Gold-now $US1210/ounce

[Sunfish]

Two problems Steve: Firstly gold has been on a tear for eight years so the GFC is not the only, or even main, cause of the rise. It started @ US$275/oz. Secondly only an optimist can think we are out of the woods yet. (You're entitled to be an optimist if you wish, nothing to do with me.)

Discussing investments here and reading others' reasoning I am convinced that each individual makes up his/her own mind on certain fundamental things and these beliefs drive them in certain directions. It is pointless for someone wearing rose coloured glasses telling me how I should invest, just as it is for me to advise them.

I have, for most of this decade, believed The Greater Depression to be a real risk. Eight years later, we are eight years closer to it with the odds having risen from 30% to 70%. This attitude does not allow me to "buy RE with confidence". Hence the difference of opinion.

 

[WinstonWolfe]

Gotliebsen has been around long enough to be entitled to have been on the bear side for the last 10 years.....and today he's increased his bearishness.

"Why is this happening? There is just too much bad news and uncertainty out there. Given that the Shanghai index is leading the world down that’s where we must start. China’s stimulation after the global financial crisis was the biggest of all countries, and much of it was driven by banks being given monthly quotas to lend money. Any one who wanted a loan was urged to accept twice and three times what they were asking for so the bank manager could meet his quota."..............

"Add to the China pot the fact that we have Europe where it is, it is clear that we are going to see a massive contraction of activity as Portugal, Italy, Ireland, Greece and Spain slash their big deficits. Almost certainly we will see a European recession and in some areas it will be a depression. That means that demands for Asian exports to Europe (which are greater than Asian exports to the US) will fall – adding to the slow down in our region."

And I wonder what Rudd and Swan's Plan B is

"But with so much bad news floating around, it's not good news for sharemarkets. Of course, in Australia, we have a government that has just prepared a budget on the most optimistic global scenario possible and then has taken to our biggest export industry with a tax axe. Could you ever think of anything crazier in a bear market with commodities falling?"


And a telling interview with Jean-Claude Trichet, talking it up to the Germans on Der Spiegel..... A Quantum Leap in Governance!!!....for everyone but the Germans.

 

[steveadl]

Thanks for the responses so far guys.

I'm generally speaking an optimist SF (as I'm sure you're well aware ), however have been lightening up a bit of late on stocks that have large exposures to Europe. Not so much that I think the world is ending, but I can (from my limited knowledge) see the Euro sliding further which will hurt earnings of my co's.

Another follow up question. I assume people buy the physical item itself or an ETF equivalent as opposed to a gold miner because the gold miner comes with the added company specific risk ie. bad projects, poor management etc. On the other hand, at least with someone like Newcrest you would have some income from your gold exposure along the way (albeit small)? I'm thinking of taking a small position as a bit of a hedge against my equities portfolio, but with guys like Newcrest you leave yourself more open to market dis/satisfaction with decisions made as opposed to the pure play on gold itself.

 

[Sunfish]

uh huh.....so....um, how else do we measure it's value in real world terms?

if the value of RE is opinion and the value of currency is again, opinion, then it leads to the value of gold is just...opinion?

As a gold bug I look at it this way: Gold has a value of 1. That is also it's long term value and as it doesn't earn a dividend it should not be a good investment. We agree on this.

Before 1971 when the US$ was quoted as being worth one thirtysecond of a troy oz of gold every other asset or good could be quoted as X% of an oz of gold. Nixon may have broken the official link but this valuation method has been seared in man's psyche for thousands of years. It is only during this recent and (historically short) period of relatively benign politics has this been forgotten.

Europe, the Subcontinent, and Asia (where the memories are longer and past upheavals more life threatening) needs only a hint of real trouble before they remember the stories of how their forefathers survived with gold. It is V difficult to buy retail quantities of gold in Germany NOW.

So I disagree with this: "the value of gold is just...opinion?"

Edit. That is wrong. It's price is an opinion of the worth and safety of all other assets.

 

[Sunfish]

Another follow up question. I assume people buy the physical item itself or an ETF equivalent as opposed to a gold miner because the gold miner comes with the added company specific risk ie. bad projects, poor management etc. On the other hand, at least with someone like Newcrest you would have some income from your gold exposure along the way (albeit small)? I'm thinking of taking a small position as a bit of a hedge against my equities portfolio, but with guys like Newcrest you leave yourself more open to market dis/satisfaction with decisions made as opposed to the pure play on gold itself.

You may have missed the leverage factor involved with buying the miners. If you know of a miner with high cash costs so that they marginally profitable, a $100 rise in POG will DOUBLE their cash flow and (theoretically) will double in price.

Warning: I have never liked Lihir as an investment but using the above theory I bought some. It was only the T/O which allowed me out in the black.

 

[hobo-jo]

If this is the case, does that mean gold is in for a correction once the world is happier again with the direction we’re heading? Ie. once people are convinced Europe can sort out it’s problems, that the US can actually start to right itself and have increased demand etc?
At what point do you make that call (either personally, or in your opinion the market) that the world is a safe place again and you can put your money back into other forms of investment?

Do you really think that it's possible for the US to just "right itself"?
Personally I think it was put quite well in an article by Sprott last year:
http://www.sprott.com/Docs/MarketsataGlance/09_09_MAAG.pdf

So how will this US debt crisis ultimately resolve itself? Let’s consider the options. It would appear from our analysis that the spending ‘promises’ are the crux of the problem now facing the US Government. If there isn’t enough new capital in the current environment to fund new Treasury bill issues (as we argued in “The Solution... is the Problem”), then there certainly isn’t enough capital to pay for the US’s unfunded future obligations. The choices, therefore, are bleak:
1. Default on Medicare promises. (Unlikely given the current debate in Washington to expand medical coverage.)
2. Default on Social Security promises. (Unlikely given the increasing average age of the voting public.)
3. Put forward a credible plan to balance the budget. (Unlikely given the most recent budget projections.)
4. Default on outstanding debt. (Unthinkable)
None of these options are feasible for the US Government. So they realistically only have one option left – to print their way out of their debt crisis.

I think the only other possible option would be a change in currency for the US. Although I think this would technically be a default on there liabilities if they were to say 1 New Currency = 5 US Dollars and paid their outstanding debts back with the new currency.

In the 1930's the US devalued the US Dollar by increasing the price of Gold which was pegged to the dollar at the time, with Gold now trading freely it is essentially doing the same thing (repricing itself against a devalued dollar) not only against the US Dollar but against all fiat currencies which are only worth what trust the citizens have in their government.

Regarding moving into other assets at the end of the Gold bull market, there are several measurements and signals I will be looking for:

- A DOW:GOLD ratio of under 2:1
- Real interest rates turn strongly positive (this broke the last Gold bull)
- Australian housing under 100oz
- US Gold value = US money supply
- Inflation adjusted highs from the 1970s Gold bull

Might see all, some or none of them, as has been implied earlier, when Gold is overvalued against other assets I will be looking to move out of it.

Not so much that I think the world is ending, but I can (from my limited knowledge) see the Euro sliding further which will hurt earnings of my co's.

It could (slide further), but against what are you talking about? It is sliding quite heavily against the USD at the moment I imagine due to a number of reasons including USD still at the moment considered somewhat a safety trade, also I imagine the carry trade is still unwinding...eventually I expect this to reverse and the USD will fall, but it's hard to know what and when this will be triggered (could be with a failed treasury auction?).

Another follow up question. I assume people buy the physical item itself or an ETF equivalent as opposed to a gold miner because the gold miner comes with the added company specific risk ie. bad projects, poor management etc. On the other hand, at least with someone like Newcrest you would have some income from your gold exposure along the way (albeit small)? I'm thinking of taking a small position as a bit of a hedge against my equities portfolio, but with guys like Newcrest you leave yourself more open to market dis/satisfaction with decisions made as opposed to the pure play on gold itself.

Physical and miners personally. I wouldn't want exposure to just 1 miner, as you say that would involve a fair amount of risk, there have been plenty of miners who have fallen with a rising Gold price, AXM & CTO are two examples of this and I'm sure there are plenty more. I avoid this single company risk by spreading my money across multiple miners, currently I hold a portfolio of 15, although at times I have scaled this back to as few as 10 or less. Regarding income, not many pay a dividend and personally I don't invest in these companies for a dividend. However, RCO (one of the stocks I hold) recently announced the payment of a 10cps distribution (25% ROI at my purchase price, tax free, reduces cost base for CGT purpose by same amount), so that was a nice little surprise. Essentially though I am looking for capital gain, not dividends.

 

[Value Emperor]

I can't personally accept that the Dow:gold ratio could go as low as 2:1.

Sure there was a time when it was that low in the past, but we need to look at what the Dow is truly worth.

To say that the value of all the businesses that make up the Dow could fall, in real terms, to what they were at 30 years ago seems a bit extreme.

Take Microsoft for example. The value of Microsoft has not increased primarily due to inflation alone.
If the ratio of a parcel of Microsoft shares vs gold was worth 2:1 thirty years ago , I can guarantee that ratio deserves to be a lot higher now and thats not just because their earnings are measured in US dollars. If they were to take payment for all their product in gold, their earnings would still be huge.

Do the same for some of its other components, Caterpillar, HP, IBM, Pfizer, Exxon. All these companies have actually grown the value of the assets of their businesses and their expected future earnings by whatever unit of measure one can use. (even more if measured in USD!)

Just something to think about before shorting the hell out of the DOW!

 

[hobo-jo]

Just something to think about before shorting the hell out of the DOW!

I guess we will see soon enough, personally I wouldn't short the DOW as we don't know under what circumstances they will come to their 2:1 or 1:1 ratio. Could be with Gold at $5000, Dow at 10,000...then what good would have shorting the Dow done you?

 

[Sunfish]

I can't personally accept that the Dow:gold ratio could go as low as 2:1.

There are two sides to an equation. It is considered possible that the "gold" side can rocket.

But even taking the DOW stocks on their own, there is currently a move to replace one of the poor performers with Google. Remember the DOW is only 30 stocks. By selecting "survivors" you, by definition, distort results.

This periodic replacement of poor performers with the new stars does not, in my mind, distort charts much but most indexes have more'n 30 stocks.

If you were to search on the nifty fifty you would find that today it is the nifty ten. But that's OK if you invested in an index of them, BAD if you picked the wrong one.

 

[Value Emperor]

There are two sides to an equation. It is considered possible that the "gold" side can rocket.

But even taking the DOW stocks on their own, there is currently a move to replace one of the poor performers with Google. Remember the DOW is only 30 stocks. By selecting "survivors" you, by definition, distort results.

This periodic replacement of poor performers with the new stars does not, in my mind, distort charts much but most indexes have more'n 30 stocks.

If you were to search on the nifty fifty you would find that today it is the nifty ten. But that's OK if you invested in an index of them, BAD if you picked the wrong one.

I agree that the gold side of the equation will rocket, but it should only go up to a fairer value in relation to fiat currency. For it to go up so high as to make the DOW side of the ratio very undervalued I just can't see it.

Trouble with all the predictions of $2000, $5000 gold or whatever is that they are relying on the massive devaluation of currency. So it could well get there (I'm betting on it). But if it did, you would also see the Dow rise by the same proportion, as the E part of the P also increases with inflation.

So to get to 2:1 you would need the real P/E ratio of the market to fall to a ridiculously low level and real company earnings to fall significantly too.

 

[Reality Cheque]

Be interested to hear what people think about silver at the moment. I haven't followed precious metals in the past but am looking at them seriously at present. From what I've found out so far I'm tending more towards silver than gold. I like that it has an industrial value as well as an investment value. Am I right in thinking that as gold gets more and more expensive that silver will get dragged up as well.


RC

 

[whatever123]

Be interested to hear what people think about silver at the moment. I haven't followed precious metals in the past but am looking at them seriously at present. From what I've found out so far I'm tending more towards silver than gold. I like that it has an industrial value as well as an investment value. Am I right in thinking that as gold gets more and more expensive that silver will get dragged up as well.


RC

You'll get all sorts of answers on this. At the moment people are investing in these metals because of inflation fears and safety so it doesnt really matter which you buy.
For what its worth, silver has outperformed gold by about 30% over the last 20 years but its been pretty random and probably insignificant. Take it back 30 years and gold has beaten silver by around 10% and thats total over that time.

Overall they both have a high long term correlation so it would be hard to guess which would outperform the other. Hence may as well stick to something thats easy to buy, hold, store and hide if necessary.

I wouldn't want to be trying to hide or transport $20K worth of silver.

 

[Sunfish]

I agree that the gold side of the equation will rocket, but it should only go up to a fairer value in relation to fiat currency. For it to go up so high as to make the DOW side of the ratio very undervalued I just can't see it.

That's OK we all see things differently

Trouble with all the predictions of $2000, $5000 gold or whatever is that they are relying on the massive devaluation of currency. So it could well get there (I'm betting on it). But if it did, you would also see the Dow rise by the same proportion, as the E part of the P also increases with inflation.

Good point but the DOW can only be valued in USD as I see it. The German exchange skyrocketed during the Weinmar inflation but I think it was still better to be invested in other exchanges. This is the most consistent thing about upheavals: the moneyed classes can cover their asses, the working class has nothing to lose. It is the middle class who cops it in the neck. This little black duck has no intention of being caught out without a hedge.

 

[Sunfish]

Am I right in thinking that as gold gets more and more expensive that silver will get dragged up as well.


RC

Gold won't "drag up" silver for long. They are separate commodities and tend to move independently already. One day silver will have it's own day in the sun and will be valued in it's own right.

 

[urbanprospector]

If using that chart as a comparison to now it pays to know the following

The share market boom in the years preceding the 1929 crash was huge. It had risen a few hundred percent in the few years prior.
So all the crash did was wipe out most of the gains from those preceding few years.
It was a traditional but massive speculative bubble, with P/E's of around 32. They aren't as high this time (although falling earnings and who knows?).

So the great depression coincided (linked to?) with the sharemarket bubble which exacerbated any falls. Unemployment also got to 30%+

I think its great to compare the two as a reality check of how much markets "can" fall, but my belief is that the fall will not be as large this time around.

The share market also overshot on fair value by at least 20% in the 30's (I have my theories on why).
We could not rely on that happening again.

Having said that, I also think this crisis is very unique in that it has to unwind decades of overspending and excessive use of credit. So it has the potential to be bigger, but I could not imagine unemployment at 30%, because then even infallible Australia would not be immune.

I prefer looking at the 100 year Dow chart for a much better big picture.

here is a chart going back .

 

[Intrinsic_Value]

This is a nice piece of research from BCA......

It shows price earnings ratios for emerging markets are now at pre GFC levels........ I agree this is reasonable indication further growth in emerging markets will be fragile....

BCA raise the excellent point that PE ratios can only continue to go up if the opportunity cost of money continues to fall......and in today's near zero interest rate environment, the opportunity cost of a buck isn't likely to fall.

When you throw in China's growing inflation dilemma, and the inability of western consumers to significantly increase consumption, the case for fragile EM growth is all the stronger.

Goldman Sachs came out with a chart today in its morning research note for the ASX300 based on PROSPECTIVE PE, ie rather than historical like the above chart. (the document wont allow me to cut and past, so i cant reproduce it here)

It shows that we are currently trading on a prospective PE of 11.4 which is significantly under the long term average of 15.
The only other periods when it traded lower than this was was in March2009, and then August 1990 (ie 30 years ago). So in the last 30 years this is the third 'cheapest' time in the market.

Now obviously the key is the expected growth factor in the prospective 'E'.
I would also state that the current market is heavily influenced by resource stocks. Resource stocks tend to trade at LOWER PE's when commodity prices are higher. So this may distort the total figure
But still food for thought.

 

[ianvestor]

Gold now $US1210/ounce!

Okay, okay, I'm an hour late with this piece of news, bit of a bounce up again to $1215.

 

[Intrinsic_Value]

Some other interesting gossip for you gold bugs:
From the FT: the Rand Refinery in South Africa has seen a recent surge in demand for Kruggerrands from overseas wholesalers.
The usual buy orders are for around 2000 coins at a time.
But apparently there has been desperate buying by some Germain banks, in lots of 30,000 and 15,000 coins.

 

[WinstonWolfe]

Goldman Sachs came out with a chart today in its morning research note for the ASX300 based on PROSPECTIVE PE, ie rather than historical like the above chart. (the document wont allow me to cut and past, so i cant reproduce it here)

Hey I'd like to see that chart. You can do a screen capture on any document, by pressing the prt scrn button, then opening an image editor and pasting....then crop as required.

Keep in mind the chart I posted was for EMs, in USD....to me they represent a much more sensitive thermometer of the global outlook than the ASX.

 

[Sunfish]

From the FT: the Rand Refinery in South Africa has seen a recent surge in demand for Kruggerrands from overseas wholesalers.

That will be German demand. The Austrian mint is out of stock and major on-line retailers have closed down their websites temporarily and not taking back orders.