Analyst Quiz Part II


Part I: I will discuss in another post and send a gift to all who provided comments.

Mr. Ackman calls you into his office and tells you that he shorted gold three days ago, because he wants to make money to support his positions in VRX, etc. Goldman Sachs promised sub-$1,000 gold in 2015.  He ignored whatever you said because you are a “junior” analyst.   But today gold is up $50 +.   Pershing Square recently installed two hotlines: 1. for investor suicide prevention and 2. for death threats.   Phones are ringin’ off the hook.

Also, this morning Janet Yellen had a nervous breakdown during her testimony to Congress.  She told Congress that, “We have no clue what is going on.”  Then she asked Congressional leaders to join her in prayer, “God, Help us!”

Her testimony: Negative Rates a failed strategy so do it

You recently read:

  1. Misconceptions about gold
  2. What Determines the Price of Gold and What determines the price of gold_Blumen
  3. Murphy’s Law of Gold Analysis
  4. Gold and 1937 Depression
  5. Money Gold and Chaos
  6. Losing Control

The above readings you may or may not agree with but you press on to learn more. And you see this:

bank shit

What do you advise Mr. Ackman to do now?

God, Help us!

7 responses to “Analyst Quiz Part II

  1. I didn’t get a chance to leave a comment on Part 1, but I stand by my decision that he should exit that short position in gold and either exit gold completely or buy a small portion, roughly equal what his position was in treasury bonds (if he has any).

    My reasoning is that gold, as mentioned in previous comments, is an extremely misunderstood and odd precious metal. Gold does have commercial uses, beyond being “precious” and a “store” of value, so it’s not a completely useless, pretty rock – so it will always be worth something. But at least in this day and age, gold is the store of value for hardcore libertarians and paranoid conspiracy theorists, as most countries have left the Gold Standard a long time ago (including the US). So it seems to be that conservatives push pressure on the store of gold value much the same way momentum investors push the price of Facebook to absurd P/E ratios.

    What this all means is that in spite of the irrationality in the price movement of gold (regardless of it’s inherent use and value as a metal), we do know that there are correlations between the macroeconomic environments and the price of gold. The two biggest macro factors right now that are driving down prices are the collapse in China, and more specifically the corresponding tanking of the value of the dollar leads to investors to trust in more traditional currencies than fiat – and thus gold rises when the dollar falls.

    The real issue is we don’t know how long these correlations will last – more specifically the dropping dollar along with the Chinese economy (or I guess the dollar dropping and gold rising).

    • Do central banks own more gold than “Libertarians?”
      Why does the Fed own 8,000 tonnes of gold? Why does China’s CB buy gold? Are there Libertarians in the Chinese Communist Party?

      Why do ALL fiat currencies throughout history (over a 100 year time-frame) collapse to zero? Fiat Currencies Should money be a store of value? Why?

  2. If he wants to save face and not cover his losing gold position, I would suggest being long the Yen/Euro against the $USD, to neutralise the bet.

    I would then scour through the list of listed miners to find the miner with lowest AISC, and lowest ev/reserve ratio. This will give outsized exposure to a rising gold price, in the event that his gold short position is incorrect. the moner can be owned ona simple business cycle basis, that is, miners have gotten religion on driving for ROIC and cashflows, and are still on average 70% of their 5 year highs. A turn in Fed policy, because of the rapid unwind that is occurring in HY, spreading quickly to European financials will cause investors to revisit hard assets and emerging markets that have been so devastated by the global tightening that ensued since the Fed bagen to taper. Acquisition of high quality EM franchsies would also make sense if you can get the valuations to work. There is also still money to be made on the short side from VRX-like models, i.e. privte equity business masquerarding in the public domains, using cheap debt to make acquisitions to drive nominal sales sales growth. Examples would include TDG and SBAC, which are only now starting to break…. and if all of the above fails… just cover the gold short.

  3. If gold rises above $2,000 or so (a relatively small move) wouldn’t high ASIC miners do better?

    • True, but as a hedge on the short gold position which Ackman has, the low cost miner should generate better cashflows through the cycle, for a given gold price. An all in bet on a rising gold price I think, is a different trade than the one Ackman is trying to structure around his short gold position, in my view.

  4. You’d want to be looking up gold miners at deeply depressed prices who have optionality on their resources and good balance sheets and future access to credit and low costs while they wait for prices to go hyperbolic in response to a panic.

    • So Novagold (NG) might be one developer to look at. However, if interest rates move up as fast or faster than the price of gold, then the cost of capital will temper future returns. It ain’t easy so you have to diversify, but tough businesses require the best managements while Coke and Paychex (figuratively speaking) only need monkeys to run those businesses.

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