Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24
RECESSION When Yield Curve Uninverts - 8th Sep 24
Sentiment Speaks: Silver Is Set Up To Shine - 8th Sep 24
Precious Metals Shine in August: Gold and Silver Surge Ahead - 8th Sep 24
Gold’s Demand Comeback - 8th Sep 24
Gold’s Quick Reversal and Copper’s Major Indications - 8th Sep 24
GLOBAL WARMING Housing Market Consequences Right Now - 6th Sep 24
Crude Oil’s Sign for Gold Investors - 6th Sep 24
Stocks Face Uncertainty Following Sell-Off- 6th Sep 24
GOLD WILL CONTINUE TO OUTPERFORM MINING SHARES - 6th Sep 24
AI Stocks Portfolio and Bitcoin September 2024 - 3rd Sep 24
2024 = 1984 - AI Equals Loss of Agency - 30th Aug 24
UBI - Universal Billionaire Income - 30th Aug 24
US COUNTING DOWN TO CRISIS, CATASTROPHE AND COLLAPSE - 30th Aug 24
GBP/USD Uptrend: What’s Next for the Pair? - 30th Aug 24
The Post-2020 History of the 10-2 US Treasury Yield Curve - 30th Aug 24
Stocks Likely to Extend Consolidation: Topping Pattern Forming? - 30th Aug 24
Why Stock-Market Success Is Usually Only Temporary - 30th Aug 24
The Consequences of AI - 24th Aug 24
Can Greedy Politicians Really Stop Price Inflation With a "Price Gouging" Ban? - 24th Aug 24
Why Alien Intelligence Cannot Predict the Future - 23rd Aug 24
Stock Market Surefire Way to Go Broke - 23rd Aug 24
RIP Google Search - 23rd Aug 24
What happened to the Fed’s Gold? - 23rd Aug 24
US Dollar Reserves Have Dropped By 14 Percent Since 2002 - 23rd Aug 24
Will Electric Vehicles Be the Killer App for Silver? - 23rd Aug 24
EUR/USD Update: Strong Uptrend and Key Levels to Watch - 23rd Aug 24
Gold Mid-Tier Mining Stocks Fundamentals - 23rd Aug 24
My GCSE Exam Results Day Shock! 2024 - 23rd Aug 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Worried about Future Inflation? Don’t Be. Just Prepare and Prosper

Commodities / Gold & Silver 2009 Jul 14, 2009 - 02:24 PM GMT

By: Lorimer_Wilson

Commodities

Best Financial Markets Analysis ArticleAs the table below depicts, commodity related stocks and their associated warrants are wasting little time recouping the major losses they incurred in 2008 and are already up 30% and 74%, respectively, YTD, even though they are currently suffering from the summer doldrums.


What is most impressive is that all this is being accomplished without inflation (we are presently experiencing marginal deflation), without a major increase in the price of gold (it is only up 3% YTD and down 4% over the past month) or other commodities and without a declining U.S. dollar In fact, the USD is actually up 5.3% YTD vis-à-vis the Canadian dollar in which many of the commodity related stocks are denominated.

 

* All calculations are based on U.S. dollar equivalents

** Week ending July 10th, 2009

***CDNX is the symbol for the S&P/TSX Venture Composite Index consisting of 558 micro/nano cap companies of which 44% are engaged in the mining, exploration and/or development of gold and/or silver and other mineral resources and 18% in oil or natural gas pursuits.

****HUI is the symbol of the AMEX Gold BUGS (Basket of Un-hedged Gold Stocks) Index and is a modified equal dollar-weighted index of 15 large/mid cap gold mining companies that do not hedge their gold beyond 1.5 years.

*****GDM is the symbol for the NYSE Arca Gold Miners Index and is a modified market capitalization weighted index of 31 large/mid/small cap gold and silver mining companies.

******SPTGD is the symbol for the S&P/TSX Global Gold Index and is a modified market capitalization index of 19 large/mid cap precious metals mining companies.

Major Increase in Money Supply Will Depreciate USD and Cause Inflation

Future inflation is assured if the growth of the monetary base (i.e. M0) in the U.S. is any indication. Until this past October the growth of the M0 on a year-over-year (Y-o-Y) basis had averaged only 6% over the previous 48 years and had seldom exceeded 10%. During the first half of 2008, in fact, it was actually trending lower averaging 1.2% growth Y-o-Y. That changed last October when the Federal Reserve undertook to solve the major problems with the economy by increasing the M0 by 111% Y-o-Y over the next 7 months! Such a monumental increase is bound to have a major affect on future inflation.

It is just a matter of time, as well, before consumer spending recovers and bids on now-depleted inventories rebound causing prices to rise for pure supply and demand reasons. When that occurs inflation will become obvious to everyone and begin to soar. Indeed, hyperinflation will not be beyond the realm of possibility under such circumstances. This looming prospect of such rampant inflation in the U.S. will severely debase the greenback over the next few years.

Rampant Inflation Will Cause USD Priced Commodities to Rise   

Historically the U.S. dollar has moved opposite to commodities in general and gold in particular when the global investment community has realized that such a store of value is necessary as a safe haven replacement for a discredited U.S. dollar.  With this expected to happen again the price of gold will be exacerbated by burgeoning demand outstripping annual global output.

Increases in Price of Commodities Will Increase Profits of Commodity Based Companies

Such major increases in demand will see the price of commodities such as gold, for example, escalate considerably in price (i.e. to $1,600, $2500, $5,000 or even more) in the next few years and perhaps as early as next year. This will have a significantly positive impact on the profitability of gold mining companies. For example, if gold were priced at $950/oz., and the cost of production was $400/oz., and two years later gold had risen to $1600/oz., and the cost of production had escalated by 20% to $480/oz. then the mining company’s profit margin would have gone up from $550/oz. to $1120/oz. (i.e. from 57.9% to 70.0%).

Increases in Profits of Commodity Based Companies Will Increase Their Share Prices

With the cash flow of a commodity-related company going up dramatically, with the size of the resource and the value of such a company going up dramatically, with demand for their production going up dramatically, with a shortage of product, with dramatically higher prices for their production and with the resultant dramatic increase in their operational profits, one could reasonably expect the share price of such a company’s stock to go up dramatically too. Since most gold and silver based stocks are still significantly below what they were at their highs back in 2007 even though the price of gold and silver is higher and, with the major drop in other commodity prices such as oil and steel, the cost of mining is lower such stocks are seeing their profits rise more and more with major prospects as the events above rapidly unfold.

Increase in Popularity of Commodity Based Stocks and Warrants Will Increase Demand  

Those investors understanding this relationship between money supply, inflation, rising commodity prices, increasing company profits, increasing share prices and demand outstripping supply have begun aggressively buying such stocks at their still depressed prices. This has had the effect of driving their prices up even more as reflected by the 38% YTD increase in the micro/nano cap CDNX and 30% YTD increase in the wider spectrum of commodity-related stocks with associated warrants.

Increases in Share Prices Will Increase Leveraged Returns of Certain Associated Warrants

However, for those who are prudent enough to do their homework and buy the right warrants associated with the right gold and silver mining and other commodity related companies at today’s undervalued prices, their returns (i.e. leverage) could quite possibly be 2 to 3 times greater than had they invested in the stocks themselves. Why is that? Because warrants revel in an inflationary environment that drives the prices of their associated stocks up to the extent necessary to make their enhanced returns (i.e. leverage) that much greater than that of the stocks themselves.

With 47 of the 112 warrants associated with natural resource companies having duration periods of 24 months or more there are a large number of companies to choose from (see preciousmetalswarrants.com for details and to sign up for their free weekly newsletter) and, as such, ample time for many of their warrants to take advantage of rising commodity-related company stock prices.

Don’t Worry. Just Prepare and Prosper from the Advent of Inflation

The next major up-leg in the secular bull market for gold and silver is not far off. It has merely been delayed by the seasonal weakness that occurs every summer, the continuing strength of the U.S. dollar and Wall Street’s best efforts to promote the abundance of “green shoots” and the beginning of a ‘new’ bull market. As sure as autumn follows summer, however, the U.S. dollar will fall, inflation will rise, safe-haven money will flow into gold and the share and warrant prices of commodity-related companies will skyrocket.

So, in conclusion, don’t be afraid of the big bad wolf called inflation? Instead, do your homework now, invest in those securities that will benefit from inflation’s short term visit, sit back and wait to reap its benefits while everyone around you is bemoaning its onslaught i.e. prepare and prosper.

Disclosure: While no specific assets are mentioned in this article I do own commodity-related stocks, warrants, gold and silver.

Lorimer Wilson (lorimer.wilson@live.com) is Director of Marketing and Contributing Editor of:

  • www.PreciousMetalsWarrants.com which provides an online subscription database for all warrants trading on mining and other natural resource companies in the United States and Canada and offers a free weekly email and
  •   www.InsidersInsights.com which alerts subscribers when corporate insiders of a limited number of junior mining and natural resource companies are buying and selling.

© 2009 Copyright Lorimer Wilson- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Lorimer Wilson Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in