Gold Bugs Need to Show Their Mettle: What Else to Buy

by: Chris Damas
A few months ago I warned gold could drop a hundred bucks really quickly, and for investors to be cautious. See the clip on BNN TV here.
Too bad my negative call was early and made just before gold started a meteoric climb from $1,325/oz to a high of $1,577.40 on the June futures reached just Monday.
The closing price moves have been ugly since: Tuesday ($16.70) Wednesday ($25.10) and so far today, down $39.10 to $1,476.30.
Today, the swoon dive I presaged is happening, in gold, silver and even crude oil.
June silver is off 9.4% at $35.68, down another $3.70 per Troy ounce.
WTI June futures mimicked the weakening in the not-so-precious metal, dropping on Tuesday ($2.47/bbl) and Wednesday ($1.81). But today has been the big plunge - $7.50/bbl at 1:45 pm EST to $101.82, or down 6.9%.
An equivalent daily drop in gold would be $104.56. And I fully expect the downdraft in gold to continue tomorrow and bottom at $1,425. Then some sort of dead cat bounce might ensue.
An interesting fact was reported yesterday, disclosed from IMF data: Mexico purchased 93.3 metric tons of gold (that's 3 million oz) during February and March (versus a reserve holding of 6.84 tons in January).
You now know why gold has had such a great rally this spring. I guess Mexico isn’t buying gold in May.
What disturbed me about gold earlier this year was that George Soros called it the ultimate asset bubble. But at the same time, his hedge fund was accumulating a big position in the SPDR Gold shares ETF (NYSEARCA:GLD).
To me, this is dissonant thinking and to be treated with trepidation. And of course, now Soros is rumoured to be bailing on the gold market, partly triggering the swoon dive this week.
What am I doing today?
I am buying more shares of TELUS (NYSE:TU), one of the big three Canadian communications companies and the biggest wireless operator in the West. The stock could be had at below $48 on the “A” shares today, but is now at $49.21 CDN.
TELUS came out with adjusted Q1 earnings of 97 cents, above the consensus estimate of 95 cents. The company delivered 6.5% growth in wireless and 80% growth in TELUS (Internet) TV subscribers.
They raised the quarterly dividend 4.8% to 55 cents implying a buy yield of 4.6%. Furthermore, TELUS guided 10% dividend growth from here to 2013, with the usual provisos. Q1 CFPS before working capital changes and after backing out a voluntary $200 million pension payment resulted was an impressive $2.28. The annualized cash flow multiple on the stock is an inexpensive 5.25X given the growth momentum.
I’ve also been buying CIBC (NYSE:CM) below $81 and holding BCE (NYSE:BCE) at current prices. BCE reports its Q1 on May 12.
It’s time for Gold Bugs to show their mettle (or metal) and buy.
But my bet is there are easier ways to make money in this market.
Canfor Q1 Earnings Released
Canfor (OTCPK:CFPZF) reported its Q1 this morning. I had indicated in yesterday’s report it would occur on Friday, it is the conference call that will occur tomorrow. The Canfor AGM is being held right now. Q1 results are reasonable and in-line with my expectations, with 52 cents of consolidated cash flow before working capital changes.
However, both Canfor and West Fraser Timber (OTCPK:WFTBF), which reported its Q1 on Tuesday, produced more lumber than they could ship in Q1 (due to terrible weather and difficulties sourcing trucks and moving rail cars) and both companies had built up substantial excess lumber inventory by March 31. Canfor’s consolidated inventories were up $76.6 million, or 23.5% vs. the year-end 2010 (that includes the pulp division). West Fraser’s inventories were up $105.2 million, or 28.3%.
This possible overhang of SPF lumber has now been confronting a slow U.S. building season. Canadian building permits came out today for March, and SFD permits were only up 2.5%. Therefore, the lumber overhang is a concern going forward. It’s possible some of this lumber has since been liquidated or exported since the quarter end, which may have exacerbated the price drop in SPF in April.
Lower diesel prices will help lower the log cost and transportation costs faced by both of these lumber producers. We are looking forward to seeing the April U.S. housing starts and building permits for signs of life.
Right now we are cautiously accumulating Canfor at current prices ($11.70-80), based on the expectation lower gasoline prices might give a shot in the arm to home buyers. We are evaluating West Fraser Timber for a possible recommendation.
Disclosure: I am long CFPZF.PK, TU, BCE, CM.
Additional disclosure: This information was disseminated to clients and subscribers of the BCMI Report anywhere from 12 to 48 hours prior to appearing on Seeking Alpha.