The current investment climate is riddled with counter-party risk, frauds and broken promises. In
an attenuated way probably in violation of the Model Rules of Professional
Conduct for attorneys even the SEC is married to Madoff. As the deflationary credit contraction intensifies holders of
capital continue seeking safer and more liquid assets in which to allocate
capital. Some neophytes have called this a ‘liquidity
crisis’. I suppose they scarcely understand the phrase.
GOLD TO OIL RATIO
The current price of February oil is
$46.20 and spot gold is $849.90. The ratio is 18.4 barrels of oil per
ounce of gold. The historic averages indicate opportunities for buying
around 10 and selling around 20. Oil, priced in gold, is getting pretty
cheap which is to be expected during a credit contraction environment.
OIL MAJORS ARE CASH COWS
The oil majors generate and hold tremendous amounts
of ‘cash’. Unlike the current nomenclature I consider gold
cash and fiat currencies such as the Federal Reserve Note Dollar, Euro, Yen,
etc. to be ‘like-cash’ which will eventually evaporate just as
other ‘like-cash’ assets have such as Auction-Rate Securities,
Asset Backed Commercial Paper, etc.
Nevertheless, at the end of 2007 Exxon (XOM) had
$86B of current assets and $5.8B change in cash equivalents. Chevron (CVX) had
$39B in current assets with $7.4B cash on hand. Total (TOT) had
$71B in current assets, $8.8B cash on hand and $5.1B change in
cash equivalents. British
Petroleum (BP) had $80B in current assets with
a measly $1B change in cash equivalents. The runt, ConocoPhillips
(COP), still possessed $24.7B in current assets with $1.5B in cash and $639M
change in cash equivalents. Combined these five companies had
current assets exceeding $300B.
On May 28, 2008 Rex Tillerson, CEO of Exxon Mobil (XOM),
speaking at the company’s annual meeting was quite proud of $7B of
share buybacks per quarter for a total of 20% of its total outstanding stock
over the last five years. Through either similar buyback programs or mergers
the other oil majors have engaged in similar transactions with their
monstrous free cash flows.
GOLD IS CHEAP
At all times and in all circumstances gold remains
money and therefore is the most important currency in the world. As
required under the International Accounting Standards gold is a
monetary commodity. For example, footnote 14 of the 2007 Annual Report
for the Bank for International Settlements states, ‘Gold is considered
by the Bank to be a financial instrument.’ Silver, while
extremely cheap with a current silver to gold ratio of 78.2, is only a
quasi-monetary commodity. Gold is carried in the cash section of the
balance sheet.
On May 20, 1999, Alan Greenspan testified before Congress,
“Gold is always
accepted and is the ultimate means of payment and is
perceived to be an element of stability in the currency and in the ultimate
value of the currency and that historically has always been the reason why
governments hold gold.” Additionally, gold has been flirting with
backwardation and fiat currency interest rates are
now nearing 0%. The COMEX had available for December delivery a puny
2,855,567 ounces and 45.7% has been demanded for delivery.
During the 1990’s Mr. Rubin had devised the
gold leasing scheme with the intent being
elucidated by Dr. Greenspan’s testimony in 1998, “Nor can private counterparties
restrict supplies of gold, another commodity whose derivatives are often
traded over-the-counter, where central banks stand ready to lease gold in increasing
quantities should the
price rise.”
GATA’s alleged central bank gold price
suppression scheme may include the COMEX’s participation. Mr. Robert Landis, a graduate of Princeton University,
Harvard Law School and member of the New York Bar, has asserted that
“Any rational person who continues to dispute the existence of the rig
after exposure to the evidence is either in denial or is complicit.”
GATA alleges that the central banks have less than half the gold
claimed.
The sophistries weaved by the derivative
illusion have confused many otherwise extremely intelligent people to
erroneously believe that the sun (gold) revolves around the earth (FRN$).
Gold is not a
portfolio asset; everything else is. For example, the
$700B bailout represented approximately 20% of the all the gold ever mined in
the world. When there is a real liquidity crisis there are no TARPs,
TAFs, TALFs and other CRAPs which are intended to confound, confuse, deflect
and misdirect. Why have hundreds of pages on the topic of gold leases
requested under FOIA
by GATA been redacted by the Federal Reserve for reasons including
‘trade secrets’ and ‘privileged or confidential’
memorandums and letters?
Peter Schiff, the extremely accurate Gerald Celente
and others have cited forecasts for gold in excess of $2,000 per ounce. Former Federal Reserve Govenor Lyle Gramley has
suggested a revaluation of the Federal Reserve’s gold.
A revaluation from the current $42 per ounce to Gerald Celente’s suggested $6,000-10,000
is not unreasonable given the condition of the Federal
Reserve’s current tumescent balance sheet. This would also bring the
DOW towards its twice historic lows of about one ounce of gold.
My assertion is that the downside risk for the oil
majors when purchasing real gold is limited while the upside is prodigious.
Humanity’s gold lust has been dormant for nearly a century and
when it awakens it will be extremely vehement and go viral.
Those who own gold know of what I speak. The yellow metal seems to call
out to the inner conscience and resonate with our DNA.
BE THE RISK NOT AT RISK
The oil majors, or anyone else for that matter, can
purchase gold and put options. Then they can cause the ultimate
liquidity crisis by sending their armored trucks to the COMEX, having them
loaded up with the supposed gold and hauling it away. Demanding and
taking physical delivery is extremely important because there are
approximately 140
ounces of ‘paper gold’ for every ounce of physical gold.
This is a key reason why the oil majors should truck away their gold
instead using problematic ETFs such as GLD or SLV (GLD)
(SLV). Someone will be left holding the bag of worthless paper gold.
As a result of all the delivery notifications in
December the COMEX currently has 1,304,994 ounces or about $1.1B.
The entire eligible COMEX stockpile represents an immaterial 0.36% of the current
assets of the five oil majors. The oil majors could
drain the COMEX with a rounding error. It would be 14% of what Exxon
Mobil was spending per quarter buying back stock. Why buy back stock
when oil is so cheap compared to gold? Why not just buy physical gold
and truck it away? Is there a potential failure to deliver for the
stock?
There is extreme instability in the worldwide
monetary and financial system accompanied with the
counter-party risk of the banks. The oil majors, or you for that
matter, can easily eliminate
counter-party, Herstatt and settlement risks with gold clause contracts
and by using
credible, transparent and reliable digital gold
currencies. This turns bullion hoards into a functional currency
for ordinary daily transactions either with international parties or domestic
employees. Under 31 U.S.C 5,101-5,118 gold clauses are legal and
enforceable. As the economic pain from the current system intensifies
more rational market participants will seek out alternatives which will only
increase the velocity of gold and its perceived value.
CONCLUSION
Because (1) oil is a bargain, (2) shares are
plentiful, (3) gold is extremely cheap money in short supply relative to the
size of their balance sheets, and (4) to reduce risk therefore the oil majors
should just buy and take delivery of physical gold instead of buying back
their own shares.
Finally, it appears almost like gross negligence
and an extreme
breach of fiduciary duty for executives and boards of
directors to continue ignoring the risks and perils of the current monetary
and banking system when safe alternatives exist. This area may become ripe
ground for shareholder derivative suits. For example, Mr.
Tillerson’s $13M compensation and $54M of stock is rather low compared
to the compensation of other oil and gas executives like Bob
Simpson of XTO Energy who earned $72M and has $600M of stock. Lawyers, here are some deep
pockets to go after!
Disclosures: Long physical gold and no
positions in XOM, CVX, TOT, BP or COP.
Trace Mayer
RuntoGold.com
Trace Mayer, J.D., holds a degree in Accounting from Brigham Young
University, a law degree from California Western School of Law and studies
the Austrian school of economics. He works as an entrepreneur, investor,
journalist and monetary scientist. He is a strong advocate of the freedom of
speech, a member of the Society of Professional Journalists and the San Diego
County Bar Association. He has appeared on ABC, NBC, BNN, many radio shows
and presented at many investment conferences throughout the world.
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