Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
In a world of corruption, financial and currency turmoil, gold will re-establish its importance in the global monetary system.
One major reason investors look to gold as an asset class is because it will always maintain an intrinsic value. Gold will not get lost in an accounting scandal or a market collapse. Economist Stephen Harmston of Bannock Consulting had this to say in a 1998 report for the World Gold Council, “…although the gold price may fluctuate, over the very long run gold has consistently reverted to its historic purchasing power parity against other commodities and intermediate products. Historically, gold has proved to be an effective preserver of wealth.
It has also proved to be a safe haven in times of economic and social instability. In a period of a long bull run in equities, with low inflation and relative stability in foreign exchange markets, it is tempting for investors to expect continual high rates of return on investments. It sometimes takes a period of falling stock prices and market turmoil to focus the mind on the fact that it may be important to invest part of one’s portfolio in an asset that will, at least, hold its value.”
Today is the scenario that the World Gold Council report was referring to in 1998.
A bad economy can sink poorly run banks. Bad banks can sink an entire economy. And, perhaps most importantly to the rest of the world, the integration of the global economy has made it possible for banking and economic failures to destabilize the world economy. As banking crises occur, the public begins to distrust paper assets and turns to gold for a safe haven. When all else fails, governments rescue themselves with the printing press, making their currency worth less and gold worth more. Gold has always increased in value when confidence in government is at its lowest. Isn’t this the current scenario in the world?
And, although not evident as yet, but soon to become apparent, a number of factors are conspiring to create the perfect inflationary storm: extremely expansionary monetary policies of the major Western governments, a long term decline in the dollar and the euro, higher oil prices, a mammoth trade deficit in the US, and America’s status as the world’s biggest debtor nation.
The early 1980s presented an once-in-a-lifetime opportunity to buy stocks. Today, economic and political conditions appear to offer a similar opportunity in tangible assets. The macroeconomic and political landscape has not looked like this since the hard asset bull markets of the 1970s. The global economic and financial market climate looks increasingly precarious. Financial imbalances have never been greater. Many countries have experienced housing bubbles and now have huge budget deficits as well as burgeoning national debt. Global trade imbalances are at unprecedented levels. The U.S. has no ability whatsoever to pay back its enormous debt, which has been stated at around $50 trillion plus dollars and not the $14 trillion the government state. If this is true, then the interest payments alone on the US debt are unsustainable. To make matters worse the biggest buyers of US debt no longer want this paper and instead are trying to cut their exposure.
The US national debt has grown so huge that the only way to pay for it is to borrow more, just like a huge Ponzi scheme. In the coming decade, we may witness one the greatest meltdowns in monetary history, as the dollar and euro decline in value. And, as this happens gold will become an important component in the global financial system.
The recent $600 billion quantitative easing plan is simply hiding the fact the US economy doesn’t have the economic base to grow its way out of this mess. And, as far as I am concerned it is not going to help reduce the high rate of unemployment either. If the latest non-farm payroll figures are anything to go by, then one can clearly see how ineffective the Fed’s program of quantitative easing has been regarding the reduction of the high level of unemployment in the US. The latest figures that were released on Friday, showed an expansion in employment of only 39,000 in November compared to markets expectations of 142,000. And, overall unemployment also jumped sharply from 9.6% to 9.8%. Even if the US economy was able to add say 50,000 new jobs per month, it would take around 15 years to get back to the levels that were last seen before this financial crisis that began in August 2007.
Furthermore as the U.S. maintains its low interest rate policy and billions of dollars flow to other countries around the world for higher returns, we will see a wave of reactive monetary policies from other countries in order to protect their currencies from increasing in value as the dollar continues to weaken. This chain reaction will send the dollar lower, but it will also make gold’s $1,400 an ounce price look like a bargain by the end of next year.
If you think this scenario is bad, think again. It gets worse when we consider the conditions prevailing in the Eurozone. Only last week the European Union warned that the turmoil over Eurozone debt is now a threat to growth, which will slow next year. The EU Commission said growth in the 16-nation Eurozone economy will slow to 1.5% next year from 1.7% this year but then pick up to 1.8% in 2012. It also adjusted radically downwards Ireland’s growth forecast, to 0.9% next year, from 3%.
Last week as borrowing costs for Ireland, Portugal and Spain soared, spreads on Italian and Belgian bonds jumped to a post-EMU high as the selloff extended beyond Ireland, Portugal, and Spain, raising concerns that the crisis could start to turn systemic.
While I do not want to appear as a doctor of gloom, the reality of the current situation is not good. We have massive government budget deficits, burgeoning national debt, expansionary monetary policies that will not rectify the high levels of unemployment but will debase the value of the US dollar and euro, and slow GDP growth in most western countries. We also have governments falsifying economic data, and price manipulation in gold and silver. We also have bank bailouts as well as country bailouts. And, we have politicians who are not trustworthy, corrupt bankers, traders and government officials, not to mention geopolitical tensions. In such a scenario, one would be well advised not to be hoodwinked by the usual political rhetoric and take precautionary measures to protect your wealth. The one sure way to do this is to own gold and silver.
TECHNICAL ANALYSIS
Since October, the price of gold has held above $1325 an ounce. Now, it is testing the resistance at $1425. A beak above this level could establish a new trading zone for the yellow metal.
About the author
David Levenstein is a leading expert on investing in precious metals. Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.
His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. The largest gold refinery in the world use his daily and weekly commentaries on gold.
David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.
For more information go to: www.lakeshoretrading.co.za
Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.
