Gold continued to outperform all asset classes as it crossed the $1,000 mark in today's trading. As the only currency without any liabilities attached to it, gold continues to strike new highs in terms of the Euro, Pound, Rupee and other currencies.
The run up in gold may be a fear trade or it may represent continued buying in the form of long term allocations out of paper currencies.
“The financial situation remains extremely fragile and gold seems to be the only safe haven,” said Ron Goodis, retail trading director at Equidex Brokerage Group Inc. in Closter, New Jersey. “Currencies are losing value and holders of currencies are losing confidence. Gold may break through $1,000 and not look back.”
As investors have poured money into haven assets, gold has gained even as the dollar has strengthened. The greenback is up 6.3 percent this year against a weighted basket of six major currencies including the euro and yen. Gold and the dollar historically have moved in opposite directions.
“People will soon realize the dollar is just as bad as other currencies,” said Mario Innecco, a futures broker at MF Global Ltd. in London.
Will the world lose its appetite for dollars? If it were to occur it will surely take some time as the dollar is still seen as a flight to quality in many developing countries. Gold and the US Dollar can both continue to perform as financial markets remain in termoil.
Inflation is not right around the corner. Demand for all goods and services continues to decline and consumers across the country remain concerned, and rightly so, about the job market. The monetary printing to come from the Obama administration's stimulus package and the bank and auto bailouts will not cause runaway inflation. Credit is the key driver to inflation and both demand for and supply of credit are shrinking. Until the growth of credit recovers hyperinflation concerns are overdone.
Getting Into Gold
Even without hyperinflation gold will perform. If you are not in the gold trade and are looking to jump on board look for pullbacks in the gold miners with strong balance sheets and cash flow.
Yamana Gold Inc., Canada's fourth-largest gold producer, may accelerate plans to double output by acquiring smaller rivals that are struggling to finance development of their mines.
"These unique times give us the opportunity to say, 'Can we get there more quickly'" CEO Peter Marrone said by telephone from Toronto, where the company is based. "That's the sweet spot for a company like ours."
After shunning acquisitions last year in favor of internal expansion, Mr. Marrone is now looking outward for bargains among mining companies with deposits in the Americas. The global credit freeze left some small mine developers and explorers without access to the cash they need to develop new mines or finance their operating costs.
Taking a look at Yamana's most recent balance sheet and a February company presentation shows the company with $410M in cash and undrawn credit. With $350M in projected 2009 capex look for the company to fund acquistions and continuing mine development/expansion through additional equity and debt. These announcements could cause a nice pullback in the stock and an opening for an entry point for a long position.
With everyone talking about gold it is due for a pullback and an opportunity to get long.
Disclosure: long GLD
