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.
Legendary Dow Theory Letters Writer Richard Russell issued a big bear warning May 27. In a special early alert for his subscribers, he announced that his analysis of the April to May activity on the Dow Jones Industrials showed the continuation of a primary bear market that started on October 9, 2007. “We are now dealing with the latter part of the primary bear market. . .subscribers should now follow a course of utmost caution,” he said. “As for gold, I think it will be under pressure for a while, but before this bear market is over, gold will embark on a major bull move. The current correction in gold will test every goldbug’s nerves,” he added.
The Gold Report asked other market watchers for their interpretations of the numbers and the impact these trends could have on the price of gold and gold equities. Their responses reflected their unique perspectives.
“Richard Russell will likely be right about the broader markets entering a bear market,” said Jeff Clark, a senior precious metals analyst with Casey Research. “Otherwise, where is all the economic growth going to come from that will nullify the otherwise unavoidable impact of record debt, obscene deficit spending and runaway money printing?” he asked.
“As a gold equities investor, though, this doesn’t worry me because the very reasons we’ll likely have a bear market in the overall stock market are the same ones that will drive gold and then gold stocks higher. In fact, gold is becoming less of an investment and more of a necessity; once the economy improves—whenever and however—expect a serious bout of inflation, something that will erode the purchasing power of cash and cash-equivalent investments.
“In fact, not buying gold will likely be a very costly blow to our future standard of living. Based on the historical performance of gold and silver, we won’t experience any inflation in the things we buy 10 years from now if we pay with the proceeds from precious metals sales. Think about that: if gas prices double, we pay today’s price if we sell some gold or silver to cover it. Ditto food. In 1964, three Roosevelt dimes bought one gallon of gas; today it only takes two of those dimes. This is one of the big reasons we’re accumulating physical metal.”
Toby Connor, author of the popular Gold Scents newsletter, was not ready to call a bear market yet. “We need to see how the market acts as it comes out of this intermediate cycle low,” he said. “Even if a bear market has begun, there is usually a denial phase where the market retests the highs or even marginally breaks to new highs. We saw this in 2007 as the subprime implosion was getting underway, but the market ignored it and focused on the Fed slashing interest rates and printing dollars. The market assumed this would fix the problems. It didn’t fix anything, but it did drive stocks back to marginal new highs where smart money sold positions to the retail crowd. Even if a bear market has begun we will almost certainly see a retest as soon as the Fed hints at the next round of quantitative easing. I don’t believe for a second the Fed will give up without a fight. They certainly didn’t in 2010 or 2011.”
Connor was still undecided about gold’s place in the cycle. “I’m not sure whether gold has formed an intermediate bottom yet. The miners seem to be saying yes, but gold is still fighting the dollar rally,” he said.
Dr. Michael Berry, author of the respected Morning Notes, has also looked at the bigger economic numbers and he saw a world perilously close to slipping into a “Fisherian debt-deflation spiral” as described by Irving Fisher in the 1933 paper The Debt-Deflation Theory of Great Depressions. He pointed to debt liquidation and distress selling, contraction of the money supply, a fall in asset prices, a greater fall in the net worth of businesses, a reduction in output, trade and employment, general pessimism and loss of confidence and hoarding of money as indicators that mirror the trends Fisher saw before the big crash in 1929.
Berry does not think there will be a reprise of the Great Depression, however. His worry is that the world may be entering a Keynesian liquidity trap in which more monetary stimulus is ineffective. He warned that until the massive debt overhang in the world is dealt with and a clean credit cycle commences, growth will be slow and inflation could be high. Of course, that could also increase gold and silver prices “significantly.”
John Kaiser, author of Kaiser Research Online, took a positive longer view. “I would point out that the peak of the real estate bubble was June 2006, with most of the descent taking place by Q1/09. It looks as if housing prices are locked into a downtrend, plumbing new lows since 2011, but the housing starts for April were at the highest level since early 2009. Given the backdrop of emerging markets such as China and India slowing, Europe grappling with its sovereign debt crisis and the United States paralyzed by an election year during which no new fiscal initiatives can be made and the Federal Reserve reluctant to engage in quantitative easing for fear of being accused of biasing the election outcome in favor of Obama, it is hard not to have a bearish macroeconomic outlook for the remainder of 2012. However, with the rest of the world off-balance, and the United States effectively in a holding pattern, the circumstances are right for a massive round of fiscal stimulus supported by additional quantitative easing in 2013 regardless of who wins the election so that the perception of the United States as a fading power gets turned around. The long-run destiny of the United States as being in relative decline within a global economic context remains intact, but the solution to avoiding a global depression requires restoration of a leadership role to the United States. This will not happen if the next government ends up with a Tea Party-styled mandate that reinforces the current austerity mindset.”
With all of the negative news in the media, Kaiser said he was not surprised by the apocalyptic outlook saturating the public consciousness, but predicted a positive change in the not so distant future. “This is the classic paroxysm of an approaching bottom. I suspect that by the end of summer we will see housing starts not plunge back the way they have done every year since 2009, real estate prices will be edging away from the cliff, manufacturing jobs will continue to grow as more companies contemplate the implications for their China-based operations by a Chinese shift away from infrastructure stimulus into domestic consumption stimulus, and the election focus will be on which party has a better centrist vision for leading the United States economy back into a more balanced state. This will happen when the political discourse shifts to the Medicare and Defense items in the budget and recognizes that the only way to avoid flushing retirees down the toilet or jettisoning America’s role as global supercop is to put the American economy back on a diversified growth track. Once it becomes apparent that it does not matter who wins the election, the glass will switch from half empty to half full, and the markets will benefit.”
That good will will shine on commodities as well, Kaiser concluded. “Gold will also benefit because, except in the case of an extraordinary energy or technology windfall generated by innovation, the modern economy only grows when fueled by a credit expansion.”
BMO Capital Markets Analyst and Vice President of Equity Research Mining Andrew Breichmanas also looked favorably on the future of the shiny metal, if not the overall economy. “We seem to be more optimistic on gold rather than calling for an extended bear market,” he said when asked after the markets closed on a particularly volatile Wednesday.
The Gold Report will continue to interview experts throughout the summer and share the most up-to-date analysis of where the market is going and how investors can profit during these volatile times.
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