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Price, Time And Precious Metals

Price, Time And Precious Metals
25 فبراير, 2011 09:54

About a century after the theory of relativity was introduced, people understand that space-time is considered by physicists as one unified set of dimensions. As T. S. Eliot wrote, the moment of the rose (brief) and the moment of the yew-tree (a very long-lived plant) are of equal duration. That’s a space-time concept.

Similarly, in investments, whether in the field of financial asset allocation or in general business decision-making, the concept of price gains and the time frame to achieve those gains is of paramount importance. Price-time is an investment equivalent of space-time.

Consider, if you will, my single favorite (hated) investment theme, that which relates to the policy of the authorities to degrade the purchasing power of the U. S. dollar.

For the first time, my father reported to me yesterday after going out to shop, that he noticed prices have risen. I have asked him routinely for quite some time if he sees inflation, and he, a dedicated Wal-Mart shopper, has finally seen that the price increases predicted by Austrian economics have begun to leave the “core”.

The traditional route to wealth protection in an age of money-printing involves gold. In the modern industrial age, the price of oil tends to track that of gold, as does that of silver, but few people can store significant oil wealth by putting up a giant storage tank in their back yard; and what if they live in a condo?

As more and more people see that a determined central bank working in concert with a determined national government can attain nominal GDP growth without breaking a sweat (except when under hot TV lights), and see that gold is “acting well”, they face the price-time dilemma. That is: Am I too late? And/or: Is there much upside left?

Price, and time.

People look back at a decade ago, or even several years ago, and do not take the plunge, or they do it nervously, in baby steps, so they are protecting almost zero percentage of their wealth (why bother in that case?). They fear that if they buy now, they will be, more or less, the greater fool. Or perhaps the greatest fool, as I was when I bought stock many years ago in George Steinbrenner’s American Shipbuilding (ABG) at what proved to be, to the very eighth of a point, the absolute highest price for the stock for the rest of eternity. Eventually ABG went bust.

So if one if fortunate enough to have saved money and one sees that cash and cash equivalents are deliberately being trashed, is it to late to invest in gold?

Unfortunately, I believe not. If one goes back not to the bottom of gold’s two decade-long bear market, in which it lost nearly all its purchasing power when compared to gains in stocks and bonds, but instead goes halfway back, to 1990, gold’s performance is mediocre in comparison with that of stocks or bonds.

Furthermore, one can purchase stock in the world’s largest gold mining company at only about 13 times this year’s earnings, with a 1% dividend yield (and thus beat cash), and have a share in ownership of proven and probable gold reserves at about a 2/3 discount from last year’s gold price. (This gold in the ground has the advantage that is not likely to be confiscated, for those who worry about such things.)

Supporting the idea that there is no mania, exploration and junior mining stocks allow one to buy known or strongly suspected gold in the ground at very cheap prices. This is the polar opposite of the pricing of tech stocks in the late 1990s.

On the charts, and tied in with the fact that few investors even now have anything to do with precious metals in their investment portfolio, and also tied in with the fact that the largest financial asset that many people have (their primary residence) probably remains in a multi-year bear market, people tend to react not to the Austrian view of inflation (increase in money supply) but to the dictionary view of that term (price increases).

Here is one scenario.

The price of gold may finally be at some reasonable equilibrium with money supply, but the money supply keeps growing and the authorities appear to want that to continue, given massive projected Federal deficit spending. Thus gold may rise in nominal price at, say 7% per year.

However the pricing of gold stocks probably is based on a reversion of gold prices to a lower price. Thus there may be a better risk-reward in stocks of gold-related companies than in the metal itself.

A word about silver.

Silver is a more volatile asset than gold. It is tied into the industrial world as well as into the world of financial assets, at least in the minds of many of its owners. I own silver. For convenience, I think of silver prices as having the inherent volatility of gold stocks, and silver stocks as being Wild West sorts of assets.

In any case, given all the uncertainties, and allowing for the ever-present possibility that initiating an investment in precious metals today could be utterly as wrong both in price and time as I was when I purchased shares in ABG in the 1980s, my sense remains that the U. S. dollar remains in but not at the end of a long-term bear market both versus better-run currencies and via what I view as the ultimate currency, gold. My sense further is that just as people refused to buy into the NASDAQ bull market as it rose 100 times between 1974-5 and 1999-2000 because it always appeared to be too high, individual and institutional investors are only now beginning to actively, truly doubt the efficacy of the prevailing “Keynesian” policies of curing debt-based problems with more debt. I believe that they are buying the gold dips, thus joining the Austrians who saw the inflation beginning approximately on September 12, 2001, when Alan Greenspan panicked and went from easy money to easier, and “W” advised America to damn the plane crashers and go shopping. I believe that these independent thinker-investors, understanding the teachings of such geniuses as Ludwig von Mises, can be analogized in an investment sense to the people who bought into the tech revolution all through the long bull market, understanding how the structure of society would change with the personal computer, mobile communications, and the Internet.

The investment times are a-changing, and price-time is not in my view yet an impediment to precious metals investing from an intermediate- to long-term perspective. (Short term, I have no idea and little interest.)

To be “long” precious metals is to be part of the change. Change for the better. Change we truly can believe in.