Tag Archives: Contrarian

Gold is the worst investment in history

Brian Lund-originally published Feb 5, 2015    Lesson: Think for yourself. 



Nobody wants to be the bearer of bad news. Nobody wants to crush people’s dreams. But in the world of investing, cold, hard facts, not dreams, are what make you money. And the fact of the matter is, historically speaking, buying gold is the worst possible investment you can make.

I am very sensitive to the fact that what I just said has probably caused some readers to go apoplectic, and for that I apologize. I know that I will never convince the gold bugs, inflation hawks or doomsday preppers of this thesis, nor my own personal position that gold will eventually be worthless. But for the rest of you, let me lay out the case to avoid gold as an investment.

The Numbers Don’t Lie

In his seminal book “Stocks for the Long Run,” renowned economics professor Jeremy Siegel looked at the long-term performance of various asset classes in terms of purchasing power — their monetary wealth adjusted for the effect of inflation.

With a $1 investment each in stocks, bonds, T-bills and gold, beginning in 1802 and ending in 2006, Siegel calculated what those assets would then be worth.

Stocks were the big winners, growing the initial dollar investment into $755,163. Bonds and T-bills trailed dramatically, returning only $1,083 and $301 respectively. But the big surprise was in how badly gold fared during that time, only growing to $1.95.

An Inefficient Investment Vehicle

In addition to its miserable historical performance, gold also has many other failings as an investment, not least of which are the cumbersome and inefficient options available to own it and the prevalence of less than reputable salespeople in the precious metals space.

Owning physical gold in the form of bullion has many drawbacks. Wide bid and ask prices on physical gold ensure that the moment you purchase it you are already underwater on your investment. In addition, shipping costs for the heavy metal will further add to your cost basis.

Once you get your gold, you then have to decide how to store it. Keeping it at home exposes it to the risk of theft, fire or natural disaster. Taking it to the bank requires the rental of a safe deposit box, the cost of which will eat into your profit as well.

Firms will store your physical gold on site, but they charge for the service, and the idea of having your yellow treasure held by someone somewhere else, commingled with that of others, is not very appealing.

Enter the Modern World

Ultimately, gold is a legacy investment vehicle from a time before mass communications, ease of global travel, and the internet. It no longer is the default store of value that it once was, and financial and technological advances have made it an investment best suited for collectors and hobbyists, but certainly not for serious investors.

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Even money says this post attracts the GOLD IS DOOMED advertisement on the page

Editor: Too bad gold isn’t an investment but just money.


Misconceptions about gold S&D

How to Lose Money Consistently; A Contrarian Speaks

buy buy sell sell

First, I get my stock tips from experts.

Second, I wait until the recommended stock goes up after the broadcast tip to make sure the trend is your friend.  Who needs to understand accounting anyway or the present value of free cash flow.  I mean understanding the magnitude and sustainablility of free cash flow or how the business makes money is old news.  Compare expectations versus funamentals?  I go with price because price is all.

I don’t need to think probabilistically because there are sure things like following Jim Cramer’s recommendations.

I am often wrong but never in doubt.

What behavioral biases? I am right, always right.  I don’t need losers like you second guessing me.

Now why would I blindly follow Jim Cramer?  The most important part of investing is having someone to blame when you lose money.  I typically lose 9 out of ten times and my losses are triple my wins.   Consistency wins!

Please read: http://ericcinnamond.com/parachute-pants/   A fantastic blog of knowledge from an experienced investor.

This article hits home because I have also felt the pain of being a contrarian as anyone who types in “gold stocks” in the search box can see.


I bought AG in mid-2014 at $8, then $4.50, then $3. Over two years, I was down over 45% based on my average price.  Clients screamed. One said that if my IQ was higher, he could call me stupid.   One client took out an insurance policy on me and told me that I might have an accident.   Now all is forgiven. Yes, I have sold some AG but still retain a position because conditions haven’t changed, but the price has begun to discount the good news. Risk is higher now than in 2015. Yet, there doesn’t seem to be a mania into these stocks–so far.  But mining stocks are burning matches where their assets deplete and deplete.  You have to jump off the train when people are clamouring for these companies.

Parachute Pants

Did your parents ever tell you not to worry about what other people think? I remember my mother telling me this when I was in eighth grade. I’m not sure if she was simply giving good advice or trying to talk me out of buying parachute pants. In the early 80’s parachute pants were a must have for the in crowd. I wanted to fit in, but my mom convinced me it wasn’t necessary to act and dress like everyone else. In hindsight, good call mom. Now if only she would have talked me into cutting off my glorious “Kentucky waterfall” mullet! The pressures of conforming and fitting in don’t go away after eighth grade – it sticks around many years thereafter. Investing is no different.

In the past I’ve discussed and written about the psychology of investing and the role of group-think. The pressure to conform in the investment management industry is tremendous, especially for relative return investors. As their name implies, these investors are measured relative to the crowd. One wrong step and they may look different. Looking different in the investment management business can be the kiss of death, even if it’s on the upside. If a manager outperforms too much, he or she must have done something too risky or too unconventional. For some relative return investors being different (tracking error) is considered a greater risk than losing money. Losing client capital is fine as long as it’s slightly less than your peers and benchmarks. From what I’ve gathered over the years, to raise a lot of assets under management (AUM) in the investment management industry, the key is looking a little better, but not too much better, and definitely not a whole lot worse.

How did we get here? Since my start in the industry, relative return investing has gradually taken share from common sense investing strategies such as absolute return investing. How well one plays the relative return game is a major factor in determining how capital is allocated to asset managers. I believe this is partially due to the growing role of the institutional consultant and their desire to put managers in a box (don’t misbehave or surprise us) and turn the subjective process of investing into an objective science. Institutional consultants allocate trillions of dollars and are hired by large clients, such as pension funds, to decide which managers to use for their plans. The consultants’ assets under management and their allocations are huge and have gotten larger over time, increasing the desire by asset managers to be selected. This has increased the influence consultants have on managers and how trillions of dollars are invested.

During my career I’ve presented hundreds of times to institutional consultants. While I have a very high stock selection batting average (winners vs. losers), my batting average as it relates to being hired by institutional consultants is probably the lowest in the industry. It isn’t that they don’t understand or like the strategy. In fact after my presentations I’ve had several consultants tell me they either owned the strategy personally or were considering it for purchase. Although they appreciated the process and discipline, they couldn’t hire me because I invested too differently and had too much flexibility and control (for example, no sector weight and cash constraints). In other words, they liked the strategy, but they were concerned that the portfolio’s unique positioning could cause large swings in relative performance and surprise their clients. In conclusion, in the relative return asset allocation world, conformity is preferred over different, as investing differently can carry too much business risk (risk to AUM).

Over the past 18 years the absolute return strategy I manage has generated attractive absolute returns with significantly less risk than the small cap market. Isn’t that what consultants say they want – higher returns with lower risks? Yes, this is what they want, but they want it without looking significantly different than their benchmark. This has never made sense to me. How can managers provide higher returns with less risk (alpha) by doing the same thing as everyone else? Maybe others can, but I cannot. For me, the only way to generate attractive absolute returns over a market cycle is to invest differently.

Investing differently and being a contrarian is easy in theory. When the herd is overpaying for popular stocks avoid them (technology 1999-2000). Conversely, when investors are aggressively selling undervalued stocks buy them (miners 2014-2015). It’s not that complicated, but in the investment management industry, common sense investment philosophies like buy low sell high have been losing share to investment philosophies and processes that increase the chances of getting hired. Instead of asking if an investment will provide adequate absolute returns, a relative return manager may ask, “What would the consultant think or want me to do?” I believe the desire to appease consultants and win their large allocations has been an underappreciated reason for the growth in closet indexing, conformity, and group-think.

In my opinion, the business risk associated with looking different has reduced the number of absolute return managers and contrarians. And some of the remaining contrarians don’t look so contrarian. For example, look at the four-star Fidelity Contra Fund. According to Fidelity this “contra” fund invests in securities of companies whose value FMR believes is not fully recognized by the public. Three of its top five holdings are Facebook, Amazon, and Google. I suggest the fund be renamed to the “What’s Working Fund”. With $105 billion in assets under management, one thing that is working is the sales department! Wow, that’s impressive. What would AUM be if the fund actually invested in a contrarian manner? My guess is it would be a lot lower, especially at this stage of the market cycle when owning the most popular stocks is very rewarding for performance and AUM.

I’m not just picking on Fidelity. The relative return gang is in this together. After the last cycle we learned most active funds underperformed on the downside. Given the valuations of some of the buy-side favorites currently, I suspect they’ll have difficulty protecting capital again this cycle once it undoubtedly concludes. This could be the nail in the coffin for active management. If the industry is unwilling to invest differently and they don’t protect capital on the downside, why not invest passively and pay a lower fee?

In my opinion, given the broadness of this cycle’s overvaluation, the most obvious and most difficult contrarian position today is not taking a position, or holding cash. In an environment with consistently rising stock prices and the business risk associated with holding cash, I don’t believe many managers are willing to be patient. That’s unfortunate because I’ve found the asset that is often the most difficult to own is often the right one to own. The most recent example of this is the precious metal miners.

After the precious metal miners crashed in 2013, I became interested in the sector and began building a position. Besides a couple positions I purchased during the crash of 2008-2009, I had never owned precious metal miners before. They were usually too expensive as they sold well above replacement value (how I value commodity companies). Miners are a good example of how quickly overvalued can turn into undervalued. In addition to selling at discounts to replacement cost, I focused on miners with better balance sheets to ensure they’d survive the trough of the cycle.

After the miners crashed in 2013, they eventually crashed again in 2014 and became even more attractively priced. I held firm and in some cases bought more in attempt to maintain the position sizes. After adding to the positions in 2014, they crashed again in 2015 and early 2016. I again bought to maintain position sizes. I’ve never seen a group of stocks so hated. Many were down 90% from their highs – similar to declines seen in stocks during the Great Depression. The media hated the miners with article after article bashing them and calling their end product “barbaric”. I haven’t seen many of those articles recently. The bear market in the miners ended in January. Today they’re the best performing sector in 2016, as many have doubled and tripled off their lows.

Owning the miners is a good example of how difficult it can be to be a contrarian. While clearly undervalued based on the replacement cost of their assets, there didn’t appear to be many value managers taking advantage of these opportunities. I thought, “Isn’t investing in the miners now the definition of value investing? Where did everyone go?” It was extremely lonely. Some investors argued they weren’t good businesses as they were capital intensive and never generated free cash flow. Obviously they’re volatile businesses, but after doing the analysis I discovered that good mines can generate considerable free cash flow over a cycle. Pan American Silver (PAAS) did just that during the cycle before the bust. As a result of past free cash flow generation, Pan American entered the mining recession with an outstanding balance sheet. New Gold (NGD) is another miner with a tremendous asset in its low-cost New Afton mine, which also generates considerable free cash flow. I also owned Alamos Gold (AGI). Alamos had a new billion dollar mine, Young Davidson, which was paid for free and clear net of cash and was expected to generate free cash flow. Alamos was an extraordinary value near its lows and was the strategy’s largest position in 2016.

Assuming a mining company had developed mines in production, generated cash, and had a strong balance sheet, I believed while the trough would be painful, these companies would survive and prosper once the cycle turned. They weren’t all bad businesses when viewed over a cycle, as all cyclical businesses should be viewed. Furthermore, many had very attractive assets that would take years if not decades to replicate. In the end, survive and thrive is exactly what happened for many of the miners this year. I sold several of the miners as they appreciated and eventually traded above my calculated valuations. The remainder were liquidated when capital was returned to clients.  It was a heck of a ride and was one of the most grueling and difficult positions I’ve ever taken. But it was worth it.

The reason I bring up the miners is not to boast, but to illustrate how difficult it is to buy and maintain a contrarian position in today’s relative return world. I believe it helps in understanding why so few practice contrarian investing, or for that matter, disciplined value and absolute return investing. During the two and a half years of pain (late 2013-early 2016), equity performance in the strategy I manage suffered. I initially incurred losses and was getting a lot of questions — I had to defend the position. Relative performance between 2012-2014 was poor (high cash levels also contributed to this). During this time, the strategy lost considerable assets under management. People were beginning to believe I lost my marbles. Whether or not I was going crazy is still up for debate, but one thing was certain, holding a large position in out-of-favor miners wasn’t encouraging flows into the strategy. While the miners were eventually good investments, in my opinion, they were not good for business.

As value investors we often talk about being fearful when others are greedy and greedy when others are fearful. However, in practice it’s extraordinarily difficult. In addition to the pain one must endure personally from investing differently, a portfolio manager also takes considerable career and business risk. Given how the investment and consultant industry picks and rewards managers, it can be easier and more profitable to label yourself as a contrarian or value investor, but avoid investing like a contrarian or value investor. Instead simply own stocks that are working and are large weights in benchmarks – the feel good stocks. I’ve always said I know exactly what stocks to buy to immediately improve near-term performance. Playing along is easy. Investing differently is not.

Investing to fit in with the crowd may feel good and it may be good for business in the near-term, but fads are cyclical and often end in embarrassment (google parachute pants and click on images). Participants in fads and manias often walk away asking “What was I thinking?”. But for now owning what’s working is working, so let the good times roll. I’ll stick with a more difficult position. Just like I did with the miners, until it pays off, I plan to stay committed to my new most painful contrarian position – 100% patience.   —

Boy does the above post ring true. 


Follow the Capital Cycle as a Contrarian


Ed Chancellor on the capital cycle…

From his introduction to Capital Returns: Investing Through the Capital Cycle: A Money Manager’s Reports 2002-15, which was released in hardcover today (Dec. 2015):
Typically, capital is attracted into high-return businesses and leaves when returns fall below the cost of capital. This process is not static, but cyclical – there is constant flux. The inflow of capital leads to new investment, which over time increases capacity in the sector and eventually pushes down returns. Conversely, when returns are low, capital exits and capacity is reduced; over time, then, profitability recovers. From the perspective of the wider economy, this cycle resembles Schumpeter’s process of “creative destruction” – as the function of the bust, which follows the boom, is to clear away the misallocation of capital that has occurred during the upswing.

The key to the “capital cycle” approach – the term Marathon uses to describe its investment analysis – is to understand how changes in the amount of capital employed within an industry are likely to impact upon future returns. Or put another way, capital cycle analysis looks at how the competitive position of a company is affected by changes in the industry’s supply side. In his book, Competitive Advantage, Professor Michael Porter of the Harvard Business School writes that the “essence of formulating competitive strategy is relating a company to its environment.” Porter famously described the “five forces” which impact on a firm’s competitive advantage: the bargaining power of suppliers and of buyers, the threat of substitution, the degree of rivalry among existing firms and the threat of new entrants. Capital cycle analysis is really about how competitive advantage changes over time, viewed from an investor’s perspective.

  1. Follow the capital cycle as a contrarian (well worth STUDYING!)
  2. Gold miners in the capital cycle (part 2)

http://www.marathon.co.uk/global-investment-review.aspx (Read several articles on the capital cycle in investing).

Watch for errors  (Interview of the gentleman pictured above)

Go Where the Outlook is Bleakest (RUSSIAN STOCKS)


One of my favorite quotes, I think from “Investing is the only place where when things go on sale, people run out of the store”

  1. Go Where the Outlook is Bleakest of John Templeton’s 16 Rules **
  2. The Risks of Investing in Russian Stocks
  3. Black Swans



Of course, being contrarian requires MUCH PATIENCE. See link (**) above that featured the gold market in my post of Jan. 2014.




An intelligent move: sandstorm-gold-announces a buy-back of shares after a 80% decline in share price.  The opposite of tech stock managements who are currently buying back shares at their all-time highs after a six-year move up in their stock prices)

Ghost Airports or EU Mal-investment Gone Berserk

A smart way to view gold ownership by an expert   This bullion dealer understands that gold is money and NOT an investment.

Financial-crises-during-the-gold-standard-era/ (great blog: www.tsi-blog.com)

The Horror of Herbalife

You can watch Pershing Square’sa 7:45 video at:  http://www.factsaboutherbalife.com/herbalife-unmasked/ and the entire 3-hour video is posted at: http://www.factsaboutherbalife.com/herbalife-unmasked/






Dead Companies Walking; Financial Accounting Course



The above is an interesting blog from an original thinker.

For a refresher: A free Wharton course on Financial Accounting (rave reviews)



Why You Win or Lose


 Jim Rogers, “Well in my new book, http://www.amazon.com/Street-Smarts-Adventures-Road-Markets/, I explain why many schools now are going to go bankrupt—why American education is going to see some starving, some shocking bankruptcies coming out of American tertiary education—and business school is certainly not much use, I was once a full professor in an Ivy League business school (Columbia GBS), and I will tell you, Jeff Macke, most of what goes on is not very useful at all, except to the professors. They charge huge amounts of money. They teach a lot of conventional wisdom, so the kids who come out, come out in the hole financially but also knowledge-wise; their peers who went to work are way ahead of them financially after two years, but secondly knowledge-wise, too, because a lot of what they teach in business school is flat-out wrong.

These poor kids have to unlearn it and start over. In my view, if you do your own work and teach yourself or start with what you know, you will come out way, way, way ahead of going to business school. I consider business school a complete waste of time, money, energy, and everything else. I’ll tell you what, Jeff, you go down and short soybeans one day, you will learn more in the first six weeks than you will learn in 10 years at any business school. The Internet and real life is a fast way to learn, if your are really interests (Source: pages 26-27 in http://www.amazon.com/Clash-Financial-Pundits-Influences-Investment/).

Why You Win or Lose: WHY_YOU_WIN_or_LOSE_Fred_Kelly (1)

A short synopsis of the 1930 contrarian classic.

Another new investing blog: http://glennchan.wordpress.com/2014/06/14/insider-ownership-is-overrated/#comment-1882

One of my favorites:

http://reminiscencesofastockblogger.com/2014/06/15/a-new-bet-on-hercules-offshore/   (Don’t be lazy–do thy own work)

A True Contrarian: John M. Templeton


What is your investment approach? John Templeton, “I search for bargains.” “Buy at the point of maximum pessimism. Go where the outlook is the worst.”

The above video is worth viewing if you want to understand how important personality and values are for the type of investor you become. Templeton’s thrifty ways and contrary streak were embedded in his approach. He is seldom studied. Too bad. 

The Templeton Way A book synopsis

Templeton on Investor Attitude

Criticism is the fertilizer of learning. –John Templeton.

Experts Opining on Markets; Lessons in Entrepreneurship

Where are the Customer’s Yachts? (1940)

For one thing thing, customers have an unfortunate habit of asking about the financial future. Now if you do someone the signal honor of asking him a difficult question, you may be assured that you will get a detailed answer. Rarely will it be the most difficult of all answers–“I don’t know.”

Today (Dec. 01, 2013) “As measured by the weekly Investors Intelligence survey of newsletter writers, the bullish boat is standing room only while the bear boat has the least amount of passengers dating back to the 1980’s. In today’s numbers, Bulls rose to 55.7 from 53.6 while the Bears fell to 14.4 from 15.5, an historic low in the history of this survey according to II. Combined with another record high in margin debt in October that puts its ratio to GDP at about 2.4%, near the high of 2.6% in July ’07 and 2.8% in March ’00 and it’s worth noting the historical limits in these two figures that we are pushing up against. That said, this says nothing about where markets go in the short term from here. This Fed hosted party can still have life left but I feel it’s always important to have perspective and these two data points should provide reason for an investing gut check in early 2014 in terms of how to be positioned.”   www.hussmanfunds.com

“Being wrong on your own, as Keynes described so eloquently in Chapter 12 of the General Theory, is the cardinal crime of an investment manager. The management of career risk results in very destructive herding. Investors should be aware that the U.S. market is already badly overpriced – indeed, we believe it is priced to deliver negative real returns over seven years [GMO estimates fair value for the S&P 500 at 1100]. Be prudent and you’ll probably forego gains. Be risky and you’ll probably make some more money, but you may be bushwhacked and if you are, your excuses will look thin. My personal view is that the path of least resistance for the market will be up.”

– Value investor Jeremy Grantham, GMO, November 18, 2013

“I cannot look at myself in the mirror; everything I have believed in I have had to reject. This environment only makes sense through the prism of trends. You have got to be in things that are trending. Crashing is the least of my concerns. I can deal with that, but I cannot risk my reputation because we are in this virtuous loop where the market is trending. I may be providing a public utility here, as the last bear to capitulate.”

– Hedge fund manager Hugh Hendry, Eclectica, November 22, 2013

“I am out of justification to fight the uptrend. Up until now, I have had what I thought was compelling evidence to believe in the bearish case, but it has now been revealed to have been insufficient for the task. I am without ammunition to bet on the bears. I don’t like it, because I see the market as overly dependent upon the Fed’s largesse for its upward continuation. I see this as a bubble, but a bubble that is continuing higher even though it should not. I plan to ride the bubble for a while, and will hope to be able to succeed in reading the right [exit] signs.”

– Market technician Tom McClellan, November 26, 2013

In a classic case of not only locking the barn door after the horse is loose, but removing its best opportunity to return home, we’re seeing a capitulation by investment managers across every discipline, from technical, to value-conscious, to global macro. Historically extreme overvalued, overbought, overbullish conditions were in place even ten months ago, and my impression is that every further extension worsens the payback will inexorably follow.

Lesson: Don’t listen to gurus or “experts”.  They are more apt to be wrong. Follow your own common-sense thinking. Right now RISKS ARE HIGH. BE CAREFUL.

Lessons in Entrepreneurship (Gary Hoover) http://www.today.mccombs.utexas.edu/gary-hoover-video-library/

My break

I have been so busy buying gold and miners that I haven’t had much chance to post, but I do plan to resume once things settle down (I hope).

I like this: buying bullion (gold/silver) at a 10% discount. Last time was 2001.

CEF Premium

While being wary of this (in general).  Go here: www.hussmanfunds.com

SP 500 Horror

Note the early warnings signs—not all is well in Europe. 

European Equities

Jean-Marie Eveillard:  “I just returned from Europe, where I was mostly in France, and the mood was not good there because the economy is not doing well.  And since the economy is not doing well, there are political developments on the far-right and on the far-left….

“Some people, and I cannot blame them, believe that the establishment has failed them in the sense that the economy continues to do poorly.”

Eric King:  “Jean-Marie, it sounds like there is a polarization happening in Europe where people are jumping on both sides and the middle-ground is being lost.”

Eveillard:  “Yes, and usually it’s the middle-ground that governs.  That has been the case in France where both the socialist party, which is currently in power, and the center-right party, both of them have historically been close to the center.  That’s not the case any more.

They both have their own extreme wings, but it has been the center that has always governed.  Now people believe that the ‘center’ has governed poorly enough that you have more people who are being seduced by the far-right, and the far-left.”

Eric King:  “Does that worry you?”

Eveillard:  “Yes, but, again, it’s a result of the establishment and it’s happening in the US as well.  You have the center disappearing in the US, which means that both extremes on the left and the right will keep gaining additional audiences.”

Eric King:  “This trend obviously has you worried.”

Eveillard:  “It worries me particularly because in the US, France, and elsewhere, it’s Neo-Keynesian policies that are being followed because it’s the fashion of the day.  Even though the Neo-Keynesians didn’t see the financial crisis coming, nevertheless they are still in power in academia, the political world, and in the world of corporate economists.

I ask myself, ‘If Keynes were alive today, would he be a Neo-Keynesian?’  I don’t think so.  But the Neo-Keynesians believe, as Keynes did, that every now and then private sector demand is weak and has to be supplemented by public sector demand.

What we’ve had in the US over the past 5 years , both from a monetary and from a fiscal point of view, is the most stimulative economic policies ever — completely unprecedented.  The printing of money, QE, etc, the budget deficit, the tremendous increase in government debt, and yet the economic recovery continues to be weak.

Now, the stock market is up sharply because some of the excess liquidity being created by the Fed is going into stocks.  Some of it has also gone into things such as the real estate and fine art markets.  But the money goes particularly into the stock market.

And the stock market is strong not just because of the excess liquidity, but because the vast majority of investors seem to believe, they are wrong, but they believe that, ‘Yes, we had a financial crisis 5 years ago, but that’s all over.  We are going back to normal, and within a few months the economy in the US will grow at more than an annual rate of 2%.’  

It hasn’t happened yet.  How come it hasn’t happened yet?  Nobody seems to be asking the question.  It hasn’t happened yet because the medicine being prescribed by the Neo-Keynesians is not working.  Incidentally, I don’t think anything will work because there no steps which can be taken by the politicians that would, almost overnight, result in a non-inflationary economy growing at 3% or 4% a year.

The reality is the steps which have been taken over the past 5 years will cause tremendous chaos and problems in the future, but we haven’t seen that yet.”

Eveillard also spoke about gold:  “I believe that if I’m right, and the Neo-Keynesian medicine continues not to work, although they can continue with their QE, even at the Fed they know that quantitative easing cannot go on forever.  So at some point something will have to give.  That’s the point where investors will change their attitudes and move to gold.  But it isn’t happening right now in the West because investors continue to believe the Neo-Keynesian medicine will succeed any day now.”

Eric King:  “If there is this move you just described back to gold in the West, Jean-Marie, do you see new all-time highs in gold?”

Eveillard:  “Yes, because gold will become the substitute currency.  People will say, ‘I don’t want the yen, dollar, or the euro because they are all engaged in a race to the bottom.’  Yes, then gold will become the substitute currency.  Gold will be money again.  In a sense it never stopped, but 40 years ago the politicians decided that we were going to operate on the basis of a pure paper money system.  But I can assure you that the history of pure paper money systems is not inspiring.” (www.kingworldnews.com)

CSInvesting: I don’t agree with everything said. Will gold become a substitute “currency?”  Perhaps, more people will understand that Gold is the best money in the world (despite the raving over bitcoin or “token” money).

The Most Hated Asset Class

Gold BGMI Ratio

 A gold mine is a hole in the ground with a liar on top–Mark Twain

The above chart illustrates how historically cheap gold mining equities are to gold. Not since the Great Depression and Pearl Harbor have equities been so cheap on market cap to production, reserves and cash costs. See the XAU (Index of gold and silver miners) below as a percentage of the gold price–currently below the Great Recession lows of 2008:

XAU vs Gold

For about six years, equities have under-performed due to poor management, rising input costs, dilution, and growth for growth’s sake. That’s the bad news. The good news is that many managements have been replaced and now the focus in on return ON capital. Dividend yields on the senior miners are above 20-year bond rates. The market is forcing managements to focus on returns and that bodes well for the future. And some input prices are falling.  However, many weak companies will go bust leaving less competition for the survivors. Therefore, you must diversify into a basket of WELL-FINANCED Companies operating with good properties in safe jurisdictions for mining and, of course, with proven management. Mining is extremely risky. However, the historic cheapness of mining equities give you a margin of error, but choose wisely.

Pessimism is rampant:

Shorts in Gold

Note below that for a risk-free asset, gold which has no counter-party risk, there is a closed end fund holding silver and gold bullion that trades at a 2% to 5% discount (A great way to buy bullion). People want out!


Monetary Mayhem is being overlooked (Many believe central banks have solved our debt problems and can eventually “exit” when the economy reaches “escape velocity.”)  Ha! Ha!

Global-Central-Bank-Assets-vs-Gold (1) 

gld purple debt stair case

Stairway to hell gold

The last two charts illustrate growing debt that as the chart below will show below is being monetized–coupled with negative real interest rates–the current environment is conducive to higher gold prices. While Western speculators flee from ETFs, Chinese Grandmas rush to buy gold for their savings.

MonetaryBase AndM2AndMZM

Real Interest Rates are supportive for gold

If the US government practiced fiscal discipline and interest rates were allowed to rise to their natural level, the bull market in gold would probably be finished. When your cab driver suggests that you buy gold for safety that will also be a read flag. Gold and precious metal miners and commodities, in general, are hated, shorted and/or ignored.

Gold and Interest Rates

Meanwhile, investors have been flocking (some by selling their insurance like gold) to buy stocks, but risks are rising in the stock market due to higher valuations. Margin debt is near all-time highs, insiders have been selling, and a Barron’s poll recently had 75% of all money managers bullish. Of course, the majority expect gold prices to decline. Note the chart below indicates the stock market relative to its Q Ratio or replacement cost of asset, a proxy for value.  

Q Ratio of stocks

And sentiment is upbeat:


Going contrary to massive market sentiment is painful, but going where the bargains are greatest will lead to better returns and safety in the long run (2 to 5 years). Depressed prices alleviate a lot of your investment risk while elevated prices (MMM, CLX, and junk bonds) raise your risks.

But risks overall have never been so high due to central bank intervention into the credit markets. Be careful and have a great weekend. I will be back next week.