Nova Gold, the Gold Market and the Euro

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Canadian gold miner NovaGold Resources (NG) raised around $100 million on Tuesday, March 9th after selling 18.2 million shares of common stock at $5.50 each. Despite the dilution from this sale and another scheduled sale of 13.6 million shares for $5.51 on March 11th, the stock rallied 9%, closing at $6.88. Together the two sales will increase the outstanding shares of NovaGold by 17%.

The purchasers of Tuesday's stock offering were funds managed by Paulson & Co. Thursday's sales will be to George Soros' Quantum Fund. Both are renowned investors, bullish on gold, and bearish on the euro. The average investor would have trouble realizing that Soros is bullish on gold because of mainstream media reports misrepresenting his outlook. The press reported that Soros stated the gold was in the ultimate bubble, instead of would be in the ultimate bubble because of governments engaging in excess spending and  money printing globally. Bubbles are where investors make the most money, as long as they can control their greed and sell around the top. Successful investors understand this. Unsuccessful investors like to blame the market, instead of how they interact with the market.

The bullishness of Paulson and Soros is even more interesting because of their funds large bets against the euro. The price of gold and the value of the euro tend to move together. The crisis in Greece caused a sharp drop in the euro and is still holding it down. Gold sold down with the euro, although traditionally gold has been a safe haven during crisis periods. It didn't hold up during Credit Crisis selling in the fall of 2008 either, although it closed up on the year. Gold is currently in a sideways trading pattern and the big January and February buying season in China and India is over. Gold prices tend to be weak in the spring because of lower retail demand for the metal. The technical patterns on the chart indicate its price is trendless at the moment.

Ultimately, the value of NovaGold is dependent on the price of gold. NovaGold is sitting on some very huge untapped mineral deposits of gold, silver and copper. For those who think the price of gold will rise sharply in the future, these deposits are like money in the bank that is paying a very high interest rate. Apparently Paulson and Soros are of this opinion based on their actions. In the short-term, NG stock may be highly volatile however. Sharp up and down moves are common. There is also strong long-term resistance around the 7.00 level that was established in 2004, 2005, 2007, and 2008. Yesterday was the third time in recent months that the stock approached this key price. Breaking and staying above it will be a technically significant event.

Investors should remember that gold is in a long-term (secular) bull market that began in 2001. This doesn't mean that prices go up everyday. There will be pauses and dips. You make your money by buying on the dips.


Disclosure: Have held positions in Novagold and gold several times

NEXT: The Economy's House of Cards

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

The Latest From Davos Switzerland

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The invitation only annual World Economic Forum - a meeting of world leaders, central bank heads, economists from big financial firms, and billionaire investors - is currently taking place at Davos, Switzerland. In an opening forum, the people who pull the strings of the global economy and stock markets came to the following conclusions (long after they have been obvious to everyone else):

1. The world is facing unprecedented economic challenges.
2. Fiscal packages may not be enough to restore economic growth.
3. The multilateral financial system needs strengthening.

Fortunately, George Soros gave an early talk that had somewhat more substance than the above long-on-platitudes and short-on-specifics comments. At the same time, Nouriel Roubini who is in Switzerland, but possibly not at the conference, released a purposely well-timed statement about just how costly it would be to fix the banking system.

Soros stated that the current crisis has the potential to be worse than the one during the Great Depression in the 1930s. According to his calculations, the global banking system in developed countries still needs an additional $1.5 trillion to be rescued. Furthermore, the only way to pay for this is with money creation, or in other words - inflation. Nouriel Roubini now says that he estimates the total global bank losses from the Credit Crisis will be $3.6 trillion, far higher than his original estimates (and mine as well, last July at a talk at St. Johns University, I estimated $2 trillion, which was double the consensus at the time). Roubini further stated the biggest U.S. banks are insolvent (New York Investing first said Citibank was insolvent at the end of 2007).

Expect some talk about the two approaches to fixing failed banking systems. These are the Japanese model and the Swedish model. The Japanese reacted to their failed banking system in the 1990s by propping up as many failed institutions for as long as possible and the consequence was economic and stock market stagnation that has now lasted almost two decades. The Swedes had a banking collapse in the mid-90s and took that opposite approach. They took swift and drastic action, which was painful in the short term, but proved highly successful and their economy revived quickly. So far, the United States has come closest to the failed Japanese model in dealing with the banking crisis. The political will to step on some very rich and powerful vested interests has been lacking as has the willingness to admit that top U.S. banks such as Citibank and Bank of America are insolvent.

One person that is not yet at Davos is Federal Reserve chair Ben Bernanke. He is busy keeping fed funds rates at zero at the Fed meeting in Washington. The meeting ends today and presumably he will be jetting off to Switzerland shortly thereafter. Expect the quality of debate at Davos to suffer accordingly.

NEXT: Government Wants to Play Good Bank, Bad Bank

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.