Gold Prices May Not Have Silver Lining – Gregory Reynolds

Gregory Reynolds - Timmins ColumnistThe long awaited – and predicted – push by the price of gold through the US$1000 an ounce barrier has occurred.

There is jubilation in the hearts of the gold bugs of the world, those faithful who attend conferences year-after-year to hear the word from on high: gold is the only asset to hold.

That the wait between gold’s previous record high in 1980 at US$850 an ounce to the March 13 break through was 27 years is being ignored.

The gold mining industry, especially in Canada, has reason to be happy but there is a need to look past the event and to ask why it happened.


Most experts, and there is a whole industry created since 1980 just to follow and to predict trends in the world price of the precious metal, only look at the sunny side of the street.

After all, doom and gloom are not welcome at the festivities when you make a living predicting good times as gold soars into the stratosphere.

Investors want, and will pay good money, to hear optimistic views on the future of gold. That is why the numerous money and precious metals conferences in Toronto, Vancouver, Miami, Las Vegas and San Francisco are packed annually.

Having attended many of these gatherings, I have always liked the speakers who placed their predictions inside the framework of the Big Picture. A handful of speakers spoke one truth, at least to me, that the world’s economy had to be in serious trouble for gold to reach the promised land of US$1000 and ounce. These days we are told that gold will continue to US$1500 or US$2000 and even US$2500 an ounce.

Financial newsletter writers, TV commentators and newspaper columnists are urging people to buy gold coins, gold mining companies’ stocks and gold jewelry in order to make a pile of money or to have a portable asset. What investors should be asking themselves is what will they be able to buy with that pile.

The price of oil is over US$100 a barrel, the price at the gasoline bar goes up nearly daily, bread at $3 a load is being predicted as part of a massive increase in food costs, prices are increasing on everything even as thousands of jobs in the manufacturing sector are being lost and companies are exporting every conceivable type of work to countries with cheap labour.

The United States dollar has been the basis of all world trade since the end of the Second World War. Today, there is a flight from the dollar that is frightening as there is no replacement.

Once George Bush won the White House in 2000 he proceeded on a foreign policy path that led to two things, fighting two wars at the same time and the deliberate reduction of the value of the U. S. dollar.

Those who think it was the strong Canadian economy that saw our dollar jump past the U.S. greenback in value have gotten events upside down. It is the declining U.S. dollar that makes it seem the Canadian dollar is strong. When the economic events of the past half dozen years are reviewed, two reasons for gold’s relentless advance stand out.

The first is the wreck of the U.S. economy under President Bush and the other is the gap between supply and demand of gold.


John Ing, a mining analyst with Maison Placements Canada in Toronto, and a long-time advocate for higher gold prices, in a newspaper interview says he is happy his forecast has proven true but worries about inflation.

He says “gold is the classic inflation hedge but it’s a bit like a canary in the coal mine, letting us know there are problems all around us.”

The definition of inflation is a persistent rise in the price of goods, services and factors of production over an extended period of time as measured by a price index.

The traditional method to fight inflation is to raise interest rates, making borrowing more expensive for companies and therefore slowing the rate of economic growth in a country through higher prices. While the Bank of Canada publicly worries about creeping inflation, it has followed the U.S. lead in cutting interest rates.

Thus we have the U.S. in a recession (a period of reduced economic activity and increased unemployment) and fighting it by cutting interest rates to make credit even easier while its inflation rate is climbing.

Bush has been running the money printing presses overtime since he was elected to pay for the wars in Iraq and Afghanistan but the trillions of dollars these wars have cost is destroying the value of those dollars.

The simple definition of inflation is too many dollars chasing too few products, thus driving up prices.

“People buy gold as a hedge against inflation,” explained Bart Melek in a magazine article. He is a global commodity strategist with BMO Capital Markets.

“This is especially true of the developing world, which has been getting richer but doesn’t have quite the sophisticated financial system in place. “Gold is the easiest way to protect yourself against inflation in these places.”


Melek points out that since 2002 there has been a 30 per cent drop in the value of the U.S. dollar. He also expects this decline to continue. That U.S. economic policy makes no sense has been apparent for years but since it is politically driven it is beyond logic.

World gold production is put at 2444 metric tons, a metric ton being 1.1 short tons, and has been declining for years. Gold demand is about 3800 metric tons and growing annually. Since it takes four to 12 years, depending on the country, to get a gold discovery into production, the gap is more like to grow than to decline.

There are four uses for gold -jewelry fabrication, industrial applications, governments and central banks and private investors. The citizens of India and China are big buyers of gold but so are residents of nations with weaker governments and histories of internal military interventions.

People must have faith in a nation’s currency for it to have any value. Around the world this faith is being eroded and having the U.S. deliberately reduce the value of its dollar is both worrisome and affecting everyone.

Part of the reason for this debasing of its currency is that the if a nation is holding a huge hoard of U.S. dollars, such as China with over one trillion, and their value is reduced by 30 per cent then the U.S. government has that much less to repay in real terms.


Another factor in today’s financial mess is the sub-prime mortgage debacle that is destroying the U.S. housing market.

While billions of dollars have been reported lost over the sale of worthless mortgage-backed securities, the full extend of these losses may not be known for years.

There was a bouncing ball stock market before all that but observers believe the market now has more room to fall.

Canada’s forestry industry was sick before the U.S. housing crisis developed in 2007 and the present mining commodities boom will only last as long as developing nations want our base metals.

We cannot afford to be complacent in the face of a world-wide credit crunch and rampant inflation.

We are still the tail of the American dog and we cannot avoid sliding into a recession, or even worse if fear overcomes common sense.

It is a time for our political leaders to realize the fate of the country is more important than squabbling for political points in Ottawa.

Gregory Reynolds is a Timmins, Canada-based columnist who writes extensively about mining and northern Ontario issues