Today we’ve got falling prices. Many pundits are saying that today’s falling prices are caused by deflation. Well whatever there caused by it’s hard to argue against gold being clearly the winning investment. With the price of gold hovering around $900 it’s definitely living up to its oft proven history of preserving purchasing power.
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. This is happening right now because dropping prices makes mining, milling and G&A costs a lot cheaper. It directly effects their bottom line making them suddenly attractive to main stream 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? "The velocity of money is the average frequency with which a unit of money is spent in a specific period of time." Wikipedia
In other words prices are falling because demand has dried up, not from a decrease in the money supply. People get some money and they’re holding onto it. Plus by far the largest percentage of the bailout money is still locked in bank coffers. Sooner or later, in my opinion much sooner than later, people will start spending and banks lending, money will flow. I believe the plan to get the worlds 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 US is going to issue untold trillions to pay for the bailout programs. As of now this money is sitting in bank coffers unused and providing the banks no return. Since banks are in the habit of making money by lending money this money won’t be gathering dust for long. And with the multiplier effect will become many times over what they now have on their ledgers.
-- 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. And increasing the number of government workers doesn’t count towards filling the gap necessary to fully fund retirements as government workers are paid by taxing existing workers or creating money to pay them.
-- World wide infrastructure building and improvement plans costing trillions of dollars. This will be paid for in large part by the spending of US $’s held in Foreign Reserve accounts. That means a lot of dollars are going to be coming home to roost. The United States will pay for its programs and multi trillion dollar deficits for years to come by printing money.
-- Existing wars, future planned and unplanned wars, escalation of wars. War on drugs, war on terror, resource wars etc etc etc.
-- And lets not forget one of President Obama’s first acts was pissing off the Chinese by calling them currency manipulators. Are they going to continue supporting US spending by continuing to purchase their debt? If they stop then the US has to monetize its debt, buy it themselves, which is the most inflationary thing a country can do.
-- Tax cuts.
What happens to our gold investments, the ones that are looking pretty good right now, when “deflation” turns to inflation? And since the broad money supply is growing at a rate of +13% a year and the monetary base has gone pretty much parabolic, doubling in a year, which is to say the dollar you held last year has had its value effectively cut in half today. I think it’s a safe conclusion we’re headed for a price reversal sooner rather than later. Does gold serve us as well in an inflationary environment as it’s serving now?
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 world wide increase in the monetary base. I’m not sure how long it will take for all the money creation to work its way through the pipeline but its coming and with trillion dollar deficits being promised for years to come once it starts it isn’t going to stop anytime soon. 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 43-101’s and then into raw greenfield exploration companies.
With world wide 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.
Today many of our larger gold companies are taking advantage of our present “deflationary” conditions and their strong share prices by selling stock and cashing up their treasuries so they can begin buying up the smaller companies and their deposits. There aren’t very many decent sized deposits, ones over two million ozs, left in politically stable countries.
Now I’m not a licensed financial planner, a broker, an analyst, a geologist nor an economist. I’m just an investor who likes junior exploration companies looking for precious metals. And I like them, my juniors, to be in the post discovery resource definition stage. I think gold juniors, without a base metal component to their prospective deposit, are going to be the most rewarding, the most lucrative way to garner the huge rewards from the coming freight train rush to gold. Those golden tracks are being laid today using the world’s currencies as ballast. It truly is going to be a time of generational wealth creation for many.
The most profitable, rewarding way to get involved is to own gold shares. And the best gold shares to own will be the shares of companies owning deposits gold producers want to buy. I mentioned “post discovery resource definition stage.” These companies have already found something and are working to see exactly what they have. A lot of the risk, and a lot of waiting time for the company to actually make a discovery worth looking at has been removed for us, the investor.
With good drill results and the junior successfully moving the project along the development path towards a mine hopefully a majors interest will be sparked. If this all happens according to plan your payback as an investor during this stage can be a many fold return of invested capital.
Let’s step back for a moment and consider what happens if I’m wrong about falling prices and are they 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.
At Ahead of the Herd we believe there is opportunity in times of crisis, that the set of circumstances we find ourselves in are better than they have ever been for astute and courageous investors. Are you going to be part of the group that plans to take advantage of the tremendous opportunity being presented for extraordinary gains?
If you’re interested in the junior resource market and would like to learn more please come and visit us at www.aheadoftheherd.com
Richard (Rick) Mills