Saturday, November 17, 2012

My Observations at the 2012 Hard Assets Investment Conference in San Francisco

Attending the Hard Assets Investment Conference in San Francisco has been fruitful, if not eye-opening.  After all, it's gold bugs preaching to the choir.  Here's the agenda and list of speakers:

Attendance is down from 2010, which is a good thing, according to Rick Rule, as bear markets beget bull markets, so the take down in mining shares should be viewed as a buying opportunity.

Most mining shares have severely underperformed the actual physical spot prices, and most presenters forecasted that the mining shares should provide positive leverage in a market of rising prices for precious metals.  Paul van Eeden, a long-time gold bug, was bearish, as he believes inflationary expectations have exceeded reality.  He has his own money supply metric, and he educated the audience on the difference between the exploding monetary base (thanks to the Fed) and money supply figures, which have stagnated as banks are not lending.  Many in the audience didn't know the difference, which is troubling, but understandable, I guess.  This is presumably one of the more informed crowds on hard currencies, and yet, they didn't understand basic central bank policy actions, and couldn't differentiate the indirect relationship between the monetary base and money supply.

Long story short, banks are hoarding reserves (and earning a guaranteed return, by the way) in reaction to the 2008 liquidity crisis.  Folks are understandably nervous, and the hoarding of cash checks money velocity--and its accompanying multiplier effect.  That's why van Eeden believes money supply growth is steady, and not flat (hence, the need for QE 3 was more for influencing market expectations), but not soaring, either.  His investment thesis is moderate inflation is bearish for gold, as inflationary expectations have soared beyond reality.

He was cornered by worried gold bulls after his presentation and some lively discussion occurred.  I honestly believe most of what he posited, but I diverge from his viewpoint contextually--we may not have high inflation now, but the monetary base represents the POTENTIAL for runaway inflation later.  In other words, the coals are in the barbecue grill, and only fuel needs to be added to the fire.  What is now mild inflation can turn to high inflation if input and labor costs rise, which becomes a self-fulfilling spiral of higher inflationary expectations.  This fuel could come in the form of any black swan event, whether it's a physical shortage of some commodity, war breaking out in the middle east, labor strikes demanding higher wages in the face of higher consumer prices, etc.  We don't know what we don't know...

Those who follow Jim Sinclair would also disagree with van Eeden, as Sinclair is a leading proponent of currency induced cost push inflation.  Both Sinclair and van Eeden correctly called the bottom in precious metals after the turn of the century, so it will be interesting to see who will end up correct--again.  My bet is on Sinclair, as his track record is longer, and he's been bullish on gold since the 70's after President Nixon closed the gold window in August, 1971.  Ron Paul, anyone?

Rick Rule gave his usual outstanding bullish case for gold, and even more so for mining shares which have been beaten down mercilessly.  His speech essentially made the case that bear markets are merely buying opportunities for buyers who like hunting for bargains.  I talked with him after his speech also, and I queried him about his partner Eric Sprott's position on the price suppression of paper gold and silver.  Rick, being a former Goldman Sachs employee, downplayed the effectiveness of naked shorting long-term.  I somewhat agreed, but we also agree that short-term, it is quite effective.  I'm more of a conspiracy theorist than he is, as I have seen collusive bear raids on biotech upstarts, so naked shorting is alive and well in equities--and in the futures pits.  Being an investor in battleground biotech stocks has given me insight on the abuse of the "Madoff exemption", which basically accords broker-dealers (market makers) the ability to create unlimited phantom shares for "liquidity" purposes.  My viewpoint is it allows them to get their friends out of trouble when the naked short goes horribly wrong.  It can buy the shorts time to cover at more favorable prices, as shares tank as a result of a bear raid.

Rick's point is that market makers may be friendly rivals, but they have a general distrust of each other.  So the collusion would break down and counterparties would call in their chips (fails to deliver) sooner rather than later.  My observations are that many hedge funds have a network of co-conspirators, which enable them to execute these bear raids synchronously.  The infamous bear raid warning of Dendreon shares is living proof--I saw that post on the Yahoo message board minutes before hundreds of millions of dollars of equity disappeared within 30 seconds.  I thank my stars (and intellect) I didn't have a stop loss put in, because all that equity loss reversed itself the next morning when trading resumed.  Many unsuspecting investors lost millions that day, having been sold out at the bottom due to their stop-loss market orders.  For those who don't recall, I explained very early on the difference between a stop-loss (market) order and a stop-loss limit order.  With a stop-loss order, there are two trigger points, and those who didn't know the difference, lost thousands or even millions.

In any case, Rick also implored that having tons of gold in the ground is not a great indicator of value because time is money.  It takes resources (permitting, water, energy, labor) and the WILL of miners to extract said gold.  And as the go/no-go decision keeps getting delayed, the value of your bet decays.  As long as the price of gold is too low to make digging it up uneconomic, investors are sitting on dead money.  That bit of advice was worth hearing, because I listened to a few companies who made compelling cases that they were literally sitting on a gold mine.  However, as I learned through Rick, getting it out of the ground feasibly is a different proposition.  The obvious solution is a higher gold prices converts formerly uneconomic mines, economic.  I should learn more at some of this morning's working sessions.  Stay tuned.

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