Does This Mean You Should Sell Your Gold?


We are enjoying our month in the country. Not exactly a vacation…but close. We work in the office from 8AM until lunchtime at about 2PM. Then, we turn our attention to other things. In the summer, that means painting. We’re repainting the billiard room, because Elizabeth decided that the curtains needed to be changed. And then, we’re repainting a farmhouse, top to bottom, before renting it out.

Painting is a fairly relaxing occupation. You can do it while thinking about other things. Rolling the walls or cutting in the corners, some men might think of going hunting…or playing golf. We try to figure out what is going on in the world economy. For these are remarkable times we live in. We see what is happening…pretty much what we expected. But we’re not sure where it leads.

Readers may have noticed a shift in our thinking recently. Well, you can blame latex. As we were painting in the billiard room we began to see that governments are more incompetent than even we had realized. They can’t create inflation on demand. A few months ago, we were preparing for inflation…even hyperinflation. Now…we’re not so sure. The depression and the Chinese vigilantes may hold off inflation…even for years.

Does this mean you should sell your gold? Well…we wouldn’t go that far. Even in the Great Depression gold and gold mining stocks rose in price. And the one and only sure thing is that the world monetary system is dangerously unstable. We’d hold gold until it settles down. Just don’t count on getting rich from it in the short-term.

Here’s another reason housing prices are going down: housing priorities are changing. Baby Boomers are entering a phase in their lives when people typically escape from urban/suburban centers in favor of small towns and rural areas. If this pattern continues, it will mean a big shift of population, say the experts.

Remember, it’s what you do, who you do it with, and where you do it that counts. By the time a person reaches middle age, the first question is usually settled…the second is often in doubt…and the third is actively being considered. That is, few people begin a new career after the age of 50…but it seems like more and more decide they might want to try life with a new partner.

“I can’t imagine it,” said Elizabeth. “It just seems like too big an adjustment. It took me a quarter century to get used to you. I don’t know if I could get used to someone else…

“On the other hand, it might be fun to try…”

Well, for whatever reason, it seems like people are changing partners – even at a rather advanced stage in life. And as for the where to live – it’s a question on practically every Baby Boomer’s mind.

“I just got tired of living in the city,” said a man who spent his entire career in Paris. “Just too much hassle. I’d rather visit occasionally than live there.”

Our friend has moved to the country not far from here. He has set up a small woodworking shop in a garage and happily spends his time making chairs and tables. When his house is full of them, he’ll probably have to give them to friends and relatives.

“It’s much nicer living out here than in the city,” says another friend. “And much cheaper. You can buy a whole house for half the cost of an apartment in town…and then you don’t have to pay for parking…you can raise chickens and vegetables…and you can even heat with wood, if you want. You don’t really have to spend much money at all.

“And the quality of life is higher. Small towns are more friendly. They’re prettier…usually. They’re easier. So they’re perfect for people who are retired.

“And here in France, there’s another phenomenon. When people retire, they want to go back to where they came from. Usually, they have a house they inherited from parents or grandparents. So, they leave the apartment in Paris to their children, who are just building their careers. And they retire to the country. It’s not a bad way to live.”

Until next time,

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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  1. If the price of gold has been fairly consistent in recent times in the mid 900’s, why is it that a company such as Lihir has seen it’s share price drop to below $2.50 from mid $3’s, when it’s achieving significant levels of output with unhedged gold sales, and production costs in the $400’s AUD.
    Can anybody explain that, or is it just a BFB (BIG FAT BUY) waiting for the market to realise what a bargain it is.

    David (Brisvegas)
    August 20, 2009
  2. If I was interested in looking David, I’d be checking out their costs a lot more. Purely anecdotal of course but a mate said to me maybe a year ago maybe, that they started to fret a bit if the price looked like going below $800 per ounce – And I assume he meant USD. (Must admit that sounded pretty strange to me at the time – How had they managed to operate before that? But I wasn’t interested and didn’t quiz him on it. But that’s a bit of hearsay from then anyway.)

    I also have a vague recollection that their share price was around $1.67 about April or May 2008 – Again you’d have to check that please! But if I’m right that could make $2.50 sound expensive depending what you reckon is going to happen with gold generally; And what specifically is going on at their four operations – Lihir PNG, Ballarat and Mt Rowden in Oz and Bonikro in Africa as I understand it?

  3. David gold mining stocks are really hard to pick. Unless you see some analysis about a gold stock (or any other mining stock) backed up by some research by a mining engineer/geologist etc then I would give them a wide berth. It isn’t so much what a miner has dug out of a mine so far, but rather what is left. I have no idea what is going on with Lihir but my tip would be to go beyond the number crunching and try to look at the quality of what they have yet to dig up. (and economists/accountants/stock analysts have no idea about this)

    Greg Atkinson
    August 20, 2009
  4. Spot on Greg – So much to consider with different mines being so highly individualised in so many ways – political, environmental, grades, stockpiles, sulphur content, reserves – and that’s before you start wondering if the world gold price will go up or down – or the price of oil or even tyres. Knew a bloke a while back who invested in a mob that got a new management team he knew was good – They were – But they weren’t good enough to overcome yet another coup and whatever the pre-existing local labour whinge nonsense was that was floating around. Pig of an industry! Smile.

  5. This is unqualified info David but Ive been told that they may be responsible for some type of environmental disaster. Apparently the problem is hard to contain. I have no idea how much of this risk has or hasnt been priced in to the share price, if the story is true.

  6. Crumbs. Bill is a little cold on gold poor chap. Cant be a true crank then Bill.
    Looks to me for a little while like some pressure is building for a resolution to the action on the gold chart and USDX chart. If the USDX breaks down suddenly to around 72 then maybe the rally in everything may go nuts on the upside. Hopefully gold then gets to a higher trading range before the USDX stages a bounce which kills the rally off. Finally if gold does get into this new trading range then its possible that Aussie Au miners will hold up well in the event of a subsequent stocks correction or in a panick selloff(if you believe it likely). Consider also the devaluing of the AUD likely at the same time to hold up AUD gold prices.
    Despite all this there seems to be many going bearish on everything (gold,commods,stocks) again at present. Maybe the USDX will bounce in the very near term as Bill seems to be thinking.
    Its hard to see how gold can breakout to the upside considering the current, monstrous commercial short position :( but the chart does have that triangle pattern that says breakout. If I try to gamble on its direction however my trading history says I’ll get hammered so Im keeping out to save $.
    Maybe China will start buying some of that 6200tonne of gold they eluded to some months ago? Or is the Au rush in their own country keeping them happy until a panick gives them a buy signal?

  7. David/Lachlan,

    History of Lihir:

    March 2009 ~US$340 million raised via Institutional Placement and Share Purchase Plan
    June 2008 Completion of merger with Equigold NL
    February 2008 Board approves Million Ounce Plant Upgrade (MOPU) project
    May 2007 A$1.2 billion raised for close out of hedge book and elimination of debt
    March 2007 Completion of merger with Ballarat Goldfields NL
    December 2006 Commissioning of 20MW expansion to geothermal power station. Board approves US$7.5 million in expenditure for formal feasibility study into increasing annual production to approximately one million ounces per annum.
    September 2005 Rio Tinto management agreement ended. New independent CEO appointed
    July 2005 Official opening of 30MW geothermal power station
    June 2005 Board approves Flotation Circuit expansion
    November 2003 US$151 million raised for key capital projects
    July 2003 Maiden dividend paid
    October 2001 Heat Recovery Plant commissioned
    April 2000 Owner mining commenced
    September 1999 One millionth ounce poured
    May 1997 First gold pour
    November 1995 Construction at Lihir started
    October 1995 Initial public offering launched
    June 1995 Integrated Benefits Package adopted
    March 1995 Special Mining Lease granted
    September 1983 Exploration commenced
    August 1982 Gold mineralisation identified

  8. Note – only one divdend paid in all this time – I think 5 cents a share, in 2003. Plenty of capital raising going on, not a lot of direct return for shareholders. I guess people are betting on form. Now I don’t know about you but this is a pretty disgraceful record considering that they started out with one of the biggest gold deposits in the world.

  9. Thanks guys, appreciate your comments.
    My average buy in price was $2.20, so I’m OK at present I think.
    My broker (if you can believe a broker) has it as a buy with a $3.10 price target.


    David (Brisvegas)
    August 21, 2009
  10. David: I held Lihir shares a while back but got rid of them just before the capital raising. You probably understand that capital raising dilutes share value, well the capital raising was at $3.00.

    Personally I wouldn’t touch Lihir at above $2.40 a share, so it looks like you are okay in that regard.

    Brokers are weird.

    Research into the company says that it is a bit of a risky gold play (as Don has pretty much said). The problems it seems to have with its main mine can really affect potential future output. Have a look at news articles about Lihirs past issues, and see if they have potential to reoccur.

    Personally I think there are much better mid-tier gold miners out there – it just seems that Lihir is a popular mainstream choice.

    I did some research on (nearly) all the publicly listed gold miners in Australia and then picked some of my favourites to invest in. So far all but one are doing well.

    I recommend that you do something similar. Check out which miners have the best qualities and preferrably have already done a capital raising in the recent past (to avoid succumbing to one in the near future) and have a decent cash surplus. Being a current ‘producer’ of gold is a must unless you like gambling on the small-caps.

    I wouldn’t trust a broker any day. I believe the only person qualified to advise you on how to spend your money is…you.

  11. Oh and of course any company with debt should be assessed critically for it. Some companies with debt will be fine, others will have big problems.

    My major preference is no debt.


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