August 18, 2008
Seldom have I ever seen anything like the recent period of time as it involves the psychology of investing - and nowhere has that been more prevalent than in the junior mining field. A combination of events has created a background of dismal pessimism when it comes to the world of mining share investments. The factors we are seeing include such as the fallowing:
* - Mining share quotes are falling sharply and apparently relentlessly.
* - Costs of mining exploration and production are spiraling upward
* - Prices for both precious and base metals declining with unexpected severity
* - Shortages of equipment and qualified personnel are occurring with disturbing frequency, creating uncertainty in planning for exploration and production work
* - Expenditures and interferences related to bureaucratic, environmental and aboriginal demands continue to escalate, particularly in foreign nations worldwide
* - Recent severe interruptions in the world of lending and credit have placed serious difficulties in the path of money-raising efforts
It is almost if a "perfect storm of negativity" has descended on our industry, one which has a history of virtually unparalleled creation of wealth and opportunity - if it is allowed to function with anything resembling efficiency and freedom.
Several anecdotal incidents have recently taken occurred that illustrate the depth of concern within the junior mining field. I have had discussions with mining managers who are scaling back exploration work to conserve capital because of fears of massive share dilution. I have had discussions with magazine editors who are feeling the effects of mining companies who are cutting back on promotion and advertising. I have talked with convention planners who are finding several companies who are bypassing the opportunity to tell their story in order to save money and avoid the necessity of additional financing for as long as possible.
In fact, it is difficult to recall a time when pessimism spread so rapidly and thoroughly. But several examples of historic black pessimism in other fields of investment do indeed come to mind - and every one of them represented unparalleled times of opportunity!
From October 1929 through June of 1932, despair prevailed in the stock markets. In fact, the public mood regarding share investments became so bleak that the very mention of an intention to purchase securities would be met with scorn and derision. And yet, in June, 1932, with the Dow Industrials having fallen from 384 to 40, investments in quality companies turned out to be so profitable that many family fortunes, particularly including the Kennedy's and that of Bernard Baruch, were founded on such investments as the Dow Industrials quadrupled over the next five years.
Following World war Two, rampant economic pessimism spread throughout America, Canada and other allied nations. While they had indeed won the war, no one had any idea how jobs would be found for the millions of returning servicemen. The Dow Industrials fell to the 140 level in 1946 and, again, investments in securities were shunned. By 1962, unprecedented industrial expansion had driven the Dow to over 800 and huge fortunes were established.
In our own world of precious metals investments, we have two sterling examples. In the summer of 1976, despair regarding gold and silver was widespread. It had been widely anticipated that the restoration of the legal right to own gold would usher in a new era of rising demand - but the opposite occurred. From December 1974 through August of 1976, gold fell from $200 (all prices US$) to $106 and mining shares collapsed. However, in the midst of that gloom, a major bull market ensued, the greatest in all precious metals mining history up to that time.
Then, again, in 2002, deep gloom pervaded the industry. Attendance at mining conferences was close to nil, gold was down to the upper $250s with silver under $4.00 and interest in mining shares was minimal - but over the net five years, new fortunes were made as both metals soared.
And so, here we are again, in the midst of gloom and despair - and the great question is this: "Will today's gloom truly be a time of opportunity as in these past examples, or are the fundamentals of mining so negative that recovery may never occur?"
The answer to that question lies in the future, but it is important to consider past history in order to develop our investment strategies.
Markets this morning are providing some relief for metals as gold has returned to the $800 level, up nearly $10 as of 8:30 AM PDT. Silver is ahead by about forty cents while the base metals are close to unchanged on balance. Crude is trading quietly near $113 per barrel, the U.S. Dollar Index remains near 73 and the financial markets are mixed with the Dow down by about 50 points while the Toronto TSX Index is ahead by 92.
