After a more than decade-long bull market in gold that started around the turn of the century, gold has not been an exciting investment over the last several years.
For gold stock investors, the last few years have just been brutal if you take it out of context with the previous run in mining stocks.
The last couple of years have also seen great gains for the U.S. dollar. It’s always important to remember that it’s not so much that the U.S. dollar has been strong, but that the other major currencies have been extremely weak.
When taking the relative strength of the U.S. dollar into consideration, the gold price over the last year or two does not seem so bad. The price has been hanging around the $1,200 per ounce mark for quite a while.
It’s easy to forget that the price is actually going up in other countries where the currencies are weaker.
One country in particular that’s seeing more action in gold is Australia.
In terms of the Australian dollar, the gold price is up there. The Australian dollar has been weak with its central bank seeking a looser monetary policy with lower interest rates.
Australia’s boom in gold mining went bust three years ago, but it’s showing signs of recovery. International companies are partnering with Australian miners, as some Australian companies are looking to be more aggressive with their investment and exploration.
There have already been 26 deals announced in gold mining worth over $1.7 billion. Companies such as Evolution Mining (OTCBB: CAHPF) and Newcrest Mining Ltd (OTCBB: NCMGY) – both Australian based – are acquiring or looking to acquire more mines.
It’s not surprising given that the Australian dollar is weaker, and labor tends to be cheaper than what was seen in the previous boom.
Another Bubble in the Making?
The Chinese central bank has created massive bubbles in real estate and the Chinese stock market. As of right now, they are still holding up.
In the U.S. central bank policy is likely responsible for the all-time highs being reached with stocks. It’s responsible to a lesser extent for increasing house prices, but this is more in certain locations such as San Francisco, New York City, and Washington DC.
It should be clear to even the most ardent Keynesian that central bank monetary inflation, coupled with artificially low interest rates, create bubbles. These are unsustainable bubbles since they depend on easy credit and loose money. They eventually pop.
So what about the pickup in activity in the gold mining sector in Australia? Is it the start of another bubble?
This is certainly possible given the Australian central bank’s easy money policies that have driven down the Australian dollar. It is logical for some of these mining companies to look for more investment opportunities.
We have to realize though that gold is a global commodity. While prices are affected by exchange rates, the overall price is somewhat universal. In other words, the dollar price of gold (or measured in almost any currency) will be the same in the U.S. as in most other countries of the world. The only exception to this may be if government policies are restrictive elsewhere.
The point here is that Australian miners alone will not make a bubble out of gold. They may make miscalculations that cause losses or reduced profits, but they can’t create a worldwide unsustainable bubble.
However, with central banks around the world engaging in big monetary inflation, it would not be surprising to see a new bull market in gold arise as people wake up to what their respective government/ central bank is doing.
Maybe the next big bubble will be in gold. Perhaps the increased activity in Australian mining is a sign of what is to come. But if this is the case, then this is the very beginning of it because mining stocks have done terribly over the last few years.
We don’t know when mining stocks will be at their bottom. Maybe the increased action in Australia will mark the bottom or maybe there is still more downside.
At some point though, there will be a resumption in the gold bull market. A bull market in mining stocks will follow and it will be a very profitable time for investors who play their cards right.
Even if the next bull run in mining stocks is an artificial bubble, it will give us many opportunities. You can take advantage of the bubble activities as long as you don’t get greedy at the end. But you don’t want to look back and regret not taking advantage of a ground floor opportunity. Maybe the Australian gold miners sense a great opportunity.
