Simple Equation Explains Long-term Effect of Money Printing

The U.S. Labor Department reported yesterday that the Producer Price Index (a measure of wholesale prices) rose by 0.3% in November, an annualized rate of 3.6%. The Labor Department also reported that Import Prices rose 0.7% in November, an annualized rate of 8.4%!

The numbers being released confirm my fears about rapid inflation ahead. If you think the rally in gold bullion is over, look at the inflation numbers coming from the Labor Department and you can’t but help rethink your opinion.

Government debt gone made, a central bank buying U.S. Treasuries, and an unprecedented expansion of the money supply, we can’t escape rapid inflation!

The only place deflation is happening is in the housing market!

Yesterday, the standard 30-yearU.S.mortgage rate fell to 3.94% (Source: Freddie Mac). You can get a home mortgage in theU.S.at the lowest interest rate since 1971, just before the energy crisis hit.

But hold on a minute. Won’t rapid inflation eventually lead to higher interest rates? Yes is the answer to this question. And won’t that mean mortgage rates will rise, further punishing theU.S. housing market? Yes is the answer to that question, too.

Two trillion dollars: that’s how much the Fed has increased its balance sheet by buying securities. And where did the two trillion dollars come from? It was created. My final question for you, dear reader: how can you create two trillion dollars, on top of the five trillion the Obama administration has expanded its debt, and have rapid inflation not become a problem?

Here is the simple formula: rising government debt plus lots of money printing = rapid inflation, which = higher interest rates, which = higher gold bullion prices, which = higher prices for quality gold mining stocks.

Michael’s Personal Notes:

Happy to see someone’s buying stock…

The year 2011 has been a difficult year for the stock market considering how well stocks performed in 2009 and 2010. Looking at the stock market and all the negative news we hear about the economy and the eurozone, it sounds like investors are avoiding the market. Wrong.

Appetite for stocks in the last quarter of this year has been exceptionally strong for IPOs with a good story. Consider these new IPOs:

Zynga Inc., the biggest maker of games for the web site Facebook, will raise about $1.0 billion in it initial pubic offering today, making it one of the hottest of this week’s IPOs. This offering values Zynga at $7.0 billion, almost seven times revenue.

Michael Kors Holdings Limited (NYSE/KORS) jumped 21% yesterday on its first …

The Stock Market Corrected; Guess Which Industry’s Best Poised for Capital Gains?

The spot price of gold has been in correction for the last couple of months. Gold stocks have also been correcting and I think the stock market is setting up the sector for a strong advance in the first half of 2012. The fundamentals for gold and gold stocksjust keep getting better and, now that central banks are coordinating even more liquidity to capital markets, the easy money will help boost global inflation rates.

According to Eurostat, which is the eurozone’s main statistics agency, the current inflation rate in the 17 countries that use the euro currency is running at three percent, while most of these economies are producing little to no growth. Unemployment in the eurozone was 10.2% in September and 10.3% in October and interest rates are falling. It’s the perfect brew for rising inflation.

In a report written by Thomas Biesheuvel at Bloomberg, gold stocks are said to be now trading at their cheapest valuation in the last nine years, even though the spot price of gold is trading close to its historic high. Everything in the stock market has been correcting in price and there’s a lot of good value out there, but no industry is poised for the same rate of earnings growth as gold.

The stock market experienced a price correction due to the European debt crisis and that brought gold stocks down commensurately. But, instead of snapping up reasonably priced gold stocks, gold investors have been buying gold exchange traded funds (ETFs) instead. According to Bloomberg and the Commodity Futures Trading Commission, holdings in gold ETFs grew to a record 2,350.8 metric tons, worth $127.6 billion as of last week. Hedge funds and other institutional speculators have been increasing their net-long position in gold over the last four weeks straight, which is the longest stretch since March. See Stock Market Correction Phase Over? Spot Price of Gold Looks to Be Bottoming.

So, we have positive, developing fundamentals for gold and gold stocks that are undervalued and poised to report record financial results in the fourth quarter. Now is the time to be considering new positions in gold stocks (if you haven’t already), perhaps more so than an ETF that moves with the spot price. Regardless, it’s pretty clear that the stock market has underappreciated the financial performance of most larger-cap gold stocks over the last several months.

The stock market’s latest correction was fostered by the European debt crisis, but what transpired was a severe reduction of confidence—in the prospect for global growth and the ability of eurozone policymakers to deal with the problem. Accordingly, stock market investors have been extremely reluctant to speculate in gold stocks, which I admit is a stock market sector that tends to be highly volatile and unpredictable. If the debt crisis in Europe can be contained, at least for the next few quarters, then I think gold stocks are extremely well positioned for capital gains. Valuations are reasonable and earnings expectations are strong. Investment risk still remains very high in the stock market at this time, but there are very few industries with fundamentals as strong as gold and precious metals.

Oil & Gold-Two Great Commodities

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

By Mitchell Clark, B.Comm.

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.

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.