Looking Beyond the Moment

Europe again dominates the financial news, with concerns that Spain may be the next country to need a bailout. Spanish bond yields have surpassed the 7% threshold, which is seen as a tipping point, making it impractical for the country to raise new debt and/or roll over maturing bonds.

Fear continues to be the dominant investor mood, making the apparent safe havens of American and German debt a popular destination for global funds. Indeed, those T-Bills and Bonds are not really investments at all; with yields lower than the rates of inflation, investors are effectively paying the governments a safe-keeping fee for holding on to their money.

The massive US debt load remains sustainable as long as the mess in Europe distracts investors from the rapidly growing mountain of debt in America and people keep giving their money to the government to keep it safe.

The other top news story in the financial media is the “slowdown” in the Chinese economy. The economy, having grown by “only” 7.2% in the most recent quarter, down from 7.6%, is hardly slowing: It is continuing to grow at an astounding pace, even if it growing slightly less rapidly.

Some businesses are undoubtedly impacted by that slightly less rapid pace of growth. From the mining industry perspective, the world’s largest consumer of metals used 7.2% more metal in the recent quarter than the earlier quarter.

Metal prices are down, impacting on the profits of the metal producers in the current quarter. The longer term picture has not changed.

Even the gold price is suffering as investors turn to the short term security of short term government debt. Looking longer term, investors globally will increasingly see the value of gold, silver and other hard assets as being a secure means of long term wealth protection in the face of growing financial uncertainty.

Looking beyond this moment, one can see that metal consumption continues to grow, mines are being depleted and the mining industry will continue to develop new mines. The mining industry faces a continuing challenge to develop enough new mines to replace depleted mines, with further new mines needed to keep up with the on-going growth in demand for metals.

The exploration and development companies will continue to play a vital role in the mining industry. In spite of their enormous long term values, in this moment many companies are trading for little more than the value of their cash in the bank, getting little or no credit for deposits that will be purchased for hundreds of millions or even billions of dollars in the not-too-distant future.

Most investors will continue to shun resource stocks, especially the juniors, until there is a clear signal that the global economy is rebounding. In the meantime, knowledgeable investors are now seeking out the best of the grossly underpriced companies and accumulating them.

It is important to be extremely selective, as many companies will see their share prices continue to wilt. The most favorable companies are seeing strong investor support. After all, how much downside risk is there from cash value.

By the time that the media makes the pronouncement that it is time to buy resource companies, the higher quality companies will have rebounded, in some cases gaining by multiples from the present oversold levels.

We will continue to highlight companies with quality assets, with capable management teams and, ideally, enough cash to see them through this depressed time in the resource markets.