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This Is Not 1979!Michael Wheelock Nearly every financial prospectus contains the words "Past performance does not guarantee future results." Incessant exposure to this phrase has undoubtedly desensitized investors to the point where they no longer pay attention to the words. This stultifying effect is unfortunate since far too many investors have adopted the practice of comparing today's precious metal markets with the bull market of the 1970's. Every few days yet another expert produces one of these comparisons, and naïve investors grasp onto it as if it were the latest words from Mt. Sinai. Each random squiggle or dip that occurred in 1976 or '78 is assigned enormous significance, and we are assured that events in the gold market today will unfold in exactly the same fashion. This behavior virtually guarantees even greater financial losses for gold and silver investors since it inculcates a false sense of security. There are three distinct differences between the precious metals bull market of the 1970's and today's market. These differences are summarized below. 1. Culture. In the 70's many of the gold and silver buyers had personally experienced the bullish action of gold stocks during the 1930's. It was a widely held belief that bullion and gold stocks were a hedge against both inflation and depression. The bullish action of Homestake Mines during the Depression was legendary. Yet even more impressive was the fact that gold stocks were contra cyclical. Even if the bullion price was stagnant, whenever the general market sold off gold stocks would explode to the upside. In the minds of many investors gold stocks and utilities served as defensive income stocks. A broad culture existed within the market that subscribed to the idea of purchasing gold stocks whenever bearish action began on Wall Street. Thus there were two reasons for purchasing gold stocks and fortunes were made even when bullion was doing nothing. That culture is all but extinct today. When the Dow and SP fall gold stocks all too often lead the way down. 2. Dividends Few investors today are aware of the fact that during the 1960's and 70's South African gold stocks were traditionally viewed as high yielding blue chip securities. Even the highest quality mines yielded between 10 and 15%. This gave support for the price of the stock, but this viewpoint does not exist today. For example, Kinross Mines, Ltd. (KGC) yielded between eight and ten percent and the yields of Gold Fields of South Africa (GFI) ranged between five and nine percent. Anglo-American Corporation of South Africa, Ltd., today known as AU, offered a yield of between four and nine percent, but had a price of a mere five dollars in the early 70's. Even ASA paid a substantial dividend in those days. Then there was DROOY, the oldest gold mine in the world. From its 1970 low of approximately $.50 the stock soared to nearly $50. Respect for our elders aside, even the most eloquent salesman could not convince me that the next bull market in gold will take DROOY back to its former stratospheric heights. The reserves are simply not there anymore. There were many other mines that offered huge yields as well, but whose names few will recognize. West Driefontein, the richest gold mine in the world, offered ten percent yields, and in 1971 sold for $12. West Drief is now part of the Gold Fields group and its best years may lie behind it. Western Deep Levels, Ltd., the deepest gold mine on earth, sold for a mere $7 in 1971 and yielded 12%. Buffelsfontein Gold Mining Co. Ltd. yielded nearly 15% and sold for as low as $3 a share in the early 70's. There were dozens of other mines offering similar yields, but they are gone now as well, absorbed by conglomerates or shut down forever. At the risk of appearing overly sentimental, I'd like to mention President Steyn Mines Ltd. Steyn was a gem among gems, a long life, incredibly rich, mine selling in the 20's and yielding about 12%. I saw it listed the other day for two pennies a share. I assumed that the stock certificates have some historical value for a collector somewhere. To my knowledge there are only a handful of gold mines in the world today that pay even token dividends. Thus assuming that today's gold stocks will ultimately perform the same way as the high yielding South Africans did in the 70's is ludicrous. This is a different era, with different buyers and sellers. South African gold stocks were high income stocks in the 70's. They were defensive stocks as well as bullion plays. Today they are neither. Most of the great South African mines are gone now, and only their memories remain. The appreciation of the Rand, the social engineering of the South African government, and the depletion of their ore has reduced these great investment gems to mere shadows of their former selves, Today a vast cloud of uncertainty and declining profits overhangs the South Africans. To expect them to perform as they did 35 years ago is unreasonable. 3. Inflation. Two weeks before Ronald Reagan was sworn in as President, spot gold rocketed to $870 an ounce. December '81 gold hit $1091 and made the dreams of many short sellers come true. Reagan inherited an inflation rate of 22% and a nation desperate for a return to economic sanity. His weapon in the war against inflation was Paul Volcker. The result, as you know, was a 20 year bear market in gold. The Bureau of Labor Statistics just released figures stating that inflation is presently 8% in the US. These figures may be suspect, but it is clear that conditions today are nowhere near as desperate as they were in 1980. Our deflation-prone economy is nothing like the vibrant inflationary economy of 1980. Evidence for this lies in the fact that Greenspan's massive injections of liquidity have not prevented the beginning of yet another economic slump. If an equivalent amount of liquidity had been created in 1979 gold would have gone much higher because our economy was more resilient at that time. The financial state of the nation, as well as inflation rates, are totally different today. Perhaps if the Fed has its way we will reach even more extreme levels of inflation, but we are a long way from that now. No one sees the future clearly. Perhaps gold will go to $1000 an ounce again or perhaps the long bear market will resume. No one can say. But present conditions are vastly different than they were in 1980 and it is illogical to expect different variables to produce the same outcome. Michael Wheelock 321gold Inc |
