Investors are sure getting their share of information overload.
In just two months, the economic landscape in America has markedly changed. It will change in the rest of the world, too. And not for the better, despite the pleasantly surprising news that the U.S. House of Representatives actually rejected the $700 billion bailout - the Treasury's latest harebrained idea.
Maybe it demonstrates there is a limit to how much the American people will tolerate, at least from the greedy capitalists on Wall Street. After all, it is not like the plan was defeated because the public has grown tired of government interventions and schemes. It just did not like bailing out the brokers.
Still, the markets had not expected this outcome. And as you saw, there was a lot of momentum behind the bailout news.
That's why the Dow was off some 700 points Monday. When I heard they were going to raise the money for the plan from foreign governments, as opposed to printing it, I started drafting plans for a rally on Wall Street that might produce another pullback in gold.
However, I still thought it was going through. Notwithstanding such unexpected surprises, markets are generally moving in the direction that we expected. In the end, gold shrugged off the reversals in the dollar and oil.
Now, I think that the failure of this bailout increases the probability of a more inflationary solution.
The Fed and Treasury have worked very hard to outwit us gold bugs by doing everything possible to support the boom without resorting to the "helicopter" option, right up to the final draft of the bailout.
But believe me when I tell you I feel little personal joy about that prospect.
Gold bulls gave back very little following the Sept. 17 one-day reversal. Including the following day, the market rallied $145 points from trough to peak on the news of the Lehman Bros. and AIG blunders.
In the days that followed, the market developed a bullish formation that technicians refer to as an ascending triangle - a pattern of higher lows closing in on a horizontal line of resistance highs.
We can't say how the Fed and Treasury are going to react to this. I'm sure it hurt in the right places, and when people get hurt - wherever - their reactions are even less predictable than usual.
From my perch, in a quiet suburb on the outskirts of Vancouver, where Agora Financial hosts an annual investment conference, it looks as if they are out of ideas, or at least their best ones.
The printing press is all they've got (aside from the much-feared laissez-faire option). So sit tight. Gold is the safest asset class to be in right now. In the current environment, producing assets reign supreme.
In fact, I recently wrote of a buy signal in the major gold shares. This may not be what you want to hear if you are loaded up with exploration stocks. However, in the context of a fear-driven gold price advance, in which stock prices are generally in decline, the companies most likely to benefit are those that can translate the gain in gold prices most immediately to their own bottom lines. These include all producers, junior and major alike, although at first, the market will probably prefer the safer large caps.
But as they rise, the pressure will build and spread to the emerging producers and even development assets, if they are close enough to production. Exploration stocks have a life of their own. There are terrific buys in that space today too, but I believe the values in the near production stages offer just as much upside with a little less risk here. The right strategy will outperform gold and the average major gold stock over time. The million-dollar question, therefore, is which juniors offer the best risk-reward?
I've looked through hundreds of companies over the past two months alone.
I've assessed our general strategy and wondered whether to sell some of the stocks in our portfolio.
In fact, the reason this month's issue is late is that I have gone back to the drawing board a few times in the search for the most appropriate investment strategy in this space.
Notwithstanding the shifting macro winds, I think that in light of the significantly improved gold price outlook, it makes sense to hold onto the bulk-tonnage low-grade development assets in our portfolio.
However, the demoralized level of sentiment has opened up a new window of opportunity to cherry-pick those top-quality gold stocks for which we normally must "pay up." These are the "alphas." These are companies that either can generate cash flows internally, by actually mining, or are led by people with deep pockets or credibility... companies with strong balance sheets and diversified portfolios of high-quality assets in politically secure regions... with growth potential whose premium is lost in the current slaughtering.
They are not cheap relative to their peers, but they probably never will be.
They are cheap in the context of the gold price cycle.
And this may be one of the few opportunities we get to accumulate such assets at favorable terms. The market has discounted their growth profiles and prospects for higher gold prices as it has with any others.
Regards,
Ed Bugos
for The Daily Reckoning Australia
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