Gyroscopic Investing

Hi all:

More a slide demonstration than a complex working paper, here is the citation:

Erb, Claude B., A Golden Bet: Gold Mining Equities versus Gold (February 17, 2014). Available at SSRN: http://ssrn.com/abstract=2397540 or http://dx.doi.org/10.2139/ssrn.2397540

Abstract:   
If there is a “long-run equilibrium”? price relationship between gold and gold mining equities, then 1) the price of gold “suggests”? that in the short-run the price of gold mining equities could rise 100% and 2) the price of gold mining equities “suggests”? that in the short-run the price of gold could fall 50%. A popular ratio of the price of “gold miner equities”? relative to the price of gold tells the same story. Though the long-run price of gold may be characterized as a “golden constant,”? in the long-run gold mining equities are seemingly a “wasting asset.”?

Number of Pages in PDF File: 33

Keywords: gold, gold mining equities, the real price of gold, golden constant, mean reversion, CAPE ratio, pairs trade, equilibrium, Howard Marks, Ed Leamer

JEL Classification: G10, G11, G12, G15, G28, E58, N20
working papers series

There are plenty of graphs.

regards,

Yes, gold miners are a wasting asset, because there is only so much gold you can mine at any given price (and only so much in total). That doesn't mean they can't be profitable, of course, but they are quite different from gold itself.

What does that mean, a wasting asset? This sounds like two words that when strung together lose their meaning. A gold mining company is not like a car that loses value, this is nonsense.

Admittedly, I didn't read the article yet.

1) the price of gold “suggests”? that in the short-run the price of gold mining equities could rise 100% and 2) the price of gold mining equities “suggests”? that in the short-run the price of gold could fall 50%.

How about 3) Gold goes up 100% and gold miners go up 300% to be at long-term equilibrium?

Then I will revist the thread on early retirement and change my opinion.

Kshartle wrote: What does that mean, a wasting asset? This sounds like two words that when strung together lose their meaning. A gold mining company is not like a car that loses value, this is nonsense.

Admittedly, I didn't read the article yet.

A wasting asset is one that loses its value over time: http://www.investopedia.com/terms/w/wastingasset.asp

In the case of a mine, that is because there is a finite amount of ore to be extracted, so each ton of ore leaves one less ton to be recovered.

Libertarian666 wrote:

Kshartle wrote: What does that mean, a wasting asset? This sounds like two words that when strung together lose their meaning. A gold mining company is not like a car that loses value, this is nonsense.

Admittedly, I didn't read the article yet.

A wasting asset is one that loses its value over time: http://www.investopedia.com/terms/w/wastingasset.asp

In the case of a mine, that is because there is a finite amount of ore to be extracted, so each ton of ore leaves one less ton to be recovered.

Yeah I mean I get that....but a gold mining company is not a gold mine anymore than an oil company is an oil well.

They use the profits from the sale of gold from their mines to explore for new mines or buy them from gold exploration companies.

The idea that a gold mining company is a wasting asset long term is totally dumb. It's not just that this is not insightful....it's totally misleading and incorrect.

I suppose this guy would also assume Exxon Mobil is a wasting asset because it's current oil wells will eventually run dry.

Kshartle wrote:

Libertarian666 wrote:

Kshartle wrote: What does that mean, a wasting asset? This sounds like two words that when strung together lose their meaning. A gold mining company is not like a car that loses value, this is nonsense.

Admittedly, I didn't read the article yet.

A wasting asset is one that loses its value over time: http://www.investopedia.com/terms/w/wastingasset.asp

In the case of a mine, that is because there is a finite amount of ore to be extracted, so each ton of ore leaves one less ton to be recovered.

Yeah I mean I get that....but a gold mining company is not a gold mine anymore than an oil company is an oil well.

They use the profits from the sale of gold from their mines to explore for new mines or buy them from gold exploration companies.

The idea that a gold mining company is a wasting asset long term is totally dumb. It's not just that this is not insightful....it's totally misleading and incorrect.

I suppose this guy would also assume Exxon Mobil is a wasting asset because it's current oil wells will eventually run dry.

As far as I know, most mining companies don't do that; they just use up the mine(s) they have. Of course, I could be wrong.

Libertarian666 wrote:

Kshartle wrote:

Libertarian666 wrote: A wasting asset is one that loses its value over time: http://www.investopedia.com/terms/w/wastingasset.asp

In the case of a mine, that is because there is a finite amount of ore to be extracted, so each ton of ore leaves one less ton to be recovered.

Yeah I mean I get that....but a gold mining company is not a gold mine anymore than an oil company is an oil well.

They use the profits from the sale of gold from their mines to explore for new mines or buy them from gold exploration companies.
The idea that a gold mining company is a wasting asset long term is totally dumb. It's not just that this is not insightful....it's totally misleading and incorrect.

I suppose this guy would also assume Exxon Mobil is a wasting asset because it's current oil wells will eventually run dry.

As far as I know, most mining companies don't do that; they just use up the mine(s) they have. Of course, I could be wrong.

You're kidding right?

They buy a bunch of equipment.....buy a mine.....pull the gold out and sell it....then sell the equipment to someone else and get out of the mining business? Even that wouldn't make them a wasting asset or send the stock to zero....you'd have all the cash. Last time I checked a dollar is worth one dollar.

Tech you have go to be joking. Even the bozos on the gold rush channels don't do that with their tiny operation let alone billion dollar plus publicly traded gold mining companies.

Of course they explore for and open new mines. They do this all the time. Some companies are dedicated to just doing that. How can you profit from gold exploration alone? You have to sell it to a gold mining company. Every mine that is found or mined is not done so by a brand new company.

A gold mining equity is no more a "wasting asset" than McDonalds is. They are operated as going concerns, this is silly.

Newmont bought it's first gold mine in 1929. It's been mining gold for 85 years. It wasn't all from that same mine.

Homestake mining was founded in the 19th century. In 2002 it merged with Barrick Gold. That's well over a hundred for this "wasting asset" and it's still going.

Again, I didn't read the paper, but if this guy is arguing that gold mining equities eventually go broke because their mines dry up he should team up with Krugman. They can be the economist equivalents of Laurel and Hardy, or dumb and dumber.