Recession fears help push gold stocks higher

Recently I saw some interesting news discussing the growth of gold stocks amid the significant rise in gold spot prices.

“We believe that 2008 continues to be a volatile year for gold based on its late 2007 activity and early start to 2008 with increased sensitivity to geopolitical tensions (Pakistan, Iran) and fear of record oil prices (resulting in inflationary pressures for the average consumer and more specifically, cost pressures for producers),” analyst Paul O’Brien wrote in a note to clients.”

Sounds familiar? Perhaps you read a similar statement somewhere

“Since that time we have seen oil soar and attain the century mark. Former Prime Minister Bhutto was viciously assassinated in Pakistan, either by Al Quida or the military/government there. The Fed did cut rates and the housing market has slowed down. At the same time, reinsurers for high-risk mortgages have been hit and another round of write-offs seems imminent. Many are starting to talk recession, and gold spot prices have hit in excess of $850 with many calling for a run to $1000.”

Well enough of the patting myself on the back.

The fact is that with the calls of a recession in the United States by Morgan Stanley and Goldman Sachs, and the various other factors affecting gold, prices continue to ratchet up. Already expectations have been increased, again, for many gold stocks including:

Western Goldfields Inc moved to $5.25
Agnico-Eagle Mines Ltd moved to $65
Alamos Gold Inc moved to $7.50
Anatolia Minerals Development Ltd moved to $7.75
European Goldfields Ltd moved to $9.50
Goldcorp Inc moved to $36

Many of these increases are moves of 15% -20% higher than the prior targets, accompanied with market perform and outperform ratings. Obviously the various brokerage houses believe that this run up is not something that is about to end immediately. And considering the factors involved it seems apparent why.

And this is not limited to the United States. The rise in the gold stocks has been attributed to helping provide a surge to the Chinese markets as well. It was identified as one of the keys in a turnaround from the early session sell-off that began with the prior sell-off in the U.S. markets.

The surge in a few of the better known Chinese gold stocks was in the 8% range, a decent increase in any market.

Zhaojin Mining up 8.27% at 40.60 hkd
Lingbao Gold was up 8.67% at 6.14 hkd

Where this run will end is hard to estimate, but with Raymond James targeting $903 for gold, demand high in China and India, and calls for a U.S. recession, $1000 doesn’t seem that far away anymore.

Predictions of China's growth by the Christmas tree

I have often found that some of the best information comes from the least expected places. For example I recently was at a Christmas party for a top NYC law firm. One of the people I met was a trader who specializes in Southeast Asia.

This trader believes that Japan, China, and Australia will all be exceptional areas of growth throughout the next 5 years. China is his personal favorite. I paraphrase…

“China has the sheer manpower that will help it outperform. In many ways it is similar to Japan of the 1950’s.”

It is hard to argue that point. Especially since the $5 billion 9.9% stake in Morgan Stanley was made December 19th. This positioning and the $29 billion Chinese buyers spent buying outside companies signal a long-term plan by China to integrate with the world markets in a more direct manner.

There is no question that the manpower resources available to Chinese corporations are a unique resource few nations can match. Add the previously stated investments and time, and you get growth and stocks that can surge longer and stronger than even in the last Chinese bull market.

But there are serious negatives. The Chinese stock market is hardly as transparent as many might wish. The latest bull has very recently reversed into a solid bear market. That transition occurring in an amazingly rapid month. And of course the communist nature of the Chinese Government adds political issues; some of which are known, some unknown, and 1 thing is assured – volatility.

There is no lack of investors that agree with the abovementioned trader I met. In fact I agree with reservations. While I am perhaps more cautious than Warren Buffett, China is a market that demands attention. The only question is the one most vital to all investors.

When is the right time to get in and out?