Tom Szabo

Facts Behind Gold's Concentration

It's more like $2000 a MONTH for talented placer miners with ton-per-day-capacity equipment on good claims. You can't make diddly squat on any bend of the American River accessible to the general public. Also, it wasn't mining permits issued but number of unpatented claims. Still a big rise but most of it is on land that has no mineral potential. The BLM isn't complaining as it's a nice little source of revenue. The only other people making money are those locating claims or selling them to the gullible public. Tourism is generally down in the Sierra foothills as it is elsewhere so shop, restaurant and motel operators aren't raking in the dough by any means for the 49'er wannabes.

Gold's Big Secret - No One's Actually Buying

Excellent overview of short-term fundamentals but one thing missing is the answer to the question, what happens if the speculators turn tail? Will physical buying show up in all possible scenarios (the so-called Beijing Put) or are there some possibilities where basically there is a sizable air gap? I'm leaning toward a middle ground scenario where we do get a sharp slide but shorts start to cover aggressively and bargain hunters come out of the woodworks. That would basically create a V-shaped correction. But what if the shorts refuse to cover, and the people who have money to buy physical (ie., China) decide to hold out for a better price (like bargaining at a market stall)?

Why a Gold Bug Isn't Buying Gold Now

The article makes reasonable sense, but why not sell some (at least stocks) on strength? How many people are able to continually buy meaningful position size without first having taken profits and thus freeing up some cash?

Gold: A Bubble Brewing?

The best option is to have been invested earlier this year so as to be in a position to have taken profits recently and to have cash on the sidelines for when there is a pullback, which is going to take place sooner than later. The only "options" I would consider are cheap December puts in COMEX gold and silver or November puts on sector leaders like AEM, GG, FCX, PCU, TCK. Some of these are fantastically priced (or at least were earlier today) at what might be the cusp of a vigorous correction. You don't need a lot of them to provide some timely protection -- a really good strategy would be to immediately convert any gains on put options into share positions. I'm also personally planning to go long COMEX gold futures against any option positions that go far enough into the money, creating a powerful slingshot scenario should a gold correction be sharp but very short, which is typically what happens this time of year.

Crude Oil and Gold: Not Worth Worrying Over

An alternate theory gaining a bit of credibility compared to "first a slight correction, then to da moon!" is that commodities, oil and gold will trade in a wide consolidation pattern during the next few years. There is no fundamental reason why oil couldn't be trading at $50 today just like there is no fundamental reason that it is trading at $80. Similarly, I think the idea that gold cannot trade for an extended period in a price range of perhaps $700-$1100, but instead must inevitably trade much higher in the short run, is a sign of groupthink. I have a large exposure to precious metals in the form of physical holdings and stocks so I would love for gold to explode in price but at the same time I believe it's important not to drink the market's Kool Aid.

Eldorado Gold: A Cost-Effective Way to Move into Gold

Those GORO numbers are all internal projections without the benefit of a detailed, independent mine feasibility study and the company could be in serious violation of SEC regulations for disseminating them to the public. That is probably why they won't think about getting listed on an exchange until after they have been in production for a year -- by that time the internal projections will prove to be either farcical or prescient so there will be no consequence in having to withdraw all of the inappropriate management projections.

Concerns About Disorderly Monetary and Economic Crisis Are Increasing

The other alternative being that the dollar decline is really the one that is "fleeting, temporary aberrations, or concocted fantasies". I haven't decided either way primarily because a conviction like yours places significant handicaps on the ability to make money.


On Oct 24 06:55 PM ManAboutDallas wrote:

> We can't, Mr. Szabo, and therefore we don't. The declining dollar
> is obvious, so that means the "disinflationary pressures" are either
> fleeting, temporary aberrations, or concocted fantasies [ read: made-up-to-look-good-s...
> ]. Given the sober reality provided by sites such as shadowstats.com,
> the curtain is about to be pulled back and we will all see the Bankrupt
> Wizard of Oz for what it is: a Naked Emperor worthy of Hans Christian
> Andersen himself.

Larkin: Gold's Stealth Bull Market

Kingsgate is pretty solid as are some other ASX listed mid-tier golds. If you are looking for maximum leverage and high risk/high reward, I'd pick Oceana -- our model gives it significantly more upside potential.

Why Are Large Hedge Funds Investing in Gold?

Hedge funds are generally technical oriented trend followers, so they are mostly in gold because it is hot. Gold is NOT a hedge against uncertainty, it is a hedge against terminal economic crisis. In other words, it isn't health insurance, it's life insurance. And gold does serve as a hedge against inflation, but instead of tracking inflation in an orderly manner, gold makes its move in leaps and bounds such that all of the net rise in the gold price from $35 in 1971 to $1050 in 2009 took place on just a few monthly bars on the long term chart. The rest is back and fill action. So for example there have only been FOUR up months in the gold price between January 1980 and today: January-March 2008 and October 2009. Because of this, timing is of utmost importance when it comes to gold, and this type of situation is precisely where a hedge fund can potentially make that elusive "alpha". By the way, many people think that gold can also go up in a deflation because it was revalued from $20 to $35 during the Great Depression, but what actually happened there was an official currency devaluation.

Concerns About Disorderly Monetary and Economic Crisis Are Increasing

Osisko has a feasibility report on the Canadian Malartic deposit from an independent party as required by 43-101 and very few of the risks outlined by "tripleback" are worth worrying about. The fact is that Osisko is a relatively low risk gold developer in Canada that is fairly valued at this time given the present gold price. It is also in an unattractive stage in the gold mine development cycle between feasibility and sustained commercial production. There are comparatively much better values out there, but you have to do a lot of work to build valuation models to screen them. Typically the better values also have a greater risk profile.

Regarding the chart of "global monetary aggregates", does anybody else see that it seems to have topped out after 30 years of parabolic growth? How the heck can we have both a declining dollar AND deflationary pressures?

Investing in Gold Now

Great advice! Load up on gold just as it hits a record high! If you're reckless enough to buy now, at least spread out the purchases over a few months, huh?

Larkin: Gold's Stealth Bull Market

He mentions Yamana and Agnico-Eagle, soon-to-be-million-ounce gold producers with 1/3rd the market cap of already-over-5-million... gold producers like Barrick and Newmont. Where is the leverage in that? What you have to find in this market are comparatively undervalued producers like New Gold and Great Basin Gold as indicated by our valuation model. If you don't mind a current copper producer that is a gold developer as well then you might look at Taseko. There are also a number of TSX-traded up and comers that have some good leverage.

As for Mr. Larkin's statements about gold market fundamentals, they are very safe and pedestrian. He makes it sound like the gold price is going to slowly drift from $1050 to $1200. Moreover, he repeats the canard that gold will really soar when the public starts to participate in earnest. Whereabouts has Mr. Larkin been sticking his head in the sand? Did he not notice Jim Cramer, hedge fund advisor to the unwashed masses, already extoll the virtues of gold? And does he not realize there is already widespread participation by the public in the gold market --- as demonstrated by all those Cash4Gold commercials. Granted, the participation isn't a widespread buying frenzy but does he really believe this bull market will look EXACTLY like the one that ended in 1980?

Eldorado Gold: A Cost-Effective Way to Move into Gold

The production profile is impressive but with a $4 billion market cap (over $6 billion after Sino Gold acquisition), EGO does not offer compelling value among the mid-tier gold producers according to our comparative valuation model. Our database has about 50 mid-tier gold producers (basically all of them) and considers a number of factors including production rate and growth, cash mining cost, resource size, capital costs, etc. Better positioned rivals include Jaguar Mining and Gammon Gold on NYSE plus New Gold and Great Basin Gold on AMEX. Indeed, only Randgold rates lower than EGO on most metrics. There are also quite a few more attractively mid-tier producers on the TSX and ASX.

Even the Fed Doesn't Want to Hold U.S. Dollars

This article is silly. Nobody chose their SDR allocations, they were made in accordance to each country's IMF quota, which represents that country's contribution to total global output as measured by the IMF. With such a faulty premise, the whole article is junk.

How Does One Value Gold?

The proper way to value gold is based on its monetary qualities, or in other words what it could purchase. Many people use inflation rates such as CPI as a proxy for fair value of gold but this is not very sophisticated for several reasons, the most significant of which include accuracy issues as well as the fact that the aboveground stockpile of gold grows every year. I prefer to use a ratio of gold to the global economy, stock markets, U.S. Treasury debt and/or global asset base.

Global economy is reasonably estimated using global nominal GDP (currently around $55 trillion). There are also available figures for Treasuries and stock markets (an effective if rudimentary approach is simply to use the S&P 500 as it is already market cap weighted).

Global assets are much harder to estimate but this is probably the most relevant ratio because it reflects gold's relative purchasing power. Clearly it wouldn't make sense for all of the world's gold to be worth more than every asset that could be purchased! Indeed, gold could only be realistically worth some fraction of total assets which throws some of the wilder (Jason Hommel, Ted Butler, etc.) gold price predictions right out the window. In any case, you basically add global stock market capitalization, real estate, private equity, debt collateral, fiat money in circulation, etc. but exclude all credit-based money, derivatives and other financial products that are zero sum (offsetting asset and liability). Let's say the current number for the global asset base is $150 trillion (probably a bit high but not that far off).

Now calculate the global market cap of gold: 5 billion ounces times $900 = $4.5 trillion. Thus the gold to global economy ratio is roughly 12 ($55T/$4.5T) whereas the gold to global asset ratio is currently around 33. Similar ratios can be computed for stock markets and U.S. Treasuries.

To determine if these ratios and thus the gold price is fair, too high or too low, you need to come up with similar ratios for various points in time, such as the 1980 high in gold, the 2001 low, under Bretton Woods (pre-1971), etc. as well as an average over time. If you do the math it basically says that gold is currently comparable to where it stood in the mid-1970's after the 1974 high and before the 1980 high. At the 1980 peak, the ratios were anywhere from 3 to 7 times lower. That implies if gold were to reach a similar extreme today, it could rise 3-7 times from current levels assuming the denominator (GDP, stocks markets, etc.) stays the same.

Alternatively, the average gold ratios over the past 40 years or so imply that fair value lies in the range between $500 and $1000. If we strip out most of the 1990's when the novelty of gold mine hedging and central bank leasing were at their peaks, these fair values become $600 to $1200. I believe at least several of the analysts that predict $1200 gold are basing their numbers on a similar model to the one I am describing.

Finally, my own studies indicate that the historical ratio of global asset values to gold may have been approximately 5 under the gold standard. In other words, gold might have typically represented approx. 10-20% of the world's material wealth in the past. Perhaps this could be viewed as the ultimate fair value of gold. If so, assuming a global asset base of $150 trillion would mean gold has a fair value of $3000 to $6000/oz. ($150T/5/5 billion ounces). Such a price assumes the adoption of a worldwide gold standard and no consequent deflation in asset prices, which may not be realistic. Perhaps $75T might be a better number given the already ongoing global asset meltdown in which case the fair value gold price under a gold standard could be $1500 to $3000.

Keep in mind all of the above gold prices are real and therefore don't need to be further adjusted for inflation because the ratios' denominators already account for changes in price over time.