Feasibility  ($1200.00 – $1300.00 = - $100.00)

In 2010, Company XYZ has 1-million proven ounces of gold with extraction costs of $1300.00 per ounce (when accounting for input costs like infrastructure). Since gold is currently trading at $1200.00 per ounce this company cannot profitably mine any gold in their reserves. All reserves sit idle and are deemed uneconomical for the time being.

Increasing Asset Prices ($2400.00 – $1800.00 = + $600.00)

Three years later (2013) gold doubles in price going to $2400.00 per ounce. Since Company XYZ couldn’t mine any reserves economically they devoted the past three years to building up reserves. Extraction costs like energy and labor have definitely gone up as well, but not at the same rate as gold. Extraction costs per ounce are now $1800.00 per ounce. Company XYZ can now start the long process of bringing gold production online. Permits must be built and infrastructure must be put in place to start extraction. Since this often takes years, we will assume Company XYZ goes “online” two years later (2015).

Proportion: Asset and Extraction Cost ($3250.00 – $2250.00 = + $1000.00)

To their good fortune the long process of bringing a gold reserve asset to production has taken a long time – for this example 2 years. To much amazement gold continued its climb up the “wall of worry” reaching $3250.00 per ounce. Again, production costs like energy and labor went up – not as much as gold though. Production costs increased to $2250.00 per ounce.

Massive Leverage!

Fortunes have certainly improved for Company XYZ, going from an economic production value of -$100.00 per ounce to +$1000.00 in just five years. Company XYZ started off with worthless reserves in 2010, but now has 1.5 million ounces of gold reserves with huge potential. On paper their gold reserve value may look something like this:

($1,500,000 ounces x $1000.00  = $1,500,000,000 )

Increasing prices for gold and silver have huge implications for small mining companies. Upward moves in precious metals prices can literally take a company from worthless to extremely valuable. The process described above may be happening for several small publicly trading mining companies and pan out nicely in the next 5 to 10 years.

The Right Ingredients

In looking for speculative precious metals mining stocks it is important to look for companies that fit the description of Company XYZ in the example above. Find gold stocks with large reserves deemed uneconomical with current gold prices. When gold prices move higher these companies should have dramatic profit potential. For those of you that understand options trading, this strategy could be reasonably compared to buying an “out of the money” call option. The best part about these speculative stocks is the lack of time expiration. Downside is somewhat limited while upside is potentially huge.

For the above scenario to take place, we would first of all need a dramatic rise in gold price. Secondly, a smaller proportioned rise in input costs like energy and labor would need to occur. Mining companies that hedge against rising input costs like energy and infrastructure could add to profitability. Companies with huge reserves of gold also benefit from “economies of scale” where the average cost per unit ounces decreases, since fixed costs are spread over a larger number of goods. Lastly, a given gold company must be able to bring a mine “online” or be able to find a buyer for its assets. Since so many variables are involved in the given scenario, this type of investment strategy is extremely speculative. Finding the right gold stocks will be the most difficult part of this strategy.

One Possible Example

One name that comes to mind is a gold miner called Novagold (AMEX: NG, Free Report). Back in late 2007, Teck Caminco (NYSE: TCK, Free Analysis) and NovaGold terminated plans to bring their 50% joint-venture Galore Creek property online – sending shares from $22.00 to less than $1.00. The two companies indicated the property wasn’t economical with surging construction costs and gold price levels of $825.00 per ounce. You really have to wonder if Galore Creek is still deemed uneconomical in 2010 with gold near $1250.00 per ounce and energy prices slightly down from where they were in 2007. Paulson and Soros funds seem to be catching on to this concept – buying institutional positions of 9.13% and 8.46% respectively.

Criteria

• Based in Foreign Countries (Currency Benefit)
• Large Un-hedged Reserves (Economies of Scale)
• Stable Governments (Safety)

Risks*

• Gold Decreases in Value (obviously)
• Mining Permits not Granted
• Gold Value Doesn’t Increase Faster than Production Costs

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[wordbay]gold bar[/wordbay]

The dramatic rise in college tuition might have you asking a lot of questions. Costs associated with obtaining a college degree have gone out of control.  Surprisingly, the trend of increased college tuition hasn’t decreased during the worst economic downturn in recent history. With the unemployment rate currently standing at 10.20% tuition has still managed an  increase of 6.50% in the fall of 2009. Worst of all, many of the reasons students have been given for rising tuition simply aren’t accurate.

In a free market college tuition prices are a product of supply and demand. Unfortunately, these free market forces aren’t allowed to play out because of government interference. All of the programs designed to help students pay for college have caused prices to skyrocket. Grants and guaranteed federal student loans are the main reasons for out of control tuition costs. That’s right, the very programs designed to help students are actually hurting our pocket books.

Guaranteed Student Loans

If students couldn’t borrow money through government guaranteed loan programs fewer students would have money for college. Private institutions would never loan this money out for fear of going broke from loans in default. When more students have access to guaranteed financing through government loan programs, demand for college placement increases. This results in a situation where students compete for a fixed amount of college positions with federal money.

Universities know this is taking place and can increase prices accordingly. They no longer have any incentive to control costs and reduce wasteful spending. Consequently, the gap between actual teaching faculty and administrators has shrunk. Along with the ever growing amount of Assistants, Directors, Deans and Heads comes supporting staff and office facilities. Throughout history the answer has always been increasing tuition prices, but never eliminating non-core expenses. This process starts a cycles of wasteful and unnecessary programs.

At public colleges, tuition has generally been driven up by rising spending on administrators, student support services, and the need to make up for reductions in government subsidies, according to a report issued by the Delta Cost Project, a nonprofit based in Washington, D.C. – Kim Clark

The chart above shows the ratio between average incomes and tuition at Stanford University at various points in history. The data shows a clear deterioration to just 1.53 in 2009. The average college student must work more than two thirds of a year (full time) to pay for just one year of tuition at Stanford. This is compared to just one-fifth of a year to pay for one  year of tuition in 1960. With increased government sponsored loan programs and other entitlements no reason exists for this trend to change in the future. Adding to that Ben Bernanke and the Federal Reserve sponsored inflation and you have rapidly rising costs.

Anytime our government interferes with free market systems costs go up and quality goes down. This is caused by moral hazard through guarantees and decreased competition. Colleges know they can charge higher tuition prices because of guaranteed loans. At the same time a greater amount of students are pursuing higher education so colleges don’t compete for enrollment as much as they use to. Instead prospective students fight for acceptance at universities. This is a recipe for skyrocketing tuition costs and a massive burden of debt for young academic Americans. The average college student is $20,000 in debt by graduation. Worst yet, many acquire consumer debt through credit cards and mortgages soon after. This certainly doesn’t sound like a good start to achieving financial security.

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[wordbay]gold bar[/wordbay]

Rising Fuel Costs

It is well known that prices of fuel have been creeping back up. Crude oil is already touching $80.00 again. Since Burlington Northern Santa Fe is a transportation company utilizing trains, it would seem that Buffett is betting on oil maintaining or more likely increasing in cost (inflation). Transportation by train simply isn’t nearly as efficient as transporting by truck with crude oil below $50.00 per barrel for prolonged periods of time. However, as fuel costs move higher transportation by train gains a competitive advantage. If you take the entire loaded weight of a typical freight train and divide it over the amount of gasoline it uses – freight trains could potentially move one ton of material over 400 miles on a single gallon of gas. Warren Buffett’s bet on train freight becoming increasingly popular over trucking is a bold bet on the price of oil and other fuel sources rising.

Dollar Devaluation (Inflation)

Trains transport a variety of goods, but are notorious for their use in commodity transportation. As you might already know commodity prices rise when demand increases or currency devalues. With the dollar at a 14-month low it would seem like Mr. Buffett is also betting on a inflation. Not only is Buffett buying a hard asset in Burlington Northern Santa Fe, but he is also betting on increased commodity prices. Companies utilizing train freight benefit from increased margins when commodities rise in price. This is especially true when the value of the commodities they transport rise more than the fuel used. Since trains are one of the only methods for transporting commidities they have huge negotiating leverage for shipping rates.

Intangibles

Because of the massive amounts of land requirements and infrastructure needed to operate a railroad, increasing competition is highly unlikely. Only existing railroad companies will compete with Buffett’s acquisition. Secondly, the railroad industry has been hard hit by the recession. This makes the price attractive to a value investor like Buffett,  scrambling to diversify out the US Dollar.  Providing the economy doesn’t double dip or fade Buffett may very well be getting in at the trough. Lastly, transportation by train is environmentally friendly and therefore appeals to the green movement.

The railroad industry is a great place to be in the current economic environment. Rising inflation coupled with increased fuel costs give transportation by train a major advantage over other forms of transportation. Gold bugs solidified this thesis immediately after the buyout announcement, sending gold higher by 25 dollars per ounce to $1089.10.  Oil also staged a small rally after the news was released. All of these factors support the thesis that Buffett’s bet on the railroad industry indicates serious potential for inflation and increased fuel costs. Examining this purchase more closely seems to hint their is more too it than meets the eye.


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[wordbay]gold[/wordbay]

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Dow Jones Industrial Average by the Price of Gold

It is quite shocking to see the Dow Jones Industrial Average fall in relation to the price of gold. For the last 10 years massive wealth destruction has carried out, behind a curtain of bullish propaganda. While your portfolio may be rising to higher levels, it has done so at the expense of the US dollar and massive inflation. Now you might be wondering why you should care. First, the value of currency is relative to what it can purchase. When government dilutes currency purchasing power is lost. Secondly, dilution is a hidden form of tax or even “theft” since the Federal Reserve has no authority to print money. Newly issued currency steals value from existing currency. A lot of currency theft has already taken place and more will come as seen by the value of the US Dollar.

Click Here: Get a FREE US Dollar Report Today!

The last point that should be discussed in this article is the topic of diversification. Most of us understand the concept of diversification after the Dot Com bubble and Worldcom and Enron scandals. However one place almost all Americans fail to achieve diversification is in their currency. Most Americans are 100% invested with the United States Dollar. Retirement plans, stock portfolios and bank accounts are 100% anchored with the US Dollar. This is alarming since our current monetary policy is set on trashing the value of the dollar. Additionally, no fiat currency has ever lasted more than than the human lifespan. You have already diversified in financial instruments like equities. Now take the final step and consider diversifying out of the US dollar. How can you do that?

1. - Buy Precious Metals (gold & silver)
2. - Buy Foreign Stocks
3. - Buy Foreign Currency
4. - Sell US Government Bonds and CDs

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Inflating Short Term Demand

The problem with stimulus is that you need more and more of it to keep the desired effects. Much like a drug addict needs increased amounts of drugs to achieve the same high. Eventually things come crashing down when the stimulus is taken away. Congress is doing precisely this in the automobile industry. Artificially increasing short term demand will hurt auto manufacturers even worse in the long term. Manufacturers will build up inventory to meet increased demand and suffer when stimulus is pulled away. It could also be argued that is practice “steals” automobile sales from the future.

Winners are Foreign

Everyone knows what car manufacturers are most energy conscious. We also know what car companies are based in the United States. Companies like Toyota and Honda are well known for elevated fuel efficiency. So if I told you Toyota was the leading auto manufacturer under the program would you really be that surprised. Toyota is based out of Japan, not the United States. Although Toyota employs many people here in the United States, companies like Ford Motor (NYSE: F, Free Report) and General Motors (NYSE: GM, Free Analysis) probably won’t gain market share.

Clunkers are Destroyed

Every clunker traded in through the program has to be destroyed. Removing products from the market that still possess viable economic value is wasteful. Borrowing money in order to destroy goods that still have life is counter-productive. Of course some of the vehicle’s components are salvaged, but still much waste exists. This doesn’t even account for people looking for used cars. If clunkers are destroyed many people will have trouble finding low cost transportation (cheap used cars).

Affordability

The worst aspect of the program is who is targeted. People who drive clunkers are generally low to middle class individuals. These people drive clunkers because they can’t afford a better car – or simply don’t want a luxury vehicle. By creating a program like this you entice low income individuals into taking on debt to buy a vehicle they likely cannot afford.

What people fail to realize is that having a vehicle is a luxury all together. It doesn’t matter what brand of vehicle you drive or how much it costs. In many countries people cannot afford a vehicle or don’t have roads to drive them on. The very efficiencies congress seeks to improve will actually be hurt over the long term. Congress should quit proposing stimulus programs that are based on the “broken window fallacy” of economics and simply let market forces play out.

Poor personal loan portfolios in a weak economy equals a lot of trouble. Couple that with a presidential administration completely against your specific business model and things go from bad to worse. These are the current circumstances surrounding publicly traded payday loan companies. The risks associated with many of the these companies are shocking – including  the complete elimination of the payday loan business model as we know it. The negativity doesn’t end there. Most of of the payday loan companies target citizens in “vulnerable” financial condition with many practices being borderline abusive. All of these areas add up to one huge problem in the consumer finance sector sparking widespread reform and lawsuits.

Let’s first take a look at the business models of most of these companies without mentioning specific names. A typical payday loan company deals with individuals in “high-risk” financially distressed situations. These types of loans are usually advertised for people with emergency or unexpected expenses. Most of the companies use “installment” based loan payment systems that are heavily front-loaded and uncollateralized. This implies a certain tendency for “extended credit” to be given to individuals already behind on their current loan through refinancing. People inside the system know this as “loan flipping”. While it seems like a nice gesture, all it really does is ensure an individual will get deeper into debt. Being financially “trapped” by payday lenders is brought about through triple digit interest rates – something many people never recover from. Well over half of loan portfolios of most of the payday lenders fall into this category.

In a strong economy with high inflation this type of business model works great. In a credit strapped economy with high unemployment, high-risk “payday” loans, refinanced many times over is the worst place for money to be. In strong economies these types of loan practices often “fly under the radar”, but when the economy is weak people get into real financial trouble. Then important people really start to take notice. Things have turned so sour that the Obama administration has taken notice and responded with potential new policy suggestions – in turn sending payday loan operators down double digits in recent trading sessions.

• Payday Loan Lenders Struck By Virtual Reality
• Payday Industry In Danger Of Default

“BARACK OBAMA’S PLAN TO STRENGTHEN THE ECONOMY FOR WORKING FAMILIES”

Cap Outlandish Interest Rates on Payday Loans and Improve Disclosure: In the wake of reports that some service members were paying 800 percent interest on payday loans, the U.S. Congress took bipartisan action to limit interest rates charged to service members to 36 percent. Barack Obama believes that we must extend this protection to all Americans, because predatory lending continues to be a major problem for low and middle income families alike. Obama also believes that we need to ensure that all Americans have access to clear and simplified information about loan fees, payments and penalties, which is why he’ll require lenders to provide this information during the loan application process…

…Barack Obama will work with his Secretary of Treasury and the Federal Deposit Insurance Corporation to encourage banks, credit unions and Community Development Financial Institutions to provide affordable short-term and small dollar loans – and to drive the sharks out of business.

These words have surely sent chills down the spines of payday lenders. A President who calls payday lenders “predatory” and “sharks” definitely means business. At the very least payday loan companies will face restrictions on interest rates. This will severely weaken current business models and lead to the destruction of market share. Industry giants like Well’s Fargo who also offer payday loan service will take current loan sharks to the cleaners. Worst of all, the attention given to the industry will put lending practices under a microscope, exposing potentially illegal loans. Several payday loan companies like First Cash Financial (NASDAQ: FCFS , FREE Analysis) , World Acceptance Corp (NASDAQ: WRLD, FREE Analysis) and EZCORP Inc (NASDAQ: EZPW, FREE Analysis) reside in the state of Texas. Coincidentally, the lone star state has some of the most lax and unregulated lending laws in the United States. The list of lawsuits against payday lenders is virtually endless. A simple search on google brings up pages of indexed lawsuits against the aforementioned companies.

• Attorney General Darrell McGraw Sues to Enforce Subpoenas and Enjoin Predatory Practices of 12 Internet Payday Lenders and Collection Agencies – 2009
• Payday lending lawsuit can proceed, court says Plaintiff OK’d as class representative – 2009
  
• Lawsuit Filed Against Payday Loan Companies – 2007
  
• Cordnyn Files Suit In Austin and Mcallen Against “Payday” Lenders – 1999
  

It is our belief that the business model of payday loan operators may be near the end as we know it. President Obama’s recent policy release may in fact be “the drop of water that makes the jar overflow”. Recent attention given to potential policy revision will most likely open the floodgates for predatory loan lawsuits by affected citizens. If lawsuits succeed in highly unregulated states like Texas, loan companies will no longer have a place to hide.

Consequently, much of the inherit downside risk associated with publicly traded payday lending companies may not be sufficiently factored into share price at the present time. We believe businesses engaged in payday loan operations may face substantial and potentially catastrophic loss during the Obama presidency – or at the very least, until the US can reinflate the credit bubble. One of the highest risk payday lenders is World Acceptance Corp (NASDAQ: WRLD) due to their specific loan business model. While many companies operate pawnshops, World Acceptance Corp engages exclusively in uncollateralized loans, putting them at extremely high risk in the present economic environment.