In case you are not sure, we are in a recession

Wednesday, November 05, 2008 | posted by RedApple
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Michael Shedlock from Mish's Global Economic Trend make a great argument that the top 20 countries in the world are all in recession with the exception of China (Global Recession, Country by Country). And he suggests that China will not be able to go alone (he also referenced an excellent read: Robini's recent article on China's hard landing).

Let's think about how we are going to come out of this global recession. I think that depending on how bad the recession is, government maybe able to push for responsible lending regulations with nationalization type of overseeing in credit lending. If done correctly (especially if co-ordinate with all G20 governments), the long term economic stability will have a good chance. On the other hand, if depression hits any country, they will push for the competitive devaluation of their currencies, massive monetary injection plus government spending to boost jobs and therefore the domestic economy. The world will end up starting another round of pushing paper money around.

We, of course, argue it will all end badly and Gold will be the long term hedge of that scenario.

BUY Paper Gold - short term opportunity

Wednesday, November 05, 2008 | posted by RedApple
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As questioned already in this blog about the spread between physical and paper gold price, we believe this article from Minyanville (5 Nov 2008 - Mother of All Short Squeezes for Gold?) gives an excellent summary of the Comex delivery situation and how other signs such as Lease Rate and Forward Curve is pointing towards a possible short squeeze.

Also read : 4 Nov 2008 - Jim Sinclair - Physical Delivery of Gold From the Comex Warehouse

Gold Juniors - more to meet the eye.

Wednesday, November 05, 2008 | posted by RedApple
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Seeking Alpha has a pretty good article (5 Nov 2008 - Junior Gold Miners Are Dirt Cheap) about how they think the Juniors gold miners are cheap. We have already points out how cheap these Gold stocks are (see Gold versus other assets) priced versus Gold prices historically. Now Seeking Alpha has offered us another angle to see how fundamentally cheap they are, especially the Juniors. Being able to buy the ones with no debt and Price/Book below 1, is certainly attractive in a value investing sense. I caution this analysis since one really need to look at a few more factors 1. the amount of Gold reserve, 2. free cash flow. Out of the list, on the safe side, NSU & EGI looks more interesting from purely able to buy the stock for less than the "cash value". However, we need to be careful here.

I started looking at NSU's Quarterly report closely (June 2008 Quarterly Report). On page 9, you will see that a 10% strengthening in USD will impact their net income by around 140k. Canadian Dollar has weakened by 20% and South African Rand has weakened by 25% since June 30th which is the Seeking Alpha table is based on. Over 50% of the account receivable is priced in South African Rand. On top of it, it seems like that NSU may have exposure to the Eritrean Nakfa Currency. Nakfa is pegged to the US Dollar (1 USD = 15 ERN) and NSU management expects little currency risk with the ERN. Even though we do not know much much of NSU's 58mm cash is in ERN. We still wonder this economy can defend its currency peg (GDP is about 1bn USD, we need to find out the size of their FX reserve) and ensure convertibility at the pegged rate. This highlights that, with such a big move in recent FX rates, all balance sheet numbers are in question. Since we are unclear what currency risk each company in its balance and income statements, I am guessing that we will need to do more research before calling these miners a complete "free lunch".

However, I must say that if we get to buy the Gold reserve for free, given a good safety of margin to cover for possible currency translation risk, some of them still look attractive.

Also see (22 Oct 2008 - Minyanville - Dear FED: Why not buy Gold Miners).

Obama win and early market reactions

Wednesday, November 05, 2008 | posted by RedApple
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We are seeing a couple of things so far today and reflecting on Obama's theme:

1. Crude off 6% (energy independence)
2. Euro and Sterling up slightly (Rumour : middle eastern selling Dollar... see our earlier post for possible reasons)
3. Canadian dollar and Mexican Peso off 1% (calling off NAFTA)

Given the level of CAD (presently at 1.1690 and the recent high is 1.30), maybe USDCAD is a good buy now. (see USDCAD chart below)