Resource World Magazine

S P E C U L AT I O N S L eon ard M e lma n The case for higher precious metal prices A s we approach mid-year 2013, junior mining share and precious metals investors agree that the two years since achieving the all-time high for gold of US $1,930/oz, in mid-2011, have been difficult. Despite frequent, glowing price forecasts and predictions of a continual parade of crises, the price quotes for gold and silver have fallen, gradually at first and more steeply of late. As of late May 2013, their prices sat at just under US $1,400/oz and near US $22.50/oz, respectively, and the prices for many junior shares have fallen steeply over the same period. The great question then, is whether a brighter day for both the shares and the metals may be expected at some time in the reasonable future or whether the great bull market of 2000-11 for gold terminated with that near-$2,000 per ounce peak. After examining several fundamentals which have historically driven gold and silver upward, it is my belief that those factors remain in effect and that we will see a resumption of the bull trend in the nottoo-distant future. Although attempting to forecast the specific timing presents genuine problems, the continuation of those previously bullish forces can be clearly identified. When we look back at the bull market of 1976-80, two pairs of "twin towers" were continually cited as drivers of the price increase in gold from US $105/oz in the summer of 1976 to over US $800/oz by 24 www.resourceworld.com January 1980. Those pairs were rapid escalation of American budgetary deficits in the late 1970s combined with rapid accumulation of America's national debt on the one hand and escalating inflation and interest rates on the other. In the first case, both of those categories now point toward a golden bull. Deficits during the past six years have exploded upward, passing through the $1 trillion mark in several of the past few years and those huge deficits have propelled the US national debt up to nearly $17 trillion as this is written. Though there has been a recent slowdown in accumulation of new debt, factors such as aging of the population as well as rapidly rising social and medical costs related to government programs point to the future acceleration of debt and deficits. The other set of "twin towers" included the rate of inflation and the exceedingly high relative levels of interest rates. As they escalated toward 15, 17, 18 and even 20%, Americans and many foreigners poured into gold and silver to preserve their buying power and to protect against fiscal instability. Clearly, those two latter forces are dormant at the moment, with both visible inflation and long and short term interest rates dragging along at the lowest levels in decades. However, when we examine the levels of fiat monetary creation and other items of government financial data over the past few years, it appears there is a growing likelihood that the era of low inflation and low interest rates may be coming to an end. Recent reports indicate aggressive money creation by central banks in America, the European Economic Community, Great Britain and Japan, among others. Japan has been particularly active in forging new policies of stimulation and that government has actually advocated raising inflation as their goal. Many analysts have suggested that only serious widespread economic weaknesses have allowed this money creation to take place without corresponding increases in visible inflation and I offer two conclusions based on this consideration. If economies begin to generate sustained and rising strength, then it would appear likely that the amount of money already in circulation will allow for rapid increases in inflation. In the other case, if economies begin to collapse anew, there appears to be little doubt that the same central banks will dramatically increase their monetary stimulation activities. There are other factors as well which appear to point toward increasing pressures toward higher, not lower, precious metals prices over time. These would include rising international pressures; growing political scandals threatening political instability and potential currency crises as many nations engage in a "race to the bottom" as they attempt to devalue their home currencies in order to gain trade advantages.I also note the increasing possibility of US dollar weakness as massive government debt, enormous deficits and an aging population impact markets. All in all, there appears to be a valid case for future bullish price pressures to develop in the precious metals and their associated shares. The time for upward breakouts may be nearer than appears evident considering today's precious metal prices. 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 JUNE 2013

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