Daily Reckoning

The war with Iran is heating up again. In the Strait of Hormuz, Iran has fired on a large number of ships attempting to transit without permission. Missiles and drones have hit a number of U.S. bases in the region, sadly killing a small number of U.S. soldiers. American forces have also been busy, launching heavy missile and bomb strikes at Iranian targets throughout the country. Today we’re going to explore why negotiations failed. And what the resumption of war means for investors.

By 1999, Stanley Druckenmiller was already a legend. From 1981 to 2000, his hedge funds had never had a losing year. His returns averaged a crazy 30% per year. Druck caught the attention of George Soros and was soon running the legendary Quantum hedge fund. In 1999, Druckenmiller saw the internet bubble forming and built up a $200 million short on tech stocks. But the bubble kept inflating. Soon he was down $600 million on the short position.

No matter how we feel about China, their industrial power can no longer be ignored. In a short time, China has become the world’s largest carmaker, steel producer, electronics exporter, and patent filer. But not long ago, in the 1980s and ‘90s, China was among the poorest countries in the world. More than 90% of the country’s population lived in extreme poverty in the early ‘80s.

Michel de Montaigne once said he’d rather keep company with peasants than professors. Montaigne said the peasants had not been “educated sufficiently to reason incorrectly.” He wasn’t in awe of ignorance. He was diagnosing something worse: a kind of education that trains sharp minds to be wrong with great confidence, at great length, and in great comfort. You already suspect this about the experts running your country. Montaigne just gave you the receipts he wrote 450 years ago.

New York, April 1930 The rally convinced Livermore, but not Bernard Baruch. He had sat in his office reading the same newspapers, checking the same prices, and listening to the same experts as Livermore. He was one of the most successful speculators in American history, having built and rebuilt fortunes over three decades on Wall Street. He had advised presidents and was known for spotting what others overlooked.

On August 24, 2006, I joined Dr. Steve Sjuggerud on a trip to Tennessee. He asked me to come with him to visit a zinc smelter, of all things. For those of you who don’t know Dr. Steve, he was one of the most successful newsletter writers and investors ever. He retired from Stansberry Research to surf, invest, and live the good life. He wanted to go to Clarkesville Tennessee because the company, Zinifex, was an anomaly. His research showed that Zinifex would earn $2.5 billion in profit that year.

I spent last week in Florida at Rick Rule’s annual investment symposium. And as the old saying goes, “What a Crowd! What a Crowd!” I was surrounded by geologists, mine builders, financiers, 800 paid attendees — the fire-department limit — and about 3,000 online viewers who still believe that rocks, rigs and real assets matter. There’s more to tell than I can fit into one note, but three themes stood out: First, gold had an early run this year, then a pullback. But it’s not done.

There have been 3 major long-term bull runs for precious metals in the last 60 years. The 1970s is the most famous, and for good reason. Today many investors view the 1970s as one epic bull market for precious metals. But technically it was two separate bull markets separated by a 2-year bear market. From 1971 to 1974, gold rose from $35/oz to $195/oz. Then, from December 1974 to late 1976, it fell 48% to around $100/oz.

There’s a martial arts technique the Chinese call “Dim Mak” (点 脉). The idea is to strike an opponent at a specific spot with a focused blow that inflicts instant trauma. Done properly, a well-placed hit can cause severe pain, paralysis, or even death. In fact, the Chinese call Dim Mak the “touch of death.” Peculiarly, Dim Mak is related to another ancient Chinese technique that’s medical rather than martial, namely acupuncture.

Yesterday, we did a deep dive on one of the largest gold miners in the world, Barrick (B). Today, we’re going to explore a smaller (junior) miner. There’s no clean definition of what makes a miner “junior”. But it generally means smaller producers, as well as companies that are in the exploration or development stage. Junior miners can produce big gains for long-term holders. But there’s also higher risk. Political risk, execution risk, and market risk.