Gold & Silver Setting up for an Attractive New Entry Point

By Mitchell Clark, B.Comm.

An opportunity is now being created in precious metals if the current correction continues. Most precious metals have been falling in price, as financial markets continue to reassess the expectations for economic growth. With lower expectations for global economic growth, the demand outlook for raw materials and spot prices are also going down.

The price of gold has, in my mind, been worthy of a correction for quite some time now. In fact, I think it would be a very healthy development for the long-term trend. It wouldn’t surprise me if the spot price of gold were to retreat and consolidate around the $1,600 level. It’s trading around $1,700 now and $1,600 should provide a good base.

Perhaps an even better commodity to concentrate on would be silver. This precious metal is more useful in terms of its industrial uses and many argue that it hasn’t kept up with the spot price of gold and could therefore be a better trade. The spot price of silver just broke the $37.00-per-ounce level and there’s no reason why it won’t retreat further to the $30.00-per-ounce level if the current trend in capital markets continues.

This is a very difficult stock market and individual investors are loath to participate. While expectations for the future continue to be reduced, the fundamentals for gold and silver remain mostly intact and are therefore worthy of new positions when spot prices find a new base.

It’s a wait-and-see stock market and a wait-and-see spot price market for precious metals. I think the focus for speculative investors should be on gold and silver and that risk-capital investors will have an attractive new entry point very soon.

As for the rest of the stock market, share prices remain very vulnerable before third-quarter earnings season begins. Over the last little while, equity investors have had to endure tremendous shocks to the system: sovereign debt problems in Europe; the downgrade of U.S. sovereign debt; natural disasters in Japan; no improvement in housing prices; and no improvement in employment…the list goes on. I think it’s fair to say that the equity market has held up quite well all things considered.

What we know is that mature economies are now in a period of very little to zero growth over the next 12 months. We also know that developing economies are slowing down and the probability of another recession is going up. The trading action in financial and commodity markets reflects falling expectations for economic growth and an expansion in the time horizon for recovery. Predicting outcomes in this environment is a crapshoot—nobody knows how or when the economy will get better.

With belt-tightening going on at the individual consumer level and at the government level in virtually all mature economies, we should be in a slow growth environment for quite a long time.

The Best Bet in Town—Resources—Getting Ready for the Big Squeeze

By Mitchell Clark, B.Comm.

The key in this bear market with stocks is to stick with resource stocks if you’re a speculator. I like large, blue-chip companies that pay high dividends for long-term investors. For risk-capital equity traders, the best action remains with gold stocks, and some of the best value now is in oil.

There isn’t much wind at your back in this market. Lately, the shorts have been winners. The trading action is choppy and trendless, reflecting investor sentiment that doesn’t have high expectations for the future. The current stock market malaise should be with us for a while longer, but the market is developing some decent values and the earnings outlook remains solid.

I’d be a buyer of new gold investments as the spot price corrects. There’s just too much strength in the fundamentals for gold for it to be ignored. In a world without growth, producing gold mines are some of the best businesses around. If you have a mining company with growing production and unhedged exposure to the spot price of gold, you have the makings of a very profitable enterprise…and the kicker is that business will just get better and better as the underlying spot price of the commodity rises.

We’ve been harping on gold for a number of years now and the trade has worked big-time. But, I also think it’s fair to conclude that the trade will keep on working with the growing likelihood of increased price inflation around the world. Global investors, even central banks, are looking for a store of value and there isn’t much in the way of anything that pays a decent return. Treasury yields are very low. The returns on cash are negative if you factor in the rate of inflation. The gold sector remains one of the best for speculators. The trading action in technology, biotech and most other stock market sectors just isn’t as good.

I mentioned oil because I like to consider investments when prices are down. Oil and natural gas are now trading at levels that I think are highly stimulative to the economy. Some exposure to this sector is warranted. And, as we see the commodity price cycle migrate into agricultural commodities, a couple of positions in this sector should also do well over the coming years.

As I say, I think equity speculators should have solid exposure to real resources going forward. Economic growth in most of the world’s mature economies is at a standstill. But emerging economies like China and India still have burgeoning appetites for raw materials. When mature economies start to accelerate, there is going to be a big squeeze on commodities and prices should skyrocket. Think of the state of the domestic economy now and consider the current prices for gold, copper, oil, corn, soybeans and sugar. Then consider the demand side of the commodity price equation when things get better. The supply side is quite stagnant. In my mind, the resource bet makes a lot of sense.

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.