All That Glitters: An Ongoing Saga

Speaking of gold, the price of bullion has barely budged in this latest stock market correction, even though some of the shares of the gold companies themselves have been beaten up by a fair degree. Increasingly, the question is, will bullion set back very much, given the horrific balance sheet condition of the US and parts of Europe?

In Europe where the PIIGS conflagration continues apace, a number of things are emerging. First, the debt of many of the PIIGS are held in vast quantities by European banks, and certainly and notably, those in France. If those countries are not bailed out by every one of the Euro-zone countries, then they will be bailing out French banks shortly. And that’s not all. It appears that manyUSshort term money market funds have also been buying the debt of the PIIGS in order to increase their yield for American clients. A collapse of one of those countries would have a significant impact on those funds (which are not permitted to go to a discount). (As far as we can tell, however, the same does not apply to Canadian bank-owned money market funds – or if so, it is so minor that investors need not be concerned.)

In Greece, where the issue is potentially closest to eruption, the Greeks themselves are draining their bank accounts and buying gold. Both Chinese and Indian citizens are purchasing gold as well because the return on the metal has been better than that available from investing.

All in all, whatever short term concerns that gold shareholders may have, the fundamentals remain highly favourable for bullion. Indeed, as the US economy shows increasing evidence of serious slowing, the pressures on Bernanke to get things moving again so as to ensure that they will not affect the outcome of the 2012 election negatively. A sort of QE2.5 may be a compromise which Congress would find acceptable – doing something while not giving too much of an overt appearance of doing something.

The overall economic news keeps getting worse, and the price of bullion itself is very close to its high even if the stocks have sold off substantially. Problems in Europe now, the US insolvency ongoing, are creating a bunch of governments with no clue as to what to do except to issue more and more debt obligations and hope to spend their way out of the economic weakness. With the US now in a condition in which it cannot grow, the Fed is becoming more and more desperate for a solution – and the printing press is the only way they can see. Being out of gold and gold stocks is riskier than being in them for anything but the short term.

Outlook for the Stock Market – Earnings Estimates

Analyst earnings downgrades are beginning to exceed analyst upgrades thereby kicking away another support for the market at its current levels. If the stock market was ‘cheap’, this would not be too worrying a consideration but it is not. In fact, ex the 1993-2008 15 year period when the US stock market sold at more than 2 times book value for the first time probably since the 1920s, theUS market in particular has risen back to levels which throughout most of its history marked the peaks of price advances. It is therefore increasingly difficult to see where the valuation support will come from, and analyst downgrades do not help.

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About rosshealy

C. Ross Healy, MBA, CFA Chairman, Strategic Analysis Corporation Ross Healy began his investment industry career in 1965 as a securities analyst for Midland Osler Securities. He was a co-founder of Sceptre Investment Council in 1970, a leading Canadian money manager. In 1984, he became Director of Research at Merrill Lynch Canada, and during this time provided support for the late Dr. Verne Atrill, the theorist who decoded the mathematics underlying the Theory of Accounting Dynamics upon which the Strategic Analysis Corporation (SAC) methodology is based. After supporting and collaborating with Dr. Atrill for many years, he joined SAC as Chairman and CEO in 1989 following the death of Dr. Atrill. Ross Healy is a past president of the Toronto CFA Society, and served on the board of the Financial Analysts Federation (now the CFA Institute) as Chairman of the Financial Analysts Journal committee, the academic arm of the CFA Society. He has served on the Financial Disclosure Advisory Board of the Ontario Securities Commission, and was a member of the Executive Committee of Trinity College, University of Toronto, chairing the Investment Committee. He currently serves as the Chairman of the Board of Trustees of Eglinton St. George’s United Church of Toronto. He contributes investment analysis to print, radio, and television media, and has been appearing regularly on Business News Network (BNN) for the past 15 years, and the Canadian Broadcasting Corporation (CBC). There is an award-winning book written about his analysis leading up to the collapse of Nortel Networks (The Bubble and The Bear, How Nortel Burst the Canadian Dream, by Douglas Hunter, Doubleday Canada, 2002. He was the “Bear” in the book.). Email Address: rhealy@strategicanalysis.ca Company Website: www.strategicanalysis.ca Telephone (work): 416-498-3604 x 133 Cell: 416-258-8342
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