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Updated @ 11:00 p.m. EDT, Monday, July 23, 2007.


WELCOME TO TRUE CONTRARIAN! I will attempt to create an entertaining, readable, and hopefully refreshing viewpoint a few times each month. Each issue will feature my intermediate-term financial outlook, my long-term financial outlook, and a personal reminiscence.

Fool me once, shame on you; fool me twice, shame on me! --Anonymous

WILL INVESTORS BE FOOLED AGAIN WITH GOLD MINING SHARES? (July 23, 2007): Unfortunately, the answer to this question is yes. Since September 2006, a popular index of gold mining shares called HUI has made a peak five times near 370, including right now. On each of these five occasions, almost all gold analysts loudly proclaimed "upside breakout!!!" and insisted that you had to buy gold mining shares right away, if not sooner. They said that if you didn't buy gold mining shares immediately, you'd be left at the train station, missing the boat just before it makes a rocket shot to the moon, Alice!

Wouldn't you think that if something happened exactly the same way four times, you'd expect the fifth time to also be the same? In the real world, even an average five-year-old child would be able to figure out pretty accurately what is going to occur the fifth time after seeing anything happen four times previously. The problem with most investors these days is that they have forgotten the lessons they learned when they were in kindergarten.

The promoters of most precious metals investments don't think the public is smart enough to want to accumulate them when they are a true bargain. They think the public will only buy gold or gold funds when they are setting new highs, and so they crank up their sales machine full blast whenever a new peak is achieved. When they really are a great buy at depressed levels, these promoters purchase them only for their own benefit, and keep quiet about them until the next high is reached.

In my old-fashioned opinion, in order to buy low and sell high, first you have to buy low. However, given the success of real-estate promoters to push overvalued real estate near its recent peak, other financial advertisers have followed their lead in emphasizing hype over substance.

There are a few simple rules of thumb for buying gold mining shares which have proven reliable for the past seven years. Instead of rules or discipline, however, most investors seem to be more interested in buzz and excitement. People are not concerned with valuations; they only want the latest "hot" product. The problem with buying a trendy product, instead of one with intrinsic value, is that it only takes a change in psychology for anything red hot to become ice cold.

The chilliest investment right now is the U.S. dollar, which currently has the most bullish traders' commitments in its entire history. This means that the U.S. dollar is set for a huge rally, to begin immediately, that will persist and intensify over the next several months. This will significantly depress the prices of precious metals and their shares. The global equity market, at a historic peak of complacency, is set for a typical cyclical correction, which will put additional downward pressure on all equity sector groups including gold mining shares.

People are always looking for the "secret to financial success". Here is the truth: there are no such secrets. As with everything in life, the only sure road to any goal is to first establish a disciplined plan and then to follow it through to its conclusion.

  • Overview of Gold Mining Shares (updated July 23, 2007)
  • Learn more about Steven Jon Kaplan and watch a live interview on MarketWatch.
  • I am currently offering a daily e-mail subscription service for $110.50 (U.S. dollars) for one year, or $37 for three months. Under this service, I will send you an e-mail every business day, and a special weekly review on Sunday, giving specific timely buy/sell recommendations, as well as long-term guidelines for money management. I will also respond to all e-mail questions that you may have regarding my daily updates. Payment can be made through PayPal, credit card, or check, whichever you prefer. Your e-mail address will not be given to any other person or organization under any circumstances.

    The price of this subscription will increase to $119.50 for one year and $40 for three months the next time that HUI goes below its weak triple bottom of 270, since that is when it will be most timely to purchase gold funds.

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    Your comments are always welcome, or send an e-mail to sjkaplan@earthlink.net.

    IF SOMETHING RETURNS 1% PER YEAR, IS IT A GOOD INVESTMENT? (July 8, 2007): The answer to the above question is obvious, especially since there are many U.S. money market funds and U.S. time deposits which are currently paying 5.25% per year, completely risk free. Of course you're thinking, what a dumb question; obviously no one would accept a 1% rate of return on any investment. And yet that is exactly what most residential real estate is yielding these days, not only in the U.S., but around the world.

    In the final analysis, any investment must be fairly measured by the return on that investment. With real estate, after subtracting property taxes, maintenance, interest, and other charges, the average return in most areas is currently only 1%--and that's before considering income taxes.

    If your response is, well, Donald Trump never talks about rates of return on real estate, then ask yourself why that it is the case. Obviously it is because once you begin to talk real economic numbers and look at real data, there is no longer any justification for owning real estate. Sure, if you happen to have bought property before the recent bubble, then that's great--but such a bubble will only happen once every one thousand years. So unless you plan to live a really, really long time until the next one, you're going to have to tolerate a 1% annualized profit until then.

    This assumes that real estate prices will remain constant around the world for the next decade or so, which is probably the most wildly optimistic estimate that anyone can make. With real-estate prices in most countries having doubled relative to inflation, such as in the U.S., or tripled, as in Ireland or much of the U.K., we have the first-ever instance in which there are severe widespread overvaluations. Whenever there are such extremes of price, the market almost always swings in the direction of the opposite extreme within a decade or so.

    So on top of a paltry 1% annualized return, an investor in real estate today stands the risk of losing half or more of his or her money within the next several years. I would go so far as to assert that real estate is no longer even a legitimate asset class until it collapses--the only question is how much money one will lose, and exactly when.

    CURRENT ASSET ALLOCATION (July 23, 2007): My own personal funds are currently allocated as follows: LONG POSITIONS: stable value fund (retirement fund with stable principal paying variable interest, currently 5.00%), 1.5%; long-dated U.S. Treasuries and their funds, and long-dated municipal government bonds, including TLT and MYJ, 35%; Treasuries between 2 and 10 years in duration, such as IEI and IEF, 12.5%; TOC, 0.5% (bought at a 15% discount); gold and silver coins and related metals collectibles, 6%; other collectibles, 0.5%; cash and cash equivalents including a long position in VMSXX, negative 30.5%; SHORT POSITIONS: Nasdaq-equivalent (QQQQ, SMH, NDX, GOOG, in that order) and related shorts, 52%; short CFC, 3%; short GLD, 17.5%; short GDX, 2%.

    REMINISCENCE OF THE WEEK (July 23, 2007): For one year I had the most peculiar white-collar job that you can imagine. I worked for a company that had an interlocking series of computer programs. The problem with these programs was that they did not synchronize with each other, since some of them ran too quickly, while others were slow. There was no easy way to speed up the slow ones, but there was a simple way to slow down the fast ones. Every computer language has a command which tells the computer to "do nothing" or "take a break for a certain exact period of time". The programs I was working on had an instruction called NOP, which means "perform no operation for 2 clock cycles". My main job for the year was to add as many NOPs as was needed to ensure that hundreds of programs ran synchronously. One of the few breaks I got from this rather tedious task was whenever one of the shared computer machines began to act crazy. The first time this occurred, I happened to be very close to where my boss was sitting. I told him confidently, "I can fix this!", even though I had no idea what to do. I asked everyone to please leave the room, so that I could work without distractions. I then turned off the computer, and turned it back on. Amazingly, this solved the problem. People asked me what I did, but I didn't want to give away my secret. After that, every time one of the main shared computers went haywire or crashed, I would be asked to fix it. More than 80% of the time, simply restarting it did the trick, but I still insisted that everyone leave the room first, to create the illusion that I was doing something really unique. To this day, I think my co-workers didn't learn my secret. Please don't tell them.

  • Best of Previous Reminiscences
  • (c) 1996-2007 Steven Jon Kaplan Your comments are always welcome.

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