By Ted Niles
Jeff Berwick of the
Dollar Vigilante argues that, adjusted for inflation, “It looks like [the gold price] hasn’t even broken out from its 1980 peak,” adding that the real bubble is in government debt. Goldbears might take issue with Berwick’s math, but John Kaiser, of
Kaiser Research Online, notes a glaring divergence from bull runs of the past. “Historically gold and copper are seen as inversely related,” he says. “Gold goes up, and the economy goes down — and, of course, copper goes down with the economy. When the economy is strong, the price of copper goes up, and the price of gold goes down. But we’re in an all or nothing scenario now.” So, if gold and copper are both trending upwards now, if one goes down, the other will follow.
The cause of this scenario is attributed to the decline of American economic supremacy — due to astronomical debt compounded by quantitative easing — and the simultaneous rise of the Asian markets, China’s in particular. “The world is adapting to a very profound change,” Kaiser says. “Which is the end of American empire, the end of the 20th century. Not the demise of America, but [its] relative decline on a global stage. What if what we’re dealing with is structural anxiety related to this idea of relative long-term decline? What if gold is being bought not because of fears of hyperbolic inflation but because of long-term uncertainty about what the world is going to look like?”
Resource Opportunities’ Lawrence Roulston stresses the disparity between Western attitudes of economic “doom and gloom” as compared to the global picture. “When you get out into the rest of the world, it’s a totally different feeling,” he says. “In the Middle East and Asia, they’re asking ‘Where the hell are we going to find enough metal to keep all this going?’ Whether the European economy grows by a couple percent a year or shrinks by a couple percent, it’s absolutely inconsequential to the global mining industry. China right now is a bigger economy than Europe, and it’s developing at a fast pace. The net result is that China is using half the world’s iron ore, a third of its copper and aluminum and a range of other metals. If you want to know what’s going on in the metals markets, don’t look at Europe or North America, look at China and Asia. So growth in metals is going strong, and there’s no question that we’re going to see growth in demand.”
Given the “structural anxiety” accompanying the transition from American supremacy, Kaiser predicts gold will remain between $1,400 and $1,600 for the next five years. This is good news for the gold mining sector, but it raises questions. One, why isn’t a strong gold price reflected in junior mining equities? Two, why has there only been a small increase in gold production since the metal’s historic price lows in 1999 and 2000?
Roulston explains that the “flight to quality and away from risk” by investors over the last year hasn’t yet caught up to the juniors. He argues that it will and that signs point to that process having begun. As regards production, he says, “A decade ago the media dismissed mining as a sunset industry, but things have turned around dramatically. The mining industry is now worth $1 trillion. It’s back on the radar of investment firms. More important, the mining industry is sitting on $100 billion in cash, and they’re looking for a home for it. So, why aren’t we seeing growth in production? It’s not that the mining industry doesn’t want to increase production; they’re simply not able to. There are a lot of new mines being built, but they are barely able to keep up with depletion of the old mines. So, on that basis, production is increasing only slowly. And it’s getting harder to build new mines — it can take a decade. Consider permitting, financing, construction. It’s also getting harder to find big new deposits.”
The average grade in the 1960s was 12 grams per tonne gold; now it is roughly 1.3 g/t.
Exploration Insights’ Brent Cook adds that the equivalent of a Carlin Trend is being mined annually worldwide. He says, “There are about 10,000 properties being explored globally right now. The straight-line probability of finding an economic gold deposit of any size is about 1 in 1,000. Finding anything of significance, like 4 million ounces, you’re talking a 1 in 10,000 probability.”
Cook and
Global Resource Investments founder Rick Rule are quick to urge caution to investors on this point. While there’s real value in the sector this year, it must be remembered that there are few barriers to entry and that 100% of the juniors’ returns are generated by the top 5%. On the upside, “The gold industry is going to generate almost $3 billion this year.” On the downside, “Every year this industry consumes $4 billion or $5 billion more than [that].”
Investors are encouraged to have an exit strategy. “It doesn’t take much due diligence to throw half of these [companies] out,” Cook says. “Look for the fatal flaw. We know 95% are going to crash. If you can identify that ahead of the crowd, you can make money on a company that does not even have a discovery.”
According to Rule, “You’re not looking for companies to buy; you’re looking for companies to throw away.” He concludes, “My last piece of good news is: I think we’re in discovery cycle. We haven’t been in a discovery cycle for a long time. If you walk around out there, there are some really smart guys in some of those booths. And they have been really well funded for six to 10 years; that’s how long it takes to go into a discovery cycle. We’ve given these guys $4 billion a year — most of it went to fast women and slow horses — but some of it got spent well. And it’s going to come back in spades.”
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