Today, the U.S. and IEA decided to sell 60 million barrels of oil over the next month, supposedly to make up for the 1.5 million barrels a day that was produced by Libya.

This is a political maneuver which will have a short term effect on oil and gasoline prices.  The authorities announced that this is meant to help the consumer, but it’s obvious that they also wanted to punish the speculators.  The IEA has previously said that targeting the speculators will backfire, yet here they are doing just that.  We find that hard to grasp that the consumer will get more than very temporary help.  The amount to be sold represents less than 1 day’s world consumption of oil, and the 30 million barrels sold in the U.S. represents about 1 1/2 day’s U.S. consumption of oil. 

The sale will decreases world energy security by decreasing emergency stockpiles. The important fact is that world energy demand is rising faster than energy supply and that problem will not be solved by these band aid programs.  The entire purpose of this is political the object is to decrease gasoline prices during the 2011 summer driving season in North America and Europe.

We predict that the effect of this sale will be unnoticeable in three months.  At that time oil prices will be rising and possibly will be higher than they are today.  We have not changed our view that further disruptions in the Middle East will take oil higher.

Gold and gold mining shares  

Gold has fallen as the U.S. dollar has rallied on today’s IEA news.  We believe that this is an excellent opportunity to buy gold and gold mining stocks.
As our readers know, our approach is to sell part of your position on rallies and buy on dips. This dip in price provides an opportunity.  Buy part now, and if gold falls lower investors should add more.  Take a close look at gold mining stocks; they have not participated as they should have during the rise in the price of gold.  It is time for them to catch up. The upcoming European QE should inspire investors to own gold for both its role as real money and as a store of value during times of financial chaos.  As we have pointed out before, large nations continue to buy gold to stockpile as protection from monetary and financial crises.

We believe that bullion and coins have a place in every investment portfolio, but we also think that some gold mining stocks have declined to a level that make them very attractive.

Repeatedly, short sellers have fabricated stories about smaller- and medium-sized gold mining companies in order to drive down their stock prices. These stories often get reprinted in the press.  Even well-run companies with new gold discoveries are targeted by the manipulations of short sellers. We believe these shares will now move much higher in coming months and years. To profit from this opportunity, we suggest investors focus on the following types of companies:

1.  Those that have not borrowed money via gold loans to grow,
2.  Those with enough quality gold reserves to build a mine,
3.  Those with proven management and a record of having built companies previously.

In our opinion, gold and quality gold mining companies will move much higher in the long run and now is the time to buy when investor pessimism is high and rationality is low.  Eventually, the larger, better capitalized mining companies will step in and acquire the smaller operations when the acquisitions have current and expected mineral reserves exceeding their market prices as is the case for some companies.  Such acquisition cycles eventually bring an end to the gold share undervaluation.

Europe’s New Plague: Debt Contagion
A new plague infests Europe. Not bacterial like the killer epidemics of past centuries, the current pathogen is debt, and the prognosis is poor. Much like 2008, when the U.S. banking system barely survived an acute crisis, Europe is careening into a monetary abyss of its own making. The outlook is increasingly uncertain. Will debt-strapped Greece accept the tough terms laid down by the International Monetary Fund (IMF) and the European Central Bank (ECB)? And behind Greece, the gasping, deep-in-debt economies of other European countries are also desperate for transfusions of money. Will they accept austerity?

The ultimate issue here is one of contagion. Will the bad debts of Greece and other nations infect, weaken, and possibly kill the collective European banking model?  In the short term, we expect the ECB to cave in and ease the austerity demands upon Greece.  Such action may avoid a serious crisis now, but not forever.

The next question is how long will the politicians in Europe continue the masquerade and pretend that policy solves the problem. What’s about to unfold is but medicine. You apply a drug (money, in this case) that temporarily relieves a symptom but you fail to address the underlying sickness which continues to progress.  Investors will sigh in relief.  The stock markets will applaud.  They’ll ignore the disease…until the next flare-up.

Look for that to happen — the next phase — when the insolvency contagion spreads to the other weakened European nations: Portugal, Spain, Ireland, and others.  The banks holding large amounts of these countries’ mounting debt will be attacked. Their ratings will be lowered. Investors will begin to aggressively bet against them using derivatives. Eventually, depositors will flee. This is what happened in 2008, first in March with Bear Stearns, and then after a few months of rally, Lehman in September.  How long before a similar collapse will threaten the big banks of Europe?   

Beyond Europe

When this happens, will the contagion extend beyond Europe? In our opinion, the odds are very high that the contagion will indeed extend to banks and stocks in U.S. and Asia.

Then what?  Remember we live in the age of “quantitative easing (QE) — of money printing — where leaders kick the debt ball down the timeline for future leaders to deal with.  We fully expect Europe and Asia, and perhaps both, to resort to massive amounts of QE-type of financing to save the European banking system just like the U.S. did with TARP, QE, and other programs that effectively averted a complete U.S. banking system collapse.  

With each passing week, we hear more concern about Europe’s debt. The decibels of concern are rising. On June 11, The Economist published an article asking frankly “how much financial risk has the ECB taken on as a result of the European debt crisis?”
Recently a report by Open Europe, a think tank, described as “potentially huge” the risk to taxpayers that lies buried in the ECB books. 

On June 21, the New York Times quoted IMF managing director John Lipsky warning that the European Union must be prepared to underwrite the finances of the Greek state for the next year, a much tougher position than European officials expected, in order for the IMF to realize its portion of the aid.

At some point there will be a huge (probably over 1 trillion dollar) liquidity injection by the ECB to buy up the cancerous debt of European nations. Additionally, in recent months, China’s banking system appears to be getting overextended and we expect that this may require a QE-fix inside China as well.  Over time, liquidity for others may also be forthcoming by the Chinese.

How exposed is the ECB Anyway?

The ECB has allowed banks in troubled Euro zone nations to borrow as much as they need from it even if those banks have shaky collateral. The ECB’s rationale is that it really doesn’t matter as long as the IMF is available to bail the nations out. Talk about throwing banking fundamentals to the wind. What happens if the IMF decides not to play ball? What happens if the borrowing nations refuse to meet the IMF’s stringent requirements of spending cuts and tax increases as many in Greece have threatened?

How much financial risk has the ECB actually taken on as a result of the debt crisis?  The ECB has already bought up low-rated bonds of Greece, Ireland, and Portugal in the market.  There are hundreds of billions more of bonds that European banks may need to sell to the ECB if they are to remain solvent. The ECB is thinly capitalized at 10.7 billion Euros.  It is true that more capital could be contributed by member nation central banks, but the ECB already has billions in unfulfilled capital contributions from its members.  To us, this means there will be a continual drain on the healthier Northern European nations. They will have to step up and contribute more and more. Hard-working, taxpaying Europeans will have to shoulder a heavy burden to pay for the profligacy of their neighbors. How long will they put up with it?

What This Means to You

As we mentioned a moment ago, Europe will eventually deal with the problem by printing money to provide liquidity to the markets and pump up the balance sheet of the ECB.  Such a program is inevitable and will, in our opinion, provide a further impetus for gold, oil, and other assets. The European strategy is to keep the continent’s banking system and the ECB from failing, but the result will be a much weaker Euro and a wave of liquidity sloshing into other markets around the world.

We are working on a buy list for later in 2011 and are monitoring the global situation closely.  Please keep current on these letters for recommendation changes.

Investment Date  Date Appreciation/Depreciation
  Recommended Closed in U.S. Dollars
Commodity Market Recommendations      
Corn 4/20/2011 Open -8.50%
Gold 6/25/2002 Open 374.50%
Oil 2/11/2009 Open 165.50%
Corn 12/31/2008 3/3/2011 81.00%
Soybeans 12/31/2008 3/3/2011 44.10%
Wheat 12/31/2008  3/3/2011  35.0% 
Japanese Yen 4/6/2011 Open -6.2%
Singapore Dollar 9/13/2010 Open 8.30%
Canadian Dollar 9/13/2010 Open 5.50%
Swiss Franc 9/13/2010 Open 19.90%
Brazilian Real 9/13/2010 Open 7.50%
Chinese Yuan 9/13/2010 Open 4.40%
Australian Dollar 9/13/2010 Open 12.80%
Thai Baht 9/13/2010 6/22/2010 6.50%
Japanese Yen 9/14/2010 10/20/2010 -3.30%
Equity Market
India 4/6/2011 Open -12.10%
Japan 2/15/2011 Open -10.40%
Malaysia 4/6/2011 6/22/2011 0.80%
Canada 3/24/2011 6/22/2011 -7.10%
Colombia 9/13/2010 6/22/2011 2.60%
Australia 2/15/2011 6/22/2011 -0.90%
U.S. 9/9/2010 3/11/2011 18.10%
Canada 12/16/2010 3/11/2011 7.90%
South Korea 1/6/2011 3/3/2011 -2.90%
China 9/13/2010 1/27/2011 5.00%
India 9/13/2010 1/6/2011 7.90%
Singapore 9/13/2010 12/16/2010 4.80%
Malaysia 9/13/2010 12/16/2010 1.30%
Indonesia 9/13/2010 12/16/2010 9.50%
Thailand 9/13/2010 12/16/2010 11.90%
Chile 9/13/2010 12/16/2010 8.90%
Peru 9/13/2010 12/16/2010 32.20%
Bond Market      
30 YR Long Term      
U.S. Treasury Bond   8/27/2010 10/20/2010 0.00%