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Auguries — EU, Then US

January 5, 2012

By Kevin Michael Grace

Gold was up (at press time) $82.60 (+5.4%) for the week to $1,623.40, and silver was up $1.89 (+6.9%) to $29.27. The Wall Street Journal attributed gold’s rise to bargain hunting. “People who were jittery about owning gold probably [cashed out] at the end of 2011,” said Adam Klopfenstein, a market strategist with Archer Financial Services. “At these [price] levels, it’s regaining a little more investor interest.”

The Journal attributed gold’s 10% December drop to “worries about a potential financial crisis in Europe [that] led investors turn to the flexibility of the US dollar for safety.” Ah, the frying pan/fire conundrum. It’s not as if Europe’s fundamentals show any indication of improvement. Reuters reports that terrified Greeks and Italians have taken to burying their Euros underground.

January 5, 2012

Peter Schiff writes, “I have said all along that the US is in worse shape than the EU overall because the EU has less will and capacity to resolve—or even temporarily paper over—its problems. The flip side is that, absent the massive stimulus the US has received, Europe has been forced to deal with its sovereign debt problems first.”

“Meanwhile,” he continues, “Ben Bernanke’s Federal Reserve seems intent on pushing all the boundaries of monetary policy.” Even going so far as to hover his helicopter over Europe’s capitals. Logically, this should not have resulted in what we witnessed last month, but instead, “The fear trade [ha]s overrid[den] all other considerations.”

Schiff concludes that likely expulsions from the Eurozone will strengthen the EU, and “Such scenarios may already be priced into the market,” as evidenced by the 2012 gold predictions from Morgan Stanley, UBS and Barclays ($2,200, $2,050 and $2,000, respectively).

In support of Schiff’s thesis, it must be noted that the European Union’s democratic deficit gives it a distinct operational advantage over the United States. Forget what you read about the “weakness” of the Republican challengers; if the US economy does not rise from its sickbed directly, President Obama will lose to whomever the GOP nominates, regardless of how “weird” he is.

Remember 1980. Forget all the political revisionism about Ronald Reagan being a candidate with obvious “winnability.” Reagan faced the enmity of a media that never forgave him for crushing the “People’s Park” at UC Berkeley. He was insulted as a “failed actor,” calumniated as a “mad bomber,” and his advocacy of the Laffer curve was ridiculed as “voodoo economics.” In short, he was presented to the American people as a scary man, but he won anyway, because his opponent was judged a weak man presiding over a weak economy.

Barack Obama knows all this. He daren’t do anything which would increase short-term unemployment, which is why there will be no serious effort to address America’s fiscal crisis until after November. So Helicopter Ben will continue to dump massive stimulus from Portland, Oregon, to Portland, Maine (and Paris, France).

In contrast, the European Union faces no such political constraints, as its mandarins are not elected. Potential obstacles, such as the prime ministers of Italy and Greece, have been ousted by Brussels, and the government of Ireland is sufficiently cowed that it sends its budgets to Berlin for vetting.

Peter Schiff, meet Dennis Gartman. The author of the Gartman Letter has advised his readers, “The bear run that began in August has now officially ended, for the string of lower lows and lower highs is over.”

Peter Grandich would be fully justified in dancing a rhetorical jig in celebration of Gartman’s volte-face, but he has elected to be gracious in victory over the man he has dubbed one of the “Three Stooges” of gold forecasting.

Perhaps now that fear of the bear has subsided, gold equities will no longer be beaten like a rented mule. David Baker is optimistic in this regard. At the Gold Report, the Managing Partner of Baker Steel Capital says, “Gold shares are very, very cheap. At some point, they’ll become expensive.” He is sweet on Africa, with 27% of his Genus Dynamic Gold (GDG) assets located there, as opposed to 17% in North America. Asked whether this is unduly risky, he replies, “The issue for gold mining is you have to go where the gold is and where new projects are. Africa has a lot of fairly virgin country in terms of exploration, areas which are very prospective.”

And now to cases. GDG is invested in Nevsun TSX:NSU and Banro TSX:BAA, which “has a fantastic resource base.” Baker contends, “Like Nevsun’s Bisha mine, [La Mancha's TSX:LMA] Hassai is a very high-return project.” Specifically, “The quality of its assets suggests that it should be valued at least double where it is now.” He adds that Great Basin Gold TSX:GBG “looks like an exceptional value right now, trading at less than book cost.”

At Seeking Alpha, Matt Grunwald also likes La Mancha TSX:LMA: “With more than US$91.4 million in cash and no debt it has solid fundamentals. All three analysts covering the stock rate it a buy with an average price target of $4.25.” (Currently $2.81.)

Another African gold miner, Wits Gold TSX:WGR, has a “highly biased” new friend in our friend Mr Grandich, who notes that its current price ($5.20) “values the stock at an unbelievable $1 per total resource ounce, significantly cheaper than the average of $80 per resource ounce for other listed juniors with gold projects in Africa.”

Again at Seeking Alpha, Davy Bui says that despite Minefinders’ TSX:MFL recent troubles, “With roughly two million ounces of gold and over 100 million ounces of silver reserves, I estimate the company’s worth to be anywhere from $10 to $22 per share. (Currently $11.24.)

Finally, the irritatingly named Myleene Klass is one of the most famous people in Britain, although it is difficult to say why. Her talent? Well, maybe a little natural talent. She is alleged to be a classical musician, yet in this official video of her “performing” a simple tune by Erik Satie, we do not once see her hands on the keyboard. Klass is in the “news” again because she has married her thug boyfriend, whose back displays a Max Cady tattoo with the terrifying injunction, “Only God can judge me.” A word of advice, sweetie: men like that are often judged, usually by a Judge.

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