Gold Market Radar (February 6, 2012)

Sunday, February 5th, 2012

Gold Market Radar (February 6, 2012)

For the week, spot gold closed at $1,726.25 down $12.82 per ounce, or 0.74 percent.  Gold stocks, as measured by the NYSE Arca Gold BUGS Index, fell 1.2 percent. The U.S. Trade-Weighted Dollar Index was essentially flat with a gain of just 0.1 percent for the week.

Strengths

• The Year of the Dragon Lunar New Year holiday in China set a new record for gold buying.  Sales for the two top jewelry sellers reached about 600 million yuan ($95 million), a nearly 50 percent jump over the prior year.  With many Chinese losing money in the stock and property markets last year, gold is emerging as one of the preferred investment choices.
• The China Gold Association reported that the country’s gold production for 2011 rose 5.9 percent in 2011 to 361 tonnes.  Five years ago, China became the world’s largest producer of gold. Most analysts believe that all of this domestic production is bought by the government to add to its reserve base, which is underweight gold relative to the size of its economy and its exposure to the dollar.
• In addition, estimates for Chinese gold imports in 2011 are roughly 490 tonnes. The public has a large appetite for gold accumulation as a means to build wealth.

Weaknesses

• A recent study by South Africa’s ruling African Nation Congress (ANC) has rejected calls for mine nationalization, but has come out in support of higher taxes and royalties.
• The policy for nationalization lost political momentum after the prime instigator, Julius Malema of the ANC Youth League, was found guilty of sowing discord among the party.
• Talk of nationalization has kept investors wary of South Africa, with higher taxes and royalties still issues.

Opportunities

• Don Coxe, in his latest edition of Basis Points, urges gold investors to invest in gold equities at the expense of bullion ETFs as the Fed continues its policy of nonstop money at zero rates.  Likewise, David Rosenberg, of Gluskin Sheff, notes the Fed policy of currency debasement means that, in his opinion, exposure to gold and gold mining stocks in a portfolio is an absolute necessity.
• In a recent issue of Market Musings & Data Deciphering, David Rosenberg highlighted the Fed policy of keeping interest rates low with the potential for more quantitative easing to come, coupled with the current back-door QE program in the eurozone as being very constructive for gold.
• Rosenberg suggested investors would be more highly rewarded if they bought gold mining stocks versus gold bullion.  He also noted that, historically, gold mining equities tend to dramatically outperform bullion in the later stage of a gold bull market.

Threats

• The Fed policy of extending low interest rates is making life much more difficult for insurance companies and pension funds that manage long-term liabilities and for retirees seeking income from their investments.  Corporations are keeping high cash balances, partly due to uncertainty over future tax policy. Perhaps some of the reserves will be needed to fund pension plan deficits, which rose more than 50 percent in 2011.
• Newmont Mining noted in its recent regulatory filing with the SEC that its Hope Bay project in the far north of Canada will be subject to impairment testing.  Back in 2007 when gold prices were trading around $800, Newmont paid $1.5 billion for a 55 million ton resource that is estimated to contain 10.1 million ounces of gold. This works out to a resource grade of 5.69 grams per ton of gold. Today gold has doubled in price, but apparently there is some concern that the $900 million in estimated capital requirements to build the project may escalate beyond where the project’s returns would not be robust enough to take the risks.
• Equity issuance has been heavy recently.  Detour Gold raised about $240 million in the prior week, while NovaGold raised as much as $333 million this week, diluting current shareholders by more than 10 percent.  While the NovaGold financing represents only a small fraction of the additional $6.7 billion it will need, financing of this magnitude cumulatively takes some of the momentum out of the market.

Tags: Anc Youth League, David Rosenberg, Don Coxe, Gluskin Sheff, Gold Bugs, Gold Equities, Gold Imports, Gold Investors, Gold Market, Gold Production, gold stocks, Holiday In China, Investment Choices, Lunar New Year, Malema, Market Radar, Nyse Arca, Political Momentum, Preferred Investment, Zero Rates
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AdvisorAnalyst’s Top 15 Stories of November 2011

Tuesday, November 29th, 2011

1. Mark Holowesko: “Right Now the Opportunities for Investors are Fantastic”
2. Special Report on Merits of Dividend Investing (Lewenza)
3. Hugh Hendry: Irony and Paradox Figure Large in 2011-2012 Outlook
4. Bonds Beat Stocks Over Past 30 Years: First Time Since Civil War
5. Exiting Chinese a Force in Canadian Real Estate
6. Don Coxe: Investment Recommendations (November 2011)
7. Dennis Gartman: Investment Outlook (Late November 2011)
8. Bob Janjuah: Germany Will Walk and the S&P Will Undershoot to 700 in 2012
9. Sprott: Investment Outlook November 2011
10. Jim Rogers: Greek Bailout may be Prelude to EU Zone Collapse, plus News and Views
11. Leading Economic Indicators: Full Steam Ahead
12. Bill Gross: Investment Outlook (November 2011)
13. David Rosenberg (In Depth): Are We in a Recession?
14. Barclays Says Italy is Finished, Mathematically Beyond Point of No Return
15. To Save the Euro, We Must Destroy Germany

Tags: Bailout, Barclays, Bill Gross, Collapse, David Rosenberg, Dennis Gartman, Don Coxe, Exiting, Gross Investment, Hugh Hendry, Investment Outlook, Investment Recommendations, Jim Rogers, Late November, Leading Economic Indicators, News And Views, Point Of No Return, Prelude, Recession, Sprott
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Don Coxe: Investment Recommendations (November 2011)

Thursday, November 24th, 2011

In his latest Basic Points, “It’s the Economy Banks, Stupid!,” dated November 18, 2011, Donald Coxe, Coxe Advisors LLP, makes the following recommendations, in the context of the full body of the issue. Here they are, Don Coxe’s investment strategy recommendations, in summary, paraphrased:

2. Investors in European bonds  should scale back their exposure to euro-denominated bonds, and companies should try to raise money and/or borrow in euros. The euro is on its way down to much lower levels.

3. Trim positions in non-Canadian bank stocks to minimiums. ‘B5′ bank stocks seem to be cheap, when they may indeed be greatly overvalued. Dexia’s troubles are not exclusive – Remember the ‘cockroach’ principle.

4. Build positions in high-quality “bullet-proof” dividend-paying stocks. We don’t mean utilities, which represent some of the more obvious high yielding stocks – though owning these as part of a overall equity portfolio strategy is appropriate. By bullet-proof, we mean the high quality dividend-paying equities of financially strong, well-managed companies focused on delivering total return to shareholders by providing dividend growth in the context of sustainably rising profits.

5. Recession risk is not the important ball to keep an eye on, when considering endogenous risk to major equity indices; banking/bank risks are. The next recession is more likely to be mild compared to that of 2008, on account of interest rates remaining near zero percent.

6. Most central banks have lost pride in their own currency. As a group, they are competing with each other, in the ‘race to the bottom,’ the goal being to see whose is the most competitive. Outside of the global Depression, this course of events is without precedent, and inflation risks are escalating.

7. Replace overvalued government bonds with high-quality corporate bonds, in bond portfolios. Ignore the Capital Asset Pricing Model.

8. If the eurozone takes tough and dramatic policy changes to end the terminal struggling and/or sinking of bank stocks, there may be a buying opportunity for non-financial equities ‘surprisingly’ soon. Keep some cash available, be prepared, and be on the lookout for a opening in the market, in the midst of a flurry of sea changes in Europe. Soaring bank stocks too would be a sign.

9. The chance of an attack on Iran’s nuclear facility is unlikely, however, global, critical, pressure on Israel may make those in its government to move forward on its own accord, in spite of those countries who have never had a true relationship with Israel. Most of the great oil companies’ shares are cheap anyway, so you get the insurance against a raid for free. Keep good exposure to to oil stocks, but don’t speculate on an airstrike.

10. We continue to recommend that its better to invest in oil producing companies as compared to investing in shale gas companies. It remains to be seen what the political outcome/risk – though still remote – over this development will be.

11. Our favourites continue to be the Canadian oil sands stocks, since they have achieved our two most important criteria: they are long duration reserves, and they’re location is low risk, politically speaking. Political (activist) enemies of the U.S. will go to great lengths to constrain their output, and have a President who seems to be more concerned about pleasing them, rather than the oil industry – whom is his main ‘whipping boy,’ as he idealistically promotes ‘Green Energy.’

Canada needs to realize that the folks in Washington D.C.’s inner circle do not feel the same way about its friendship with the U.S., and to take on new initiatives regarding pipelines and other export strategies. Until then, institutional investors who have holdings in oils sands stocks can expect to continue to be unfairly roughed up in discussions with their green clients.

Source: Donald Coxe, Basic Points, November 18, 2011

Tags: agricultural, Agricultural Commodity, Bank stocks, Bullet Proof, Central Banks, Cockroach, Commodity Stocks, Dividend Growth, Dividend Paying Stocks, Don Coxe, Donald Coxe, Equity Portfolios, Global Depression, High Yielding Stocks, Inflation Risks, Investment Recommendations, Investment Strategy, Oil Sands, Portfolio Strategy, Precious Metal, Quality Bullet, Race To The Bottom, Recession, Shale
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Gold Market Cheat Sheet (October 3, 2011)

Sunday, October 2nd, 2011

Gold Market Cheat Sheet (October 3, 2011)

For the week, spot gold closed at $1,623.97, down $32.83 per ounce, or 1.98 percent. Gold stocks, as measured by the NYSE Arca Golds BUGS Index, fell 2.21 percent. The U.S. Trade-Weighted Dollar Index rose 0.33 percent for the week.

Strengths

• AngloGold’s chief executive announced this week that the company will be investing $250 million each year in Brazil through to 2016 to raise its Brazilian output of the precious metal by two thirds. Relative to its Latin American neighbors, Brazil has not targeted the mining sector as an “enhanced” revenue opportunity for the government.
• While gold mining in Australia is the country’s third-largest resource export, the minority-led government said that broadening the controversial profits-based tax on coal and iron ore miners was not going to be expanded to include the gold industry. The 30 percent tax on mining profits is estimated to generate $8.2 billion in its first two years from July 1, 2012, helping the budget return to surplus which is laden with unfunded government pension benefits. The tax legislation was designed to shift government liabilities to China via a resource tax on exports which are primarily heading to the Chinese market.
• Don Coxe, a global portfolio strategist, highlighted as his investment recommendations to maintain heavy weighting in precious metals, particularly through gold mining companies. He pointed out that gold mines are the cheapest relative to bullion that the market has ever seen.

Weaknesses

• Senior gold mining companies, while down about 2 percent for the week, outpaced the junior gold and silver mining companies which were down 5 percent. While we had one acquisition announced in the gold space last week, there was only one new acquisition proposed by the close of the this week by a Chinese company for a copper company in the Democratic Republic of Congo.
• Peruvian President Ollanta Humala signed into law higher mining taxes and royalties, while Cabinet Chief Salomon Lerner told a news conference that the Humala Administration has no plans to ask other industries to pay more taxes. Miners will now pay 1 to 12 percent royalties of operating profits, in addition to a windfall profits tax ranging from 2 to 8.4 percent of net profits, with the goal of increasing tax revenue during the mining boom years. Previous to this, miners were paying royalties between 1 and 3 percent. However, new labor actions this week in Peru may signal that unions are still not satisfied and we may have not seen the end of this hot issue yet.
• Mineweb reported that the Shanghai Gold Exchange will raise trading margins for gold and silver forward contracts from September 30 temporarily to prevent default risks, ahead of the week-long national holiday. Gold and forward-contract margins would be increased from 15 percent to 20 percent and from 18 percent to 22 percent, respectively. Daily upward and downward trade limits would be raised to 18 percent from 12 percent. Margin requirements would return to original levels on October 11 should there not be any breach on the upward or downward limits on the first day of trading on October 10.

Opportunities

• Jeff Nichols, Managing Director of American Precious Metals Advisors, has said that the “summer run-up in the gold price was too far too fast” but continues to feel that fundamentals still support much higher prices ahead. Nichols noted that from the September 6 all-time high of $1,923 per ounce, to the September 23 gold price of $1,628 per ounce, we have only seen a decline of 15 percent, which is well within normal corrections for the precious metal. He pointed out it is not unusual for gold prices to correct by 10, 15 or 20 percent after a run-up similar to what we have recently experienced.
• Gold traded down, touching the 150-day moving average on Thursday, and bouncing off that to close on Friday with an uptick. Gold now appears to be returning to the upward pattern that we have seen steadily over the past five years. In light of the fact that the European and U.S. debt problems are not going to be sorted out next Monday, gold should find renewed support at these levels.
• In addition, gold mining stocks have fallen back. European-based funds in the resource space are thought to be experiencing redemptions, which may be part of the issue, as junior-tiered mining companies have been pushed lower due to a distressed seller being in the market.

Threats

• Professor Dick Stacey of the School of Mining Engineering at the University of Wits in South Africa emphasized that there is a fall off in South African mining research. Twenty years ago, there were 600 to 800 people involved in full-time mining research in South Africa. “If there are 40, it’s a lot,” he said. He went on to say that despite an absolute demand for rock mechanics in mining, there is a major Western shortage. This is poised to further worsen as well.
• Roubini Global Economics published a piece questioning whether or not the Indian and Chinese festivals will provide support for the plummeting gold prices. Gold fell 16.7 percent between August 25 and September 26. The decline was attributed to profit-taking to cover losses in other asset classes, Chicago Merchant Exchange (CME) margin hikes, disappointment in the Fed’s Operation-Twist-like bond restructuring program and concern around further rounds of quantitative easing not materializing.
• Michael Sata was sworn in as President of Zambia in a tightly contested election. Mr. Sata has promised to re-introduce the windfall mining tax and to promote policies that will bring greater benefit to poor people. Currently mining in Zambia, Africa’s top producer of copper, contributes 11 percent of GDP and the country aims to double the contribution by 2015.

Tags: Brazil, Copper Company, Democratic Republic Of Congo, Don Coxe, Global Portfolio, Gold, Gold Industry, Gold Market, Gold Mines, Gold Mining Companies, Gold Mining In Australia, gold stocks, India, Junior Gold, Latin American Neighbors, Nyse Arca, Ollanta, Peruvian President, Portfolio Strategist, Republic Of Congo, Silver Mining Companies, Spot Gold, Tax Legislation
Posted in Brazil, Gold, India, Markets | Comments Off

How to Find Opportunities from Blood, Debt & Fears

Monday, September 5th, 2011

How to Find Opportunities from Blood, Debt & Fears

By Frank Holmes, CEO and Chief Investment Officer
U.S. Global Investors

My long-time friend and mentor Seymour Schulich forwarded an email to me that puts today’s U.S. government debt mountain startlingly into context. By removing several zeros, one can place the debt situation in terms we all can understand—that of a family’s income and expenses.

A family who takes in an annual income of $21,700 but spends $38,200 will soon be in dire straights. The large outstanding balance on the credit card only exacerbates the situation. Clearly, spending cuts need to be made, but eliminating only $385 from the family’s budget would be a drop in the bucket. Either a substantially higher amount of income needs to be made, or the family will have to learn to live with less.

Of course, the fiscal situation is more complicated when it comes to a “family” of 311 million. It is only one part of a large conundrum for the global economy.

Gold is “Sole Beneficiary” in this Economy

Don Coxe, global portfolio strategist, points to the Shanghai Composite Index and Bombay Sensex which are currently at one-year lows, indicating that investors are not feeling confident even in these relatively strong markets where GDP is growing. In this environment, Coxe believes gold is the “sole beneficiary.”

We’ve discussed several times that another driver of gold prices has been real interest rates. Take a look at the chart from Gold Stock Analyst (GSA) depicting the price of gold going back to 1968. In each case when real rates (calculated by subtracted the 12-month moving average of the year-over-year change of CPI from the 12-month moving average of the 3-month Treasury bill) went negative—in the 1970s, the first years of the new decade, and off and on from 2008 until now—gold has had a dramatic rise in price.

A negative real interest rate means that a hypothetical $100 investment in a T-bill is worth, for example, $98.90 a year later, i.e. you’ve lost purchasing power. Investors seeking yield have fled to gold in these instances.

Conversely, when interest rates turned positive in the 1980s, gold trended downward for the next 20 years.

Despite gold’s dramatic bull run over the last 10 years, the yellow metal is only twice as high as its 1980 price. In comparison to other economic yardsticks since 1980, this is miniscule. Ian McAvity, editor of Deliberations on World Markets, says that federal debt, the S&P 500 Index and even GDP has grown much faster than gold over that same timeframe.

The gross U.S. federal debt of $14.3 trillion is 17 times its 1980 level. In 1980, the S&P 500 was at 105; today, it trades around 1,100. A gold price of $1,808 seems paltry as it is only 2.5 times the 1980 high of $738.

McAvity extrapolates the relative growth rate of the yellow metal, indicating that if gold doubled from its current high, it “would nearly ‘catch up’ to GDP, while it might take a quadruple to match the S&P, or even a six-fold gain from here to catch the growth of debt.” Multiplying the largest of these figures by the current price of gold means prices could theoretically go to $10,800. By these standards, gold is hardly a bubble.

Gold these days has become so “legitimized,” helped by negative real interest rates, that the metal now directly competes with stocks for a share of investors’ portfolios, says the GSA. We applaud this development, as we have always thought investors should allocate a small portion of their portfolio to gold. However, we argue that a gold ETF is not always a wise choice, particularly when it is treated as a short-term trade, like a stock.

Tags: 3 Month Treasury Bill, Blood Debt, Bombay Sensex, Bonds, Chief Investment Officer, Commodities, Debt Situation, Don Coxe, Dramatic Rise, Fiscal Situation, Frank Holmes, Global Portfolio, Gold, Gold Prices, Gold Stock Analyst, Long Time Friend, New Decade, Portfolio Strategist, Price Of Gold, Real Interest Rate, Shanghai Composite Index, Sole Beneficiary, U S Global Investors
Posted in Bonds, Brazil, Commodities, ETFs, Gold, Markets | Comments Off

Top 20 AdvisorAnalyst.com Stories in May-June 2011

Wednesday, June 15th, 2011

Here are this month’s top 20 stories during May-June, according to you.

1. Inside Donald Trump’s Sleazy Empire
   
2. Bill Gross: Investment Outlook (May 2011)
   
3. Don Coxe: Investment Recommendations (May 26, 2011)
   
4. Breakdown: Commodities Tumble for Good? (Sonders)
   
5. Bill Gross: Investment Outlook (June 2011)
   
6. Niels Jensen: Investment Outlook (May 2011)
   
7. Jeremy Grantham: Time To Be Serious (and probably too early) Once Again
   
8. Howard Marks: “How Quickly They Forget”
   
9. Prepare for a Fed Hike… in 2018. So Says Goldman Sachs?
   
10. Mobius Says “Financial Crisis Around the Corner”
    
11. Jim Rogers: “Bernanke Is A Disaster” Who Will “Bring QE Back”
    
12. Does Unreal GDP Drive Our Policy Choices? (Arnott)
    
13. Stocks Aren’t Necessarily Best for the Long Run
    
14. Why Jim Rogers is Bullish Gold
    
15. Goldman: “QE 3 Optimism Is Excessive”
    
16. Bill Gross: “No QE 3″
    
17. Efficient Markets? (Saut)
    
18. John Taylor: “The Nice Risk Rally Since The First Half Of 2009 Is Ending” And Will Be Replaced By A “Scary Descent”
    
19. David Tepper Tells CNBC QE3 Will Come Only if Stock Market Falls Substantially
    
20. “The Big Interview” – Jim Rogers on debt, China, energy and gold

Tags: Arnott, Bernanke, Bill Gross, China Energy, Cnbc, Commodities, David Tepper, Don Coxe, Donald Trump, Financial Crisis, Goldman Sachs, Gross Investment, Investment Outlook, Investment Recommendations, Jeremy Grantham, Jim Rogers, Mobius, Niels Jensen, Policy Choices, Qe, Qe3
Posted in Commodities, Markets | Comments Off

Top 15 Stories of April 2011

Thursday, April 21st, 2011

Here are AdvisorAnalyst.com’s top 15 stories during the last 31 days, according to YOU.

1. Don Coxe’s Investment Recommendations (April 2011)
2. Bill Gross: Investment Outlook (April 2011)
3. 10 Worst Foods For Your Stomach, and other Weekend Reads
4. Canada’s Mortgage Monster
5. Canada’s Demographic Time-Bomb
6. PIMCO Prepares for Global Inflation, Sees QE3 if Economy Sputters
7. Hugh Hendry: Why Monetization Will Continue
8. Jim Rogers Comments on Triple Digit Silver, Issues Warning Parabolic Moves Always Collapse
9. The Biggest Urban Legend in Finance (Arnott)
10. David Sokol: “This is why I am resigning from Berkshire Hathaway”
11. Why High Oil Prices Are Likely Here to Stay
12. How Men Can Be Wise About Women, and other Weekend Reads
13. Did Goldman Sachs Lie
14. Bond Guru Bets Against PIMCO’s Bill Gross, and Post-QE2 Conventional Wisdom
15. Goldman’s Magnum Opus on the Economic Impact from Japan’s Earthquake

Tags: Arnott, Berkshire Hathaway, Bill Gross, Canadian Market, Conventional Wisdom, David Sokol, Demographic Time Bomb, Don Coxe, Gold, Goldman Sachs, Gross Investment, Hugh Hendry, Investment Outlook, Investment Recommendations, Jim Rogers, Magnum Opus, Monster Canada, Oil Prices, Parabolic, PIMCO, Qe2, Worst Foods
Posted in Canadian Market, Energy & Natural Resources, Gold, Markets, Oil and Gas, Outlook, Silver | Comments Off

Gold Market Diary (August 16, 2010)

Saturday, August 14th, 2010

Gold Market Diary (August 16, 2010)

For the week, spot gold closed at $1215 per ounce, up $10, or less than 1 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, declined 1.76 percent. The U.S. Trade-Weighted Dollar Index gained 3.15 percent on the week.

Strengths

• “The U.S. is in an untenable position – between a rock and a hard place – in an inescapable debt trap – where the options are, at best, dire – either hyperinflation or a deflationary depression. It would seem all that we can do is ride out the storm in a boat laden with gold,” Jeff Nielson from Bullion Bulls Canada recently said.
• Following China’s move last week, India’s central bank is mulling a proposal to allow banks to trade in gold. If cleared, the move will only strengthen the bullish case for gold.
• Don Coxe noted “the gold story has been around for millennia, but is now attracting investment for thoroughly modern reasons. This month, we advance that none of the three major tradeable currencies will regain its role as a prized store of value. Gold is moving from the shadows, where economists and politicians had consigned it, to center stage.”

Weaknesses

• China’s largest gold producing city halted output after a mine fire killed 16 workers. The fire is the latest in a series of Chinese mining accidents that left 61 people dead this month.
• The investment attractiveness of mining jurisdictions in Australia has suffered a large fall in rankings due to government regulation an annual survey from Fraser Institutes shows.
• Gold output in South Africa fell 5.3 percent in volume terms and total mineral production dropped 4.9 percent in June compared with the same month last year.

Opportunities

• Analysts forecast that the takeover deal announced by a major mining company could nudge other big miners looking to replace reserves back into the market. This means they could be more involved in merger and acquisitions.
• Jeff Nichols, MD of American Precious Metals Advisors, said fundamentals pushing gold higher are going to be operating for several years but the market will remain volatile. He told MineWeb “the market will remain volatile with big corrections like we’ve seen the past weeks and periods of consolidation. So how fast we move up remains a question but the directions and the magnitude are assured.”
• The annual rate of growth of gold spending in China has been 23 percent this decade and the nation’s gold purchases could see an additional 200 tonnes of consumption in the next decade.

Threats

• Numbers from seven of the world’s largest gold diggers show that gold miners are in the money but face headwinds in rising costs and scarce pure gold opportunities.
• The San Francisco Fed, who correctly talked about deflation risks last April and was the first Fed bank to discuss recession risks back in 2007, published a report experimenting with the components of the Conference Board’s Leading Economic Indicator Index and concluded that the odds of a recession at some point in the next two years are slightly below 50-50 that the economy slips into recession.

Tags: Canadian Market, China, Debt Trap, Deflationary Depression, Dollar Index, Don Coxe, Gold, Gold Bullion, Gold Equities, Gold Market, Gold Output, Gold Story, India, Investment Attractiveness, Jeff Nichols, Market Diary, Merger And Acquisitions, Mineral Production, Nichols Md, Philadelphia Gold, Silver, Silver Index, Spot Gold, Takeover Deal, Untenable Position, Volume Terms
Posted in Gold, India, Markets, Silver | Comments Off

Don Coxe Dissects Gold, As “The Oldest-Established Store Of Value Moves To Center Stage”

Monday, June 21st, 2010

From Don Coxe of BMO, Basic Points – Summer’s Storms and Norms

The Oldest-Established Store of Value Moves to Center Stage

Who needs gold?

Over the decade that we have been advocating exposure to gold and gold mining stocks, we have been routinely subjected to basic skepticism: why gold? Isn’t it irrelevant?

If the dollar doesn’t look good, I can buy the yen.

If the yen looks bad, I can buy the euro.

Besides, what good is gold? Other commodities are useful and, in most cases, absolutely necessary.

But gold hasn’t been needed for central banking for nearly a century, and, apart from jewelry or for providing Mafiosi with a convenient vehicle for storing their wealth, it doesn’t fulfill any purpose that sound paper money can’t do better. (This, of course, assumes the availability of sound paper money.)

In answering a question about gold’s rather dramatic return to store of value status with the portfolio managers of one of Canada’s largest public sector pension plans, we took a new tack:

“The longest-established text-based religion in the West is about the God of Jacob—His works and His worship. For roughly five thousand years, a believer summed up his credo by saying, ‘I believe in God.’

“But when this credo arrived, it had to share space with an alternative belief system that was around for thousands of years before the Judaeo-Christian era began. A believer in this system summed it up, ‘I believe in Gold.’”

Two systems—similar professions of faith. Neither could prove to a skeptical rationalist why its tenet was valid.

As we have thought about this space-sharing and competition between spiritual and temporal beliefs, we have mused that large-scale skepticism about both of them occurred only recently. Darwinism, paleontology, and astrophysics combined to drive the Old Testament explanation of history out of the temples of scientific learning. Keynesianism came along to drive gold from the temples of the central bank money-changers in favor of the printed paper promises of politicians.

Why is gold back among serious, respectable investors?

Why is it now available through ATMs in the gold market of Abu Dhabi?

Is it a return of inflation?

How could that be, when, as the wise David Rosenberg routinely scoffs, “What inflation?”

Indeed, Canada reported its first negative CPI in 44 years, the US, its biggest decline in 18 months, and across the OECD there is, (at least for now), more fear of deflation than inflation. Despite astonishingly high housing subsidies that are swelling the already-bloated US national debt, US home prices remain soft, and foreclosure is not only no longer a disgrace—it threatens to become almost chic. (A recent poll of homeowners disclosed that 55% of those with mortgaged homes believed their house was worth less than their mortgage.) Not all the news is bad: The cost of TARP has turned out to be far less than feared: the cost of saving the US from house price collapses on a scale that would unleash a Depression—including the mind-boggling costs for keeping
Fannie, Freddie and the Federal Home Loan Bank alive and lending, and the various cash subsidies to buyers—is many orders of magnitude above the Wall Street bailouts.

If the only thing keeping house prices from collapse is a boost in the national debt bigger than the total cost of all the US’s foreign wars since World War II, then how can inflation be a threat?

Continue Reading Here.

Tags: Astrophysics, Belief System, BMO, Canadian Market, Center Stage, Central Banking, Christian Era, Commodities, Darwinism, David Rosenberg, Don Coxe, Dramatic Return, Gold, Gold Commodities, Gold Mining Stocks, Judaeo, Mafiosi, Old Testament, Paleontology, Paper Money, Pension Plans, Portfolio Managers, Rationalist, Religion In The West, Skepticism
Posted in Canadian Market, Commodities, Gold, Markets | Comments Off

Donald Coxe: $1,100 Gold is a Warning Sign

Friday, November 13th, 2009

In his November 6, 2009 weekly conference call, Don Coxe of Coxe Advisors discussed gold, the economy and commodities.

Coxe says that there are a host of reasons for the recent outperformance of gold, the least of which is the crumbling dollar. As long as interest rates are at zero, the carry trade in the US dollar will continue to flush liquidity into the markets and into gold, and as that involves shorting the dollar the dollar will continue to slump.

It also means that all assets could blow off together should there be any reversal in monetary policy resulting in a rate hike. That may still be a while coming as central bankers have stated a willingness to wait until next summer to revisit rates.

On a supportive note for gold, India and Sri Lanka have bought much of the IMF’s 430-tonne overhang of gold inventory, and China is said to be buying the rest.

However, Coxe says, don’t be fooled by the fact that gold and equities are doing well at the same time. The rise and outperformance in gold is also due to the appetite of large investors betting on long term prospects for inflation, now.

Good economic news from around the world last week, as well as promising news from the US, is a serious threat to the economy, the market. We had very positive news, for example, coming from India and China that growth would be better than expected, and their commodity demand continues to be sustainable. In the US, while capacity utilization still remains slack, wage demands have remained stable. Unemployment in the 10% range may be understated by the BLS though because of the way they account for part-time employment, says Coxe. Do-over economists have stated that unemployment could be 16-20%. The BLS has quietly said that there could be inflation in food prices.

Coxe said, “Those of us who accept David Dodge’s view that this has been a rebound, and not yet a recovery; a rebound from a dramatically oversold territory where it looked liked the world was coming to an end, to some optimism that things were going to get better, and pricing in how good things would be, then what it does, is put enormous pressure on central banks not to feed inflationary fears.”

“What we learned from the 70s, is once the inflationary fears start to work into peoples decisions, then all sorts of non-economic decisions are made which makes the inflation forces develop a life of their own. Specifically, changes in inventory policies, such as people buying now, rather than later, because they expect the price to go up, those kinds of things.”

“One of the things central bankers learned is that they must move before the surveys of inflation expectations start to show a sustained rise. Its when people predict that there’s nowhere for inflation to go but up, and its going up, that then its very difficult to hold off the inflation that occurs. What you have to do then [central banks] is dramatically raise rates.”

“So, we’ve seen those go past 20% in the US before, and those inflation expectations got crushed, and in the process the economy got crushed too.”

Good economic news from around the world, and domestically is actually bad news for investors and for the economy, as it means that we could end up in a situation similar to the mid-1970s when we had high unemployment coupled with interest rate hikes. If interest rates remain zero for too long, then the problem may end up being bubble-like economic conditions artificially enhanced by zero interest dollars, and could cause a central bank move swiftly, then, to reign in overheated conditions.

$1,100 gold is a sign that this could be happening. Coxe says that if commodity demand continues to strengthen and wage demands prove to be stickier than expected, the combination could be very bad as it would intensify inflation, and cause policymakers to raise rates at a time when there is high unemployment. That will choke off the fragile recovery and it will choke off the easy money.

Either way, Coxe says that you want to be in gold. You’re better off in gold has it will hold its value better than other “risk” assets. $1,100 gold is a warning sign; not a sign of a really good bullish environment to be investing in. Coxe finishes by saying, “Its the outperformance of gold that should give investors pause.”

Coxe goes out of his way to make sure he’s understood that commodity ETFs that invest in commodity futures are not a effective way to partake in the commodity trade, because of contango/backwardation effects. One way to go, and he makes his disclosures, as advisors is to the way of Coxe Commodity Strategy Fund, and otherwise, via the stocks of the commodities producers as he has discussed on a regular basis in the past.

Coxe also discussed crops, saying that while the warmer November weather was good for farmers, and crop prices came off as a result, they still had not accounted for crop blight.

Tags: Bank Move, Bls, Capacity Utilization, Carry Trade, China, Commodities, Conference Call, David Dodge, Don Coxe, Donald Coxe, Economic Conditions, Economic News, Emerging Markets, ETF, ETFs, Food prices, Gold, Imf, India, Interest Rate Hikes, liquidity, Mid 1970s, Monetary Policy, Outperformance, Overhang, Part Time Employment, Positive News, Rate Hike, Term Prospects, Wage Demands, Warning Sign
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