 Gold Recommendations
Kenneth J. Gerbino
Kenneth
J. Gerbino & Company
Investment
Management
Aug 20, 2004
We recommend being over weighted in the developmental gold/silver
mining sector, where we believe the strong value and growth opportunities
are. Stay mostly with companies with already well-defined billion
dollar plus economic resource bases. This sector is selling at
a discount to underlying Adjusted Net Asset Values. Adjusted
Net Asset Value is an important mining valuation tool; this is
basically a company's balance sheet items added to the future
value of the company's expected after tax cash flow. When these
values are below historical averages and ranges, it usually signals
an excellent value and growth investment.
Exposure to larger companies
in your gold stock portfolio is also recommended. Best values
look to me like Freeport Copper & Gold (FCX: NYSE) at 6.2x
next years expected cash flow and Placer Dome (PDG: NYSE) at
10.8x. If Cortez Hills develops the way some think, then PDG
could have some extra zip in its stock price. Wheaton River
(WHT: NYSE) also at 6.2x next
year's cash flow looks like a good one. We own them all.
Latest Gold Demand & Supply
stats look good. Jewelry demand alone has outstripped all net
mine supply by 150 tonnes, a $1.9 billion shortfall for Q2 2004.
The very robust gold mining
share market in 2003 has been met with a natural pullback that
looks like it is ending right now. The odds of a temporary lower
gold price is always a possibility but I believe this is diminished
greatly based on past economic correlations that have usually
preceded strong gold markets.
These correlations start with
the latest monthly trade deficit of $58 billion, the largest
monthly deficit in history, and negative for the dollar. This
also means we are now on track to break $600 billion in trade
deficits for the year. The dollar cannot stay strong in this
environment. Here is exactly how this works. When a $10 million
locomotive comes over from Japan, $10 million is sent over to
pay for it. The local manufacturer who most likely makes a 5%
profit will need 95% of that money to pay all his employees and
suppliers. He will need Yen. He will send his $10 million check
to his bank and his bank will sell those dollars
to someone somewhere in the world who will pay for the dollars
with Yen. Notice that the dollars are being sold. This is why
trade deficits are bad for the dollar. With $600 billion more
goods coming into the U.S. a year than going out, a lot of dollar
selling takes place. When the dollar goes down gold goes up.
The U.S. economy is an 'importing" economy and excessive
imports weaken the dollar.
Next, our economy is at the
end of a major economic cycle that has been extended by massive
amounts of paper money pumped into the economy out of thin air.
This always eventually creates inflation and gold becomes an
alternative for anyone who desires to protect themselves from
currency depreciation.
The next building block to
our rationale for owning gold related assets is budget deficits.
Just released by the White House is a projected $445 billion
budget deficit for 2004. This is on the heels of the $375 billion
in red ink from 2003. This means that money will have to
come from somewhere to make up for this. Plenty is just printed
to make ends meet. Some is borrowed from foreigners. We are running
such high deficits that it almost demands continued excessive
money creation. Other governments are also operating with budget
deficits and they are printing money also. All this new money
and paper floating around means it is worth less.
Gold will not be weak when
printing presses are going so strong.
To sum up on a broad front:
The trade deficits are the highest in history, the budget deficit
for 2004 will be the highest in history, the recent money supply
increases are the highest in history, and the total debt levels
are the highest in history and as a per-cent of GDP are much
higher than 1929. This is why one owns gold mining companies.
Red Gold
At this time in the economic
cycle, I like owning precious metal miners with some base metal
exposure. The commodity boom that has started could last a decade
according to some experts. Currently there is a low level of
inventory in the big three metal trading centers for copper.
The stats in London, New York and Shanghai are the lowest I have
ever seen. Warehouse stocks of copper in these trading centers
were 795,000 tonnes six months ago. Today they are 225,000 tonnes.
China alone consumes 258,000 tonnes per month.
With the U.S and European economies stronger than last year,
copper demand should continue to be healthy. Even a slow down
in China may not curtail this very strong demand for this basic
metal.
China ten years ago consumed
3 million barrels of oil per day and 750,000 tonnes of copper
per year. Today China consumes 6 million barrels of oil a day
and 3.1 million tonnes of copper per year. It is expected that
gold consumption in China will be very strong along with their
economy.
The bottom line is that we
are entering a period when almost every economic stat you can
review is bullish for gold and commodities. It is for this reason
that I believe we will have a substantial and long term bull
market in all the metals. The gold and silver mining sector currently
presents a strong valuation premise. The recent sell-off has
most likely ended or is close to it and trade and budget deficits
and excessive money creation will continue to underpin the basic
economic rationale to own gold and the mining shares. Please
visit our website for more articles on gold and the economy.
For other articles on gold
and the economy please visit our website.
Kenneth J. Gerbino
Aug 20, 2004
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
321gold Inc
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