The most bullish of Bay Street’s gold bugs, John Ing of Maison Placements Canada, says we are about to enter a period of inflation that will dramatically improve gold prices in the medium term.
In an Oct. 31 report, he predicts that one of the single biggest generators of inflation will be sustained deficit spending on the part of the U.S. government. The deficit will be used to fund the new war on terrorism and help rebuild lower Manhattan’s infrastructure.
“History shows that wars tend to be inflationary because the cost of waging a war is unmatched by revenues,” writes Ing. “Business spending normally increases revenues or profits, but during a war, the spending to fight the war forces businesses to spend more to produce the same.”
Ing also expects to see another wave of U.S. government spending that will be undertaken simply to score political points during the current period of economic weakness.
He sees the U.S. government creating more than US$150 billion in tax cuts and spending, which would be the biggest fiscal stimulus since 1975. Instead of a US$150-billion surplus, he expects Americans will wind up with a US$25-50-billion deficit.
“Balanced budgets and fiscal restraint ironically went out with the Democratic Clinton Administration and, in a reversal of roles, the Republicans are bringing back old-time spending,” writes Ing. “It is important to remember that both deficit spending and wars are potent stimuli, and the U.S. economy will see a rapid pick-up in inflation.”
Furthermore, he expects that, with the U.S. Federal Reserve unable to turn the American economy around quickly, impatient policy-makers will likely forgo budget discipline and spend yet another US$100 million-plus on an economic-stimulus package of tax cuts and spending this year.
“If history is any guide, the stimulus will not live up to its good intentions,” writes Ing, citing the example of Japan, whose government has poured trillions of yen into 13 bailout packages without reversing the country’s protracted economic slump.
In the past, writes Ing, when governments pursue a path of deficit spending, consumers spend less and tax cuts disappear under mattresses and into savings accounts.
As an analogue for the future, Ing looks to the 1970s, when inflation was at its peak because of the oil crisis in the Middle East. At that time, Ing notes that gold stocks proved their worth: the average gold fund was up 227% versus 103% for inflation and 77% for the Standard & Poors Index, including the reinvestment of dividends.
“We believe that the premium prices being paid for Canadian oil-and-gas reserves reflect American concerns that their over-dependence on the Middle East may well prove to be too expensive,” writes Ing. “Many of today’s portfolio managers were not around during the 1973 oil crisis, but one lesson learned from the events of then and Sept. 11 is that anything is possible.”
As a hedge against a financial catastrophe and inflation, Maison continues to recommend a diversified-portfolio strategy with an allocation of up to 10% of assets in gold bullion or gold stocks.
“While the government may be able to print money, it can’t make more gold, and when the value of money depreciates because of inflation or credit woes, people historically rush to put their savings in gold,” writes Ing.
“Although gold looks unattractive at the moment, we continue to expect a move to US$375 per oz. next year,” he continues. “This view has been strengthened by the massive creation of liquidity of the major central banks led by the Americans, coupled with an expectation that the U.S.-dollar bubble has burst, and that means that the dollar-denominated gold will rise next year. At today’s price, gold [as] an insurance policy against the uncertainties comes cheap.”
Ing further predicts that any renewed interest in gold and gold stocks will be particularly volatile since there are so few gold producers in which to invest.
Maison Placements continues to like its oft-recommended “fearsome threesome” of
Maison continues to recommend its top-10 junior mining stocks, owing to their “excellent risk/ reward and ten-bag potential.” The companies, in alphabetical order, are:
As for majors, Ing favours
Maison remains underweighted to large-cap players such as
Ing makes special mention of Placer Dome’s long-expected decision to close down the failed US$1.4-billion Getchell mine in Nevada. He comments that what went unsaid in the announcement was “how a company such as Placer could blow so much when everyone else knew that it was a disaster.”
Ing remains similarly concerned that the company is pursuing the same path in its development of the South Deep mine in South Africa: “The irony is that most South African companies are trying to diversify their assets outside of South Africa at great cost while Placer seems willing to pay a premium to increase its exposure to South Africa. It just does not make sense.”
Also, noting Placer’s never-ending disputes in both the Philippines and Venezuela, Ing recommends switching from Placer to Barrick or one of the “fearsome threesome.”
Contacted by telephone in mid-November after Newmont went public with its takeover offer for
He said he is uncertain as to what the ultimate, merged entity will be but that it’s “going to be a protracted deal, and there’ll be a lot of curves along the road . . . but my feeling is that Newmont will prevail.”
He doesn’t think Barrick will be a player in the Normandy-Franco drama, simply because Barrick “has much too much on their hands right now with the Homestake bid, and they wouldn’t jeopardize that deal.”
He emphasized that the Homestake merger cannot be delayed beyond year’s end; otherwise Barrick would not obtain a pooling-of-interests benefit, which was a major reason for launching the bid.
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