Investment Strategy Viewpoint

Fri. Nov. 12, 2010

Strategas Research Partners, LLC

Jason DeSena Trennert (212) 906-0133 [email protected]

GOLD: STILL A RODNEY DANGERFIELD ASSET

“It just can’t be right,” said the 30-something hedge fund manager through a towel after
a grueling 45 minutes on the squash courts of the New York Athletic Club.

“I mean, G. Gordon Liddy is trying to selling it to me on Fox News. My orthodontist

owns gold -- he wears gold, for crying out loud. It just can’t be right,” he said, shaking
his head, his voice trailing.

The case against gold is well-known and, until relatively recently, time-tested. The yellow
metal is never ever really consumed, provides no yield, and carries with it storage costs.
The polemic surrounding gold, like the inflation vs. deflation debate, is enough to result
in bar fights in some sections of this grand city and it’s hard to find too many investors
who are agnostic about it. You either see it as the barbarous relic of the retail crowd or a
necessary hedge against the cupidity of politicians the world over. Despite the recent
run-up in gold, it is, by our lights, too early to fade. There are now, unquestionably,
elements of froth in the market that should give investors pause. But if there is one
fact that is missed among investment sophisticates, it’s that investing in gold is
still considered a hopeless backwater at most large mutual fund companies in
this country. It is for this reason, that we believe that it is not yet over-owned.

Gold Stocks at Prior Peaks: Then & Now

1980 Ticker Name Mkt Value $B
Largest Gold Company ANGLY Anglo-Amer So Afr ADR 3.7
Avg Mkt Cap of S&P 500 Stock 1.9
Avg Mkt Cap of Gold Stock 0.7

2010 Ticker Name Mkt Value $B

Largest Gold Company ABX Barrick Gold 51.1
Avg Mkt Cap of S&P 500 Stock 21.5
Avg Mkt Cap of Gold Stock 8.7

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I find a certain irony in the fact that I have two friends in the investment business who,
after enjoying great success and fortune managing other peoples’ money in the 1980s
and 1990s, have been, in their retirement, buying physical gold. They are unknown to
each other and are different in many ways save for the fact that they were born in
foreign lands – one in Armenia, the other in Cuba. They live in America, not by
tradition or family ties, but by choice. Despite the fact that they so obviously believe in
the great promise of this country, they have both come to the conclusion that they
should hedge their hard-earned fortunes with hard assets. For them, their decision to
own gold isn’t the result of some ethereal academic exercise, it is based on life
experiences most people born in America couldn’t possibly understand.

While the hard asset story may seem tired and old to some in the investment business, it
is just starting to capture the consciousness of many professional and retail investors
alike who thought it was overly alarmist to believe the political class might seek to
devalue its way out its own profligacy. This isn’t to say that we believe the Fed is
intentionally trying to cheapen the dollar. We take the Chairman at his word that he is
simply trying to decrease the tail risks associated with deflation. But intentional or not,
the net result of further monetary accommodation is the same – weaker purchasing
power of the greenback. Ultimately, we believe the crux of the case for gold is that
it’s hard to quadruple the size of the Fed’s balance sheet and run budget deficits
of nearly 10% of GDP and also stick the landing on inflation. However you might
handicap the prospects of either a Reinhart-Rogoff style deflation or efforts to reflate
that work too well, gold remains one of the best hedges against the volatility of inflation.
In the past century, the asset “worked” in two distinct periods – the deflation of the
1930s and the inflation of the 1970s. Given the uncertainty of global monetary and
fiscal policies today, there is probably still room for it to garner the respect it deserves.

Gold ($/Oz.) Gold Miners Index Market-Cap as %

Nominal vs. Inflation Adjusted of NYSE Market-Cap
2,000
1 ,800 2.5% 2.2%
Real
1 ,600 2.0%
1 ,400
1 ,200 1.5%
1 ,000
800 1.0%
600
400 0.5%
200 Nominal 0.0%
0 '96 '98 '00 '02 '04 '06 '08 '10
'7 5 '80 '85 '90 '95 '00 '05 '1 0

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THE SELF ESTEEM SOCIETY
Availing myself of the pleasures of commercial airline travel each week and frequently
subjected to the sullen ennui of the cashiers at Duane Reade here in Manhattan, I had
thought that I was well past the point at which the nerve endings of my dignity could
register the slightest offense. That was until we decided to place postings for a variety of
entry-level jobs in recent months and we started to receive cover letters from recent
college graduates that would have made Donald Trump blush in their pomposity. “The
question isn’t whether you should hire me,” started one, “it’s whether I’m going to want to work for
you.” Another candidate made it clear that he was “a caged tiger waiting to enter the arena of
the world of finance.” Subsequent interviews with candidates whose cover letters were the
least obnoxious often didn’t go much better – and regardless of how little ego you may
think you have, it’s hard to maintain your composure when a 22-year old kid expresses
disgust at the fact that your company doesn’t possess green initiatives greater than
recycling. Of course, we are a small company and only four years old and our offices
have a certain Eastern European DMV-vibe. There is no fish tank, no tragically
beautiful receptionist. We know we’re not Goldman Sachs but we are, after all, offering
these candidates the prospect of gainful employment and a paycheck which, one would
presume, might engender some humility among the unemployed.

Of course, most of us are idiots when we first leave college, often not nicked-up enough
by the slings and arrows of outrageous fortune to understand how hard life is and how
little to which others actually think we’re entitled. This all started to make sense to me
upon reading a small squib in the paper about how American kids, when compared to
their contemporaries in 29 other developed countries, ranked 25th in math, 21st in
science, while ranking # 1 in only one category -- confidence. I started to think about
my late father, as I often do in the quiet of long transcontinental flights. At his core, he
was a sweet man with the heart and soul of a poet. But he was a man of different era in
which there were no participation trophies. His code was based on the belief that self-
esteem had to be earned and he had zero tolerance for phonies or pretense of any kind.
When confronted with those who had no appreciation for the great opportunities this
country afforded, he could make The Great Santini look like Deepak Chopra. The
transformation of a society in which prior generations prized an equality of opportunity
to one that insists on an equality of outcome seems so much more important now, when
the country is again faced with the need to make sacrifices to ensure its long-term fiscal
viability and to compete with increasingly aggressive economic rivals. It is in this context
that we should all be somewhat saddened by the reaction of those on both the right and
the left to the recommendations of the President’s Commission on Fiscal Responsibility.
Everyone recognizes that, despite our status as a reserve currency, the U.S. cannot
sustainably spend far in excess of its means. But when it seems as if we all want the
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other guy to make the necessary sacrifices we reveal, in the process, our own, although
more mature, sense of entitlement. This is, of course, not a uniquely American problem.
One doesn’t know whether to laugh or cry at the spectacle of 17-year old French
students protesting the fact that their retirement age needs to be extended from 60 to 62
in a country in which the average life expectancy is nearly 81 years old. But without
political leadership designed to do the right thing regardless of the electoral
consequences, it’s hard not to feel that the correlation between the West’s sense of
entitlement and the price of gold will only grow.

Jason DeSena Trennert

A NOTE TO FELLOW TRAVELERS: If you ever find yourself on line for one of those 
body  scanning  machines  and  have  the  choice  to  go  with  the  traditional  metal 
detector,  always  choose  the  metal  detector.    Besides  the  fact  that  you  are 
probably providing cheap thrills to a guy who lives with 20 cats in a room with a 
big  ball  of  twine  and  thousands  of  50‐year  old  copies  of  Life  magazine,  it  is  a 
painfully  slow  process  in  which  you  need  to  take  off  virtually  every  article  of 
clothing (belts, cufflinks, etc.) and must stand in the starting position for some 
obscure African interpretive dance. It's hard not to think that the terrorists have, 
in some small way, won. 

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