It isn't much of a secret that gold mining shares have suffered greatly in
the past 18 months. In fact, since the summer of 2011 the Market Vectors Gold
Miners ETF (GDX) has plummeted nearly 40%. That has caused many precious metal
investors to give up hope on mining shares altogether; and to also now anticipate
a tremendous plunge in gold prices.
Nevertheless, I believe gold and gold mining shares offer investors a great
value at this juncture and let me explain why.
Interest rates in nominal terms are at record lows and have been promised
by the Fed to remain near zero for an indeterminate duration. To highlight
this point, Fed Vice Chairman Janet Yellen said in a speech to the AFL-CIO
this week that the central bank may hold the benchmark lending rate near zero
even if unemployment and inflation hit its near-term policy targets. Yellen
said the Fed's objectives of a 6.5% on the unemployment rate and 2.5% inflation
rate are merely, "...thresholds for possible action, not triggers that will
necessarily prompt an immediate increase" in the FOMC's target rate. "When
one of these thresholds is crossed, action is possible but not assured." Her
statements underscore the fact that the $85 billion per month worth of Fed
debt monetization and ZIRP will not end anytime soon.
Since the Fed is NOT anywhere close to raising interest rates
or reducing its bond purchases, this should also allay fears that the U.S.
dollar is about to enter into a secular bull market. The greenback is just
about unchanged on the DXY over the past 12 months and has been mostly range-bound
between 79 and 81 during that timeframe. There isn't any evidence that the
USD is ready to soar in value against our six largest trading partners. Without
a new bull market in the U.S. dollar, the price of gold cannot enter into a
secular bear market.
Regarding the notion that the dollar is about to re-emerge as the world's
most desirable currency holding, the G20 nations meeting in Moscow this week
released a statement proclaiming they are not currently engaged in a currency
war. In saying they embrace "market-determined" exchange rates, these most
wealthy nations sought to calm fears that Europe, Japan and the United States
were outwardly competing to win the crown of the world's weakest currency.
However, in truth the U.S. and Japan are already in the middle of a currency
cold war...at the very least. The BOJ has committed to a 2% inflation rate,
which is the same target inflation rate the Fed has adopted. To that end, both
the Fed and BOJ are purchasing massive quantities of bank debt. Asian Development
Bank President Haruhiko Kuroda (the most likely candidate to take over the
Japanese central bank next month) said this week, "A two percent inflation
target has become a global standard, and it is a landmark decision on the BOJ's
part to adopt the same target." The only way a nation can achieve a sustained
rate of inflation is to commit to a perpetual increase in the rate of currency
creation. This action will send real interest rates further into negative territory.
Since both the BOJ and Fed are in a tacit currency war, the only guaranteed
winner will be precious metals.
Another factor boosting gold prices is the fact that debt accumulation in
the U.S. continues unabated. Not only is the debt to GDP ratio already above
105%, but future deficits are projected to accrue at rates that are 4 times
larger than before the Great Recession of 2007. Even if D.C. adopts the sequestration
come March 1st, the 2013 budget deficit will still be $845 billion! However,
in the unlikely event that sequestration is actually adopted, there is tremendous
pressure for Washington to increase its deficits even more. The afore mentioned
most likely replacement for Ben Bernanke, Janet Yellen, said in the same speech
to the AFL-CIO, "I expect that discretionary fiscal policy will continue to
be a headwind for the recovery for some time, instead of the tailwind it has
been in the past," she continued. "... Fiscal austerity does raise unemployment,
weaken the economy and ... in addition undermines the goals for which it is
designed to achieve." Former President Bill Clinton is also exhorting larger
government spending saying last week that, "Everybody that's tried austerity
in a time of no growth has wound up cutting revenues even more than they cut
spending because you just get into the downward spiral and drag the country
back into recession."
With such huge pressure to increase government spending there is a real prospect
of the U.S. producing deficits that continue to increase at far greater rates
than GDP growth. This further strengthens the notion that the central bank
will continue to monetize government debt in order to prevent interest rates
from spiking and rendering the country insolvent.
In addition, because of the cheap cost of money and huge buildup of the monetary
base in the U.S., the money supply growth rate as measured by M2 is up 8% YOY.
And the Japanese money supply should also be booming soon, as their monetary
base was up 10.9% YOY in January.
Finally, central banks have become net buyers of gold instead of net sellers.
According to Bloomberg, before the credit crisis began central banks were net
sellers of 400 to 500 tons a year. Now, led by Russia and China, they're net
buyers by about 450 tons. That isn't news. However, the news is what Russia
is now saying about fiat currencies. Vladimir Putin's regime is actively downplaying
the dollar's role as the de facto world's reserve currency by saying last week, "The
more gold a country has, the more sovereignty it will have if there's a cataclysm
with the dollar, the euro, the pound or any other reserve currency," said Evgeny
Fedorov, a lawmaker for Putin's United Russia party in the lower house of parliament.
Putin's Russia has added 570 metric tons of gold in the last decade.
All of the chatter about gold entering a bear market is patently false. Instead,
every bullish fundamental behind a strong bullion market is currently in place--and
if anything those factors are becoming even more pronounced each day. Currency
cold wars, massive debt accumulation, negative real interest rate levels, rising
inflation targets, central bank bullion purchases, rising money supply growth
rates and the tenuous condition of the dollar as the world's reserve currency;
all lead to the conclusion that gold is nearing the end of a long consolidation
inside a secular bull market, and readying for the next major move to new all-time
highs.
