I Have Good News and Bad News about the Mining Stocks

Let’s start with the big picture:

• No deflation
• Debt defaults and bailouts in Europe are coming and will be met with paper money creation
• Inflation is in the Pipeline
• Interest Rates Must go up with Inflation
• Mid East chaos will affect the oil price
• Austerity measures could take hold but slowly in EU, England and maybe the U.S.
• Gold and Silver now looked at as Monetary Insurance by a wide universe

Next is the Good News and the Bad News but and then a practical solution for you to ride the great roller coaster of the precious metals. It is the solution we use at the Gerbino Gold Group LLC mining fund.

First the Good News for the Bullish Case

• In 1980, Gold and Gold Stocks were 2.5% of all Global liquid assets and that was a bubble. Today they are less than 1%.To catch up with 1980, $4.5 trillion of gold needs to be produced (40 years of mine supply) or the price needs to go much higher, which means we are along way off from the next bubble.
• Latest annual money supply increases from gold and silver buying countries: China: 15.6%, India: 13.2%, Brazil: 12.9%, USA: 12.8%, Switzerland: 9.2%. Inflation is coming to these countries.
• Real interest rates in China and India are negative. -2.4% and -1.5% respectively. This is always a basic support for gold and silver prices
• Annual budget deficits as a % of GDP predicts even more money to be created.       UK: 11.4%, Spain: 11.1%, USA: 9.2%, Japan: 8.4%,  Euroland: 6.3%, India 5.1%
• Central Banks are buying gold. They sold over 6500 tonnes at average price of $475 between 1992 and 2007. Now they are buyers and have almost unlimited funds
• Mine supply versus money creation annually is about 1 to 25. Considering a lot of that gold goes into jewelry, the ratio of investment gold (bullion jewelry, bars, coins) is easily 1 to 50. This means, as an alternative investment or money substitute, the ratio is saying too much new money not enough new gold
• There are many people in India and China who will be buying gold and silver as these economies grow and inflation shows up.

The above would lead one to believe the mining stocks should be selling at much higher prices. The majors are currently selling at only 8-10 times 2012 expected cash flow - very conservative cash flow multiples for any industry sector.

Now for the Bad News

• All the bullish news above has already been discounted by the gold and silver markets and the investment community that buys mining stocks. This is why gold and silver are roughly 600-900% higher than a decade ago.
• The horrendous problems of Portugal, Spain, Greece and the U.S. has been dissected and known and is already in the price of the metals currently
• The bullish consensus for gold was over 96% a few weeks ago. That means everyone is in the pool. A negative sign.
• The recent correction in Silver was a major crack in the bullish scenario and this needs to be respected. One of the few writers/analysts who called this top in silver was Bob Moriarty. An impressive call backed up by solid thinking and research
• The mining community in Canada has flooded the world with new mining companies over the last 5 years and that has diverted money from your favorite stocks
• The Gold ETF (GLD) is a new player in town and billions of “gold related” investment capital has found an easy home here instead of mining shares
• Many huge gold players are not committed philosophically to the metals. These are people that still think inflation is “cost push” or that the Fed should control interest rates or that a little bit of easy credit and money printing is good for business. They only bought gold because it was going up. If it stalls they will be big sellers just like the silver players the last two weeks
• Real estate may start to compete with gold for a long term inflation hedge as prices in many parts of Europe and the U.S. are at very low levels
• The deflation crowd (plenty of big money managers in this group) who bought gold because of deflation are seeing no deflation and selling. They are not that concerned yet about inflation. When inflation does return they will probably be back buying the metals for that reason
• China and India are growing because of outrageous money supply increases propping up the economies beyond what would be considered normal. If a recession hits these countries, even a short term one, gold and silver buying could dry up for some period of time.
• Remember all this bad news may be discounting events that could take place 6-12 months from now so take that into consideration

What to Do

Mining stocks are not excessively valued. The world has plenty of challenges that look to make investing in gold and silver a “no brainer”, yet most of the quality mining shares have been going nowhere for 6-9 months and silver has just had a huge sell off and gold could follow with a nasty correction.

Because of the volatility of the precious metal markets one has no choice but to divide your portfolio into a 50% core position and 50% trading position. One cannot tag along and hold onto your gold stocks when gold hits $2,000 and then corrects back to $1,200…then goes to $2,500 and then back to $1,500 and then to $3,000 over the next 10 years or whenever.

If nothing else your mental health and your spouse will drive you crazy if you just sit back and take it on the chin on the big pullbacks. So the solution of a 50-50 portfolio allows you to have your monetary insurance by owning a core position in the mining stocks (hopefully with solid growth and value attributes) and having a mind set of selling on big run ups the other 50% and taking some off the table and coming back on sell offs. This trading could be once or twice a quarter or whatever suits your mind. Make it a common sense trading mentality. Hit some singles and doubles and even bunts with this 50%. Leave the big homeruns for the other 50% over the long term. I get up every morning and I could care less which way the gold and silver price is going as I am hedged as well as looking for trading opportunities all the while having a solid core position always.

There is so much money in the world today and so much debt that the forces that move markets are now huge. There are also so many money managers with gigantic assets under their control who do not understand gold or solid Austrian school economics who will see the world 180 degrees different than you as a philosophical gold stock investor. So take advantage of this.

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