All That Glitters

Respect that glitters
Thursday, March 20, 2008
The Contra Guys

TORONTO (GlobeinvestorGOLD) - Gold is searching for something Aretha Franklin sings about, "A little respect". Most articles that mention the record gold price are quick to point out that it really isn't such a big deal because in inflation adjusted terms, the price is still far below the $850 (U.S.) price it hit in 1980. That may be strictly true, but let's put that into context. That record close 28 years ago was the briefest of blips, a culmination of a sharp speculative frenzy set off by the Iranian hostage crisis and consequent oil shock, the Soviet invasion of Afghanistan, and the looming inauguration of cold war hawk, Ronald Reagan.

Just two months before, gold was trading at only $373. Two months after the high, it touched $481.50.

A better comparison would be to see how gold has done since it was deregulated in 1968. At that time it could be had for $35 an ounce. On that basis, the total return over the intervening 40 years has been better than 2,500 per cent, not a bad store of value for a "barbarian relic".
This time around the bull market in the mythic metal has a more solid feel. Sure, there is a heavy element of speculation, but it seems to be more broad based and less frenzied. Taking a position in gold is a lot easier now through vehicles like trust units and ETFs, and transaction costs are lower.

The main threat to those who want to see gold go higher is the potential for stepped up selling by central banks. That's always possible. However we take the conspiracy theories about how gold is being suppressed by shady powers in order to maintain confidence in the global financial system with a large grain of salt. The more logical scenario is that those who were reluctant to sell off their gold are feeling mighty good about their vaults right now and apt to holding on.

Meanwhile, those who dumped their gold, like our own Bank of Canada, which sold off nearly all of its reserves at a fraction of today's price to get rid of an "unproductive asset", are seeing the folly of putting too many eggs in the U.S. dollar basket.

If former U.S. Federal Reserve Chairman Paul Volker was still in the driver’s seat instead of Ben Bernanke, gold speculators might be cringing. His policy jacked up interest rates to 20 per cent inducing a fierce recession, a contraction of the money supply and a massive deleveraging of the financial system, crushing the gold price.

Instead we have Helicopter Ben, who while not facing the same scenario Mr. Volker did, seems to think that the cure for a drunken spree of excess liquidity is a double shot, straight up. Meanwhile, most other major central banks are nervous about the sinking U.S. dollar and firing up their own printing presses. As long as creating money out of thin air is seen as the solution, rather than the cause of the current financial difficulties, it should be a good time to hold the golden cards, not fold them.

Outside of the Contra portfolio we took divergent methods to gain exposure to gold. A few years ago one Contra Guy loaded up on units in Central Fund of Canada (CEF.A-TSX), which holds gold and silver bullion in a roughly 50-50 split. He is maintaining his position in expectation of further profits. The other contrarian is sitting on a bevy of penny plays that include Goldstake Explorations (GXP–TSX), Opawica Resources (OPW-TSX), Patricia Mining (Pat-V) and South American Gold (SAG-TSX), confident that at least one or two will double in the next twelve months. That's how we spell R-E-S-P-E-C-T.

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