Offtopic (?) - The Investment Case For Gold - viel, viel Text, Teil 1

verfasst von Cosa, 03.03.2002, 12:53

Hi!

Hier eine interessante Lektüre, die nun absolut nichts mit Autos oder Viehzeug zu tun hat ;-)
Ist zwar schon etwas älter, aber in anbetracht der Themenverlagerung hier, komme ich zum vermehrten Fremdstöbern ;-)

Der Server schafft irgendwie nicht den ganzen Text, daher ist der in zwei Teile aufgeteilt.

einen schönen Sonntag wünscht
Cosa

<font size="4">The Investment Case For Gold</font>

By John Hathaway from Tocqueville Asset Management
01-24-2002

The investment case for gold centers on the notion that the over valuation and excessive supply of the US currency has funded a decade’s worth of uneconomic investment and unsustainable consumption. According to Professor Robert Mundell, as recently quoted in The Wall Street Journal (WSJ) Europe “There will come a time when the pileup of international indebtedness makes reliance on the dollar as the world’s only main currency untenable. It is no longer necessary or even healthy for the U.S. or the rest of the world to rely solely upon the dollar.”

The price of gold will rise as the dollar based system of credit and commerce falters under an overload of bad debt, weakening financial institutions, and a stagnant economy. The end of the NASDAQ mania marked the beginning of this process. The Enron bankruptcy, de facto default on sovereign debt by Argentina, and a looming financial crisis in Japan are random but high profile reminders of a deteriorating global credit environment. Turning points in long-term market trends rarely achieve completion within the confines of a single business cycle. The NASDAQ blowout was the noisiest and most visible sign of a turning point. Much more quiet has been the failure of the dollar price of gold to make a new low since August of 1999, a good six months before the Nasdaq peak.

A revaluation of the dollar, like a credit downgrade, will choke off the flow of capital destined to be misspent. Its principal manifestation is likely to be a substantially higher gold price. The revaluation of gold will be permanent, based on three factors, each representing time spans of different but overlapping durations. The three factors are:<ul><ul>
(1) The structure the gold market, including the short positions, the annual flows of physical metal, and the economics of mine production, favors a price rise to $400 - $500. Current gold prices of around $280/oz. do not justify sufficient investment to maintain world gold production. Production is set to decline slowly in the current year and more precipitously in the years after.

2) The deflationary climate prompts economic policies that lead to the increased issuance of dollars including rapid money growth and fiscal deficits. It will inspire protectionist measures, which effectively devalue dollars held offshore. It will lead to rising interest rates, inflation and weakening balance sheets.

(3) The metaphysics of gold, or market mythology and popular perception, have the potential to exert more influence than the other two factors combined. Market metaphysics change glacially over decades. They explain the vast swings in valuation as demonstrated by the chart depicting the Dow Jones average by the dollar price of an ounce of gold. These very long cycles in the public mood range from mania to depression. Imagine the opposite of the recent mania and you will picture the 1970’s, even if you weren’t there. The 1970’s featured miniscule equity valuations, a cynical and apathetic public regard for investing, and distrust of financial institutions, political leadership, and currency. </ul></ul>

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Mine output in 2001, estimated at 2600 tonnes, is likely to prove to be the peak, assuming no change in the gold price. Even if the gold price were to rise by $100/oz, the supply response would be muted. “Mothballed capacity” is negligible. Lower exploration means fewer ounces are being discovered, and that ounces mined are not being replaced. The lead-time to bring new discoveries into production is measured in multiples of years, even decades. Industry production of 90mm oz per year has been achieved at the cost of depleting capital, especially through high grading and starving mine development expenditures. The “growth” in output achieved by several of the major companies has been via acquisition rather than organic. Following a substantial rise during the 1990’s, world mine production has turned static and will soon fall. A recent UBS Warburg study: “Gold Production Set to Plunge” dated 11/29/01 provides more details and amplification.

The industry’s use of “cash cost” per ounce as its principal performance metric reveals a disregard for return on investment, and partially explains the 18% expansion of global production from 1991-2001 despite falling gold prices. However, the increase of mine supply justified by cash cost thinking is but one explanation for the inadequate gold price. Two additional critical factors responsible for an oversupply of gold were the substantial growth in forward sales by the mining industry and outright sales by central banks.

Forward selling or hedging by gold companies to “lock in” margins is the antecedent of business practices adopted by Enron and other entities that prefer counter party to market risk. The architects of the gold industry’s lamentable dalliance with derivatives will engineer grief well beyond the gold sector. Financial market exposure to interest rate and foreign exchange derivatives dwarfs the notional value of gold and commodity contracts. Gold derivative traders have laden the books of their host institutions with the financial equivalent of toxic waste dumps. The intellectual basis for the existing gold derivative books, representing at least 5000 tonnes, or two year’s mine production, was a bearish view of gold and a uniformly bullish view of the dollar.

Remediation may be costly, long term, and vulnerable to periodic short squeeze attacks by those who recognize that the supply of physical gold is scarce in comparison to gold-linked paper instruments that have been supplied by bullion dealers. The illiquidity of physical gold relative to gold derivatives endangers the creditworthiness of the issuers. A substantially higher gold price is not in the commercial interest of active or former bullion dealers.

The concentration of gold derivatives in the hands of one institution cannot be comforting to central bankers who had originally lent their gold reserves to a wide array of bullion dealers. JP Morgan Chase, also a major counter party to Enron in a variety of energy derivatives, held 80% of the gold derivatives reported by the OCC (Office of Controller and Currency) as of 9/30/01. Although total gold derivatives reported to the OCC have declined from the peak levels of $87.6 billion at year-end 1999, JP Morgan held only 40% of the total that time, which was prior to the merger with Chase. The decline in OCC-reported gold derivatives from the 1999 year end peak is most likely due to an offloading of positions to a non OCC reporting entity such as Enron, an Enron-like organization, or a foreign bank. Now that many have abandoned the gold derivatives trade, it appears that JP Morgan Chase has become the rear guard to defend the derivatives universe against higher gold prices.

The same central bankers might also question the fact that the hedge books of the gold mining industry already border on negative valuations even though the dollar price of gold is languishing. Mining executives might respond that within their hedge books, the real culprits were erroneous bets on local currencies, particularly the Australian Dollar or the South African Rand. However, the same bankers might wonder why the capacity for error should be limited to currency hedges but not the gold price.

Two years after its “hedge book induced” brush with bankruptcy, Ashanti Goldfields still has a substantial book of 8.4mm ounces (down from a peak of 12.2mm ounces) despite earnest efforts to remediate and production of more than 3mm ounces during the time span. Gold hedge books in the best of all worlds, meaning a well-behaved gold price, are difficult to liquidate. The easiest, lowest cost method to repay the borrowed gold as it is mined, returning it the bullion dealer who then repays the central bank. Should sentiment turn more positive or the gold price rise, miners will accelerate deliveries into their hedge contracts. Accelerated hedge book liquidation would shrink supply and accentuate a price spike.

The intellectual rationale for gold hedging no longer enjoys enthusiastic support. As one major mine company hedger said to me recently, “ the dollar price of gold seems unable to break $250 over the last three years, despite having repeated chances to do so.” Based on a low contango, or the spread between short and longer dated interest rates, forward gold prices relative to spot have decreased to the point where short term volatility could easily wipe out the hedging premium. The mining industry has already begun to respond to these new realities by accelerating deliveries into existing hedges or by abstaining from new hedges. Slack demand has deflated the formerly thriving gold derivative trade. The list of former major bullion dealers no longer committed to the business includes CFSB, JP Morgan (Chase has assumed most of the former JPM book), J Aron (Goldman Sachs), UBS, Deutsche Bank, and Dresdner. Even though these institutions are not increasing their exposure, previously written derivative contracts survive somewhere in financial cyber space and constitute a very large stale short position. The exodus has increased the concentration of counter party risk for mining companies and central banks alike. Mining companies face the new headache of rollover risk when existing contracts with departed counter parties expire. Finally, investors have begun to differentiate between the equities of hedgers and non-hedgers. Since 1/2/01, the shares of Barrick Gold, the most prominent hedger, have under performed declining 2% vs. a 13% gain for the XAU (Philadelphia Exchange Index of Gold Mining stocks) as of 1/22/01.

Of the three known extraordinary factors depressing the gold price in recent years, central bank selling, industry hedging, and rapid expansion of mine output, only the first remains. Central bank selling was motivated in part by a desire to diversify reserve assets away from gold. In addition, they were seeking attractive yields available from paper that could not be provided by the “sterile” metal. The banks have been so successful in accomplishing this that the US dollar represents 76% of central bank reserves (2000 BIS annual report). With dollar interest rates plummeting to barely positive real returns, it clear that this diversification has accomplished little beyond substantially increasing the risk profile of their reserve positions.

This pendulum has swung as far as possible. Look for a change in central banker sentiment towards gold and the dollar. The euro and the yen are liquid alternatives for diversification. In comparison, gold is not liquid at the current dollar price. Gold, like an extremely undervalued stock, might be seen as too difficult to position. However, the cure for illiquidity has always been a higher price. As central banks begin to act on their desire to diversify away from the dollar, gold will initially seem impractical. The practicality issue will vanish at higher prices. At a minimum, central bank selling will dwindle. More likely, sellers at low prices, the banks will become avid buyers along with the odd lotters.

With gold trading below its mining replacement cost, the factors responsible for this aberration dissipating, and a massive stale short position still outstanding, why hasn’t speculative capital been attracted to this opportunity? Perhaps it is only a matter of time. On the other hand, potential new gold longs might be put off by concerns that the gold market, is in some way, manipulated. There is ample and credible evidence of manipulation in a number of financial markets, including gold. History, however, reminds us that price manipulation is unsustainable and creates violent price adjustments when abandoned.

The mining replacement cost of gold appears to be in a range of $400-$500/oz on a sustained basis, all other things being equal. However, that range does not take into account the tendency for speculative excess to overshoot a norm. It also does not take into account factors external to the peculiarities of the gold market. A reassessment of the dollar or a displacement of the dollar by some alternative and as yet unknown reserve currency would drive the gold price well above the equilibrium range suggested, and quite likely into four-digit territory.

Der zweite Teil folgt im neuen Posting

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gesamter Thread:

• Offtopic (?) - The Investment Case For Gold - viel, viel Text, Teil 1 - Cosa, 03.03.2002, 12:53
  • The Investment Case For Gold - Teil 2 - Cosa, 03.03.2002, 12:57
    • Re: The Investment Case For Gold - Teil 3 Gibson's Paradox und andere Details - Popeye, 04.03.2002, 06:21
  • @Cosa The Investment Case For Gold I &amp; II - vielen Dank für diesen find! - Popeye, 03.03.2002, 17:09