A Melman Minute
| By | Leonard Melman |
|---|
NOTE: It has been a distinct honour to have received an invitation to address the Financial Conference at the giant PDAC convention, the world's largest annual mining gathering, scheduled for March 2-5 in Toronto. My time slot is set for 9:30 AM, Sunday, March 2. We certainly invite all convention attendees or other readers residing in the Greater Toronto Area (GTA) to attend.
Canadian juniors are finding themselves on the positive side of two important recent developments. In the first case, the prices for precious metals themselves are on the rise. In the second place, as noted on the chart below, the Canadian Dollar (C$) is clearly headed lower.
Since the international price for gold is normally quoted in US Dollars, any weakness in the C$ compared to the US$ results in a higher net Canadian Dollar gold price. For example, the current quote on gold this morning is about US$1,324.00 and the present quote for the C$ is .8974 relative to the American currency. The resultant price for gold expressed in C$ is 1,324/.8974 or C$1,475.40.
Two somewhat obvious net results are a commensurate increase in prices received by productive miners, increases which directly improve their bottom line. In addition, if it is presumed that the C$ will remain at low levels compared to the US$ for some time into the future, the industry could well up-value all in situ metals holdings for exploration and developmental juniors as well as producers.
Something of this sort of revaluations may indeed be taking place as the mining share indexes have been putting on a major rally of late, particularly during the past few weeks. Please note that the price of one widely followed gold ETF, GDX, has soared during the early part of 2014 from 20.5 to a current 26.7, a gain of 6.2 points or almost exactly thirty percent. Many individual companies have gained far in excess of that number.
WHAT ABOUT INFLATION?
As noted earlier, inflationary expectations over time may be the single most important factor in the public's participation in the world of precious metals. Lately, official figures are hardly encouraging - and yet......
As for official figures, reports just released show inflationary rates remain close to nil as the 'core' rate of American consumer inflation - that is the overall rate of inflation with food and energy stripped out because they are too volatile - fell to 0.1% in January according to the US Department of Labour. The overall rate came in at a still minimal 1.6%.
But do these official figures truly reflect the real world and do they truly suggest that inflation is a dead issue? I don't think the answer is 'yes' to either question.
Regarding the present, anyone who has visited the movies and purchased anything at confection stands would agree that prices are anything but stable. People looking at their heating oil bill or their natural gas bill would also be inclined to dismiss claims of benign inflation. As for government 'services', has anyone looked at their rising costs and compared such numbers to those governments' own inflationary figures?
(I just had one of those experiences when I renewed my Canadian passport. In 2009, the charge for a five-year passport was C$87.00; in early February it was C$130.00 - a sixty percent increase in five years!)
But of even greater concern - and perhaps most relevant to the price of the precious metals - is the outlook for price increases into the future. On that count, we may be headed toward higher prices over time. Pressures are building for enormously rapid increases in Minimum Wage legislation which would impact the entire price structure. Rising populations combined with worldwide advances in consumerism suggests higher raw materials prices going forward. Intense environmental and regulatory requirements suggest higher cost structures for industry and commerce. And, the political world is changing.
It is this last one that is worthy of serious contemplation and we have two recent developments to consider. In the first case, it appears that Republican Party policies are undergoing a dramatic shift away from confrontation regarding debt and deficits and toward accommodation, which I believe will ease the future path toward continued expansion of their government's own inflationary expenditures.
And, most interestingly, it appears that election--year politicking is underway as President Obama just announced a willingness to abandon some previously-embraced reductions in government benefits. In fact, according to an AP article this morning, "...He will ask Congress to approve about $56 billion in new or expanded programs, stepping back from aggressive efforts to tackle long-term government deficits and debt." One potentially huge change in focus is that efforts to trim back cost-of-living increases to Social Security will now be scrapped.
It is said that markets anticipate changes in fundamental economic directions and it is certainly possible that gold's relatively good fortune to date in 2014 suggests the beginning of a change in the inflationary outlook.
ONE LAST BIT ABOUT BITCOINS
After receiving little but positive comments, the world of "Bitcoins" is now on the receiving end of serious questions regarding their suitability as money. In my opinion, the question is directly relevant to our world of precious metals because if Bitcoins are now the new alternative to government-created fiat currencies, the automatic question then becomes, "why invest in gold and silver?"
The idea of Bitcoins was introduced in 2008 in a highly technical computer report coming out of Japan. Little attention was paid at first, but in the past year, attention has grown intense and this intensity has resulted in staggering increases in the quotes on these coins, rising from about $13 in January, 2013 to over $1,100 one year later. However, during the past month or so, as questions are being raised, quotes have dropped by 50% to around $550 and the future of the entire concept has become uncertain. In fact, one source suggests quotes could easily fall quickly to the $100 area.
These questions revolve around the proper attributes of genuine, widely-accepted money which, by general agreement, should include a stable storehouse of value, an effective measurement of value, and virtually universal acceptability. There should also be wide understanding of the identity of such 'money'.
Serious questions are being raised about Bitcoins' suitability on each of these questions. We do not know yet of its storehouse function; its uses as a reliable measurement of value or medium of exchange is dramatically limited; it is NOT widely accepted and, in terms of identity, the mass majority of the public has no concept of exactly what could be the definition of a Bitcoin.
Until these questions are satisfactorily answered, at The Melman Report we believe that the role of precious metals as THE alternative to government-created fiat currencies remains secure.
As of 9:00 AM PST, financial markets in the US and Canada are trading moderately to the upside with the Dow Industrials 35 points higher while the TSX Index has gained 25. Precious metals are little changed near $1,320 and $21.70 respectively and base metals are close to unchanged on balance. Mining share indexes are retreating from recent gains and are down around one percent so far today.
In other markets, the US Dollar Index has gained 6 basis points to 80.38; Crude Oil is down by 51 cents to $102.24 and the TYX Index of rates on US Treasury 30-year bonds is down by 123 basis points to 3.713%.
All quotes US$ unless otherwise noted.