What’s Ahead for Gold

Google (Nasdaq:GOOG) knocked it out of the park last night. The company earned $2.7 billion on $9.72 billion in revenue for the third quarter. That revenue number represents a 33% gain over last year.

Needless to say, Google crushed expectations. The stock was up 6% last night.

We’re all aware of how dominant Google is in the online ad space. But its mobile division is doing great, contributing $2.5 billion in revenue. Analysts were a bit worried when Google bought out Motorola Mobility so it could put its Android operating system on its own phones.

Making phones is a low margin business. And entering the handset business puts you squarely in competition with seasoned players like Apple (Nasdaq:AAPL). But at this stage, I’m not at all worried that Google will be successful. And that’s because, like Apple, Google gives customers what they want. In regards to handsets, it will be the same service you get from Google.com — maps, information, etc.

There should be no doubt that Google’s acquisition of Zagat was brilliant. When you can pull up restaurant reviews, maps and directions on your phone in a matter of seconds, well, that’s good stuff.

In many ways, the tech sector has gotten much smaller. The dominance of Google and Apple, and smaller companies have to get in line with them, or be left out. And what’s especially amazing is that neither of these companies trades with an outlandish valuation. Google has a forward P/E of 13, and Apple’s is 12.5. You could even say they are cheap.

Unfortunately, though, uncertainty about the Euro-bank re-capitalization plan is starting to seep into investors’ consciousness.

Back in July, 8 out of 90 Euro-banks failed a stress test by a combined 2.5 billion euros in Tier 1 capital. Yesterday, a Credit Suisse analyst said that 66 of those 90 banks would currently fail a stress test, and would need to raise 220 billion euro ($300 billion). And if Greek default (or debt forgiveness) is 60% or more, the amount is probably higher.

Deutsche Bank (NYSE:DB) CEO Josef Ackerman said that the "actual problem" is that government bonds have lost their risk-free status. Umm, yeah, when those are Greek government bonds, you betcha.

And France’s Sarkozy is still talking about making any debt forgiveness voluntary so that credit default insurance doesn’t kick in, but I have a hard time believing Euro-banks will voluntarily go for a big number, like 60%.

So basically, Europe has pledged to have a Euro-bank re-capitalization plan done in 10 days. But then, Europe promise 18 months ago to save Greece, and that still hasn’t gotten done.

And to make matters worse, Spain was downgraded by S&P yesterday for the third time in three years.

The big question for Europe is: where will all the money come from? At some point, government guarantees lose their effectiveness. That’s driving the euro lower against the U.S. dollar. So another important question is: will resolution of the Euro-bank re-capitalization be bullish of bearish for the euro?

I ask because this has important consequences for gold. Gold should be an attractive asset these days, and I can imagine the European situation being a catalyst for gold prices. But it likely depends on which way the euro goes. I’m thinking the euro rallies, but we’ll see.

Write me anytime: [email protected]

Have a great weekend,  

Ian Wyatt
Daily Profit

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