Unemployment and Gold
Source: Jeb Handwerger, Gold Stock Trades (7/11/11)
"Mining stock selloff offers best opportunity for long-term investors."
Can the economy get any worse from here? Perhaps, yet the situation brings to mind an old aphorism, "The worse things were. . .the better they got." The Gershwin Brothers put the same thought another way: "With gloom to lead the way, I've seen more skies of gray, then any Russian play can guarantee." The time to buy stocks is when the lumpen are terrified, instead of euphoric.
This year, investors have been engulfed by the perfect storm resulting from the Japanese Earthquake and Tsunami, Middle East and North African turmoil, credit downgrade warnings in the U.S., and the exacerbation of Eurozone debt fears amongst others. What does this all mean? The global market has had all the slings and arrows of outrageous fortune thrown at it. This chaos has had a positive effect on precious metal stocks that has not been reflected in its current price.
Newcomers to the arena are being given a golden opportunity to participate in an underpriced and oversold mining sector. Gold (GLD) is close to all time highs yet miners have recently been basing at 52-week lows (GDX).
This represents an unusual opportunity, which becomes increasingly evident. Central banks are increasingly buying gold. Witness the recent acquisitions by Mexico, Russia, China and India adding to their repositories of precious metals as they choose to diversify away from the U.S. dollar (UUP).
This dollar bounce and mining stock selloff is providing one of the best opportunities for long term mining investors to enter the market during this short term liquidity crisis.
There is currently a short-term consolidation and pause in the U.S. dollar decline. This is a phenomenon resulting from the extreme weakness of the Euro (FXE) and the need for liquidity rising from the potential exit from QE2. With the end of QE2, liquidity becomes increasingly important and is the obverse of all of the stimulus that had been previously provided by the Fed.
Looking forward to the 2012 election and the rest of the summer, it may become evident that a QE3, in whatever semantic guise, may have to be instituted to buoy the economy, improve employment and postpone a financial crisis. Already, Obama has addressed the nation that he will propose a massive infrastructure stimulus after today's horrendous jobs data.
This unemployment crisis may benefit the long-term holders of precious metals and mining stocks as interest rate hikes will have to be kicked down the road to some future date. Quantitative easing and stimulus projects will also be instituted, putting us into further debts.
To reiterate, there are too many well publicized negative considerations when the see-saw of speculation tilts to one side. It is entirely possible that the equilibrium is somehow going to be restored. In time, there has got to be a morning after. Precious metals will inevitably occupy their rightful place in the investment universe. Miners have bounced off 2011 lows and are now positioned for a major reversal, while gold and silver are consolidating near key resistance levels.
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