I think this is worth a look, from Coxe:
Courtesy...TheSlowLane @ SI
"So, this is a somewhat murky field, but of course everything in this financial crisis is murky. Nothing is as it seems. For example, the word this week is that Citibank’s total write downs this year are going to be twenty-two billion dollars. Now this starts to get to the level where even the recent injection of capital they got gets drained away. And meanwhile they’ve still got stuff that they thought they could peddle off, what we call the Jurassic Park Avenue creations, or the Macbeth Witches Brew documents. They’ve still got lots of those on their balance sheet and they’re still showing them at valuations which are, to put it charitably, suspect.
So, if you’ve got the two biggest retail banks in the US - Bank of America and Citigroup – that are struggling, you have to wonder about the purer investment banks out there, whether although they’re not facing supervision from the deposit agencies, the question again is, how good are their balance sheets? If Bill Gross’s concerns are valid – and one hesitates to challenge the work of somebody of his stature – then these Babel Bonds out there are certainly enough to completely blow all holes in the protective layers over London and New York.
Now...all of this I believe is what’s playing out for gold.
Because if you begin to wonder…first of all, you don’t particularly like to have assets denominated in Dollars. Although gold theoretically is denominated in Dollars, it’s outperforming all currencies, even the Iraqi Dinar, which has been one of the stronger currencies in the world this year.
So we’ll take away gold as being inversely-correlated to the Dollar because the Dollar has not collapsed anywhere near as much as gold has gone up. And as I say, it’s not functioning purely as an inflation hedge. So what it’s doing now is saying all sorts of other assets are going to be written down drastically. Let’s have something that cannot be written down. And on that basis, it’s hard to predict a top for gold.
Now I see that the CEO of Agnico Eagle said gold will go up to its old high, which was 850, but if you adjust for intervening inflation that gets it to 2200 an ounce. It’s a nice calculation, but the problem with that is that 850 was a triple waterfall peak. And it vastly overstated gold’s rise in response to the Third World debt problems of the banking system at the time, which in the light of what we’re seeing now were purely trivial. And also the inflation that was going on, although it did peak out at thirteen percent. The accumulated inflation since gold was revalued from 20. 67 an ounce to $35 by Roosevelt in 1933 was nowhere near enough to take gold to 850. Probably something close to 450, 500 would have been functioning as a store of value.
So I find those kinds of calculations dubious. Having said that, it’s no secret to anybody on this call or who reads Basic Points that since our trip to India we’ve become increasingly enamored of gold and gold stocks and we just started pounding the table on them in July when it became apparent that such insouciance as we had had that the subprime mess would go away without major consequences, vanished.
But did I think that we were going to touch $900 on gold? No! I certainly never used figures like that. I simply said that the perceptions of relative risk and reward in gold and gold stocks were going to change decisively in favor of them. And you know the run-up that we’ve had in these gold stocks has been...just pretty much along with gold itself. Which means that the leverage factor that you get on unhedged reserves in the ground, there’s not much gold hedging left out there, because the prominent hedgers finally took the lessons of the marketplace in line and covered in most of their book of hedges. So, the leverage that you’ve got with gold mines that have ten or twenty years of reserves in politically secure regions, should mean that the stocks will outperform the bullion.
Now, the problem there is that although the gold mines that are important in the world aren’t located in places such as Venezuela or Russia. What you do have is exposure to a bunch of Latin American jurisdictions which may decide that they’re going to rewrite their rules for gold mines in light of gold moving to this level.
In other words, what these gold mines may face is something akin to what the oil sands companies in Alberta have faced, which is that the government says “You’re doing much better than anybody assumed at the time you took on these risks, and so therefore the rewards must go primarily to the people. ” And most of the bad things that have ever been done by governments anywhere have been done in the name of the people. And on that basis, I can see why it is that the gold stocks may not have done as much as I would have expected, had anybody told me that we were going to be seeing 895 gold.
I still believe that they are a superior investment class. And that no matter what you may think about the overall stock market – and I do think we are in a bear market, I don’t think it’s a big bear market because frankly, if we write off all this stuff that’s out there, I think still, that the global economy is not going to go in to a deep recession. And although the US will probably experience a recession – could even be in one now – the economists are very much divided on this, which means I can’t use my basic rule for judging these things. If you assume all of this, you’ve still got a situation where you want to own the commodity stocks.
And at the moment, the two commodity groups that look to be the best ones to be in are the gold stocks and the agricultural stocks."
