GOLD MINING STOCKS: WHAT IS HAPPENING
There are two parallel markets happening in gold.
If you own the mining stocks
you are currently caught between these two financial forces.
One market is the bullion market and this is showing steady demand
and relatively very solid price action. The other market is the
mining shares and this market has been in a severe 5 month downtrend.
These markets are currently disconnected. The mining share market
is divided into three separate sectors. It comprises 1) "hot"
hedge fund and "hot" investor money, 2) a regular but
small global retail and institutional market, and 3) the "Canadian
mining regulars" (brokers, market makers, speculators, promoters,
gold mutual funds, entrepreneurs, newsletter writers and their subscribers).
" The first group has come and gone. When momentum changes
this group leaves the party regardless if they believe inflation
or a debt collapse is coming. The U.S. deficit story, both trade
and budget is old and tired news to this group. For now they are
on the sidelines or in biotech or some other sector. Some did well
and some came in late and lost money. When inflation heats up again
or the dollar starts a serious fall and the mining stocks start
a new run, they will be back in even larger numbers.
" The regular retail and institutional gold mining stock investors
with the help of the Internet have grown in numbers and they have
been battered in the last 5 months. They are probably fully invested
and a percentage of this group who came in late are worried that
maybe the inflation crowd is all wrong or maybe the end of the world
crowd is all wrong, whichever abstraction got them into gold in
the first place. More of these investors will be needed for the
next bull phase. The second wave of these investors will be much
larger in the next few years as the economic and financial problems
(debt, deficits and paper money printing) continue.
" The Canadian Regulars have been through these volatile swings
so many times that many of them have taken some money off the table
or made so much in 2002 and 2003, they started to get greedy and
overextended themselves. They will be back in force once the dust
settles - and that may be sooner than later.
As of the end of April, the sentiment on the mining shares was
almost as bad as it can get. The very negative call-put ratio on
the XAU was at April 2003 and April 2004 levels. Both times a very
strong and extended rally took place from those oversold readings.
With this kind of pessimism, the sellers are almost all gone. Everyone
that wanted out of the pool is most likely out already. In fact
we just may have seen a significant low on April 28th.
Let's take a roll call of the Who's Who of Finance and see where
they stand vis-à-vis gold or concepts that would be conducive
for gold going up.
Paul Volcker: His op-ed piece in the Washington Post actually
stating the "C" word. He talks about a "financial
crisis" possibly if Washington doesn't get it's act together.
The title of his article; An Economy on Thin Ice
Warren Buffet: The smartest investor of all time. He is short
David Dreman: Famous value manager who manages $11 billion,
recently stated on Bloomberg "Bonds are almost suicidal".
Bill Gross: Head of the world's largest bond management company
($464 billion), has warned of the dire consequences of U.S.
monetary and economic policies.
The above people are not gold bugs; they are part of the heart
and soul of the establishment of global investments and economics.
They know that something has to give. They know that past and present
economic policies are beyond reason and that a terrible economic
accident or a powerful inflationary period is surely coming to the
western world. Either scenario means gold is going to be a very
important asset class to own - and if gold is good then mining stocks
will be even better.
Inflation in the U.S is 3.5% and rising. Globally this number is
4.3%. If the inflation numbers continue then just a small amount
of investors buying gold could have a dramatic effect on the price.
With U.S. households time deposits and savings accounts at $4.3
trillion, it would require only 1/2 of 1% of this money purchasing
gold to create a substantial (1,574 tonne) demand imbalance (more
than half the world's annual mine supply). Stock ownership, mutual
funds and life insurance/pension reserves of U.S households equals
another $20.8 trillion. Again only a 1/2 of 1% allocation to gold
would create a demand that would be 3x annual mine output.
My investment management firm monitors 61 foreign countries that
report regularly on money supply statistics. In the last 12 months
these 61 foreign countries have increased their basic money supplies
by an average of 15.2%. Most people with savings in these countries
will try and protect themselves from inflation that is surely looming
and will most likely be buying gold. The Chinese basic money supply
from 1998 has averaged an annual increase of 13% for 7 solid years.
Inflation is coming to China - and that means plenty of gold buying.
Also if the Chinese revalue the RMB, the very next day after a
5-10% revaluation (and this could be very soon) every Chinese saver
will be able to go out and buy 5-10% more gold for the exact amount
of cash from the day before. The revaluation of the RMB should be
very positive for the bullion market. Also if the RMB floats, U.S.
dollars held by foreign central banks could more easily be converted
to RMB to cover trade with China and this would put even more pressure
on the dollar.
In the U.S., record trade deficits are continuing at a $730 billion
annual pace. Money leaving this country to buy goods has been essentially
matched by that money coming back to this country to buy U.S. treasury
bills and bonds. On the surface this doesn't sound too bad and economists
are saying this shows foreigners have confidence in the U.S. But
this return of the money is not a commercial transaction for gain.
It is foreign governments and investors owning debt that someday
must be repaid. 6% of our entire economy annually is based on buying
goods overseas and going into national debt to pay for it. Too much
debt and too much money creation are bullish for gold.
The key reasons to accumulating a substantial position
in the metal stocks in the coming years, especially the precious
metals are logical and simple and are as follows:
||More population: Up 50% globally
since the last big run up in gold in 1980 equals
More low-to-middle 'middle class' people continuing to buy gold
jewelry and this consumes more gold annually than mines produce,
Industrialization in Asia and India is a mega-trend favoring
Inflation in most countries is increasing and excessive money
is being printed
Debt levels in the industrialized countries are at levels that
are well beyond prudent limits - and the most important reason
to have some gold assets is;
The Bank for International Settlements reports Exchange Traded
Derivatives are now $279 trillion and OTC derivatives are now
$220 trillion. This is $100 trillion more than when Warren Buffet
declared them "economic time bombs".
One does not have to be an economist to know that
a basic conservative plan for wealth preservation and accumulation
is now critical. Gold mining and related metal companies should
be part of this plan.
Investors should stay with quality merchandise and leave the speculation
and geological hopes and dreams properties to others.
Please visit our website at www.kengerbino.com
for more articles on gold, stocks and the economy.
Kenneth J. Gerbino Kenneth J. Gerbino
& Company 9595 Wilshire Boulevard, Suite 303 Beverly Hills,
CA 90212 Telephone: (310) 550-6304 Facsimile: (310) 550-0814 E-mail: