Gold should move to new records

BMO Global Portfolio Strategist Donald G. M. Coxe forecasts that commodity stocks will reach new profit peaks as they "lick their wounds, while still recording high returns on equity and still boasting high quality balance sheets.

In his report, Basic Points Homeicide: the Crime of the Century, Coxe predicts, "When the next global economic recovery takes flight, their [commodity stock] profit will reach new peaks."

Although gold prices actually fell last week (recovering again later), delighting central banks and giving Fed Chairman Ben Bernanke greater freedom to cut interest rates in the first financial crisis in more than thirty years in which gold failed to rally, Coxe firmly remains bullish on gold.

On July 13th, many of the best-performing equity hedge funds were heavily invested in commodities and commodities stock, when U.S. Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke deliberately acted to force hedge fund liquidation of commodity futures and commodity stocks.

"They succeeded brilliantly partly because political pressure forced unwinding of many large pension funds' passive investment in commodities at the same time hedge funds were in panic liquidation," Coxe said. "After the July 13th massacre, these funds were hit hard and faced withdrawals."

"In recent weeks, other hedge funds have been feasting on their brethren. Knowing that the high-fliers were loading leading commodity stocks...the predators shorted their stocks," he suggested.

These hedge funds are "delighted to find stocks they can short, so going after Potash, Monsanto, Deere, Mosaic, Suncor, and other major winners is like shooting fish in a barrel as long as overlevered hedge funds are still having to raise cash," he added.

"History may well record that the "Midnight Massacre [the July 13th massacre], which was a devastating attack on hedge funds and commodity investors, was the most brilliantly executed piece of surgical intervention in modern mining history, Coxe asserted. He believes Paulson and Bernanke stopped the total collapse of Fannie Mae and Freddie Mac, triggered a 40% short-covering rally in the bank stocks, and ultimately will lower the top-line Consumer Price Index for months to come.

Meanwhile, Coxe suggested that "mining stocks have been savaged by falling base metal prices, rising metal inventories, and a fast-spreading global recession. The base metal stocks' collapse is one big selloff that is based on actual economic data, rather than runaway pessimism."

But the bright spot in the panic-driven selloff in commodity stocks is that China could make "several bold and assertive" commodity acquisitions abroad, using some of its vast hoard in Treasuries and Fannie-Freddie paper to buy reserves in the ground in politically-secure areas of the world-or undersea," he suggested.

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Coxe advised "Long-term investors should not delay much longer in picking among the wounded commodity stocks on the market's bloodied battlefield. The best of these companies are among the best the world has to offer, in terms of importance to the global economy, competitive position, balance sheets, cash flow and management quality. At current prices, many of them sell for no more than a discounted value of their reserves in the ground, with no allowance for their balance sheet assets."

While commodity prices fall during recessions, Coxe noted that "the real value of great commodity stocks does not."

"Why? Because recessions are devastating to smaller, undercapitalized commodity producers, and they become easy pickings for the majors once they see light at the end of the tunnel."

"`There's nothing surer, the rich get rich and the poor get poorer' was a Depression song, but it will doubtless have relevance as the big commodity companies survey the landscape," he said.

Meanwhile, Coxe stressed that "gold and gold mining shares remain the best way to reduce endogenous risk within an equity portfolio. Although inflation is bound to recede for at least a few months, the amount of stimulus being injected into the global system will prove highly intoxicated once the downturn bottoms out, and gold should move to new records."