Donald Coxe Call Notes (September 2, 2011)

Don Coxe Conference Call Notes (September 2, 2011)

- One look at the Shanghai (topped 2008) and Bombay exchanges (two tops in 2008 and 2010) makes one wonder whether or not some of the really serious problems around the OECD are just being masked, particularly in context of discussions surrounding global GDP. The incredible rally in the S&P500 forces the question of whether the Capital Asset Pricing Model is broken. Most of Europe is skirting negative growth; Canada just printed its first negative quarter. What does that say about what is really going on in the global economy?
- Remark: If the Capital Asset Pricing Model theory (CAPM) is no longer valid, the only asset that should be increasing in value is gold.
- Coxe noted that as we get further into the fall season, there will be shift back to “bedrock” thinking, and a dismissal of the usual, now out-of-date indicators.
- Dollar General’s CEO commented recently that consumers are strapped with high fuel costs and high food costs.
- gold’s rally is a negative indicator for the economy in general, and it is the only indication that the CAPM, and as such, is not actually in a rally.
- banks have been using Bernanke’s money to buy back their own stock.
- Coxe remarked how rapidly markets rolled over following the official termination of QE2, however in reality it was due to the fact that global manufacturing hit a wall, with everyone cutting back in raw materials and inventory.
- Economists were raising estimates at the same time as The Journal of Commerce Index of Sensitive Industrial Materials dropped!
- Broader indices are now in sync with this, reflecting this reality.
- Coxe commented/refuted reports that Canadian banks are suffering from the same problems as the European banks, noting that the Canadian banks don’t have the exposure to high risk bonds that European banks have, and hence, under Basel II, European banks come our much weaker, and Canadian banks come out stronger, given they have more equity.
- Investors should be careful about exposure to equities.
- gold miners are very cheap relative to bullion
- out of 197 subgroups, Coxe remarked that Agricultural Chemicals were #1, and gold miners were #3 – therefore investors should be overweight Agriculturals.
- Corn will most likely be in a shortage this year due to the weather
- Corn and soybeans are most important in the context of animal protein.
- If the Keystone Pipeline suffers from serious delays, he does not hold out hope for the Obama administration, where the jobs outlook is concerned.

Question and Answer
Q: Is the Brazilian rate cut a canary in a coalmine?
A: Brazilian policy makers have a history of hyper-inflation, and the move is courageous. Brazil’s central bank is in a much better position, and they have garnered a great deal of respect.

Q: Thoughts on gold’s performance since the 70s?
A: In the past, miners were the only way to really play gold, and there were no ETFs then. In the past there were few profitable gold miners, prior to gold reaching $100/oz. and they enjoyed subsidies. He believes one group (hedge funds) have been arbitraging gold bullion via ETFs vs. gold miners. Gold miners are now for investors, no longer just a speculation. Coxe sees that miners are very cheap, and things are very different now vs. the 70s.

Q: What is considered cheap gold-in-the-ground, for a miner?
A: It depends on the deposit. If if costs $1,200, then $600 valuation for reserves in the ground would be attractive. Look at reserves and the increases that are happening. You get a free call option on gold reserves increasing in value as the price of gold increases, when you invest in “cheap” miners.

Q: Any comments on the off-book financing at Chinese banks, and what is the impact on those banks?
A: You can hide a lot of stuff when you have double-digit growth, but you’d better be virtuous if your growth is 0%. China’s growth is no longer in the double digits, but its still 4 times better than anywhere developed; their currency is very strong as a special factor and they have a 35% savings rate, and will likely be able to handle any problems that come as a result of these debts in question.

Q: What were the catalysts that caused narrowing between bullion and gold bullion ETFs in the past?
A: The impacts are 1) the existence of ETFs and 2) hedge funds. The existence of bullion ETFs has had the greatest impact. Recognition that any deposits located in dubious countries can come forward very fast – As we get down to 1 gram/ton of gold deposits, it becomes very complicated to calculate the bullion vs. gold equities question of narrowing. Hedge funds have been a wild card, using short term earnings, and don’t seem to understand gold equities, and as a result the gold stocks get smashed. Any minor disappointment on earnings will impact gold equities severely.