Gold, an interesting take...

Gold can give you euphoria & depression (like receiving a gift of it, or
watching it walk out the door when you get divorced).... I do not now, nor
ever plan to, own gold. I look at investing in gold as a crap shoot, and it
is not my style. That said, here is one person's take on gold....

By the way, I feel the same way about most jewelry, and especially diamonds,
whose TV 'guilt inducing' ads I find abhorring and distasteful.

Happy Guy

-----------------------------

Four Gold Stocks to Avoid

We do not dig these four producers of the yellow metal.

by Parvathy Krishnan, CFA | 11-23-05 | 06:00 AM | E-mail Article | Print
Article | Permissions/Reprints

Gold prices have been skyrocketing recently, continuing the secular bull
market in gold that started in 2001. After starting the year at $420 per
ounce, gold prices have rallied to within shouting distance of $500 per
ounce, levels not seen since the late 1980s. Not surprisingly, gold bugs
feel vindicated, and the metal and its producers have been getting a lot of
attention from the financial press and potential investors.

So, is this a time to invest in gold, gold stocks, gold mutual funds, or
gold exchange-traded funds? My colleague Michele Gambera has some
interesting thoughts on this subject. As value-oriented investors, we at
Morningstar believe in buying assets at a discount to their intrinsic value
and waiting patiently for prices to recover. The metal has been justifiably
touted, though, as an inflation hedge and portfolio diversifier. However,
gold stocks, while highly correlated with gold, carry additional baggage
that may offset some of their diversification and inflation-hedge benefits.
As I've written before, gold miners are plagued with rising costs, lack of
control over the price of their product, and few product differentiation
opportunities. It follows that most gold producers have no competitive
advantage, or economic moat, and their returns on invested capital trail
their cost of capital.

Historically high prices, no moat, poor returns on invested capital--these
are all reasons we find the sector in general quite unattractive at this
time. It is not surprising that most gold stocks today get our 1-star
rating.

Having said that, there are a few gold producers of whom we are particularly
wary because they expose the investor to additional risks for one of several
reasons. First, these stocks tend to have higher-than-average operational
risk. This is a characteristic of small, undiversified producers whose
output relies on a small group of mines or even a single mine. Because this
is the case, a small operational glitch could severely affect overall
production and revenue. Second, extraction costs at these companies tend to
be above average. High costs are very undesirable in a price-taker's market
like gold because it means producers will be among the first to incur losses
if commodity prices take a dive. Indeed, even with the price of gold at the
current high levels, three of these four companies we have singled out below
have posted losses so far this year. Finally, our less desirable companies
tend to have operations in politically unstable countries, adding
geopolitical risk.

Cambior CBJ Three of Cambior's four mines (one in Guyana and two in Canada)
are high-cost operations. Costs at the fourth mine--Rosebel in Suriname--are
not substantially below average. The company's extraction costs in 2004 were
$257 an ounce, compared with the industry average of about $250. Cambior is
also subject to a high level of operational risk due to its small number of
mines. For example, milling operations have been suspended at Rosebel this
week due to a leakage. Because Rosebel produces about half of the company's
gold, a stoppage here, even if temporary, will have a big adverse impact on
overall production and revenue. Finally, Cambior's debt--at 12% of total
capital--is relatively high for a gold producer. Paying down debt during
flush times, like now, is considered a best practice in the mining industry.
However, Cambior has been only marginally profitable so far in 2005, and the
company has not brought down its debt level during the year. When gold
prices fall and profits turn to losses, servicing this debt might become a
burden the firm cannot bear, given its high operation costs.

Bema Gold BGO Bema operates two mines--one in Russia and one in South
Africa. While the economics of the Russian mine are respectable with
slightly below-average cash costs, the South African operation has been a
drag on profits and cash flow since Bema started mining there in 2003.
However, instead of improving profitability at its existing operations, the
company is intent on raising production from about 290,000 ounces projected
for 2005 to 1 million ounces. Given the lack of cash flow from operations,
Bema has been forced to raise additional equity and debt capital to fund its
exploration and expansion projects. As a result, Bema has one of the weakest
balance sheets in the gold mining industry. Negative free cash flow, a weak
balance sheet, and uncertain prospects make an investment in Bema little
more than a speculative bet on the company's future, in our opinion.

Hecla Mining HL Given all the risks at Hecla--a relatively small production
base in unattractive countries, future production not growing as much as
expected, commodity prices not cooperating, as well as more financing and
environmental charges--an investment in these shares remains highly
speculative.

DRDGold DROOY Mining gold in South Africa is a high-cost business that
started more than a century ago. As more gold is mined, mines get deeper and
costs generally rise. In addition, older technology and strong labor unions
in South Africa also contribute significantly to the high costs prevalent in
that country. Even by South African standards, DRDGold is saddled with
relatively high cost and older mines. While recent efforts at operational
improvements mean that DRDGold is less of a "cigar-butt investment" than
before, we do not think the company is out of the woods. Even with all the
improvements, we still expect the company's cash costs to be more than $300
per ounce, compared with the industry average of around $250 per ounce. For
DRDGold to consistently turn a profit, gold must trade at prices comfortably
above the firm's operating costs and relevant currency-exchange rates must
cooperate. As a commodity producer, DRDGold has little influence over either
of these factors because it is a price-taker in both the gold and the
foreign-exchange markets.

Should gold prices fall precipitously in the next year or two, something
that is not inconceivable, these companies will be among the first to
suffer.

Re: Gold, an interesting take...

Tch, tch, tch... . Guys posting with a name like Parvathy on
Morningstar's special-issues staff should be immediately suspect.
Krishnan is attempting to cause an international bias for gold,
obviously*, for the betterment of his fellow Indian countrymen, who are
known relishers of gold. Gold in India is imputed to possess
characteristics of an aphrodisiac since, at least, early ancient
antiquity**. Which is reason why Indian men horde gold, in order to
wield an associative quality of enhancement, to whom, alpha Indian
feminine types are most responsive, in designating accedence for a
suitable bearer of such invigorating charms, while significantly mewing
demurely evovative utturances. So it has come to be - that gold has
evolved to be ceremoniously subsumed, truth be known, during the
Imminent Indian Rites of Dowries, in accordance with national
convivalities spawned over The Seventh Moon of Conjugal Trystom.

*


**
'In 1001 ways does a woman toy with a boy.' -Upanishads

happy-guy wrote:
> That said, here is one person's take on gold....
>
> By the way, I feel the same way about most jewelry, and especially diamonds,
> whose TV 'guilt inducing' ads I find abhorring and distasteful.

Diamonds are much the same, widely cultivated within Western rites,
where there had existed none such prior, through a sole concerted
effort and direct marketing effect* of John D. Rockefeller.
*
'Who needs Sun City.' -Nancy Reagan.

Re: Gold, an interesting take...

"happy-guy" <> wrote in message
news:TKjhf.13899$
> Gold can give you euphoria & depression (like receiving a gift of it, or
> watching it walk out the door when you get divorced).... I do not now,
> nor ever plan to, own gold. I look at investing in gold as a crap shoot,
> and it is not my style. That said, here is one person's take on gold....
>
> By the way, I feel the same way about most jewelry, and especially
> diamonds, whose TV 'guilt inducing' ads I find abhorring and distasteful.
>
> Happy Guy

{snip}

I've been in and out of Invesco's (now AIM's) Gold & Precious Metals fund
over the past decade, and have done quite well:


This and many other gold funds invest in gold mining stocks, which not only
diversify across companies, but also currencies, as gold mining stocks often
trade in Canada, Austrailia, and South Africa.

Besides a good hedge against a declining dollar and inflation, gold has some
industrial purposes...plus is a popular jewelry purchase in China and India,
the 2 largest emerging markets.

Gold could easily add another 20% over the next 2 years, to $600 per ounce;
many gold funds will increase, too.

David Hannes
Fitchburg, WI

Re: Gold, an interesting take...

I get queasy at 30% losses - can't weather being exposed to the
elements well at all.



Dave Hannes wrote:
> I've been in and out of Invesco's (now AIM's) Gold & Precious Metals fund
> over the past decade, and have done quite well:
>
>
> Besides a good hedge against a declining dollar and inflation,
>
> Gold could easily add another 20% over the next 2 years, to $600 per ounce;
> many gold funds will increase, too.

Re: Gold, an interesting take...

happy-guy wrote:

> Gold can give you euphoria & depression (like receiving a gift of it, or
> watching it walk out the door when you get divorced).... I do not now, nor
> ever plan to, own gold. I look at investing in gold as a crap shoot, and it
> is not my style. That said, here is one person's take on gold....
>
> By the way, I feel the same way about most jewelry, and especially diamonds,
> whose TV 'guilt inducing' ads I find abhorring and distasteful.
>
> Happy Guy
>
> -----------------------------
>
> Four Gold Stocks to Avoid
>
> We do not dig these four producers of the yellow metal.
>
> by Parvathy Krishnan, CFA | 11-23-05 | 06:00 AM | E-mail Article | Print
> Article | Permissions/Reprints
>
> Gold prices have been skyrocketing recently, continuing the secular bull
> market in gold that started in 2001. After starting the year at $420 per
> ounce, gold prices have rallied to within shouting distance of $500 per
> ounce, levels not seen since the late 1980s. Not surprisingly, gold bugs
> feel vindicated, and the metal and its producers have been getting a lot of
> attention from the financial press and potential investors.
>
> So, is this a time to invest in gold, gold stocks, gold mutual funds, or
> gold exchange-traded funds? My colleague Michele Gambera has some
> interesting thoughts on this subject. As value-oriented investors, we at
> Morningstar believe in buying assets at a discount to their intrinsic value
> and waiting patiently for prices to recover. The metal has been justifiably
> touted, though, as an inflation hedge and portfolio diversifier. However,
> gold stocks, while highly correlated with gold, carry additional baggage
> that may offset some of their diversification and inflation-hedge benefits.
> As I've written before, gold miners are plagued with rising costs, lack of
> control over the price of their product, and few product differentiation
> opportunities. It follows that most gold producers have no competitive
> advantage, or economic moat, and their returns on invested capital trail
> their cost of capital.
>
> Historically high prices, no moat, poor returns on invested capital--these
> are all reasons we find the sector in general quite unattractive at this
> time. It is not surprising that most gold stocks today get our 1-star
> rating.

During the disastrous bear market of 2000-2002, 95% of financial pundits
and financial advisers remained bullish. You never hear them suggesting
to sell anything. You rarely hear them suggesting that stagflation
might be picking up.

It's fair to criticize gold as an inflation hedge. But it's unfair to
not suggest an alternative, but rather to pretend that the problem will
go away. To claim, as this article does, that gold prices will "decline
precipitously" in the near future is to claim that the U.S. dollar will
appreciate sharply. Why the hell would that happen?



--
Steven D. Litvintchouk
Email:

Remove the NOSPAM before replying to me.

Re: Gold, an interesting take...

Howdy folks,

Feh! I'm long and staying long. I don't particularly like his 4 bad
stocks, but I see us being in a major long term bull market in gold and
the other precious metals. Right now it looks like we're about to break
$500 and this is a huge psych level of resistance. Story I posted on
another thread had us going to ~550 by May. I've felt all along we'd
hit $500 by year end. I'm carry TGLDX and UNWPX for funds with miners
in gold, silver, palladium, and copper as follows: GG, GFI, AUY, EGO,
CDE, PAAS MRB, WTZ, PAL and FCX. I also hold Permanent Port PRPFX in
two accounts.

I guess you could say I'm bullish. ;-) Note, however, that I'm
waaaaayyyy overweight silver and have the other metals covered. This is
because I see silver as having a greater profit potential than gold. In
the late 70's, gold doubled to $850 or so, but silver went to ~$50.

best,

rono


happy-guy wrote:

> Gold can give you euphoria & depression (like receiving a gift of it, or
> watching it walk out the door when you get divorced).... I do not now, nor
> ever plan to, own gold. I look at investing in gold as a crap shoot, and it
> is not my style. That said, here is one person's take on gold....
>
> By the way, I feel the same way about most jewelry, and especially diamonds,
> whose TV 'guilt inducing' ads I find abhorring and distasteful.
>
> Happy Guy
>
> -----------------------------
>
> Four Gold Stocks to Avoid
>
> We do not dig these four producers of the yellow metal.
>
> by Parvathy Krishnan, CFA | 11-23-05 | 06:00 AM | E-mail Article | Print
> Article | Permissions/Reprints
>
> Gold prices have been skyrocketing recently, continuing the secular bull
> market in gold that started in 2001. After starting the year at $420 per
> ounce, gold prices have rallied to within shouting distance of $500 per
> ounce, levels not seen since the late 1980s. Not surprisingly, gold bugs
> feel vindicated, and the metal and its producers have been getting a lot of
> attention from the financial press and potential investors.
>
> So, is this a time to invest in gold, gold stocks, gold mutual funds, or
> gold exchange-traded funds? My colleague Michele Gambera has some
> interesting thoughts on this subject. As value-oriented investors, we at
> Morningstar believe in buying assets at a discount to their intrinsic value
> and waiting patiently for prices to recover. The metal has been justifiably
> touted, though, as an inflation hedge and portfolio diversifier. However,
> gold stocks, while highly correlated with gold, carry additional baggage
> that may offset some of their diversification and inflation-hedge benefits.
> As I've written before, gold miners are plagued with rising costs, lack of
> control over the price of their product, and few product differentiation
> opportunities. It follows that most gold producers have no competitive
> advantage, or economic moat, and their returns on invested capital trail
> their cost of capital.
>
> Historically high prices, no moat, poor returns on invested capital--these
> are all reasons we find the sector in general quite unattractive at this
> time. It is not surprising that most gold stocks today get our 1-star
> rating.
>
> Having said that, there are a few gold producers of whom we are particularly
> wary because they expose the investor to additional risks for one of several
> reasons. First, these stocks tend to have higher-than-average operational
> risk. This is a characteristic of small, undiversified producers whose
> output relies on a small group of mines or even a single mine. Because this
> is the case, a small operational glitch could severely affect overall
> production and revenue. Second, extraction costs at these companies tend to
> be above average. High costs are very undesirable in a price-taker's market
> like gold because it means producers will be among the first to incur losses
> if commodity prices take a dive. Indeed, even with the price of gold at the
> current high levels, three of these four companies we have singled out below
> have posted losses so far this year. Finally, our less desirable companies
> tend to have operations in politically unstable countries, adding
> geopolitical risk.
>
> Cambior CBJ Three of Cambior's four mines (one in Guyana and two in Canada)
> are high-cost operations. Costs at the fourth mine--Rosebel in Suriname--are
> not substantially below average. The company's extraction costs in 2004 were
> $257 an ounce, compared with the industry average of about $250. Cambior is
> also subject to a high level of operational risk due to its small number of
> mines. For example, milling operations have been suspended at Rosebel this
> week due to a leakage. Because Rosebel produces about half of the company's
> gold, a stoppage here, even if temporary, will have a big adverse impact on
> overall production and revenue. Finally, Cambior's debt--at 12% of total
> capital--is relatively high for a gold producer. Paying down debt during
> flush times, like now, is considered a best practice in the mining industry.
> However, Cambior has been only marginally profitable so far in 2005, and the
> company has not brought down its debt level during the year. When gold
> prices fall and profits turn to losses, servicing this debt might become a
> burden the firm cannot bear, given its high operation costs.
>
> Bema Gold BGO Bema operates two mines--one in Russia and one in South
> Africa. While the economics of the Russian mine are respectable with
> slightly below-average cash costs, the South African operation has been a
> drag on profits and cash flow since Bema started mining there in 2003.
> However, instead of improving profitability at its existing operations, the
> company is intent on raising production from about 290,000 ounces projected
> for 2005 to 1 million ounces. Given the lack of cash flow from operations,
> Bema has been forced to raise additional equity and debt capital to fund its
> exploration and expansion projects. As a result, Bema has one of the weakest
> balance sheets in the gold mining industry. Negative free cash flow, a weak
> balance sheet, and uncertain prospects make an investment in Bema little
> more than a speculative bet on the company's future, in our opinion.
>
> Hecla Mining HL Given all the risks at Hecla--a relatively small production
> base in unattractive countries, future production not growing as much as
> expected, commodity prices not cooperating, as well as more financing and
> environmental charges--an investment in these shares remains highly
> speculative.
>
> DRDGold DROOY Mining gold in South Africa is a high-cost business that
> started more than a century ago. As more gold is mined, mines get deeper and
> costs generally rise. In addition, older technology and strong labor unions
> in South Africa also contribute significantly to the high costs prevalent in
> that country. Even by South African standards, DRDGold is saddled with
> relatively high cost and older mines. While recent efforts at operational
> improvements mean that DRDGold is less of a "cigar-butt investment" than
> before, we do not think the company is out of the woods. Even with all the
> improvements, we still expect the company's cash costs to be more than $300
> per ounce, compared with the industry average of around $250 per ounce. For
> DRDGold to consistently turn a profit, gold must trade at prices comfortably
> above the firm's operating costs and relevant currency-exchange rates must
> cooperate. As a commodity producer, DRDGold has little influence over either
> of these factors because it is a price-taker in both the gold and the
> foreign-exchange markets.
>
> Should gold prices fall precipitously in the next year or two, something
> that is not inconceivable, these companies will be among the first to
> suffer.
>
>
>
>
>
>

Re: Gold, an interesting take...

Gold did terrible 1985-2000. Now it is seeing it's day. I like a gold
mutual fund as "insurance". If major calamaty stricks, it will be the
last haven and probably actually will go up. Gold kept close to home is
even better, but hard to store and account for.... Holding gold allows
me to take more risk with my portfolio. Fewer bonds. I'm about out of
bonds now, as interest rates rise....

Otherwise it's just an asset play, like real estate or oil. Gold stocks
can make money even if the price of gold goes down, BTW.

I'm not selling, at least not much. I might rebalance.

Re: Gold, an interesting take...

I was tempted to take a day at a time for the retail season focus over
much news, say PWJ, for lack of a better object to broadly compare the
immediate domestic front by gold. Thought the movement interesting, if
that's what "long" entails. And though I tried, I couldn't lump ego,
mrb, fcx, prpfx, unwpx, and tgldx, alongside pwj for domestic
immediacy, given a good shop til you drop spree. It may looks nice at:



Or even after trying to implicate PWJ further below an immediacy of
either GG or auy, but perhaps closer to cde paas wtz pal:



That is, until it all fell apart when I started shifting back the
timeframes for immediacy into a shorter momentum. Gold is holding its
weight well, no doubt.

Ronald V. Overton wrote:
> Feh! I'm long and staying long. I don't particularly like his 4 bad
> stocks, but I see us being in a major long term bull market in gold and
> the other precious metals. Right now it looks like we're about to break
> $500 and this is a huge psych level of resistance. Story I posted on
> another thread had us going to ~550 by May. I've felt all along we'd
> hit $500 by year end. I'm carry TGLDX and UNWPX for funds with miners
> in gold, silver, palladium, and copper as follows: GG, GFI, AUY, EGO,
> CDE, PAAS MRB, WTZ, PAL and FCX. I also hold Permanent Port PRPFX in
> two accounts.
>
> I guess you could say I'm bullish. ;-) Note, however, that I'm
> waaaaayyyy overweight silver and have the other metals covered. This is
> because I see silver as having a greater profit potential than gold. In
> the late 70's, gold doubled to $850 or so, but silver went to ~$50.

Re: Gold, an interesting take...

If a calamity strikes, I'd rather be in a bear fund.... or own Kruggerands.

Arne (Laissez Les Bon Temps Roulez)


----- Original Message -----
From: "Doug" <>
Newsgroups: misc.invest.mutual-funds
Sent: Thursday, November 24, 2005 10:58 PM
Subject: Re: Gold, an interesting take...


> Gold did terrible 1985-2000. Now it is seeing it's day. I like a gold
> mutual fund as "insurance". If major calamaty stricks, it will be the
> last haven and probably actually will go up. Gold kept close to home is
> even better, but hard to store and account for.... Holding gold allows
> me to take more risk with my portfolio. Fewer bonds. I'm about out of
> bonds now, as interest rates rise....
>
> Otherwise it's just an asset play, like real estate or oil. Gold stocks
> can make money even if the price of gold goes down, BTW.
>
> I'm not selling, at least not much. I might rebalance.
>

--

Re: Gold, an interesting take...

Hi Doug,

I concur, although an alternative fund to a gold fund would be Permanent
Portfolio PRPFX - holds gold, silver, foreign currencies, etc. As for
holding bullion, it's actually easier than one might think. American
Eagle coins are available in Brilliant Uncirculated (don't buy the proof
for bullion purposes, they're only for collectors) in various sizes. In
gold and platinum, they come in 1 oz, 1/2 oz, 1/4 oz and 1/10 oz. IN
silver they only come in 1 oz. At $496 spot for gold, a 1 oz eagle
would probably cost $520 or so a piece and Silver Eagles a little under
$10. This means that 10 gold eagles would cost you ~$5K or so and would
equal a stack about 3" tall and the size of a quarter. I'd bet you
could find a place to stash that around your house.

BTW, the best prices can be found in either Coin World or Numismatic
News which are both weekly newspapers found at your local book store.
Never EVER buy a coin off of a tv shopping channel. They're overpriced
by anywhere from 33-100% over retail and that means you'll probably have
to own for several lifetimes to recover your investment.

best,

rono


Doug wrote:
> Gold did terrible 1985-2000. Now it is seeing it's day. I like a gold
> mutual fund as "insurance". If major calamaty stricks, it will be the
> last haven and probably actually will go up. Gold kept close to home is
> even better, but hard to store and account for.... Holding gold allows
> me to take more risk with my portfolio. Fewer bonds. I'm about out of
> bonds now, as interest rates rise....
>
> Otherwise it's just an asset play, like real estate or oil. Gold stocks
> can make money even if the price of gold goes down, BTW.
>
> I'm not selling, at least not much. I might rebalance.
>

Re: Gold, an interesting take...

Gold did do terrible in that timeframe but it's cyclical in it's
performance just like stocks are.

Look at some charts on bull & bear markets between stocks &
commodities and you'll see some very obvious trends (one is up
when the other is down).

I own Gold & Silver and will hold onto it for probably a few more
years. So far it's beating the S&P 500's performance.

Commodoties on a whole since (could be off a year or two
here) 1998 have outperformed stocks & real estate. We're in
a bull market for commodities.

-Mike

Doug <> wrote:
> Gold did terrible 1985-2000. Now it is seeing it's day. I like a gold
> mutual fund as "insurance". If major calamaty stricks, it will be the
> last haven and probably actually will go up. Gold kept close to home is
> even better, but hard to store and account for.... Holding gold allows
> me to take more risk with my portfolio. Fewer bonds. I'm about out of
> bonds now, as interest rates rise....
>
> Otherwise it's just an asset play, like real estate or oil. Gold stocks
> can make money even if the price of gold goes down, BTW.
>
> I'm not selling, at least not much. I might rebalance.
>

Re: Gold, an interesting take...

Ronald V. Overton wrote:
> Howdy folks,
>
> Feh! I'm long and staying long. I don't particularly like his 4 bad
> stocks, but I see us being in a major long term bull market in gold and
> the other precious metals. Right now it looks like we're about to break
> $500 and this is a huge psych level of resistance. Story I posted on
> another thread had us going to ~550 by May. I've felt all along we'd
> hit $500 by year end. I'm carry TGLDX and UNWPX for funds with miners
> in gold, silver, palladium, and copper as follows: GG, GFI, AUY, EGO,
> CDE, PAAS MRB, WTZ, PAL and FCX. I also hold Permanent Port PRPFX in
> two accounts.
>
> I guess you could say I'm bullish. ;-) Note, however, that I'm
> waaaaayyyy overweight silver and have the other metals covered. This is
> because I see silver as having a greater profit potential than gold. In
> the late 70's, gold doubled to $850 or so, but silver went to ~$50.

But that was the period of Bunker Hunt trying to dominate the silver
market, and the institutional authorities striking back.

AFAIK the industrial uses for silver are falling: it is I think
(almost) the case that silver halide film production is in decline (due
to the rise of digital photography). At the very least, it is barely
growing.

So you have a metal which is only 'valuable' because people invest a
value in it. And where much of the world's supply is sitting in vaults
or silverware, where it can be converted back into bullion.

Now empirically (if not theoretically) there is a case for gold as a
diversifying asset-- long term historical record of anti-correlation
with the US Dollar. And there is a supply-demand case (the South
African gold production continues to fall). But silver? I've yet to
see anyone make a strong case (other than 'if gold goes up, silver will
go up').

If your scenarios are global apocalypse, meltdown of the financial
system, etc. then perhaps. But if not, a diversified commodities fund
is a hedge against the US dollar collapse scenario. Against deflation,
you probably want a nice AA rated European bond.

Re: Gold, an interesting take...

Whilst I agree it is unlikely, the US dollar could appreciate because:

- inflation becomes a problem and the Fed jams on the brakes-- short
term currency movements are driven by interest rate differentials

- the Euro breaks up: not, now an impossible scenario-- Italy in
particular is busting at the seams, trying to hold on to it

- another Asian crisis in some form eg Japan slips back into deflation/
depression, plus some kind of political crisis-- perhaps arising from
debt levels in Thailand, government malfeasance in Indonesia, South
Korean consumer debt and conglomerate scandals, etc. Or simply
something we can't see emerging in China (widespread political unrest,
environmental disaster etc.).

A war between India and Pakistan would certainly be bullish for the
dollar ;-).

Re: Gold, an interesting take...

darkness39 <> wrote:
> Whilst I agree it is unlikely, the US dollar could appreciate because:
> - inflation becomes a problem and the Fed jams on the brakes-- short
> term currency movements are driven by interest rate differentials

But inflation implies dollar weakness, right? Too much printing and
too many dollars chasing after goods drives up their prices.

> - another Asian crisis in some form eg Japan slips back into deflation/
> depression, plus some kind of political crisis-- perhaps arising from
> debt levels in Thailand, government malfeasance in Indonesia, South

Or China, which many think is slipping into deflation.

> Korean consumer debt and conglomerate scandals, etc. Or simply
> something we can't see emerging in China (widespread political unrest,
> environmental disaster etc.).
>
> A war between India and Pakistan would certainly be bullish for the
> dollar ;-).

But unlikely given the progress their making.

I know the dollar has rallied recently but if you keep your emotions in check
and look at the underlying facts it's gonna have to go down.

Re: Gold, an interesting take...

darkness39 <> wrote:
> So you have a metal which is only 'valuable' because people invest a
> value in it. And where much of the world's supply is sitting in vaults
> or silverware, where it can be converted back into bullion.

These are good points. I don't know enough about silver to really invest
in it.


> Now empirically (if not theoretically) there is a case for gold as a
> diversifying asset-- long term historical record of anti-correlation
> with the US Dollar. And there is a supply-demand case (the South
> African gold production continues to fall). But silver? I've yet to
> see anyone make a strong case (other than 'if gold goes up, silver will
> go up').

But silver does even better in those scenarios. Silver rose exponentially
in the 70's, much more than gold (given their starting points). If you
had money in silver it would have done much better.

> If your scenarios are global apocalypse, meltdown of the financial
> system, etc. then perhaps. But if not, a diversified commodities fund
> is a hedge against the US dollar collapse scenario. Against deflation,
> you probably want a nice AA rated European bond.

I agree. Buy Canadian strips, Euro bonds etc...



-Mike

Re: Gold, an interesting take...

Mike S wrote:
> darkness39 <> wrote:
> > Whilst I agree it is unlikely, the US dollar could appreciate because:
> > - inflation becomes a problem and the Fed jams on the brakes-- short
> > term currency movements are driven by interest rate differentials
>
> But inflation implies dollar weakness, right? Too much printing and
> too many dollars chasing after goods drives up their prices.

If the Fed thinks inflation is rising, it will raise interest rates by
enough to raise real rates, not just nominal ones. At which point, the
dollar becomes a relatively attractive haven for international currency
investors/ traders. Relative to Japan and Europe which are stuck in
low interest rate doldrums.

>
> > - another Asian crisis in some form eg Japan slips back into deflation/
> > depression, plus some kind of political crisis-- perhaps arising from
> > debt levels in Thailand, government malfeasance in Indonesia, South
>
> Or China, which many think is slipping into deflation.
>
> > Korean consumer debt and conglomerate scandals, etc. Or simply
> > something we can't see emerging in China (widespread political unrest,
> > environmental disaster etc.).
> >
> > A war between India and Pakistan would certainly be bullish for the
> > dollar ;-).
>
> But unlikely given the progress their making.

That is actually my big scenario for the next major war. There are too
many very sensitive variables at stake: Musharaff's precarious hold on
power, the fact that Indian nationalists are momentarily in abbeyance
but the attitudes persist, the capacity of terrorists to stage new
outrages. Pakistan is a place where people build statues of nuclear
missiles on traffic roundabouts: the chauvinism in both countries is
tangible. And they don't have a 'Hot Line'.

If the Kashmiri terrorists had managed to attack the Indian Parliament
when it was sitting, and kill a group of Parliamentarians rather than
the gardener, India would have had to strike back (imagine if a group
of Afghans killed some US congressmen in the Chamber). That attack on
Pakistan would have been met with an armed response, and so on in a
downward spiral.

>
> I know the dollar has rallied recently but if you keep your emotions in check
> and look at the underlying facts it's gonna have to go down.

Other way. I am this massive dollar bear *but* that has become
conventional wisdom, and in currencies, CW tends to be wrong.

The dollar is close to neutral on a purchasing power basis. What is
wrong is the size of the current account deficit. But if we take a
portfolio view of that (that people all over the world are happy to
hold dollars) rather than a trade view (that the US consumes too much
domestically and exports too little) that may be sustainable.

My own scenario is more the SE Asian or Argentine Crisis. The US needs
to devalue by 40% to increase its exports and decrease its imports to
bring the current account deficit down to a sensible 3%. Domestic
industries like housebuilding go into a sharp recession, whereas traded
goods industries (like Boeing or Microsoft) suddenly do well selling
overseas. But it takes a *long* time to shift resources from domestic
consumption to overseas consumption: this is a fancy way of saying
businesses go broke and people lose their jobs. This is a crisis if it
happens too quickly, if it happens gently the US can adjust.

Another way the current account imbalance might be met, and would be
met, in a crisis is by a rapid deflation of domestic demand/ increase
in domestic savings (Current Account Balance = mathematically the
Savings of a Country minus its Investments ie S-I). This could be
achieved by a very deep domestic recession. Which is more or less what
Argentina did.

The Fed would play the same role: inflation rises, or it fears it will
rise because of pressure on the currency, so it raises interest rates,
and the US housing market goes down and the country falls into
recession.

The decision to massively increase the deficit in the early 00s has
left the US with few viable policy options: domestic consumption has
stayed strong (so far) and government consumption has grown as fast as
any time since Lyndon Johnson (the fastest of any President since LBJ).
The next President will be faced with the unpalatable task of raising
taxes and/ or reducing government spending to close the gap. This is
independent of his political or ideological stripe.

If there is a currency crisis, this will be forced on him. If there is
a managed depreciation of the currency, it can be fudged (for a while).

But what I have outlined above is (again) CW. And since market prices
are set by CW, there is always the chance that the market will do what
is not priced in (ie value the dollar up, not down).

Re: Gold, an interesting take...

darkness39 <> wrote:

> If the Fed thinks inflation is rising, it will raise interest rates by
> enough to raise real rates, not just nominal ones. At which point, the
> dollar becomes a relatively attractive haven for international currency
> investors/ traders. Relative to Japan and Europe which are stuck in
> low interest rate doldrums.

So we have another short term rally for the dollar :) My point is that
at some point you have to bring the account balance into equilibrium.
Check out some of the papers on rgemonitor.com about it.

No country has allowed their account deficit to become such a large
percentage of GDP (i think we're at 7%) and not had a hard landing
from it.

Your scenario would make the dollar decline be even more problematic.

But like I said - I'm talking about the long term here. It's going to
go down in value. I don't know and haven't thought about hwo it will
be for the next 2-3yrs.

> If the Kashmiri terrorists had managed to attack the Indian Parliament
> when it was sitting, and kill a group of Parliamentarians rather than
> the gardener, India would have had to strike back (imagine if a group
> of Afghans killed some US congressmen in the Chamber). That attack on
> Pakistan would have been met with an armed response, and so on in a
> downward spiral.

Ok, I really don't know much about the relationship between the two.
I just seem to recall some articles in the Financial Times saying
things were much improved.

> Other way. I am this massive dollar bear *but* that has become
> conventional wisdom, and in currencies, CW tends to be wrong.

Yeah, I agree with you there.

I'm bearish on the stock market as a whole but when I look at the
charts it really seems like we could be in for a prolonged bull
market.

Maybe the worst has past. I don't know. I surprised myself by
buying back into the S&P a few weeks ago. I think some fundamentals
in our economy have improved since the crash of 2000 but I'm still
pretty confident we'll see new lows late 2006, early 2007.

The rest of your post is priceless. I couldn't agree more so I'll
leave it here for everyone to re-read and absorb:

> My own scenario is more the SE Asian or Argentine Crisis. The US needs
> to devalue by 40% to increase its exports and decrease its imports to
> bring the current account deficit down to a sensible 3%. Domestic
> industries like housebuilding go into a sharp recession, whereas traded
> goods industries (like Boeing or Microsoft) suddenly do well selling
> overseas. But it takes a *long* time to shift resources from domestic
> consumption to overseas consumption: this is a fancy way of saying
> businesses go broke and people lose their jobs. This is a crisis if it
> happens too quickly, if it happens gently the US can adjust.
> Another way the current account imbalance might be met, and would be
> met, in a crisis is by a rapid deflation of domestic demand/ increase
> in domestic savings (Current Account Balance = mathematically the
> Savings of a Country minus its Investments ie S-I). This could be
> achieved by a very deep domestic recession. Which is more or less what
> Argentina did.
> The Fed would play the same role: inflation rises, or it fears it will
> rise because of pressure on the currency, so it raises interest rates,
> and the US housing market goes down and the country falls into
> recession.
> The decision to massively increase the deficit in the early 00s has
> left the US with few viable policy options: domestic consumption has
> stayed strong (so far) and government consumption has grown as fast as
> any time since Lyndon Johnson (the fastest of any President since LBJ).
> The next President will be faced with the unpalatable task of raising
> taxes and/ or reducing government spending to close the gap. This is
> independent of his political or ideological stripe.
> If there is a currency crisis, this will be forced on him. If there is
> a managed depreciation of the currency, it can be fudged (for a while).
> But what I have outlined above is (again) CW. And since market prices
> are set by CW, there is always the chance that the market will do what
> is not priced in (ie value the dollar up, not down).