Richard,
I apologize for taking so long to respond to your post but it has taken me taken me considerable time to think through a response. I also apologize for being so long winded. The following are my thoughts; though, as I tried to make clear, I don't have any special knowledge. There are many, such as Ray Hughes, who post on other threads that know more about the subject than I will ever know. However, if nothing else, you have motivated me to clear up my understanding of the issues.
First, with respect to the Barron's GMI/POG indicator, it is unclear to me that it is useless. However, no indicator is perfect and I have been debating with myself for months the question of how much more it means than the POG itself and whether it has significant value. It seems to me that the indicator provides a good measure of the relative value of PM stocks in an environment where the prices of PMs are relatively stable or, at least, above levels where a significant number of PM mines become uneconomical. The data on which the projections given in the reference in post 9 are based was probably obtained during such a period.
It seems to me that the POG is, at least, at a level where a significant number of mines have become uneconomical and it seems to me that there are other factors that are controlling the price of PMs. Under these conditions, it is not clear to me that the indicator is telling us more than the POG. However, whether you look at the indicator or just the POG, both suggest that the POG is relatively low. The question is does this mean that the POG is more likely to move up than if it were high. I would suggest that the answer is, at least in the long term, YES.
Many argue that the market for gold is quite different than in the
past. A good friend of mine in Switzerland bemoans the fact that the
younger generation doesn't understand the value of gold. There are
frequent stories about banks questioning the holding of gold in their
reserves. And, I'm not aware of any currency that today is backed by
gold. But, neither am I aware of any market analyst/economist that
doesn't expect the POG to recover in the future. Even Armstrong, that
many on these threads love to hammer, says the POG will sore by 2003.
In any event, I will continue posting the ratio as long as I continue to buy Barron's and anyone is interested.
Your comment about the POG staying is narrow range about $290 is
probably more interesting to me at the moment. I assume that the
thought behind your comment is not some other technical analysis but
rather is the view that CBs will not let it out of this range. They
don't want it lower because it would hurt the value of their reserves.
They don't want it higher because a significant segment of society with read an increase in the POG as an indication of inflation and will drive up interest rates which would adversely impact our (and the global) economy. Many economists, Kudlow (a long time bull who is frequently on WSW and other shows), for example, speak of the POG being the key inflation indicator. However, many of these same economists, including Kudlow, believe that CBs cannot maintain control of the price. (This latter view makes sense to me but my only strong view is that I don't know.)
What I do know is that a lot of mining companies have been selling
forward, during the past few years, to protects themselves from of drop in price. This increases supply initially but it seems to me that as time passes it impact on supply becomes null. We have heard of a few covering their forward sales, which would increase demand, but not many. While forward sales have the same impact on supply when initiated, unlike shorts, companies that sell forward don't have to cover when the price goes up. My conclusion is that forward sales are no longer a significant factor in determining supply or demand. This is a big plus if you accept the view that demand is substantially greater than supply from mines.
Sales of CBs has been talked about as a major source of supply but sales by European CBs have dried up and there is reason to believe that Asian CBs are buying. I am aware that Switzerland and the IMF may sell some in the future but we still don't know and sales are not eminent. So I see CB sales a neutral.
AG has said CBs stand ready to loan gold to hold the price down. We
know that a lot of gold has already been loaned but this game cannot
continue to work indefinitely. Whether gold loans are feeding the carry trade or shorts, really doesn't matter, both increase supply but carry a high level of risk. At some point, this supply will dry up and the longer it takes and the more that is loaned, the more severe will be the squeeze when the price moves up. I don't doubt that there are discussions among CBs and that there is collusion of some level but I don't believe that that egos involved will allow it to continue even if there is some level of agreement today. All it will take is one CB head to see the big advantage of being the first to pull back their loans. It isn't only investors that suffer from greed.
From what I have read mine supply hasn't been impacted much by the lower price of gold but my guess is that it will be unless the POG increases significantly.
A lot has been written about the demand in Asia falling as a result of
the problems with their economies but Murphy and others have pointed out that the demand for both gold and silver in India has actually
increased. My understanding from the writings of those that study
demand, is that it is well above the supply from mines.
The posting of Wallanchuk's views was timely for me. I listened to him a couple of years ago at an investment conference and found him to be very arrogant and not very articulate but he has an almost unmatched record of being right. And, when it comes to advisors, I'm only interested in their records. He says gold is going up big time, if not this year, then next year. I think even Armstrong, who many on the SI threads like to trash, says gold will start to move up by the second half of 2000 and speaks of it reaching a new all-time high.
My bottom line is that I don't think the POG is going to stay in a
narrow range and that it will move up strongly at some time in the
future. I just don't know when and I don't confidence that our
indicator is going to give us a reliable indication of when. Of course, if dollar rises very much the POG may fall correspondingly but I don't think we can afford a much stronger dollar and I expect Rubin and Greenspan to make sure that it doesn't strengthen too much. In the interim, if it stays in a narrow range, I think exploration companies that find economic deposit will benefit from a confidence that will develop that it isn't going down further. And, I would think those that buy gold for insurance will also be motivated to buy as they gain confidence.
While I have mentioned PMs in the foregoing most of what is said
pertains to gold only and I think Barron's GMI is determined largely by the gold mining stocks. Silver fundamentals may be quite different and its price seems to be bounced around by speculators. However, the only arguments against silver moving up in price that I have read and think I understand are 1) that there are very large stores in warehouses in London and that these stockpiles will hold the price down and 2) that digital cameras will reduce photo demand. Armstrong has mentioned the large stockpiles but, while he may be right, the silver in these stockpiles must have been purchased over a period of years with the expectation of their being sold at a higher price. I find it hard to believe that market factors that motivated the owners to buy have changed so much that they are going unload at present prices. I have exchanged emails on the digital camera question with several people that are knowledgeable and discussed the technology with some of the best in the World but I remain unconvinced that digital cameras will seriously impact the market for silver for many years. The general slowdown in economies world wide is probably a more important consideration but the impact to date doesn't appear to be serious. If these economies don't continue to pick up, they could impact all applications for silver, not just that involving photography. The fact that the experts that have been right about the broad market and the global economy are relatively bullish eases my concern.
Enough for now and then some. I would be interested in your comments.
I don't claim any special knowledge or expertise and am always ready to learn.
I will put the latest GMI/POG ratio in a separate post.
Cheers,
Larry
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