Sticking to my guns
October 3, 2005

Since the dollar started falling in 2001, mining companies’ costs have gone up dramatically from their 1990s feasibility studies. Because all these studies were done in US dollars the cost increases reflected the fall in the dollar more than anything else. There is no doubt that raw materials such as steel have gone up in price in real terms, and that the recent highs in energy costs are having a noticeable impact on operating costs. But I still think that both the mining industry and the market are completely oblivious to the impact of exchange rates on the industry.

At the same time, gold investors are extremely bullish, convinced that we are in a roaring gold bull market, while gold mining companies are unable to increase revenues even though the gold price has almost doubled.

There is a reason the mining industry is not making money. All we have seen thus far is a bear market in the dollar: that means that companies that operate in non-dollar environments have seen very little, if any, margin expansion at their mining operations. There is no evidence of a bull market in gold. That does not mean a real gold bull market is not imminent and, as I will discuss in my next commentary, there are reasons to be bullish. Personally, I prefer to bet on a continuing decline in the dollar and to invest in such a way that I would benefit if the increase in the gold price continues to be dollar related. Should a real gold bull market develop, I would still be able to benefit from it, but I would not be dependent on it.

What is the strategy? Since mining is a depleting business, the biggest problem facing the mining industry is reserve replacement. This is where the exploration industry comes in. Fortunately, there are very few people in the exploration industry itself that are capable of making new discoveries: like any other industry, the majority of the people are average, some are below average and some are above average. I look for those above average groups and invest in a big way.

If we can participate in a mineral discovery we will make money regardless of what happens to commodity prices. The mining industry severely curtailed its exploration efforts during the 1990s, so even if commodity prices decline the industry cannot afford an extended hiatus from exploration. But I would not take a chance on base metal exploration because declining base metal prices would reduce the economic thresholds of new projects, so fewer discoveries will be economic discoveries. Given how rare new discoveries are, you want the cards stacked in your favor as much as possible.

But gold is not a commodity. Gold is an international monetary asset and its price is a function of exchange rates and monetary inflation. So even if we encounter economic stagnation that would hurt commodity prices, the gold price would not necessarily be affected. In fact, the gold price is likely to outperform other metal prices going forward. That’s why I focus on the gold sector.

I continue to believe that the most likely course of events is a deflationary economic slowdown in the US that will result in global economic stagnation. Given the US’ dependence on foreign capital it will also result in a further, major devaluation of the dollar and that, in turn, will cause the US dollar gold price to rise. It is also possible that a substantial increase in the US dollar gold price will spill over into other currencies, driving the gold price even higher. However, a worldwide slowdown in economic activity would hurt the commodity bull market.

The risk is that a decline in commodity prices and commodity stocks will then weaken the gold market, especially the exploration sector, and that is a dilemma I have been grappling with for a while. I am becoming more and more convinced that the end of the current boom in US real estate, equities and bond markets are upon us. Of course, it is not only impossible to predict when markets will turn but also how the future will unfold. So I have decided to stick with my original plan, which is to focus on mineral exploration because of the depleting nature of the mining industry and, within that, to focus on gold.


Paul van Eeden

Paul van Eeden works primarily to find investments for his own portfolio and shares his investment ideas with subscribers to his weekly investment publication. For more information please visit his website ( or contact his publisher at (800) 528-0559 or (602) 252-4477.

Paul van Eeden works primarily to find investments for his own portfolio and shares his investment ideas with subscribers to his weekly investment publication. For more information please visit his website ( or contact his publisher at (800) 528-0559 or (602) 252-4477.


This letter/article is not intended to meet your specific individual investment needs and it is not tailored to your personal financial situation. Nothing contained herein constitutes, is intended, or deemed to be -- either implied or otherwise -- investment advice. This letter/article reflects the personal views and opinions of Paul van Eeden and that is all it purports to be. While the information herein is believed to be accurate and reliable it is not guaranteed or implied to be so. The information herein may not be complete or correct; it is provided in good faith but without any legal responsibility or obligation to provide future updates. Neither Paul van Eeden, nor anyone else, accepts any responsibility, or assumes any liability, whatsoever, for any direct, indirect or consequential loss arising from the use of the information in this letter/article. The information contained herein is subject to change without notice, may become outdated and will not be updated. Paul van Eeden, entities that he controls, family, friends, employees, associates, and others may have positions in securities mentioned, or discussed, in this letter/article. While every attempt is made to avoid conflicts of interest, such conflicts do arise from time to time. Whenever a conflict of interest arises, every attempt is made to resolve such conflict in the best possible interest of all parties, but you should not assume that your interest would be placed ahead of anyone else’s interest in the event of a conflict of interest. No part of this letter/article may be reproduced, copied, emailed, faxed, or distributed (in any form) without the express written permission of Paul van Eeden. Everything contained herein is subject to international copyright protection.