Just one word GOLD!

[Horrible Player]

Should i say more...

[adios]

Yes I would appreciate it if you would. I've asked this question to the gold bulls numerous times and I haven't gotten a straight answer yet. I'm not against betting on gold mind you. However, lots of stuff has gone up a lot more than gold has so why should I prefer gold to them as I'm sure at least some of them are going up for the same reason even other precious metals hell even other metal hell even other commodoties. A lot of speculators are betting heavily on the gold miners due to the leverage from the increased price of gold. The most concrete statement I can get from the gold bulls is that the US $ is going to tank and gold will go up and there will be increased demand for gold world wide due to the desirability of having some gold. There's also some fuzzy ideas about rampant inflation occuring in the US economy. Some of them are citing China as an example of lots of pent up demand for gold. As far as the US $ tanking and gold going up well I believe platinum has done much better over the last 3 years than gold has and there seems to me to be many more effecient ways to hedge against a falling US $. As far as increased demand for gold world wide. Ok can't argue with that and say it won't happen but it does strike me as being a somewhat low probability event. Not against gold per se but can't see why it would be better than some other alternatives for hedging against a fall in the US $. I mean gold mining stocks might go wild from here but they seem kind of risky to me as others have pointed out. Well why should that stop anyone I guess because current stock market valuations make many stocks very risky as longs anwyway in my mind.

[A9suited]

Tom:

You responded to my earlier post on gold last weeks with some valid points on my portolio, which I appreciated.

The bullish case for gold (as best as I can read in the tea-leaves, although I dare not speak as an authority) is as a purchasing power hedge aginst the devaluation of the US dollar. This is my reason. The US dollar has already weakened significantly vs the Euro, for example, and the Bush administration continues to press for further devaluation.

I could not find a chart that graphically displays the minimal price change of gold vs the Euro over the last 3-4 years, but Euroland residents with a sock full of Maple Leafs have not had earth-shaking gains.

There are a couple of other incidental items that need to be weighted as well. These have been valid for years, but I believe a case can be made that they are increasingly important. First, as an asset class, gold is under-owned. It will take a very small amount of additional investment purchases to affect prices.

Second, centarl bank selling has decreased.

Third, it seems hedging and foward sales are occuring less frequently (although statistics are muddled)

Fourth, world tensions are increased. India and Pakistan are nuclear-armed enemies, and the goofy guy in North Korea might do almost anything. And even if nothing is done intentionally, the chance of an accident is certainly increased.

[A9suited]

5. An EFT gold-tracking security is slated for a November roll-out. This will allow purchase of 1/10 oz of gold increments on an exchange, as easily as buying or selling a stock. The ease of adding gold to a portfolio may (I expect will) add some incremental purchasing of gold metal, as many ma and pa investors are uncomfortable in the commodity markets.

A9s

[adios]

Thanks for your clear and thoughtful reply. It's very much appreciated. I've heard something about the central banks selling less gold from other sources as well. Don't know much about it though. Interesting. What are your favorite gold investments for instance which stocks related to gold do you like?

[A9suited]

Almost all my gold equity exposure is in Newmont Mining common stock. This is the only S&P 500 gold related equity, and is extremely well-managed. The management team is led by President Pierre Lassonde, in my estimation the sharpest mind in the entire industry. I have a small interest in Goldcorp, an extremely high-grade Canadian miner, also well managed.

NEM has equity interest in properties containing 85+ million ounces of gold (this is understated as these are reserves deemed profitable at $330/oz gold; the properties they control have significant additional ounces that become profitable to mine as prices approach $400/oz.)

Given NEM's size (it expects to produce about 7 million ounces per year for the next 3-4 years), geographic diversity (their mines are located on 6 continents, and in perhaps 25 countries), and tight-fisted management (they will not do anything stupid with the current cash-flow) I don't believe diversifying among several producers is necessary. (Note this is possible because they produce a pure commodity) Management quality drops off a cliff after these two companies, including (IMHO) the other Billion-dollar gold producers ABX and PDG. I keep away from African-based producers.

Many investors have the mistaken impression that gold mining companies can simply crank up production when prices rise, but it is not so easy. Even the poorest of African nations have strict rules for mine construction and environmental protection, and financing is dependent on adhering to these. Any deposit that can produce at market-significant levels (say 1 million ounces/year, for 5 years) require at a minimum several hundred million dollars for construction, not an easy sum to raise for underfunded juniors. Even established mines require years not months to meaningfully ramp up their output. The only real possibility of increased supply in the short term is the restart of mines previously shut down due to low bullion prices, that are currently on 'Care and Maintenance'. But since many miners have poor financial discipline, there are few of these....the unprofitable mines were usually kept cranking right into Chapter 11.

NEM has had an impressive run-up lately, and with a 50 PE is not for the faint-of-heart. ( I have to 'fess up I do own some NEM puts, although not many, and they are well below the current price) Which is another advantage of NEM vs other golds...the liquidity of its option market.

Anyway, thats my take.

(FWIW, based on your comments to last week's post, today I decreased my exposure to Canadian nickel miners, and have used this US market correction to modestly increase US equity exposure, and will add to it if the markets continue to wilt next week.)

Regards
A9s

[Wildbill]

If you believe in your arguments, I would guess your best investment would be Swiss Franc futures. You will benefit from a fall in the dollar without worrying too much about gold supply and demand. If tensions in the world increase the Franc always goes up due to its safe haven status.

[Horrible Player]

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