Marc Courtenay's  Instablog

When surveying the financial and economic landscape of November 2009 it isn't that hard to get "the big picture". It seems to me that the manipulations and the activities of the "Smart Money", a.k.a the Exchange Insiders, the Specialists and their array of big banking clientel makes it abundantly clear that they want the stock market and precious metals market to remain in "bubble mode" for awhile longer. There are many opinion and myths about it all floating around. This concerns me.

Alfred Goldman, the wise old sage of the former brokerage firm called A.G. Edwards and Sons had a saying that I always liked: "It's not the snake you see that bites you, it's the snake you don't see." He wanted to warn customers that we can easily become distracted by all the noise, all the "talking heads" and myriad opinions and miss what is really going on.

So I have a question for you. Do you still think the stock market and the precious metals markets are an orderly, auction-based market that responds to the forces of "modern portfolio theory" and the best interests of investors?

Another question might be: Since we made it through the scariest months of September and October with not much damage to the DJIA, the S&P 500, the Russell 1000 Financial Index (symbol:RIFIN) and the precious metals markets, is it "up-up-and-away" from here?

Our most followed Seeking Alpha contributor David Fry had an interesting comment in his Friday Roundup:  

"RBS economist Stephen Stanley wrote today’s employment report was “a mild disappointment”. It’s easy to say with his firm and others, plied with cheap money from a generous Fed. And, that’s really the issue. The liquidity bubble for Da Boyz is creating a stock bubble. Like all bubbles it will have an ugly end. But with cash and bond yields low, going for higher returns in equities is an easier; “make hay while the sun shines” choice. So, spin bad news and go for returns in stocks."

Once again we see the underlying reality that what we see and hear about the economy and the stock market doesn't necessarily correlate to why stock prices or the price of gold goes up and down. For now, keeping interest rates low and creating the myth that the stock market or the precious metals market can't suddenly and dramatically fall, is working it's magic.

I keep my eyes on companies like Alcoa, GE, Proctor& Gamble, Boeing, JPMorganChase, Goldman Sachs, Google, Apple, Texas Instruments, Chevron, Exxon, Chesapeake Energy,Dupont,NYSE Euronext, Barrick Gold and Freeport McMoRan Copper and Gold. I want to see the hourly and daily volume, and what appears to be driving each of these very popular stocks.

Listening to the Spin Doctors on CNBC or Bloomberg, as well as the interviews that are often available on Yahoo! Finance gives me some idea of the prevailing consensus and "schizophrenia" that drives the emotions of the investing public. No wonder so many people are confused and turn to actors like Jim Cramer (although he is a very well-connected Goldman Sachs alumnus) to try to make sense on current market conditions.

Having read the books of the late Richard Ney, I continue to benefit from the monthly reports that are posted by my friend and "Ney student" Richard Wendling at The Bear Facts Specialist Report (www.bearfactsspecialistreport.com).

Ney and Wendling have reminded realists and seekers of truth to keep their eye on "the ball" and to know what "the ball" actually is. These reports help us to see the market forces and the Smart Money from a unique, historical perspective.

Legendary Hedge Fund Manager Kenneth Gerbino of Beverly Hills weighed in on the current misunderstandings on the markets in an interview he gave to the Mineweb.com folks. You can read the entire interview at Mineweb or at my site. I just wanted to give you a sample of what he wrote. It reminds us that myths, misperceptions and conventionally unaware thinking can set any investor up for some nasty disappointments and unexpected outcomes.
 

PROBLEMS THAT COULD ARISE

The three areas that could present big financial problems in the future are:

1) State governments are mostly in horrible financial shape and could require massive federal bailout funding.

2) European banks are more leveraged today than our banking system was during the crisis. This is a simple measurement of their tangible assets (real stuff) versus what they have lent out or invested. The US major banks that were in trouble were leveraged 45 times (up from 18 times in 1998). The major Euro zone banks are 55 times leveraged.

3) The commercial real estate market in the U.S. needs a recovery and quickly. If not, this huge $3.5 trillion arena could face even more severe credit conditions and bankruptcies. Interestingly, all roads lead to printing more money to bail out the country's problems. This is bullish for gold and the mining sector.

GOLD MINING STOCKS

The precious metal mining sector should one day explode to the upside for the same reasons that have been staring investors in the face for a long time

Mining is one of the few industries where many of the best of breed professionals do not want to work at a major company. The industry lives and dies based on geologists and engineers. Geologists find the metals and the engineers build the mines and infrastructure. The geologists or "mine finders," have vastly better compensation if they create their own company and do away with the layers of corporate management that must approve exploration budgets. Consequently, thousands of these risk taking professionals with seed capital from venture funds embark to find large economic deposits around the globe. Most fail. But the ones that do discover and develop quality properties reap rewards in the $10's of millions versus an $80,000 salary working for a major mining company. Because the best and brightest are independent and flexible, approximately 85% of all new mines coming on stream are because the initial discovery was made outside of a major company.

The majors therefore can rely on this professional army of risk takers to be at the forefront of the discovery cycle. They wait and pay $100 million to billions for a proven and developed property. Our job is to find companies that have already found and proven up metal deposits that would be prime candidates for a takeover. Since the gold industry produces about 80 million ounces each year, the industry has to replenish these reserves each year with viable new deposits. This is very difficult, especially for the larger producers. Hence consolidations and takeovers are numerous and expected to grow as gold demand increases in the years to come.

BHP Billiton, one of the largest mining companies in the world has recently committed a record $10 billion to exploration and capital expenditures because they feel demand for commodities will be strong in the coming decade despite economic cycles. Barrick Gold Corporation, the world's largest gold mining company just committed $4 billion to close out their hedge book (gold companies sometimes sell future production to get immediate cash and this is called hedging). If the gold price goes up, the company loses out on the higher price when they produce the gold because they already have committed to sell at the earlier price. For the largest gold miner to attempt to close out their hedge book is stating that the biggest and best in the industry thinks gold is going much higher. I couldn't agree more.

Gold stock investors should be very wary of small unknown companies and exploration companies should be considered very high risk. Committing most of your gold allocated funds to quality companies in production as a core position and also having some trading positions is a good idea. It allows you the insurance of gold in the ground and also allows you to take advantage of the high volatility that is probably coming our way in the gold sector for the metal as well as the miners.

UNITED STATES POLITICS

The U.S. political scene is more antagonistic than any time since the Civil War. The fight is held in place by two abstractions - benevolence and liberty, both high quality human concepts. Political wolves on both sides of the aisle use bad economic policies to make believe they are trying to "attain" these concepts to keep constituents happy but fail with misguided programs.  Many programs are illogical and intellectually dishonest in my opinion. Most of our government policies and 90% of U.S. spending is for welfare (benevolence) or warfare (liberty).

We are a welfare-warfare nation. In spite of this, the U.S. is the greatest nation on earth and responsible for saving mankind from tyranny the last 70 years (Nazi Germany, Imperial Japan, Soviet Communism). We also have spent more money defending Muslims (Kosovo, Kuwait) than all the Muslim countries together. Our private sector donates 2-3 times more money to natural disasters outside the U.S. than all the governments of the world combined. Private individuals are what keeps this country going. We are a great nation slowly being destroyed by tax and monetary policies that are politically motivated.

Economic mismanagement has prevailed too long and now the chickens are coming home to roost. Most advanced countries have made too many commitments bailing out the banking elites and pandering to voters who want more from their governments. The overused answer to economic problems (caused in the first place by printing money) has been.... to print more money. The future is obvious and gold is responding.

This country has problems stemming from big government which will eventually hurt many people who do not protect themselves financially. The Department of Agriculture has 86,000 employees (outside of the Forest and Parks Service); none of them grow anything. The Massachusetts Medical Society reports that 25% of all medical expenses are to avoid lawsuits, by doctors prescribing unnecessary "preventive tests" and prescriptions, wasting $200 billion per year, enough to give all the uninsured poor in the U.S. a $5,000 health insurance grant.

Our leaders are more interested in getting elected than really helping people. As long as these unworkable and wasteful government programs continue, gold and the mining stocks are going to be the best insurance and a good investment for a portion of your nest egg.

SOME LIES AND MYTHS ABOUT THE GOLD MARKET

• Gold will go opposite to the stock market. Not true. During the last big move in gold 1978 - 1980 the Dow went from 810 to over 1,000 while gold went from $200 to above $800. Many times they go the same way for the same reason....mo' money in circulation.
• Adjusted for inflation gold should be above $2,000. These are numbers based on using the unreal and unsustainable highest gold price in 1980 and then adjusting it for inflation from 1980. Why not use 1978 gold or 1981 gold? Gold based on prices going back over 200 years is a better idea and therefore should be around $900 - $1100 depending on what numbers one uses. But this is only the U.S., the rest of the world is buying gold. China has increased their money supply by 29% in one year! India 15%. These people know what's coming. Much higher inflation globally and if you add 10% compounded to $1,000 for 3 years you get $1330.
• Gold should not be going up because there is little inflation. Not too bad an argument. But money supply increases today create inflation tomorrow and the gold price is discounting this future expectation. But because the entire global banking and monetary system is so suspect, over leveraged and held together by paper printed or money created out of thin air and called currency, the inflation rationale may not even count any more! How is that for outside the box thinking? What counts is the entire system is suspect! It could collapse. Gold is something that will keep its medium of exchange value if the system ever goes under (which I do not think will happen, but many people do).

THE NEXT FEW MONTHS

My first thought is to tell you - don't worry about it. Gold will be volatile and could as easily go to $1200 next month as $950. I suspect that $1,000 is going to be the new floor. The most important thing is the trend is going up and many years from now it should be a lot higher. Don't lose sleep over the gold price. Also the Indian gold purchase is very significant and expect other countries to join the gold bandwagon.

For other commentaries on gold, the economy and stock market visit Ken Gerbino's website at: www.kengerbino.com

DISCLOSURE: I currently own some AA,CHK,BA, NYX,FCX,TXN and CVX