A “Patton Speech” for Gold

Do you remember the 1970 Academy Award-winning movie Patton, starring George C. Scott? In the beginning of the movie, Scott — playing the iconic American Gen. George S. Patton — stands in full dress uniform, backed up by a gigantic American flag. Scott then rouses the troops (and the audience) with a stirring speech that follows the lines of the address the real Patton gave the Third Army on June 5, 1944, the eve of the invasion of France in World War II.

Patton’s original speech is considered by many to be one of the great motivational talks in all of military history. And actor Scott’s portrayal of Patton delivering the speech is one of the most memorable scenes in all cinema.

If you are a gold investor, something similar happened not too long ago. While the ups and downs of the precious metal markets may not be as momentous as the invasion of France in 1944, things have been tough for gold this past spring and summer. After a several-year climb to over $1,000 per ounce in March 2008, prices began to drift from that all-time high to recent lows near $750. Many gold mining shares fell in price by 50% and more.

So it was quite a moment in the world of gold investing when the CEO of Kinross Gold Corp. (KGC: NYSE), Tye Burt, addressed the Denver Gold Forum on Sept. 10, 2008. Burt just plain shook the rafters with his optimism about the prospects for gold and gold mining companies.

Burt stared into the faces of a roomful of analysts, institutional investors and mining peers. And he spoke plainly: “This is the gold business. It is cyclical.” In a direct reference to recent weakness in both gold prices and share prices for gold miners, Burt counseled, “Do not lose hope.”

Burt expanded on this theme:

The demand fundamentals are strong. The supply fundamentals have never been better for our metal… Not only are major mines in Peru, South Africa and the United States slowing; not only are new mines not coming into production whether they’re in Argentina, in Alaska, in Romania or in Venezuela; but it’s never been tougher to permit, build and finance a new gold mine.

Capital cost inflation is also taking a bite out of mine construction and operation. Overall, mining costs are rising by as much as 25% year to year. About 30% of the cost of running a mine is to pay rising bills for energy, whether from liquid fuel or electricity. And costs for steel and concrete are rising at double-digit rates, as well.

So Burt explained how, in his view, there is a looming long-term shortage in the gold supply. He looked back at previous years’ statistics and said that “Global mine production in gold has been in decline for the last nine or 10 years. We don’t see that stopping anytime soon… To me, that’s symptomatic of an industry that is going to be in severe supply constraint in the not-too-distant future.”

Burt allowed it is difficult “to explain the difference between Comex and physical demand today.” He was referring to the fact that while “paper gold” assets are easy to trade, there are spot shortages of physical gold out in the metal markets. Many dealers simply have no product to sell, at least at recent prices. Even the U.S. Mint has run out of gold with which to stamp out its wildly popular $50 Gold Eagles.

Burt was adamant that “It isn’t hard to look into the future and see a world of dramatically constrained gold production and gold supply.”

So Burt expanded on a point that he has made in numerous public appearances in recent months. That is, now is “the time to buy good stories… That’s the time to look at the discounts we see in our market today and say, ‘I can load up on a good story.’”

Burt has previously explained that Kinross is watching the share prices fall for many junior exploration companies and early-stage miners. So the environment is becoming more amenable for the large-capital players to pick up bargains via asset purchases, takeovers or joint ventures.

Using a phrase almost identical to that of Gen. Patton in 1944, Burt said, “It’s not the time to climb into a foxhole today.” Then he added, “These are markets where risk-takers are rewarded.”

Burt’s address to the assembled gold bugs was a beacon of optimism. Kind of like Gen. Patton’s speech, it made you want to go out, charge up a hill and plant a flag at the top.

Until we meet again,
Byron W. King

October 29, 2008

Greg’s Endnote: Hearty thanks to one of the original Whiskey bartenders for the inspirational note. We commodity investors definitely do need to keep our wits about us and our feet firmly planted.

A lot of you Whiskey shooters have written in to tell me that you know full well that your investments are sound, despite the recent price pullbacks.