GOLD MINING STOCKS: WHAT IS HAPPENING NOW
By Kenneth J. Gerbino
May 4, 2005
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)
" 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
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
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
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