About that Gold Price Crash..

‘Gold Plunges as Fears of Inflation Fade,’ noted the Wall Street Journal last week. And yes, the gold-silver decline was nasty, taking down nominal precious metal prices, as well as the share price for many a mining firm, large, medium and small.

So, why are ‘Fears of Inflation’ fading? It helps that oil prices are moderating and likely will stay moderate for a time. Control over energy costs is good for many a business. No complaints from me, on that point.

Then again, for all the moderation in energy prices, we still see wild immoderation — call it utter profligacy — in government spending across the globe. That’s raw inflation, being cooked into the books.

Governments everywhere — certainly in the US — spend more than they take in, and run up future obligations that they’ll never be able to pay, no matter how many Cyprus-like haircuts governments give to savers and investors.

So can someone explain to me why the fading fear of inflation? I don’t get that. Indeed, as governments spend, spend and spend some more, many investors still buy all manner of government bonds — which as one wag notes, are the latest form of ‘return-free risk’.

Really, when the government can’t repay you, it won’t repay you. If governments can nick your savings accounts, what else can they do to ‘their’ bonds that you were kind enough to buy? What did P.T. Barnum say? ‘There’s a sucker born every minute.

My point is: why are currencies — dollars, pounds, yen, euros, etc. — not still at risk for inflation? Why are people selling gold and silver down? Well…are people really doing that? Or is it paper gold and paper silver that sold down? Because from what I hear out in the trading pits, the ‘physical’ metal is still scarce, especially in large weights.

The Junior Resource Space

The overall downward situation, with gold and silver, reminds me of what Rick Rule told me in an e-mail, not long ago. We’re in a ‘capitulation’ phase of the market. That, and he advised, ‘Many of your readers will hate you.’

Well, I’m truly sorry that many junior mining plays are ‘down’ in share price, in this overall tough market. Small mining companies carry a boatload of risk — that much you should know. Yes, you can make ‘big’ money with some of those plays, under the right circumstances. But they’re NOT the kind of things on which to bank your retirement wad, if you know what I mean.

I hate vicious, stock market roller-coaster rides as much as anybody, but in my view there’s something there and I’m willing to be patient. Why be patient? Why not take the money off the table and sit on the sidelines for a spell?

Looking Ahead…to the Next Phase

Looking around, the global economy is pouring more metal than the mines and pits can deliver, certainly into the future. Old mines are declining in grade, such as we’ve seen with the recent knocks against copper mining in Chile, for example. Most new mines are horrendously expensive, such that even big guys are cutting back, like BHP Billiton.

Meanwhile, new and significant discoveries are few and far between.

In other words, the ‘long-term’ investment paradigm for exploration and mining is still valid. We have to navigate the shoals, and live through the up and down metal and share markets, which are a disaster, and which may be so for a while.

Through it all, many companies have consistently, as the saying goes, ‘over-promised and under-delivered.’

So what lies ahead? Darwinian selection.

The slow and stupid management teams will fall away. The better thinkers — the true ‘warfighters’ — will come to the forefront, and realize that Big Mining Company XYZ cannot stay in business, let alone get its share price up, by merely laying off secretaries, cutting maintenance on equipment, scaling back exploration and somehow digging ‘deeper’.

No, the intermediate and large guys will have to — perish the thought — go out and BUY something that’s worth a crap. They’ll have to find strong plays, with solid resource numbers, in predictable and safe jurisdictions, with the prospect (so to speak) of turning brown-stained dirt into an economic ore body and mine — with hallmarked ingots coming out the back end.

When that time comes, I have a few ideas if anyone is interested.

Byron King
Contributing Writer, Money Morning

Join Money Morning on Google+

From the Archives…

Why Waste Your Time on Gold When You Can Invest in Dividend Stocks?
19-04-2013 – Kris Sayce

A Trader’s Eye View of Gold’s Frightening Collapse
18-04-2013 – Murray Dawes

Why You Should Buy ‘Dirty, Grimy’ Gold Stocks
17-04-2013 – Dr. Alex Cowie

Why this Historic Fall in the Gold Price Equates to a Historic Opportunity
16-04-2013 – Dr. Alex Cowie

Beware the ‘Safety Bubble’, But Don’t Sell Dividend Stocks Yet
15-04-2013 – Kris Sayce

Money Morning Australia