Here's the latest from my blog... please check it out and leave a comment! cheers.
https://www.dubito.ca/blog
It is strange and frustrating that golddoes not seem to be reacting as one would expect given the currentmarket conditions. Those conditions include negative real interestrates on the global reserve currency, soaring oil, money supply growthwell into double digits, massive turmoil in the credit markets, and aquickening string of bank failures.Yet, this concern is fairly shortterm. Looking at the long-term chart, gold has done very well in thelast year, even taking into account the correction from 1000 down topresent levels. A longer term perspective is refreshing.
The HUI shows a similar healthy uptrend, though since even largestocks should leverage gold’s gains, their performance isn’t tooimpressive. The percentage gains in gold and the HUI have actually beenpretty similar, with the HUI performing marginally better.
That leaves the gold juniors, whose performance has been pretty awful considering gold itself. Why is this?
There are two rational concerns with the juniors, one of which isthat the ongoing credit grind will prevent banks from financing miningprojects. I believe that the exceptional fundamentals for gold miningwill supercede this problem as bankers become less panicked and willingto consider the economics of these projects. A related but differentissue is that costs are rising. While this is a problem, it’s really anunavoidable symptom of the crisis which makes gold so attractive now,namely inflation. Gold’s gains will far outpace this inflationaryproblem, exactly because gold is seen as an island in the sea ofinflation, and attracts a special premium for that reason, more so thanbase metals for example which will be more prone to cost-inflation(though I expect base-metals too to perform well in the coming years.)
So why the disastrous junior performance? Here’s my theory. We livein an age in which rational analysis is devalued, and often irrelevant.The invasion of Iraq, the denial of global warming, peak oil, thedenial of the American government’s insolvency, the promotion ofethanol as fuel… to name just a few examples of the failure of reason.Here’s a headline from Forbes today: “Gold Firm as Dollar Softens but Risk Aversion Caps Gains“.Risk aversion caps gold’s gains? What are these people smoking? Thesame thing the people who are buying US treasuries are smoking,evidently! This is indeed the opiate of the masses, but this opiate issimply and absolutely that of denial, the preference to live in amental fantasy, and to deny and avoid reliable empirical facts. Thisspirit of denial is somewhat self-propagating, in the sense that in theshort-term people will not react to reality so long as they can avoidit and eventually the disconnect between reality and fantasy willbecome wide enough that one must commit to fantasy more or lesscompletely in order to avoid the unpleasant contradictions that therift entails.
What does that have to do with gold juniors? From the perspective ofmainstream investors, whose investment decisions ultimately movemarkets, gold juniors represent everything that should be despised.“Why mine gold when I have hard US dollars in my wallet? Gold is arelic. The US dollar is the world reserve currency for a reason, namelythat America is the sole superpower, and ought to be emulated. Thatother countries can prosper best by embracing monetary subservience.Sure, for the time being we have to give a little respect to thecashflow of producers, but juniors? Come on! That stuff they have inthe ground will only be lucrative if these things we believe turn outto be wrong! How likely is that? Whatever may come, I sure don’t wantto lose my shirt in this whole commodities bubble thing!”
It is this kind of thinking that holds the juniors back from mainstreamappeal. Private investors who have long understood the fundamentalmerits of gold juniors are still prone to giving up this understandingin favor of fantasy, especially as the reality of the price of theseshare reflect the fantasy of mainstream investors. Challenging times,indeed.
What other strategy can there be for us now, other than to buy valueand wait? How can we predict when this market will turn around, giventhat it is driven by irrational forces? We can’t. I thought the wheelswould come off the financial system years ago, and I had no idea whatlengths central bankers could go to to prolong the reckoning. So too inthis case.
Yet greed is as eternal as fear. When the turn from loathing to lovecomes, it may be fast and furious. I remain in position, waiting forthe inevitable encounter of the mainstream with reality. 