We’ll, we been banging on about the latent value in much of the mining spectrum for the vast majority of this year and, as the year draws to an end, for us resolute bulls, it seems that Santa will not be making his entrance in this particular sector of the market.
This blog has made the case for value which, from a pure valuation perspective, is pretty much unarguable with great swathes of the mining sector trading at cyclical valuation lows on the key measure of price to book. The one ingredient that has been missing to spark a serious rally has been a catalyst. Inflation has not surged (according to “official” Govt statistics anyway, and which are frankly “poppycock”) across the wider economy, with real wages continuing to be squeezed and so the “mass” consumer is not able to contribute to mainstream inflation. Instead it is the top 1% of the populace that sees the cost of their necessities (and many others luxuries) rise and, as our editor Zak Mir relayed yesterday in this insightful blog – http://www.spreadbetmagazine.com/blog/the-theory-of-selective-hyperinflation-leading-to-general-hy.html – we are in fact witnessing the peculiar phenomenon of segregated inflation, ie it is all pervading in some areas (note London property!) and seemingly subdued in others.
Seeing stats out yesterday that the Chinese banking system has created nearly $15tn in new banking loans and that she continues to voraciously consume much of the world’s luxury goods from Ferrarris, Rollers, Patek Phillip watches, London real estate and of course, our fav commodity – gold – has us with our thinking caps on as to how this will (if indeed it will), finally, spill over into the wider global economy and tip the inflation spark scale towards ignition.
Consider that Japan and the US are also pumping over $2tn per year into the global economy and there is talk of the ECB joining the party again next year then at some point the dam has got to break. Historically, we know of no precedent where the magnitude of this liquidity as a proportion of global GDP has not resulted in serious inflation. In fact, research out of Edison this last week forecasts a high likelihood of inflation reaching double digits over the next several years. The markets are not prepared for this and if they are only half right then there is going to be a scramble for commodity producers.
And so, as I sit here today watching yet another screen of red on the undervalued and stupidly cheap mining plays whilst the fundamentals for their products firm by the hour and the supply/demand characteristics tighten, bearish sentiment is truly entrenched and our old friends the “anal”ysts fight to lower further price targets on gold and silver (the very same ones that grappled to upgrade the price targets at the peak , and of course couldn’t see it, 18 months ago), I find myself asking – “isn’t this what bottoms feel like?”. Particularly as even I am looking at my portfolio in disgust and questioning my sanity in buying in the face of such dire price action. It is at times like this the old saying of “Price is what you pay, value is what you get” that springs to mind. And that is a thought I shall try to keep in the foreground on my mind as we roll around this bottom…