Some brokers and letters are still recommending either big gold companies or very small ones. Both are mistakes, not because they're bad recommendations, but just sub-optimal relative to the alternatives. Let's look at what's going to happen to different kinds of gold companies in the future.

 

Big Companies

The big companies (Newmont, Homestake, Placer, etc.) are managed, naturally, like big companies. Despite the fact they have plenty of highly competent people, they also have plenty of "suits" who specialize more in corporate infighting and politicking than company building. And even the competent people tend not to have an entrepreneurial bent - or else they wouldn't be here.

There's plenty of upside in them, of course, because they produce a lot of gold, and their earnings are leveraged to the metal's price - which will itself at least double. More important, they're "safe" household names, and will be the first, and biggest, recipients of buying both from the public and from funds. So these stocks will easily triple and quadruple over the next few year. That's a spectacular performance by any standards and people who buy them now will have no cause for complaint - especially when most people will suffer a 50% or more meltdown in conventional stocks and bonds.

Frankly, that about all you need to know about what to do with your money for the foreseeable future - assuming you buy the basic scenario.

 

Little Companies

On the other hand, there are many hundreds of little companies out there, with small properties and minimal cash. Management may be honest and competent, but lacking in vision; many of these guys, however, amount to a parody on the old prospector wandering around the hills, telling stories of how he'd have been rich, if only the mule hadn't died.

Unfortunately, the market has almost no interest in little narrow vein properties in North American, and even if management if able to raise a "grub-stake" - and that's how they tend to view it, even it is a public company - the most they'll ever have is a little mine. Who cares?

Those little companies will also do well as the bull market progresses, because just a little bit of buying can have such a huge effect on a small market cap. But the risk/reward ratio isn't good, because so many will be casualties; most won't be able to raise money to start with. They're had to follow, will never get the attention of the big boys, and have to be viewed as stock market plays, not growth situations. Most amount to a burning march, passed from one tyro speculator to another; eventually somebody gets burned.

 

Growth Golds

As far as I'm concerned, the only stocks to own are what might be called "growth golds"; my personal holdings reflect that assessment. With very few exceptions, the only companies you'll find in these pages - and this has been the case for several years now - are those that have very big properties, top-notch people, and the ability to raise big money as a consequence.

By big properties, I mean those with a minimum of a million ounces of economic reserves, and the prospect for much more. These properties are almost always going to be located in the Third World, as well, because costs are much lower, they're much less explored, and regulations are workable. It baffles me, in light of that, when I see people holding some company that hopes to produce 25,000 ounces in California; that will give them about enough revenue to pay their legal bills.

By top-notch people, I mean those who have a wealth of technical expertise, practical experience, street smarts, drive, and connections. Those things don't necessarily have to be all in one person, but all are needed. Further, the people have to have integrity; if I don't like that they've been up to in the past, you won't find them here. It's just not worth the aggravation.

By big money, I expect that if they need $5 million or $10 million in financing for a project, they can get it in a few weeks. Most small businesses fail because of undercapitalization; I've seen it happen, and there's enough risk without having to deal with a lack of money in a capital intensive business.

It doesn't scare me, therefore, even at this very early stage of the market, to own (eating my own cooking, and in gargantuan mouthfuls) companies with $50 million market caps. These could easily be l0- or even 20-to-one shots.

The reason is that, with the opportunities they're able to exploit aggressively in the Third World, these outfits can develop in a brief period the kind of reserves it's taken the stodgy majors decades to put together. Those are the fundamentals.

And those fundamentals are going to make their stocks absolutely howl. Because this time time around there are 35 mutual funds devoted exclusively to gold stocks. In the 70s, there was only International Investors, and as late as l982 there were only five funds. Now there are over 4,500 U.S. mutual funds, most are members of families, and almost all those families have a gold fund. When the public gets the bit in its teeth as the current bull market takes off in earnest, they'll be transferring millions of dollars a day into those gold funds. And hundreds of the other funds will buy gold stocks as well - because they're momentum plays, because they want a hedge, or perhaps because they see it as a growth industry.

There will be such a torrent of buying on the part of these funds it's going to make the record books. But what will they buy, after they're loaded up with Homestake and l0 other majors?

They'll buy the growth golds I'm telling you about here. In fact, they'll buy the growth golds in preference to the majors. I'll warrant there'll be days when many of these stocks won't be able to open, because of an imbalance of buy orders. There aren't many of them, and their combined market caps still add up to only half that of Newmont alone. And every gold stock in the world has a combined market cap only half that of Coca Cola.

I urge you to take fat positions in all of them - equal dollar amounts. That includes those I've described here in the recent past, the four in this issue, and those you'll see here in the future. Unless you're taking this letter for its movie reviews alone.

I don't run around the world checking these deals out because I like spending days on an airplane; I've come to loathe it since starting to average l50,000 plus miles per year. But, having paid my dues over the last decade, I'm not about to roll over with the finish line in sight. The conditions now brewing smell like one of the most spectacular bull markets in investment history getting ready to bubble over. I know that's sticking my neck out but, having already done so financially, it's an easy stretch.

I sincerely hope that a year or two from now, then this market is getting really frothy, we'll be able to find a group of stocks that has equal upside potential to buy, when we feed the golds to the lemmings who'll want to buy them at a considerable multiple of today's prices.