Thursday, September 22, 2011

Brien Lundin's Long-Term Resource Investing Tips


In the present and continuing economic distress and market volatility it should be becoming clear to investors that when looking for the long potential in stocks precious metals have moved to the top of the list.  This is the time to take a 5 year view for returns—if you still have any money left that is!

Brien gives an informed view for investors and, in my pinion, is a must-read.

Invest well and prosper.


repost from The Gold Report

The Gold Report: Brien, cited the escalating European and U.S. debt crises as triggers for the August 22 spike in gold prices, when it briefly eclipsed the $1,900/ounce (oz.) mark. Since then, the French bank Société Générale has been downgraded and austerity measures are forcing the Greek economy further into recession. Despite these significant catalysts, the gold price remains range-bound between $1,750 and $1,850/oz. Why isn't gold reacting?

Brien Lundin: If the European debt crisis and the S&P downgrade of U.S. sovereign debt had happened separately, say a couple of months apart, I think gold would have risen just as far, but the rise wouldn't have been as steep and the market wouldn't have overheated. But they happened to occur right on top of each other, so the market got ahead of itself and went nearly parabolic. Speculators who were merely trend-following traders came into gold, but the end of the rally sent them all packing at once. That dealt a sharp psychological and emotional blow to the market that we are still recovering from. Since then, we have seen a lot of very fluid, hot money coming in and out of the market.

More recent news from Europe hasn't had quite the same effect. We have seen some itchier trigger fingers, people playing the news of the day and getting right back out. We have also seen physical gold buyers from Asia come in on the price dips.

The result has been rallies tempered on the upside by the speculators abandoning trades more quickly. We have also seen drops tempered by bargain-hunting, physical gold buyers coming in on the downside. In short, gold is in a consolidation phase, awaiting the next trend, which I think will continue to be headed upward.

TGR: You mentioned Asian physical buying. Recent rumors suggested China could be buying Italian debt to help Italy out of its problems. Is that bolstering the euro and keeping investors out of gold?

BL: I think that China helping out Italy hurts the gold price in an indirect way. It's a sign of China knowing which side its bread is buttered on and knowing that it needs a stable Europe to support its economy.

We saw that need for stability when the European Central Bank and other central banks announced a coordinated U.S. dollar liquidity program and Germany and France said that Greece would definitely stay in the euro. All of this is part and parcel of trying to calm the markets down in the interim and to show that the gold price is essentially capped or that the rise is being dampened by official intervention.

TGR: Are you implying that the euro is doomed?

BL: I believe the euro is doomed as it currently exists. I think there is very little chance Greece will remain in the European Monetary Union. The rest of the PIIGS (Portugal, Ireland, Italy, Spain) remain to be seen. After all, what's the use of a club if you can't kick anyone out?

Obviously, the risks here are the implications of such an event, the dominos that would fall in the European banking system. The fact that Germany and France are so reluctant to kick Greece out of the euro zone shows that the problems could be very deep and widespread. I think they are just prolonging the situation. Ultimately, the euro of the future will not be the euro we see today.

TGR: What effect has the news out of Europe had on the gold price?

BL: There may have been some official manipulation in the gold price recently to bolster the idea that things are calming down. When the Swiss announced its cap on the franc, the news was incredibly bullish for gold; gold in effect became the last safe-haven investment standing. But shortly after that news broke, the metal sold off about $50/oz. overseas in just a few seconds. Investors wondered who could have known that news was coming, who could have reacted that quickly and sold so dramatically. The evidence points toward official management of the gold price.

TGR: In the September issue of Gold Newsletter you wrote that "long-term factors still favor a continued uptrend" in the gold price. Can you give us more detail?

BL: When we look at the S&P downgrade of U.S. sovereign debt, the problems in Greece and the potentially cascading effects across the banking system in Europe, what we see is the result of far too much debt being created on both the governmental and private level. Too much money has already been created and will have to be created in the future to inflate away all that debt. It is mathematically and politically impossible for austerity programs to be severe enough to overcome these debt loads. There is no way, especially under the weight of those austerity programs, that growth can be robust enough to overcome these debt burdens. At some point and to some degree, inflation will have to depreciate those debts away. That is the very reason why investors with a long-term view are buying gold. They aren't concerned about gold having come so far over the past 10 years. They are looking down the road and seeing the amount of currency that will have to be created to get out of our tremendous fiscal problems.

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