Money in the banks and gold in your future
Sooner or later, inflation will explode, says this U.S. advisory, and gold will be a necessity – and that includes a group of Canadian gold stocks.
Inflation and gold. They’re inseparable partners, the experts tell us.
And that partnership is about to become more important than ever.
Inflation is going to rise dramatically. And gold will be the single best investment you can have when the value of money starts to drop.
This is the firm conviction of The Complete Investor. This U.S. advisory looks at a market that will be flooded with pent-up money and makes some specific recommendations on what to do about it.
Included in those recommendations are several Canadian gold stocks.
They also include gold, the metal. The advisory’s editor, Mr. Stephen Leeb, thinks your gold holdings should be half stocks, half metal.
Gold above all
Don’t wait for the economy to get back to normal, says Mr. Leeb. “The economy has been permanently altered, with 2008’s wild zigzagging between inflation and deflation setting the template for years to come.”
Inflation is the one to worry about now — it is due to reach “extraordinary levels,” according to this advisory. “For investors, this means that the one investment you should own above all is gold — not just as a mere hedge but as a key asset category on a par with or even more important than cash, bonds and stocks.”
That’s saying a lot. But Mr. Leeb is prepared to back it up.
Start with the monetary base, he says. This is roughly equal to bank reserves and cash. It’s what banks have on hand to make loans. During the recent crisis it has soared, thanks to the Federal Reserve Board.
The advisory publishes a chart showing that the buildup in the monetary base “far exceeds anything seen in more than a century.”
But this does not represent the money supply, the money that is actually in the economy today. The monetary base is the banks’ potential lending power, the editor explains. Right now, this money is sitting quietly.
When the fog lifts
It’s easy to see why banks are hanging on to that money, says Mr. Leeb. All the past bad loans continue to cripple the system. Plus, the would-be recipients of new loans have become less creditworthy in a poor economy with rising unemployment.
This situation may not be cleared up without another massive injection of liquidity into the banks and the purchase of even more toxic assets.
But when the fog finally lifts, watch out. The monetary supply will explode. “Even Warren Buffett, not prone to making dramatic forecasts, looks for inflation to exceed that of the 1970s.”
The case for inflation has never been stronger, states Mr. Leeb flatly.
Then, gold will be “the single most important investment you can own.”
Gold as a currency
Stocks, bonds and cash are fine as long as the yields or earnings are higher than inflation. But when inflation takes off, gold is the only currency that offers a shelter.
“If you don’t view gold as a currency, realize you can easily chart its price going back to the 1200s or even earlier,” says Mr. Leeb.
And it holds its own during deflation. In the 2000s it has been the only investment to rise every year, even in 2008.
In a word, you should be buying gold. Half of that should be in the metal itself, says Mr. Leeb. His recommendation is SPDR Gold Trust Gold Shares ETF (NYSE-GLD) (which is also a recommendation of several Canadian advisers we follow).
The case for gold mining stocks, says Mr. Leeb, is that “the price of gold rises faster than miners’ costs, allowing margins to increase.” There are risks, of course, but a miner that can increase production can outperform the metal over time.
Among those stocks, this advisory has two Canadian firms in its Growth Portfolio, Angico-Eagles Mines (TSX/NTSE-AEM) and Kinross Gold (TSX-K; NYSE-KGC). It also has Australia’s Newcrest Mining (ASX-NCM; OTC-NCMGY) and Randgold Resources (LSE-RRS; NASDQ-GOLD).
But the editor makes his point with a smaller Canadian stock and its bigger partner.
A superior miner
NovaGold Resrouces (TSX/AMEX-NG) is in this advisory’s Small Cap Value Portfolio. “It illustrates particularly well the potential a superior miner can have even when gold prices are flat.”
“Barrick (TSX/NYSE-ABX), now Nova’s partner in developing one of the world’s largest gold deposits, proves that miners can rise independently of a bull market in gold,” says Mr. Leeb. “Between the mid-1980s and early 1990s, Barrick climbed more than fifty-fold on extraordinary increases in gold production.”
The production of gold, copper and silver from Nova’s Donlin Creek and Galore Creek sites may come close to those production levels, says the editor. Donlin, one of the largest discoveries ever in North America, is estimated to contain at least 54 million ounces of gold.
How much gold is this? In 2006, Barrick offered $16 a share to buy Nova. Then, as now, it held a 50 per cent interest in Donlin. The credit crunch has pushed Nova’s price well below Barrick’s 2006 bid. But Barrick still has its 50 per cent interest in Donlin.
And Galore, which ran into problems with costs several years ago, remains one of the largest undeveloped copper deposits in the world.
The only meaningful risk with NovaGold, says Mr. Leeb, would be the inability to get financing for its properties. “But that’s extremely unlikely given Barrick’s 50 per cent interest in a deposit that would more than double its North American gold resources.”
This is a speculative investment, to be sure, but from a risk/reward perspective, concludes the editor, “you won’t find a better play than NovaGold.”
And if this advisory is right, inflation is going to force us all back on the gold standard before too long.
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