Gold Chart Gone Hyperbolic

[Hawks]

Estimated Profit

Beginning to believe you are absolutely right re the bursting of the "bubble" in Fiat currency.  As Prem said, Bernanke is out of options.

I have mostly cash, some FFH, and some gold stocks. Other than that, not interested in other companies for now; maybe when the S&P 500 hits  700-800.

[opihiman2]

+1 Liberty. Not like he just bought the currency... I wonder what that gold would be worth if paper currencies truly dissappeared because we have an economic reset. How much gold would you need to buy yourself something that actually can produce something of value? The worth of gold would be the least of my worries. If you can't be optimistic and assume that in the end things will turn out ok, there really is no point in investing.

 

Just for fun, says it all :

 

http://goldprice.org/charts/history/gold_all_data_o_usd.png

 

This is rational. Really!

 

 

I expected more from the members on this board.  I am definitely not a gold bug, but I do know that chart is very misleading.  Adjusted for inflation and the depreciation of the USD, gold is still nowhere near the 1980 highs.  Not only is the chart misleading, it's a non-sequitur.  Just because gold prices went nowhere for 20 years doesn't mean the current run in prices means it's in a bubble.  Gold was priced MUCH lower 100 years ago as was equities and other commodities.  The USD was much higher back then too.  

 

This just reminds me of when someone else on here claimed that Japanese stocks jumped after their S&P index.  It's selective bias, and it was clearly wrong.  I hate cherry picking data to fit one's hypothesis.  It's not scientific and leads to terrible thinking.

[moore_capital54]

I think the problem is that a lot of value investors just read a copy of Security Analysis and/or Intelligent Investor and base every single investment decision through that prism.

 

I have yet to hear one solid argument as to why gold is in a bubble other than rhetoric relating to booms and busts or historical quotations. The last response defended the original assertion of the author and then said "even if gold goes to 3-5k" so assuming that logic is correct and gold runs to 3-5k per USD and then settles at say 2,500 or 1,900, that means all this bubble talk today was pointless.

 

There are absolutely no analogies to the real estate bubble. The commercials you all see on TV are for the RETAIL INVESTORS TO SELL THEIR GOLD, not to buy homes and second homes with borrowed money. The gold gets sold to cash for gold stores that in turn sell the gold (all on an unlevered basis) to smelters that smelt it down to .999 fine and sell it on to mints where it is  molded into Good Delivery bars  and becomes part of the supply.

 

On the Demand side, the retail investor is the smallest segment of the gold market, representing less than 100 tonnes per annum.

 

Instead of just throwing around rhetoric that gold is in a bubble month in month out, true value investors should be seeking opportunitites. There are so many right now! Seth Klarman has ramped up his gold equity research team and they are deploying some serious capital there (over $1b). His favorite way is to gain leverage to the gold price by buying it in the ground. He has so far taken stakes in Gabriel Resources (GBU) which is developing the Rosia Montana development in Romania and other positions which I know but cannot disclose.

 

The gold developers represent asymmetric exposure to the price of gold as you can buy through them, the gold in the ground at a fraction of its spot price. In some cases I am buying Canadian juniors hand over fist at $10-30 per ounce in the ground.

[tombgrt]

+1 Liberty. Not like he just bought the currency... I wonder what that gold would be worth if paper currencies truly dissappeared because we have an economic reset. How much gold would you need to buy yourself something that actually can produce something of value? The worth of gold would be the least of my worries. If you can't be optimistic and assume that in the end things will turn out ok, there really is no point in investing.

 

Just for fun, says it all :

 

http://goldprice.org/charts/history/gold_all_data_o_usd.png

 

This is rational. Really!

 

 

I expected more from the members on this board.  I am definitely not a gold bug, but I do know that chart is very misleading.  Adjusted for inflation and the depreciation of the USD, gold is still nowhere near the 1980 highs.  Not only is the chart misleading, it's a non-sequitur.  Just because gold prices went nowhere for 20 years doesn't mean the current run in prices means it's in a bubble.  Gold was priced MUCH lower 100 years ago as was equities and other commodities.  The USD was much higher back then too.  

 

This just reminds me of when someone else on here claimed that Japanese stocks jumped after their S&P index.  It's selective bias, and it was clearly wrong.  I hate cherry picking data to fit one's hypothesis.  It's not scientific and leads to terrible thinking.

 

I believe I said it was posted "just for fun", as it relates to the topic title. Nowhere I claimed the chart was adjusted for inflation and depreciation of the USD, nor did I claim gold is a bubble. The only thing I wanted to show is price evolution of gold over the years and the increasing rate at which it appreciates lately.

 

Also, it is dangerous to view separate members and their posts/ideas as the "average level" of this board. Sadly, I am far less experienced and talented than most here, not to mention my limited intelligence compared to some.  ;)

[moore_capital54]

Good Piece from the FT Today for those that actually want to learn about this and keep an "open mind"

 

http://www.ft.com/intl/cms/s/0/7cf047b8-c70c-11e0-a9ef-00144feabdc0.html?ftcamp=rss#axzz1VVdUlWtN

[tooskinneejs]

Moore_capital54,

 

At noon you said: "One More thing, I never once said I believe in investing in gold."

 

A few posts later you then said: "I am buying Canadian juniors hand over fist at $10-30 per ounce in the ground."

 

How do these square?

 

Finally, how much is an ounce of gold worth today and how did you compute that value?

[opihiman2]

I think the problem is that a lot of value investors just read a copy of Security Analysis and/or Intelligent Investor and base every single investment decision through that prism.

 

 

That framework is excellent for making equity and debt investment decisions.  However, I think people try too hard to extrapolate it to nearly everything.  The problem I find with the rationale on here is that everything has an intrinsic value.  This is clearly wrong.  In the finance sense, there is a definition of what intrinsic value is.  However, in the pure economic sense, there is no IV.  Value is what humans place on an object and it is strictly a function of supply and demand.  I don't know why people on here keep insisting on doing simple balance sheet exercises with gold to point out there is no "IV".  Yeah, there is no IV in the finance sense, but there is plenty of value in the economic sense.  As long as people see value in it and want to buy it, there is IV there.

 

Also, to all the gold bashers, remember this: there is a finite supply of gold and it is priced in an infinite supply of something else.  Just remember that as QE3 hits.

[rranjan]

I think the problem is that a lot of value investors just read a copy of Security Analysis and/or Intelligent Investor and base every single investment decision through that prism.

 

I don't have any opinion on gold but how do you suggest people should make investment decision?

 

If it is based only on expectation of some one else paying higher price in future then wouldn't you call it a speculation? Speculations can be very profitable but it is still a speculation. Some people might be sucessful speculator but it is still a speculation unless you can put some reasonable valuation estimate.

 

Again, I don't have any opinion on gold but I would like to hear what argument you can make for an investment decision which is not based on copy of security analysis or Intelligent Investor. I also did not mean that if certain object does not have balance sheet then you can not anayze. I am mainly talking about the essence of security analysis or Intelligent Investor.

[ubuy2wron]

Intrynsic value and margin of safety are the two central tennants of value investing. Get these two things right and good things flow get it wrong and you can be in  for a world of hurt. Intrynsic value is impossible to value for gold all you can do with gold is look at  value on relative  basis currently gold is unargueably not cheap. Gold bulls keep taking about gold as a currency how many keep all of their wealth in cash it seems to be a pretty sure way to come last in any long distance race. If the arguement is should I hold my cash in gold or tbills, the answer is it depends, on what interest rate am I getting on tbills and what is the price of gold to everything else. The return on tbills over a long period of time certainly for the last 30 years has been pretty decent if one considers the effect of compounding.  The US could revert to a gold standard this weekend if they wished they do not by the way have to use the same standard they used previously 1/35 per ounce they could simply add up the gold in fort knox and divided by the currency in circulation and say this is the new standard( A lot of gold bulls would be VERY unhappy if this happened because they are anchored in the old standard) A central bank could also decide that perhaps they wished Not to hold gold the price of gold is where it is because very little of it every freely trades most of it sits in highly gaurded vaults gathering dust. Who knows what the price of gold would be if it was a free mkt set price. It was at least partialy central bank selling which caused the price of gold to so underperform as an asset class during the 80's and 90's in fact gold looked a lot like the the NASDAQ does today until it finaly turned the corner and stopped going down- sideways around the time that equities generaly peaked. When Gold is looking cheap relative to everything else I think it makes some sense to hold some in your portfolio but when its relative price to just about every other measurement of value is showing extended or even extreme valuations one just has to say no thank you to gold. I am actively looking for an entry point to short gold and as I have said before here I expect the new bull mkt in equities will start around and about the same time as gold starts its decline.  

[moore_capital54]

tooskinneejs it is exactly what I said, I don't buy gold at spot price (I have bought some bullion personally over the last few years) but instead buy shares of companies developing proven gold deposits in safe geopolitical jurisdictions. In this way I buy the gold in the ground at a large discount to it's current spot price.

 

Does that register?

 

rranjan - I have provided in this thread several times the fundamentals of gold (Supply/Demand Numbers), and that supports my wanting exposure to it and believing it is not in a bubble. The Value investor in me chooses to buy gold at a discount by accepting the "risk" of time whereby it may take several years for the companies I own to develop their gold deposits, but the risk-adjusted IRR, in my opinion, supersedes that of buying Bullion @ 1859.

 

Tooskineejs - I never once tried to compute the value of gold.. You guys all did!! By saying so definitively that it was in a bubble you have all made the decision to compute the price of something.

 

Any commodity/natural resource investor will tell you, there is never a definitive intrinsic value of a commodity or natural resource, rather a "range" or a "trend". Things go up, things go down, but the big money is made on the trends.

 

The key to commodity/natural resource investing is understanding the underlying fundamentals of your target commodity/natural resource.

 

For finite commodities/natural resources the most important fundamentals are Supply/Demand.

 

For Gold, the supply/demand figures are extremely bullish and have been for the last decade. This was on a pure economics 101 basis (Mine supply declining,discoveries declining even though exploration budgets rising, and vanilla demand increasing due to population growth, IE: middle class buying jewellery).

 

BUT THEN - We get this 2008 financial collapse, and people start thinking.. "hmm Is this the nail in the coffin of the Fiat System? How can I truly get my assets OUTSIDE of the financial system in a liquid fashion. With every single financial asset I have access to I have a counterparty, whether it is a central bank or a Triple A institution, what can I own that is nobody else's liability, with no counterparty risk and with deep liquidity" And all of a sudden, Gold starts a new phase whereby it is back in vogue as a financial asset.

 

AND ON THAT BASIS IT IS COMPLETELY UNDER-OWNED. As I write this the world's financial assets are worth $160 Trillion while gold represents just 0.6%. Historically gold formed the monetary base. Does that sound good or bad for the fundamentals?

 

Those are the fundamentals of gold the way I see them right now. And even still I am choosing to participate through the Juniors.

 

ubuy2wron - Your comment relating to Fort Knox is not accurate and lacks logic. The US official gold holdings only amount to $450B while the financial assets implicitly backed by the US Government exceed $20 Trillion (CONSERVATIVELY) I am not even going to count Medicare/Medicaid, and future commitments, nor will I count equity markets and other financial assets denominated in US Dollars that we all view in our bank and brokerage accounts as immediately cashable. There would be immediate pressure to convert dollars into gold to test the system before it was found to be credible and if the ratio was not such which would support the asset values floated in USD than the gold hoard would be gone in a few days bankrupting the US of its gold.

 

You can't just wake up after forty years and arbitrarily decide that the gold you have equates to all your liabilities.

 

The ratio would have to be just right to support current economic activity and asset values. If we use the reserve multiplier of 8 used by banks to create broad money, I would say a fair guess (and this is a totally unscientific way of doing it) is to efficiently count all financial assets floated in USD, and eliminate double counted assets or liabilities that would zero out assets, and then divided that figure by 8.

 

That could work. I don't know what the figure is but it would certainly require a much higher gold price to work.

[rranjan]

 

rranjan - I have provided in this thread several times the fundamentals of gold (Supply/Demand Numbers), and that supports my wanting exposure to it and believing it is not in a bubble. The Value investor in me chooses to buy gold at a discount by accepting the "risk" of time whereby it may take several years for the companies I own to develop their gold deposits, but the risk-adjusted IRR, in my opinion, supersedes that of buying Bullion @ 1859.

 

 

Owning gold mining companies are bit different than owning gold. Due to gold price swing it might not be always possible but you are also basically using the principle of Inteligent Investor and Security analysis in this situation. It's easier to predict the valuation range in case of mining comapnies.

 

My question was more pertinent in case of direct gold holdings because you can always find profitable mining companies which can be good investment at not so good gold price.

[moore_capital54]

Yes of course Rran Jan I use the Intelligent Investor and Security Analysis but it is not the ONLY thing fueling my investment methodology.

 

About gold mining companies, I don't think you understood, I don't buy PRODUCING mining companies, I buy non-producing developers that aren't profitable and have yet to produce any cash at all. They are developing proven gold deposits and essentially function as leveraged call options on gold, with no expiration date.

 

What I look for is an ore body or hydrocarbon reservoir that has been defined based on drilling and carries an independent estimate of mineral content or NPV.

[rranjan]

Yes of course Rran Jan I use the Intelligent Investor and Security Analysis but it is not the ONLY thing fueling my investment methodology.

 

About gold mining companies, I don't think you understood, I don't buy PRODUCING mining companies, I buy non-producing developers that aren't profitable and have yet to produce any cash at all. They are developing proven gold deposits and essentially function as leveraged call options on gold, with no expiration date.

 

What I look for is an ore body or hydrocarbon reservoir that has been defined based on drilling and carries an independent estimate of mineral content or NPV.

 

Understood now.

 

Anyway - Since I don't hold any opinion on gold, I can not put any range of valuation. If I happen to do what you are doing then it will be pure specuation on my part.

 

[Parsad]

I think the problem is that a lot of value investors just read a copy of Security Analysis and/or Intelligent Investor and base every single investment decision through that prism.

 

Actually I think it's because Security Analysis and Intelligent Investor rationalized the whole process of investing in equities.  It was the first piece of literature that actually created an intellectual framework for valuing a security.  I can talk to 1000 people about equities and intrinsic value, but only 50 or so will actually go pick up a book by Graham.  Of that 50, for ten of them it will be like a light bulb went on...enlightened perhaps!

 

That's why many people cannot wrap their head around your views on gold.  It was the same thing when people talked to them (me included) about internet stocks that were trading at 100 times price to earnings.  It's the same thing when we looked at Salesforce.com or Open Table in the last few months.  Same thing when Jeff Rubin said that oil was going to hit $200/barrel a couple of years ago.  Or when HGTV showed nothing but marathons of "Flip That House!"  We've seen all of this before.  There is always a way to justify gold's price, yet every nascent instinct we have is telling us that this cannot exist at these levels for a prolonged period. 

 

Money will be made...be it through speculation or divine intervention.  The whole world will clamour to this path of gold...oh wait, they already have!  And we will look stupid, through $1,000/oz, $1,250/oz, $1,500/oz, $1,750/oz and very likely $2,000/oz.  When fear or greed run rampant, the limits are always underestimated!  And then with a thunderous thud, it will come down.  The seasoned veterans long gone, the recent investors hammered, and the institutions caught somewhere in the middle...but it won't matter because they'll get some sort of support from someone...options granted recently gone unexercised of course!  And then people will assume that gold will one day go down to zero.  Which is when I bought it $350/oz.  Everyone thought it would go down to $100/oz!

 

I remember people telling me that it was crazy to buy Wells Fargo at $9 and GE at $7 three years ago.  I was told Fairfax was a fraud eight years ago...at $80 US.  And I remember how I was told that Buffett didn't understand the internet twelve years ago when Berkshire B's were at $1,250....$25 split-adjusted!  Recently, I've been told that I'm buying way too early...which I've done on numerous occasions...and I've also sold early too many times.  I'm only human!

 

The reason we put our faith in Securities Analysis or Intelligent Investor is because it works!  It protects us from new fads, rampant fear and blind greed.  I've never permanently lost a significant portion of my investments, my corporate investments or partnership funds since reading those two books.  We won't make money quickly, but we certainly won't lose it either.  Not to mention it's worked pretty darn good for the people below:

 

Warren Buffett

Charlie Munger

Walter Schloss

Marty Whitman

Prem Watsa

Roger Lace

Brian Bradstreet

Lou Simpson

Peter Cundill

Francis Chou

Tim McElvaine

David Winters

Mohnish Pabrai

Bruce Berkowitz

Ian Cummings

Joe Steinberg

Steven Markel

Anthony Markel

Tom Gaynor

Arne Van Den Berg

Howard Marks

Seth Klarman

Jeremy Grantham

Larry Sarbit

Irwin Michaels

Eddie Lampert

Robert Rodriguez

Guy Spiers

Sardar Biglari

Whitney Tilson

Glenn Tongue

 

The list goes on and on.  They've all done alright by most standards.  My point is that sometimes you don't need to look any further than that prism.  Cheers!

 

 

[seshnath]

tooskinneejs it is exactly what I said, I don't buy gold at spot price (I have bought some bullion personally over the last few years) but instead buy shares of companies developing proven gold deposits in safe geopolitical jurisdictions. In this way I buy the gold in the ground at a large discount to it's current spot price.

 

Does that register?

 

 

 

Just because you bought tulips at a discount doesn't mean you got a bargain or you have a margin of safety.

 

rranjan - I have provided in this thread several times the fundamentals of gold (Supply/Demand Numbers), and that supports my wanting exposure to it and believing it is not in a bubble. The Value investor in me chooses to buy gold at a discount by accepting the "risk" of time whereby it may take several years for the companies I own to develop their gold deposits, but the risk-adjusted IRR, in my opinion, supersedes that of buying Bullion @ 1859.

 

Tooskineejs - I never once tried to compute the value of gold.. You guys all did!! By saying so definitively that it was in a bubble you have all made the decision to compute the price of something.

 

 

I have a problem with supply demand numbers thrown up.  The physical property of gold is that it is virtually indestructible.  As a result, the supply for a year is whatever is dug up out of the earth already and is easily convertible.  Gold bullions in vaults, jewellery etc are all supply since investment flows can turn into disinvestment flows when the price trend changes. 

 

Anecdotally, being from India, in our families, we always keep gold - at least I know three generations before me did.  According to my late grandfather who was a rice retailer, half a sovereign (4 gms) of gold bought a sack of rice (about 20kgs) in the 1930s and 40s.  Today, the same sack of rice (limited in supply based on production and perishable) costs about USD 10 in my hometown and the same 4gms of gold - about a tenth of an ounce is USD 170-180.  This is despite the fact that unlike back then there are no paddy farms in the 100 km circle from that town.

 

BUT THEN - We get this 2008 financial collapse, and people start thinking.. "hmm Is this the nail in the coffin of the Fiat System? How can I truly get my assets OUTSIDE of the financial system in a liquid fashion. With every single financial asset I have access to I have a counterparty, whether it is a central bank or a Triple A institution, what can I own that is nobody else's liability, with no counterparty risk and with deep liquidity" And all of a sudden, Gold starts a new phase whereby it is back in vogue as a financial asset.

 

AND ON THAT BASIS IT IS COMPLETELY UNDER-OWNED. As I write this the world's financial assets are worth $160 Trillion while gold represents just 0.6%. Historically gold formed the monetary base. Does that sound good or bad for the fundamentals?

 

Regarding end of the world theories, they have been around since time immemorial and there is always new ones made every 5 or so years.  It never made for a good investment thesis.

 

If someone believes 2008 was a financial collapse, I would ask them to really go a check-in at a sanitarium.  Just look at the GDP numbers to begin with.  All we have now is a media day-in-day-out crying about a percent of percent change in GDP and decide we have financial collapse.  In fact, the real economy is doing well - only difference is it is not in the steroids of sub-prime money and hence, cannot perform as well as before.  The Central Banks who kept the interest rates low back then under lax regulatory environment are to blame, IMHO.

 

 

[moore_capital54]

Parsad, you and I both agree that there is no more important principle to investing than that of Graham & Dodd, that is no the point I was making and I really am saddened by the fact that I have spent countless hours presenting facts, reasoning and loads of data which supported my point and you are still comparing my views on gold to those of internet stocks and housing bubbles.

 

This leads me to believe that in the end if Buffet says jump most value investors say "how high" without questioning whether he is self interested or the logic behind it. Buffet never once discussed the fallacies of the fiat money system in public while many of his cohorts and followers have, quite vocally.

 

Joe Steinberg, Michael Burry and Seth Klarman for example all invest in gold and believe it is the only true money, and that fiat currencies always end up worthless over time. Burry and Klarman own significant stakes in gold juniors and producers.

 

The list of gentleman you presented have all skinned the cat in many different ways and have added a personal touch to the principles of value investing. Nobody did it by reading and applying one for one the lessons learnt in the chapters of those two great books.

 

And one more even more important note, is that in life it is important to sometimes lead by example and talk from experience.

 

As the wise Confucius says:

 

I hear and I forget, I see and I remember, I do , and I understand.

 

Your last reasoning of just listing some value investors you don't even know personally (with the exception of Francis Chou and Prem) does not win me over. Win me with facts, and logic.

[ubuy2wron]

Moore please tell me why the US treasury can not say each $ is backed by 1 1/000 of an ounce or any other ratio which they decide. Clearly at one ratio let us say the old standard every one would immediately swap their paper for for bullion but there is a price where the mkt as opposed to you personaly would be indiferent. You appear to be anchored as are most gold to the moon believers in the old 1/35 exchange ratio however when you look at gold in relation to price of almost any other measure it appears expensive. Gold to the dow gold to housing gold to other commodities gold to hours of labour. There are times when gold appears as an attractive alternative to fiat currency to hold your cash. Mr Buffet at one point I believe held the largest single amount of silver bullion since the Hunt Bros. tried to corner the mkt. Bubbles are extremely difficult to identify prospectively but easy as pie retrospectively every bubble however has a chart that looks a lot like the one that caused you so much concern . Gold does appear to be perhaps entering a parabolic period of its price trajectory however the realists here will all admit that 1900 2000 2400 or any number you wish to pick for a short to medium term price target is known only by the gods and your guess is probably better than mine.

[moore_capital54]

Seshnath I don't even know how to answer you man. With respect, your post appears to be a smorgasbord of words and sentences that don't disprove anything I said.

 

1) You are comparing Gold to Tulips which are plants which are renewable and infinite as long as the sun is shining?

2) Your math is way off, actually you prove how well gold works as a store of value.. Let me explain:

 

In 1920, the USD was 1/20th an ounce of gold. 1 Troy Ounce  = 31.1 Grams.

 

You say a bag of rice which costs $10 USD Today, cost 4gms per gold in the 1940's. I don't know if that's true or not, but for arguments sake let me disprove your point. Money was tied to gold back then in a ratio of 1/20 so each dollar represented 1.55 grams of gold.

 

The 4 grams you speak of are comparable to $2.58 Equivalent dollars at the time (1940s) (4/1.55). It is plausible that something in 1930-40 cost $2.58 which today cost $10 USD. There are a lot of other goods and services that cost less on a real basis due to advances in trade and human ingenuity and have nothing to do with the monetary base. Your example is far from disproving gold's strength as a store of value, if anything you should cede to the lessons of your ancestors who witnessed periods of hyperinflation and currency erosion. Something I am dead sure you have yet to experience in your lifetime, or else you wouldn't be saying things like:

 

"If someone believes 2008 was a financial collapse, I would ask them to really go a check-in at a sanitarium.  Just look at the GDP numbers to begin with.  All we have now is a media day-in-day-out crying about a percent of percent change in GDP and decide we have financial collapse.  In fact, the real economy is doing well"

 

These are not the words of someone who has any significant exposure to equity markets over the last say 3-4 years....

 

And then your final point on Central Banks lacks the depth that I would expect after spending quite a bit of time explaining the mechanics of central banking. Its too short and shallow to just say whimsically:

 

"The Central Banks who kept the interest rates low back then under lax regulatory environment are to blame, IMHO"

 

It's not that simple my friend... really give it some more thought.

[ubuy2wron]

Yes of course Rran Jan I use the Intelligent Investor and Security Analysis but it is not the ONLY thing fueling my investment methodology.

 

About gold mining companies, I don't think you understood, I don't buy PRODUCING mining companies, I buy non-producing developers that aren't profitable and have yet to produce any cash at all. They are developing proven gold deposits and essentially function as leveraged call options on gold, with no expiration date.

 

What I look for is an ore body or hydrocarbon reservoir that has been defined based on drilling and carries an independent estimate of mineral content or NPV.

Moore just how long have you been following this strategy. I have lived in Vancouver the speculative mining venture capital of the world. I inhereted a pile of worthless mining certificates from an uncle who invested in non=producing mining ventures . They do have a short life expectancy some times shockingly so they can in no way be considered non expiring options on the price of gold.

[moore_capital54]

Ubon2wron did you read my post at all? Don't you understand that if you fix gold to a currency that means the currency is redeemable in gold?

 

And there are tens of trillions of dollars worth of financial assets denominated in USD. If you decide to fix the USD to gold, and allow it to be redeemable in gold (A Gold Standard) you need to make sure you have enough gold to redeem at the least your base money or your broad money.

 

If you have a ratio that doesn't do that than it isn't a gold standard and nobody is going to care about your currency.

 

Does that make sense?

[ubuy2wron]

I think the problem is that a lot of value investors just read a copy of Security Analysis and/or Intelligent Investor and base every single investment decision through that prism.

 

I have yet to hear one solid argument as to why gold is in a bubble other than rhetoric relating to booms and busts or historical quotations. The last response defended the original assertion of the author and then said "even if gold goes to 3-5k" so assuming that logic is correct and gold runs to 3-5k per USD and then settles at say 2,500 or 1,900, that means all this bubble talk today was pointless.

 

There are absolutely no analogies to the real estate bubble. The commercials you all see on TV are for the RETAIL INVESTORS TO SELL THEIR GOLD, not to buy homes and second homes with borrowed money. The gold gets sold to cash for gold stores that in turn sell the gold (all on an unlevered basis) to smelters that smelt it down to .999 fine and sell it on to mints where it is  molded into Good Delivery bars  and becomes part of the supply.

 

On the Demand side, the retail investor is the smallest segment of the gold market, representing less than 100 tonnes per annum.

 

Instead of just throwing around rhetoric that gold is in a bubble month in month out, true value investors should be seeking opportunitites. There are so many right now! Seth Klarman has ramped up his gold equity research team and they are deploying some serious capital there (over $1b). His favorite way is to gain leverage to the gold price by buying it in the ground. He has so far taken stakes in Gabriel Resources (GBU) which is developing the Rosia Montana development in Romania and other positions which I know but cannot disclose.

 

The gold developers represent asymmetric exposure to the price of gold as you can buy through them, the gold in the ground at a fraction of its spot price. In some cases I am buying Canadian juniors hand over fist at $10-30 per ounce in the ground.

You are commenting about the lack of retail participation as an indication of not a bubble. I believe most retail participation is expressed through GLD and like vehicles. I believe at this stage GLD is one of the largest stores of Gold bullion on the planet and in fact is gretaer than most central bank holdings so I am not sure of the adequacy of your lack of stupid money buying{ I have always had a problem by the way with equating retail investers with dumb money.) I am pretty convinced that dumb investors are pretty evenly distributed amongst both the professional and amatuer investor classes.

[moore_capital54]

Ubon2wron, I am sorry to hear that but it sounds like you did not really even attempt to learn the industry.

 

I have been investing in Juniors for over a decade and have generated outstanding returns for my investors and I, with the goal of achieving exposure to our underlying commodities.

 

There are about 3,000 companies listed on the Canadian Exchanges (TSX and TSX.V), of owhich about 1,700 engage in mineral exploration development or production.

 

Of those 1,700 there are three categories.

 

Exploration - They have a geologic anomaly if at all and hope to develop it further to the point where it is an economic ore body.

Developers - They have passed the stage of delineation and have a 43-101 or CIM/JORC Standard Independent Resource Estimate or are at the Prefeasability Stage with an Independent NPV.

Producers - They are in the business of moving tons and generating a delta between their cost vs the price they get for the sale of their target commodity.

 

There are about 1,300 Exploration Companies, of those about 70% are either frauds or complete BS Companies. Those are the ones you probably got involved with. We track around 400 legitimate exploration companies that are honest in their exploration practices and are truly trying to define an anomaly with potential.

 

There are about 300 developers, and those are the ones we watch very closely and understand them. Of those you need to decide if you are comfortable owning an interest in a development project in Africa or if you wanna stay close to home. I personally stick to US/Canada and Latin America.

 

The developers provide the best opportunity for risk/reward, as you already know there is an economic ore body and are now attempting to extrapolate what the potential NPV will be. There are tons of variables, an ore body can grow mineralization can extend at depth or along strike, there are permitting and environmental issues that may have to be looked at. There could be metallurgical issues or issues with grade, and then you need to actually raise the capital to build the mine.

 

Here are some examples of some companies that have gone through this cycle.

 

1) Osisko Mining - 6 years ago, the company acquired a deposit named Malarctic. It had a historical resource estimate from the 1980's of around 200,000 ounces of gold. The CEO reinterpereted the deposit from being a high grade underground operation to a low grade bulk tonnage operation based on what he felt was going to be a rising gold price environment. They began to drill largely spaced holes and encountered additional mineralization. Over the ensuing two years the deposit grew from 200,000 ounces to around 14 million becoming one of the largest in the world. The company completed their feasibility study and raised around $1B in equity and debt. In April of this year the entered production, and are now producing around 40-50k ounces per month. The NPV of the project is about 7-8 Billion dollars today.

 

6 years ago, shares of Osisko traded at under $.10 and now they trade at $14

 

2) Richfield Ventures - Didn't get as far as Osisko but drilled some incredible holes within about 6 months the stock ran 900% before the company was acquired by Newgold for around $500mm. You could have tracked each drill hole and understood that what they encountered was rare.

 

There are many opportunities in the junior market, I can go on and on and on.

 

Our largest position right now, is a company that is developing a deposit which last stood at 3.0mm~ ounces and since then the company has drilled 7 stepout holes roughly 300 metres from the original resource envelope and each hole encountered identical mineralization retaining grade continuity and a suite of sulphide minerals, indicating that in fact the ore body is quite larger. The market is currently valuing the company at around $25 per ounce of gold in the ground, while I can already tell the ore body when they publish the next resource estimate may grow by 50-60%. This is akin to buying AAPL at a multiple of 10, having AAPL increase its quarterly earnings while the share price remains the same providing you with a lower multiple.

 

I suggest you dig into the business. The single best source of information for newbies is this:

 

It's the weekend. If you have time, I suggest you watch ALL the videos on Ore Deposits in sequence:

 

http://www.gril.net/education

 

You will understand how incredible the opportunities are in the junior space. The only downside is that they can be very illiquid at times.

 

 

[moore_capital54]

again mate you are WAY OFF. The value of ALL The gold held by GLD is about $66 Billion, under your logic the Bernie Madoff fraud should have caused epic damage to the $200 Trillion dollar global economy.

 

The market is too small mate, ask people you know if they own any GLD or GOLD Bullion, and if they do ask them the next two questions:

 

1) Do you own it with leverage?

 

2) What percentage of your networth does gold currently represent.

 

You will find that I am right. Either they don't own it, and if they do they own it with excess cash they don't need and it represents an irrelevant portion of their net worth.

 

It won't change ANYONE's life if gold goes to 200 tomorrow, Also according to Bloomberg data around 60% of GLD is owned by institutions, I am hard pressed to think the retail investor even owns 10% of it.

 

A bubble by definition should cause significant pain when it pops. The only people who need gold to be lower are the Central Bankers as this is causing a mass exodus from their experiment. Think of it like the Matrix.

[moore_capital54]

Here is a list of companies that are all reputable and are either explorers or developers of proven precious metals deposits:

 

http://precioussummit.com/participating-companies/

 

For institutional investors on this board that are interested, I can get you invited to the conference in Vail which is going to be very good.

 

Not all these companies are a sure thing, some have yet to reach the point where they have an independendt NPV.

 

Others like NovaGold and Gabriel have 2 of the largest undeveloped gold mines in the world, and are just waiting to get permitted. Management is taking as long as possible due to their views on the gold market. In Novagold's case their partner is Barrick the $50 B largest producer of gold in the world.

 

Tahoe Resources is developing what may be the world's largest undeveloped silver deposit at 300mm+ ounces of silver!!

 

There are many interesting companies, and all trade at a fraction of the commodity spot price, when valuing based on the formula:

 

Market Cap - Cash + Debt (EV/ Proven Ounces)

 

 

 

 

[ubuy2wron]

Moore, " The ONLY downside is they can be very illiquid at times" Look if your original thesis is correct and gold is just getting started then you and your clients are going to get VERY rich however if your thesis is incorrect the results may be markedly different. I suggested that the US treasury could simply devide currency in circulation by the amt of gold in Fort Knox and return to a gold standard overnight. The premise for the lovers of Gold is that we have to return to a gold standard and we have to use a ratio of currency to gold that existed at some previous time in history. Most of the gold is owned by central banks. I can assure you that central bankers could use a standard that would cause horrible pain to the gold lovers and they would consider it expropriation but as you have so rightly said the amount of gold in private hands is so insignificant that the central bankers and elected leaders will not care nor will the general public (Ron Paul will be right pissed tho> LOL). You reject that scenario out of hand I am not sure why this is not possible nor desireable for the stable currency crowd. You mention that GLD is insignificant yet I suspect it is rapidly growing to become one of the largest piles of the metal that has every existed in the whole of human history how can this be considered immaterial? A strongly held investment conviction and thesis which is correct by the way is the surest path to fame and fortune. There is something in my personality that makes it impossible for me to hang buy AAPL @ 8.00 and hang on until its trading for 400  I suspect that this flaw exists in many who are attracted to the value discipline.