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When I was starting my money management business in the early 70’s the most important occurrence that I remember was that in late 1974 and lasting until September of 1975 the stock market was going up almost daily in spite of the worst economic news being reported week after week and month after month. The economy was getting worse and worse, yet the stock market was going higher and higher. The reason for this was that money was flowing into stocks from major institutions because they were discounting the future of the economy a year or more out. This, coupled with an oversold condition that rivaled 1930 – 33 made the typical stock on the NYSE a bargain. Note that in 1974 the average NYSE stock was down 75% from its high in 1972-3. (75% is not a typo). The world was coming to an end.
Smart People are Bullish
My friends for 35 years, Harry Schultz and Richard Russell both amazingly called the bottom of the U.S stock market when there was blood in the streets at the end of 1974. They were all alone on these calls and despite the dismal economic news somehow they saw the future. They were top professionals then and 34 years later these two guys are still at it. They are even smarter now. Friend Jimmy Dines in 1966 predicted the gold price and the Dow would someday cross (gold was at $35 and the Dow 1,000) which was an amazing predictions at the time. These three guys have made some of the greatest Wall Street calls ever. They are people you want to listen to. They are all bullish on the long term price of gold. They understand the big picture and so should you.
We can also look to no other than Sherlock Holmes for some wisdom that applies to ones gold stock portfolio: “The ideal reasoner would when he has been shown a single fact in all it’s bearings, deduce from it……all the results which would follow from it.” …from The Five Orange Pips. (By the way, for you Sherlock fans out there look up “The Quintessential Sherlock Holmes” at ( www.sherlockholmeslives.com ) and look for the five new Sherlock Holmes stories by best selling author Richard L. Boyer. He writes in the same style as Sir Arthur Conan Doyle.
The single fact for you to remember is that the world is awash with paper money being created at unprecedented rates. That is all you have to know. Inflation always follows and gold and gold stocks then go up. That is the way it works. I am sure Sherlock would be long the gold mining shares right now.
Good News on the Mining Shares
Currently the best news I can give you is that the gold stocks have lagged badly behind the increase in the price of gold. This is actually very good news because it means that this move in gold and the gold shares is still in the beginning stages. Look back all the way to 1927 and you will see that the gold miners lead the parade. When they do not the big parade has not gotten out of the parking lot. The best is yet to come.
One of the reasons for the latest very poor showing of the gold stocks I suspect is that the Shanghai stock market was annihilated in the last 3-4 months by 45%.The Chinese are gold bugs. Most likely some Chinese institutional and offshore players with international funds who had Canadian gold stocks had to sell to meet margin calls on the Mainland. This is now over and could lead to a rebound in the mining stocks as this selling pressure abates.
Printing and Borrowing
You cannot print wealth and you cannot borrow your way to prosperity. This is exactly what the greatest western nations on earth have been doing for 10-15 years. The great newcomers (China and India) are mostly printing money. These policies are enormously inflationary and will insure higher prices of almost everything including precious metals.
Because of the paper money and credit expansion in the U.S., the stock market is responding and currently holding up quite well despite the fact the major banks and financial institutions are in big trouble. Because the dollar is weak and interest rates are low in the U.S., big money currency players are betting that when interest rates go up it will attract foreign money and a dollar rally will take place and this would be bad for gold. Wrong. Inflation is in the works in the U.S. When interest rates go up and inflation goes up the price of gold will go up regardless of the dollar or the Fed. If the dollar is going up elsewhere but down versus the Chinese Yuan (one of the most undervalued currencies in the world) this high savings rate - gold buying country will be seeing gold in their currency going down but at the same time inflation going up from all their past monetary expansion (four year average annual rate of 18%). In local terms the gold price to them will be a super bargain. This could have a huge counter balance to a dollar rally elsewhere. Also India has expanded their money supply by 17% in the last four years and gold hoarding will certainly take place regardless of some rallies in the dollar versus the European currencies.
The Commodity Boom has Just Started
We are now at the beginning of a multi decade bull market in commodities. The updated graph below shows that adjusted for inflation the CRB (Commodity Research Bureau) Index has not even caught up the 1950’s! Therefore it has a long way to go just to catch up and then will be increasing for years to reflect three huge mega trends:
- The massive amount of new money created the last 15 years globally that will now express itself in much higher global inflation rates that could last at least a decade.
- The raw material demand from China and India as they continue to grow.
- Population increases that mathematically increase demand for all products and services, including precious metals.
The updated graph below shows that adjusted for inflation, the strong commodity bull market that started in 2001 has barely begun to catch up in real terms to the general price level of everyday goods and services in the late 1950’s. It is also showing a 45 year down trending real price level that has clearly ended.
This graph implies that a substantial increase of commodity prices from 2008 levels would only take the index in real terms to the price levels of 1958. Therefore commodity prices should continue to trend higher for a long time. This graph makes a strong case for investing in companies that own or produce natural resources especially precious and base metals.
With global liquidity increases at excessive levels the last 15 years and well below average capital investment by commodity producers from 1983 to 2003 the coming mega-trend of higher commodity prices looks very probable.
Gold stocks many times move the same way as IBM and GE as Joe Money Manager (who is not a gold bug) buys some of the mining sector based on earnings or value or even a little fear of inflation. With higher inflation rates in the U.S. and elsewhere, more of these managers should allocate some portion to the miners and even bullion.
Inflation rules all markets when it gets out of control. That scenario is coming.
Currently we are being very selective in buying the right gold and silver mining companies for our clients and I would advise anyone in this market to stop speculating and start making sure when the tide comes in that your boats do not have holes in the hull.
For more articles on the Economy, Gold, and Stocks please visit our website at www.kengerbino.com
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