Gold Price is Now Higher Than Inflation Adjusted 1980 Price

[ubuy2wron]

Ubuy, so now the argument shifts to, QE is printing money, and QE is inflationary, unless the fed sells back these securities when times get better to prevent inflationa nd does so with iscar blade like precision :)

 

You are fooling yourself sir, those securities will NEVER get sold back. It's never gonna happen.

 

Packer, I enjoyed the book very much and am familiar with this cycle, but you have to understand that in the end the fed will get it's inflation. We are going to see QE3, very shortly here.

 

Your comemnts relating to gold are disappointing, gold is not a commodity it is a currency or financial asset. I completely disagree with your assessment of what drives the price of gold, I suggest this essay for you sir:

 

http://mises.org/daily/3593/Does-Gold-Mining-Matter

 

If gold was a true commodity it sure as hell has never acted as one. In 2008 the price of all commodities collapsed while the price of gold went up.

If I believed what you believe that the fed would never reverse its QE actions I would be long gold as well but is it the best and saftest bet one could make under those circumstances?

[RRJ]

Do any of you more knowledgeable folks have the feeling that the fed could be buying stocks or futures directly as a way to bolster the market?  This would ostensibly be to increase the wealth effect and consumer confidence, to help stave off deflation.  I realize this would be somewhat unprecedented, but Bernanke at least hinted at such "other tools" in his 2002 speech, and Einhorn has repeatedly stated that the fed is "obsessed with the stock market" (see Charlie Rose interview). 

[moore_capital54]

Ubuy its not the best and safest bet. I don't advocate buying gold at spot to anyone here as an investment. I advocate that people on this board who have reached a stage in their life where they can afford to diversify, to ask themselves a simple question:

 

Why shouldn't I own some physical gold somewhere? Just in case even 1 ounce. And most people will agree it makes sense to own just a little. If you understand that logic you can understand that gold is not expensive as only 93mm ounces are produced each year.

 

I personally love buying companies that own or are developing proven gold deposits as I gain leverage to the gold price while maintaining a margin of safety so long as I am buying them at an in-situ price (price of gold in the ground + production costs) which is substantially less than what I view as the long-term price of gold. Say I think the long-term price of gold is $750 an ounce, well today I can buy companies trading at $100 in situ while production costs are roughly $400-500. That is a good way for me to gain exposure. That is how we played it. Our resource funds have averaged over 35% CAGR since 2001 and have only been 50% weighted in gold. We absolutely killed it in the space, investing in this way and never owned any bullion. I personally own bullion and have purchased some as recently as $1,300 an ounce and will never sell it. It represents maybe 3-4% of my total assets at this stage and when I started buying it maybe represented 0.5%.

 

Packer, you can now use gold to buy food in Utah and Virginia, here is the Press Release:

 

http://www.sltrib.com/sltrib/home/51364301-76/silver-gold-legal-tender.html.csp

 

:)

 

 

[ERICOPOLY]

Second the seller of securities may turn and buy other assets and does not necessarily have to keep the funds on deposit.

 

Fed gives me a dollar for my bond.  I don't have to put it in the bank, I can buy another asset.

 

But that just means somebody else has the cash.  That person may buy a new asset, then somebody else has the cash.

 

It knocks the bid up on several assets but somewhere it hits the bank, where it becomes yet another deposit.

 

 

I think you are right, it is inflationary.  That however does not mean we will get inflation.  There are offsetting headwinds.  I think that's what Gary Shilling was saying to Schiff -- revolving debt is declining.  Money is created when reserves are lent against.  It's destroyed when lending falls.  Schiff's argument is QE2 therefore hyperinflation, without taking account the effect of falling economy being an offsetting deflationary force.  I summarized it wrong, but I don't think Shilling is wrong (might have misstated himself in the interview).

[moore_capital54]

Do any of you more knowledgeable folks have the feeling that the fed could be buying stocks or futures directly as a way to bolster the market?  This would ostensibly be to increase the wealth effect and consumer confidence, to help stave off deflation.  I realize this would be somewhat unprecedented, but Bernanke at least hinted at such "other tools" in his 2002 speech, and Einhorn has repeatedly stated that the fed is "obsessed with the stock market" (see Charlie Rose interview).

 

RRJ I really don't think this is going to happen because the politicians would rather have the fed print money to support their fiscal disasters than inject capital directly to the investor class that fuels the economy. It also sounds as though you are favoring the investor class over the machine workers for example (the rich guys). I don't think it will ever fly.

 

That being said, here is why I think it would work much better and create a lot more jobs.

 

If the fed bought say 5% of the current US Market Capitalization which is roughly $11T, that would cost $550B. The fed would then retire these shares, so effectively existing owners who did not sell would own more of their companies. Dividend yields would grow and P/E ratios would decline. Moreover, the $550B which flowed into the hands of investors would look for ways back into Equity markets or comparable asset classes, as opposed to boring treasuries. This would fuel demand for Corporate Bonds, with lower ratings, and provide much needed air for those small to midsize businesses, moreover lots of new technology businesses would find much needed seed and vc capital creating even more jobs. That $550B of capital which represents what is the most "speculative" sliver of the asset pyramid, would look for a comparable and aggressive investment program.

 

This is my personal dream but it won't happen.

[moore_capital54]

Second the seller of securities may turn and buy other assets and does not necessarily have to keep the funds on deposit.

 

Fed gives me a dollar for my bond.  I don't have to put it in the bank, I can buy another asset.

 

But that just means somebody else has the cash.  That person may buy a new asset, then somebody else has the cash.

 

It knocks the bid up on several assets but somewhere it hits the bank, where it becomes yet another deposit.

 

 

I think you are right, it is inflationary.  That however does not mean we will get inflation.  There are offsetting headwinds.  I think that's what Gary Shilling was saying to Schiff -- revolving debt is declining.  Money is created when reserves are lent against.  It's destroyed when lending falls.  Schiff's argument is QE2 therefore hyperinflation, without taking account the effect of falling economy being an offsetting deflationary force.  I summarized it wrong, but I don't think Shilling is wrong (might have misstated himself in the interview).

 

Eric all this proves is how bad things are, and how dependent we are on QE from now on, and this quite poetically brings us back to the original point of this thread.

 

We know the fed needs inflation and we know its only going to get it by printing more money.

 

So why in this environment is gold in anything near a bubble? :)

 

Good Night Folks.

[ERICOPOLY]

This would fuel demand for Corporate Bonds, with lower ratings, and provide much needed air for those small to midsize businesses, moreover lots of new technology businesses would find much needed seed and vc capital creating even more jobs. That $550B of capital which represents what is the most "speculative" sliver of the asset pyramid, would look for a comparable and aggressive investment program.

 

This is my personal dream but it won't happen.

 

My dream is to just reduce the tax rates on such bonds, temporarily (phased out over time).  The federal government lowered the cost of capital for states and munis by making them tax-exempt.

 

Doing the same for all kinds of loans (like car loans or mortgages).

 

It also rapidly recapitalizes the banks who can then sell the assets into the market place at better-than-otherwise prices.

 

That's how you most effectively lower interest rates -- not by theorizing that if you buy down the long term bond with QE2 it will flow downstream to all interest rates. 

 

Anyways, that's not something the Fed can do.  I just found it to be the best way of not only making loans cheaper immediately, but also recapitalzing the financial institutions.  All in one stroke.

[moore_capital54]

Wonderful idea.. I just don't see obama doing any tax cutting, but that was a very good one. Or even abolishing the capital gain all together, see what happens then.

 

"Capital gains taxes are included in income tax revenue, and the OMB doesn’t give a breakdown for that. According to a 2002 Congressional Budget Office report, capital gains taxes "normally make up about 4 percent to 7 percent of individual income tax revenues" and are usually 2 percent to 3 percent of total federal tax revenues. "

 

These are two fiscal policies (yours and mine) that could easily be implemented even for 3 years and would work very well imho.

[moore_capital54]

Packer your post made me think of this quote, which I think is very true for all the gold bashers on this board:

 

“It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.”

[ERICOPOLY]

Eric all this proves is how bad things are, and how dependent we are on QE from now on, and this quite poetically brings us back to the original point of this thread.

 

We know the fed needs inflation and we know its only going to get it by printing more money.

 

So why in this environment is gold in anything near a bubble? :)

 

Good Night Folks.

 

The Fed claimed QE2 was intended to bring down interest rates.  That never made sense to me though -- because if you want to bring down interest rates then doing nothing (and getting deflation) would do the trick well.  At the time I thought the Fed was worried the government was borrowing too much money, and thus soaking up the liquid dollars out there.  Perhaps that wasn't right.

 

I don't trust gold's rise because I'm not patient enough to get in during 1980 and hold on until today, just to get back my CPI-adjusted value.  It's easier for me to see the discount in BAC, and I strongly believe that what will be bad news on the inflation front will be very, very good news for business at the banks.  That's because I believe the bank lending itself is necessary to get that very inflation!

 

And so yes, gold has risen a lot in reaction to fears over inflation, but what to buy now I feel like I might pay twice last year's gold price in order to protect me against an overall doubling in the price level.  So maybe we get a doubling in the price level from this coming inflation but gold doesn't move in price, because it anticipated the inflation already?  So anyhow, I think that buying gold today after the move is going to work out only if the prices in the real world much more than double in the near term.  But even then will it do better than BAC?  Hard to say, but I'm guessing it would need to more than triple just to keep pace with BAC when this bank lending begins to materialize.  Maybe some out-of-the-money gold calls at $5,700 an ounce would cover it -- to me it just feels like such a longshot.  Of course, BAC could go bust.  Time will let us know.

 

[scorpioncapital]

"The average price of an ounce of gold in 1980 was about $1,825 inflation adjusted dollars, while the single peak price was about $2,350 in 1980.  At $1,900 per ounce, gold is now higher than the average 1980 inflation-adjusted price"

 

A 30 year real return of zero, while the S&P500 went up something like 6x. No wonder many smart investors consider gold a foolish long term investment!

 

 

[ERICOPOLY]

With regards to the disappearing ink, it is a naive comment. First, the fed did not just buy 6 month securities. In some cases they bought very long-dated securities.

 

They could tie the excess money up while they wait for maturity -- raise the reserve requirement for example.  In theory if perfectly executed it ought to work (as I understand it anyhow).  Likely it won't be perfectly executed, erring on the inflationary side I would guess.

 

 

[Eric50]

Why buy gold at $1800 an ounce when you can get the miners at $1200? NEM, AUY, GG, ARM are very cheap compared to the price of gold.... It's only gold in the grounds.

[Parsad]

Packer your post made me think of this quote, which I think is very true for all the gold bashers on this board:

 

“It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.”

 

Moore, I'm not bashing gold, I'm bashing speculation and overvaluation.  I owned gold from 2003-2004 to 2009-2010.  Just like I own the same technology stocks today, that I was reeling against in 1999 and early 2000.  Or financial institutions from 2006-2008, which I own in abundance now and am buying more of. 

 

Now I'm reeling againt the overvaluation in gold.  I don't short because the liabilities are unlimited and the upside is limited, but if I was someone who was inclined to short overvalued and irrationally priced investments, then I would be shorting the hell out of gold right now.  With CRM and OPEN down significantly (CRM still has room to go), there is nothing else I can see that I would want to go completely short on right now more than gold...nothing else!

 

We can both make arguments till the cows come home, but I see it as clear as my hand in front of my face.  Based on supply/demand, gold is over double what its price should be.  It probably will go higher because there just is so much fear, but it is overvalued.  And when it does correct, it won't be over a long period of time, it will be a rapid correction with many late buyers getting creamed. 

 

That's just how it works:

 

- 12 years ago Microsoft was at $140 and dominated the computer software industry.  Everyone wanted to own it.  Today it's at $25, makes more money per share than ever before and has virtually no debt, yet no one really wants to own it. 

 

- 10 years ago Citigroup was at $50 and was the largest financial institution in the world.  Again, everyone wanted to own it.  Today at a split-adjusted $5, no one wants to own it, even though spreads on lending and deposits are the best they have been in 20 plus years. 

 

- 7 years ago, gold was at $300/oz and no one wanted to own it.  People thought gold had no value left and anyone buying was a fool...I was stuffing my safety deposit box.  Today, it's at a higher inflation-adjusted price than the average price in 1980 when inflation was rampant, and everyone wants to buy it because they are scared. 

 

I don't need to know about the velocity of money, quantitative-easing or fiat currency.  All I need to do is apply some common sense.  Cheers!       

[anders]

Why buy gold at $1800 an ounce when you can get the miners at $1200? NEM, AUY, GG, ARM are very cheap compared to the price of gold.... It's only gold in the grounds.

 

I agree, the spread is crazy.. I bought the miners last year to get exposure and to have something to calculate.. Can't do it with pure gold.. However, recently switched my gold positions to financials instead since the risk/reward is better here.. And the gold has started to go into the parabolic phase, which makes it more difficult..

 

However, I am a believer in gold and will probably buy some back when the hick-up arrives, I think it will go pass 2000 next year, and continue to up to maybe 5000 by the end of the bear market 2014.. And silver.. I believe will go pass the $100 mark..

Watched a clip on j.rogers.. apparently, all the managers he spoke with, about 90% of them never purchased gold.. he said that when the opposite occurs, that is the time to become bearish..

 

For those who don't understand why gold will continue to rise in price as long as the Fed continues to debase the currency, should read what Bernanke wrote himself 2002.. (the reason why he is called helicopter ben)..

 

http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm

 

Further, Ben's special field while studying was the great depression.. He wont let the country slip into deflation, meaning continuously adding credit to the financial system thereby increasing the monetary base... I'm simplifying of course but all comes down to increasing consumption to increase growth.. that's the US model.. And what happens when you increase consumption.. ::)

 

As a sidenote, I saw a clip about Friedman there he states that Keynes warned about exaggerating his principles.. which is happening now, so there is a probability of high inflation when the pendulum start to move towards growth and lower unemployment.. 

 

I agree of what buffett is saying about gold, I also rather own the farmland and exxon mobiles.. and c.munger when he says that for gold to rise even more, then the world need to become more afraid next year.. and that is pretty hard to predict..

 

But as long as USA choose to debase their currency, one should have a gold-bullet in the portfolio.. :)

 

Rgds,

[mevsemt]

White collar workers quitting their jobs to become day traders... internet bubble.  Nurses quitting their jobs to become real estate agents... housing bubble.  Now people are quitting their jobs to throw sell-your-gold-tupperware-style parties...

 

I personally have no idea if gold is over or under priced (but I have asked my wife if she has any old gold jewelry she doesn't want anymore). 

 

As an afterthought, the tone & mutual respect on this thread is a welcome relief after reading the recent BAC posts.

[ERICOPOLY]

Why buy gold at $1800 an ounce when you can get the miners at $1200? NEM, AUY, GG, ARM are very cheap compared to the price of gold.... It's only gold in the grounds.

 

I am not interested in gold mines right now, but your comment did get me interested in learning something about miners.

 

First off, my instinct is to assume gold in the ground should always be priced lower than gold on the surface.  The further into the ground, the greater I would expect the discount.  However, how great should that discount be is my question?

 

The reasons I think there should be a discount:

1)  A dollar bill on the sidewalk is worth a dollar bill.  One that is deep in the ground will be a pain in the butt to bring to the surface -- it will take a lot of time to extract all of it (discount the present value of that dollar to the day I'll actually have it in my hands), and hiring a miner to dig it up will cost money (I can't risk having the dollar cost me more than a dollar after including the cost of digging it up)

 

2)  In buying a business you are trying to make a profit.  If you pay too close to your final market price for that gold in the ground, then how much return on equity are you left with after paying for the mining operations?  I guess it's like if you are selling pizza, you expect to purchase the raw materials at a big discount to the price you expect to sell it at after putting them all together and baking it.

 

Then if you are dealing with mining, you can't just dump the gold on the market today.  Rather, you have to take a risk that whenever you do actually get that gold out of the ground that the price of gold will still be high enough for you to make a profit.  So you effectively might want a discount embedded in the price to guard against price volatility (instead of buying hedges). 

 

In other words, I think there should be a discount.  I don't know what that discount should be.  What do you think it should be?

[bmichaud]

Bmichaud if it is such a non-event why did equity markets bottom exactly when it started and peak exactly when it ended. That paper is nonsense. I sold some treasuries to the fed during the time they were buying which formed part of the cash which was then paid out to me personally as part of my quarterly incentive allocation. I then used that cash to buy a new home, how is that a non-event? I don't necessarily have to re-purchase treasuries with this new money. I can do whatever I want. At some point it all becomes inflation.

 

The problem is that there aren't many people in my position that needed a home and have no existing debt. There is little demand for new assets which historically were fuelling the previous boom cycle. That is the issue. When housing bottoms fundamentally we can start to see the light at the end of the tunnel.

 

How is that paper nonsense? QE is an asset swap and nothing more. As Eric said, the cash swapped for USTs simply sits within the banking system as deposits - so the banking system is holding cash versus holding treasuries. That was QE2, and it did nothing for the banks' capital position b/c treasuries and cash are treated the same in capital ratio calculations. QE1 actually improved the banks' capital position b/c it removed risk-weighted assets, MBSs, and replaced them with non-risk-weighted assets, cash. QE1 was money printing, QE2 was not.

 

But that is not what QE 2 was, in QE 2 the fed created money out of thin air (printing) and purchased securities from investors who had them for sale. The investor that sells securities to the fed is receiving new money that never before existed, which then circulates in the economy.

 

You are dead wrong here. This "new money" you speak of did not all of the sudden start finding its way into other assets. Yes it affected the speculative forces of the market, b/c investors that previously held a yielding asset, USTs, and now hold a non-yielding asset, cash, thus they are forced out the risk curve in order to find return, but it DID NOT find its way into other assets. This "new money" does not magically find its way into stocks or real estate as you mention. So Moore, you hold $500K of USTs then the Fed swaps $500K of cash for your USTs, now you purchase a house - the person you purchased the house from now holds your $500K of cash and you hold the house. Nothing changed. Even if the Fed had not swapped cash for your USTs directly you still could have purchased the house b/c USTs are another form of cash. If you had $500K of McDonalds stock however, you could not have purchased the house UNLESS the Fed had swapped $500K of cash for your MCD stock. Once that MCD stock is retired, THAT is money printing.

 

Imagine all the assets to the private sector in the US are as follows:

 

1. $1,000B cash

2. $2,000B USTs

3. $5,000B real estate

4. Total = $8,000B total assets to the private sector

 

Whether the above composition was $0 cash and $3,000B USTs or $3,000B cash $0 USTs, total money in the system is $3,000B. If, however, the Fed buys $5,000B of real estate, now there is $8,000B of total money in the system.

 

Whether QE is money printing 100% depends on the assets being replaced with cash. Bottom line.

 

So if we can agree that total US liabilities in the system, dollar bills + USTs, equals total money in the system, then we can conclude that DEFICIT SPENDING and the Fed purchasing non-UST assets are the primary risk to inflation. Deficit spending is what creates actual money in the system and the Fed simply pushes around the outstanding liabilities in order to control interest rates (unless of course the Fed buys non-UST assets). 

 

Deficit spending will not become (highly) inflationary until the private sector is finished deleveraging. The deficit is the only mechanism sustaining the US recovery at the moment, NOT QE where the Fed buys non-UST assets.

 

 

So bringing this discussion full circle, how does all of this affect gold and stocks.

 

RE gold, I think it does best in an unstable economic environment - inflation or deflation - and the instability right now is private sector deleveraging, forced austerity measures, ultra-low interest rates and lack of debt restructuring. These factors are NOT going away anytime soon, thus I am comfortable owning gold miners even with gold at its inflation-adjusted high of the 1980s b/c I think they provide a margin of safety.

 

And I don't see any logic to the inflation adjusted high of gold argument either. Homes cost more inflation adjusted, cars cost more, burgers cost more and there are about 3 billion more human beings living on planet earth today vs 4 billion in 1980.

 

How does Parsad using the inflation-adjusted high not make sense? He's comparing the former bubble in gold to today, and if you use a trend-line over the past 100 years, gold is overvalued. Your argument against that makes no sense.

 

RE stocks - I happen to be of the belief that the total market should not be trading above fair value considering the hideous macro backdrop. I don't think the developed world has faced a macro environment such as this since the Great Depression, thus I don't think investors should invest as if we are in a normal post-recession environment. Considering the likelihood that we are in a secular bear market combined with the hideous macro backdrop, I don't want to own economically-sensitive names such as banks, energy and industrials. Stocks can get a lot, lot cheaper from here. How does this tie into QE? I believe the Fed's irresponsible actions have put a "bid" under all risky assets and is currently keeping the market above FV.

[Eric50]

Ericopoly - Let's take NEM to show you how I assess the gold mines:

 

NEM has an entreprise value of $34.29bn (mkt cap of $32.04bn + debt of $4.31bn - cash of $2.06bn) for 94m ounces of gold in the ground. That means that gold in the ground is valued at $364 per ounce.

 

Latest cash cost to extract the stuff is $583 per oz.  So, by buying NEM now you get an ounce for $947 (disclosure: I built my position at a lower price). Of course, this is quite a simplistic analysis (you have to take into account capital costs and the rising cost of extracting the stuff out), but this is a good way to get the stuff cheaper than the current price of gold.

 

 

[ERICOPOLY]

Ericopoly - Let's take NEM to show you how I assess the gold mines:

 

NEM has an entreprise value of $34.29bn (mkt cap of $32.04bn + debt of $4.31bn - cash of $2.06bn) for 94m ounces of gold in the ground. That means that gold in the ground is valued at $364 per ounce.

 

Latest cash cost to extract the stuff is $583 per oz.  So, by buying NEM now you get an ounce for $947 (disclosure: I built my position at a lower price). Of course, this is quite a simplistic analysis (you have to take into account capital costs and the rising cost of extracting the stuff out), but this is a good way to get the stuff cheaper than the current price of gold.

 

Do you discount for the present value of that future product sale?

[moore_capital54]

I will answer Bmichaud later just wanted to help the two Eric's.

 

I have attached a research report from Jennings Capital, if you turn to page 6, you will see a nice table and how the industry generally values the producers, Page 8 is more interesting and is where our primary focus is.

 

One more thing, do not forget NAV. In the natural resource space, almost all M&A is done under NAV valuations. What we do is do NAV valuations for each asset, and then reconcile with P/E and EV/Total Resources.

 

Ive said this before, but there is nothing I would like to see more than value investors enter this space. It is an incredible frontier.

 

Enjoy!

JenningsCapitalRockTalk.pdf

[moore_capital54]

And as we are on the subject, another consolidation in the space today.

 

Minera Milpo of Peru acquired Inca Pacific (IPR.V) for $35mm in cash or $.61 cents a share. IPR owned the Magistral deposit which contained over 2 billion pounds of copper. If you ask me the buyout price is too low and I think shareholders got sold short. We are not buying the arb as we think Rick Rule (largest shareholder) will agree to the offer.

 

With Hathor we did buy the arb, we think Cameco will raise.

 

2 Consolidations in less than 2 weeks. This is why this space is not a bubble, the world needs copper and lots of it. The juniors are the only ones actively exploring for new deposits.

 

For those that are interested here is a 43-101 level feasibility study on Magistral which I consider to be fairly good.

 

http://www.incapacific.com/i/pdf/MagistralFFS-43-101.pdf

 

An intelligent investor reading this report can develop a pretty good understanding of the economics of the asset while employing various internal risk adjustments.

 

 

 

 

[Eric50]

No need to discount for present value of future gold revenue. My margin of safety is large enough. And frankly, I have no idea what's the intrinsic value of gold. I suspect it's gonna go higher as we are far from the final blow-off phase of a bull market. The Fed will have to adopt a much more orthodox monetary policy before the current gold bull market collapses. Generally speaking, I view gold as an insurance against the stupidity of governments. Unfortunately I don't see an end there...

 

Re gold and exploration, I find it easier to invest with the more established miners. You could get multi-baggers with the juniors but you could easily lose everything. I'm working hard to improve my knowledge in that field but not the point where I can comfortably invest with some of the junior miners.

[ERICOPOLY]

Some sort of a discount seems warranted though.  Would you for example ever swap one ounce of gold in your vault for one ounce of a "proven" reserve in the ground, without asking for some kind of discount?  I would never do such a swap myself.

 

 

 

[Eric50]

sure, but why bother with the calculation when I can get the stuff in the ground for less than half of its price?

 

You'd also have to take into account the new gold that they are going to find/purchase. To go back to NEM, its reserves haven't changed in the past 5 years, i.e. they increased their reserves at the same pace that they extracted gold.