I will keep this article short as I’m too busy with my work on valuing some gold miners. Today, I added to my Gabriel Resources position at 1.9 CAD/share. I bought the same amount of shares to the one I got with my initial purchase and now my average stock price is 3.9 CAD/share. I bought more shares to average down, as from now on, I believe that even with higher royalties and lower cyanide levels, this stock is cheap. Of course, it could become even cheaper and even a zero in case the government goes nuclear and dissolve the mining license or  refuse to give the environment permits. Today for example, the Romanian new left-leaning government has pledged a moratorium on shale gas exploitation and said that it will review a controversial Canadian plan to build Europe’s largest open-cast gold mine.

http://www.winnipegfreepress.com/business/romania-govt-promises-moratorium-on-shale-gas-exploitation-review-of-open-cast-gold-mine-150169825.html

That is why, please keep in mind that my purchase is not a recommendation. You could lose everything by investing in junior miners. That is why it is best to spread the risk by investing in several miners or to put a small percentage of your shares in each.

There is one very important lesson that all investors should remember. To recover a loss of 10%, the asset must rise 11.11%. To recover a loss of 50%, the asset must rise 100%. To recover a loss of 80%, the asset must rise 400%, and to recover a loss of 100%, the asset must rise “it is never gonna happen”.

The only way to recover a loss of such magnitude is if you can average down. Still, that is one of the most dangerous idea or principle that investor might have and even because it is I don’t recommend it to investors with poor risk management and portfolio weightings . The reason is that, if the stock is really going to zero, you increase your holding and continue to lose until you lose everything. By averaging down you guarantee yourself a big trouble and a huge loss. That is why every investor, as I said many times, should start positions no matter how good they look with a small percentage of its portfolio. Especially in risky junior miners with a potential for triple returns. That is a must because if the holding is a small percentage, you can average down and even with the additional purchases, you can still afford and be fine if the junior fail and go under. If you start with a bigger holding relative to your portfolio size, you can’t average down without later ruin yourself and your portfolio.

Today, I have decided to sell the addition that I bought on April 9-th and mentioned in this article:

http://octafinance.com/2012/portfolio-changes-microsoft-gabriel-resources/#more-658

The reason behind this sell is purely political. Source: http://news.yahoo.com/romanian-government-falls-confidence-vote-125424091.html

BUCHAREST (Reuters) - Romania’s centre-right government collapsed on Friday when it lost a vote of confidence two months after taking office, raising the prospect of months of political turmoil and casting doubts on an austerity programme.

For a new prime-minister was nominated the strong enemy of Gabriel Resources, Victor Ponta. He will soon form the new government. as you know, Mr Ponta said in  Oct 2011 – “The Rosia Montana is blocked because not all politicians can be bought”. Even though this might be too aggressive comment as without a green light for Rosia Montana’s mining, Romania will have a huge financial problems and no foreign company will ever want to work there, his comments and views are a big risk. That is why now I hold just the initial purchase of the stock. The risk are too high as you know and even though the reward could be huge, Gabriel Resources should just be a small percentage of your portfolio.

The following are proposed as the Minister of Environment for Romania by Victor Ponta the new Prime Minister: Rovana Plumb, Carmen Moldovan.  An internet search of each name AND rmgc provides some telling details.  Particularly Ms. Plumb’s stance on the project in a commentary date April 12, 2012 and Mr. Moldovan’s complaint regarding the company’s radio ads in Oct. 2011.

I believe that Rovana Plumb will be the environment minister but who knows. What I believe will happen next is that the new prime-minister will want to re-negotiate the royalties which will lower the economic effects of the mine. The second thing is that permit will probably be given by the environment minister but the cyanide levels proposed will have to be lowered. These news are definitely not good and should be kept in mind. I still feel that Romania will have no other choice but to give the permits because if it doesn’t Gabriel will probably fill for arbitrary lawsuit and ask for huge compensations for the $450 mln CAD already invested the near 14 years time lost. Such an action could cost Romania up to $3 billion CAD which a broken country can’t pay.

That is why going forward, I still see Gabriel Resources working the mine but I have no idea how a royalty change as well as a cyanide level will impact the profits of the gold miner.

I just sold my Microsoft position in full. As you know, Microsoft was 4% of my trading account and I bought it on August 24 2011, at $24.78 USD. I sold it today at $31.32 USD, for a profit of 26.4%. BP is still hold as it has not appreciate much and I still believe it is extremely undervalued.

You can refer to this page: http://octafinance.com/2011/microsoft-and-bp-value-investments/ for valuation of Microsoft and BP.

As you can see, Microsoft has 11.3 PE right now and has forward P/E 10.4. I bought it at P/E 8.1 and forward 7.66.

Today, I also increased my position in Gabriel Resources Ltd. I increased my position by 100%, so Gabriel Resources is now almost 1.7% of my portfolio. The company’s market cap is $1.15 billion CAD today and its price has collapsed about 66% from the high in 2011. The stock has dropped 45% just in the last 2 trading sessions, so now could prove to be the best time to buy.

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Today I increased the portfolio’s Novagold position by 50% to 0.3% of the portfolio.  As Novagold declined about 20% since my initial purchase I have decided to add to the position as I find the stock even more undervalued now. The portfolio’s total exposure to precious metal stocks is now 1.8%.

I still believe that there is significant downside risk to gold, silver and precious metal stocks so I look forward to increasing the portfolio exposure if declines happen. I believe that the total exposure might go up to 5% until a final bottom is formed in this sector.

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This is a continuation of the article “Japan’s debt crisis comes after Europe buy some long term OTM yen puts”

Surprisingly honest, Japanese Ministry of Finance official admits that “Japan is fiscally worse than Greece“. Bloomberg is reporting that, at a conference in Tokyo, Yasushi Kinoshita said “Japan’s 2011 fiscal deficit was up to 10% of GDP and its debt-to-GDP has soared to over 230%”. It seems that Kinoshita is worried that there is a big risk of shocks even with large amount of JGBs that are held domestically. I completely agree with him as stated in my analysis.

And now a former top Japanese currency official:  “The Bank of Japan is locked into purchasing more government bonds and may contribute to a loosening of fiscal discipline in the world’s largest public debt market”. “Since they have come this far, if the BOJ stops purchasing bonds, there will be a fall in bond prices and huge valuation losses for banks.”  said Makoto Utsumi, former vice finance minister for international affairs and now president of Japan Credit Rating Agency Ltd.

BOJ last month increased bond purchases through its asset fund by 10 trillion yen ($123 billion) to $374 billion QE as part of measures to counter deflation and spur growth. That means that BOJ will monetize most of the deficit that Japan has. Don’t underestimate the significance of such program, the Japan’s economy is much smaller than the USA one.

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While some people are worried whether QE3 will be initiated so they can reap some profits there are others who are worried that hyperinflation might suddenly happen and destroy their wealth.  Because I received a few emails from such nervous investors and businessman from Europe and USA, I have decided to dedicate this post to them and assure them that even though money printing is risky and causes hyperinflation, we have nothing to worry about in Europe and USA.

Hyperinflation is one of the worst systemic risks. People and investors usually avoid holding much cash because they believe that hyperinflation might destroy it and they are partly right in their assessment. The only problem with that assumption is that there are specific causes that result in hyperinflation and cash might be a good option for now, even for those that hold Euros.

There have been 28 episodes of hyperinflation in national economies in the 20th century, with 20 occurring after 1980. Peter Bernholz, (more…)

On February 17, 2012, I bought shares of three gold miners: Gabriel Resources Ltd.  (GBU), Allied Nevada Gold Corp. (ANV) and NovaGold Resources Inc. (NG)

I want to emphasize that these purchases are a part of my portfolio as they are long-term investments and not trades. The allocation of capital is as follows: Gabriel Resources Ltd ~ 1.1% of my portfolio, Allied Nevada Gold ~ 0.4%, and Novagold Resources ~ 0.2%. My total exposure to precious metal stocks in the core portfolio is now 1.7%.

Currently the precious metal stocks are very cheap compared to the metal price. The gold bull market has a long way to go until it forms a bubble phase. The precious metal stocks that I bought have probably an upside of up to 400% long-term (3+ years). I still believe that gold will correct more, probably going to $1400/oz, or even $1200/oz, before resuming it’s uptrend. Still that didn’t stop me from doing these purchases because they are all unique and special situations that might go up significantly, no matter what the price of gold does.

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In this article I will share with you some more details about the impact of electric and hybrid cars to the rhodium demand, which will also be important for investors in the PGMs (platinum, palladium).

I received an email today from a reader who was worried what will happen to the rhodium demand and investments in the metal, if electric or hybrid cars production increase. In his opinion because more than 80% of the rhodium market demand is from catalytic converters, and in the long run fuel engines are doomed we have to pay attention to the electric cars development.

That’s why I will post here my reply to him as it’s a part of an analysis that I didn’t share with you in my previous writings. I will start with my own opinion that fuel engines are not doomed even in the long-run and that is because of the supply and existence of rare earth metals.

Now, let’s start with a little introduction. Hybrid cars are required to have catalytic converters because they have fuel engines along with electric engines. Hybrids do have catalytic converters and are not a threat to the rhodium demand.

Electric cars don’t need catalytic converter but here are my three main points why electric cars will never be of a much importance to the rhodium demand:

1. Rare Earth Metals in electric cars. There are not enough rare metals in the world to produce much electric cars. About 95% of all rare earth metals come from China, which lowered its export quote to world in attempt to save its resources for the decades ahead and for its own production. For example, electric cars use rare earth metals in their electric motors and car batteries like neodymium which is in deficit even at this increase of electric cars and other tech stuff.

Currently, every Toyota Prius uses 2.2 lbs (1 kg) of neodymium in each motor, while the hybrid batteries each pack 22-33 lbs. (10-15 kg) of lanthanium (another earth metal in short supply). In summary, even if we find more rare earth metals, they will be much more expensive which will make these cars much more noncompetitive to normal. Even now, electric cars are more expensive than gas because such rare metals.

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Today, I sold my Cocoa at $2,375 USD/ton. That is a 16.2% return on the invested capital. I still believe that it will continue going up but I prefer to take profits at this point. If Cocoa go down again, I will probably re-enter the position.

Today, December 12 2011, I bought Cocoa Futures at $2,044 USD a metric ton. Please keep in mind that I’m extremely pessimistic about the resolution of the European debt crisis. I still think that commodities will go down next year due to BRICS slowdown, countries in Europe going under and more bankruptcies. This position, is not in my portfolio but in my trading account, so it’s just a speculative play. I don’t have a stop or take profit yet. I believe the time to buy Cocoa is now but I might be early as usual. I might add more Cocoa if the price continue going down.

Please take a look at the chart below:

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