Europe's Final Act
Research for Online Investors

01/27/12

Ford (F) reported nice sales growth this morning, but missed on earnings.  Proctor & Gamble (PG) missed on the top line, but earnings beat estimates.  What’s the market to do? It looks like we are going to drift lower as we wait for the latest Greek drama to play out.

Reports out of Athens are that an agreement is imminent.  We will believe it when we see it!  Fool me once…twice…   Bottom line is the eurozone is just rearranging the deck chairs for the inevitable default by Greece.  They forestalled bankruptcy in 2010, and again in 2011 and now want bondholders to take a 70% loss on their bonds VOLUNTARILY so Greece won’t default.

Even if the private sector takes these losses, Greece can’t pay their bills.  They have to borrow more money from other European nations to pay pensions and public employees.  Of course, the IMF and ECB don’t want to write down the value of their Greek bonds.  It came out yesterday the ECB bought some of their portfolio of Greek bonds at a fraction of actual face value, so they are holding out to make a windfall if private bondholders will take the brunt of losses “for the good of Greece.”

Don’t you love the duplicity?

What happens Monday if a deal is done; will the world is saved, are happy days here again?  We think not.  The markets have been on a great run, and it would be natural to think removing the “Greek problem” from traders and investor’s box of worries would be bullish for the market, but hold on…what about Portugal?  What about Spain and Italy?

The big picture is still a mess.  But while of this has been playing out, precious metals have been staging a comeback.  Hedge funds dumped gold and silver at the end of last year driving the prices down.  John Paulson sold almost one-third of his holdings in the GLD etf.  Turkey, Thailand, Korea, Russia and China were all buying.  Turkey bought 63 metric tonnes in October and November alone.  Last year Thailand added 53 metric tonnes, Korea 40 tonnes, and Russia over 65 tonnes.

Germany sold 166,000 ounces in October.  French President Sarkozy must have told Merkel to sell quickly, his government sold 56.7 million ounces in 2009!

In October, 85 tonnes of Gold were shipped into China.  While China is the biggest producer of gold in the world, they are also the largest importers.  In addition to Chinese Central bank purchases, the government allowed, even encouraged, their 1.1 billion citizens to accumulate gold.

The world’s miners produce about 200 tonnes of gold each month.  I am not a conspiracy nut, but it looks like just a few governments were buying all the gold production in the world last fall.  Funny how other “smart” investors were selling.

Central bank purchases have been increasing their purchases of gold since they became “net buyers” in 2010.  The World Gold Council estimates central banks will buy almost 20% of world gold production this year.

The easiest way to own gold and silver is with the GLD and SLV etfs.  Both have been on a tear lately.  We expect them to come into resistance next week.  Watch GLD try to push through 170.50 (high of 12/2), SLV needs to overcome $34.25.  If you do not have any precious metals exposure in your portfolio look to buy on a break above these levels or wait for a pullback.  A good entry for SLV would be $31.00 and for GLD $164.00

Remember, if the general market goes into a sell-off, traders will sell what they have profits in first, then anything they can to raise money.  Gold has a negative 0.48 correlation to the value of the dollar, but in extreme moves will follow.  We watch the UUP etf for dollar moves.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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