Gold Mining Investors Hate Record Highs in the Gold Price - Huh?

25, 26 & 27 April 2011

Gold mining investors absolutely hate new record highs in the gold price. Every time gold moves to a new high, the gold mining shares plummet.

I understand why. It's because the investors who accumulate gold stocks think gold is too high and has to go back down again.

Huh?

If that's the explanation, though, what (the heck...) are they doing investing in this sector???

Case in point. Gold soared to a new record high in the $1518 range overnight. As is so often the case, it was sold off in New York (that is a recurring pattern too).

But as I write, the gold price is doing just fine, acting quite comfortable in the $1500 range. And last week, people seemed to think $1500 was a pretty high price for gold. (In 2008 and 2009, they though $1000 was pretty high, and so on and so on, back to $300 in 2002, which seemed like quite a lot at the time also!)


So what did gold stocks do today, as indicated by the HUI Gold Bugs Index?

They sold off hard. Every time this happens, a text box pops up above my head with one word in it:

How, then, are gold stocks looking relative to the gold price? Here is the ratio chart, using the GLD ETF to create an intraday chart.

Hmm. This looks really bad - trending sideways, and actually falling when the gold price climbs!

Well, perhaps it's not as bad as it appears. It does seem that investors are willing to dip their toes back into the market when gold holds at new prices for a few days. It's just a very skittish crowd, for reasons I don't totally understand.

Of course, this broad behavioural pattern has actually caused gold mining shares to underperform the gold price since 2006.

So, yes, you can still buy gold shares very cheaply, relative to the cost of gold, which, surprisingly enough, is what they happen to produce and sell - the better ones in increasing quantities and with rapidly rising profit margins... making gold mining more or less the most profitable business on the planet at this particular juncture in history.

However, at some point this pattern will change, and cheap gold stocks will no longer be readily available.

For the holdouts in the crowd, I'm warning you now.

You are getting gold stocks at a steal. Enjoy it while it lasts, because, hey, it's not gonna last forever!

And think about this: When the gold price sets new record highs - for example - for the last ten years in a row, that might be a reason to hold gold miners, not sell them!

So, why not buy and hold gold mining stocks now? It's just a thought on my part....

Looks like it's been a good idea for the past ten years.

Have you ever noticed how, when a trend sets in motion, it just tends to keep going that way?

Seems to me we might have some kind of trend going on here! So... why not stick with it?

26 April 2011:

Here's an update for you.

Gold, in my opinion, had an uneventful though somewhat lower day (after all, it's a bit hard to trade higher every time an all-time record high has been achieved...):

Gold stocks of course, were smacked down for the second day:

And HUI:GOLD, the ratio chart, is back to valuing gold miners - relative to the gold price - about where they were in late January, when gold was trading $200 lower, in the low $1300s.

Duh.

Let me do the math for you. When the gold price is $200 higher, gold miners make more or less $200 more in profits per ounce of gold sold.

That is, if math is tough for you - as it obviously is for most gold mining investors, then at this level, the miners' margins might be up by, say, 25%.

Let me explain.... Suppose their production costs are $500 per ounce - it can vary considerably, from $0 to $800 or so. Then from late January to late April this year, the miners' profit per ounce of gold sold has increased from something like $800 per ounce to something like $1000 per ounce.

So, independently of the gold price, the miners should trade on the order of 25% higher now than they did in January. In this case, that would constitute a rise in the HUI index from the bottom-feeding 492 in January 2011 to a still undervalued 615 today (the HUI actually closed today at an absurdly low 574).

Let me tell you now - this logical increase in the market value of the gold miners is systematically not happening! The gold miners have lost traction as the gold price has risen for the past 5 years, just as has occurred over the past 3 months, with an additional 33% underperformance from already undervalued levels!

So long as mining company investors go running for cover - like cockroaches under an upturned rock - every time the gold price drops from a new high, that pattern is not going to change!

I guess a smart speculator could play this game for profit, just by going short the miners every time gold sets a record high.

In fact, I'm going to guess that some do, as many commentators on Eric King's program have been maintaining (Dan Norcini and others, for example)!

Shorting the investment sector I believe in more than any other is contrary to my ethics, but what an easy way to make money for the past 5 years!

27 April 2011:

OK. Anywhere around $1500 is a perfectly fine gold price for now. Watch out, as we're setting yet another new record high in gold.

It would be nice to see gold stocks respond positively to a record high in the gold price for once. They are still below last week's levels.....

If that occurred, it would be a watershed event!

Oh, Ben Bernanke is speaking now. The first news conference ever for a Fed Chairman. I disagree with every Fed policy and every statement he makes. However, I admire his courage in attempting to make the Federal Reserve and its policies more open and understandable to the public. That single decision on his part is entirely admirable, and increases my underlying sense of hope for the future.

That is, I believe Mr. Bernanke is wrong about literally everything, but I have total respect for his openness and directness.

You can't help but notice Mr. Bernanke's voice shaking from time to time. He is a courageous and well-intentioned man who is really trying to do a good job! Oh, by the way, his job is probably impossible. He can't fix everything by himself. For example, you'd need a few committed politicians. And how can they do it if the citizens themselves are not willing to take the road less travelled?

You need an entire people working together to respond to a crisis of the present proportions. I hope that will happen one day. But, unfortunately, today is not that day. Almost everyone still wants the easy but short-term solution with higher long-term costs!

Post-News Conference comment:

Hmmm. Mr. Bernanke and I agree on one important point. He stated that the US Federal budget deficit is "unsustainable," and that US Federal debt is "our most serious problem." Wow! That is exactly correct.

Obviously we have different ideas about how to respond to that problem, but yes, we are all looking at the same problem.

Mr. Bernanke was somewhat happy about the S&P downgrade of US debt (S&P warned that its rating of US debt may fall below an "AAA" credit rating, which would drive interest rates powerfully upward!). Obviously Mr. Bernanke hopes that something will get the politicians (and public) moving, so he won't have to do the whole job by himself - which, as we have discussed - he can't possibly do in any case!

As to the gold price, it is soaring on an intraday basis, higher still post-news conference. Somebody somewhere believes that inflation is going to continue....

Are you surprised?

Jim Sinclair's $1521 gold price target was met (and surpassed) today. It hovered at that level following the Fed announcement (due to a promise of continued dovishness in a situation where something entirely different is obviously needed), and the gold price moved over the $1521 level following the conference with Mr. Bernanke. Note that $1600 seems to be the next stop....

Mr. Bernanke still believes that he can act effectively when long-term inflation expectations get out of hand.

Just a small caveat on that one.... We are long past that point, and Mr. Bernanke has obviously missed this critical historic juncture! Pandora's box was actually opened back in 1987, when Alan Greenspan took over the chairmanship of the Fed. That is an event that has been unacknowledged for the past 24 years!

Oh, the question I would have asked... "Mr. Chairman, given that you have announced your intention to cease purchasing US Treasuries in June of this year, what will be the result if no one steps in to take your place?"

Not sure why no one asked that question. It would have been my first!

And... are gold stocks still underperforming the gold price?

Radically so. It is a shocking disconnect! However, the long tail and the trend reversal in today's chart looks optimistic for gold mining shares in the short-term....

If we had a new high in gold and gold stocks climbed... that would be a BIG DEAL! Let's wait and watch for that one....

That would change everything.
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Atlas Shrugged: The Movie Is Worth Seeing Despite Its Obvious Failures

15 April 2011

OK. Just caught the premiere of Atlas Shrugged: Part I this evening. I read the book in high school (at which time it was still fairly new - it was published in 1957). The movie is only on 200 screens.

In my view, Ayn Rand, the controversial and celebrated author, was not a great novelist. She used the form of the novel to express ideas about her personal philosophy ("objectivism") that had been formed by her personal survival of Russian collectivism and a genocide twice the scale of Hitler's. This woman definitely has something to say. As to the film, I was most struck by the conflicting and deeply compromised premises at its core.

Rather than seeing the film set in historical context, we find that it opens in the year 2016. Gas is $36 a gallon, everybody is unemployed, and evil politicians scheme to loot the last few of the country's wealthy and successful people.

Sound like Russia? You've got it. And we are also taken back to the original story of railroading, iron, steel and coal – and ballroom cocktail receptions. That is quite a disconnect, and at least for me, I couldn't set the railroad story in our present decade.

There are other problems. I was bugged by the characters' inability to construct grammatical sentences (“we/us,” “is/are,” basic stuff). The dialogue itself was probably taken from the book, but honestly, that is not an inspired source. Rand's characters can speak for 50 pages without taking a breath. So a lot of the pieces of the story didn't work together.

I also have the impression that the screenwriters (John Aglialoro and Brian Patrick O'Toole) don't know much about modern business. For example, and most tellingly, they stayed with Rand's notion that individuals would be outlawed from owning more than one company.

Hey, individuals don't own any major companies anymore – and don't want to! Everything has been floated on the market to exploit shareholders! Why do it yourself, when you can suck the shareholders dry?

This problem is in fact one of the contemporary manifestations of exactly the problem that Ms. Rand was trying to illustrate from the middle of another century.

That is, the evils of our age are different than those of the mid-20th century. So if we're going to set this story in 2016, then let's see the collective thinkers mired in political correctness and tortured compromises, trying to rescue the economy by destroying the currency. Hey! That is actually happening – and it would make the same point in a contemporary setting, as I think the screenwriters intended.

So, at least for me, this WAS still worth watching. I guess the producers didn't have much money or time. I understand. This is not a big budget film, and that's OK. Give them a break.

I think what everyone involved in this shoestring effort was trying to get across is that individual initiative is the only thing that can save us (as opposed, say, to organizing various factions into groups and going at each others' throats – as seems to occur on Fox News nightly!).

So yes, this film is trying to be about courageous people believing in something and doing it, not unlike trying to produce this film with no money! Good for them. It's probably still the right answer.... I commend them for trying!
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Fuel: By Josh Tickell

11 April 2011

I just watched the film "Fuel," on DVD, by my fellow New College of Florida alum, Josh Tickell.

This is basically the story of Josh's life's work. He has had an interesting life, and tells his story well. He happens to be a gifted environmental activist, plus a talented film maker.....

Josh majored in sustainable living at New College of Florida (yes, you can do that - that is, you are allowed to invent your own major, and this is what Josh did).

Basically, this film is about biodiesel. Biodiesel is not good. Biodiesel is revolutionary.

Biodiesel is NOT corn-based ethanol. It is not food-to-fuel. It returns the energy input 3:1 or better. It is safe and even edible. It pollutes less than so-called fossil-based diesel fuel. There are many ways to produce it, and more and better ways of doing it are being found all the time.

As an aside, the US can produce all the biodiesel it needs, and never has to import oil from anyplace again, if it chooses this path.

As Josh says, "War is not required."

Willie Nelson, Neil Young and Richard Branson are among biodiesel's better-known advocates.

Oh, and this film isn't only about biodiesel. It is also about how to live, how to conserve energy, the history of our present fossil fuel-based energy system, other ways to produce energy besides fossil fuels, the life story of Rudolph Diesel, a lot of Josh's own life story, interviews with scientists and business people, finance, educational graphics, statistical analysis, etc., etc. I hope you're getting the idea. My impression is that there are investible ideas here too, and why not?

Anyway, (1) you have to watch this to learn more, (2) you need to figure out how to get biodiesel and related sustainable technologies into your home, your life and your communities, and (3) you need to tell other people about this.

Again, this has nothing to do with corn-based ethanol, which is not a particularly good idea at all, at least, not much better than fossil fuels. This is entirely different. You can make this stuff from trees that grow to maturity in 3 years, from algae (thank Jimmy Carter for getting this started), from sewage sludge, etc., etc.

Again, the US does not need to import oil. Neither does any other country that wants to do this. This is good, very good.

Watch.
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Enantiodromia: The Word of the Day....

5 April 2011

The following is a comment I made on the Dollar Vigilante Blog. If a little more context will help you after reading this, then click here for Jeff Berwick's thought-provoking article ("Mortgaging Our Grandchildren's Future? That's Being Optimistic!"). In any case, my recent thoughts on enantiodromia:

Jung (the Swiss psychiatrist) used the term "enantiodromia" to describe the psychological principle of "running into opposites."

Historically, no people have ever been more opposed to centrally-planned, non-free-market economies than the citizens of the US. That, of course, has changed, and it is perhaps instructive to analyze why.

The healthcare system is one example.

Layers of bureaucracy and regulation have accreted over the years to PREVENT the emergence of government-provided healthcare in the US. The notion that government regulation can advance a free-market system has made the quasi-free-market health-insurance-encumbered US health system perhaps the most expensive in the world.

Like it or lump it, but government-run healthcare in Canada costs half as much, and for most people, it is also better.

Somewhere, the idea that the government and the Fed have the "responsibility" to rescue an economy in trouble became acceptable (our forefathers would not have accepted this idea for a moment), and the executives on Wall Street have been feeding at the publicly mis-regulated "private" trough for decades, making Animal Farm no longer an allegory (the pigs are running the farmyard).

A guy I respect (Bill Fleckenstein) says that the Fed (the US Federal Reserve Bank, headed by Ben Bernanke) has more implicit responsibility for this situation than any other body, including the big spenders in Washington and the over-leveraged risk-takers and game-players on Wall Street.

That is, easy money creates a climate in which elected representatives, business leaders, et al, simply believe they will be rescued.

And of course the public buys into this idea.

Who in Wisconsin is demonstrating in the streets, saying, "Hey, thanks for saving us taxpayers the money we can't afford to pay!"

Anyway, the greatest opponents of the centrally-planned economy have now morphed into its greatest advocates. Read more about it at the Dollar Vigilante....

Enantiodromia: the word of the day.....
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The Heroes of 2011: Japanese Nuclear Workers

2 April 2011

I've been following the New York Times Asia-Pacific page since the Japanese earthquake and tsunami.

I wish to make one point. We knew from the start that the reactors would leak as a consequence of the damage from both an earthquake and a tsunami. Come on, nothing is built to withstand such dual forces of destruction.

And yes, there is serious local leakage of very poisonous and persistent radioactive substances - plutonium, iodine, cesium and more, and they will spread. It's horrible.

But we must remember that (1) nothing nuclear blew up or (fully) melted down and (2) nothing nuclear burned.

Yes, it's disastrous, unimaginable, really. But it could have been far, far worse.

I give full credit to the courageous frontline workers, who knew from the start they would be over-exposed to life-threatening radiation.

They did this for us, and I thank them for their sacrifice on our behalf. When Time Magazine chooses the "person" of the year this year, I hope they remember these workers!
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Military-Industrial Malinvestment

21 March 2011

I wish I had time to say more on this topic, but for now, here is my quotation of the day, from my friend and adviser, Ed Bugos at the Dollar Vigilante website (I recommend that you join as a subscriber):

"If the world were on a gold standard, governments could not afford the wars they are involved in today, and there’d be no question of the West withdrawing from the Middle East, because we would not be able to afford it! If, instead of printing the money, the government said that it will increase taxes for everyone by $20,000 this year to fund their ongoing intervention in the Middle East in the name of democracy, there would be a lot less "Gotta Support The Troops" going around! Without the ability to print money, there’d be no military industrial complex."

- Ed Bugos, from The Dollar Vigilante Blog

In fact, I can say a little bit more on this subject, as I commented on Ed's post at the Dollar Vigilante site, as recapitulated below:

"OK. That was an interesting twist at the end. Where does the excess money printing end up? In the hands of terrorists, despots and dictators in the oil producing nations, and in the hands of the Military-Industrial Complex on our side of the pond! Now, you could write a book on military-industrial malinvestment!

"As to the crisis that produced Reagan and Thatcher, I suspect the next one will somehow be a blend of the 30s and the 70s, but I do not know which parts will figure into the final blend. Unfortunately, it will not be pretty, and it will be the direct result of money-printing!

"What I do know is that nobody will be calling, "The bottom is in! Buy real estate/stocks/whatever now!" The bottom will appear endless, and gold will be the ONLY bright light at that point...."

That's all for now, folks!

(Credit: The poster used above and the US dollar chart below came from this interesting article.)

(Disclaimer: The above comments are not directed at any particular military venture, some of which are needed in my view, but rather at the type of world that is created by printing money rather than paying our bills....)

Additional comment: Regarding the present intervention in Libya, the application of the above lesson runs something like this: (1) Money-printing (inflationary monetary policy) made oil expensive, enriching (and arming) such despotic leaders as Qaddafi. (2) We "solve" the problem with MORE money-printing, to pay for military interventions to protect the Libyan people from the ruthless leader whose ascendancy we funded in the first place! (3) The devastating consequences? We'll "solve" that with money-printing yet again! I hope you can see where this is going.... The cycle continues literally until the currency reaches the point of inflationary collapse. Then, hopefully at least for a while, we learn to live within our means again!
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