 The
Big Sell Off -
18 Important Facts to Understand
Re: Gold, Stocks and Bonds
Kenneth J.
Gerbino
Archives
Kenneth J.
Gerbino & Company
Feb 28, 2007
Let's get some facts straight
before you make any decisions regarding your gold stock portfolio
and your other assets. Most of these facts point toward higher
gold and metal prices after the panic selling stops. Industrial
stocks and bonds may have shown the first signs of a sustained
decline or at least a major topping range.
1. There will be no recession
or slow down in China which people feared would cut demand for
gold and base metals as well as impact other economies. The facts
behind this statement are: a) Money supply (M1) increases in
China are 20.3% y/y (year over year) and have averaged an incredible
14% for the last five years. Recessions don't start with that
kind of new money in the system; in fact this data spells boom
times for years and inflation as well for China. Also retail
sales in China y/y, has averaged 18% for the last four years
which shows an internal economy is developing. China is most
likely at least 2-3 years away from even a slowdown to 5% growth.
a
2. The Chinese authorities did the right thing in clamping down
on illegal stock sales on the Shanghai and Shenzhen stock markets.
Their other measures to curb speculation (margin and bank lending
for stocks) caused a panic in these two overbought markets sporting
an average p.e. ratio of 45 (these markets are mostly retail
accounts and basically limited to Chinese nationals only). The
result was a huge 8.8% sell off in one day. But the Hong Kong
market had only a small reaction and was down only 1.75%. So
the smart Chinese money in Hong Kong wasn't in any way panicking.
a
3. ZTE, China's largest phone equipment maker was up 3% during
the panic. This is more anecdotal evidence of no recession anytime
soon for China.
a
4. Gold in Hong Kong was almost flat in spite of the stock sell
off on the mainland. Therefore the more sophisticated Chinese
investors weren't buying into the TV talking head syndrome that
the strong economy in China is now over and that gold and base
metal demand would decrease.
a
5. In New York gold was only off $2.5 despite the Dow plunging
at the close of the commodity trading session. In the NY after
market which is illiquid and easily influenced by a panic, gold
was hit hard and then the Gold ETF followed suit and sold off
as well.
a
6. Bonds in the U.S. rallied as a safe haven. But will foreigners
buy US bonds if the dollar continues to go down - which it did
- which makes the gold rout in the aftermarket that much more
suspect and temporary. My guess is that gold needed a breather
since it has had a recent sustained rally.
a
7. The Fed is now faced with a housing slowdown and a possible
further market crash from a nervous and obvious vulnerable stock
market. They would be way out of character to raise rates any
time soon especially with the latest report on mortgage defaults
at four year highs.
a
8. The Fed not raising rates means more weakness in the U.S.
dollar and that is bullish for gold.
a
9. India is the largest gold consuming nation. What's happening
there? 2006 M1 money supply is up 20% and has averaged 17% per
year for the last 3 years! GDP is expected to grow 9.2% in 2007.
These are powerful stats that should mean continued support for
gold prices.
a
10. How long will it be before China lifts exchange controls
and allows all those remimbi's they have been creating to be
sold for some other currency to facilitate investing overseas?
This will allow the government policy of a weaker currency to
be aided by the people themselves and allow their mercantilist
economy to continue. A good Libertarian definition for Mercantilism
is where a government is on the side of the factory owners and
big business and pursues a policy that benefits the business
class at the expense of the average person. A strong currency
allows Joe six pack to buy cheaper goods from overseas whereas
a weak currency makes everything more expensive for him but allows
the business owners to export more. Mercantilism squeezes the
little guy and helps government cronies. It's a bad deal and
180 degrees from a free market.
a
11. Margin calls are a real possibility in the next 24-48 hours.
So one should just be patient with buying until the dust settles.
a
12. The sell off in the mining shares took place when almost
every mining analyst, mining money manager, and gold fund manager
who are anywhere on the global radar screen were all attending
the BMO Gold Mining Conference in Tampa. These smart money players
were all away from their screens and definitely out of the loop
as their sector took it on the chin. Most likely by Thursday,
when these heavyweights are back at their desks, they will have
a shopping list of mining stocks they love but were waiting for
a sell off to buy.
a
13. Nikko Cordial is the 3rd largest brokerage house in Japan.
They are being nailed for cooking the books and their stock is
plummeting. This should be another reason why some Japanese household
money will find its way into gold.
a
14. My experience dealing with and knowing many hedge fund managers
is that they have little knowledge or even know what Austrian
school economics is all about and certainly have little knowledge
of the hard money- paper money controversy. Ayn Rand, Nobel Laureate
F.A. Hayek, Murray Rothbard and Harry Schultz could be Academy
Award nominees for all they know. Hedge fund participation in
the gold market and gold shares is growing not because of a deep
seated reasoning on economic issues but only because it is a
hot sector. The volatility in the gold shares will be above average
in the coming years because of them. They will be the gold bugs
worst nightmare and best friend - depending on the trend. This
is why being on margin will be a bad idea.
a
15. Derivatives: With a global market panic starting in a low
interest rate and, so far, low inflation environment, one has
to be wonder about the real reason for this sell-off. Easy money
almost everywhere leads to leverage and speculation. No where
is this more prevalent than in the global derivative market.
It is not out of the question that third party defaults and risk
aversion designed instruments that collapse and go sour may someday
overwhelm the financial markets. Latest figures from the Bank
of International Settlements: $8.3 trillion of real money is
controlling $313 trillion in derivatives. That's 38 to 1 leverage.
These figures are just for the over - the - counter derivatives
and do not include the global exchange traded derivatives in
currencies, stocks and commodities which are another $75 trillion.
Any accidents here should make gold a very desired asset class.
a
16. Every once in awhile technical trading and computer trading
take over almost completely when a human panic evolves in markets.
This is what happened on Tuesday's crash. Fundamentals were ignored.
The Shanghai and Shenzhen markets were selling at 45 price earnings
ratios. Many of the mining stocks that we own in our fund are
selling at only2-3 times expected cash flow when they go into
production. These developmental mining companies with documented
reserves and real value in the ground sold off even though they
are obviously not at speculative levels. I am sure there are
similar stories for other mining portfolios. This across the
board sell off is a sign that hot money is being chased out of
the mining stocks and the shares will be going into stronger
hands.
a
17. If the mainland Chinese are bidding stocks to 45 times earnings,
it is an indication of how high they will eventually bid up gold
mining companies in New York and Toronto when exchange controls
are lifted. As Doug Casey likes to say; "it will be like
Hoover Dam going through a garden hose."
a
18. The U.S. money supply is up 5.5% for the last twelve months
and 16.7% for the last three years. Raw goods and Intermediate
goods are now climbing at above 7% and this will soon impact
consumer prices. With inflation in the pipeline, will foreigners
want to buy US bonds which will be heading down? This will also
hurt any dollar support in the future from this source and therefore
be supportive of gold.
Conclusion
Excessive speculation in China
by retail customers and a market correction have little to do
with the Chinese economy's forward progress. The plans to build
120 airports a year for the next 10 years and tens of thousands
of other projects will not be affected because some gamblers
and speculators overdid it.
Gold and gold mining shares,
despite a short term disappointment will surely recover as the
investing world has been given a wake up call on the frailty
of paper assets owned by global investors. Base metal stocks
will also recover as the China and India growth story has many
years to go.
For other commentaries on gold,
mining stocks and the economy visit our company's website. www.kengerbino.com
Ken Gerbino
Archives Kenneth J. Gerbino & Company
Investment Management
9595 Wilshire Boulevard, Suite 303
Beverly Hills, California 90212
Telephone (310) 550-6304
Fax (310) 550-0814
E-Mail: kjgco@att.net
Website: www.kengerbino.com Copyright ©2004-2016 Kenneth J. Gerbino & Company. All Rights Reserved.
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