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.
I can guess the bear argument before they begin to make it. The republicans win congress and there will be a new mandate. Spending will be cut. Money printing may cease. We may have austerity in the US. The US Dollar will rally. This will crush the bull market in precious metals.
First of all, some must have amnesia. They must be forgetting that the largest expansion in government spending and debt came about during republican administrations. (Would Bush have done any different than Obama?). Suddenly they are going to get religion on cutting spending? Will republicans go against their brethren and end the wars? Will they cut social services when at least one person in 50% of households are dependent on Uncle Sam? Will they go for austerity when economic growth and employment growth are stagnant? These are not policies that will keep them in power.
Even if the US cut back and went to austerity, it wouldn’t ameliorate our debt burden. The national debt is $13 Trillion with a 2010 budget deficit of $1.3 Trillion and interest payments of $413 Billion in FY 2010. That’s right. The interest on the already accumulated debt is growing by $400 Billion per year. And that is at a low interest rate. What happens if we have to refinance in a few years at 5%? Interest payments could reach $700 Billion annually. With a small rise in interest rates, we could be looking at $1 Trillion in annual interest payments four years from now. That would amount to 25% of the federal budget or more. We are less than five few years away from default becoming a certainty.
And unlike the years following the Depression, the engines of growth, businesses and consumers are already quite leveraged. The 1930s eliminated the weak businesses and indebted consumers. Today, consumers have paid down some debt but have a ways to go. Meanwhile, bailouts from the Federal Reserve and cheap corporate credit, have allowed businesses to basically re-leverage when they should have been cutting back. Following WW II, businesses and consumers were in a position to grow and take on more debt. That is not the case today. Therefore, it is impossible that we “grow our way” out of the debt burden.
And no, the Federal Reserve or Ben Bernanke has no power to stop what is coming. Rising interest rates only put more pressure on the banking system and hurt the economy’s ability to grow in the short-term. The weaker the economy gets, the larger the debt burden becomes and the closer we move to some form of sovereign default. Of course, zero percent interest rates and quantitative easing have been totally ineffective in trying to juice the economy. This policy has only encouraged speculation (albeit rational) in hard assets.
In the coming days, financial media and various pundits will obsess over what the election means for the markets. Problem is, these folk only focus on the next few days or weeks. They hardly ever consider the primary or structural trends in place. Just remember that the big money is made by finding those structural trends and holding for many years. Do you think the big money is fazed by whatever happens today?
The big smart money has already taken positions in precious metals and the corresponding shares. They know that today’s results won’t change the bullish prognosis. Unlike the financial punditry of today, these folks are thinking five years down the road. They see default coming in the western world in one way or another. They know that precious metals offer safety and potentially, huge profits.
Even if you’ve yet to secure yourself with physical or enhance your portfolio with junior producers and developers, you still have time. If you’d like more professional guidance during this bull market, then consider a free 14-day trial to our premium service.
Jordan Roy-Byrne
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