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goldminingXpert (28.65)

Analyzing TMFSinchiruna's "700 billion reasons to own gold" article



October 02, 2008 – Comments (4) | RELATED TICKERS: GLD , KOL , UNG

I have puts on Gold (Via the GLD ETF) and I also am short stock in Goldcorp--I am long Jaguar Mining and Northgate Minerals, however, I am net short gold by a wide margin at present. That being said, Christopher (TMFSinchiruna) has written another interesting article taking the opposite view of mine.

He presents 5 reasons to be buying the shiny metal now. I have no argument with arguments #2, 3, and 4. However, let's take a closer look at arguments #1 and #5.

Here is his article for reference.

First, here is his argument #1.

"Inflation looms ever larger."

He talks about the bailout (which I strongly oppose... and one of my posts on it got 45 recs.) While the bailout is a no good piece of legislation giving your tax money to fat cats, it isn't deeply inflationary. $700 billion is nothing, absolutely nothing, compared with the size of the problem. On Monday, the equity market lost more than $1 trillion dollars in value. In one afternoon, the stock market wiped out more $$$'s than the bailout would inject into the system. Seeing as how the stock market continues to lurch towards its long-term goal of around 8,000 (850 S&P), we will keep seeing money destroyed at an enormous rate.

Secondly, where is that inflation? At least in my life, prices are falling. I am a college student. My tuition went up 3%, my rent dropped 2%, my food costs are down sharply (milk, meat, cheese, eggs, bread--the essentials--are all dropping fast), gas has fallen from $3.80/gallon to $3.30, the cost of my electricity has bumped up slightly, the price of clothes has fallen, and I'm finding more deals to buy stuff from other students used at steep discounts. My life costs me no more, and quite possibly a bit less than last year. The economy is seeing trillions of dollars of credit vanish--a measly little bailout is merely a small drop of water in a shark tank.

And argument #5:

"Insiders agree: gold is going much higher. From Goldcorp (NYSE: GG) founder Rob McEwen, to Fronteer Development Group (AMEX: FRG) CEO Mark O'Dea, mining industry executives are increasingly comfortable spelling out their long-term price targets for gold."

I know little about FRG, but let's talk about Rob McEwen for a minute. I think the guy is a genius. Once he left GG, the company went nuts, paying a king's ransom for Glamis and diluting itself so thinly that, well, um, it makes spandex look thick. Sorry, my mind went wandering, anyway, Sadly though, he has lost his touch, his new projects have been complete catastrophes. US Gold (UXG) has fallen from $7 to $0.95 over the past year as it has studiously avoided finding signifcant economic deposits of gold. McEwan also has a major investment in Rubicon Minerals (RBY) a company that I used to like, and still think is alright, but with the shares barely hovering over a buck, you can't really say that one has performed recently either. I hate to sound mean, but McEwan needs to set a ridiculously high price target on gold to have any hope of saving US Gold from heading to the pink sheets.

My counterargument:

Short and sweet, here's the problem for gold bulls. The dollar keeps rising as the US is in better shape the rest of the world. Europe is nationalizing their entire banking system with frightening speed, yet our Congress stepped up and told the Fat Cats no on Monday and appears to be trying to blunt the power of the Senate's bill that comes up tomorrow (a bunch of congressman trying to reduce the package to $250 billion.) The US isn't dead yet (that doesn't come until the boomers retire en masse.) Until then, the debt-laden train wreck Euroland economies will continue to eat our dust (woohoo our GDP growth is going to average -2% while theirs is around -4% for the few years! Go America!)

First we were hearing that gold was a good buy cause the dollar was crashing and that the global economy was strong. Now the global economy is terrible, the dollar is rocketing higher through key technical resistance, and we should still be bullish on gold? No. If you must play commodities, either play them like I am: long speculative gold stocks that are 10-baggers if we hyperinflate: NXG is a $10-15 stock if we hyperinflate, but my GLD puts and GG short won't lose nearly as much as my NXG gains. After finding a speculative stock, short the metal or the big miners... those aren't going to go up nearly as much as the miners should their be real hyperinflation. This way you profit if gold goes down or way up... and your losses are moderate should gold only rise a bit.

The other way to play is to go long a commodity that has no fear trade built in like coal (KOL) and short gold. Gold has an artificial risk premium built in while coal is trading as if I invented cold fusion. I can't see that trade not working. Nat Gas is also too beaten up... people need to heat their homes, and I've never seen anybody putting gold bars in their furnaces.


4 Comments – Post Your Own

#1) On October 02, 2008 at 8:20 PM, XMFSinchiruna (26.52) wrote:


As always, I welcome the discussion and look forward to responding in greater detail. For the moment, though, I have to ask: WHERE ARE YOU SHOPPING? :)

I buy groceries every week, and I've seen nothing but increases in the price of every category of food item. My rent hasn't budged, and who in their right minds would lower their rents right now? Gas is still $3.50 in my neck of the woods.I'm glad your're finding deals on used goods from fellow students, but I'm more concerned with the welfare of those classmates of yours that are so desperate for capital that they are selling their items for anything they can get for them.

I'm curious to see what some other Fools think, but I certainly find life to be far more expensive today than it was a year ago.

As I said, I look forward to responding in greater detail tomorrow.

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#2) On October 02, 2008 at 10:16 PM, Tastylunch (28.52) wrote:

I'm more in your camp than Sinchi's on this now GMX, it took me awhile to come to grips with it, but the hedge fund implosion made up my mind up for me. There's no question we have greater deflation pressures now. I didn't think the deflationary pressures would get this large. I do think in the long run the gov't actions will end up being net inflationary as the gov't has a tendency to overshoot when they try to deal with these sorts of problems. I think it may take a good while for it show up though (late 2009? 2010?) considering how much asset value destruction has occurred...

However that being said, I think you are partly wrong about point 1. I run a retail store and I can tell you that we are still seeing 10%-20%+ per annum increases on new inventory purchase prices, particulary anything involving metal in the packaging. Any goods coming from China we are also experienceing big price increases as they were experienceing huge inflationary pressures over there. Now maybe that will slow down in the coming months as the raw goods work their way up the production chain to me (if Deflation is truly here it hasn't shown up for me yet), but my inventory costs are a long long way from what they were in 2007.

The big boxes (Walmart, Kroger, Safeway etc) AFAIK are sacrificing margin to gain market share which may have been partly why your costs were down at the grocery if that's where you shop.

Why your rent is down, I don't know and that makes no sense to me. In Columbus Residential Rent is way up, due to residential rental vacancy rates dropping from about 13% to 7% due to people losing homes not buying homes etc. Deflation or not your rent should probably be up. Chances are it's something local for you or your landlord is an idiot. Either way must be nice for you :-)


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#3) On October 02, 2008 at 11:34 PM, goldminingXpert (28.65) wrote:

1. I mostly shop at Safeway for my groceries, and Target and Big Lots for other stuff. Makes sense that China stuff would be going up as their currency is appreciating--rightfully so. The price of a lot of stuff, oil, eggs, milk, corn is truly falling on a commodity level and so it should continue to fall in grocery stores as well.

Rent is down as people owned a lot of houses that were vacant as investments here. Now these houses are being turned into rentals, so supply is flooded. Quite a few students can't get student loans, so there are lots of people dropping out, while housing stock is rising. Maybe this is a local event, but it is certainly widespread in my community. 

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#4) On October 03, 2008 at 11:04 AM, XMFSinchiruna (26.52) wrote:


1. If the industry average all-in cost of getting gold out of the ground has reached $800 as confirmed by the management of two of the largest producers in the world (Barrick and Gold Fields), how on Earth do you expect gold to sustain prices at these levels? Yukon Nevada shut down its Jerrit Canyon project on negative cash flow, and Goldcorp recently shelved its Pamour mine until prices rebound. These aren't GSEs here... these are private, for-profit corporations, and beneath $800 the gold will not come out of the ground. That is a fact of supply and demand that trumps every other argument you might make. What's more, points 2,3, and 4 from the article seal the deal on where the price of gold is going.

Honestly, I don't know how you can say that Europe is in worse financial shape than the U.S. You present no evidence to that effect. You suggest that Europe is nationalizing its banking system faster than we are????????????????????? Huh?Did you happen to catch that Fannie Mae / Freddie Mac bailout? I'm pretty sure they covered that on T.V. :) AIG????? Bear? The Fed even shelled out $138 billion for the one they say they let fail: Lehman. I guess you skipped over the part where I pointed out that the Fed through more than $1 trillion at the crisis in September alone. Expansion of the monetary base is, in all instances and in every example that history provides, inflationary.

The Fed's balance sheet is now cooked, so every subsequent outlay of dollars will necessitate the fresh printing of crisp new dollars.

Finally, you state that prices have fallen in your lifetime. That's quite a statement. There's plenty of documented evidence that way CPI is now measured differs from the methods used in prior decades in such a way that it understates the actual rise in prices for the average consumer. See the shadowstats website for more on that. Now, since you're a student I'll make a leap and assume you're young. That 'official' CPI has shown prices to be rising throughout your lifetime, with an acceleration of the curve since the latest round of rate cuts began. Your USD has lost 33% of its purchasing power overseas since 2001. Since many commodities that we need are purchased abroad, you feel that in the wallet whether you realize it or not. Peter Schiff has the best explanations of that often-misunderstood phenomenon. Though oil is down from its peak, you're still paying way more for heating oil, gas, and every otherfuel you burn. Although you may feel as though prices have eased, that is not a very scientific analysis and I can refute that feeling with facts: you have experienced inflation, not deflation, in your lifetime. :)

Certainly home prices are plummeting, as well they should.

I thank you as always for the discussion. Be careful shorting gold. Everyone else out there... I believe shorting gold at this stage is akin to buying a homebuilder or GM or Ford... you'd be better off in cash.  :)

Fool on!

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