I Have Good News and Bad News about the Mining Stocks

By: Kenneth J. Gerbino

Let’s start with the big picture:No deflation
Debt defaults and bailouts in Europe are coming and will be met with paper money creation
Inflation is in the Pipeline
Interest Rates Must go up with Inflation
Mid East chaos will affect the oil price
Austerity measures could take hold but slowly in EU, England and maybe the U.S.
Gold and Silver now looked at as Monetary Insurance by a wide universe

Next is the Good News and the Bad News but and then a practical solution for you to ride the great roller coaster of the precious metals. It is the solution we use at the Gerbino Gold Group LLC mining fund.

First the Good News for the Bullish Case
In 1980, Gold and Gold Stocks were 2.5% of all Global liquid assets and that was a bubble. Today they are less than 1%.To catch up with 1980, $4.5 trillion of gold needs to be produced (40 years of mine supply) or the price needs to go much higher, which means we are along way off from the next bubble.
Latest annual money supply increases from gold and silver buying countries: China: 15.6%, India: 13.2%, Brazil: 12.9%, USA: 12.8%, Switzerland: 9.2%. Inflation is coming to these countries.
Real interest rates in China and India are negative. -2.4% and -1.5% respectively. This is always a basic support for gold and silver prices
Annual budget deficits as % of GDP predicts even more money to be created. UK: 11.4%, Spain: 11.1%, USA: 9.2%, Japan: 8.4%, Euroland: 6.3%, India 5.1%
Central Banks are buying gold. They sold over 6500 tonnes at average price of $475 between 1992 and 2007. Now they are buyers and have almost unlimited funds
Mine supply versus money creation annually is about 1 to 25. Considering a lot of that gold goes into jewelry, the ratio of investment gold (bullion jewelry, bars, coins) is easily 1 to 50. This means, as an alternative investment or money substitute, the ratio is saying too much new money not enough new gold
There are many people in India and China who will be buying gold and silver as these economies grow and inflation shows up.

The above would lead one to believe the mining stocks should be selling at much higher prices. The majors are currently selling at only 8-10 times 2012 expected cash flow – very conservative cash flow multiples for any industry sector.

Now for the Bad News
All the bullish news above has already been discounted by the gold and silver markets and the investment community that buys mining stocks. This is why gold and silver are roughly 600-900% higher than a decade ago.
The horrendous problems of Portugal, Spain, Greece and the U.S. has been dissected and known and is already in the price of the metals currently
The bullish consensus for gold was over 96% a few weeks ago. That means everyone is in the pool. A negative sign.
The recent correction in Silver was a major crack in the bullish scenario and this needs to be respected. One of the few writers/analysts who called this top in silver was Bob Moriarty. An impressive call backed up by solid thinking and research
The mining community in Canada has flooded the world with new mining companies over the last 5 years and that has diverted money from your favorite stocks
The Gold ETF (GLD) is a new player in town and billions of “gold related” investment capital has found an easy home here instead of mining shares
Many huge gold players are not committed philosophically to the metals. These are people that still think inflation is “cost push” or that the Fed should control interest rates or that a little bit of easy credit and money printing is good for business. They only bought gold because it was going up. If it stalls they will be big sellers just like the silver players the last two weeks
Real estate may start to compete with gold for a long term inflation hedge as prices in many parts of Europe and the U.S. are at very low levels
The deflation crowd (plenty of big money managers in this group) who bought gold because of deflation are seeing no deflation and selling. They are not that concerned yet about inflation. When inflation does return they will probably be back buying the metals for that reason
China and India are growing because of outrageous money supply increases propping up the economies beyond what would be considered normal. If a recession hits these countries, even a short term one, gold and silver buying could dry up for some period of time.
Remember all this bad news may be discounting events that could take place 6-12 months from now so take that into consideration

What to Do

Mining stocks are not excessively valued. The world has plenty of challenges that look to make investing in gold and silver a “no brainer”, yet most of the quality mining shares have been going nowhere for 6-9 months and silver has just had a huge sell off and gold could follow with a nasty correction.

Because of the volatility of the precious metal markets one has no choice but to divide your portfolio into a 50% core position and 50% trading position. One cannot tag along and hold onto your gold stocks when gold hits $2,000 and then corrects back to $1,200…then goes to $2,500 and then back to $1,500 and then to $3,000 over the next 10 years or whenever.

If nothing else your mental health and your spouse will drive you crazy if you just sit back and take it on the chin on the big pullbacks. So the solution of a 50-50 portfolio allows you to have your monetary insurance by owning a core position in the mining stocks (hopefully with solid growth and value attributes) and having a mind set of selling on big run ups the other 50% and taking some off the table and coming back on sell offs. This trading could be once or twice a quarter or whatever suits your mind. Make it a common sense trading mentality. Hit some singles and doubles and even bunts with this 50%. Leave the big homeruns for the other 50% over the long term. I get up every morning and I could care less which way the gold and silver price is going as I am hedged as well as looking for trading opportunities all the while having a solid core position always.

There is so much money in the world today and so much debt that the forces that move markets are now huge. There are also so many money managers with gigantic assets under their control who do not understand gold or solid Austrian school economics who will see the world 180 degrees different than you as a philosophical gold stock investor. So take advantage of this.

Read this Book

Friend John Mauldin has written an important book. He has managed to combine solid investment advice, economic reasoning and a host of graphs and wisdom from very smart people he refers to the reader.

The title of the book is Endgame and is published by Wiley. This book is on the bestseller lists and is loaded with so many insights I found myself dog-earing many pages (for later reference) and scribbling notes everywhere….always a sign of a good book for me.

He pounds home convincingly one the best concepts you need to know today to preserve your money. By consulting history and a host of economic studies he is telling his readers that when certain economic scenarios are present – like right now in almost all countries – history shows that without warning and seemingly out of nowhere comes a trigger event and then a major panic, a collapse or big bang default that mushrooms and destroys asset values beyond reason. He is warning people that one tipping point in unsustainable government debt in the U.S. and elsewhere that could erupt in an unpredictable form at any time and create havoc beyond what even the skeptics believe.

Mauldin is a seasoned writer who mixes investment savvy as well Will Durant style comments that make the read enjoyable. Quips like this to his daughter…” no Melissa, that is not some Republican research conspiracy” and “we wrote this book so even a politician could understand it”

He is warning the world that global markets and investments are connected and that a panic over here or there or anywhere can affect global markets. The book is filled with quality revelations and data.

He devotes an entire chapter to a revealing study by two scholars that look back 800 years and analyze panics and crashes. The data, with his insights, is a tour d’ force of solid wisdom for investors.

The book then takes you to various countries and analyzes the risks and opportunities in each. This is a unique and commendable effort and one I don’t recall anyone ever doing before. He may not be right about deflation or inflation but at least you will have the concepts better understood.

All in all this is a book that deserves your attention. You will not fall asleep and will come out the other end prepared for the future.

A Must See Documentary

The greatest economist of our era was Nobel Laureate F.A. Hayek. Nobel Laureate Milton Friedman has said that the greatest economist that ever lived was F.A. Hayek. George Orwell was inspired to write his classic book, 1984, after reading Hayek’s great work The Road to Serfdom.

Years ago I took a film crew to Germany and interviewed Hayek. The interview has been turned into a documentary and is being entered into various film festivals around the world. This is the only interview in his career where he answered very controversial and politically sensitive questions.

His answers to these questions and his discussions of two dozen subjects pertaining to economics and politics very much relate to the investment climate today. This documentary, I believe, will be hailed as one of the greatest dissertations on economics ever recorded. Without using any big words and with brilliant clarity, the best of F.A. Hayek in a never before interview is now available.

The film is called The Hayek Prophecies and can be viewed at www.thehayekprophecies.com

If you have confusions or are unclear about economic concepts, this interview will set you straight.

For other economic and market commentaries please go to www.kengerbino.com

Ken Gerbino

The Answer is a “No Brainer”

Stewart Thomson
email: stewart@gracelandupdates.com
email: stewart@gracelandjuniors.com
May 10, 2011

1. The smartest millionaires of 1913 watched the Federal Reserve being formed with great interest. They sold a million paper dollars and received 50,000 ounces of gold.

2. Today’s paperbug millionaire of 2011 barely knows what the Fed is, let alone what an ounce of gold is. If he sells his million US dollars today he gets about 666 ounces, based on gold at $1500 an ounce. A very interesting number indeed.

3. I’d like you to tell me whether you would rather have 666 ounces of gold, or 50,000 ounces of gold.

4. If you want to build major wealth, you need to understand that you don’t have a $100 million algorithm trading computer system on your desk. While I understand the gold community is fairly concerned about the recent rally in the dollar against gold, the fact is that you are not going to compete with the best hedge funds by attempting to trade counter trends, especially with size. Do it for fun (or to stay sane). Use put options and leveraged ETFs to play counter trends.

5. For the bulk of your wealth building, only the power of the biggest primary trends will work to make you seriously rich.

6. On that note, there is no primary US dollar uptrend. I own the UUP (bull US dollar) fund, as a tactical trade. Owning UUP, or any counter trend play, is often more of a mental tactic than a financial one.

7. You should hold 100 times more risk capital in metals assets than in UUP. I do. The time to buy the US dollar in size is when interest rates are already sky high, not now in a counter trend play. Buy UUP to strengthen yourself mentally, so you can step into the discomfort zone and buy more gold in size.

8. I want you to read these next two points many times, because they are absolutely critical for serious wealth builders. First, the odds of a near-term rally in the dollar against gold are higher than the odds of a near term decline in the dollar against gold.

9. Second, and much more importantly, note that when the odds of a near term counter trend asset rally are high, but the odds of a collapse of that same counter trend asset are sizable and real, the wealthiest investors will not take that counter trend trade. Are you taking it in size? If so, you are making a grave error. It’s only a matter of time before those tactics destroy you financially.

10. The bottom line is that the dollar could rally, but you are not going to build any serious wealth selling gold to play that rally, and it could turn into a collapse that wipes you off the financial map.

11. Have the patience to wait for a collapse in the bond market, the backing of the dollar in some way with gold, then buy the dollar and the bond in size. That time is many years away.

12. Gold and food go together. Both are extremely low risk assets, in terms of the odds of them going off the board. The lower they go, the more of them you should want to buy. I have a $100 target for the DBA-nyse agricultural ETF. Click here now to view the weekly DBA chart.

13. I have little to zero interest in up and down trend lines. When you look at the weekly flyer from your grocery, do you get a ruler out and draw an uptrend line across the weekly sale prices? Do you say, “look, the uptrend line on bread broke, I better not buy any even though it is on sale!” No. If price is on sale, you buy.

14. Click here now to view the daily DBA chart. DBA is “10% on sale in the $32 area and the oscillators are indicating we could spike higher. You will not make it to DBA $100 with your core positions intact if you disintegrate mentally into a world where all you do is look in the mirror and ask how much lower price could go after you buy. Don’t worry, people are going to keep eating!

15. Click here now to view the daily gold chart. The gold price meanders between the green Keltner lines, like a river bounded by its banks.

16. Note that price has only come close to the lower “river bank” about 3 times in since September! The decline into $1462 has been analysed into oblivion, and bought by almost nobody. I called the gold market “out of control” on the day of the $1462 low, and urged you buy anyways.

17. Now price has soared $50 an ounce, and the short term oscillators suggest much further upside is possible, basis this daily chart!

18. Click here now to view the 30 minute gold chart via the comex gold trust fund, IAU-nyse. I’ve drawn in five blue HSR (horizontal support/resistance) lines. Those are five beautiful profit booking areas.

19. Note that price has risen to one of them, at $14.70. Only if you bought into your own feelings of panic are you now able to ring the cash register. While others guess whether the market will bounce or fall, you get richer!

20. I have begged, urged, and come close to using expletives to “encourage” you to get richer by building ounces, rather than staring at the dollar valuation of a fixed amount of your gold. You need more gold, more silver, not more marked to model valuations courtesy of Ben “Dr. Pinocchio” Bernanke’s photocopier machine.

21. Click this 30 minute gold to silver chart. This is a method of getting richer by building more ounces of both gold and silver, keeping yourself at least partially isolated from the world of the US dollar paperbugs. Note that I am using SGOL for gold and SIVR for silver.

22. That chart is just days old, and at the time I suggested it was time to sell some gold and buy some silver. Now, I would suggest it is already time to sell some silver and buy gold. Silver has jumped strongly against both gold and the dollar over the past few days, but focusing on the dollar isn’t going to get you any more ounces of silver, or gold!

23. Now click HERE to view a freshly annotated version of the gold to silver chart. The 30 minute chart is absolutely ideal to move back and forth from gold to silver, and vice versa.

24. What sounds better to you; spending your trading day staring at the dollar valuation of gold or silver, or building more ounces of both? I’ll dare to suggest the answer is a “No Brainer”.

Thank you
Cheers
st

May 10, 2011
Stewart Thomson
Graceland Updates
website: www.gracelandupdates.com
email for questions: stewart@gracelandupdates.com
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Tuesday May 10, 2011
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Risks, Disclaimers, Legal
Stewart Thomson is no longer an investment advisor. The information provided by Stewart and Graceland Updates is for general information purposes only. Before taking any action on any investment, it is imperative that you consult with multiple properly licensed, experienced and qualifed investment advisors and get numerous opinions before taking any action. Your minimum risk on any investment in the world is 100% loss of all your money. You may be taking or preparing to take leveraged positions in investments and not know it, exposing yourself to unlimited risks. This is highly concerning if you are an invetor in any derivatives products. There is an approx $700 trillion OTC Derivatives Iceberg with a tiny portion written off officially. The bottom line:
Are You Prepared?

Gold Market Update – May 01, 2011

The interesting thing about gold is that although it has been in a steady long-term uptrend there has still been no meltup, such as we have seen in silver, but if the dollar really caves in that could very well happen – and such a meltup may have just started this past Friday. The most important thing revealed by our long-term chart for gold, which goes back to the beginning of its bullmarket, is that its uptrend to date has been steady – there has been no parabolic blowoff move, and certainly no meltup – that is believed to lie ahead of us and it will mark the final climactic phase of this bullmarket that will lead to the latest fiat experiment being consigned to the trashcan of history.

If it is just starting now we could see some real fireworks shortly, but as stated in the Silver Market update, you should be careful what you wish for, because such a meltup would be expected to synchronize with an all-out dollar collapse, which the Fed and Wall St banks have worked tirelessly for years to bring about – the Fed has in fact now painted itself into a corner, which is why it cannot follow suit when the European central banks raise rates to head off inflation – it CANNOT raise rates, because if it did it would collapse the debt-wracked US economy and and bring the major Wall St banks’ derivatives pyramid crashing down. So it has decided on procrastination and what for it and its cohorts in kleptocracy is the best option, which is to allow the dollar to go down like a lead balloon, which at least serves the purpose of defrauding foreign creditors out of fair value for their holdings of dollar denominated securities, especially Treasuries.

So it was very interesting to see gold finally follow silver’s lead by zooming ahead on Friday, as we can see on our 6-month chart, and while it is possible that both it and silver are putting in an intemediate top, especially with gold now being very overbought on a short and medium-term basis, the latest COT chart for silver, which is strongly bullish despite silver being fantastically overbought, suggests a continuation of the meltup in silver and thus a possible meltup phase for gold, which could lead to its exceeding our $1700 target zone by a country mile.

With gold well into critically overbought territory on its RSI indicator it is reasonable for it to take a breather early next week to digest its latest gains and we can expect that. Then we will watch to see if silver can vault above its key $50 rersistance level, which will have major implications for gold (and the dollar).

Clive Maund

Silver Market Update – May 01, 2011

The big question on the minds of silver investors and especially silver traders is whether the meltup in silver has run its course, or whether it has further to go. On Monday last week we saw temporary burnout with a Reversal Day showing up on the chart at a point where silver was fantastically overbought. On the basis of this, and also the extremely bullish public opinion on silver and extremely bearish public opinion on the dollar (the public are normally wrong) it was reasonable to conclude that silver had either topped out or that a correction was imminent, and that is what we did conclude. However, the situation is now complicated by the fact that the latest COT figures reveal that Commercial short and Large Spec long positions have been dramatically scaled back just over the past week, which is not what you would expect to see ahead of a drop – what should happen is that Commercial short positions either ramp up or least remain constant. This latest COT chart by itself portends another upleg soon.

To make life even more interesting we had a bizarre divergence between the performance of gold and silver on Friday, with gold soaring and silver reacting back by about 50 cents. Even though they theoretically shouldn’t, gold and silver normally move as if joined at the hip in their day to day fluctuations, so this huge divergence was most unusual. What can we put it down to? – well, silver has stalled out at its 1980 highs, and even though the 1980 highs are 31 years ago so we wouldn’t expect much resistance at this level as very few will have held on for all those years, it is still a psychologically important level because a break above it means silver attaining new all time highs, and these highs happen to coincide with major “round number” resistance at the $50 level.

Therefore, if silver gets above this level we can expect the meltup to accelerate even more, and the COT chart does suggest that this level will soon fall. This is why silver held back on Friday even as gold advanced strongly – the $50 level is hugely important.

To say that silver’s uptrend looks unsustainable on its long-term charts would rank as one of the understatements of the year, given how incredibly overbought it is on its MACD indicator, yet, as we have observed the latest COT chart does suggest another upleg. You have all heard the saying “Be careful what you wish for – (because you might not like the consequences if it comes true), and that is certainly the case here, for if silver’s meltup continues, and gold moves into meltup mode too, which may have just started on Friday, then it probably means a collapse in the dollar – not a drop, a COLLAPSE, that will have disastrous consequences for the US economy and way of life as a result of inflation ramping up in the direction of hyperinflation, which will collapse living standards in the US and destroy the middle class (what’s left of it), most of whom will suddenly find gas unaffordable and food very costly. It will be back to commuting to work on a bus, if you are lucky enough to have a job, that is, and if you happen to live near a bus route. Look on the bright side, it will at least help to conserve the world’s oil supplies.

Obviously, if you are long silver or silver stocks, you will want to milk the meltup for all it’s worth – after all, it would be a shame to sell now and then have silver tack another say $30 in a matter of just weeks. But at the same time, you don’t want to be around if the wheel suddenly comes off, especially given that when silver drops it drops like a rock. The way to handle this? – simple – stay long and buy yourself cheap protection in the form of out-of-the-money Put options in silver itself, or Call options in something like the ProShares Ultrashort Silver, code ZSL. The cost of these options is peanuts compared to what you will save yourself if silver should suddenly tank.

Clive Maund