-- Posted Monday, 4 February 2008 | Digg This Article
| Source: GoldSeek.com
By James West
www.MidasLetter.com
The hemorrhaging of stock values in the resource exploration sector, particularly gold stocks, is a direct result of the contraction of available capital at the center of the banking universe. The general sell-off in the market has trickled down to companies that have considerable amounts of gold in the ground, and these companies are a steal right now. The gold price is starting to really gain traction with the broader market now, and the reasons for that have to do with the onset of economic recession.
Are we going into economic recession? In North America, the answer is “yes”. But globally?
Yes. Here’s why:
The worst piece of news last week, and the one that bodes most ill for the future, was the loss of 17,000 jobs in the United States. That is the first drop in 4 years, and confirms in the minds of many that the U.S. recession is now underway.
With the incessant write-downs of banks that have dominated the news for the last 5 months, one could be forgiven for failing to understand why anyone is surprised about the onset o recession, or why some don’t see it as inevitable.
Banks worldwide have suffered more than $135 billion in credit losses and write-downs, and some analysts estimate that the write-downs could total as much as $800 billion.
This is essentially the global banking system admitting to the public that it has overvalued the quality of the assets backing its loan portfolio. Since this is all essentially sub-prime mortgages on residential real estate, a lot of people, particularly in the United States, have been living way beyond their means, and a lot of the profit that has generated for companies is now going to evaporate as the system is forced to correct itself.
The effect of this contraction in global money supply is that real estate owners are forced to sell assets at whatever price they can get for them to cover inflated financing costs coincident with declining asset value. The owners we’re talking about here are homeowners and the banks who financed them.
Citigroup Inc. (NYSE:C), the world’s largest corporation and the Unites States’ #1 bank, wrote down the value of its portfolio by $18.1 billion. It chopped a total of 21,400 jobs in 2007, and subsequently sold 4.9% of itself to the Abu Dhabi Investment Authority for $7.5 billion and diluted itself again in January with an additional $12.5 billion in financing in a private offering.
And herein lies the great paradox. At the center of the financial universe, the nattily dressed and over-educated Wall Street boobs who have managed to engineer themselves into a Ph.D. level disaster have now sent out ripples amounting to the fire-sale of equities with real value represented by natural resource assets.
This means a buying opportunity for anybody with liquidity.
The forced sale of quality assets is amplified by the Sheep Effect.
Investors see the sell-off and think it’s a reflection of the value of the equities being sold, and in panic they dump whatever they’ve got fearing the worst.
And here we are. Mining and oil and gas stocks at ridiculously low prices, looking for a buyer.
China and India, and to lesser extent, South America and Russia, are widely expected to prevent the recession from growing to global proportions, but it is unlikely that this will be the case.
Yes, China is the manufacturing center of the universe, gobbling up a large percentage of the raw commodities that have powered the mining sector, and India too is in the midst of an infrastructure build-out unlike anything in its history.
But these two economies have grown on the back of a strong U.S. economy, and with the diminishing revenues from this source that are to result from the contraction of the U.S. economy, the impetus of China and India’s growth will also suffer.
Furthermore, and this applies to China more so than India, the U.S. Dollar’s diminishing value and its apparent tendency to try and spur growth through rate cuts resulting in further downward pressures on the dollar means that the US dollars held as foreign reserves are going to have a negative effect on the Chinese balance sheet.
So I think you’ll see growth slow around the world. Which means that its time to buy gold.
And sure, you can buy the metal, but as ever, and especially now, the real big wins will be made from juniors who have the goods. Past producers that shut down and sold during the depressed gold price of the late 90’s with ounces left behind are a safe bet.
James West is the publisher of the Midas Letter, a financial advisory service that identifies promising resource industry equities at the earliest stages of their existences. Visit the Midas Letter online at http://www.midasletter.com.
-- Posted Monday, 4 February 2008 | Digg This Article | Source: GoldSeek.com
