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A Raving Precious Metals Bull


Save in something tangible, unprintable, natural, beautiful, indestructible and limited in supply.


G'day. Anyone who knows me will tell you I am a raving precious metals bull. I have been for 5 years on the public record. I am a premature speculator as I bought physical gold at $266, on the way down, not on the way up. I have been called everything from a lunatic to a dinosaur over that time. I make no apologies for being outwardly and vocally bullish – from my analysis, I see no other position to take. That others disagree is great and discussion is welcome. Differing opinions are what make a market.

"The sky is falling, the sky is falling" said Chicken Little of nursery rhyme fame. My little bloke loves that story. There are plenty of "Chicken Littles" running around the precious metals markets at present. I like the odds when there's a $50 or $100 downside versus unlimited upside. I don't subscribe to the "that's all folks" mentality of some who are saying that Precious metals have had their day in the sun. Precious metals are a long, long way away from where I see them basking in a few more years. History says so and who am I to argue with history? Gold has been sound money and a store of wealth for 5000 years. The dollar, in its current form has been around for 35 years and has devalued 95% versus gold in that time. Who are you gonna back?

Flight from Fiat

In my last scribbling I mentioned the "Flight from Fiat" which drew some responses so I thought we should expand somewhat….

Every fiat currency system the World has ever seen has ended in tears. It is a fact that not one, ever, has stood the test of time or the ravages of inflation. How can this one be any different? Marco Polo made mention of the Chinese under Kublai Khan treating "paper as if it was gold itself" way back in the 1400's. That ended very badly. John Law, a smart Scotsman back in the 1700's, nearly bankrupted France with his attempt at un-backed paper money. We all know about Weimar Germany and how the Germans ended up paying billions of Marks for an ounce of gold. Old "Elmer" Greenspan himself wrote in his 1966 essay Gold and Economic Freedom, "In the absence of the gold standard, there is no way to protect savings from confiscation through inflation." Today, there is not one currency in the world that is backed by anything but a "promise." That is a first in recorded history, as previously there was always somewhere to run whenever the powers that be succumbed to the temptation of the printing press. Not these days, apart from gold and silver. Furthermore, the bloke in charge of the World's "reserve currency" is on record as saying he will "gun the presses" if deflation becomes an issue. Isn't that comforting?!

Most people are aware of the outrageous printing of money that has occurred in the last decade via the Fed and the GSEs. Economists call it "liquidity." I call it inflation and currency debasement. Check your M3 data, especially post-1995. This monetary inflation has been somewhat disguised by dodgy calculations of official inflation numbers and through the magic of hedonics. Inflation is significantly higher than what we're asked to believe. Your skinny wallet is the best guide in that regard. The gold price exposes inflation and it is only getting started, IMO. Check the late 1970's for a guide. We've seen this monetary inflation manifest itself recently through the rise in paper dollar terms of "Real assets" – commodities. The commodity hasn't changed - a tonne of copper is still a tonne of copper - the paper that is used to buy it has devalued, massively.

On the subject of inflation

I think we're headed for a situation in coming years where there is further massive inflation of what we "need" (food, water, energy, metals, store of wealth – real stuff) and deflation of what we want (boats, cars, racehorses, plasma TV's, the 3rd house, high end consumables etc). Just my opinion but am keeping a few fillies as a hedge! Actually, two that we bred ourselves are racing for some serious prize money down here tomorrow. We have our fingers crossed.

In 1971 an ounce of gold cost US$35. Today it is US$700. Same dollar, same gold. The dollar has lost over 95% of its value relative to gold in that time. Those who have saved in paper dollars have been crushed. The answer is simple: save in something tangible, unprintable, natural, beautiful, indestructible and limited in supply. Gemstones and diamonds don't count, IMO. Sure some gemstones fit the criteria and they are indeed nice rocks but there is one big difference. A $1 million bar of gold or silver can be cut up into 10 equal pieces each worth 1/10th of the whole. They can be "rejoined" in any combination and the value remains. Try doing that with a Diamond or Ruby or Opal or whatever. Waterfront property is difficult to lug around in your pocket. A few years back, I carried 20 x 10 ounce bars of gold out of a bullion dealer in my jeans pockets. Make sure you wear a good belt.

Let's get physical

I talk about paper gold versus physical gold every day. There is a huge difference. If everyone who has a paper claim over physical gold demanded delivery, well, there just isn't enough to go around. Same with silver. Current Open Interest on Comex silver is 110,000 contracts. That's over 500,000,000 ounces of silver, yet the Comex warehouse has only 120,000,000 ounces (We won't even get into what's eligible for delivery versus what is just stored there for registered owners). Remembering that a Silver futures contract is a commitment to deliver 5,000 ounces of silver on a given day at a given place, if everyone who is long demanded physical delivery, where's the silver gonna come from? Being short silver is a very dangerous game, IMO. Owning a paper claim over precious metal is not the same as owning physical metal (unless it is allocated metal but we won't go into all that here).

In 2002 I met a bloke from a big fund manager in NYC through an Aussie mate on the sell-side over there. They are very commodity focused. We had a robust conversation regarding the dollar and metals. You probably can guess what side of the discussion I was on. I nearly fell over when he said he had never heard of the Gold Confiscation Act of 1933 the first great US Dollar default. Imagine money managers that have no idea as to the history of the dollar, the reserve currency of the world!? There are traders taking million ounce gold positions out there who wouldn't know a bar of gold from a bar of chocolate.

Shifting to gold

The dollar weakness argument doesn't fly with me as we are well below the Euro level that the dollar was trading with gold at $440 or so. Smart people, everywhere, are shifting some of their assets to Gold. Let's wait and see what happens when an allocation shift of an additional 1% of all funds under management to precious metals eventuates. It is only a matter of time. They'll be buying both paper and physical metal. It may sound insignificant but it's a truckload of capital chasing a finite amount of metal and their producers. Check the market cap of Google (GOOG) versus the market cap of the HUI combined.

The gold stocks are behaving dreadfully and indicating that we're headed back to $600 or worse in the near future. It will take a lot of physical metal to do so for very long, IMO. Be ready and loaded to go. Something is out of whack with the shares. The HUI was 330 when gold was $540 earlier in the year. Today we see HUI at 325 and gold is some $135 an ounce higher. I'm buying selected stocks at these levels and am looking at the mid-tiers most closely. Of the big boys, Goldcorp (GG), the "bomb-proof" gold exposure in my opinion, is off 25% from its high last week. Fair dinkum, I reckon they are a steal with gold up here. Getting paid $88 to produce their 100% un-hedged gold, is rather attractive to me! That is a real "printing press," one that Sir Alan would have dreams about I reckon. Others have copped harder hits than -25%, and I reckon this is an opportunity to pick up some very cheap metal equities, especially for those with a longer outlook than next month's performance bonus. The equities do not reflect the metal price and they certainly do not price in the inherent optionality of a precious metal share. Opinion only and never advice!

The silver/gold ratio that I love so much is getting back to levels that appeal. Silver is cheap compared to gold, IMO. At 54 it looks pretty good and I have an expectation that it breaches 20 before the decade is out. We set original positions at 64-66 and am looking to add opportunistically.

My old favourite, Rhodium is nudging $7,000 an ounce. I even got an email the other day from a mate who worked at Macquarie Bank regarding the time I tried to buy lots from him at $420, not 30 months ago. They don't make prices in Rhodium, worse luck! Thanks for remembering, Michael.

Owning some physical Gold and Silver are the only way I see to protect oneself from the dollar's inexorable march to oblivion. Simple. There are going to be periods that are nasty for the precious metals. That's what markets do. The same occurred during the last great gold bull where we saw three sell-offs of 50% or more as gold rose from $35 to $852 over 8 years. Bulls are very hard to ride. Don't get tossed off!

The last piece I wrote was titled "Gold at $700 will look cheap in a few years." I have no edge or inside info. It's just what I see as the only feasible result of what has occurred in the last 35 years, accelerated over the last 5-8 years. I am confident in saying such because the world is in a significantly worse position than it was when gold was last at this price in nominal dollar terms. In 1971 the USA was the world's biggest creditor with huge manufacturing production and not much debt. How times change. Gold doesn't.

Watch the London Fixes - that's the physical market talking!

See y'all on the Buzz…. It's Friday and that's always a fun day for gold!!!!


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Position in gold, silver, GG

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