Big Ideas on Gold and Resources in the Big Easy

For nearly four decades, curious investors have made their way to the large Easy for a taste of New Orleans and many helpings of advice and viewpoint at the New Orleans Investment Meeting.

In preparation for my presentations in Brand new Orleans as well as for the Metals & Minerals Expense Conference in San Francisco and the Mines and Money in London in a few days, I’ve been pulling together this kind of research that we can all put to use now.

One contrarian idea these days is investing in resources. This is an unloved and underowned area of the market, but there is an instance to be made for owning goods.

Consider the low expectations that analysts have on earnings growth with regard to cyclical industries. BCA Research looked at instances when the Institute for Provide Management (ISM) new orders index had been more than 60, and determined the average earnings growth in the subsequent 12 months. The chart exhibits the gap between past earnings performance and what analysts are looking forward to in the next 12 months.

According to BCA, industries including energy and materials stand out ‘as having overly bearish anticipations compared with their historical overall performance patterns.‘

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These analysts are bearish although the world is experiencing a good earth-shaking resurgence in manufacturing. In Oct, the JP Morgan Global Manufacturing Purchasing Managers’ Index (PMI) grew for an incredible 29-month high, rising to 52.1 in October. Several above 50 indicates expansion in manufacturing, and if manufacturing is actually expanding, so should the economy.

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If you look at the PMIs of individual countries, including the data coming out of the U.S., Europe, Japan, China, Brazil, and Australia, more than 90 percent are above 50.

Historically, when an overwhelming most of countries see this level of production expansion, world-wide growth remains raised for an extended period of time. Since January 2005, there were two previous times when PMIs remained high: From 2005 until the Great Recession within 2008, and from January 2010 through the middle of Next year.

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What’s exciting about this rebirth in global manufacturing is the relationship between growing strength in PMIs and higher returns from certain commodities, including copper, oil, as well as energy and supplies stocks.

Based on 23 observations from January 1998 to December 2012, there is a high numerical probability that physical commodities and commodity stocks rise in the 3 months after the current PMI quantity rises above its 3-month moving average.

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In addition, the Business for Economic Co-operation and Improvement (OECD) Composite Leading Indicator has been heading in a positive direction. This particular leading indicator provides early signals of turning points in business cycles, including economic activity. Historically, alloys performance has closely followed this leading indicator, so as developed markets improved, the S&G GSCI Industrial Metals Index increased.

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Gold is certainly a contrarian buy these days, but the big tale that is affecting the supply associated with gold is how the physical metal continues to migrate eastern. According to Paolo Lostritto of National Bank, year-to-date net physical imports by The far east equate to approximately 50 percent of global mine supply.

This is in addition to the reports from GFMS suggesting that China is the world’s biggest gold producer with an estimated 400-plus lots annually, or roughly 14 percent of global mine supply.

As Profile Manager Ralph Aldis likes to say, the gold going into China won’capital t be coming back to the market. This journey is a one-way journey for gold.

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However, Chinese interest in gold is only one ingredient within the very significant Love Industry. With the increasing gold transfer restrictions in India, the country’s leading position as the world’utes biggest buyer of gold is in jeopardy.

For a firsthand viewpoint on what is really taking place using the demand for gold and to get a flavour for what’s going on, I’ll end up being traveling to India later this particular month. Stay tuned.

Frank Holmes
Contributing Editor, Money Morning

Publisher’s Note: This is an edited version of an article that originally made an appearance here.