STRAIGHT TALK ON MINING
THE END OF THE BEGNNING
Keith M. Barron Ph.D.
The following is for the gold bugs - succinct and to the point:
Some people would assert that if governments were prepared to accept
monetary discipline there would be no need for gold, but this is rather like the
statement that if there were no sin there would be no need for laws. In the effort
to please (or bribe) their voters, governments are under constant temptation to
do things that, directly or indirectly, lead to monetary expansion and inflation; and
it may be easier to resist such temptations if the authorities are subject to some
form of external discipline, even though it is one to which they have voluntarily
submitted. Politicians cannot be expected to accept such a curb on their powers
unless the public demand for it is so strong that acceptance is the only way to get
elected.
From Gold or Paper by E. Victor Morgan & Ann D. Morgan, 1976
Now this is not the end. It is not even the
beginning of the end. But it is, perhaps, the
end of the beginning.
Lots of quotes today.
The above words by Sir Winston Churchill and the Morgans encapsulate the where we
are and the why. There has been much hand wringing today over the drops in the gold
and silver spot prices. If you convince yourself that the rise in commodity prices is due
to the ephemera of any given day a la Marketwatch, CNBC, Fox News, Reuters or AP
(take your pick….could be Iran nuke threats, oil price shock, Nigerian rebels, etc. etc.
etc.) and that the precious metals market is a bubble, then carry on with your blinkered
existence and don't read anything into the fact that the US Fed has stopped reporting the
numbers for the M3 money supply.
Gold, silver, base metals, natural gas, oil, and practically all other commodities are going up in price because of inflation. Inflation is too many dollars chasing too few goods….it is a concept that few seem to grasp in this dumbed-down media era in which we live. Instead the financial reporting world dismissively wave such things away and blame price rises on shortages or gouging. It is INFLATION pure and simple!
From the editorial in the back of Barron's this week:
"not even the supply and demand for gold is stable enough to make the
"barbarous relic" a reliable touchstone for the value of money. The recent rise in
the dollar price of gold is as much due to a change in policy from some foreign
central banks as it is to any suspicion (well-founded though it may be) about U.S.
dollar debt or the purchasing power of the dollar.
Codswallop!
The spectacular price activity of gold and silver over the last week are phenomena
unavoidable for the mainstream press to comment upon. I have seen perhaps a dozen press articles, almost all of which attach the caveat at the end about the all time high of $850/oz January 21st, 1980 and the 20 or 25 year (take your pick) bear market that ensued. This is all pretty much disingenuous rubbish. The bear market days were only really for 5 or so of those years when the dot.com machine was in full throttle and gold mining was not making much money.
Kudos to the Sunday Times of South Africa, October 16th, 2005 from which I clipped this
nugget. This is one of the few unabashedly bullish pieces on gold I have seen in the
mainstream media. Those who took note of it when it appeared have assuredly made
money.
When I attended the San Francisco Gold Show in December, 2005, the gold price crossed
over into +$500 territory, however I was so deflated by the response this event seemed to
be getting that I actually began writing a piece entitled "Not with a bang but a whimper",
after T.S. Elliott's famous poem "The Hollow Men". Thank goodness I didn't put it out,
because within hours it seems the gold price started to begin its rapid ascent.
Whatever way the media choose to spin the gold price - and most choose to fence sit -
those people who have been knocking gold for years now are sounding more and more
like "Hollow Men". There is no denying that gold is very significantly up in price since
the heady dotcom daze of 2000-2001. As someone who has been watching the gold price for decades, I always know the bias of a publication when I see the gold price graph they
are using…. I'd say most of the time, the idiot press would choose to begin their graph at
the all-time high of January, 1980, when the price was at its peak. The gold price since
then looked like a ski slalom, with a precipitous drop. With gold in $620 territory the
graph is starting to look more like a parabolic mirror than a ski slalom. The naysayers
will continue to tell you that gold is still doing poorly in 1980 dollars because of
inflation. They will tell you this bull run is almost done. They will tell you that this bull
market cannot be sustained. Disregard it, because gold is probably going to go a lot
higher still.
The January 1980 top in the gold market was what we call the manic phase in the market;
when everyone is leaping in, when gold was the subject of conversation at every cocktail
party and around every water cooler. Gold was going up $50 in price each day. We are a
long way away from this type of activity. But, we sure have seen it in recent years in the
internet stocks and the housing market haven't we? I would say that times are such that a
manic buying frenzy in precious metals is completely and entirely conceivable, even
predictable. Why? Inflation.
Disaster Preparedness
In North America and Europe, spring season is here and for the most part the fires,
floods, and hurricanes of last year are but an unpleasant memory. Hurricane season is
well past in the USA, but Queensland, Australia is taking a beating right now, and places
like Tennessee are getting their annual pummeling from tornados. Last year was quite
something for natural disasters. The Asian Tsunami struck December 26th 2004 but it
wasn't until the early days of 2005 that reporters were able to get access to many areas
and see the magnitude of the devastation. America was hit with three major hurricanes:
Katrina and Rita in quick succession, and then Wilma. I flew over Miami a couple of
days ago and still there are plenty of blue tarpaulins on damaged roofs. Last year the
mountains of Kashmir and the foothills of the Himalayas were hit with a massive 7.6
magnitude in the Hindu Kush. On April 18th at 5:12 AM Pacific Time was the 100th
anniversary of the great San Francisco Earthquake.
In Louisiana and Mississippi, homes and local banks were "wiped to the slab" by Katrina.
Banknotes were reduced to a pulpy mass and covered with a combination of diesel oil,
pesticides and raw sewage. For those already weary survivors, convincing the check-out
girl at the local 7-Eleven where you had been evacuated that what you offered in your
hand was indeed money became a beyond-the-pale task.
Incidentally, for those hapless folks who may have to call on the services of the Treasury
Department's Bureau of Engraving and Printing (BEP) in Washington D.C. ; according to
Coin World they handled more than 26,000 mutilated currency claims in 2005. "If the
currency is seriously damaged or mutilated it must be sent to the BEP for examination
and identification after which the claimant will be reimbursed for its face value by a U.S.
Treasury cheque. The standards by which mutilated currency can be exchanged at face
value are: (1) at least 51% of a currency note is present and identifiable, or (2) 50% or less of a currency note is present and the submitted evidence justifies the method of
mutilation and the U.S. Treasury is satisfied that all missing portions of the currency note
have been totally destroyed."
Sounds pretty complicated huh?
Apologies to Matthew 6:19, but gold is the only treasure where moth and rust doth NOT
corrupt.
Turning to man-made disasters: through history, gold has got many people out of tight
scrapes, be it the coins and ingots handed over for passage on rickety rafts by the
Vietnamese boat people to the bangles and jewellery handed to corrupt soldiers I watched
last week in the film, Hotel Rwanda. Even in fiction, James Bond 007 had 50 gold
sovereigns hidden in the lining of his leather attaché case in From Russia with Love;
Major T.J. "King" Kong (Slim Pickens) had 100 dollars in gold in his survival kit along
with a "combination bible and Russian phrase book and 3 lipsticks" in Dr. Strangelove.
Gold stays money after the social fabric has been torn to pieces.
The majority of folks reading this are not imminently threatened by natural disaster or
mob violence. Your parents or grandparents might have stashed some gold behind a few
bricks in the cellar because they had lived in a very different time, with a couple of World
Wars, a pogrom or two, and a Depression. To do so today seems so old-fashioned. To
say it's important is like Chicken Little saying the Sky is Falling.
However, there are other disquieting things out there which threaten our comfy existence;
more subtle and pernicious and not apt to make it into sound-bite CNN coverage
….INFLATION.
Sometimes in order to understand the gold and silver markets you need to look at other
markets like energy and the base metals. For the next couple of paragraphs I'm going to
focus on base metals. Take the 30 second test. How many articles of metal can you
come up with? Here's my list:
Safety pins, propane cylinders, guard rails, automobiles, thumbtacks, locomotives, wing
nuts, oil tankers, construction cranes, soda pop cans, lightning rods, CD coatings,
pipelines, paperclips and pennies.
All of these essential parts of 21st century life (some arguably more so than others).
In order to get a proper picture it's often necessary to back away from the canvas and
stare at it from the middle of the room. You can't divine much from a 1 month chart due
to noise caused by volatility. Let's look at the 5 year graphs for aluminum, copper, lead,
nickel and zinc. Start with http://www.kitcometals.com/charts/
and then scroll through the various historical charts for the metals listed on the left hand
side of your screen when you click on the above link.
Every one of these metals is in a bull market. Zinc and copper are just as parabolic as
gold and silver. This is not just a spike or a blip on the graph…this is a very disquieting
trend built over time which is metal market wide.
So…..if the metals are all going vertical, and yet inflation (as measured by the Hollow
Men) is flat or minimal there is something that doesn't compute in the official figures
…or….manufacturers are taking it on the chin and not passing the costs on to the
consumer. Not yet anyway. Take car manufacturing. In the average automobile there's
17 pounds of zinc in the form of galvanized steel for rust proofing. Another 20 pounds
go into die cast parts like door handles, locks and trunk latches. Each tire contains about
half a pound of zinc which is used to cure rubber. A car battery contains 18 pounds of
lead, and another 9 pounds is used in soldering and other components. There's 42
pounds of copper in a car in the radiator and wiring. The average passenger car also
contains 267 pounds of aluminum. Nickel provides a few pounds as catalyst supports,
exhaust systems, and safety belt springs. I haven't even counted the steel….
With metals going higher it seems obvious to me that the price of every item made of
metal is going up - unless manufacturers eat the increases and slash their costs (pensions,
workforce) to stay competitive (think car manufacturers). Should the increased costs of
production translate into a consumer pull back…downturn, recession or even dare say
"deflation". Well…..in the Sage Words of Mr. Bernanke:
Like gold, U.S. dollars have value only to the extent that they are strictly limited in
supply. But the U.S. government has a technology, called a printing press (or, today, its
electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at
essentially no cost. By increasing the number of U.S. dollars in circulation, or even by
credibly threatening to do so, the U.S. government can also reduce the value of a dollar
in terms of goods and services, which is equivalent to raising the prices in dollars of
those goods and services. We conclude that, under a paper-money system, a determined
government can always generate higher spending and hence positive inflation.
Remarks before the National Economists Club, Washington, D.C. November 21,
2002
In the words of an editorial in yesterday's Wall Street Journal, entitled "Betting on
Bernanke": "Our own surmise is that Mr. Bernanke may be muttering to himself that
Mr. Greenspan skipped town just in the nick of time."
(Ode to a Central Banker): The Hollow Men: T.S. Eliot
We are the hollow men
We are the stuffed men
Leaning together
Headpiece filled with straw. Alas!
Our dried voices, when
We whisper together
Are quiet and meaningless
As wind in dry grass
Or rats' feet over broken glass
In our dry cellar
This is the way the world ends
This is the way the world ends
This is the way the world ends
Not with a bang but a whimper.
I welcome you to visit the Straight Talk on Mining Website at
www.Straighttalkonmining.com
All the old commentaries are there for your viewing pleasure. There's lots of good
stuff. Send your E-mail address and we'll put you on our mailing list and alert
you of new Straight Talks.
April 22, 2006
© 2006 Keith M. Barron Ph.D.
kmbarron@straighttalkonmining.com
Straight Talk on Mining is provided for information purposes only. Nothing herein is to be
construed as a recommendation to buy or to sell any particular security or financial instrument.
Nothing herein is to be construed as a recommendation to engage in any particular investment
strategy or trading strategy.
The investments discussed herein may be unsuitable for investors depending on their specific
investment objectives, financial situation, and risk tolerance. Private investors should obtain the
advice of a qualified financial advisor before entering into any transaction.
Straight Talk on Mining is based on information that is generally available to the public. The
sources used are believed to be reliable, but because the information and data that they provide
are beyond our control, no representation is made that it is complete or accurate. Staff of Straight
Talk on Mining may or may not be invested in the equities mentioned.
References to other publications and direct links to external Internet sites are sometimes given.
The inclusion of any publication, organization or Internet site herein does not imply any
endorsement. Straight Talk on Mining has no control over the content of any Internet site that you
may reach through links that are provided, nor can their truth, accuracy, or completeness be
vouched for.
Straight Talk on Mining Ltd. is not a financial services company nor is it affiliated with any
financial service company in any jurisdiction.
The author/publisher, Dr. Keith M. Barron, is not a qualified financial advisor and is not acting as
such in this publication. The accuracy of any legal term or definitions used herein should be
verified with your legal advisor or the appropriate government agency.
Printer Friendly Version
Email this Article
