Peak gold theory gains impressive adherents
In his latest Basic Points analysis, global market strategist Don Coxe suggests investors maintain a high exposure to gold and gold miners whose production comes from politically secure areas.
Author: Dorothy Kosich
Posted: Monday , 22 Feb 2010
RENO, NV -
Global market strategist Don Coxe, chairman of Coxe Advisors, said he believes in "a hitherto-undiscovered erogenous zone in gold bugs: peak gold-which could be the latest Big Thing since peak oil."
In his latest Basic Points, Hard Rocks and Hard Shocks, Coxe credits "Aaron Regent, Barrick's market-savvy new CEO" for "fueling the flames of desire" through the concept of peak gold.
Regent has noted "that new mined production of gold has been declining for a decade," suggesting this could prove to be the equivalent of peak oil, the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline.
Much of the recent commentary on gold, Coxe said "is that Obama's deficits, coupled with Bernanke's money-printing, could produce either a Depression or runaway inflation. To us, this is an argument investors really should take seriously."
Coxe advised that "a holding of gold and gold sticks offers excellent protection under both extremes, and attractive potential under a regime of moderate inflation and modest recovery."
In his analysis, Coxe noted that a "big boost in bullion prices has not meant a big jump in gold production-but was actually accompanied by declining output. Rather, he adds, "the kinds of mining companies in which you should invest are those that recognize that each ton of ore taken out of ground brings the mine closer to closure."
"A mine's closing is painful for stockholders and management, but usually a disaster for a community," he observed. "Therefore, responsible mining means mining some lower-grade ore during period of high metal prices to expand mine lives. This not only serves the community, it protects the value of the company's biggest asset-the mine."
"This was illustrated a while back when Freeport McMoRan announced a slight reduction in its copper and gold output, which meant earnings came in modestly below the estimates of some Street analysts," Coxe said. "'Some of these responded with criticisms of management's ‘failure to execute,' and argued that shareholders should reconsider their approach to the stock."
"These criticisms bespoke not sophistication, but ignorance," he added. "When copper and gold prices soared, that gave Freeport the chance to mine some lower-grade sections of its Grasberg mine, thereby extending its life and smoothing its earnings growth."
Coxe has argued that "investors should overweight the gold mines and underweight the bullion if they are bullish on the metal, and reverse the strategy if they turn bearish on the metal."
"Quite simply, higher gold prices not only mean more profits from existing reserves, but likely mean major additions to publish reserves," he explained. "You win-or lose-two ways on a significant move in metal prices."
Coxe also advocates one other alternative form of previous metals investing, royalty and streaming companies. While the pioneer in the field was the original Franco-Nevada, which has acquired imitators and competitors, he advised "the field doesn't yet look so overcrowded that investors' returns will shrink. "
In his investment recommendations, Coxe recommends investors "maintain high exposure to gold bullion and the gold miners whose production comes from politically-secure areas."
"The core belief system for gold is that governments can't be trusted," he advised. "Investing in miners dependent on the sustained honesty and wisdom of conspicuously dubious governments may work out for a time, but the principle behind that strategy is oxymoronic."