Stop. That’s exactly what China just did. They just made it clear they’re not playing the printing game anymore by allowing the U.S to dictate their monetary policy; they’re not going to allow the U.S. to win this currency war.
If you’re worried about inflation, investing in stocks shouldn’t keep you up at night. In America, the stock market acts as an inflation buffer for those with disposable income; however, Chinese citizens tend to save and avoid the stock market or other risky assets.
As a result, the Chinese have three times more bank deposits as a percentage of GDP than in the US. That means China is much more worried about inflation than we are, as their stockpiles of money sit and lose value.
Yet, if China doesn’t print soon, it will have its hands tied as it waits to import the world’s inflation set off by the Fed, European Central Bank, Bank of Japan, Bank of England, Bank of Korea, Reserve Bank of Australia, and many other central banks currently attempting to print their way out of economic decay.
As central banks issue base money to buy dollars, domestic interest rates are forced down while domestic inflationary pressure is forced up. When interest rates are low, speculators can easily bid for long positions in organized commodity futures markets, forcing commodity prices up quickly. In turn, this causes major issues with the developing countries of the world where the rise in food prices is a matter of life and death.
America’s printing press exports inflation at a much greater rate than any other country. In 2010, consumer price indexes shot up more than 5% in major emerging markets such as China, Brazil and Indonesia, while the consumer price index in the U.S. itself rose only 1.2%.
Looking back at history, the same thing happened after the Nixon shock of 1971, where Japan experienced more extreme inflation than the U.S. But half a decade later, inflation in America’s producer and consumer price indexes was more than 13%.
What happens now that the U.S., the world’s superpower, has launched an unprecedented and unlimited bond buying program called QE3?
Years from now we’ll feel the dramatic effects of the aftermath caused by the Fed’s actions.
A rampant uproar in inflationary pressures is likely to occur and will be combated by a quick and massive increase in interest rates – just like in the early 1980s where Fed Chairman Paul Volcker imposed extremely high interest rates (the fed-funds rate touched 22% in July 1981), to beat out stagflation (a period of high inflation, slow economic growth, and high unemployment.)
To prevent their currencies from falling further, foreign central banks were forced to sell dollars and let their domestic money supplies contract. The aftermath was an extremely overvalued dollar.
While stagflation was defeated, the combination of high interest rates, an overvalued dollar, and large fiscal deficits caused a sharp increase in the U.S. trade deficit. This eventually led to the world-wide recession of 1982-1983 (see America’s Gold Wiped Out.)
No Other Choice
The only foreseeable way to avoid the above scenario is a sudden and massive sustainable increase in jobs.
But there’s no way that will happen (see A Really Big Problem.)
What to Do?
The easy answer is to invest in gold, silver and related stocks (and other hard assets such as fine art, collectibles, and real estate.*) But that also doesn’t mean you should do this forever, as most gold bugs will tell you.
(For Canadians, this will not be the case in the short term as housing prices in Canada have yet to crash and remain at levels with little upside. However, we’re finally seeing decreases in both prices and demand. Eventually, overall real estate in Canada will make sense as an inflation hedge – but not yet and not for a while.)
I am not a gold bug. I simply invest in bull markets and strong fundamentals; gold has both (silver does too.)
When to Sell Gold
When the Fed finally decides it needs to curb runaway inflation, as it did in the 80s, that’s when you sell your gold and gold stocks. Of course, you will eventually buy them back at much cheaper prices.
(Those who say, “Never sell your gold,” will never make money investing in it. I am an investor and that means I invest to make money. You don’t make money if you don’t sell.)
But don’t worry; we still have a long, long way to go before that’s happening. We’re nowhere close to explosive inflation yet and it will be sometime before we experience it (see It’s Time to Get Stinky.) Housing prices in the US remain subdued and economic conditions around the world remain weak.
However, once global growth begins to accelerate and capacity utilization increases, economic bottlenecks will cause the price of inputs, such as energy, to rise:
There will then be another inflection point when countries will realize that by allowing their currencies to appreciate, reduced import prices will spur productivity and domestic growth. This will happen when it becomes apparent that the savings resulting from lower input prices exceeds the export losses associated with a stronger currency. Though the timing of this event is difficult to forecast, its occurrence will likely cause Bretton Woods II (our current monetary system) to collapse. – Scott Minerd of Guggenheim Partners
By then, gold prices will be so high it wouldn’t matter – those invested in the right gold and silver stocks will have made a ton of money in the process.
When Will Gold Stop
The real answer is never. It will always climb – just like everything else (well, except for currency.) However, there will be long periods where it does nothing. Now is not one of them.
At the beginning of 1970, gold was trading at $35 (under Bretton Woods). As soon as the United States unilaterally terminated convertibility of the US dollar to gold, gold has never looked back. By 1980, gold had shot up to over $800 and never dipped below $250; that’s a rise of 2185% and 615% respectively. While gold took a dive following those years, its price floated at a much higher base level than ever before.
Even under Bretton Woods, countries fought for currency stability and pegged their currency to the dollar – much like they do today. As I mentioned before, when the US prints, so does the world. The more money is printed, the higher the price of gold will go. It’s not rocket science.
A lot of things need to happen before gold’s current rise stops and turns stagnant. We’ll need a strong recovery in the economies of the world, we’ll need a higher dollar, and we’ll need much higher interest rates. Furthermore, these all need to come together in unison to seriously curb the price of gold. I don’t see that happening anytime soon.
That means gold will go much higher.
As Scott Minerd of Guggenheim Partners had noted:
“The U.S. gold coverage ratio, which measures the amount of gold on deposit at the Federal Reserve against the total money supply, is currently at an all-time low of 17%. This ratio tends to move dramatically and falls during periods of disinflation or relative price stability. The historical average for the gold coverage ratio is roughly 40%, meaning that the current price of gold would have to more than double to reach the average. The gold coverage ratio has risen above 100% twice during the twentieth century. Were this to happen today, the value of an ounce of gold would exceed $12,000.”
Will we see $12,000 gold? Maybe. Not soon, but a strong possibility in our lifetime. But we wouldn’t need that to make our fortunes in gold.
As a matter of fact, we simply need gold to inch up a few hundred dollars before certain gold stocks take off.
Gold stocks have recently outperformed gold for the first time in years (see A Really Big Problem.) When gold decides to make its move, I believe we’re going to see gold stocks once again take centre stage in a big way.
Of course, I wouldn’t invest in just any gold stocks. There are thousands of them, many of them garbage, and they’re all vying for your money. So which ones deserve it?
Narrowing Down the Playing Field
Over the past year, 3 of the 4 stocks I covered have climbed significantly since my initial report*. That’s because they all fit in one of the following three categories:
- Producers that are increasing production and decreasing costs, while lagging in price when compared to peers (Timmins Gold, up 23%*)
- High grade explorers next to producing, or near production, mines that are takeover targets (MAG Silver and Balmoral Resources, up 43% and 70% respectively)
- Near term producers with strong Preliminary Economic Studies and blue sky, take-over target potential.
So far this year, I have covered companies in categories 1 and 2. That means I am now looking for a company in category 3.
I just came back from a site visit last week to look for just that. And I think I have found it.
This company has:
- Strong capital structure (no warrants, ever) with a low float
- Excellent infrastructure; next to a major highway, power, and experienced local workforce
- Minimal production start-up costs
- Initial PEA highlights a payback period of just over one year (1.2 years) with current gold prices and 1.7 years at $1500 gold.
- A new high grade gold-silver vein discovery that is attracting the attention of majors in the area
Of course, none of the above criteria would make any sense if their management team wasn’t top notch. Any company I invest in needs to be meticulously managed, with a team proven to make money for shareholders.
Just a few years ago, this same team was able to raise over $250 million for their last company. They also turned their previous $1 stock to over $10 in less than two years. Now they’re onto a new near-term production project.
If everything checks out, be prepared for one of my last company reports this year; I cover no more than 6 companies per year.
Make sure to check your emails next Sunday.
Until next week,
Disclosure: I am long gold and silver through ETF’s and bullion, as well as long both major and junior gold and silver companies. We’re biased towards MAG Silver because they are an advertiser and we own shares. We’re biased towards Balmoral because they are an advertiser and we own shares. We’re biased towards Timmins Gold because they are an advertiser and we own shares and options. You can do the math. Our reputation is built upon the companies we feature. That is why we invest in every company we feature in our Equedia Reports, including MAG Silver, Timmins Gold, and Balmoral Resources. It’s your money to invest and we don’t share in your profits or your losses, so please take responsibility for doing your own due diligence. Remember, past performance is not indicative of future performance. Just because many of the companies in our previous Equedia Reports have done well, doesn’t mean they all will.
Furthermore, MAG Silver, Balmoral Resources, Timmins Gold, and their management, have no control over our editorial content and any opinions expressed are those of our own. We’re not obligated to write a report on any of our advertisers and we’re not obligated to talk about them just because they advertise with us.
Disclaimer and Disclosure
Equedia.com & Equedia Network Corporation bears no liability for losses and/or damages arising from the use of this newsletter or any third party content provided herein. Equedia.com is an online financial newsletter owned by Equedia Network Corporation. We are focused on researching small-cap and large-cap public companies. Our past performance does not guarantee future results. Information in this report has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. This material is not an offer to sell or a solicitation of an offer to buy any securities or commodities.
Furthermore, to keep our reports and newsletters FREE, from time to time we may publish paid advertisements from third parties and sponsored companies. We are also compensated to perform research on specific companies and often act as consultants to many of the companies mentioned in this letter and on our website at equedia.com. We also make direct investments into many of these companies and own shares and/or options in them. Companies do pay us to advertise on our website and we often distribute our reports on featured companies. While we are never paid to write a rosy and positive report on any company, we do market our reports using the advertising fees paid for by our featured companies.
This process allows us to continue publishing high-quality investment ideas at no cost to you whatsoever. Our revenue is generated by sponsor companies and we grow our readership by using the advertising fees we charge to distribute our reports. This helps both Equedia and our client companies gain exposure and allows us to provide you with our research at no cost. Therefore, information should not be construed as unbiased. Each contract varies in duration, services performed and compensation received.
If you ever have any questions or concerns about our business or publications, we encourage you to contact us at the email or phone number below. Equedia.com is not responsible for any claims made by any of the mentioned companies or third party content providers. You should independently investigate and fully understand all risks before investing. We are not a registered broker-dealer or financial advisor. Before investing in any securities, you should consult with your financial advisor and a registered broker-dealer. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. Any decision to purchase or sell as a result of the opinions expressed in this report OR ON Equedia.com will be the full responsibility of the person authorizing such transaction.
Equedia Network Corporation is also a distributor (and not a publisher) of content supplied by third parties and Subscribers. Accordingly, Equedia Network Corporation has no more editorial control over such content than does a public library, bookstore, or newsstand. Any opinions, advice, statements, services, offers, or other information or content expressed or made available by third parties, including information providers, Subscribers or any other user of the Equedia Network Corporation Network of Sites, are those of the respective author(s) or distributor(s) and not of Equedia Network Corporation. Neither Equedia Network Corporation nor any third-party provider of information guarantees the accuracy, completeness, or usefulness of any content, nor its merchantability or fitness for any particular purpose.