Hinde Capital: “Sentiment Towards Gold Is Of Total Disgust—And It Often Pays Well To Be Contrarian Of The Extremes”
July 22, 2013 | By Tekoa Da Silva
I had the chance to reconnect with Mark Mahaffey, co-founder of the London-based Hinde Capital, and co-manager of the Hinde Gold Fund—one of the world’s top performing gold funds, even amidst the shocking metals correction of the last two years.
It was a fascinating conversation, as Mark indicated a predictable, ‘speculative cycle’ is now playing out in the equity and gold markets, punctuated with unrealistically bearish news stories on gold. This cycle timing, combined with aggressive monetary base growth—suggest increased exposure to the metal is warranted.
Speaking to the concept of the “speculative cycle”, Mark noted that,
“The cycle of sentiment never really changes. At the top we have total confidence, delusion, irrational exuberance and it gives way to hope, anxiety, panic and despair—and then total disgust at the lows.
Sentiment towards gold is [currently] of total disgust and the confidence of owning equities is supreme. The media has done a great job of getting gold to exchange at lower prices, and even Ben Bernanke said [last week] that gold was exchanging at lower prices because [investors] don’t really need the disaster insurance now.
So from an asset allocation perspective, I would certainly be decreasing my equity exposure…and increasing my gold exposure here…as it often pays well to be contrarian of the extremes.”
With respect to the mainstream financial news stories punctuating this cycle in gold, Mark said,
“You do tend to get a lot of bullish articles at the highs…and a lot of bearish articles at the lows…[but] they write about gold in isolation…There was a piece in the FT [arguing] that gold was still much higher than its 20-year long term average, and with that line of reasoning, most assets are substantially above their long term averages as well.
It’s possible that gold can drop to $300 an ounce [the 20-yr. average] but I think it should be seen in the same context and possibility of the DOW [dropping] to 1000—and obviously if you said that to most people, they [would] think you are rather foolish.
When I first started in this business in the early 80s, the DOW was 1000. Oil was at $20 a barrel. London real estate traded at a 20th of today’s prices and I was getting a £4000 annual salary, which was more than adequate for me to live very nicely in Central London.
[But] prices have changed because of the growth in the global monetary base. It expanded far greater than the population over the last 100 years. It continues to do so at a pretty aggressive rate…it’s not rocket science, it’s just paper currency dilution. All real assets; equities, real estate, art, fine wine, gold…[are reflecting] the global monetary base with a speculative cycle overlay.”
When asked about the prospect of gold mining stocks at this time, Mark commented that,
“Companies should fail by the hundreds and production will fall dramatically unless the gold price improves quickly…our analysis…is the price of gold that will produce a zero number in the current free cash flow column for the whole industry (i.e. breakeven, cash neutrality)…it’s $1750 an ounce.”
Every single [expense] of a mining company needs to be taken into account [and] divided by the amount of ounces you’re digging out of the ground…oil is at $109 and climbing, labor unions are demanding more money and the cost of regulation keeps going up.
[So] today with gold trading at $1300 an ounce and production at $1750 and climbing, gold is trading at 75% of its production cost—and that has never happened before.
When gold traded to $800 an ounce in 1980, the cost of extraction was $100 an ounce. So gold traded eight times its production costs. Now that’s a bubble.”
As a final comment towards the firm’s outlook on gold, Mark said,
“Hinde Capital is focused on physical gold being the bedrock of any gold investment. We don’t trust the paper aspect of the market and you’re not paid anything to trust the paper aspect.
Unfortunately, we see many more years of crisis and instability ahead as a direct result of socialist debt policies and today’s monetary responses continuing to misallocate capital…I’m afraid it’s not over yet by a long way.”
This was a powerful interview with one of the world’s top performing gold fund managers. It is required listening for serious investors and market students.
To listen to the interview, left click the following link and/or right click and “save target as” or “save link as” to to your desktop:
Additionally, Mark published an equally powerful new blog post at Hinde Capital, entitled, “Where Has All The Gold Gone?” The piece provides much of the supporting framework for this interview, and is required reading for serious investors and market students.
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Tekoa Da Silva
Bull Market Thinking
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