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Gold Stocks - Five Data Points to RememberKenneth J.
Gerbino When you start worrying about your portfolio, please remember these simple data points that make precious metal stocks good investments:
Economic Confusion The vast majority of establishment money managers are still suffering from intellectual confusions on sound macroeconomic concepts. Most of the people managing trillions of dollars from London to NYC to Tokyo actually think their respective Central Banks and Treasury Departments are doing a decent job by printing money when needed, interfering with exchange rates, and manipulating interest rates by decree and policy. These are insane and unworkable policies. They are also unethical, as these actions rob from the poor working and middle classes and eventually redistribute wealth to the big and the powerful. This is why socialists are still around today. Socialists are clueless on economic truths but they look around at the rich getting richer and the poor getting poorer and they question "capitalism" and "free enterprise" because they are too stupid to realize that capitalism and free enterprise have been infected with insane monetary policies and that is why the poor are getting poorer. Their answer- tax the rich and productive, tax the corporations, tax everyone. Paper money policies will promote socialist power in the future. A sad conclusion. Our Elite Fed and Treasury at Work Printing money creates inflation which lowers the standard of living of every working man. Lowering interest rates artificially makes retirees and savers get 1-2% interest on their hard earned savings when the free market for interest rates should be much higher. They are robbed of economic security and forced to speculate in the stock market or real estate. Exchange rate manipulations create mayhem in global trade. These three government interventions by these powers to the free market are destructive. Free markets are as valuable to mankind as free men and women are to personal happiness. The Worse is Yet to Come The main stream establishment money managers who control so much investment capital have no idea what is coming. With inflation coming on stream in the U.S. and elsewhere, interest rates will begin to rise and the stock market will begin to head south. Long term bonds will become bad investments. If a recession develops, then lower productivity and high inflation together will make things even worse. The Fed cannot stop inflation. Once all the new money floating around is in the system prices go up regardless of interest rate hikes. When these confused Keynesian thinking money managers realize that their economic premises are totally wrong, it will lead them to stampede into the precious metals and the mining stocks. They will be a huge force pushing up prices to levels that will be unreal to even the gold bug crowd. Valuations of Mining Stocks Mining stocks are dependent on the price of metals for profitability and valuation. We always invest for our clients in companies that have strong growth profiles and low cost production projects which should negate even substantial metal price weaknesses. These are the types of profiles that you should embrace also. Over time, the future cash flow from companies will determine the value assigned to their stock prices. We expect these types of stocks to be more profitable as new mines come on stream. We are still using $550 gold as our baseline for our value expectations. This is a conservative parameter in a world where we also expect gold to go much higher. When doing your homework use a conservative price of gold and then see how the stock's value pencil's out. If you can see a cash flow per share multiple of only 5-8 times with $550 gold within a 1-2 year period, you should have a winner (assuming all the other key facts are in order). Weekly share price fluctuations have little to do with the final value outcomes of your gold stock portfolio and everything to do with nervous and uninformed investors, traders, brokers and speculators. Given time, good mining projects analyzed properly with conservative parameters usually become very profitable investments. The Writing is on the Wall In a world besieged by politicians and central banks that continuously print money and populations that are becoming more and more in debt and dependent on their governments to help them survive, inflation is destined for the future. There is no other way out. Since there is some actual global economic progress that will create increases in demand for raw materials, mining stocks should be one of the best sectors to take advantage of these trends. Warren Buffet had some wise advice for the recent Berkshire Hathaway annual meeting: "I'm willing to bet the dollar will weaken against other currencies over the longer term". This sounds logical to me and more reason to own precious metal mining stocks. More Inflation Coming The United States imports $2.4 trillion of goods or roughly 17% of our GDP annually. As prices go up in foreign lands, prices of our imports will follow as will our inflation rates. Food shortages and price increases are creating an inflationary future in many parts of the world. According to the United Nations, food riots have erupted in Mexico, Morocco, Uzbekistan, Senegal, Guinea and Mauritania. Egypt has banned rice exports to keep the food at home and China has put price controls on meat, grain, milk and eggs. Food inflation in the United States is at its highest level in 30 years. Oil is now over $130 a barrel. It is the end of an era of cheap goods from overseas. Import prices from China have risen in price for 8 consecutive months. Mining Stocks The time for the gold mining stocks is now. A recent Financial Times of London featured editorial was titled, "Gold is the new global currency." We couldn't agree more. The article quite correctly concluded that printed money is indeed the barbaric relic. In 2007, the U.S. Government debt increased by $500.2 billion. Even worse news is this recent statement from the U.S. Comptroller General, "The federal government's fiscal exposure of direct and indirect debt increased by $2 trillion in 2007. Direct and indirect debt obligations totaled approximately $53 trillion as of September, 2007... an increase of more than $32 trillion from September 2000." (Emphasis ours). These are big numbers that make us very secure in holding well thought out gold mining stocks. For more articles on gold, the stock market and economy please visit our website at: www.kengerbino.com May 22, 2008
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