Gold Market and PM Mining Share Report

Source:

"It is a foregone conclusion that the U.S. dollar as the monetary unit of the world's largest economy will be a weak sister internationally. . ."

The Dollar

Assumptions:

The majority of global investable funds under the management of small, medium and large institutions and private individuals are already placed in various asset classes.

The graph below is showing that $4.6 trillion of negative influences against the U.S. dollar value will be forthcoming from both a negative trade account devaluing the dollar and currency created by the Federal Reserve to accommodate the U.S budget deficits depreciating the dollar. All numbers averaged from the CBO, Dept. of Commerce.

Combined, the sheer size of these two dollar valuation killers will have a positive effect on the following sectors:
  • U.S. exporters who will benefit from a weaker dollar
  • Gold and silver mining companies
  • Commodity producers
The negative effects will be:
  • High inflation in the pipeline for the U.S. as budget deficits are monetized
  • A lower dollar
  • Higher interest rates when inflation returns to the U.S.
USD Negative Influences 2010-2012

It is a foregone conclusion that the U.S. dollar as the monetary unit of the world's largest economy will be a weak sister internationally as these deficits are so much larger in gross numbers than the deficits of the other world governments which have competing currencies.

Friend Bob Moriarty, in a speech in Vancouver stated that if The U.S. government had to abide by GAAP rules that are mandated to all corporations, that the U.S. budget deficit for just 2010 would be in excess of $7.8 trillion!

What to Expect

Considerations that will affect gold, gold/silver mining stocks and the U.S. stock market:
  • The U.S budget deficits cannot be financed by the available money supply in the U.S.
  • Within 36 months, the demand for currency to finance the expected $3 trillion budget deficits alone cannot possibly be found in a total U.S. money supply that equals only $8.5 trillion! Foreigners already are choking on U.S. Debt obligations.
  • Obviously the Federal Reserve will have to buy the majority of these new Treasury Securities and pay the U.S. Treasury in newly created money.
  • The U.S. stock market will benefit, as all the money spent by government eventually goes to corporations or people who then buy Pepsi, Marlboros, Pizza, Medicine, and shop at Wal-Mart.
  • Until higher interest and inflation rates show up in the U.S., the general stock market should hold its own in a trading range.
  • The implication for the gold price is obviously very bullish.
  • Dollar rallies will fail and gold declines will be short lived.
The U.S. Stock Market

Even though the U.S. unemployment rate is 10.4%, it appears that the economy is stabilizing and showing some upticks. The Fed statements regarding keeping interest rates at low levels for the foreseeable future really means that the big banking system is probably still unhealthy and they are not prepared for another big bank banking nightmare.

Even though the KBW Banking Index, which is an Exchange Traded Fund tracking banks has been slowly heading higher for a year, my feeling is that the balance sheets of the Feds good friends (large banking institutions) are still in repair and this (as well as the 2010 elections) are good reasons to keep rates low for now. Low rates are bullish for gold.

For those of you in the double dip recession camp, or worse, the Depression camp, the following economic stats should allow you to sleep better at least for a while. Following are three very important indicators that are telling us the recession is over and the massive global artificial stimulus policies are keeping things afloat for now:
  1. Dr. Copper or King Copper is trading at $3.25
  2. Crude steel production in the 66 reporting countries in January 2010 is up 25.5% versus 2009.
  3. The U.S. stock market is holding its recent gains.
These are pretty good economic indicators for the medium term. So far, all is quiet on the western front but looming ahead is plenty of paper money and debt to keep the economies of the world moving. The end result of this will be more volatility and inflation. Mining companies are the place to be.

Gold Mining Stocks

Following are some simple guidelines for this sector:
  • Our universe of small, medium and large producers shows that these stocks are very undervalued.
  • Bank of Montreal's senior producer NPV (0%) is -41% compared to spot gold. This is one of the lowest readings I can remember. It shows that based on cash flow from future mining activities the stocks are 41% undervalued. Using expected 2010 operating cash flow per share, Kenneth J. Gerbino & Company's producers universe average multiple is only approximately 9 times cash flow. This is a low valuation versus almost all other sectors.
  • Considering gold mining is really mining for a universal cash equivalent, the cash flow multiple in a 2-4% interest rate environment should be much higher.
  • In a higher interest rate environment of 5%, a 20 times cash flow multiple would be reasonable. Therefore, even with an uptick in interest rates the cash flow multiple of mining stocks should go higher.
  • Current growth in the pipeline for mining companies are from feasibility studies using $650$750 gold. That's it. There will be a huge green light to numerous projects when the Boards of these companies see a sustained gold price above $1,000. This means plenty of long term growth. Always a positive for long-term institutional players.
  • Mining companies usually will green light a project if it has an internal rate of return above 15% using a 10% discount rate. If these companies start to use a $1,000 gold price as a guideline, then the IRR improves dramatically and globally hundreds of projects start to enter the growth pipeline. This enhances the value of companies who own these projects already and allows companies with financing muscle to acquire projects or companies with quality prospects. This helps the junior sector.
I am expecting a dramatic shift in the valuations of the mid-tier and large precious metal mining companies based on the above.

Our client portfolios are strategically positioned to take advantage of these factors mentioned above and I suggest you do this as well.

For more commentaries on gold stocks, the economy and stock market please visit our website at www.kengerbino.com.

Ken Gerbino

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