The Financial Times Discovers Gold Stocks

Frederick Sheehan is the co-author of Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.

His new book, Panderer for Power: The True Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, was published by McGraw-Hill in November 2009. He was Director of Asset Allocation Services at John Hancock Financial Services in Boston. In this capacity, he set investment policy and asset allocation for institutional pension plans.

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Having read “Gold and Silver Stocks”, the Financial Times decided to follow the trend with “Investors Bet Miners Will Follow Gold’s Gain.” (September 20, 2011) The article discusses efforts of gold miners to distinguish themselves from Gold ETFs: “[G]old miners are beginning to respond to their share-price underperformance. The most popular response is to raise dividends, offering investors one thing an ETF cannot: a yield.” (See “Gold and Silver Stocks” for the same discussion.) The Financial Times continues, discussing two companies that are increasing dividend payouts, Newmont Mining and Gold Resource Corporation.

These are the same two miners discussed in “Gold and Silver Stocks.” The Financial Times relays Newmont Mining’s Monday announcement (September 19, 2011) that it will pay out an additional 10 cent dividend for every $100 above $2,000 an ounce. The FT discussed a novel dividend payout being considered by Gold Resource Corporation. The miner “might start paying dividends in physical gold.”

This is fine but the FT story may cause confusion. The reason for owning gold is easily misunderstood. This ambiguity will continue to be the greatest problem for potential and current owners of precious metals. Gold will be bought and sold at the wrong times by many of the misinformed. (Note: what follows only fleetingly addresses an important consideration – prices and cash flow should rise.)

A lack of precision may lead to a misunderstanding just as a truth may stumble into a half-truth. A half-truth is often more dangerous than a lie.

Quoting from the FT: “Investors increasingly buy gold as a form of insurance against further economic turbulence. Mining companies – which can miss production targets, suffer strikes, accidents and higher taxes, or see their profits eroded by cost inflation – appear to offer less protection against this scenario.”

The sequence is correct. It runs from (first sentence) gold to (second sentence) gold stocks. Gold stocks derive their price from gold, but they are stocks. The second sentence is a good synopsis of why the derivatives (gold stocks) have performed so poorly in comparison to the metal. Their attraction lies with the probability that these shortcomings have been excessively discounted.

The FT describes gold as being bought as a “form of insurance against further economic turbulence.” That is true but not the whole truth. One might interpret this to mean “I should own some gold as a hedge against further volatility [my stocks might go down 30%]. I don’t care about volatility because I read Stocks for the Long-Run, so I don’t need to buy gold”

Quoting from “Gold and Silver Stocks”: “The real story is that gold is money but only speaks up when the credibility of states and their currencies deteriorate.”

The great minds at the central banks, by manipulating every market under the sun, have lost control of the world’s financial system that, they apparently thought was a chalkboard theory. Official interference has failed. Last week, the great minds showered European banks with dollars, because some European banks are having great difficulty borrowing dollars. This massive flood has not regenerated trust. Siemens disclosed that it withdrew more than 500 million euros from French commercial banks and deposited them at the European Central Bank. (The ECB, itself, is extraordinarily leveraged. This should not simply be dismissed as a “boys will be boys” curiosity.)

From Reuters: 9/19/11:LARGE CHINESE BANK STOPS TRADING WITH SEVERAL EUROPEAN BANKS DUE TO FEARS REGARDING EUROPEAN DEBT CRISIS – Sources say the unidentified Chinese bank has stopped all swaps and foreign-exchange forward trading with Societe General (GLE.FP), Credit Agricole (ACA.FP), and BNP Paribas (BNP.FP). The bank has also stopped trading with UBS (UBSN.VX) due to worries about UBS’s loss from the new rogue trading affair. (Remember the hastily planted rumor, just last week, and for the 63^rd time, that China was buying Europe’s debt?)

We are witnessing the insolvency of the fractional-reserve banking system, at the highest level. (At the lowest level, local banks and small insurance companies should be buying precious metals. Tell the regulators to scram.) It would be a mistake for the average investor to buy and sell gold and gold shares depending on one’s view of market volatility over the next month or year. Gold, silver and other inanimate objects are assets without liabilities. Unlike dollars, these…things, do not bear the government’s Lewis Carroll promise: “This note is legal tender for all debts, public and private.” The dollar’s value is a derivative of the loony professors who run the country. Choose your weapon.