September 19 2007

Disintermediate This!

Ah yes, that sub-prime thing. As many analysts away from the Wall St. genius factories have warned for months, sub-prime has come home to roost.  We noted to subscribers on the day of the PNB-Paribas announcement that we all needed to brace for a nasty few weeks or months in the market. They haven’t been long in coming and we don’t think they are over yet.  Wall St started screaming for rate cuts right on schedule, of course. Today helicopter Ben delivered. In spades. While we don’t think a rate cut really deals with a seized up commercial paper market it will probably make life easier for a lot of sub prime borrowers and it sure cheered up Wall St.

Of course, it’s had an equally happy effect on the gold price. A lot of gold’s followers were disappointed by what they considered a lackluster performance during the August credit crunch.  To our minds, gold again performed one of its most important functions; acting as a portfolio anchor and largely retaining is value while virtually all other assets were tumbling. A pull back of a couple of percent represented traders who had to sell something and gold was simply part of the list.  One thing and it’s a big thing, that gold has going for it is that there are no counterparties in a bullion transaction, as there are with any transaction based in fiat currencies. After the gyrations in the commercial paper markets that have shaken lending institutions and blown out hedge funds that is no longer just an interesting footnote to gold’s story. We expect increased “insurance buying” by wary investors who don’t feel up to trusting the other side of a trade.

Now that the Fed is back on the cutting track, a new high for the gold price is all but assured.  The Dollar is suffering the breakdown we talked about in a couple of earlier columns here and there is nothing to put a brake on bullion now.  We were early proponents of the commodity super cycle and that stance has not changed. We don’t think the troubles in the asset backed paper market are over and we don’t expect any sort of revival in the US housing market for at least a year or two. All that said however, commodities are about global, not US demand and the US hasn’t actually been the driving force in these markets for some time now.

The biggest sector in the S&P is financials. The entire market was jubilant after the Fed announced it cut but we think the financials in particular have more bad news ahead.  How bad largely depends on how well they traded the correction and how much creative accounting the SEC lets them get away with. If history is any guide, they’ll get away with a lot. 

 Many of the leading sectors like financials that lead the charge to Dow 14,000 will put in much weaker performances in the next quarter or two. We think that, after 18 months of frustrating sideways trading, gold producers and developers will again get their names in the paper, especially with the yellow metal making new multi-decade highs. Gold and silver other metals will be back to being out performers for the next few months at least.  Enjoy the ride.

Eric Coffin
HRA Advisories.

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David Coffin and Eric Coffin are the editors of the HRA Journal, HRA Dispatch and HRA Special Delivery publications focused on metals exploration, development and production stocks. They were among the first to draw attention to the current commodities super cycle and have generated one of the best track records in the business thanks to decades of experience and contacts throughout the industry that help them get the story to their readers first. Please visit their website at www.hardrockanalyst.com for more information.

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