U.S. Mint Suspends Gold Coin Sales
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Your Daily Profit

October 9, 2009

*****Crisis of Confidence

*****The U.S. Mint to Profit from Gold

*****Reader Mail

Fellow Investor,

It was another good day for stocks, as expected. Surprisingly good earnings from Alcoa (NYSE:AA), along with better than expected initial jobless claims gave investors the confidence to bid stock prices higher.

We’re seeing a fundamental condition for economic recovery play out – confidence. I’ve said it before – an economic system is, at its heart, a belief system. For there to be growth, Americans must believe the U.S. dollar has value, we must be confident that contracts will be honored, we must believe our money is safe in banks, we cannot doubt that we will have jobs to provide for our families.

The financial crisis shook our faith in the U.S. banking system. Rumors of insolvency at Bear Stearns sparked a run on the investment bank that made the rumors real. The same thing happened at Lehman, but the shockwaves echoed around the world. The financial crisis was a crisis of confidence.

Now, that’s not to say that the sudden skepticism of our banks was misplaced. Using obscene leverage, derivative alchemy and making some really dumb decisions, America’s banks pushed themselves right to the brink. And in some cases, right over the cliff.

*****The U.S. government rightly understood its job was to restore confidence to the American people. And that’s been the focus of most stimulus actions. The government had to make it clear that our money, our jobs and our economy are safe.

So we’ve had TARP, TALF, Cash for Clunkers and 1st Time Homebuyers Credits. Accounting rules for banks (Clunker Stocks, as I like to call them) have been re-written so they could go from insolvent to profitable. Now, the government is considering tax credits for companies that hire new employees. (Note: not an original idea, several European governments have done this or a hybrid where they give cash to companies that scale back employee hours rather than firing them, with mixed results and potential long-term negative consequences for the job market.)

*****It’s working. Confidence has been restored. And the subsequent rise in equity valuations has helped struggling companies – especially banks – sell stock, raise money, and actually become stronger.

So long as the government is intent in underwriting risk, the Cash for Clunker Stock rally will roll on.

Of course, there are limits. Unemployment is a drag, so we won’t be seeing Dow 14,000 in the next 12 months. But I believe Dow 10,500 is coming soon.

*****Speaking of beliefs, the relationship between gold and inflation is a good example. There’s nothing specific to gold that makes it a “value store.” But when investors worry about inflation, they buy gold. It could be diamonds, rubies or baseball cards for that matter.

Gold has been running because inflation is a distinct possibility as global economic growth returns. It’s a self-fulfilling prophecy. And one the government is helping along.

Two days ago, the U.S. Mint said it was suspending production of gold coins, specifically the American Eagle proof and uncirculated series, because demand was very strong. The Mint already owns the gold it presses into coins. We can presume its cost basis is far lower than current prices. Gold coin sales is a for-profit operation by the U.S. Mint.

So what do we make of the suspension of gold coin sales? Clearly, the U.S. Mint thinks it will make more off the coins in the future as gold prices continue to rise than it can by selling them now.

The U.S government gave the “all-clear” sign for Clunker Stocks. AIG (NYSE:AIG) has run from a March low of $6.67 to current prices around $44. Bank of America has moved from $2.53 a share to current prices around $17.

Now that the government is giving the “all-clear” sign for gold, how will it run? I’ve got some great gold stocks waiting for you in a Special Report called Gold Rush 2010: 3 Gold Stocks for Gold Over $1,000. Click HERE to get your copy.

*****I got a couple good questions from Daily Profit readers I’d like to share. Bob writes: It looks like you should have sold CHNG (China Natural Gas) when it hit $14 plus since it seems to ignore NG (natural gas) price increases but falls on NG drops... what do you think about CHNG?

China Natural Gas (Nasdaq:CHNG) is a stock in the SmallCapInvestor PRO portfolio. I recommended it at $6.14 a share after the company said in a 10-K that it would be moving onto the Nasdaq.

I love undervalued Chinese stocks, especially ones that are directly tied to industrial activity in China. They are about as “no-brainer” as it gets.

China Natural Gas currently trades around $13 a share. It just got an upgrade today. China Natural Gas does seem to ignore the price of natural gas in its trading pattern. That’s because it’s a Chinese stocks first – it trades as the Chinese stock market trades.

As for selling the last time it hit $14, I have to say I’m glad I didn’t. I expect much more upside for the stock, say to around $18. And I’ve made the mistake of selling an energy stock too soon. I recommended selling Gulfport Energy (Nasdaq:GPOR) at $6.04 for a 141% profit when I though oil was topping out back in June. Wrong. Oil didn’t fall and Gulfport is currently trading around $8.50 a share.

141% was sweet. But 240% would have been sweeter.

SmallCapInvestor PRO members have a 117% gain on China Natural Gas. I think we’ll be up 193% by the time we sell, which will be better.

*****Dave asked a great question about oil prices after last weeks’ drop: Because the oil prices have held up during these last two down day corrections do you think that when the stocks go back up that oil would increase its price as well? Please advise [sic] your thoughts.

It would seem that oil is tracking stocks closely. Stocks tend to rise when oil prices rise. And they both tend to move on economic expectations. But oil also has a life of its own. It has traded between $66 and $73 for months now. It seems like that range will not be broken, no matter how much oil is in storage, or how weak the demand forecasts become.

This is certainly due to the fact that oil traders know it’s simply a matter of when, not if. Demand will return, and oil prices will move higher. So there’s a natural floor for prices.

But that doesn’t explain why oil doesn’t break above the established range when stock prices move higher. After all, the S&P 500 is spitting distance from new highs, and oil is stagnant around $70.

Here again, I would say it’s simply a matter of when, not if. Oil hasn’t broken higher because demand is still relatively weak. That will change and oil will break out of its range to the upside.

Oil is also trading in concert with the U.S. dollar. And the dollar has been bouncing off of support levels lately. That’s helping keep oil prices range bound.

That’s it for today, have a great weekend,

Ian Wyatt

Editor

Daily Profit

 

P.S. I mentioned SmallCapInvestor PRO earlier without telling you more. Sorry. CLICK here to find out more about my small cap service and my new report on the 10 small caps to own for 2010. In just 5 weeks after picking them up, we’re already seeing double digit returns, and we’re tracking for triple digits in 2010. Use this link to find out how to get your hands on my new report and load up on these powerhouse small caps.

 





Posted 10-09-2009 11:57 AM by Ian Wyatt
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