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Daryl Montgomery  

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  • Middle East OPEC Oil Rig Count Jumps 14% [View article]
    Good point! The Saudi's are producing more oil now, when oil is selling for between $40-$50 a barrel, than they did when it was at its price peak of close to $150 in mid-2008. It was thought in 2008 that they were at their maximum production to take advantage of high prices. They have managed to exceed that production by adding more rigs to already existing fields. This doesn't mean that they will get more total oil out of the ground, they are just be getting it out faster by over pumping (a dangerous game in old fields).

    The pressure drop in the Saudi Ghawar field, the largest in the world, started in the late 1960's. This is when they began pumping water into the outer areas of the field to get oil out of the ground. Saudi production costs had to begin increasing from that time and are probably much higher than acknowledged -- and certainly much higher than the figures from 40/50 years ago that sometimes appear in print.
    Mar 16, 2015. 12:06 PM | Likes Like |Link to Comment
  • Middle East OPEC Oil Rig Count Jumps 14% [View article]
    What companies are reporting oil "drilling costs" at $20/barrel and where are they located? This figure seems quite fanciful outside the Middle East. Any verification for those numbers? What exactly do those "drilling costs" include? I imagine overhead is not included. If so, staff employees want to be paid, landlords want their rent, and banks want debt service payments and if they don't get it, companies go out of business.
    Mar 16, 2015. 11:52 AM | Likes Like |Link to Comment
  • Reading The Tea Leaves; Yuan Down, Hang Seng Down, Gold Down Overnight [View article]
    "Gold is clearly the asset to sell in a crisis, ...". This hasn't been true for 2,000 years, but I guess things are different this time. Yeah, sure.

    By the way, there have been long periods of time when the U.S. dollar and gold have moved together.

    You yourself say central banks are long-term holders of gold. Then, you claim the Chinese central bank will sell gold in a crisis. East Asians particularly have a long time horizon for investments. This would not be consistent with their worldview.
    The Chinese government has encouraged the populace to accumulate gold over the last few years. Engaging in actions to drive it down, would prove to be politically unpopular. But politicial leaders don't need to worry about maintaining their power, do they?

    Any analysis of gold must be a global analysis of supply and demand (the ultimate determinant of price in economics) since the market is global.

    Gold also hit technical resistance the day before this article was published. Not surprising it went down the next day (nothing goes straight up), and no fanciful explanation needed.
    Feb 26, 2014. 11:32 AM | 1 Like Like |Link to Comment
  • Will China Back The Yuan With Gold? [View article]
    Excellent article. Please publish an update in the future.

    I doubt the U.S. has the gold that it claims (and that goes for some European countries as well). It is known that there was substantial selling of gold by the U.S government in the mid-1970s, and that doesn't seem to be reflected in the chart. There hasn't been a real audit in the U.S. since the mid-50s. The U.S. was the biggest holder of gold at the end of World War II. After that, gold drifted to Europe until all gold backing was removed from the dollar in 1971 (effectively in 1968). Then, the European central banks sold substantial amounts of gold from the late 1980s to the early 2000s. A lot of that gold moved into Asia. The current trend of gold moving from weak hands in the West to strong hands in Asia is merely a continuation of something that began decades ago. Although, China is certainly the big story now in that trend. Indian consumers own 20% of all gold in the world -- more than all central banks combined.

    Gold mining supply has also changed significantly since the 1970s. In the early part of the decade, South Africa by itself supplied a majority of the world's gold. It now generally ranks around 5th place. Although China is now the number one producer, it doesn't have the dominant position that South Africa once had.

    As for supply from scrap, this is correlated to gold price. Higher prices mean more scrap, lower prices mean less scrap. The current lower prices are also going to mean less mining supply going forward for the next few years. Miners were already starved for capital in early 2013 BEFORE the big price drop in gold. Expect a dearth of new mines for several years into the future.
    Jan 11, 2014. 09:49 AM | 1 Like Like |Link to Comment
  • China Becoming The Most Important Factor In Global Gold Markets [View article]
    South Africa wasn't just the biggest producer, but actually mined a majority of global output by itself in the early 1970s. Its fortunes have fallen so far that it now usually ranks around the 5th largest miner of gold. China is number one, but its percentage of global production doesn't remotely rival South Africa in its heyday. Gold production is in severe decline and this means more and more expensive sources have to be tapped to try to meet demand -- and this puts a floor under its price.

    At the same time, demand has increased significantly because central bankers went from large net sellers to net buyers and the newly prosperous in emerging markets are buying gold with their money. Basic economics indicates the price of gold has to keep rising. Asia controls the gold market, but the mainstream media frequently focuses only on what is going on in the U.S. even though it is just a secondary player.
    Jun 15, 2013. 11:01 AM | 4 Likes Like |Link to Comment
  • Why QE Didn't Generate Inflation [View article]
    The markets don't trust the Fed, the markets are CONTROLLED by the Fed. When you buy huge amounts of treasuries (or other government bonds) as the Fed has been doing since 2008, you increase demand significantly. This increase in demand has been much bigger than the increase in supply. Economics 101 says under such circumstances (bond) prices go up and interest rates go down. Notice that every time the Fed has stopped buying, it quickly decided to start buying again. Econ 101 also predicts that when the Fed stops buying government bonds, interest rates will balloon and the consequences will be very ugly.

    As for inflation not showing up there are 2 reasons: ONE: the government calculates the inflation figures and governments have a long history of manipulating and lying about inflation rates because gullible people can easily be tricked with numbers. TWO: there is a long lag time between pumping money into the economy and when it shows up in your bank account. It has to slowly filter through the economy. In the 1970s, maximum money supply increase was in 1971 and maximum inflation in 1980 -- and that's only because Volcker took strong measures to stop it. It could have been 15 years later.
    May 29, 2013. 10:39 AM | 3 Likes Like |Link to Comment
  • The Great Disconnect Between Paper And Physical Precious Metals Prices [View article]
    Your point could have been made during the Credit Crisis when gold fell from 1000 to 700. The "smart" money was selling back then to. And "dumb" people who bought it made a killing. I put a buy out on gold at that time (and yes, a sell when it went to 1000 before that). I got out before the 1900 top and just bought back in. You make money in the market by buying assets when they are cheap and the "smart" money has dumped them and selling them when the "smart" money is telling you how great they are. And if the "smart" money is really so smart, they are doing the opposite of what they are telling you and you have to be pretty dumb to believe them.

    Unlike, stocks commodities have minimum prices (production cost) and gold got close to the upper limit at $1350. And the demand in Asia for physical product proved to be insatiable at this level (and it was very high elsewhere as well). If the price of gold keeps dropping, there will be no physical metal left to buy. Therefore, the price won't go down too long or by too much if it does. The supply/demand picture is very bullish for gold and this is the only thing that ultimately determines the price for everything.
    May 23, 2013. 02:54 PM | 1 Like Like |Link to Comment
  • Portfolio Strategy For An Inflationary Environment [View article]
    It is better to define inflation as a currency losing its value. While I agree that an increase in money supply that is greater than the economic growth rate will EVENTUALLY lead to this, the path to doing so may be long and winding.

    And yes, inflation is a general (and that is a key word) increase in consumer (another key word) price levels. To claim otherwise is to divorce your ideas from real world experience, which is all that investors care about.
    Apr 20, 2013. 11:06 AM | Likes Like |Link to Comment
  • Portfolio Strategy For An Inflationary Environment [View article]
    I have written four books on inflation investing and have analyzed inflation over the last 2000 years. Your article has most of the basic ideas, but needs some refinement.

    All "commodities" do not behave the same in inflation and it is not very helpful to say invest in commodities. Gold and silver are in a class by themselves because they are monetary metals, whereas industrial metals are heavily influenced by the state of the economy and not just inflation (these include platinum and palladium as well as aluminum, copper, nickle, lead, zinc, etc).

    Assets can be divided into primary and secondary choices. Primary ones would be gold/silver, energy, agriculture and art, antiques and collectibles. There are variations among assets in the last 3 categories though. You can also say some investments are early cycle and some late cycle when inflation hits and it is important to know which ones.

    As for your idea about TIPS not being good because of taxes. That is not the problem. They are not good because they are based on government reported inflation and the U.S. understates its inflation rate substantially. See the Shadowstats chart in your article. Bonds should be shorted during inflation. Because of central bank policies this is now a late cycle investment, whereas previously it would have been an early cycle one.

    Hope you will be continuing your work in this area.
    Apr 20, 2013. 10:56 AM | 1 Like Like |Link to Comment
  • Gold: The Recent Collapse And Approaching All-Time High [View article]
    Your understanding of commodity production costs is "limited". There is no ONE price. For metals, mines with higher and higher production costs come into operation as prices rise. If price falls enough, the higher priced mines close down production first. Then if it falls further the next higher priced mines close down, etc. If demand is not falling too, price can't fall much below the highest production costs for long (some short dip is possible, but not sustainable).

    The easy to mine gold (ie. cheap production costs) disappeared long ago by the way. Also take a look at South African production -- a majority of global production in the early 1970s. Ranks only 5th globally now because output is drying up.

    You also don't differentiate between behavior in a secular bear market (the 1980s and 90s for commodities) and a secular bull market (after 2000). The rules are different. If you were selling at the peaks in a bear market, you should be buying on the dips in a bull.

    Your analysis of the supply/demand structure of the market is a bunch of random, disconnected thoughts. Central Banks were net
    sellers of gold from the late 1980s to early 2000s and added to available supply. They are now net buyers and this has added to the overall demand from the jewelry, investment and industrial markets (yes, approximately 15% of gold is used in industry). Supply needs to increase substantially to meet the extra demand, but this is not possible. Production can only rise between 1% and 2% a year (it can take up to 10 years to open a gold mine). Hence prices have gone up.
    Apr 17, 2013. 10:42 AM | 1 Like Like |Link to Comment
  • Gold: The Recent Collapse And Approaching All-Time High [View article]
    Lot's of luck. On what planet are you going to get those prices?

    Gold starts going out of production around $1300/oz. A great deal of production would disappear by the time the price fell to $1000. And you think the rest of the world will just sit around waiting for you to pick up a super bargain? A number of bullion dealers already ran out of supply after the drop on Monday.
    Apr 17, 2013. 10:20 AM | 1 Like Like |Link to Comment
  • February Retail Sales Show Strongest Gain In 5 Months; Now What? [View article]
    Retail sales are not adjusted for inflation. As a rule of thumb, you can use the gasoline number as a gage of the inflationary impact. Almost half of the entire increase was gasoline. Is this because driving increased significantly on the blizzard-racked US roads during the month or did prices go up? Increased prices aren't an indication of a healthy economy, they're an indication of inflation.
    Mar 15, 2013. 01:29 PM | Likes Like |Link to Comment
  • Why Hyperinflation Is A Myth (And What It Means For Gold Prices) [View article]
    Official inflation figures can be and are low because governments lie about the inflation rate. Argentina and Belarus are good current examples. No one in the respective countries believes the reported numbers. US is also a good example with a key difference -- a lot of gullible people believe the official numbers.

    Without accurate numbers, your analysis is meaningless.
    Feb 12, 2013. 09:49 AM | 37 Likes Like |Link to Comment
  • A New (Temporary?) Glitch In The Jobless Claims Data [View article]
    You're disbelieving of raw data, but you believe the statisitical adjustments could be correct??? Raw data is accurate, statistical adjustments are the devil's playground for govenernments who can't fix entrenched economic problems, so decide to manipulate the numbers instead (much easier to do). The story of a recovering economy is propaganda created by the government, disseminated by the media and believed by gullible fools.
    Jan 25, 2013. 05:37 PM | Likes Like |Link to Comment
  • It's Official: U.S. November Sales Increased Across The Board [View article]
    Are any of these numbers adjusted for inflation? The U.S. retail reports are not. Sales going up because of inflation are not an indication of growth. It's merely an attempt to fool the public into thinking the economy is better with a money illusion.

    The inflation figures themselves are grossly underestimated as well (makes GDP look a lot better as well as other figures). All of the "improvements" introduced since the 1980s to calculate the inflation statistics have all acted to lower the reported inflation rate. If you recalculate the inflation rate as it was done in the 1970s, you will find inflation is much higher now. If instead, you think the current techniques are accurate you need to recalculate the 1970s inflation numbers and you will find inflation didn't exist and everyone just imagined they were paying higher prices.
    Jan 12, 2013. 03:22 PM | Likes Like |Link to Comment
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