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The Goldbug's Comment

August 25, 1998

GOLD, Is it US$284, C$440 or $A490 ? -

"Increased gold production and lower operating costs, enables Richmond Mines to have excellent results for the second quarter ended June 30, 1998." Jean-Guy Rivard, President, Ritchmont Mines.

With gold at $US284, you would think that this kind of statement would come from a miner who has all its production hedged at the lofty prices we had in early 1996. Not so. Although Ritchmont has three producing mines, with one being among the lowest costs canadian producers, excellent management and a small hedging program in place, the truth is that Richmont is getting almost $500 for each ounces of gold it produces. That is $500 Canadian dollars of course. With the $C dollar down 12% vis-a-vis the US$ in the last 12 months, canadian miners who have most of their costs in the local currency are getting some unexpected help. I am sure that many Australian miners are also reaping good profits thanks to the developping currency crisis.

The truth is that gold is in a bull market in many world currencies. The truth is that the US$ is now overvalued in terms of many of these currencies including the Canadian and Australian dollars. The truth is that gold is cheap, extremely cheap in $US terms. This imbalance will be corrected. Be ready, this day is coming and will give birth to the biggest bull market in precious metals of all times.

It is important to understand what has occurred since gold traded near US$280 in the fall of 1979, some 19 years ago: the gold market (including mining stocks and total above ground gold) has shrunk relative to the basket of world currencies as money supplies have exploded since then. Again in 1998, the US money supply is up by 10% on an annual basis and other countries are even showing greater percentage increases. The money printing machines have been running on high gears for more than two decades.

In the fall of 1979, the total value of all the gold held by central banks, private investors and individuals, plus the total market capitalization of all gold mining companies was in the neighborhood of US$ 750 billions. Today, after more than 30,000 tons of new gold production since 1979 as well as the growth of companies like Homestake, Newmont and Barrick, total market capitalization of this market is barely approaching the US$1 trillion dollars mark, a small 33% increase or less than 2% per year. During that same period, Bill Gates became a multi-billionaire and can now buy all the gold in Fort Knox. General Electric’s market capitalization can now buy all the gold held by the central banks of this world. Add to this, Microsoft, Coca-Cola, Intel and IBM...and these 5 companies are now more expensive than all the gold on the planet. In 1979, the DOW 30 could not even buy the gold held by the European Central banks.

The reality is that the size of the 1998 gold market is now more than 10 times smaller than the 1979 market, relative to the US equity markets which are now approaching US$9-10 trillions. Now should we include the bond and stock markets of Europe, Japan and Asia. In short, the new supply of gold investments increased by some US$250 billions in 19 years while the new money available to buy this new precious supply has increased to more than a dozen of trillions. This is the recipe for a bull of gigantic proportion.

When the new Gold discipline emerges, there will simply be too much money chasing almost the same ounces of gold we had in 1979-80. If gold could reach US$850 back then and our governments continue to print more and more money, you can bet that we could see 5 digits this time around on the price of our preferred metal. Only a deflationary depression of huge proportion, stock market crashes that wipe out 90% of current market capitalizations and debt repudiations of unforeseen magnitude, will keep gold from reaching these high levels. Even then, gold will have to rise to much higher levels, if only to satisfy investors who demand protection for the remaining of their paper money. Nobody knows what will be the trigger and when it will be pulled, but I do know that huge demand and low supplies means price explosion! When the music stops, gold will soar!

A medical study in France during the early twentieth century suggests that gold is an effective treatment for rheumatoid arthritis.
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