Utilities Yielding to Miners

"You know, the worst ain't so bad when it finally happens. Not half as bad as you figure it'll be before it's happened."
--Curtin (The Treasure of the Sierra Madre)

Those seeking dividend income often flock to utilities given the sector's consistently high payouts. However, the income-producing status of utes is currently being challenged by...mining stocks. The dividend yield differential has narrowed to decades+ lows.

Two things are going on. One is that utility stocks have been bid up recently, causing their yields to fall. The other is that mining stocks, despite their strong balance sheets and cash flows, have been crushed recently, causing their yields to rise.

While they have surely been disappointed that the sector has not yet responded to the present environment as expected, gold bulls are at least being paid well to wait.

position in gold

Dollar Dominance

We're talking 'bout the dollar bill
And that old man that's over the hill
--Simply Red

The US dollar has been touching multi-year highs as 'risk off' traders flee to what is perceived as the best house in a bad neighborhood. The below graph is telling in that regard.

At some point, the USD may be a meaty short candidate--particularly if you subscribe to the notion that the USD is in the process of losing its reserve currency status.

Another High

First class and fancy free
She's high society
She's got the best of everything
--Tal Bachman

CPI prints another 40 yr high at 8.6%.

Gold up on the news as perhaps central banker's chronic incompetence is beginning to sink in w investors.

position in gold

Stock to Flow Ratio

I don't know why
You treat me so bad
Think of all the things
We could have had
--Talking Heads

Nice point about stock to flow ratio differences between gold and other commodities. Stock to flow ratio is measured here by taking above ground inventory and dividing it by annual production.

Unlike most commodities, gold's stock to flow ratio is high. Nearly all gold mined over thousands of years still exists in its stand alone, elemental form. Because physical gold is durable and inert, it remains with us. On the other hand, annual gold production is relatively low, constituting only 1.5% or so of above ground stock. Consequently, gold's current stock to flow ratio is above 50.

Compare this to wheat. Above ground wheat stocks are rapidly consumed. Wheat put in storage is subject to decay. In order to meet demand, about 3x the amount of wheat inventory must be produced annually. Inventory turnover is high, resulting in wheat's low stock to flow ratio below 0.5.

Of course, the properties of gold that elevate its stock to flow ratio, e.g., durability, scarcity, etc, make it attractive from a monetary perspective. In fact, it seems to follow that commodities with high stock to flow ratios would constitute a nice short list of plausible monies.

The article stresses that stock to flow ratio helps explain pricing differences between gold and other commodities. Whereas the price of wheat is driven largely by supply/demand dynamics of its stock to flow ratio components, the price of gold is less subject to short term volatility. Above ground inventories are high compared to new supply and consumer demand.

Instead, gold price should be driven more by changes in institutional demand. The more institutions demand gold, the higher the price--regardless of inventory levels or annual production.

While institutions are often regarded as large financial entities such as money center or central banks, in a broader sense institutions represent societal rules and norms.

Stated another way, when it becomes more 'societally correct' to own gold, then price will go up.

Stated another way again, changes in institutional rules are likely to coincide with changes in price of high stock to flow ratio commodities such as gold.

Financial System Warfare

"Dude, we're on the grid!"
--Riley Poole (National Treasure)

Over the past month we've witnessed countries using the financial system to suppress behavior that they don't like. First it was the Canadian government freezing bank accounts and funding sources of citizen CV19 protestors and their allies. 

Then there has been the international response to the Ukraine situation. The US, EU, and other state entities have levied an array of financially-oriented sanctions on Russia to the point where it seems nearly impossible for people inside Russia to engage in external economic transactions. Even inside Russia, those sanctions have wrought chaos--sovereign debt downgrades, plunging stock markets, a cratering Ruble among them.

What should be clear is that modern financial systems, whose digital configurations are far easier to manipulate than in the past, are being used as geopolitical tools of warfare. Armed with these tools, governments can target either their own citizens (e.g., Canada) or remote citizenry (e.g., Russia).

This lesson is unlikely to be lost on at least two groups. One group involves countries with, shall we say, invasive aspirations. In anticipation of where escalating geopolitical tensions might head, Russia began decoupling its monetary and financial system from the international grid several years ago. For example, it substantially cut its US dollar reserves and increased its gold holdings. Consequently, the present barrage of financial system sanctions, while difficult to handle, has not completely incapacitated a more independent Russian financial system.

Given its aspirations to take control of neighboring Taiwan, China will undoubtedly prepare for a similar barrage before physically moving across a border (if/when). Any belligerent, for that matter, will need to decouple its financial system to the point where it will be able to survive the monetary salvos.

The second group involves citizens at large. The issue is captured in a question: Knowing that a government can, at its discretion, freeze or confiscate digital bank accounts as well as block digital financial transactions of any citizen, do you really want to have all of your financial resources on the grid?

The more people wake up to the specter of government-waged financial warfare, the more likely they will begin re-positioning for greater financial sovereignty. 

This re-positioning to combat geopolitical financial warfare seems likely to include gold.

position in gold

Betting on Disorder

Oh, a storm is threating
My very life today
If I don't get some shelter
Oh, I'm gonna fade away
--The Rolling Stones

Gold touching $1900 on both inflation and Russia/Ukraine war fears.

Gold is a bet on disorder. Increasingly, investors appear to be sensing more of it.

position in gold

Stagflation and Gold

You're calling my name
But I gotta make it clear
I can't say, baby
Where I'll be in a year
--Aerosmith

Stagflation is a period of economic malaise the combines stagnant economic growth with rising prices. The last major period of stagflation in the US occurred in the 1970s. Some will recall those gas lines.

Chatter about pending stagflation is getting louder.

Here is an interesting analysis that considers gold in a prospective stagflationary environment. The basic thesis is that, in a stagflationary environment, gold is one of the last commodities bought. As inflation picks up, businesses and speculators first buy consumable commodities that they need (e.g., oil, ags, base metals). 

However, as business prospects dim (the 'stag' part) and there is still worry about inflation, buyers turn to gold.

What about Bitcoin as an alternative to gold? As proposed in the piece, Bitcoin is likely to benefit more from 'risk on' environments with ample central bank money printing. In 'risk off' situations with tighter monetary policy, then the focus turns to gold.

We've certainly seen Bitcoin bid higher over the past few years of gargantuan central bank money printing. More recently, we've seen 'usable' commodities bid to the moon while gold has languished.

All of this is consistent with the above propositions, and suggests that gold's time is approaching.

This is an interesting thesis--one that I might put to work.

position in gold  

Holing Out

Oh no, no, no
I'm a rocket man
Rocket man burning out his fuse
Up here alone
--Elton John

Nice stick save by Hoofy's Heroes to pull market out of the abyss yesterday. The short covering rally that began midday reversed a -1000 down day on the Dow and even added the better part of percent.

The rebound leaves a sense of more unfinished downside business pending. Perhaps we're seeing it this am, with the Dow down nearly 800 this am.

Personally, used yesterday's melt to pretty much top off where I wanted to be in the miners. Also picked here and there at small positions and pockets of value. 

Will look to do more of that if prices head lower.

Correction Territory

I'm sick and tired of you setting me up, yeah
Setting me up
Just to knocka, knocka, knocka
Me down
--Bruce Springsteen

Futes melted in the hour or so before the open, leading to a weak open. SPX now in 'correction' territory.

Pretty oversold in near term. Snapper (snapback rally) around here to relieve some selling pressure would be intuitive.

Meanwhile am picking away at pockets of perceived value. Also continue to build miner positions as it feels like opportunities to do so are becoming, uh, precious...

Forty Year High

And when I'm lost 
You'll be my guide
I just turn around
And you're by my side
--Madonna

The CPI printed at +6.8% YOY this am, the highest annual rate in almost 40 years. The inflation gauge has now exceeded 5% for six consecutive months.

In what may retrospectively be perceived as one of the larger market disconnects on record, gold continues to languish in this environment. Bullion has more or less flatlined on the news and the miners have been sold, with many names marking new lows for the move.

I continue to add to the sector on weakness, and to shift bullion ETF funds into miner shares, as it seems the stars are favorably aligning the risk/reward relationship for precious metal producers.

position in gold

Positioning for Retirement

Doing the garden
Digging the weeds
Who could ask for more?
--The Beatles

With retirement coming up fast I've been doing a few things w.r.t. personal finance. I've been saving more and spending less in order to build cash. Have also been selling some stuff on ebay and elsewhere to collect extra 'juice.' Also helps thin things out at the house--much needed.

Preparations are being made to rollover my 401(k) from work. I'm looking forward to allocating this capital among far more choices than those available thru the current fund administrator.

In both my brokerage and IRA accounts, I've been buying dividend paying stocks. Dividends are real cash that can provide a significant, and perhaps under-appreciated, income replacement in retirement.

Inflation is particularly bad for retirees as it erodes purchasing power of savings. To hedge against the prospects of Big Inflation, I've been building stock positions in the oil complex (e.g., ENB, XOM) and miners (e.g., AEM, AGI, PAAS). 

The miners appear particularly attractive. The financial strength of many in this group has perhaps never been better. Solid balance sheets and cash flows. Many are paying significant, and increasing, dividends (which helps me kill two birds with one stone). The sector has been pounded down to attractive valuation levels--particularly given the growing inflationary environment.

I've been swapping funds out of precious metal ETFs such as PHYS and into the miners to more fully express my perception of this situation--albeit at a slightly higher risk profile. 

positions in AEM, AGI, ENB, PAAS, XOM

Inflation and Stocks

Hundred dollar car note
Two hundred rent
I get a check on Friday
But it's already spent
--Huey Lewis & the News

Some believe that if Big Inflation cometh, stocks will get creamed. Surging prices will drive folks to spend less. Simple ECON 101.

Lower demand for goods and services should be bad for stocks.

A counterargument is that Big Inflation occurs when people get nervous about the value of their dollars sitting idle, so they put them to work today assuming that they can buy more today (i.e., goods, services, AND stocks) than tomorrow. The psychology feeds on itself, creating, in its ugliest form a reinforcing cycle of higher prices and money printing that feeds it.

Although producers are hurt on the input side with higher costs, they can offset them at least partially by raising prices, thereby preserving profit margins to some degree. To the extent that producers own tangible assets, these are also likely to appreciate in value as inflationary pressures rise--giving a boost to book value at least in nominal terms.

In this scenario, stocks are likely to rise. Perhaps not to a degree that completely compensates for purchasing power decline, but at least to serve as a partial hedge that preserves wealth (note Kyle Bass estimates perhaps 85% coverage).

Historical analysis supports this thesis. Weimar Germany, Venezuela, Zimbabwe. Equities tended to rocket in the local currency--even if they didn't keep pace with exchange against more stable currencies (and gold).

One thing seems increasingly clear. In Big Inflation environments, stocks are likely to be a better place to be than cash.

It also seems that, in the current market environment where the CPI is starting to print some big numbers, stocks seem unfazed--like they want to go higher.

position in gold

Out of the Tube

Step right up, and don't be shy
'Cause you will not believe your eyes
--The Tubes

The October CPI increased at a 6.2% annual rate. That's the largest monthly print in over 30 yrs. Gold and silver both ripped higher on the news.

Brace up, 'cause the toothpaste is coming out of the tube.

positions in gold and silver

1933 Double Eagle

Crapgame: Then make a deal.
Big Joe: What kind of a deal?
Crapgame: A DEAL deal!
--Kelly's Heroes

Yesterday the only 1933 double eagle decreed to be 'legal tender' by the US government sold at a small numbers Sotheby's auction for a record $18.9 million (listing here). It had previously been owned by shoe designer Stuart Weitzman, who bought it in 2002 for a then record $7.6 million.

Although the coin has not been 'slabbed' by PCGS, company experts examined it in-hand and formally assigned a grade of MS65 with a corresponding cert. Similarly, CAC has conferred a virtual 'green bean' on the coin.

In 1933, FDR issued Executive Order 6102 which essentially outlawed private ownership of gold. The mint had already struck nearly 500,000 $20 gold pieces (also known as 'double eagles' or 'Saints' after the coin's designer Augustus Saint-Gaudens) for that year, but none had left storage yet. In concordance with the president's order, issuance of 1933 double eagles was banned and the entire inventory was subsequently melted.

Well, almost the entire inventory. 

A few 1933 Saints snuck out the door. Despite tireless efforts of the 'gold police' to recover the rogue twenties, a few remained at large. One wound up in hands of King Farouk of Egypt, who repeatedly rebuked attempts by federal agents to confiscate the coin. As the mainstream media likes to tell it, after decades of due diligence (and who knows how many million$ in US taxpayer resources), the federal government finally seized the coin in what is sometimes referred to as a 'secret service sting operation.' 

In reality, the feds struck a deal with a British coin dealer with whom the coin surfaced. Rather than melting it down, the feds subsequently accepted a face value payment of $20 from private parties in exchange for a 'certificate of monetization' (above) declaring that the coin was legal tender for public trade and ownership. That ceremonial transaction directly preceded the 2002 auction. 

Did I fail to mention that the federal government and dealer shared the auction proceeds?

A few other 1933 Saints are known to exist. A couple reside at the Smithsonian Institution. About 15 years ago, ten examples were found in a Philadelphia attic and dutifully submitted to the feds by the finder. I'm sure that federal bureaucrats were more than happy to trade ten crisp $20 Federal Reserve Notes for the coins. 

Legal battles involving the the Philly hoard of ten (which, not surprisingly, has not been melted) are certain to intensify now that the market has priced the stakes in the hundreds of million$.

As for any 1933 Saints that have retained their freedom, perhaps yesterday's sale will motivate a few rogues to trade on a market where their freedom is not questioned--the black market.

In Motion

Just when you think she's yours
She's flown to other shores
To laugh at how you break
And melt into this lake
--Echo & the Bunnymen

Sure looks like gold wants to mount an assault on its mid 2020 record at about $2050. The near term downtrend line has been broken, and prices are tracing a cup-and-handle pattern.

As previously noted, we're on gold's time.

position in gold

Letting It Fly

Time keeps on slippin,' slippin,' slippin'
Into the future
--Steve Miller

The always insightful Stan Druckenmiller zooms with the USC student investment fund group. In the first 20 minutes he offers prepared remarks, primarily concerning his current macro view, while the remainder is Q&A.

Druck lets it fly in part one. After unprecedented monetary and fiscal intervention in response to CV19 last spring, he contends that both the federal government and the Fed are being reckless on a historic scale by continuing to pump stimulus into the system after indicators show that the economy no longer needs assistance. Debt has exploded and prices are rising. He is preparing his family trust fund (a few $billion large) for Big Inflation with bets against the US dollar and on commodities. 

Although he remains long stocks, Druck says that he'll be surprised if he isn't out of equities before year end. I'm not sure whether he thinks inflation will hurt stocks or whether he believes prices are too high (he mentioned that he sees bubbles in nearly all assets classes).

Several interesting notes from the Q&A. On lessons learned from his mentors, Druck highlighted the advice he received about envisioning what things will look like in 1-2 years rather than where things are today. Today has already been priced in. Also enjoyed the Soros story about sizing positionss accordingly. Attractive opportunities should be well funded.

Re digital currencies, he suspects that the dollar et al will be headed electronic. However, he isn't keen on Bitcoin or its brethren being the chosen one.

On unequal wealth distribution, Druck suggests there has been no greater facilitator than central banks--a point these pages has made before.

In prepping for inflation, was surprised there were no questions or comments on gold. I'll take that as a bullish contrarian indicator...

His remarks on shorting also surprised me. While the last 10-12 years have been 'miserable' on the short side, Druck said that recently his shorts have been doing better than his longs. Moreover, given the historic macro situation, he suspects that upcoming years may be very friendly to shorting assets that are wildly overpriced. 

This inspired me to start thinking about setting aside modest short side space in my taxable account for some put projects. Also set up a short candidate watch list. 

position in gold 

On Gold's Time

"I will fire when I'm goddam good and ready! You got that?"
--Maverick (Top Gun)

Concerns about inflation finally seem to be making their way to the front page. But where's gold? While it's moved higher, gold hasn't exactly been zooming. 

Silver's been a bit perkier, and seems to be resolving a bullish-looking pennant pattern.

But still. If markets truly are discounting mechanisms, then shouldn't gold have sniffed out pending inflation by now? 

Of course, in the land of intervention ad infinitum, there is some doubt about the functionality these days.

Funny thing about gold, though. When it takes off, it has a way of leaving even ardent bulls behind. 

Gold isn't on our time. We're on gold's time.

positions in gold, silver

Golden Reorientation

People talking
They're saying that you're leaving
So unhappy
With the way that you've been living
--John Waite

Gold closed yesterday at over $2020/oz. Record high. It is up another $25 this am.

Silver making hay too. Up over a buck this am to ~$27. Miners moving in sync. Pan American Silver (PAAS) now more than a triple from March lows.

Using terms from punctuated equilibrium theory (Gersick, 1991; Tushman & Nadler, 1985), after a long period of convergence, it feels like reorientation is underway.

References

Gersick, C.J.G. (1991). Revolutionary change theories: A multilevel exploration of the punctuated equilibrium paradigm. Academy of Management Review, 16: 10-36.

Tushman, M.L. & Romanelli, E. (1985). Organizational evolution: A metamorphosis model of convergence and reorientation. In L.L. Cummings & B.M. Staw (Eds.), Research in organizational behavior, vol. 7: 171-222. Greenwich, CT: JAI Press.

positions in gold, PAAS

Disorderly High

We'll be fighting in the streets

With our children at our feet

And the morals that they worship

Will be gone

--The Who

Spot gold closed at an all time high yesterday at $1901/oz, exceeding the previous record set in 2011.

Hard to imagine a record close attracting less fanfare. Guess folks are distracted by all of the disorder around them.

Exactly.

position in gold

Disorderly Sponsorship

I must've dreamed a thousand dreams
Been haunted by a million screams
But I can hear the marching feet
They're moving into the street
--Genesis

Yesterday gold topped $1800 for the first time since 2011. Silver launching from coiled position as well. Reflected well by the chart of Pan American Silver (PAAS).

Pretty breakout from textbook cup and handle pattern.

As we've noted many times on these pages, precious metals are bets on disorder--whether than disorder be financial or social.

Given current events, it is easy to see why this bet is attracting sponsorship.

position in PAAS