Never Enough Gold Jewerly

It’s no secret that the Mogambo is insanely bullish on gold – well, at least, it’s no secret that he’s insane – but in the essay below, the Masked Economist explains why gold is such a good bet.

Ambrose Evans-Pritchard at The Telegraph.co.uk reports that the U.S. Academy of Sciences calculates that "some 26 percent of all the copper and 19 percent of all the zinc that ever existed in the earth’s crust has already been lost to mankind, mostly wasted in milling or smelting or buried in landfills."

Gregory Wilkins, of Barrick Gold, says that the same thing is happening in gold, as "Global mine supply is going to decrease at a much faster rate than people generally believe. Many of the new mines that people are anticipating will never come into production."

Kevin McArthur, chief executive of Goldcorp, is quoting Mr. McArthur as agreeing, and that "global output was on a relentless slide."

The point of the whole thing is that "The era of ‘peak gold’ has arrived", which is truly momentous, because it means that the "easy to get at" gold has been gotten to, and the rest of the gold left in the earth is harder to get to, and thus the rate at which gold is being discovered, has collapsed when compared with the old days, which is just like the collapse in new discoveries of oil, which is where you get the phrase "peak oil", and they both have crucially to do with how a rising demand growth curve and a falling of supply growth intersect at that place called Lonely Street. Oops! Sorry! That’s Elvis Presley!

I mean, falling supply and rising demand intersect at that precise point that is scientifically referred to as "Expensive like you wouldn’t freaking believe!" And since everything from fuel to fertilizers to plastics to medicines to everything you can name under the sun is made from oil, then you are going to see inflation in prices like you will not freaking believe, which means that the currency will buy less per unit like you will not freaking believe, which means that people are going to be hungry and broke and miserable and rioting like you will not freaking believe.

And here is where I reveal why I am so insanely bullish on the future of gold, and how I am actually salivating at the prospect of having so much money that I can spend my time gallivanting about in a carefree manner, playing golf, and hiring lawyers to, as my old high school said in its school song, "fight until we have victory, and all our enemies have gone away", which I always thought was kind of a stupid creed, since my enemies could be massing just over that hill in preparation to attack us, and our best course of action is to immediately track them down and kill them all in a frenzied orgy of blood, and then dance like ghouls on their dismembered bodies, swaying to the hypnotic sounds of captivating rhythms on the bass line, but they called me mad! Mad! Hahahaha! I’ll show them madness!

But this is not about stupid sanity hearings or about psychiatrists recoiling in horror at what I "see" in their stupid ink blots, or how traitorous neighbors and family members are lying their heads off in their testimony, but about why I am so bullish on gold. Easy. Mr. Evans-Pritchard reports that inflation is hitting gold mining, too, and "Costs are rising at $60 an ounce annually. They will average $460 by next year. From tires to diesel fuel and the geologists’ salaries, mine inflation is running at 15 percent."

Inflation of 15 percent! Yow! At that rate, dividing 15% into 72 as per the "Rule of 72", this means that costs will double in about five years! That means that it will cost $920 an ounce to mine gold in five years, which means that gold is selling right now for $140 below the cost of mining gold in five years!

And while supply may be falling, Junior Mogambo Ranger (JMR) Ed S. sent me a posting from the Gold Anti Trust Action Committee that Reuters reported that "Global gold demand in the third quarter rose 19 percent year-on-year to 947.2 tonnes on the back of robust inflows into bullion investment funds and improved jewelry consumption, industry-sponsored World Gold Council (WGC) said on Thursday."

Even more significant, Milling-Stanley said, "The increase in investment demand has replaced jewelry buying as the major source of growth for the third quarter." It was then that I wished if I knew of any time in my whole freaking life when some woman ever said to me, "Don’t buy me any more jewelry! Buy gold bullion as an investment, instead!" And I laughed.

The details, in case you are interested, are that they all wanted more jewelry, and that their wishes were answered, in that "Total gold supply for the third quarter was 1,045 tonnes, up 16 percent year-on-year due to significantly increased official-sector sales."

And in a related news item, the St. Louis Post-Dispatch reported that some outfit called Missouri Coin "sold seven times as much gold and silver as it did a few months earlier." Wow! A 700% increase!

And this is seemingly borne out by Junior Mogambo Ranger (JMR) Chad K., who writes, "I went to purchase some silver today. There is now a 4-8 week waiting period and prices cannot be locked in." She says that "I am glad I started listening to you weirdo gold bugs a few years ago and purchased when the dealers actually had some."

Me, too, Chad! Me, too!

Until next time,

The Mogambo Guru
for The Daily Reckoning
November 26, 2007

Mogambo sez: If it weren’t for gold, we would be in a mess with no place to go for safety. If it weren’t for silver, we wouldn’t have such a startling upside potential.

And if it weren’t for corrupt people in and out of government who have created the mess, neither one of these assets would make us as filthy stinking rich as they are going to make us, as the ultimate value of fiat currency is always literally zero, meaning that when all the money is gone, the skimpy 5 billion ounces of gold extant in the world will be, theoretically, ALL the money, and the people who have some of it will have their share of everything! Wheee!

This could be it, dear reader. This could be the week when three important milestones are reached.

When we left you last week, the unstoppable force of inflation seemed to be hurtling towards the immovable object of deflation.

This morning, we check the headlines. What happened?

First, let’s look at inflation.

The most inflationary price of all is the price of oil. And guess what? Oil hit a new all-time high on Friday – at $98. The hundred dollar mark is less than the cost of a cup of coffee away.

What will $100 oil mean? Use your imagination, dear reader.

Over the weekend, we went back to France to celebrate Thanksgiving at our old country house. We drive a Nissan Patrol, which Elizabeth uses to pull a horse van. Filling it up, we watched the numbers fly around on the pump; we thought we were watching the world population counter. By the time the figures came to a rest, we owed the station nearly 140 euros – or more than $200. The high price comes from several sources. Gasoline is always more expensive in Europe than in America; the Europeans tax it more heavily. Plus, oil itself is more expensive worldwide. Finally, the euro (EUR) is a much stronger currency. Result: pain at the pump.

In America, as in Europe, the rising price of gasoline is much more painful at the bottom of the income pyramid than it is at the top. It’s at the bottom where inflation is most keenly felt. That’s where people who spend more on gas have less to spend on other things.

Meanwhile, the euro traded Friday at a new all-time high…$1.4966. Yes, we’re about to hit another milestone there too. Here at The Daily Reckoning we predicted that the dollar would fall to $1.50/euro. That was when the dollar was still trading at less than $1.30. Now, it looks like our target could be hit today or tomorrow. (Is it too late to move money into euros? More below…)

A lower dollar is inflationary. On world markets you get less for your money. Meaning, prices rise. Since so much of what goes around the world eventually comes around to the U.S. domestic market, soon consumer prices rise in the United States, too.

There was also a back-eddy in the stock market on Friday. The Dow gained 181 points. We call it a "back-eddy" because it looks to us as though the tide is running in the other direction – but we could be wrong.

And gold – the ultimate measure of paper currency inflation – shot up $26. Ooh la la. We saw the correction in the gold market coming; our problem was that we didn’t see it going. Gold was clearly ready to do some backing and filling a couple of weeks ago – when the price shot up over $830. We knew we would soon have an opportunity to buy it more cheaply. Trouble was, the correction was so fast and so short; it came and went before we had a chance to react. Last week, gold had practically already recovered. And this week, we wouldn’t be surprised to set it hit that old milestone from 27 years ago – $850. In fact, we wouldn’t be too surprised to see it knock over the milestone and keep on going.

Nevertheless, this morning, the force of inflation looks less unstoppable than it did last week. Up against the immovable object of falling prices, inflation looks like it might come to a halt.

Everywhere we look; there are more signs of a slump. Two year Treasuries have been having a nice bull run; they’re now yielding less than 4%. Holiday shopping fell short of last year’s binge by 3.5%.

"Don’t look now; here comes the recession," says Fortune.

Finally, the press is putting two and two together:

Americans owe more money than ever before – including $11 trillion of mortgage debt. And their #1 asset – the main collateral behind all this debt – is falling in price. Housing prices are down 5% so far, nationwide. Robert Shiller, whose index tracks the housing market, says this could turn out much worse than people expect. The last major downturn in housing was ’25-’33, when prices fell 30%. A 30% drop in the value of America’s housing stock today would turn the immovable object of deflation into something closer to a black hole.

It could "create a nightmare effect," says an Associated Press report.

"Subprime mess to worsen," says the Wall Street Journal.

"Subprime woes leaking into economy," says another article.

Let’s see, a 30% drop in housing prices is equal to, more or less…$6 trillion down the black hole of deflation. Hey…a trillion here…a trillion there…

*** Is it time to buy euros? A quick answer: we don’t know. The rise of the euro was a cinch…from 88 cents to $1.50. Now, it’s not such a cinch. The euro is a paper currency too. The ‘esperanto currency,’ we called it when it first came out. We know who backs the U.S. dollar – that’s why we mistrust it!

But who stands behind the euro? And how long will the Europeans accept a rising currency? A strong euro makes it hard for them to export to the United States. And while the European Central Bank is less concerned with full employment than its U.S. counterpart, Brussels has windbag politicians too – just like Washington.

What’s more, there are powerful, natural mechanisms that tend to keep currencies from diverging too much, one from another. How much higher will the euro go? We don’t know. But it’s no sure thing. As a hedge against the dollar, gold is probably a better bet.

*** And a note from our intrepid correspondent, Byron King…

"We note with sadness the passing of Ali Samsam Bakhtiari (1948 – 2007), of Tehran, Iran. Mr. Bakhtiari was a former director of the National Iranian Oil Company, and a vocal proponent of the Peak Oil school of thought. I was a regular correspondent with Mr. Bakhtiari, and Agora Financial was privileged to publish a number of articles based on material that Mr. Bakhtiari forwarded to me."

Mr. Bakhtiari died suddenly. Byron will publish a more detailed obituary in the next few days. Meanwhile, we express our condolences to the Bakhtiari family.

*** We don’t really have any more thoughts about the markets.

We spent the weekend in the French countryside, getting together the two branches of the family for a Thanksgiving feast on Sunday.

The two girls and their father came from London. Two boys and their mother came from Paris. And what a glorious weekend it was! The sun shone so bright on Saturday, we couldn’t bring ourselves to go inside. So, we whipped up a batch of cement and worked on one of the stone walls.

Poor Henry. He almost immediately hurt his back and had to withdraw from the masonry trade at a very young age, without pension benefits.

Then, on Sunday, the weather changed completely. We worked again on the stone wall, but we were working in soup. The fog was dense, with a light drizzle all day long. Perfect weather for cement and ducks.

For Thanksgiving dinner, we built a roaring fire in the dining room – which was otherwise as cold and damp as a taxman’s tomb. The fire took the gloom off the room…that, and a bottle of champagne.

Your editor is not a cook. He knows nothing about it and is happy to leave it to others. But he likes seeing others cook. And he likes smelling them cook. They gave the whole house a festive air…bustling…stirring…bussing…fetching…and finally all sitting down to eat.

We had invited a couple of French friends. Soon, the conversation turned to the strikes. Your editor, arriving in Paris at the Gare du Nord, had to make his way across town. But the subway was barely running. Taxis were no where to be found. What could he do? He set out on foot, arriving at his apartment an hour and a half later. He enjoyed the walk. Then again, he didn’t have to be anywhere special at any special time:

"I’m sick of it," said a young man. "It just makes daily life so difficult. Everything takes longer. What a pain. And for what? There are actually fewer French people in labor unions – as a percentage – than Americans. It’s a tiny part of the whole economy…but it causes trouble for everyone. The trains don’t run. They even sabotage the railroads. Why do people put up with it?"

"Yes…at the Sorbonne, it is even stupider; because the people causing the troubles are not even students. But every time there is a disturbance, they bolt the doors so you can’t get in or out. I went to school on Friday morning, after staying up half the night preparing my work. But the whole place was locked down for the weekend. What a drag."

Until tomorrow,

Bill Bonner
The Daily Reckoning