Gold to Reach US$1000, Economic Lessons From Ancient Egypt

The focus at the Diggers and Dealers conference in Kalgoorlie is not on credit but real money. Here at the Old Hat Factory we simply call it gold. Newmont Mining’s Pierre Lassonde repeated his claim that the gold price will soon “have three zeroes in it.” That’s on a per ounce basis. “I just don’t know what the first number will be,” he quipped.

Will gold reach US$1,000? $2,000? Higher? If the U.S. dollar reaches its intrinsic value, the first number in gold may even be a four or a five. And if you think that’s unreasonable, of course it is. Market panics are not reasonable. They are irrational. And there’s plenty of precedent for massive change in the value of government-issued paper money not backed by something of tangible value (like gold.)

We happened on some notes we jotted down at Phillip’s Judge seminar in Melbourne a few month’s back. Judge runs Anglo Far-East Bullion, and did a great job of showing how wealth is transferred during periods where the value of money is in dispute. His analysis also goes to show you that while times may change, human nature doesn’t. People still do stupid things. And prudent people try to make sure that when the bad things do happen, they don’t happen to you.

“There are five lessons from ancient Egypt,” Judge said. The first lesson is that a major economic crisis will eventually become a currency crisis. The second lesson is that the majority of people always have a false sense of continuity and are unprepared. The third lesson is that when money is debased, people begin to question its real value. Most things people think have value (like expensive televisions) will be deeply discounted to reality. The fourth lesson is positive. If you identify asset of real tangible value, you can establish a large position at a low price. The fifth lesson is a simple reminder: today’s strategy may not work for tomorrow.

It all makes sense. For example, counting on the next government to improve the purchasing power of your money is yesterday’s strategy. The value of money is a good barometer for the health of a society. And when a society is unhealthy, money is not sound, and all values (monetary and social) are unstable. That’s the reason gold always gets a bid when a monetary crisis leads to a social crisis.

Because we live in modern Australia and not ancient Egypt, we have the option of owning gold shares, in addition to owning gold bullion. Australia happens to be a very good place to be a gold miner these days. And thus it’s a pretty good place to be an investor in gold shares, if you have done the proper diligence on gold companies.

“Australia alone accounts for over 650 million ounces of endowment so it is a great region to be in,” said Joc O’Rourke, the president of Barrick gold’s Australia Pacific operation. Barrick is the largest gold company in the world. It’s spending nearly $57 million looking for gold in the Asia-Pacific region, including Australia.

As readers of the Australian version of Outstanding Investments know, there are many much smaller gold companies looking for gold in Australia. Gold exploration is by far the largest component of minerals and metals exploration budgets in the country. We’ll keep looking for small Aussie producers, explorers, and prospect generators to add to our long-gold position.

In the meantime, our nerdy Gold friends in Perth have opened up a website to feature their proprietary research on the Aussie gold sector. You can find the site at www.goldnerds.com.au We got this note from them yesterday:

“Dear Dan:

“GoldNerds is open for business. DR readers can get an exclusive head start on understanding the Australian Gold sector and be among the first to sieve through the ASX gold sector in a way that has not been possible before. This is it, the first public announcement!

“We're looking for cheap gold. With central banks pumping money supply up by around 12% pa, we were looking for investments that would survive an inflationary volcano, and naturally drawn to the gold sector. But when we tried to research the Australian offerings we were struck by the lack of a comprehensive comparison. Nowhere could we get a list of who has a resource, and what it costs. Indeed – there wasn’t even an up to date list of which companies on the ASX were IN gold.

“So we’ve done the legwork and research ourselves. It’s taken 10 months, and we’ve collected a team of 12 to do it, but it’s finally here. A spreadsheet with shares, options, market cap, EV, resources, reserves, locations, status, production, cash costs, cash, debt, hedges and all the cost ratios you could want to compare. There’s over 7000 data points in our full spreadsheet. Heaven for number-crunchers and bargain hunters!

“We found over 200 companies with more than a $10m market cap who are serious about gold or silver.  The good news for investors is that there are plenty of opportunities for bargain hunting. The Australian market is under-analysed, there are plenty of companies the market has missed.  Look at the random noise in the graph (on our site here). There is little rhyme or reason to the cost of the resources.

“The Australian market hasn’t woken up to the value of having rights to underground gold. Gold companies are valued on other factors like production or cash costs. But if the gold price spikes to $2,000 an ounce, the value of these underground resources will be leveraged like a catapult. Currently you can buy a stake in underground gold for as little as $10 an ounce (EV/oz — EV is a better measure of the value the stock market is putting on a company’s resources than market capitalisation; in the GoldNerds spreadsheet we do both). There are even three producers with gold resources valued at less than $30 an ounce. On the other hand, the median price of gold resources on the ASX is about $130/oz. And well known take-over target, Newcrest, is around $225/oz.

“Cheers, Joanne Nova”

PS:  ‘EV’ is an recognised standard measure, it means Enterprise Value, and is calculated like this, EV = market cap – cash + debt.  It’s what you’d end up spending (in theory) to own the company and settle its books.”

Dan Denning
The Daily Reckoning Australia

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