is article was first published
(September 28, 2007)
What can you say about the gold bull market at this point? Another month like this one would put its price well over $800, triple the level that gold traded at as recently as April of 2001. Demand for gold is strong, dollar-hedge alternatives (other currencies) are weak, and world gold production continues to plod along, adding about 1% a year to the total stock of gold, while world fiat money production increases at an unbridled level equaling several percentage points per annum.
John Hathaway, the senior managing director of Tocqueville Asset Management, and a man whose opinions we have quoted here many times over the years, was interviewed this week by Sandra Ward of Barrons. Ms Ward asked him,
“What gets us to the magic number of $1,000 an ounce?”
Hathaway: “I don’t think it will take much. Let’s not forget, in 1980 dollars, gold is less than half of its nominal price today. The disparity between the amount of paper that has been created since 1980 and the amount of gold that has been produced since then is just enormous. The ratio of financial assets to physical gold is at the low end of a historical range. If you were to mark all the gold to market that has ever been mined, which is a very conservative approach, and then take the valuation of all the global stock markets and all the global bond markets, gold represents about 3%, compared with a figure in the mid-20% range n 1980, which was at the top of the bull market in gold, and the beginning of the bull market in financial assets.”
“Gold is a good value, certainly, at these prices, just based on the considerations that we’ve discussed. Even is you don’t think worst- case outcomes are in the cards, gold is still rare and hard to find, and believe me, these companies (gold miners – ed.) are having the toughest times trying to maintain production, much less build it.”
Hathaway went on to discuss gold stocks and gold mining today, pointing out the obstacles to new gold production coming on stream in any significant quantity. Gold mining today faces increasing environmental regulations, both in the US and abroad. Gold production costs are rising, mainly due to energy price increases. And large gold mining projects butt heads with political considerations in countries that, as John puts it, “are not all that hospitable to private enterprise.”
Hathaway: “Most noteworthy is Venezuela. Its president, Hugo Chavez, has a certain cultural and ideological view that is gaining influence in other South American countries, such as Bolivia and Ecuador and Peru. The risk premiums are going up for putting a lot of money into places that are otherwise geologically very attractive. Russia has great geology, but it is dicey in terms of its rule of law and sanctity of contracts.”
We agree with John Hathaway that the scale of physical gold compared to financial assets is out of line to an absurd degree. The past few weeks have witnessed the re-assertion of gold’s role as the ultimate safe haven asset. When push comes to shove, only gold proves itself so scarce, universally valued, and beyond manipulation. Derivatives are by definition ‘derived,’ and today’s currencies are seemingly created on demand, but gold is an element in limited supply, and no amount of financial alchemy will create more of it.
Our view is that gold is fundamentally undervalued today. Short term, it should always be kept in mind that nothing goes straight up, and price corrections will occur. But this bull market in gold has been a fairly orderly one, and shows no sign of being near its end.
Perhaps most significantly for the future of gold prices, gold is still not being noticed by that group holding the most US dollars – the American public.
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All this occurred on the week of Alan Greenspan’s book release, his own write-up of his life heading up the Federal Reserve. I am not going to pretend to have read the Maestro’s book. But for those who will read it, there may be some surprises.
Alan Beattie, who supposedly has read the book, wrote in this weekend’s Financial Times,
“The appeal of Greenspan’s memoirs, “The Age of Turbulence,” should be relatively broad – they are at least more lucid than his famously opaque prose while in office. But what emerges from the book is that even he, who knew so much more than most, knew far less than most supposed.”
Mr. Beattie is referring, of course, to the prior spell cast by this enormous intellect, through his public statements during his reign - the mysterious, sometimes circular, and always oracular constructions of the English language that Chairman Greenspan was known for.
Ben Bernanke and Alan Greenspan, as chairmen of the Federal Reserve Bank, have held the most powerful unelected position in the world – steward of the US dollar. And because today’s dollar is a psychological construct without any grounding in gold, the Chairman of the Fed by his very deeds and words, give the dollar its definition, life, and value.
Obviously, the Fed chairmanship is not an easy job. Arguably the task of captaining a worldwide fiat currency is ultimately impossible, because eventually, on someone’s watch, the whole house of cards will collapse.
The last few weeks have certainly pointed up the fragility of today’s financial structures. Jim Kunstler, speaking particularly about the securitization and global marketing of subprime mortgages in his “Back to School” essay of August 27th, said,
“The damage to global structured finance has been done, and it can be stated rather precisely: a widespread recognition that it's not possible to get something for nothing, after all. And that when you hold a lot of paper that was gotten for nothing, and put it up for sale, nothing will be offered for it. What a surprise.”
“The task of people holding power now in the finance sector (which itself may be a conceit at this point) is to manage the rapid dissolution of hallucinated wealth in such a way that as few people as possible notice that x-trillions in dollar denominated pixels have vanished from the hard drives. Sooner or later, though, millions of shlubs dependent on pension checks, or annuities, or monthly payouts of one kind or another will notice that something has stopped landing in the mail box.”
But whatever happens, we wish Mr. Bernanke the best in his efforts. And by holding gold, we insure ourselves against the worst.
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News of the world included the Dow losing some 1,000 points in the month of August, and then on Thursday an unexpectedly gloomy US jobs report that genuinely surprised the markets. Gold’s reaction was simple: fewer jobs means that the economy is not doing so well, therefore the Fed will likely be in an accommodative mood when they meet in a couple of weeks to decide on a possible rate cut.
Gold prices hit a three-week high of $672 on Friday August 31st, and moved up early this past week, and then the employment report set off the fireworks, pushing gold to prices not seen since May of 2006.
Alan Abelson’s column in the September 10th Barrons’s drew a gold lesson from the current credit trouble afoot,
“As the credit crunch deepens and widens, “Scarcely will they finish putting the subprime situation under house arrest..” before other problems, including credit card debt and commercial real-estate loans, cause the credit engine to sputter, and the Fed repair crew has no other option other than to ‘print and spend.’"
Abelson concludes, “That…is what gold this week so dramatically figured out. And what equities, we might add, are only beginning to learn.“
Javier Blas of the Financial Times quoted James Gutman of Goldman Sachs as saying, “Gold will continue to face upside pressure driven largely by weakness in the US dollar.” Mr. Gutman was further cited as predicting that gold prices will rise to $725 over the next twelve months. This call that gold will rise over the next 365 days only as much as it did over the past 72 hours seems a little tepid, but gold bullishness is not part of the corporate culture at Goldman Sachs.
Another view comes from John Hathaway of the Tocqueville group, in his August 29th article, “A New Chapter for Gold:”
“The general meltdown in credit is the ideal macroeconomic scenario to launch gold into all time high territory. While those same conditions have been disruptive for gold and gold shares in the short term as investors sell whatever they can to meet margin calls, it is important to understand that this is a necessary passage to higher ground. Gold must shed the perception of recent years that it is just another "run of the mill" tangible asset and emerge as the premier way to escape financial havoc.”
As to the dollar and gold prices, the Fed is classically between a rock and a hard place. The pressure to lower the Fed funds rate at its September 18th meeting is strong – to kick-start credit demand, the housing market, and large segments of the faltering US economy, and perhaps not just a quarter-point will do the job. On the dreaded other hand, substantially lowering US rates may send the dollar into a downward spiral.
So for Chairman Bernanke and the Fed, the question is whether to support the US economy, or the US dollar. Our bet, based on several decades of experience, is that the economy will get the (attempted) boost, and the dollar, and its buying power, will get the shaft.
Gold, that forgotten and most anti-social of elements, will be the ultimate beneficiary. As we have pointed out before, society pays lip service to the horrors of inflation, but for the most part, we’re all for it. Didn’t we enjoy watching our house going up in value, back when it was doing so? Don’t we appreciate our salary hikes and what they say about us, even if in our hearts we know they’re only cost-of-living increases?
Factually, the dollar tumbling downward reduces our net worth in direct proportion to how many dollars we own, or are owed in the future. But psychologically, most of us are consoled by that fact that inflation is an affliction shared equally by everyone else in our dollar economy. It seems bad that everything is going up in price, but talk with other people, and you discover that the things that they buy are also going up in price! It’s actually good party chatter, and we all enjoy telling stories of prices today versus what they were – just last month, or just a couple of years ago.
The funny things about the human economic animal is, once you rise above the basic needs of food, shelter, and clothing, most of us are relativists who measure our financial comfort against other people that we know. Inflation, being universal, therefore seems to be a zero-sum game that’s not worth worrying about.
Of course that’s assuming that your neighbors aren’t taking steps to protect themselves by buying gold without telling you, that is. They wouldn’t do that, would they?
