If you like gold, the news is still good
The recent shocks to the market may not be fatal, says this Canadian analyst, but gold still looks good, and so do some small growth stocks.
If you’re an investor who likes thrills, chills and suspense, you’ve had lots of fun in the past week.
Essentially, we have spent three years dealing with uncertainty, but last week’s joyride was more than anyone could bargain for.
At one point last Thursday, it was hard to tell who had caused more chaos — a guy on the trading floor who pushed the wrong button, or guys in Greece who have been pushing the wrong buttons for a long time.
So was this just another blip on a scrambled screen, or are we heading into still more trouble?
When you add it all up, says Mr. Louis Paquette, the editor of Emerging Growth Stocks, gold still looks good.
Mr. Paquette finds some cause for optimism as he surveys the markets and the economy from his vantage point in Vancouver.
But overall, he thinks the gold bulls have time and circumstances on their side.
Before we get his take on the markets, we’ll look at his updates on two small growth stocks. One shows a great deal of promise, while the other suffered a setback, but is still in the editor’s good books.
Plenty of promise
These two stocks are suitable for “thrills and chills” investors. They’re penny stocks with plenty of promise, little production, and no dividends.
Exactly a month ago, Simba Energy (TSX/V-SMB) released a positive “oil seeps survey report” on its property in Liberia. The share price spiked — from $0.06 to $0.10. It has since settled back to $0.07.
The more Mr. Paquette learns about this stock, “the more I believe it has upside potential for patient holders.” The next step comes when Simba gets its “PSA” or production permit. This is due in September and “could do more than double the stock price.” It could also bring new financing.
Western Potash Corp. (TSX/V), on the other hand, got investors all excited with a possibly large discovery on its Milestone potash property in February. But on April 26, the company declared that the samples lacked “porosity” and the exploration would come to an end.
Even though Western had reported “more great potash assays” a week earlier, the stock slid, as smalls stocks will on any bad news.
In fact, it gave back almost exactly the gains it had made in February. “Yes, the markets are efficient after all,” says the editor wryly. The stock sits today at $0.44. Despite the disappointment, he says, “this remains my favorite Canadian junior potash play.”
No simple answer
Was last week’s dizzying plunge on the markets just one of those “air pockets” that have shaken the big indexes over the past year? Or is it the beginning of the dreaded “double dip” — another sustained downturn?
There can be no simple yes or no answer, says Mr. Paquette. All we can do is look at the pros and cons of recovery.
“I will say up front though that this would be a natural place for a seasonal turn in the markets if nothing else, and I have put the breaks on putting much more cash into stocks for the time being.”
There is good news. The economy continues to recover, and corporate earnings have enjoyed a double-digit rebound. Market-leading stocks keep pulling the others higher and cash levels at corporations are the highest they have been in years.
The bad news is speculative, but compelling. First, this is the time of the year at which stocks tend to fall off, as mentioned above.
Next, we can almost certain that interest rates will rise in a few weeks, and there is plenty of anxiety about the rise of inflation as well.
Not least, a recovery sustained by government-subsidized debt may not hold up when that subsidized manna is withdrawn.
In the meantime, some analysts claim that forward price/earnings ratio estimates are the lowest in years. Yet, says the editor, the oft-quoted Mr. David Rosenberg of Gluskin Sheff says current ratios are 35 per cent too high — and that stocks could fall by a similar percentage!
And then there’s gold.
The gold bull market
As he follows the price of gold, Mr. Paquette has been impressed by its ability to move up even when the U.S. dollar does, “something that usually doesn’t happen.”
Once it breaks through “resistance” at US$1,200 an ounce and $1,220 it will reach fresh all-time highs in U.S. dollars, he writes. And so it has. It closed at $1,243 yesterday, and is at $1,242 today.
The editor goes on to compare gold with three other “historic bubbles,” and the comparison suggests the gold bull market will go on.
These three previous bubbles (gold in the 1970s, the Nasdaq in the last two decades of the twentieth century and Japans’ Nikkei from 1970 to 1990) rose by as much as 1,500 to 2,300 per cent. Gold has moved up a mere 300 per cent during its current rise.
Gold may not match these other three bubbles. “But given the rate at which fiat currencies across the globe are being devalued, not just in the U.S., combined with the other strong fundamentals, there’s no reason why it can’t,” the editor insists.
Mr. Paquette concludes with a note on his own gold holdings for the readers of Emerging Growth Stocks.
“I haven’t bought physical gold since the year 2000 or so, when it was trading for less than it cost to produce it. But I have not sold any and still hold more gold stocks than any other sector.”
For all those who think gold is the best defense against uncertainty, the past week alone is making an ironclad case for gold.
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