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The Relevance Of Gold - Sprott's 3 Litmus Tests
Submitted by Trey Reik via Sprott Asset Management,
Few assets command more disparate investment motivations than gold. Most investors hold opinions of gold’s merits, usually with surprising conviction. Some view gold as an inflation hedge, others as a deflation hedge. During times of financial stress, some view gold as an asset to own, while others might view gold as an asset to short, because of gold’s historically inverse relation with the safe-harbor U.S. dollar. Many view gold as the ultimate “risk off” asset, and just as many view gold as the ultimate “risk on” trade.
At Sprott, our investment thesis for gold has never been limited to popular relationships, such as CPI-type inflation, financial meltdown or political instability. We prefer to focus on the irretrievable gap between financial assets (claims on future output) and productive output (GDP). In essence, the most compelling reason to own gold is that financial assets have lost their underpinnings to sustainable productive output. We train our analysis on the United States because we believe the “dollar-standard” system is at the heart of mounting global monetary stress. To us, the ultimate litmus test for gold’s ongoing relevance as a productive portfolio asset will always be the relationship between claims on future output and the productive output itself. We believe U.S. paper claims (aggregate valuations of stocks and bonds) have become completely untethered from underlying productive output.
The outlook for gold rests squarely on the mathematics that U.S. GDP can no longer service U.S credit-market debt without fresh credit creation on the order of nearly $2.0 trillion on an annual basis. In essence, new debt claims on this order of magnitude are now necessary to support the burden of outstanding debts. During the past 15 years, this mandatory debasement of existing claims has been at the nexus of gold’s ongoing bull market. It is a common misconception that gold’s strength since the turn of the millennium has been closely linked to central bank programs. However, gold posted nine straight years of advances before the Fed’s first asset purchases in 2009.
We believe quantitative easing programs reflect the Fed’s tacit and comparatively recent admission that a credit-creation backstop must be provided to forestall U.S. debt defaults whenever the U.S. economy’s capacity for fresh credit creation stands at low ebb. Gold’s wealth-protection relevance will not diminish until the ratio of debt-to-GDP reverts to a sustainable, functioning level, which history suggests will certainly be no greater than 200%. We believe current GDP levels suggest debt-defaults of at least $20 trillion will ultimately be required to rebalance the U.S. financial system. In an environment of likely, large-scale debt-default, gold remains a mandatory portfolio asset.
We have developed three litmus tests for gold’s portfolio-diversifying relevance which we believe every global investor should currently be mulling.
First, could the U.S. financial system endure even moderate normalization of interest rate structures?
Second, has the process of debt rationalization been allowed to proceed in U.S. financial markets?
Third, is the U.S. economy capable of achieving 3%-to-4% GDP growth with a healthy net national savings rate of say 8%-to-10%, alleviating the need for copious amounts of U.S. nonfinancial credit growth.
If the answer to all three of these questions is not, “yes,” gold remains a mandatory portfolio-diversifying asset.
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Those who think that gold should not hold a place in an investment portfolio are not paying attention or have an ulterior motive.
It's way simpler than what author Trey Reik writes. Gold is the best hedge vs. .gov mismanagement of our financial system.
So many people, even finance people, look at gold and don't understand what it's for. Just the other day a friend of mine, who works for a bank, said it's return is an average of 3% p.a. He didn't understand why you would want to hold gold over asset classes at all. To him it's just another stock and in his eyes a poor performing one therefore will never be part of his portfolio. I think most people probably have this perception of gold, even if they don't admit it. The stupidity and alpha conditioning is real...
You believe the government that has surpressed the price of gold for 8 years and spent billions will just let you walkout the door with your gold bars .......not a chance . All your gold she belong to us
So, I should be stacking gold? I'm alright with that and just in case lots of silver too.
Question for the forum...
If someone is going to hold gold in an investment account with a brokerage (I know, I don't need to hear how it has to be physical in possession, just work with me here) what do you think is the best way?
I would avoid GLD, but was thinking ..
CEF (Central Fund of Canada?).
Thoughts?
What country are you in, and what brokerage firm do you use?
United States, say one of the big houses like Merrill Lynch or Morgan Stanley
Whatever you do, don't use them.
You are far better off buying and holding your own bars or coins bro.
Those two brokerages will actually have more limited options than certain others who let customers buy funds listed on SIX. If your plan is to buy and hold as opposed to day trade (in which case a crappier vehicle with more liquidity and better tracking of the underlying asset and a cheaper broker would make sense), then 1) do your own due diligence on CEF (I own some, but it's not a significant share of the long side of my gold position). Consider direct registration of the shares if you don't want to be bailed in the next time ML goes BK. Both of those brokerages should also allow customers to purchase physical gold bullion, but proper due diligence for that would be a nightmare, and cost prohibitive vis-a-vis a boating accident or an investment in a proper safe (one good thing about physical gold vs paper gold is that you don't need a fireproof safe).
CEF seems like a good bet, currently trading at a 10% discount to NAV
There a 5 countries to hold gold accounts.
The best way is NOT in brokerage accounts but in metal accounts for jewellers.
In Antwerp, London and Signapore, austria and germany, jewelers can buy gold, store gold and have price accounts.
Those are not banks and operate for decades and decades for the jewelers and are not linked to the financial institutions.
In Belgium, I have a account at www.argentorshop.be where you can open such a account where you can collect your gold with a small premium and even let it ship to to you or simply let it there where you can always sell it at the dayprice.
The best is heraeus-trading.com But the premium is larger there to get your gold.
I don't know why but I don't trust sprott, he is against everything what he sells himself and it's all a bit to marketing for my taste. Never go into business where the boss is a constant keynote speaker. To slick.
He's right on a lot of things but that's also why I don't trust him.
In 2009, Sprott was predicting 800 on the HUI.
stay away from paper gold entirely. I know you said you know, but jesus man - buy some coins.
Yes, however, fully allocated paper gold may make sense for IRA funds where assuming counterparty risk is required by law anyway.
CEF, PHYS, or GTU
If you are going to gamble by holding paper, may as well go for the leverage and buy the miners.
Remember solid gold in your hand has no 3rd party risk, everything else does so what ever you do your only as good as your 3rd party. So miners are only as good as their managment, etc. I cant really think of many I would trust with gold these days. I do like some miners, but thats about it. I also like slw which is a bit different type of company. I think its a bad idea personally. Just look at a company like BullionDirect, people got screwed. If Uncle Sham ever decides he wants to confiscate gold, whoever has it will just turn it over? Thats no fun?
I have incomplete research on CEF. I found nothing wrong with them and was in and out of a position back in 2009. Nevertheless, I would take physical and hold it...in actual point of fact, I have forsaken market based gold vehicles in favor of directly holding physical. Why?? Because physical is physical. My latest trick...I bought placer gold mine production at a discount to spot! ....Thank you, I'm here all week. ;)
If you sure you're don't want physical, look for allocated gold ETFs. The higher the allocation factor the better. Just don't forget about 'em. If physical runs short ETFs will have a hard time maintaining their allocation and you could get screwed. You could also get screwed because they confiscate or just lied about their allocation in the first place. Never trust banks...
Thoughts on (CEF) gold?
You would be better off with Tesla, Facebook, Apple and Twitter than paper gold.
They keep talking up gold like this and it'll be under a thousand by tomorrow! lol
" Trey Reik" - you gotta be kidding. The cousin of "Reince Preibus"?
If gold makes sense, then so do the miners. Why? Because if gold takes off, so will the miners. The free cash flow for many of the producers is going to be excellent. Look at the numbers. Here is a typical example:
200,000 oz of production. All-In Costs: $1200 per oz. Gold price $2000.
200,000 x $800 = $160,000,000 million in free cash flow.
Valued at 10x cash flow = $1.6 billion market cap.
Today most of these companies are trading for under $300 million, with some under $100 million.
Yes, there is high risk. The price of gold may never rise, or could go down and bankrupt these stocks. But the risk/reward looks pretty good.
Most of the majors should be at least 3 baggers if we hit $2000. The mid-tier producers should average about a 5 bagger. And the juniors have the potential to explode in value. I don't know of any other investment sector that has this kind of setup. The bottom line is that if gold takes off, so will the miners.
www.goldsilverdata.com
That's nice, but your hypothesis is based on a very vulnerable assumption:
That miners will go bankrupt first. Which sends the share values to zero, and allows bigger fish of fiat credit to snap up the remains at 10 cents on the dollar.
Avoiding a Third Party liability means exactly that. Otherwise you are playing in the Paper Fiat Casino of Crony Capitalism, and must think and adapt accordingly.
We can become immune to other people's lies only when we no longer let our own fantasies and greed lie to us.
Paper gold is worse than toy guns.
Paper Gold shares are nothing more than Casino Chips.
Play accordingly.
Forget Central Fund of Canada,buy physical gold and silver bullion:
http://www.kitco.com/ or small amounts at:http://www.albern.com/
Or collect:http://www.mint.ca/store/template/home.jsp , http://www.perthmint.com.au/
Or buy BitGold on the TSX Venture symbol XAU. http://www.theguardian.com/money/us-money-blog/2015/may/31/bitgold-new-s...
https://silvergoldbull.com/gold
This is gold, Mr Bond. All my life, I have been in love with its color, its brilliance, its divine heaviness. I welcome any enterprise that will increase my stock- which is considerable.
I love gold so much that I lost my genitalia in an unfortunate smelting accident.
https://www.youtube.com/watch?v=HnzH15hwt48
This is the first item I have read on ZH that goes to the heart of the current market imbalances in the US. Therefore it is strange that it does not receive unanimous approval from readers. No economy can survive if claims on future production vastly exceed the actual production - not to mention the burden of debt imposed on future generations.
To solve your quandry -
WE KNOW. WE KNOW. Let's explode this shitshow already.
Gold is insurance. you spend money to insure your house, car, income, business, etc. At the end of the year if you have made no claims your money is gone. With gold you still have your gold if there has been no need to use it!
You lose the return you would have had investing your wealth into productive enterprise.
Of course, you lose the risk you would have had with that productive enterprise, which is the whole point.
which productive enterprise might you be refering to currently?
Yup. The only productive enterprises NOT grossly overpriced today are... small productive businesses that you own and operate yourself.
Well, some of them.
Overpriced versus what. Cash sitting in a bank account loses 5%-10% due to inflation and bears all the risks of staying invested in fiat and the mainstream economy. Gold is immune to all those risks and to inflation but its productive return sitting at the bottom of a lake is 0%. Let's compare a structured financial investment to an investment in gold.
Apple stock is currently $120. Its trailing total returns are:
15-Years: 35%
10-Years: 31%
5-Years: 24%
1-Year: 12%
A 1-year, at the money put, is currently $10. That's 8% of the purchase price for a year of asset price protection. Apple has an interest coverage ratio of 700, so credit default not a material risk. A few percentage points might be given to some structured instruments to mitigate any inflation flareup risk.
This neglects steady state inflation at 5%-10%, but it also neglects gold/dollar downward price manipulation, which is also about 5%-10% (relevant if the manipulation continues beyond all our lifetimes).
All together even at today's bloated valuations and high risk environment, one can mitigate the brunt of these risks and invest in Apple with an expected return of somewhere between 2%-25%, downside capped at -10%. Not too bad a risk/reward profile compared to gold's 0 risk / 0% return profile.
Just what I want to invest in Apple's "Yesterdays Junk" It would be interesting to know who is paying you?
That's why I picked Apple. If a person can safely invest in junk and make money off the current scheme, why not. You can downvote having more money if you'd rather have less and live in a shack, to each his own. But personally, I'll take the extra money and use it to buy goods and services I want, including more gold.
At some point the fake merry-go-round of swirling junk is going to come crashing down? And yes there maybe 20 companies that are safe, but are those the companies who you want to support? The ones that are planning all this fun? They are scum. Just a hint we are getting close when most of the rest of the world hates us? Some junk company isnt going to save any of us? If we didnt have incompetence ruling I would consider investing in this garbage economy. The rest of the world is focusing on positioning themselves with gold, real money. Our Achille's heel, Good luck to you.
Of course at some point the ponzi scheme is crashing down. That's what the put is for. Did you read or understand my post?
I have no idea what you're talking about saying investing in junk stocks is going to save us. A little early in the day to be smoking, no?
Is your put in currency? Do you understand the difference between real and fake money? Look at the long term dollar value against gold? Its going to become worthless? Do you know what happened to the British? I bet they had no clue it was coming.
No I havent smoked yet.... but it just might be time for a puff. You keep on facing "reality".
Yes, of course the scheme is all coming down including fiat. At some unknown point in the future. As anyone who shorted the stock market or the dollar in 2012 and is now a pauper has come to better appreciate.
Unless you have inside information the crash is guaranteed to occur within the next year, you might want to turn your attention from only investing in the implosion-this-year scenario, to the stickier question of how to maximize your risk-adjusted return across all scenarios, including one where a heavily manipulated environment persists for many years to come before only later finally imploding.
No, I have no time-line or inside information, but when you see the direction everything is pointing in and most people I know still have 08 pretty fresh in their minds, I knew 08 was coming because the market was simply built on B.S., I know its coming again because not one thing has changed and its only gotten worse. Where else to we have to go? UP? Are you kidding me? The problem is, is our government doesnt understand what money is or they have evolved without explaining it to us? We are using unconventional structure in the markets as an "experiment" with no explanation. They want me to make a huge leap of faith, when I have never been able to trust my gov? You go ahead and find out, please tell me how it works out for you in the end.
If all that junk is what makes you happy then so be it.. but dont bring the rest of us down with all your inferior cravings of insecurity. How are you going to know when its time? Do you have some inside information? Let me know when you see it coming wont you. In the mean time keep trying to fill that hole inside yourself.
There is far more freedom living in a shack than being apart of this fucking nightmare? When the music stops how many chairs will be left at the junk store?
Yes, more freedom living in a shack in the woods. I in no way begrudge that lifestyle for those who value that more. You may be such a person, and that's totally cool.
Others, like me, value a higher degree of material comfort and social interaction even at the higher cost of living in a statist society. So I'm only talking about strategy for such people.
It is an unfortunate fact that you can become rich by investing in a fad for just the right period of time.
Or by being a master thief... or bankster.
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BTW, literally the easiest thing in the world is to identify profitable bets/investments after the fact. Even a smart 4 year old can understand stock price charts and point to periods of time that would have been great to invest (rising line).
This skill is no use to anyone without time machine.
For proof, just wait until fiat currencies fail.
Millions of "paper rich" will become broke.
With insurance you pay to remove risk of catastrophic loss in your house, car, business, etc, but continue to enjoy utility and/or productivity gains yielded by those assets. With gold you pay via opportunity cost and holding cost to remove risk of all loss and all return including risk-adjusted time-value-of-money productivity gains. It's this last part that's a bitch about owning gold.
This is why barring complete implosion of the currency, in theory a better outcome than gold might obtainable if you could cost-effectively construct a portfolio that successfully hedged against all the potential losses in value attributable to use of fiat (counterparty risk, confiscation, debasement through inflation, asset price manipulation, exchange rate manipulation, etc.). This would allow you to remain invested in productive assets while giving up only some of those productivity gains instead of giving up all of them as you do investing in gold.
Complete implosion of the currency is coming. On a long enough timeline, the survival rate for every fiat currency drops to zero. And the dollar's days are getting short.
True and fair enough. Only way to effectively hedge that risk is to hold substantial amounts of one's wealth in physical gold.
I just make the case substantial need not mean all. By intelligently hedging manipulated, bubble, fiat economy investment risks, one can earn more fiat which for the time being can still be used to buy useful stuff...including more gold.
Thats right currencies have a life span, gold lasts forever.
I think it's so polite of all of you haven't mentioned that from Turk to Turd, none of these guys have been right about PMs since 2011, save for the simple fact that price discovery doesn't exist. Aside from that, all shot have failed to impinge on the longer side of a bovine enclosure.
Just keep stackin' until doomsday I guess.
Just because we have had a few years with the dollar printing machine working away doesnt mean some of these ideas wont come to light? Time takes time and things change over time. Gold is coming off 2000/oz highs? Just like the market is coming off tanking in 2008? and it doesnt appear much has changed, so yes its easy to underestimate how long the gov can keep us propped up? Everyone like yourself still assumes everything is great in a dollar printing world with no one working? This "Experiment" has been a disaster. Its funny how fast we forget? There are a few who are trying to keep reality in focus. Just because something hasnt happened yet doesnt mean it wont.
So, since Sprott knows that the dollar will collapse what happens if you buy into his fund and the dollar collapses? Sprott will not redeem in metal as far as I can determine, so what? You get worthless FRNs and they keep the gold/Silver?
That's EXACTLY what governments do, even ones with, so called, gold backed currency.
And that's also why there hasn't been a true gold backed currency for hundreds of years, (thousands of years? ) and there will never be one again.
1964 they made 90% silver quarters? That is backed? It couldnt be more backed than being made from silver? A silver quarter is worth around 2.80 right now and its backed money. Backed money is freedom which we dont have anymore. Based on your comments I would say your paid government scum? You seem to have issues telling the truth?
The scenario is as follows:
Price of gold will increase sharply -> Gold mining becomes profitable -> production increases -> ancillary equipment & manufacturing is required -> more steel for mining equipment and transportation is required -> More energy is required (coal, petrol) -> OUT of Crisis -> Increase in demand requires gold price to be suppress by US Gov and mainstream media in support of US dollar -> less mining -> Back to square one. Nothing will happen
For the mankind to get out of this perpetual crisis is to remove the "US suppressing Gold" which means:
1. The destruction of the Economic terrorism conducting by the US Gov <- Destruction of the US power
2. Bringing to the international justice the US Gov for the systematic destruction of the world habitat, culture, economy, humane spirit
3. As terrorists are on CIA, US Gov and mainstream media pay cheque journals they will also vanish naturally
I own some CEF. Rather than summarily dismissing CEF as a mere equivalent of GLD and SLV, does anyone have specific criticisms of CEF as an investment vehicle?