Plain talk about making money and buying junior gold stocks
As the world creates more and more debt, the value of gold continues to grow, says this Canadian analyst who likes three junior gold stocks.
The question is: Who creates money?
And the answer is almost always wrong. Because the correct answer is not “the government.”
The cash you carry around and the change tossed in that old coffee mug you keep on your chest of drawers were indeed minted in Ottawa.
But all those notes and coins represent only a tiny percentage of the money in circulation, says Mr. David Chapman.
When we look at where the balance comes from, he writes in Investor's Digest of Canada, we get a keener appreciation of the value of gold.
We also see why it might be a good idea to have several junior gold stocks tucked into one’s portfolio.
Mr. Chapman is the second senior columnist in this publication to point his readers in the direction of junior gold stocks in recent weeks (see Daily Buy-Sell Adviser, April 14).
Is this a growing trend in a world worried about interest rates, debt and inflation? We’ll follow this adviser and technical analyst on a trail that leads from Canada’s bank vaults to the mining camps of northern Ontario.
Lending over and over again
All the currency circulating in Canada amounts to four per cent of M3. And M3 is all the money out there — currency, demand deposits, savings, money market accounts, CDs, mutual funds, Eurodollars and so on.
The other 96 per cent is created by our commercial banks.
The expansion of the money supply of any nation depends entirely on banks being able to lend. “And banks don’t lend a dollar once,” says Mr. Chapman. “They lend it over and over again.”
This is called the multiplier effect. The only restraint on it comes from the reserve requirement (the minimum a bank must keep in its vaults). In Canada, there isn’t actually a stated reserve requirement, while it’s roughly 10 per cent in the U.S.
In short, while central banks influence the money supply, it is the commercial banks that create it as they set all that money in motion.
And money is not the same as it was forty years ago, says the analyst.
The gold standard
For most of the 20th century, money and gold were equal in the eyes of governments. The currency in circulation had to match the amount of gold held in reserve. In 1971, the gold standard was dropped and money became whatever governments said it was.
There was one very compelling reason to go off the gold standard. How could commercial banks keep pushing more money into the system when it was tied to a commodity as scarce as gold?
That led to good news and bad news. Expanding money supply through the growth of debt is good, because only in that way can economies grow. But the need to produce ever more debt will from time to time produce a failure to pay debt — i.e., a financial crisis.
Mr. Chapman offers some figures. Since 1971, the money supply in the U.S. has grown 12.5-fold. Gross Domestic Product (GDP) has grown 12.8-fold. Debt has grown more than 19-fold.
After each financial crisis, it has taken more and more debt to buy one dollar of GDP. And where is gold, forty years after it was set free?
Bedrock value
In 1971, the world produced about 70,000 tonnes of gold. Today, it produces about 145,000 tonnes. But for almost a decade, the demand had exceeded the supply from the mines. The supply caught up in 2009.
But it will almost certainly fall behind again, says Mr. Chapman. We are not finished dealing with the massive debt from the financial crisis. Indeed, we are creating more of it every day.
Those 145,000 tonnes of gold are worth about US$5.1 trillion. Outstanding U.S. debt alone is $34.7 trillion. All the stocks and bonds in the world add up to about US$180 trillion — plus derivatives worth $650 trillion!
In a world in which money keeps spiralling into uncharted regions, gold retains its bedrock value. Wise investors will hold gold, says this analyst.
“One of the cheapest ways to hold gold,” he adds, “is to hold it in junior exploration mining stocks.”
Three northern juniors
There are three juniors this analyst follows in the Porcupine and West Timmins camps in northern Ontario.
Moneta Porcupine Mines Inc. (TSX-ME) was actually established as far back as 1910. Of late, it has been gathering one of the largest property portfolios in the region and owns 100 per cent of five different projects.
Moneta recently reported high-grade mineralization in one of its projects. The stock is at $0.27. Look for it to break above 35 cents and then rise more rapidly, says the analyst.
Explor Resources (TSX/V-EXS) has holdings in the West Timmins Camp as well as the rich Abitibi greenbelt, which has already produced over 180 million ounces of gold. It also has properties in Saskatchewan and New Brunswick. The stock has been on a “bit of a volatile ride,” says the analyst, but it should find support once it reaches $0.60. It’s at $0.46.
The analyst notes that Explor’s West Timmins holdings are right next door to another junior that has been singled out for attention by several analysts in Investor's Digest of Canada.
Currently developing a large gold deposit, Lakeshore Gold (TSX-LSG) has been as low as $1.50 and as high as $4.37 in the past year. Rising 40 cents since this article went to press, it now stands at $3.00. Like the two other juniors, it pays no dividend.
It may take a few years for stocks like these to reach their potential, says Mr. Chapman, but the rewards can be very lucrative.
And as the world keeps piling up money and debt, he warns, it will need all the gold it can get.
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