 Gold Stocks: Managing The Portfolio
Kenneth J. Gerbino
Archives
Kenneth J.
Gerbino & Company
Investment
Management
November 9, 2004
The Next Ten Years
I expect a long bull market
in the precious and base metal markets. There will be periods
of consolidations, slowdowns, and mini bear markets, but overall
this sea change in raw materials and precious metal demand could
last a decade or more. There most likely will be four phases,
each phase adding to investment demand.
Phase I - The commodity pendulum of tight
supplies and strong demand. This is currently happening on a
global scale.
Phase II - The dollar being weakened by twin
trade and budget deficits and loose monetary policy. Also currently
happening.
Phase III - Global inflation due to almost all
governments creating too much money.
Phase IV - Extremely high profits by the mining
companies allowing them to pay strong dividends. In the mid 1970's
many of the quality South African gold companies paid 8-10% yields
regularly.
There may even be another Phase
that could occur somewhere over the next 10 years. This would
be a Phase where the rush to own gold and silver as a money substitute
could be caused by massive debt defaults or multiple institutional
bankruptcies that are so large and widespread that an international
collapse of banking assets would occur. The likelihood of this
occurring is remote simply because the authorities would print
enough money to avert the crises. But no one really knows if
that would work, since the amount of money needed may be so overwhelming
that it may not be accepted.
Current Gold Market
With gold looking like it may
sustain a break above $430, large cap gold shares are moving
up smartly while juniors and the exploration sector are lagging.
The juniors are lagging because the big money coming into gold
stocks is new money from major financial centers and institutions
and they are buying the more recognized and established names.
Also the relatively small universe of hard core gold bugs that
usually buy the smaller companies are fully invested and most
likely have limited buying power. Insiders, promoters, traders
and private placement stockholders from the last 18 months are
most likely selling into this run up and getting some liquidity
as well. Remember the wall of worry effects these people too.
This should serve as a reminder
to all gold stock investors to have a well-diversified portfolio
for most of your funds composed of major, mid-tier, and developmental
(emerging producers) and then if one is inclined, a small amount
for the exploration stocks which are very high risk.
Important News
The most important news for
gold bugs is that for the first time in over a century the U.S.
government and the powers that be at the Fed and the Treasury
may actually do something that is pro-gold. Apparently they think
a lower dollar is the only way to help the U.S. economy. This
is very bullish for gold. It means gold may take a big run up
with relatively low inflation rates.
Donald Coxe from BMO Nesbitt
Burns/Harris Bank, acknowledged by many as one of the smartest
market/economic analysts of our time feels that at least a 25%
devaluation of the dollar must take place from current levels.
The U.S. trade deficits are unsustainable and the dollar must
go lower as the U.S. is pricing itself out of world markets.
He states that if it occurs gradually so adjustments can take
place internationally then the transition could be relatively
smooth. He mentioned that at the recent IMF meeting in Washington,
there was a lot of unofficial talk about a lower dollar as a
policy option.
Also David Gitlitz of TrendMacrolytics
(a sophisticated private institutional research group) reports
"no fewer than five senior Fed officials have broached the
prospect of a weaker currency.Dallas Fed president Robert McTeer
asserted 'there's only one direction for the dollar to go - lower.'"
If the dollar goes down 25%,
the price of a Honda goes up from $20k to $25k and people buy
Fords, it's that simple. A lower dollar by 25% could shift $300
billion of spending on overseas products to domestically made
products. It could also boost our exports by hundreds of billions
of dollars. Both these scenarios would create lots of jobs. The
trade deficit (now expected to be $650 billion in 2004) would
be reduced dramatically in coming years and U.S. manufacturing
would boom, creating jobs. This would also spur economic expansion
well beyond the $300 billion as this money circulates through
the economy over and over again creating even more activity.
Tax receipts would increase lowering the budget deficits. This
all sounds pretty good but the bottom line is that a lower
dollar means a higher price of gold.
Oil imports would become 25% more expensive, but importing 8.5
million barrels a day costing another $12 per barrel, would be
only $37 billion more a year small change compared to keeping
$300 billion of buying power in the U.S. and booming our exports.
Theoretically, if the dollar devalues by just 15% then gold goes
to $506, since gold is priced internationally in dollars - it's
pure math - $430 gold divided by 85 cents (the new dollar value
on foreign exchange markets) equals $506.
The significance of this policy
development has wide and positive implications for precious metal
investors. It is arguably the most politically bullish news for
gold since President William McKinley won the election of 1896,
(He was for a gold standard).
Gold stock investors will now
be most likely faced with even more volatility. If gold does
in fact make a run at $500, then a simple correction of 15% would
from that level bring gold back to $425. This would be a $75
correction and would create havoc with all gold stock valuations.
Even bigger run ups in the future with corrections may also be
in the cards and this could go on for many years to come. I suggest
you think this through and have a plan to handle this.
Inflation in the U.S. is much
lower than I have expected, but in the coming years I believe
this will have to eventually pick up. In the countries where
gold demand is strong, inflation is strong. India's CPI is running
at 7.1% and China's at 5.2%. Since these countries are also experiencing
strong economic growth, per capita consumption of gold jewelry
should also continue to be healthy. China's money supply has
increase every quarter in the last five years by at least 12%
from the year ago quarter. This should also underpin investment
demand for gold.
November and December are historically
good months for the precious metal stocks. So gold stock investors
should have an enjoyable Thanksgiving and Holiday season.
Please visit our website
for more articles on gold, mining shares and the economy .
November 8, 2004
Kenneth J. 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
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