A Comment -- General Comments From an Expert (A Commentary)

Gold. Generally gold stocks have underperformed the gold price. It is all of their own making. Management teams have been terrible. They have made poor acquisitions, costs have been going up, etc.

Economy. Thinks the Fed has lost control of interest rates. The fact that they couldn’t taper with a 3% on a 10 year bond says that the economy is really weak, weaker than what they have been presenting. He is wondering how quickly bond rates will reverse and go back up to 3%. Next time they won’t be able to even cut, they are going to have to increase because, going forward is about controlling the rise of interest rates and they are the buyer of last resort. Also, US$ is extremely weak. In essence, we have massive financial lunacy going on right now because of the money printing and everything else that is going on. They are going to start to lose control. For now, he would be betting against the market going any higher.

Gold. The #1 insurance against financial lunacy is the least owned asset in North America. The Chinese love gold, India loves gold, all the rest of the world loves gold because they are feeling inflation. There has been manipulation in the market, only because you have a massive disconnect between the physical exit of North American gold that is going over to Asia.

US Inflation. How will this affect Canada? Thinks the US inflation will be more affected by the fact that they have to kill the currency. At some point they have to let the dollar go. We are living in the fiat currency system where the debt and currency are similar. In Canada, the bigger issue is that we export most of our goods to the US so he thinks we will track the US.

Markets. Doesn’t think Fed knows how to get out of QE. The Fed thinks there is much more trouble than most of think there is. The debt ceiling is coming up. It is one crisis and then another. You have to have some cash for sure. There is going to be some serious volatility. Don’t buy on the dips but buy on the craters.

Gold. There is only one gold company that beat the rate of return of the bullion. CGL is the gold bullion ETF. FNC-T is the only company to beat Billion. He also recommends OSK-T.

Economy. Debt ceiling in the US is a bigger story than the budget slowdown. Democrats and Republicans can’t seem to agree and 2 years ago, when they had to raise the budget ceiling, they created so many problems and delayed it so long but it is something that has to be done. US have a lot of difficulty there and they are in trouble and they have to take care of this on a longer-term basis, and start to balance the budget. If he is looking to sell anything, he might be looking to sell before it gets potentially worse. Most of his buying is in November and December although sometimes he will buy now. However, if there is a showdown again, and it should hit the markets, that means he will be getting better prices.

Precious metals. This is a fascinating area. Mostly small miners/exploration stage and they are crying out because it is so difficult to raise money. About 600 of them have less than $250,000. This is really bad for the sector, but it means there will be less exploration coming on and less mines coming into play. In terms of supply/demand, this is good for gold. Some of the major miners are cutting back on the mines that they were going to bring on stream as well as closing some mines, which is also good for gold. At this time, there is nothing of major interest to him.

REITs. Is this a good time to look at this section and would you go the ETF way? He prefers to cherry pick companies rather than using ETFs. If he can get 3 or 4 companies in a sector that he feels are the best players in the sector, to him, that is better. Also, you pay once when you buy and once when you sell, you don’t pay annual fees.

If a stock is in danger of getting delisted, do you Sell or Hold? If it’s in danger of getting delisted, you have an excellent chance of getting absolutely nothing. He would look to sell before the delisting, even if it means only getting a few pennies on the stock.

Markets. Doesn’t expect to see any kind of tapering on quantitative easing for quite a while. Ben Bernanke’s notes indicated that they were pulling back on growth estimates for the US economy and they have been doing that for 5 years since 2008. US economy is not catching fire the way they had hoped. Also, entering into an election year and the last thing that either party wants to see is interest rates leaping up and the stock market plunging down. Looking at the valuation of the market itself and the earnings forecasts, we are seeing forecasts falling steadily. There is also a lot of value compression in the index, which in the past has presaged falling markets.

Energy. Is the volatility a sign that the market does not know what it is doing or is there something to be read into it? Part of the answer is that the evaluation of the stocks are sort of high enough so that you can see some optimism in them, but low enough so that is some value comes in, they can go. However, in the last couple of years we haven’t seen anything there at all and they have just been fluttering.

Energy. Every data point he has received up until now has been very encouraging. There has been very strong gasoline consumption and crude oil demand in the US. Price of oil has been over $100 for the last 15 months during which there have been many worries. None of these worries ever came to fruition. A very, very recent data point in the last 2 weeks indicates US investors are turning back to Canada. 2014 is shaping up to be a really good year for Canadian oil producers. There is still too much natural gas. Average rig count on rigs drilling for natural gas is down about 60%-65% from its highs. At the same time, gas is off 25%. He sees a ceiling price of about $4-$4.25 for several years.

REITs. Prices have been quite weak since the announcement of the tapering news, however real estate fundamentals have been excellent. While the REITs aren’t bidding for properties, there are lots of pension funds that are there supporting the works. Maybe not as many, but there is still good flow on real estate transactions. You have to be selective, but the falloff was overdone for many names. Many are showing good solid growth and trading at very large discounts to NAV. This gives you opportunities to pick up extra names and, as well, you are gaining extra yield. He is currently slightly overweight in the US due to the opportunities that are there.

Markets. We are finally seeing a welcome shift from people focusing on a little bit more than fundamentals. This is most evident between specific stocks, say S&P 500 and the TSX 300 for example. Correlations are spreading out, which is an indication that investors are actually looking at stock by stock and company by company. We are by no means clear of any macro situation, especially in the coming months right now, which traditionally are pretty tough. September correction that everybody always expects may have happened a little bit earlier in August. Germany’s election gave some clarity. Obama wants to take a diplomatic approach for the rest of his term. Some of the numbers out of China and the euro zone are getting quite a bit better.