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Cowboy Logic
By Sara Patterson

I once covered 30 miles in the backwoods of Georgia on horseback with an elderly cowboy named Bobby, who rode with his reins looped over the saddle horn, a lit Marlboro in one hand, and a sawed-off shotgun in the other. The gun was for water moccasins and the cigarette was for gesturing grandly as he asked me whether I believed in Jesus. The horse steered itself.

This is all to say, of course, that maybe we’ve been putting a little too much thought into the ride.

The third week of June ticked forward with the requisite amount of sparse news and plentiful speculation, punctuated at intervals by that most beloved of ‘I’-words. On June 17, for instance, MarketWatch reported that “gold futures fell…after government data showed U.S. consumer prices fell in the past year at the sharpest pace in 49 years, reducing gold's appeal as a hedge against inflation.”

If I were Bobby, I’d go ahead and light another Marlboro, because we’ve been down this trail before and there’s certainly no room to gallop.

Last month, when we were only midway through the beating of the proverbial dead horse, the conversation centered on the bailout-inflation continuum, with gold bugs all aflutter about the likelihood of cash injections to bolster the hedging glitter of the precious metal. Many, of course, argued that a one-time injection would re-inflate things temporarily—economic collagen, if you will—before the whole mess evened out again. But even when you argue against inflation, you’re still arguing about inflation.

The issue, perhaps, is that we’ve been looking for causes and effects to trickle over and under and through, in some sort of complex series of conjectural tubes, when the fact is that the simplest, truest variables will always trickle down. Water is not the only element that seeks its own level.

Canada’s Metals Economics Group said on June 16 that “the rate at which the industry as a whole is discovering new deposits will not be sufficient to meet needs over the long term,” a statement quickly buried under the far more intriguing are-we-or-aren’t-we-inflating headlines. Further, tonnage gold demand in the first quarter of 2009 was up a strong 38% on the levels of a year earlier, according to the World Gold Council. How easily we forget that when debating the future trajectory of a resource, it helps to actually consider the physical resource.

Gold, if we give it a brief respite from its sundry economic roles, is thoroughly tangible. It comes out of the ground and supplies a demand. The majors produce it and the juniors feed properties and prospects into the pipeline. For all the surrounding economic noise and wildly romantic financial prose, it is, at the end of the day, humble and uncomplicated, nestled sleepily within a chunk of ore and wondering what all the fuss is about.

Even as “paper” demand for gold has fluctuated over the past year, as seen in stocks and spot prices, physical demand has continued upwards at a smart clip, supporting the “bottom” that analysts so feverishly looked for with little more than a brief shrug. (Anyone who tried to buy physical gold in October 2008, when the paper gold price saw lows in the $700’s, doubtlessly felt the depth of this disconnect.) This physical demand braces against fallout, to be sure, but it also forms the literal and figurative foundation of all our paper castles. And so when something affects it on a tractable level, the effects will be felt in a linear manner far more dull and less heart-racing than inflationist conspiracy theories.

The MEG report, of course, is woefully downtrodden, relaying news of “maturing mines” and “increased costs” with all the charisma of a Valium-laden Eeyore. They’ll get over it. The rest of us, in the meantime, might do well to consider the effects that the facts of resource production might have on the future of resource price.

And the facts are these: global gold demand is increasing faster than new deposits are being discovered and mined. The increase of the gold price has offset the increased cost of production—or, as the MEG grudgingly put it, “only a tripling of gold prices… has prevented a financial meltdown” (as if the magical fairy godmother the sector ordered didn’t arrive in time, and only dusty old cyclically increasing prices and logic saved us all). And, finally, areas of potential new discoveries sometimes carry increased political risk—which is to say, not every country will fling open its doors, toss you a pickaxe and ask you how much clamato you’d like in your Caesar.

Determining what this means for the sector’s coming months and years requires one to loop one’s reins over the metaphorical saddle horn for a mile or two. The causes and effects are as simple and unassuming as the ore itself; projected supplies that fall short of increasing demand produce a burgeoning price, and climbing prices—though their climb may well hold the same net-gain corrections we’ve seen in decades’ worth of patterns—support riskier and more costly exploration and production.

It is this combination, resting so quietly beneath the MEG’s lambent lament, that makes the modern gold sector just the right sort of exciting. Uncharted exploration areas, unheard of technologies, unforeseen partnerships and associations—few can say, with much certainty, how such new branches will bud and bloom.

But a demand-driven market, and consequent market-driven growth? This horse steers itself.


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