Dec
10
Gold Talk, from Nick Pribus
December 10, 2009 |
1. Gold has little value outside building monuments to human vanity — 80% of use is jewelry, 10% speculation, and 10% industrial.
2. Gold is the ultimate recyclable. While one may throw away the occasional aluminum can or copper pipe, gold will generally always be recycled.
3. The marginal production cost in today’s world is about $400 per ounce. There are plenty of producers well below that number, the low cost producers sitting on high grade deposits, the high cost producers on lower grade deposits.
4. There is plenty of gold in the world, in lower grade undeveloped deposits. They sit undeveloped because it seems nobody wants to buy a long term gold future, just a short term spec.
5. I know of at least 10 different undeveloped gold deposits in the former Soviet Union where the all in cost of production is $500 an ounce or less. It will take $50-100 million of investment and three to four years until first pour, but it really will be $500 an ounce gold.
6. People will buy gold today for $1,130 an ounce, but will not buy future delivery in four years at $500. That must be because they perceive operational risk substantially higher than they perceive commodity price fluctuation risk. Which is wrong, the operational risks are under your control governed by physical properties you can manage.
7. Those $1,130 gold buyers at the margin are retail specs who could no longer make money at condoflip.com, and instead heeded the eight-times-hourly talk radio spots hawking gold investment — “Get your free gold investor kit today [a $40 value!] by calling 1-800”.
8. Producers and investors will dig more gold as they become more comfortable that the long term price will continue to exceed the marginal production cost. Just as they stopped digging new mines for a decade while gold price was less than the marginal cost, more and more new digs come on-stream every month the price is above $1,000.
9. Gold at current prices is simply overvalued.
Rocky Humbert replies:
In the 1973 movie “Dirty Harry,” Clint Eastwood famously says, “A man’s got to know his limitations.” I know my limitations, and that means that I don’t know whether gold is “simply overvalued” as Mr. Pribus alleges.
Nonetheless, I do understand the history of “money,” and gold has been a store of wealth (one definition of money) for thousands of years. Since I’m a long-term trendfollower, I’ll extrapolate this trend, and gladly sell a $1,130-strike European-style Put on gold which expires in the year 3009.
More seriously, it is important to discern between “A Hole In the Ground with a Liar on Top,” (to quote Mark Twain’s description of gold mine promoters) and “money in one’s pocket.”
As any investor in Bre-X knows, there are important differences between the gold bars in your vault as a “store of wealth,” and paper shares of a “proven” mine as an investment/speculation. At its peak in 1997, Bre-X had a $6 Billion market cap, but was subsequently discovered to be a complete fraud.
Let’s assume that Mr. Pribus’s analysis of Russian gold deposits is correct. Nonetheless the recent history of Russian politics and gold mining in general quite sensibly demand a massive “arbitrage” discount. I wish him godspeed in trying to monetize those reserves — assuming he’s risking his own capital. Again, “a man’s got to know his limitations,” and my ignorance of geology and geopgraphy means I’ll sadly miss Mr. Pribus’s riskless arbitrage.
Interested readers might want to consult the book “A Hole in the Ground with a Liar at the Top: Fraud and Deceit in the Golden Age of American Mining”.
Russell Sears remarks:
In Alaska I met an old gold miner turned tour bus operator who pointed out all the closed down gold mines in the town on the Inner Passage. He also pointed to the large steep hill/mountain in front of the cruiseship port and said that hill alone has seven million ounces of known gold, but the government would never allow it to be mined as they use to. He also claimed the Inner Passage is littered with hills just like that one, that could now be mined very cheaply if permits could be granted. I have no idea if he was exaggerating or not, but clearly by the shut-up mines at one time there were people making money. If the mineral rights are privately owned, it is clear that the government will regulate you out of business. An if it's owned by the government, if they trully wanted the gold they can get it. But why? If this happens in USA, imagine what the rules of the game are in Russia.
Comments
12 Comments so far
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Yes got to say the days of the Gold Rush are over.
Hmmm…. alright perhaps the marginal cost of production is lower.
But that is hardly the point i guess, the point is the valuation of dollar.
One reason that people by gold, despite everything you have said, is because they are worried about dollar price and not so concerned about the cost of production.
Every asset’s valuation is jut its perception and its desirability.
I will present an example;
There are some who produce commodities and food while there are others who use those commodities to produce other assets such as houses.
However if the prices of houses go much farther ahead of food and commodities, the producers of food will have no incentive to produce it and will go out of business. So many will leave the business, that eventually the food price will go up. Similarly commodity prices have to go up. If they do, then doubling of costs of production can happen in 3-4 years.
This has already happened over last two years. Crude has outperformed houses.
Currently the gold is not going up not only against dollar but against all currencies. Now, this is either a systemic risk premium or a inflation risk premium.
If one thinks it is a systemic risk premium, and one thinks that it is overstated, one can sell gold and sell equities. The equities will fall more than the gold goes up if there is a crisis, i like to think.
If one thinks it is an inflation premium, then one can sell gold and buy other commodities.
Gold is acting more like a currency than a commodity this past year or so. It normally gets killed with the lagging economic index negative and hasn’t so far. This is pretty amazing: People sign petition to “increase inflation to 100%” to cause hyperinflation. http://www.youtube.com/watch?v=vJtS9CuyuaU
Well put Rocky, but I thought when Twain said “A Hole In the Ground with a Liar on Top,” he was talking about golf.
How could gold be considered a better store of value than the dollar — when the entire might of the US government stands behind the dollar?
Ask your lady-friends which they would rather have: baubles or wallpaper. Might makes right.
There are two quotes over at The Golden Truth worth contemplating. There is no fiat paper currency that has stood the test of time. None. Nada. Not a one. They’ve all gone bust.
Gold, otoh, has been a reliable store of wealth for 4,000 years.
What are you going to put your faith in? Timmy Geithner, Helicopter Ben, and the Annoited One? Or physical gold/silver? It’s no contest in my book.
—————
“Paper money eventually returns to its intrinsic value – ZERO.”
– Voltaire 1729
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the reult of a voluntary abandonment of further credit expansion or later as a final and total castastrophe of the currency system involved.”
– Ludwig von Mises – Austrian Economist (1881- 1973)
Point #6 is an absolute credibility crusher for the author.
If I understand correctly,
4 year, $100m project in former Soviet Union = controllable and manageable operation
therefore,
gold is overpriced.
Absurd!
1. Tell that to Indias central bank. I am sure they are planning to make bracelets. Gold reserves held by central bank as a percentage of currency reserves have never been lower.Diversification effects alone can lift gold prices further. Gold is a tiny market and the only real alternative to fiat reserves.
2.Even so, increased investment demand and declining output means that people will pay up to get this recycled gold from their fellow men, no?
3+4. Gold mining production is in decline, and has been in decline for almost ten years. Why do you think that is? Lower grade mines then probably have a higher marginal prod. cost than you state. Mining is risky and slow. Please consult the gold future curve regarding your second point. It appears mr market disagrees with you.
5. I know about at least 10 people who say the same thing. Weird how these deposits aren’t mined with a 400$ production cost. Weird how most of them end up never coming online.
6. Last done for the june 2014 contract is above 1200 dollars.
http://futures.tradingcharts.com/marketquotes/index.php3?market=GC
7. In the last reporting period, 170 institutional investors bought more GLD while 76 decreased their positions. New entries on the institutional side were 91, while 39 sold. I am sure this pattern has completely reversed this period…
8. This you are probably right about. Or are you? As gold has almost quadrupled in price since the bottom, mining production has declined. I happen to think you are right on this going forward, but lead times on gold projects are very long. Plenty of time for the price to soar in the meantime.
9. Compared to the cost of production in usd, yes. But since confidence in the usd is rapidly waning, it can go much higher still. This is a matter of real money vs fiat money. As long as the value of the usd is perceived to be at risk of debasement gold will continue to go up. Look at the policies of Ben Bernanke and tell me these are not debasing the usd.
“I have no idea if he was exaggerating or not, but clearly by the shut-up mines at one time there were people making money.”
I guess I would argue that if the mines were still open, that would be a sign that people were making money. Hopeful Americans brought a lot of their savings and borrowings to Alaska to mine for gold. They closed the mines and left when they ran out of savings and borrowings. All Alaska equipment dealers know not to accept part-ownership in mines as collateral for mining equipment.
In days of old
When bucks were gold
And fiat wasn’t invented
You kept your gold inside a vault:
Inflation was prevented.
It seems as though most of us have forgotten that precious metals directly compete with Fiat currency, and that is why it has taken a heavy beating lately. Also, most of you do not seem to have appreciated that increasingly rising gold prices sends alarm bells to the financial world that there is something wrong with the economy. It is only logical therefore for the Fed to defend the dollar by hitting Gold and Silver prices. Also, it seems to have been forgotten that what we see going on in the Gold and Silver ETF’s is only in paper trading, and this in no way reflects what is going on in the real world. For we know that more Gold and Silver is being bought every week than what exists in the real world. -Which is why the most prudent investors have already bought physical gold and silver. Another matter which is often overlooked is the ongoing depletion of resources. As most, if not all resources have long since peaked and that stocks are declining. Then there is the issue of mines which have misrepresented their mineable resources, and/or which are successively closing down mines. Yes, new, low grade mines are opening, because of higher market prices, but the costs of refining is also getting more expensive. Or have you not considered that paper trading commodities does not reflect at the moment the huge shortages which are coming upon us quickly.
According to the old miner, permits and regulations were put in place to stop the mining to prevent any possible environmental harm.
http://en.wikipedia.org/wiki/Pebble_Mine
“estimates that Pebble contains over $300 billion worth of metals at early 2009 prices.”