Michael Pascoe and the Snarky Disinformation About Gold


Yesterday we closed with a promise to talk about asset allocation in 2010, followed quickly by a just-as-pleasurable un-anesthetised tonsillectomy. Both are about as exciting.

Instead, we’re going to review your 2010 asset allocation strategy in a roundabout way by exposing some of the snarky disinformation being put out by the mainstream media about gold, courtesy of Michael Pascoe at the Age.

By the way, apologies for any typos and grammar errors in today’s edition. Your editor was late getting his copy to the e-mail senders who normally clean it up. We’ll own up to every single error.

First though, let’s just check to see that markets are still functioning normally. That is, let’s just check to see that heavy government intervention is supporting house prices (by providing guarantees to home lenders), GDP growth (by spending money on infrastructure), and disguising the true state of the labour market (by lying about how many people are out of work).

Yep. Situation normal, all fouled up. The oil price, the U.S. dollar, and bond yields were all up on bullish industrial production figures in the U.S. The “recovery” meme is taking a tenuous hold. Stocks were down. Because why would stocks rise if the economy were recovering?

Ah. Well that tells you something right there. It tells you that stocks haven’t risen in anticipation of a global recovery. They’re just enjoying the benefits of all that monetary and fiscal smack being peddled in Washington, London, Tokyo and Canberra. It’s hard to rally on fundamentals when you’re already over-valued.

Speaking of value, let us now return to the question of element number 79 on the periodic table. The snarky article we mentioned at the top is this one from Michael Pascoe at the age, titled “There’s more gold where that came from.”

In the article Pascoe takes on the issue of “peak gold.” But how well has he done in accurately stating the argument for gold? And more importantly, is he right about the relationship between market prices and gold? Well, obviously we think he’s pretty wrong. But let’s see what he’s said.

“Part of the dogma of the less rational gold bugs is that the world is running out of the stuff. As an article of faith, it makes a pleasant change from the idea that fiat money is about to be exposed as huge confidence trick and we’re heading back to the caves.”

Webster’s defines “dogma” as “a religious doctrine that is proclaimed as true without proof.” Already you can see what Pascoe is up to. Gold bugs are nutters and zealots. Apparently 5,000 years of monetary history where gold has proven utility as a medium of exchange and store of value does not qualify as empirical evidence of gold’s value. There’s no pleasing some people, especially those who come to an argument with their mind already made up.

But that’s fair enough. Opinion journalists get paid to give opinions. They cloak themselves in supposed objectivity because that makes their views more respectable to the mainstream. But we’ve never been concerned about respectability here at the Daily Reckoning. Why base your judgments on what other people will think of them?

We’re entirely subjective in our views. But at least it’s transparent. And at least we base our conclusions on facts and arguments. And we’ve not once argued here – although perhaps some gold bugs have – that the world is running out of gold. That is not what “peak gold” means at all.

The first step in any debate is to define your terms. So we will do so here and say that “peak gold” mean’s declining annual gold production. We’ll prove that in a minute. But just so it’s clear, no one in this space is saying the world is running out of gold. But gold IS getting harder to find and more expensive to mine. And the supply of paper money continues to grow faster than annual gold mine production.

We won’t dwell on the subject of paper money too much longer, except to say Pascoe’s dismissal of the current status quo is nearly as laughable as it is naive. He says ‘peak gold’ “makes a pleasant change from the idea that fiat money is about to be exposed as huge confidence trick and we’re heading back to the caves.”

Seriously. How can any objective observer take a look at fiscal and monetary of the last three years and assume that central banking and fiat money are not a giant con job on the general public? Fiat money allows the government to create money backed by nothing. Not only does decrease purchasing power – especially hurting savers and those on fixed income – it accelerates the misuse of real resources.

When it comes down to it, it’s a kind of theft. The government prints money and gets the benefit of using it first before purchasing power is diminished. It trades paper money for real goods and services – things which take labour and raw materials to produce. The systematic inflation inherent in fiat currencies IS theft of real labour and resources.

As long as that inflation makes house prices and stock prices go up, it appears to please everyone. But it’s the argument of this publication that the monetary regime in place since August of 1971 – when Richard Nixon took the U.S. off the gold standard – is a) a fraud, and b) in the process of disintegrating. It’s disintegrating because, at it’s heart, it’s based on the idea that money doesn’t have any real tangible value.

Gold does, of course, have tangible value. To the extent that it’s intrinsically valuable, it’s valuable because it’s physical properties – relatively scarcity, durability, transportability, divisibility, homogeneity – make it particularly useful as a monetary unit of exchange. To suggest it has no inherent value is to misunderstand the qualities that make money useful, and more importantly, sound.

But back to the issue of production. It’s not just the nut jobs in the newsletter industry warning that gold production is falling. It’s the gold miners. Of course you have to discount what they’re saying to the extent that they’re talking their own book. But they do know their own business and they are saying that 2009 could be the last year for some time that gold production rises.

Omar Jabara, the spokesman for Newmont Mining in the US, says that in terms of production, “2009 is the outlier as far as the trend. The trend is that production has been in a general decline since 2000. Why does that matter?

Pascoe says, quite correctly in theory, that price discovery and market mechanisms help ensure that supply grows when prices rise. Or, in his own words, “The ‘peak gold’ story isn’t quite as dodgy as some of the ‘peak oil’ scare mongering the more sensationalist media have trotted out over the years – we’ll never run out of oil as the market mechanism very successfully rations it and because, at a price, we simply make the stuff. Shell, for example, is spending $20 billion building a gas-to-diesel plant in Qatar.”

Running out of gold? Don’ worry!! We’ll just make more of it!

It’s hard to reconcile this with the fact that the gold price has been rising since 2000, but gold production has not. In late 1998 the gold price was in the mid $200s and annual global production was just under 2,500 tonnes per year. Since then, the gold price is up 340%. Yet production this year is set to be just over 2,400 tonnes. That’s an increase over last year, mind you. But still down from the production level over ten years ago. So why aren’t higher prices attracting new producers?

Well there are a couple of factors here. First, a lot of the big mines that were producing in the 1970s – especially in South Africa – are seeing production declines. That’s not say all the mines are played out. But they’re having to dig deeper and pay more for labour and energy, all of which leads to rising production costs.

That is, despite the rising price, production costs are rising faster for some companies. Those companies are making less money from the price rise, leaving less to invest in new exploration and production. Besides which, surely Pascoe would know that there’s no such thing as just-in-time gold production.

You have to find the stuff. And it has to exist in an ore body that’s economic to mine at current gold prices. And you have to get permits to mine it. All of that takes time and money – usually years – during which central bank printing presses are busy churning out new paper notes at a much faster rate. The supply of paper money is growing a lot faster than the annual mine supply of gold, which does not look like growing much at all in the coming years.

Barrick Gold’s Vincent Borg says that, “it’s a fact that gold production form mines has been in decline since 2001 and has gone from 85 million ounces to about 75 million ounces a year…It sort of goes down about one million ounces every year and or forecast is that it will continue to decline despite the higher price.”

In most markets, higher prices to attract new producers. But as we’ve said before, quoting our friend Doug Casey, gold mining is a lousy, capital-intensive, highly-regulated business. It is not like opening a lemonade stand. Therefore gold production does not automatically increase because prices are higher. That’s a fact, not a dogma.

Yet Pascoe persists. He quotes StandardBank analyst Waler de Wet, who, presumably because he has a South African sounding name, must be right about gold. De Wet told clients that, “Given that the US gold mine production is 10% of global mine production, if you assume gold resources are proportionate to current mine production, global resources could be 330,000 tonnes. That is another 137 years of production.”

The argument here is that higher gold prices turn more resources into proven reserves. That is, marginal gold projects become economically viable with higher gold prices. But the reason that these projects were marginal to begin with is that they were more expensive to bring into production (away from infrastructure, lower ore grades, smaller ore bodies). If the margins don’t improve on the projects, there’s no guarantee anyone is going to bother producing them, especially if the cost of production is rising as much or more than the gold price.

Further, why would anyone assume that “gold resources are proportionate to current mind production?” It seems like a rather large assumption to make. As anyone who’s spent any time analysing resource stocks knows, a resource is not the same thing as a proven reserve.

The energy market is fortunate that higher oil prices make other sources of unconventional more economically viable. That’s why Australia’s LNG and coal-seam-gas industries have done so well this year (a trend Kris Sayce profited from in Australian Small Cap Investigator and Alex Cowie is bullish on in Diggers and Drillers.)

But you can’t just “make more” gold the way you can make more energy. The world doesn’t need oil. The world needs fuel and the work that fuel can do when you burn it. Thus, high oil prices lead to investment opportunities in oil and other energy sources, which eventually brings down the price of energy.

The funny thing is that the last time we checked, the oil prices is above $70. This confirms the peak oil thesis. The age of cheap energy is over. Oil is still out there. But it’s getting harder to find and more expensive to produce. The cheap stuff is going fast.

With gold, of course there is more gold in the ground waiting to be mined. But who’s going to mine it? And at what cost? It’s an expensive business. And even if exploration spending boomed and turned up even more gold, it will take years to bring into annual mine supply.

You could argue that the rising gold price is only a function of scaremongering by newsletters like the Daily Reckoning – or that it’s being ramped up by speculators and fund managers. This would explain why gold producers didn’t increase production to meet rising prices. They saw the price rise as fictional or fundamentally unsound.

We wouldn’t agree with that argument, mind you. But it’s one way to explain why gold production isn’t more price sensitive. The other is the simpler one: gold production is hard to increase, no matter what economic theory or Michael Pascoe says.

But by the end of the article you can see that Pascoe doesn’t really have his head in the argument, just his heart. “The gold price’s recent stall thanks to the Greece and Dubai-inspired up-tick in the US dollar demonstrates just how much of the gold rally has really been a currency story rather than anything intrinsically valuable about the yellow metal.

“It’s just another alternative to greenbacks, one that doesn’t do much productive or pay dividends but relies purely on speculation for any non-currency price improvement. The unkind might think that’s why the gold bugs keep the scare campaigns coming – that and the need to sell more internet newsletters.”

He’s partially right and mostly wrong here. Yes, the rising gold price is a function of the bear market in paper money. Gold is better money than paper, if you’re a gold bull. That makes gold stocks a leveraged speculation on higher gold prices. We don’t have to say any of that to sell newsletters. After all, this one is free.

But we keep saying it because it continues to be important. Only a numbskull would ignore all the warnings about paper money coming from the markets in the last two years. Rising fiscal deficits…insolvent banking systems…the re-monetisation of gold by central banks as a reserve asset. These aren’t articles of faith. They’re facts.

Of course gold isn’t an investment panacea. But it’s something you should take a lot more seriously than Michael Pascoe does. Unless you’re worried about being respectable amongst those of your friends who thought that a currency crisis was something that only happened in history books, and not something you ought to prepare for.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.


  1. Great article Dan. There’s another article out today entitled “Gold Buying by Central Banks Signals Sell as Past Haunts Future” buy a couple of what can only be described as “novices” from Bloomberg!

    In their bid to become experts in the Gold Fraternity, they’ve unfortunately forgotten Black Monday in October 1987, and a catalogue of subsequent events. In their clearly uneducated opinion, banks buying gold means time to sell. Why is a year after in 1988, which i hasten to add was just tremor, compared to the current financial earthquake, did the Central banks start buying up gold? I’ll tell you why, because they were running scared of overvaluation and illiquidity and inflation. If this does’nt ring any bells then stop reading this now, as you really need to go back to your day job, as a Stock Ananlyst or Trader. I mean, Stock Analyst’s have got the market right now, i hear you say. Wrong…its a fools prophecy that has been initiated out of desperation to make the banks minuscule returns, and stimulate public confidence. How else would a stock market rebound, i was just about to say the middle, but that would mean it was dissapating, i should say the beginning of the world most biggest financial crisis since the man first landed on the moon. Rememeber the banks have repay their clients, shareholders, otherwise they close, again ring any bells. Oh, forgot to mention, and repay their government bailouts.

    Hummm…back to those banks again. The Central Banks in particular propping up the whole fiasco. I would love to be a fly on the wall at the smaller banks policy meetings, “ok chaps, this is how it works, Central Banks are buying gold, which could be a bad sign, any suggestions”??? “Yes boss, lets create a greater positive market psychology and by more stock, this way the market will continue to climb and private investors wont move to gold”!

    To late, as the savvy among us already have i’m afraid, so another dip in market sentiment, aint going to save you again boys, and all that’s going to be slushing around is your money, or should i say your Governments money. Bailout phase two immiment, HYPERINFLATION next stop, all change!

    Anyway, enough of my summantics, lets get back to Bloomberg article. to sum up Central Banks bought gold after a tremor, most Governments sold their gold in 1998, 10 years after. Unfortunately the UK government sold there gold later, in what was know as the “The Brown Bottom” correctly described by Bloomberg, well done folks. So after 10 years of Central Banks buying, they sold some holdings, which made the market bottom out 3 years later.

    We also have to look into why some of these banks sold their gold in the late 90’s, toxic Asian assets from 1997 crisis, and lets not forget the European Monetary Union in 1997. How else were the likes of Ireland & Co expected to reach structural parity.

    This is clearly great cause for concern if they continue to buy gold, but hey, we’ve got at least another 8 years of a the gold bull to run.
    Then they will flood the market and regain control until the next downturn.

    You know the old addage, “good as gold”. It was invented for reason.

  2. I was just about to mention the nutty Bloomberg article myself. Central bank buying is a signal to sell, indeed. Ignorance must be sheer bliss. But actually, having been a trade journalist myself, the truth is that publictions pay people very little to know nothing in particular.

    As for sneering at peak gold, well, it doesn’t even matter since we haven’t gotten to peak human population yet. There’s a lot less gold per human on the planet than ever before, which must point to some ratio-type significance. There’s a lot less everything per person, in fact, which relates to why someone would want to hold onto a bunch of physical gold.

  3. Does anyone actually pay much attention to Michael Pascoe? He seems to think that Australia’s GDP numbers are good and he appears off in his own world these days.

    By the way, one thing to take into account is that the demand for gold in India for jewellery use seems be be in the long term decline. Also there is a lot of gold around yet to be recovered…i.e. it is sitting in industrial tips. (and plenty of companies are trying to work out a cost effective way to “mine” this)

    It is actually hard to get a balanced story on gold from anywhere, the bulls omits facts and so do the bears. It reminds me of the property prices debate.

    Greg Atkinson
    December 16, 2009
  4. no wonder packer sacked pascoe :P

  5. Sorry darling, I can’t buy you that $50,000 necklace you wanted for ya birthday – The world’s run out of gold you see. But I hung onto the chop bone from me dinner last night and am more than happy to poke the pointy end through your nasal septum to make ya look pretty. Hmmm … Works for me? :)

    Simply put, if the world “runs out” of gold, who really WILL care? Might even be a good thing in a LOT of ways.

  6. A few of the more traditional Indian types might struggle a bit to cope? But they will. As will the Japanese eventually adjust to a whale free diet I’d guess? (I am assuming they eat the things???) And ladies who liked wearing exotic dead furry animals stopped liking wearing same – Even though exotic dead furry animals look as pretty as they always did. The world IS changing. In lots of ways. And rapidly. So be careful of the assumptions you make based on history. Some will hold. But others won’t. IMO.

  7. Greg,

    couldn’t agree more.

    The bulls and gold bugs twist the story to their own desires just like the internet bubble bulls were justifying insance prices for companies with a log and a .com

    As do some of the bears.

    Ned. Agree with you also. Gold has intrinsic value – until it doesn’t anymore.

    in the stone age – sharp pieces of stone were really valuable as were animal teeth and mammoth ivory.

    5,000 years aint much history. Gold will be worthless one day and historians will laugh at our obession with it.

  8. prozak, Ned, we seem to be on the same wavelength regarding gold. There seems be an awful lot of gold now sitting in vaults doing, well, absolutely nothing. I use to collect wine years ago, at least when I got sick of that I could drink the stuff :)

    By the way the story I read about gold in India basically said as people become more affluent they found new things to buy besides gold. In other words, gold has competition in terms of being the gift of choice at weddings etc.

    In terms of industrial use, there is enough gold around now to last a long, long time.

    Finally gold ain’t oil. Gold can be reused over, and over again.

    Greg Atkinson
    December 16, 2009
  9. Folks,

    history is a wonderful archive, and yes histories may well laugh in years to come. But we’re talking about the Status Quo, which is gold has had for the past 2000 years as a recognised device for negotiating. So it’s not going to be in this millenium.

    If stone age man could have used those sharp pieces of stone to strike gold, then we wouldn’t even be having this forum, as gold would have been out of most peoples reach today, a bit like flying to the moon in the future with Richard Branson.

    But they didn’t, and thats my point. It’s still there and without an immediate solution to extract it all, it will remain an unknown quantity, regardless of economic condition.

    Speaking of history, i have no vested interest in Gold, apart from a metal detector. And i’m only highlighting some facts that appear to be ommitted, when supposed clued up professionals cast the net of Acumen on unfounded waters.

    Gold is fascinating however you look at it, historically or otherwise. Modern civilisation probably wouldn’t exist without gold. However i’m sure it still would have, but with something else rare like Ivory!

    However, as an ex estate agent, i can tell you why property prices went through the roof, simply put; Greedy Vendors, and unrealistic pricing by agents, desperate for instructions. Loose lending, leading to the bubble. What happens after the pop is down to the vendors, agents and banks. A bit like “Groundhog Day” End of that debate.

    Right…..i’m off metal detecting.


  10. Greg,
    I am just a logical type chap where I can be and try not to get emotional about any sort of investments. At times I’ve said buy gold and others I’ve said sell.

    Gold is a subject that a LOT of people get emotional about. After shorting gold I once had one chap tell me that I didn’t “deserve” to make money from gold! Like you had to be a true believer to deserve the almighty gold to bequeath you money.

    I haven’t looked in a while but I do recall that the gold supply situation was fundamentally unsound. It is only the speculation/investors that is taking up the additional supply. This is enough to drive the bubble at the moment and it may be anough to drive it to “the moon” that all gold bugs talk about.

    GOLDS inflation adjusted value is now higher than all previous prices except for the last bubble in 1980.

    I’ve got the data to back this up (Jan21 prices and inflation adjusted prices since 1975) should anyone disagree and have posted it here before.

    My average inflation adjusted price since 1975 for Jan 21 2009 is 661. The Median is 592. I am trying to come up with a weighted average that is fair if anyone has suggestions.

    So you see either we are headed for hyperinflation or gold is in a bubble.

    My vote at present is a bubble.

  11. Mystic Meg,

    there is stone age evidence of panning for gold in bulgaria.

  12. thanks for that Prozak…good luck with your vote.

  13. just another alternative to greenbacks!

    Actually, the greenback is just another alternative to gold. And so what if there is another 300000 tonnes to be mined over the next 130 years, there already exists at least 150000 tonnes, most of which was mined in the last 100 years or so.

    And anyway, quantity has little if anything to do with value, it is utility that gives an object its value.

  14. I had a good long chat to a Yugoslav immigrant to Oz who had an interesting take on the intrinsic value of gold – Work here for three months scrouging same – Hop plane to Phillipines for 3 months during which time spend 2 weeks with each of 5 wives strategically positioned so they’d never meet (2 weeks with each terminated by deep and obvious mourning over having to return to Oz for 3 months to find more gold so he could visit her again in 3 months for 2 weeks) – That was in 2002 maybe? And gold’s gone up a LOT since then. So I imagine he has at least 15 wives now maybe? But it sounded like a lot of effort to me … :)

  15. Maybe he opted to remain “faithful” to the original 5 wives and just spend longer with each??? Perhaps … But either way I can imagine the fun economists have with their mathematical models – Cell FE14043 on Raw Data Sheet of Gold Price Forecast – Number of Oz Yugoslav migrants highly motivated to find product by prospect of continuing to have sufficient funds to visit multiple wives abroad – Please enter estimate! :)

  16. Too bad some of those “stone age” folks aren’t still around. Perhaps they could teach us how to domesticate animals.

    63 y.o. American
    December 17, 2009
  17. Sugar is on fire!

  18. You’re a legend Dan! For all the emperical aura the mainstream money morons project from their ill-formed egos, they are but arrogant ignoramuses. The tristar relationship between greed, counterfeit theft and the vehicle of paper money is beyond them because it is so simple, just like every perfect plan. It is also said that the ‘ultimate understanding’ in spirituality & true religion is so simple as to evade all but the lucky few.

    The hardest thing in life is to stick with what you truely understand and believe, in spite of the lizard brain’s impulse to run with the crowd.

    Cheers to all you reckoners

  19. prozak I also try to plod along and be logical. I don’t see the point in getting emotional over gold, real estate or any investment…there are simply more important things in life.

    Mystic Meg..good luck with the metal detector!

    By the way the snow looks like it will be early here in Fukuoka this year and we had a cool summer. Guess the old planet isn’t heating up everywhere just yet :)

    Greg Atkinson
    December 17, 2009
  20. Justin I have no idea why your so thrilled with sugar but judging on your enthusiam now Im going to have do some research and find out.
    I suppose if your hoarding some of it you can always eat it if the price goes down.

    Lachlan Scanlan
    December 17, 2009
  21. Lachlan,


    & if you can find it observe the price of sugar back through the 1970’s & early ’80’s. Then compare it to say, maybe…..gold?

  22. Justin, can you access a multi decade chart URL? What is your logic beyond the recent fluctuation and the Soviet era denial of Cuba and other producers from world markets? Do you know that the US last week acknowledged that an agent of theirs had recently been detained in Cuba for disseminating illegally imported laptops, mobiles and sat devices (in a similar vain to that campaign organised for the Northern suburbs of Tehran minority elite pre the Iranian election)? Obviously corn ethanol is not a viable energy pathway and Cuba is a strategic asset that the US continues to show by action that it is ready to fight to subjugate Cuba no matter what bs Obama narratives his spruikers getout on the wires. Do you know that the post Soviet era world price collapse nearly took out the Australian industry? Is there anything beyond the ethanol story that would support a return to a world price boom?

  23. I was following NY sugar #11 about 6 months ago at around $17. Look now and its $26 and of course too dear. Next time I buy a coffee I’ll swipe the sachels! Whats going on with sugar?

    Lachlan Scanlan
    December 17, 2009
  24. A mob called TD (economists Derek Burleton and Dina Cover) are quoted as giving a “long-term, inflation-adjusted average price” here Prozak if it’s any help:


    G’day Lachie, Sugar – Yeh, full credit to Justin – He’s been screaming same for the best part of a year now – As I recall? Might give the value added side at home a skip though – The end product can cause a bloke to fall over (as opposed to just laying down restfully for a few hours) – In my experience … Should that be IME? :)

    Think I’ll stick to houses though – I’m a boring chap who’s never gotten addicted to making his capital quickly. And prefers losing it slowly – Should losses be what the government/market gods ordain.

  25. Another big day for sugar! A record high!, this generation anyway.

    What sort of profit would BIKER Pete have made if he bought sugar#11 12 months ago? His margin account would be overflowing!

    I suppose it could be due for a correction though. Monetary disorder is certainly confusing.

  26. Pascoe and Denning and CNBC say gold has no yield, but many of the precious metal majors DO pay a good dividend–despite being lousy , capital-intensive businesses.

  27. I have to agree with the more qualified journalist here.
    Michael Pascoe.


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