Gold Bug Bashing, 1976 Edition

The Golden Cycle

The New York Times had the definitive take on the vicious sell off in gold. To summarize one of their articles:

Two years ago gold bugs ran wild as the price of gold rose nearly six times. But since cresting two years ago it has steadily declined, almost by half, putting the gold bugs in flight. The most recent advisory from a leading Wall Street firm suggests that the price will continue to drift downward, and may ultimately settle 40% below current levels.

The rout says a lot about consumer confidence in the worldwide recovery. The sharply reduced rates of inflation combined with resurgence of other, more economically productive investments, such as stocks, real estate, and bank savings have combined to eliminate gold‘s allure.

Although the American economy has reduced its rapid rate of recovery, it is still on a firm expansionary course. The fear that dominated two years ago has largely vanished, replaced by a recovery that has turned the gold speculators’ dreams into a nightmare.

This analysis provides a good representation of the current conventional wisdom. The only twist here is that the article from which this summary is derived appeared in the August 29, 1976 edition of The New York Times. At that time gold was preparing to embark on an historic rally that would push it up more than 700% a little over three years later. Is it possible that the history is about to repeat itself?

At the time The Times article was written gold had fallen to $103 per ounce, a decline of nearly 50% from the roughly $200 it had sold for in the closing days of 1974. The $200 price had capped a furious three-year rally that began in August of 1971 when President Nixon “temporarily” closed the gold window and allowed gold to float freely. Prior to that decision gold had been fixed at $35 per ounce for nearly two generations. That initial three year 450% rally had validated the forecasts of the “gold bugs” who had predicted a rapid rise in gold prices should the dollar’s link to gold be severed. The accuracy of these formerly marginalized analysts proved to be a bitter pill for the mainstream voices in Washington and Wall Street who, for reasons of power, politics and profit, were anxious to confine the “barbarous relic” to the dustbin of history. Incredulous as it may seem now, with gold still priced at $35 per ounce, official forecasts of both the Secretary of the Treasury and the Chairman of the Federal Reserve were that demonetizing gold would undermine its value, and that its price would actually fall as a result.

Of course government experts could not have been more wrong. Once uncoupled from the dollar, gold‘s initial ascent in the early 1970′s was fueled by the highest inflation in generations and the deteriorating health of the U.S. economy that had been ravaged by the “guns and butter” policies of the 1960′s. But the American economy stabilized during the mid-years of the 1970′s and both inflation and unemployment fell. When gold reversed course in 1975 the voices of traditional power elite could not contain their glee. When the gold price approached $100 per ounce, a nearly 50% decline, the obituaries came fast and furious. Everyone assumed that the gold mania would never return.

Although the writer of The Times piece did not yet know it, the bottom for gold had been established four days before his article was published. Few realized at the time that the real economic pain of the 1970′s had (to paraphrase The Carpenters 1970′s hit) “Only Just Begun”. When inflation and recession came back with a vengeance in the late 1970′s, gold took off (to quote another 1970′s gem), like a skyrocket in flight. By January 1980, gold topped out at $850 an ounce. The second leg of the rally proved to be bigger than the first.

The parallel between the 1970s and the current period are even more striking when you look closely at the numbers. For example, from 1971 to 1974 gold prices rose by 458% from $35 to $195.25, which was then followed by a two-year correction of nearly 50%. This reduced total gains to just under 200%. The current bull market that began back in 2000 took a bit longer to evolve, but the percentage gains are very similar. (We should allow for a more compressed time frame in the 1970s because of the sudden untethering of gold after decades of restraint.) From its 1999 low to its 2011 peak, gold rose by about 650% from $253 to $1895 per ounce, followed by a two year correction of approximately 37%, down to around $1190 per ounce. The pullback has reduced the total rally to about 370%. The mainstream is saying now, as they did then, that the pullback has invalidated fears that rising U. S. budget deficits, overly accommodative monetary policy, and a weakening economy will combine to bring down the dollar and ignite inflation. But 1976 was not the end of the game. In all likelihood, 2013 will not be either.

The biggest difference between then and now is that until 1975 ordinary Americans were barred by law from buying and owning gold. About the only route available to participate in the earlier stage of the precious metal rally was by hording silver dimes, quarters and half dollars minted prior to 1965. My father indulged in this process himself by sifting through his change, the cash registers of any merchant who would allow him (exchanging new non-silver coins and bills for silver), and by sifting out silver coins from rolls he bought from banks. It was a time-consuming process, and most of his friends and family members thought he was crazy. After all, he had $10,000 worth of pocket change earning no interest.But the $10,000 face value worth of those coins he collected had a melt value of over $350,000 when silver hit its peak.

By the mid 1970′s none of the problems that initially led to the recession in the early years of the decade had been solved. Contrary to the claims of the “experts” things got much worse in the years ahead. It took the much deeper recession of the late 1970′s and early 1980′s, which at the time was the worst economic down-turn since the great Depression, to finally purge the economy of all the excesses. The lower marginal tax rates and cuts in regulation implemented by President Reagan and tight money under Volcker helped get the economy back on track and create investment opportunities that drew money away from gold. As a result gold fell hard during the early 1980′s. But even after the declines, gold maintained levels for the next 20 years that were three to four times as high as the 1976 lows.

Although the economy improved in the 1980′s, the cure was not complete. Government spending, budget and trade deficits continued to take a heavy toll. The U.S. was transformed from the world’s largest creditor to its largest debtor. When the time came to face the music in 2001, the Fed kept the party going by opening the monetary spigots. Then when decades of monetary excess finally came to a head in 2008, the Fed open up its monetary spigots even wider, flooding the economy with even more cheap money.

Unfortunately just like 1976, a true economic recovery is not just around the corner. More likely we are in the eye of an economic storm that will blow much harder than the stagflation winds of the Jimmy Carter years. And once again the establishment is using the decline it the price of gold to validate its misguided policies and discredit its critics. But none of the problems that led me and other modern day gold bugs to buy gold ten years ago have been solved. In fact, monetary and fiscal policies have actually made them much worse. The sad truth is that as bad as things were back in 1976, they are much worse now. Whether as a nation we will be able to rise to the occasion, and actually finish the job that Ronald Reagan and Paul Volcker started remains to be seen. But I am confident that the price of gold will rise much higher, and that its final ascent will be that much more spectacular the longer we continue on our current policy path. Don’t believe the mainstream. Just as before, they will likely be wrong again.


Gold Fields And Other Gold Stocks Being Accumulated By Gold Sector-Focused Funds

In a recent article, we discussed the large-cap gold stocks being sold by gold sector-focused funds. In this article, we present three mid-cap gold mining stocks that are being bought and two being sold by gold sector-focused funds, such as Sprott, Tocqueville and five others, in the latest quarter. The buys are particularly notable given the steep decline in both the price of gold and the price of the average gold stock, as represented by the Market Vectors Gold Miners ETF (GDX), that are down 27% and 44% respectively below the highs set last fall. Overall, gold funds collectively or in consensus sold $281 million in Q1 from their $7.85 billion position in the prior quarter.

Gold Fields Ltd. Adr (GFI), a South African mining holding company engaged in the exploration and extraction of gold in South Africa, Ghana, Australia and Peru, has figured among the top buys by gold sector-focused hedge and mutual fund managers for about four quarters now, since Q2/2012. In the latest quarter, gold-focused funds added a net $26.60 million shares, buying 5.02 million shares and selling none, to their $211.9 million prior-quarter position in the company. In the last four quarters, these gold funds have added 14.92 million shares to their 30.08 million share combined position in GFI at the end of Q2/2012. Besides gold-focused funds, 79 guru and 27 mega sector funds also collectively or in consensus added 0.67 million and 1.89 million shares in GFI in the latest quarter. Also, 57 billionaires and billionaire fund managers together added 0.27 million shares of GFI in the latest quarter.

In its latest March 2013 quarter, GFI missed earnings estimates, reporting 9 cents versus the 12 cents analyst estimate. Its notional cash expenditure (NCE), which is a measure of the true cost of producing an ounce of gold, declined from $1,355 per oz. to $1,291 per oz. The decline was on account of an 8% decline in net operating costs and reduced capital expenditures, partially offset by an 11% decline in production from 534,000 oz. in the December quarter to 477,000 oz. in the March quarter. Its shares trade at 7.0 times forward earnings, a steep discount to the 16.3 average for its peers in the gold mining group, while earnings are projected to rise from 50 cents in FY 2012 to 76 cents in FY 2014. GFI also has a dividend yield of 4.9% compared with the 0.9% average for its peers’ stocks (based on financial data from Furthermore, it also trades at 0.8 times book, 0.9 times sales, and 3.0 times cash flow versus averages of 1.1, 10.6 and 6.5 respectively for its peers in the gold mining group.

We believe that GFI is an attractive buy at current levels based on its discount valuation, high dividend yield, and it being a favorite among leading fund managers, including gold-focused fund managers. Furthermore, with gold prices fast approaching levels equal to the sustainable cash costs of many producers, the consequent plunge in profits is bound to drive lower capitalization producers out of the market. While GFI‘s sustainable cash costs are slightly above the average for gold companies, it does have $600 million in cash, which should provide it with protection if times get tougher in the gold mining industry. Also, in that event, it could even use its cash pile to acquire marginal lower-cost producers and improve its competitive position ahead of an eventual rebound in gold prices.

Besides GFI, precious metals sector-focused investors also collectively or in consensus bought the following two mid-cap gold mining stocks (see table below):

(click to enlarge)

  • Compania de Minas Buenaventura (BVN), a Lima, Peru-based precious metals mining company, engaged in the acquisition, exploration and development of gold and silver mines in Peru, in which gold sector-focused funds together added a net 0.93 million shares or $14.9 million to their 14.06 million share prior quarter position in the company.
  • Agnico Eagle Mines Ltd. (AEM), a Canadian company engaged in the production, development and exploration of gold in Canada, U.S., Finland and Mexico, in which gold sector-focused funds together added a net 0.54 million shares or $14.6 million to their 9.94 million share prior-quarter position in the company.

Also, precious metals sector-focused investors collectively or in consensus sold the following two mid-cap gold mining stocks (see table above):

  • Randgold Resources ADR (GOLD), that is engaged in the exploration and development of gold properties primarily in Mali and Cote D’Ivoire, in which gold sector-focused funds together cut a net 0.51 million shares or $34.2 million from their 8.13 million share prior-quarter position in the company.
  • Yamana Gold Inc. (AUY), a Canadian company engaged in the exploration and development of gold properties in South America and Mexico, in which gold sector-focused funds together cut a net 1.83 million shares or $17.3 million from their 37.05 million share prior-quarter position in the company.

With the average gold stock as represented by the Market Vectors Gold Miners ETF (GDX) currently at multi-year lows, the time may be approaching for adding high-ranked gold mining stocks to a well-diversified portfolio. While bears currently rule the gold market, and it is likely that it may continue a bit further as it is one of the few areas of the market where bears have had any success lately, the current trend is bound to end soon. At sub-$1,300 prices, gold is fast approaching levels equal to the sustainable cash costs of many producers. As profits plunge and maybe even go into negative territory, it will drive some of the lower capitalization smaller producers out of the market, thereby paving the way for lower supply and higher prices going forward.

We believe that knowledge of how the best minds in the investment community, in the form of guru, mega and gold sector-focused fund managers, are collectively positioning themselves can help us pick the best stocks to add to our portfolio. We have observed predictive power in the moves of leading fund managers on stock prices going forward, some of which are documented in our earlier articles on Q4/2012 small-cap biotech picks by guru funds and Q1/2013 top telecom equipment picks by guru funds.

General Methodology and Background Information: The latest available institutional 13-F filings of 128 sector-focused hedge fund and mutual fund managers, including seven focused on precious metals, were analyzed to determine their capital allocation among different industry groupings, and to determine their favorite picks and pans in each group. These sector-focused fund managers allocate most or all of their resources to their sector of specialization, and the argument is that they have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When these sector-focused fund managers invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence.

This article is part of a series on institutional holdings in various industry groups and sectors, and other articles in the series for this and prior quarters can be accessed from our author page.

Credit: Fundamental data in this article were based on SEC filings, Zacks Investment Research, Thomson Reuters and The information and data is believed to be accurate, but no guarantees or representations are made.

Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.

Business Relationship Disclosure: The article has been written by the Hedge and Mutual Fund Analyst at is not receiving compensation for it (other than from Seeking Alpha). has no business relationship with any company whose stock is mentioned in this article.


Falling Prices Not End Of The World

Just when we thought things couldn’t get any worse for the miners, Ben Bernanke throws a ball at the dunk tank. On Thursday, after Bernanke signaled that the Fed may soon start turning down the printing presses, global markets across multiple sectors have sold off their holdings – most noticeably in the mining sector. Gold finished off the day down 7%, about $95 to $1,278 an ounce – the lowest level in 2.5 years and well below the psychological resistance point of $1,300 – and silver was off by even more than 7%. This article discusses the significance of the day and why investors should prepare for more falling precious metals prices.

Gold has declined almost 17 percent since mid-April driven by a benign global inflationary environment. Today, after Ben Bernanke‘s comments that U.S. bond buying could be slowed later this year, the appeal of Gold as a hedge against inflation has lessened significantly.

Gold Prices Headed Lower

Back in April I warned investors that Gold prices could fall to $900/oz by early 2014 and it looks like it will be headed in that direction. On April 15, a sharp fall in gold prices led to the Chinese buying 300 tons of gold-more than a third of the gold China purchased in all of 2012 – which helped the price of gold recover from that fall. The drop on Thursday was much greater and I don’t think the retail demand from China can help gold prices recover this time (not to mention the weak industrial demand coming from China and India as a result of economic slowdowns).

For those of you who regularly read my articles, you know I normally formulate investment decisions based on fundamental analysis. However, the technical chart below (200-week moving average) derived from Yahoo Finance figures reveals an interesting trend that investors should keep a close eye on.

Source: Yahoo Finance

If you had bought gold at the bottom of that 200-week moving average back in 2011 (at the white circle), you would have made a 600% return on investment. We now broke below the 200-week moving average, back in April (at the red circle), for the first time in over a decade. Again, I’m not much of a technical wizard, but this chart clearly shows the downward momentum that is pulling on Gold prices. In this market environment that we find ourselves in, momentum seems to play a huge part on stock rallies (take a look at virtually every single resource-based stock and technology stock).

Prices Could Fall Below $1,000

By the end 2013, I think gold prices are headed down towards $1,200-$1,100 an ounce (on the upside). In the downside scenario, prices could break below the $1,000 psychological resistance point. Having said that, I don’t think that is the end of the world for miners. Average production cost of gold worldwide is about $1,200 an ounce, therefore at spot prices of $1,200 about 10% of the world’s gold producers will enter a loss-making threshold. If spot prices fall to the $1,100 level, around 44% of the world’s gold producers will be operating at a loss. On the upside, some of the best gold miners in the world operate at below $800 all-in cash costs. Keep in mind that these all-in costs include administration costs, sustaining capital expenditures, depreciation and, most importantly, the cost of development and exploration.

Even as gold prices fall, I’m still looking for miners to invest in. I continue to like Silver Wheaton (SLW), Goldcorp (GG), Silver Standard Resources (SSRI) and Sandstorm (SAND) because I believe in the companies and their abilities to manage costs effectively. However, I’m currently sitting on the sidelines on the resource space not because of falling spot prices but because of the global slowdown in demand for gold and metals (and materials in general).

What Am I Watching For?

I’m waiting for demand in China and India to pick back up, or for some country to emerge and demand more metals. My concern is not on falling spot prices because I believe the costs of companies are much lower than reported. Companies have an incentive to reveal much higher all-in cash costs to ensure that prices remain high accordingly (as we’ve seen). Back in early 2000, gold prices were $300 an ounce yet producers still continued to mine gold and make money. It’s very difficult to imagine that production costs have risen about three times what they were since 2005.

I truly believe that once the global demand picture recovers, the best gold miners world-wide will be profitable whether the prevailing spot rates are $1,400 or $900.