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Strategies & Market Trends : Ride the Tiger with CD -- Ignore unavailable to you. Want to Upgrade?

To: Veteran98 who wrote (203847)	9/16/2011 11:26:10 AM
From: Veteran98	1 Recommendation Read Replies (1) \| Respond to of 313012

Also from Canaccord today... We recommend investors scale into any price weakness in gold equities as this may be the last pause before a phase of accelerated relative price appreciation or mania begins. Daily Letter Summary \| 3 16 September 2011 PORTFOLIO STRATEGY Portfolio Strategy \| Martin Roberge, M.Sc, CFA, 1.514.844.3734 • Portfolio Strategy: Sector Rotation Insight -- Gold equities: calm before... the mania? The Denver Gold Forum has arrived. Time to sell? Next week begins the Denver Gold Show. History shows that this period often coincides with an interim peak in gold and gold shares before negative seasonality starts in October. We recommend investors scale into any price weakness in gold equities as this may be the last pause before a phase of accelerated relative price appreciation or mania begins. Why? • First, our gold reflation gauge remains bullish. This timing indicator blends key variables influencing gold and gold stock prices. Above zero, the odds are about two-thirds for the bullion to rise and gold shares to outperform the market. • Second, book-based valuation of senior golds is cheap. At prior cyclical peaks, world gold equities were overbought and traded at relative price-to-book ratios between 2x and 4x. At 1.7x, there is much room for valuation expansion. • Third, relative price strength is supported by relative EPS strength. Relative to the world equity market, the gold sector has broken out to 52-week highs. This push is corroborated by relative forward earnings and ROE trends. • Fourth, payout ratios should increase markedly. Dividends of world gold companies represent only 20% of their profits (1.5% of their free cash flows). This is much lower than the historical average of 45%. The lukewarm reception of recent acquisitions and investors’ appetite for yield argue for higher payouts. • Fifth, conditions for a mania appear to be here. Aside from the 14% weight in the S&P/TSX, excess liquidity, moral-hazard economics, extrapolation of false assumptions and herding mentality are the ingredients to feed a mania. • Our view of a possible mania on gold equities is subject to risk factors that we classify into four categories: 1) Economics. A positive resolution is found to the European debt/banking crisis and global quantitative easing measures are halted. 2) Earnings. Capex and cost inflation accelerate and bite into profit margins. Income. Companies are too slow to pass on higher gold prices to investors in the form of higher dividends. And 4) Valuation. While gold equities are cheap on most valuation metrics, the gold bullion is near/above its 1979 peak relative to other asset classes such real estate and industrial commodities.