On another subject... our old friend Rick Rule explains why gold did not go up, even as the Fed undertook the most ambitious programme of money-printing in history:
'Part of the retrenchment is a natural and normal backing and filling, if you will, in a resource market. We had a whole range of commodity prices that did extremely well in the last decade. Gold price as an example, increasing from $260/oz at the beginning of the decade to almost $1800/oz at the end of the decade, and that's only an indicator of the most outrageous of the moves.'So, from one point of view, one of the things that happened was that the market wanted to catch its breath. The second thing that happened is that quantitative easing was put in place to combat a global economic slowdown... And markets move on two primary forces: supply and demand. The fact that the Western world's economies, the world's 'mouths' - North America, Japan, Western Europe - experienced a pretty substantial slowdown beginning in 2008... reduced demand for commodities...
'... the resource equities did extremely well in the ten years that comprise the decade between 2000 and 2010. So well in fact that they probably in most cases over-shot their value.
'In addition to overshooting their value, the companies that issued those equities underperformed relative to the expectations of many investors including myself, in terms of how their free cash flow would evolve... Taking the gold equities as an example, one would have expected that companies that were at least breaking even in a $260 gold environment would literally be coining money above $1,500/oz.
'But that gush of free cash flow didn't occur. Instead, the companies gushed new equity. They sold stock to buyers who were eager to cash in on the increase in gold prices...
'A classic example of that is Goldcorp. With Goldcorp, although the price rose, and rose reasonably well through the decade, the market cap expanded much more radically as a consequence of the fact that the issue in outstanding shares at Goldcorp increased by 600% in the decade.
'And finally, of course, there was the incredible issuance of resource equities in the junior market. Well, the junior market share prices didn't always escalate through the sector. The market capitalisations escalated dramatically, first of all as a consequence of company formation and second of all as a consequence of equity issuance by the existing participants in that market. So while share prices didn't rise, equity issuances rose very, very, very dramatically.
'So, to summarise, one thing that happened was that prices of both equities and commodities rose very fast in the middle part of the last decade, and the beginning part of this decade was spent in a catch-up period.
'Secondly, the quantitative easing, which should have resulted, by conventional wisdom, in an increased acceptance of equity and commodity prices, in fact happened as a consequence of the economic slowdown that reduced demand for commodities and hence commodity quotes. Thirdly, corporate performance itself. The issuance of new equities began to bog down the prices of new equities.
'It's important to note that cyclical declines in a secular bull market are commonplace events. We have previously discussed the fact that in the great 1970s, the gold price rose. The price advanced from $35/oz to $850/oz, a wonderful gold market by anybody's standards. In the middle of that, in 1975, the gold price declined from $200/oz, where it has risen from $35, all the way to $100/oz. So in the middle of a secular bull market that saw a run from $35/oz to $850/oz, we had a secular decline of 50% from $200/oz to $100/oz.
'What's important for people to consider in the context now is that people who got shaken out in 1975 in the face of a 50% decline missed the move in the period from 1975 to 1981 from $100/oz to $850/oz. An 850% move in six years. I believe very much that what we're experiencing as we speak is a cyclical decline in a secular bull market...
'... moves in a commodity markets are dramatic and long-lasting, because the industry itself is very capital intensive. When you have a period of rising commodity prices, and you expect supplies to rise, it still takes many years to find, permit and build things like gigantic copper mines or gigantic oil fields, never mind forests.
'And once prices begin to fall as a consequence of the new supply additions, it takes the industry an awfully long time to decommission surplus supplies. So the lengths of bear markets and bull markets in the natural resource business are extremely long. The bear market aftermath of the bull market in resources in the 1960s and 1970s lasted for 20 years. The hangover if you will from the party that natural resource investors enjoyed in the 1960s and 1970 commenced in 1982 and lasted until 2002.
'What's important to note is that these secular bull and bear markets can last as much as 20 years. The bull market of the 1960s and 1970s caused the bear market of the 1980s and 1990s which in turn is causing the bull market that we're in. Specifically, we had 20 years of underinvestment in natural resources productive capacity in the decades of the 80s and 90s. For 20 years we as a society were consuming more by way of natural resources than we were reinvesting in productive capacity. We were using up the capital that we had invested in the 1960s and 1970s.
'The consequence of this, of course, was that as we continued to increase our rates of consumption without increasing our ability to produce, eventually we went to a place where consumption was outpacing production and prices began to rise. And this is the situation that we are still involved in today. The decades of the 1980s and 1990s so constrained investments of natural resource that we have impaired for a very long period our ability to increase production in natural resources.
'Conversely, the very low prices that existed in real terms in the 1980s and 1990s increased consumption. So we had the classic supply and demand curb shift with increasing consumption and declining production raising commodity prices.
'Demand for natural resource commodities on a per capita basis has increased very rapidly, spread over billions of capitas. So this resource bull market that we're in, we're in for very important fundamental reasons. Supply is still constrained from two decades of underinvestment and demand is soaring both from the low prices that the markets enjoyed in the 1980s and 1990s and as a function of the liberalisation of people in the third world and their increased ability to spend and compete with us for commodities.
'And since 2008 the supply of fiat currencies has increased very dramatically as a consequence of what the politicians call quantitative easing. You and I would call this counterfeiting but regardless of what you call it the fact that there are more currency units issued relative to the production of goods and services in the economy means that every currency unit issued is worth, in a real sense, less.
'As more and more of these currency units - call them dollars, call them yen, call them euros, call them renminbi - are issued, it would make sense that the nominal price of resources over time, the non-inflation adjusted price of resources, should go up.'