February 16, 2012
By Kevin Michael Grace
Gold was down (at press time) $1.20 (-0.1%) for the week to $1,730.10, and silver was down $0.40 (-1.2%) to $33.52. According to our favourite wire service, gold remains dependent on the Euro, which isn’t looking too good “after European officials postponed a decision on a bailout package for Greece, which fuelled fears the heavily indebted nation could face a chaotic default.”
This space remains highly sceptical regarding this magical power attributed to the Euro. In any event, we should see a clarification shortly, as the Greek bailout is a busted flush. At best. At worst, it is Germany dealing from the bottom of the deck. According to a website called The Slog, “A written document giving firm dates and detailed actions for a planned Greek default has been in the possession of two top Wall Street bank currency trading bosses since the second week in January… The plan gives a firm date of March 23 for default to be announced after the close of business.”
Karl Denninger comments, “As I have repeatedly said, the problem is not, in the main, Greece. It is that Italy, Portugal, Ireland and perhaps others will demand the same thing when Greece defaults, especially if they ‘get away with it,’ and it is nearly certain (absent armed intervention) that they will. Be ready.”
If these countries default, Club Euro will be smaller and much more exclusive shortly. But the Euro isn’t the big news in gold this week. Warren Buffett is. The soi-disant Oracle of Omaha this week delivered to his shareholders (and Fortune) an encyclical on the subject. Buffett doesn’t like gold, for the same reason the Vicar of Rome doesn’t like contraception: it’s not “procreative.” To wit: “If you own one ounce of gold for an eternity, you will still own one ounce at its end.”
One could respond that that’s precisely the point. As the great Peter Blegvad sings,
Gold would be useless if it didn’t require such
Heartbreak to seek it, to find it and mine it
Things remain precious as long they’re rare
If gold could be found lying round everywhere
It’d be the lowliest of metals, too soft for serious use
Pretty, of course, and warm to the touch
But no longer alluring, when you’ve handled so much
Buffett believes goldbugs are scaredy-cats, and, “What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As ‘bandwagon’ investors join any party, they create their own truth—for a while… But bubbles blown large enough inevitably pop.”
Perhaps so, but “inevitably” can mean a long time. Gold traded at $37 an ounce in 1970, while the Dow Jones was at 839. Based on today’s closing prices, the Dow is worth 15.4 times as much, but gold is worth 46.8 times as much.
A rather nice rate of return, but what would Buffett have us invest in instead? His prefers “productive assets, whether businesses, farms or real estate.” Real estate? Is he having us on? In procreative terms, houses are more barren than gold, which doesn’t need constant and expensive maintenance to prevent it from literally falling apart. As for businesses, some are productive, and some are not. It would be hard to argue that the Bank of America (as currently constituted) is a productive asset, but, as Auguries readers will remember, that didn’t stop Buffett from a making a substantial investment (read: sweetheart deal) in that institution last year.
Few will remember that Buffet delivered a pretty much identical encyclical last year (when gold was at $1,440) and was treated with the same fawning reverence. Why, he’s so sagacious and just-plain-folks, sort of a Mayor Tommy Shanks of the financial world. Practically a saint, really—who just happens to be the richest man in the world. And to paraphrase The Simpsons, “No one who invests $5 billion in Goldman Sachs in 2008 could be an evil man.”
Buffett, like all good men, is a stalwart supporter of President Obama and has raised a great deal of money toward his re-election. And of course this had nothing do with Obama’s rejection of the Keystone Pipeline. That Buffett, through his ownership of Burlington Northern, stands to benefit greatly by this is the purest coincidence, a happy accident, if you will.
Buffett is, above all, a patriot, as proved by his November 16, 2010, letter to Uncle Sam (reprinted in the New York Times), wherein he remembers 2008, “the darkest of days,” when “Ben Bernanke, Hank Paulson, Tim Geithner and Sheila Bair grasped the gravity of the situation and acted with courage and dispatch.” Buffett confesses, “And though I never voted for George W Bush, I give him great credit for leading, even as Congress postured and squabbled.” How admirably bipartisan of him and unexpected, too, especially as President Obama’s policy of bailouts for the 1% is exactly the same as President Bush’s.
Ultimately, Buffett is the standard bearer for the mutant capitalism whose hegemony over the world economy is coming to an end, first in Europe, then everywhere else. He says gold is a bad investment, but he would say that, wouldn’t he?
Will gold equities remain bad investments? In the Financial Post, Peter Koven writes, “Half-a-dozen large-cap gold miners are set to announce record profits for 2011, but investors are far from excited about their prospects. Despite gold prices above $1,700 an ounce, miners are struggling with soaring costs, execution problems and country risks. As a result, their stock prices have underperformed gold bullion despite the massive cash flows they are generating.”
Further to this, the Globe and Mail‘s Simon Avery reports that, despite a record-breaking 4Q, “Investors continue to value Barrick TSX:ABX at a price-to-earnings multiple far less than telecom companies and only a hair above most major US banks.” Which suggests that the market is simply prejudiced.
And now to cases. At Seeking Alpha, Vatalyst presents “five silver stocks, all with stories for generally positive outlooks, which could be profitable in 2012 [and] present a great entry point for investors looking to get into the silver market”: First Majestic TSX:FR, Silvercorp TSX:SVM, Silver Standard TSX:SSO, Coeur d’Alene TSX:CDM and Endeavour TSX:EDR.
From the same source, Simit Patel is quite keen on gold miners Nevsun TSX:NSU (especially after its recent fall in price) and Sunridge TSX:SGC. Yes, they are both in Eritrea, but Patel considers this a benefit, not a cost: “The country has been sanctioned by the UN, and so there is fear that it is economically cut off from the world at large. But I believe these fears are unfounded; China is a major supporter of Eritrea, and so I think from a geopolitical perspective, Eritrea is part of the value network that China runs. As I’ve noted numerous times…I believe China is the smart money of the global economy at large and particularly the resource sector.”
And at the Gold Report, newsletter publisher Sascha Opel touts European gold miners Carpathian TSX:CPN, Colt TSXV:GTP, Orex TSXV:REX and Astur TSXV:AST. He suggests “two potential takeovers in 2012″: Mansfield TSXV:MDR and Rye Patch TSXV:RPM.
Finally, controversy rages in New Jersey, where Governor Chris Christie will honour the late Whitney Houston by lowering state flags to half mast Saturday. In defence of his decision, Christie admitted that Houston was “not a role model” but noted that she was “a daughter of New Jersey” and claimed her as a “cultural icon in the history of this state.” This is good news for Garden Staters Deena, JWoww, the Situation, Pauly D and Snooki, cast members of the culturally iconic Jersey Shore, who will doubtless all succumb to tragic vodka and Valtrex overdoses sometime during the Christie administration.