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