Why Peter Schiff is still wrong about gold

While Peter Schiff, and others of his ilk, have remained staunchly bullish on gold since the all-time highs in 2011, I feel they have done a terrible disservice to those who have followed them for the last three-plus years of (relative) pain.

Schiff is an uber-bull, or gold bug, as some may call him, who continually calls for $5000 gold. Since markets move in two directions and not just up, I believe that anyone who is uber-anything should be dismissed, as there is no appropriate substance being proffered by simply saying the word up every day. Ultimately, they will be right, but, in this case, you have to deal with a multi-year 40%-60% drawdown before eventually being correct.

Myra Saefong had a piece earlier this week reiterating Peter Schiff’s perspective about gold going to $5000. So, let’s look at Mr. Schiff’s underlying perspective a little more closely, and see if he is finally going to be right. Or should people consider our perspective that Mr. Schiff’s followers have more pain to experience in the near term, as metals have a lower low to be seen before the next bull phase takes hold.

First, last year, Mr. Schiff was of the exact same perspective regarding gold, and, he has been of the same perspective on gold since it topped in 2011. However, we called the top to gold within six dollars of the actual top in 2011, while most were still looking for gold to exceed the $2000 mark along with Mr. Schiff. In fact, we even called the downside targets correctly even before gold topped. Since that time, gold has lost 41% of its value from its high to low during this correction. Yet, Mr. Schiff has stayed staunchly bullish during this 40% draw down.

Second, last year, Mr. Schiff maintained the perspective that “renewed weakness in the dollar and strength in oil and other commodities will add to gold’s appeal during 2014.” Despite its drop, Mr. Schiff simply dismisses it as being “completely out of touch with reality.

I want to digress for a moment and point out something to those that feel that the dollar must drop in order for metals to rise. There is nothing written in stone that states that the dollar must fall for the metals to rise. In fact, if one closely observed the market action since November of 2014 until the end of January of 2015, gold rallied almost 15% while the dollar rallied over 9%. And, yes, we expected both markets to rally together at that time, too.

Third, Schiff seems to claim that only further quantitative easing will cause the metals to rise. But, this was the same perspective he had with all the previous QE programs were instituted by the Fed. We had QE1, QE2, Operation Twist, and then QE3, and metals are still near their lowest levels in four years. Yet, we are to believe that QE4 will be the one that supposedly causes the metals to rise to $5,000? Does anyone else see the inconsistency in this argument?

Fourth, in Schiff’s recent interview, he noted that “what is holding gold back . . . is the idea that the Fed is going to be raising interest rates.” Wait a second. For years, all people have been talking about is that a rise in interest rates evidences inflation, which is the real driver of gold. So, isn’t the common theme that gold will go up when rates go up, because that is supposedly a signal of inflation?

Yet, when looking a little deeper into what Schiff is now suggesting, it seems that low interest rates are needed to cause gold to rally? Is not a drop in rates commonly viewed as being associated with periods of deflation? So, is it deflation which will cause gold to rally or is it inflation?

The answer is that gold’s movement is not based upon either if you look honestly at the history of gold’s movements. Let’s take a look at the 2007-2009 time frame, which evidenced the most recent period of deflation in our markets, and see if we can glean anything from the metals action in relation to deflationary market pressures and dropping interest rates.

We all know that the S&P 500 topped in October of 2007 and began an estimated 300-point decline into March of 2008, and then we saw a corrective bounce in the equities for a couple of months. During that same period of time, the metals continued to rally. So, here we have “evidence” of the metals supposedly rising during a period of deflation.

But, when we then look toward the May 2008-March 2009 severe decline in the equity market, we witnessed the metals also experienced significant declines within that time period. In fact, gold lost a little more than 30% (yet, rallied again, thereafter). So, when one is presented with these facts, does it make sense that the metals are surely going to rise during periods of deflation and/or low interest rates?

One has to put aside their personal biases toward the metals and recognize that they are not necessarily going to rise during periods of deflation, or due to the drop in the dollar or interest rates. Oddly enough, metals can rally during periods of deflation or dollar appreciation, and they can fall during periods of deflation and dollar appreciation.

The same applies to periods of inflation as well. I know you are likely thinking to yourselves, “Avi has really lost it this time.” But in all honesty, how can you come to terms with the reality of how they reacted during the 2008 broad equity market carnage, which was clearly a deflationary event? Did they act as the supposed “safe haven” during the strongest period of deflationary pressures experienced since the Great Depression, especially while interest rates were dropping precipitously?

The one thing said by Mr. Schiff with which I agree is that “the moves in gold come in waves.” And, these wave movements are driven by waves of sentiment. That is exactly what we track. In fact, not only did the tracking of market sentiment allow us to make various calls, such as the drop into the November 2014 low, but at this time, unlike Mr. Schiff, we still believe that lower lows and more pain are still in store for those that have been continually bullish since 2011.

So, I would urge anyone reading prominent pundit “expectations” about metals to test them against the reality of the price action history. If someone suggests to you that it is a matter of interest rate sensitivity or an inflation/deflation argument or a factor of quantitative easing, you need to think long and hard about if the price history of metals supports their proposition. I suggest that it will not.

Rather, metals are purely a sentiment trade, and unless you understand how sentiment drives metals, you will more than likely be caught on the wrong side of a popular fundamental argument. Ultimately, he will be right. But, do we all have the deep pockets to be able to withstand yet another drop to lower lows before being proven right?

See chart on GLD 2007-2009.

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Gold Action/ Direction Continues Down : Braggin’ Rights To JAB

You can review my past articles to confirm my calls:

1) BUY when gold was below $ 900

2) Steady reductions in all positions for Jack A. Bass Managed Funds

     from $ 1800 til today.

 

Now What ?

We continue to see more downside risk in the next several days- from The Crude Oil Trader blog this quote which I second: ” as the next major level of support is 1,180 & if that price level is broken prices could slide rather dramatically. Gold prices settled last Friday at 1,216 finishing slightly lower for the trading week as volatility has certainly increased as prices were up $20 a couple of days back on the news of the coalition & the United States bombing ISIS but then prices came right back down as I still think lower prices are ahead as there’s no reason to own gold right now especially with a very strong U.S dollar so continue to play this to the downside making sure you place your stop above the 2 week high.”

No stocks are being spared .

In my book ” The Gold Investors Handbook” – available on Amazon – I pick B2Gold ( BTO) as my top junior . It moves lower and is so very tempting but there is no way to call a bottom. Wait and buy when there is a turn rather than catch all the falling knives.Use the book to develop your own gold watchlist . In the meantime there are so many better places to earn money with less risk.

The ever lower prices for Yamana are almost painful to watch – but there is less pain in the sideline compared to watching your portfolio wither away.

It is criminal in my less than humble opinion the Sprott and Peter Schiff continue to urge investors to buy into the conspiracy theory of manipulation of the commodity price. The printing press in the U.S. runs at full speed 24 hours a day – but the fact is there is still no inflation and no inflation on the horizon. This undermines a central argument for owning gold. Mining costs continue to escalate and thus pressure mining returns at lower commodity prices.

Even the Ukraine and Middle East turmoil and have not proved to be much of a factor to boost gold as a safe haven in times of trouble. Gold bugs are reduced to hoping the stock market stops its advance and the economic recovery in the U.S. runs out of steam.Right now dividend paying stocks in a recovery are more attractive than the gold sector.

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The Gold Sector :The Worst Slump In Prices In 30 Years Will Continue

The gold industry, recovering from the worst slump in prices in 30 years, needs more mergers to help

improve investor returns and eliminate unprofitable mines or prices will continue to fall said Jack A.

Bass , author of The Gold Investors Handbook.

ABN Amro’s commodity analysts put it plainly last week. They expect gold’s 11% rise in the first-half of 2014 to be “temporary” because US Fed rates hikes are coming, while the outlook is “positive” for equities. Such thinking makes sense based on 2013’s example. Taper talk pushed bond prices down last year, nudging market interest rates higher. The S&P500 meanwhile returned 32%, a little more than gold prices fell.
Logic might also see a trade-off between gold and rising returns on other assets. Because the metal yields nothing and does nothing. It can’t even rust. Equities and interest-paying investments on the other hand work to increase your money. So gold prices should fall when equities rise, and also when the markets expect higher interest rates. Or so analysts now think.
GOLD was a universal “sell” for professional analysts at New Year, writes Adrian Ash at BullionVault.
Losing 30% in 2013, the gold price faced the long-awaited start of US Fed tapering – widely supposed to make fixed-income bonds go down, nudging interest rates higher – plus strong hopes for further gains in world equities. Who needed the barbarous relic?

Gold producers, which are gathering for the annual invitation-only Denver Gold Forum that began yesterday, cut budgets, sold assets and adjusted mine plans after the metal plunged 28 percent last year, prompting more than $26 billion of writedowns. The industry already has started a consolidation process.

“The industry did a very poor job from a capital-allocation standpoint, from a risk-management standpoint and from an operational-execution standpoint,” he said. “For long-term oriented investors it would be better for the industry to get more right-sized where companies are focused on generating profit at a conservative gold price assumption.”

‘Darwinistic Scenarios’

Combining companies can help eliminate their respective unprofitable operations, he said. Weak companies with good assets may also be targeted by stronger producers, he said.

“Or the least appealing of the Darwinistic scenarios is a company that has gotten all of those things — capital allocation, risk management and operational execution — wrong and they wind up going bankrupt,” he said.

There have already been some moves toward consolidation this year. Yamana Gold Inc. and Agnico Eagle Mines Ltd. bought Osisko Mining Corp. after beating out a hostile bid from Goldcorp Inc. Barrick Gold Corp. (ABX) and Newmont Mining Corp., the two largest producers by sales, also discussed a merger this year before breaking off talks in April.

“I do believe the gold industry is in the process of consolidating,” Wickwire of Fidelity  said.

‘Survivors and Thrivers’

Wickwire said as an investor he focuses on companies he terms “survivors and thrivers”: those with good management and strategy. He is also interested in enterprises that may have poor strategy or boards and management but own good assets that would be better operated by another producer. He declined to name specific companies.

The Fidelity Select Gold Portfolio rose 17 percent this year through Sept. 12, compared with a 2.4 percent increase in New York gold futures. The Philadelphia Stock Exchange Gold and Silver Index of 30 companies gained 8.9 percent.

Wickwire holds both bullion and gold equities in his fund. While gold miners underperformed the metal in the past two years, they can also outperform strongly when companies’ operations, capital allocation and risk-management decisions improve, he said.

“Under the appropriate backdrops, if you have a 10 percent movement in the gold price, some companies out there have the potential to generate 30 to 40 or 50 percent cash flow and earnings-per-share growth,” Wickwire said. “And when the companies are executing, the market rewards that dynamic aspect with a higher valuation.”

Barrick Gold SELL

ABX : TSX : C$19.82
ABX : NYSE
SELL 
Target: C$17.50

COMPANY DESCRIPTION:
Barrick is the largest gold producer in the world and has
a portfolio of operating mines and development projects
located in the United States, Canada, Australia, Peru,
Chile, Argentina, and Tanzania. In 2012, the company’s
operating mines produced 7.42 million ounces of gold, at
total cash costs of $584 per ounce.
All amounts in C$ unless otherwise noted.

Metals and Mining — Precious Metals and Minerals
FORECAST 2014 PRODUCTION 11% DOWN,  RESERVE LOSSES AT 18%
Investment recommendation
Our target price has been revised from C$20.50 to C$17.50 to reflect the
recent shift lower in the gold forward curve and to reflect our estimate
of potential reserve and mine plan changes at YE13. This report
provides an analysis of potential YE13 reserve changes on an asset by
asset basis. Based on the implied negative return to target, we have
revised our rating on Barrick from Hold to SELL.
Investment highlights
 Barrick is developing new mine plans to reflect a lower gold price
environment and maximize cash flow. We estimate 2013 gold
production at 6.36mozs, 11% lower sequentially. Cash operating
costs are expected to be only modestly lower at ~$585/oz.
 We estimate that operating reserves (excluding development assets)
will have declined ~18% at year-end. While reserve grades could
potentially increase ~11%, we note that Barrick has been mining
~19% above reserve grade over the past four years.
 Our 2013 EPS and CFPS estimates have been revised to $2.30 (from
$2.32) and $3.23 (from $3.07), respectively.
Valuation
We have revised our target price from C$20.50 to C$17.50, which is
predicated on an above sector average 0.90x multiple to our forward
curve derived operating NAVPS estimate of C$22.34 (from C$25.65) plus
net debt and other assets. Our target multiple fully reflects Barrick’s
numerous positive attributes; we just do not see the value proposition
for Barrick at current metals prices. Barrick is currently trading at a
27% premium to its gold peers on NAV. Near term positive free cash
flow is expected to be largely utilized to finish constructing Pascua.

 

Barrick Leads Gold Producers With New Mine

Sacramento Gold Miners logo
Sacramento Gold Miners logo (Photo credit: Wikipedia)

Sept. 22

It is simple math – the new mine- Pueblo Veiejo will produce 1 Million ounces a year at a cash cost of  less than $500.

At the same time Barrick has an annual production in access of 7 million ounces –  to be reduced only slightly by the sale of the African Barrick properties. Barrick has in 2012 an average realized price of $ 1.608 per ounce.

In the gold portfolio blog www.ampgoldportfolio.com the twin goals are to some measure of investment saefty  in gold miners by finding the producers that offer :

1) increasing production

2) cost containment.

Barrick meets both these standards and ( of course) avoids the junior miner qundary of funding expansion without taking on debt or issiung more shares.

On the technical front, Barrick Gold appears to be on a great run, as it has outperformed its peers in the industry. With a price earnings multiple of 9 times, which is well below the industry’s nearly 15 times.

Barrick leads its peers in return on equity at 16.32% as compared to its competitors such as Newmont Mining at almost 5% and Goldcorp at 8.15%

For further incentive – and again simple math ) look att he results for Barrick if and when gold hits the targets of Bank of America ( $2000) or Jim Sinclair ( $3500).

Add investor psychology – we have not yet witnessed any media attention to gold as an inflation hedge or media stories of ” average ” investors turning to gold for any portion of their portfolios. In a recent video ( available on You Tube ) Marc Faber asked a Dubai audience if any members had more than 5% of their assets in gold. Few raised their hands . his conclusion was that the price had a long way to run and that the ” maia” stage of price appreciation would not happen until the audience reply was 50 %  of those present.

Barrick is fully covered in our new book – available on Amazon – The AMP Gold and Precious Metals Portfolio

2. $19.95
Product Details

Barrick Gold – Great Results – No Respect

Barrick Gold's Cortez gold mine
Barrick Gold’s Cortez gold mine (Photo credit: Sandra Cuffe)

Barrick Gold Corp. (ABX-T37.690.170.45%) reported a 3-per-cent rise in first-quarter profit and announced an increase in its dividend as higher gold prices helped it offset higher cash costs. <:aside>

<:aside>

Barrick Gold Corp.  (ABX-T)  

37.69     0.17   0.45%
As of May 4, 2012 4:00
 
 
“What more can you ask for?
Record results for six years in a row. Great fundamentals, exceptional performance, meeting guidelines, social responsibility, high quality of people and employment, a great team of management, a leading position in your industry – for God’s sakes, the world should be at your feet,” Mr. Munk told CEO Aaron Regent and other officers at the company’s annual general meeting in Toronto.

The results met analysts’ expectations but even so, stock in Barrick closed 2.7 per cent lower in Toronto, about 30 per cent off 52-week highs set in September.

Market pundits say investors are abandoning the gold sector due to uncertain growth prospects and perceptions of increased risk around existing deposits that have yet to be developed. The case of Kinross Gold, which was forced to write down $2.94-billion on its flagship Tasiast mine project in Africa just a year after acquiring the asset, is seen by some as a warning of what can go wrong.

Other gold stocks under siege include No. 2 Canadian miner Goldcorp Inc., valued at $37.54 a share these days and off roughly the same amount as Barrick. Kinross Gold has seen its market capitalization chopped by more than half in the past eight months.

Barrick, which produces more than seven million ounces of gold a year, reported a profit of $1.03-billion (U.S.) or $1.03 a share for its first quarter, as gold prices jumped 22 per cent from a year earlier.

The miner raised its dividend 33 per cent and Mr. Regent, who also holds the title of president, promised that three new projects to come on stream this year and next will add significantly to cash flow.

Pueblo Viejo, the Dominican Republic project that starts production this year; and Pascua Lama, the gold project straddling the Andean mountains between Chile and Argentina and due to start production next year, will make Barrick a nine-million-ounce-a-year gold producer.

The Jabal Sayid project in Saudi Arabia will add up to 45 million pounds of copper production this year.

“We used to be able to show the kind of achievements that made Barrick, year in and year out, the best-performing stock … and there is now a divergence,” said Mr. Munk, who built the Toronto-based company after humble beginnings as an immigrant from Hungary.

There are many reasons for that, but not to face up to it and not to talk about it would be the greatest mistake a board and management and people responsible for the welfare of this company could do,” he said, otherwise describing the company as a text-book example of success worthy of Harvard Business School.

Mr. Munk also said he believes the fundamental driver of a mining company is the value of the metal it produces, even though gold prices are hovering near all-time highs as Barrick stock wallows.

Eventually, he said, Barrick’s stock price will reflect both the company’s strength and the value of gold.

“We made good progress on a number of areas in the quarter,” Mr. Regent said. “We had good operating performance, which translated into solid financial results and further advanced our projects under construction with Pueblo Viejo and Jabal Sayid to start producing this year and Pascua Lama in the middle of next year.”

Barrick Gold Sector and Forecast Follow Up

African Barrick Gold
Image via Wikipedia

Thesis: The AMP reputation was built in part on the call for gold at $ 780 to go much higher. The AMP continues to raise our targets based on the exclusive Richardson/ Bass Quant – now seeing $ 2000 as the next target.

We see gold as a hedge against government cupidity and stupidity and follow the major players .

Goldcorp (GGtrades around $46, has a year high of $56.31 and a year low of $41.91. The price earnings ratio is 23:31. The company’s earnings per share are $1.97. The dividend yield is 1.20%. Total cash is $1.48 billion and total debt is $7.26 million. The current ratio is 3.82 and book value per share is $25.76. The company is well positioned, with a low cost basis in its overall operations. Goldcorp’s core business is its mining operations in North America, Mexico, Central and South America. The company’s income from operations comes from its gold, silver, copper lead and zinc sales, but primarily this is a gold producer.

Third quarter 2011 results showed the company increased gold production to 592,100 ounces compared to 588,600 ounces in the same period 2010. 

Barrick Gold Corporation (ABXtrades around $48, has a year high of $55.95 and a year low of $42.50. The earnings per share are $4.17, and the price earnings ratio is 11:54. The dividend yield is 1.20%. The company has total cash of $2.96 billion and total debt of $13.38 billion. The book value per share is $22.38. Barrick mines for gold in the U.S., Canada and Argentina, which represents 39% of the company’s gold production. It also mines for copper in Argentina and Chile and the Dominican Republic. I think the company is well-positioned. It operates gold mines in Papua New Guinea and in Western Australia which represent 12% of the company’s proven and probable reserves.

For third quarter 2011 Barrick had record net earnings which increased 45% to $1.37 billion or $1.37 per share compared to $940 million or $0.96 in the third quarter of the prior full fiscal year. Record earnings were due to higher gold and copper prices along with higher sales volumes of copper. Barrick is in good shape to reach its full 2011 year operating guidance in my opinion, which has production expectations of 7.6 million to 7.8 million ounces at cash costs of $460 to $475 per ounce. Copper production is expected to be 450 to 460 million pounds at total cash costs of $1.60 to $1.70 per pound for the full 2011 year.

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