An Afternoon with Donald Coxe

This afternoon Donald Coxe talked at the Hyatt hotel in Calgary.   I was fortunate enough to listen to him speak.

Before I get into the details of what he talked about I want to recount something he said on one of his weekly conference calls a couple of weeks back.  During the question and answer session, a questioner asked what Coxe thought would be the outcome of the European crisis.

Coxe hesitated and walked around the question for a time, before finally explaining that he had to watch what he said on the conference call since they were now being transcribed.   He was worried about being quoted to a comment that might be too candid.

Well I guess that the talk that Coxe gave tonight wasn’t transcribed, because he was very candid and  he spoke plainly about what he thought of the situation in Europe.

What he said wasn’t terribly encouraging.  Nor was it terribly surprising.

We are in a financial crisis.  The economy is taking a back seat to the events in Europe.

The problem that he described is well known and one that I have brought up myself numerous times in the last couple of months.  It has guided my own investment decisions, those perhaps not enough.

Along with the euro came a strange presumption among banks and ratings agencies that countries of disparate histories and lifestyles could now be considered to behave as one and that the same terms of credit could be applied to their debt.   At the extreme of this conclusion was Greece, whose bonds were valued a mere 10 basis points above the Germans, and whose debt was triple A.

Unfortunately the historically profligate countries lived up to their reputation. Equally unfortunate is that so many European bankers fell for this ruse.   The problem that we now face is not so much that Greece and the other PIIGS cannot repay their debts, but that the holders of those debts are European banks that do not have the capital to cover the losses of default.

In the question and answer session the same question that had been posed on the call was posed to Coxe again: How was this mess in Europe going to turn out?

Coxe, being free of transcription, was much more candid in his answer.

First, he said that the process, whatever it may be, was bound to be messy.  He pointed out that the EU has no escape clause that allows for a country to leave.  It is the quintessential “roach motel”.  This lack of a way out makes it very difficult to map out the sequence of events that will precipitate from a default.

But defaults, at least in the case of  some of the PIIGS, is inevitable.  Thus, a recapitalization of some of the banks (he made reference the French ones) is inevitable too.

The tax paying public of the European countries who will have to anti up for these bailouts are not going to be happy.  How strong the response is we can only speculate, but Coxe did point out that each of the 5 French constitutions written in the countries history were, like the EU, devised without a clause for their unwinding.  In each case the constitution was eventually unwound by “the mobs of Paris”.

But that was not the end of Coxe’s forthright appraisal.  When the dust settles, Coxe said he would not be surprised if the Eurozone rolled all the way back to its beginning, and was reduced to its original 6 member nations.

I’m not sure if the audience grasped the gravity of that forecast.  The Eurozone is right now 17 countries.  That means he sees potentially 11 countries leaving the EU and returning to currencies of central banking of their own.  One can only shutter at the dislocations that would be involved in such tectonic shifts.

Well, in a world where the earth is moving  miles under our feet and where the admittance that the debt the PIIGS owe will not be repaid must be owned up to, what does one do?

Invest in the asset class that is the opposite of such un-payable liabilities.

Gold.  And gold mining stocks.  Gold is no one’s liability.

Lately we have had lots of commentary attributing the movements in gold to what the Fed is going to do or what the US economy is not going to do.  Well tonight Donald Coxe did not mention Operation Twist once in his primary comments, nor did he mention Bernanke, and he only once mentioned the US economy, but it was in a passing comment, one that actually was referring to the reality that it was not the economy that would drive the direction of the markets in general, and gold in particular, going forward.

To Coxe, trying to peg each movement of gold to a Fed comment, to operation twist or to a disappointing economic data point is akin to predicting the movement of the poles by watching which way the wind blows.

There are far greater forces at work.

The basic point that he made was that the reason to invest in gold and gold mining stocks right now is not the traditional one.  It is not the expectation of inflation, or the anticipation of a clever monetary trick by Bernanke.  The investment case for gold lies in the 500 million people living within 17 different countries that have their savings, pay cheques, and pensions tied to a currency that was based on a theory and seems by the day to have less of a tie to reality.

Coxe does freely admit, however, that the move up in the bullion must be consolidated.  With gold having risen dramatically, Coxe feels that the gold mining stocks are the better place to put your money.  He said that this kind of disparity between the bullion and the mining stocks has only existed one time before in history. So while he feels gold will go much higher, he also believes that more value lies in the gold stocks at the moment.

In particular Coxe passed along his usual recommendation:  look for companies with long life reserves in secure areas of the world.  Put less emphasis be put on near term earnings and more emphasis on long term asset value.  And if possible, find companies that have large peripheral deposits that will become or have recently become economic with the rise in the price of gold.

As Europe slowly and painfully gets resolved, Coxe thinks that gold is going to work its way back into the monetary system.  The Keynesian economists are going to fight it, and they are not going to like it, but in the end the only way to reinstate solvency in these otherwise bankrupt and soon to be currency-less countries is going to be to accept that gold must be used in some form to bring some confidence back to their system.

Coxe was short on words to describe how this process may play out.  But he did say, quite emphatically, that it would happen at a much higher gold price then the price we have today.