The data and discussions in my columns since January 28 ("Indices Form Secular Triple Top") emphasize the disjunction between 1) the economy whose basics are deteriorating and 2) the indices soaring on POMO injections, corporate cash and the public's need to participate and recoup damage done in recent years. Free digital credits and treasury issues enable deficit spending, devastate those relying on fixed income and drive everyone like geese to the markets. Declining net worth, employment, and rising debt and inflation are masked by official metrics. The government punitively taxes corporations (33%) and drives them abroad, forcing distance from America by taxing even their overseas income. The misfit between markets and the economy is recognized by some even when official numbers are used.
While fiat currencies are vitiated, precious metals consolidate their secular bull with repeated bottom touches near $1555/oz Au. The disdained metals and miners again have made secular lows. Buy now.
The disjoint between socio-economic conditions and the markets brings to mind some haunting verses:
Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the center cannot hold;
Mere anarchy is loosed upon the world… (Yeats 1919)
Fiscal policies in the fiat bloc have unleashed socio-economic anarchy upon a world stumbling toward a new monetary order. Dial spinners beggar their nations to facilitate management of generic human inventory. No one can see when they will wean the addict from its fix. They may assert reasons to increase POMO for years. The ultimate withdrawal / crash will be heard around the world and precious metals will emerge from the wreckage resulting from this transformative experiment in fiscal-economic apocalypse.
In the fiat-POMO era depressed metals and miners are a growth strategy as well as a hedge. We have been dragged into a fiscal-economic dusk where experts intend "to serve man" per the famous Twilight Zone episode. In a March 05 interview, Stan Druckenmiller said regarding entitlements that "there are too many eaters," a turn of phrase with nasty historical resonance. Ads instruct seniors "don't outlive your money" while fiscal policies destroy wealth and tribunes of the people incite class and inter-generational rage and distrust. So what shall we do?
Robert Fitzwilson of the Portola Group says "silver is the most grotesquely undervalued asset on the planet." A perusal of the manifold uses of silver confirms his view. Regarding gold, he contrasts its 1970s overvaluation relative to the dollar to its artificially suppressed value today. Distinguishing between bullion and miners he notes that mining companies have many forms of risk and "investors need to take a long term approach" to the shares. Long term means more than two years. If you can tolerate volatility and declines that often are irrational then they are a good option. Investing in mining shares is not like owning Kimberly Clark (KMB) or Proctor & Gamble (PG). "Central Banks and investors are scrambling to buy gold not gold [mining] stocks," Fitzwilson observes while reiterating his guidance that "the case for energy and precious metals has never been stronger."
Don't grieve if you missed the bottom made last week. Further drops may occur in this extended basing of prices in the unloved sector. Follow companies with good properties in safer jurisdictions, with minimal debt and buy. There are enticing options: several miners recently bounced off or made new 52-week bottoms. Many folks focus on increased expenses for Barrick Gold (ABX) or the political pressures it and Gold Corp (GG) are getting from the President and Parliament of the Dominican Republic re the Pueblo Viejo site. But reserves, production and integration with global trends make these two major companies a buy at current prices. Both pay dividends and at its fallen valuation Barrick gives a 2.7% annualized yield. At $32/share, its bottom last May and June, Gold Corp which pays monthly (1.84% annualized) and has steadily tripled its dividend in the past three years also is a buy. Silver Wheaton (SLW) has added significant gold streams in Brazil, new contracts in Ontario and an increasing yield (.91% annualized) and is a strong buy at $30 or below. Both GG and SLW have average target estimates 60% above their current price.
A good vehicle for metals is the Sprott Physical Platinum & Palladium Trust (SPPP). Take profit from high-flying equities and shift to metals and a few miners. It is wise to transfer from tops to bottoms when the depressed assets have many intrinsic merits and the markets are far above the economy's floor. First Majestic (AG) with five producing mines and six E & D projects in Mexico is a good silver play in a friendly jurisdiction. In 2012 it increased production 20% to 2.5 M oz with net income 35% of revenue, stable EPS, growing cash flow and cost of $9.08 /oz. This is good even with silver below $30/oz. It will rise.
During the melt down, McEwen Mining (MUX) remained above its 52-week low and rose sharply after basing at $2.15. It has no long-term debt and owner Rob McEwen is invested 25% in its success. Vista Gold (VGZ) which despite good properties in America, Mexico, Indonesia and Australia has under-performed its peers for a year double-touched 32-month lows at $1.60 and recovered strongly to $2.17. With that rebound and no long-term debt, sentiment on VGZ is 89% bullish. The junior gold miners ETF (GDXJ) seems to have found support at $14.95. It closed March 8 at $16.10. This ETF holds 79 companies, 85% of them Canadian and Australian. Its main holdings include B2Gold (BGLPF), Perseus Mining (CA: PRU), Medusa Mining (AU: MML), Silvercorp Metals (SVM) and Sandstorm Gold (SAND). Sandstorm has a streaming-purchase agreement with Entrée Gold (EGI) of which Turquoise Hill (TRQ) and its majority owner Rio Tinto (RIO) have a 23.6% share. Another top ten holding in the Junior ETF is Nevsun (NSU) nearing mid-capitalization size and noteworthy because it shows the limits of risk analysis based solely on region. Nevsun's property is in Eritrea, a dicey area. Yet in the recent sector collapse it remained 40% above its May-July 2012 double bottom and yields 2.54%. Of similar size, Gold Resources (GORO) with six properties in Mexico has a 60% net income to revenue ratio and no long-term debt. It just went ex on a 5.2% annualized yield and its average target estimate is 64% above its current price. Last week it rose strongly off a 28-month double bottom. Dividend-paying mid-tiers with big upside include IamGold (IAG) which has risen 10% off its bottom, has 13.4 million oz of proven reserves, average costs and target estimates double its current price. Also consider Kinross Gold (KGC) whose 2.6 million oz/year production, proven reserves of 60 million oz and mine life rank just behind Gold Corp. Synergies like that between RIO - TRQ, Entrée Gold and Sandstorm indicate strong growth potential in the sector going forward. Expect to see more of them.
Despite very attractive valuations in the sector and good companies (supra), concerns about miners arise from geopolitical games. Regulatory, tax and geopolitical policies are punitive. An example is laws suppressing use of American coal and pushing its export to China. This results in higher electricity costs in America, loss of jobs and increased pollution. American companies scrub coal and filter stacks, minimizing particulate emissions. China does not spend on these technologies. Thus on any given day 75% of the particulate matter on America's west coast comes from China. Though largely unreported, for seven years China has been the main source of global CO2 pollution. It also accounts for 35% of mercury in the world's oceans. Yet politicians and NGO's lambaste American companies and tax them till they depart. In a fierce double jeopardy, Federal mandates force States to control emissions from China, an impossible task. It recalls when "acid rain" from America supposedly was destroying Scandanavian forests thus justifying an assault on American industry. What is the motive? Surely environment regulators understand these dynamics just as the Federal Reserve Board grasps the results of its policies.
Just as the managers of the fiat system have an apparent animus against the economies they regulate there may be a general bias against miners, not least precious metals miners who produce the commodities suppressed by the fiat system. Disorder in global economies largely results from self-aggrandizing governmental policies. Like war, government is a nexus of waste and corruption, a parasite growing on the economic house like poverty in the attic. Like a black hole it feeds on energy and substance and voraciously draws more into its maw. Identifying the State as "the New Idol" Nietzsche wrote, "whatever it says it lies, and whatever it has it has stolen." Hawthorne's caustic meditations in "The Custom House" on the Federal Eagle are apt: luring unwitting citizens to its embrace with promises of care, it will fling them off with scars from its claws and arrows. The point is that absent government interventions, the miners are a sector sure to rise on fundamentals and a new monetary order. But with government unlikely to limit itself bullion may be a steadier investment if one wants to choose either/or. To me it seems that several miners should be in every portfolio and that now is a time to initiate or increase positions. Just remember that the sector requires patience amid volatility.
We still favor Consumer Discretionary and Staples and Health Care with undervalued energy fourth. Energy's growth possibilities are offset by volatility arising from the nexus of taxation, diplomacy and war. An ideal play is Sprott Resources (SCPZF.PK) that in one vehicle unites several basic principles and trends. Its holdings are gold bullion, agriculture, fertilizers and it pays a monthly dividend that annualizes to 10.5%. Its funding and thesis are sound and suited to the macro situation.
Richard Russell recently recognized that we are in an uniquely disordered cycle. His evolving view is that after 1980-2007's secular bull we are five years into a secular bear market likely to last at least four more years. This meshes with the no-nonsense analyses of John Williams at American Business Analytics, Michael Pento, James Turk and others. These perspectives derive from a turbulent re-ordering of the world's fiscal, demographic and international arrangements. For example, G20 is in the midst of a coordinated and massive liquidity expansion to boost nominal values. Remember, the recent nominal tops that mask economic deterioration only return us to the levels of sixty-six months ago, not even to those when inflation is considered. Dollar strength relative to the EURO and Yen disguises intrinsic loss of value while artificially suppressing precious metal prices for now.
World economies, demographics and power vectors are being re-ordered in a shift unprecedented in scale, depth and impact. Among the best ways to position your self are precious metals and agricultural related commodities. For the metals, a major buying time is here. Have multiple defensive positions in place and remain alert for governance and discourse have a Hobbesian - Malthusian cast. We are in a period of managed wealth destruction and economic chaos. Precious metals are an essential defensive position with strong growth potential almost assured by fundamentals and the multi-polar monetary order already in view.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SAND over the next 72 hours.