Wednesday , 17 April 2024

How Inflationary and Deflationary Outcomes Might Affect Your Bullion and Mining Shares

Whilst we, as staunch Austrians, would prefer less liquidity provision and more allowance for markets to naturally self-correct and deleverage… we suspect that as markets try to self-correct, the authorities generally will be forced to print more and more [as] it is the easiest course for them to take and the typically all too human option…As such we look once more at how inflationary and deflationary outcomes might affect precious metal investors. Words: 1323

So says Will Bancroft  ( in edited excerpts from his original article* which Lorimer Wilson, editor of (A site for sore eyes and inquisitive minds) and (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) below for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.

Bancroft goes on to say, in part:

Inflation and perhaps hyperinflation.

An inflationary, and possibly hyperinflationary, scenario is naturally an outcome we are lead to by desperate authorities becoming locked into the printing press as a policy response. We believe Bernanke is pretty much well down this road now as, should he try to flip-flop back to austerity as a new response, his previous raison d’etre would be completely undermined and his legitimacy busted.

We believe this month’s announcement by the world’s leading central banks to act collectively to provide essentially unlimited liquidity to the financial system is further consolidation towards this collective policy response.

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We continue to urge investor cynicism with the inflation figures reported by the authorities who naturally have their interests to protect. Note the differences found in the official American data, and the data released by John Williams’ Shadow Government Statistics. When it comes to managing our portfolios and returns, we would prefer to use Mr Williams’ inflation in-puts [and,] in such a scenario when the inflationary genie starts to emerge further and further from the monetary lamp, and as the world’s savings and purchasing power are depleted, the precious metals should shine.

In this scenario, as we experience higher and higher prices…for gold and silver, their upside price limits…are only limited to how enthusiastically the authorities increase the money supply. [Refer to “Gold: $3,000? $5,000? $10,000? These 151 Analysts Think So!” for what] more adept forecasters than us…look for [ in future] gold prices… [We, too,] find gold and silver fundamentally undervalued today in relation to recent levels of money printing and the attendant risk in the financial system, so should easing become the general global policy response gold and silver are set to move significantly higher.

[Read these articles for their understanding of the implications such quantitative easing will have on the future price of gold:

Within this scenario we would also see the mining shares rewarding investors richly. In fact we like Jim Sinclair’s hypothesis that the precious metals miners will become the most significant dividend payers and will thus become the ‘utilities of the future’. The use of the term ‘utility’ in relation to the gold and silver sector might be a new way of thinking for some, but should gold and silver return to the heart of the monetary system, these miners are essentially supplying our money. They would be supplying an essential commodity, not that different to water or electricity. We are sympathetic to this prediction, and the gold miners are thinking more intelligently about the issue of dividends, admirably lead by Newmont Mining. It would be the precious metal miners acting as such dividend payers and utility stocks that would start to bring in some larger more long term focused investors that have as yet remained on the sidelines; the pension funds. So far pension funds have had minute allocations to the bullion and the miners. [Read “Pension Funds: Why $5,000 Gold May Be Too Low!“]


This is where our analysis will perhaps become more controversial, because we believe that a significant deflation in today’s financial system will also be positive for precious metal investors.

Although we feel precious metal investors would be rewarded in this scenario, this may occur more slowly than in a significantly inflationary scenario. We would suggest that deflation would gradually put unbearable pressure on banks’ balance sheets, and bank failures would become more and more common. Fiat currencies, working hand in hand with a highly leveraged reserve banking model, have conspired to deliver us to our current situation. Investment banking failures might not capture the immediate attention of Main Street, but as this contagion spreads to commercial banks, savers would open their eyes further to the potentially risky nature of keeping cash in a bank. As Eric Sprott continually reminds us, ‘keeping money in a bank is a risky investment’…

Given the degree of leverage still at work in the banking system a domino effect of failures is not difficult to imagine. The depositors of the world would then increasingly have to reconsider what vehicle is more apt for holding their savings. The market will simply have to find a new savings mechanism in which to contain its money and liquidity. Where would the market turn to in this reallocation of capital? Well, the market has typically chosen gold and silver as money throughout the history of human development. As gold and silver’s almost unique properties are more widely appreciated once more, the fact that these assets are no-one else’s liability will again be greatly appreciated.  [Read “Surprise, Surprise – Gold Is A Safer Investment Than Any Other!“]

Within this deflationary scenario, we also see the mining shares rewarding investors, and find the case of Homestake Mining during the 1930s in America a useful guide post. Amidst a wider deflation of significant proportions, pretty much the only capitalist endeavour one could get financing for was for a gold mine. During this decade there were close to 100,000 gold mines in North America. The share price of Homestake went from $80 in October 1929 to $495 in December 1935, but this capital appreciation was not the only reward for investors. During these six years Homestake paid out a total of $128 in cash dividends, and the 1935 dividend alone was $56 per share. A 70% dividend yield pay-out (basis year 1929) in only one year is pretty exceptional in a wider deflation. It is for these reasons we are so encouraged by Newmont Mining’s previously mentioned moves regarding dividend pay- outs. As John Hathaway at the Tocqueville Gold Fund comments, these mining stocks are going to be growth stocks.

Some readers may be wondering about how silver miners might perform in this scenario given silver’s industrial demand component. We are bullish on silver

and thus quality silver miners, in such a scenario because of our previously articulated analysis of silver’s fundamentals…[which] may be high level, macro, and contain some premises which are new to readers, but it is because of our opinions above on gold and silver’s potential performance during inflation or deflation that we are so attracted to these asset classes. This is why we find gold and silver bullion as an excellent place to hold some of your liquidity or money [read “Your Portfolio Isn’t Adequately Diversified Without 7-15% in Precious Metals – Here’s Why“] (gold first, then silver as a more speculative allocation), and the precious metal miners as one of the best places to allocate your investment capital.


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