EU Uncertainties: Keep Your Powder Dry

|
 |  Includes: AEM, FXE, SLW
by: Bob Kirtley

During the first financial crisis whereby the like of Lehman Brothers failed we heard the war cry "Too Big To Fail" trotted out by our political masters. As the next financial crisis approaches we might hear a new mantra: "Too Big To Bail" as one or more of the larger banking institutions enters into bankruptcy.

We are of the opinion that the previous financial crash was really only a crack in the system which was quickly papered over by the powers that be via the deployment of copious amounts of the taxpayers' cash. However, the next episode could well dwarf this event with its magnitude and the suddenness of its arrival. Let's face it, the same people are still in charge at both the boardroom and ministerial levels and they will do the same things, make the same mistakes as before, all whilst expecting a different outcome. This is the definition of madness. After all, there has been no punishment for their failures, so they are comfortable with taking even more risks, as you and I will bail them out if things come unstuck. In an attempt to probe a little deeper, we made a few calls over the weekend to our old buddies in London. The mood appeared to be one of nervousness and tension, as if floundering for a solution that was yet to appear on the horizon. The latest rogue trader incident also added to the prevailing gloom as it raises questions of compliance, methodology, procedure and management.

Anyway, let's suppose that the next round of failed banks include the some of the larger ones, some of whom are rumored to be heavily leveraged, where would we get the money from?

Household debt is already at record levels, so there is little room there for more financial impositions. The printing press is a strong possibility in a "print now, pay later" strategy. A massive dose of inflation would surely follow a massive dose of liquidity, but that would create a problem to be tackled in the future, whereas a major banking crisis has to be addressed as soon as it arrives.

As investors, our core position is made up of physical gold and silver, and a small number of what we deem to be quality precious metal mining stocks, along with the occasional options trade. They include such companies as Agnico-Eagle Mines Limited (NYSE:AEM) and Silver Wheaton Corporation (NYSE:SLW) household names in the gold and silver space. Many of the companies in this sector are now profitable and the expectation is that they continue to do well.

But will they?

When we look back to the previous financial crisis, we can see that none were spared, as the margin calls were fired out and investors sold all and sundry regardless of gleaming fundamentals, in a dash to raise cash and protect their positions.

Will it be different this time you ask? We very much doubt it, as we just cannot see what alternative actions could be taken if and when the cat hits the fan.

The prospect of another mishap in the financial sector casts a long and dark shadow over our doorway and fills us with trepidation when our research suggests that the mining sector is a good buy. If the mining stocks are once again thrown out, as the proverbial baby with the bath water, then these stocks would be at rock bottom and present us with the buying opportunity of a lifetime, as prices would be similar to that of late 1980.

In conclusion, we intend to keep our powder dry rather than purchase more stocks at the moment.

(Please note that the phrase "Too Big To Bail" was borrowed from Nigel Farage, the leader of the United Kingdom Independence Party, who in our very humble opinion is the only politician talking sense in the U.K. today.)

Stay on your toes, volatility will be the order of the day and have a good one.

Disclosure: I am long AEM, SLW.