Gold Talk, from Nick Pribus

December 10, 2009 |

Handed out as prizes for drama or athletic competitions in Ancient Greece1. 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, 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:

A H i t G w a L a t TIn 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:

ProspectorIn 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.


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