Mining Equities: Now Positioned To Sky Rocket In Any Economic Environment
For those of you who have read my previous blog posts, you know how bullish I am on Gold and Silver. We have now reached an inflection point that has put a floor under these metals, for the both camps who believe we will get out of this crisis and those such as myself who think we will not come out of this recession anytime soon. This post is not meant to provoke an economic debate, but rather point out the fact precious metals have bottomed in any economic scenario.
We come out of this recession - Unprecedented inflation is inevitable due to the fact that A) monetary aggregates have more than doubled in the last 8 years excluding the following: 1) Any losses incurred on the MBS purchased by the FED (I would be shocked if the 1.2 trillion fetched 25 cents on the dollar. 2) The Portion yet to be included through the fed purchase of long term treasuries (lets says 100 billion to be conservative. 3) the projected and likely conservative estimate of a 2.5 trillion in deficit spending for 2009. 4) The 956 Billion in healthcare costs (SS, medicare, medicaid) in 2010, which will double to 2 trillion by 2016-2017. 5) The money creation from loan losses (which is still rising as more ARMS reset and up 370% Q/Q. It is currently 4% of approx 9 trillion (the numbers have not been updated past dec 08'. This is why excess reserves remain near 900 billion (fractional reserve banking allows banks to cover 8.1 trillion in loan losses. Makes you think..... 6) Interest on debt held by the public and foreigners will be nearly 450-550 billion per annum assuming a 2.8 avg int rate. 7) Commercial Paper funding facility - 350 billion already issued with a maximum allowance of 1.8 trillion. 8) Term auction facility - 415 Billion issued and maximum 900 billion 9) 249 billion guarantee to citigroup 10) Maiden Lane Portfolio - 35 Billion issued 11) 130 billion AIG. Even Assuming 50% of 7-10 is paid back, that is a massive infusion of capital. I won't even dare to project the increase in the money supply due to Money & Credit inflation (the latter is entirely dismissed by the mainstream). This still excludes defense spending, etc. I think my case for inflation in the coming years has been made. Wait! Not to mention the public agreement between China's trading with Brazil and Argentina in the Yuan = Flood of US dollars outside the country back in (the majority of currency in circulation is held outside the U.S).
This being said, suppose we inflate (borrow) our way out of another recession, Inflation will likely send gold past 3000 and silver to 50. On the other hand, if the recession continues to accelerate, the FED has openly said they will purchase more assets (that being long term treasuries to supress long term rates and mortgages- as they are highly correlated with the 10 year).This will only add to the case for inflation!
Conclusion: As Usual, I am reiterating my conviction for the mining industry - As I believe they will be reminiscent of the NASDAQ bubble except they have the valuations to support prices 5 and 10x of what they are currently trading for. Excluding the aforementioned case for inflation, the industry is attractive because the industry is often looked upon as a joke and think gold bugs are crazy. Maybe I'm crazy, but i have had many 4 and 5 baggers since nov but continue to add to them.