Gold stocks look cheap

by Addison Wiggin – January 24, 2011

  • China, Russia accumulate more gold, silver

  • Dan Amoss on why gold stocks look cheap

  • After an S&P pullback, why “it’s still too early to call a top”

  • African power struggle powers cocoa prices to new high

  • Illinois raises income taxes, native businessman bails after three decades

Gold begins a new week up a touch from where it ended last week. The spot price as we write is $1,348. Silver is off a few pennies, to $27.45.

While the markets tread water, the Russians and Chinese are snapping up metal…

  • Chinese silver imports quadrupled last year, according to figures from Mitsui. Net imports of less than 900,000 kilograms in 2009 surged to nearly 3.5 million in 2010. China, long a net exporter of silver, became a net importer in 2007

  • Russia’s central bank plans to keep loading up on gold. In 2010, Russia grew its gold reserve 23.9%, to 790 metric tons. Now the deputy head of the Central Bank of Russia has announced plans to add to that stash at a pace of 100 metric tons a year.

“It’s time to buy gold stocks,” declares Strategic Short Report editor Dan Amoss. “Top-down ‘macro’ analysis indicates that the bull market in gold stocks still has a long way to go. And bottom-up analysis tells me that gold stocks are cheap.

“I see the most likely macro scenario as follows: a steady rally in gold, a sideways stock market (some sectors up, some down) and falling Treasury bonds (rising yields) as more bond investors look ahead to a future of endless U.S. budget deficits and decide to hit the Fed’s ‘QE2’ bid.

“The Fed’s balance sheet will probably double in size again over the next few years, filling up with even more Treasuries. The central banks in China, India and elsewhere are woefully short of gold — and stuffed to the brim with less-desirable U.S. dollar assets — so they should continue to trade paper for gold and other real assets at a steady pace.

“More than an inflation hedge, gold is a hedge against chaos in the monetary system; people flee to gold when confidence in paper money crashes.”

Meanwhile, gold stocks remain cheap relative to gold, Dan says. Check out a chart of the HUI — a major gold stock index — divided by the price of gold. Leave aside the Panic of 2008 and gold stocks haven’t been as cheap by this measure since 2003:

“This fact is even more compelling,” Dan continues, “when you consider that the gold miners are far more profitable today. Profit margins are much higher.

“More importantly, these margins are likely to stay higher, since the cost of mining — diesel, steel, equipment, chemicals, labor, electricity, etc. — is not likely to rise at anywhere close to the rate at which gold bullion should rise. There is little chance we’ll see the same intensity of industrial activity worldwide over the next seven years as we saw over the past seven.”

Buying opportunities like this will be rare, Dan concludes, because many institutional investor portfolios remain underweight in gold. “These investors will keep looking to add exposure to gold because of the state of the private credit markets, government debts and central banks.”

Stocks are inching up as the week begins. The major U.S. indexes are all in the green, if only by a couple tenths of a percent.

“The S&P 500 closed slightly lower last week,” writes Jonas Elmerraji of our small-cap team. He figured the index would race resistance at 1,300, and “sure enough, the S&P hit an upside barrier at 1,296.06 on Tuesday.

“As a result, I think we can make a fairly good case for stocks to behave as predicted in the short term. While traders may see continued consolidation to end January, it’s still too early to call a top in the market.

“One thing that is worth noting is the spike in volatility that accompanied that price action. The CBOE S&P 500 Volatility Index, better known as the VIX, gained nearly 20% last week, a sign that uncertainty and tumult are creeping back into the market.

“Earnings season is likely the culprit for much of the added volatility of last week. With a slew of firms (including Wall Street behemoths like Apple and Goldman Sachs) reporting their earnings data, it’s understandable that reactionary price swings are on the rise. It’s likely we can expect more of the same into February.”

Rare earth stocks are surging today on news that Molycorp plans to double its production capacity by the end of 2013. Current shareholders plan to sell $500 million of their holdings to finance the expansion.

Molycorp is up close to 5% — still more than 25% off its high reached on Jan. 4. Other stocks in the space are catching a tail wind and moving up, too.

It doesn’t change Byron King’s outlook on the sector — that overall, it was due for a rest. He still sees one exception, though. While momentum players chase Molycorp and other familiar names in the sector, “Right now, you have a rare opportunity to claim a stake in one company before the mainstream catches wind of it… while it’s still DIRT-CHEAP.”

Byron calls this situation a game changer… and you can see why in this presentation.

Crude oil is off slightly today, back below $89 a barrel. Saudi Arabia’s oil minister says worldwide oil demand might rise 2% this year and OPEC might boost output to meet that demand.

That would be news to other OPEC members who’ve insisted production will stay steady this year.

Cocoa prices have jumped 6.3%, to a 15-month high… thanks to a disputed election.

The president-elect of Ivory Coast just banned cocoa exports for a month… in a gambit to cut off revenue to the government of the incumbent president, who refuses to step down. Now it’s up to the country’s main exporters to decide whether to go along with the ban.

Cocoa prices have jumped 21% in the two months since the election. Another 3.7% rise and cocoa will equal the 30-year highs set in December 2009.

“Hepatitis C is a devastating, sleeping killer,” writes Ray Blanco of our tech and biotech team. “Two out of three with the virus do not know they have it. Once it starts showing symptoms, the liver damage becomes severe.

“Although new infections have been falling, there is a huge population of older people with decades-old infections that will be newly diagnosed over the coming years. Total cost of treatment is expected to skyrocket to $80 billion by 2020. Obviously, we need better cures.”

Ray is tracking one that he says represents “a quantum leap in hepatitis C therapy. Current marketed treatments require nearly a year of combined interferon/ribavirin treatments, and the unpleasant side effects are quite strong.”

In contrast, the treatment Ray is following “boosts the cure rate up to 75% when used with interferon/ribavirin, while halving the amount of time that patients are under the regimen.”

Best of all, this treatment was just granted “priority review” by the FDA. That means “the amount of time for a final FDA response is generally halved over standard review”… and it can become the first to tap a potential $2 billion market.

This is one of six “jackpot events” Ray and Patrick Cox see taking shape. You can learn about all six of them here.

The FDIC shuttered four banks on Friday night. The biggest by far was Denver’s United Western Bank, with $2.05 billion in assets. The others were in Georgia and the Carolinas.

This brings the total so far in 2011 to seven. Last year, 157 banks bit the dust, 140 the year before.

Since capital goes where it’s treated best, it’s about to start fleeing Illinois.

Jimmy John Liautaud, founder of the Jimmy John’s sub chain, just applied to move his residence from Illinois to Florida… and his company’s headquarters could soon follow. “All they do is stick it to us,” he says of the state legislature’s move to jack up the personal income tax from 3% to 5%… and the corporate income tax from 7.3% to 9.5%.

“I could absorb this and adapt,” Liautaud tells his hometown paper, the Champaign-Urbana News-Gazette, “but it doesn’t feel good in my soul to make it happen,” he says. Too bad for Champaign, where he brings people in to headquarters for training, accounting for 350 motel nights every week.

Where the firm ultimately moves is up in the air… but his kids started school in Florida this month. “My family and I are out of here.”

“You said you would appreciate our comments, so I’m giving mine,” a reader writes. “Let me first say I love my subscription to Capital & Crisis and find it extremely helpful in managing my brokerage business.

“As for The 5 Min. Forecast, I have stopped reading it. It is so negative that I just found myself not wanting to go through the misery of reading it each day. I realize you want to express what you are feeling, but the tone is just too negative for me.”

The 5: Too negative? You want to see negative? Check out what this guy, perhaps channeling The Mogambo Guru, had to say after our survey of the municipal bond market on Friday.

“Talk about heart palpitations, the way you so subtly put that. If I read that right, IT’S THE DAY OF RECKONING!!!!!!!!!!! Tell Bonner.

“Am I the only one to see it — wow!

“One curious thought: Exactly when did this news (leak) come out? Was it Friday, Jan. 21, 2011? And at what time, 1, 2, 3 p.m.?

“Can’t imagine what opening bell on Monday would bring — ouch — with this news going around on a weekend to brew and stew on ears? It’s a no-brainer. Place a sell order for Monday, mark Jan. 24, 2011, down. I thought we had till the summer for this. As the minutes tick away…

“Yours truly, this historic weekend (when were the maggots going to tell us?). And thanks to The 5, why I read ya. I know what to do, got two days.

“Anybody ‘long’ Monday is in trouble.”

The 5: Ahem… If you’re purposely engaging in exaggeration, you’re not doing a very convincing job of it.


Dave Gonigam

The 5 Min. Forecast

P.S.: “We have the opportunity to short one of the most overhyped, overvalued stocks I’ve ever come across,” Dan Amoss wrote to his readers on Friday.

“The stock just enjoyed a blistering rally, having tripled since last summer. Now it faces growing competition and pushback from its largest customer. Plus, the stock is selling for 30 times highly questionable earnings and 10 times its squishy-soft book value.”

Put Dan’s strategies to work and this stock’s impending fall could double your money in four months. We’re still offering discounted membership in Strategic Short Report. Check it out here.


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