Fred Hickey's Inflection Point Call on Gold Miners

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By Inflection Point Investing LLC :

Although Fred Hickey's profile and opinions have certainly garnered more attention over the past few years with his presence in Barron's Roundtable , for the most part, Hickey remains an iconoclast. Quietly huddled in his Nashua, New Hampshire home office, parsing through scores of earnings reports and conference calls each month, The High-Tech Strategist consistently provides well-researched and profitable market calls to those who care to listen. When you consider Hickey's stretch of double digits returns over each of the past ten years, thanks to his foresight into the dollar/debt crisis and his out-sized position in precious metals, The High Tech Strategist's $140 annual fee is one of the best bargain-investments any investor could make right now.

Hickey appears poised for another banner year in 2011. In addition to the profits on his over-sized gold position, Fred recently scored big on his various technology short-sale recommendations. In July alone, Hickey nailed 11 of 13 shorts and I am sure he saw substantial returns on the other two calls during Thursday's market swoon. Ironically enough, The High Tech Strategist has been a bit of a misnomer over the past decade as Hickey's focus has remained more on gold and precious metals than technology.

After a single down year in 1999, Hickey profited handsomely from the massive tech carnage of 2000 and 2001. Then, observing the Fed's decision to keep interest rates historically low and swap the tech bubble for a housing bubble, Fred became one of gold's earliest and most ardent bulls in 2002. Since that date, Hickey has been riding the gold secular bull and is still sounding gold's clarion call.

In the recent August edition of The High-Tech Strategist, Hickey strategically moved some of his portfolio's gold allocation to the gold miners. The logic of this move is brilliantly simple and quite timely given investors' likely flight to safety on Monday morning. Even if there is some movement by the ECB/Trichet to buy Italian bonds by the market's opening bell, in light of S&P's downgrade of U.S. Debt to AA+ on Friday night, we still expect to see chaos grip the global equities markets when they open for the week - first in Asia, then Europe, and finally in the U.S.

S&P's historic downgrade has set the stage for our creditors to accelerate their move away from U.S. Debt on a forward basis. As Treasuries lose their luster as "instruments of safety," Gold's shiny luster should be the most immediate beneficiary of this trend in the near-term. Consider what China had to say about the downgrade and our structural debt problems:

Expect other creditor nations to voice similar concerns. Ultimately, such sentiments will cause these sovereign states to re-direct their money flows into "the barbaric relic," just as South Korea did last month when the Bank of Korea purchased gold for the first time in thirteen years, nearly tripling its holdings to 39.4 tons. This was regardless of the fact gold was trading at all-time highs!

Against such a backdrop, gold could very well be poised to enter its parabolic stage as early as Monday. As gold moves higher, expect to find it up $100 in a single day. Such an unprecedented move becomes less of a percentage gain with every incremental move of $100 higher from this point onward. Indeed, gold could quickly gallop into the $2,000s by fall with any forthcoming announcement of QE3. Should equities gap below Friday's lows on Monday morning, watch out below! There is no support on the S&P 500 until 1,125. The die certainly has been cast for gold bulls and equity bears Monday morning.

S&P500 16-Month, Daily Chart


Because we are sure Fred Hickey does not mind the free publicity for his stellar picks - in addition to the underlying bids! - let's discuss them now. In Fred's view, the gold miners are the new opportunity of gold's secular bull market, due to the heavy institutional interest they should garner over the next few quarters. By his calculations, gold miners like Agnico-Eagle Mines ( AEM ) and Newmont Mining Corp. ( NEM ) are achieving such increased cash flows, higher dividends to shareholders and dramatic earnings beats in the second half of the year are just around the corner. In addition, Hickey also favors the Market Vectors Gold Miners ETF ( GDX ) as a way to play the expected surge in the miners.

A hat tip to Hickey as the Nashua native sure seems to be right. With commodity input-cost pressures decreasing heavily with the past week's decline in oil, and gold on the verge of $100 up-days in the near-term, the gold miners should finally have their gleaming day in the sun, either later this year or in early 2012. Inflection Point Investing feels this way for a few reasons. First, consider that every $100 increase in gold at these levels will be pure profit for all of the miners. Assuming that gold sprints above $2,000 with the arrival of QE III, this will only be a quick stopping point. We can easily conceive of gold going parabolic when Bernanke caves in to the pressures of another 5% drop in equities, and thus launches QE III in the next 4-8 weeks.

In our view, QE III will be a resounding failure, however. Just as we saw the market's sizeable gap-up higher last Monday turn and fail, we believe the equity bulls' hopes will be quickly dashed on the expected QE III market rally. Whenever this stimulus is announced, we expect the Dow to open higher by 300-400 points but we don't view this rally enduring longer than a few days. Such is the nature of bear market rallies - they are ferocious and short-lived. Albeit, it is difficult to go short in the face of such powerful rallies but it is necessary to take advantage of the short-term euphoria in order to profit big later on. It's just that type of tape.

Looking now at the dollar, should the greenback's descent accelerate, gold should also benefit and make a dash to $2,500 by year's end. Think about it. Even if gold only goes to $2,000 by the end of this year, gold miners are going to earn significantly higher profits than the current estimates reflect. While we agree there is an important inflection point approaching for the miners these next few quarters, it could also be three to six months before the miners, as a group, are in position for lift-off. To put it simply, breakouts during bear markets typically fail. Therefore, investors may need to see the S&P drop down to 1,050 and six to nine months elapse before enough bearishness has been built up for breakouts to work.

Assuming it will take time for the miners to "really work," we plan on slowly averaging into select gold miners such as AEM and NEM, along with out-of-the-money calls on these names and GDX, over the next 3 months. Out-of-the-money options going out to 2012 and 2013 all seem very cheap. At some point, the carnage in equities will come to a halt. With the potential for a steady stream of outsized earnings beats and increases in respective dividend rates, gold miners will jump to the top of new institutional radars very soon. Then, the gold miners too will go parabolic. Review your history. It happened before during gold's historic run in the late 70s and it will happen again. We plan on participating in this move for our clients and own accounts.

Disclosure: I am long GLD , GDP , GDX .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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