Up and Down Wall Street

All that’s gold doesn’t glisten. That melancholy assay applies in particular to the shares of companies that mine the precious stuff. While bullion has taken its lumps this year, it’s still up something like 18% over the past 12 months. In sorry contrast, the mining shares, which had a relatively brief but brisk upswing, have been marked down sharply, and investors’ seemingly only interest in the group is to sell whatever stray nuggets they still happen to possess.

Which to us spells opportunity. More to the point, it does also to a couple of savvy investment pros — Alan Newman, who puts out the unfailingly valuable market commentary Crosscurrents, and Darren Pollock, a seasoned, risk-conscious portfolio manager and principal of Cheviot Value Management, which calls Santa Monica, Calif., home. Both Alan and Darren evince a healthy skepticism of whatever the conventional Street wisdom of the moment happens to be, and sedulously avoid the usual sell-side platitudes. Neither is overly thrilled by the outlook for the economy.

Alan points out that gold stocks have languished or worse for months, even as equities as a whole staged an impressive rally. But he’s convinced that the next move for gold shares will be sharply higher. He’s strongly cautions, however, against rushing out to scoop up the mining issues until the market overall suffers a meaningful correction, which he sees as very much in the cards.

Not the least of Alan’s bona fides is that he started pounding the table for gold as a super long-term investment back in September 2001, in the wake of the bursting of the dot-com bubble, and since then, bullion has risen a cool 347%. He exhibits the typical technician’s affinity for charts and ratios, and on this score, he finds that the fact that the stock market, as measured by the Dow, is trading at a ratio of eight times gold vastly underestimates the potential for gold. He confidently expects that ratio to shrink in the fullness of time to 5-to-1.

The catalyst for such a sharp decline, he asserts, is the near-universal debasement of currencies around the globe, an inexorable and extended process destined to continue “until paper assets once again can prove their worth.” That desideratum, in turn, will be achieved only with a great unwinding of the debt cycle, stretching out over many years.

To illustrate the extremely bullish implications for gold if he’s right, the inexorable contraction of the Dow/gold ratio to 5-to-1 would mean $3,000-an-ounce gold, with the Dow at 15,000; $2,400 an ounce with the Dow at 12,000, and $2,000 an ounce with the Dow at 10,000.

Again, let us make clear that Alan doesn’t expect this to happen overnight, but rather to stretch out for a bunch of years. And, in any event, he firmly believes that any would-be buyers of the gold stocks rather than bullion itself would do well to delay taking the leap, and until the “significant correction” he foresees for equities generally runs its course.

He ends his little seminar on gold by pronouncing its less-than-exhilarating recent action “an ideal consolidation.” Fear has shaken out the weak holders (something, we might interject here, we’ve been prattling on about for quite a spell), and doubt pervades. Meanwhile, he contends “the fundamentals argue that each dollar printed ensures an increase in value for each ounce of gold.”

In his astute view, the battle-scarred market vet Darren Pollock also cites the wave of liquidity unleashed by nervous governments as a compelling cause for investor concern, and a big long-term plus for gold. The stock market, he posits, has been ignoring the “longer-term requirements and ramifications of deleveraging economies,” which manifests itself in the recent lessening enthusiasm for the metal and especially gold shares.

He points out, however, that one group of investors, namely the central banks, “are keenly aware of a time-tested cause and effect: the more debt monetization, the greater the likelihood of lower currency value and higher inflation.” The central banks are worried stiff, Darren says, about shielding their own assets from devaluation, and, accordingly, abandoned a long-term inclination to sell off their stockpiles of gold—and are now busily accumulating it.

Out in front of this noteworthy about-face, he reports, are the creditor nations — China, India, Brazil, Russia and South Korea. Darren calculates that, were these countries to invest “even a paltry 15% of their foreign reserves” in gold, they would have to buy all new production of the metal for the next four years. And, he anticipates, if anything, they’ll step up their demand for bullion, kiting its price in the process.


The securities discussed in the posted article are current holdings of Cheviot’s clients. The viewer should not assume that investments in the securities identified and discussed were or will be profitable and it should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. All information is provided for informational purposes only and should not be deemed as a recommendation to buy the securities mentioned. Cheviot closely monitors its positions and may make changes to the portfolio’s investment strategy when warranted by changing market conditions. If a security’s underlying fundamentals or valuation measures change, Cheviot will reevaluate its position and may sell part or all of its position. There can be no assurance that Cheviot’s clients will continue to hold the same position in companies described herein, and their portfolio positions may change at any time.
For additional Information:
·         Recommendations made by Cheviot during the previous 12 months
If you have any questions on specific recommendations mentioned in the list, please contact Cheviot.
Bookmark the permalink.