On Gold Bugs!
An article yesterday titled ‘Taking Issue with Some Gold Bugs’ – reading time 4 minutes – is written by Jordan Roy-Byrne of The Daily Gold blog. In the article, Roy-Byrne, a self-confessed “gold bug both philosophically and in terms of investing” takes exception to a number of ‘gold bug’ headlines and talking points, being:
· ‘there will be system wide meltdown as U.S. enters hyperinflation’. Roy-Bryne opines that, in his view, the odds of hyperinflation are very low, and hyperinflation talk is nonsense. A few days ago I commented on the criteria that must be met to meet the definition of hyperinflation in a fiat currency environment – being at root that a compound inflation rate of 26% must occur over a consecutive three year period. I don’t think this is likely to happen in the U.S. in the foreseeable future, and accordingly, am in Roy-Byrne’s camp on this;
· ‘gold & silver have bottomed, and there will be a ‘summer explosion’ ahead’. Roy-Bryne believes gold and silver both will find new highs going forward, but that won’t happen for gold until at least August, and won’t happen for silver for as long as 12 months from now. From my perspective (and I think importantly) all gold and silver future price estimates, be they Roy-Bryne’s or anyone else’s, are nothing more or less than forms of ‘proxies on unstated specific future macro-economic conditions’. As a result, I don’t pay attention to them. I focus for purposes of my own investments on my own view of macro-economic trends, about which I currently am on the side of pessimism – which current view leads me to conclude that the trend price of gold will be up from here, without me having or assuming a target price. As I have said repeatedly in these e-mails, I find physical silver to have a far more complex supply/demand interaction with the global economy than I find physical gold to have. Accordingly, while I indirectly own both, my indirect holdings are far more weighted to physical gold than they are to physical silver. That said, as every investor’s risk profile and strategy needs to be specific to him/her, I strongly believe you should not participate in either the physical gold or physical silver markets without first seeking your own ‘fact-specific’ investment advice;
· ‘hedge funds are ‘shorting’ the gold stocks and the juniors’. Roy-Byrne doesn’t’ believe this, and believes that the reason gold producer and gold explorer stocks are lagging the price of gold currently has to do with ‘risk aversion’. I have been working on an e-mail commentary setting out my views on the reason for what many equity market observers have seen since the end of April as being a dichotomy between the physical gold price and the market price of gold producer and explorer stocks. I plan to include my commentary in an e-mail later this week. For now, suffice to say that at a high level I agree with Roy-Byrne’s conclusion as to ‘risk aversion’; and,
· ‘bonds will crash without QE, interest rates will skyrocket’. Roy-Byrne expects “continued debt monetization, currency depreciation and inflation but (disagrees) that Bonds are going to collapse anytime soon”. Based on what I am reading and thinking, Roy-Bryne’s comment currently is consistent with my own views assuming Roy-Bryne is using the term inflation in the context of the U.S. Federal Reserve’s current guideline of 2% or less. In all the attendant circumstances (U.S. unemployment rate, monthly trade deficits, consumer confidence, etc.) if the reported U.S. inflation rate climbs significantly past 2% to me that will signal near-term ‘bad things economic’.
As if out of a page ‘from my own book’, Roy-Bryne concludes by saying “one-way thinking with sensational statements can be dangerous and deadly to your portfolio. It is more sensible to be cautious, entertain foreign ideas and explain both sides of the coin”. I find it refreshing to find an admitted ‘gold bug’ express what I think to be a balanced view, and will pay more attention to Roy-Bryne’s comments going forward than I have in the past.
Fort Knox Gold Count?
An article yesterday titled ‘Fort Knox Gold Audit’ – reading time 1 minute, with a 5 minute accompanying video – says that it has been suggested it would take 400 people six months to count (and I assume properly record) what is said to be the 700,000 gold bars held in Fort Knox. The video says that would cost U.S. taxpayers about U.S.$15.0 million. I added the following comment to the article:
If there really are only 700,000 gold bars in Fort Knox there has to be something seriously wrong with the idea it would take 400 people 6 months to count it. Unless American arithmetic works differently than Canadian arithmetic 700,000 divided by 400 is 1,750. I am 69 years old. I would have thought it would be an easy task to count 500 gold bars per day, and simultaneously account for the serial numbers on each. Assuming 5 working days per week, working at a rate of counting and recording 500 bars per day, it would take one person (700,000 / 500 / 5) 280 weeks to count the gold said to be in Fort Knox. That equates to 70 properly supervised people working for 4 weeks to count 700,000 gold bars. What am I missing?
Even if I am wrong by more than 50%, and it would be possible only to count and record gold bar serial numbers at a rate of 30 per hour, assuming a 7 hour working day it would take 700,000/(7X30) = 3,333 working days, or 70 properly supervised people 3,333/70 = 48 (rounded) days, or 12 weeks, to count the gold bars said to be in Fort Knox. At that count rate, if 400 people working for 6 months would cost U.S.$15.0 million (an annual imputed income rate of U.S.$75,000 per person), 70 people working for 3 months would cost slightly over U.S.$1.3 million. It seems to me:
· even at my assumed lower counting rate, U.S.$1.3 million plus supervisory costs would be a small price to pay to satisfy the American public and the world that Fort Knox indeed has the physical gold claimed; and,
· if the cost estimates quoted were generated by U.S. civil servants, and the implication in the video is that they were: (1) this is a blatant example of the view of at least one or two U.S. government civil servants as to ‘productivity expectations’ of government employees, (2) and if representative of general ‘U.S. civil servant productivity expectations’ there may well be a lot more U.S. civil servants ‘on the dole’ as productivity demands on remaining civil servants is increased as U.S. Federal, State and Local Governments work to cut their respective deficits.
Headlines – Internet as ‘Go To’ Media!
A recent article is titled “What Happens in Greece Is Ultimately Irrelevant” – reading time 2 minutes. The reason I am commenting on this article has to do:
· once again with the use of what I consider to be misleading headlines to attract attention – where as a result readers may reach a different conclusion than the author intended, or reach a conclusion that doesn’t, or perhaps doesn’t, make sense; and,
· because of an ‘Internet conclusion’ I reached as a result of a comment I made on the article, and the author’s response I received back on my comment.
Aside from that, I think this article is worth reading for its content. I added the following comment to this article yesterday morning:
Mr. Wachtel: I assume your article focuses on your views as a trader, and not as a long-term investor. I agree with you that it is likely Germany and other Eurozone countries will support Greece to avoid its short-term default, and largely for the reasons you outline. While that may present a short-term trading opportunity, to say broadly in an article headline ‘That What Happens in Greece is Ultimately Irrelevant’ – without adding “irrelevant to short-term traders” I think to be wrong-headed in the context of long-term investors. This is because I believe that while support for Greece is likely now, I see that as a ‘kick the can down the road’ approach in hope for ‘better days ahead’ – as I take from your article you do as well. Importantly, I think it quite likely that not everyone who will read this article will make this distinction, and you may find that many readers are long-term investors, not traders, who may conclude your view is that the Sovereign Debt situation in Greece is simply ‘broadly irrelevant’. I don’t think that is what you mean to say. If it is I disagree with you. Your comments?
To his credit, Mr. Wachtel responded to my comment later yesterday as follows:
Correct. I hoped it was clear that I was addressing the market’s fixation with Greek austerity plan vote next week and other near term Greek politics.
Long term Greece and other PIIGS represent a bomb strapped to the chest of the global economy, unless
—banks can build up more cash reserves to absorb default losses
—govs can plan bailouts big enough for TBTF financial institutions so that confidence in the banking system and liquidity/credit can be maintained.
Again was addressing only the very short term, but that’s important too, because I’m astounded by the naivete of much of the financial press, which really seems to think EU will let Greeks drag down EU & global economy. Pure yellow journalism/sensational…
The opportunity to comment and exchange views with authors is one place that gives, in my view, the Internet an ‘opportunity to shine’. That same opportunity is not afforded to those who watch ‘news’ (often a misnomer) on television; hear ‘news’ on the radio, read newspapers and magazines, etc.
If one thinks about it, there are no real checks and balances on writers who ‘write the news’ for those media, outside of the editorial policies and checks and balances imposed by their own organizations, and respective levels of their own professionalism, independence, objectivity, intellect and knowledge of the subjects they write about. In my view, this means that the Internet in the end has the potential of being the ‘go to media’ for credible filtered and independently ‘commented upon’ news.
Interestingly, a StockResearchPortal.com Subscriber wrote to me at the end of last week expressing the view that some the best observations and views are to be found in the comments added to the articles I link to in my commentaries, as contrasted to the articles themselves.
About Ian R. Campbell
Ian R. Campbell, FCA, FCBV, is a recognized Canadian business valuation authority who shares his perspective about the economy, mining and the oil & gas industry on each trading day. Ian is also the founder of Stock Research Portal, which provides stock market data, analysis and research on over 1,600 Mining, Oil and Gas Companies listed on the Toronto and Venture Exchanges. Ian can be contacted at firstname.lastname@example.org
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