The term “leverage”
is used in several ways. Gold applies to all of them.
The word usually
refers to influence. When someone says of a politician, “he’s got
a lot of leverage,”
it means influence.
Consider a U.S.
Senator. He has one vote out of 100. But if he is the chairman of a
major committee, he
has more influence than his single vote indicates. If his committee is
important for
generating pork barrel spending projects for the voters in other Senators’
states, he has even
greater leverage. Same person; different leverage.
A preacher has
leverage in his congregation. But if he is a satellite TV preacher, he
has a lot more
leverage. He has leverage in other preachers’ congregations.
The term “leverage”
also applies to the world of investing. It usually refers to
certain debt
contracts, but not always.
I do not think anyone
should buy leveraged gold until he owns $10,000 worth of
gold bullion coins,
such as American eagles or Krugerrands. But some people like to
speculate with
leverage.
LEVERAGING
GOLD
Consider gold. Say
that you own a one-ounce gold coin. (I hope this is true several
times over.) Gold’s
price in dollars then doubles: $1,800 to $3,600. Your gold coin is
worth twice as much
in dollars. Of course, if the price of everything else has doubled,
your gold coin is
worth twice as much in dollars, not twice as much in goods. But that’s
still much better
than having held dollars instead of gold.
But what if your gold
investment was leveraged? What if you had gone into the
futures market to buy
the gold coin? The gold price doubles from $1,800/oz to $3,600/oz.
You had $900 of your
own money in the deal: 50%. Your investment is now worth
$3,600. Your profit
is $2,700 ($3,600 minus the original $900). You sell the gold coin for
$3,600, pay off the
$900 loan, and pocket $2,700. It cost you $900 (plus interest) to make
$2,700 free and
clear. You made close to 300%. That’s sure a lot better than 100%.
4
The
Gold Wars 5
But what if gold’s
price falls to $1,500? You would now owe $300 ($1,800 minus
$1,500). You have
lost one-third of your $900 investment. This arrangement called
buying on margin.
I assume that you
want a safer kind of leveraged gold, a kind where you can’t be
sold out for this
good reason: you never borrowed any money. You don’t have a margin
account. It’s as safe
as owning a gold coin -- you can’t be sold out against your will -- but
it still offers
leverage upward. Of course, it is risky on the downward side, too, but you
can’t be sold out
because you aren’t in debt. You want debt-free leverage. You can get it.
This is what North
American gold mining shares offered back in 2001. That was
when I told my Remnant
Review subscribers to start buying junior North American gold
mining shares. I got
an expert to give specific recommendations: Sam Parks He described
the leverage feature
in an interview with me in 2003.
Marginal producers
offer the most leverage to gold. Say that a mining
company can show a
profit of $5.00 per ounce of production when gold is
$350 per ounce. If we
up the gold price by $50 per ounce, and the
company’s profit
increases to $55 per ounce of production. This leverage of
course works both
ways. If gold goes down $50, the company’s profit per
ounce will go from
$5.00 per ounce to a loss of $45 per ounce.
The potential for
North American gold shares then was that gold’s price has been
down for so long that
investors had forgotten about gold, or were still scared of buying it.
They had heard of
gold coins, but hardly anyone ever buys them. The number of
national dealers who
make a living by selling bullion coins like American eagles or
Canadian maple leafs
can be counted on the fingers of two hands. The general public isn’t
in this market.
Another gold market
is the commodity futures market: mostly debt-based, highly
speculative, and very
risky unless you put down a high margin. The contracts are so large
that hardly anyone
can afford to invest without a lot of margin debt. Also, investors are
personally at risk for
every cent borrowed.
This leaves gold
mining stocks, which are mostly South African mines -- two miles
deep, operated by
Africans with AIDS, and supervised by a socialist government. The
few other mines that
stock brokers know about are the larger North American mines. The
most famous is
Barrick. But Barrick has a problem: it is sold short. That is, it has
promised to deliver
gold in the future at a fixed price. Parks commented in 2003:
In the past, hedging
was profitable for the gold producers. In its 2001
annual report,
Barrick stated that over the preceding 14 years, it had made
$2 billion from its
hedging activities.
GN:
Two billion?
SP:
Yes, two billion. For
several years, Barrick was the most popular gold
stock. Much of its
popularity came from its profitable gold-hedging
activities. But, as
the gold market began to improve in mid-2001, the effect
on Barrick turned
negative. Gold stock investors shunned the company
because it had so
many ounces sold forward.
GN:
Quantify that -- how
many ounces?
SP:
At year end, 2002,
Barrick had 18 million ounces sold forward at an
average price of $341
per ounce.
GN:
What effect has
Barrick’s hedging had on its share price since the bear
market in gold ended
in 2001?
SP:
At the beginning of
the 2001, two companies were trading around $17 or
$18. Newmont, the big
major known for its disdain for hedging, is currently
about $28 and Barrick
is stuck at $17.
Sadly, I got stuck
with Barrick. It bought out Homestake, which I owned. But,
even so, it is around
$50 these days.
What Parks did for Remnant
Review subscribers in 2001 and early 2002 was to
identify smaller gold
mines that most stock brokers had never heard of. (They still
haven’t.) These are
marginal mines, i.e., they are high-cost producers. But they are well
positioned for highly
leveraged returns. They get “more bang for the buck” when gold
rises above their
production cost per ounce. These mines are still the Rodney
Dangerfields of
mining. They get no respect. Brokers still are unaware of them. Remnant
Review
readers who took Parks’ advice are up by 30 to one or more,
depending on a
mine’s leverage.
That was then. This
is now.
But enough about how
to make money. Let’s get back to the other meaning of
leverage: influence.
PERSONAL
LEVERAGE
My initial example of
leverage was a U.S. Senator with a committee chairmanship.
In a sense, I want to
put you in a similar position within your circle of influence. That’s
what The Gold
Wars is really all about.
The number of people
who are willing to read a report like this is so small as to
constitute a remnant.
I’m using the word in the biblical sense. God told the prophet Elijah,
who believed himself
to be alone in Israel,
Yet I have left me
seven thousand in Israel, all the knees which have not
bowed unto Baal, and
every mouth which hath not kissed him (1 Kings
19:18).
You have decided to
read this report. You have designated yourself as someone
who is interested in
gold. This is not the equivalent of being interested in pork bellies or
even copper. But
there are more people today who are interested in gold than back in
2001.
Gold used to be the
industrial world’s money. Then World War I broke out in
1914. The banks
suspended redemption of gold for paper money. This broke all contracts,
but the governments
all ratified this action. Then the governments had their central banks
confiscate the gold
that had been stored in the vaults of the commercial banks. The public
has never returned to
a full gold coin standard. Instead, the world went on a fiat money
standard.
The governments’
confiscation of the public’s gold transferred enormous leverage
to central banks,
which can now issue credit money without the restraining factor of a
threat of a gold run.
The last gold run ended on Sunday, August 15, 1971, when President
Richard Nixon
unilaterally “closed the gold window.” He announced that the U.S.
Treasury would no
longer honor the IOU’s to gold (T-bills) in the possession of foreign
governments and their
central banks. In the first half of 1971, there had been a run by
central banks on U.S.
gold (meaning gold which was held in the vault of the Federal
Reserve Bank of New
York) at $35 an ounce. Nixon ended this run on gold, which was a
run against the
dollar, in the same way that the world’s commercial banks ended a similar
run in 1914, after
the war broke out. He broke the contract.
If you go to the
Bureau of Labor Statistics, you can use the Inflation
Calculator
to see what has happened to the dollar as a result of Nixon’s
action. Select 1971
as the base year (or “debased” year). Enter $100. Then
click the CALCULATE
button. See how much after-tax money it would
take today to match
the $100 in purchasing power in 1971.
http://bit.ly/BLScalc
The day after World
War I broke out in July, 1914, a wise investor with money in
the bank would have
gone to the bank and demanded gold. The handful of people who
did this got their
gold. But hardly anyone will do this, even when war breaks out. The
masses lose. They
trust their banks, they trust their governments, and they get their gold
confiscated.
He who trusts the
government to honor its contracts in a major national crisis is a
fool. Most voters are
fools. Most investors are fools. They trust professional liars -- the
same politicians who
keep promising the moon in election years but who don’t deliver
after the election.
They pay a heavy price for their misplaced trust.
If you want a classic
pair of examples of those who trust the government and those
who don’t, watch Gone
With the Wind. Rhett Butler uses his ship to run guns -- illegal,
the North says. He
also gets paid in gold -- unpatriotic, the South says. When he is caught,
he deliberately loses
at cards in the yankee prison, so he knows that the commander won’t
hang him. He is in a
position to settle his bets in yankee dollars. He has gold hidden
somewhere. In
contrast is Scarlett’s father, driven mad, sitting in poverty and holding
bonds -- “good
Confederate bonds” -- as his only form of liquid capital.
No, gold is not like
pork bellies. Central banks still settle their accounts at the end
of the day by means of dollars and gold.
Gold is not just another commodity.
No comments:
Post a Comment