Krug on Money


This is a tale of three money pits. It’s also a tale of monetary regress — of the strange determination of many people to turn the clock back on centuries of progress.


The first money pit is an actual pit — the Porgera open-pit gold mine in Papua New Guinea, one of the world’s top producers. The mine has a terrible reputation for both human rights abuses (rapes, beatings and killings by security personnel) and environmental damage (vast quantities of potentially toxic tailings dumped into a nearby river). But gold prices, while down from their recent peak, are still three times what they were a decade ago, so dig they must.

The second money pit is a lot stranger: the Bitcoin mine in Reykjanesbaer, Iceland. Bitcoin is a digital currency that has value because … well, it’s hard to say exactly why, but for the time being at least people are willing to buy it because they believe other people will be willing to buy it. It is, by design, a kind of virtual gold. And like gold, it can be mined: you can create new bitcoins, but only by solving very complex mathematical problems that require both a lot of computing power and a lot of electricity to run the computers.

Hence the location in Iceland, which has cheap electricity from hydropower and an abundance of cold air to cool those furiously churning machines. Even so, a lot of real resources are being used to create virtual objects with no clear use.

The third money pit is hypothetical. Back in 1936 the economist John Maynard Keynes argued that increased government spending was needed to restore full employment. But then, as now, there was strong political resistance to any such proposal. So Keynes whimsically suggested an alternative: have the government bury bottles full of cash in disused coal mines, and let the private sector spend its own money to dig the cash back up. It would be better, he agreed, to have the government build roads, ports and other useful things — but even perfectly useless spending would give the economy a much-needed boost.

Clever stuff — but Keynes wasn’t finished. He went on to point out that the real-life activity of gold mining was a lot like his thought experiment. Gold miners were, after all, going to great lengths to dig cash out of the ground, even though unlimited amounts of cash could be created at essentially no cost with the printing press. And no sooner was gold dug up than much of it was buried again, in places like the gold vault of the Federal Reserve Bank of New York, where hundreds of thousands of gold bars sit, doing nothing in particular.

Keynes would, I think, have been sardonically amused to learn how little has changed in the past three generations. Public spending to fight unemployment is still anathema; miners are still spoiling the landscape to add to idle hoards of gold. (Keynes dubbed the gold standard a “barbarous relic.”) Bitcoin just adds to the joke. Gold, after all, has at least some real uses, e.g., to fill cavities; but now we’re burning up resources to create “virtual gold” that consists of nothing but strings of digits.

I suspect, however, that Adam Smith would have been dismayed.

Smith is often treated as a conservative patron saint, and he did indeed make the original case for free markets. It’s less often mentioned, however, that he also argued strongly for bank regulation — and that he offered a classic paean to the virtues of paper currency. Money, he understood, was a way to facilitate commerce, not a source of national prosperity — and paper money, he argued, allowed commerce to proceed without tying up much of a nation’s wealth in a “dead stock” of silver and gold.

So why are we tearing up the highlands of Papua New Guinea to add to our dead stock of gold and, even more bizarrely, running powerful computers 24/7 to add to a dead stock of digits?

Talk to gold bugs and they’ll tell you that paper money comes from governments, which can’t be trusted not to debase their currencies. The odd thing, however, is that for all the talk of currency debasement, such debasement is getting very hard to find. It’s not just that after years of dire warnings about runaway inflation, inflation in advanced countries is clearly too low, not too high. Even if you take a global perspective, episodes of really high inflation have become rare. Still, hyperinflation hype springs eternal.

Bitcoin seems to derive its appeal from more or less the same sources, plus the added sense that it’s high-tech and algorithmic, so it must be the wave of the future.

But don’t let the fancy trappings fool you: What’s really happening is a determined march to the days when money meant stuff you could jingle in your purse. In tropics and tundra alike, we are for some reason digging our way back to the 17th century.

ABX-December 2013



Barrick Gold – A Contrarian Play Based On Improved Capital Allocation

Dec 11 2013, 04:20                         by: Tim Travis  |              about: ABX,

Disclosure: I am long ABX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

After gold’s stellar performance from 2000-2010, television commercials seemed saturated with a great deal of snake oil salesmen, pitching gold coins with outrageous commission structures to market participants concerned about the strength of conventional global currencies. Despite the metals ascension, gold mining stocks have been abysmal performers, as cost inflation and poorly conceived capital projects have produced terrible returns on invested capital. Barrick Gold (ABX) is an example of a company that in the past hasn’t focused on maximizing per share value, but instead has been more interested in building the world’s largest gold mining company via acquisitions and massive capital expenditure investments. It is my belief that the recent decline in oil prices and in the stock of Barrick Gold, has finally brought about changes, which should make for a more attractive future for the company’s shareholders. Management is now concentrating on right-sizing the balance sheet and focusing on the highest returning projects, which should unveil the fact that the sum of the parts is greater than the market price being given to the whole company right now. Value investing is about buying businesses such as Barrick when they are priced with extreme pessimism and selling them when the outlook is more optimistic.

Barrick has built a powerful and diverse collection of mining assets that have considerable upside potential, but that also require heavy investment, which only makes sense in an extremely accommodative pricing environment. In broad terms, North America represents that more conservative region of Barrick’s mines, with strong returns and drastically less political uncertainty. This region was bolstered by the addition of Pueblo Viejo in 2012. South America is the company’s highest risk and most capital intensive development region, but that could also offer the highest long-term returns. The major $10 billion project in South America, which has been the source of extreme angst for shareholders, is the Pascua-Lama mine on the border between Chile and Argentina. Pascua-Lama was expected to average 825,000 ounces in the first five years and because of ample silver credits, the cash costs were anticipated to be quite low, but this project has now been curtailed due to the volatile declines in gold prices over the last year, which has put further pressure on the CAPEX budget. The controversial decision to temporarily shutter the mine could lead to political backlash, but hopefully for Barrick shareholders, when prices recover, the mine could still potentially yield solid long-term profitability.

The Australia/Pacific and African regions are home to most of Barrick’s non-core assets in my opinion, due to their higher costs and risks, so if further divestitures are needed in the next couple of years, I would expect them to come from those assets. Barrick intelligently offered 26% of Africa Barrick Gold to the public in 2010, but the company paid way too much to acquire Equinox and its disappointing mines in Zambia and Saudi Arabia. It is telling that this $7.66 billion acquisition of non-core assets, now represents nearly 40% of the current market capitalization of the company, despite contributing a great deal less than that in the value and earnings of the company. This type of poor capital allocation decision at nearly peak commodity prices destroyed incredible shareholder value both by paying too rich of a price, and through necessitating an equity issuance at an extremely unfavorable time, which diluted shareholders.

On September 30th, Barrick had cash and equivalents of $2.3 billion and $4.0 billion available under its credit facility. The company generated operating cash flow of $3.22 billion in the first nine months of 2014. ABX had approximately $1.3 billion of cumulative debt maturing by the end of 2015. On November 14th, Barrick announced that it had completed its previously announced equity offering of 163.5MM common shares at a price of $18.35 for net proceeds of approximately $2.9 billion, meaning that the company now has approximately 1.16 billion shares outstanding. The company is using $2.6 billion of the net proceeds to redeem or repurchase outstanding debt, primarily short and medium-term debt. Specifically, Barrick is using $1.1 billion to redeem the outstanding $700MM aggregate principal amount of 1.75% notes due 2014, together with the $350MM aggregate principal amount of 4.875% notes due 2014. Barrick is also using approximately $1.5 billion of the net proceeds to purchase other notes pursuant to its tender offer, which was announced 10/31/2013. This reduces net debt by 21% and eliminated $2.5 billion of debt repayments over the next 5 years.

On October 31st, Barrick Gold reported 3rd quarter financial results. The company had gold production of 1.85 million ounces at all-in sustaining costs (AISC) of $916 per ounce. Copper production was 139 million pounds at C3 fully allocated costs of $2.15 per pound. Adjusted net earnings were $.58 billion ($.58 per share), down from $.88 billion ($.88 per share) and adjusted operating cash flow was $1.3 billion, down from $1.4 billion YoY. Net earnings were $.17 billion ($.17 per share), which were down from $.65 billion ($.65 per share) in the year ago period. Realized gold and copper prices for the quarter were $1,323 per ounce and $3.40 per pound, respectively, compared to the spot averages of $1,326 per ounce and $3.21 per pound.

Management made the decision to suspend construction at the Pascua-Lama project, which will further reduce 2014 capital costs by up to $1.0 billion. In addition, the company is flattening its operating model to save an additional $500MM per year. This will include a reduction in headcount, reduced procurement costs and other initiatives. Also, African Barrick Gold (GM:ABGLF) has targeted annual savings of $185MM. ABX made the decision to sell Barrick Energy for total consideration of $435MM, including cash of $387MM and a future royalty valued at $48MM. The company also sold Yilgarn South assets to Gold Fields Limited for $266MM, consisting of $135MM in cash and $131MM in Gold Fields Limited Shares.

(click to enlarge)

Source: ABX 3rd Quarter 2013 Report

Barrick expects that for the full year and adjusted for the sale of the Yilgarn South mines, full year gold production is now expected to be at the low end of the original 7.0-7.4 million ounce guidance range. All-in sustaining costs are expected to be within the range of $900-$975 per ounce and the company has lowered the top end of its adjusted cost guidance to $575-$600 per ounce. Barrick increased its full year company-wide copper production guidance to 520-550 million pounds. Full year C1 cash cost and C3 fully allocated cost guidance has been reduced to $1.90-$2.00 per pound and $2.40-$2.60 per pound, respectively.

(click to enlarge)

Source: ABX 3rd Quarter 2013 Report

For the first nine months of 2013, Barrick has reported a loss of $7.5 billion compared to net earnings of $2.5 billion in the first nine months of 2012. The decline reflects the impact of $8.7 billion in impairment charges (net of tax and non-controlling interest effects), lower realized gold and copper prices, higher interest expense and higher income tax expense for Pueblo Viejo, primarily due to the recognition of an increase in the deferred tax liability, which will be drawn down over the life of the mine, as well as an acceleration of current taxes payable for 2012 and 2013 related to the substantive enactment of the revised SLA, partially offset by higher gold and copper sales volumes. Adjusted net earnings for the nine month period of 2013 were $2.2 billion compared to adjusted net earnings of $2.8 billion recorded in the nine month period of 2012. EPS and adjusted EPS for the first nine months of 2013 were ($7.53) and $2.16, respectively. Operating cash flow was $3.223 billion, down from $4.138 billion during the first nine months of 2012.

While Barrick has been battered over the last year due to some poor decisions, there is still tremendous value in the company’s portfolio of assets. For example, 55%+ of 2013 production came from 5 large mines at all-in sustainable costs of around $700/oz. These 5 mines had 58.2 million ounces in reserve as of December 31, 2012. Pueblo Viejo is one of the growth mines, which should reach full capacity in the first half of 2014 with AISC of $700-$750/oz. Costs will come down materially, allowing the company to significantly close the cash flow gap that has concerned investors. With the stock price so cheap, I’d expect to see further dispositions, which should highlight the higher value of the sum of the parts, despite a weak pricing environment.

At a recent price of $16.86, ABX trades at around 8 times forward earnings and 3.5 times forward cash flow. The cash flow multiple is more than 50% cheaper than historical averages and while earnings might be revised lower, Barrick is still far cheaper than it has been in years. The company has tremendous low-cost assets, which should generate reasonable cash flows. Costs and capital expenditures will go down dramatically, reducing the need for the company to access the capital markets moving forward. It is extremely difficult to predict gold prices or value this business with anything close to an approximate number, but when you look at the assets, it is tough to imagine losing money over the long-term. To make the investment even safer, one might look to sell long-term put options. The $15 January 2016 put options are going for around $280 per contract right now, which would mean that assuming the stock closes above $15 at expiration, the investor would earn 23%, or 11% annualized on the maximum risk of $1,220 per contract. The breakeven price is $12.20 per share, so the stock would have to drop 36% by expiration for you to be in a losing situation upon being exercised. If the stock appreciates significantly prior to expiration, it is very likely that the puts could be bought back at much higher than targeted annualized rates of return.

Source: Barrick Gold – A Contrarian Play Based On Improved Capital Allocation

GOLD vs the US Dollar

There is often a directional linkage between Gold and the Dollar. Here’s one analysis. By Richard Cox.


GLD Falling As Expected

Many of this site’s readers know that I am generally bearish on gold. I am speaking now from a personal perspective as the metal’s practical applications are negligible — and, aesthetically, gold is tacky. I have never worn anything made of gold and I have no interest in seeing any of it in my home. Bulls like to cite the long-standing history of gold usage as a store of value and a hedge against inflation. But the sad reality is that this is no longer the world we are living in, and the time for excitement has long passed. Of course, there are plenty of people that disagree, as interest in emerging Asia shows evidence of increasing. For these reasons, it should be understood that not all of my articles on gold are bearish.

But I feel the need to give complete disclosure: Instances of bullish viewpoints will usually be based on mean reversion, the need for markets to correct themselves, or one-off fundamental events that are finite in nature. This is made even more true by the fact that there are some clearly troublesome issues involved when holding non-physical assets like the SPDR Gold Trust ETF (GLD). So, if I am bullish on GLD, expect the recommendation to come from a trader’s perspective that is short-term in nature. But you can expect the bearish recommendations to be longer-term — and more of “the real thing.”

Momentum is Telling

Late last month, I suggested it made sense to sell gold as it posted a weak rally. This recommendation has been largely supported by price activity, which has fallen in line with the longer-term momentum in the markets:

(click to enlarge)

Valuations in GLD have fallen-off significantly from the time I made the recommendation, and upside bounces have been limited. There are two important arguments for why these declines will continue: We have yet to see the price gap filled after the move above 124, and Fibonacci support in the low 125s has yet to be tested.

Watch the Dollar

The majority argument in my October recommendation was based on the fact that GDP fundamentals in the US to not match the weakness in the country’s currency itself. Weakness in the US Dollar has been propelled by the fact that the market feels the need to reposition itself for continued stimulus after the recent government shutdown. But these fears have yet to be matched by the overall growth performance, especially when we start looking at the macroeconomic situation in Japan, the Eurozone, and the UK. As the Dollar goes, so goes gold (in its inverse correlation):

(click to enlarge)

ETFs like the PowerShares DB US Dollar Index Bullish ETF (UUP), which track the US Dollar have seen impressive gains. After bouncing from 21.30 we quickly saw a break of resistance at 21.75 with almost nothing to be seen in the way of corrective retracements. The suggestions here in the impulse move are clear, and the Dollar set for substantial moves higher. Recent weakness is a buying opportunity.



For most of this year so far it seems that sentiment has been increasingly risk and yield seeking which has favoured the stock market over gold. Low interest rates in combination with generously supplied liquidity has led to a stock market rally to new previously unexperienced highs, and a gold price correction that has turned bugs into bears.

It seems that it has almost become common knowledge that the gold price must go down as long as the stock market is going up. Forgotten are the times when gold and stocks have marched in lock-step, be that up or down. And now our data indicates that the recent strong inverse correlation between the stock market and the gold price is in the process of breaking down again. It may just be that gold is swinging back in line with the general stock market again.

In the following we shall use the SPDR Gold Trust ETF (GLD) as a proxy for the price of gold. The daily price data can be readily downloaded from all the way back to its inception in 2004. And for better or worse we shall use the SPDR S&P 500 Trust ETF (SPY) as a proxy for the performance of the stock market. Again, the daily price data can be downloaded from

We used this data and correlated the daily closing prices of the two funds. The chart below shows the price performance of GLD and SPY respectively, plus the 100 day moving correlation between the two.

To be clear: every point on the blue line gives a reading for the correlation between the S&P 500 and GLD for the 100 days preceding this point. Correlation is measured on the secondary right axis of the chart, while share prices for GLD and SPY are measured on the primary left axis. We shall consider values of greater than +0.8 as a strong correlation, and values less than -0.8 as a strong inverse correlation. The areas shaded in grey on our chart below indicate these areas.

(click to enlarge)

In this chart we can observe 5 periods of time since 2005 with a strong correlation between GLD and SPY, and only 3 periods with strong inverse correlation. The most recent period of inverse correlation is clearly visible at the right hand side of the chart. However, we also observe that this inverse correlation has broken down and correlation between the GLD and SPY for the past 100 days has been almost exactly zero.

Consider the next chart below showing the same 100 day moving correlation again in blue, plus the red line for a moving correlation period of 200 days. As could be expected, the 200 day line is a little more sluggish in its moves. We also observe that if the 100 day line crosses zero correlation from a previous peak the 200 day line usually follows. And this is what seems to be happening at the moment.

(click to enlarge)

If performance of the past nine year can serve as a template then we can expect GLD and SPY moving in parallel again shortly. In other words: if our reading of this correlation analysis proves correct, then we need to start looking to the SPY for clues on GLD.

During the past couple of weeks we have pointed to our observation of fewer and fewer stocks participating in the rally as a possible sign of an impending stock market reversal. This concern has all but evaporated during the past week. Sentiment seems high and we are expecting new highs in the S&P 500 in coming weeks.

If both our calls are correct, then we would expect the stock market dragging gold higher in coming months, which would be a nice and long awaited change for gold bugs.

ABX–October 11-2013


The entire gold sector caused huge value destruction for shareholders over the last two years with near gradual declines in share prices. Barrick Gold lost 61% of its market capitalization, Goldcorp (GG) lost 46%, Anglogold Ashanti (AU) 68% and Newmont Mining (NEM) 57%

Barrick Gold Corporation (USA)

(Public, NYSE:ABX)   Watch this stock

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Dow Jones 15,237.11 0.73% S&P 500 1,703.20 0.63% Basic Mater… 0.63% ABX 17.23 -3.42%

-0.61 (-3.42%)
After Hours: 17.24 +0.01 (0.06%)

Oct 11, 7:36PM EDT

NYSE real-time data – Disclaimer

Currency in USD


More prosperous societies in Asia, above-average growth in emerging markets and global, long-term GDP growth are likely to support gold prices. Actions taken by the FED to extract liquidity out of the market will be implemented because the economy grows and does not need to be on artificial life support anymore. A growing economy is characterized by increasing inflationary pressures which should also support long-term gold price appreciation as commodities are sought out for their inflation hedging properties. Short-term governance or operational issues at Barrick Gold are manageable. Barrick also takes the right steps and divests non-core assets to improve free cash flow. Given the extremely depressed valuation of Barrick Gold, anti-cyclical investors with patience could get a serious bargain here. If Barrick Gold just manages to trade at the peer group average of 13.58 the shares have 68% upside potential. Long-term Buy.



-0.68 (-2.59%)
After Hours: 25.60 -0.02 (-0.08%)

Oct 11, 7:58PM EDT

NYSE real-time data – Disclaimer

Currency in USD
Dividend-seeking investors might find Newmont Mining a good deal with a dividend yield of 3.73%. Barrick Gold would not be the most attractive candidate for investors who desire dividends from the gold mining sector. The dividend yield is the lowest for the peer group at 1.11%.

GOLD: holding pattern

Disclosure: I am long UGLD.  From: Epsilon. Seeking Alpha.

With the speculation surrounding gold recently, many investors are wondering whether to buy, sell, or hold. As with all investments, the answer grossly depends on your time frame.

First let’s take a look at where gold is currently, via one-year and two-year time frames:

(click to enlarge) (click to enlarge)

A number of factors, including a strengthening U.S. dollar, a stabilizing world economy, and the absence of Chinese gold demand during its Lunar New Year holiday last week have driven gold to a six month low, closing just above $1,600.00 last Friday.

This recent sell-off can also be partially attributed to the market’s reaction to institutional investors George Soros, Julian Robertson, and Allianz’s Pimco reducing their stake in SPDR Gold Trust (GLD) in the fourth quarter of 2012. (More info can be found here.)

Naturally, the culmination of all of these factors has left gold investors feeling a bit unsettled.

But that’s why I love gold investing. Unlike stocks, whose volatility can increase unnaturally with the slightest earnings miss, lawsuit, CEO replacement, et cetera, the ebbs and flows of the precious metals markets are generally natural and often times even predictable.

So looking at where gold is currently and where it has been in the past couple of years, here’s my outlook:

Gold is currently in what others have deemed a “holding pattern”, trading in a sideways pattern between the $1,600.00 and $1,700.00 price levels. This is most easily seen by the gold futures graph below:

(For clearer illustration, further graphs in this article will use gold futures in lieu of the gold spot price. Please be aware of the differences between spot and futures price, as explained here.)

(click to enlarge)

This holding pattern could certainly extend further downward toward $1,550.00 or even as low as $1,525.00, where the metal has previously established strong support. With this support around the $1,525.00 to $1,550.00 levels, I believe gold is a strong buy for both short and long-term investors within the $1,525.00 to $1,600.00 range.

Similarly, within the range of $1,600.00 to $1,625.00 I feel that the metal is a buy for both short and long-term investors.

Once gold reaches back up toward the upper, $1,700.00 level of this holding pattern, this could be a good place for short-term investors to sell and/or place a trailing stop order. For long-term investors, I recommend a hold at the $1,700.00 level with a further profit target or strategy reevaluation at the $1,800.00 price level, where the metal found resistance in both February and October, 2012.

The next area of resistance will likely be seen at the $1,850.00 to $1,875.00 price level, where gold found strong resistance in August, 2011. Naturally, this could be a very good place to sell or place a trailing stop.

Using gold futures, below is a graphical interpretation of the above recommendations:

(click to enlarge)

It is also worth noting that some gold fund managers, including Nick Barisheff of Canada’s Bullion Management Group, see gold reaching to new highs near $2,000.00 in 2013. If we see the metal break above the $1,850.00 to $1,875.00 resistance level this could signal a break out and a quick, subsequent move toward $2,000.00 or above.

Confident in the above-mentioned support levels, I purchased VelocityShares 3x Long Gold ETN (UGLD) during gold’s recent downturn. Anticipating that gold will rebound off of said support, my profit target correlates to the $1,675.00 to $1,700.00 gold price range mentioned above, where I will place a trailing stop on my UGLD position.

As decay risks are a significant concern with leveraged ETFs, I plan to hold this ETF as a short-term position only, regardless of my profit target.

In addition to UGLD, the following ETFs can also be used to trade gold, on both the long and short side of the trade. A full list of related ETFs can be found here.

(Please be aware of risks associated with leveraged and inverse ETFs before investing. An explanation of these risks can be found here.)

Symbol Long/Short Leverage Fund Name
GLD Long 1X SPDR Gold Trust
DGP Long 2X PowerShares DB Gold Double Long ETN
DZZ Short 2X PowerShares DB Gold Double Short ETN
UGLD Long 3X VelocityShares 3X Long Gold ETN
DGLD Short 3X VelocityShares 3X Inverse Gold ETN