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
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
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 (www.paulvaneeden.com)
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 (www.paulvaneeden.com)
or contact his publisher at (800) 528-0559 or (602) 252-4477.
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