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.
Once again gold has proved to be an effective preserver of wealth as well as an outstanding performing asset class. Since 2000, when the bull market in gold began, the price has moved from $250 an ounce to over $1400 an ounce. In 2010 gold was up 30% in US$, 35% in Sterling, 22% in Canadian dollars, 17% in Swiss Francs, 13% in Japanese Yen, 30% in Russian Rubbles, 25% in Chinese Yuan, 16% in South African Rand and $38% in Euro. And the average annual gain for gold in US dollars has been more than 20%, consistently for 10 years now.
What amazes me is that there are still investors out there who continue to denigrate gold as an investment simply because it does not pay a dividend. Yet, even a person who has the most rudimentary understanding of mathematics and who can manage to add a few prime numbers together can surely comprehend the following:
If you invested $100,000 in gold in 2000, the value of that gold is now worth around $560,000. If on the other hand you invested the same amount into bonds yielding say 8% per annum, on a compounded basis, the value of that investment is now worth around $216,000. (Yes, you may have gotten higher yields from some broken country but these higher yields come with a risk of a default. Recently, interest rates soared in the Eurozone; Greece 12.5%, Ireland went above 9%).
With trillions of dollars circulating in the global financial system, fund managers are constantly making capital allocation decisions, moving funds in and out of various instruments. Typically, these fund managers as well as large corporations and banks that are sitting on billions of dollars in cash purchase short-term US or European government bonds because of the relatively low default risk. And, as the government bond markets are so huge and liquid, there is always a market for these financial instruments and hence they are considered ‘cash equivalents’. And, the reserve currencies play a big role in this because unallocated capital is frequently parked in their bond markets.
However as long-term government bonds lose their luster, and as these major currencies continue to devalue against each other, gold has emerged as an alternative to foreign currencies and government paper. However, the amount of money flowing into gold compared to the other financial markets is miniscule.
The current problem that many of these investment advisors and fund managers tend to ignore is the fact that these reserve countries in particular the US dollar and the euro are looking very precarious. Even though the latest unemployment figures released in the US hint that the unemployment rate is improving slightly, there is little reason for exuberance, in my view. The widely anticipated report from the US Labor Department indicated that the U.S. economy created far fewer jobs than expected in December. Non-farm payrolls increased by 103,000, the Labour Department said on Friday, below economists’ expectations for 175,000. The unemployment rate fell to 9.4 %, the lowest since May 2009 and down from 9.8 % in November.
While the non-farm payroll increase was one of the best seen in months, usually major companies do not hire during December. So these figures suggest that many of the people added to the payroll figures are merely temporary workers needed over the holiday season. And, it is going to take more than just this one report to convince me that more workers are being hired. And, as far as the report released on Wednesday, by the payroll services provider ADP which stated that the economy added 297,000 private-sector jobs last month, the biggest increase since the company began tracking employment 10 years ago, I am not paying any attention to this as I do not consider this to be a reliable indicator.
Despite the fact that the major US stock indices have gained over the last year, and recently the dollar has rebounded, I maintain that the US still has weak economic growth, high unemployment, and of course levels of national debt that are unsustainable under these conditions. Currently, although the government figures indicate that the national debt is now $14 trillion other sources believe it to be much larger. Frankly, I concur with the other sources. While the last thing I want to do is to appear as a doctor of gloom and doom for the US economy I am tired of listening to useless government rhetoric which only misinforms and misleads the public.
From my perspective the US economy is very fragile at the moment and the only way the government is going to be able to service its debt is going to be to debase the US dollar by implementing new bouts of what they call “quantitative easing” which is tantamount to printing more money.
During the last ten years we have seen the US dollar lose more than 30% of its value against the other major currencies and the effect of increasing the money supply of the greenback will ultimately lead to high inflation, the beginnings of which are now creeping into the system. In the last year, we have seen the price of many commodities increase in value such as corn, wheat, soybeans, rice, oil, cotton, sugar, cocoa. As the demand for these commodities have not increased so dramatically as to cause such rises in prices, we can assume that since most of these commodities are dollar denominated, the weaker dollar has been the main contributing factor. Like gold, when the value of the dollar declines the values of these commodities increase.
Not Just Gold, Silver Will Benefit From Volatile Financial Markets
In fact, even though I specialise in precious metals I see a major commodity cycle developing on account of the current financial crisis. Not only will the weaker dollar create an inflationary cycle, it will cause a period of international currency devaluations, a race to the bottom and a period of much instability.
The other problem in this picture is of course the Eurozone. Concerns of sovereign debt in Ireland, Spain, Italy, Portugal, Greece and Belgium are only going to get worse as European banks are going to compete with European countries for some $1.250 trillion dollars in funding (banks need $500 billion and European countries $750 billion). One country that perturbs me is Spain. As soon as Zapatero the Spanish prime minister publicly stated that the Spain’s finances are healthy, I knew the opposite must be true. And, to me it seems as if Spain is in a mess.
Like Dubai, Spain experienced a major property boom. Over a decade, land prices rose around 500% and developers built hundreds of thousands of units. But, when the sub-prime debacle spread around the world, developers in Spain took a real hit. And, developer loans are coming due soon. Of course under the current circumstance there is absolutely no ways that these developers are going to make interest payments let alone pay any principal. This will result in the collapse of many developers, which will leave the banks holding vast amounts of underdeveloped land at overvalued prices. And to make matters worse for these banks, it seems that the prices of houses still have a long way to fall, as much as around another 35%.
Frankly, it is a matter of time before investors realise that Spain is massively understating the problems of its banks. On top of this, Spain has to deal with various austerity measures in a time when the country is suffering from a various austerity measures and a high level of unemployment. Although Spanish officials claim that the unemployment rate is 20% you can bet your bottom dollar that the real unemployment rate is higher.
As we enter another year, and while the price of gold slips, I urge investors to take advantage of these lower prices and allocate some funds to the yellow metal.
TECHNICAL ANALYSIS
During the past week the price of gold breached the medium-term 50 day MA suggesting that we may see some lower prices in the short-term. However, it is important to note that the current price represents a 23.6% Fibonacci retracement and on previous occasions, when we have seen this kind of break, the price has soon rebounded. No matter, the long-term trend remains very much intact and I suggest using this dip as a buying opportunity.
