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A new year, yes. But a well-aged story: Generalized fear and loathing about Europe is fueling the safety trade. The longest, most-boring financial crisis in history continues.
For laughs, let’s tote up the damage:
- The Dow is down nearly 1%. Other U.S. indexes are down more, others less
- Banks dragged down European stock indexes. Spain closed down nearly 3%, Italy 3.5%
- The euro is down to $1.279 — a level last seen in September 2010
- The dollar index is approaching 81 for the first time in a year
- The yield on a 10-year Treasury note is back below 2%
- Oil is down about 1%, to $102.21
No single euro-story is driving the action.
The Italian bank UniCredit plans to offer new shares at a steep discount to raise capital. Spain’s government said that nation’s banks need to raise 50 billion euros in new capital. A French bond auction generated less demand than you’d expect considering the rating agencies insist on rating France AAA, at least for now.
In other words, there’s nothing especially new or alarming… just scattered reminders that the dust bunnies of Europe can’t be swept under the proverbial rug.
Gold isn’t escaping the fallout. It dipped below $1,600 just after Comex trading opened. At last check, it’s recovered a bit to $1,607. Silver clings to $29 by a few slender pennies. Keep an eye on those GLD and SLV charts. Even with the pause in the metals’ advance, stocks of producers are holding their own. Silver Wheaton and Pan American Silver are both up 7% in the past four days and the gold miners in the GDX are up 5.7%.
“What we learned in 2011 was that when a Great Correction pinches, the dollar is the salve of choice — not gold,” wrote Bill Bonner on Tuesday. “When investors fear losses, they turn to the dollar for protection.” They will continue to do so a while longer, Bill surmises: “We’ll probably see a further correction in the gold price…perhaps down to $1,200. Or perhaps it will stop at $1,400.”
“2012 should see more trouble from Europe, and therefore potentially more dollar buying,” adds Peter Schiff — who now sells bullion in addition to running a brokerage.
“But,” he cautions, “what is important to understand about these circumstances is not the scale of the moves but the direction of the trend.”
Even with the dollar riding high, “it’s still down over 30% over the last decade as measured by the generous U.S. dollar index,” says Mr. Schiff. “Gold, by contrast, is up over 350% in that period.
“Of course, past performance does not guarantee future results, but the fundamentals have not changed.” Indeed, one day, it will dawn on nearly everyone that no fiat currency is safe, including the dollar.
But we’re not there yet. Not by a long shot. It goes back to our friend Doug Casey’s crack about how something that’s inevitable might not be imminent.
For all of today’s “risk-off” weakness, gold stocks are holding up remarkably well. The HUI index is off a quarter percent, a hair below 520.
“In this environment, to make the big money,” says our old friend Rick Rule, “you need to enter [gold] stocks that aren’t institutional momentum favorites. Those stocks aren’t going to work.”
Instead, you need to look for “the kinds of stocks that are going to be sold to the Rio Tintos and the BHPs and the Newmonts and the Barricks of the world. The buyer this year is going to be the industry.”
Thus, “the impetus for the market in exploration stocks this year will be takeovers. The companies that have done a good job, although they may not find traction among institutional or retail investors, will be taken over by larger mining companies.
“These larger companies have both the need to replace production and the financial strength to complete the takeovers and to build out the discoveries that have been made by the juniors.”
As a result, Rick sees the majors paying substantial premiums for the juniors — more than you’d normally see.
source: forbes.com
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