By Alf Field
Oct 29 2007 3:15PM
http://www.kitco.com
There is often a moment in a major market move where public perceptions of the item suddenly change and the feeling is something like: “Yup, this REALLY is a bull market!” or “Yup, this REALLY is a bear market!” This is sometime called the “Point of Recognition”.
Gold and the US Dollar seem to be experiencing something of this nature right now, except that gold is being recognised as being in a bull market and the US Dollar as being in a bear market. The Point of Recognition generally occurs about midway through a major move and is a useful guide as to the remaining length of the move underway.
Very often the Point of Recognition is seen as a large gap on the chart of the item.
Data updated to 26 Oct 2007.
In this chart of the Comex Gold price, a gap occurred Friday 26 October 2007 and with gold trading in Asia at around $790 in morning trade on Monday 29 Oct 2007, another gap may be formed in USA trading today (29 Oct 2007).
There is little doubt that the perception of gold has changed in the past week and one can sense the new sentiment of “Yup, this is REALLY a bull market” has emerged in the market place.
If we saw the midway gap on Friday 26 Oct 2007 at $777 on the Gold Comex Futures, we can estimate that the current up move should take the gold price to around $900 without any significant corrections on the way. This is calculated by deducting the starting point of the move at $647 from $777, giving a figure of $130. When $130 is added to the midway point of $777, we get a target of $907.
There are still sceptics around, people pointing to sentiment indicators that suggest that gold is over-bought. Numbers such as 92% bulls are suggested as a reason why the gold market should turn around and correct.
The fact is that in a real bull market, sentiment numbers can (and often do) remain extremely extended for considerable periods of time. People who rely on these over-bought/over-sold indicators may find that they miss a major opportunity or, worse still, suffer burnt fingers.
Perhaps a more reliable indicator of the level of interest and bullishness in the gold market can be gleaned from the following record of web site traffic for www.Kitco.com, which has been defined by alexa.com as the No. 1 site for visitors interested in the gold price.
The chart above covers the past 5 years. The peaks in activity in late 2003 and in May 2006 coincided precisely with major frothy interim peaks in the precious metal markets from which lengthy corrections followed.
What is obvious from this chart is that activity on the Kitco.com site is very near to a 5 year low! This certainly does not suggest that the gold market is anywhere near over heating.
Other gold web sites are also reporting 5 year low points in web traffic.
Some of this decline may be related to overall web traffic increasing while gold related traffic has remained static. This has the same implication – there is no sign of speculative excesses in the precious metal markets.
The Point of Recognition appears to have come about due to an increasing awareness of the economic crisis that has developed and the safe haven properties of precious metals. The world is facing a truly unprecedented series of global events, the consequences of which will represent the single most important factor impacting investment decisions from now onwards.
We cannot understand the present or make practical, useful, forecasts without knowing where we have come from. Some historical detail is imperative. The following few paragraphs are extracted from an article by Richard Duncan in the September issue of FinanceAsia and they explain the historical perspective succinctly and extremely well:
Flaws in The Dollar Standard
The Dollar Standard is the most appropriate name for the international monetary system that evolved following the collapse of the Bretton Woods System in the early 1970s. The principal flaw in The Dollar Standard is that it has no mechanism to prevent large and persistent trade imbalances between countries. Consequently, the deterioration in the United States’ current account deficit has gone unchecked, recently reaching nearly 7% of US GDP.
The countries with a trade surplus with the United States have been blown into economic bubbles. Japan in the 1980s, the Asia Crisis countries in the 1990s, and China today are examples. Moreover, as the central banks of the United States’ trading partners have reinvested their dollar surpluses back into US dollar assets, the United States itself has also been blown into a bubble. In short, the US current account deficit has destabilized the global economy. That was the theme of my book, The Dollar Crisis: Causes, Consequences, Cures (John Wiley & Sons, 2003, updated 2005).
Before the breakdown of the Bretton Woods International Monetary System, international trade balanced. Subsequently, however, the gap between what the United States bought from the rest of the world and what the rest of the world bought from the United States began to steadily expand.
Under a Gold Standard, or the quasi gold standard Bretton Woods system, such large trade deficits would not have been sustainable since the US would have had to pay for its deficits out of its limited supply of gold reserves. However, the willingness of the United States’ trading partners to accept payment in dollars instead of gold meant there were effectively no limits as to how large the US trade deficits could become. This vendor financing arrangement allowed much more rapid economic growth around the world than would have been possible otherwise. The larger the US current account deficit became, the more the United States’ trading partners benefited.
When the foreign companies selling product in the United States took their dollar earnings home and converted them into their own currencies, it put upward pressure on those currencies. The central banks of those countries intervened to prevent their currencies from appreciating so as to preserve their trade advantage. They intervened by creating money and buying the dollars entering their countries. In this way, the exporters were able to keep their export earnings in their domestic currency and the central banks accumulated large foreign exchange reserves.
As the US current account deficit grew larger, central banks created more and more money and intervened on a greater and greater scale each year. In fact, total foreign exchange reserves have doubled over the past four years.
In other words, during the course of the last four years, foreign exchange reserves have increased by as much (US$ 2.8 trillion) as in all prior centuries combined. The reinvestment of those dollar reserves into US dollar assets fuelled the credit excesses in the United States that culminated in an unsustainable property bubble there.
It is this sequence of events that has created the vast distortions in the world economy, the vast growth in Debt, Deficits, Derivatives and other acronym challenged pieces of paper. The real estate crisis in the USA, combined with illegal and fraudulent practises in the sub-prime market, has resulted in a situation where global credit markets are caught up in a systemic crisis, possibly the worst ever.
The US is caught between a rock and a hrd place. If the Fed does not reduce interest rates, the economy will unravel and massive de-leveraging will occur with devastating consequences. If the Fed does reduce interest rates, the US Dollar will continue to tank, probably at an increasing rate. We already know that the Fed has made its choice. It will abandon the US Dollar and try and save the economy.
Let’s be blunt about it: THE US DOLLAR IS IN A DEATH SPIRAL.
This is already (and will become increasingly more so) the single most important factor to consider in investment decisions.
Those countries that continue to intervene in currency markets to prevent their currencies from appreciating against the US Dollar will cause their currencies to follow the US Dollar into the Death Spiral.
We are facing the end of the US Dollar Standard in world trade.
It is the end of an era that has spanned 36 years and there is no ready-made replacement for the US Dollar as a unit of measurement. The world is facing a period of monetary chaos.
How this will all work out is extremely uncertain.
It is possible that the world is facing a debt implosion and a deflationary crash.
The background factors for that to happen are all in place. Governments, such as the USA and Britain, have indicated that they are not prepared to accept the pain of a deflationary depression and will do whatever they have to do in order to prevent this from happening. They are prepared to sacrifice their currencies and endure a wild ride on inflation - if that is what is required. There appears to be no middle or “muddle-through” path. An ugly, damaging landing of some description seems to be inevitable.
These opposing forces, Deflationary vs Government Intervention, in an era where the US Dollar Standard is rapidly coming unhinged, leads to an expectation of Hyper-Stagflation as the possible economic outcome.
How does one handle the situation from an investment standpoint?
If the deflationary forces do produce a massive collapse despite the Government’s and Fed’s best efforts, the safest and possibly best place to be is in Government Bonds. If it is the Hyper-Stagflation scenario, one would want to be in tangible assets, “store of value” items, of which precious metals will no doubt prove to be the best and safest haven.
As nobody can be absolutely certain as to the how this major crisis will play out, the prudent and conservative policy is to have something in both camps, adjusting the percentages as time goes by when it becomes clearer which of the two outcomes will prevail.
Money is flooding into US Treasury bonds and into gold, silver and oil. It seems that money managers have passed the “Point of Recognition” and are adopting the prudent and conservative policy suggested above.
Alf Field
29 October 2007
Comments to: ajfield@attglobal.net
****
Disclosure and Disclaimer Statement: In the interest of full disclosure, the author advises that he is not a disinterested party in that he has personal investments in gold and silver bullion, as well as gold, silver, uranium and base metal mining shares. The author’s objective in writing this article is to interest potential investors in this subject to the point where they are encouraged to conduct their own further diligent research. Neither the information nor the opinions expressed should be construed as a solicitation to buy or sell any stock, currency or commodity. Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions. The author has neither been paid nor received any other inducement to write this article.
Monday, October 29, 2007
Sunday, October 28, 2007
Gold Stocks -which direction it will go
Gold Stocks - Crucial Information for the Investor - Not All Rosy
By Kenneth J.Gerbino
Oct 26 2007 9:19AM
www.kengerbino.com
The big news globally is that the U.S. Federal Reserve and the Bank of England both threw in the towel on monetary policy to deal with market panics in the last two months. We believe these problems are only the tip of the iceberg of a massive credit and investment bubble that is threatening to unwind. Their only answer is more money and soon more inflation.
In the U.S., the Fed lowered important benchmark interest rates well beyond what was expected and instigated very lenient bank repayment policies for borrowed capital from the Fed. This was not to help the man in the street or to “avoid a recession”. Since unemployment is so low the Fed rate move was obviously made to bail out Wall Street and the major banking institutions. This resulted in the dollar hitting new lows and gold moving higher. These trends are likely to continue. History tells us the truth about the Fed.
In the twenty years before the Fed was created, there were 1,724 bank suspensions, in the twenty years afterwards there were 15,502. By subsidizing and protecting the banks they encourage speculation, overleveraging and excessive credit creation which leads to major banking problems that are then solved at the expense of the general population.
In England the central bank announced that all depositors of Northern Rock, Britain’s 5th largest mortgage bank would have their deposits guaranteed by the government. This was in response to a bank run which had ensued with world press coverage showing thousands of people lining up to withdraw their savings at various branches.In the future this will become a disastrous precedent encouraging more speculation by institutions and investors.
Northern Rock had a $6 billion equity base and had leveraged its balance sheet to $226 billion. I suspect they are not alone and this may not be the last of the bail outs.
These actions are only the beginning of a new round of paper money injections that will surely bring on above average inflation. An excellent study by economist John Williams shows the real inflation rate in the U.S. since 1991 was annually 4% higher than government figures. Financial writer Howie Katz reports adjusting the CPI from 1983 to reflect housing costs as opposed to rents shows U.S. consumer prices have tripled not doubled as reported by the Bureau of Labor statistics.
Gold averaged around $400 in 1983, it is reasonable to triple this price for a future target just based on a simple real CPI formula.
The Dollar
With the dollar at new 40 year lows, it will force Europe and other countries to devalue their currencies. If you are an international business working on 2-3% margins or less and you can now buy your U.S. goods 8% cheaper because of a weak dollar, it is an incentive to do so. This means other countries that depend on exports will not get that business and their governments will respond with competitive devaluations.
Devaluations in the current floating currency environment (where exchange rates change daily in response to supply and demand as well as government intervention can be accomplished by
1) manipulating interest rates lower (which then leads to more money creation by the banking institutions)
or 2) just printing money.
The central banks and the banking establishment in these countries along with the politicians also have a beautiful excuse to print their way out of the fiscal mess they are in because they cannot meet the obligations to their citizens.
This is and always will be bullish for precious metals. This is one reason why precious metal ownership by way of reserves in the ground of mining companies is prudent. Precious metals could be one of the only monetary assets still standing when this excessive global credit and monetary cycle is over.
China and Japan – The Big Currency Misconception
Because of competitive devaluations, already mentioned above, the death of the dollar may not be as fast as some people think. Also one of the big misconceptions that I keep reading about is that China and Japan will soon dump their holdings of dollar denominated Treasuries because they are losing value with the dollar going down.
Not true.
Follow this very carefully.
A million dollars of clothing is exported from China to the U.S.
A million dollars is sent to China.
The Chinese factory owners send the million dollars to the central bank and ask for the equivalent in renminbi so they can pay their workers and suppliers.
No problem so far.
But what does the Chinese central bank do?
They actually create (print) $1 million worth of renminbi and send this off to the factories and keep the original $1 million and buy U.S.Treasuries with it.
The central bank does not have to exchange the dollars for renminbi’s, they can create an additional $1 million worth of renminbi’s.
Since China now has $1 million in local currency they earned for the clothing does the central bank even care if the value of extra $1 million in Treasuries they own goes down by 20% or more.
The answer is no.
China sent $1 million of clothing to the U.S. and now they have $1 million of local currency and $1 million of U.S Treasuries. Easy money.
China now has more money in circulation (M1) than the United States. $1.9 trillion vs. $1.4 trillion. The reason is that they have been double dipping.
In the above example the $1 million they have in Treasuries is all gravy and this is what the Chinese have done the last 10 years and that is why their money supply has mushroomed.
When the time comes they will most likely take the trillions they have in U.S. Treasuries and come back to the U.S. and buy buildings and factories (like the Japanese did in the late 80’s) Spending dollars for dollar denominated assets in the U.S. will have zero effect on the exchange rate. So the argument that these Treasuries are a huge overhang on the U.S. dollar because the Chinese don’t want to lose value is not true. They are so far ahead already it doesn’t matter.
Of course the local citizens will now have to put up with plenty of inflation that is coming to China from all the new money floating around the country.
Gold Demand
High oil prices are flowing huge amounts of money to countries in the mid east that have been historically pro gold and the higher oil goes the more gold will be absorbed by these governments, their financial institutions and investors.
It has been estimated that all the gold in the world ever mined equals 5.3 billion ounces. This has a value of $3.7 trillion. Much of this gold is in woman’s jewelry cases and on men’s wrists or resides in peoples teeth.
Global liquid financial assets are in the hundreds of trillions of dollars and global derivatives are over $450 trillion. Therefore the ratio of gold available for investment is a tiny fraction of the other investment alternatives. When further financial problems arise gold will have to rise when too much money chases too few ounces.
The U.S. Economy – Where’s the Beef?
The U.S economy has been skating on thin ice. Subtracting out the money that people have spent from refinancing their homes, the U.S. economy (GDP) has averaged only one half per cent growth annually for the last six years.
This means we are living in an economy that has been fueled by consumers borrowing home equity money and this has now come to an abrupt end. This, coupled with the underlying problems in our banking system, means the only way out is a loose monetary policy. The overleveraged banking system cannot handle a recession. This unfortunate scenario coupled with more trade and budget deficits will have a positive effect on the gold price and will also contribute to future inflation.
Since 2002 crude materials in the U.S. are up exactly 100%. This is more anecdotal evidence, that the inflation rates in the U.S. will rise substantially in the coming years.
Money Creation Versus Gold
Our survey of the seven largest countries in the world and Europe show that they created $775 billion in new money in the last year. The supply of gold available for investment, outside of jewelry and industrial demand which would include bars, coins and bullion funds was approximately $13 billion. This is a ratio of 60 to 1 and does not include the money creation by the other 175 countries in the world.
The point is that there really is not much annual gold supply around for investment purposes or financial insurance or a money substitute. Sooner or later the price will dramatically reflect this imbalance.
India has increased it’s money supply 15.3% in the last year. This is probably why in the first eight months of 2006, gold imports increased by 86%. India could be on track to consume over 35% of 2007 global mine supply all by itself.
Because mining companies have gold in the ground, their valuations over the next decade are logically bound to increase substantially. These companies provide an outstanding opportunity to own gold in the ground via stock ownership.
Volatility and The Gold Stocks
The recent volatility of the precious metals and the mining shares unfortunately is part of the equation of this investment sector. We attempt to balance these fluctuations in our hedge fund but it is a difficult task and requires focus and discipline.
You should expect volatility with your personal portfolios in the future and realize that volatility in this sector is normal. But, in my opinion, this type of volatility is a small price to pay for the long term trend that is clearly in your favor and the excellent growth and value attributes of a well diversified and hedged portfolio.
The mining sector should continue to be one of the top performing investment sectors in the coming 3-5 year period.
The past actions of the Fed and other central banks mean they will surely do everything they can to avoid a credit and debt implosion that according to many experts could be in the trillions of dollars of potential defaults and bankruptcies.
If this estimate is true then bailing out the institutions that are in danger will require the greatest expansion of paper money in history. The winner will be gold and other natural resources because the more money that is created the higher the prices of basic commodities and monetary substitutes (gold and silver) will go.
Gold mining shares are the beneficiaries of the economic excesses of others.
It is important to be careful of exploration stocks and allocate only a small amount to this sector. The large mining stocks are now being bought by huge non gold savvy hedge funds and will create lots of volatility as we go forward. A stampede by these players either way can be profound. The developmental mining companies with solid resources in the ground and a 1-2 year horizon to production will be targets for buy outs by mid-tier and major mining companies.
Good luck - you are going to need it especially if gold goes to $1,200 and then back down to $700 and then to $2,000, which is very possible in the coming decade.
So always keep a core portfolio as insurance (and long term appreciation) and a trading portfolio that rolls with the punches. Do not go on margin and do not spend much time or money on the exploration stocks as more than likely every share you buy is usually from an insider who is selling.
Also if there ever is a major economic upheaval gold and silver mining companies with known and verified resources in the ground will go up dramatically but exploration companies with nothing but a geologist and promoter’s dreams will go no where because they have nothing in the ground.
Remember that - they have nothing - so be careful.
For more information on the economy, stock market and gold please visit our website at:
http://www.kengerbino.com
Ken Gerbino
26 October 2007
By Kenneth J.Gerbino
Oct 26 2007 9:19AM
www.kengerbino.com
The big news globally is that the U.S. Federal Reserve and the Bank of England both threw in the towel on monetary policy to deal with market panics in the last two months. We believe these problems are only the tip of the iceberg of a massive credit and investment bubble that is threatening to unwind. Their only answer is more money and soon more inflation.
In the U.S., the Fed lowered important benchmark interest rates well beyond what was expected and instigated very lenient bank repayment policies for borrowed capital from the Fed. This was not to help the man in the street or to “avoid a recession”. Since unemployment is so low the Fed rate move was obviously made to bail out Wall Street and the major banking institutions. This resulted in the dollar hitting new lows and gold moving higher. These trends are likely to continue. History tells us the truth about the Fed.
In the twenty years before the Fed was created, there were 1,724 bank suspensions, in the twenty years afterwards there were 15,502. By subsidizing and protecting the banks they encourage speculation, overleveraging and excessive credit creation which leads to major banking problems that are then solved at the expense of the general population.
In England the central bank announced that all depositors of Northern Rock, Britain’s 5th largest mortgage bank would have their deposits guaranteed by the government. This was in response to a bank run which had ensued with world press coverage showing thousands of people lining up to withdraw their savings at various branches.In the future this will become a disastrous precedent encouraging more speculation by institutions and investors.
Northern Rock had a $6 billion equity base and had leveraged its balance sheet to $226 billion. I suspect they are not alone and this may not be the last of the bail outs.
These actions are only the beginning of a new round of paper money injections that will surely bring on above average inflation. An excellent study by economist John Williams shows the real inflation rate in the U.S. since 1991 was annually 4% higher than government figures. Financial writer Howie Katz reports adjusting the CPI from 1983 to reflect housing costs as opposed to rents shows U.S. consumer prices have tripled not doubled as reported by the Bureau of Labor statistics.
Gold averaged around $400 in 1983, it is reasonable to triple this price for a future target just based on a simple real CPI formula.
The Dollar
With the dollar at new 40 year lows, it will force Europe and other countries to devalue their currencies. If you are an international business working on 2-3% margins or less and you can now buy your U.S. goods 8% cheaper because of a weak dollar, it is an incentive to do so. This means other countries that depend on exports will not get that business and their governments will respond with competitive devaluations.
Devaluations in the current floating currency environment (where exchange rates change daily in response to supply and demand as well as government intervention can be accomplished by
1) manipulating interest rates lower (which then leads to more money creation by the banking institutions)
or 2) just printing money.
The central banks and the banking establishment in these countries along with the politicians also have a beautiful excuse to print their way out of the fiscal mess they are in because they cannot meet the obligations to their citizens.
This is and always will be bullish for precious metals. This is one reason why precious metal ownership by way of reserves in the ground of mining companies is prudent. Precious metals could be one of the only monetary assets still standing when this excessive global credit and monetary cycle is over.
China and Japan – The Big Currency Misconception
Because of competitive devaluations, already mentioned above, the death of the dollar may not be as fast as some people think. Also one of the big misconceptions that I keep reading about is that China and Japan will soon dump their holdings of dollar denominated Treasuries because they are losing value with the dollar going down.
Not true.
Follow this very carefully.
A million dollars of clothing is exported from China to the U.S.
A million dollars is sent to China.
The Chinese factory owners send the million dollars to the central bank and ask for the equivalent in renminbi so they can pay their workers and suppliers.
No problem so far.
But what does the Chinese central bank do?
They actually create (print) $1 million worth of renminbi and send this off to the factories and keep the original $1 million and buy U.S.Treasuries with it.
The central bank does not have to exchange the dollars for renminbi’s, they can create an additional $1 million worth of renminbi’s.
Since China now has $1 million in local currency they earned for the clothing does the central bank even care if the value of extra $1 million in Treasuries they own goes down by 20% or more.
The answer is no.
China sent $1 million of clothing to the U.S. and now they have $1 million of local currency and $1 million of U.S Treasuries. Easy money.
China now has more money in circulation (M1) than the United States. $1.9 trillion vs. $1.4 trillion. The reason is that they have been double dipping.
In the above example the $1 million they have in Treasuries is all gravy and this is what the Chinese have done the last 10 years and that is why their money supply has mushroomed.
When the time comes they will most likely take the trillions they have in U.S. Treasuries and come back to the U.S. and buy buildings and factories (like the Japanese did in the late 80’s) Spending dollars for dollar denominated assets in the U.S. will have zero effect on the exchange rate. So the argument that these Treasuries are a huge overhang on the U.S. dollar because the Chinese don’t want to lose value is not true. They are so far ahead already it doesn’t matter.
Of course the local citizens will now have to put up with plenty of inflation that is coming to China from all the new money floating around the country.
Gold Demand
High oil prices are flowing huge amounts of money to countries in the mid east that have been historically pro gold and the higher oil goes the more gold will be absorbed by these governments, their financial institutions and investors.
It has been estimated that all the gold in the world ever mined equals 5.3 billion ounces. This has a value of $3.7 trillion. Much of this gold is in woman’s jewelry cases and on men’s wrists or resides in peoples teeth.
Global liquid financial assets are in the hundreds of trillions of dollars and global derivatives are over $450 trillion. Therefore the ratio of gold available for investment is a tiny fraction of the other investment alternatives. When further financial problems arise gold will have to rise when too much money chases too few ounces.
The U.S. Economy – Where’s the Beef?
The U.S economy has been skating on thin ice. Subtracting out the money that people have spent from refinancing their homes, the U.S. economy (GDP) has averaged only one half per cent growth annually for the last six years.
This means we are living in an economy that has been fueled by consumers borrowing home equity money and this has now come to an abrupt end. This, coupled with the underlying problems in our banking system, means the only way out is a loose monetary policy. The overleveraged banking system cannot handle a recession. This unfortunate scenario coupled with more trade and budget deficits will have a positive effect on the gold price and will also contribute to future inflation.
Since 2002 crude materials in the U.S. are up exactly 100%. This is more anecdotal evidence, that the inflation rates in the U.S. will rise substantially in the coming years.
Money Creation Versus Gold
Our survey of the seven largest countries in the world and Europe show that they created $775 billion in new money in the last year. The supply of gold available for investment, outside of jewelry and industrial demand which would include bars, coins and bullion funds was approximately $13 billion. This is a ratio of 60 to 1 and does not include the money creation by the other 175 countries in the world.
The point is that there really is not much annual gold supply around for investment purposes or financial insurance or a money substitute. Sooner or later the price will dramatically reflect this imbalance.
India has increased it’s money supply 15.3% in the last year. This is probably why in the first eight months of 2006, gold imports increased by 86%. India could be on track to consume over 35% of 2007 global mine supply all by itself.
Because mining companies have gold in the ground, their valuations over the next decade are logically bound to increase substantially. These companies provide an outstanding opportunity to own gold in the ground via stock ownership.
Volatility and The Gold Stocks
The recent volatility of the precious metals and the mining shares unfortunately is part of the equation of this investment sector. We attempt to balance these fluctuations in our hedge fund but it is a difficult task and requires focus and discipline.
You should expect volatility with your personal portfolios in the future and realize that volatility in this sector is normal. But, in my opinion, this type of volatility is a small price to pay for the long term trend that is clearly in your favor and the excellent growth and value attributes of a well diversified and hedged portfolio.
The mining sector should continue to be one of the top performing investment sectors in the coming 3-5 year period.
The past actions of the Fed and other central banks mean they will surely do everything they can to avoid a credit and debt implosion that according to many experts could be in the trillions of dollars of potential defaults and bankruptcies.
If this estimate is true then bailing out the institutions that are in danger will require the greatest expansion of paper money in history. The winner will be gold and other natural resources because the more money that is created the higher the prices of basic commodities and monetary substitutes (gold and silver) will go.
Gold mining shares are the beneficiaries of the economic excesses of others.
It is important to be careful of exploration stocks and allocate only a small amount to this sector. The large mining stocks are now being bought by huge non gold savvy hedge funds and will create lots of volatility as we go forward. A stampede by these players either way can be profound. The developmental mining companies with solid resources in the ground and a 1-2 year horizon to production will be targets for buy outs by mid-tier and major mining companies.
Good luck - you are going to need it especially if gold goes to $1,200 and then back down to $700 and then to $2,000, which is very possible in the coming decade.
So always keep a core portfolio as insurance (and long term appreciation) and a trading portfolio that rolls with the punches. Do not go on margin and do not spend much time or money on the exploration stocks as more than likely every share you buy is usually from an insider who is selling.
Also if there ever is a major economic upheaval gold and silver mining companies with known and verified resources in the ground will go up dramatically but exploration companies with nothing but a geologist and promoter’s dreams will go no where because they have nothing in the ground.
Remember that - they have nothing - so be careful.
For more information on the economy, stock market and gold please visit our website at:
http://www.kengerbino.com
Ken Gerbino
26 October 2007
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