Should You Buy Gold? The Answer’s Yes, But Not Quite Yet

By Mitchell Clark, B.Comm.

There’s no rush to take any new action in this market. That’s the best stock advice I can give to any equity investor with new money to play with. There are all kinds of attractive opportunities out there, but this market needs a break. Stocks need a rest and so do oil, gold and silver. Investors shouldn’t feel any pressure to make any new trades. The timing isn’t quite right yet for bold new action.

With markets in need of a correction, it’s actually quite a difficult environment to be making new picks in. Investing in gold is a key strategy, but this sector’s been so strong that all the good companies have already seen their stock prices go way up. The returns are going to be mostly incremental from existing producers. Like always, the big money will be made with juniors who are making new discoveries.

As a speculative investor, I would actually devote a great deal of my efforts to the junior mining sector, especially given the state of the global economy. The underlying price of gold is going to stay strong for the next several years and institutional investors are on board with this view. Also, the domestic economy still isn’t strong enough to generate the kind of growth that a speculative investor is looking for. Even the technology sector isn’t producing the kind of top-line growth that gets people excited.

As I’ve written before, I like a junior miner to be an existing producer, have lots of cash in the bank with little to no debt, to be currently drilling for more minerals, and have a following from the Street and institutions. There are a lot of these companies out there, but the game has changed now that gold is trading over $1,000 an ounce. Now the business model really makes sense and companies have the cash to go looking for more metal.

The mining business has always been a cyclical industry and the same goes with investor sentiment for the sector. Right now, there is a ton of cash floating around the entire industry and, for investors, it’s time to milk it.

It’s always difficult giving generalized investment advice, because it’s tough to predict markets and each investor has a different view of things. Over the very near term, I would let both the equity and commodity markets consolidate for a while. Then I would be a new buyer of micro-cap gold stocks.

Mitchell is a Senior Editor at Lombardi Financial specializing in small-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, such as Penny Stock Reporter, Micro-Cap Stocks, and Monster Profits. Mitchell, who has been with Lombardi Financial for thirteen years, won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was as a stock broker for a large investment bank. While Mitchell is not working he enjoys fly fishing, motorcycling and tending to his hobby farm.

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Moody’s Very Late, But Nevertheless Quite Appropriate Greek Downgrade Inches Us Closer To the Rate Volatility Storm

For the past two years, and particularly over the last couple of months,  I have been harping on the coming interest rate volatility storm. Things are now moving in lockstep, precisely as I have forecast. In the news this morning from the mainstream media…

Moody’s Downgrades Greek Sovereign Debt by 3 Notches:

Moody’s rating agency downgraded Greece’s sovereign debt on Monday from B1 to Ba1 and assigned it a negative outlook, citing significant risks to its fiscal restructuring program.

Moody’s now has the lowest rating for Greece of all the major credit agencies and is the first to classify Greek government debt as ‘highly speculative’.

“The fiscal consolidation measures and structural reforms that are needed to stabilize the country’s debt metrics remain very ambitious and are subject to significant implementation risks,” Moody’s said in a statement. It added that it saw risks that conditions attached to continuing financial aid after 2013 will reflect solvency criteria that the country may not satisfy, and result in a restructuring of existing debt.

“At a time when the global economy is fragile and market sentiment is sensitive, unbalanced and unjustified rating decisions such as Moody’s today can initiate damaging self-fulfilling prophecies and certainly strengthen the arguments for tighter regulation of the rating agencies themselves,” it said.

So, the Greek officials threaten to “regulate” those who FINALLY come out with the truth. Did you guys ever see that movie called the “Adjustment Bureau”?

The Greek government wants the truth “Adjusted”, and will even go so far as to do it themselves – see the Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! excerpt below.

In addition, Moody’s is soooooo late to the party. As illustrated in explicit detail nearly a year ago, this event is practically a foregone conclusion. See What is the Most Likely Scenario in the Greek Debt Fiasco? Restructuring Via Extension of Maturity Dates and look as Greece’s situation before and after any restructuring after 2013 (Professional and Institutional level subscribers (click here to upgrade) may access the live spreadsheet behind the document by clicking here (scroll down after for full summary, spreadsheet and charts).

… and that is with their “pie in the sky” estimates, as clearly pointed out in Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!

…try taking a look at what the govenment of Greece has done with these fairy tale forecasts, as excerpted from the blog post “Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!…

Think about it! With a .5% revisions, the EC was still 3 full points to the optimistic side on GDP, that puts the possibility of Greek  government forecasts, which are much more optimistic than both the EU and the slightly more stringent but still mostly erroneous IMF numbers, being anywhere near realistic somewhere between zero and no way in hell (tartarus, hades, purgatory…).

Now, if the Greek government’s macroeconomic assumptions are overstated when compared with EU estimates, and the EU estimates are overstated when compared to the IMF estimates, and the IMF estimates are overstated when compared to reality…. Just who the hell can you trust these days??? Never fear, Reggie’s here. Download our “unbiased, non-captured, empirically driven” forecast of the REAL Greek economy – (subscribers only,click here to subscribe)  Greece Public Finances Projections 2010-03-15 11:33:27 694.35 Kb.

The Greek Restructuring and Haircut Analysis that linked to above goes into explicit detail, showing the NPV of cashflows to investors after a a wide scenario analysis of prospective default and restructuring scenarios. It ain’t pretty!

We have performed similar analysis for the usual suspects: Portugal, Spain, Italy and Ireland. Portugal is currently at record high funding rates – and that’s AFTER the bailout!

This is Portugal’s path as of today.

Even if we add in EU/IMF emergency funding, the inevitability of restructuring is not altered. As a matter of fact, the scenario gets worse because the debt is piled on.

Let it be known that there are larger sovereign states that are worse off. Ireland is a prime example. If one were to look at the cumulated funding requirement of Ireland over the next 15 years as clearly illustrated in Ireland’s Bailout Is Finalized, The Indebted Gets More Debt As A Solution But The Fine Print Is Glossed Over – Caveat Emptor! Monday, November 29th, 2010

There are other states that are not in as bad a shape but are poised to do much more damage,  and then there are a plethora of states that will get dragged down through contagion. Yet, the natural manner of pricing risk in the equity markets does not transmit these facts because of the unprecedented amount of liquidity stemming from central bankers around the world doing the Bernanke/Japanse QE thing.

Keep in mind that the German’s game plan is to kick this down the road till 2013, at which point it will be unsustainable butthe mechanisms will be in place to force bondholders to take haircuts in front of the tax payers…

Sounds like a plan, doesn’t it? Except for the high probability that you will probably have a rate storm well before 2013. If rate volatility and/or levels spike for the more developed nations before then, all hell breaks loose. In the US, we’re damn near zero now. Hey, what happens to residential and commercial real estate valuations when rates spike higher? See  The Coming Interest Rate Volatility, Sovereign Contagion, Geo-political Unrest & Double-Dip Recessions: Here’s The Answer To Valuing Global Real Estate Through This Mess.

Now, let’s return to the post “The ECB Loads Up On Increasingly Devalued Portuguese Bonds, Ensuring That They Will Get Hit Hard When Portugal Defaults“. All readers should open this link in a new window, scroll down to the spreadsheet at the bottom of the post, and reference the first column with the cell labeled “Decline in present value of cash flow for creditors” under the label “Haircut in the principal amount”. Now, scroll over the to the column labeled “Restructuring by Maturity Extension & Coupon Reduction w/Haircut”, which is the second to last column in blue highlight and carefully read the figure for the “Decline in present value of cash flow for creditors”. Booyah! And that’s the unlevered losses. 5x leverage wipes you out several times over. It is rumored that the ECB is levered over 90x, just for the sake of discussion. I strongly suggest anyone interested in this space study this spreadsheet very closely. This level of analysis is probably not available anywhere else on the free Web.

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