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Gold/Mining/Energy : Gold Price Monitor -- Ignore unavailable to you. Want to Upgrade?

To: Bobby Yellin who wrote (15351)	8/6/1998 1:38:00 PM
From: Ray Hughes	Read Replies (2) \| Respond to of 116779

Hi Bobby, Firstly, let me say I think MA is sometimes totally off his rocker because next I'm going to say I generally like this piece. Commodities cycles will not be robust without a high level of world confidence and consumption based on a stable-to-rising reserve currency, i.e. the USD. It is a generalization and does over simplify certain aspects of commodities analysis. Specifically, while I agree that commodity prices must be rising in numerous currencies to stimulate wide private buying in order to spur inflation, he misses a key element of specific commodity supply/demand fundamentals. MA is simplistic in relating inflation only to macro analysis. However, he's right to an important degree in that the macro setting must be favourable to yield a virtuous micro setting. That said, I think he is right in the view that it will take several years to absorb the Asia/Europe debt bubble, break European labour's outlandish expectations, restore consumer confidence and get demand for commodities growing once again. In the interim, excess speculatively held inventories are under fire-sale liquidation. In such corrections commodities prices swiftly crash as bank inventory financing is called in resulting in material being dumped on markets. Hence, the worst of commodities price corrections occurs very early in the downside of the cycle. We may now be approaching the bottom of the inventory bust and metal prices will rebound slightly from the oversold position. However, demand will languish for a considerable time so the next upcycle is perhaps 2 -3 years off. One bright element is that building of new supply will be put on hold earlier compared with the 60s and 70s because management has learned to react swifter and/or financing is less available because banks and equity investors are better educated about commodities cycles. So, lowflation follows deflation for another 1-3 years following which Asia gets rolling strongly again whereupon demand for commodities will boom. Excess inventories will have been depleted, new capacity building will lag so that quite suddenly speculators will realize a new commodities inflation, driven by the micro side, augmented by a virtuous macro side (currencies, monetary policy, etc.) is setting in. Speculators will gobble up commodities inventory setting supply/demand parameters for a powerful price rise. The only exception to this scenario is silver but I am troubled by two thoughts: 1) Greenspan, et. al., will not want a major silver rally to spur gold so may sit on silver's price rise by cutting all margin buying, etc. and, 2) the damping of speculation generally could put a lid on silver's potential price rise as specs say "forget it I've been too burned in commodities." WB is a player for the really long term. Silver's long term equilibriun value is about US$9.00/oz based on operating costs of Idaho, Nevada, Mexico, Peru & Bolivian mines that could be reactivated. So he doubles his silver investment in, say, 5 years at worst. Thats a 10% compound return. Better that he knows he will get in zeros from here as interest rates have (or are in process) bottomed. Pure and simple smart money management. Cycles come and go. In May 13-14, 1987 I wrote a piece for James Capel, "Nibbled To Death By Ducks" arguing against gold and calling for the "decade of the (base) metals." Well, its been grand! Spawned Vancouver - Friedland, et. al. I admire Frank Guistra, ex-chair of Yorkton Securities. He and Yorkton were instrumental in the VSE promotion schema bringing European speculators into play. Frank is now in the movie business. RH