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Don Coxe On Gold
Even though we presented Don Coxe's report in full earlier, we wanted to recapitulate his thoughts on gold, as we believe they deserve a post of their own. With gold having become, as we expected more than half a year ago, the most discussed and volatile asset class to accompany the latest Fed inflated bubble, Coxe's view is a welcome addition to other such notable perspectives from the likes of Jim Grant, David Rosenberg, Dylan Grice, Goldman Sachs and many others.
Gold
As the only major financial asset that never pays interest or dividends, gold’s performance could be the clearest, purest example of Zero-Based Investing:
With a 25% rise this year, Gold has beaten the S&P roughly 7%. As measured by the XAU, gold mining stocks’ total return is 35%.
But gold’s investment return was exceeded by the amount of publicity and debate it generated. Its late-year blow-off past $1200 briefly made it a Page One story—thereby automatically guaranteeing a sharp correction.
The media were filled with authoritative explanations:
- Hyperventilating Commentators’ Explanations:
- the collapse of the dollar;
- the repudiation of Obamanomics;
- a warning of a coming financial collapse, leading to Depression;
- a signal of the runaway inflation to come;
- China has only begun to convert its dollar holdings into bullion: the best is yet to come;
- a short squeeze on gold ETFs which are misrepresenting how much bullion they hold: beware of counterparty risk: buy bullion, not paper;
- a coming Armageddon in the Mideast.
Sophisticated Explanations
- gold is the only asset that is nobody’s liability and is therefore a haven in an increasingly uncertain world;
capitulation by hedged gold miners, notably Barrick; - India’s purchase of 203 tonnes from the IMF, removing the overhang in bullion markets;
- China’s announcement that its gold holdings are higher than were previously revealed;
- “Peak gold” discussions, as investors ponder the failure of gold mines to maintain—let alone increase—their production despite record bullion prices. The classic expression for getting rich quick is to find a gold mine—but it takes time, experience and capital to bring on a mine. Reported gold companies’ reserves haven’t been rising, but soaring gold prices will change that: millions of tons of low-grade “resources” that haven’t been booked as ore reserves will be reclassified if gold prices remain near or above current levels;
- recognition of the longer-term implications of central banks’ astounding levels of creation of fi at money at a time they are collectively becoming net buyers of gold—after decades of sustained selling;
- respect for gold’s future because prices have managed the remarkable feat of setting new records at a time jewelry demand—traditionally the main support for gold—is slumping sharply;
- portfolio diversification by sophisticated investors who seek a haven at a time of zero returns on Cash—with no indications that central banks are about to abandon their Zero policies.
Clients can undoubtedly add other justifications and explanations to their lists.
We were in Toronto the week gold prices were setting records daily, and were asked—on TV—to explain the dramatic run-up. Various prominent commentators were falling all over themselves to issue ever-higher targets for bullion prices.
We admitted that we couldn’t explain the sudden rush and the dramatic daily leaps. When asked for our price target, we suggested….
“As an historian, I seek some historic data to assist our predicting. When gold broke through $1,000, we began considering appropriate targets. As every English schoolboy knows, 1066 was the Norman Conquest—the first gold target. The next important date was Magna Carta—1215—and gold has now managed to attain that level. The next big date is the Provisions of Oxford 1258 [when Simon de Montfort forced important constitutional changes on Henry III].
“My one-year target for gold is 1345—the onset of the Black Death.
“Apart from that, I really can’t say how high gold could ultimately go, although longer-term it should reach 1485, when Richard III fell in the Battle of Bosworth, launching the Tudor monarchy, and giving us the enduring quote, “My Kingdom for a horse!” The interviewers laughed, and changed the topic.
Next day, Goldman issued its authoritative target price for next year: 1350.
We were called for comment, and graciously accepted that prediction because it was the end of the Black Death.
The point of these musings is that no one really has any idea of the longer term price of gold that can be justified by sober analysis.
All that we can sensibly say is that gold’s price entered a 20-year Triple Waterfall collapse in 1980, falling from $825 to $250, and has risen every year in this decade. If it can maintain its strength at a time jewelry demand
is shrinking, then investors and speculators are in charge; their motivations include momentum and malaise: Gold looks good because it keeps going up, and they’re scared about what the Fed and Obama and other central banks and governments are doing, and have no great confidence that there will be a sustained, noninflationary economic recovery, so gold is a good place to hide.
Gold has been the best-performing major commodity since the financial crisis began:
We see no big reason why that outperformance should be over. After its breathless run to $1220, it’s entitled to correct back toward $1,000—or even a bit below that chiliastic level—without ending its bull market.
Finally, gold may even be decoupling from the dollar. The sheer scale of foreign exchange reserves in China, Hong Kong, India and other countries whose currencies are pegged, directly or otherwise, to the dollar may be
opening a whole new demand for gold. Just to maintain even tiny percentage exposure to gold in forex reserves means these nations must remain on the buy side. The euro was once seen as a worthwhile alternative to the dollar in Asian forex accounts, but the unfolding problems of its Eastern European and Mediterranean members are exposing the euro’s internal contradictions as a viable alternative to the dollar.
In a world in which nearly all paper money has problems, and in which the sheer supply of paper money is expanding far faster than global GDP, gold has its best claim as a constituent of foreign exchange reserves since Bretton Woods booted it out sixty-five years ago. [emphasis ours]
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Just an incredible article - THANK YOU
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Don't trust your retirement savings to a government printing press! Our nation started with devaluation--"Not worth a Continental [Dollar]" and will likely end with devaluation.
Thats so true. I also think in the same way as you.
http://www.egovernmentjobs.in
I keep looking for clues on the decoupling aspect (which I expect to happen).....a very critical juncture to keep a lookout (on guard) for..... Also, I will not drink from my "Gold Bitches!" coffee mug until we get a close above $1,221.
yup & lets party like its 1999...
Coxe pretty much nailed it. I have been watching for that decoupling w/the dollar daily.
lmk if you see any signs------this would be a good thread in the gen discussion forum
Trading Tactic:
In a secular bull market for gold, what matters most are the low-risk entry points to add to your overall total position. Therefore stabilization levels like the current one provide a much better entry point for bulls than the $1225 we saw recently.
Remember, when pyramiding all those profits that a pyramid is a tomb; not a monument.
actually, the pyramids, were initiation chambers, into the great mysterys, and many who weren't prepared, went mad
You said: "As the only major financial asset that never pays interest or dividends"
I say: you might want to include most tech stocks in that laughable description...
With all due respect to Mr. Coxe and his excellent article, I fear he is conservative in his estimates based on several factors:
1. Israel will not allow the Iranian situation to fester.
2. Ben will have monetize the MBS situation other overtly or covertly further or the real estate market collapses.
3. Ben will also have to re-visit QE once 10 & 30 year yields crease the 5.0% and 6.5% areas respectively.
4. There is no fiscal discipline and the cap and trade plus health care fiascoes in addition to further election eve stimulus will be implemented.
5. PIIGS fly then crash.
6. China and India will seek a stable anchor releative to other currencies and if war breaks out in the Middle East a dollar and gold price rise will benefit their situations tremendously.
7. Russia will continue to convert production into reserves.
8. The EU faces a potential fracturing due to domino defaults.
9. Mexico is entering a new era of instability due to the so-called U.S. recovery that does not exist in reality.
$1500-$1600 is a given. $2000 if we see any 3 of the above scenarios occur in a parabolic move. This parabolic blow off phase we are now in should end between $1020 to $1080. After that, the idiocy of our leaders will do all that is needed to move the markets up.
Dramatically.
Nice list.
Wish Tyler would invite Jim Sinclair over for supper...
Indeed!
as in all major changes of this sort, tyler could you address the de-coupling theory and assess the pain involved
(if any ) for the many gold and silver bugs out here in the void.....
everybody, scuso
but jim willie has been-a missing for 2 weeks. i'm afraid he has been murdered by men who want power so that they can have more power and then use this power to get more power.
where is-a the jackass
let's-a start a search party and by that i mean no wine and loose women but men you want to find jim willie
Willie has a new article:
http://www.gold-eagle.com/editorials_08/willie121509.html
grazie
he's safe
for a minuto i thought the killing has started
about 6 to 8 months ago Bill Buckner's ' the privateer' newsletter foretold events we see in the global markets and the movement of gold and currencies. he spoke of the situation at a municipal, county and state level in the us and europe. his archives are free. long gold and silver.
I'm not for gold or against gold but what I have I can touch and feel.
If you don't have physical gold then you're proving that Gold can be FIAT and Fractional..
Gold will never decouple from the US dollar. As the largest holder of gold reserves in the world, the United States may have abused her power of owning the reserve currency, but it's still hers to lose. As for the trillions in US government paper orbiting the globe, well, how about making it redeemable for gold at say $49k per oz? Notice the DX climb in relation to the gold price on it's way to the top of the paper heap?
At the risk of being flamed, I think Ben Bernanke truly deserved Time's Man of the Year cover. He didn't invent this runaway mega machine. That had it's roots in the industrial revolution or possibly even the chartering of the Bank of England. He just had to salvage the retirement savings of the baby boom generation, or find his head on a pike. He may still.
While there is every evidence that the US has hoodwinked other CBs into leasing out their gold under our scheme, please show me what confidence you have that the official tally of US holdings is accurate. Just like the audit of the Fed books, all attempts to inventory have been waved away for decades. Why? I have heard that cost was even used as an excuse to forstall a current accounting. That is ridiculous on its face. We know that CBs including the Fed have been involved with both leasing and swaps, so where do we stand right now? How much is owed by the bullion banks? These are questions that need to be answered, before we can have any confidence in your assertions.
Indeed Crime of the Century, #169525 do you really believe the US is the largest holder of gold bullion? When's the last time there was an inventory done at Fort Know? There hasn't been one in my lifetime and I'm pretty sure I know why.
Welcome to the Gold-Dollar Bifurcation
JoeSixpack.me
Welcome to the Gold-Dollar Bifurcation.
Just in time for the Obama administration.
Competition for the dollar.
This ought to cause the Fed to holler!
Welcome to the Gold-Dollar Bifurcation.
A new trend is in formation.
Shiny beats empty, and the financial systems goin' down.
If you got gold or silver, you're goin to town!
Welcome to the Gold-Dollar Bifurcation.
Derivatives implosion lead to dollar's deprecation.
Markets down, and bonds collapse.
The world's current financial system will lapse and pass.
Gold and Silver
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Performed by Frank Sinatra and Al Bundy
Adapted by JoeSixpack.me
Gold and silver, Gold and silver
Go together like a horse and carriage
This I tell you brother
You can't have one without the other
Gold and silver, Gold and silver
It's a currency you can't disparage
Ask the local gentry
And they will say it's bimetallism
Try, try, try to separate them
It's an illusion
Try, try, try, and you will only come
To this conclusion
Gold and silver, Gold and silver
Go together like the horse and carriage
Dad was told by mother
You can't have one, you can't have none, you can't have one without the other!
No Sir!
have you been drinking?
Goldschlager
Silver is going to be the real star. So much more upside potential than gold-- Not now, but soon.
We may be waiting a long time for silver's next super spike. There are a lot of research papers about. Some have been waiting since 1981. I think we'll get there, but when?
"China and India will seek a stable anchor releative to other currencies and if war breaks out in the Middle East a dollar and gold price rise will benefit their situations tremendously."
--huge factor I hadn't considered. Thanks.
Practically a factor that concerns straightly half of the worlds population..
"The point of these musings is that no one really has any idea of the longer term price of gold that can be justified by sober analysis."
This is what should have been emphasized. Honesty makes for a refreshing read.
Goldman's prediction for GOld's continued rise are probably as good for their $200 oil prediction last year, for the moment gold has peaked and will pull back over the coming months.
Peak gold theory this year, peak oil theory last year, it is all hogwash.
Rantor
Yah - next year is Peak Ink
uh...gold production peaked in 2000.
Oil in 2005.
Production amounts of both have declined every year since, despite persistently high and even record high prices.
While people talk about issues in current event mentality,they tend to forget where things should,instead of where they are. While recent dollar ralley has been huge,but the question realy should be:where should the dollar be,if everything else is constant(no qe,or garbage buying)?and you get the answer by looking at the DXY. Currently,it stands at the late 2007 level,despite all the changes since then. With all the slack in the economy,defaults on debt,high unemployment,in my opinion the DXY should be in the range of 99-01,since we are back to these years level credit wise.
2001- the space odessy...
we're going to be forced into a new modality- eg it's currently the year 5770 in the hebrew calendar...
I see an industrial revolution resistance around 1700- 1800
Actually, if the world's supply of gold (160,000 m-tons) were to represent a 10% fractional reserve on world assets, which are about $200T, that yields a price of about $3,888/oz., not impossibly far away.
You can hypothesize some kind of world gold standard, where all monetized assets (i.e., all the money in the world) were backed up by 10% gold reserves. In that scenario, this would not be an unreasonable price.
This just one guess at an ultimate price. You could also imagine everybody having 5% of their investments in gold, which would be something $1944/oz. What's interesting is these prices represent a complete world wide penetration of a given gold strategy, and they aren't wildly far away.
Of course, these would be an equilibrium prices. Given that a lot of gold is locked up underground, and not for sale at any price, a rush to a safe haven in the case of hyperinflation or deflation would likely drive the price much higher temporarily.
Hey Fiasco, Jim Willie is alive and well
Yesterday, late, he shot out some emails to "gold friendly" sites on his latest uncovering.
THE BULLION BANK RUSH IS ON. STARTED YESTERDAY.
The details are currently brief, but Large Holders are demanding gold from the holders of such metal. It seems that there isn't all there is supposed to be in their accounts. Bribes have been offered to take cash, and rejected. The worrys about tungsten bars coated with gold are due to more discoveries than China.
A lot of depositories are short of required metal.
This is an end game sequence.
We still have Willie but it looks like the splendid comic relief of the Mogambo Guru is no more. I wish him well, and hope he sees this. Nobody could point and laugh (PAL) quite like you, Mogambo.
I think India has taken the title for most Gold Reserves.......
@15,000 Tonnes.
I mean gold could buy you food, clothing and shelter 2,000 years ago and will still buy you food, clothing and shelter now. Try cashing in binary 1's and 0's on someone's hard disk.
I'm not a farmer nor a tailor nor a doctor so my skill set is not terribly essential or easily marketable. Right now, gold is it, like or not.
I mean gold could buy you food, clothing and shelter 2,000 years ago and will still buy you food, clothing and shelter now. Try cashing in binary 1's and 0's on someone's hard disk.
I'm not a farmer nor a tailor nor a doctor so my skill set is not terribly essential or easily marketable. Right now, gold is it, like it or not.
thats it. I will sell all my gold today.
In November 1982, the Dow Jones Industrials broke 1000 and never looked back. Seasoned investors called it a "Dog Named Spike", "a bubble" going back to the tired days of the late 1960's & 1970's. It didn't. It went up, not in a straight line, but up nonetheless. Financial & real assets inflated to the levels we know of today. Gold languished during 20 years of blips and false starts, difficult to buy & sell, never really finding its footing, while financial & real assets were still commanding investors attention ... until the dawn of a new century. Now gold is easy to own, buy & sell and is commanding investors attention. It is catching up, catching up to the inflation of the past 25 years ... and there is alot of catching up to do!
http://grandich.agoracom.com/2009/12/gold-alert-1001000-may-the-riskreward-be-with-you/
Peter Grandich
I have to tell you something before I conclude this commentary. I laugh (a lot) at those who call gold in a bubble. Why? Because they never gave it the light of day all the way up. Trust me most of these “bubble blowers” have urged avoidance of gold forever. Exactly when did it go from worthy to bubble stage in their book?
One more thing about bubbles: in order to have bubbles, you need to have the masses within the bubble. Remember the Internet bubble? Or how about the housing bubble where seemingly everybody became a real estate baron? Please ask the bubble blowers exactly where the masses are in ownership of gold? See how many of your friends bought gold. Go down to a local financial services firm and see how many of their clients actually bought the shiny yellow stuff. Sorry, bubble blowers, but the gold boat still has ample seating and the chewing gum is still in its package.
Let’s look at where we stand on the three factors I’ve noted to be the key to gold’s success as an asset play.
* Central Banks are net buyers. More importantly, the key banks buying are from areas of the world where real economic growth exists. Also, look at those bankers who chose to sell most of their gold. How smart was that move? You don’t have to go any further than the Bank of England and England’s economy for the answer. It’s not so important that Central Banks are buyers as it is that it’s clearly no longer desirable to be a net seller to realize this factor has gone from quite negative to net positive.
* The incredible loss by Barrick Gold from hedging will be on the minds of most mining CEOs. Hedging has become so disliked by the investing community that I don’t believe any CEO could keep his job if they so chose to hedge much of their future production. Emerging producers will continue to hedge as it’s a requirement to get funding to build and run your new mine and this won’t change.
* While a bear market rally has been born in the U.S. Dollar, the dollar is terminally ill. America’s economic, political and social problems have become acute and the key players in the world know it. IMHO, the surprise in 2010 can be how well gold does without a declining dollar but, rest assured, in the next 1-3 years we should make new lows in the U.S. Dollar. The big mistake would be not to own gold because the dollar isn’t declining. In the middle of the economic collapse recently in the Spring of 2008, the U.S. Dollar Index was around 72 and gold in the mid $800s. Today, that dollar index is approaching 78 and gold is several hundred dollars higher.
So, what DID happen to the Mogambo Guru? I miss him too.
I would prefer gold much.
Gold price never falls.
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Gold cost remains stable even in economic disaster.
So Gold is best business material.
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