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.
For this week, we charted and analyzed the performance of gold for each President and their respective party since Nixon began his term in 1969.
During the Nixon administration from January 1969 until August 1974, Nixon implemented a series of economic measures aptly named the Nixon Shock. The most significant of which was the cancellation of the direct international convertibility of the United States dollar to gold, or the Bretton Woods System. Gold, along with currencies, was finally free to float. The price of gold spiked accordingly.
Jimmy Carter came to power in 1977 and inherited an economy that would be mired in continual inflation and recession, as well as an energy crisis. He could thank President Nixon for that; the Nixon Shock was the root cause of the Great Inflation, and in 1979 inflation skyrocketed to 15%. Gold, the forever inflation hedge, acted in kind.
Up until this point, the presidency had succumbed to public demands for limitless monetary expansion. This would change with the appointment of the new Chair of the Federal Reserve, Paul Volcker, who with an iron-fist, finally tamed inflation and threw the US into a much-needed recession. The recession began just prior to the Reagan administration.
Ronald Reagan was the benefactor of Volcker’s aggressive anti-inflation push, commencing his presidency in 1981 and implementing a brand of supply-side economics, called “Reaganomics”. This included tax rate reductions, deregulation, reduced public spending, and controlling the money supply to curb inflation. During his two term tenure, inflation declined from 12.5% to 4.4%, and real GDP grew by 3.4% on average annually. As a result, gold prices dropped 30% during Reagan’s term.
Due to “Reaganomics”, George H.W. Bush inherited a sizeable annual government deficit of $220 billion – a deficit which had grown almost threefold during Reagan’s tenure. To curb the burgeoning deficit and regain some respect in the international arena, Bush made a push to cut government spending. He was rebuffed by the Democratic congressional majority, which eventually forced him to raise taxes instead – a move that would prove to be immensely costly in his 1992 re-election effort. Many fellow Republicans viewed Bush’s capitulation as a betrayal and never forgave him for it.
After seeing Bush’s approval ratings briefly skyrocket in the aftermath of the 1991 Gulf War, the US entered into a mild recession. While interest rates and inflation remained very low, unemployment reached 7.8% in the latter part of 1992 – the highest rate since 1984. Gold finished George H.W. Bush’s one term in office down 19%.
Gold’s performance was also lackluster during the Clinton administration, partially due to his appointment of two advocates of tight money – Alice Rivlin, Vice Chair of the Federal Reserve System, and Laurence Meyer, a Federal Reserve System governor. President Clinton oversaw a period of significant growth and economic expansion in the US, with the Dow Jones Industrial Average (DJIA) increasing over 250% from January 1993 to the early 2000s. Inflation also remained in check due to sky-high labor productivity. The asset bubbles that would come to significantly define Alan Greenspan’s tenure as Fed Chairman had not yet popped before President Clinton left office in 2001. The price of gold stagnated during Clinton’s eight years in office, ending down 19%.
George W. Bush’s presidency was roiled by turmoil in both the economic and foreign policy spheres. Problems began with the bursting of the dot-com bubble, continued with missteps in Iraq and in the aftermath of Hurricane Katrina, and concluding with the 2008-2009 financial crisis. Depending on your perspective, much of the blame for the economic woes from 2001 to 2008 can be either assigned to President Bush or Fed Chairman Alan Greenspan. The financial crisis was borne substantially out of the easy money policies of the Federal Reserve in the late 1990s and 2000s, which inflated real estate value and other asset pries. What cannot be denied, however, is the massive growth in the national debt during Bush’s two terms. The national debt grew from $5.8 trillion in 2001 to $10 trillion in 2008. Gold finished with a massive 213% gain during Bush’s presidency!
With the 2008 failure of Lehman Brothers, Bear Stearns, and many other entities, followed by a huge stock market crash, the government moved to enact a massive $787 billion stimulus package. A combination of tax rebates and spending measures were implemented; meanwhile, Federal Reserve Chairman, Helicopter Ben Bernanke, emerged and quantitative easing became the policy du jour at the Federal Reserve.
The current President, Barack Obama, is still printing money, and similar to Bush, is also utilizing expansionary fiscal policy to stimulate economic growth. The national debt during Obama’s tenure has grown from $10.6 trillion to over $19 trillion. Much of that increase is from the burgeoning costs of mandatory domestic programs like Social Security and Medicare, but the stimulus package, education spending, and Obama’s signature healthcare reform bill, the Affordable Care Act, have also added significantly to the annual federal budget deficit. The combination of loose monetary policy and Obama’s spendthrift ways has helped gold to return 54% so far during his presidency.
As the chart above shows, there is no clear connection between the performance of the gold price and which political party is in power. There is a much clearer relationship between the gold price, monetary policy, and the economy. Whenever a President has inherited an economic situation where monetary expansion has been prevailing, rampant inflation and even stagflation have been hallmarks of that presidency. Jimmy Carter’s tenure is a prime example – besides confronting the new reality of the abandonment of the Gold Standard, Carter also had to deal with accommodative monetary policy. Richard Nixon had earlier pressured Fed Chairman, Arthur Burns, to engage in expansionary monetary policy in the run-up to the 1972 election.
It now appears that Donald Trump’s presidential aspirations are a lost cause; however, it does not really matter who wins the election. Gold is poised for over a 325% gain in the years ahead because of the mess that both political parties and the Federal Reserve have created in the past and accelerated since the 2008-2009 financial crisis. Good luck to Hillary (or Trump)… Whoever wins is screwed.
