THE GREAT RESOURCE BULL MARKETS, THEN AND NOW
dailyreckoning.com
by Doug Casey
A quick refresher: the last great resource bull market, roughly from late 1971 to early 1980, saw, among other things, gold rise 2,390%, silver 3,487% and crude oil 1153%.
Naturally, a number of geopolitical and economic factors contributed to these gains. In an attempt to add some structure to this exercise, I’ll use the 7 Ps, my trademark template for sound investments, to compare the resource sector of the 1970s to that of today.
People
In 1970, "mining" wasn’t the dirty word it has become in today’s politically correct world. Back then, getting a degree in geology or mining engineering was a perfectly acceptable career move, and such training could be had at any number of prestigious universities. Today, save-the-environment studies are many students’ first choice, while geology programs have been partly, or, more frequently, entirely shut down. As a consequence, far more geos are retiring than graduating. You can see this at any mining convention: it’s a sea of gray hair, or no hair at all. This may be bad for mining companies, but it can be positive for investors: the dearth of experienced exploration geologists and mining pros limits discoveries of new deposits and keeps supplies tight. It also makes it easier for us to identify promising companies; they’re the ones attracting the best talent. These professionals write their own tickets in the current market, and therefore gravitate to the most prospective ventures.
Politics
In August 1971, after years of Johnson’s "guns and butter" policy and its consequent inflation, Nixon unleashed the price of gold. Nixon’s move had nothing to do with promoting free markets, about which he couldn’t have cared less - as demonstrated by his simultaneous implementation of idiotic wage and price controls. De-pegging the gold price was really about defrauding the Europeans, who kept trading increasingly worthless American currency for gold at $35. In a classic case of unintended consequences, the dollar lost ground against gold further and faster than Nixon ever dreamed possible.
The ‘70s also saw escalating costs of the Vietnam War, the OPEC oil embargo in response to U.S. meddling in the Middle East, generally underpriced commodity markets, and large government deficits. All of these have even more serious counterparts today.
For example, we have a "hedonically adjusted" (which is to say, arbitrarily adjusted or politically corrected) U.S. inflation rate that has officially remained relatively low, but which many observers, myself included, suspect is actually much higher. And of course, we have the Forever War on terror, a wholehearted entanglement in the Middle East and threats to the crude oil supply from Iraq (and, in time, probably from Saudi Arabia and Venezuela as well) - all unintended consequences of the most bellicose U.S. foreign policy since Teddy Roosevelt, and maybe in history.
Given that the same kinds of moronic domestic and foreign policies at large in the 1970s are at work today, we have good reason to think prices will take off like they did three decades ago, starting from a similar low base.
Property
That low base in “property” is important. Many people think commodity prices are higher now, but in inflation-adjusted dollars many key commodities are actually cheaper than they were before the last great commodities bull market peaked. For example, the current “record high” crude oil price of $68 is only $31.63 in 1981 dollars, when oil peaked at C$38.34. Gold, at $440, is only $185.55 in 1980 dollars, when gold peaked at $850. In fact, at $440 in 2005 dollars, gold is actually lower than it has been in 30 years... save for the 2000-2003 period when it bottomed.
At $1.73, copper today is at about half of the 1980 peak of $1.44. This doesn’t mean prices can’t temporarily go lower - for the short-term, given my overall pessimism about the U.S. economy, I’m particularly concerned about base metals - but it does paint a bullish picture for commodities for years to come.
Supporting this view is the fact that there have been no giant oil discoveries for 20 years, and discoveries of large mineral deposits are becoming similarly scarce, particularly for precious metals. This begs the question: are we seeing a Peak Oil-type phenomenon developing in minerals?
An 80-page report released by JP Morgan on January 24, 2005 projects falling gold production in South Africa and North America this year and states: “We believe that the larger driver for gold prices is the coming decline in gold production." This growing supply crunch, coupled with increased demand from both institutional and individual investors, could be the catalyst that takes gold over $500 this year. Of course, the companies we are following in the International Speculator that actually have resources in the ground - or are good at finding them - will rise by multiples of any gains made by these commodities themselves.
On the other hand, the collapse of the Soviet Empire and the opening of the Third World have made vast areas of the world available to new exploration. We also have new exploration and production technologies that simply didn’t exist back in 1970 (to name tw using satellites to spot mineralization and using heap leaching to extract it inexpensively). Then there’s China - communists in name, but capitalists in practice. I don’t doubt that China has great geological potential, and we are currently following one particularly undervalued Canadian junior with a large gold deposit in that country, but I won’t get overly excited about China as a home for my mineral investments until a fairly steady flow of Chinese projects begin making it through the minefield of local regulation.
At the right commodity prices, there is literally an infinite amount of mineral wealth out there. But mines are not like a McDonald’s that you can knock together in a few weeks on any given street corner. A typical exploration cycle - the time it takes to find and evaluate a mineral deposit - is about two years. If a property appears economic, then the company has to engage in a lengthy and bureaucratic permitting process (ensuring there are no semi-rare salamanders in the area, for example). They also have to do the extensive and expensive drilling and mine plan analysis required to complete a bankable feasibility study, as well as raise the small mountain of cash necessary to keep the process moving along.
The bottom line is that it takes a long time to bring a mine into production, which means that for many metals, supply is relatively, if not absolutely, inelastic.
The Demand Picture
Of course, for prices to rise in real terms, demand has to outstrip supply. On the supply side, the situation looks extremely bullish for silver, copper, nickel and gold - significant new mine production of these metals is unlikely to be realized in the near term. But will demand continue to rise?
As long-time readers know, I believe commodities are ultimately trending toward zero (once nanotechnology and other major new technologies live up to their potential), but we’re a long way from there.
At this stage of the super-cycle, more people have access to markets than ever before, increasing their standards of living and therefore increasing their demand for resources. Starvation was a common phenomenon in the '70s; now former basket cases such as China and India are emerging as world economic powerhouses. Such developments never go smoothly, of course, and I’m concerned by the possibility of a cooling in the global economy affecting many things - base metals in particular. Long-term, however, the question is not "if" demand for commodities will grow, but,
"How fast?" |
