Rampant debt, credit deflation and impotent monetary policies are fueling a bull market for gold and gold equities according to Jay Taylor, editor and publisher of J. Taylor's Gold, Energy & Tech Stocks. His Progress A1 companies were up a combined 22% as of Oct. 17. Taylor shares those names and some lesser-known stories in this Gold Report interview.
The Gold Report: Jay, what investment themes are you focusing on in your newsletter?
Jay Taylor: I focus a lot on the huge credit deflation that the markets are demanding. Debt has become so large that it cannot be serviced with the amount of income available. The so-called solution requires the creation of more debt money. In a fiat currency system, money is debt.
At some point, total debt levels have to be wound down to levels akin to the normal levels of the past when total debt to GDP in the US ranged between 175% and 225%. Following Lehman Brothers it grew to over 360%! These debt levels simply cannot be repaid from current income steams even with zero interest rates. Those debt levels are leading to tension in the banking system that bodes very well for gold because people are starting to lose confidence in the banking system and in the fiat monetary system itself. As long as credit deflation remains intact, it will be a very bullish environment for gold and gold mining stocks.
Another major focus is what I call the "real" price of gold. Is gold going up relative to most other things? Or, putting it another way, what will an ounce of gold buy? I like to measure gold's purchasing power in terms of the Rogers Raw Materials Fund, which includes energy, base metals, food and clothing related commodities like cotton and wool. Indeed, the real price of gold has risen dramatically from 17% in July 2008 just before the Lehman Brothers failure to something like 44% of the fund by March 2009 (See chart below); it has risen to 49.5% at the height of the European crisis a few months back.
From 17% pre-Lehman Brothers in July 2008 to 47% at the end of October, the trend of gold's purchasing power in terms of how much of the Rogers Raw Materials Fund it will buy is in a clear and dramatic Uptrend. Not surprisingly then, the profits of major gold producers has risen as demonstrated in the chart above.
It is not a coincidence that gold mining profits of the big household names in the gold space rose along with the real gold price.
To keep track of how the big gold mining firms are doing, I follow the earnings of seven majors. If you add up the per-share profits, their consolidated per-share profits went from $8.30 in 2008 to $20.50 in 2011. The consensus analyst estimates for 2012 are down a bit to $19.75 in 2012. For 2013, the latest prediction of the collective profits for these seven companies are $24 – almost triple where they were in 2008 on the eve of this major ongoing credit deleveraging crisis.