BARRICK GOLD CORP ABX
April 24, 2013 - 3:59pm EST by
bedrock346
2013 2014
Price: 18.60 EPS ($0.66) $3.67
Shares Out. (in M): 1,001 P/E N/A 5.1x
Market Cap (in $M): 18,618 P/FCF N/A 10.0x
Net Debt (in $M): 12,456 EBIT -816 6,092
TEV ($): 31,075 TEV/EBIT N/A 5.1x

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  • Gold
  • Mining
 

Description

Barrick is a LONG because:

  • A recent (futures driven) drop in gold prices has caused ABX stock to plunge.  Any normalization in gold prices should provide upside.
  • The new CEO is pursuing cost cutting and return maximization strategies
  • The potential resolution of problems at 2 major mines – Pachua Lama and Pueblo Viejo – should provide upside from where the bearish sentiment currently stand. 
  • The stock is at historic price lows and 4x EBITDA.

 

Company:  Barrick is the largest gold company in the world, by reserves, market cap and production. 

The company produces approximately 7mn ounces of gold and 500mn pounds of copper per year.  Its recent SEC reserves and resources were:

 

 

Reserves

Resources

 

Proved

Probable

P&P

Measured

Indicated

M+I

Inferred

Gold (oz mm’s)

29.7

110.6

140.3

6.4

76.7

83.1

35.6

Copper (lbs mm’s)

7.6

6.3

13.9

1.5

8.9

10.3

0.5

Silver w/the gold (oz mm’s)

118.4

933.3

1,051.7

19.9

235.7

255.6

60.2

Copper w/the gold (lbs mm’s)

853.5

4,907.8

5,761.3

87.8

1,247.2

1,335.0

1,638.9

Nickel (lbs mm’s)

 

 

 

378.8

701.6

1,080.4

596.1

 

In the past 10 years, Barrick has grown its revenue at a 22% CAGR, to $14.5bn in 2012.   Gross margin has averaged 49%.  EBITDA has grown at nearly 24% compounded, with an average margin of 42%.   For the next several years, consensus has Barrick earning around $3.8bn per year in net income. 

 

The Stock:  Despite a 7-fold increase in the price of gold off the bottom, the gold mining stocks have generated little reward for their owners.  Barrick is no exception:  since its 2003 bottom, the total return on Barrick stock (including reinvestment of dividends) has been approximately 3% compounded. 

 

The Recent Sell-off

Within the past few weeks Barrick’s stock has been cut in half for several reasons:

 

  • There has been a fairly quick 12-15% decline in the price of the metal to below $1,400.  On April 15, in fact, the single day drop in gold was the most in 30 years.
  • Given that price decline, seemingly permanently bullish equity analysts are stepping over themselves to cut their ratings on Barrick and the entire sector.  For example, on April 22, the Deutsche Bank analyst said that Barrick’s NAV would actually decline even if the price of gold recovers to $1,500 an ounce where it had been a mere week earlier. The analyst also cut his price target in half.
  • The analysts and the market seem to assume that the current gold liquidation will last forever.  From what we can tell, the recent price moves have been driven as much by margin calls on gold speculators and traders as anything fundamental.
  • Specific to Barrick are concerns about the Pascua Lama and Pueblo Viejo mines discussed below.
  • Another, not unreasonable, fear in the market seems to be that the companies will try to make up for price with volume.   The sector clearly has a history of value destruction in which the miners will continue to dig unprofitable holes and issue equity below NAV to open up mines at or above NAV.

 

We believe that any lift in the price of gold would provide upside for the stock.  We note that, until the recent decline, gold had remained above $1,500 an ounce since mid-2011. 

 

Opportunities at Barrick specifically:

We think Barrick in particular offers an interesting opportunity, since its new CEO, Jamie Sokalsky, seems much more focused on shareholder value creation than many others in the space. 

 

Sokalsky was appointed in June 2012.  Barrick’s legendary founder and chairman, Peter Munk, is still there. 

 

Prior to Sokalsky’s appointment, Barrick had a produced a mixed bag of results.  Certainly, the company had increased production, revenue and profit significantly over the past decade.  At the same time, there were several bumps in the road.  For instance, the company took multi-billion write-offs of both hedging contracts and of part of its Equinox acquisition.  Barrick’s stock price return clearly reflected that mixed bag of results. 

 

Turnaround in Place at Barrick:

We believe that Sokalsky shows the signs of a manager who will surprise to the upside in the coming years.   We think he is significantly more shareholder focused than we might expect (he has been with the company since 1993). 

 

In the last year, Sokalsky has taken a number of steps to improve profitability and returns at Barrick:

  • Cutting production target in 2016 from 9mn ounces to 8mn, ridding them of unprofitable volumes
  • Cutting $100mn in overhead
  • Putting various lower-return assets up for sale (3 mines in Australia, Barrick Energy, ABG (although that sale fell through),  Kabanga nickel project in Tanzania)
  • Changing management incentive compensation to be more in line with returns and profitability
  • Committing to not opening any new mines beyond what they have planned now

 

Earlier today (April 24, 2013), the company reported earnings that beat analysts’ estimates.  Notably, the company has taken steps that support the idea of a turn around in place.  While maintaining their production guidance, ABX actually cut their exploration spending and capex guidance.  We view these as good signs that the management continues to focus on generating shareholder value. 

 

Optionality on the Pueblo Viejo and Pascua Lama Mines:

Barrick has 2 mines that will be important contributors to its future production:  Pubelo Viejo in the Dominican Republic and Pascua Lama in Argentina/Chile.  They are both very low cost, long-lived mines that should help maintain (or even grow) Barrick’s production and lift its overall profitability.  Both have recently run into controversy with the local governments.    We believe the stock can rally should the company show more clarity on either of these situations. 

 

Pascua Lama

Pascua Lama will add 800,000 ounces to annual gold production (at $0 cash cost) – 10% of Barrick’s total production.  It is supposed to open in 2h14.  Recently, the company has run into problems over both water rights and property rights in Chile.  The company has sunk almost $5billion into the mine and has another $3-4billion to go so any delay or cancellation would be a disaster.  Construction continues on the Argentine side of the mine. 

 

 

Pueblo Viejo

Pueblo Viejo should add 500-650,000 ounces in 2013 production, also at low cash cost.  The Dominican President Danilo Medina recently said that Barrick’s contract was unacceptable and must be changed

 

While it is impossible to predict the outcomes in either case, Barrick has plenty of experience in operating and developing mines in tough political climates and we expect that these situations will prove to be no different and will eventually be allowed to operate after the political shakedown is addressed. 

 

2013 Guidance:

  • Production of 7.0-7.4mn ounces of gold at $1,700 per oz
    • Each $50 in the gold price hits EBITDA by $350-370mn
    • Production of 480-540mn pounds of copper at $3.50 per lb
      • A $0.25 drop in copper prices hits EBITDA by $60-70mn
      • A $0.25 rise in copper prices improves EBITDA by $120-130mn
      • Capex of $6bn  (revised down with 1q13 earnings to $5.45bn)

 

Consensus:

  • Revenue of $14.5bn
  • EBITDA of $7.5bn

 

Low Valuation:

At current levels you are buying the stock for just over 4x EBITDA, 5x 2013 earnings and a 5% dividend yield – assuming some mean reversion of gold prices.  Even assuming that gold prices remain around $1,400 and Barrick’s EBITDA gets hit by $2bn (this assumes that the sell-side had baked a $1,700 gold price into their assumptions, which seems high), the company still trades under 6x TEV to 2013E EBITDA. 

 

At $18.60, Barrick is still trading near its recent and multiyear lows while gold itself has been rallying for days. This trend cannot continue.   While the stock is up today on earnings, we expect significant further upside in the coming months. 

 

At March 31, Barrick had $14.7bn in debt versus $2.3bn in cash.  While there have been noise about credit downgrades and Moody’s did put the company on watch, Barrick is still investment grades and its various tranches of bonds still trade tight to treasuries.   The company believes it can cover dividends, capex and debt service out of cash on hand and its credit facility.  

 

Tactics:

We would also just go long Barrick as this should work on an absolute basis.  For the faint of heart we would recommend shorting the GLD dollar for dollar against ABX. 

 

I am not a gold bug and do not think of it as some mystical object but do believe that is has always functioned as a form of money and ABX looks like a way to hedge Bernacke helicopter risk as well and buying a cheap yielding stock.

 

 

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

  • Gold stabilizes and eventually goes up

     

  • Resolution or clarity on Pascua Lama and Pueblo Viejo
    sort by   Expand   New

    Description

    Barrick is a LONG because:

     

    Company:  Barrick is the largest gold company in the world, by reserves, market cap and production. 

    The company produces approximately 7mn ounces of gold and 500mn pounds of copper per year.  Its recent SEC reserves and resources were:

     

     

    Reserves

    Resources

     

    Proved

    Probable

    P&P

    Measured

    Indicated

    M+I

    Inferred

    Gold (oz mm’s)

    29.7

    110.6

    140.3

    6.4

    76.7

    83.1

    35.6

    Copper (lbs mm’s)

    7.6

    6.3

    13.9

    1.5

    8.9

    10.3

    0.5

    Silver w/the gold (oz mm’s)

    118.4

    933.3

    1,051.7

    19.9

    235.7

    255.6

    60.2

    Copper w/the gold (lbs mm’s)

    853.5

    4,907.8

    5,761.3

    87.8

    1,247.2

    1,335.0

    1,638.9

    Nickel (lbs mm’s)

     

     

     

    378.8

    701.6

    1,080.4

    596.1

     

    In the past 10 years, Barrick has grown its revenue at a 22% CAGR, to $14.5bn in 2012.   Gross margin has averaged 49%.  EBITDA has grown at nearly 24% compounded, with an average margin of 42%.   For the next several years, consensus has Barrick earning around $3.8bn per year in net income. 

     

    The Stock:  Despite a 7-fold increase in the price of gold off the bottom, the gold mining stocks have generated little reward for their owners.  Barrick is no exception:  since its 2003 bottom, the total return on Barrick stock (including reinvestment of dividends) has been approximately 3% compounded. 

     

    The Recent Sell-off

    Within the past few weeks Barrick’s stock has been cut in half for several reasons:

     

     

    We believe that any lift in the price of gold would provide upside for the stock.  We note that, until the recent decline, gold had remained above $1,500 an ounce since mid-2011. 

     

    Opportunities at Barrick specifically:

    We think Barrick in particular offers an interesting opportunity, since its new CEO, Jamie Sokalsky, seems much more focused on shareholder value creation than many others in the space. 

     

    Sokalsky was appointed in June 2012.  Barrick’s legendary founder and chairman, Peter Munk, is still there. 

     

    Prior to Sokalsky’s appointment, Barrick had a produced a mixed bag of results.  Certainly, the company had increased production, revenue and profit significantly over the past decade.  At the same time, there were several bumps in the road.  For instance, the company took multi-billion write-offs of both hedging contracts and of part of its Equinox acquisition.  Barrick’s stock price return clearly reflected that mixed bag of results. 

     

    Turnaround in Place at Barrick:

    We believe that Sokalsky shows the signs of a manager who will surprise to the upside in the coming years.   We think he is significantly more shareholder focused than we might expect (he has been with the company since 1993). 

     

    In the last year, Sokalsky has taken a number of steps to improve profitability and returns at Barrick:

     

    Earlier today (April 24, 2013), the company reported earnings that beat analysts’ estimates.  Notably, the company has taken steps that support the idea of a turn around in place.  While maintaining their production guidance, ABX actually cut their exploration spending and capex guidance.  We view these as good signs that the management continues to focus on generating shareholder value. 

     

    Optionality on the Pueblo Viejo and Pascua Lama Mines:

    Barrick has 2 mines that will be important contributors to its future production:  Pubelo Viejo in the Dominican Republic and Pascua Lama in Argentina/Chile.  They are both very low cost, long-lived mines that should help maintain (or even grow) Barrick’s production and lift its overall profitability.  Both have recently run into controversy with the local governments.    We believe the stock can rally should the company show more clarity on either of these situations. 

     

    Pascua Lama

    Pascua Lama will add 800,000 ounces to annual gold production (at $0 cash cost) – 10% of Barrick’s total production.  It is supposed to open in 2h14.  Recently, the company has run into problems over both water rights and property rights in Chile.  The company has sunk almost $5billion into the mine and has another $3-4billion to go so any delay or cancellation would be a disaster.  Construction continues on the Argentine side of the mine. 

     

     

    Pueblo Viejo

    Pueblo Viejo should add 500-650,000 ounces in 2013 production, also at low cash cost.  The Dominican President Danilo Medina recently said that Barrick’s contract was unacceptable and must be changed

     

    While it is impossible to predict the outcomes in either case, Barrick has plenty of experience in operating and developing mines in tough political climates and we expect that these situations will prove to be no different and will eventually be allowed to operate after the political shakedown is addressed. 

     

    2013 Guidance:

     

    Consensus:

     

    Low Valuation:

    At current levels you are buying the stock for just over 4x EBITDA, 5x 2013 earnings and a 5% dividend yield – assuming some mean reversion of gold prices.  Even assuming that gold prices remain around $1,400 and Barrick’s EBITDA gets hit by $2bn (this assumes that the sell-side had baked a $1,700 gold price into their assumptions, which seems high), the company still trades under 6x TEV to 2013E EBITDA. 

     

    At $18.60, Barrick is still trading near its recent and multiyear lows while gold itself has been rallying for days. This trend cannot continue.   While the stock is up today on earnings, we expect significant further upside in the coming months. 

     

    At March 31, Barrick had $14.7bn in debt versus $2.3bn in cash.  While there have been noise about credit downgrades and Moody’s did put the company on watch, Barrick is still investment grades and its various tranches of bonds still trade tight to treasuries.   The company believes it can cover dividends, capex and debt service out of cash on hand and its credit facility.  

     

    Tactics:

    We would also just go long Barrick as this should work on an absolute basis.  For the faint of heart we would recommend shorting the GLD dollar for dollar against ABX. 

     

    I am not a gold bug and do not think of it as some mystical object but do believe that is has always functioned as a form of money and ABX looks like a way to hedge Bernacke helicopter risk as well and buying a cheap yielding stock.

     

     

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Messages


    SubjectPascua Lama
    Entry04/24/2013 04:22 PM
    Memberbibicif87
    How would you assess the probabilities of the various outcomes, and their payoffs, on Pascua Lama?  I seem to recall reading somewhere that whether the mine is running or not, at a certain point ABX owes Silver Wheaton either billions of dollars or large amounts of silver at $3.70 or so per ounce.  What is the deal on that, and if Chile is still recalcitrant and the mine is long delayed beyond that point, how does ABX handle it, do you think?  Thanks. 

    SubjectArgentina
    Entry04/25/2013 08:22 AM
    Membervalue_31
    How is ABX going to get money out of Argentina re: Pascua Lama with capital controls in place?  Black market FX rate is ~40% below the offical rate.  Doesn't this mean large amounts of cash get trapped in country (or alternatively get haircut on the way out)?  

    SubjectGold price risk
    Entry04/25/2013 12:51 PM
    Memberjcp21
    Given the relatively low inflation level, the Fed has no reason to pull back quickly. But, you have to admit based on a lot of talk from Fed watchers it seems very possible easing could start to be pulled back. It is worth noting that QE is not causing any inflation to speak of (ask Japan about this dynamic).
     
    And, US deficits are finally starting to come down by a meaningful amount. Lastly, Europe appears to be more resiliant then a lot of people expected. 
     
    Given gold is the doomsday trade predicated on Fed so called "money printing" and selfish politicians running up deficits to stay elected don't you think the fundamental outlook for gold is very uncertain? I fully agree that if Europe starts to collapse again and if the Fed goes BOJ on everyone gold will have support but why not just short or buy puts on European banks? 
     
    Any investment that is regularly sold via infomercials, radio and TV clearly have a lot of hot money. Is the risk/reward really there? The price of gold is clearly pricing in some new QE / money printing and increases in the deficit. If that doesn't happen, why would gold be priced above $1,000? 
     
     

    SubjectRE: RE: RE: Gold price risk
    Entry04/25/2013 10:43 PM
    Memberbibicif87
    Jcp21: Where I disagree with your thinking is that you appear to think that "inflation" is something that has to do only with consumer prices, and not asset prices.  When central banks  create new money there are times in which it does go into goods and services, and you have "inflation" that gold purportedly will protect portfolios from.
     
    But when most consumers are broke and have no borrowing power, which is the current situation, that excess money doesn't go into the things that are measured by the CPI, but instead goes into other assets, as those with wealth try to trade in something that is being created in growing quantities out of thin air (their dollars, yen, pounds, etc.) for something of which the supply cannot be so readily increased, i.e., investment assets.  That is why Picasso paintings go for over $150MM now, not because they are so much prettier than they were when they were $10MM, or $1MM, but because no matter how many Fed staff economists Bernanke sends to art school, none of them will ever churn out even a single Picasso.
     
    Similarly, gold is something whose supply cannot be increased by a government functionary tapping on some computer keys.  It has some advantages over art, real estate, stocks and bonds as an alternative to funny money, which is why there always has been demand for it and probably always will be, so it benefits from asset inflation.  In the event of a deflationary collapse, good luck selling your mansion or art work, but banks will be failing left and right and gold will be extra appealing for that reason.  Either way, gold is good.
     
    The one thing you said where, IMO, you are really wrong, is your assertion that "Overall, the world economy has never been more productive and conservatively managed (ex-China and Japan)."  I would say it has never been less conservatively managed than it is at present.  Nearly every government is spending much more than it is taking in, and running up debts to finance consumption, not to finance genuine investment that is capable of liquidating the associated debt.  Governments think that if they waste money at a high rate, but raise taxes on those citizens who produce goods and services other citizens actually want, then they are being "austere".  Economic orthodoxy these days says savings are bad and consumption is good, forgetting that it is only savings that can create investment and growth.  So how is all that conservative?
     
    As for productivity, the information revolution you think is so great is now down to creating clever cell phone apps.  Compared to the massive returns available in previous centuries from improving transportation (roads, railroads, canals), the introduction of electricity, sewer systems, clean water, telegraphs and telephones, replacing horses with mechanized transport, and so forth, there just isn't all that much new that is going to make a serious improvement in most people's lives.  Of course there will be medical advances and what not, and new technology is still a positive force, but the benefits are diminishing and trivial compared to what we got out of previous advances. Not sure how that relates to gold, but you mentioned it so I thought I would comment.

    SubjectRE: RE: RE: RE: RE: Gold price risk
    Entry04/26/2013 08:51 AM
    Memberaagold
    Cuyler,
     
    If you can buy a "depleting asset" for a small fraction of the present value of cash flows generated by said asset, what exactly makes that a bad investment?  I get your point about self-serving management teams (although I think it's a stretch to claim that *all* gold miners have self-serving management teams), but there's certainly nothing wrong with buying a depleting asset for far less than what it's really worth.
     
    - aagold

    SubjectRE: RE: RE: RE: RE: RE: RE: Gold price risk
    Entry04/26/2013 09:32 AM
    Memberaagold
    Cuyler,
     
    I hear you, and your comment #1 resonates very well with me.  But I think this basic "agency problem" exists all over the stock market, not just gold mining stocks.  As a matter of fact, I think that mismatch of incentives - management being incentivized to grow their business and paychecks, or at least keep the business running at constant size, rather than allocate capital as a private owner would do in order to maximize their personal wealth, is the biggest problem value investors face in general.  The only way around that problem that I'm aware of is activist investing. (Take a look at PCC if you want to see a non-mining stock where runoff is obviously in the shareholders best interests but, just as obviously, not in management's.)
     
    - aagold

    SubjectRE: Pascua Lama
    Entry04/26/2013 10:50 AM
    Memberbedrock346
    Pascua Lama:
     
    Pascua Lama is admittedly a big deal to ABX's future.  If all went as planned, they would produce 800,000+ ounces of gold and 35mn ounces of silver per year for the first 5 years.
    • 800,000 ounces of $1,500 gold is $1.2bn in value. This would be 10% of their total annual production.  And this is at -$150 to $0 cash cost.  
    • 35mn ounces of $23 silver is $800mn in value (less 1/4 of that production owed to SLW is $600mn)
    When this mine was first planned, it was to cost $3bn and start production in 2013.  Now, they expect the total cost to be $8bn, with production perhaps starting in 2014.  With the recent delays, it's a bit more hazy as to when production will start.  Some speculate 2016.  The company has said they expect a firmer decision in the next 6 months.  

    There are a couple different ways they might work this out:
    • ABX does what they need to do to get this mine going (people estimate an additional $0.5-1.0bn in costs, to make this thing a $9.0-9.5bn project) and it starts producing in late 2014 or after.  
      • What they decide to do will obviously depend on the price of gold, what the Chilean government demands, and what other production options they have. 
    • ABX cancels the whole thing and sells the mine for what it can get.  In the short term, this would be great for cash flow, as it saves $2.5bn in capex this year and perhaps $2+bn next year.  The longer-term issue is that in 2015 and beyond the company will need to make up for the missing Pascua Lama production and declines at some of its other mines.  
    In terms of what they owe SLW:  
     
    From ABX:
    " In 2009, Barrick entered into the Silver Purchase Agreement with Silver Wheaton whereby it sold the equivalent of 25% of the life-of-mine Pascua-Lama silver production from the later of January 1, 2014 or completion of project construction, and 100% of silver production from the Lagunas Norte, Pierina and Veladero mines until that time. In return, the Company was entitled to an upfront cash payment of $625 million payable over three years, from the date of the agreement, as well as ongoing payments in cash of the lesser of $3.90 (subject to an annual inflation adjustment of 1% starting three years after project completion at Pascua-Lama) and the prevailing market price for each ounce of silver delivered under the agreement. During 2012, Barrick received the final cash installment payment of $137.5 million."

    From Silver Wheaton (SLW):
    "Barrick has provided Silver Wheaton with a completion guarantee, requiring them to complete Pascua-Lama to at least 75% of design capacity by December 31, 2015. During 2014 and 2015, Silver Wheaton will be entitled to the silver production from the Lagunas Norte, Pierina and Veladero mines to the extent of any production shortfall at Pascua-Lama, until Barrick satisfies the completion guarantee. If Barrick fails to satisfy the requirements of the completion guarantee, the agreement may be terminated by Silver Wheaton. In such an event, Silver Wheaton would be entitled to the return of the upfront cash consideration of US$625 million less a credit for silver delivered up to the date of that event."

    From me: 
    In 2012, ABX delivered 2.7mn ounces of silver from Lagunas Norte, Pierina and Veladero that was attributable to SLW.   Assume silver was at least $26 last year.  The difference then would be $24 (=$26 less $3.90) = $64mn.  

    SubjectRE: Argentina
    Entry04/26/2013 11:11 AM
    Memberbedrock346
    Good question.  Here are some broader thoughts on operating in Argentina:
     
    Clearly, there's risk from operating in Argentina .  I think the three big ones are 1) nationalization of the mining assets (either directly or through punitive tax or other regulatory schemes), 2) capital controls, and 3) out of control inflation. 
     
    Direct Nationalization
    Direct nationalization a clearly a risk (see YPF), but I would guess it's not huge.  While it's more likely to happen in Argentina than in other jurisdictions, I'm not convinced the government would want to do something that kills the mining sector.  The miners invested something like $4bn in Argentina last year and are expected to do something similar this year.  And the sector employs something like 275,000 people.  I think as long ABX continues to invest, it's probably okay. 
     
    Barrick has certainly taken steps to get in good with the government.  Last year, when the YPF nationalization was heavy in the news, ABX made sure to emphasize how much local sourcing they were doing.  
     
    Also, Vale and the Argentine government have recently been battling over the $6bn Rio Coronado potash mine in Mendoza that Vale wants to abandon because inflation has made the mine uneconomic and Vale was looking for tax breaks to make the project more economic.  Vale demonstrates the risks from Argentina, but I wonder how many other fights with mining companies the government is really willing to undergo.  Notably, ABX has had an easier time dealing with Argentina than with Chile on this mine.  
     
    Capital Controls
    Capital controls are also a risk, but I've always been under the impression that good investment banks have methods to help companies manage those issues.   As well, Barrick has been operating in some pretty tough places for a long time, so I assume they have an ability to manage that risk.  
     
    Inflation
    I think the bigger direct risk is inflation.  Since they mainly sell in dollars but source a significant amount locally, it's an issue.  That said, the cash costs of this mine (-$150 to $0 per ounce) are so low that I'm not certain it matters that much.  Certainly, it would be a bigger issue if the costs were higher.  

    Subjectre: gold price risk and short gold
    Entry04/26/2013 07:37 PM
    Memberjcp21
    Bravo Bibici... very well said. Only thing I'd add to your list of retorts is that the Fed holding to maturity is a dumb argument. The debt still needs to be rolled. Letting debt mature and assuming somebody other than the Fed buys it all is no different than a Fed sale.

    They won't need to roll it over if they use it as a means of exit. That is the argument. There won't necessarily be a massive seller (i.e. the Fed). 
     
    But when most consumers are broke and have no borrowing power, which is the current situation, that excess money doesn't go into the things that are measured by the CPI, but instead goes into other assets, as those with wealth try to trade in something that is being created in growing quantities out of thin air (their dollars, yen, pounds, etc.) for something of which the supply cannot be so readily increased, i.e., investment assets.  That is why Picasso paintings go for over $150MM now, not because they are so much prettier than they were when they were $10MM, or $1MM, but because no matter how many Fed staff economists Bernanke sends to art school, none of them will ever churn out even a single Picasso.

    Given the experience in Japan, I don't see why asset price inflation is a worry unless massive amounts of leverage are involved. 
     
    Similarly, gold is something whose supply cannot be increased by a government functionary tapping on some computer keys.  It has some advantages over art, real estate, stocks and bonds as an alternative to funny money, which is why there always has been demand for it and probably always will be, so it benefits from asset inflation.  In the event of a deflationary collapse, good luck selling your mansion or art work, but banks will be failing left and right and gold will be extra appealing for that reason.  Either way, gold is good.
     
    Yes gold is liquid and the government cannot make gold. So that implies gold is primarily an insurance policy against the U.S. becoming a banana republic. What are the odds of that happening? I think pretty low. Yet gold has more than doubled on that chance. Also, if there is a deflationary collapse gold will collapse. Purchasing power will go up. 
     
    The one thing you said where, IMO, you are really wrong, is your assertion that "Overall, the world economy has never been more productive and conservatively managed (ex-China and Japan)."  I would say it has never been less conservatively managed than it is at present.  Nearly every government is spending much more than it is taking in, and running up debts to finance consumption, not to finance genuine investment that is capable of liquidating the associated debt.  Governments think that if they waste money at a high rate, but raise taxes on those citizens who produce goods and services other citizens actually want, then they are being "austere".  Economic orthodoxy these days says savings are bad and consumption is good, forgetting that it is only savings that can create investment and growth.  So how is all that conservative?

    The two biggest economies (U.S. and Europe) are now lower deficits and cutting spending. Things on that front are getting better (ex Japan of course). And, the private sector is what matters. It is the biggest producer. And tax levels are still reasonable by any measure. 
     
    As for productivity, the information revolution you think is so great is now down to creating clever cell phone apps.  Compared to the massive returns available in previous centuries from improving transportation (roads, railroads, canals), the introduction of electricity, sewer systems, clean water, telegraphs and telephones, replacing horses with mechanized transport, and so forth, there just isn't all that much new that is going to make a serious improvement in most people's lives.  Of course there will be medical advances and what not, and new technology is still a positive force, but the benefits are diminishing and trivial compared to what we got out of previous advances. Not sure how that relates to gold, but you mentioned it so I thought I would comment.
     
    I agree in relative terms. But I am talking absolute. The cost of making a unit of production has never been lower. Hence corporations have massively high profit margins. But I agree on the medical side too. That creates liabilities. Cancer drugs that go for $250k that add 3 months of life for a smoker? Don't smoke. 
     
    I agree that governments are a big risk. But if things go bad I think deflation is far more likely because debt will be coming out of the system. And debt is money. Therefore, the dollar will and rise and gold will crash.
     

    SubjectRE: RE: re: gold price risk and short gold
    Entry04/27/2013 01:03 PM
    Memberjcp21
    Cuyler,
     
    Having to find a few more buyers from the borrowers rollover is much less significant then one of the biggest holders of treasuries having to sell in the open market. And it will happen gradually over time. I don't see much risk here. The world has a surplus of capital and the U.S. is the #1 choice for almost any investor from around the world. Europe is scary, China is a ponzi scheme and Japan is close to defaulting on its debt. 
     
    Also, I agree with what Greenspan rights here and I think it is a reason to short gold. Why? Gold is an alternative to fiat money and always should be. Because most people realize this, the money printers (the treasury via congress NOT the Fed) know they can't get away with much. The net result is stable currencies. So I am a huge fan of gold. It is the potential competition that keeps countries honest. And with honest countries the price of gold remain very low. 
     
     
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