I've had some questions along the lines of "What about Company X or Company Y?" There are many mining companies out there. A few are really good. Many are mediocre ― or worse.
I could write a book on precious metals and mining ― and energy and capital formation ― which is something that Agora Financial publisher Addison Wiggin wants me to do. On that one, well… stand by. But as I await my inner Johannes Gutenberg to surface ― and keep in mind that Gutenberg was a goldsmith as well as a printer ― I'll just continue to publish these weekly notes to keep you up-to-date on what's going on.
Precious Metals on a Tear
So what's going on? Gold had a heck of a month in May, rising about 9%. And silver did even better, moving upward by over 26%. It's that silver slingshot effect, in which silver occasionally makes up for the time spent in the shadows of gold.
Gold and silver were on a tear last month, and that's great. Can they do it again in June? You surely know that price of gold and silver can go down as well as up. Don't be shocked at a pullback. But for the medium and long term? Precious metals look good.
The "Insurance" of Gold
I've often referred to owning gold and silver as a form of "insurance." And now, guess what? According to a recent report from Bloomberg, Northwestern Mutual Life Insurance Co. ― the third-largest U.S. life insurer by 2008 sales ― has been buying gold. This is the first time in its 152-year history that Northwestern has purchased gold.
According to Northwestern CEO Edward Zore, "Gold just seems to make sense; it's a store of value." Then Mr. Zore added, "In the Depression, gold did very, very well." (And I'll discuss that same point below).
According to Bloomberg, Northwestern has accumulated about $400 million in gold. CEO Zore believes that the price of gold could double "or even rise fivefold" if the economy continues to weaken. "The downside risk is limited, but the upside is large," Zore said. "We have top stocks to buy for 2010 in our portfolio that lost 95%." But gold "is not going down to $90."
So here's a large, sophisticated company like Northwestern Mutual putting gold where its money is. I guess it wants to be around for another 152 years.
You Can't Cheat Hephaestus
Meanwhile, the central banks, money center banks and most politicians of the world (except Germany's Angela Merkel) HATE monetized gold and silver. Why? Because precious metals require these worthies to suck it up. They have to live in an economy based on hard work, long-term investment and honest governance. Can't have that, can we? So there are serious forces out there attempting to manipulate the precious metals back down. Expect it.
But you can't cheat Hephaestus, god of the forge. So if the metals retreat and share prices pull back for mining companies, use the opportunity to acquire more metal and shares at a discount to the future price. And remember that my basic precious metals recommendation is that you should have 5-10% of your portfolio in physical metal ― and TAKE DELIVERY!
I'll be plenty happy if our six new precious metals plays move upward in the short term ― say, over the next few months. But if we have to wait for the medium term, say, six-12 months, that's OK too. And surely, over the long term, a year or more, these guys ought to shine (no pun).
In my view, the politicians are spending the country so deep in the hole that the nation will never be able to work and pay its way out. Thus, the monetary stars are aligning toward economic hard times and future inflation. And as we see with Northwestern Mutual above, one investment idea that has historically worked out during hard times and inflation (as well as deflation, I should add) is the precious metals angle.
The Homestake Story
Along those lines, let's look at the share price of the old Homestake Mining Co. back in the 1920s and 1930s. (See the chart, below.) Homestake was among the world's largest gold miners in its day, digging gold from the Black Hills of South Dakota. Due to a dearth of records, many historians use Homestake as a proxy for the entire gold-mining industry in that era.
Notice how between 1929-1935, the Homestake share price rose ― along with a significant rise in both earnings AND the dividend. Homestake's earnings per share (EPS) increased from $4.16 in 1929 to $32.43 in 1935. In other words, the gold miner showed annual compound EPS growth of 41%. Wow.
And notice how much of the rise took place in 1930, 1931 and 1932, before Franklin Roosevelt became U.S. president ― and seized the nation's gold, in April-May 1933! But even FDR's gold seizure didn't stop the upswing for Homestake. The best stock, and its earnings and dividend, kept appreciating and held strong through most of the early years of the New Deal.
That is, the rest of the U.S. business economy suffered from declining earnings during essentially ALL phases of the Great Depression. The overall U.S. economy was awful, with national unemployment rates well over 25% at times. But through it all, the gold mining industry was a hot spot of economic vibrancy.
Gold Miners Versus Banks
While we're looking at the history of gold in the Great Depression, let's consider what was going on with the banks in the U.S. According to economist John Walter, writing in 2005 in the Economic Quarterly of the Federal Reserve Bank of Richmond, the U.S. went from over 31,000 banks in the mid-1920s to under 15,000 banks by 1934. That is, over HALF of all banks FAILED! In 1933 alone, over 4,000 banks failed ― that's about 80 per week, or 16 per business day.
And back then, a bank failure was almost always a total wipeout for depositors. There was no federal deposit insurance until late 1934, and the initial coverage was just $2,500. Most depositors in those 16,000 failed banks of the 1920s and early 1930s just plain lost everything. There was no relief at all. If you were a depositor, you went down with the ship.
Banks that didn't fail paid depositors a paltry 1% (or less) in "earned interest" on their savings. Makes you wonder why people kept any money in banks at all. Risk losing it or get paid 1% interest. Not much choice, right? No wonder that a lot of Depression-era people spent the rest of their days saving money in coffee cans in their basement.
Gold Mine Shareholders Did Well
All the while, Homestake shareholders collected dividends in the range of 8-10%, plus capital appreciation. The Homestake dividend went from $7.00 in 1920 to an astonishing payout of $56 per share by 1935.
It's interesting that "hard times" are somehow good for gold miners and gold mining stocks to buy. One explanation I've heard is that the aftereffects of the 1929 stocks market crash caused a sustained contraction of the money supply (thanks to the Federal Reserve), along with a reduction of bank credit.
The result of less credit was that lending just plain froze. (Sound familiar?) Many businesses, households and individuals simply could not obtain credit no matter what their story. And most of the early New Deal programs ― "relief," the Civilian Conservation Corps, the Works Progress Administration and the like ― were just transfer payments to otherwise idle individuals. The New Deal may have institutionalized humanitarian government policy toward the unemployed, but it was NOT capital investment.
So with most private capital investment halted during the New Deal, there was a dearth of fundamental capital formation in the economy. The economy couldn't get traction to move ahead.
Tight credit extended even to governments, and by extension to their fiat currencies. As world trade tightened due to protectionism, public credit evaporated as well. Eventually, investors fled from paper currencies (even U.S. Treasuries). The big players in international finance converted paper currency into the only "money" that was not someone else's liability ― and not subject to counterparty default: gold.
"Gold Has Worked for 2,000 Years."
Let me sum up by quoting one of America's legendary financial geniuses, Bernard Baruch (1870-1965). He said, "Gold has worked down from Alexander's time… When something holds good for 2,000 years, I do not believe it can be so because of prejudice or mistaken theory."
Byron King will be joining us in Vancouver for the 10th Annual Agora Financial Investment Symposium. As I've told you before, it's also the 10th anniversary of our flagship newsletter The Daily Reckoning. We aim to make it special. Help us do so by being there.
Byron will also be on our Whiskey Bar panel. Your editor is too humble to say that the Whiskey Bar alone will be worth the price of admission, but he is not above dropping the hint.
Here's one of those protestations I was expecting…
Stop with the peak oil propaganda would you? Like global warming it to is just another fallacy concocted by those with the New World Order Agenda. Stop feeding us their BS could ya, would ya?
No, we can't. It'd sorta be like stopping with this "the world is round" nonsense we also tacitly support.
We're willing to listen to debates about global warming all day long, but the bar management's firm policy is to treat peak oil as painful fact. The only debate there is whether or not a hydrocarbon dependent humanity can squirm out of the worst of the consequences. It'll be amusing to watch! Or it would be if we weren't fending off starvation and dehydration or being cannibalized by post-apocalyptic gangs.
Surprisingly few of you had a problem with James Howard Kunstler tending yesterday's bar, however…
I'm glad to see someone out there admit that the days of Manifest Destiny are long gone, and we will have to adapt or perish.
This mess started back in the early '70s when we got off the gold standard to pay for Arab oil and the Vietnam War. And since we got away with it for more than 30 years, why change now?
Shooter gets a prize!
Gold standards force nations to live within their means. That's why Nixon got rid of it entirely when push came to shove. Since then the American way of life as embodied by hyper automobile-dependence (often confused with "freedom") has been essentially running on credit!
We've been giving the brown people of OPEC our little green paper promises ― backed by a wink and a smile instead of gold or industrial output ― for over 30 years.
But the now the jig is up. The dollar ― like a shabby, penurious baron with a penchant for gambling ― can no longer hide behind the respectability of the family name. Everyone knows he's broke and they're not going to take his promises as payment anymore.
Hi Gary.
Just finished Jim Kunstler's June 6th essay, and as always found it revealing, and as always, alarming. In his passing remarks concerning "we can't service our debt at any level, personal, corporate, or government", he touches on developments that we all agree might be possible (i.e., the bankruptcy of the United States), but nowhere is there any discussion what an outright bankruptcy (or default on the national debt, if you prefer) would look like.
What if the United States became so indebted that it was mathematically impossible to pay off or even service the national debt, and simply repudiated it? I've scoured the net and find no intelligent discussion of what our Nation would experience in such a default. It's easy to outline a world without cheap oil, and Jim has done an admirable job illustrating it. A national bankruptcy is more complicated. I ask you and I would like you to ask Jim, what exactly do you think it would be like, here, as a result of such a colossal default. Keep up the Good Work; I read you every day!
Thanks! Your guess is as good as mine, but I'm sure that it looks pretty ugly no matter who's doing the guessing. I refer you to what Byron had to say above: "In my view, the politicians are spending the country so deep in the hole that the nation will never be able to work and pay its way out. Thus, the monetary stars are aligning toward economic hard times and future inflation."
Countries go bankrupt from time to time. In advanced, industrialized nations full of white people all sorts of wacky things follow. It's like a mass nervous breakdown: dizzying currency devaluation, hunger, revolutions, executions of the upper class, pogroms for the rest, genocide…that sort of thing.
Simultaneously running low on the lifeblood of industrial society will just make things that much more interesting.
Wow, I'm actually managing to alarm and depress myself this time. I chalk it up to the pain of a lingering knee injury that has practically immobilized me this morning. I'll tell you why this is especially personally troubling at another time.
A couple of weeks ago a Shooter wrote "Ask Patrick Cox if it's possible to volunteer for clinical trials of stem cell therapies."
I'll ask for both of us.
Patrick will be tending the bar again later this week. We'll talk about it more then.
No comments:
Post a Comment