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Posted 12/12/2005
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Ben Bernanke scares me -- already
A recent profile of the incoming Fed chairman reveals his lack of real-world experience and an arrogant confidence the economy can be managed.
By Bill Fleckenstein
We got a peek into our new Fed chairman's brain Wednesday -- and it wasn't pretty -- when Greg Ip, Fed stenographer (ne Wall Street Journal reporter), penned a story titled "Long Study of Great Depression Has Shaped Bernanke's Views."
No understanding of booms or busts
Anyone with even an ounce of common sense -- and a similar degree of familiarity with the Depression -- will quickly see that Bernanke has no comprehension of the fact that booms and busts are related. More than related. To a degree -- honest people can argue how much -- booms cause busts. They don't just precede them. Booms derange prices and therefore misdirect investment.
Bernanke says that the Fed should never prick a bubble but only clean up the mess afterward. I disagree with him there, too, but this Fed doesn't just stand around watching bubbles inflate. It's inflating them, both with its monetary policy and with its tonsils. Bernanke's tenure will prove this in spades as the residue from the prior stock mania and fallout from the leveraged-housing bubble cave in on him. It's also apparent that he has no understanding of why Communism failed, or that capitalism involves creative destruction.
Related news and commentary on MSN Money
Anyone reading Ip's article can quickly see that when things turn dicey here, the dollar will be shredded and gold will explode. (I'm guessing the bond market will be wrecked, as well.) I was going to dissect the article this week, but a friend beat me to the punch. I decided not to produce my own rebuttal, since my friend's take was so succinct and spot-on. Though he asked me not to identify him, here it is:
Lead the economy by the nose
"Ip writes: 'While some have criticized him for saying in 2002 the Fed could print money to end deflation, the comments typify his willingness to question orthodoxy.' Oh, no, they don't. What his comments actually typify is Bernanke's own brand of orthodoxy, at the root of which is an arrogant belief that a central bank can lead a market economy around by the nose.
Ben Bernanke
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"By manipulating the funds rate, says the Maestro-designate, the Fed can fine-tune the measured rate of inflation, promote full employment and assure financial stability. For Bernanke, booms have nothing to do with busts. The common-sense theorists of the so-called Austrian School (including Friedrich Hayek and Ludwig von Mises) might as well never have been born.
"So, on top of the arrogance of the central economic planner, add the arrogance of the cock-sure college professor. The gold price isn't going up for nothing."
The math on Newmont, revised edition
Turning to my favorite miner of gold -- Newmont Mining (NEM, news, msgs) -- I received an e-mail from a reader asking me to update my "valuation calculations." (Please see my past column on the subject, specifically the section titled "A valuation primer for a gold miner.")
While I can go through the motions, without knowing exactly what Newmont's reserves are, it's somewhat of an incomplete exercise with gold at $500 an ounce. At $400 an ounce, Newmont has stated that its reserves are about 100 million ounces. In the past, Newmont President Pierre Lassonde has indicated that for every $25 increase in the price of an ounce of gold, Newmont's reserves will increase a certain amount. However, we don't really know what that certain amount is.
Neither does Newmont, though it has some idea what the reserves are liable to be. But without new drilling, the company can't know for sure. And, in many cases, it makes no sense to drill ahead of what you need to drill to produce the gold, especially when working in underground mines.
Gold in the ground, at less a 'pound'
But at 100 million ounces and with the stock price at $47-ish, it means that when you buy a share of Newmont, you're paying $208 an ounce for its proven and probable reserves. With its cash costs at $240, you're buying an ounce in the ground for about $448, excluding the depreciation and amortization costs.
In the past, I've stated why I tend to offset that against Newmont's land package. Whether or not that's reasonable can be debated, but that's how I'm inclined to look at it. This analysis assigns no value to Newmont's enormous tar sands project in Canada. That could either be valued on its own or used as an offset against the company's energy costs, which would obviously bring down the cost per ounce.
In late 2004, when the price of gold was $450 and Newmont's stock was at $50, my calculations approximated the spot price regularly. Of course, back then we didn't know that the cost per ounce of production would be as high as it is now. In any case, with Newmont's reserves likely understated, you can see how with gold at $510 an ounce, Newmont is relatively quite cheap vs. bullion. If we knew for certain that its reserves have climbed to some higher number, you could see that it's cheaper still.
Fleshing out a fleshier stock price
For instance, if reserves were 25% higher (or 125 million ounces), that could mean we were paying $408 for an ounce of gold via owning the shares, versus the actual spot price. Meaning that if gold via owning stock in Newmont equaled the spot price, with reserves of 100 million ounces, the stock price should be about $60. Likewise, if reserves were 125 million ounces, that would imply a stock price of about $75. Again, we can't know exactly what the right reserves number is, but we can see that Newmont appears to offer a fair bit of upside, if this methodology is reasonable. Obviously, the valuation would be lower if the price of gold drops.
On the subject of "upside," one needs only a minimal understanding of technical analysis to see that Newmont's chart is currently very powerful. If it were a painting in the Louvre, a friend jokes, it might outdraw the Mona Lisa. Maybe that's a bit much, but it seems to me that we Newmont bulls stand a decent chance of getting paid in the not-too-distant future -- if my making that statement doesn't jinx us.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily "Market Rap" column on his Fleckenstein Capital Web site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of CNBC or MSN Money. At the time of publication, Bill Fleckenstein was short Research in Motion and long Fannie Mae puts.
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