7-Eleven, Rare Earth, Gold, Oil, Rick Rule, And, Oh Yes, The Fed (video)

In the middle 1970s, in the midst of a well-spent but arguably wayward youth, I worked at the 7-Eleven in Idaho Springs, Colorado. Across the street was a statue of Steve Canyon — apparently this was the cartoon character’s home. Famed actor Robert Redford’s Downhill Racer also hailed from there. Today, on the real world side, ski traffic stops at the Buffalo Bar and Beau Jo’s Pizza for fuel en route to higher elevations, or zooms by on the highway paying no attention at all.

The Argo Mine, Idaho Springs, CO
But, the thing that you notice now as you drive by on I-70 from Denver, if you are paying attention, is a series of old-time mining operations. Some are very large, like the Argo Gold Mine and Museum, and others look more like a pile of dirt thrown up by a muskrat digging into a dam.

When I worked at that 7-Eleven as night manager, before I would head out in the morning, there would be a flood of workers stopping by for coffee, cigarettes, and junk food breakfasts. They were headed either to Loveland Pass where they were working on the second I-70 tunnel, or to the molybdenum mine at Climax. Both were great-paying, albeit dangerous jobs at the time.

We have mentioned before in the Daily Pfennig® newsletter that in the 1990s and especially the 2000s, many experts suggested that China had undertaken a strategy to undercut the world producers of important rare earth elements in order to force them to close. Once this had occurred, the logic went that China could raise prices at will as the dominant remaining player in the market. The Climax Mine was a casualty of this strategy as were many other operations. And, as a result, jobs departed.

Rick Rule Has Something To Say
Rick Rule has tramped all over this territory, and many more like it around the world, exploring resource opportunities. Now Chairman of Sprott U.S. Holdings, Inc. and a global sage on the resource and extractive markets, he has been sticking his head down mining holes and into the face of industry executives for longer than I have known him, which is quite some time.

We sat down recently to discuss mining, metals and power. First, take a look at the video; then I’ll come back for a few comments.

(Click here to view video.)
Gold’s Price — A Moving Target
The franchise owners of that little 7-Eleven operation considered the food stop a secondary business to their main operation, which was small-time gold mining. At the time, the price of gold was still controlled by the U.S. government. Since then, of course, we have seen prices rise and fall with a lot of space between the top and bottom of the chart.

Pinning down a rationale for a specific price for gold is very difficult, as it is with currencies. Gold prices shift with the economy, with inflation — at least in the long run — with sentiment, and finally, with a fudge factor that is hard to put into an analytical framework.

In the video, Rule introduces an alternative way to consider this. With large chunks of investible assets now in the stock market after a six-year positive run, gold holdings as a percentage of investible assets have declined to around a third of 1%. If holdings were to return to their long-term mean of 1-1/2%, perhaps that would propel a rise in prices. We’ll see.

The Fed And The Market
I am writing this article one day after the Fed announced that it would leave short-term rates unchanged for now. Both our very own Chuck Butler and about 80% of analysts won their bet on this result.

While analysis of the Fed’s statement focused on the comments about the global marketplace, I would note that the significant decline in the price of oil, industrial metals, and other raw inputs must also have the Federal Open Market Committee (FOMC) spooked. After hearing Chairperson Janet Yellen’s comments on inflation, I can’t help but wonder if a significant portion of the meeting wasn’t spent discussing resource prices.

To me, the Fed’s decision underlines the apparent divergence between the economic statistics here in the U.S. and market prices of real assets. Statistics here are bumping along at a slightly upward trend, while the message in the markets appears to shout low or no growth. Given the volatility in the market with no change, one wonders what will happen when the Fed finally starts inching the rate up. We’ll see.

Until the next Daily Pfennig® edition…

Frank Trotter
EVP & Chairman
EverBank Global Markets Group