This is in response to powayseller’s question “how are you positioning your investments at this time?”
I wrote this e-mail to my parents this past weekend:
You shared the April 9 Union-Trib business section with me. Probably because the front page has this headline above the fold: “Some would-be gold bugs need to be aware of past volatility.”
We are going to see lots of articles like this in coming years.
Here are some facts for you to consider so you have an idea of what I expect from the current bull market in precious metals and other commodities.
All markets ebb and flow. One aspect of the ebbing and flowing is that commodities and equities take turns being the preferred investment vehicle (ie, when equities are hot, commodities are dogs, and vice-versa).
There have been 5 bull markets in commodities during the last 200 years. The shortest one was 14 years and the longest one was 40 years. The average was 18 years.
The current commodities bull market started in 1999 (when gold finally bottomed in its 20 year bear market) or in 2000 (when the equity markets tanked).
1999 plus 14 years takes us to 2013 so 2013 is the earliest that I believe the bull market in commodities will end.
Given that 3 billion new people (China and India) are trying to reach the living standards of the Western world, the current commodities bull is likely to run for much longer than anyone currently expects (and will likely take prices much higher than anyone expects). Think about all the metals and energy required to make TVs, refridgerators, cell phones, computers, cars, air conditioners, cities, etc and you can understand why demand for commodities is high.
My last point is supported by the behavior of the base metals over the last five years. Aluminum +105% Zinc +230% Lead +263% Copper +287% Nickel +302%
Notice that articles urging caution about the precious metals don’t point out that we are in a commodities bull market and that ALL commodities are surging in price.
So, this is my main point #1: we are in a commodities bull market that is supported by the addition of 3 billion people striving to achieve a western lifestyle – based on past commodities bull markets, the current one is likely to continue until 2013 AT LEAST and probably much longer.
Another significant factor in the current bull market is that commodity production has been in decline for the last 20 years. Low commodity prices caused numerous exploration companies and mining companies to go out of business and/or stop exploring for new resources.
It takes years to bring a new mine into production (5 to 7 years is typical) so it will take several more years before commodity production can ramp up to meet surging demand.
Some commodities (copper) will stop surging in price once supply is ramped up to meet demand – other commodities (uranium, zinc, silver, etc) will probably never be available in amounts large enough to stop them from continually increasing in price.
So, main point #2 is the other side of point #1 – ie, not only do we have surging demand for commodities we also have a lack of supply caused by the previous 20 year bear market in commodities. This lack of supply will take several more years to address.
The last point I’m going to make today has to do with money.
My understanding of monetary history says that fiat currencies have a lifespan of 50-70 years before the people reject them and (usually) move into silver and gold-backed currencies. Bankers and politicians reluctantly follow the people into silver and gold-backed currencies until they can pull the wool back over the people’s eyes and introduce another fiat currency.
The US dollar has been a fiat currency within the US since 1933 (illegal for US citizens to own gold) and outside of the US since 1971 (Nixon closed the gold window) – ie, based on history the US dollar is reaching the end of its lifespan.
This movement from fiat currency to real money (silver and gold) occurs because people lose trust in the governments that are (over)producing the fiat currency.
I won’t bore you with the laundry list of financial issues that the world is facing – let’s just say that part of the current rise in silver and gold prices is due to the poor economic state of ALL the western countries. As people become more aware of these economic issues they move into real money to protect their assets.
This would indicate that one way to stop the rise in silver and gold prices is to fix the economic issues that are causing people to move into real money. In the 1970’s, Paul Volker (Fed Reserve chairman) raised interest rates to 18% before economic issues were ‘fixed’ and the bull market in silver and gold was crushed.
So, from a monetary perspective, I expect the current bull market in silver and gold to continue until the economic issues of the world are fixed or at least addressed in a serious manner.
In the US ‘fixing the economy’ means all three deficits (trade, current account, budget) have to be resolved. In all of the western world, ‘fixing the economy’ means that all the unfunded promises that have been made to people (welfare state) have to be funded or revoked.
I believe it is likely that some country (probably China) will choose to back their currency with silver and gold before all the western countries resolve their economic issues. The next reserve currency for the world will most likely be the first one that is backed by silver and gold.
Point #3 – it isn’t reasonable to expect the bull market in silver and gold to end until the economic issues of the world are resolved and, probably, until some country backs their currency with silver and gold.
Bottom line for me: I’m not going to be swayed from my commodities bull market position until I see economic issues being seriously addressed in western countries or until some country backs their currency with silver and gold. I expect that the soonest this will happen is 2013.
I didn’t discuss it in this e-mail but real estate and equities should be making significant bottoms in the 2010-2012 timeframe and I will probably be moving investment money out of commodities and into real estate and equities when those bottoms occur.
