Update Goldcorp (GG)

Goldcorp (GG) reported first quarter 2012 earnings of 50 cents a share on April 25 after the close of New York markets. That was 5 cents a share below the Wall Street consensus. Revenue climbed 10.9% to $1.35 billion, below Wall Street expectations for revenue of $1.48 billion.

Do I need to tell you that the stock has tumbled on the news? As of 2:40 p.m. New York time on April 26 Goldcorp is down 6.5% to $38.39. (Goldcorp is a member of my Jubak’s Picks 12-18 month http://jubakpicks.com/the-jubak-picks/ and Jubak Picks 50 long-term portfolios http://jubakpicks.com/jubak-picks-50/  )

The problem seems to be focused on the company’s Red Lake mine. Read more

So how does this end?

I don’t mean the current Spanish debt crisis or even the euro debt crisis. I think we know what the “solution” will be to that.

And I don’t even mean the U.S. debt crisis or the Chinese debt crisis. I think we know what the “solutions” for those will be as well.

But what about the meta crisis? The one that’s been created by the current round of “solutions?” How does that end?

I’d suggest that we all brush up on Gresham’s Law, the 16^th-century description of what happens to strong currencies when they meet up with bad money. In a nutshell Gresham’s Law says that the bad currencies win. Figuring out what to do about that is important as investors head into an era of bad money as far as the eye can see.

I think it’s clear by this point in the aftermath of the global financial crisis that all the various local crises have been “solved” to date by the creation of vast sums of money essentially out of thin air on the official balance sheets of central banks such as the Federal Reserve and the European Central Bank and on the unofficial balance sheets of, say, China’s banking system. And I think it’s equally clear that, for all the talk about economic reforms creating growth or austerity creating growth or financial market confidence creating growth, the most likely “solution” going forward is the creation of vast sums of money essentially out of thin air.

It’s still an open question if the “solution” will work. In the case of Spain, for example, the European Central Bank fixed the crisis for a while by giving banks access to 1 trillion euros in 3-year loans in December and February, but by late March the crisis was back and the yields on Spanish and Italian government bonds have started to rise again. And now we’re looking at another program of bond buying by the central bank to lower yields or another program of 3-year loans to banks to give them the money to buy more bonds in order to lower yields.

To condense what I wrote in my Friday, April 13 post on the current state-of-the-art in the Spanish crisis http://jubakpicks.com/2012/04/13/the-spanish-debt-crisis-combines-the-worst-of-the-greek-and-irish-crises-in-a-too-big-to-fail-package/ Spain and the EuroZone are likely to fall back on a series of increasingly desperate kludges by the European Central Bank, other global central banks, and finally the International Monetary Fund. Each of those fixes would require somebody to print money—either the European Central Bank, or the International Monetary Fund, or some combination of the Federal Reserve, the Bank of Japan, and the People’s Bank of China. Print enough and the immediate Spanish crisis goes away again as bond yields sink and governments get another breathing space to propose economic reforms and budget cuts.

At some point, though, the bill for these solutions comes due. Read more

Dollar Ben Bernanke was very good for gold yesterday

Stocks liked Fed chairman Ben Bernanke’s speech yesterday that emphasized the Federal Reserve’s doubts about the strength of the recovery in the job market. But the gold market liked it even more. The SPDR Gold Shares climbed to $164.40 yesterday from $161.53 on Friday, March 23. That was a 1.8% gain for the gold bullion ETF.

Bernanke chose a glass-half-empty approach to recent job gains in his speech to the National Association of Business Economists. The rapid drop in the unemployment rate in the last six months to 8.3% from 9.1%, he said, may reflect a one-time bounce reversing the job cuts of 2008 and 2009. “To the extent that this reversal has been completed,” Bernanke said, “further significant improvements in the unemployment rate will probably require a more rapid expansion from consumers and businesses, a process that can be supported by continued accommodative policies.”

In other words the Fed isn’t even vaguely thinking of rescinding its promise to keep interest rates at current extraordinarily low levels through the end of 2014. And the possibility of another round of quantitative easing remains on the table.

The stock market, accurately, heard the sounds of printing presses churning out dollar bills in Bernanke’s remarks. Stocks rallied because increases in the money supply support faster economic growth (in the short-run anyway and who worries about the long-run on Wall Street right now?) and because lower interest rates make stocks look even better against bonds. (The S&P 500 stocks currently yield 1.86%. That’s more than the 1.02% yield on the 5-year Treasury note and not far behind the 2.18% yield on the 10-year Treasury.)

So too did the gold market where the sound of printing presses argues for a falling dollar (good for gold) and an eventual increase in inflation (good for gold).

Right now it looks like the SPDR Gold Shares ended their 10% or so correction from their February 28 intraday high at $174 to a bottom at $158 and have, with yesterday’s move broken through resistance to start a new rally.

Potentially anyway. Read more

India’s tax increases another reason gold is weak (for now)

For the second time this year, India, the world’s biggest buyer of physical gold, has increased its tax on gold imports. On January 17 the Indian government doubled the tax on gold and silver. The newest move will raise the tax from the 2% rate set in January to 4%. (The most recent tax increase covers gold bars and coins and platinum. The tax on silver remains at 2%.)

In 2011 Indian purchases of gold bullion hit a new record at 969 metric tons. Gold futures in India climbed 32% in 2011, far exceeding the 10% increase in global gold prices.

Indian gold importers anticipated the tax increases and the slump in buying that higher prices would create by cutting their imports of gold in the fourth quarter of 2011. Imports fell by 44% in the fourth quarter as jewelry and investment demand fell by 44% and 38%, respectively, according to the World Gold Council.

The announcement of an increase in the tax on gold came in a speech announcing the government’s proposed budget for the fiscal year that begins on April 1. The 50% rise in gold imports, Finance Minister Pranab Mukherjee said, was one reason for the sharp deterioration in India’s current account deficit. (India, unlike China, runs a current account deficit and is dependent on inflows of overseas capital to keep its accounts in balance.)

Indians have a history of slowing gold buying when prices rise—for a time. Read more

Buy Yamana Gold (AUY)

I’d use today’s drop in gold and gold mining stocks on strength in the dollar to buy Yamana Gold (AUY). As of 1:30 New York time shares of Yamana Gold were down 4.01%.

I think the strength in the dollar is temporary due, first, to this morning’s announcement by the European Central Bank that European banks had borrowed 530 billion euros under the central bank’s new three-year loan facility. That means the central bank has added 1 trillion euros to its balance sheet since December. The central bank’s balance sheet now stands at a record 2.74 trillion. The currency markets, rightly, feel that this expansion is inflationary down the road.

The dollar’s strength is due, second, to disappointment in this morning’s testimony by Federal Reserve chief Ben Bernanke that the U.S. central bank wasn’t thinking about another round of quantitative easing that would pump more dollars into the U.S. money supply.

On a day when the European Central Bank adds 530 billion euros to its money supply, the Fed seems like a paragon of strong money.

Of course, that’s not really true. The Fed remains committed to 0% interest rates through 2014 and the U.S. government’s fiscal deficit continues to build up debt—and add to the money supply.

Before today’s drop, the U.S. Dollar Index was sinking toward a test of resistance at its 200-day moving average and gold mining stock (represented by the Market Vectors Gold Miners ETF (GDX)) had moved above its 200-day moving average.

In other words, with the dollar falling, gold and gold mining stocks were moving to new highs. I think that pattern will resume after a brief interruption. Read more