The debt from fiscal red ink caused by the financial meltdown he alludes to is not just from patching up the recent ailing financial system, of course. It’s also paying for fighting two wars, stimulating the economy out of recession, and providing funds to foreign powers to fight terrorism. Next in queue is the massive Health Reform bill that could add big bucks to the deficit.
US Debt Estimate of $11.4 Trillion in 2011 Could Top GDP for First Time
In addition, Kurson points out that according to the Congressional Budget Office, by 2011 the amount of money the US owes will be $11.4 trillion, an amount as great as the value of what it produces, when expressed as a portion of GDP.
Such an event would be the first time in US history, and would require the federal government to either issue more debt or jack-up GDP somehow, to produce more tax receipts. In a sense, the government has gotten into the same Catch-22 situation that has maxed-out many credit card consumers.
In 2009 US Dollar was Devalued 17.3% in Foreign Exchange Markets
For investors the potential consequences are serious. As more US debt securities flood world financial markets, selling pressures on the US dollar will likely mount. This will probably lead to further dollar devaluation, Kurson points out.
In the past year, seven major currencies have increased in value an average of 17.3% against the US dollar, according to Forex trading data, as reported by FinWiz financial portal. Bonds, domestic stocks that count on foreign income and other US dollar-denominated securities usually lose value at such times. Savvy investors have been looking for stocks that offer defenses against such a a swoon by the US dollar.
Swarming Gold Bugs Have Seized the Moment
Enter the Gold Bugs. They are investors who regard gold bullion as the quintessential commodity in which to store wealth, during dollar weakness or economic crises. In stock markets, the Gold Bugs' surrogate for gold bullion is gold stock shares. They began buying gold shares a year ago, running stock prices up 54.1% in the FinWiz index.
For investors who can accept the extreme cyclicality of gold markets, the three stocks below can be considered for aggressive portfolios.The companies selected are Canadian, which means foreign exchange differentials are important to know, before making investment transactions.
YAMANA GOLD, INC. (AUY/$11.84) acquires, explores, develops, and operates gold properties, in addition to investing in copper and silver prospects. Its production includes gold in Brazil, Argentina, Chile, Mexico, and Central America, from seven operating mines and five development projects. Shares pay a $0.04 dividend. Headquartered in Toronto, Canada, the company was founded in 2003.
IAMGOLD CORP. (IGO/ $16.89) works mineral properties worldwide, exploring for gold, silver, zinc, niobium, diamonds, precious metals, and copper. The company holds interest in seven operating gold mines, a niobium producer, a diamond royalty, and exploration and development projects located in Africa and the Americas. It has exploration and development projects in Canada, Ecuador, and French Guiana. The company is based in Toronto, Canada.
ELDORADO GOLD CORP. (EGO/$14.81) engages in exploration, development, mining, extraction, processing, reclamation, and production of gold and iron properties. It operates in Turkey and China, as well as developing projects, in Turkey, Brazil and Greece. Founded in 1992, the company changed to its present name in 1997 and headquarters in Vancouver, Canada.
Each company possesses the following investment attributes:
- Midsize $2 - $10 billion market cap
- Recommendations by respected analysts
- Positive earnings past five years
- Low debt to equity ratio
- Low insider holdings
- Positive gross margin
- Positive Return on Equity
- Expected earnings growth in 2010
- Positive earnings projected next five years.
Investors Should Take Into Account Cyclicality in Gold Markets
Those who buy gold stocks are “concept” investors; that is, they are not looking for long-term earnings growth or high dividend yields. Instead, they seek managements that can take advantage of spikes in gold prices to achieve irregularly cyclical profits and boost book values.
Besides maintaining ample gold reserves, this means management should possess the capital equipment and skills to extract and smelt ore profitably. In addition, the scope to process other minerals profitably can be very helpful, in times when gold is out of favor.
Investors in Gold Shares Should Never Feel They Have the Midas Touch
As to timing, investors should avoid the greed of the gullible King Midas – the mythological ruler of Phrygia, in what is Turkey today. He made the mistake of wishing everything he touched would turn to gold. His wish was granted by the god Dionysus, so that all he touched became gold. To his sorrow, this included his plain daughter, who transmuted into a radiant golden statue.
Investors can reasonably assume gold stocks will never turn to gold, and they should constantly watch for signals that indicate a market run-up is slowing down: indicators like improving US dollar values. Sooner or later, gold share values revert to their basic industrial market values.
*The writer is a Chartered Financial Analyst (CFA). Data on stocks mentioned courtesy of FinWiz.com.
Howard Bryan Bonham - Howard Bryan Bonham is a former daily newspaper editor and award-winning financial writer.
