Oil & Gold-Two Great Commodities

Oil & Gold—Two Great Commodities Whose Prices Reflect the Fear in
Financial Markets

By Mitchell Clark, B.Comm.

Oil & Gold Two Great Commodities

The only trading action that seems to be working for long investors is in gold stocks these days. This isn’t a surprise, nor is it unexpected with the spot price of gold so high. Two more junior gold producers, AuRico Gold (NYSE/AUQ) and Northgate Minerals (AMEX/NXG), announced a deal to merge. The two juniors hope to create a new intermediate gold player and the expectation for production growth as a combined company is significant.

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In this particular case, AuRico Gold is doing the buying. The company’s share price (which has almost doubled since the beginning of the year) appreciated swiftly to a recent 52-week high of $14.17 per share. Then the company announced the all-share deal to acquire Northgate. It’s a trend that we’re going to see more of over the coming quarters. With share prices lofty and bank accounts full, everyone in the gold mining business wants to bulk up before the party’s over.

The broader stock market’s trading action reflects the overall sentiment in the economy. Add in the fact that the month of September is often not a good one for stocks, and one could easily predict that the next several weeks are going to be difficult. The stock market isn’t expensively priced, but that doesn’t mean that it will be anytime soon. There’s a mini cycle going on in the stock market and it’s all about the revision of expectations for the future. Expected returns from stocks are going down big-time, as current economic data sink in. No doubt the stock market needs a major catalyst in order for it to advance. It’s unclear at this time what that catalyst will be. As is usually the case, the market will need a combination of factors to come together if it’s going to move higher in any sustainable fashion.

The S&P 500 Index did an impressive job of recovering from the 1,120 level. It clawed its way back to 1,200 and is now trying to balance itself out with the fears in the marketplace. The next major move could be anything. What’s likely in my view is that the trading action will very difficult until we get into third-quarter earnings. Any earnings warnings from corporations in this market will not be well received. The same goes for any changes in fourth-quarter visibility come reporting time. Everything now has a fragility to it—the economy, financial markets, and expectations for the future. The only exception is the market for gold; investors still view this specific asset as a haven, even though the spot price has already gone up dramatically.

The best near-term indicator for share prices continues to be the spot price of oil. A weaker oil price is exactly what the economy needs, but it also serves to illustrate declining sentiment about the future. Stocks won’t advance until the economic news shows some major improvement.

Gold: Getting Ready for the Coming Correction

By Michael Lombardi, MBA

I’ve learned many things about investing over a career that has spanned 30 years. One of the biggest lessons is that not a single investment goes either straight up or straight down.

When an investment is rising in price (bull market), there are usually dips and corrections on the way up. Just look at the long-term secular bull market in stocks that started in the early 1980s and ended in 2007—there were many times stocks “took it on the chin” during that 25-year bull market run.

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Gold: Getting Ready for the Coming Correction

On the other side of the equation, not a single investment goes straight down either during a bear market. Just look at the U.S. new-home-builder stocks.

As these stocks started collapsing in 2006 with the real estate market, there were many rallies in the prices of home-builder stocks, as the new long-term downtrend in these stocks entrenched itself. Investors lacking experience would have bought on these rallies thinking that the home-builder stocks were showing life again. Most investors fail to realize the strength of a long-term bull or bear market.

And that brings me to gold bullion.

Long-term readers know I’ve been a big believer in gold investments since late 2001, when gold traded at about $300.00 per ounce. Each time that gold prices pulled back (five percent to 10% corrections); I would suggest dollar cost averaging down—buying more gold investments on price weakness of the metal.

Over the past 12 months, gold bullion has risen an astonishing $611.00U.S.per ounce—up 49%. The rise from $1,700 to $1,800 to $1,900 an ounce has been too swift and quick for me.

I’m warning my readers to expect a correction in the price of gold bullion. That correction could bring the metal back to $1,600, even $1,500 an ounce. However, I would view a pullback in the price of gold bullion as an opportunity…an opportunity to buy more gold investments at lower prices. My investing in gold preference would be the stocks of junior and senior gold-producing companies.

I believe we are in a long-term bull market in gold that will eventually see the metal at $2,500, even $3,000 per ounce. I’ve had this opinion for years and I continue to view any price correction in the long-term bull market in gold as an opportunity.

Michael’s Personal Notes:

Should you follow Warren Buffett and make an investment in Bank of America Corporation (NYSE/BAC)?

Bank of America common stock has collapsed from $15.31 in January of this year to $7.91 today, a drop of 48%. The nation’s biggest bank was experiencing a vote of non-confidence from investors. In my opinion, it brought on Buffett as a big investor in the bank to show “a vote of confidence” in the stock and the bank.

But the average investor cannot get the deal Buffett received for his $5.0 billion. Buffett’s Berkshire Hathaway investment was in preferred stock of Bank of America. These preference shares will pay Berkshire Hathaway six percent per annum. An investor buying the common stock of Bank of America gets a dividend yield equal to less than one-tenth that.

As an inducement, Buffett can buy another 700 million common shares of  Bank of America at $7.14. The stock sits at $7.91 today. Buffett is already “in the money.” Regular investors will not be able to get this deal in the open market.

Finally, Bank of America can give Buffett back his $5.0 billion at any time…but they will have to pay a “goodbye fee” of $250 million to get rid of him.

Personally, I’m not a big fan of Bank of America stock. I believe the company has plenty of problems. It could take years to turn it around.

Buffett’s recent investment in Bank of America makes sense for him. The average investor can’t get the same deal Buffett did. And I notice Buffett didn’t buy any of the common shares.

Where the Market Stands; Where it’s Headed:

The stock market sits today at about the same place it started 2011. Investor and stock advisor sentiment is quite negative. Monetary stimulus continues to be expansive. The yields on stocks are attractive compared to government bond yields. These three factors alone provide a positive backdrop for stocks.

However, economic conditions are very fragile. Consumers, worried about the economy, are increasing their savings as opposed to spending. The depressed housing market continues to be a drag on the economy. Jobs are difficult to create in a country that has lost its manufacturing base.

The immediate-term market conditions remain favorable to stocks and that’s why I believe the bear market rally will bring stocks higher. However, the short-term to long-term outlook is quite negative, hence why I continue to believe that all we’ve really been experiencing since March 2009 is a rally within the confines of a general bear market.

What He Said:

“The proof the party is over in the U.S. housing market could not be clearer to me. The price action of the new-home-builder stocks is telling the true story—these stocks are falling in price daily (and the media is not picking it up). Those who will hurt the most when the air is finally let out of the housing market balloon will be those buyers that bought in late 2005. In fact, the latecomers to the U.S. housing market may end up looking like the latecomers to the tech-stock rally that ended so abruptly in 1999.” Michael Lombardi in PROFIT CONFIDENTIAL, March 1, 2006. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.

Precious Metals Sector Deal-making Padding Investor Wallets

By Mitchell Clark, B.Comm.

There have been a lot of mergers and acquisitions in the mining industry lately and the consolidation is only going to increase with gold over $1,800 an ounce and silver over $40.00. The buying and selling of entire companies adds to the attractiveness of the mining sector, with the bonus of a potential takeover of one of your holdings at a premium price.

gold precious metals

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According to Ernst & Young, which compiles a lot of research on the metal and mining industry, the first half of 2011 saw a total of 19 megadeals in the mining industry, each worth over a billion dollars. This is twice the number of deals compared to the first half of 2010 and the average transaction value has more than doubled. North American took the lead as the most attractive region for mergers and acquisitions. Ernst & Young cited that the average mining company debt is at an all-time low, while cash flow and profitability are at all-time highs. With good availability of capital and historically low debt levels across the sector, the firm expects robust third and fourth quarters for mining company mergers.

Precious metals is the one sector of the stock market in which I would consider taking on new positions with enthusiasm, even though as a group, share prices have already advanced significantly this year. We’ve seen this advance especially in smaller companies with established production. Small operations see their business model improve significantly when the spot price of the underlying commodity moves higher, largely because junior miners are typically unhedged. At $1,800 an ounce for gold, virtually any producer of the commodity is making money hand over fist as cash costs for production typically average around $500.00 an ounce.

There is a unique set of circumstances that have come together at the same time for precious metals (gold and silver in particular). A number of factors have contributed to the major move in spot prices. These include a declining U.S. dollar, the sovereign debt crisis in Europe, huge increases in the global money supply, interest rates at record lows, the U.S. sovereign debt downgrade, stagnant supplies of precious metals, and consistent demand for the commodities.

I think it will take some kind of catalyst for the spot price of gold to move above $2,000 an ounce and stay there. It’s likely that this catalyst will be related to sovereign debt, which is an issue that hasn’t gone away. All that’s happened so far is that European sovereign debt has been bailed out with another round of new debts. It’s a vicious cycle of debt that will probably be responsible for the breakup of the euro currency sometime this decade.

Accordingly, the fundamentals for gold (and silver) continue to be robust.