George Soros has built a $20 billion personal fortune from scratch, over a fifty-five year career.
And it’s just been reported that he has been buying one of the most deeply unloved parts of the market…
When one of the wealthiest and most experienced investors in the world is buying something, it often pays to do the same…
Resource stocks don’t have many friends right now. After two years of falls, in terms of ‘excitement factor’, resource stocks currently rate close to having a root canal.
But Soros knows a thing or two about investing. One of these things is that you should buy when no one else wants to. Understanding this fact helped Soros’ own fund notch up an incredible average of 20% a year for 40 years.
But not only is Soros buying into the unloved sector of resources, he’s buying into possibly the most despised subsector within it…
Yes that’s right.
Soros is buying gold stocks. By the way, this isn’t a rumour. This isn’t a ‘Soros may be behind this’ story. Soros is actually buying gold stocks.
He recently increased his holdings of the ‘Market Vectors Gold Miners’ Exchange Traded Fund (ETF) by 70%, from $59 million, to a lazy $100 million. This ETF is made up of a mix of the biggest gold miners from around the world. Buying this way is an easy way to spread your bets in one go.
On top of this, Soros also has $32 million of specific gold stocks. This allowed him to increase exposure to the ones he likes the most.
Where Gold Gets Really Interesting…
Soros has also purchased $25 million worth of the ‘Market Vectors Junior Gold Miners’ ETF, which is the small-cap gold stock version of the other ETF.
Small-cap stocks are higher risk than big caps, so taking a big position makes it look like he’s feeling confident about a major turnaround.
What’s more, he’s getting his exposure to the ‘Market Vectors Junior Gold Miners’ through ‘Call Options’. Buying this way gives him flexibility on when to buy in, but more importantly gives a great deal of leverage if gold stocks rise.
On top of what he already owned, Soros now has almost a quarter billion dollars of gold exposure.
Right at the time that many gold investors are getting nervous and running for cover, one of the world’s wealthiest people is buying gold in a big way.
A quick look at this chart gives you an idea why. Gold is now back to a long-term support level.
The last time it bumped against the base of its channel was 2008, and before that 2005. Both times, gold went on to jump over 80% in the following twelve months. A repeat of that from here would take gold to $2,500.
The other technical signals are flashing green too. The RSI at the top is as low as it’s been, as is the MACD. Both are clear warnings to expect gold to make some major moves up from here, and soon.
In my newsletter to Diggers and Drillers subscribers at the start of May, just after gold had bounced $150 from its lows to reach $1470, I wrote:
‘Just a note of caution here though: expect a brief pullback in gold during the early stage of any recovery.
‘If you study the charts closely you’ll see that when gold has bounced after the 30% sell-offs in 2003, 2006 and 2008, it hasn’t been plain sailing. Each time, gold has recovered, but has seen a 9-12% pullback during the recovery within the first few months.
‘If we see this happen again, depending on when it happens we could see gold potentially pull back to the US$1300’s again. Be prepared for the possibility of something like that to happen along the way. The market is nervous, and any pullback would rattle investors. Though it would probably be the last good buying opportunity you will see for a while. That applies to gold, as well as gold stocks.’
Sure enough, gold fell to the $1,300’s suddenly last week. The drop was 10%, taking it from $1490 to $1340.
But it didn’t stay there for long, and gold was already back above $1400 last night. If gold keeps following the script, then the worst may be behind us. Soros seems to be investing like he thinks it is, at any rate.
So Which Gold Stocks to Go For?
Cash is the first thing to look at.
When you heard from me yesterday, I explained how a strong cash balance is essential for the company, and its investors, to succeed.
One of the cashed up stocks I found last time increased in price almost twenty-fold.
The problem is that most companies are down to their last ten bob. And small gold stocks are in a particularly bad way.
But there is a small cluster of cashed up gold stocks too. And incredibly there are a few gold stocks that are trading below the value of their cash balance. See what I mean:
That’s right. There’s an Aussie gold stock with $45 million in cash in the bank, selling for $28 million.
These stocks, and the ones I showed you yesterday, are just a few of the cashed up beauties that floated to the surface when I waded through hundreds of quarterly reports this week. The benefit of running raw numbers like this is that some obscure but pretty decent stocks can emerge.
Cash is just the first of many things to check. I have a long checklist to follow.
But cash is where I start. Having no cash is like having no fuel in the tank. It doesn’t matter how good the car is; it won’t get very far!
You can safely assume that Soros is running a firm ruler over the balance sheet of the gold stocks he likes. It pays to do this research. Because if gold stocks are poised for a big move, like he and I both believe…then it is the cashed up ones that will lead the pack.
Dr Alex Cowie
Editor, Diggers & Drillers
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