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