Published on June 04 2012

The Table Is Set for a Mania

Dear Readers,

I’m writing to you from Vancouver, where Doug Casey, Jeff Clark, Andrey Dashkov, and other members of the Casey team are attending the World Resource Investment conference.

I don’t know what the official numbers are, but attendance is clearly down, and the mood among investors is considerably less buoyant than last time around. No surprise.

Being a contrarian, this is a clear buying signal to me. I don’t know if the market has bottomed, but the way to “buy low” is to buy when few, if any, others are doing so, and from the looks of things here in Vancouver this weekend, the present seems like a buyer’s market…assuming one does not think this precious metals cycle has peaked. Jeff Clark presents some intriguing speculations regarding what’s possible in a precious-metals mania if institutional investors start pouring into our sector.

It’s not easy buying when no one else is, but if it were easy, everyone would do it, and there’d be far less profit in it. That’s the difficult but inescapable logic that confronts all investors who want to buy low and sell high.


Louis James

Senior Metals Investment Strategist
Casey Research

Rock & Stock Stats
One Month Ago
One Year Ago
Gold 1,624.71 1,662.36 1,539.49
Silver 28.49 30.94 36.82
Copper 3.31 3.84 4.10
Oil 83.23 106.16 100.29
Gold Producers (GDX) 46.58 46.44 57.07
Gold Junior Stocks (GDXJ) 20.66 23.37 37.18
Silver Stocks (SIL) 18.38 21.51 24.96
TSX (Toronto Stock Exchange) 11,361.20 12,332.79 13,527.88
TSX Venture 1,291.59 1,431.68 2,067.42

The Table Is Set for a Mania

By Jeff Clark, Senior Precious Metals Analyst

It may feel like I’m out of touch with the precious metals markets to broach the subject of a mania today, but I think the table is being set now for a huge move into gold and silver.

There are, however, very valid reasons to reasonably expect a mania in our sector. For one thing, manias have occurred many times before, but the main issue is that a mania in gold and gold stocks is the likely result of the absolute balloon in government debt, deficit spending, and money printing. Saying all that profligacy will go away without inflationary consequences seems naïve or foolish. Inflation may not attract investors to gold and silver as much as force them to it.

Now, one could make the argument that any rush into gold and silver will be muted if no one has any savings, especially given that demographers say a quarter of the developed world will soon be retired. But even if individuals are wiped out, the world’s money supply isn’t getting any smaller, and all that cash has to go somewhere.

I wanted to look at cash levels among various investor groups to get a feel for what’s out there, as well as how money supply compares to our industry. Data from some institutional investors are hard to come by, but below is a sliver of information about available cash levels. I compared the cash and short-term investments of S&P 500 corporations, along with M1, to gold and silver ETFs, coins, and equities. While the picture might be what you’d expect, the contrast is still rather striking.

(Click on image to enlarge)

Naturally, not all this money or even a big chunk of it will be used to buy GLD, Barrick, or American Eagles, but it’s clear that if any significant fraction of the cash sloshing around the economy were to be used to buy gold, it would have a major impact on the price of gold – which would trigger the mania I fully expect. Let’s take a quick look at what kind of impact our sector could experience if just a small amount of available funds were devoted to various forms of gold and silver.

  • The entire worldwide value of all gold exchange-traded products (ETPs) currently represents just 2.1% of the cash and short-term investments held by S&P 500 corporations. If 20% of these companies decided to put a mere 5% of their available holdings into these precious metals vehicles, their value would more than double.
  • If just 1% of the physical currency (M1) floating around the system were used to buy gold Eagles, it would be 13 times more than the entire value of all coins purchased last year.
  • If corporations chose to invest 1% of their cash in silver ETFs, it would surpass the total current value of all such ETFs.
  • If corporations moved 5% of their “short-term investments” evenly into gold stocks, the market cap of every gold company would increase by 20%.
  • If they chose silver stocks, they’d each grow by a factor of six.
  • Five percent of M1 would increase the market cap of gold producers by 14%. The same fraction would be 3.4 times bigger than the entire current value of all primary silver producers.

This is just S&P 500 corporations – there are many more corporations in the world, as well as pension funds, hedge funds, sovereign wealth funds, mutual funds, private equity funds, private wealth funds, insurance companies, and other ETFs.

It’s striking, when you really stop to think about just how big the impact could be if some significant fraction of the larger financial world started chasing the small niche market that is gold. Such cash inflows will send our industry to the moon.

In the meantime, keeping our eye on the big-picture forces that have yet to play out is the plan to follow. Sooner or later, though, I’m convinced the catalysts will kick in that will pull/push/drag/compel/force the mainstream into our sector. I suggest beating them to it.

And when the mania arrives, we’ll all wonder why anyone doubted it in the first place.

While it is a very good idea to hold some physical gold and silver, other investment plays exist. Current market conditions have created a great discount in one of these approaches – you really can’t afford to pass it up.

Gold and Silver HEADLINES

Peru’s Illegal Gold Miners Generate More Money than Drug Traders (Mineweb)

Peru’s economics publication Gestión revealed surprising numbers related to illegal gold mining. The report states that illegal mining in the country generated more money than the illegal drug trade in 2011.

Gestión‘s source, Elmer Cuba, who is a managing partner at Macroconsult, says:

“The volume of exports of gold from illegal sources is at least $1.8 billion, more than drug trafficking which reaches $1.208 billion; illegal gold beats cocaine.”

In Peru there is a discrepancy between falling production and an increase in shipments, and illegal mining explains the gap. Elmer Cuba elaborates that of the total five million ounces in gold exports, one million comes from unknown sources.

Illegal mining is a negative phenomenon. Illegal miners are not obligated to submit to environmental standards, and their activity is often harmful. Illegal mining has already destroyed about 18,000 hectares of the Amazon territory in Peru. Governments receive no tax payments from illegal miners.

However, there is another side to this issue. It is estimated that Peru’s illegal mining industry directly employs around 100,000 people and indirectly helps to employ 400,000.

Our take? An investor-friendly environment leads to both job creation and lower environmental impact. More often than not, it’s not the miners who are to blame, but rather the government that does not create satisfying conditions for international gold miners to operate in.

Indonesia to Propose Incentives to Build Metal Smelters (Reuters)

New Indonesian mining laws that halt export of some unprocessed metals unless companies submit plans to build smelters shook the industry.

In a move to ease the situation, the government is going to offer financial incentives to help firms build smelters to comply with the latest mining regulations. Sixty-five minerals, including 21 metals (gold is among them), will be subject to a 20% export tax, which was announced last week.

While big companies can find resources to adjust to the new laws, smaller miners will probably postpone their exports.

Once a prominent mining jurisdiction, Indonesia has made politically initiated changes in mining laws which have immensely lowered the country’s attractiveness to foreign investors. The consequences of these decisions should be apparent soon.

Gold May Return to Monetary System (Resource Investor)

The Basel Committee for Bank Supervision (BCBS), a committee of banking supervisory authorities established by the central bank governors of the Group of Ten countries in 1974, is studying the possibility of making gold a bank capital Tier 1 asset with 100% weighting, rather than the Tier 3 asset with just a 50% risk weighting that it has today.

If the move is made, it’s almost certain we’ll see a huge growth in demand for bullion. Some analysts project that commercial banks could purchase as much as 1,700 tonnes (59.9 million ounces) of gold, with clear, bullish implications for gold.

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