BMO's Don Coxe advocates gold shares as attractive havens that can outperform under the extreme scenarios of financial collapse and runaway inflation.

Mineweb: Dorothy Kosich - Reno, NV Posted: Friday, 04 Sep 2009

While BMO Capital Markets' Don Coxe believes most U.S. equity groups are due for a correction that could be quit prolonged, "we remain bullish on Emerging Markets as an asset class, and on commodities and commodity stocks."

In The Coxe Strategy Journal for September, Coxe recommends his clients "continue to overweight commodity-oriented stocks in diversified portfolios. ...If the economic bulls are right, commodity prices will soar."

"If it takes more time-and some signs of restraint in Washington-to launch a sustained US recovery, then commodity stocks will have the attraction that comes from producing goods priced by the new Asian economic leaders," he advised.

Coxe also suggested that Canadian stocks be emphasized in North American portfolios; stressing Canada has the best range of commodity-oriented stocks, as well as the best banks and the best North American currency.

In his analysis, Coxe noted that, until this week, gold had been range-bound this year, "so gold shares sharply underperformed the market."

"On Tuesday, bullion staged a sudden upside breakout from its pennant pattern, which could signal a sustained move through $1, 000," he said. "Gold shares are attractive havens, because gold is the only asset that can be expected to outperform under both extreme scenarios-financial collapse and runaway inflation. Remain overweight gold within commodity-oriented portfolios."

Regarding gold, Coxe found "retail investors have been bailing out of gold jewelry as fast as they buy bullion, so this isn't a consumer inflation-fear bubble about to burst."

In the meantime, "central banks have long ceased trying to sell all their ‘excess' gold holdings," he noted. "As club members, they aren't about to swap Treasuries for gold, but China has modestly boosted its gold exposure, and the next global recovery will almost certainly shift investor perceptions of the relative attractions of paper money to precious metals."

Coxe recommended a 33% global exposure to precious metals stocks, as well as a 12% global exposure to base metals and steel.

"Despite the violent commodity selloff, few raw materials are back to levels at which efficient producers cannot earn profits," he noted. "The industries continue to consolidate into ever-stronger hands. Consider how quickly the mining majors cut back on copper production when copper broke $2 a pound. Notice how firm the producers are as unions increase their wage demands."

"Notice also the trend we have been discussing toward the new autarky [the concept that the county should be self-sufficient and not take part in international trade]," Coxe said, "as major commodity-consuming countries make acquisitions of mines and oilfields across the world."