Liquid Gold (Recommendation/Action)

Buy oil companies

ConocoPhillips (COP)

Rationale

1. General move into commodities as currencies are shaky
2. Hubbert's Peak Oil Theory- The rate at which our current technology allows us to extract oil from the ground is soon to be outpaced by our demand for it
3. Oil is priced in dollars, which means a falling dollar increases nominal dollars per barrel

Source

Seeking Alpha

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Allocated 10 percent of portfolio to ConocoPhillips (COP)

Price

$60/share

Current Allocation
10% GG
10% SLW
20% AONE
20% COP
40% Cash

CFTC and Silver

The CFTC, or the Commodity Futures Trading Commission regulator is putting pressure on the agency to take action of a two year investigation involving controlling silver prices.

According to the Wall Street Journal, "market players have made "repeated" and "fraudulent efforts to persuade and deviously control" silver prices."

Yesterday, silver traded up 28 cents, and today silver rose another 23.1 cents.

More from the WSJ, "Over the past two years, silver prices have bounced around, rising to around $20 just before the May 2008 CFTC report, then dropping through the rest of that year to around $9. In 2009, silver prices climbed back to just under $20.

This year, silver prices have soared 41.6% amid a lower US dollar and rising concerns over inflation.

Despite silver's lofty price, some analysts and other suspecting manipulation believe the metal should be trading at far higher level."

It is not clear what impact the CFTC will have on sliver prices, but as the Journal states above, some analyst expect the price of silver to rise further.

Hopefully, if this happens, it will increase the price of our SLW stock.

Pricing, Expectations, and QE2

The dollar strengthened and commodities fell today as word of a more gradual QE2 asset purchasing program repriced investor expectations.  Gold closed down 1%.  This market reaction hurt GG and SLW today, but I saw a parallel to something I'm learning in class that could possibly reassure our decision to purchase gold and silver companies.

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A simple concept I'm learning in my financial management class is pricing a stock as the sum of the present value of earnings and the present value of growth opportunities.

In formula form: p= [EPS/r] + PVGO

p= price
EPS= earnings per share
r= discount rate
PVGO= present value of growth opportunities

Basically, EPS/r is a term that assumes a company paying out all its earnings as dividends forever (i.e. none reinvested in the company- no growth), discounted at the appropriate discount rate.  PVGO is a residual term that accounts for any money a company doesn't pay out (in other words, "plowback") and reinvests in itself.  The formula for PVGO is a little complicated, so it's easier to treat it as a residual to analyze investor sentiment.  For example,  if you have the current price of the stock, EPS, and r, you can find PVGO.
One way to think about PVGO is as a premium investors put on the price over the current earnings based on speculation of future growth.
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Applying this to today's markets, as soon as news of a more gradual and less "dollar doomsday" QE2, the essential PVGO of gold and other inflation-hedges dropped.  This makes sense because investors like us bought these commodity companies and drove their prices up in future anticipation of a falling dollar.

So does this mean that all future expectations are already priced into gold, silver, and the like?  If so, does gold and silver have much more room to run?

I think it's unreasonable to say QE2 has been fully priced in until it happens.  There's not much basis for investors to compare QE2 to (besides a failed QE1) and I believe once it actually happens, GG and SLW will reap the benefits.

Dollar vs. Gold/Oil FIGHT!

Thoughts on the Dollar

As of late, it seems that the value of the dollar has been affecting the US stock market quite significantly. With even a small fluctuation of the dollar, the stock market responded accordingly. This past week's G20 meeting on the discussion of currency wars has not reached a conclusion, so I think this has had an impact on the dollar's power on our markets.

From what I have seen recently, the dollar has been inversely correlated gold and oil. The dollar, being pounded these last couple days/weeks, has in turn greatly increased the price of gold. Oil hit has been trading its highest in a year.

If trends continue this way, I think the dollar will have a substantial influence on these two commodities for the near future.

Easy as A(BC)123 (Action)

Allocated 20% of our portfolio to A123Systems (AONE)

The price has been beaten down since since the IPO and we believe now would be a solid entry point

Price

$10.17/share

Current Allocation

10% GG

10% SLW

20% AONE

60% Cash

Easy as A(BC)123 (Recommendation)

Buy electric battery suppliers

A123Systems (AONE)

Rationale

1. As the population seeks less dependence on oil, electrics vehicles will start becoming mainstream

2. A123Systems provides lithium-ion battery solutions for electric cars, including GM's Chevy Volt which will be released in November 2010 as a 2011 model. They also supply batteries for the Saturn Vue plug-in hybrid and the Think City electric

3. In the future, we believe there is some potential for electric vehicles and A123Systems can meet the needs for electric car manufacturers

Sources

1. Wall Street Journal

2. Seeking Alpha

The Silver Lining (Action)

Allocated 10 percent of portfolio to Silver Wheaton Corp (SLW)

Price

$27/share

Current Allocation
10% GG
10% SLW
80% Cash 

The Silver Lining (Recommendation)

Buy silver

Silver Wheaton Corp. (SLW)

Rationale

1. Prices are correlated with gold with a little more volatility for upside potential

2. Indecisive G20 summit pummels dollar to 15-year lows against the yen, causing further moves into precious metals
3. UPDATE (10/25)-  "The Treasury sold $10 billion of five-year Treasury Inflation Protected Securities at a negative yield for the first time at a U.S. debt auction as investors bet the Federal Reserve will be successful in sparking inflation." - Bloomberg.com

Sources

1. Barrons (October 18)

2. Seeking Alpha
3. Bloomberg

A Golden Opportunity (Action)

Allocated 10 percent of portfolio to Goldcorp (GG)
Gold was temporarily depressed yesterday due to the rise in the dollar from China's 25 basis point interest hike, creating a good entry point

Price
$42/share

Current Allocation
10% GG
90% Cash

A Golden Opportunity (Recommendation)

Buy gold miners
Agnico-Eagle (AEM)
Barrick (ABX)
Goldcorp (GG)
Great Basin Gold (GBG)

Rationale
1. Falling dollar makes gold a more attractive safe haven
2. Hedge against inflation which will be caused by future quantitative easing
3. Considerable spread between average cost of mining across all mines (~$580 per ounce) and current futures price (~$1330/ounce)
4. Depressed value of US gold holdings as a percentage of the money supply (~25% of every dollar is backed by gold, below the 40 year average)
5. Depressed ratio of gold price to the S&P 500 index (below the 100 year average)

Sources
1. Bloomberg Businessweek (October 18-October 24)
2. Barrons (October 11)