Investment Postcards from Cape Town

The report below comes courtesy of the Gold
Anti-Trust Action Committee (GATA).

“Market analyst Paul Mylchreest, who wrote the 2006 report for Credit Agricole’s Cheuvreux brokerage house concluding that the gold market was being manipulated surreptitiously by central banks and, the following year, a similar report for Redburn Partners, has revisited the gold market in a study for his own analysis service, the Thunder Road Report.

“Mylchreest examines the gold traded in the world’s biggest gold market, London, and concludes that either a tiny amount of real metal is supporting a spectacular volume of paper trades, “an accident waiting to happen”, or else that the world’s gold supply is spectacularly larger than officially acknowledged and the London gold market has been used in recent years to launder questionably obtained gold, perhaps the fabled “Yamashita’s gold” plundered from Asia by the Japanese military during World War II, in which case the London gold market is a “crime scene”.

“Mylchreest’s report is fascinating and as conscientious as the obscurantism of the gold world allows.”

Click here for the full report.

Source: Chris Powell, GATA, October 16, 2009.

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Doug Casey is an American free-market market economist, financial author and entrepreneur. He has been writing a monthly investment newsletter, the International Speculator since 1979 and I always find his ideas quite refreshing. He is also somewhat of a perma gold bull as gleaned from an interview posted here a few days ago. In a follow-up discussion with Louis James, editor of the International Speculator, Casey focused on the outlook for gold stocks.

Here is the first section of Casey’s interview:

L: Doug, we were talking about gold last week, so we should follow up with a look at gold stocks. If one of the reasons to own gold is that it’s real - it’s not paper, it’s not simultaneously someone else’s liability - why own gold stocks?

Doug: Leverage. Gold stocks are problematical as investments. That’s true of all resource stocks, especially stocks in exploration companies, as opposed to producers. If you want to make a proper investment, the way to do that is to follow the dictates of Graham and Dodd, or use the method Warren Buffett has proven to be so successful over many years. Unfortunately, resource stocks in general and metals exploration stocks in particular just don’t lend themselves to such methodologies. They are another class of security entirely.

L: “Security” may not be the right word. As I was reading the latest edition of Graham & Dodd’s classic book on securities analysis, I realized that their minimum criteria for investment wouldn’t even apply to the gold majors. The business is just too volatile. You can’t apply standard metrics.

Doug: It’s just impossible. For one thing, they cannot grow consistently, because their assets are always depleting. Nor can they predict what their rate of exploration success is going to be.

L: Right. As an asset, a mine is something that gets used up, as you dig it up and sell it off.

Doug: Exactly. And the underlying commodity prices can fluctuate wildly for all sorts of reasons. Mining stocks, and resource stocks in general, have to be viewed as speculations, as opposed to investments.

But that can be a good thing. For example, many of the best speculations have a political element to them. Governments are constantly creating distortions in the market, causing misallocations of capital. Whenever possible, the speculator tries to find out what these distortions are, because their consequences are predictable. They result in trends you can bet on. It’s like the government is guaranteeing your success, because you can almost always count on the government to do the wrong thing.

The classic example, not just coincidentally, concerns gold. The U.S. government suppressed its price for decades while creating huge numbers of dollars before it exploded upward in 1971. Speculators that understood some basic economics positioned themselves accordingly. As applied to metals stocks, governments are constantly distorting the monetary situation, and gold in particular, being the market’s alternative to government money, is always affected by that. So gold stocks are really a way to short government - or go long on government stupidity, as it were.

The bad news is that governments act chaotically, spastically. The beast jerks to the tugs on its strings held by its various puppeteers. So it’s hard to predict price movements in the short term. You can only bet on the end results of chronic government monetary stupidity.

The good news is that, for that very same reason, these stocks are extremely volatile. That makes it possible, from time to time, to get not just doubles or triples but ten-baggers, twenty-baggers, and even a hundred-to-one shots in these mining stocks.

That kind of upside makes up for the fact that these stocks are lousy investments and that you will lose money on some of them.

L: One of our mantras: volatility can be your best friend.

Doug: Yes, volatility can be your best friend, as long as your timing is reasonable. I don’t mean timing tops and bottoms - no one can do that. I mean spotting the trend and betting on it when others are not, so you can buy low to later sell high. If you chase momentum and excitement, if you run with the crowd, buying when others are buying, you’re guaranteed to lose. You have to be a contrarian. In this business, you’re either a contrarian or road kill. When everyone is talking about these stocks on TV, you know the masses are interested, and that means they’ve gone to a level at which you should be a seller and not a buyer.

That makes it more a game of playing the psychology of the market, rather than doing securities analysis.

I’m not sure how many thousands of gold mining stocks there are in the world today - I’ll guess about 3,000 - but most of them are junk. If they have any gold, it’s mainly in the words written on the stock certificates. So, in addition to knowing when to buy and when to sell, your choice of individual stocks has to be intelligent too. Remember, most mining companies are burning matches.

L: All they do is spend money.

Doug: Exactly. That’s because most mining companies are really exploration companies. They are looking for viable deposits, which is quite literally like looking for a needle in a haystack. Finding gold is one thing. Finding an economical deposit of gold is something else entirely. And even if you do find an economical deposit of gold, it’s exceptionally difficult to make money mining it. Most of your capital costs are up front. The regulatory environment today is onerous in the extreme. Labor costs are far above what they used to be. It’s a really tough business.

Click here for the full interview.

Source: Conversations with Casey, September 30, 2009.

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The following comments come from Chris Powell of Gold AntiTrust Action (GATA):

During last Friday’s hearing of the House Financial Services Committee on his legislation to audit the Federal Reserve System, US Rep. Ron Paul asked the Fed’s general counsel, Scott G. Alvarez, whether the Fed has ever been involved in the gold market. Four days earlier GATA had disclosed the Fed’s admission that it has records of its “gold swap arrangements” with “foreign banks” that it wants to conceal from the public. (Click here.)

Replying to Paul, Alvarez professed to have no expertise in the matter of intervention in the gold market but added that he could get Paul such information. Paul replied that one purpose of his audit legislation was to determine whether the US government was intervening in the gold market by using other governments as intermediaries.

That surely is one reason for the Fed’s hysterical opposition to Paul’s bill. Let’s hope Paul followed up by asking for the gold intervention information Alvarez claimed not to have.

You can watch the exchange between Paul and Alvarez at YouTube below. (The section involving gold begins at about 5 minutes and 30 seconds into the video.)

Source: Chris Powell, GATA, September 28, 2008 and YouTube, September 27, 2009.

And while we are on the topic of Ron Paul, his new book, “End the Fed” should be on your list of prescribed reading.

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Doug Casey is an American free-market market economist, financial author and entrepreneur. He has been writing a monthly investment newsletter, the International Speculator since 1979 and I always find his ideas quite refreshing. He is also somewhat of a perma gold bull, but nevertheless argues his case convincingly, as gleaned from the interview below with Louis James, editor of the International Speculator.

But before getting stuck in the discussion, Adam Hewison’s (INO.com) has just produced a short technical analysis of the short-term direction of gold. Click here to access the presentation.

Here is the first section of Casey’s interview:

L: Doug, we’ve talked about cars, cows, and cash, but the investment world thinks of you as a gold bug, so let’s give that a go; why gold?

Doug: Sure. First of all, it’s because gold is actually money. It’s an unfortunate historical anomaly that people think about the paper in their wallets as money. The dollar is, technically, a currency. A currency is a government substitute for money. Gold is money.

Now, why do I say that?

Historically, many things have been used as money. Cattle have been used as money in many societies, including Roman society. That’s where we get the word “pecuniary” from: the Latin word for a single head of cattle is pecus. Salt has been used as money, also including in ancient Rome, and that’s where the word “salary” comes from; the Latin for salt was sal (or salis). The North American Indians used seashells. Cigarettes were used during WWII. So, money is simply a medium of exchange and a store of value.

By that definition, almost anything could be used as money, but obviously, some things work better than others; it’s hard to exchange things people don’t want, and some things don’t store value well. Over thousands of years, the precious metals have emerged as the best form of money. Gold and silver both, though primarily gold.

There are very good reasons for this, and they are not new reasons. Aristotle defined five reasons why gold is money in the fourth century BC (which may only have been the first time it was put down on paper). Those five reasons are as valid today as they were then. A good form of money must be: durable, divisible, consistent, convenient, and have value in and of itself.

L: Can you elaborate on that?

Doug: Yes, and from them, we can draw inferences that will help us anticipate the fate of the dollar.

First, let’s take durable. That’s pretty obvious - you can’t have your money disintegrating in your pockets or bank vaults. That’s why we don’t use wheat for money; it can rot, be eaten by insects, and so on. It doesn’t last.

Divisible. Again, obvious. It’s why we don’t use diamonds for money, nor artwork. You can’t split them into pieces without destroying the value of the whole.

L: If I paid for a new Ford GT with the Mona Lisa, what would be my change - a small canvas by Picasso?

Doug: [Laughing.] That’s right. Maybe you’d get millions of those paintings of Elvis or Jesus on velvet.

Consistent. The lack of consistency is why we don’t use real estate as money. One piece is always different from another piece.

Convenient. That’s why we don’t use, for instance, other metals like lead, or even copper. The coins would have to be too huge to handle easily to be of sufficient value.

Value of itself. The lack here is why you shouldn’t use paper as money.

Actually, there’s a sixth reason Aristotle should have mentioned, but it wasn’t relevant in his age, because nobody would have thought of it…

L: It can’t be created out of thin air.

Doug: Right. Not even the kings and emperors who clipped and diluted coins would have dared imagine that they could get away with trying to use something essentially worthless as money.

L: I think we can forgive Aristotle for the oversight.

Doug: I think so. At any rate, these are the reasons why gold is the best money. It’s not a gold bug religion, nor a barbaric superstition. It’s simply common sense. Gold is particularly good for use as money, just as aluminum is particularly good for making aircraft, steel is good for the structures of buildings, uranium is good for fueling nuclear power plants, and paper is good for making books. Not money. If you try to make airplanes out of lead, or money out of paper, you’re in for a crash.

That gold is money is simply the result of the market process, seeking optimum means of storing value and making exchanges.

But it’s not something that suits governments, because paper money is an excellent means for governments to tax people indirectly, surreptitiously, through inflation. That’s one reason central bankers love paper money, but also, phony economic theories, like those of John Maynard Keynes, hold that the government not only can but should meddle with the economy, and the ability to print paper money gives them a means to do that.

In today’s world, not only do people around the world take it for granted that paper is money, but that it should be so.

But it’s all nonsense. It’s one reason for taking a gloomy view of humanity — people will believe almost any kind of claptrap, if the story is retailed by those in authority.

After the current system collapses, as every paper money system in the past has collapsed, some form of money will have to replace it, and it’s almost certainly going to be gold.

Click here for the full interview.

Source: Conversations with Casey, September 23, 2009.

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