The Golden Rule? Gold Will Rule

More metal talk today. There's been more buzzing about the mining companies shedding their gold hedges. From Briefing.com:

"However, the industry has clearly realized this and gold companies have been de-leveraging, and thus are once again drawing investor attention due to the potential for earnings acceleration as the price of gold rises."

"While prices are expected to rise more moderately this year compared to 2006, the bullish gold fundamentals will likely drive prices even higher in 2008."

This bodes well for those invested in mining companies. Just as rising oil prices benefit oil exploration companies, rising gold prices benefit mining companies. And why would the price of gold rise? Well, in addition to an increasing demand, the supply of gold is decreasing:

"On the supply side, production has been curtailed due to the absence of new discoveries as well as environmental activism in North America and Asia, and political and labor turmoil in hot spots such as Venezuela and Angola."

Ah what great news that is. At the beginning of the month I recommended a couple of mining companies. This month I recommended a few funds that are derived from various mining companies. I shed the mining funds last week due to volatility, but I'm retaining the two giants: Newmont Mining (NEM) and Barrick Mining (ABX). Not invested yet? There's still time; gold hasn't exploded yet.

Gold Funds, Mining Stocks

Gold is getting primed to take a shot up. To cash in, I suggest these ETFs: iShares Comex Gold Trust (IAU) and Streettracks Gold Trust (GLD). The former ended trading today at $65.10 while the latter ended trading at $65.02. I also recommend two mining companies: Newmont Mining Corp (NEM) and Barrick Gold Corp (ABX). The former ended trading today at $39.89 while the latter ended trading at $29.79.

This graph displays the three measures of the money supply:


You'll notice that M1 and M2 extend further out than M3. (Definitions of the components of the money supply can be found here.) The government claimed in 2006 that M3 didn't produce enough useful information to justify the cost of tracking it. You can see where it was heading - up up up. The textbook definition of inflation is an increase in the supply of money. An increase in the money supply causes prices to increase. Since the beginning of the NASDAQ bubble, the money supply has taken off. Major contributing factors include low interest rates, relaxed mortgage lending standards, and major expansions in revolving credit. With every loan made, the money supply expands causing inflation. Inflation is WONDERFUL for gold, gold funds, and mining stocks, thus my recommendations.

Housing Starts Fall in May

Via Bloomberg:

"Builders broke ground on new houses at an annual rate of 1.474 million, down 2.1 percent from the prior month, the Commerce Department said today in Washington. Building permits increased 3 percent to 1.501 million."

"The drop in starts was led by a 20 percent slump in the West. Construction also fell 1.6 percent in the South. Starts rose 16 percent in both the Northeast and Midwest."

On the heels of the latest decline in the builder's confidence index, we have more evidence to support the pessimistic mood.

"'Builders are really worried now, not only by the credit tightening in the mortgage market, but now all of a sudden by an increase in the fundamental mortgages as well,' David Seiders, chief economist at the National Association of Homebuilders said in an interview yesterday."

"'Without a doubt, things have slowed since about March,' said Ara Hovnanian, the builder's chief executive officer in an interview yesterday. 'There is not a recovery that is about to happen.'"

There are no truer words than "there is not a recovery that is about to happen". The housing market is highly illiquid; thus, price corrections take years. I don't anticipate any semblance of a recovery until at least May/June of '08, and I wouldn't be surprised if the downturn stretches into 2009. And there will be more casualties. Steven Church investigates:

"'The weakest publicly held builders are staying out of bankruptcy by relying on the profit they made when sales boomed, and on the public debt they sold in those years', said Ronald Greenspan".

"'The value of shareholder equity for some companies equals or exceeds the value of the undeveloped land that the companies have under contract', Greenspan said. 'As the housing downturn continues, that land will fall in value'".

Only time will tell which companies will be hit the hardest. StreetTracks homebuilder index (XHB) will be an interesting fund to watch. Currently, the fund is priced at $32.69. I believe it will lose at least 25 percent of it's value by the end of the year winding up in the $20 - $24 range.

Over the coming days, I'll be researching the publicly-traded home builders and will report what I find.