The Canary in the Coalmine

Gold is not money. We’ve had this argument before.

Yeah yeah… Iran started accepting payment for oil in gold. But gold will never replace fiat currencies… and it will never knock the U.S. dollar from its global reserve currency status.

Gold bugs tend to look at their precious yellow metal through a myopic lens. They see it simply as an inflation fighter… the sole weapon against loose central banking.

They fail to recognize that at least 63% of the entire world’s gold goes into jewelry and computer chips.

Gold is still just a commodity.

There’s nothing that special about it. It’s in the ground, we find it. we dig it up, we buy/sell it.

A quick look at junior miners – the exploration companies that search for new gold deposits – clearly shows the disconnect between gold prices and reality. Take a look…

See larger image

The chart on top (yellow) is gold. Prices peaked in late August, 2011 and have dropped 18% since. That’s significant underperformance and it flies in the face of gold bugs’ primary thesis: gold prices rise when central banks print money.

But the underperformance of gold itself is nothing compared to the dismal returnrns of junior miners, which you can see in the second (white) that shows a massive 64% decline since late 2010.

Junior miners peaked well before the price of gold – nearly a full year earlier. Were they the canary in the coal mine? It seems so.

With gold prices dropping below $1,600, junior miners have much less incentive, and profit potential, searching for new deposits.

Watch for this industry to suffer as long as gold lacks luster.

If you haven’t done so already read the Economy & Marketsissue on “Sequestered Cuts are the Only Way.



Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.