“There are two ways to conquer and enslave a country. One is by the sword. The other is by debt.” – John Adams, 1735 – 1826
We continue to be concerned about the increasing levels of federal debt, Fed policy and quantitative easing, and the overall lack of political will to change the present course. As a result, we believe that the probability of elevated inflation over the next 5 years has dramatically increased and have been reviewing gold as a potential investment for our portfolios.
The Odey Special Situations Fund declined - 0.3% in November, according to a copy of its monthly investor update, which ValueWalk has been able to review. Following this performance, the $94 million fund has returned - 12.4% year-to-date. It remains 2.16% ahead of its benchmark, the MSCI World Index, for the year. In the November Read More
During our study of gold, we arrived at a methodology that prices the commodity from five different viewpoints. Currently trading at $1,225 to $1,300 per ounce, we believe gold is selling in a fair value range.
While physical gold is not in our buy zone, many gold mining companies are selling as if the price of gold is currently $800 to $900 per ounce, which is 28% to 36% lower than gold’s closing price on January 31, 2014, and well within our buy zone.
With or without high inflation in the future, we believe many gold mining companies have
been selling at bargain prices and have added them to our portfolios.
We have been concerned about debt levels and the possibility of inflation or deflation for the past 10 years. We first wrote about these issues in our 70-page newsletter in December 2004, where we outlined the risks and concerns we had about various over-valued markets and the unsustainable direction of our country’s finances.
Chart 1 shows there is currently $17.2 trillion in total public (federal) debt outstanding. Divided by the U.S. population, the amount of public debt translates to $54,335 worth of
debt for every person in America. However, these figures do not include unfunded liabilities, such as Social Security, Medicare, Medicaid, Veteran Health Care Benefits, the Medicare Prescription Drug Bill, and the Affordable Health Care Act. These liabilities increase the total U.S. public debt outstanding to $82 trillion, or $258,254 per person. This is up from $100,000 per person just 10 years ago!
When you consider the rate at which public debt is increasing, along with the fact that so many countries around the world instituted their own versions of quantitative easing (i.e. printing money) while increasing debt levels, these conditions are unprecedented. We have found no historical example of so many major countries simultaneously engaged in quantitative easing. Just ten years ago we would not have thought such an economic environment was even possible.
See Ful PDF here: Inflation, Gold, and Gold Mining Companies