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SUMMER GOLD FINDS COSMIC FAVOR
ONLY GOLD IS AS GOOD AS GOLD
Our BIG play for 2005 is that gold will break out to $480 to $500 by this summer. Traditionally, geopolitical uncertainty, war and global economic sluggishness have been good for gold companies. Years ago, we were one of the first to suggest that Gold was more than just an inflation and safety metal (a status it lost after the first Gulf war), but also is a currency. Today, it is widely recognized that gold acts like a currency and that a weak US dollar is good for gold. It is also widely recognized that a further decline in the US dollar is inevitable.
GOLD IS AN INFLATION METAL
While gold acts much like a currency, it should not be ignored that it remains a traditional safe haven inflation hedge. Remember when just a few years back the financial press feared $400 gold as a “canary in the mine” barometer of inflation. Yet for how long has it been over $400, while US government statistics until recently failed to measure signs of real inflation? Today the signs of inflation are loud and clear to anyone who eats, drives, visits their doctor, buys a home, pays for college, etc. The CPI has been significantly understating inflation for years. Bill Gross of Pimco is quite correct in pointing out the CPI con job. It understates inflation (the cost of living as well this year as last year). That perception will soon change, as I see it no later than the summer of 2005. These days I am not alone in considering gold the cheapest long term protection against both inflation and/or an eventual US Dollar decline. Thus I believe virtually EVERY investing portfolio should have 10% gold or similar hard asset allocation in 2005.
FUNDAMENTALS
These are extraordinary times, where geopolitical risk and outlook continue to outweigh normal stock market considerations. Remember: Life jackets, Deadbolts, Smoke and Fire Alarms etc. do NOT provide you with Financial security. Liquidity, Global Diversification and hard assets such as gold DO offer some protection.
Gold demand continues to grow faster than its global mined supply. It is strongly rising in emerging economies, especially India and China, which are becoming two of the largest gold consuming nations. Additionally, forward gold producer hedging continues to be unwound at a strong pace. The biggest risk intermediate term is the potential of further central bank selling. We believe this will continue to be restrained by current European Central Banks agreements at least until mid 2006, as well as partially offset by some Asian Central Bank buying. Bottom line: By the summer of 2005, EVERY investor will want some exposure to the gold market, just as they wished they had to the energy market in 2004/2005.
The fundamental reasons for gold are fourfold:
1) US Monetary Policy of easy money, which has also resulted in a Real estate Bubble.
2) US Fiscal Policy: While investors cheered income tax reductions and believed it to be a stock market positive, longer term there is no such thing as a free lunch.
3) US Government Spending is Out of Control.
4) US Foreign Policy: Imperialistic, unilateral wars are inflationary.
Summary: all of the above is GOOD FOR GOLD.
Our investing advice calls for a modest 10% gold/commodity hedge with a monthly accumulation April, May and June.
Our Current Fair Value for gold is $450 as a currency. As an inflation metal, we calculate gold’s Fair Value to be $500.
April 1, 2005 gold closed at $425. You do the math.
TECHNICAL
Gold has been in a secular bull market since making its 22-year low four years ago on April 2, just under $257. Short term, gold’s technical action in 2005 to date has been neutral to bearish. We believe this picture will change dramatically before the summer.
Gold has broad support in the 420-425 area; it has overhead resistance 450-460. Assuming it is broken on the upside, then $480 to $500 is the next natural gold target.
ASTROLOGY
While there are some positive indicators in the US Dollar horoscope in Q2 2003, both the XAU and COMEX horoscopes are very positively configured for the summer of 2005. Looking further out, in 2006 we are forecasting that Gold will also outperform, while for 2008 we project it could be somewhat of a home run. Enough said.
What is our long term track record for precious metals? As a sun sign Leo, I have a natural affinity for gold. Perhaps for this reason, our Gold forecasting record has often been nothing less than stellar. For example, The Astrologers Fund had warned clients a month before the Bre-X disaster. Years ago, when the gold commodity pit was boring and “sitting dead in the water”, we forecast a major rally from under $300 to the DAY it would break $400! We forecast that gold would reach $450 by December 2004 and have loudly and publicly proclaimed our $480-$500 August Gold break out rally for 2005!
HOW TO MAKE MONEY IF OUR FORECASTS ARE CORRECT
Historical cycles show that a strong gold rally ignites the major producers first. Soaring microcap gold exploration plays then follows this. Just as IBM and GE are the Dow bellweathers, Newmont (NEM) is the key proxy for gold. Given gold’s small market capitalization, NEM would be the first big money portfolio play. Along with the gold ETF (GLD) and Barrick Gold (ABX), it is where much of the BIG Wall Street money will go. Currently the stock price of the bigger gold companies have already factored in a gold price of $450. Hence there may be more short term upside in the metal itself. However, once gold moves into the $480-$500 range, the reverse will be true and the gold company stocks will outperform. A lot of more aggressive hedge fund money will move into midcaps such as Glamis Gold (GLG) and Nova Gold (NG). Should any of this be allocated to small caps? The answer obviously varies according to individual portfolio risk/reward parameters.
If I am right about August gold (Futures) break, this time microcaps will fly as the public will enter the market. However, as the first quarter is often a seasonal high for many gold microcaps, we recommend some caution here. I would wait until Gold is at least $440 before a strong commitment to gold microcaps.
If you prefer the adventure of finding buried treasure, then there are nearly 1000 mining exploration or development stage companies on the TSX alone. Note: In general, I prefer Gold stocks with mines located in countries having minimal, or no, political and currency risk.
No sector demonstrates the advantages of illiquidity better than the gold share market. In a rising gold market, small- and mid-cap gold stocks tend to produce a much bigger bang than simply buying gold itself. When gold breaks through $450 an ounce on route to new multi-year highs, small cap gold stocks (as a group) are likely to perform much better than either the big cap XAU stocks or the metal itself. However, investing in junior resource companies can be especially risky. To minimize some of this risk, don't overload your portfolio with junior mining companies. I recommend buying over time a diversified basket of 5 small cap companies, all together totaling no more than 5%-10% of an overall aggressive portfolio. If you are sporting a large portfolio, then a 10 small cap gold basket would reduce risk. Note: You may wish to choose a mixture of early state exploration companies (highest risk/reward) with a strong exploration upside ["bonanza"] potential with near production/early production (lower risk) ones. Again this depends on one’s personal risk/reward profile.
SUMMARY
· Gold was last above $500 in mid-December 1987 and we project it to test $480-500 as early as July 2005. If so, this time small cap junior gold companies will shine as the Majors and Midcaps have already done.
· As a portfolio hedge, we recommend at least 10% gold. This would be done conservatively with a mixture of physical gold (GLD) and gold majors ABX and NEM. If you have more tolerance for risk, look to midcaps such NG.
· I recommend an accumulation over April, May and June.
· If you love to gamble and desire Las Vegas style investing excitement, buy a group of 5-10 microcap stocks that are likely to soar should the public becomes as excited about gold as they have about energy.
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