Central Bank and Inflation—the Top New Fundamentals for Gold Stocks

By Mitchell Clark, B.Com

So the stock market is gyrating and this is the new norm. All equities can’t escape the prevailing trading action in the stock market, but the one sector that continues to have above-average potential is precious metals; gold stocks in particular. Not all gold stocks are doing well in this market, but there’s a lot that are, and they are smaller players that have their own growth stories. If I were a stock market
speculator focused on only one industry group, it would be on gold investments. The outlook is that good within the industry.
The best news for the spot price of gold and individual gold stocks isn’t the European debt crisis; it’s the fact that central banks are buying gold bars again. For years, the central banks of mature economies have been selling off their gold holdings for the simple reason that the assets didn’t generate any rate of return while sitting in the vaults. Now that there’s so much uncertainty in the marketplace and U.S. dollar leadership has lessened, many countries are quietly creating new stockpiles.
We’ve talked about a number of growing gold producers in this column (see Everything Gold Is Turning Into Some Serious Green). I watch dozens of gold stocks at once, and I’d stick with those trading near their 52-week highs. I’d rather try to buy gold stocks high, with the hope of selling at a higher price later, than try to buy low. If a gold stock isn’t doing well now, then it’s less likely to do so later. This isn’t the case for the rest of the stock market, but the gold sector in particular.
The stock market has already rewarded many gold investments, but the spot price of the commodity has so much upside potential going forward that the business model for established producers is very good. There is a lot of risk in the global economy and core inflation rates in mature economies are going up. If the stock market does nothing over the next six months, it’s my prediction that gold stocks will be some of the best performers, following the spot price as it slowly ticks higher.
For speculators in the sector, you want to choose from gold stocks that offer an attractive package—an established miner with growing production, ongoing exploration, declining cash costs, etc. With so much uncertainty in the world and the stock market, exposure to some gold investments is a must in this market. There isn’t any rush to consider much else.


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New Fundamentals for Gold Stocks

The Only Way the Stock Market Breakout Will Hold

By Mitchell Clark, B.Com

I continue to be dumbfounded by the actions of Greek politicians. Just when more certainty was returning to currency and stock markets, they screw it up again. Make no mistake; today’s stock market woes are largely due to the European debt crisis. I’m totally unimpressed by how this is being handled.
The stock market did a great job breaking out of its correction trading range. The question is, can the breakout hold? If Greece would get its act together, then this is a stock market that wants to go higher.
Everyone knows that corporate earnings tend to be managed by companies and Wall Street analysts. But corporate earnings have been decidedly strong this quarter and all throughout the year. I’m certain the stock market would be a lot higher today if it wasn’t for Europe’s sovereign debt crisis.
We’ve seen very solid corporate earnings from the technology sector, basic materials, healthcare, and industrial goods. Stock market investors revised their corporate earnings expectations lower going into 2012 and this is setting up the stock market for a new advance, providing that the debt crisis or some other shock doesn’t take place. It’s a tricky time to be a stock market investor—with the age of austerity comes a great unknown. There will be growth in the future, but will it be like it was before? It’s tough to imagine Main Street corporate earnings taking off without a new up cycle in the real estate market.
The current stock market is well set up for a decent rally. Valuations are reasonable, visibility for corporate earnings is mostly solid and there is lots of cash sitting on the sidelines. The key going forward will be renewed certainty on the European debt crisis and renewed spending from consumers. With confidence comes hope and with new hope for the future comes renewed consumer spending.
One thing that’s seems quite unlikely, however, is a speedy return to normal economic growth rates. We’re still coming off a major period of debt-fueled excess and both Main Street and Wall Street (banks in particular) are trying to establish a new normal for operations (see All Global Investment Risks Point to a Steady Dollar & Mediocrity in Stocks & Metals). I have to say that, if it weren’t for emerging markets, interest rates being low, and a weaker U.S. dollar, corporate earnings would not be so robust. Policy-wise, the Federal Reserve is making progress domestically. It’s Europe that’s holding things back.
The stock market was due for a little rest after such a strong breakout, but the Greek news was a real surprise. The expectation for the fourth quarter is for another round of solid corporate earnings and, accordingly, the breakout should hold. Any return below 1,200 on the S&P 500 Index would not be good technically. The stock market is muddling through the tough times. It’s time now for Greece to get its act together.

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