Markets continue to tumble. The January effect seems to be over already. We can only hope to see an Australian Open effect, or an Australia Day effect. If that doesn’t work then the pressure is on for a February effect.
It doesn’t help the market psyche when headlines such as “$60bn mining projects under threat” leap out from the front page of the Australian Financial Review (AFR).
There are plenty of familiar names in there. Projects all over the place are being thrown aside in the interests of saving cash, or the inability to raise finance to continue with a project.
But regardless of the financing, the real problem comes back to supply and demand. We won’t go through the full details of what’s happening in mining, Dan Denning over at the Daily Reckoning is going to tackle that puppy. He’ll be appearing in your inbox later. (Ed. Note: if you’re not a subscriber to the Daily Reckoning, click here and sign up for FREE!)
But something struck us as we were reading the AFRs story. Let’s see if you can work out what it is…
The short version of the long story is that the world economy has boomed on easy credit. More people were buying more things than ever before. Retailers were scrambling to stock up on more things than ever before. Banks were recruiting the finest (and the worst even) graduates from any university they could to invent new ways of creating capital.
Manufacturers were working overtime to make as much as they could to sell to the retailers. And resources companies were digging and drilling and prospecting to find as much iron ore, copper and oil as they could. They for one knew that commodity prices wouldn’t stay that high forever.
And of course they were right. In less than twelve months the sky has fallen in on the economy and there is no money left to spend.
Yet we now seem to have a two-tier economy. We have the government funded and guaranteed secondary economy of bail-outs, bribes and boof heads. But we also have a glimpse of how a free-market should work.
Go on, take a peak, it isn’t that scary.
While politicians, most economists and the press are screaming that car manufacturers, banks and retailers are “too big to fail”, mining explorers and producers are failing and shutting up shop everywhere.
The market has come to a collective realization that at the moment it doesn’t need all those raw materials that it thought it needed. The taps are being turned off. The demand has gone and therefore the supply must also go.
As far as we can tell – and we could be wrong – there aren’t too many mining companies holding their hands out for a government subsidy. There also don’t seem to be too many lobbyist clamouring to get on the news lamenting the imminent death of a nickel mine in Western Australia.
Maybe they build mining executives tougher than other industries.
Or maybe it is because business risk is part of the daily thought process for mining companies. They know they are taking a risk by drilling in this spot rather than two kilometers away. They know it’s a decision that could mean the difference between dust and billions of dollars of revenue.
Therefore, when market forces decree there is too much of something and not enough buyers, they know what to do. They turn out the lights.
The resources industry should probably do the rest of the economy a favour and offer classes to explain the effects of supply and demand… and how to cope without getting out the begging bowl.
Going Long Coffee at the Local Cafe
You may have received today’s Money Morning a little later than usual. Apologies for that. But after sitting down yesterday for a chat with Gabriel ‘Swarm Trader’ Andre about gold, we thought we would make a habit of it.
So this morning we took a quick stroll down to Cafe Presse on Brighton Road for a coffee and a bowl of bircher muesli and put Gabriel through the wringer on commodity prices in general… read below for the full story.
p.s: Yesterday we mentioned the recent Diggers & Drillers Gold Special Issue, but forgot give you the link to it. So here it is. If you’re like a lot of our readers and want to know how to buy gold, when to buy and what price it’s going to go to, we’d suggest you take the take to have peak at what D&D editor Al Robinson has to say on the subject.
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