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Political rescue attempts could hold gold prices hostage - Don Coxe

During a time of nightmares about U.S. deficits and mad politicians, analyst Don Coxe suggests it "would be hard to write a better script for a recommendation to buy gold."

RENO, NV -

Retain above-average exposure to gold and gold stocks, but continue to underweight base metals stocks, global investment advisor Don Coxe recommends in his latest issue of Basic Points.

Thanks to the latest fiscal crisis whipped to a frenzy by the political machinations of the U.S. Congress and President Barack Obama, Coxe observed, "Main Street is wracked with nightmares of monstrous deficits that will end the sweet national dream-the American Dream. It feels betrayed by the political class."

"Has the entire US political class gone mad?" a Canadian friend recently asked Coxe in a one-line email.

A U.S. Senate vote on a debt plan compromise already approved by the House is scheduled Tuesday afternoon. "However, investors cannot assume that a last-minute "Perils of Pauline" outcome that snatches solvency from destruction means that Treasurys will thereupon retain their status as the Premier Global Risk-Free Standard," Coxe cautioned.

Instead, he suggested, "Treasurys could well have a somewhat deflowered look for many years."

"Why accept an apparently subsidized yield for paper issued by an apparently dysfunctional government, backed by an increasingly dysfunctional economy?" Coxe asked. "Investors can do better and they should."

"It would be hard to write a better script for a recommendation to buy gold than (1) the crisis in the eurozone, (2) a possible US debt ceiling default, (3) strong oil prices, (4) weak economic news in the US and Europe, and (5) pitiful performance of bank stocks in the US and Europe," he observed.

"However, those same factors are near-surefire guarantees to jolt politicians and political activists in Europe and the US to rush to the rescue," he warned. "Result: gold's near-term price action is hostage to political events, and speculators could be scaling back on bullion and gold stocks in coming days."

Nevertheless, Coxe is skeptical "that quick fixes during crises will challenge the basic arguments for strong portfolio representation in gold, and, for the gutsy, silver. Volatility will continue as the rescue packages unfold, but long-term investors in gold will surely use selloffs to build their exposure."

In his analysis, Coxe advised "gold is gradually becoming recognized as a necessary investment for those with wealth to conserve who do not assume that the political classes in the US and Europe will display sustained statesmanship. "

He believes the gold rally "is primarily driven by fear-not greed."

"Despite the trillions in bailouts, many major investment banks in the US and Europe continue to struggle under the weight of putrefying balance sheets," Coxe observed. "Gold is the exact inverse asset to bad mortgages and bad government bonds and the oft-derided love of gold is the exact inverse emotion to the misplaced greed of bad bankers."

However, Coxe is far less enthusiastic about the outlook for base metals.

"We have been recommending an underweighting in the base metals stocks partly because we didn't believe the consensus forecasts for good growth in the US economy, and we thought Europe would also disappoint, but mostly because China was obviously tightening because of (1) food and fuel inflation, and (2) a likely moderation in the furious rate of expansion of capex."

Meanwhile, strikes at key copper mines and flooding problems for major Australian iron ore and coal mines have meant somewhat stronger metals prices than Coxe anticipated.

But, he observed that Chinese auto sales have plummeted; while there have been far too many housings starts and far too few completions in the past year, which means the credit squeeze is hurting. Chinese stock prices have been basically flat for 18 months as the nation suffers from food and fuel inflation.

COXE'S INVESTMENT RECOMMENDATONS

Among Coxe's investment recommendations are the following:

1. Retain above-average exposure to gold and gold stocks.

2. Emphasize high-quality corporate bonds in debt portfolios.

3. Continue to invest in high-quality Canadian assets, including banks and bonds.

4. Within the energy group, oil and coal remain favorable.

5. Base metal stocks are cheap-particularly the majors with long-duration reserves. They will probably get cheaper. Continue to underweight the base metals stocks.

6. Overweight Japan. Japanese stocks have completed their Triple Waterfall Crash, and are showing signs of a renaissance.