A Distortion in the Gold Market Could Make You 200% This Year
By Dan Ferris, editor, Extreme Value
Thursday, February 19, 2009
Have you tried to buy gold coins or bars in the last few months?
If so, you already have a good idea of the "distortion" I'm going to tell you about today. Right now, the premiums on gold bullion coins and small gold bars have shot up to as much as 15%-20%, sometimes more. That's if you can find any to buy.
The reason: "Large purchases of coins are perhaps the ultimate sign of safe-haven gold buying," said John Reade, a precious-metals strategist at UBS. I said the same thing to a MarketWatch reporter who called me up several weeks ago to talk about gold bullion.
If this were a full-on, mom-and-pop gold mania, it'd be a sign of the top. But this is different.
A recent Financial Times article said gold buying is being driven by professional money managers and the "very rich," who are hoarding the metal in vaults. Peter Munk, founder of Barrick Gold, recently said just about the same thing to a group of power brokers in Davos, Switzerland. Munk said he's never seen such strong interest in physical gold ownership.
Something strange is going on. People are paying double-digit premiums for gold bullion... and yet quoted gold prices are still well below their March 2008 highs of just over $1,000. The CBOE Gold Index, at around 151, is more than 30% below its all-time high. The bellwether gold stocks like Barrick and Newmont are still 30% off their all-time highs... But the high premiums on bullion coins and bars indicate the published gold price could be too low by as much as 20%.
People can't get enough real gold in their possession. They're buying gold coins so fast, the U.S. Mint has rationed them, trying to fairly distribute the supply among throngs of customers.
But at the "risky" end of the gold spectrum, gold stock prices are so cheap investors can buy gold exploration projects for less than nothing.
Everyone is terrified of risk. They look ahead and see nothing but disaster for years to come. All they want is investment insurance: cash, gold bullion, and nothing else. They sure as hell don't want "risky" natural-resources stocks.
The distortion has created a paradox: There's almost no risk left in risk. That's no typo. I said, there's almost no risk left in risk. Say it a different way and it becomes clear: Risk is dirt cheap. Safety, the safety of Treasury bills, is way too expensive, selling at the equivalent of almost 29 times pretax earnings.
How can you and I take advantage of this distortion? First off all, get acquainted with gold stocks right now. Do it this week. I recommend starting with a unique group of natural resource stocks called "prospect generators."
If you dislike the mining business because it's too risky and capital intensive, I agree completely. But prospect generators aren't mining companies...
Mining companies use enormous machines and armies of people to dig gigantic holes and pull tons of dirt and rocks out of them. That's how they make a living. Prospect generators just employ a few smart guys who know their geology. They get ideas, find a partner – and hardly spend a penny of their own money.
Let's get one thing straight. I'm not saying natural-resource exploration isn't a highly risky business. It is. Most exploration stocks are terrible places for your money. There are perhaps 5,000 of these little companies in the world. Only about 400 of them are worth knowing anything about.
But the best among those are so cheap right now, they could easily double or triple your money this year.
Good investing,
Dan
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THE BIGGEST FINANCIAL DISASTER NOBODY IS TALKING ABOUT
The Daily Crux calls it "the biggest financial disaster nobody is talking about." We'll call it another chapter in the book of "gold is soaring, you just don't realize it."
The disaster is the enormous debt problem Western banks have with Eastern Europe and Russia. The old communist bloc countries borrowed over a trillion dollars to fund rapid-fire economic growth over the past decade. That growth has disappeared... but the debts are still there. The situation threatens the entire European banking system.
With such stupendous debt problems, Europe's paper currency is plunging against gold right now. In the eyes of Americans, gold is still below its 2008 peak... But if you're just looking at gold in U.S. dollar terms, you're missing the "big picture."
As you can see from today's chart of gold versus the euro, gold is soaring. The yellow metal reached an all-time high yesterday. The charts look similar for folks in South America, Australia, and Asia. We stand by our claim: Gold is soaring. Gold is at historic new highs... you just don't realize it.
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Merrill Lynch economist David Rosenberg says home prices will drop another 15 percent as housing inventories remain double those in a normal market, making a late 2008 economic recovery a pipe dream.
"People would rather rent than take on a mortgage to service a deflating asset," Rosenberg told the Canwest News Service.
He said that housing demand continues to collapse despite the best homeowner affordability ratios in 40 years.
"In our view, hopes that the economy is going to recover as soon as mid-year are likely to be dashed in coming months," Rosenberg says.
– Newsmax
Policymakers at the Bank of England voted unanimously earlier this month to start the process of quantitative easing by buying gilts and other securities.
Minutes for the Bank's monetary policy committee's February meeting, published this morning, showed that all nine members of the MPC agreed that the Bank needed to act now to try and get credit moving through the UK economy again.
Quantitative easing is what non-economists call "turning on the printing press" – the authorities buy up bonds either from banks or from the commercial sector to boost the supply of money in the economy.
– The Guardian
[Monday] was Presidents Day. Congress commemorated George Washington's throwing a dollar across the Potomac by throwing $780 billion down a rat hole.
– Jay Leno
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