Gold Mining Confusion
Why so down when prices are up...?
DESPITE MOVING to the new Vancouver Convention Centre, constructed in advance of the 2010 Winter Olympics, the recent 2009 Cambridge House World Resource Investment Conference didn't seem to carry the enthusiasm equal to its new venue or previous conferences, writes Mike Niehuser, founder of Beacon Rock Research, LLC, for the Gold Report.
The number of mining companies attending the conference seemed to be lower than normal, most likely due to belt tightening. There also appeared to be an absence of those "mini-bubbles" that seemed to accompany conferences in past years over molybdenum, uranium or potash. This would appear to be due to the reticence of investors to replace their risk aversion with greed, or lack of cash and/or leverage, to fuel momentum in fashionable investments. A lack of speculative spirit seemed to haunt the event.
We found this to be surprising, considering that both silver and Gold Prices were close to their 52-week high. While this may be expected due to the seasonality in precious metal demand, enthusiasm for a store of value didn't appear to be measuring up to flagging confidence in the US Dollar and other world currencies. One might also assume that a nuclear North Korea with intercontinental delivery systems capable of crossing the Pacific might generate anxiety, pushing investors toward a safe haven.
But in many ways it appears that the financial market is in the process of completing its revaluation of equities thrashed during 2008 and the dead cat bounce in the first quarter of 2009. This bounce followed a near collapse of financial markets and tax-loss selling fueled by an increase in the monetary base, increased inflationary expectations, and stocks at prices that were too cheap not to buy. The "smart money" is now back, and now that the easy gains have been made, investors simply don't know how to proceed.
This confusion appears to extend beyond the Cambridge House conference. Last year the "safe" place to be was out of the market, and now with the latest bounce, investors appear unsure.
Clearly there are initiatives to stimulate the United States and world economy through fiscal policy, but very little has actually been spent. The banking industry appears back from the brink but there is questionable evidence that borrowers or lenders are willing to take risks with an uncertain future. The unemployment rate in the US is now above Canada and the UK, and even that of Europe for the first time in decades. And with the US administration promising 600,000 jobs, investors are at risk of suffering both "job illusion" and "money illusion"; in other words, stagflation.
Even though the money supply may have increased, the reduction in the velocity of money is holding back economic growth and inflation and propping up the US Dollar. So stock picking based on cash flow, resources and takeover potential appears to be regaining traction as investment themes. And in Gold Mining as well as other precious, base and industrial metal producers, we see the lowest equity prices in years providing an opportunity for investors in some of the companies we visited with at the conference.