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Strategies & Market Trends : Strictly: Drilling II -- Ignore unavailable to you. Want to Upgrade?

To: Jacob Snyder who wrote (5319)	12/13/2001 3:59:18 PM
From: pater tenebrarum	Read Replies (5) \| Respond to of 36161

yes, it is gold's 'safe haven' role that increases its purchasing power during deflationary stress. mining DOES differ in a material aspect from other businesses. namely in its cost structure: it mainly has to contend with relatively large fixed costs. let's look at an example: a marginal mine may produce 1m oz. of gold at say $270, or basically the current PoG. in the event of a 10-dollar price rise, it would make $10m. if the price rises 20 dollars, its profit would double, or rise 100% while the PoG has only increased by another 3.7%. the same holds of course true when the cost of producing an oz. falls by 10, 20, etc. dollars while the PoG remains constant. so if the expectation of an increase in gold's purchasing power holds true, the mines can be expected to benefit accordingly. regarding monetary and fiscal profligacy in reaction to deflation, consider that gold is a currency too. there's no reason why its price shouldn't increase vis-a-vis ALL currencies, including the dollar. again, due to what you rightly say is its core quality of not representing anyone's obligation. the Rand gold price actually illustrates the example of the gold mine with falling input costs nicely: gold has stayed constant in USD terms, but it has proven an excellent Rand hedge. and Thai Bath hedge. and Brazilian Real hedge. and so on. eventually, it will become a dollar hedge as well imo. regarding the assets you cite, i like lumber too. it's true that demand will suffer, but lumber's history as an investment is most excellent. it outperforms the S&P over the past 130 years. re. trust in the dollar, and the comparison with Japan: please note that there is a material difference: throughout its deflationary collapse, Japan has had at times huge current account surpluses and the world's highest (by far) private sector savings rate. it is in fact still the world's banker (and will imo come to regret that role). this has in fact put UPWARD pressure on the Yen, despite the government's fiscal irresponsibility in reaction to the deflation. proof is the fact that the BoJ's dollar reserves have increased by 50% to the enormous $400 billion plus pile it has now over the past two years alone. that is how many Yen it had to sell to keep the currency down. contrary to the Yen, foreigners hold some 2.3 trillion dollars as a result of the US current account deficit. whether they continue to think it's safe to do so depends on a great many things, and i believe that many of the props that have held the dollar up are in fact crumbling. regarding Europe, and its structural rigidities, yes, they do exist, no doubt. but that also means that there is much greater room for reform and restructuring, something the Euro zone's growth and stability pact actually FORCES Europe's governments to do. i do not believe that growth is condemned to 'permanently' underperform vs. the US. especially as the Euro zone's economy is not beset by the same enormous imbalances that plague the US economy. no credit bubble, an asset bubble with FAR lower public participation, no current account deficit, a strongly positive savings rate, etc. - these things count for something at the onset of the deflationary K winter. btw., according to the Economist (i'll have to dig up the article in order to present detailed figures) there's also no truth in the widely accepted myth that US productivity has magically outpaced Europe's in the boom decade of the 90's. even accepting the statistical mirage of hedonic indexing which is an exclusively US phenomenon, the Economist article showed that German labor productivity has grown much faster. regarding the 'war of civilizations', while Europe may be closer to the front lines, it is also not the primary target of the Islamist militants. then again, the war concerns the entire West, and should as such not be a major factor in the Euro/USD relationship.