The best contrarian indicator of all: the Labour government
By
Dominic Frisby Feb 21, 2008
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This Labour government is fast becoming one of the greatest contrarian indicators in the history of markets.
After selling gold at the bottom of the market, they buy an insolvent mortgage lender – Northern Rock - at the top of the housing market. Are they really this incompetent? Or is it that the taxpa
y
ers’ interests are low on their list of priorities? Whichever it is – and I suspect it’s the latter - history will give them greater notoriety than the shoeshine boy who convinced Joe Kennedy to sell out of the stock market just ahead of the 1929 crash, when he started giving him stock tips.
They’re a bit like a really badly run hedge fund. The fees they charge are extortionate, the performance they deliver is woeful, and investors can’t get their money out.
“It was the right decision and the right time for the right reasons,” said Gordon Brown. Yeah, right...
The Government has managed to buy one of the housing market’s most aggressive lenders, just at a time when the housing market is running into serious trouble. Alistair Darling commented that “as and when market conditions improve, the value of Northern Rock will grow and therefore the taxpayer will gain.' As and when market conditions improve! When’s that going to happen? 2012 at the earliest if Fred Harrison’s 18-year property cycle is anything to go by.
On this subject, you may remember that a few months back I posted a chart of UK house prices measured in gold, drawn up by Tom Fischer, a mathematician from Herriott-Watt University in Edinburgh. Well, Tom recently sent me another chart with data going back as far as 1952.
Tom thinks that before this is all over the average UK house is going to cost less than 100 ounces of gold. That’s an extreme view, but I would suggest, looking at the above chart, 300 ounces is a virtual certainty, and if it makes 200, I shall be picking up the phone to Foxtons - assuming they’re still in business.
And how will we know when this is all over? One clue will be the government: if they sell Northern Rock and buy gold, that will tell us the bottom is in. Who knows? Perhaps by 2012 whoever’s in power will see fit to bail out a gold miner who lied about their drill results.
Three junior miners to keep an eye on
Going from an underperforming bank to the more vexing question of the underperformance of the junior miners, please take a look at the chart below. It shows the share price of Hecla, a junior to mid-tier silver producer, in the 1970s.
Despite the fact that gold and silver were in a bull market, many of the miners were not tracking their underlying metal, and were in a nasty bear market from 1974 all the way to late 1978. Then suddenly they turned and Hecla went from about $4 to $35 in a year.
I maintain my belief that at some stage, we’ll see this again this cycle, and the junior mining stocks will turn and suddenly sky rocket. And we are seeing signs that that time may be soon, with platinum miners leading the rally. Huge volume came into the North American platinum explorers late last week – shortly after my article went out, coincidently – and we saw 10 and 20% gains in a day across the board. Pacific North West saw a 20%+ move. Beartooth Platinum (CA:BTP), which I mentioned, had more shares traded (over 10 million) that day than they have ever had in the history of the company. I must confess I would like to have seen the stock close nearer the high of the day, but the chart still looks bullish. It all depends on its drill results, which, hopefully, will be published by the time you read this.
Proactive Investors runs presentations for small cap companies, usually in the resource industry, which are attended by retail investors and fund managers. I must say I was relieved to see that there were no members of the cabinet in the audience at their forums last week.
But presenting were, in my view, three of the top ten junior miners listed on Aim. They were Leyshon (LRL), Emed (EMED) and Kryso Resources (KYS). I’ve written about Leyshon and Emed in the past (you can find out more about them in this cover story I wrote for MoneyWeek last year) and I’ll write about each stock in greater detail here at a later stage but for now, although there is plenty that can go wrong with each, you should note that all three are serious juniors with serious prospects and a serious chance of making production. I recommend you put them on your watchlist.
Turning to the wider markets…
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London market close: FTSE 100 - 5,966.90 (+20.3)
European markets: Paris CAC-40 - 4,885.83 (+41.31); German DAX-30 - 7,002.29 (+54.61).
US markets: Dow Jones Industrial Average - 12,337.22 (-12.37); S&P 500 - 1,348.78 (-7.08); Nasdaq - 2,306.20 (-42.78).
Asia markets: Japanese Nikkei - 13,497.16 (-95,31); Hang Seng - 24,123.58 (+667.84).
Crude oil: $88.77. Brent spot: $89.77.
Gold $901.60. Silver: $16.62.
Currencies: pound/dollar: 1.9767; pound/euro: 1.3339; dollar/euro: 0.6748; dollar/yen: 106.9200.
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