Addison Wiggin – January 5, 2012
- Risk off: Hot money flees stocks (and gold), floods into dollars…
- Our 2012 gold outlook: Why this might finally be the year it takes a rest… and the remarkable profit opportunity that results…
- Rick Rule on the year of the takeover in gold mining… and an early sign it’s already under way….
- The full story behind the “$16 trillion bailout”… readers comforted they’re not alone… how to take advantage of volatility without chaining yourself to a trading screen… and more!
A new year, yes. But a well-aged story: Generalized fear and loathing about Europe is fueling the safety trade.
The longest, most-boring financial crisis in history continues.
For laughs, let’s tote up the damage:
- The Dow is down nearly 1%. Other U.S. indexes are down more, others less
- Banks dragged down European stock indexes. Spain closed down nearly 3%, Italy 3.5%
- The euro is down to $1.279 — a level last seen in September 2010
- The dollar index is approaching 81 for the first time in a year
- The yield on a 10-year Treasury note is back below 2%
- Oil is down about 1%, to $102.21.
No single euro-story is driving the action:
The Italian bank UniCredit plans to offer new shares at a steep discount to raise capital. Spain’s government said that nation’s banks need to raise 50 billion euros in new capital. A French bond auction generated less demand than you’d expect considering the rating agencies insist on rating France AAA.
In other words, there’s nothing especially new or alarming… just scattered reminders that the dust bunnies of Europe can’t be swept under the proverbial rug.
Gold isn’t escaping the fallout. It dipped below $1,600 just after Comex trading opened… At last check, it’s recovered a bit to $1,607. Silver clings to $29 by a few slender pennies.
“What we learned in 2011,” wrote Bill Bonner on Tuesday, “was that when a Great Correction pinches, the dollar is the salve of choice — not gold.”
“When investors fear losses, they turn to the dollar for protection.” They will continue to do so a while longer, Bill surmises: “We’ll probably see a further correction in the gold price…perhaps down to $1,200. Or perhaps it will stop at $1,400.”
“2012 should see more trouble from Europe, and therefore potentially more dollar buying,” adds Peter Schiff — who now sells bullion in addition to running a brokerage.
“But,” he cautions, “what is important to understand about these circumstances is not the scale of the moves but the direction of the trend.”
Even with the dollar riding high, “it’s still down over 30% over the last decade as measured by the generous U.S. dollar index,” says Mr. Schiff. “Gold, by contrast, is up over 350% in that period.”
“Of course, past performance does not guarantee future results, but the fundamentals have not changed.” Indeed, one day, it will dawn on nearly everyone that no fiat currency is safe, including the dollar.
But we’re not there yet. Not by a long shot. It goes back to our friend Doug Casey’s crack about how something that’s inevitable might not be imminent.
For all of today’s “risk-off” weakness, gold stocks are holding up remarkably well. The HUI index is off a quarter percent, a hair below 520.
“In this environment, to make the big money,” says our old friend Rick Rule, “you need to enter [gold] stocks that aren’t institutional momentum favorites. Those stocks aren’t going to work.”
Instead, you need to look for “the kinds of stocks that are going to be sold to the Rio Tintos and the BHPs and the Newmonts and the Barricks of the world. The buyer this year is going to be the industry.”
Thus, “the impetus for the market in exploration stocks this year will be takeovers. The companies that have done a good job, although they may not find traction among institutional or retail investors, will be taken over by larger mining companies.”
“These larger companies have both the need to replace production and the financial strength to complete the takeovers and to build out the discoveries that have been made by the juniors.”
As a result, Rick sees the majors paying substantial premiums for the juniors — more than you’d normally see.
“If the industry sees $2 billion in discounted free cash flows and they see a market cap of $600 or $700 million, they are willing to pay $1.3 billion to secure net-present value. So it’s possible that you will see 70%, 80% or even 100% premiums in bad markets, for good assets, in select names.”
Options traders are already sniffing this out: Early signs of a rally in small-cap gold stocks are showing up. According to figures from Trade Alert, open interest in call options on GDXJ — the gold junior ETF — reached a record 222,300 contracts as of Tuesday.
Starting a week earlier, “Options traders have demonstrated conviction in a turnaround, setting up multiple new positions that profit from gain over the coming months,” reports the Dow Jones Newswire.
What’s more, the put-versus-call ratio is the lowest since mid-September.
Interesting activity for an ETF that, as we noted yesterday, dropped 38% during 2011.
Another catalyst Mr. Rule sees: New gold discoveries.
“It’s my belief that we are going to re-enter a discovery cycle and I would be surprised, frankly, if we didn’t have four or five names that made 50- or 100-fold returns on pre-discovery market capitalization.”
In fact, Rick finds the coming period analogous to the mid-1990s… when names like Diamond Fields shot up from $4 to $160… and Arequipa Resources catapulted from 30 cents to $30.
We agree… and not just because we’ve respected Rick’s analysis for years, so much so that he’s become a fixture of our annual symposium in Vancouver.
You see, in the course of assembling our 2012 forecasts, our research team stumbled upon something remarkable in the gold sector. It’s happened only four times in the last 33 years.
The average gain that’s resulted: 158%. The maximum: 219%.
We’re so excited about this, we’ve assembled a team of experts to lead an online seminar… and you can watch it absolutely free.
Rick Rule will be among the participants. So will another Vancouver favorite, U.S. Global Investors chief Frank Holmes. Our own resident rockhound Byron King is in the mix, and so are Chris Mayer and Michael Pento.
This event launches one week from tomorrow. You can ensure your access today. Details here.
A day before the Bureau of Labor Statistics delivers its December jobs report, two “preview” numbers rang in better than expected…
- The number of private-sector jobs grew by 325,000 during December, according to the payroll firm ADP
- First-time unemployment claims shrank last week to 372,000, according to the BLS.
The service sector grew modestly in December. The ISM nonmanufacturing number clocked in this morning at 52.6.
That’s up from the month before, and still comfortably above the 50 dividing line between expansion and contraction — but below the “expert consensus.”
Looking under the hood, we see employment in the service sector actually shrank last month. Doesn’t exactly square with ADP’s private-payroll number. Hmmm…
Here come the “worse than expected” reports on the holiday retail season: Same-store sales at Target rose 1.6% last month.
The Street was expecting double that figure.
“Is this for real?” a reader writes. He then links to a six-month old article from a site called unelected.org detailing the results of the one-time Federal Reserve audit made possible largely through the persistence of Rep. Ron Paul.
“What was revealed in the audit,” the article states, “was startling: $16,000,000,000,000.00 had been secretly given out to U.S. banks and corporations and foreign banks everywhere from France to Scotland” during the 2008 panic.
As synchronicity would have it, someone sent us a link to this video making the same point… and much more entertainingly.
Before you click on it, a warning: At the end, you learn the video is part of someone’s campaign for Congress. Try as we might to stay out of politics, we find we keep getting sucked in… and we suspect the problem will get worse as 2012 goes on.
So to answer the reader’s question: Yes, it’s for real.
A caveat: A lot of that is a case of these banks borrowing, say, $1 billion overnight, returning it, borrowing it again the next night, and so on… running up the total.
But even when you take out the double counting, the numbers are staggering. The lending reached its peak on Dec. 5, 2008 — at $1.2 trillion. As Bloomberg reported last summer, that figure “was almost three times the size of the U.S. federal budget deficit that year and more than the total earnings of all federally insured banks in the U.S. for the decade through 2010.”
And the banks that took out those loans are no more solvent now than they were during the panic three years ago. The difference now is they no longer have to apply “mark-to-market” accounting; they can value their “assets” however they damn well please.
“At last, some discussion of this travesty,” writes a reader after our mention of the National Defense Authorization Act, complete with its effective repeal of habeas corpus rights.
“This needs to be publicized and analyzed to make the public aware of how egregious this act is.”
“It is very comforting to know,” another writes, “that my fellow 5 Min. Forecast reading Americans passionately engage in discussions about how the NDAA includes or excludes U.S citizens from ‘indefinite detention without any legal access.’”
“However, no one cares to question the humanity or legality of such laws. Even if Americans were excluded, the USA has no right to kidnap non-U.S citizens without due legal process, proving someone’s guilt in court and affording them the right to defend themselves and clear their names.”
“If I recall correctly, the Bible tell us, ‘Recognize that your neighbor feels as you do, and keep in mind your own dislikes’ (Sirach 31:15). U.S. of Authoritarianism has sunk to despicable lows and is no different from third-world dictatorships. I guess Americans will wake up only when they will taste their own medicine, but by then it may be too late anyway.”
“You can’t imagine how delighted I am that you are capable of using proper English grammar,” writes a reader, evidently impressed with the correct usage of “whom” in a recent issue.
“We even hear President Obama saying ‘for who the bell tolls,’ and every TV newscaster and newspaper making the same mistakes. ‘For he and I’ (good grief), instead of ‘for him and me and for whom’!”
“Thanks for knowing your grammar, plus all that other good information.”
“Thank you for opening yesterday’s 5 with my opinion,” a reader writes. “It always brings a smile when I feel like just maybe my thinking is in line with yours.”
“The other point is it is all those little subtle comments that maybe the readers miss that go through the daily post. It takes a lot of time and readers must read these missives daily to understand the real value of the free service.”
“And no, I don’t always agree with everything. I just take the good with the bad.”
“Thanks again for the daily education.”
The 5: You’re welcome.
Cheers,
Addison Wiggin
The 5 Min. Forecast
P.S. “If there’s one byproduct of the European crisis I am sure of, it’s global market volatility,” says our income specialist Jim Nelson.
“Likewise, the conversation over what we should do about Iran is likely to grow in intensity. No matter what direction the governments of the Western world take this conversation, the result will be the same: more volatility.”
“That means stock markets are likely to see more 4% and 5% intraday movements in 2012. This is great news for day traders.”
And if you’re not a day trader? You still have some excellent choices, Jim says. “There’s no reason we should let speculators have all the fun in 2012.”
“Rapid volatility causes investors to do one of two things: either get out of stocks altogether or hedge their positions against potential rapid movements.”
Jim has refined a strategy to take advantage of those potential rapid movements. No day trading required. You won’t have to chain yourself to your computer… and you can still rake in some handsome gains.