Last week was another busy week in our business, with one salient highlight being gold's drop on the Eurozone's woes. How does that work? It's a bit crazy, but when the euro drops sharply against the USD, the dollar looks strong – and if the dollar is "strong," what do we need gold for?
|Rock & Stock Stats||Last||One Month Ago||One Year Ago|
|Gold Producers (GDX)||57.83||60.69||61.43|
|Gold Junior Stocks (GDXJ)||28.99||31.44||41.36|
|Silver Stocks (SIL)||23.21||24.15||25.64|
|TSX (Toronto Stock Exchange)||12,034.75||12,156.22||13,166.94|
But failure to be the worst currency of the week is not the same as being a strong currency. We believe traders caught in the old paradigm of selling gold when the dollar rises will come to regret their short-sightedness. And as the paper-money con game continues unraveling, that regret may not be long in coming.
Meanwhile, your Casey Research metals team has taken a look at the supply side of the gold market, comparing the situation now with that leading up to the 1980 gold mania. It's an interesting context to keep in mind while you make your investment decisions.
Bottom line: We believe that a mania of epic proportions still lies ahead. No telling exactly when that train will leave the station, so we want to get on board now while the market is weak and prices are low. However, we also don't want to go all in, not because we're concerned about the eventual end game for this market, but because we want to have cash to deploy at lower prices before the mania, should a much greater correction give us the chance to do so.
By Louis James
We have reported on changes in global gold demand, from booming investment demand in Asia to European and US debt concerns that have re-solidified gold's long tenure as the ultimate safe-haven asset for turbulent times. In fact, with investment demand from private and institutional buyers continuing to grow and central banks increasing their gold reserves, total demand reached a record US$57.7 billion in the third quarter of 2011. Quite astounding.
But what's happening on the supply side of the equation?
The most important source of gold supply is mine production – which is responsible for about two-thirds of the total – followed by recycled gold. While recycled gold is the reason supply is inelastic, new production has more predictive power since it can reflect shifts in industry conditions and investor sentiment.
Starting with a bird's-eye view, take a look at global gold production since 1900.
(Click on image to enlarge)
The 1980 gold mania occurred when gold supply had the same structure as it does today: two-thirds from production and one-third from recycled product. As the chart shows, in the 1980s, production increased after the short-lived mania came to an end, while this time around, production has already gone up (more on that below). Also, as the 1980s wore on, production grew in spite of the price falling dramatically.
History doesn't repeat exactly, but it often does rhyme, so comparing the 1970-1980 decade to the present can give us a useful context for thinking about gold today. Reviewing the data available, here are some key comparisons:
1970-1980 Gold Production
2000-2010 Gold Production
At interim peak (1970): 0.40 grams
At interim peak (2001): 0.42 grams
During mania phase (1980-1981):
Current value (2010-2011): 0.37 grams
However, gold is not a consumer good – it's not something people need to eat a certain amount of every day, so the physical quantity of gold per person in the world means less than it would for other commodities. Gold, we have long argued, is a "fear barometer" in today's world. It's valued, which means it has demand in inverse proportion to people's confidence in other forms of money. So the fact that supply has kept up with population growth does not imply that supply has – or "should have" – kept up with demand… and we can see that it hasn't in the price of gold. A major part of that is the return of investment demand, almost to levels we saw in 1980, as you can see in the chart below.
(Click on image to enlarge)
(Click on image to enlarge)
(Click on image to enlarge)
Such decentralization has benefits: It creates flexibility and stability in the gold market. The market psychology is more diverse, making it more liquid and robust.
No Crunch Today – Crunch Tomorrow?
Your Casey Research metals team believes the supply of gold is going to tighten. Most companies have been forced to look in riskier jurisdictions and remote locations with poor infrastructure. Environmental and other regulations are multiplying and becoming more costly every year, and even in places where they are not, labor strikes and increases in taxes are taking their toll. Worldwide, mining becomes more complicated and expensive every year… and in some cases, not even worth trying. At the same time, big discoveries remain few and far between – and even when a discovery is made, it often takes up to ten years to reach production.
As they say, the low-hanging fruit has been picked: We do expect a supply crunch in the years ahead.
It's tempting to try to make an argument based on future constraints in gold supply and some of the interesting similarities between past and present conditions in that supply – they seem to point to a gold mania ahead. But it's the demand side that dominates the price of gold. Whether a shortage of gold supply from production occurs or not, demand for gold is more flexible than supply overall.
Gold is a monetary metal. If confidence in paper money evaporates the way we think it will, the flight to the safe haven of gold could swamp any conceivable glut in supply. We've no crystal ball to tell us when it will start, but we definitely see a mania coming.
And another question arises: Now that gold demand and supply are dispersed across the globe, where will the mania start? US? Europe? How about China, India, or Malaysia? Things could really start cooking with no immediately evident cause in the West at all.
Regardless of when or where the mania starts, our advice is to make sure your personal gold reserves are in place.
[Institutional investors are taking advantage of a little-known anomaly in the metals market to get positioned in gold at a steep discount. You can learn how they're doing it.]
Despite the fact that mining equity financing is steadily decreasing this year, Ernst & Young analysts claim, "there is light at the end of the tunnel for junior mining companies." The firm reports that as majors have improved their financial standings and reducing debts, more room on the secondary financing markets is left for the juniors. That's bullish for many of the smaller companies we follow, but the increased liquidity won't last as long as a snowflake in a bonfire if broader global markets go into a dive as deep as we think they may soon do. For now, we continue focusing on the "buy low" side of the investment equation.
Due to high prices of gold jewelry products, Indian consumers are starting to buy bars and coins. In some cases, investors are repurchasing bars they'd sold at higher prices in September.
Demand for bars and coins is estimated to have risen by 30-40% since September, with the current gold weakness acting as an accelerator. Meanwhile, local banks are offering new physical gold products and adding electronic bullion exchanges.
This attitude shift makes sense, since investment-grade gold is of higher carat and certified, which makes its exchange easier and the market more liquid. Demand in China and India has been growing at a high rate this year, and with investment products entering what was traditionally the reign of jewelry products, we are looking at a new type of investor and new type of market for physical gold. Both are bullish signs for the yellow metal.
Yes, on the streets of New York: take a look at the five-minute YouTube video linked to above.
We would be remiss not to mention that many members of the Casey team will be at the Cambridge House Investment Conference in Vancouver, on January 22-23, 2012. This year we're going to be much more visible than before... with our own, spacious pavilion that fits up to 300 people. We’re currently putting the finishing touches on our program to make sure something will be going on all day at the pavilion – including but not limited to free presentations by our metals and energy editors, an Explorers’ League panel discussion, and our own "Best of Show" and Casey NexTen awards.
If you're planning to visit the Cambridge House conference, make sure to stop by; we always love to meet our subscribers in person. And don’t forget to mention “Casey” when you register at the conference website.