Page 11 - NG_2019.indd

appear only after gold prices begin their surge, seeing in its outperformance an interesting dynamic worthy of closer inspection. Upon this more forensic examination, what will such players find now that they didn’t find a year ago? I would posit that they will discover two key ingredients for a rip-roaring bull market which will, at that point, be staring them in the face: some new and unexpected smart-money analysis now validating taking a position in gold as it rises, and multiple different reasons being put forward to justify precisely why the bull market is actually happening and why it has become logical – if not actually imperative – to have some gold in one’s portfolio.
It is that extraordinary fissiparity of scenarios that, when superimposed onto a normalized scramble for a relatively scarce asset such as gold, will help propel the noble metal to an entirely new equilibrium level. For if, as I believe, gold goes from relatively unowned to an era
in which most fiduciaries conclude they need to own
some, the sky truly is the limit. Even a 1% portfolio
allocation among the outsized institutions would
likely cause the price to multiply. For who will sell it to
them at low prices? Central banks? Not likely, as they
are not just not selling, but indeed, as a group, are
adding more. Miners? That’s a laugh. They can barely
replenish the reserves they’re depleting and new
mines take decades, assuming one can make a
number of meaningful, sizable discoveries (which they
aren’t). The Indians and Chinese, who have been
competing against one another to buy gold? Unlikely.
It is rather rare to witness investors who have
experienced positive reinforcement from their
investments do a U-turn, especially when the reasons
that have prompted them to buy the asset in the first
place remain undiminished in their rationale. Positive
reinforcement is a hard feeling to slough off so readily.
To distill the thesis to its essence, the core realization we have seen emerge from the gold bulls is that gold represents the only financial asset that isn’t somebody else’s obligation. Unlike other currencies, it cannot be debased on a whim. And as we shall see, the miners who are supposed to be minting it can barely find enough of it to satisfy demand at a time when the interest in gold is coiling like a python before it lunges.
What then is making individual investors take their own lunge into the space, over and above this fundamental precept? In the case of Ray Dalio, it is both “risk reducing and return enhancing” to have gold in one’s portfolio. Ever hyper-rational, “excellent analysis” of gold has convinced him that it merits inclusion in a basket of currencies: “Gold is a currency. We have dollars, we have euros, we have yen and we have gold. If you don’t have 10% of your assets in gold, there is no sensible reason other than you don’t know history or you don’t understand the economics of it.” Stanley Druckenmiller also sees it as a currency. As does Paul Singer, who is adamantly on board with the currency debasement thesis. Mark Mobius says gold is a currency with limited supply that he can see doubling in price – and hence that one should be buying the metal “at any level.” “Gold’s long-term prospect is up, up and up,” he writes, “and the reason why I say that is money supply is up, up and up.” For Ken Rogoff, who, like Mark Mobius, is more than mildly well acquainted with emerging markets dynamics, “the shift in emerging markets toward accumulating gold would help the international financial system function more smoothly and benefit everyone.” Gold is Paul Tudor Jones’ “favorite trade” for the next year or two; should there be a recession at some point, gold will not only “scream,” but “will be the antidote for those with institutional equity portfolios.” Jeff Gundlach, the Bond King, also “loves gold,” while Sam Zell, who shares that he has now bought gold for the first time in his life as a hedge, cites “shrinking” mine supply and the fact that
Gold Price US$/oz
$2,500 $2,000 $1,700 $1,500 $1,300
Net Present Value (NPV) (US$ in billions)
NPV at 0%
NPV at 5%
Donlin Gold’s Upside Value with Higher Gold Prices
27.0B
19.2B 14.6B
11.6B 8.2B
$5.0
$10.0 $15.0
$20.0 $25.0
$30.0
Donlin Gold estimates as per the Second Updated Feasibility Study, effective November 18, 2011, amended January 20, 2012. All dollar figures are in USD, represent 100% of the project of which NOVAGOLD’s share is 50%, and reflect after-tax net present value (at 0% and 5% discount rates) of the Donlin Gold project using the feasibility study reference date of 1/1/2014 (start of Year -05) as the first year of discounting. Estimated project development costs of approximately $172M to be spent prior to the reference date are treated as sunk costs. At a 5% discount rate, the net present value is: $1,465M @ $1,300 gold; $3,147M @ $1,500 gold; $4,581M @ $1,700 gold; $6,722M @ $2,000 gold; and $10,243M @ $2,500 gold. The project requires a gold price of approximately $902 per ounce to break even on a cash flow basis. See “Cautionary Note Concerning Reserve & Resource Estimates” and “Mineral Reserves & Mineral Resources” table on page 46.
NG 9