Vancouver Investment Advisor Ritch Wigham

The Gold Bull/Bear Argument

From the desk of Ritch Wigham..

First of all, EVERYONE HAS AN OPINION. I will quickly try and give a reasoned response to a subject that can start fist fights and insults to your mother.

The first thing to remember is that gold is a commodity. So ultimately supply and demand is the first factor that you need to deal with. As we all know from being informed over and over again is that something like 80-90% of all the gold ever mined is still potentially in circulation somewhere. Either in central bank depositories or held privately by individuals for what ever reasons they may individually have. So the question is:

Is there enough gold in current supply?

I don’t believe there is. The pace of replacement coming from the ground like all other commodities is in decline. It has been in decline for some time(a number of years). New discoveries like almost everything else from sulphide nickel to copper is not being discovered at a pace that would safely cover current off take from mining sources. The few discoveries that are being made are relatively small or have inherent difficulties in the processes needed to liberate the gold from the other elements that are there. For example, most of the Alaskan gold in large deposits has expensive processing or climate problems. Heap leaching as a source works in Nevada because it is hot and very dry; it doesn’t work as well in Alaska on lower grades because it is colder and much wetter. This is simplistic, but I am just trying to make an illustration. In essence new discoveries in safe political places are becoming more and more problematic. So if demand only keeps pace with current levels the price should by nature drift higher all on its own. So supply is a problem.

What about inflation?

What about it. There is none and there is not the prospect of any real inflationary pressure in the near term. Sorry “bugs”, but it just isn’t happening. The economies of the world can’t afford it. With the current decline in the flows of money that is not being lent and put into circulation, money supply is actually contracting, and not expanding, at the pace that would create inflationary pressure. This is of course contrary to what the loudest gold bugs would have you believe.

But does gold really need inflation to appreciate in price?

Here’s the kicker; “NO IT DOESN’T” It would take me quite some time to dig back into my archives for exactly where you can find this little know point, so please bear with me and accept this next statement. My understanding is that if you look historically at the price of gold it has always been more likely to appreciate in times of stress much more than during inflationary periods. That doesn’t mean just wars it means in times when one area is depreciating relative to another area. The GREAT WARS are an example of where gold had greater importance as a hedge against currency concerns if you where say French during 1940 or German after 1944. Weimar “inflation” was because of currency collapse in Germany not from price increase necessarily for goods and services. (No it is not the same thing).

We are actually in kind of a similar currency environment. The U.S. dollar isn’t collapsing as did the D-Mark, but it is drifting inexorably lower relative to just about every where else. As a currency hedge there has yet to be a better vehicle than gold to compare your currency to that which gold trades in. Namely the U.S. dollar. Even if there is some mechanism to create some other reserve currency you still have to compare,” your stuff against some one else’s stuff”. As long as that is the case(there has to be a yardstick to measure against) and consequently gold will hold that elite position.

In the time I have been in this business gold has been very high and then it has been very low. It is in assent ion again as we go forward in this new financially challenged world. Gold has always been my friend when I didn’t like the U.S. dollar. It has never been my friend when I thought it would go up for some other reason beside either supply and demand or a hedge against the policies in Washington. Or the mess the Americans have managed to inflict on the world this time around. If you were long gold during the eighties you were pulling your hair out because it just didn’t co-operate, and go up with price increases(Inflation), same for the nineties.

Am I a gold bull or a bear? Well, that depends on what I think of the “GREENBACK” over the next short period. Longer term I am definitely a bull.. Short term I would be looking to solidify profits as the U.S. dollar has probably gone down enough against the Euro, as parts of Europe appear to be coming out of recession quicker than the U.S.

Either way it isn’t because I believe that THE GREAT INFLATION is upon us.

Yours,

Ritch

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