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November 11, 1998

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Subject: Re: Beta
Author: solasis


Look, my take on it this. gold is a commodity, with SPECIAL characteristics. i think a good analogy is zero coupon bonds. zero's are a specific type of bond that has certain characteristics, ie, they don't pay interest, so price moves in zeros are highly correlated with the overall bond market but the moves tend to lead the broad curve and to be more highly exaggerated. gold is similar in the commodities realm. contrary to what the survivalists say, it is not money, per se, but it does have this special quasi-monetary role because of its rarity, its metallurgical properties, and simply tradition (which is nothing to scoff at, as there is a very well defined market for it and hence it has a great deal of liquidity for people who want to buy/sell it). it is much more durable and liquid than say, hog bellies, in the int'l marketplace.

Afterall, any commodity can be openly bartered and traded for another commodity or for real estate or for money, gold is not uniquely endowed with value. for example, i could take a crate of bananas and trade them to a local restauranteur for apples, or money, or a few pancakes just as easily as a $5 gold eagle.

Gold IS different than copper or moly or aluminum because [1] it is rarer, and [2] the demand side of the equation is primarily due to hoarding rather than industrial fabrication. again, these are special characteristics that gold has, so its price does move differently than the base metals. you have to keep these in mind when looking at the metal as an "investment" but in the end, imho, it is just a unique niche within the metals sector which is itself a niche within the broad commodities market. which is why it amazes me that people interested in it don't spend more time charting/investigating the BLS raw materials index or the CRB index.

What i'm saying is that yes, gold and wool and oil and wheat could be in a bull phase while copper is mired in a bear phase. sure, that COULD happen. there is nothing necessarily linking copper and gold and wheat and pulp paper. but it is unlikely that moly, aluminum, nickel, and tin could all be in a bull-phase while copper is in a bear phase. that would be an unlikely thing to happen.

Back to gold, if you take the $35, early 1933 rooseveltian peg, and adjust the price for CPI inflation, you get $264.82 in 1998 dollars using numbers from the Conference Board database that i have on my bookshelf. so yes, gold has maintained its value vis a vis consumer product inflation over the years. but the real value is in the common stocks, and occasionally the senior debt, of the better mining co's . that way you get the 3% inflation return, you also get a cut of the annual profits in the form of a dividend to the tune of 2-3%/year, and if you can invest in a company that can grow its production 1-3%/year over time, and you add up the pieces, guess what? you get 75 to 150 basis points better long term than 20 year bonds. (i guess the market isn't so inefficient in the long term afterall). but in no way can you torture the numbers of a group of common stocks in the major mining producers to get an above S&P 500 average return long term. sorry, you can make the big money in the exploration stage and development co's (you can also lose big in these too) but torture the numbers all you want you're not going to get above average LTBH results with these mining co's. so like the CRB, this is an area for trading, not LTBH.

OTOH, as long as the world economy keeps expanding, there is a case to be made that the demand for gold will continue to rise proportionally and people will pay guys like me to figure out how to get the stuff out of the ground, although fwiw, as Newmont pointed out in their last quarterly press conference, there isn't a pressing need to risk capital life and limb to get the stuff out of the ground and sell it to you all at 290. but, as i've said before, the street (and many players here) have a very short fuse while the unfortunate reality is that busts in mining, can be very PROLONGED and DEEP. way beyond the typical trading desk timescale. i personally know several people who bought two story, 5000 square feet+ well built masonary houses in Butte in 83 and 84 ON THEIR CREDIT CARDS. and let me tell ya, cash advance limits back then were not nearly as high as they are today, capeche?


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