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Auguries — Flowers In The Dustbin

February 2, 2012

By Kevin Michael Grace

Gold was up (at press time) $37.20 (+2.2%) for the week to $1,762, and silver was up $0.85 (+2.5%) to $34.30. At the Globe and Mail, David Rosenberg comments, “Gold has begun behaving less as a commodity and more like a currency. Its attractions are obvious: No central bank can print gold, and it is no country’s liability. In contrast, holding paper money is looking less and less attractive.”

Reuters, on the other hand, remains committed to the position that gold is lashed to the mast of the SS Euro. It matters not whether this explanation makes any sense; its continued assertion will cause gold prices to fall with the Euro, at least in the short term. With that in mind, let’s have a look at the latest financial news from the Continent.

February 2, 2012

Oh là là! French consumption fell 0.5% in 2011, the biggest decline since 1997. President Sarkozy intends to turn this around by raising the VAT(!) Fitch has downgraded the credit ratings of five countries: Belgium from AA+ to AA, Slovenia and Spain from AA- to A, Italy from A+ to A- and Cyprus from BBB to BBB-.

Euro Area unemployment has risen from 10.2% to 10.4%, with Italy at 8.9%, France 9.9%, Slovakia 13.4%, Portugal 13.6%, Ireland 14.5% and Spain 22.9%. Portuguese 10-year bond yields reached 17.38% Monday. And Euro Area banks “cut lending sharply at the end of 2011…raising concern that Europe was on the verge of a credit crisis that could lead to a deeper recession than expected.”

Germany’s unemployment rate has fallen to 5.5%, the lowest since reunification, even as Chancellor Merkel has been fitted with a black hat by the IMF, and the doling out of bailout dosh to the rest of the EU threatens a constitutional crisis and has resulted in the possibility that “If any of the crisis countries exits the euro or if there is an EMU break-up, the Bundesbank bears extreme risks.”

Greece is supposedly close to a bailout deal, but this will not “avert the risk of a Greek default in March.” And there is no guarantee the Greeks will agree to “further austerity cuts equal to 1% of GDP,” “a cut in the minimum wage” and “an EU ‘debt commissar’ to take direct charge of Greece’s budget.”

At the American Interest, Walter Russell Mead comments, “The austerity policies the Germans favour are hopelessly biased in favor of German banking interests and are aimed more at the preservation of the reputations of German politicians than at helping Greece.”

Meanwhile, Europe has a message for its youth—no future for you! The unemployment rate for those aged 16 to 24 has reached 30.7% in Portugal, 46.6% in Greece and 51.4% in Spain. ZeroHedge comments, “If there is no hope for tomorrow, what is the opportunity cost of doing something stupid and quite irrational today?”

Johnny Rotten put it somewhat differently:

When there is no future
How can there be sin?
We’re the flowers in the dustbin
We’re the poison in your human machine
We’re the future, your future

Globalism makes no provision for bulkheads, so if the Euro goes down and the PIGS drown, the big banks are going to get awfully wet. Combined exposure of Citigroup, JPMorgan Chase, Bank of America, Morgan Stanley and Goldman Sachs to the debt of Portugal, Italy, Ireland, Greece and Spain: $80.4 billion. The Future Tense concludes, “The last man holding paper currency loses when the music stops.”

Will the precious-metals juniors ever cash in? According to Jordan Roy-Byrne at Seeking Alpha, it’s happening already: “ [BMO Junior Gold Index] is a Canadian junior ETF which is comprised of entirely gold companies while three of the top 10 companies in GDXJ are silver companies. ZJG is nearing resistance at 20-21 while GDXJ is nearing resistance at 31-33. More importantly, both markets have broken out of their downtrends against Gold.”

And now to cases. At the Globe, the “legendary” Frank Mersch, co-founder of Front Street Capital, avers that if he had $100,000 to “invest right now,” he would put “40% in gold stocks like Barrick Gold TSX:ABX and Continental Gold TSX:CNL, an exploration play.”

From the same source, Tim Kiladze notes that Detour Gold TSX:DGC “came to market last week and easily raised $241 million” in a bought-deal private placement. The bought-deal private placement by NovaGold TSX:NG Kiladze mentioned has now been increased from US$250.8 million to US$332.5 million.

At the Financial Post, Jonathan Ratner reports that Agnico-Eagle TSX:AEM is down “more than 30% since [it] announced the closure of its Goldex Mine on October 19, 2011,” and notes that Dundee Securities has changed it recommendation from neutral to buy. Analyst Paul Burchell has “cut his price target on the stock to $44 from $56.” (Currently $37.42.)

From the same source, Peter Koven reports that “emerging West African gold miner SEMAFO TSX:SMF disappointed investors on Monday when it reported weaker-than-expected production and cost guidance for 2012.” Steven Green of TD Securities has cut his price target to $9, while Brian Christie of Desjardins Securities has cut his to $12.25, and Dan Rollins of UBS Securities has cut his to $10.50. (Currently $6.87.)

At Seeking Alpha, Marco G argues that Pan American’s TSX:PAA proposed $1.5-billion takeover of Minefinders TSX:MFL establishes a new benchmark value of $5 per ounce of silver in the ground. He presents a chart of 12 other silver equities, which asserts their relative value, as measured by multiplying their reported silver ounces by $5 and comparing these totals to their market caps. By this metric (and with the caveat, “In real life, there is a world of difference between proven reserves and inferred resources”), Impact TSX:IPT was given a rating of -55%, meaning overvalued by 55%: $110-million market cap versus $50-million silver resource. Fortuna TSX:FVI was at -42%, Excellon TSX:EXN -39% and Aurcana TSX:AUN -15%. MAG TSX:MAG was given a rating of +13%, meaning undervalued by 13%: $500-million silver resource versus $443-million market cap. US Silver TSX:USA was at +51%, Avino TSX:ASM +113%, Cream TSX:CMA +486%, Soltoro TSX:SOL +628%, Silvermex TSX:SLX +722%, Revett TSX:RVM +855% and Defiance TSX:DEF +1,186%.

And at the Gold Report, Matthew Zylstra has this to say about the following gold juniors—Armistice TSX:AZ is “interesting”; Niogold TSX:NOX is “fairly attractive”; and Orvana TSX:ORV is “compelling.” He has this to say of the following silver juniors—Oremex TSX:OAG is “very interesting”; and Cream TSX:CMA “has the potential to more than double the current resource.”

Finally, Mayor Dave Bing’s plan to avert the takeover of bankrupt Detroit by the Michigan state government is threatened by the recalcitrance of its police, who have refused a 10% pay cut and threatened strike action. At a news conference today, Mayor Bing said he was fully prepared to meet that contingency with a daring technological advance in law enforcement. “We’re predicting the end of crime in Old Detroit within 40 days,” he said. “There’s a new guy in town. His name is RoboCop.” Experts in chaos theory decried the introduction of this cyborg constable, warning that it might somehow become sentient, go rogue and demand to be called “Murphy.” VP Bob Morton of Omni Consumer Products, which created the man-machine, rejected this concern, pointing out that RoboCop’s actions are strictly controlled by rigorous and civilian-friendly “Prime Directives.” Morton said, “Let me make something clear to you. He doesn’t have a name. He has a program. He’s product.”

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