A Wild Week at the PDAC: Part II – Ed’s Story
Ed Bugos here. Jeff has been somewhat derailed in Lima, Peru, this evening in what will almost certainly turn out to be another interesting blog post. In the meantime he asked me to fill in.
I just returned from the PDAC myself and had quite a few of my own thoughts on it all – which hopefully you will find of some interest.
The PDAC was huge this year. More than 20,000 attended. I've been coming to events like this for years. The word “overwhelming”, as Jeff put it Tuesday night, was the first time it entered my mind in the 11 long years that I have been promoting the gold story. But let me explain, because I think it would be a mistake to don your contrarian hat, just yet.
I will admit that I believe there is a little froth in the market, and a correction is likely (and may have begun in earnest today, something about which we sent an alert out to subscribers last night) . But, it is not certain to be very large. I've laid out my views on that in our Interim Update to subscribers in which I changed our short term outlook on 5 of the 6 sectors in which we follow. However, the key term here, is “short term” (which to us means 0-3 months).
In the early days of this bull market in the last decade I used to enjoy engaging people on my flight to the PDAC, or wherever I happened to be heading, especially if it was a mining / gold related investment conference.
I had much to say that was fresh and new. You might have expected a 65 year old gray hair to rant about the tech bubble he missed and the new economy hype that the world bought into in those days, but a 33 year old gold bug? With a youthful vigor I would go on about over-valued tech stocks, an inflationary monetary policy, an overvalued reserve currency and the end of the new era. The latter had hardly begun in people’s minds, and the verdict on inflation and instability was out: it was long dead. It was the new economy! Kudlow dawned his Uncle Sam costume and CNBC paraded him around as “Lawrence of America.”
Just to give you a sense of it, let me tell you a story.
Back then I was a good looking young man (before my hair turned gray) but I'm not making it up when I tell you that I was literally laughed out of an establishment by two young girls who wanted to buy me a drink.
It was a sunny day in March 2000. I just quit my stock brokerage career. Hallelujah! It was a liberating change in my life, but also a big one. For, I gave up the big incomes, and set out to live by my own means, and yet, I chose to pitch a story that everyone on earth thought died nearly two decades earlier. The girls sitting at the bar when I went up to get a drink that day asked what I was working on. I told them I was raising money for a new gold mining venture that was going to make me rich.
In hindsight, I would have held my ground, but then it shook me for the time being…their laughter. It actually did hurt my feelings. I was embarrassed and had to leave with my tail between my legs. It wasn't long before my confidence returned. In fact, it made me more confident than ever…whatever doesn't kill you, right.
But such was sentiment about gold then. At times I felt like I may possibly be the only person in the world who believed in the stuff!
I got married shortly after that. My wife didn't believe me about gold either but she didn't leave me despite the financial sacrifice. Just let him play with his little business idea, she thought. I've been successful before, so maybe this one will work out too. But gold $2,000? Yeah right.
In fact I wasn't alone. It was not a glorious time for anyone in similar shoes, even though there were all of 5 of us back then. But that only inflamed my passion, as did my experience with those barflies I met earlier in the same year. So I wrote my heart out. I thought I was single-handedly taking on the dollar, or the Machiavellian dollar as I called the policy back then – that was when people forgot the dollar (or stocks for that matter) could fall in value…we are seeing the same in bonds today.
Somewhere around 2005-06, however, during the most significant expansion in the gold-bullish crowd since 2003, and preceding the latest one just following the 2008 crisis, I stopped engaging people.
Gold had been rising year in and year out since 2000.
I took a lot of verbal beatings on the way up. “Gold and commodity prices would fall faster than they rose,” my hate email would read. Gold was going to $150/oz, the deflation camp exclaimed! “Why buy gold when in this modern day you can simply jump from one currency to another,” one promoter objected. It'll never get past $400, everyone said. And as it approached that number, it was a bubble! Yes it was.
Several of the large brokerage houses issued reports back in 2001 and 2002 that gold was in a bubble! So it must have been. Even Barron's did that, and after 9-11 to boot, even though, in the words of their peers, the world had changed after 9-11. It will never get past $500 said the bears nevertheless! Never! Even resource guys said so. I got one email back then from a reader who back in 2001 bet me 100 shares of Eli Lilly against 1 gold ounce that his equity would outperform my gold by so and so time. Let's just say I never got my gold ounce.
But after 2005, the bull market in gold did change.
The inflection point changed. It was after all, as I said earlier, a “significant” expansion in the bullish crowd. It was the point at which the bull market gained critical mass…a recognition point. The froth began to come in during 2006 but worked itself out quickly with a sharp 2002-like correction in the summer that year.
I felt vindicated by events, as did many bulls. Our ultimate targets were still much higher but the early bears were so clearly wrong that it resulted in a big migration of newbies into our camp. By then, I started to worry that the gold share environment was ripe for what I dubbed a “primary liquidation” of the kind that was apparent in the Barron's Gold Stock index during the 1968-70 and 1974-76 corrections of up to 50 or 60 percent. I shut down my gold and currency newsletter in 2006 recommending that investors sell down their gold equity positions (to a bare minimum but not entirely), and split the proceeds between buying bullion directly and shorting the stock market via ETF. I shied away from telling the gold story as passionately as before – I felt the short term was fraught with risk, especially in the miners. Jeff tracked all of my recommendations throughout the 2000s and did up the following chart showing how I stopped recommending gold stocks and told many to sell in the year before the greatest collapse in gold stocks in history.
I took a sabbatical. My wife gave birth to a new baby girl in 2005. So suddenly I was a father. I better get a real job I thought. After a short stint with on outfit I went on my own again. But, I’ve become to uncompromising to hire (except to a person like Jeff who wanted to venture with me on The Dollar Vigilante – as he told me, “if you ever feel like it is time again to sell like you did in 2007, I and the readers of TDV want to be the first to know!”).
The 2008 crisis, and the massive liquidation in gold shares that accompanied it later in the year, breathed new passion into my pen. My employer then didn't buy it. “It didn't work,” they said, ‘people went long gold and it didn't protect them' he meant. At the time the price of gold had fallen from $1000 an ounce through the $850 level where I said it might bottom, and all the way to $695 where I said it would bottom. By then they'd lost faith though, especially since the miners took such a beating. The psychology of the bull market was in jeopardy but the new bulls that came in during the 2006 period did not all abandon ship. Some went over to the deflation camp but most of them maintained their bullish convictions.
I am not yet concerned about a repeat of the 2008 crisis, especially not in gold and gold stocks – the latter are as cheap as they were in 2003 given gold prices where they are today. While, as I say, there is some froth in the market today, it is nowhere near as frothy as it was in those late days of 2007-08 before the miners tumbled. And I am telling the story with as much zeal as I was in 2003.
On the plane to the PDAC this week I gave my speech to a University of Calgary professor to whom I explained the boom-bust cycle, and the fundamental causes of a rising gold price. At dinner I engaged a nice family from Ireland. When they found out I was there for the mining conference they asked why it was so busy this year – that they couldn't get a hotel in town. Neither could I, we laughed.
I explained to them why the conference was so busy. Mining has become very profitable because, I said, people expect too much from their governments. They listened intently as I explained further that as long as people expect their government to solve all their problems, mining will continue to boom because there are only two ways governments can fund their activities – taxation and inflation – and the latter is easier because it can be under-reported, un-noticed, and its effects unpredictable because its causes are misunderstood. In fact, governments wouldn't be able to raise taxes for many of their agendas – especially the unpopular wars.
One cab driver after another wondered why the PDAC was so busy this year, and one even asked me about it.
I gave him the same story with a different angle – I had to explain how it wasn't only gold that went up, but rather that everything goes up in price when governments resort to printing money. He caught on when he realized that house prices were going up too. He also mentioned how he has to work harder and harder to make “more” money that “buys” less. I told him, exactly. He asked me if he should buy gold now. I said it is best to buy it when it comes down 5-10% off its highs, not at times like this though…or to average in slowly over time.
I had lunch with a miner and one of his sons who was not very optimistic. I gave him the story. His eyes lit up – I think he gained an insight or two. I had many such episodes at the PDAC ending in my flight home where I sat next to a pretty young MBA in the entertainment business. She is an ad executive for one of the net's bigger music sites. Obviously not shy, she asked me right off, “so, what's your 5 year plan?” Haha. I don't have one of those these days. I explained about the importance of preserving capital in times like this…that investing in gold and hard assets wouldn't necessarily make her rich but would protect her wealth from confiscation by government through this policy of inflation. She listened. She didn't laugh. She said she even learned a few things.
It is a different time than it was ten years ago.
But, something important should be observed. None of these people promoted me on gold. They wondered why the PDAC was so busy. They wondered what caused the boom-bust cycle. They wondered how much I had. They wondered, in fact, what the hell was going on out there, and what they should do about it. As Jeff pointed out, with his “No one owned gold before $1,000/oz and now everyone thinks it is too late to own gold after $1,000/oz,” he is quite correct and to this day the REASON to own precious metals eludes almost everyone – even many at the PDAC itself who just own it “because it's going up”.
The precious metals story is no longer the ugly duckling I wrote of in the days before 2005 – at least not in the industry. However, the retail buyer is not yet so bullish that he is promoting me on gold. None of the cab drivers promoted me on gold. They inquired. I promoted them. We are at another inflection point much like we were back in 2005-06 in my view where a new generation of new buyers to gold are about to come in. Slowly they awaken.
They will form a top of some significance as they pile in through the door. Where it will be who knows.
The low end of our target this year is $1650 (after a small correction first). It could run real hard up to $2000, or to $2700 if the right catalysts were to arrive on the scene. Our guess is the high will be somewhere between the $1650 and the $2000 level in 2011, and maybe it gets to $2700 in 2012, amid lots of volatility.
From there we might see a repeat of the 2008 crisis with gold prices falling up to 35%, say from $2700 down to roughly $1800. Or maybe not. Maybe that crisis will happen from a slightly lower gold price, like say $2000, if, for example, governments turn over a new leaf and abandon their boom time policies sooner than later. Or on the other hand, if, for example, they intensify their production of inflation and bring on Mises's crack up boom. The crack up boom is when the currency goes into a final death spiral – something I still hope doesn't happen – but I know that Jeff considers it the most likely outcome.
The new crowd will talk about the inflationary apocalypse. The crowd that came in after 2008 – the Paulsons of the world – had been the dominant voice in the bullish camp since but soon it will be a whole new generation. It will be the younger generation because it will be fashionable and they will be worried about their futures.
Whether the bull market in gold ends with them or continues on afterward is not necessarily cast in stone. It will depend on how governments react to the next crisis, which might come sooner than 2012 to be sure. It may well come this year, though from higher levels in many assets and commodities yet in our opinion. And how governments react to the crisis will depend on how the public perceives the causes. We have come a long way from blaming these things on events like terrorism. The world can see that Greenspan's forcing of the interest rate down to 1% in 2003-04 had a little something to do with the subprime crisis.
However, I'm getting ahead of myself. The next bullish leg in gold is too far in the future to predict with any precision. The current leg – the one that started after the 2008 crisis – is just two years old. We expect it will last another one to two years before the next significant liquidity crisis hits it too hard.
By the time we get to the end of this road I expect that there will be shows as big as PDAC in every major city in the modern world. As you ride in the taxi to the show the taxi driver will brag about how he just invested everything he has in gold.
Until then, we will keep riding this wave. This isn't just an investment, it is a movement.