Not too many portfolio managers are laying claim to stellar performance in 2011. Equities were a killer, debt is choking Europe, Asia and the United States and forcing investors in Greece to accept losses. Commodities were weak, and the only solid performers were the monetary metals, with gold ratcheting up a 17% gain on the year, which was disappointing after the $1,920 high that was touched in September.
The fact that Japan, structurally the weakest currency, followed by the U.S. dollar, the second weakest currency fundamentally, were the strongest forex performers is a testimony to the utterly dysfunctional investment environment we have to contend with in 2012. Volatility was absolutely the accurate choice of words for 2011 in one word, and in 2012, that word is “unpredictable”.
A number of new realities born in 2011 can now be considered fundamental aspects of markets, which is in itself, the most alarming new reality. Among these:
1. On days rife with horrible financial news, which historically took markets downward reliably, we are now just as likely to see markets move up significantly;
2. Gold and silver, which over the last decade moved somewhat reliably in opposition to major indices and treasuries, now emulate the performance of those asset classes;
3. Europe and the United States have taken to capital fabrication without any kind of preamble or announcement, and it is only through careful scrutiny of foggy central bank balance sheets and IMF transactions that we can discern the shape of Quantitative Easing.
4. Both Europe and the United States have proven that institutions are “too big to fail” when they hold substantial amounts of sovereign debt on their balance sheets, and they will be the recipients of bailouts and restructurings ad nauseum.
These market encumbrances, which have now thoroughly demolished any pretence of a “free market” in discerning minds, are also evolving into the most significant barricades to any market recovery.
Instead of lending the funds to businesses and institutions further on down the food chain, (which would arguably be used to underwrite economic activity) recipient banks of one percent loans opt instead to deposit them with central banks at 0.25% interest. Since the collateral can now be anything that fits into a garbage bag (defaulted sovereign debt included), and in the full knowledge that bailouts will continue commensurate with the impact any given institution’s demise would have on the surrounding house of cards, large financial institutions who have made bad bets on sovereign debt are now thoroughly incentivized to expand the balance sheet on the debt side as much as possible, and as quickly as possible, to assure their place at the trough where free money is dispensed now daily.
In that macro climate, instead of 2011’s volatility, we have that, plus the aforementioned unpredictability, which gives us uncertainty.
Uncertainty, mostly because the level of interference in key markets, and impossible-to-take-seriously government statistics, renders any kind of mathematical forecasting impossible in any market. The intentions and goals of those manipulating statistics and markets are unknown to the general and institutional investing public, and so its impossible to enter x an y values in any equation because you can’t know what they are supposed to add up to. I mean, its obvious that the underlying strategy is to foster confidence where none exists. But it is lost on those operating the levers that the more they try to bamboozle, the more obvious that not only is leadership absent, but that the stand-ins are baboons.
If you ask me, I think there is more coordination internationally behind the scenes than the media is aware of and therefore that we are permitted to know. The end objective of such covert cooperation is the retirement of USD, EUR, and YEN currencies to facilitate the cancellation of debt, and the introduction of a global trade unit, along the lines of the IMF’s Special Drawing Right. That won’t happen, of course, until the largest asset bases which are the targets of those who control this whole process have been plucked from the hapless climbers soon to be dismayed by the fact that they weren’t in the “in club” they thought they were.
The United States dollar continues to be the biggest obstacle to the unfettered increase in the price of gold as that currency’s overpopulation provides the cover for its movements into ETF’s and Futures, whereby they enter gradually and exit suddenly for maximum negative effect. CFTC reporting protocols render it impossible to document proof of such intentions, and the CFTC itself is set up as a shield from prying eyes into the affairs of the largest banks who control ETFs and futures markets, and thereby the prices of gold, silver, oil and any commodity they want.
Mainstream media continues to demonstrate a willful denial that anything untoward is going on, botched CFTC and SEC investigations notwithstanding. Mainstream investment analysts besmirch themselves by trying to identify newsbits as the key forces behind daily market direction.
PRECIOUS METALS
Not that India’s crash in gold exports had no effect – from a purely fundamental perspective, gold’s trend in jewelry certainly appears to be heading lower. Theoretically, I expect that physical end use deterioration to be replaced by investment demand, but one can’t ignore the fundamental reality of price interference through futures markets. The most recent figures from the World Gold Council indicate a strong rise in investment demand coincident with the drop in jewelry demand, but those are Q3 numbers, which won’t reflect the drop in investment demand that will no doubt be proven in the Q4 figures, after the coordinated sell-off in gold by SPDR Gold ETF and gold futures at the same time shortly after gold set the record mentioned above.
At this point, we haven’t seen a resumption of the assault on the gold price, but I suspect that may change this week upcoming as the cows fatted on the ill-gotten gains of last year’s criminal market interference are not likely to be back at their desks just yet. Silver, of course, sustains parallel performance for the same reasons. The bankruptcy of Kodak is certainly the writing on the wall for silver usage from photography.
The patience of clear-eyed gold and silver investors continues to be rewarded annually though. Now we see a lot more publication of increasingly high target numbers for gold, with Rob McEwen’s $5,000 gold price call in 2004, which then seemed outlandish, now seem conservative alongside the multitude of $10,000 dollar an ounce calls growing.
Resource Stocks
Copper declined by 20.4% in 2011. To me, that’s one of the purest indications of next year’s global economic outlook; despite supply tightness caused by aging primary production assets, even that positive wasn’t sufficient to offset the negative influence of China’s slowing growth.
Given that we know to expect volatility, unpredictability and therefore uncertainty, investing in resource stocks is going to be tricky. Adopting the guerilla mindset necessary, be prepared to take profits off of anything that does 15% or better. There are xx categories of resource stocks that do well in these types of markets:
1. Companies that are getting reorganized, rolled back, and boards of directors replaced by recognized names in the industry. Buying at the right time, often these stocks will be an easy double, if you know where to find them, in a matter of a few months.
2. Companies that already have a major deposit, and a high level of confidence exists that a larger mining company will buy that company’s asset or all the shares of the company.
3. Companies drilling what is already known to be a great project, with lots of money in the bank to finance continued drilling for at least another year or two, and where confidence is high that more “discovery” holes will be hit. The potential for major share price appreciation is especially present if drilling has been consistently successful, yet the company has yet to publish a 43-101 resource calculation.
In all of these scenarios, on days where there is a heavy sell-off in the major indices, these stocks often get dragged down with the herd, and that’s the time to build a position in these deals.
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Midas Letter is the Journal of Investment Strategy of the Midas Letter Opportunity Fund, a Luxembourg-based Special Investment Fund that specializes in Canadian-listed emerging companies in the resource sector with a focus on precious metals explorers and miners. James West is the Portfolio and Investment Advisor to the fund.
Every month, James West’s MidasLetter Premium Edition deconstructs the economic and political events of the past and upcoming week, and identifies risks and opportunities to investors seeking to profit while the majority of investors are losing money.
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