The Great Resource Bull Markets, Then and Now
Those who don’t learn from history are doomed to repeat it. In that context, Doug Casey studies the last great resource bull market providing useful insights into the current unfolding commodities bull market.
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.
Resource Bull Markets: 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.
Resource Bull Markets: 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.
Resource Bull Markets: 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.
Resource Bull Markets: 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,
for The Daily Reckoning
October 13, 2005
Doug Casey, legendary natural resource speculator and author of "Crisis Investing", one of the best-selling investment books of all times, has helped tens of thousands of investors become a great deal richer. His monthly newsletter, the International Speculator, which is now in its 26th year, recommends almost solely companies that can be expected to generate a double – or triple-digit return within a year.
In today’s financial news, we find what looks to us like dangerous erosion.
Stocks lost a little topsoil, under the first autumn rains. So far, the loss has been marginal. The Dow is still over 10,000 – despite huge losses in name-brand stocks and vital industries. The Philadelphia housing index, for example, is at a six-month low…falling on news of higher bond yields. Fannie Mae, the biggest mortgage finance company God ever laughed at, has lost half its value. And oil, despite widespread predictions of a price collapse, is still over $60.
In the housing market, too, we think we see the rivers running brown. The mud is washing out from under house prices. In Broward County, Florida, for example, the median price of a house dropped 2% from August to September; the backlog in unsold units rose 18%.
"Signs of economic slowdown emerge in U.S. housing market," says a Reuters article. Mortgage applications are falling. Experts predict fewer sales next year both of new and used houses.
Here in London, some streets are festooned with so many "For Sale" signs you’d think the entire neighborhood had packed up and moved to Manchester. In America, too, inventories are growing.
"It takes a lot more work to sell a house," said a realtor. It’s a wonder they sell any at all. In California, only one household in six can afford to buy the typical house. Even at today’s low interest rates, the $568,890 price is too much for most people to handle.
The typical household’s buying power is eroding away, too. A new credit card regulation requires marginal buyers to make higher payments. If you have $25,000 worth of credit card debt, for example, carried at an annual rate of 29% (sounds unbelievable, but that’s what poor credit risks pay…) you will have to pay $855 a month, minimum, of which $605 is just to cover the interest.
Meanwhile, the poor householder is looking at energy costs that have risen 20.2% over the last year, and home heating costs expected to increase 48% this winter. His only hope has been to buy a house on credit, and hope the thing goes up enough to cover his rising debts and additional costs. But the ground is giving way beneath him. The feeble foundations of America’s housing market are being exposed; when this poor householder finally takes a look at what Alan Greenspan and his economic architects at the Fed have wrought, he’s likely to be appalled.
Bankruptcy filings continue to rise.
More news from the fellows at The Rude Awakening…
Dan Ferris reporting from Washington…
"If you think that Hurricane Katrina is responsible for the uptick, I’ll have to disagree. The rental apartment market in the U.S. improved for the third straight quarter, and Katrina happened a little over a month ago (has it been that long already?)."
Bill Bonner, back in London…
*** Gold, Dec. contracts, is selling for almost $480 an ounce. We moved our target-buying price up to $450. We hope it goes to $450, giving us a chance to buy more, before going to $500.
*** Maggie Thatcher’s 80th birthday will be celebrated in London tonight. The poor woman has had a couple of strokes, leaving her a little "confused," say the papers. She had her confusions when she was prime minister, too, of course, but she was more certain of them, and stuck to them better.
The English papers are looking back at her "legacy" today. The Independent, for example, brings out a group of chatterers with the usual assortment of opinions – from the merely foolish to the plainly imbecilic. A musician complains that she leaves, "a spiteful legacy, because the legacy of Thatcher damages the basic compassionate society that the welfare state was trying to build…and perhaps would have built if it wasn’t for her." For some reason, the Independent thinks musicians’ opinions are important; they give us two of them: "This is the woman who stopped free milk for kids, was responsible for the poll tax, and after she left [office], joined the tobacco industry to promote smoking," comments the second musical nitwit. "She ran a smug, dictatorial, patronizing government." A historian sees it differently: "Anyone who thinks the pre-Thatcher years were a golden age really didn’t live through them; just ask anyone who rode on the clapped-out railways or tried to make a telephone calls when the Post Office ran the phones."
What we recall most from the Thatcher years is the image of the British fleet headed for the Falklands. Retaking the Falklands was probably foolish in some sense, too. The matter probably could have been settled by negotiation. Besides, what did it matter who ruled the desolate islands? But Britain’s pride was on the line, and if it was foolish, it was at least majestically foolish.
*** "People everywhere want freedom," said George W. Bush. We wish it were true. But what people really seem to yearn for is safety, and a way to put one over on their fellow men. While it is Americans who most frequently have the word freedom on their lips, it is they who seem to have least regard for it. Just try to enter the United States from overseas. The homeland is harder to get into, or out of, than other countries. America also puts far more people in jail, proportionately, than other civilized nations. And cometh even the most remote hint of danger, Americans rush to find a heel they can crawl under. The latest call for boots comes in today’s International Herald Tribune, where a group of "experts" are asking for the appointment of a "bird flu czar."
*** What caught our eye most in today’s paper were the Hobbit people.
Here at The Daily Reckoning we cannot resist petting the underdog, looking for lost causes, and helping the little guy. On a remote island in Indonesia, scientists have discovered a whole race of the littlest guy ever. Called the "Hobbit" by people in the English press, these runts were barely half as tall as modern humans. One paper even did a cute drawing of one of them. We took a liking to him immediately; small brain, dull eyes…he reminded us of a public official.
The big question before scientists is this: Were these little critters really humans who just adapted to short rations by getting smaller, a phenomenon known as "island dwarfing"? Or were they some form of apish creature that merely resembled a human being but in miniature?
We don’t know. But what interests us most about the little fellows is that they are no more. One obvious hypothesis is that they were wiped out by bigger people, perhaps hunted to extinction like giant sloths or dodo birds. One of the major themes of The Daily Reckoning is the principle of regression to the mean. What goes up, eventually goes down, we say. Looking back through history…what we find are many things going up, and down. But the population of humans, after having been stable for many thousands of years, rose steadily for the past three millennia, and then shot up sharply for the past three centuries. We wonder when it will turn down.
If only we could bring one back to life…and find out what happened.
*** "Oh Daddy," began a familiar voice on the phone yesterday. "I can’t believe it…I locked up my bicycle in front of the apartment. But the key broke off in the lock. Now, I can’t get the key out, and I can’t get my bicycle…and I need it to get to school."
"Don’t worry, just go buy a hacksaw…I’ll cut the chain off."
"Are you stealing that bike?"
The sight of a middle-aged man in coat and tie, sawing away on a bicycle chain, was too much for the woman to resist. She posed the question while walking by, hardly waiting for an answer.
"No, I’m not stealing it…I’m liberating it."
"Oh…what’s the difference?"
"One is theft…the other is social justice."
"You’re kidding me…you’re not really stealing that bicycle?"
"Oh no," Maria came to our defense. "It’s my bicycle. The lock broke. Dad is just sawing off the chain."
"Well, I was going to saw off your chain, Maria. But this looks like a better bike…and since I had the hacksaw in my hand, and I needed one…"
"Oh, you are kidding me…"