Buy Hatred and Fear: Kinross (Russian assets for practically free)


Gold Sentiment (CEF)

The above shows the extreme negativity in the gold market. You can buy the Canadian Closed-End Fund (CEF) at a 10% to 11% discount to gold (60% of assets) and silver (40%) approximately.  Gold and silver have no counter-party risk. Such is the world of closed-end funds.  Note the 20% premiums during bull runs!


The absurdity of gold stock valuations is illustrated by Kinross. Consistently improving operations with $5.30 book value and with no value attributed to their Russian mine. Net-debt-to-EBITDA of 1.28 with their debt covenants being 3.5xs to 1. Cash of $879 million. 1.14 billion outstanding shares. 27 cents of operating cash flow this quarter share, up 22%. A 2.6 to 2.7 million gold equivalent oz. producer. $698 cash costs and $919 All-in Sustaining Cash Cost.  They can survive at $1,000. Below $1,000 operations would be reduced.  Of course, Kinross represents a trifecta of hatred: poor past acquisitions (declining stock price), the gold market, and some Russian assets.

Basically, the market is heavily discounting their assets because the market is assuming sub-$1,000 gold. No value given to their Russian mine.


110514 kinross reports 2014 third quarter results


You should listen to the  Kinross conference call

Mining is a crappy business

Miners at or near ALL-TIME (past 90 years) low of stock price to gold price. Part of the reason for the decoupling is the time to find new deposits and place them into production has gone from five to six years out to ten years. Mining costs hve not been kept in check until recently. Past mining managements made poor capital allocation decisions. A mine is a depleting asset! But the market has had four years to replace managements and adjust.


Current sentiment in the gold miners ZERO (0). The recommended allocation is Zero. Contrarians take note but you better have a strong stomach in the near-term.


But what you need to focus on is not so much the nominal price but the REAL price of gold.  15% or more of the costs of a mine are energy based.

gold to oil

That said, do your own thinking and use this as a case study of where to look for negative sentiment.   The question is…..are you being paid enough for the risks?

Can gold go to $800? Sure and Kinross and other miners will be closing down many of their operations or even going bankrupt. But consider what $800 gold would mean in a world choking on debt! Perhaps stocks might not hold up in a deflationary bust!  It is not just the gold price but the real gold price that matters to miners.  However, nominal gold prices in US dollars matter to miners that have debt denominated in US dollars.

Just never buy one miner because of the risks to any one company. Use the EXTREME price volatility to your advantage. Don’t buy the stock all at once. If you need to diversify and have limited capital, then SGDM might be a choice–IF you think owning miners is the lowest cost way to participate in either a deflationary bust or inflationary response by the Fed.  Otherwise, CEF (above) might be a cheap form of insurance to monetary mayhem.

Miners in a capitulation phase–crashing on huge volume–after four year price decline. Folks have had enough. Money managers in forced liquidation?


Some history

Just remember that you are trying to buy assets at extremely low prices since this is not a franchise. A mine is a DEPLETING asset.   How much money goes into a mine versus what is sold discounted by your cost of capital.

Obviously, with a cyclical asset you will find losses and the widest spread between price and financial operating metrics because a trough occurs in a bear market of declining product prices.  The reverse occurs at the top of a cycle–huge revenues and profits during the boom. So you MUST sell–this is a “burning” match not a franchise. Burn this into your brain.

What could go wrong with financial assets?

Paul Singer grits his teeth while holding gold during a monetary delusion

Paul Singer on “illogical” market trends:

I disagree with Mr. Singer because the bubble in confidence in central planning by the Fed means extreme trends.   For example, massive printing of money will cause LOWER gold prices because the market sees perpetual support of financial assets. Why own gold when equities will NEVER drop more than 10% in our lifetimes.  Thus, massive monetary intervention is bearish for gold. Of course, house prices could NEVER fall nation-wide and the Internet Bubble ushered in a new normal.  Timing is impossible. 

THIS IS WHAT IT FEELS LIKE TO OWN MINERS THIS PAST MONTH–Please no women or children to click on this link!

Gold, Inflation Expectations and Economic Confidence

Wednesday November 05, 2014 11:29

Below is an excerpt from a commentary originally posted at on 2nd November 2014. Excerpts from our newsletters and other comments on the markets can be read at our blog: 

As a result of what happened during just one of the past twenty decades (the 1970s), most people now believe that a large rise in “price inflation” or inflation expectations is needed to bring about a major rally in the gold price. This impression of gold is so ingrained that it has persisted even though the US$ gold price managed to rise by 560% during 2001-2011 in parallel with only small increases in “price inflation” (based on the CPI) and inflation expectations. The reality is that gold tends to perform very well during periods of declining confidence in the financial system, the economy and/or the official money, regardless of whether the decline in confidence is based on expectations of higher “inflation” or something else entirely.

Inflation expectations are certainly part of the gold story, but only to the extent that they affect the real interest rate. For example, a 2% rise in inflation expectations would only result in a more bullish backdrop for gold if it were accompanied by a rise of less than 2% in the nominal interest rate. For another example, a 1% decline in inflation expectations would not result in a more bearish backdrop for gold if it were accompanied by a decline of more than 1% in the nominal interest rate.

Other parts of the gold story include indicators of economic confidence and financial-market liquidity, such as credit spreads and the yield curve.

That large rises in the gold price are NOT primarily driven by increasing fear of “inflation” is evidenced by the fact that the large multi-year gold rallies of 2001-2006 and 2008-2011 began amidst FALLING inflation expectations. These rallies were set in motion by substantial stock market declines and plummeting confidence in central banks, commercial banks and the economy’s prospects. Even during the 1970s, the period when the gold price famously rocketed upward in parallel with increasing fear of “inflation”, the gold rally was mostly about declining real interest rates and declining confidence in both monetary and fiscal governance. After all, if the official plan to address a “price inflation” problem involves fixing prices and distributing “Whip Inflation Now” buttons, and at the same time the central bank and the government are experimenting with Keynesian demand-boosting strategies, then there’s only one way for economic confidence to go, and that’s down.

Since mid-2013 there have been a few multi-month periods when it appeared as if economic confidence was turning down, but on each occasion the downturn wasn’t sustained. This is due in no small part to the seemingly unstoppable advance in the stock market. In the minds of many people the stock market and the economy are linked, with a rising stock market supposedly being a sign of future economic strength. This line of thinking is misguided, but regardless of whether it is right or wrong the perception is having a substantial effect on the gold market.

For now, the economic confidence engendered to a large extent by the rising stock market is putting irresistible downward pressure on the gold price.

Steve Saville

7 responses to “Buy Hatred and Fear: Kinross (Russian assets for practically free)

  1. Anon.

    Hi John,

    Now seems like an apt time to revisit our gold debate given the piece you sent out today. I am sorry to say that I believe nothing has changed in the gold market since we last spoke, and that investors are primed for further losses. The arguments used by gold bulls at this point are spurious at best. When speaking of what it would “mean” for gold to be at $800, what would one have said if told them in September 2011 that gold would be at $1150 today? They would come up with some theory of extreme fiscal/monetary tightening and/or deflation, yet none have happened.

    The basic problem with gold is the same reason it rallied in the first place: it is a psychological asset. Gold only protects you from economic events if everyone else thinks that it does too. Given that we have seen volatility in stocks, fixed-income, currencies and pretty much every other market over the past 3 years, yet gold has traded consistently lower, institutional investors have zero faith that gold protects them from anything. We have even seen open-ended quantitative easing out of the US, accompanied by unprecedented easing out of the BOJ and ECB. None of these had more than a fleeting bullish impact on the price of gold.

    I fully expect gold to be under $1,000 in the next 12 months and likely follow a good bit lower. It is possible during the next recession that gold rallies as the Fed follows their expansionary playbook, but I would not even bet on that necessarily. I believe the reason why the Fed stopped QE is because they realize that verbal guidance is much more effective than actual bond purchases when it comes to controlling market interest rates. For example, if the Fed came out and said they were re-initiating QE today, they could achieve the same or better results by simply stating they will hold the Fed Funds rate at zero until December 2016 or longer. For this reason, even if the US falters back into recession soon, I believe the verbal communication tool will be employed much more aggressively than balance sheet expansion.

    As we have not spoken on this subject in quite some time, please let me know your thoughts as to the above. Hope all else is well, talk to you soon.

  2. “Gold is a psychological asset.”

    “Gold is money; all else is credit” JP Morgan

    Sure, all valuation is subjective. I may only value gold at $200 an oz because I think gold bars are only good for fancy door-stops. But I see today that the exchange value of gold is $1,130 for gold in US dollars or XX in Jap. Yen, etc. So today I can exchange two pounds of gold for a new car. If I am speculating on the price of gold, I have to estimate what future supply/demand will be for gold in whatever currency I will exchange for gold. Gold is being produced at a lower increase (1.5% to 2%) per year than fiat currencies (5% to 20%?) per year. I like that long-term as a reason to hold my gold coins.

    But since gold is simply money not an “investment” unless you consider a dollar an investment. Gold has held its exchange value better than any other currency in the world for the past 200 years. Check it.

    If gold goes to $800 then at the current exchange ratio of gold to oil, then oil will be $50 per barrel. For certain debt-free miners, that would be fine. The “real” price of gold is what matters.

    My thesis on gold is simple:

    Chinese and Indian Grandmothers are buying gold on this price decline, so they are smarter money than Wall Street. Follow the smart money–Grannies.

    Central planning doesn’t work. Therefore, the Fed’s actions will inevitably cause a massive crisis. Bernanke: The sub-prime is contained (2007). Greenspan, “Our models don’t work!” 2009. I will fade the bubble in Central Planning over at the Fed. Zirp ends in an implosion.

    Gold is at all-time lows against global debt and money supply. The huge amounts of debt (Japanese, US, European) mean a very unstable financial system.

    All fiat currencies have gone to Zero. It has happened twice in US history with the Continental Dollar and the Confederate dollar.

    I look at a gold to dollar chart and I see an uptrend since 1900, 1971, and 2001. Until that trend changes, I will be “long” gold while praying for price declines. Let’s hope gold goes down to $1,000 so I can exchange more for my dollars.

    The point is that my time frame is very long. My guess is that goldbug sentiment has to be wrung even further? Who knows?

    But I am taking at least a five to ten year timeframe. The very conditions that are causing gold to go down will be the same reasons for gold to go up. Life is ironic and viewed in different perspectives.

    I hope you’re right.

  3. I forgot to add. My timeframe is three to seven years. I have held gold since 1998. I have owned miners since May 2013, buying and selling. I plan to hold until the next cycle–usually miners go in three to seven year cycles of boom/bust. My typical holding period is three to eight years for stocks.

    The point is to understand your time frame. Mine is long-term.

    Goldbugs may need to be crushed further?

  4. In the long run, we’re all dead. If we hold poor investments in the meantime, we’ll become poorer in the present. This presents a huge problem as an investor because it robs us of the one essential ingredient to be an investor, capital. When I think about investment, I take great care to consider whether I am making a mistake, even if it is possible it is only a short term one, because any loss robs me of more than just present dollars, it robs me of significant future dollars as well because I will have less capital to allocate to a good investment when I finally do find one, diminishing my future net worth.

    I do not see a distinction between currency and investment if the currency being held is not the same as your local market currency. For example, if you live in the US and you hold euros, there is not much distinction between holding euros as an investment and as a currency. If you thought it was a poor investment, you would not be holding the currency. You are not holding it for fun, you are holding it as a diversifying investment outside of your local jurisdiction currency. This is why people hold gold, they view it as a diversifying hedge against either their local currency, or all fiat currencies.

    I believe the main discrepancy between gold bulls and bears at this point is the expected response to current economic stimulii. No cogent observer can argue that central banks and governments have not injected unprecedented amounts of money into the financial system. However, just because the reaction in the past has been for investors to favor gold as the money supply increased does not mean that this will be the reaction of the present or the future.

    Indeed, investors piled into gold for over a decade because of this belief. However, as gold began its most vigorous upwards move after the financial crisis, hyperinflation theories were debunked and bonds moved upwards steadily. This is perhaps evidenced most greatly by the performance of long-dated treasuries this year, which are up handsomely even as the Fed has ended their asset purchase program and is openly discussing raising rates. Most gold investors who joined the rally late decided to liquidate as it became apparent over the past 3 years that inflation was not quickening regardless of the size of the Fed balance sheet.

    The simple fact is that the US and the rest of the developed world is much closer to deflation than it is to inflation. Of course, if we go in to deflation, the central bank response will be to print even more money. I suspect this is why a good deal of smart investors are holding gold even still.

    This brings me to my last point: just because something happened in the past does not mean it will happen again in the future. Even if all of gold investors’ hopes are realized and inflation quickens and confidence in fiat currency declines, this STILL does not mean that gold must rise. In today’s era, we have digital currencies such as bitcoin, as well as the most free access to useful commodities such as gasoline and agriculture than we have ever had before. There are a myriad of options available to investors even if fiat currency fails, and there is no necessity for them to turn to gold.

    Finally, even though gold is the most classic historical store of value does not mean it ever will be again. Keep in mind that institutions such as slavery and feudalism persisted for thousands of years, yet will not be making a comeback any time soon. Sometimes things that thrived in the past are better left in the past.

    • OK, there is a problem defining terms.

      I define an investment as being able to grow my capital at my risk adjusted rate of return. I define gold as money so it has no rate of return. It is just a medium of exchange and a store of value. An oz of gold buys about a similar basket of goods today as it did in the 1890s or 1930 give or take. The advantage of gold is that it can’t be created by fiat.

      Whether gold doesn’t go “up and down” in price much since its stock to flow ratio is the largest of any good in the world, but dollars, yen, barrels of oil change relative to gold. If gold goes down in nominal price from $1,000 to $500 US but the supply of goods and services goes up by ten times, then your real price (all else being equal) of gold has gone up five times. Hope for that.

      Why was gold chosen by men as money?
      Why do central banks TODAY buy gold?

      Gold had some of its largest increases via the US dollar during the great deflation of the 1930s. Gold is a hedge for some) against monetary chaos.

      The only laws that we know that are immutable: 1. Human nature hasn’t changed in a million years. 2. central planning (the Fed and other CBs) has never worked/always failed/unintented consequences. the combination makes for some interesting times over the next twenty years. If money printing “worked” then Zimbabwe would be the wealthest country in the world. Rising CPI is just one consequence of inflation. But you can have declining prices WITH inflation. Computer prices would be declining FASTER without our current monetary debasement.

      Google: The Theory of Money and Credit by Mises (.pdf). You will learn about money and credit. Beats an MBA by a mile.

      • Gold is most certainly not a medium of exchange. It is a dubious store of value at this point as well, but at least that point can be argued. Name me one store in the US where you can buy essential goods, or even capital goods, for gold? Sadly, you will be able to find one because of how many misguided holders of gold there are out there at this point, but the vast, vast majority of businesses here in the US, and even around the world, do NOT accept gold in exchange for goods and services.

        Your 2nd point regarding central planning is particularly noteworthy. It is absolutely true that the Fed has been proven inept time and again. What is much more dubious though is that the Fed’s current experiment will end with exploding gold prices. Just because in the past investors turned to gold as a hedge against monetary chaos and debasement does not mean they will in the future, especially given how much money has already flown into and out of the metal. Also keep in mind that the world just went through its worst downturn since the Great Depression, yet all the fiat currencies people love to hate so much continue to exist and thrive, with the US dollar actually gaining handsomely in value. My guess is that not a single goldbug thought this would be true when buying gold in 2008.

        Also, it is highly contradictory to ask why central banks hold gold while simultaneously excoriating their past failures as a reason to hold gold. If they are so dumb and always fail, then why would you want to hold the same assets they do? Considering that the largest holders of gold today are the same governments and central banks that goldbugs cite as overindebted and doomed to fail, this would seem to be a source of massive future selling in gold rather than buying.

        In my view, if you are really worried about the purchasing power of currency, then you should trade that currency for a stake in a business or rental real estate in a jurisdiction with the least bad currency you can find and strongest property rights. That jurisdiction at this point in time is clearly the United States. With the world reserve currency status and most powerful military, our currency will not go the way of Zimbabwe’s any time soon. Moreover, owning these types of assets will give you pricing protection in inflationary times while maintaining your dollar denomination in deflationary times and not causing too much diminution of value as long as debt is not employed.

        • Best to stick to facts and not opinion since our goal here is reasoned discourse. I can turn in my gold coins for $20 face value any time :). Actually, gold coins are readily useable in parts of the Mid-East. Gold is certainly not currency. But money is a commodity (Mises and Rothbard). ASk WHY was gold chosen as money 5,000 years ago? Why not pigs or sea shells. Even ISIS is turning to gold as money:

          The monetary mayhem from central banks isn’t causing hyperinflation but MASSIVE distortions in prices–therein lies one reason to own gold. Suppressed interest rates leads to mal-investment and mal-investment leads to………………? Central banks hold gold because it is the only reserve asset without liabilities. But that is no link to the stupidity and guarantee failure of central planning. Since all value exchanges are subjective-ergo central planning fails.

          Looks like gold is in an uptrend against the US dollar for the past 202 years despite being fixed for about 120 years at $20. The compounded gain of gold over the US dollar is 2% per year for 200 years. Those numbers add up. I would rather hold gold waiting for good opportunities in the stock market than a depreciating dollar. Gold has done even better against the Lira, Peso, Reich mark, etc. I was going to cherry-pick and choose 1971 when Nixon severed the tether between gold and the US dollar thus giving gold a 8.1% annual increase in exchange value to the dollar. Beats a U.S. T-Bill. Oh, I forgot, gold doesn’t earn interest!

          TOUCH DOWN, SLAM DUNK, and HOME RUN for the “Goldbugs!” I feel like this:

          Now the 202-year (or 20,000 years) history may be about to change (but I doubt it.), but the chart STILL “looks good.” I have my stop-loss at $20.00 since that would be a new low and change of trend. Until that happens, I don’t see how you can believe that the US dollar has gained more in exchange value in gold than a non-debaseable money like gold. The dollar has been in a 202 year free-fall. I didn’t choose gold, the market did. I am holding my breath for the change in trend.

          I would gladly turn in my gold coins for ownership in a compounding machine. I would love to own Coke at $25 but that is not to be.

          Read Mises and then reply. LEARN! How can you become a better investor without understanding money. What is it? How did it come to be? Is bitcoin money? etc. Hope this helps.

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