Right now, we are on the edge of a mining recovery. Some are forecasting a new boom within the next year-and-a-half, as the demand for for a safe haven from bad international financial policy grows, and the global economy recovers.
The question I have to ask myself, is “Who is going to benefit, and how?” Right now, it does not appear to be those with large deposits of base metals. Nickel, copper, and aluminum (or aluminium, for my non-Yankee brethren) producing mines are watching stockpiles of these particular metals grow, albeit it at a lesser rate than they were during the middle of the current wave of losses.
I’m not a geologist, or a highly technical mining analyst looking at the supply chain, but we are on the edge of a bigger issue for base metals. You see, many of these metals are used in the manufacture of buildings, or used as alloys for manufacturing. While copper and aluminum have recovered, they aren’t headed back to boom levels (unless things get really inflationary, and stockpile values increase as a result). For instance, an article is out this morning stating “Copper steady, as the dollar dives“. If you hold an asset, and the price stays essentially the same, as the overall purchasing power of your cash declines, then you just lost money holding that asset. Value is being lost.
Speaking of value, while residential home ownership has been given an artificial push through an $8,000 per buyer “grant” of the US government, the commercial real estate market is a massive bubble ready to rain fire and brimstone on all of us(and punish any international investor who thought it was foolproof to invest in American real estate).
In a rather long article over at Casey Research, Doug Hornig lays out the case that commercial real estate sales are not only dropping, but defaults are about to skyrocket. They are also going to have to take serious writedowns on the existing notes they hold, so they can refinance the borrowers at a lower rate. This is the best case scenario, where the banks lose some serious money.
The other alternative, is that the defaults become so great, that the US revisits the same place we did with Morgan Stanley, Goldman Sachs, and the rest of those brilliant bozos who threw us into this last downturn, with much higher stakes. Then, the government has two nasty alternatives(and I quote):
Let all the troubled banks fail, and the consequences will range from some excruciating but short-term pain, to a plunge into full-bore depression. Prop them up with yet more newly printed fiat money, and anything from high to hyperinflation will inevitably result, along with the possibility of extending the problem well into the next decade.
So, what does this have to do with the mining market. The US is a large percentage of the global economy, mainly in terms of consumption. We have plenty of land still available for expansion, for growth, etc. If our inventories of commercial real estate are too high, then we won’t be buying increasing stockpiles of base metals. If we do buy them, we’ll be buying them at a far higher premium as people won’t have any faith in our currency.
They will have faith in precious metals, however, as their limited supply will ensure trust. That is where we will see the majority of growth within the mining sector. There is a wrinkle in that sector, at least where gold is concerned. In the past, I made the common error of not viewing mining from a geologist’s perspective. In many cases of late, exploration has revealed gold veins that are weaker in deposits than originally projected. This has lead some mines to shut down production altogether.
For some mines, it is not a matter of running more shifts, hauling more earth, or blasting more rock. It is the case of cost of extraction outweighing production of the metal. At last check, it cost just over $900 USD to extract 1 Oz. of gold. That does not include the cost of refinement.
Silver, on the other hand, seems to be underperforming at present. I believe we will see that issue correct itself over the next 6 months or so. Gold mines will do very well, provided they have a reasonably rich vein in which to mine. Silver mines will be the area where we see profits and activity grow the most over the next 12 months.
As to tire demand, it’s going to be interesting. Many of the mines are shedding their existing stockpiles of tires. Michelin and Bridgestone, and Goodyear are offering incentives, just to get current inventory off their books. If there is a real, quantifiable mining boom, as they are predicting in Australia, then we may very well see a repeat of 2005-2007 with regards to availability.
While I am not opposed to an economic boom anywhere, I don’t see it being anything more than a last feast on the Titanic. Will precious metal prices continue to soar? I wager that they will. Would this growth be enough to offset predicted woes? I think not.
Over a year ago, I wrote the most idiotic post ever. It was called “Why Disasters Help The OTR Industry“. I have been tempted to delete it several times, so that future readers would never know how horribly stupid I was to title an article in that manner.
I thought that the mines would be spurred back to life on the increasing prices in gold, that construction would increase because of political change, and that domestic disasters would mean somebody had to clean it up. Disasters do nothing but devastate. Political unrest destabilizes nations, and families. Financial collapse is of benefit to no one.
The only thing that article proved was that I was right on the timing of the gold breakout. That’s it. I would rather have been wrong, and kept things the way they were before things crashed. That being said, I hope I am wrong about a future downturn. I hope that it is all sunshine and roses from here on out, and that I get laughed out of the country for my negative remarks. It would be far better if I was wrong about all this, for all concerned.
For all our sakes, I really pray that I am.
Related posts:
