Gold thoughts:
(I'm holding GG long term)
Gold: The Long And Short Of It
Jack Adamo, 07.20.05, 9:41 AM ET
NEW YORK - I've been following Insider transactions for more than 13 years. Much of the Insider buying seen today is phony public-relations buying mandated by investor-sensitive boards. It doesn't take a genius to tell the real from the fake, but a lot of experience helps.
One place where I still get very clear and valid Insider signals is the gold industry. It's not the standard type of corporate Insider buying, but rather proprietary measures I've observed and developed over the years. Those signals are pretty good right now.
Short-Term Outlook
The U.S. dollar got a real shot in the arm this spring after France and The Netherlands spurned the proposed European Union Constitution. Central banks that had been diversifying out of the greenback and into the euro undoubtedly had second thoughts about a currency that may not be around in ten years. Since gold is priced internationally in dollars, it is a bullish sign that the metal is holding up so well against the greenback's rise.
By mid-May my indicators said that Insiders were again positive on gold. In the May 14 newsletter, I began removing the holds on our gold stocks that we had in place during the winter correction. A few weeks later, I repeated my recommendations (see: "Gold Stock Resurrection").
In the two months since my original call, the four stocks in our portfolio rose between 10% and 18%. The short-term indicators weakened somewhat after the big run, but now appear to be firming again. We're still holding two gold positions and took profits in two others, Newmont Mining Corp. (nyse: NEM - news - people ) and AngloGold (nyse: AU - news - people ) Ashanti, but those were for company-specific reasons. I may have new buy recommendations this coming weekend if the data show continued improvement.
Long-Term View
My fondness for gold isn't based solely on short-term indicators. It is based on the structurally weak long-term outlook for our currency. The U.S. has been staving off a post-tech bubble recession by pumping easy money into the economy. In the decade prior to 2000, M3 money supply growth roughly tracked gross domestic product growth. Since 2000, M3 growth has been double the rate of GDP growth. The only thing keeping inflation at bay has been outsourced labor and cheap imports from abroad.
But that can only go so far. According to David M. Walker, the Comptroller General of the U.S., the U.S. has $43 trillion in unfunded liabilities. Yes folks, that's trillion, with a capital T. What's more, that number is up $13 trillion in the last year alone! What are the chances our fearless leaders will opt to exercise the extremely unpopular fiscal discipline necessary to reverse this trend? My trusty financial calculator with advanced probability functions says, between slim and none.
We will inflate our way out of these liabilities. We will pay off our debts in cheaper and cheaper dollars. Ben Bernanke, who is the odds-on favorite to succeed Alan Greenspan as head of the Federal Reserve, has said he would drop money from helicopters, if necessary, to fight deflation. I'm sure he'd find a whirly bird or two to help pay down the national debt if some future White House occupant said "pretty please."
But the U.S. isn't the only one diluting its currency. Japan and China have been doing the same to keep their exchange rate low in relation to ours and to avoid losing their trade advantage.
Europe has maintained a strong currency and fiscal discipline up until now, but its economy is stagnant, and member states are complaining about the strong euro, despite its recent decline. Some countries are even talking about going back to separate currencies. Italy, for example, has a strong and growing movement to return to the lira. The temptation to stimulate the economy with cheap money will eventually overcome Europe.
Ultimately, gold will rise the most in dollar terms, due to our huge and growing deficits. This will help American-based miners such as Barrick Gold (nyse: ABX - news - people ) and Glamis Gold (nyse: GLG - news - people ), as well as the Canadian Goldcorp (nyse: GG - news - people ), which reports its earnings in U.S. dollars.
To sum it up, the short-term outlook for gold is moderately positive and shows signs of improving. The long-term trend can only be upward. The intermediate term of six to 24 months is less predictable, since a recession would probably knock prices down for a while. But for patient investors, gold is very likely to outperform the stock market.
Written by Jack Adamo, editor, Insiders Plus.
Disclosure: Jack Adamo owns positions in Meridian, Newmont, AngloGold, Goldcorp and Randgold.
Cash is King until further notice!!!
My comments on companies are usually my opinion of long term success (years). The PPS may go up or down greatly in the meantime depending on the number of greedy suckers with money.
