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.

Source: http://www.zerohedge.com/news/2013-07-01/gold-bug-bashing-1976-edition

Barrick Gold could take $5.5B hit over Pascua-Lama project

Mining trucks sit parked on the facilities at the Barrick Gold Corp's Pascua-Lama project facilities in northern Chile.

Barrick Gold Corp., the world’s biggest gold miner, may take a writedown of as much as $5.5 billion on its Pascua-Lama project in the Andes after the price of the metal plunged close to a three-year low.

Barrick is also likely to take other “significant” impairment charges for the second quarter as it reviews goodwill and other assets, the Toronto-based company said yesterday in a statement.

Barrick now expects first production from the mine on the Chile-Argentina border in mid-2016, compared with a previous target of the second half of 2014. It will provide an updated capital cost estimate during the third quarter, after finalizing a new construction schedule. Barrick raised the cost estimate twice last year to as much as $8.5 billion.

Gold futures in New York have plunged 27% this year and slipped below $1,200 an ounce on June 27 for the first time since August 2010. A “storm of writedowns” is coming from the gold mining industry, Jefferies analyst Jake Greenberg said in a June 19 note.

Source: http://business.financialpost.com/2013/06/29/barrick-gold-could-take-5-5b-hit-over-pascua-lama-project/

Is this the Rothschild Moment for Gold?`

We’ve all been watching the selloff in the global gold market. Armies of chicken littles are in a frenzy due to suggestions that the Fed may be ending its quantitative easing, so I thought this is a good time to check in with my friend Henry Smyth of Granville Cooper Asset Management Ltd. (GCAM). Henry is a former Coutts & Co. banker and a very astute observer of the global financial markets. We spoke last week in New York. — Chris

RCW: Henry, the gold market has been taking a beating in the past few months. What do you see as the drivers of the gold market today?

HS: Since $1525 support broke gold has been in the throes of stop loss selling. Gold is now over 2% below its 200 day moving average. Physical supply is extremely tight. The precious metals analysts where I trade in Zurich have very good contacts among the refiners. They tell me the order backlog is over four weeks now versus four days in a normal market. Same for Shanghai and Mumbai where you see sharply increasing demand as US Dollar gold prices fall and gold premiums rise. Here in the United States the US Mint cannot keep up with demand for gold and silver eagles.

RCW: So is this correction a normal reaction to the Fed? Or has the fact of QE magnified the volatility of gold (and everything else)?

HS: The shorts in the market are running out of short fuel. The decline in gold has been going on since late 2011 and is very long in the tooth. Sentiment against gold is virtually 100% right now among Western gold analysts. This is a Rothschild moment.

RCW: This is a reference to the famous dictum by Baron Rothschild: “Buy when there’s blood on the street?”

HS: It is. There seems to be an expectation that the end of QE will be bullish for the Dollar and therefore bearish for gold. My view is the end of QE will be bearish for all those asset classes which require QE for life support and/or do not do well in a rising interest rate environment. That would include the bulk of US equity and fixed income markets.

RCW: So then I take it you currently are a buyer of gold?

HS: Gold is in a primary uptrend and has been since 2001. The long gold strategy of the Granville Cooper Gold Fund II Ltd. began in 2003. We went through a correction in 2004-5 and another in 2008-09. The current correction is longer in duration but similar in percentage change to the previous corrections. Our investment mandate is long term outperformance against the US Dollar gold price. We use corrections to build positions for the resumption of the primary trend. We have buy stops out there now.

RCW: So given the degree of government manipulation of the financial markets, how do you get a clear view of the gold market?

HS: Gold began its uptrend prior to the onset of the first QE. Fed policy can accelerate or retard, but not alter, the primary uptrend in gold. Gold is a global asset class but is viewed in a very provincial way in the United States. We are seeing a tectonic shift in global asset allocation as gold moves from West to East. This is far more significant than the West appreciates. In my view, this shift is it is akin to the movement of gold from Europe to the US following the 1933 devaluation of the dollar via gold by the Roosevelt administration and the promulgation of the Nuremburg Laws in Germany in 1935.

RCW: That is a pretty bold statement. The real driver of wealth migration from Europe to the US was two world wars. How do you see China leveraging their accumulation of gold to build long-term advantage for the Chinese economy?

HS: It appears that China has since the turn of the century had a state policy of encouraging gold ownership by its citizens. Given this policy and the evolution of their bilateral trading and clearing agreements and systems, it is reasonable to assume the Chinese have global ambitions for their currency, and that their gold holdings will be a significant support to the international acceptance of that currency. A reserve currency is the ultimate projection of state power. I think the Chinese get that.

RCW: Thanks Henry. Hopefully somebody in Washington will take heed of your analysis.

Source: http://www.zerohedge.com/contributed/2013-06-28/henry-smyth-rothschild-moment-gold