 Gold Mining Stocks: What is Happening Now
Kenneth J. Gerbino
Archives
Kenneth J.
Gerbino & Company
May 4, 2005
There are two parallel markets
happening in gold. If you own the mining stocks you are currently
caught between these two financial forces.
One market is the bullion market
and this is showing steady demand and relatively very solid price
action. The other market is the mining shares and this market
has been in a severe 5 month downtrend. These markets are currently
disconnected. The mining share market is divided into three separate
sectors. It comprises 1) "hot" hedge fund and "hot"
investor money, 2) a regular but small global retail and institutional
market, and 3) the "Canadian mining regulars" (brokers,
market makers, speculators, promoters, gold mutual funds, entrepreneurs,
newsletter writers and their subscribers).
- The first group has come and
gone. When momentum changes this group leaves the party regardless
if they believe inflation or a debt collapse is coming. The U.S.
deficit story, both trade and budget is old and tired news to
this group. For now they are on the sidelines or in biotech or
some other sector. Some did well and some came in late and lost
money. When inflation heats up again or the dollar starts a serious
fall and the mining stocks start a new run, they will be back
in even larger numbers.
.
- The regular retail and institutional
gold mining stock investors with the help of the Internet have
grown in numbers and they have been battered in the last 5 months.
They are probably fully invested and a percentage of this group
who came in late are worried that maybe the inflation crowd is
all wrong or maybe the end of the world crowd is all wrong, whichever
abstraction got them into gold in the first place. More of these
investors will be needed for the next bull phase. The second
wave of these investors will be much larger in the next few years
as the economic and financial problems (debt, deficits and paper
money printing) continue.
.
- The Canadian Regulars have
been through these volatile swings so many times that many of
them have taken some money off the table or made so much in 2002
and 2003, they started to get greedy and overextended themselves.
They will be back in force once the dust settles - and that may
be sooner than later.
As of the end of April, the
sentiment on the mining shares was almost as bad as it can get.
The very negative call-put ratio on the XAU was at April 2003
and April 2004 levels. Both times a very strong and extended
rally took place from those oversold readings. With this kind
of pessimism, the sellers are almost all gone. Everyone that
wanted out of the pool is most likely out already. In fact we
just may have seen a significant low on April 28th.
Let's take a roll call of the
Who's Who of Finance and see where they stand vis-à-vis
gold or concepts that would be conducive for gold going up.
- Paul Volcker: His op-ed
piece in the Washington Post actually stating the "C"
word. He talks about a "financial crisis" possibly
if Washington doesn't get its act together. The title
of his article; An Economy on Thin Ice.
.
- Warren Buffett: The smartest
investor of all time. He is short the dollar.
.
- David Dreman: Famous value
manager who manages $11 billion, recently stated on Bloomberg
"Bonds are almost suicidal.".
.
- Bill Gross: Head of the world's
largest bond management company ($464 billion), has warned of
the dire consequences of U.S. monetary and economic policies.
The above people are not gold
bugs; they are part of the heart and soul of the establishment
of global investments and economics. They know that something
has to give. They know that past and present economic policies
are beyond reason and that a terrible economic accident or a
powerful inflationary period is surely coming to the western
world. Either scenario means gold is going to be a very important
asset class to own - and if gold is good then mining stocks will
be even better.
Inflation in the U.S is 3.5%
and rising. Globally this number is 4.3%. If the inflation numbers
continue then just a small amount of investors buying gold could
have a dramatic effect on the price. With U.S. households time
deposits and savings accounts at $4.3 trillion, it would require
only 1/2 of 1% of this money purchasing gold to create a substantial
(1,574 tonne) demand imbalance (more than half the world's annual
mine supply). Stock ownership, mutual funds and life insurance/pension
reserves of U.S households equals another $20.8 trillion. Again
only a 1/2 of 1% allocation to gold would create a demand that
would be 3x annual mine output.
My investment management firm
monitors 61 foreign countries that report regularly on money
supply statistics. In the last 12 months these 61 foreign countries
have increased their basic money supplies by an average
of 15.2%. Most people with savings in these countries
will try and protect themselves from inflation that is surely
looming and will most likely be buying gold. The Chinese basic
money supply from 1998 has averaged an annual increase
of 13% for 7 solid years. Inflation is coming to China
- and that means plenty of gold buying.
Also if the Chinese revalue
the RMB, the very next day after a 5-10% revaluation (and this
could be very soon) every Chinese saver will be able to go out
and buy 5-10% more gold for the exact amount of
cash from the day before. The revaluation of the RMB should be
very positive for the bullion market. Also if the RMB floats,
U.S. dollars held by foreign central banks could more easily
be converted to RMB to cover trade with China and this would
put even more pressure on the dollar.
In the U.S., record trade deficits
are continuing at a $730 billion annual pace. Money leaving this
country to buy goods has been essentially matched by that money
coming back to this country to buy U.S. treasury bills and bonds.
On the surface this doesn't sound too bad and economists are
saying this shows foreigners have confidence in the U.S. But
this return of the money is not a commercial transaction
for gain. It is foreign governments and investors owning
debt that someday must be repaid. 6% of our entire economy annually
is based on buying goods overseas and going into national debt
to pay for it. Too much debt and too much money creation are
bullish for gold.
The key reasons to accumulating
a substantial position in the metal stocks in the coming years,
especially the precious metals are logical and simple and are
as follows:
- More population: Up 50% globally
since the last big run up in gold in 1980.
.
- More low-to-middle 'middle
class' people continuing to buy gold jewelry and this consumes
more gold annually than mines produce.
.
- Industrialization in Asia
and India is a mega-trend favoring all commodities.
.
- Inflation in most countries
is increasing and excessive money is being printed.
.
- Debt levels in the industrialized
countries are at levels that are well beyond prudent limits -
and the most important reason to have some gold assets is:
.
- The Bank for International
Settlements reports Exchange Traded Derivatives are now $279
trillion and OTC derivatives are now $220 trillion. This is $100
trillion more than when Warren Buffett declared them "economic
time bombs."
One does not have to be an
economist to know that a basic conservative plan for wealth preservation
and accumulation is now critical. Gold mining and related metal
companies should be part of this plan.
Investors should stay with
quality merchandise and leave the speculation and geological
hopes and dreams properties to others.
Please visit our website at
www.kengerbino.com for
more articles on gold, stocks and the economy.
May 3, 2005
Kenneth J. Gerbino
Archives Kenneth J. Gerbino & Company
Investment Management
9595 Wilshire Boulevard, Suite 303
Beverly Hills, California 90212
Telephone (310) 550-6304
Fax (310) 550-0814
E-Mail: kjgco@att.net
Website: www.kengerbino.com Copyright ©2004-2016 Kenneth J. Gerbino & Company. All Rights Reserved.
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