2017. Phoenix Capital Research, Phoenix Capital Management Inc. All Rights Reserved. Protected by copyright laws of the United States and

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1 2017. Phoenix Capital Research, Phoenix Capital Management Inc. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This newsletter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of Phoenix Capital Management Inc. All Rights Reserved. 1

2 Disclaimer: The information contained on this newsletter is for marketing purposes only. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice by Phoenix Capital Research or any of its affiliates, nor is it to be relied upon in making any investment or other decision. Neither the information nor any opinion expressed on this newsletter constitutes and offer to buy or sell any security or instrument or participate in any particular trading strategy. The information in the newsletter is not a complete description of the securities, markets or developments discussed. Information and opinions regarding individual securities do not mean that a security is recommended or suitable for a particular investor. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Opinions and estimates expressed on this newsletter constitute Phoenix Capital Research's judgment as of the date appearing on the opinion or estimate and are subject to change without notice. This information may not reflect events occurring after the date or time of publication. Phoenix Capital Research is not obligated to continue to offer information or opinions regarding any security, instrument or service. Information has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. Phoenix Capital Research and its officers, directors, employees, agents and/or affiliates may have executed, or may in the future execute, transactions in any of the securities or derivatives of any securities discussed on this newsletter. Past performance is not necessarily a guide to future performance and is no guarantee of future results. Securities products are not FDIC insured, are not guaranteed by any bank and involve investment risk, including possible loss of entire value. Phoenix Capital Research, OmniSans Publishing LLC and Graham Summers shall not be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided. Phoenix Capital Research is not responsible for the content of other newsletters to which this one may be linked and reserves the right to remove such links. OmniSans Publishing LLC and the Phoenix Capital Research Logo are registered trademarks of Phoenix Capital Research. OmniSans Publishing LLC - PO BOX 2912, Alexandria, VA 22301

3 Survive the Inflationary Storm Five Trades That Could Double in the Next 24 Months The Fed and other Central Banks have finally unleashed inflation. It took over 600 interest rate cuts, seven years of free money and some $14 TRILLION in Quantitative Easing (QE), but inflation has finally arrived in the financial system. This initial shift began in 4Q16. At that point we witness a sudden spike in inflation expectations. This is a global phenomenon. As I write this, inflation has begun to spike in Japan, Germany, Sweden, Mexico and more. This is just the start. As history has shown us time and again, once the inflation genie is out of the bottle, it s almost impossible to get it under control. Take a look at the US. 3

4 The Fed tracks FOUR inflation metrics. They are Core CPI, Core PCE, Trimmed Mean CPI and Cleveland Median CPI. Of these four, THREE are already above the Fed s target rate of 2%. Core CPI is growing at an annualized rate of 2.1%. Cleveland Median CPI is growing at an annualized rate of 2.2%. Trimmed Mean CPI is growing at an annualized rate of 2.1% Only Core PCE is below the Fed s target rate of 2%, at 1.6%. This is just the beginning. The fact is that the Fed s inflation measures are actually TERRIBLE at predicting inflation. You don t have to take my word for it. The Fed itself has admitted this! In a little known paper published back in 2001, the Fed admitted openly that its official measures of inflation (CPI and PCE) do a horrible job of predicting future inflation. So what does predict future inflation accurately? FOOD prices. We see that past inflation in food prices has been a better forecaster of future inflation than has the popular core measure Comparing the past year s inflation in food prices to the prices of other components that comprise the PCEPI (as in Table 1), we find that the food component still ranks the best among them all /predicting-inflation-food-for-thought I want you to focus on these two admissions: 1) The Fed has admitted that its official inflation measures do not accurately predict future inflation. 2) The Fed admitted that FOOD prices are a much better predictor of future inflation. In fact food prices were a better predictor of inflation than the Fed s PCE, non-durables goods, transportation services, housing, clothing, energy and more. 4

5 Put simply, if you want to predict inflation well you NEED to look at food prices. The process of tracking food prices begins with agricultural commodity prices: wheat, soy beans, lean hogs, sugar, rice, and the other stuff that is used to make food. With that in mind, agricultural commodity prices look to be bottoming/ breaking out of a massive falling wedge pattern that has been developing over the last THREE years. Even more bullish, RJA put in a base (red line) and is now set MAJOR move higher. THIS CHART PREDICTS A 40% INCREASE IN FOOD PRICES Put simply, this chart is SCREAMING that inflation is coming to the US within the next 12 months. Smart investors are preparing now for this with targeted positions. Below are my five inflation plays of choice. All of them have the potential for triple digit gains. Play #1: The Gold Mining ETF (GDX) Our first Gold mining play is the Gold Mining ETF (GDX). 5

6 GDX is a diversified play on the entire mining sector. At $10 Billion this is one of the largest ETFs on the market. And it gives you exposure to 52 mining plays ranging in size from multi-billion dollar mining giants like Newmont Mining to smaller plays like Sandstorm Gold. All told, the companies that comprise GDX own a whopping 25 million ounces of Gold. With gold around $1200 an ounce, you re talking about $30 billion worth of Gold at market value. However, GDX s entire market cap is less just $10 billion. Put another way, the stock market is currently valuing GDX s gold assets at just $400 per ounce! The value here is incredible, and due to its diversification, GDX should be the backbone of your exposure to the mining sector. However, I want to stress that this play, like all mining plays, IS volatile. It is not unusual for GDX to swing 5% in a single day. A 10% move in a single week is common. So be prepared to weather some volatility here. This is a buy and hold play that will feature short-term bumps for MAJOR long-term gains. Indeed, based on where Gold is going, GDX could EASILY rise 160% in the next 24 months. Action to Take: Buy the Gold Mining ETF (GDX). Play #2: The Gold Mining Junior ETF (GDXJ) Our second Gold mining play is the Gold Mining Junior ETF (GDXJ). GDXJ is quite similar to GDX, except it focuses on junior gold miners (mining companies with market capitalizations of $250 million or less). Individually, gold mining juniors are HIGHLY risky investments. Many of them are pie in the sky companies where there is no guarantee that they will be able to deliver on their potential reserves. On top of this, gold mining juniors are often based in politically unstable regions where it s not uncommon for civil unrest to disturb operations, and lead to serious losses of capital. This is why I prefer GDXJ instead of individual junior plays. 6

7 GDXJ is a large ($4 billion in net asset value) ETF that gives you broad exposure to the junior mining sector. All told, GDXJ has holdings in some 54 junior mining plays. This diversification provides greater stability. Because it is so broadly invested, no single individual mining company can result in your capital being completely wiped out. Put simply, in terms of risk, this is about as risk averse as you can get in the junior mining sector. But don t let the diversification fool you. GDXJ is built like a hot rod with the potential for rapid and massive gains. During the last bull market in Gold, GDXJ rose an astonished 100% in a single year. Put simply, GDXJ is like the Gold Miners ETF on steroids. However, these massive moves come at a cost. GDXJ is EXTREMELY volatile. It is not uncommon for GDXJ to move 10% in a single day. So make sure you re prepared to weather some SERIOUS volatility here. However, the potential gains more than make up for this. Based on where Gold is going, GDXJ could EASILY rise 278% in the next 24 months. Action to Take: Buy the Gold Mining Juniors ETF (GDXJ). Play #3: Royal Gold (NGD) Our third Gold mining play is Royal Gold (RGLD). RGLD is a Gold royalty company. What this means is that RGLD supplies capital to Gold miners in exchange for a percentage of those companies Gold sales. The beauty of this arrangement is that RGLD experiences little of the operational risk/costs associating with mining. As a result of this, RGLD has lower costs and higher margins that most miners and most S&P 500 companies: as of December 2016, RGLD s gross margins were 79% vs. 40% for Gold Seniors and 32% for the average S&P 500 company. As of year-end 2016, RGLD has seven producing properties from which it is collecting royalties with another 21 properties in development. And thanks to its low costs and higher profit margins, RGLD pays out a nice dividend that it has increased for the last 16 years. As I write this, RGLD s dividend is 1.35%. Don t let that safety fool you though. Based on where Gold is going, RGLD could EASILY double 7

8 in the next 24 months. Action to Take: Buy Royal Gold (RGLD). Play #4: Silver Wheaton (SLW) During periods of high inflation, Silver dramatically outperforms Gold. Consider that during the first leg up for precious metals bull market ( ) Gold rose 468% while Silver rose an astounding 948%. For that reason, we need to have some exposure to Silver during the next Bull Run in precious metals. Our first Silver play is Silver Wheaton (SLW). SLW is a precious metal streaming company. What this means is that rather than mining for precious metals itself, SLW arranges to buy Silver and Gold from mining companies at a set price. Here s how it works. 8

9 Metals ore is often polymetallic. What this means is that you will find multiple metals in the ore. In the case of Copper, there are usually small amounts of Gold and Silver also present in a particular resource. SLW offers to buy this Gold or Silver from these companies at a set price, usually in two installments (one large payment upfront with additional delivery payments when the mining firm delivers the Gold or Silver). In this setup, the Copper miner gets additional capital for operations, and SLW gets exposure a relatively steady stream of Gold or Silver production with minimal investments. In the very simplest of terms, SLW gets all of the upside potential to precious metals mining (owning Gold and Silver that can both rise rapidly in value) with virtually none of the risk (SLW doesn t actually own a mine and so is not exposed to high operating costs, capital requirements or the like). It s as close as you can get to a risk-free investment in Silver. SLW has this sort of agreement in place with 22 actively producing mines and eight development stage projects. It is the single largest metals streaming company in the world. However, the potential gains more than make up for this. Based on where Silver is going, SLW could EASILY rise 115% in the next 24 months. Action to Take: Buy Silver Wheaton (SLW). Play #5: Silver Standard Resources (SSRI) Our final play is Silver Standard Resources (SSRI). SSRI is a traditional precious metals producer with three actively producing properties located in the US, Canada, and Argentina. Two are gold producers the third produces Silver. SSRI has another eight properties in the pipeline: two in development and six more in exploration. In 2016, the company produced 393,000 ounces of Gold equivalent generating operating cash flow of more than $100 million. The company expects to produce another 340,000 to 370,000 in 2017 with an average cash cost somewhere between $700 and $770 per ounce of Gold equivalent. 9

10 On top of this, the company has a rock solid balance sheet with $270+ million in cash and an additional $170+ million in marketable securities. The company is also incredibly cheap for a precious metal miner with an Enterprise Value/ EBITDA ratio of 7. Based on where Silver is going, SLW could EASILY rise 250% in the next 24 months. Action to Take: Buy Silver Standard Resources (SSRI). Based on where Gold and Silver are heading due to inflation these plays offer us the potential for triple digit gains. I suggest taking a portfolio approach to them, spreading capital across all of them instead of piling into a single one. However, if you HAVE to pick just one or two plays, I would focus on the ETFs (GDX and GDXJ). However, those plays as well as the rest will be volatile. It is not unusual to see them move as much as 10% in a single week. So be prepared to stomach some volatility as the next bull market unfolds. This concludes this report. Thank you for reading. Best Regards, Graham Summers Chief Market Strategist Phoenix Capital Research 10