Resource World Magazine

A U G U S T / S E P T E M B E R 2 0 1 8 www.resourceworld.com 21 Speculations by Leonard Melman O ne of the advantages of long expe- rience in a given field is that you can personally remember criti- cal times in the past. Now, as I look at my 40-year chart of gold in relation to the past seven years since the highs of sum- mer 2011, I recall the 20-year bear market from 1981-2001 and wonder if we are wit- nessing a repeat performance. Those were indeed difficult times for precious metals advocates. The great question at this time, then, is whether we are now in a repeat of that two-decade period of pessimism or whether gold's decline from US $1,930/oz to the present $1,250 area is just a correc- tion of the enormous bull market which carried gold from $250 to almost $2,000. After reviewing a great deal of current research, I believe that a solid case can be made for a relatively early return to more bullish precious metals markets. Here are some of those arguments. Under the heading of 'watch what I do, not what I say' it is most interesting to note that while many are recommending that US Treasury paper be accumulated and gold holdings be reduced, accord- ing to Danske Bank research, Russia has recently been unloading 50% of their US Treasury securities over the past three months while increasing their gold hold- ings to almost 2,000 metric tonnes. The report also indicated China was growing leery of continuing to hold huge amounts of US government debt and they have also been buying gold of late. According to a study prepared by finan- cial writer Arkadiusz Sieron, worldwide corporate and government debt has been soaring, particularly when compared to total global Gross Domestic Product. The ratio of debt to global production stood at 190% in 2001; 210% in 2007 and 245% at the end of 2017. With debt growing faster than total productivity, the ability of gov- ernments to successfully service their debt appears to be diminishing, potentially leading to a renewed financial crisis. Historically, when gold and silver shares outperform the metals themselves, that is a positive sign for the metals' future because insiders normally accumulate shares when they believe the metals will be rising in order to obtain a more leveraged invest- ment in those gains. In early December 2017, gold stood near US $1,270/oz while the popular XAU mining share index came in at 75.65. As this is written in mid-July, gold is trading just under US $1,250/oz while the XAU is at 81.75 and so, despite gold hitting new relative lows, the XAU has actually moved higher. Without doubt, anticipation of the direction of inflation has been one of the primary factors in precious metals' prices with gold and silver rising when anticipa- tion of rising inflation is on the rise and vice versa. According to the US Commerce Department, the official rate of overall price inflation has just hit a six-year high during May and is now close to 3%. In addition, wage rate inflation is now an increasing factor due to both rising mini- mum wage enactments as well as the fact that for the first time in many years, there are more jobs waiting to be filled than workers available to fill them. There is yet another factor favouring pre- cious metals and, while difficult to quantify, has been significant in the past and that has been a 'contrarian view' toward overall sen- timent. Simply put, when sentiment reaches exceedingly low levels, we have frequently seen the emergence of strong rallies – and the opposite. The years 1971-1980 provide sterling examples. In the early 1970s everything seemed to be working in gold's favour. Inflation was on the rise, the Nixon investigations were capturing headlines daily; inter- est rates were soaring and, perhaps most important, the legalization of private gold holdings in America was imminent. Gold rose from barely US $50/oz to $200 and mining shares multiplied quite literally, in some cases by thousands of percent. Just as enthusiasm peaked, gold plunged over the next 18 months to barely US $100/oz and despair was rampant. And then, just as suddenly, at the very peak of negativ- ism, all the factors which led to the great rally of 1980 emerged and gold ultimately soared by 750% in just four years. I believe we are now seeing negativity at a high level, and by contrarian strategy, this may well be an indicator of a much more positive future. Yes, there are indeed some negative fac- tors to consider such as recent increases in the US Dollar Index and a general rise in interest rates which many consider to be negative for gold and silver – but all in all, I believe a strong case can be made for the emergence of a renewed – and potentially powerful – bull market for the precious metals. n This material is taken from sources believed to be reliable and is provided for information only. Any investment decision should be made only after prior consultation with investment professionals. Leonard Melman is a financial and political writer who focuses on issues relating to the resource sector. Mr. Melman lives in Nanoose Bay, British Columbia, Canada and can be reached at lmelman@ shaw.ca Critical time for precious metals

• Cover