Mexico’s proposed higher mining royalties could block nearly $7bn in investments
The Mexican government proposed raising mining royalties under the argument that metal prices have risen in recent years.
Gold has made its way down again, to around 1,300 per ounce this month. Rick Rule, Chairman of Sprott Global Resource Investments Ltd. says that a few years out, you will be happy you stuck with gold.
For context to today’s downturn, look back at the great bull market for gold in the 1970s’.
During that time, gold rose from $35 per ounce to around $200, and then came crashing down to around $100 per ounce. Weak hands, who lacked the courage or the financial strength to hold on, sold their gold. It was a disaster for them, but a great opportunity for investors who believed in the metal. They were able to enjoy an 850% gain over the following five years. The ‘anti-gold’ investors watched as gold soared.
As Rick recently put it to King World News, “that is the kind of regret that no investor wants to live with for the rest of their lives.”
Rick believes the overall bull market will return and produce substantial returns to investors who own gold.
Today, low yields on bonds help maintain confidence in the U.S. dollar and in U.S. bonds.
As of April 16th, 10-year U.S. Treasuries yielded a paltry 2.6% in interest, which is close to historic lows. Low interest rates are a helping hand for the Feds, who have a debt burden of over $17 trillion1, and off-balance sheet liabilities – payments they will need to make, but that are not considered debt – estimated at around $70 trillion2.
Now, if you are an investor that holds a 10-year Treasury, you will make more than the officially-reported inflation numbers3. But those numbers don’t tell the whole story. For one, they leave out food and fuel. They also do not include taxes. That’s fine if you do not eat, drive, or pay taxes.
Using the pre-1980’s inflation index for inflation, we find that your cost of living is increasing at around 5% per year4. So by holding a 10-year Treasury, assuming inflation remains steady, you will be losing 2.4% in purchasing power every year for 10 years.
It won’t be long before investors begin to slow down their bond purchases, says Rick, as they see their purchasing power erode. They will look at other investments to help them avoid that guaranteed loss.
As interest rates grow, so too will the Feds’ debt problem. The more expensive it is to borrow, the more bonds they will have to issue to cover interest payments. And the more dollars the Fed will have to print to soak up the excess.
As the investment public sees rising rates and the Fed picking up the pace on money printing, it won’t be long before they dump their bonds altogether, Rick believes.
As Rick warns, ‘anti-gold’ investors may once again witness gold shining on through the resulting calamity.
1 http://blogs.wsj.com/washwire/2013/10/18/u-s-debt-jumps-to-17-076-trillion/
2 http://www.breitbart.com/Big-Government/2013/08/04/Study-U-S-Debt-Obligations-70-Trillion
3 http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/
4 http://www.shadowstats.com/alternate_data/inflation-charts
By Henry Bonner
This information is for information purposes only and is not intended to be an offer or solicitation for the sale of any financial product or service or a recommendation or determination by Sprott Global Resource Investments Ltd. that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the objectives of the investor, financial situation, investment horizon, and their particular needs. This information is not intended to provide financial, tax, legal, accounting or other professional advice since such advice always requires consideration of individual circumstances. The products discussed herein are not insured by the FDIC or any other governmental agency, are subject to risks, including a possible loss of the principal amount invested.
Generally, natural resources investments are more volatile on a daily basis and have higher headline risk than other sectors as they tend to be more sensitive to economic data, political and regulatory events as well as underlying commodity prices. Natural resource investments are influenced by the price of underlying commodities like oil, gas, metals, coal, etc.; several of which trade on various exchanges and have price fluctuations based on short-term dynamics partly driven by demand/supply and nowadays also by investment flows. Natural resource investments tend to react more sensitively to global events and economic data than other sectors, whether it is a natural disaster like an earthquake, political upheaval in the Middle East or release of employment data in the U.S. Low priced securities can be very risky and may result in the loss of part or all of your investment. Because of significant volatility, large dealer spreads and very limited market liquidity, typically you will not be able to sell a low priced security immediately back to the dealer at the same price it sold the stock to you. In some cases, the stock may fall quickly in value. Investing in foreign markets may entail greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. You should carefully consider whether trading in low priced and international securities is suitable for you in light of your circumstances and financial resources. Past performance is no guarantee of future returns. Sprott Global, entities that it controls, family, friends, employees, associates, and others may hold positions in the securities it recommends to clients, and may sell the same at any time.
