Hello Valuepro
I did have a bit of the flu but my little fella had it bad and I was nominated to help him through it for about eight days. So I was out of circulation for at least that much time. All is well now and he's back being the terror of the daycare.
If you subscribe to the theory that the USA is heading into deflation then I might be persuaded that gold would be worth consideration. In that event however, I would not chose gold stocks, but rather gold bullion or better yet Platinum or Paladium. It is buying power and preservation of wealth that you want in a deflationary environment not investment, gold stocks would only be valued in deflated dollars and suject to other pressures.
An investor might consider bonds, food retailers, pipelines, discount clothiers, bankruptcy corporations, barter corporations, etc. but philosophically, I have tried up until now, not to prosper by my fellow man's misfortune and I don't propose to start now.
Yes many parts of the free world have banking problems most notably, Japan and Korea and yes China, Russia, Latin America may all devalue currencies or worse, but the USA is of course the key. Aside from individual instances of stupidity such as the hedge fund you referred to, fundamentally, there is little one can find wrong with the US economy. Yes there may be bank failures and yes their trade imbalance and debt is worrisome but their economy is healthy. In my view, their greatest danger right now is not inflation, or deflation, but rather their inability to compete by virtue of the price their goods reflect in world currency terms.
Greenspan needs to drop the US exchange rate by at least a full percentage point to reduce the value of the US buck in relation to other world currencies. So long as US manufactured goods are priced out of the market place, there is a danger of significant profit impacts hence a stock market meltdown. If profits can not begin to reflect the value placed on US equities, there will be a rush for the doors. Clinton's problems don't matter in the scheme of things but what does, is confidence in the economy.
Yes there is a sea of capital out there looking for a place to be safe and make a profit, and all things being equal, it will migrate to equity markets, but at some point forty to one or worse price earnings ratios have to come home to roost.
The trouble with gold is not that it would not be a good investment in deflation, it is that its supply is not yet driven by the market. There is still a huge supply held by central banks who continue to sell. Yes consumption outstrips production, but this artificial supply keeps driving prices down. In my view, world banks would probably continue to sell gold into deflation to maintain the value of their currencies in relation to gold and reduce debt through the proceeds. By the last estimates I have seen, at the current rate of sale, there is still two years worth of gold reserves held by central banks who have been selling and that is not counting the huge reserves held by, Germany, Switzerland and the US. If they started selling to maintain the value of their currencies, gold would at best hold its own, and more than likely go down to $240 or more.
If you want to choose a commodity that would appreciate, I would choose investment quality diamonds and Platinum or Paladium. In the case of the latter two, investment and industrial demand is increasing and very little additional supply is being put into production. In the case of investment quality diamonds, they are a finite commodity of considerable rarity and despite what you might think, supply is not expanding. Many mines in Russia are playing out and have limited life spans. One or two of DeBeers are even marginally economic. With an Angolan civil war, the new Canadian pipes would be the only significant new supply of rough on the market. Despite what people might think, investment quality diamonds are a market driven commodity and therefore would be in demand. In deflation, no one is going to trust anything controlled by the government or big banks as they will be seen as the reason for the problem.
If you were looking to preserve your capital, you would choose something that is in short supply and significant demand. All investment value is based on artificial factors whether it be gold, diamonds, platinum or the US buck. If everyone wants it, its valuable, if no one wants it, its not. If gold supply is artificially lowered, people will not view it as a storehouse of wealth and in fact will sell it, even though it is rare. If Platinum is in short supply, consumed industrially and can not be dumped by banked supplies, people will view it as a storehouse of wealth. Same with diamonds. Marginal mines will close along with those chiefly producing rough that ends up under the counter at Montgomery Wards or on the Shopping Channel. Mines producing larger quality diamonds will survive and supply into a market in demand. The cost of production will remain the same or go down due to deflation, yet the rough will command increasing prices due to rarity and therefore wealth preservation.
Hilton-Ashton's Diamond Industry Review published August 25th, like you sees a coming crunch in major diamond miners and manufacturers. I agree with his basic thesis, but what I do not agree with is selling any miner which predominantly produces high dollar per carrat stones, or who's ore is amongst the highest in value per tonne in the world. He recommends buying exploration plays like MPV which I do not agree with. MPV has low dollar per carrat stones and only medium value ore. CAV, MIY, IAR, SUF and GMD on the other hand have leverage on what chemically anyway promises to be highly economic sources. If pipes are found next spring these will be exciting plays so long as the diamonds found are valued on average of $120 per carrat plus and the ore runs one carrat per tonne or better. A three or four pipe cluster in these numbers will be another DMM or ABZ but only initially. You will have to wait six years for profits or a buyout before the market will truly reward shareholders. In the case of SUF, it is Klipspringer and hopefully Camafuca which will make it so attractive initially as these are high quality significant resources.
SUF, DMM and ABZ all qualify as high value producers and in the latter case potential producer. Their goods are rare and therefore they will be profitable. In ABZ's case their ore value simply make them profitable. If they are profitable when most other miners are not, their shares will be in demand as little else will be profitable as an investment.
For what its worth, that's where I would focus as soon as I paid off all my debts.
Regards
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