$1800 Can’t Kill Gold Demand

Addison Wiggin – August 30, 2011

  • Up, down, back up again: Gold crests $1,800… again. China, India and the global ‘love trade’…
  • The ideal moment to load up on gold stocks… and a special offer with access to your best picks, free
  • Dow up 800 in three weeks: Why Chris Mayer says “meh” and what he’s doing instead…
  • Smash the system? Heh… protesters stuff corporate coffers instead…
  • The mailbag unplugged (at last!): Hurricane irritation, regulatory overreach, a Tea Party “sex strike”… economics in one lesson and more!

   If you woke up this morning a little bleary eyed, you likely blinked and missed gold’s latest sortie above $1,800. Our favorite precious metal shot above $1,800 Friday… and tumbled back below yesterday… only to reclaim it again today.

At last check, the spot price is $1,829.

Warning: If you have been following our advice and been buying gold since it was in the $280 range, the following episode of The 5 contains a fair dose of guilty pleasure.

   In fact, perhaps just to spite “bubbles Roubini” this morning, The 5 takes (yet another) look at what near record prices are doing to demand for the Midas metal in markets around the globe.

Slowing it down, right?

   Well, no. Not in China — the world’s largest gold producer and its second-largest consumer..

In shops around Shanghai, a Reuters survey found “surprisingly solid gold sales over the last few weeks. Shoppers [are] unfazed by gold’s stellar price gains.

“Demand from the world’s most populous country,” the world’s oldest news organization of the English speaking world adds helpfully, “is adding hundreds of thousands of people to the ranks of affluent and middle-income consumers of gold every year. [Which] implies that the long-term price floor for gold is set for a steady increase…”

   How about India? Not in the land of curry, either.

In India — the world’s No. 1 gold-consuming nation — the “love trade” is about to kick in. Gold consumption during the gift-giving season — which begins in earnest on Oct. 26 with Diwali — is expected to surge 25%.

“Purchases may climb to 250 metric tons in the three months ending Nov. 30,” say Rajesh Exports, India’s biggest jewelry maker. That’s up from 200 metric tons last year.

Of course, Diwali in October is followed by Indian wedding season… then Christmas in the West… and then Chinese New Year

   In Dubai, today is the first day of Eid al-Fitr, the Muslim holiday that marks the end of Ramadan and “traditionally a period of strong gold buying in the Middle East,” according to Sharps Pixley.

“Traders and investors… and you newsletter writers… are always fixated on the ‘fear trade,’” our friend Frank Holmes chided us about over drinks at the Fairmont lounge during our Vancouver symposium in July. “But it’s the ‘love trade’ that drives demand several times a year.”

“It’s all good,” we assured him. “We can live with love.”

   “Gold’s steady rally — still without mining stock participation — presents an opportunity,” says our short strategist Dan Amoss, turning our attention to the gold stocks.

“The HUI Gold Bugs Index includes all the popular large gold stocks. The ratio of the HUI to gold has weakened over the past six months — retracing half of its rally from generational lows in late 2008:

“Large-cap mining stocks will report spectacular cash flows in the second half of 2011,” Dan goes on. “Gold mining projects must compete with base metals projects for mining equipment. As global GDP growth slows and base metal prices weaken, the competition for scarce mining equipment and skilled labor should ease.”

Meanwhile, “high capital and operating costs, which have held down gold mining stock prices, should decline. Diesel prices should remain weak in terms of gold (perhaps not in terms of dollars), offering another boost to profit margins.”

   Dan suggests it’s also looking like a prime time to jump into the higher-risk-but-higher-reward junior gold miners, a segment that has heretofore remained not nearly as attractive.

“Take a look,” Dan says, “at this 10-year monthly chart of the TSX Canadian Venture Index, a proxy for junior mining stocks.

“It shows that in most years, the first half tends to be weak, offering buying opportunities. And the second half of the year typically witnesses strong rallies:”

“The two exceptions: In 2007-08 (straight down) and 2009 (straight up) as a deflationary depression was fully priced in — and then didn’t happen.”

“After the recent rally in gold bullion prices above $1,900 per ounce, the junior mining stocks still have plenty of catching up to do.”

Mr. Amoss made a recommendation last Friday: a small firm working a 55-million ounce deposit in Western Canada. The guy who runs the firm has an incredible track record, building his last company from a $2 million market cap to $2 billion.

[Ed. Note: This is a remarkable time. Unique in your lifetime, even. With gold hitting new highs on a routine basis, the mainstream is just about to come around. Many of our analysts are “backing up the truck” on gold stock recommendations. So much so, we’ve assembled a special report of AF’s top gold picks and we want to give it to you for free.

Along with your free report, we’re opening a unique opportunity for you to join one of our most valuable membership services, The Equity Reserve. If you’d like a chance to make some solid gains with record highs in gold… as well as the trends and forecasts we’ve been highlighting here in The 5… but you’re not interested in trading options, currencies or commodities… the Equity Reserve is perfect for you.

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  • Energy & Scarcity Investor, featuring tiny energy and mining plays hand-picked by Byron King
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  • Mayer’s Special Situations, with under-the-radar opportunities from Chris Mayer
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What’s more, as a new member, you get an immediate all-access invitation to join us in Baltimore for our Emergency Summit Oct. 13-14, 2011 — a “boot camp” for investing in these volatile and “interesting” times.

The following Equity Reserve invitation is an extraordinary offer — one we’ve never extended before and aren’t liable to extend again. Please, review your list of benefits right here. Including your free special report detailing the array of Agora Financial’s top gold stock recommendations… free of charge, gratis for taking a trial membership. Give it a shot.]

   U.S. stocks are drifting after yesterday’s big gains. The major indexes are down, but not by much, as traders digest these numbers…

  • Home prices gauged by the Case-Shiller home-price index moved up 3.6% from the first quarter to the second, but are down 4.5% year over year. Every city in the 20-city survey experienced a year-over-year decline; the Twin Cities had it worst, and even the government-inflated bubble of Washington, D.C., couldn’t escape a modest 1.2% drop
  • Consumer confidence as measured by the Conference Board plunged to its lowest reading since April 2009. This was another instance of the result being lower than even the lowest guess among dozens of economists polled by Bloomberg.

The market will likely drift most of today until the midafternoon release of minutes from the Federal Reserve’s Aug. 9 meeting. From that, traders will try to deduce the Fed’s next moves on Sept. 21, much as a witch doctor examines entrails.

   The Dow is up 800 points in the last three weeks.

“The rally is surprising if you focus on the bad economic news and the potential for another recession,” says Chris Mayer. “It’s not… if you look at stocks compared with what else you might do with your money.”

   In this space two weeks ago, Mr. Mayer observed that relative to Treasuries, stocks hadn’t been this attractive in three decades. Not long after that panic, money flooded out of stocks and into Treasuries.

“A tidal wave of money pushed the short-term T-bill negative for a brief moment,” Chris recalls, “but it would be irrational to stay there for long, given where stocks are.”

Now comes a report from James Bianco of Bianco Research — with a chart showing price-earnings ratios for the last half-century, along with his projection of 2011 earnings…

“Low rates benefit P/E (price-earnings ratios) more” than slowing economic growth hurts them, Bianco maintains. Based on the 10-year Treasury rate of 2.2%, he thinks fair value for the S&P 500 would be at least 14 times earnings. That’s 1,358 on the S&P, which would mean a 13.5% rise from here.

“Of course,” Mr. Mayer points out, “you could poke holes in this a few different ways. Interest rates could rise. And earnings could fall. So far, neither has happened. Corporate profits for the first half of the year have been strong, for example.

“It can be helpful sometimes to have a sense for the backdrop on the overall market. In the late 1990s, it helped to understand the market was frothy. By 2000, it made no sense at all, with even ho-hum companies like Coca-Cola commanding a price-earnings ratio of 50 times. It helped to know in the late 2000s that there was a housing bubble. It meant you skated around banks, real estate and housing stocks.”

Chris’ unique conclusion: Unlike the tech bubble or the housing bubble, “today, though, there are no such extremes in the stock market as a whole. I think the market is in some gray middle area — neither cheap nor dear.”

In other words, it’s a stock picker’s market — which is exactly what Chris likes.

“I don’t buy the stock market,” Mr. Mayer asserts, “I buy stocks. I buy businesses. And I look to hold onto them and not trade them.”

For some of Chris’ favorites, look here. And for access to all of our editors’ favorites across the spectrum of stocks, you can’t go wrong with the Equity Reserve. We wouldn’t be urging you this hard if, in fact, we didn’t believe the following offer is your best possible shot at maximizing returns before the “love trade” concludes early next year.

   Last today, let’s file this one under: “Subversion FAIL.”

It seems protesters of all stripes have taken a shine to the Guy Fawkes masks made popular in the 2006 movie V for Vendetta.

It’s become a particular favorite of Anonymous, the computer hackers who sometimes turn out for public protests against Scientology, or police brutality or even the Federal Reserve.

Turns out, selling the masks is a good business.

“We sell over 100,000 of these masks a year,” says Howard Beige, executive vice president of Rubie’s Costume in New York. “We usually only sell 5,000 or so of our other masks.

“We just thought people liked the V for Vendetta movie. Then one morning I saw a picture of these protesters wearing the mask in an online news article. I quickly showed my sales manager.”

“What few people seem to know,” says a bubble-bursting article in The New York Times, “is that Time Warner, one of the largest media companies in the world and parent of Warner Bros., owns the rights to the image and is paid a licensing fee with the sale of each mask.”

Heh… as Thomas Frank would say, “Commodify your dissent.” Maybe the nabobs who populate the ranks of Anonymous will target Time Warner next. Wouldn’t that be sweet irony?

   “I wonder,” writes a reader of the gold market’s action last week, “why seven hours before margin requirements were raised on gold, the price was down $100.00.

“To say it leaked out through our fearless leaders and commodities exchange hours before it was released to the public would not be out of the question — just as bank stocks jumped 10% or more before the bailout.”

“No wonder our congressmen and -women are so rich. They are exempt from insider trading… nor does the SEC ever find the obvious.”

The 5: Suspicious, indeed.

But other than the obvious enjoyment one derives from conspiracy theories, why obsess over the short-term movements? Dollar cost average your way into gold, so you smooth out your acquisition costs, and give yourself peace of mind while the trend still holds. Here’s a good place to start.

   “I’m somewhat annoyed by your comment that Irene was underwhelming,” writes another reader. “Lots of preparation by some very careful people made it a nonevent for most of us.”

“The storm reminds me of Y2K, where a whole lot of meticulous work turned it into a nonevent too. I sincerely hope the people who ‘hyped’ Irene are around the next time and make it a nonevent too. I personally thank each and every one of those dedicated professionals.”

   “Really?” adds another. “Thirty-seven dead, fourth deadliest hurricane. Surely you’re not so desensitized that you can’t recognize tragedy! You offer good advice, but sometimes get too partisan. Leave the rhetoric to the politicians.”

The 5: “Partisan?” What’s partisan about media and the wea… oh, never mind.

   “The tweet from Lizzie O’Leary was illuminating,” writes another reader who managed to figure out that we found Irene underwhelming relative to the media’s bigger-than-Katrina treatment. “I live in New York City and spent some time on Saturday morning scanning cable and broadcast news channels for some storm information.”

“Each channel was filled with hysterical commentators shrieking on about how awful things were. Yet the images shown just didn’t look that severe. As I suspected, the storm wasn’t so bad, yet trying to find honest and useful commentary accurately describing what to expect from the storm was simply impossible.”

“Amidst the blaring headlines and constant commercials was nonstop shrieking about how awful it was to be. In the end, we got some wind, some rain and in a five-block radius around my apartment, one poor small tree fell over. At least the supermarkets had a great day Saturday.”

“The one near me was packed. Who knew shopping carts jammed with beer and chips were survival supplies?”

“Of course, the stores bought the hype and closed all day Sunday, which ended up a mostly cloudy and breezy, dry, perfectly safe day. So I guess it all balanced out — media-hyped, crazed-sales Saturday and an unfortunate total loss of business on Sunday.”

“It’s not just financial news — we can’t even get honest, nonhyped weather reporting, either.”

The 5: We have this conversation all the time: Media is entertainment. Not the “news.” You get what you pay for.

   “Whenever attorneys need work,” writes a reader in response to the “news” the Securities and Exchange Commission (SEC) is undertaking to regulate the hydraulic fracturing of shale gas deposits, “Congress listens, and apparently, so does the administration.”

“It appears the Brotherhood of Attorneys, to which most members of our esteemed Congress belong, had some empty pages in their day timers. So we now have the SEC concurrently doing work done by the EPA.”

“I wonder: Will we now have the EPA requiring corporations to submit their balance sheets, P&L and forward-looking statements when an environmental permit is applied for? What’s next? Will the SEC require proof that the board of directors’ flu shots are current?”

“If the people in government don’t snap out of this zombie-like trance they are in, they will wake up one day and find that the brightest and best that was America has moved on to a place that provides them with a better opportunity, just like America was for those that sought a better opportunity away from their homeland over 100 years ago.”

   “What an idea!” writes a reader who saw our item on the sex strike in Colombia. “My grandfather used to say that the best contraceptive was a pair of crossed legs. Maybe this could spread to the United States and the Tea Party.”

The 5: Um… your suggestion is a tad racy for a family outfit such as ours, but we can’t help but ask: What conditions do you think the Tea Party women should set before agreeing to end the strike?


Addison Wiggin
The 5 Min. Forecast

P.S. “Chris Mayer’s recommendation of Hazlitt’s book Economics in One Lesson cannot be emphasized enough,” adds our last reader for the day. “If all were required to read this pithy tome, and just 50% grasped its contents, then we would not be a nation of economic illiterates.”

The 5: Well, taking Hazlitt’s lead, we wouldn’t want to make the read “compulsory” exactly… except perhaps among the bureaucracy. Not that it would do much good.

P.P.S. “Gold stocks are like dry kindling in a forest,” Chris Mayer advised his readers yesterday. “They’ll light at some point.”

When? Don’t fret about that. Just load up on the best stocks you can find. Our team has sniffed out six of the best in a special report available to you right now. Learn how to get yours here.


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