(August 18, 1997)
|Love is a temporary insanity curable by marriage.|
|- Ambrose Bierce|
Robert H Goddard, one of the most underappreciated geniuses of the century, was a 37-year old assistant professor of physics at Clark College in western Massachusetts when he published a paper in 1919 entitled, The Future of Rockets in Space Travel in which he included this sentence: "The dream of yesterday is the reality of tomorrow." He was treated by the press as an eccentric scientist, yet Goddard remained fascinated by the possibilities of liquid and solid-fuel rockets, so he engaged in experiments in the 1920s (financed by the Smithsonian) even as Werner von Braun was studying rocketry in Germany (financed by the Nazis). Having gained notoriety as the "Moon-Rocket Man," Goddard fired a rocket in Edna Valley in 1930 that rose 2,000 feet above the prairie, a good beginning, but his dreams of going to the moon were still regarded as "lunatic" by the public. Meanwhile, the German military was enthusiastically funding rockets as an extension of artillery science while the US was not. Guggenheim ended his funding of Goddard in 1932 because of the Great Depression, but in September 1934 Goddard got an $18-million grant that went toward a gyroscopic stabilizer, and on 8 March 1935 a flight finally produced promising results. Unfortunately, by now, the Nazis were leaving Goddard far behind as they developed the A-4 and moved their secretive experiments from Berlin to Peenemunde because of its isolation.
Goddard remained a private loner, but in the spring of 1937 he got a rocket almost as high as 9,000 feet. In 1941, Guggenheim induced him to visit the US Government and for the first time he wasn't laughed at, but they were only interested in jet-assisted takeoffs for seaplanes. Meanwhile, Werner von Braun continued sprinting ahead, and on 3 Oct 1942 he launched a rocket that reached outer space, prompting him to predict gloatingly that on that day "The Space Age" had begun in total secrecy they had stolen Goddard's dream. The Germans named that rocket the V-2 (for "vengeance") and Himmler's SS then diverted Braun's moon goals to military purposes, using slave labor. In 1943 and 1944 US Military Intelligence (its Oxymoron Division) had no idea that the Germans were cooking up the V-2. After World War II ended in 1945, the Soviets rushed to Germany with a list of names of rocket scientists to seize, including Werner von Braun, but the group had already been spirited away to the finally awakened United States, which was how our country at last caught, up. We got over one-hundred of the German rocket scientists who had worked on the V-2 program, so the United States had finally entered The Space Age in earnest. Unfortunately, Goddard died on 10 Aug 1945 and did not see it come to flower in America, once again exemplifying the challenge of being a hero in the United States of America. So it might be with a gold-backed US currency someday, when TDL gets its first Nobel Prize. The second Nobel Prize will be for having predicted in 1979 that China would go capitalist, and our third for having predicted physical immortality in 1985. (Please forgive that Walter Mitty moment.)
Much of the multitudinous misinformation muddling minds these days derives from the widespread insistence that an absence of inflation means gold must drop, a ridiculous thesis on the face of it. First of all, investors were negative on gold in the 1950s and 1960s precisely because of the fear of inflation and, second, consumer prices are rising even though the government cannot seem to detect them as well as anybody shopping in supermarkets or paying for rent or postage.
Next we're told that gold must drop because central bankers are going to liquidate all their gold, which is an erroneous thesis. Australia's money is now backed entirely by paper, and if the Australian government thinks that just because there are gold mines in the country their currency would be protected by the gold in them, central bankers ought to remember that those mines belong to shareholders from all over the world. The stage is being prepared for a future currency calamity as predicted in your editor's second book The Invisible Crash (see excerpt #2 page 7).
A clue to the real reasons for gold's weakness is the fact that silver has also been weak, an industrial metal, with many uses in the rapidly-growing field of electronics. That both gold and silver are declining amid pessimism, while the stock market is soaring apparently without limit, is a classic expression of Dinesism #7, the Dines Rule of Gold Countertrend. If this reasoning is correct, regardless of what central bankers do, or whatever the inflation rate, gold will probably turn up only when the rest of the stock market turns down, so gold remains a crucial component of all portfolios seeking a hedge in case the market plunges unexpectedly.
Calmly observing the facts, the truth is that gold has been oscillating between 300 and 500 for the last sixteen years, and we are now at the lower end of that trading range which, in the past, has spawned rallies. Pessimism is practically total, and there are many wild predictions that gold will get down to $150 or even lower.
This newsletter has studied the many gold bear markets in the last 40 years, and this one is a classic. The Mass Fear and Pessimism, especially among Canadian gold-mining investors, is so total that we must be nearing a bottom, especially with so many gold-mining stocks having plunged to near their cash value; this might even be a "Graham & Dodd" Bottom. Acknowledging that there is no sign of them yet, if our reasoning is correct, there should soon erupt out of nowhere a wave of mergers and acquisitions. If the price of gold does decline further, the gold-mining industry will begin closing down, which in itself would create such a shortage of gold production that it might well be a prelude to a buying panic, believe it or not. Even Merrill Lynch Analyst Ted Arnold is looking for $250 gold, at which price he envisions only around 19% of global gold-mine output closing down in his bearish dreams.
|We remember Merrill Lynch having been bearish on gold from $35 up to $850, when they finally turned bullish at the all-time high around $850 in 1980.|
For the moment, 80% of total gold demand is for jewelry, which is rarely sold back or melted down and we have yet to even get into the phase of speculative demand for gold, someday, especially if it is driven by Mass Fear. The current currency upheaval has sent buyers to the US dollar for refuge, but if our currency is shaken for some reason (a stock-market crash, a banking crisis, spreading devaluations?) then the stampede into gold and silver could be phenomenal.
We are intrigued that platinum and palladium are rising even as gold and silver are declining, a clear violation of Dinesism #10, The Dines Wolfpack Theory. Either platinum and palladium are leading the way higher for gold, or they are simply reflecting the possibility that Russia's October Ski Mine in its Norilsk complex will run out of ore in the next year or two. One reason we are so bullish on Stillwater (SWC), the world's largest producer of platinum and palladium outside Russia and South Africa, a company bound to attract the attention of the whippets running mutual funds sooner or later. Larger portfolios might want to hedge with a small speculative position in North American Palladium (PDLCF). Nobody knows when Norilsk might run out of ore because the Russians are keeping it a tight secret. Why? They have 200,000 employees who would leave were they apprised that the mine was scheduled to close down workers have not been paid since last October as it is. Maybe the reason staff has not been paid is because the Russian government cynically knows that it's going to be closed down anyhow. The Norilsk mine is in terrible condition, having been built by political prisoners and Soviet slaves in the 1940s, when it was part of the Gulag.
Our favorite blue-chip gold in the world remains Franco-Nevada (FN) in Toronto, which has risen from a dollar a share to over $60 because of its growing royalty stream. Their Midas property has an indicated resource of 4.5-million ounces of gold equivalent, with an estimated cash operating cost at an incredibly low $78-equivalent ounce of gold. Franco-Nevada has over $300 million in cash, so they should be on the acquisition trail soon. We also favor Euro-Nevada (EN.TO); these two are known as "the royalty sisters."
Golds in our Lists are now on "Hold," and, since gold stocks are already down to bargain underpriced levels, our plan is to wait and grab them just as soon as their Downtrendlines are penetrated. Again, using Dinesism #1, that a trend will continue until it "actually ends," any rally that brings golds up through their Downtrendlines would be the renewed "Buy" signal by Interim Warning Bulletin near these mouth-wateringly cheap, underpriced levels.
In the blue-chips, we favor Barrick, Placer Dome and Newmont for conservative investors, but also Getchell, TVX and Cambior. In the silvers, we would buy a "package" of Industrias Peņoles, Pan American and Silver Standard. In the "penny" stocks, International Pursuit, Laramide and TNK Resources.
Those who never seem to buy at rock bottom can see why not: because every gold investor is gripped by Mass Fear, more interested in buying when they're soaring then when they're way down. Your ship can't come in unless you send it out. Unsurprisingly, heavy covering of large short positions has been propelling the precious metals up, especially since western gold buying for Christmas is only a few months away and usually pushes prices higher. Gold bullion's low was reached on July 7, downside penetration of which would imply a test of the $300 area.
Selected Precious Metals Comments from Various Sources -
1. Of the 26,500 tonnes of gold held by central banks, excluding 6,358 tonnes held by official institutions, some 18,310 tonnes (56%) are held by large holders that apparently have a "stable" view toward their bullion, and do not lend significantly. Of the balance of 8,350 tonnes, some 40% may have already been lent out or otherwise committed, leaving approximately 5,000 tonnes of "mobile" gold, which is by no means all really mobile. In 1996 secondary disposals of gold (not all of which would have been central bank derived) amounted to 509 tonnes (GFMS). We estimate that if the strength of physical demand seen in Q1 persists, then a secondary disposal of around 770 tonnes (15.5%) will be required this year. While central bank gold will undoubtedly become more mobile over the coming years, economic growth spurring jewelry demand should require ongoing disposals of at least 500 tonnes/year. If prices move much further down we would expect to see some real production cutbacks, although prices would probably have to persist low for at least a quarter. Excluding FX changes (especially in South Africa), at $330 gold around 22% (515 tonnes) of the world's production is cash-flow negative, increasing to around 35% (820 tonnes) at $300 gold. Using the normal sensitivity of gold demand to price, production cutbacks of this size would be expected to have a positive impact on the gold price of $40 and $65 respectively. This suggests an equilibrium price of $365-$370 with secondary disposals running at 1996's 509-tonne level. Australian and South-African operations would be worst affected, with 1996 average cash costs of $294 and $293 respectively (GFMS). North-American companies generally come off quite well; we can identify only eight mines which might be forced shut at $330 and 14 at $300, although changes in mine plans could inhibit output from some others. - SCOTIA CAPITAL MARKETS EQUITY RESEARCH, 25 Jun 1997
(Ed: This well-written analysis using hard numbers suggests that massive government gold sales are unlikely but, if they materialize, the gold-mining industry would shut down, sending gold prices higher.)
2. Australia said it could not justify holding so much gold, the total having amounted to 247 tonnes, given its vast underground gold reserves as the world's third-largest producer at 300 tonnes per annum. For the short term at least then, the outlook for gold remains bearish. There appears to be a decreased commitment to gold on the part of the G-7 countries as reflected in central bank gold sales. The surge in global equities markets, led by the US, has decreased interest in precious metals. Should stock markets stabilize or even ease somewhat, investors may well shift to alternative investments, including precious metals. Japan's Prime Minister Ryutaro Hashimoto recently implied Japan could shift its buying plans to gold versus US Treasuries. This is viewed by some as putting gold back into play as a safety asset. It may also be viewed as a threat to the stability of the US Treasury market.
Silver has yet to move on an independent path which may well be its destiny in the future. There are several possible reasons for this: An expansionary economy, emanating from the US and likely to spread abroad, increases industrial demand for silver. Strong economies suggest inflation potential. If European countries succeed in re-valuing the gold in their reserves, that too, would suggest an inflationary bias by increasing the money supply growth globally. Silver inventories are at lower levels than they have been in recent years. Silver is increasingly being used in new technological applications such as cellular phones and computers. Inventories: Consumption has been exceeding production, but the supply deficits have not been large enough to create a bullish impact. Nonetheless, inventories have been eroding moderately but steadily. At some point as the gap between supply and demand widens, it seems likely prices will rise. A few primary silver mines have closed in recent years because of low prices, and say they are unlikely to reopen until the price reaches $6.00/oz. Outlook: We expect silver to cast off its precious metals constraints within the next six months and respond to the overall constructive scenario we outlined above.
Our expectations of strength in the platinum group metals will also likely be supportive of better prices in silver. Inventories and production of these metals may be declining. So far, decreased output has been supplemented by stockpiles of palladium and some platinum. In the past, Russian officials kept palladium prices at a reasonable level by providing adequate supplies in order not to encourage its substitution by other metals such as nickel or silver. Such substitution, however, would require fabricators to retool their operations at substantial cost and within a long time frame. At this stage, some Russian leaders may feel they will not be around to suffer the consequences of such substitution decisions should they occur. Russia is financially strapped, and the price increases could result in a significant windfall. This would tend to encourage the continuation of recent withholding policies. The most significant issue of concern to us is, how much platinum and palladium does Russia actually have available? When the Soviet Union collapsed some years ago, the view was that they held enormous quantities of gold as much as 4,000 to 6,000 tonnes, or more. We disagreed with that assessment, estimating their gold holdings to be about 400 tonnes, figuring they had probably been selling gold to meet their hard currency requirements. We were correct. We think the same scenario may be playing now with respect to platinum and palladium. We suspect that both inventories and production of these metals are low and steadily declining. Reports from Russia's Norilsk operations indicate a lack of money for replacement parts, for infrastructure repair and particularly for wages. When deliveries from Russia are ultimately resumed, we may see some weakening in platinum and palladium prices. However, this weakness is likely to be of short duration and supplies are likely to remain tight for the balance of the year. Beyond that, it may well depend on the true state of their production abilities at the Norilsk mining complex. Once Russian exports appear to have stabilized, we would be particularly interested in buying palladium given the uncertainties surrounding Russia's production capabilities, since it is the world's major source of the metal. - Prudential Securities, Inc, CONSENSUS, 11 Jul 1997
The Dines Letter
June 7, 1997 June 14, 1997 June 20, 1997
June 28, 1997 July 12, 1997 July 21, 1997
August 1, 1997
Back to Editorials
Copyright © 1997 vronsky and westerman