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Guest Post: If Deflation Wins, What Will Gold Stocks Do?
Submitted by Jeff Clark, Senior Editor, Casey’s Gold & Resource Report
If Deflation Wins, What Will Gold Stocks Do?
The talk of a possible double dip is now common banter on TV
investment programs. And indeed, deflationary forces seem to have the
stronger grip right now than inflationary ones. So if deflation is the
next reality we have to face, what happens to our favorite stock
investments?
There’s lots of data about what gold does during periods of high
inflation, but less so with deflation, partly because we don’t see a
true deflation all that often. But of course we’ve got the biggie we
can look at, and the seriousness of the Great Depression can give us a
big clue as to how gold stocks behave in a true deflationary
environment.
First, we know what happened to the stock market in 1929, and in that
initial shock, gold stocks crashed too. A rally ensued in most equities
until the following April, including gold stocks. Then the Dow took a
one-way elevator ride down for the next two and a half years.
What did gold stocks do?
From 1929 until January 1933, the stock of Homestake Mining, the
largest gold producer in the U.S., rose 474%. Dome Mines, the largest
Canadian producer, advanced 558%. In spite of the gold price being fixed
at the time, gold stocks rose dramatically.
At the same time, the DJIA lost 73% of its value.
And the chart doesn’t show that you could have bought both stocks at
half their 1929 price five years earlier, which would have led to gains
of around 1,000%. That’s not all: both companies paid healthy and
rising dividends as the depression wore on; Homestake’s dividend went
from $7 to $15 per share, and Dome’s from $1 to $1.80.
Yes, volatility was high in the gold stocks throughout the depression,
with occasional wild price swings. But after the 1929 crash, much of
the volatility was to the upside.
The bottom line is that the two largest gold producers – during a time
of soup lines and falling standards of living – handed investors five
and six times their money in four years.
What about gold itself? On April 5, 1933, President Roosevelt issued an
executive order forcing delivery (i.e., confiscation) of gold owned by
private citizens to the government in exchange for compensation at the
fixed price of $20.67/oz (you can read the original order here).
And less than nine months later, he raised the gold price to $35,
effectively diluting every dollar 41% overnight and swindling everyone
who had turned in his gold.
We don’t know exactly what an untethered gold price would have done
during the depression, but given its distinction in history as a store
of value, we believe it would retain its purchasing power in a
deflationary setting regardless of its nominal price. In other words, while the price of gold might not rise, or could even fall, your best protection is still gold.
But with all this said, the overriding concern isn’t deflation. Yes,
economic growth will likely be flat for years, and many Americans will
see some hard times ahead. But deflation won’t win; in a fiat money
system, any deflation will be met with an inflationary overreaction (as
we’ve seen). And the worse the deflation, the more extreme the
overreaction will be.
In fact, I think there’s another round of money printing before this
year is over. And sooner or later, that extra money is going to dilute
every dollar you own, giving us an inflationary hit as bad as the
deflationary one we got during the Great Depression.
It’s for this reason that I continue to urge you to own physical gold,
in your possession and under your control, given its reliability as a
store of value in both inflationary and deflationary environments. If
you don’t have a meaningful portion of your investments in physical
gold, I think you’re playing with fire. And those who play with fire
eventually get burnt.
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Going up, bitchez !
naked short to death bitchez
Once the algos get involved, they'll take your money, just like any other stock.
Maybe I'm wrong, but I certainly wouldn't put any money in ANY sector of any Western stock market.
I agree. If you take a look at miner's stocks during the 2008/2009 crash, they vastly under-performed the metal. Everything paper will come for sale.
If you want exposure to gold, why not buy the physical and store it? Might be a bit more illiquid, bigger bid ask spread, but if you are buying gold for the long term (and not a trade), IMHO the only way to go.
Plus you get to play with your precious...
Just curious - how will not being on the gold standard in America be impacted in relation to this example when we were in 1920's-30's?
The 400-500% gains were against relatively constant, gold-backed dollars.
If gold goes up against the dollar, and the stocks go up, this would act as a multiplier. For instance, if gold goes to $2400/ounce, and stocks gain 500% when priced in gold, then the price of stocks, in dollars, goes up by 1000%.
That's what I was thinking.
Gold miners went up because their product's price was fixed, but their expenses kept dropping because of rampant deflation.
Today the price of gold isn't fixed and deflation may or may not happen. So I don't think you can realistically say that the exact same things will happen this time.
I agree as well. The price of gold was held constant while everything else was allowed to decling in price. Therefore, the relative value of gold and gold producing companies increased at least proportionately.
If gold is not fixed and allowed to depreciate with everything else during a deflationary time then the gold mining stocks would most likely decline as well.
Gold may or may not decline in an environment of general deflation. It may even go up. But its hard to see miner stocks going up during a crash in the stock market. They dropped in 1987 and 2008. I think we have to expect that again.
Gold price was fixed, yet the Gold/DOW ratio only hit 2:1 in 1932. Make of that what you will.
Do you mean DOW/GOLD? (not GOLD/DOW)?
No. In 1932 it took 2 ounces of Gold to buy 1 unit of the DOW. As long as the ratio is expressed correctly you can call it either way.
depends on the miner, costs, production, reserves, fundies. IMO many juniors with promising reserves will be bought out.
that underlies Hickey's thesis
- Ned
Gold is money..the system is rotten and bankrupt, miners are a real source of capital..... banks. Don't listen to the hype, deflation is a gig, own miners.
+1
miners "print" real money!
When the Gold Rush is on.. the banksters will want every share. Re-capitalization!!!
Yet, if you're REALLY pessimistic--what are the chances Fed Govt nationalizes all miners and compensates shareholders with worthless FRNs?
Keep it physical, keep it safe...
Homestake Mining, bitchez!
If They Can’t Afford Wheat Let Them Buy Real Estate? Why the Price of Food Will Guarantee a Chinese Real Estate Crash
China will own gold and print like crazy.
We can buy all the bullion proxies (gold stocks) we want....the result will be the same. They WILL confiscate.
Obama will have to pry my gold from my gun powder caked dead hands.
That can, and probably will, be arranged....
Seriously, are these bastards going to make me bury it in the damn yard to keep it away from them like i'm friggin blackbeard or something?
ARRRRRR!
O: "your proposal is acceptable."
- Ned
"[i]n a fiat money system, any deflation will be met with an inflationary overreaction (as we’ve seen). And the worse the deflation, the more extreme the overreaction will be."
Bingo. How can a three toed sloth like the Fed who couldn't predict/react to the real estate bubble be expected to time things perfectly when it comes to inflationary policy?
For what it's worth, however, I'm looking at oil first and foremost because it has defined industrial uses, price elasticity adn the prospects for confiscation are lower.
Yawn, first of all, deflation will win. It has been winning, M3 is contracting at an annualized pace of 10pc. Secondly, why would the FED and the bankers destroy the source of their power? The US Dollar. They have extracted your wealth and will buy back the country for pennies on the dollar. Hyperinflation is simply not in their self interest for now. That's a few years down the line, when they will confiscate all the gold. Plan for now is to control all productive assets and then to confiscate the gold. First by deflation then by hyperinflation.
So far this week, I've heard of two inflationary stories.
1. The Fed is buying it's own debt (ie. hiding bills & collection notices from the wife and kids.)
2. Federal transfers to out state and local public sector employees (taking the wife and kids out to for dinner to the Cheesecake Factory in a respectful celebration of normalcy. On plastic of course.)
Deflation will be shortlived.
Deflation can't be allowed to win, end of story. It may peak in for 6 months this fall and winter but it will be met with massive money printing. Betting on Deflation is dumb money bitchez.
that says it all
Yawn...
Deflation will NEVER win
The only reason we have had no hard core inflation is because we have had no hard core deflation. If there was no bailouts in late 08 and 09, the dollar would have been done by June of 09(HYPERINFLATION)
No bailouts means no economy for a while, in other words NO WAY TO SERVICE THE US DEBT. Remember the dollar is backed by the full faith and CREDIT of the US govt(US economy)
One of the reasons we have not had hard core inflation is that the money printed has gone nowhere. It has not effectively increased the money in circulation. It is parked. Deflation has largely been held at bay by simply refusing the recognize the losses - extend and pretend all the way. Leverage up even more.
Can't say what will win here - but am looking for signals of funny business bypassing the normal route to get money into mainstream circulation. If push comes to shove, it seems we are in store for "something new and unexpected" from the Fed. Should be interesting.
Your getting demand pull inflation mixed up with currency inflation.
The Euro had inflation before the trillion dollar bailout even came. The Euro went from 1.5 to 1.2(CURRECNY INFLATION)
I guess I would have to say that I don't see that angle so clearly. My feeble grasp here is that the bailouts bought time. They afforded a pause in a debt-deflationary event, deleveraging - which I would believe would imply a stronger dollar. The resultant hyperinflation however would be the result of a loss of confindence in the purchasing power of the fiat currency in question - through whatever means yields such a crisis (i.e. increasing currency in circulation, not just electronically created and parked per se). Saying that deflation will never win, IMO, is saying that in the context of the current system our gov't and the Fed simply can't let this happen.
Thanks for the feedback by the way... got to think more about what you said of course.
One of the reasons we have not had hard core inflation is that the money printed has gone nowhere. It has not effectively increased the money in circulation. It is parked.
That's the way I see it. I would think Q3 would be released into circulation.
The debt deflationary event would mean that all the US banks would be bust, the US government would have no revenue to service the debt. The debt will be sold off, the debt is what backs the US dollar. A dollar selloff is currency inflation no differnt then the Euro sell off when Greece was having problems servicing its debt.
Partly right by it is simpler then that.
WE DONT NEED ANY MONEY PRINTING TO HAVE HYPERINFLATION. As the US economy contracts, the revenue that services the US debt also contracts. When the debt cant be serviced, the debt/dollar will sell off.
That's the million dollar question, isn't it?
If gold stocks go up in deflation, then why did gold stocks go down from $50 in July 2008 to $17.50 in Oct 2008? (I $h!t you not--see GDX).
Don't get me wrong, I love gold stocks. But remember in the 1930's, everyone KNEW that gold was money, since their paper FRNs were redeemable in gold up until FDR stole the sheeple's gold in the mid-30s.
In 2008, apparently, NO ONE seemed to understand that gold is money, judging from the slight 65% drop in gold stocks. Gold bullion only went down about 30% during that period. Quite a difference! So, FRN-denominated debt deflation may pinch gold stocks again, as in 2008.
I'm hoping that Mr. Market has learned more about gold since 2008, but I am not sure.
Caution warranted.
"If gold stocks go up in deflation, then why did gold stocks go down from $50 in July 2008 to $17.50 in Oct 2008? (I $h!t you not--see GDX)."
Like you say: This isn't 2008. Most of the US is being bombarded by an aggressive campaign to keep them on the fence about the value of Au/Ag as currencies without counter party risk, but the majority of the population of the world aren't. Indeud, some larger nations may in fact be doing the exact opposite.
There was a good eg of the 'tell' today: DXY up, but Au up too. Any increase in the strength of the USD is being seen as an opportunity to divest while the divesting is good. As fiat currencies race to the bottom against one another each population in the 'lead' scrambles to use it's foreign reserves (whichever is 'losing' the race during that period) to grab hard assets.
It bears repeating: This isn't 2008. Internationally a lot of waking up has been going on the last two years. The USD is not viewed as the 'safe haven' it once was, except mb where the myth of its value is being feverishly perpetuated: stateside.
The argument that a lot of international debt demands repayment in USD is invalid. I'd bet the larger the creditor and the larger the debt the more likely the creditor would rather have hard assets like gold for payment. Especially if they needed to support some naked short position they've gotten themselves deeper and deeper into. The same line of reasoning Mish uses to point out that it doesn't matter what currency is used to buy oil applies (otherwise Mr. Shedlock and I have some very conflicting definitions for the 'flations): Gold is fungible.
So when, through a general loss of confidence in fiat currencies as a whole, gold starts replacing USD as the preferred medium of exchange for some large repayments of debts outstanding (even on a relatively limited scale), it's not too hard to figure out what will happen to Au priced in USD, or any other fiat currency for that matter. Guess how that affects our mining friends who were smart enough not to take GS' advice this time around and hedge their production (I think that may be ALL of them. Feel free to correct me anyone who knows better).
And this is not even taking into account the dearth of new supply juxtaposed against the backdrop of private investors' demand.
Absolutely every last word above, below, and anywhere else I've commented on ZH are entirely my humble opinion and meant only to be used for entertainment purposes even if you were bored to tears and quit reading half way through, natch. Any investment decisions based on them are the sole responsibilty of the decider who could lose fiat currency (though he/she may be left with some real money).
Regards
Average American could barely explain what happened during the depression. Nor could he explain what inflation is.
Germans on the other hand, emptied out the Austrian mint of gold coins just after the Greek debt crisis broke.
Those who refuse to learn from history are doomed to repeat it. And as John Derbyshire tells us: We Are Doomed.
Gold and Economic Freedom are Inseperable. - Alan Greenspan - 1966.
Pre dark side....
Also it is nice to be verified about gold and deflation.
Gold miners in the 30's had a buyer at a fixed price. They did well. In a deep recession asset prices are reduced. Without a buyer at a fixed price, expect gold price to be pressured (in a deflationary environment described). Miners will also be under pressure.
Personally, I dont believe there will deflation so as stated above, buy gold.
Even if miners do a moonshot, govt will nationalize them before it leaves 500 feet, and pay stockholders in FRNs.
Much less politically deadly than seizing PMs.
DOW and SP500 bearish megaphone wedge charts continue ...
http://stockmarket618.wordpress.com
In a deflationary environment miners that are levered will be hurting for credit. Consumers with declining wages won't be buying gold. Shoddy analysis.
I would disagree with you there.
Yes this deflationary spiral that people are calling for now should be synonymous with a higher US Dollar.
But a higher US dollar is also synonymous with a lower Euro. As we saw from April to July, when the Euro plummets, European consumers start buying up gold left and right.
If you believe John Taylor then I would bet on this trend continuing.
Americans are not the only buyers in the world of gold.
The trend is continuing today. Euro down, Swiss Franc up, gold up.
Swiss will be using another huge chunk of their GDP to beat down their own currency vs Euro.
WRONG
Why didnt the Euro rise(DEFLATION) when its economy was on the verge of debt distruction ?
It will be no different for the dollar.
a) Miners 'hurting for credit' means that no new supply comes on stream, against the backdrop of rapidly increasing demand.
b) Gold represents such a small portion of portfolios, less than 1%, that it doeesn't take a wholesale expansion of credit to drive gold prices higher. Only a shift in portfolio asset preference amongst investors.
IMHO, rising interest rates are great for gold, because investors, seeing that the jig is up with 30-year bonds, will simply look for something else. Like in 1979, the crash of the bond market will correspond to a rocket shot in gold prices.
Not sure I see the rapidly increasing demand. I would also add that I'd expect to see wholesale central bank intervention as a risk as deflation IMHO could spark seriously counterintuitive knee-jerk reactions from the CB crowd.
A cutback in production may have demand consequences in the form of gold price appreciation but reductions in profit and revenues for the miners don't exactly make them attractive stocks.
I believe that as long as illegal naked short selling of the junior miners is allowed to continue then it doesn't matter if we're in an inflationary or deflationary environment.
I agree with the likes of Ian Gordon and Bob Hoye who think gold stocks will do well even in a deflationary environment but there will be bumps along the way. The latest thoughts of Bob Hoye are worth a listen: http://www.howestreet.com/index.php?pl=/goldradio/index.php/mediaplayer/1732
There will be a time for physical gold and PM....after the upcoming D-E-F-L-A-T-I-O-N........
If gold prices go down any significant amount, you won't be able to get it without massive premiums, as happened in 2008 (only moreso, as more people have caught on, and the fundamental problems are larger).
Incorrect. I purchased my first physical in late 2008 at $735.00. I had no problems finding physical and the premiums weren't any higher than they were at $1,000.00.
There won't be a physical shortage, or massive premium hikes, until panic sets in. The question to me is, when deflation catches a toe hold and people wake up, will the rush be to dollars or gold? If everyone rushes to dollars again, gold is gonna get smashed.
No, the Euro was falling in value(INFLATION) when Greece was having trouble servicing its debts. The Euro did not rise(DEFLATION) and when California officially goes broke the dollar will not rise either.
Deflation won,t exist long as it will become unworkable as debts remain largely unpaid,the temptation to print will be too easy to resist then Hyperinflation and the rest is history.Gold off the scale ........................
gold will decline during deflation...it already received a kiss of death from Goldman. when stocks are declining and people are losing money people will need to raise cash and we will see gold liquidation unlike any before. Last I checked they don't accept gold at my local walmart. Gold is a bubble and the current acceleration of deflation will soon pop that bubble.
Walmart doesn't take GBP or Euros either, does that mean they are in a bubble?
I don't think they'll let me pay with much of anything other than dollars. I guess everything but dollars must be in a bubble.
my point was that during deflation people who hold physical gold or paper gold will have to sell to raise cash during deflation because cash will get scarce.
I'm sure you mean "credit", as cash is still being printed like crazy.
You don't buy gold with credit in any event, so a declining M3 is unlikely to have much effect at all.
Your position is clear. It is the equivalent of "you can't eat gold", and just as wrong.
You assume that folks will carry the stuff around in their pockets and try to pass it off as currency. Currency is not money. Get some education about what gold is, and represents, and come back for a spirited discussion. Until then you are obviously out of your league.
Gold is the ultimate international exchange right from ancient times as you will find out ............
Gold was needed in the Great Depression because of the gold standard. Today it is not and that is why it will fall with deflation.
You all say as you like, up, down , sideways. What is real and in YOUR possession without counterparty.
Silver, gold and food. Paper ? Yes, charmin, easiest on the rear.
Trolling. Not a serious argument.
Deflation is a joke. First of all it is no big deal. Countries don't get destroyed by deflation. Inflation has killed many countries. Secondly the prices of oil, gold, wheat, corn etc are exploding. We are fighting INFLATION.
Maybe deflation in the days of when people used to save their money. Unfortunately we live in the days where people have absolutely no savings and let alone physical cash. It's all numbers on a computer.
Deflation hurts bureaucracy because their salary depends on asset valuation (property taxes) and economic activity (income/sales tax).
The inflation that comes as a result of printing money to preserve the status quo is what kills Countries' currencies.
Of course, deflationary spirals aren't much fun either...
that sums it in a nutshell!
While I can't speak for gold equity stocks-- pure gambling as far as I'm concerned, and nearly diametrically opposed to the reasons of owning physical-- Roy Jastram's The Golden Constant goes into great detail about the purchasing power of gold over the last 400 odd years.
The conclusion in a nutshell? Gold does better in purchasing power terms in deflation than during inflationary conditions. (purchasing power is the operative measure here, not nominal $ price)
I don't really think that you can continue to look to the past to see how things are going to go anymore. Today's market and economy is behaving like nothing we've ever seen. The Fed and others found that out. Things are different this time around and these things may not work how you think they may. It's a topsy-turvy world now and anything goes. Cash is your friend.
I don't really think either - too much effort.
The reason why gold stocks did so well in the early 30's is that the output price was fixed (gold standard) but cost were going sharply down.
It was the only industry for which sale price was stable and benefitting from lower salaries, chemicals and energy prices.
Have a look at silver mines and you will see the initial impact on precious metal stocks of a deflationary collapse.
Granted, it could be short lived with heli-Ben on the deck.
Still, you've been warned.
from what I know, silver miners have been under pressure because silver is most often the by-product of base-metal production, which has been hurt by deflationary "price pressures"
Take a glance at a 10-year AU chart from left to right. That chart has been through everything the market has been through. 2008 is a valley long since filled back.
Hazards w/ miners include possible Nationalization by banana republics; fuel costs for energy-intensive mining and smelting; and of course their share price diving w/ everyone else's. When the police bust the whorehouse they take the piano player too. I don't plan to own any miners.
"When the police bust the whorehouse they take the piano player too."
LMAO!
Of course, nearly all countries will become banana republics during the Great Unraveling.
Honestly, I don't expect any form of private mining to survive, well, other than Barrick, of course (wink, wink, nudge, nudge). Between leveraged debt in the form of recourse loans made from the bullion banks to the miners (JSMineset 101), governments' desperation for revenue ("windfall" taxes), and environmental regulation pressure, I just don't see how they have a chance.
They are simply too big of a pot of "free-money" to be left alone.
Guy and gals, gather round and let's all look at the neat old paper money. Ain't it sweet?
http://news.yahoo.com/s/ap/20100812/ap_on_re_us/us_money_expo_4
Oooh....Ahhhhh....
There is a structural component which is overlooked here...if people realize that only gold is real money, and they are suddenly prohibited from owning gold, how else to protect ones self but the miners? That may explain a portion of the rise in the 30s.
This is a good point.
I also wonder if we have data for the recession/depression that followed 1873. Was that also a time of deflation? If so, it would be interesting to know how the price of gold behaved then.
Here's the way I see it....
The cumulative debt/asset number in terms of availability in 2006/7 was 100/100....
Now the number is 60/100...and falling....
What this means is that the pressure on cumulative prices is 60/100....going towards 30/100....
Assets that would demand higher prices with a 40-70/100 negation in overall pricing capability ?
Answer.....few to none....
Debt destruction is coming in a big big way.....
...........................................
If deflation gets out of hand, the govt will eventually give money directly to the people in debt. You are already hearing about a programs to help forgive mortages. Fight deflation by giving people money to help them pay down their mortgages.
That's really ugly for taxpayers who are not up to their eye balls in debt.
Don't worry, we won't have many of those for very long.
Cramer Pumping Gold
mining stocks would have performed much better since 2008 had it not been for the PM etf's which have diverted alot of investment that would have gone into PM equities instead; if it's true that these etf's are primarily paper backed, they just might be part of the bullion banks' master plan to supress PM prices
sure, stocks are paper too, but a share in Yamana that actually pulls physical out of the ground is more of a tangible investment than a share in GLD which may be nothing more than a filing cabinet full of comex warehouse receipts
I agree with Clark, and think the gold stocks will continue to outperform every other sector of the equity markets as long as the Fed continues to fight deflation. this page keeps a good running list of news on gold stocks on a daily basis, and other sections there discuss specific gold stocks that have done well in recent years and may continue to do so:
http://www.goldalert.com/gold-stocks.php
Physical can't go bankrupt though...
I withdrew $500 from the ATM today.
http://www.youtube.com/watch?v=Yt1vQ81jNWw&feature=related
me too, bought a pair of shoes, a bottle of cab sauv, lunch at the local cafe, a few other goodies and now I'll have to go back and get some more tomorrow : (
I closed an entire account at Regions Bank!!
Opened a new one at an S&L.
I think this whole argument is upside-down ...
discussing whether physical gold will go up or down in price,
discussing whether gold miner stock will go up or down in price ....
you all are trying to use the fiat currency as a "standard" when it is the fiat currency that is moving.
Gold stays pretty much the same, all the time...doesn't rust, never evaporates; doesn't swell (inflate) or shrink (deflate).
The miners contribute less than 1% of the world's supply, the rest is all in vaults or on ladies fingers ....
The current price of gold in US dollars, or francs, or rubles, or renmimbi, or dong, does not matter.
Over the history of mankind, currencies come and go like clouds.
All of those currencies are in imminent threat of becoming meaningless.
Gold will go on ....
Agree--no one is going to get rich off owning 25 Krugerrands, regardless of what the U.S. Dollar does over time. You might, however, be sitting pretty in comparison to people who end up chasing rats for dinner.
In regards to gold stocks, with deflation, a bias to big cap stocks is best as the equity finance market will be difficult for the small caps, and the majors will take them out on the cheap. With inflation, equity financing will be plentiful and a bias to small caps is warranted.
My Experiences With Gold Miners
You can't compare modern gold miners with those of the past, because they are more likely very similar to Freeport Macmoran.(this should be your example because the company goes back aways.)
Most gold miners during the bullion price bear market acquired large copper mines with gold as a by-product, and some primary gold mines. Some produce copper, but hedged-forward contracts like Yamana, but in the end found their hedges underwater due to the stockpiling of copper. So if the copper price declines, those with hedges will show a profit.
Dome and Homestake are examples of never-to-be repeated discoveries. They were large outcrops that were basically discovered by kicking off the duff. Nowadays, well-endowed gold mines are to be discovered at depth. Red Lake was discovered after mining had gone on for some decades in the camp. And adjacent to them, the discovery has since already made, but at depth and were bought out. You have to keep in mind that grades are likely overstated, so mines in production may actually disappoint.
What is occurring is that the miners making discoveries have mines in operation, but with previously unknown en-echelon duplications of geological formations in proximity to their producing property. Even the larger miners are doing the same. The rest of the activity is buyouts which favour the larger company, not the shareholders of the target acquisition. Mostly gold comes in high grade, but narrow-vein greenstone porphyry formations, or in low grade, widely disseminated sulphide lenses - mostly as a by product from base metals mines.
Despite the gold bull market, exploration and development has been hit and miss, with even the largest discoveries getting utterly trashed by the market during the crash. The recovery has been robust, to say the least. It was easier to bet on Uranium mines during that bull market, since people were literally throwing their money at companies with no mining prospects. Uranium attracted a lot of attention, because finding a viable uranium deposit means finding highly valuable ore that states require to keep the lights on. Uranium mining exploration benefitted from a rising discount rate into 2004, which eventually turned downward in 2007. So people borrowed to invest and made money. We saw the same occur in base metals. There is now no prospect of the discount rate rising at all for many years.
It takes far more due diligence to assess a gold mining company nowadays than formerly. Even so, some gold mining exploration companies presenting deposits known since the 1980's and repackaging them to the market became darlings. Mines which had not seen service since the depression are being pressed into operation. (much like the depression era.)
Some mines with no reserves and an uphill battle to bring a mine to market are trading at billion dollar market caps, while mines with reserves and in production are totally ignored.
There are undeveloped gold belts that have been known for some decades that simply can't catch a bid, and one company I know of had the interest of a mining major, yet the company went bankrupt during the crash. Still others will dilute their floats well beyond insanity, if only to save face on promises of going into production. Others borrow massive amounts of money. (a gold miner borrowing money during a gold bull should be led out and shot without a blindfold or a last cigarette.)
With so much wreckage, its hard to make a go of raising money. Your mining company should be able to make a profit with a robust IRR, show consistent grades, and typically prove up the geology. You have to thank Goldman for pointing out that lower interest rates mean higher gold prices. As a miner, you would be looking at obtaining an average price over the year, not a peak price. The lower the rates go on sovereign bonds, the better the IRR on gold miners. (which is the inverse of most the economy.)
A buyout is not necessarily a godsend, because larger miners have become adept at buying out smaller prospects very cheaply, swindling investors out of greater gains. And then, you have out-of-control CEOs like buying risky mines at a premium, diluting their shareholders. One mining exploration company I know anxiously sold their flagship deposit to a major mining interest, and once completed was totally ignored by the market. More than once this year, shareholders giddly sold their investment at the prospect of a buyout, not realizing that they were selling at a discount. Aurelian comes to mind, because they were bought out very cheap and the backroom deal swindled shareholders out of their investment.
Even the richest gold miners are skinflints in the distribution of the wealth, doling out chickenfeed in dividends. I can say that the gold market is totally unimpressive from a mining standpoint. Bullion may actually have been the better investment so far. What the market did for the banks during the bubble by lending to buy their own shares worked for Homestake and Dome.
People will be looking for yield and share price appreciation.
Deflation(with a government "printing" money at record levels) is the short stop on the way to hyper-inflationville. It will be the last call to grab your gear before the FRN final destination. Reading the history behind fiat currencies has been extremely enlightening. The play book hasn't changed since almost the beginning of currencies.
There may be one more stop before when we reach our final destination. History has shown most governments will first restrict the ownership of precious metals and persecute those who stand against fiat, first. Many have required its citizens to exchange their PM's for local currencies. Ancient China even made it a death penalty crime at one point to use anything but paper money(later, lowered to just exile).
I just don't see how they could pull off confiscating gold again. Last time, they allowed citizens to keep about 5 ounces. I doubt more than 0.1% of the population even is above that. Previously, many of the middle class probably had that much.
Maybe in my lifetime I can see a true USD issued by my government. Actually, I take that back. My silver eagles are probably just as good as a true USD. Even slightly better, by constitutional terms.
Inflation or deflation, it doesn't matter: If there is a greater NEW demand for gold each year that is above the NEW production, the price will go up. If not, it won't. If the volume of sales required plus new production is greater than the demand for gold, the price will go down.
Perceptions about inflation / deflation, and the economy etc can drive the process - but it is still a supply and demand issue as for everything with a price on the face of the planet.
Lots of great comments here, but I hold the position that the inexorable rise of PMs in this secular bull market can produce nice returns for me on both sides of the equation: Metal AND Miners. I want both!
2 things:
1. IMHO, to not own any PM Miner positions at all seems a huge mistake. I too favor physical possession first, but once that's done, to not have some exposure to the leverage that miner shares can offer somewhat erodes the reasoning for investing in the PM space. And possibly one's returns... On a dollar cost average basis, I'm buying really terrific companies at awfully low prices. Ditto metal itself. The PM mining sector is confusing as hell at first but experience and lots of research has led me to excellent investments that I feel really good about. I invest and I trade in the space. Big producers are the best place to keep most of one's PM Miner money, whereas the exploration outfits and junior producers offer what can be stellar speculative opportunities. Learning when to buy and sell the startups can often result in 2 bagger+ returns. Amidst such pathetic returns in the broader market, I'm not sure how one just walks away from all that... But this is high risk/high reward betting, so know that going in and don't bet money you can't lose. No money to lose? Then buy GG, SLW, FNNVF, ABX & PHYS each time they get hit by a Cartel bear raid. Lather/rinse/repeat. Then take a chill pill and wait for your ship to come in.
2. Let's face it, in this "market", investing part of one's $$$ in the PM space is just wise & prudent diversification. After 2008 who'd want to be all in paper? Yet too often the pieces I read are based on absolutes, or they somehow overlook the fact that for most of us, physical metal and miner shares are at this point at least mostly a hedge. Much of my investment portfolio remains in dollar/paper denominated assets. But I've swung 401K monies to a PM IRA and will migrate more toward Hard Assets as ongoing developments warrant.
Holding physical metal as well as miner positions is just diversification come to the PM investment space. I'm really glad I own both and will busily continue to accumulate both at these prices. Currently I see nothing that would make me change that outlook.
I respectfully don't agree here. The reason I don't agree is that (except for the 1929 crash) every other recession was caused by an unrealistic rise in a particular asset class. Either oil, real estate, or stocks. The first oil and real estate busts were largely confined to the commercial investor. Granted, you did have spill over into the public sector, but not to the degree of today's problem. When you look at a chart of public debt you will see that the consumer debt load began rising exponentially right around the beginning of the 1980's.
It is this debt that allowed the American consumer to continue their consumption all the way up until 2007. I think it actually cracked in 1999 or the early the 2000's. My theory is that the consumer restricted their debt purchases to cars, boats, sea doo's, vacations, cloths, electronics etc. etc. up until about the mid to late 1990's. Cars, boats, sea doo's and cloths can't form a bubble. Then came the Tech stock bubble. This was the first asset class that sky rocketed and truly busted. So what did our leaders do? They made it easier and easier to buy a home. By now they had figured out that you can in fact manipulate the GNP numbers by making more and more credit available on big ticket items. Our financiers and monatary policy makers also learned that more credit, or debt, was the key to kicking the can down the road. You see this experiment in loading the consumer with debt to drive our economy has been going on since the rearly 1980's.
My point is that they have crammed trillions of dollars of debt down the throats of the American consumer and the consumer not capable of eating anymore debt. The feast has ended. We have a super saturation of debt
Inflation is not going to be caused by the consumer getting their hands on a wad of cash or a new credit line and go out and chase goods and services. Inflation may however set in if the world totally looses all faith in the US dollar. Which I don't see happening anytime in the foreseeable future for the mere fact that the dollar is the primary source of money throughout the world. In other words something MUST take the US dollars place. What?
Therefore my conclusion is that we may see some localized inflation in commodities due to speculation and predominantly deflation in everything else.
Deflation will eventually cause EVERYTHING to go down. My concern is that Japan has and is showing us that things can continue going down for a long, long time.
Japan had a society that were good savers(compared to Americans) and an economy that ran a huge account surplus, didn't they? It seems they were better suited to be able to handle the deflationary shock. Although, I don't know for certain, I am guessing they had a ton of foreign reserves also to defend their currency if there were any problems.
The US has a mostly indebted society with the largest account deficit in history with the largest government debt in history and basically zero foreign reserves. Add to that, they have flooded their currency to every country on the planet.
I just don't see the Japan scenario playing out here. Gold is the only thing to take the FRN's place, in the world markets. Silver is the only currency available to handle day-to-day transactions. Most of Europe was on the silver standard not too long ago.
I just don't buy the "we are so different" than Japan thing. I guess we'll see who is right in about 15 years from now. The bottom line is the amount of US dollar denominated debt in the US and abroad MUST be reduced by trillions of dollars before we can even think of the economy growing.
The only way an economy grows is when it's citizens spend money and more so, excess disposable income. This is the income available to spend after the necessities to live are purchased. The bulk of our citizens have already or are currently making purchases with a promise to pay later. More and more of our citizens are finding out that they can't honor all those promises to pay. Some find themselves in this situation by circumstances outside their control and others (which I say is 95%) made stupid decisions.
Regardless, the debt must be purged from the system and this my friends produces a deflationary environment. Period.
Educate your children that credit can have devastating effects on peoples lives.
gold mine accident in Elko this morning
http://www.forbes.com/feeds/ap/2010/08/12/general-materials-us-nevada-mi...
I'm thinking that U.S. monetary policy is similar to that tried in Japan. So, after nearly two decades of asset deflation, when does hyperinflation happen in Japan?
It doesn't and it won't.
But, what if you can't re-inflate assets but you can inflate your currency? Isn't that the question? I don't think many people here think the Fed will be any better at reinflating the real estate market than Japan was at reinflating theirs. (Remember the farcical late 80's situation where the land under the emperor's residence was worth more than all of California at one point?) I don't think many people here think that the Fed will be any better at re-inflating equities than the bank of Japan was at restoring value to the Nikkei.
But Japan's sovereign debt was held internally. They weren't going to cut their own throats. U.S. sovereign debt is only held about half internally.
Damn it, the Yen is not the world's reserve currency! So insisting that the U.S. will undergo deflation like Japan is ludicrous unless you explain how the U.S. ability to print at will is NOT going to hit home at some point.
What about afghan gold ? I heard from NYT there is plenty to mine there:
http://www.nytimes.com/2010/06/14/world/asia/14minerals.html?_r=1&hp
What is the ticker for Afghan Gold Corp ? DOD ?
Dome and Homestake stand out for sure, but just tread carefully. This guy put together a table of all the gold & silver miners' stock prices from 1924-33. In short: outcomes vary widely.
http://seekingalpha.com/article/109880-gold-not-the-safe-haven-people-th...
Don't you guys realize that if the MSM is talking deflation, it must be a deception to get the public looking the wrong way? The bankers want to buy your gold and silver cheap, before they hyperinflate to appease the morally and financially bankrupt politicians.
Yup. And make sure the pension funds and the money of the public is 'fully invested' in securities that can be rendered worthless due to hyperinflation.
The people who buy into this 'deflation' thesis are also buying into the concept that the boomers are going to be able to retire (because they hold insane amounts of FI investments), and that housing is going to rise (because housing is a deflation hedge). Just ain't gonna happen folks, but they'll try and suck as many people in as possible before they pull the plug.