Gold Ratio
Not too long ago we read an interesting interview authored by Christoff Gisiger via Finanz und Wirthschaft, in which he spoke to Pierre Lassonde, chairman of Franco-Nevada. Mr. Lassonde a Canadian co-founder of the aforementioned business that owns royalties and streams in the gold mining sector, as well as other natural resource commodities. In the interview, the fact that the gold miners haven’t any large discoveries should put upward pressure on prices.
So where do you think the gold will go from here?
My view has been between $1250 to $1350 per ounce for this year and then slightly ramping up next year to around $1300 to $1400.
What does this mean for the mining industry?
First of all, at a gold price of $1300 the industry by and large is doing well. I tell my peers: »If you are not making money at $1300 you should not be in this business.
What are the consequences of that?
Production is declining and this is going to put an enormous amount of pressure on prices down the road. If you look back to the 70s, 80s and 90s, in every of those decades the industry found at least one 50+ million ounce gold deposit, at least ten 30+ million ounce deposits and countless 5 to 10 million ounce deposits. But if you look at the last 15 years, we found no 50 million ounce deposit, no 30 million ounce deposit and only very few 15 million ounce deposits. So where are those great big deposits we found in the past? How are they going to be replaced? We don’t know. We do not have those ore bodies in sight.
Why aren’t there any large discoveries anymore?
What the industry has not done anywhere near enough is to put money back into exploration. They have not put anywhere near enough money into research and development, particularly for new technologies with respect to exploration and processing. The way our industry works is it takes around seven years for a new mine to ramp up and then come to production. So it doesn’t really matter what the gold price will do in the next few years: Production is coming off and that means the upward pressure on the gold price could be very intense.
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What’s your advice for investors who are interested in gold?
It’s very interesting. When you look over a hundred years back there are periods of 10 to 30 years where you would rather be in the stock market. But then, there are other periods from 10 to 15 years where you would rather be in gold.
In which period are we today?
Let’s take the Dow Jones Industrial. To my mind, the Dow is essentially an expression of financial assets. Gold on the other hand is what represents hard assets: real estate, paintings and other hard assets. So when you look at the gold cycle from 1966 to 1980, you can see that the ratio between the Dow and the gold price at the beginning topped out at almost 28:1: It took 28 units of gold to buy one unit of the Dow. Then the long term trend reversed and the ratio went all the way down to 1:1. A similar cycle took place in the 30s. The Dow crashed from around 360 in 1929 to 36 in the next years. So it lost like 90% of its value. On the other hand, the gold price went from 20 to 34 and the ratio essentially bottomed out at almost 1:1, like at the end of 1966 to 1980 cycle.
And what does that mean for investors today?
Today, the Dow is over 22,000 and the price of gold is around $1300. This equals a ratio of almost 18:1 and you can clearly see that the trend is starting to roll over. So what does it mean if we go down to a ratio of 1:1 once again? The gold price would hit a big number and nobody is prepared for that. I don’t know any more than anybody else because it’s about the future. But it happened already twice in the past 100 years. So I think the odds that it’s going to happen a third time are pretty good. History does repeat itself, never exactly in the same fashion, but in the same form. Therefore, I would rather own a little bit more gold than not. So I think for an average investor, it should be the absolute rule to hold around 5 to 10% gold in your portfolio, like rule number one.
We couldn’t agree more. Natural disasters, money printing around the world, profligate spending governments and the LACK of exploration should indeed have one invest 10% of their assets in gold; perhaps more if one is so inclined.