Three Signs for the End of Gold

Christian DeHaemer

Updated March 21, 2011

It must have been 1998 or 1999, the year I went two miles down into Durban Deep.

The rust was flaking off the crude, yellow elevator. Water dripped from the chicken wire ceiling and the odor of a 1,000 previous users wafted up from the safety vest I was given…

At the time, gold was selling for a little over $210 an ounce and it cost the gold mining company $301 an ounce to pull it out of the ground. The company was losing money by the shovelful.

Durban Deep was a work program put in place by the new government to help lower the 40% unemployment rate.

I looked at the ancient cable and decayed generator that lowered the elevator and wondered why I was risking life and limb for a company that I could never recommend.

After the elevator landed hard on the rocky floor, we climbed into a giant metal tub with wheels and were sent bouncing down at a chute to where mining was going on. It was dark, hot, wet — and loud.

The company had found a seam in this old, played-out mine; they were digging out a layer of gold that was about three centimeters wide and laid at an angle across a vast plain.

Imagine picking up a table by one leg and holding it at a thirty degree angle.

The roof of sedimentary rock was held three feet away by a forest of thick, round posts. We walked hunched and crablike down this slope, grabbing columns for support as we went.

The shaft was full of miners — black, shirtless, short, and built like they’ve spent their lives moving rocks.

They leaned on pneumatic hammers and stared, unhappy with the interruption…

No One Cared about Gold

At the time, the price of gold had been falling for 20 years.

Oil was at $12 a barrel. Major coal companies were selling for less than the cash they had in the bank.

Gold conferences were being shut down due to low attendance.

You couldn’t give away commodities. This was a clear sign of a bottom.

The market darlings at this time were the likes of Amazon, Cisco Systems, and Yahoo!. They went up 10% a day.

Right now, the only unlikely dot-com that’s made it back to new highs is Amazon (NASDAQ: AMZN). I doubt very many people held it all the way through and I certainly wouldn’t be buying it now, as it has a P/E of 65 and a profit margin of 3.37%.

Cisco (NASDAQ: CSCO), the king of switches and routers, has been dead money for a decade. But boy did it run in the 90s…

Note the volatility after the blow-off top in 99/00:

csco mar 21

For the record, I recommended South African Breweries — a small, emerging market company that now owns Miller (SABMiller: SBMRY.PK)

Meanwhile, gold has been the buy of the century…

10year gold mar 21

Clearly, the year 2000 was a turning point in market history — a sea change, if you will.

Tech died and commodities took over. And this trend will continue until the next market Maelstrom. (I’ll tell what that trigger is below.)

Today, all you need to know is that commodities are going up. Just open a Web browser and look at the news: Japan is melting down, Libya is blowing up, and much of Europe remains on the verge of default.

The talking heads will explain that this bad news leads to a flight of money to low-risk commodities.

As I write this, oil climbed back above $103 a barrel for WTI. Gold jumped $17.80 to $1,433.50 an ounce.

Short Timer

The headlines you read on Bloomberg attempt to explain short-term volatility. And they do, for what it’s worth.

What you need to understand as an investor is the long-term cycle of markets.

Right now, we are in the loose money phase. The Fed is creating money out of the firmament and pushing it out to select banks through 0.25% interest rates. This will continue until it stops.

The trigger that will make it stop is inflation.

As my cohort Adam Lass says, “When the corporations no longer like a cheap dollar — that is, they no longer get the export benefit of selling cheap goods overseas because the material cost of raw imports are too high — they will force a strong dollar policy.”

The last time the price of gold fell from grace and the dollar took off was 1980.

Two things happened at this time: Ronald Regan replaced Jimmy Carter, and Paul Volker was appointed Chairman of the Federal Reserve in August 1979.

Chairman Volker raised the federal funds rate from 11.2% to 20%, which in turn caused the greenback to go up 77% on the dollar index (USDX went from 90 to 160 in seven years).

Here’s the deal

Right now gold, oil, and other commodities like silver are going up due to a weak dollar policy by the Fed (USDX is back down to 75 and falling).

Obama, like Carter, is a wishy-washy leader — an American apologist and a creator of large, debt-inducing government programs.

Gold will continue to go up until three things change:

  1. Inflation is recognized. (It will be an issue in the 2012 presidential elections.)

  2. Helicopter Bernanke is replaced at the Fed with an inflation hawk.

  3. We get a new president.

Until then, the best returns are ahead for gold. As you can see by the gold chart above, the trend line keeps getting steeper… but it has yet to go parabolic.

And as you can see from the CSCO chart, the last years of a bull market see the fastest gains.

As for Durban Deep…

It is now called Durban Roodeport Deep Limited (DROOY.PK). They have been plagued with a host of problems over the years including high costs, closed mines, and poor management. They are the only gold miner whose share price is down over the past few years.

But just last month, Durban announced an “118% increase in operating profit to R151.5 million for the fourth quarter of 2010. This reflected higher gold production, an improved Rand gold price received, and lower costs.”

Perhaps they’re due for a comeback.


 chris sig

Christian DeHaemer
Editor, Wealth Daily

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