Forum Archive Index - February 2003

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi Travis,
 
>
> 
>So, the long term buy and hold is pretty ordinary. 
>We'd have to determine a fair price.  Can anyone tell
>me how to value gold?  Is gold trading at a discount
>to its future cash flows or well below net asset
>backing?  Obviously these can't be answered because
>commodities can't be valued with tools that investors
>usually use.
>
>

I guess the answer is to use tools that investors do not normally use 
then ;-).

How to value gold?   From a strict 'supply' way of looking 
at things you have various producers around the world operating 
different mines.   These mines have a cost of extraction.  The market 
price above the cost of extraction will determine the profitability 
of the mine.  I haven't done this work myself, but I believe it is 
possible to get a handle on this side of the equation.

Of course the market price is determined by the demand, and this is 
where things get a little trickier.  There is the industrial 
demand for gold (gold teeth, layering on CDs, jewellery etc.) which I 
guess we could analyse in some detail.  Overlayed on this is 
what I term the 'fear' demand of gold.  People are stacking up on 
gold because they perceive it to be a 'safe haven' material.  People 
buying gold today may consider it a bargain at $US360 an ounce.   But 
is it still a bargain at US$450 an ounce? $US550?  Have there ever 
been any studies on this type of thing?  And the problem for New 
Zealanders and Australians investing in gold is that we are earning 
'down under dollars' that are outperforming the American ones.  So 
how do we manage the exchange rate risk?

I'm not raising these points just to raise the ire of the gold 
brigade.  I freely admit I don't know everything about investment and 
when you have seasoned investors like Sir Ron Brierley and Tony Gibbs 
of GPG taking a position in a gold company you would be foolish to 
dismiss gold out of hand.  I'm kind of hoping that some of the gold 
brigade might come up with some intelligent debate on this subject.  
Unfortunately fear inspired staements like: 

"We are facing the imminent threat of World War 3, America is melting 
down so we should all invest in gold." 

doesn't cut it for me.


> 
> ... which is why they are the exclusive domain of
> speculators, and obviously not speculators that care
> what the long term performance of the asset class is.
> 


And perhaps I should add here that based on a discussion in another 
forum, Travis doesn't automatically lump all speculators together in 
a basket as 'bad'.   He admits there are good speculators and bad 
speculators.  I guess what defines a good speculator is someone that 
remains disciplined and has a suitable exit strategy.  So my second 
challenge to the gold brigade is to tell us how you would go about 
designing a suitable exit strategy for gold.  Anyone?

SNOOPY




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