What Would Socrates Say?

As Socrates would say: 'There's no use in trying to argue with a gap-toothed, fact-challenged moron with a reading skills deficit on the internet. Because to them, your are nekkid. Hoo boy, are you evar nekkid! NEK-KID!!' *stomp* *stomp* *point* *point* Or something irritating to that effect.

The Importance Of Yield

In the coming deflationary collapse, one thing that should stand out to investors is that money is not generating growth. Its generating lower yields in the bond markets. Most bond markets along the entire yield curve are already well behind the rate of inflation. Even long term mortgages in Canada yield ~6%, which is behind real inflation. Much of this inflationary impetus is related to the actual printing of money to stimulate aggregate demand, which in turn repeats the vicious cycle of lower yields, and higher bond prices.

Most people see the outcome of this vicious cycle as being hyperinflation. But there is another outcome. Hyper-deflation. This has never actually occurred, at least not to my knowledge, that bond yields remain much lower than any actual deflationary contraction.

That, once yields are low enough, that currencies maintain brute strength in a spiralling price decline. That real yields turn negative and stay there for an extended period. And should contractions in GDP continue, that yields retreat, even if they remain negative or actually go negative for extended periods.

Everyone talks inflation, but nobody ever looks at inflation-adjusted charts. In reality, we are in a vicious, long-term bear market. So who can you trust? People that live as if we are in a huge bull market for stocks promising unlikely returns on speculative stocks, or people who will look for yield in the market?

And where is this yield scenario if you theoretically can't make gains in equities? You would need a gold mine with robust grades and a company which is set up to yield beyond money printing excesses, and price excesses in the markets. Gold will continue to advance as a store of value, even though currencies should advance, and mining companies should be able to maintain their value, though this has not been the case.

Stats Can

Stats Can reports that the gross money supply actually INCREASED in 2009 from 2008 by ~11%. (I shudder to think what 2010 numbers will look like.) But stocks, since the 2008 crash have actually underperformed inflation. Since 2000, they have badly underperformed inflation, depending on who you believe. Yet, in this environment, the vast majority are trading their hearts out for gains, on the expectation of a huge bull market.

http://www40.statcan.gc.ca/l01/cst01/econ07-eng.htm

Various Bear Markets, Adjusted For Inflation

This is THE reference on the web for bear markets, bar none.

source: http://www.nowandfutures.com/forecast.html#bear_markets

The Yield Scenario

So in the yield scenario that would adjust for inflation, you would require an average gain in the stock you are invested that would best inflation to keep its value, not only that, but you would need a yield that would also keep up with inflation. I don't know of any stocks that yield better than 11% other than some income trusts. Only debentures for high risk corporations like airlines yield higher.

In the past, when mining was a primary growth industry in North America, mining stock would always pay out a dividend. Nowadays, 'value' is perceived in potential equity gains in a bull market, and high yields are a major cause for alarm.

Theoretically, if you paid out high yields, your share price would not experience huge gains, but remain stable vs. inflation. But the yield would have to be better than inflation. A daunting challenge.

http://watch.bnn.ca/market-call-tonight/march-2010/market-call-tonight-march-11-2010/#clip336173

As far as I'm concerned, GBN.V remains positioned for a strong yield scenario, but not a share price gain scenario. There are two things that would place GBN.V in line to provide gains for shareholders. No dilutive, undervalued takeovers of GBN.V with a bigger company such as Centerra. If that happens, all is lost. Second, paying out a hefty yield should not impair organic growth.

And I would add that a reverse split is eventually necessary to place the value of the company in the sights of larger investors, with no view to actual share price gains.

Horrible to think this way, when we're so used to massive speculative bubbles in just about everything.

Bear Market For Gold Stocks, (Adjust For Inflation)

So, if we adjust for inflation, (or if we take gold mining indeces vs. gold - a great way to measure) we are typically in a bear market for gold stocks. And this goes back to 1997, when they peaked out. This has not prevented some stocks from becoming speculatively overvalued. Some examples of stocks not providing value for their investors against inflation:

Kinross

Kinross makes a great example, because if you took this chart, and you adjusted for inflation, this stock would look absolutely terrible. The bull market here is in people's overheated speculative imagination. It MIGHT happen, but to surpass inflation, you would need a stock price of ~$129/share to provide a return, or a ~1000% dividend yield this year. Or 10% yield per year for 100 years to make up for the losses against inflation. (using shadowstats) AND they just bought out extremely overvalued RBI @ ~60p/e, diluting the shareholders. Speculative excess like this will only occur at the top of a mania.

stockcharts.com

source: http://www.halfhill.com/inflation.html

You can see why people are going to the bond markets, because at least price appreciates if yields decline. And there is reason to believe that gold companies are inherently risky by comparison. If their share price declines against inflation, yet they don't pay out a dividend to match, what's the point of investing? Why not just gamble with your money or shareholders money to an uncertain end?

Bre-X did just the damage intended to gold mining stocks, but the legacy is now one of a very long winded bear market, if you're willing to accept adjusting for inflation in all things.

Newmont

Newmont, if we take the same time period, adjusted for inflation would require a share price of ~$176/share to make up for losses due to inflation, or something like 300% yield this year, or 10% yield for the next 30 years to make up. Of course, if you invested in 2000 you would argue vociferously that NEM is in a bull market. Not until it makes up for losses:

stockcharts.com

Conclusion: We are in a bull market for bullion, but not so much for gold mining stocks. In fact, gold mining stocks will probably significantly lag bullion price advances until gold cools off. Try Newmont or Kinross as a ratio against $Gold in stockcharts.com.

Bull market? What bull market?

-F6