With Gold Companies Planning to Spend Much More on Mining, This Business Cycle Is Far From Over

by Nigel Bolton-Shaw on August 13, 2012

Newcrest Mining plans to spend A$5 billion to raise gold output, according to a Reuters news story. This is certainly to be expected given that gold’s price has risen to as high as nearly US$2,000 in the past decade.

Gold is down around US$1,600 now but there is no reason to believe this bull market in gold and silver is going to be over any time soon. It’s like the 1970s where gold ended up around US$800 and silver at US$50 by the end of the decade.

That’s because the 1970s saw a bull market in money metals just like today. That’s how a fiat monopoly money banking system works, for better or worse. Central banks always print too much money, distorting economies and making people feel richer than they are. When the bust part of the cycle takes place, people often find themselves overextended and can lose everything.

But there are other things going on as well. Paper money itself is devalued during a bust in our current central banking environment. That’s because people don’t know which companies are solvent and which ones are not. Also there is the deflationary effect.

The volume of money itself contracts as more money is withdrawn from circulation and the velocity of money itself slows. In such a situation prices go down but this is not comforting to people who have assets and find these assets devalued.

You can see an article by Jeff Clark over at Casey Research on deflation and money metals entitled “Could Gold Be Tripped Up by a Coming Deflation?

Clark concludes that gold will likely continue its price appreciation over time, and the article is a useful analysis because of the level of detail.

In simplest terms, however – and over the long term – people simply start to turn to “stores of value” at such times as we are in now.

As gold and silver are universally seen as stores of value, the prices of these metals begin to rise. For this reason, during eras of deflation, gold and silver often rise.

It happened in the 1970s and it’s happening today. Here’s some more from the Reuters article:

Australia’s Newcrest Mining Ltd (NCM.AX), the world’s No.3 gold miner, said on Monday that it expects to spend about A$5 billion ($5.28 billion) over the next five years to lift output by 1 million ounces.

By 2017, Newcrest could see output of as much as 3.5 million ounces annually versus a target of 2.3 million to 2.5 million ounces for fiscal 2013, according to Managing Director Greg Robinson.

The push comes as gold continues to draw investors seeking more tangible assets amid persistent economic uncertainty in most world markets.

Other big mining companies, including Newmont Mining Corp (NEM.N), Barrick Gold Corp (ABX.TO) and AngloGold Ashanti Ltd (ANGJ.J) are also targeting million-plus ounce production increases over the next several years.

This is all very predictable. Gold and silver prices go up until mining companies big and small start to produce more precious metals. After a while, people start to buy the stock of the companies themselves.

But it is not only gold and silver that benefit from paper purchasing at the end of a money-metals bull market. Other kinds of stocks, especially smaller stocks, can benefit as well.

Often these stocks are positioned in some kind of commodity. And after the initial deflation, commodity prices can rebound as well, including land and housing prices.

The big question this time around is how high can gold and silver prices go, along with small stocks generally.

Central banks have printed so much money that once a recovery gets going, inflation is going to rise precipitously. At that point, bankers will face the issue of raising interest rates.

Paul Volcker had to raise rates to nearly 20 percent at the end of the 1970′s money metals leg. But this time the distortions are much deeper and rates might need to go to 30 or 40 percent to slow the velocity of the money.

Can the current dollar reserve system stand short rates that run that high? One could speculate we are on the verge of a new monetary era. It could be that the dollar reserve system is about to be replaced by a new system entirely.

Time will tell what that system will be, if any. In the meantime, gold and silver will likely continue to be viable investment options at some price level. This business cycle is far from over.

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