Is the EU's Greek bail-out wise of foolish? No matter for Gold Prices...
PROUD and AVOWED Keynesian economist, Victor Gonçalves continues to analyze and recommend precious metals and gold-mining stocks to his subscribers, looking for what he calls "no brainer" positions that you simply don't have to worry about.
Editor of Equities and Economics Report, as well as the Green Dollar Report blog, Victor Gonçalves here tells The Gold Report about his current long and short-term perspectives on gold, silver and mining investments.
The Gold Report: Victor, one of the big headlines since we last spoke is Europe's loan to Greece. Some are calling it an EU bailout. As an economist, what's your perspective?
Victor Gonçalves: I think it's a positive thing actually, given the parameters. A lot of your Austrian guys would say this is the devil's work and you should let markets run free. Given the economic policies of the European Union, which is not a free market, that's probably one of the only options it has.
TGR: What impact is this going to have on the markets?
Victor Gonçalves: It'll have a positive impact because what it basically says is we're not having a country go into default. That's the short-term impact. The longer-term impact isn't just Greece, it´s the bigger picture in relation to the EU. Will more countries come out of the closet with bad debt? I don't know if that's the case, but I'm suspecting that might happen.
TGR: When we last spoke in January, you said that the economic fundamentals weren't stellar and you were expecting a correction within the markets. The TSX is still trading around 12,000, while the Dow remains around 11,000. Do you still see a correction coming and if so, when can we expect it?
Victor Gonçalves: We actually did get a correction, albeit a small one. We did have about a 10%, 11% drop in the market. It wasn't as much as I would've liked to have seen, but it still happened, nonetheless. The fundamentals of the market really act in weird ways, so I'm not sure we're going to see the correction we should see in the short term. Technically, we should be seeing one quite soon. We should've seen one already.
If you look at the TSX Venture index of stocks, which is a better barometer because it shows a better picture of who is putting money in venture capital, it's moved up parabolically recently. So that has to cool off a bit. Whether it will do it now or in a couple of months, that's a lot harder to tell. It's a situation where investors really need to watch the market a lot closer for the volatility. Investors need to watch for the change in sentiment. It's a little harder to figure out now, compared to what it was even a couple of years ago when you could better predict when these things would happen.
TGR: We're currently in a decent earnings season. Historically, after a good earnings season we've seen corrections. Some are saying that because the mood is positive we won't see a selloff this time. What's your opinion?
Victor Gonçalves: There's two ways to look at this. Earnings can look good, but what kind of expectations are we giving ourselves? That's really what it comes down to. If we reduce our expectations a lot and then all of a sudden we meet those expectations, we end up fulfilling our own prophecy. So I think short term, the market will probably do well if earnings levels are met, given the current sentiment of the market. That's because we've lowered the bar. Longer term is the issue. In the long term if nothing has changed, or if a little has changed, the problems are still there.
Realistically we'll probably see a rally in the Dow. Even the TSX should probably jump, but I don't think a ton. We are also coming into seasonal weakness in the summer. Adding all those things up means that we're probably going to see some strength near term going into the summer, and then a selloff going into the summer.
TGR: If there's a summer selloff, how would you advise investors to play that correction?
Victor Gonçalves: There's multiple ways of doing it. The easiest way to do it is to look back in history and see where the corrections have happened. Typically, you're looking at the middle of May. Just sell the stocks that you've made money on.
Now if they're really good stories, stories that you should be involved in long term, then have a trading position and a core position. That core position is something you want to build; it's one that you only want to sell once you hit your target, which should be either full valuation of the company or a level where you feel comfortable selling. The trading position is something that you keep building and peeling away as the market dictates.
TGR: In January, Gold Prices were still around $1000. We've gone up to $1150. Where do you think gold is going as we head into the summer and through the rest of 2010?
Victor Gonçalves: You're going to see technical moves one way or the other. You may see a drop to $1,000 and I wouldn't panic if that happens. You may see it run to $1250 or $1300. I certainly wouldn't get overly excited if that happens, unless it holds there for a little while so it creates a new base. We're probably not going to see a strong gold market in the summer. That doesn't normally happen. So really we'll probably see more weakness going forward than strength.
That being said, Gold Mining equities still have to catch up to the $1000 valuation of gold, let alone where we are now. So even if gold were to come off a little bit during the summer, gold equities still have to catch up to that valuation point before they can keep moving up. I think we're really going to see a move in gold when we saw it last year, around September. We might see a little strength here for the next month or so. We may hit $1200. We may test $1240 but it should come off after that during the summer. For really June, July and August it should see some weakness and that's normal. So I wouldn't be concerned.
Long term, at the end of 2011, I think that $1500 for Gold looks fair. Now if we see a huge debacle in Europe, and let's say three or four countries start singing the same tune as Greece, then I'm suspecting we'll see the $1500 level come a lot quicker.
TGR: Very interesting, Victor. Thanks for spending time with us today.
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