GOLD

[giofranchi]

I know that most of you do not even want to hear talking about gold… Anyway, I think I have just read a very good piece on the topic, and I share it with you.

At the end of his article Mr. Williams quotes Mr. Pal, from a presentation he made in Shanghai last May. I also attach Mr. Pal’s presentation. You might think that macro is just a waste of time, but please look at slide n.25:

 

“The problem is not Government debt per se. The real problem is that the $70 trillion in G10 debt is the collateral for $700 trillion in derivatives…

Yes, that equates to 1200% of Global GDP and it rests on very, very weak foundations.”

 

That is not macro forecasting! Those are actual numbers! Who is on the hook for all that debt? I am aware of the fact that American banks today are much better capitalized than they were in 2008, but, if European and Japanese banks will plunge into a real crisis, do you see American banks get along completely unscatched?

 

Even if your answer is “Yes!”, wouldn’t you sleep more soundly, knowing that you also own some gold just in case?

 

“Ultimately, nothing should be more important to investors than the ability to sleep soundly at night.”

Seth A. Klarman - October 20, 2007 – MIT Remarks

 

giofranchi

533_eva8.31.12na.pdf

Raoul_Pal_May_2012_Shangai_Presentation.pdf

[writser]

I am not particularly impressed by that presentation. I have never heard of Raoul Pal (he doesn't even have his own wikipedia page!). If I google his name I only find zero hedge articles and links to websites that preach financial meltdown. His presentation consists of a couple of line drawings created and exported from Bloomberg. I don't think head and shoulders patterns in graphs can predict the future. On page 11 he states his predictions are "facts", which is a lie. The $700 trillion in derivatives is a principal amount and tells us nothing about the risks involved.

 

We have around 6 months left of trading in Western markets to protect ourselves or make enough money to offset future losses.

Is this serious? Both the messenger and the message are dubious and I don't think this material should be presented on this high-quality forum.

[giofranchi]

Both the messenger and the message are dubious and I don't think this material should be presented on this high-quality forum.

 

writser,

I agree with you that the message is much exaggerated and extreme! I just thought it could always be useful to listen to people who don’t agree with our viewpoint. Being able to find flaws in their reasoning, usually add strength to our own reasoning. At least, that is how it works for me!

Anyway, I apologize for posting something not worthwhile… In the future I will be more careful!

 

giofranchi

[berkshiremystery]

I know that most of you do not even want to hear talking about gold… Anyway, I think I have just read a very good piece on the topic, and I share it with you.

At the end of his article Mr. Williams quotes Mr. Pal, from a presentation he made in Shanghai last May. I also attach Mr. Pal’s presentation. You might think that macro is just a waste of time, but please look at slide n.25:

 

“The problem is not Government debt per se. The real problem is that the $70 trillion in G10 debt is the collateral for $700 trillion in derivatives…

Yes, that equates to 1200% of Global GDP and it rests on very, very weak foundations.”

 

That is not macro forecasting! Those are actual numbers! Who is on the hook for all that debt? I am aware of the fact that American banks today are much better capitalized than they were in 2008, but, if European and Japanese banks will plunge into a real crisis, do you see American banks get along completely unscatched?

 

Even if your answer is “Yes!”, wouldn’t you sleep more soundly, knowing that you also own some gold just in case?

 

“Ultimately, nothing should be more important to investors than the ability to sleep soundly at night.”

Seth A. Klarman - October 20, 2007 – MIT Remarks

 

giofranchi

 

Gio,...

we had here some good discussions about gold before,... but not sure if you found the message threads. "moore_capital54" seemed to have always some interesting analytical thoughts about gold. I just post the old thread links:

 

Gold Chart Gone Hyperbolic

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/gold-chart-gone-hyperbolic/

 

You Can't Print More Gold

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/you-can't-print-more-gold/

 

Gold Standard Causes Depressions

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/gold-standard-causes-depressions/

 

Gold Price Is Now Higher Than Inflation Adjusted 1980 Price

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/gold-price-is-now-higher-than-inflation-adjusted-1980-price/

 

China To Install More Than 2000 Good ATM's

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/china-to-install-more-than-2-000-gold-atms/

 

Cramer Blasting Buffett Over Gold (for entertainment value only)

http://www.cornerofberkshireandfairfax.ca/forum/berkshire-hathaway/cramer-blasting-buffett-over-gold-(for-entertainment-value-only)/

 

 

[giofranchi]

Actually, I haven’t found the threads on gold… Thank you berkshiremystery for posting them again: always very helpful!!

 

giofranchi

[Packer16]

Have you had long-term success with gold or gold related equities?  I have found oil & gas to have similar characteristics as gold (store of value) and easier to assess in terms of cash flow.

 

Packer

[giofranchi]

Packer16,

I have read the posts on gold that berkshiremystery was so kind to share once again. Intuitively, I agree with Parsad (though I enjoyed moore_capital54 very much!): I really loathe any graph that shows parabolic price appreciation! But my firm owns just 1,7% of its equity in gold…

Let’s put it this way:

 

My shorts are a protection against something I deem will probably happen in the next two or three years, something not pleasant, but not terrible at all: a 30%-40% retreat of the stock market. They represent a sizeable position.

Summary: likely event; not pleasant, but not terrible at all; sizeable position.

 

My gold is a protection against something I deem very unlikely to happen (think, we go back to the gold standard…), that will cause great dismay and uncertainty. It represents a very small position.

Summary: very unlikely event; extremely unsettling; very small position.

 

Parsad, I might be wrong, but, if we go back to the gold standard, also a graph already gone parabolic will shoot even higher.

 

giofranchi

 

[Packer16]

So gold is a disaster hedge not a call on gold.  I have heard that others including Martin Capital Managment have purchased 2 to 3 year puts for the same type of protection Fairfax and others  obtained for equity market protection.  I guess it also becomes a good bet if the position is unwound at the bottom like FFH's unwinding in March 2009.  With the VIX so low puts may be a good way to play a potential decline.

 

Packer 

[ShahKhezri]

Currently nearing a 10-year holding period for the gold/silver I purchased in 2004 at $394/$7, respectively.  Also hold a significant amount of MS-63's, 65's and the King Umberto Italian coins.  Back then, I was reading quite a bit of Fleckenstein, his logic made sense and quite frankly it was dumb luck.  Also, call it what you want, there was a little bit of Lynch ideology behind it.  I was born in Iran, I know the middle east pretty well, I know what they value (physical/shiny things) and what they don't (paper assets because they know the government's are corrupt).  There is no such thing as the full faith of the treasury, and that has less of a meaning every passing day.  Anyways, I had an opinion that oil was going higher and the people that would gain from oil assets going higher were the same people that liked physical/shiny things. 

 

It was dumb luck, I never researched the marginal cost of production or anything that on this board would be considered fundamental analysis.  For that reason I don't talk about it because somehow Buffett/Munger planted this idea that value investors shouldn't look at it.  I think that's kind of stupid.  Value investing is looking at any asset class and after careful due diligence and conservative assumptions investing in that asset given there is a margin of safety.  I'm not a gold bug and I'll call a spade a spade, it was dumb luck with a view that oil was going higher and that people benefiting from that would buy shiny things, I was 19 at the time.  I also don't think the end of the world is 6-months, 6-years or X-years from now.  I don't subscribe to that, I don't think you can/should invest if you think that.

 

WB bought a significant amount of silver at $4 and change...yes I know it's an industrial metal...but still.  The entire swimming pool analogy makes very little sense to me, if anything that just makes it more valuable to the people that see wealth that way (limited) 

 

I've invested in the miners here and there, but never really spent time on them.  That's not a surprise considering the time to sell them is typically at low valuations and time to buy at valuations that don't look attractive, psychologically I don't do that well.

 

The cost to store is not a big deal at all, it costs about $50/year to store it at a bank.  The best part is that because it isn't easily liquidated, it has kept me away from trading it and just hold it long term.  I don't know when I will sell, I will at some point.

[Liberty]

Sometimes I feel like I'm sitting between two chairs and just can't figure out which chair is the solid one and which one is about to break down...

 

The more I read about fiat currency, the more disgusted I am by how manipulated and "faith-based" that system is, and I also find it scary how the powers that be equate consuming and spending with saving and productive activities, but I also can't figure out what precious metals are worth and whether that the fiat system can just keep going and be patched for a very long time. I like to invest in things that I can understand, but I don't really understand macro...

 

My strategy is still pretty Buffett-esque, in that I want businesses I understand with pricing power & a moat & a margin of safety & profitable growth & good capital allocation, etc.. But I've started to look a lot more closely at getting some exposure to commodities (mostly indirectly/obliquely, as mining is such a hard business and I don't want to own miners) in case all the newly created dollars/euros/yuans/etc end up creating a lot more price inflation than people expect (the official CPI definitely should not be trusted, based on what I've been reading) and/or there's a crisis of confidence and financial assets suddenly start to feel a lot less 'real' than hard assets.

 

But who the hell can really know what's what in the macro world? It's so confusing. I hear an argument that makes a lot of sense, and then an opposite argument that also makes a lot of sense... In the end, I think I'll have to just keep buying good businesses when they appear cheap and hope for the best. Being a macro investor isn't for me, even if I really wish I could get a clearer overall picture of the world economy's foundation to better position my portfolio for what is coming (huge crisis? next bull market? inflation? deflation? more government intervention? or even more government intervention than the high level we already expect?). I wish I had the conviction of either the doomers or the optimists, but I just don't know, so I'm trying to put something together that should do all right either way. I guess that's Buffett-esque too, though he might be a bit more optimistic than I am*  :-\

 

*Sometimes I wonder if Buffett isn't a bit over-optimistic because a lot of the data that he gets from Berkshire's businesses comes from such good, above-average businesses. While it is pretty representative of trends in the general real economy, it might still paint a too-rosy portrait. Just a theory... He 's smart enough that he probably compensates for that, so the theory probably isn't correct.

[Rabbitisrich]

 

 

The more I read about fiat currency, the more disgusted I am by how manipulated and "faith-based" that system is, and I also find it scary how the powers that be equate consuming and spending with saving and productive activities, but I also can't figure out what precious metals are worth and whether that the fiat system can just keep going and be patched for a very long time. I like to invest in things that I can understand, but I don't really understand macro...

 

 

I'm not sure that gold is best understood through cpi price movements, or even expectations. Look at gold in yen terms over the last two decades compared to inflation, or see gold in dollar terms relative to yield curve and tips implied inflation.

 

Here are a couple of interesting conjectures about gold:

 

http://krugman.blogs.nytimes.com/2011/09/06/treasuries-tips-and-gold-wonkish/

 

http://ftalphaville.ft.com/blog/2012/08/27/1128691/china-dollars-gold-and-a-theory-of-relativity/

[Liberty]

I'm not sure that gold is best understood through cpi price movements, or even expectations.

 

I agree. What I meant is I think is that there's a big incentive to inflate the money supply while keeping official CPI numbers 'within the normal range' (trying to have their cake and eat it too), so there's a very high chance that the CPI numbers understate actual price inflation.

 

What this actually ends up meaning at the end of the day is unclear, as is pretty much everything else in the macro world (just too many other variables and feedback loops). As William Goldman would say, nobody knows nothing.

[Vish_ram]

I bought some GLD shares in late 2005 only to sell it after couple of months after reading  Buffett's thoughts on gold. If only BRK performed 1/4th as good as GLD.

 

I recently watched "End of road" documentary. A scary one. http://documentarychannel.com/movie.php?currID=10536&t=End%20of%20the%20Road:%20How%20Money%20Became%20Worthless;%20The

 

For decades, a bubble in housing was unthinkable. In early 2000 there was a talk about it. The recklessness of people dealing with every aspect of housing industry made the bubble a reality and finally it burst. Many decades of conventional wisdom was proved wrong. The same thing can happen to dollar. if it happens, it'll take several decades for US to recover.

 

The way the Auction rate security market collapsed, we might very well see treasury auction attract no bidders. This can start the panic. What if US govt bans possession of Gold & confiscates everything? Any fiat currency is just a confidence game.

[LC]

My issue with gold is this: if one holds gold as a hedge against say, the USD devaluation, wouldn't it make more sense to hold a basket of currencies? Or if one holds gold to protect against inflation, wouldn't a basket of commodities make a more useful hedge? Or equity of companies with pricing power?

 

It seems that the only way gold increases in value is due to falling confidence in another currency. As an investor I don't want to invest in falling confidence: I want to invest in future production.

[Liberty]

My issue with gold is this: if one holds gold as a hedge against say, the USD devaluation, wouldn't it make more sense to hold a basket of currencies? Or if one holds gold to protect against inflation, wouldn't a basket of commodities make a more useful hedge? Or equity of companies with pricing power?

 

It seems that the only way gold increases in value is due to falling confidence in another currency. As an investor I don't want to invest in falling confidence: I want to invest in future production.

 

That makes a lot of sense, but if I try to look at the other side of the argument, I would say:

 

1) If you buy a basket of other currencies and they all inflate, you could be losing purchasing power anyway, while gold might still go up as a safe haven (but can we prove that? not really).

 

2) If you buy a basket of commodities and there's a big negative event (devaluation, inflation, loss of confidence in the USD, etc) that creates a big global recession/depression (even if just by crushing animal spirits), demand for industrial commodities could go down at the same time as demand for gold goes up (again, as a safe haven that is not anyone's liability, but who knows how that would play out exactly).

 

(in other words, some would claim gold/silver would protect you against those two scenarios, while with your approach, you kind of have to pick one and be right or split capital between the two and potentially lose on one side, and maybe both)

 

3) Unlike most other commodities, it's easy to take possession of gold and store a lot of value in little space. Most other commodities, you probably won't take possession, and if all goes to hell, having a piece of paper that says you own "X" might not help much.

 

It's still very hard to value gold, but if we look at the cost of production, it seems to be pretty high now, especially if you don't just include the cash cost of taking it out of the ground but also the costs of exploration. What I've seen makes me think the real cost of production is well above 1000/oz, but that won't help if demand dries up, if the paper market is manipulated, or if central banks decide to flood the market again.

[Eric50]

For those interested in gold and who believe the deflation fears are over, here is a great interview with Frank Giustra. I had never heard of him before but he is very insightful, has great perspective and seems to be a great human being.

 

http://ceo.ca/frank-giustra-long-form-interview/

 

[Aberhound]

http://www.indiavision.com/news/article/business/339477/china-launching-gold-backed-worldwide-currency--now-the-americans-will-have-to-find-a-reason-to-go-to-war-against-china-/#ixzz25Lmk36Ci

 

The US used to have the trade dollar backed by silver to facilitate trade. It looks like we are heading back to that world. The pre-WW1 world was the golden age of international trade and investment so maybe the return to that world is not a bad idea. When the British put the Pound back on the gold standard after the Napoleonic war their interest rates dropped. Most other nations joined the system to enjoy the benefit of lower interest rates.

 

This transition will create lots of opportunities for value investors. The relative values of gold, silver, platinum and the mining companies become silly. For instance I put 25% of my portfolio into Goldcorp when it recently dropped to $32 upon reporting poor short term results. Super cheap juniors that can't get financing is the best environment for majors like Goldcorp and some quarters will have bad results based on poor grades etc. so why does the share price fall? When you have a big buyer like China putting the floor under a price like Fairfax put a floor under the price of Odyssey Re you can invest on dips and enjoy the background of upwards price momentum. Look at the price of platinum miners and the gold/platinum price ratio. When car demand picks up again platinum will do well. The collapse of the platinum miner prices demonstrate the dirth of long term investors. Mining is extremely diffiuclt and risky so only a few companies will do it successfully so it is likely safe to invest in the top quality mining companies for the long term where the management invests their capital sensibly. As the recession spreads mining costs should start to fall again due to excess capacity so the margins should improve, especially when oil plummets after the Iran scare is over. Margins should also improve because of improved technology.

[BargainValueHunter]

Gold miners have been getting slaughtered but SOMEBODY is making a massive bet on the upside:

 

http://finance.yahoo.com/news/huge-buying-gold-miners-close-111440417.html

 

A trader bought 250,000 January 90 calls in Barrick Gold for their ask price of $0.07. A minute later, he or she bought 156,312 January 80 calls in Goldcorp for the ask price of $0.10. And a minute after that, the same trader purchased 200,000 January 90 calls in Newmont Mining for their ask price $0.10.

 

The open interest at each of strike was under 5,000 contracts, so these are clearly new purchases. The delta of these options was 0.01 in all three, meaning that they have a 1 percent probability or less of finishing in the money at expiration in about 11 months. So these are relatively cheap bets on these stocks, but the total cost of the long calls is more than $5.3 million--no small change, especially given the very small probability of profit.

 

Now that is true conviction that will make a fortune if it pays off!

[Palantir]

I think there was a great investment case for gold (despite what Charlie Munger likes to lecture us) based on deleveraging in Western markets. However, that was a few years ago. Do you foresee deleveraging to continue in the near future? If the Fed really does reduce the bond buying program, then it will have deflationary effects on the money supply which will hurt gold badly, as well as the actual economy. That worries me.

 

 

I believe the article I have attached was posted on this forum.

 

 

Asset_Class_Returns_in_Deleveraging_-_Bridgewater_Daily_Observations.pdf

[Guest wellmont]

I think there was a great investment case for gold (despite what Charlie Munger likes to lecture us) based on deleveraging in Western markets. However, that was a few years ago. Do you foresee deleveraging to continue in the near future? If the Fed really does reduce the bond buying program, then it will have deflationary effects on the money supply which will hurt gold badly, as well as the actual economy. That worries me.

 

 

I believe the article I have attached was posted on this forum.

 

I don't see deflation if they stop buying bonds. the central banks have been planting the seeds of higher inflation down the road with all this money printing. that will be good for gold.

[PlanMaestro]

If deflation it's good, if inflation it's good … that reminds me of something.

 

Feynman on vague theories.

[Palantir]

No. If it's deflation it's bad, if it's inflation it's good. It's just that a certain community of people is so obsessed with inflation that they can't grasp the idea that a contracting money supply is extremely damaging to the economy. "Ben Bernanke is printing money and debasing our savings and creating hyperinflation!!!! :'( :'( :'(". Byah byah byah.

 

 

But oh well.

[ericd1]

Gold miners have been getting slaughtered but SOMEBODY is making a massive bet on the upside:

 

http://finance.yahoo.com/news/huge-buying-gold-miners-close-111440417.html

 

A trader bought 250,000 January 90 calls in Barrick Gold for their ask price of $0.07. A minute later, he or she bought 156,312 January 80 calls in Goldcorp for the ask price of $0.10. And a minute after that, the same trader purchased 200,000 January 90 calls in Newmont Mining for their ask price $0.10.

 

The open interest at each of strike was under 5,000 contracts, so these are clearly new purchases. The delta of these options was 0.01 in all three, meaning that they have a 1 percent probability or less of finishing in the money at expiration in about 11 months. So these are relatively cheap bets on these stocks, but the total cost of the long calls is more than $5.3 million--no small change, especially given the very small probability of profit.

 

Now that is true conviction that will make a fortune if it pays off!

 

I wondered where Eric was putting his BAC money....lol