Well, yes, and that would be general, worldwide, inflation--or depreciation of paper currencies against commodities (including that commodity known as labor).
That's why I maintain very large positions that would benefit from a rise in energy prices. I am also doing well with the metals (a triple on certain of my NEM calls) but I am resisting joining the goldbug euphoria captured so well in today's Thom Calandra piece:
SAN FRANCISCO (CBS.MW) - The possession of gold, Thomas Bailey Aldridge once said, has ruined
fewer men than the lack of it.
This column isn't about Aldridge, the American short-story writer who quit school at age 13 to write for
19th century magazines. I just put it there so you can turn away from this column now if you don't
want to hear my view of markets in coming years - a view that essentially is the gold story with some
dollar-trimming and a swollen current account deficit for good measure.
A month from now, a year from now, five years from now - you choose the timing, because I won't - the
price of an ounce of gold will be three to six times what it is now. By then, the world's money flows will
have stopped way short of the fiber-optic fork in the ocean that leads to New York.
By then, the euro will be worth a ton more than 91 cents. So will the Canadian dollar and the Australian
dollar. By then, overseas investors long will have stopped hoarding U.S. securities in their digitized
central banks or their frosted chalets. (As I write this, the flow of fur-ner money into dollar-denominated
assets is falling sharply, to well less than half the average monthly flow of $44 billion we saw last year.)
The world's battered economies, the ones that rely on metals and other natural resources for their
livelihoods, like Ghana, Australia, South Africa, Chile, Canada, even Russia, will be less battered. We'll
be seeing more folk heroes from the top bullion producers, like South Africa's Nelson Mandela this
week, ringing the bell at the New York Stock Exchange, or listing on the Toronto Stock Exchange.
Gold Fields' Chris Thompson presents the bullish story for bullion.
By then, the paper wealth that is the industrialized world's stock and trade will be more paper and less
wealth. America's current account deficit, the best way to judge this country's money flows, already will
have surpassed an annualized $450 billion. (See definition below of the ticking time bomb called the
current account deficit.)
There are some who believe that when the red ink in the U.S. current account surpasses 5 percent of
gross domestic product, all heck will break loose in financial markets. Stephen Roach at Morgan Stanley
is on record saying a "hard landing" for the dollar, and with it the boatloads of U.S.-linked securities in
foreign portfolios, may be inevitable. "A crisis of confidence is not inconceivable," Roach writes. (Six or
nine months from now, you can go back to Roach's report and long for the good old days, when a euro
was worth just 91 cents.)
I submit that with that swollen account deficit and the
dollar's decline will come (has come and is coming) an
explosive move up in the price of gold. The $310 metal,
up almost 20 percent this year, one day will sell for a
price that reflects a cascading American balance sheet.
With U.S. households living off their spree of
credit-card and mortgage debt, the perpetual stock
market and housing market bubbles in this country, and
in most of the world's major cities, will hiss, hiss, hiss.
In coming weeks, I hope to bring you several
high-profile money managers and (of course) mining
executives who state better than I do the case for, as Tocqueville Gold Fund (TGLDX) manager John
Hathaway put it to me, "a big number" for the gold price. Whether that big number comes from a sinking
dollar, or the $63 billion of gold derivatives on the books of U.S. banks and trust companies (as of Dec.
31), or creeping inflation, shocking deflation or, Lord help us, bigger and more deadly exploding
mailboxes, remains to be seen.
Ian McAvity, the longtime newsletter editor whose Deliberation on World Markets provides in my view
some of the hardest-to-find historical charts, money flows and hard data on international gold mining
equities and gold and silver bullion, says the gold-price trigger may be days or weeks away.
McAvity, who keeps paper files of every chart, stat
and mining press release, stretching back 25 years,
points to a pending rush by hedged gold miners to
reduce the amount of gold they are forward-selling. As
Gold Fields Ltd.'s (GFI) top executives, Chris
Thompson and Ian Cockerill, put it this week from
New York, the forward-sale of gold is a source of
supply in a falling gold market, spurred by bullion
banks and central banks lending their gold reserves. But
in the current market, where gold relentlessly sets new
highs, the scramble to close forward-sale contracts - to
de-hedge and go to the spot market for bullion - is a
source of potent demand in a rising gold market.
South Africa's Gold Fields and several other large miners, such as Newmont Mining (NEM), have
virtually no hedged sales of gold. In other words, they sell an ounce of gold for whatever it sells for in
the spot market.
Andy Smith, the London-based precious metals analyst at Mitsui & Co. whose work in this field sets
him apart from most Wall Street gold analysts, estimates there are 3,000 tonnes of gold on mining
companies' hedge books. "In Q1 2002, (South African) Anglogold (AU) disarmed its hedge book by 1.7
million ounces, some 20 percent more than quarterly output, implying about 0.3 million ounces of buy
backs on top of deliveries into hedge positions," Smith notes. "Anglogold's hedge was defused another
0.65 million ounces in April. In fact, this de-hedging in Q1 exceeded (gold) imports into Japan . . . by
almost 30 percent."
McAvity up there in Toronto on Friday told me a
story, complete with charts and press releases from
long ago, to illustrate how powerful the rush to
de-hedge can be in a rising gold market. In May 1993, a
company called Lac Minerals, now operated by Barrick
Gold (ABX), announced they had decreased their hedge
book to 85,000 ounces from 585,000 ounces. The
company said it was doing so "to take advantage of
rising gold prices." The average price they achieved on
their remaining 85,000 ounces of hedged gold was $333
an ounce.
When the announcement hit the wires that day in May 1993, McAvity coined what came to be known
as the "Lac gap." The price of gold gapped up to first $363 an ounce, then higher and higher. By
summer, the price would reach $407 an ounce, not bad for a metal that began the year at $328.
"History certainly won't repeat itself precisely, but a look back at the surge in 1993 may add some
perspective to what I believe is going on now," says McAvity.
On Friday spot gold's price just after midday was up $2 to $311.30. Gold mining equities in Canada and
New York were trading erratically, approaching their highest points since October 1999. Gold mining
indexes, as measured by the Amex Gold Bugs Index (HUI) and the Philadelphia XAU (XAU), were last
up 1.2 percent for the day. See our CBS MarketWatch metals report. |
