Wednesday, May 19, 2010

Is Gold Too High?

Jon Nadler of Kitco is saying that the price of gold is too high. Authorities he cites as agreeing with him include Barclays and Societe Generale. Of course, those firms sure got the zero-return decade for stocks correct, as they were correct that housing-related securites were smart bets a few years ago. Right?

In any case, he states that cash mining costs are around $500/ounce. Given the time, money and risk involved in developing a mine and looking at gross margins on consumer products of over 90% (and over 95+% on drugs and software), $800 sounds puny if after all the effort, it costs $500 to pull an ounce of gold out of the ground.

Since 1920, when the price of gold was $20/ounce, the investment yield on gold has been 4.5% annually. Given that gold was also at $20/ounce in the 1800s, a price of $1200 today shows that gold has appreciated at a slow rate compared to most other financial assets.

Gold is up at a faster rate than many agricultural commodities that have benefited from scientific discoveries. If you want to walk down memory lane, please compare today's prices to those from the depths of the Depression. A 12-room Italian villa cost $17,000 and a room at the Waldorf-Astoria was $5-10 per night.

The price of gold in Federal Reserve notes is subject to all the free market and manipulated forces that currently exist.

A growing number of people look at gold as an alternative form of money, and thus ask the question: what is the value of a Federal Reserve note per ounce of fine gold?

One would think that the U. S. Government, supposedly the largest single owner of gold in the world, would be happy for its cache to be appreciating against all other currencies just as FRNs also appreciate against almost all other fiat currencies. Unlike the early 1980s, it is hard to see any important political reason to substantially suppress the gold price.

Re today's activity, it was palladium that was truly knocked for a loop. Speculators and profit-takers took it down. So it goes. Palladium's long-term chart has none of the strength of gold's.

As a financial asset, one that costs money to store and pays no dividend, if gold tracks the Dow approximately 1:1 or the S&P 500 approximately 10:1, holders of stocks will beat gold if historical trends hold. Given that gold dropped in the post-Lehman panic to about $700, perhaps Mr. Nadler will be correct. I suspect however that the goal is stealth (or not so stealthy) monetization of various governmental deficits. Time will tell.

In the 1982-2000 stock market bull, the single most memorable day was the 1987 crash day. People also remember the crash surrounding LTCM/Russian default. It was only at the crazy peak that we started seeing insane discontinuous moves upward in the NASDAQ averages. In other words, dramatic downmoves in an asset that has been in a steady uptrend often are simply buying opportunities. If gold or any asset starts getting really exciting in its upmoves, watch out. The past 9 years have seen gold break out to new highs and then meander around in a general uptrend. Why should matters be different now? But until there is political will to deal with U. S. and U. K. etc. public finances and realistic short-term interest rates, why should not every saver has some of his/her nest egg in the form of wealth with the longest track record?

Copyright (C) Long Lake LLC 2010

1 comment:

  1. typical BS

    I wonder is $ 13 trln US debt high too ?
    or 1.9 trn $ budget deficit is too high ???

    who gives a #uck ...