Risk is a function of market participants having a perception of lower risks while governments increase their intervention of market prices.–Chicago Slim

One Sign of Increasing Risk: GOFO

The lack of liquidity in the leasing market for gold has pushed the gold forward rates (“GOFO”) into negative territory, meaning that gold for forward delivery is trading at a discount to the physical spot market price–a rare situation that has only occurred a few times in the past twenty years–the last time in Nov. 2008 when a scramble for physical spurred a sharp rally in the dollar price of gold.

This week the GOFO rate did something it has only done a handful of times in its long history–it went negative out to three months which means somebody was willing to pay to have gold instead of dollars right now.

Be careful out there!

6 responses to “RISK!

  1. Hey John, which email address are you currently using?

  2. DanielONRME@hotmail.com


    A couple of questions if I may:

    1. Could you elaborate or point to another post on how you, John, calculates NWC and NFA?

    2. You have written a lot of posts about gold and gold miners and it seems you are of the opinion at least some of them are a buy. Why do you think they are cheap?


  3. OK, Daniel:

    Net Working Capital: Current Assets minus current liabilities (but segregate out excess capital–for example MSFT). But what IS a current asset? If a company has AAA real estate on Park Avenue, NYC on its fixed asset side, those assets are really CURRENT ASSETS because you can price and sell them with a phone call.

    Think about what you are trying to do.

    Net fixed assets—know the replacement costs of those assets. If you go old textile looms, then worth NEGATIVE $$ because of costs to take to the dump. Evaluate the specifics.

    WHY don’t YOU tell me if miners are cheap or not. How would you go about it. Perhaps miners are EXPENSIVE. WHAT type of miners.

    The purpose is to get YOU to think.

  4. DanielONRME@hotmail.com


    My understanding of the miners industry is that in general they are value destroyers (=value trap). The only time where I would consider them is if they were extremely cheap to satisfy a good risk:reward ratio.

    However, to be sure they are cheap, at the minimum, it would require a very high understanding of the industry and its technicalities, and even then… I took a quick look and it’s not something I’d get into at the moment (i.e. into the too hard pile). Either way, because of the high risk involved, I think it’s much easier to recreate the risk:reward with a “safer” industry with the use of options. Just my 0.02.

    As for adding LTA, that’s indeed interesting would have to think about that. Should be adjusted. If they took on debt than the interest would be in the current liabilities. Also if it’s a LT investment than it’s not in whole an asset used to create current earnings. It might also be double counted in the EV which means it’s redundant for the calculation… when you audited Greenblatt’s class your understanding was that he does it this way?

    Many thanks.

    • Yes, your assessment is probably accurate. Some say that the mining industry has destroyed more capital than the airline and car industry combined. That said, I believe certain gold/silver miners are at the cheapest prices relative to gold and silver since 1937 (BGMI). Google BGMI versus gold 1920.

      Take (Goro) even at today’s prices, as it ramps up production and pays out 1/3 of its cash flow as a dividend, it will pay close to a 10% dividend if the price stays near $7.50. Of course, gold could go to $500.00, but I doubt it. See next post–The Golden Constant.

      However, many managements have been changed at the majors and now there is a keen emphasis on return on capital. Weak companies being flushed out. Also, certain companies like FNV, RGLD, SAND, SLW have an asset-light model that depends upon expertise in an oligopoly structure that makes them value enhancers. The sentiment that Gold will go to $0.00 and miners to $0.00 is off the charts. I have received DEATH THREATS (only 4) for even suggesting that miners are a buy. Some may be but most will go bankrupt (note te Vancouver Venture exchange–100s of “explorers will shutter).

      So I view buying 10-12 STRONGLY capitalized companies with low operating costs (Yamana, for example) as where I find the most value. Of course, if I could buy Coke (KO) at $30 today I would gladly switch.

      I see overvaluation EVERYWHERE.

      Greenblatt uses CA-CL (deducting excess cash from operations) + Net Fixed Assets as the capital in the business to operate.

      The point is that if you are looking to buy net/nets sometimes they are hidden in plain view. For example, What is a liquid asset?

      If you have an oil tanker company those assets may be on the books as fixed assets, but they can be sold in two minutes with a phone call. Tankers (in certain categories) trade daily in an open market. The point is not to be hung up on convention but understand the principles.

      Good luck.

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