The price of gold may be stuck right now, but it's still high enough to secure large profits for many senior mining companies. Yet, the gold stocks aren't doing that well. Case in point: Barrick, which is at about the same level where it was when it closed its hedge book. Despite the company taking the loss that came with the closing of their hedge book, which puts the hedge-book drag-down in the past, it's now selling at about the same price now that it was when the book was closed.
In the third segement of the Financial Sense Newshour podcast [.mp3 file], John Doody explains why the gold stocks aren't faring that well. Part of it is operational issues, like Newmont finding lower grades than expected in its new Boddington mine, but part of it is the convenience of gold ETFs taking away investment demand for gold stocks. Doody expects those companies to become more dividend-focused, which would help boost demand for their stocks particularly from funds that don't invest in issues that don't pay dividends.
Next on that segment was Patrick Heller of Liberty Coin Service, who argued againt the opinion that the new form 1099 rules were aimed at gold holders. The rules require any company to fill out one (in triplicate) if they pay $600 or more for any good(s) or service(s) in the course of a year to a supplier. The Obamacare bill, now law, requires a 1099 when any seller gets more than $600 total in the entire year. Some have argued that this new requirement was aimed at tracking gold coins, but Heller disagreed; he believes that it was just a general sweep. He (and Jim Puplava) still complained about it.
Following was John Williams of ShadowStats, who believes that inflation is still around the corner. The reason why is, the data he uses still shows the eocnomy in a real mess. He expects quantitative easing as a result, which would drive down the greenback a lot.
The relative underperformance of the gold stocks is a bot of a mystery, but it is a sign that they're out of favour right now. Boosting dividends, like Newmont's 50% boost and Barrick's 20% increase, will help because they'll increase the payout for waiting.
Showing posts with label financialsense. Show all posts
Showing posts with label financialsense. Show all posts
Sunday, August 1, 2010
Sunday, July 25, 2010
Financial Sense Newshour Discusses The Weather
There wasn't much on gold in this week's Financial Sense Newshour podcast; instead, other topics like energy, a possible double-dip, and weather events were discussed. Mentioned in passing was Niall Ferguson's continued warnings about the state of America's government finances and the suddenness of a crisis.
What if the crisis that Prof. Ferguson and other have been warning about comes to pass? What if America is visited by imperial decline, which is covered up by some quick fiscal fix that seems to restore the good old days? What if the climactic blow is covered over by the assertion that the crisis is over and things will be getting only better, once [say] 401Ks have been commandered to force American savers to act more like Japanese savers?
The final tip-over for the U.K. was World War 2. Although it's common for Americans to claim that America won World War 2, the United States didn't enter the war until more than two years after Great Britain did. On the eve of Pearl Harbor, there were lots of British soldiers who had already served more than a two-year hitch. The Battle of Britain, with the U.K. serving as the last rampart of civilization in Europe, was more than a year in the past. It's true the the Roosevelt Administration provided aid to the U.K. in the form of Lend-Lease, but the British boys were doing the fighting and dying. The later Vietnam War can serve as evidence that money and materiel alone does not win a war.
The same point applies to members of the Commonwealth like Australia and Canada. The U.K. Parliament declared war on Sept. 1st, 1939. The Canadian Parliament declared war two days later. On the eve of Pearl Harbour, it wasn't that hard to find the Canadian equivalent of "Gold Star Moms."
Revisionist historians have said that America was dragged into war because of blandishments from the U.K. government, which President Roosevelt looked favourably upon. He wanted war, and Churchill wanted him in. They have a point, in that the U.K. was glad to have help from anywhere in the English-speaking world. (Yes, it was that bad in 1940 after France fell.) The ultimate price was the loss of the British Empire in part because of a precedent set after World War 1. Although the beginnings of Britain's welfare state were inched into earlier, with the People's Budget of 1909, it got its real start after 1918 by flying under the colours "A Nation Fit For Heroes To Live In." Temporarily pushed back by the Geddes Axe, it reached full fruition with the new Labour government of 1945. In a very real sense, the British welfare state was a G.I. Bill writ large.
Of course, the foundation of the welfare state - social insurance - was first introduced in the German Empire. Thus, the Tory quip after the 1945 election: "After the Beveridge Plan, it is clear that the man who won was Bismarck."
The fiscal trick that the Labour government used was a 30% devaluation of the pound in 1949. Although the U.K. had already lost India, and the Empire was effectively through, it had the temporary effect of convincing many in the U.K. that Britain would carry on. The return of confidence was such that an early BBC miniseries called The Quatermass Experiment took it for granted that the first manned flight into orbit would be British.
On the ground, something else was apparent. Young men and boys in gangs were sporting garb that came from Edwardian times; hence, they were called the "Teddy Boys." During King Edward VII's time, the British Empire had hit its height. Youngsters appearing in the garb of the time reflected a kind of A-OK confidence in the future of Britain, which dovetailed with the devaluation that was supposed to solve the U.K.'s fiscal problems.
If the United States gets scathed by a crisis and emerges through some kind of quick fix, like the commandeering of 401Ks for forced investment in U.S. Treasuries, we might well see the American equivalent of the Teddy Boys: young toughs dressed up like they stepped off the set of Mad Men - right to the nines. Full grey flannel suits with three buttons, narrow silk ties, leather wingtip shoes: the kind of garb worn by movers and shakers at the time America had hit its height. The female garb would be pillbox-hat glamour. Tail-finned Cadillacs, authentic classic models, would likely be the preferred mode of transport.
It'll last as long as the United States isn't humbled on the world stage, like the U.K. was during the Suez Crisis. Being left in the lurch by the United States, and unable to fight the battle alone, exposed the remnants of the U.K. empire as not worth belonging to anymore. It was the spark for the final devolution of the former British Empire: decolonization.
The American equivalent would be the unravelling of NATO, which would not happen unless the U.S. lost a major war affecting its traditional territorial claims after being humbled by the more quotidian means of excessive debt. An example of a major war in this context would be, say, a foreign power backing a successful insurgency in Hawai'i that led to its independence. If such should happen, NATO would appear to be a millstone...just like membership in the British Empire appeared after Suez.
What if the crisis that Prof. Ferguson and other have been warning about comes to pass? What if America is visited by imperial decline, which is covered up by some quick fiscal fix that seems to restore the good old days? What if the climactic blow is covered over by the assertion that the crisis is over and things will be getting only better, once [say] 401Ks have been commandered to force American savers to act more like Japanese savers?
The final tip-over for the U.K. was World War 2. Although it's common for Americans to claim that America won World War 2, the United States didn't enter the war until more than two years after Great Britain did. On the eve of Pearl Harbor, there were lots of British soldiers who had already served more than a two-year hitch. The Battle of Britain, with the U.K. serving as the last rampart of civilization in Europe, was more than a year in the past. It's true the the Roosevelt Administration provided aid to the U.K. in the form of Lend-Lease, but the British boys were doing the fighting and dying. The later Vietnam War can serve as evidence that money and materiel alone does not win a war.
The same point applies to members of the Commonwealth like Australia and Canada. The U.K. Parliament declared war on Sept. 1st, 1939. The Canadian Parliament declared war two days later. On the eve of Pearl Harbour, it wasn't that hard to find the Canadian equivalent of "Gold Star Moms."
Revisionist historians have said that America was dragged into war because of blandishments from the U.K. government, which President Roosevelt looked favourably upon. He wanted war, and Churchill wanted him in. They have a point, in that the U.K. was glad to have help from anywhere in the English-speaking world. (Yes, it was that bad in 1940 after France fell.) The ultimate price was the loss of the British Empire in part because of a precedent set after World War 1. Although the beginnings of Britain's welfare state were inched into earlier, with the People's Budget of 1909, it got its real start after 1918 by flying under the colours "A Nation Fit For Heroes To Live In." Temporarily pushed back by the Geddes Axe, it reached full fruition with the new Labour government of 1945. In a very real sense, the British welfare state was a G.I. Bill writ large.
Of course, the foundation of the welfare state - social insurance - was first introduced in the German Empire. Thus, the Tory quip after the 1945 election: "After the Beveridge Plan, it is clear that the man who won was Bismarck."
The fiscal trick that the Labour government used was a 30% devaluation of the pound in 1949. Although the U.K. had already lost India, and the Empire was effectively through, it had the temporary effect of convincing many in the U.K. that Britain would carry on. The return of confidence was such that an early BBC miniseries called The Quatermass Experiment took it for granted that the first manned flight into orbit would be British.
On the ground, something else was apparent. Young men and boys in gangs were sporting garb that came from Edwardian times; hence, they were called the "Teddy Boys." During King Edward VII's time, the British Empire had hit its height. Youngsters appearing in the garb of the time reflected a kind of A-OK confidence in the future of Britain, which dovetailed with the devaluation that was supposed to solve the U.K.'s fiscal problems.
If the United States gets scathed by a crisis and emerges through some kind of quick fix, like the commandeering of 401Ks for forced investment in U.S. Treasuries, we might well see the American equivalent of the Teddy Boys: young toughs dressed up like they stepped off the set of Mad Men - right to the nines. Full grey flannel suits with three buttons, narrow silk ties, leather wingtip shoes: the kind of garb worn by movers and shakers at the time America had hit its height. The female garb would be pillbox-hat glamour. Tail-finned Cadillacs, authentic classic models, would likely be the preferred mode of transport.
It'll last as long as the United States isn't humbled on the world stage, like the U.K. was during the Suez Crisis. Being left in the lurch by the United States, and unable to fight the battle alone, exposed the remnants of the U.K. empire as not worth belonging to anymore. It was the spark for the final devolution of the former British Empire: decolonization.
The American equivalent would be the unravelling of NATO, which would not happen unless the U.S. lost a major war affecting its traditional territorial claims after being humbled by the more quotidian means of excessive debt. An example of a major war in this context would be, say, a foreign power backing a successful insurgency in Hawai'i that led to its independence. If such should happen, NATO would appear to be a millstone...just like membership in the British Empire appeared after Suez.
Sunday, July 18, 2010
Credit Troubles On Financial Sense Newhour
This week's Financial Sense Newshour podcast highlighted two little-reported items from the news. The first involved uranium, but the second pertained more to gold. A mainland Chinese ratings agency downgraded U.S. sovereign debt from AAA to AA. Needless to say, the American rating agencies won't follow suit; that downgrade was far out of the mainstream. If heard about in the U.S., it was likely scoffed at.
In the third segment [.pdf file], it was brought up twice by Jim Puplava. He passed it by James Turk, and Peter Schiff later. It ties in with the deflation-to-hyperinflation theme. Schiff said the U.S. dollar is going to fall; Puplava reiterated his belief that there will be another stimulus and/or quantitative easing before the 2010 elections. Turk had an interesting sell point for gold, which he believes is going much higher: the time to "sell" gold is when you spend it.
There was also mention of Shadowstats inflation figures. As made clear in its inflation graph, this last decade was a lot like the 1970s if '70s inflation-calculation methodology is used. Another Shadowstats graph, of the M3 money supply, both puts doubt on the recurrence of inflation and adds to the QE2 story.
Puplava also mentioned that his firm has been advising clients to buy put options on their gold stocks, as those stocks have been acting poorly lately.
In the third segment [.pdf file], it was brought up twice by Jim Puplava. He passed it by James Turk, and Peter Schiff later. It ties in with the deflation-to-hyperinflation theme. Schiff said the U.S. dollar is going to fall; Puplava reiterated his belief that there will be another stimulus and/or quantitative easing before the 2010 elections. Turk had an interesting sell point for gold, which he believes is going much higher: the time to "sell" gold is when you spend it.
There was also mention of Shadowstats inflation figures. As made clear in its inflation graph, this last decade was a lot like the 1970s if '70s inflation-calculation methodology is used. Another Shadowstats graph, of the M3 money supply, both puts doubt on the recurrence of inflation and adds to the QE2 story.
Puplava also mentioned that his firm has been advising clients to buy put options on their gold stocks, as those stocks have been acting poorly lately.
Sunday, July 4, 2010
Gold Rountable Special On Financial Sense Newshour
The second segment of this week's Financial Sense Newshour podcast was devoted to a gold roundtable with four experts discussing where the gold market is [.mp3 file]. The consensus was, the gold bull market was still intact and it shows little signs of froth. The chief difference between this bull market and that of the 1970s was the relative smoothness of this one. The '70s one was punctuated by a severe downturn in '75 and '76; this one hasn't had a multi-year drop.
The supply situation was also discussed. Although there are new discoveries, the capital costs of bringing new "elephants" into production has multiplied. Bringing the biggest new deposits onstream costs $2 billion, which makes it prohibitive for any except a major with access to that kind of capital. Jeff Christian dissented, as based on overall reserve replacement. Christian added the point that smaller companies will likely fill any production gap should gold keeps going up. Later, Bob Morarity dissented too by arguing that production was crimped because of margin squeezes. Still, the overall impression given was gold miners running out of world.
Investment demand is one of the drivers of gold in this present bull market, but there's little to no sign of any selling. Gold is coming in to its own as a store of value and even potential money; even some central banks are accumulating gold. The possibility was broached, but the consequence of a selling spree were basically minimized except by Jeffrey Christian. He noted that central banks becoming more responsible at the margin could tip off a real selling cascade.
In the third segment [.mp 3 file], John R. Ing disussed his observations about ballooning sovereign debt and his impression that the debt levels are such that the developed world is moving into a pre-hyperinflationary phase. He said that there was going to be no deflation because the money supply won't be falling, like it did in the early 1930s. In the next interview, with Frank Barbera, Jim Puplava discussed the possibility of a new and bigger quantitative easing program in the offing which would work this way: the U.S. government would spend the money directly and the Fed would directly monetize the resultant (added) deficits. Since the banks don't seem to want to lend that much, and creditworthy borrowers aren't borrowing in great numbers, QE through the banking system hasn't done the job. There's the possibility that the Obama Administration is looking to undertake a more fiscal-centric reflationary program.
Both segments were quite educational, and even eye-opening. I have to say that I share Jeffrey Christian's concern about central banks becoming more monetarily responsible at the margin, which can be "relatively less irresponsible" from a more distant view. Investment demand turning into divestment supply would be a major blow to the gold market, whatever be the cause.
The supply situation was also discussed. Although there are new discoveries, the capital costs of bringing new "elephants" into production has multiplied. Bringing the biggest new deposits onstream costs $2 billion, which makes it prohibitive for any except a major with access to that kind of capital. Jeff Christian dissented, as based on overall reserve replacement. Christian added the point that smaller companies will likely fill any production gap should gold keeps going up. Later, Bob Morarity dissented too by arguing that production was crimped because of margin squeezes. Still, the overall impression given was gold miners running out of world.
Investment demand is one of the drivers of gold in this present bull market, but there's little to no sign of any selling. Gold is coming in to its own as a store of value and even potential money; even some central banks are accumulating gold. The possibility was broached, but the consequence of a selling spree were basically minimized except by Jeffrey Christian. He noted that central banks becoming more responsible at the margin could tip off a real selling cascade.
In the third segment [.mp 3 file], John R. Ing disussed his observations about ballooning sovereign debt and his impression that the debt levels are such that the developed world is moving into a pre-hyperinflationary phase. He said that there was going to be no deflation because the money supply won't be falling, like it did in the early 1930s. In the next interview, with Frank Barbera, Jim Puplava discussed the possibility of a new and bigger quantitative easing program in the offing which would work this way: the U.S. government would spend the money directly and the Fed would directly monetize the resultant (added) deficits. Since the banks don't seem to want to lend that much, and creditworthy borrowers aren't borrowing in great numbers, QE through the banking system hasn't done the job. There's the possibility that the Obama Administration is looking to undertake a more fiscal-centric reflationary program.
Both segments were quite educational, and even eye-opening. I have to say that I share Jeffrey Christian's concern about central banks becoming more monetarily responsible at the margin, which can be "relatively less irresponsible" from a more distant view. Investment demand turning into divestment supply would be a major blow to the gold market, whatever be the cause.
Sunday, June 27, 2010
Financial Sense On Devaluation, Gold Holding
There wasn't much about where gold's going in this week's Financial Sense Newshour podcast, in part because there was a special on the possibility of the state of California going bankrupt. [.mp3 file]. In the third segment [.mp3 file] was a roundtable interview with Axel Merk and William Poole, former president of the Federal Reserve Bank of St. Louis. The point was made that, although it's formally impossible for the U.S. dollar to be devalued, debasement serves the same function.
Afterwards was an interview with Jonathan Potts, managing director of gold-storing outfit FideliTrade. Amongst other points, he said that it's a better idea to take delivery of a large amount of gold in coin or small-bar form because the bigger bars have to be assayed when they're brought back in for resale. (The assaying requirement is a downside of the otherwise-cheapest option of buying a futures contract and taking delivery.)
Afterwards was an interview with Jonathan Potts, managing director of gold-storing outfit FideliTrade. Amongst other points, he said that it's a better idea to take delivery of a large amount of gold in coin or small-bar form because the bigger bars have to be assayed when they're brought back in for resale. (The assaying requirement is a downside of the otherwise-cheapest option of buying a futures contract and taking delivery.)
Sunday, June 20, 2010
Financial Sense Has Special Guest Bob Prechter
The second hour of this week's Financial Sense Newshour podcast was devoted to an interview with Bob Prechter, the man behind the resuscitation of the Elliott Wave and noted deflationist. [.mp3 file] He returned to the deflation theme again, recommending that cash was the only safe investment for the times. He even recommended shying away from T-bonds. As for gold, he pointed to the fact that the gold stocks had not confirmed the new highs in gold itself; nor has silver. These non-confirmations, he pointed to as a reason why gold is vulnerable to a pullback.
Of course, Prechter has missed the gold bull market for most of it. He's been bearish on gold since about 2002. A note: he first broke into fame in the investment world by correctly predicting gold's top in 1980.
As a counterpoint, David Morgan in the third segment [.mp3 file] pointed out that one major gold stock, Newmont, has made an all-time high along with gold. He also noted that many investors prefer the pure play in bullion itself, leading to relative lack of demand for gold mining stocks. Jim Puplava pointed out that the gold stocks were squeezed a few years ago because of margin compression: the costs of inputs such as steel, oil and labour has gone up a fair bit too. Nowadays, that squeeze is absent. Morgan also said that the juniors are a place to find some great stocks, but only by being very selective. The only ones worth investing in are the lucky few that already show they'll eventually be mines.
Unfortunately, the best returns from that approach come when gold has been hammered and the stock market is in the doldrums. Late 2008 would have been the best time to get in to the best juniors. If there's any Warren Buffet principle that's transferrable to gold exploratrion juniors, it would be: buy the companies with the best projects when the market's fear-ridden and distressed. (Buffett got into the Washington Post in 1974.) Should gold collapse by 40%, as Precher recently forecast, and the stock market collapse too, as he also said, there would be another huge buying opportunity for the few juniors that have huge deposits. The market for them now, sad to say, is them having a market cap that's close to what it would be had they been producing already.
Of course, Prechter has missed the gold bull market for most of it. He's been bearish on gold since about 2002. A note: he first broke into fame in the investment world by correctly predicting gold's top in 1980.
As a counterpoint, David Morgan in the third segment [.mp3 file] pointed out that one major gold stock, Newmont, has made an all-time high along with gold. He also noted that many investors prefer the pure play in bullion itself, leading to relative lack of demand for gold mining stocks. Jim Puplava pointed out that the gold stocks were squeezed a few years ago because of margin compression: the costs of inputs such as steel, oil and labour has gone up a fair bit too. Nowadays, that squeeze is absent. Morgan also said that the juniors are a place to find some great stocks, but only by being very selective. The only ones worth investing in are the lucky few that already show they'll eventually be mines.
Unfortunately, the best returns from that approach come when gold has been hammered and the stock market is in the doldrums. Late 2008 would have been the best time to get in to the best juniors. If there's any Warren Buffet principle that's transferrable to gold exploratrion juniors, it would be: buy the companies with the best projects when the market's fear-ridden and distressed. (Buffett got into the Washington Post in 1974.) Should gold collapse by 40%, as Precher recently forecast, and the stock market collapse too, as he also said, there would be another huge buying opportunity for the few juniors that have huge deposits. The market for them now, sad to say, is them having a market cap that's close to what it would be had they been producing already.
Sunday, June 13, 2010
Financial Sense Interviews Rob McEwen
This week's Financial Sense Newshour podcast featured an interview with Rob McEwan in the third segment, right after one with Jim Rogers about his latest book A Gift To My Children [.mp3 file.] McEwan, the chair and CEO of US Gold Corp., spent some time focusing on an issue that's important to gold mining investors but doesn't get a lot of mention: dilution. He said that some managers of exploration companies are tempted to overdilute along the way, to the point where their actions seem to contradict their words regarding the worth of their properties and their opinion on gold's prospects. He ascribed it to managers falling under the spell of the investment bankers, who tend to advise getting as much money as possible when the private-placement market is good. He also noted that some junior stocks fall because expectations got too high for amangement to meet.
His advice for junior investors comes down to waiting patiently and not being bothered by even large declines as long as the companies have good and improving fundamentals. Since many promising projects do not become mines, it's best to take a portfolio approach. In some cases, if the investor has the stomach for it, buying more shares of a good company whose price has been slaughtered is a good idea.
He doesn't mention it, but the dilution he speaks of is likely the result of cash-strappedness. Unless the private-placement market is good, it's hard for the typical junior to get money. Even though it's not good for the shareholders, getting a large private placement and lots of money in the treasury seems like a great idea when previous private placements fell short or were even cancelled. I think more than a few top managers fall into McEwan's dilution trap because they're too used to seeing even a great deposit being greeted with yawns. The investment-banking spell comes with the relief reflex kicking in: "My Gawd, they finally see it!" There's also the safety factor that come with having a large surplus of cash to draw on.
McEwan noted that top managers of senior producers don't take over juniors when the market is lousy and the juniors are undervalued because they're like ordinary investors: fear takes over. The relief reflex is a lot like ordinary investors who buy an undervalued stock and sell way too soon when it begins to recover. Top managers of junior explorers are like ordinary investors too, only ones that become frustrated with an undervalued stock that stays undervalued for a long time.
An example of a junior mining corporation that's fallen into the dilution trap is Premium Exploration. Recently praised by 321Gold's Bob Moriarty, Premium recently closed a $10 million private-placement deal resulting in the issue of 40 million additional shares and warrants. The warrants kick in at 35 cents. At the time the deal was announced, the stock price had shot up above the warrants' strike price. There are going to be twenty million of those warrants outstanding as a result of the deal.
There are currently 65.38 million shares outstanding. With the additional 40 million shares, there'll be 105.38 million. If all the warrants are exercised, there will be 125.38 million shares. Should Premium take off as a result of further good news, and should the warrants all be exercised, the company will have doubled its total shares outstanding. They'll still have the ten million, plus seven million from exercise of the warrants, but each share will only be entitled to half of what a pre-PP share was entitled to. The price of the shares-plus-warrants was recently lowered to 25 cents because Premium's stock was in a bear trend, which was reversed a little more than a week ago. [Chart here.]
Disclosure: It doesn't make me look very good, but I have a small position in Premium. Currently, I'm riding a loss on it.
His advice for junior investors comes down to waiting patiently and not being bothered by even large declines as long as the companies have good and improving fundamentals. Since many promising projects do not become mines, it's best to take a portfolio approach. In some cases, if the investor has the stomach for it, buying more shares of a good company whose price has been slaughtered is a good idea.
He doesn't mention it, but the dilution he speaks of is likely the result of cash-strappedness. Unless the private-placement market is good, it's hard for the typical junior to get money. Even though it's not good for the shareholders, getting a large private placement and lots of money in the treasury seems like a great idea when previous private placements fell short or were even cancelled. I think more than a few top managers fall into McEwan's dilution trap because they're too used to seeing even a great deposit being greeted with yawns. The investment-banking spell comes with the relief reflex kicking in: "My Gawd, they finally see it!" There's also the safety factor that come with having a large surplus of cash to draw on.
McEwan noted that top managers of senior producers don't take over juniors when the market is lousy and the juniors are undervalued because they're like ordinary investors: fear takes over. The relief reflex is a lot like ordinary investors who buy an undervalued stock and sell way too soon when it begins to recover. Top managers of junior explorers are like ordinary investors too, only ones that become frustrated with an undervalued stock that stays undervalued for a long time.
An example of a junior mining corporation that's fallen into the dilution trap is Premium Exploration. Recently praised by 321Gold's Bob Moriarty, Premium recently closed a $10 million private-placement deal resulting in the issue of 40 million additional shares and warrants. The warrants kick in at 35 cents. At the time the deal was announced, the stock price had shot up above the warrants' strike price. There are going to be twenty million of those warrants outstanding as a result of the deal.
There are currently 65.38 million shares outstanding. With the additional 40 million shares, there'll be 105.38 million. If all the warrants are exercised, there will be 125.38 million shares. Should Premium take off as a result of further good news, and should the warrants all be exercised, the company will have doubled its total shares outstanding. They'll still have the ten million, plus seven million from exercise of the warrants, but each share will only be entitled to half of what a pre-PP share was entitled to. The price of the shares-plus-warrants was recently lowered to 25 cents because Premium's stock was in a bear trend, which was reversed a little more than a week ago. [Chart here.]
Disclosure: It doesn't make me look very good, but I have a small position in Premium. Currently, I'm riding a loss on it.
Sunday, June 6, 2010
Return To The Endgame
There wasn't much discussion about gold specifically in this week's Financial Sense Newshour podcast, but there was some discussion of Jim Puplava's deflation-to-hyperinflation scenario in the third segment [.mp3 file] right after the interview with Gerald Celente. Celente made the point that Americans tend to not believe that government officials are incompetent because they're awed or impressed by pomp.
Puplava believes that the U.S. dollar will go down substantially once the U.S. economy hits the shoals and another round of quantitative easing is put in place. That QE2 will tip the U.S. economy into an inflationary spiral.
I can see his point, but I'd like to disagree regarding the fate of the U.S. dollar.
The fact is, a rising U.S. dollar fits in well with the huge load of public debt that the U.S. has to refinance. If the greenback keeps going up over time, then foreign creditors will be more willing to buy U.S. Treasury securities at low rates. If I (a Canadian) buy a six-month U.S. Treasury bill at 0.19%, and the Canadian dollar drops 2% against the greenback over that period, I've made 2.19% over six months: 4.42% annualized. That's a better rate than I could get with a six-month Canadian T-bill. As long as the greenback has a tendency to rise, I'd be willing to do my part to keep U.S. T-bill rates lower than they otherwise would have been.
And people wonder why there hasn't been much bite in the renminbi-revaluation barks. If the PRC has to revalue the renminbi upwards, then the value of their Treasury security holdings will go down in their own currency's terms. That means losses. It also means the PRC government can scale back on their Treasury holdings for business reasons. In order to keep investing, they would have to peg the value loss as a loss leader.
I've written it before, and will likely write it again, but I think D.C. authorities have come to a decision to sacrifice export growth for the sake of the fisc. The larger the trade deficit, the more capital inflows there are. The more capital inflows, the more funds are available for U.S. Treasury purchases. The more funds available, and deployed, the lower U.S. interest rates will be despite the huge increase in funded Treasury debt. Rising demand for borrowed funds (the exploding deficits) meets rising supply (foreign capital.) As an extend-and-pretend strategy, there's a lot to recommend it. Japanese investors can be assuaged by pointing to the rise in the U.S. Dollar Index and saying their currency gains will come eventually.
In addition, thanks to the Eurocrisis, there's an "altruistic" reason for it. Poor Europe needs a lower Euro to gets its export-driven economy moving again. Why not let the Euro fall to give 'em a hand, while saying in the next breath that the currency losses suffered by foreign investors for most of '09 have been more than made up for in '10?
There's only one potential drawback to this plan. Since the renminbi is pegged to the greenback, a rising greenback pulls the renminbi up with it. PRC officials might complain that the greenback is going too high. If not, however, it can be said that a greenback rise amounts to an upvaluation anyway. It's an argument that misses the point, but could assuage those who think that mainland China has had it too good for too long.
Best of all: it allows for U.S. inflation, provided that the rate is less than that of other major currencies. All it takes is for the U.S. to 'lose' the competitive-devaluation race with other nations that want to inflate faster. All that's required is throwing exporters under the bus.
This aspect means that gold and the greenback will rise in tandem over time.
Given the pragmaticality of this option, I think the U.S. dollar will not collapse except by accident.
One final point I'd like to make: gold and the greenback rising together means that a rising gold price does not make the greenback look bad. Given the current crisis, it makes the Euro look bad.
Puplava believes that the U.S. dollar will go down substantially once the U.S. economy hits the shoals and another round of quantitative easing is put in place. That QE2 will tip the U.S. economy into an inflationary spiral.
I can see his point, but I'd like to disagree regarding the fate of the U.S. dollar.
The fact is, a rising U.S. dollar fits in well with the huge load of public debt that the U.S. has to refinance. If the greenback keeps going up over time, then foreign creditors will be more willing to buy U.S. Treasury securities at low rates. If I (a Canadian) buy a six-month U.S. Treasury bill at 0.19%, and the Canadian dollar drops 2% against the greenback over that period, I've made 2.19% over six months: 4.42% annualized. That's a better rate than I could get with a six-month Canadian T-bill. As long as the greenback has a tendency to rise, I'd be willing to do my part to keep U.S. T-bill rates lower than they otherwise would have been.
And people wonder why there hasn't been much bite in the renminbi-revaluation barks. If the PRC has to revalue the renminbi upwards, then the value of their Treasury security holdings will go down in their own currency's terms. That means losses. It also means the PRC government can scale back on their Treasury holdings for business reasons. In order to keep investing, they would have to peg the value loss as a loss leader.
I've written it before, and will likely write it again, but I think D.C. authorities have come to a decision to sacrifice export growth for the sake of the fisc. The larger the trade deficit, the more capital inflows there are. The more capital inflows, the more funds are available for U.S. Treasury purchases. The more funds available, and deployed, the lower U.S. interest rates will be despite the huge increase in funded Treasury debt. Rising demand for borrowed funds (the exploding deficits) meets rising supply (foreign capital.) As an extend-and-pretend strategy, there's a lot to recommend it. Japanese investors can be assuaged by pointing to the rise in the U.S. Dollar Index and saying their currency gains will come eventually.
In addition, thanks to the Eurocrisis, there's an "altruistic" reason for it. Poor Europe needs a lower Euro to gets its export-driven economy moving again. Why not let the Euro fall to give 'em a hand, while saying in the next breath that the currency losses suffered by foreign investors for most of '09 have been more than made up for in '10?
There's only one potential drawback to this plan. Since the renminbi is pegged to the greenback, a rising greenback pulls the renminbi up with it. PRC officials might complain that the greenback is going too high. If not, however, it can be said that a greenback rise amounts to an upvaluation anyway. It's an argument that misses the point, but could assuage those who think that mainland China has had it too good for too long.
Best of all: it allows for U.S. inflation, provided that the rate is less than that of other major currencies. All it takes is for the U.S. to 'lose' the competitive-devaluation race with other nations that want to inflate faster. All that's required is throwing exporters under the bus.
This aspect means that gold and the greenback will rise in tandem over time.
Given the pragmaticality of this option, I think the U.S. dollar will not collapse except by accident.
One final point I'd like to make: gold and the greenback rising together means that a rising gold price does not make the greenback look bad. Given the current crisis, it makes the Euro look bad.
Sunday, May 30, 2010
Gold At 5000?
The third segment of this week's Financial Sense Newshour podcast contained an interview with Brian Pretti [.mp3 file], in which he played around with some numbers that inclined him to think that gold could go much higher. One interesting fact he dug up related to total funded debt in the U.S. economy: its peak, in the 20th century, was at the depths of the Great Depression. The same level was broken, however, in 2001 - the same year that gold started on its bull market. He also disclosed that the real value of gold as adjusted by the (presumably core) CPI was the same as the value adjusted by the average wage. [The figure he got was around $1,800, which is a lot lower than the figure others have gotten. One interesting implication was the official CPI tracks the average wage. If the former is understated, then real wages have been eroding over the course of the last three decades.]
The $5,000 figure, he got using a calculation familiar to many veteran goldbugs: it's the value at which gold could completely cover M1.
If gold ever got that high, a restoration of the gold standard would be thinkable in the popular press. Stories of that sort make for a good addition to the cocktail-party indicator of a top.
The $5,000 figure, he got using a calculation familiar to many veteran goldbugs: it's the value at which gold could completely cover M1.
If gold ever got that high, a restoration of the gold standard would be thinkable in the popular press. Stories of that sort make for a good addition to the cocktail-party indicator of a top.
Saturday, May 22, 2010
Aftermath Of The Great debate
In this week's Financial Sense Newshour podcast, the first segment had a lot on gold - but that's because of the public reaction to last week's "Great Gold Debate," on whether or not the gold price is manipulated. [.mp3 file of it here, if you need it.] More than a third of that more recent segment [.mp3 file], at the end, was devoted to reactions to each side. One of the callers used the word passionate, which was the right word to describe GATA's Bill Murphy. He carried the day with those who respected his passion, as well as with the disaffected. Those more dispassionate, as well as the image-conscious, tended to favour Jeffrey Christian. There was at least one caller who thought Jim Puplava was unfair to Murphy, which I don't believe was the case.
Also on, just before the Q-calls, was Ron Greiss of The Chart Store. He raised the possibility of gold entering into a bullish cup-and-handle formation, which may lead to the metal going back up again once the present difficulties are hurdled over. Mindful of the seasonality factor, Puplava suggested that gold may be in the doldrums until June.
The third segment features an interview with one of FSN's more colourful guests. Martin L. Gross is a bestselling author who thinks that the fisc has gone to a rather sulphrous place, and he has some choice words to describe politics as usual in today's D.C. The title of his interview, which has been placed early in the segment [.mp3 file], gives a good indication of what his words are: "When Racketeering Is Legal."
Here's an important point relating to the $100 trillion in unfunded liabilites the U.S. government has assumed: as of now, total U.S. household wealth is somewhere in the neighbourhood of $60 trillion. Since corporations are owned, this figure captures corporate wealth as well - more specifically, that part of it owned by members of U.S. households. Here's the jaw-dropper: if the U.S. government instituted a 100% wealth tax, its shortfall would still be in the neighbourhood of $40 trillion. Yes, if total 100% expropriation could somehow be enacted, the U.S. goverment still couldn't fully fund all its unfunded liabilities.
Now here's an interesting legal decision that's made all the difference in the world to U.S. Treasury debt: a court once ruled that a future entitlement commitment is not an asset. Unlike a whole-life insurance policy, it's impermissible for someone to borrow using future Social Security payments as collateral. It can be done with a whole-life policy, which is an asset of the policyholder.
If the decision had gone the other way, GAAP would require the U.S. government to record those "assets" as firm, real liabilities. By extension, Medicare would be a firm liability too. Had it not been for that judge, unless it could be demonstrated that U.S. government property has a value of $40 trillion or more, GAAP rules would officially declare the U.S. government insolvent. That's right: under GAAP terms, Uncle Sam would be a walking bankrupt. Imagine Moody's twisting words around to justify not slapping a C-Ccc rating on long term T-bonds.
It's amazing how a seemingly quotidian legal decision makes the difference between Aaa and Ccc.
Thanks to that decision, the U.S. government has the right to do the as-now politically unthinkable: slash entitlement spending without being held in breach of contract. The way the numbers work out, a future Congress will need that right.
Also on, just before the Q-calls, was Ron Greiss of The Chart Store. He raised the possibility of gold entering into a bullish cup-and-handle formation, which may lead to the metal going back up again once the present difficulties are hurdled over. Mindful of the seasonality factor, Puplava suggested that gold may be in the doldrums until June.
The third segment features an interview with one of FSN's more colourful guests. Martin L. Gross is a bestselling author who thinks that the fisc has gone to a rather sulphrous place, and he has some choice words to describe politics as usual in today's D.C. The title of his interview, which has been placed early in the segment [.mp3 file], gives a good indication of what his words are: "When Racketeering Is Legal."
Here's an important point relating to the $100 trillion in unfunded liabilites the U.S. government has assumed: as of now, total U.S. household wealth is somewhere in the neighbourhood of $60 trillion. Since corporations are owned, this figure captures corporate wealth as well - more specifically, that part of it owned by members of U.S. households. Here's the jaw-dropper: if the U.S. government instituted a 100% wealth tax, its shortfall would still be in the neighbourhood of $40 trillion. Yes, if total 100% expropriation could somehow be enacted, the U.S. goverment still couldn't fully fund all its unfunded liabilities.
Now here's an interesting legal decision that's made all the difference in the world to U.S. Treasury debt: a court once ruled that a future entitlement commitment is not an asset. Unlike a whole-life insurance policy, it's impermissible for someone to borrow using future Social Security payments as collateral. It can be done with a whole-life policy, which is an asset of the policyholder.
If the decision had gone the other way, GAAP would require the U.S. government to record those "assets" as firm, real liabilities. By extension, Medicare would be a firm liability too. Had it not been for that judge, unless it could be demonstrated that U.S. government property has a value of $40 trillion or more, GAAP rules would officially declare the U.S. government insolvent. That's right: under GAAP terms, Uncle Sam would be a walking bankrupt. Imagine Moody's twisting words around to justify not slapping a C-Ccc rating on long term T-bonds.
It's amazing how a seemingly quotidian legal decision makes the difference between Aaa and Ccc.
Thanks to that decision, the U.S. government has the right to do the as-now politically unthinkable: slash entitlement spending without being held in breach of contract. The way the numbers work out, a future Congress will need that right.
Saturday, May 15, 2010
The Great Debate On The Financial Sense Newshour
The second segment of this week's Financial Sense Newshour podcast was a debate between Jeffrey Christian and Bill Murphy on the subject "Is the Gold Market Being Manipulated?" - or, "Are GATA's Allegations True?" [.mp3 file]. It took the form of Jim Puplava presenting GATA's main claims to Christian for rebuttal, and then allowing Murphy to counter-rebut. I have my own preconceptions on the subject, but the most telling point to me was Christian saying that the gold market isn't seen by central banks as important enough to manipulate now.
From what I've read, the typical central banker is a monetarist who believes that a system of fiat currencies in a floating-exchange-rate framework is the best monetary system. When central bankers say that the gold standard is obsolete, they're not being disingenuous; they really mean it. I have this suspicion that presiding over the gold desk is regarded by Fed employees the same way as CIA agents regard a posting to Alaska to keep an eye on the Russians: a career-killer. A job that a high-flyer avoids at all costs; the real-world equivalent of the War Graves Commission in Truro on the show Yes, Minister.
To be blunt about this, I believe the central bankers don't see the gold market as worth manipulating. It ain't worth the ammo. This belief can easily be checked by looking at the career path of high-flyer employees at the Fed, or at any other central bank. If managing the gold market were that important, there should be promotions out of the gold desk. I don't think they are.
I also have something else to mention. One of the comments on the Q-line part of the first segment [.mp3 file] is mine; I identify myself as "Daniel from Toronto." Thanks to Mr. Puplava for airing it.
From what I've read, the typical central banker is a monetarist who believes that a system of fiat currencies in a floating-exchange-rate framework is the best monetary system. When central bankers say that the gold standard is obsolete, they're not being disingenuous; they really mean it. I have this suspicion that presiding over the gold desk is regarded by Fed employees the same way as CIA agents regard a posting to Alaska to keep an eye on the Russians: a career-killer. A job that a high-flyer avoids at all costs; the real-world equivalent of the War Graves Commission in Truro on the show Yes, Minister.
To be blunt about this, I believe the central bankers don't see the gold market as worth manipulating. It ain't worth the ammo. This belief can easily be checked by looking at the career path of high-flyer employees at the Fed, or at any other central bank. If managing the gold market were that important, there should be promotions out of the gold desk. I don't think they are.
I also have something else to mention. One of the comments on the Q-line part of the first segment [.mp3 file] is mine; I identify myself as "Daniel from Toronto." Thanks to Mr. Puplava for airing it.
Sunday, May 9, 2010
Gold Gets Special Mention In Financial Sense Newshour
The Financial Sense Newshour podcast had four segments this week; the first half of one of them [.mp3 file] was an interview with James Dines. It's wide ranging - gold was only one of the subjects discussed - but Dines is the "Original Gold Bug." He had some tidbits of little-known information about the gold standard and its breakdown, which are in his book Goldbug!
The second part of the second segment [.mp3 file] was an interview with James Turk, who is one of those people who believes that the gold market is manipulated downwards. He expects the onset of an Argentine-style inflationary crisis to begin in months. He also expects gold to reach $1,800 this year, but not because of incipient hyperinflation; he expects a short squeeze, as caused by the paucity of physical gold relative to paper claims on the metal in the commodity exchanges. Jim Puplava mentioned that, in an investment conference, nine out of ten people there were concerned about deflation.
And that's really the trouble with Turk's timeframe. It's based upon the velocity of money shooting up because ordinary people are losing confidence in fiat money. That kind of sea change doesn't happen overnight, and it depends upon a widespread belief that the currency is being hollowed out by inflating. In order for it to take place, ordinary folks have to be inflationists. If bond funds (particularly government bond funds) are popular, then Joe and Jane Average aren't.
The trouble with forecasting hyperinflation, or any economic change based upon a mass movement, is that it's not enough to be in opposition to popular opinion. One has to be ahead of popular opinion. In ordinary investment analysis, there's no need to outguess the crowd: value investing has never been popular, but it usually works. All that's needed is enough investors coming in to push the investment up to (or above) its fundamental value. A value investor can makes good money without his or her stocks ever becoming crowd favourites.
With respect to an economy-wide tectonic shift, though, the crowd itself has to come around. Most everyone has to act like the currency is rotting away. Since the crowd is more on the opposite side of the divide, there has to be a lot of habit-shifting before even a mild hyperinflation can set in. So, I have to demur regarding the timing of Turk's forecast. By my reckoning, it would take years for such a sea-change to take place.
The second part of the second segment [.mp3 file] was an interview with James Turk, who is one of those people who believes that the gold market is manipulated downwards. He expects the onset of an Argentine-style inflationary crisis to begin in months. He also expects gold to reach $1,800 this year, but not because of incipient hyperinflation; he expects a short squeeze, as caused by the paucity of physical gold relative to paper claims on the metal in the commodity exchanges. Jim Puplava mentioned that, in an investment conference, nine out of ten people there were concerned about deflation.
And that's really the trouble with Turk's timeframe. It's based upon the velocity of money shooting up because ordinary people are losing confidence in fiat money. That kind of sea change doesn't happen overnight, and it depends upon a widespread belief that the currency is being hollowed out by inflating. In order for it to take place, ordinary folks have to be inflationists. If bond funds (particularly government bond funds) are popular, then Joe and Jane Average aren't.
The trouble with forecasting hyperinflation, or any economic change based upon a mass movement, is that it's not enough to be in opposition to popular opinion. One has to be ahead of popular opinion. In ordinary investment analysis, there's no need to outguess the crowd: value investing has never been popular, but it usually works. All that's needed is enough investors coming in to push the investment up to (or above) its fundamental value. A value investor can makes good money without his or her stocks ever becoming crowd favourites.
With respect to an economy-wide tectonic shift, though, the crowd itself has to come around. Most everyone has to act like the currency is rotting away. Since the crowd is more on the opposite side of the divide, there has to be a lot of habit-shifting before even a mild hyperinflation can set in. So, I have to demur regarding the timing of Turk's forecast. By my reckoning, it would take years for such a sea-change to take place.
Sunday, May 2, 2010
A Golden Bubble
This week's Financial Sense Newshour podcast had little to say on gold, So I'd like to discuss an article appearing in Stockhouse that discusses the potential of gold going in to an all-out bubble:
It's entitled "Gold price and 'the' parabolic peak." Its author, Dudley Pierce Baker, expects an imminent bubble in gold. Although it opens by debunking the claim that gold's in a bubble right now, the bulk of it is a review of two assets classes, a commodity, and two stocks that went parabolic in what were clearly bubbles. Four of them - the Nikkei, Toll Brothers stock, the NASDAQ 100 and crude oil - are charted before gold is brought in. The chart of the fifth, Homestake Mining in the 1930s, is shown after gold is discussed. The author's point is that, if gold goes into an all-out bubble starting now, the parabolic rise will be great enough to push the metal up to at least $2,450 an ounce and likely above $3,000.
That's what the author thinks. He could be right, as gold is beginning to act in unexpectedly bullish ways - most obviously, its rises in tandem with the U.S. dollar. The amount of fear that accompanied the December drop - in retrospect, a mere correction - was about the same as the level that accompanied the '08 financial panic.
Speaking of '08, I'd like to point out something that not many have, because the "nine-year bull market" characterization makes sense overall. Going by standard definitions, the bull market that began in '01 ended in early '08. The fall from $1,035 in February of '08 to $700 in October of that year was a 32.4% drop. Using the standard definition of a bear market, a drop of 20% or more, there was a gold bear market during the credit crunch. When over, gold entered into a new bull market. It started on October '08 at $700 and is currently less than two years old. By this interpretration, the "new gold bugs" have come in because of a new bull market getting rolling.
There is a parallel to gold in the '70s. The metal did see a drop of about 50% between 1974 and 1976, which would count as a severe bear market had it been the stock market. The 1976-1980 period saw the second gold bull market of the '70s.
Using this framework, the commodity cycle that we peg as a single bull market is really composed of two. The first one is longer, and starts off in general apathy. Gold starts off in the most encouraging contrarian environment of all: except for a dedicated few, no-one cares enough to be bullish or bearish. People who would otherwise have been bearish have consigned gold to the dustbin. So have a lot of people who wind up being bullish later. At the start, the buying of those few bulls is enough to move the metal upwards.
The best comparison would be to Wall Street in, say, 1949. Public sentiment wasn't overwhelmingly bearish; it was overwhelmingly dissociated. Bulls and bears are lumped together in the popular mind as belonging to a kind of cult. "Stocks? Why would anyone care outside of a Wall Street [you fill in]? Do I look like one of them to you?"
The first bull market proceeds in a draining of that apathy as more people discover the metal and its fundamentals. With respect to the gold cycle, the first bull ends when the fractional-reserve system is hit by an economic disaster that threatens to tip the economy into outright deflation. Yes, there were deflationists in the '70s - and their arguments are quite familiar to anyone following the inflation/deflation debate right now. An economic wound, such as the 1973-5 and current recessions, will precipitate massive money destruction caused by massive defaults. Scared, depositors will trigger bank runs that will overpower the Fed's response. It'll be like 1929-33 all over again.
For obvious reasons, the deflationistas enter in to the public consciousness. When the stock market's cracked and times are tough, "another Great Depression" finds a ready audience. Because of the economic gutting, the case for future inflation is easy to debunk. "Inflation how? Have you seen the unemployment figures? The unused capacity figures? With that kind of slack, inflation is yesterday's worry." Yes, those arguments were made in the mid-1970s too.
Consequently: the second bull market in the cycle begins with widespread skepticism. The first bull market feeds on the return of inflation, which becomes painfully evident at its peak. [Remember '07?] The second bull market, initially, feeds on reflation and goes into a parabolic peak when reflation turnes into an inflationary crisis.
What gives it is parabolic nature is, the skepticism barrier falls more easily than the indifference barrier. We're already seeing the gold skeptics fade away, and gold itself being mainstreamed for essentially pragmatic reasons. The first bull market, as compared with the range-bound behaviour of the stock market, makes for an easier sell than learned discourses on the nature and flaws of fiat currency. Once inflation returns, the bull market kicks into high gear and ends up in a parabolic ascent. The second bull market is the bubble.
Of course, it's easier to think of gold's bullish phase as comprising one large bull market with a vicious decline in the middle of it. The final push gibes well with standard characterizations of the third and final stage of a single bull market.
That being noted, I have another point to make: in all assets that have gone into bubbles, there's a pseudo-popping that scares the willies out of bulls and encourages a lot of skeptics to proclaim, "see? I told you it'd pop!" Yes, Internet stocks were besotten by that pseudo-popping in late '97 and early '98. David Dreman, in his Contrarian Investment Strategies: The Next Generation (1998), treated the Internet stock boom as a bubble that had come and gone.
The same pseudo-popping visited the oil market in late 2006. I have to admit to being caught out by that drop; I thought at the time that the big bull run was over. For a time, I was right - but, of course, I was proven to be wrong as the oil bubble got rolling again in '07.
Should gold go into a parabolic bull market, there almost certainly will be a fake-out drop like the Internet stocks suffered in '97-98 and oil went through in '06. This pseudo-popping will be widely vaunted as the end of the bubble, and lots of bulls will act as if they believed that to be the case. After all, common sense will say that gold went too far, too fast at that point; it'll look like a popped bubble for a time.
The only ones that'll stay steadfast, and loudly proclaim that gold is going back up, will be the "true believers." When it does, they'll be the ones who'll be right when a lot of others were wrong.
At this point, the final climax is on its way. Everyone except for true believers, who will become bankable, will have been shown up. At this stage, the credulous will be the big winners. Naive bullishness will look like genius.
It's at this point that the legendary shoeshine attendants, waiters, taxi drivers, homemakers, etc. will be bending people's ears about gold. What they'll see is the credulous and naive are really becoming rich simply by being gold hyperbulls. What better invitation could there be than seeing your likesake making easy money hand over fist?
At this point, the gold bubble is on its way to really popping. Sad to say, anyone who pulls out at this point is going to feel pretty stupid for doing so.
We're far from this stage yet, as many gold analysts have noted, but we may be in the next few years.
It's entitled "Gold price and 'the' parabolic peak." Its author, Dudley Pierce Baker, expects an imminent bubble in gold. Although it opens by debunking the claim that gold's in a bubble right now, the bulk of it is a review of two assets classes, a commodity, and two stocks that went parabolic in what were clearly bubbles. Four of them - the Nikkei, Toll Brothers stock, the NASDAQ 100 and crude oil - are charted before gold is brought in. The chart of the fifth, Homestake Mining in the 1930s, is shown after gold is discussed. The author's point is that, if gold goes into an all-out bubble starting now, the parabolic rise will be great enough to push the metal up to at least $2,450 an ounce and likely above $3,000.
That's what the author thinks. He could be right, as gold is beginning to act in unexpectedly bullish ways - most obviously, its rises in tandem with the U.S. dollar. The amount of fear that accompanied the December drop - in retrospect, a mere correction - was about the same as the level that accompanied the '08 financial panic.
Speaking of '08, I'd like to point out something that not many have, because the "nine-year bull market" characterization makes sense overall. Going by standard definitions, the bull market that began in '01 ended in early '08. The fall from $1,035 in February of '08 to $700 in October of that year was a 32.4% drop. Using the standard definition of a bear market, a drop of 20% or more, there was a gold bear market during the credit crunch. When over, gold entered into a new bull market. It started on October '08 at $700 and is currently less than two years old. By this interpretration, the "new gold bugs" have come in because of a new bull market getting rolling.
There is a parallel to gold in the '70s. The metal did see a drop of about 50% between 1974 and 1976, which would count as a severe bear market had it been the stock market. The 1976-1980 period saw the second gold bull market of the '70s.
Using this framework, the commodity cycle that we peg as a single bull market is really composed of two. The first one is longer, and starts off in general apathy. Gold starts off in the most encouraging contrarian environment of all: except for a dedicated few, no-one cares enough to be bullish or bearish. People who would otherwise have been bearish have consigned gold to the dustbin. So have a lot of people who wind up being bullish later. At the start, the buying of those few bulls is enough to move the metal upwards.
The best comparison would be to Wall Street in, say, 1949. Public sentiment wasn't overwhelmingly bearish; it was overwhelmingly dissociated. Bulls and bears are lumped together in the popular mind as belonging to a kind of cult. "Stocks? Why would anyone care outside of a Wall Street [you fill in]? Do I look like one of them to you?"
The first bull market proceeds in a draining of that apathy as more people discover the metal and its fundamentals. With respect to the gold cycle, the first bull ends when the fractional-reserve system is hit by an economic disaster that threatens to tip the economy into outright deflation. Yes, there were deflationists in the '70s - and their arguments are quite familiar to anyone following the inflation/deflation debate right now. An economic wound, such as the 1973-5 and current recessions, will precipitate massive money destruction caused by massive defaults. Scared, depositors will trigger bank runs that will overpower the Fed's response. It'll be like 1929-33 all over again.
For obvious reasons, the deflationistas enter in to the public consciousness. When the stock market's cracked and times are tough, "another Great Depression" finds a ready audience. Because of the economic gutting, the case for future inflation is easy to debunk. "Inflation how? Have you seen the unemployment figures? The unused capacity figures? With that kind of slack, inflation is yesterday's worry." Yes, those arguments were made in the mid-1970s too.
Consequently: the second bull market in the cycle begins with widespread skepticism. The first bull market feeds on the return of inflation, which becomes painfully evident at its peak. [Remember '07?] The second bull market, initially, feeds on reflation and goes into a parabolic peak when reflation turnes into an inflationary crisis.
What gives it is parabolic nature is, the skepticism barrier falls more easily than the indifference barrier. We're already seeing the gold skeptics fade away, and gold itself being mainstreamed for essentially pragmatic reasons. The first bull market, as compared with the range-bound behaviour of the stock market, makes for an easier sell than learned discourses on the nature and flaws of fiat currency. Once inflation returns, the bull market kicks into high gear and ends up in a parabolic ascent. The second bull market is the bubble.
Of course, it's easier to think of gold's bullish phase as comprising one large bull market with a vicious decline in the middle of it. The final push gibes well with standard characterizations of the third and final stage of a single bull market.
That being noted, I have another point to make: in all assets that have gone into bubbles, there's a pseudo-popping that scares the willies out of bulls and encourages a lot of skeptics to proclaim, "see? I told you it'd pop!" Yes, Internet stocks were besotten by that pseudo-popping in late '97 and early '98. David Dreman, in his Contrarian Investment Strategies: The Next Generation (1998), treated the Internet stock boom as a bubble that had come and gone.
The same pseudo-popping visited the oil market in late 2006. I have to admit to being caught out by that drop; I thought at the time that the big bull run was over. For a time, I was right - but, of course, I was proven to be wrong as the oil bubble got rolling again in '07.
Should gold go into a parabolic bull market, there almost certainly will be a fake-out drop like the Internet stocks suffered in '97-98 and oil went through in '06. This pseudo-popping will be widely vaunted as the end of the bubble, and lots of bulls will act as if they believed that to be the case. After all, common sense will say that gold went too far, too fast at that point; it'll look like a popped bubble for a time.
The only ones that'll stay steadfast, and loudly proclaim that gold is going back up, will be the "true believers." When it does, they'll be the ones who'll be right when a lot of others were wrong.
At this point, the final climax is on its way. Everyone except for true believers, who will become bankable, will have been shown up. At this stage, the credulous will be the big winners. Naive bullishness will look like genius.
It's at this point that the legendary shoeshine attendants, waiters, taxi drivers, homemakers, etc. will be bending people's ears about gold. What they'll see is the credulous and naive are really becoming rich simply by being gold hyperbulls. What better invitation could there be than seeing your likesake making easy money hand over fist?
At this point, the gold bubble is on its way to really popping. Sad to say, anyone who pulls out at this point is going to feel pretty stupid for doing so.
We're far from this stage yet, as many gold analysts have noted, but we may be in the next few years.
Sunday, April 25, 2010
Financial Sense Holds Gold Roundtable
The first segment of this week's Financial Sense Newhour podcast touched on Jim Puplava's "end game" 2014 prediction, during which hyperinflation is supposed to hit, but the second segment [.mp3 file] was specifically devoted to gold. One of the experts, Jeffrey Christian, wasn't all that bullish on the metal's prospects. The topic of gold's popularity was discussed, and the standard answer changed a bit: gold seems to be entering into the investment mainstream's awareness. The man in the street isn't crowding the gold shows, as yet, but there is increasing interest in the gold market. Also discussed was the undervaluedness of gold stocks at this point: John Doody said that by his calculations, they were undervalued by about 10% right now.
Although most of the panelists were inclined to be bullish, there wasn't that much excitement evident; the excitement in the podcast overall seems to be reserved for oil. Again, Puplava distanced himself from the GATA crew.
Although most of the panelists were inclined to be bullish, there wasn't that much excitement evident; the excitement in the podcast overall seems to be reserved for oil. Again, Puplava distanced himself from the GATA crew.
Sunday, April 18, 2010
Continued Controversy About Manipulation/ Lack Of Physical
Last week's discussion of the position-limits controversy and a supposed scandal with the SocitaMocatta Toronto vault gained enough traction that this week's Financial Sense Newshour podcast revisited the subjects. There were some people who did not like what Jeffrey Christian had to say in defense of his opposition to position limits, enough so that he's been invited to appear on next week's podcast. Regarding the ScotiaMocatta controversy, Nick Barisheff was on again this week. He repeated his belief that the person who saw a storage room that was near-empty of gold was not the custodial vault but the storage space for the retail desk on the main floor of Scotia's main Toronto branch. He also said that the fund he manages, which has physical gold stored with Scotia, is regularly subject to physical audits.
Before I weigh in, some disclosure. I know exactly where the retail-sales desk at Scotia's main Toronto branch is, because I bought some physical silver there some time ago. I also bought, and later sold, a little physical gold. When I was down there, the line was slow-moving but it wasn't that long. Most of the people ahead of me were there to buy or sell foreign currencies, as the foreign-exchange desk and the bullion desk are combined. Back then, between one and two years ago, the lack of any crowd convinced me that there wasn't any kind of precious-metals bubble then extant. Had there been, the line-up would have been much longer and there would have been far more employees staffing the desk. (Half the booths were unstaffed when I was there.) The time I was down there to buy a little gold was the same time when the 100-oz bar shortage had erupted on the silver market. A fellow ahead of me was there to sell a non-standard bar that looked, by my gaze-at-a-distance estimate, about 100 oz in size. It looked like a paperweight and was poured. Although I had come down to buy gold, I was tempted to try and buy that bar - even if Scotia's procedures would have prevented it. Since it was unlikely that Scotia would have had any (other) 100 oz bar, I gave up on the idea and bought some gold instead. I might as well admit that buying a hundred ouncer would have cleaned me out, even at the lower silver prices prevailing back then.
That gold I bought, as I mentioned above, I later sold back. I got full credit for the proceeds in my Scotia bank account, which I withdrew without any trouble. The only bullion products I have now from Scotia are four 1-oz silver Maple Leafs. Other than an account which I set up solely for the proceeds of the gold sale, which now contains only a few dollars, I have no accounts with Scotiabank or its affliliated subsidiaries. By normal standards, the extent of my dealings with Scotia (and my risk if anything funny's been going on) are minimal. I don't own a single share of any stock issued by Scotia, not a single dollar in the form of any debt instrument. All I have is that few bucks in a deposit account. My own reaction is influenced by my Canadianness, both emotion-based and knowledge-based.
I have to say, flatly, that the possibility of Scotia perpetrating a massive fraud in which gold held for clients was defalcted and sold off, is infinitesimal. Had I been less jaded, I would say right off the bat that it was utterly impossible. Canada's big banks have been criticized often in certain circles, but the idea that Scotia would be another Enron would be shocking even to confirmed bank-bashers. The big banks are criticized for being stingy, for being too reluctant/unimaginative to lend, or for giving too little service for too much fees extracted. Never for engaging in a company-wide fraud.
The surviving big banks in Canada have never done so, even during the Great Depression and lesser economic calamities. The last major bank to have engaged in corporate-wide (not-rogue-employee) fraud was the Home Bank in 1923. Not since then.
Given we Canadians' relative probity in banking matters, the possibility that Scotia is perpetrating an Enron-scale fraud is as shocking as, say, would be a revelation that the U.S. military's nuclear arsenal is full of duds without one working bomb among them.
[Now, that would be an interesting conspiracy theory...]
To get back to the podcast, Frank Barbera announced that he's become a believer in the current U.S. equity bull market. He was on the bearish side until very recently; contrarians might want to take note. He also believes that upwards moves in stocks will preface a big move up for precious metals once reflation turns into the nastier sort. The hosts also mentioned Jim Puplava's hunch that the climax for stagflationary troubles will hit in 2014.
Before I weigh in, some disclosure. I know exactly where the retail-sales desk at Scotia's main Toronto branch is, because I bought some physical silver there some time ago. I also bought, and later sold, a little physical gold. When I was down there, the line was slow-moving but it wasn't that long. Most of the people ahead of me were there to buy or sell foreign currencies, as the foreign-exchange desk and the bullion desk are combined. Back then, between one and two years ago, the lack of any crowd convinced me that there wasn't any kind of precious-metals bubble then extant. Had there been, the line-up would have been much longer and there would have been far more employees staffing the desk. (Half the booths were unstaffed when I was there.) The time I was down there to buy a little gold was the same time when the 100-oz bar shortage had erupted on the silver market. A fellow ahead of me was there to sell a non-standard bar that looked, by my gaze-at-a-distance estimate, about 100 oz in size. It looked like a paperweight and was poured. Although I had come down to buy gold, I was tempted to try and buy that bar - even if Scotia's procedures would have prevented it. Since it was unlikely that Scotia would have had any (other) 100 oz bar, I gave up on the idea and bought some gold instead. I might as well admit that buying a hundred ouncer would have cleaned me out, even at the lower silver prices prevailing back then.
That gold I bought, as I mentioned above, I later sold back. I got full credit for the proceeds in my Scotia bank account, which I withdrew without any trouble. The only bullion products I have now from Scotia are four 1-oz silver Maple Leafs. Other than an account which I set up solely for the proceeds of the gold sale, which now contains only a few dollars, I have no accounts with Scotiabank or its affliliated subsidiaries. By normal standards, the extent of my dealings with Scotia (and my risk if anything funny's been going on) are minimal. I don't own a single share of any stock issued by Scotia, not a single dollar in the form of any debt instrument. All I have is that few bucks in a deposit account. My own reaction is influenced by my Canadianness, both emotion-based and knowledge-based.
I have to say, flatly, that the possibility of Scotia perpetrating a massive fraud in which gold held for clients was defalcted and sold off, is infinitesimal. Had I been less jaded, I would say right off the bat that it was utterly impossible. Canada's big banks have been criticized often in certain circles, but the idea that Scotia would be another Enron would be shocking even to confirmed bank-bashers. The big banks are criticized for being stingy, for being too reluctant/unimaginative to lend, or for giving too little service for too much fees extracted. Never for engaging in a company-wide fraud.
The surviving big banks in Canada have never done so, even during the Great Depression and lesser economic calamities. The last major bank to have engaged in corporate-wide (not-rogue-employee) fraud was the Home Bank in 1923. Not since then.
Given we Canadians' relative probity in banking matters, the possibility that Scotia is perpetrating an Enron-scale fraud is as shocking as, say, would be a revelation that the U.S. military's nuclear arsenal is full of duds without one working bomb among them.
[Now, that would be an interesting conspiracy theory...]
To get back to the podcast, Frank Barbera announced that he's become a believer in the current U.S. equity bull market. He was on the bearish side until very recently; contrarians might want to take note. He also believes that upwards moves in stocks will preface a big move up for precious metals once reflation turns into the nastier sort. The hosts also mentioned Jim Puplava's hunch that the climax for stagflationary troubles will hit in 2014.
Sunday, April 11, 2010
Financial Sense Newshour Tackle CFTC-Manipulation Story
The first segment of the Financial Sense Newshour podcast [ .mp3 file ] contained a long interview with Jeff Christian of the CPM Group, in which he corrected some misimpressions of his testimony before the CFTC. This story, for example, conveys the impression that Christian believes that "leverage" - the multiple of contracts outstanding to the physical metal available for delivery - is used to suppress gold and silver prices. In his interview, Christian said that he meant something different. He didn't mean that 1% margin was permitted. He also said that he intended to convey that the "leverage" (in the sense he was using the term) is similar to that of financial instruments, including currencies. He also said that, from what he has seen, there was no large-scale manipuation of the metals market. The only "smoking guns" were simply sneaky traders' tactics.
Like it or not, the Financial Sense Newshour crew are on the skeptics' side when it comes to this issue. While not denying thast there are shenanigans on the futures markets, they aren't really partial to the idea that large financial institutions are colluding with the government to keep gold and silver prices down.
Like it or not, the Financial Sense Newshour crew are on the skeptics' side when it comes to this issue. While not denying thast there are shenanigans on the futures markets, they aren't really partial to the idea that large financial institutions are colluding with the government to keep gold and silver prices down.
Saturday, April 3, 2010
Financial Sense Newshour Has Founder Of Northwest Territorial Mint
This week's Financial Sense Newshour podcast, in addition to having Donald Coxe in the first hour [.mp3 file], had founder of Northwest Territorial Mint Ross Hansen. He was questioned on the gold-bubble issue, and he said that there's two sides to it. On the one hand, gold has gone up to the point where it's squeezing traditional sources of demand like jewelry; investment demand is making up the balance. On the other hand, from his own personal experience, investment gold is being held by strong hands. He recommended shying away from short-term trading of the metal and accumulating for the long haul. The interview itself is at the beginning of the third hour [.mp3 file].
A point he made was important enough for me to highlight. People who believe that gold's in a all-out bubble point to buy-gold ads on conservative talk shows. Hanson made the point that a lot of those firms use a high-pressure sales tactic to get would-be buyers to trade up to semi-numismatic coins at big mark-ups. The salespeople claim that the federal government is going to confiscate gold in the near future, like it did in 1933. They also claim that, as in 1933, collectors' coins will be exempt. Thus, buying semi-numismatic bullion coins is safe but buying lower-margin bullion coins may not be.
Regarding the threat itself, Jim Puplava said that confiscation of gold coins in individual hands is unlikely because it's inefficient. The government would have a much easier time confiscating the holdings of the SPDR Gold Shares Trust: it's much easier to pick on one institution and a lot more gold could be gotten than through house searches. Hanson added that there's a lot more belief in owning gold nowadays, and any U.S. administration that tried it would find the job a lot harder now than in '33. Illegal drugs are far from being confiscated out of existence, and drugs are amenable to search techniques like sniffer-dog usage that gold isn't. He didn't suggest it outright, but the drug dealers have come up with a lot of sneaky ways to hide drug stashes that weren't around in 1933. Those tricks could be adapted by gold holders.
Returning to the high-pressure confiscation angle: the salespeople who do this may be cynical, just in it for the higher commission, or they may sincerely believe it. Whatever their beliefs, it's obvious to a non-believing outsider like myself that fear-inducing stores, if believed outright, create a hot button in the head. There are those in the world that believe hot buttons in others' heads are there for pressing. Some do so for monetary gain, some for political gain, some for more informal power-tripping, some because they just like to jerk certain others around.
My own approach in these matters is to shy away from anything that gets the blood boiling, or the pulse pounding, with respect to gold. I'll grant that this approach makes me passionless, and it means that I may be inappropriately skeptical on certain points, but I find that an approach of this sort makes my chain less easy to pull. Those who prefer a more engaged approach, I suggest, should take precautions to make sure their chain is out of reach of others' pull hands.
One way of doing so, which works for salespeople who call on you, is treating any ad or spiel as a kind of mini-show in its own right. Enjoying the show is a way of insulating oneself from the come-on while still grooving with the message. I've never tried this method, but one way to blow off a high-pressue salesperson is to consumer too much of his/her time with the message instead of listening to the pitch. Another is to treat (say) an incoming caller as someone who needs your advice on the matter, which you should give in copious detail. Of course, this is a counter-tactic: it may require cultivating a false innocence to make it work, which may not be for all people. Most everyone knows that there's only one reason why a salesperon calls.
I should add that this technique, if widely used, weeds out the sincere salesperson and leaves the cynic in place. A cynic finds it easier to cut off the reply, and/or subtly bait the would-be customer into getting "on message."
For ads instead of direct pitches, it's easier: just drink in the ad - maybe critique it if you like - but don't follow through. Or, displace any urge to follow through by taking it to, say, eBay unless the pitching firm offers a good enough value to go with them.
To return to the interview, Hanson also said that silver is better for crisis investing that gold. It's much less expensive per unit weight, and that differential make it easier to use silver as money.
This kind of reasoning actually explains why the gold standard came relatively late in the game. Back in the aulden days, the European world had two standards. The gold standard was for nobles, grandees, gentry and those of large means. The silver standard was for the ordinary commonfolk. In auden England, at the base level, the unit of account was actualy the silver shilling for some time; the U.K's clapped-together pre-decimal system was a product of that dual standard. It could be argued that the use of copper meant there were three standards: gold for the flush, silver for the multitude, and copper for the truly poor.
In the first hour, Coxe made a point worth passing on. He said that, if the People's Republic of China were impelled to upvaue their currency, they would become richer in terms of U.S. dollars. That would enable them to buy more commodities for the same amount of renminbi; it would increase mainland Chinese demand power for any commodity they wanted to buy. Gold, of course, is one of those commodities; the push in mainland China to own gold is still going strong. Not mentioned by him is the possibility of more commodity diversification as, in part, a tit-for-tat measure. The other part, of course, would be value protection; any upvaluation is likely to be a managed float over a lengthy period of time, making an early decision to buy more commodities a profitable one ceteris paribus.
A point he made was important enough for me to highlight. People who believe that gold's in a all-out bubble point to buy-gold ads on conservative talk shows. Hanson made the point that a lot of those firms use a high-pressure sales tactic to get would-be buyers to trade up to semi-numismatic coins at big mark-ups. The salespeople claim that the federal government is going to confiscate gold in the near future, like it did in 1933. They also claim that, as in 1933, collectors' coins will be exempt. Thus, buying semi-numismatic bullion coins is safe but buying lower-margin bullion coins may not be.
Regarding the threat itself, Jim Puplava said that confiscation of gold coins in individual hands is unlikely because it's inefficient. The government would have a much easier time confiscating the holdings of the SPDR Gold Shares Trust: it's much easier to pick on one institution and a lot more gold could be gotten than through house searches. Hanson added that there's a lot more belief in owning gold nowadays, and any U.S. administration that tried it would find the job a lot harder now than in '33. Illegal drugs are far from being confiscated out of existence, and drugs are amenable to search techniques like sniffer-dog usage that gold isn't. He didn't suggest it outright, but the drug dealers have come up with a lot of sneaky ways to hide drug stashes that weren't around in 1933. Those tricks could be adapted by gold holders.
Returning to the high-pressure confiscation angle: the salespeople who do this may be cynical, just in it for the higher commission, or they may sincerely believe it. Whatever their beliefs, it's obvious to a non-believing outsider like myself that fear-inducing stores, if believed outright, create a hot button in the head. There are those in the world that believe hot buttons in others' heads are there for pressing. Some do so for monetary gain, some for political gain, some for more informal power-tripping, some because they just like to jerk certain others around.
My own approach in these matters is to shy away from anything that gets the blood boiling, or the pulse pounding, with respect to gold. I'll grant that this approach makes me passionless, and it means that I may be inappropriately skeptical on certain points, but I find that an approach of this sort makes my chain less easy to pull. Those who prefer a more engaged approach, I suggest, should take precautions to make sure their chain is out of reach of others' pull hands.
One way of doing so, which works for salespeople who call on you, is treating any ad or spiel as a kind of mini-show in its own right. Enjoying the show is a way of insulating oneself from the come-on while still grooving with the message. I've never tried this method, but one way to blow off a high-pressue salesperson is to consumer too much of his/her time with the message instead of listening to the pitch. Another is to treat (say) an incoming caller as someone who needs your advice on the matter, which you should give in copious detail. Of course, this is a counter-tactic: it may require cultivating a false innocence to make it work, which may not be for all people. Most everyone knows that there's only one reason why a salesperon calls.
I should add that this technique, if widely used, weeds out the sincere salesperson and leaves the cynic in place. A cynic finds it easier to cut off the reply, and/or subtly bait the would-be customer into getting "on message."
For ads instead of direct pitches, it's easier: just drink in the ad - maybe critique it if you like - but don't follow through. Or, displace any urge to follow through by taking it to, say, eBay unless the pitching firm offers a good enough value to go with them.
To return to the interview, Hanson also said that silver is better for crisis investing that gold. It's much less expensive per unit weight, and that differential make it easier to use silver as money.
This kind of reasoning actually explains why the gold standard came relatively late in the game. Back in the aulden days, the European world had two standards. The gold standard was for nobles, grandees, gentry and those of large means. The silver standard was for the ordinary commonfolk. In auden England, at the base level, the unit of account was actualy the silver shilling for some time; the U.K's clapped-together pre-decimal system was a product of that dual standard. It could be argued that the use of copper meant there were three standards: gold for the flush, silver for the multitude, and copper for the truly poor.
In the first hour, Coxe made a point worth passing on. He said that, if the People's Republic of China were impelled to upvaue their currency, they would become richer in terms of U.S. dollars. That would enable them to buy more commodities for the same amount of renminbi; it would increase mainland Chinese demand power for any commodity they wanted to buy. Gold, of course, is one of those commodities; the push in mainland China to own gold is still going strong. Not mentioned by him is the possibility of more commodity diversification as, in part, a tit-for-tat measure. The other part, of course, would be value protection; any upvaluation is likely to be a managed float over a lengthy period of time, making an early decision to buy more commodities a profitable one ceteris paribus.
Sunday, March 28, 2010
Financial Sense Newshour Touches On Gold Bubble
In the usual way, during an interview with John Doody about gold stocks in the third segment of the program [.mp3 file.] Doody said that, based upon his valuation models of proven and produced ounces, the major gold stocks were undervalued by more than 10%. Times when gold stocks are undervalued at that level tend to lead to 10%-or-more overvaluation the next year, but gold itself would have to co-operate to make that overvaluation a reality in 2011.
Doody had an affection for gold royalty stocks, in large part because of their dividend policies. He thought that Royal Gold and Silver Wheaton could be doubles by about 2012.
Regarding a gold bubble, the same talking point was unveiled: despite ads popping up from gold companies to buy gold, the general public isn't really in on the market. The gold shows haven't been that popular amongst the general public. Except for the big names continually unveiled by gold bulls, there's little to no institutional-investor interest in gold stocks. That's in part because the seniors pay little or no dividends, even though their cash flow is coming in strong.
There's little to say at this time about those points, as they're true. Myself, I believe that gold's in a nascent bubble, and will expand into an all-out bubble once a real driver kicks in.
The rest of the podcast largely deals with the new health-care reform legislation.
Doody had an affection for gold royalty stocks, in large part because of their dividend policies. He thought that Royal Gold and Silver Wheaton could be doubles by about 2012.
Regarding a gold bubble, the same talking point was unveiled: despite ads popping up from gold companies to buy gold, the general public isn't really in on the market. The gold shows haven't been that popular amongst the general public. Except for the big names continually unveiled by gold bulls, there's little to no institutional-investor interest in gold stocks. That's in part because the seniors pay little or no dividends, even though their cash flow is coming in strong.
There's little to say at this time about those points, as they're true. Myself, I believe that gold's in a nascent bubble, and will expand into an all-out bubble once a real driver kicks in.
The rest of the podcast largely deals with the new health-care reform legislation.
Sunday, March 21, 2010
Financial Sense Newshour Interview With Brent Cook
Although the Financial Sense Newshour podcast is still maintaining its focus on energy, there was an eye-opening interview in the third segment with Brent Cook of Exploration Insights about gold-exploration stocks. [.mp3 file; interview starts at 38:00.] Cook is convinced that juniors, as a whole, are overvalued right now. It's easy for most junior exploration companies to find money through private placements.
More particularly, companies with huge gold discoveries in Alaska and British Columbia have seen their share prices skyrocket to the point where they trade at near-done-deal levels. That's great for the shareholders who bought in early, but it leaves a certain headwind to deal with. Getting even a huge deposit into production is difficult, time-consuming and expensive...and the financing might not be forthcoming. The shares of those companies are too expensive to make a takeover by a major worthwhile. Consequently, they're going to be in a bit of a spot.
Regarding huge deposits, Cook said that the only ones likely to be found now are porphyry deposits with copper-gold. Any major wishing to replenish its reserves faces the dilemma of becoming a copper-gold company if it chooses to take over such a deposit, or if it finds one on its own.
One underappreciated area that the exploration market hasn't caught on to yet is Mexico, with some deposits in the million-ounce range that aren't considered exciting. Cook believes that there's a real opportunity for a company, one with a financial orientation, to take over and consolidate the exploration companies in the region and make a new major producer out of them. He mentioned a junior producer, Minefinders, in another context but left it open as to whether that company could be the consolidator.
As far as the senior producers are concerned, Cook said that their earnings came in strong and their multiples are reasonable.
From what I've seen of the little corner of the exploration-junior market I watch, the companies are beginning to have a tough slog. Perhaps that's because I naturally gravitate towards the out-of-favor; perhaps I'm seeing the early stages of what will turn into a slide in exploration juniors as a whole. As a class, they performed extraordinarily well last year. The valuation question, and the slim chance of one spectacular year turning into another, suggests the entire sector will have tough sledding over the course of this year.
More particularly, companies with huge gold discoveries in Alaska and British Columbia have seen their share prices skyrocket to the point where they trade at near-done-deal levels. That's great for the shareholders who bought in early, but it leaves a certain headwind to deal with. Getting even a huge deposit into production is difficult, time-consuming and expensive...and the financing might not be forthcoming. The shares of those companies are too expensive to make a takeover by a major worthwhile. Consequently, they're going to be in a bit of a spot.
Regarding huge deposits, Cook said that the only ones likely to be found now are porphyry deposits with copper-gold. Any major wishing to replenish its reserves faces the dilemma of becoming a copper-gold company if it chooses to take over such a deposit, or if it finds one on its own.
One underappreciated area that the exploration market hasn't caught on to yet is Mexico, with some deposits in the million-ounce range that aren't considered exciting. Cook believes that there's a real opportunity for a company, one with a financial orientation, to take over and consolidate the exploration companies in the region and make a new major producer out of them. He mentioned a junior producer, Minefinders, in another context but left it open as to whether that company could be the consolidator.
As far as the senior producers are concerned, Cook said that their earnings came in strong and their multiples are reasonable.
From what I've seen of the little corner of the exploration-junior market I watch, the companies are beginning to have a tough slog. Perhaps that's because I naturally gravitate towards the out-of-favor; perhaps I'm seeing the early stages of what will turn into a slide in exploration juniors as a whole. As a class, they performed extraordinarily well last year. The valuation question, and the slim chance of one spectacular year turning into another, suggests the entire sector will have tough sledding over the course of this year.
Saturday, March 13, 2010
Jeff Christian Explains Soros On The Financial Sense Newshour
In an interview for the third segment of the Financial Sense Newshour podcast [.mp3 file], starting in the middle of the file, Jeffrey Christian of the CPM Group took some time to explain what George Soros meant by his gold-is-the-ultimate-bubble remark. According to Christian, Soros meant that a bubble economy results in bubbles springing up in several asset classes. "Ultimate" means the end of the road, the final asset bubble.
To put it in another way: once gold goes into a bubble, the bubble economy is coming to an end. After that point, there's little option except to tighten up and clamp down on money creation. Gold entering a bubble means that serious inflation is arriving, and the inflation has to be cleaned out of the system or else it becomes hyperinflation. A gold bubble, therefore, is the end game for central back policy of monetary expansion as economic stimulus.
Christian also brought up an important point regarding gold being in a bubble as of right now: if it were, then the likes of John Paulson, Paul Tudor Jones and Soros himself would not be buying in to it. How common-sensical is it to assume that three legendary hedge-fund managers would be buying at the top of a bubble like the proverbial waiter giving out stock tips? Especially given that the first of the three became legendary by betting on the collapse of the housing market when it was toppy?
Myself, I think that gold's in a nascent bubble - close to the beginning of the real thing. I also think it's going to be a doozy, but I'm getting ahead of myself.
To put it in another way: once gold goes into a bubble, the bubble economy is coming to an end. After that point, there's little option except to tighten up and clamp down on money creation. Gold entering a bubble means that serious inflation is arriving, and the inflation has to be cleaned out of the system or else it becomes hyperinflation. A gold bubble, therefore, is the end game for central back policy of monetary expansion as economic stimulus.
Christian also brought up an important point regarding gold being in a bubble as of right now: if it were, then the likes of John Paulson, Paul Tudor Jones and Soros himself would not be buying in to it. How common-sensical is it to assume that three legendary hedge-fund managers would be buying at the top of a bubble like the proverbial waiter giving out stock tips? Especially given that the first of the three became legendary by betting on the collapse of the housing market when it was toppy?
Myself, I think that gold's in a nascent bubble - close to the beginning of the real thing. I also think it's going to be a doozy, but I'm getting ahead of myself.
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