and small put together.

I calculate that, at 17 cents an ounce, if you invested $4,000, you could have purchased about twenty two 1,000 ounce silver bars. Each one of them would have been worth $50,000 at the peak, or over one $1 million for the lot.

But back then, if you told me silver would go to $50 an ounce, I would have said you were nuts. It just goes to prove, again, that no one can possibly predict ahead of time the ultimate peak or the ultimate bottom be it in a commodity or a stock.

Our Third Stop:
The Time: January 2001
The Place: Palm Beach Gardens

Were in the former headquarters of the John D. and Catherine T. McCarthur Foundation, the building we bought to house my research company along with our school for gifted children.

Silver and gold are again out of favor, and the pessimism about the metals is the greatest since the 1930s.

Wed been publishing a newsletter dedicated to the subject, The Silver and Gold Report, but the interest was so dismal, we decided to fold it into our other newsletter, Safe Money Report.

Larry Edelson, whose children attended the Weiss School on the west side of the building, has joined us at the research company. Hes a precious metals specialist and has been for over two decades.

Since the 1980s, hes been very bearish on both metals. But now he says this is the big bottom, the time to buy.

At first Im skeptical. Gold and silver investments have been mostly dead for so long Im wary of analysts telling me that this bottom is truly the real bottom.

But Larry is persistent. Its way too soon for silver, he says. But for gold, the time has come. Why? One reason is precisely because so many people are so down on the metal, and all the selling is now behind us.

As he speaks, I remember the stories my father told me about his gold buddies in the early 1930s and about his meeting with Joe Kennedy five years later. Wait until you can see the whites of their eyes, Dad told me before he passed away, echoing the words of his mentors of the 1930s. Then buy with both hands.

Larry and I decide to recommend some of the major mining shares. Plus we also like a couple of juniors.

Starting shortly thereafter, the markets take off. The price of gold more than doubles. And the value of good mining shares goes up far more rapidly:

Newmont Mining, up 224% … Kinross Gold, 541% … Coeur DAlene, 553% … GoldCorp, 747% … Bema Gold, 1,372%.

For early investors, its a great profit bonanza. But is it the end? Or just the beginning?

Our Last Stop:
Back to the Present

If todays rise in silver and gold were eliciting great enthusiasm and euphoria, I might again be skeptical of a further rise. But theyre not.

Quite to the contrary, as I told you at the outset, we still see rampant disregard even disdain for the metals.

Moreover, the lessons of history are clear: As long as powerful economic forces scarce supplies, burgeoning demand, and investor fear of global disorder continue … and as long as the overwhelming majority of mainstream investors remain on the sidelines … there is no end in sight to the rise.

The key to your success:

Dont be afraid to buck the crowd. Even if youre totally alone, consider that a blessing.

Venture off the beaten path. If that takes you to so-called exotic investments in faraway lands, so be it.

In reality, in todays global economy, theres really no such thing as far away. All investment markets are closely linked. Virtually all shares traded on major foreign exchanges can be easily bought through U.S. brokers. And more so than ever before in history, foreign public companies are listed and traded on the New York Stock Exchange or the American Stock Exchange.

Right now, for example, Sean and Larry are looking closely at gold and other natural resource companies in Asia and Australia. I recommend you check it out. The profit potential is greater than virtually anything weve seen in the United States. And the risk is strictly limited.

You can get all the details in Seans latest report, just released on Friday.

Good luck and God Bless!

Martin

For more information and archived issues, visit http://legacy.weissinc.com.

About MONEY AND MARKETS

MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Jennifer Moran, John Burke, Beth Cain, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.

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