Gold's rise in purchasing power compared to the price drop in other commodities is lowering the cost of energy and other capital and material costs for gold producers. Pretty sweet to be a producer with rising product prices because of investor demand, tightening supply and dropping production costs!
And our gold producers are quickly becoming market darlings. Dropping prices makes mining, milling and G&A costs a lot cheaper. It directly affects their bottom line making them suddenly attractive to mainstream investors whose normal stocks are a whole lot less attractive.
But what if we're not seeing deflation, a decrease in the money supply, but a temporary slowdown in the velocity of money?
In other words prices are falling because demand has dried up, not from a decrease in the money supply. Sooner or later, people will start spending and banks lending, money will flow. I believe the plan to get the world's economy back on track by massive monetary stimulation will work, as a matter of fact I believe it'll work so well we're heading, over the next few years, to a massive hyperinflationary blow-off, Weimar Germany style.
Consider the following:
- The U.S. is going to issue untold trillions to pay for the bailout programs.
- Medicaid and Medicare have no money in their respective accounts
- Social Security is broke and the first baby boomers are starting to retire at the same time the workforce is shrinking.
- Worldwide infrastructure building and improvement plans costing trillions of dollars.
- Existing wars, future planned and unplanned wars, escalation of wars. War on drugs, war on terror, resource wars, etc.
- And let's not forget one of President Obama's first acts was pissing off the Chinese by calling them currency manipulators.
Gold shines brightest in inflationary times. The ongoing deflationary scare is a buying opportunity for gold and gold company shares. The real threat facing us today is the coming massive rise in prices right across the board caused by the ongoing worldwide increase in the monetary base. When investors wake up to this fact we'll see a flood of money into all things gold.
That deluge of money will start hitting the major gold producers and ETF's first then trickling down to the mid tiers then into brownfield juniors well along the track to developing a deposit, those with a 43-101's and then into raw greenfield exploration companies.
With worldwide gold production down so drastically and the dramatic disruption of the junior markets last year, and continuing still, supply and demand is going to be completely out of whack. There will be fierce competition for stable safe ozs in the ground by producers having to replace their reserves in an extremely competitive environment.
Let's step back for a moment and consider what happens if I'm wrong about falling prices, and they are here to stay? Well that's the beauty of gold. It works well in either situation, better in inflation but still very good in a falling price regime as its doing today. Add in geo-political tensions, falling supply and it seems like a perfect storm is developing for gold. Whichever way the wind blows, from this point in history, gold and its related investments should do well.