GOLD ANALYSIS

Gold not even close to being overvalued yet - Doug Casey

The investment legend said he wouldn't be surprised if gold hit $5,000 in the next couple of years as central banks continue to pump liquidity into the system but warned risks remain high in the sector

Author: John McCrank (Reuters)
Posted: Tuesday , 08 Mar 2011

TORONTO (Reuters) - 

Junior resource stocks, while no longer cheap, still present speculators with big opportunities as an unprecedented rally fuels precious metals and the companies that find them, said veteran investor Doug Casey.

Casey, a legendary investment guru who founded and chairs his own research firm, said he would not be surprised if gold hits $5,000 an ounce in the next couple of years, as paper currencies in the United States, Europe, and Japan drop in value.

"Central banks all over the world are creating trillions of currency units and that in turn is creating lots of bubbles," he said in an interview on the sidelines of the PDAC prospectors and developers convention in Toronto.

"It's very probable that they're going to ignite a bubble in gold and they're going to ignite a really wild bubble in small resource stocks."

Gold hit a record high of $1,444.40 an ounce on Monday as oil prices spiked on political instability in the Middle East and North Africa, and on worries that a downgrade of Greek debt could undermine confidence in the euro.

Casey said he believes that gold is not even close to overvalued. In his opinion, the current economic recovery will not last -- we are "in the eye of the hurricane," he says -- so gold's safe-haven appeal will only get stronger.

He said he also likes the prospects for silver, and that if there's a bubble anywhere in the commodities sector right now, it's likely in rare earths, a group of metals used to make electric car batteries and electronic devices.

A SIX-YEAR-OLD WITH A CHAINSAW

While there's a lot of money to be made in speculating on companies that seek out and extract precious metals, it's a high-risk sector that's not for everyone.

"For the average person to get into this sector and get overweight in this sector is like giving a six-year-old a chainsaw - it's very dangerous."

The stocks are volatile, the commodities fluctuate in value, they require huge upfront capital to extract, and there are huge political risks. Most explorers will fail.

Some, though, will find what they're looking for, and when they do, their value can grow by 10-fold or even 1,000-fold.

"You only need one of those if you have a halfway descent position in it, once in a lifetime," he said.

His Phoenix-based firm recommends prudent investors put 90 percent of their portfolios lower-risk sectors, like short-term bonds, dividend-paying stocks, and precious metals and gold, while putting the remainder into speculative investments.

DIG IN, BUT KNOW WHEN TO GET OUT

The 54-year-old Casey, who as a youngster wanted to be a paleontologist, an archeologist or a geologist, said his own portfolio is heavy in physical precious metals, miners and explorers, and also in property. About five years ago he bought a vast piece of land in Argentina where he raises cattle.

He wouldn't name which stocks he likes, but said that to get a piece of his wallet, companies must have several things going for them. They need the right people, good land, solid finances and a host of other factors.

"People -- that's more important than the others put together," Casey said. "Good people make a success and bad people can turn a wet dream into a nightmare."

It's not just about finding the right company or sector to invest in, it's about knowing when to get out.

Casey, who's book "Crisis Investing" sat atop the New York Times bestseller list for several weeks in 1980, said that the day he sees a picture of a golden bear tearing up the New York Stock Exchange on the cover of Business Week, or some other magazine, he'll know it's time to get out of precious metals.

He said that if he were not so pessimistic on the prospects for currencies and the global economy, he'd be telling people that after the strong run in commodities we've seen in recent years, now would be a good time to get out.

"The reason I think they shouldn't, perhaps, is because I think we're likely to go into a mania that's going to be a mania for the record books. It's going to be a super-bubble." (Editing by Frank McGurty

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