Gold Is Leaving the Miners Behind

If you’re anything like me, you caught the gold bug over the past year or two.  However, investing in the precious metal is easier said than done.  Buying physical gold can be somewhat of a daunting task.  Alternative investments, such as Gold ETFs or individual gold mining stocks are options.  I decided to go with the latter. 

I own three well-known mining stocks; Newmont Mining (NEM), Agnico-Eagle Mines (AEM) and Barrick Gold (ABX).  My return on these three stocks the past year is -7 percent, -3 percent and 2 percent, respectively.  Gold is up roughly 25 percent over the past year. 

You may now be asking the same thing as me, what gives?

Gold rose 25 percent, while the mining stocks languished over the past 12 months.  Did the companies have bad earnings, were there large scale issues with mines that stopped production?  The answer to these questions is essentially, no.

I realized it had been quite sometime between gold’s previous bull market and the current one.  So, I decided to look back at gold’s last bull market, particularly 1971 to 1980, as that’s when we saw very robust growth in the metal.  Then I looked at the individual mining stocks and made an interesting discovery.

Gold mining stocks did not participate in the bull market!  Well, atleast not until the end of the bull market.

Looking at Newmont mining, I saw shares began 1977 at $28 a share and ended 1978 at $21.50, a 23 percent loss over two years.  Meanwhile, gold rallied 56 percent in the same timeframe. Those stats run similar to my present day situation, so again, what gives? 

In 1979 gold prices really accelerated, maybe even to “bubble” status.  The precious metasl surged 126 percent for year to $512 an ounce.  Such a move had to fuel a rally in the miners, right?  Well, it did, Newmont shares jumped 84 percent to close out the year at $39.62 a share.  

Shortly after 1979 gold had a blow-off high, topping out in January of 1980 at roughly $850 an ounce.   However, this wasn’t the end of Newmont’s run as shares tacked on another 17.4 percent in 1980, despite gold posting a small loss and being off 30 percent from the 1980 top.     

I now find it easier to be patient with my miner stocks since the possibility of a strong run still exists, if history is any indicator. Are we close to a blow off top? I don’t know, but I can tell you I am looking forward to when it occurs.

Where Did The Jobs Go?

In this Issue:

Where Did The Jobs Go?

Price Rises Continue

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A widespread assumption exists throughout American households today.  It is that the American worker is constantly losing jobs as they are outsourced by U.S. based multinational companies to foreign countries with cheaper labor and expenses.

The general consensus is that these jobs are lost forever and that jobs lost during tough economic times will not be filled by American workers when economic growth returns.  Rather, those jobs will be added overseas as multinational corporations look to stay lean and agile in order to react swifter if and when another slowdown occurs.

Now don’t get me wrong, for quite a while I was a proponent of camp “stop shipping our jobs overseas.” However, if review clear statistical evidence that supports otherwise, I will certainly keep an open mind. 

Industry Comparison: U.S.  vs. Foreign Employees    

Change (in thousands) From 1999-2008	U.S. employees of U.S. mulitnationals	Foreign Employees of U.S. mulitnationals
All Industries	-1,903.4	2,358.0
Mining	85.4	68.8
Utilities	-170.6	-41.1
Manufacturing	-1938.3	242.8
Wholesale Trade	140.4	126.9
Information	-100.7	65.5
Finance & Insurance	-330.5	-13.4
Professional, scientific and tech services	176.8	283.4
Other Industries	234.2	1,625.3

Source: Bureau of Economic Analysis

Looking at manufacturing, which is the sector widely regarded as having an exodus of jobs sent overseas, presses the question even further.  We can easily see that is where all the jobs have been lost. However, just 242,000 manufacturing jobs were added overseas.

Again, where did all the jobs go?

I’m sure at this point you are wondering the same thing I was; what about all those jobs in “other industries?”  The below chart explains:

 

Breakout of Other Industries Foreign Employment

Foreign Employment in Other Industries (in thousands)	2008	Change from 1999
Agriculture	58.6	-2.7
Construction	52.7	14.7
Retail Trade	1,063.2	649.5
Transportation & Warehousing	220.3	103.3
Real Estate & Rental	75.5	24.3
Management (non bank companies)	37.9	22.4
Admin, support & waste management	873.2	438.8
Healthcare & social assistance	15.8	8.4
Accommodation & food service	693.0	328.1
Misc services	131.3	38.5
Total Other Industries jobs	3,221.5	1,625.3

As you can see, the manufacturing jobs are certainly not hiding here.  In fact, the majority of growth was seen in the retail sector, which is supposed to be America’s biggest employment strength being that we are a SERVICE economy.  However, America did add 232,000 jobs in “other industries,” so we didn’t lose the jobs to foreign land there either.

There are dozens of hypotheses on where the jobs have gone.  The most glaring one to me is strong growth in productivity, more being done with less people.  Assembly lines have fewer humans on them than they did 10 years ago. Technology had made us so much more productive.  The data below shows that manufacturing productivity grew every year in the 2000s until the last recession, and then rebounded strongly in 2010.

Major Sector Productivity and Costs Index

Year	Qtr1	Qtr2	Qtr3	Qtr4	Annual
2001	-0.3	3.3	1.5	8.5	1.9
2002	9.8	8.9	7.2	4.4	7.3
2003	9.1	4.7	7.8	-1.5	6.3
2004	-0.6	3.2	3.1	7.7	2.3
2005	7.5	4.3	0.6	-0.2	4.7
2006	-0.7	-0.4	3.6	4.7	0.8
2007	5.5	3.9	3.2	5.7	4.2
2008	1.2	-6.5	-5.5	-6.8	-0.4
2009	-2.9	5.3	12.4	6.9	-0.4
2010	4.7	5.2	2.1	5.1	5.9
2011	6.3

Let’s not forget the increased workload adding to productivity either. Salaried employees are working far more hours now than they did years ago.  The 9 to 5 job is a thing of the past.  Blackberries and VPN (Virtual Private Network) connections give employees access 24/7.

The good news is that as the economy continues its recent growth trend hiring will continue to pickup (244,000 jobs were added in April).  However, due to automation and productivity gains, a large majority of the jobs listed in the above charts are just not going to come back.

Price Rises Continue    

In what has become a recurring topic in the Mainstreet Investment Insight letter, let us look at some additional information with regard to the continued rise in prices.  The cost increases that I mentioned (in previous issues) would soon be passed to consumers is coming to fruition.  Corporations cannot hold off any longer and have pushed aside fears of losing consumers in our rebounding economy. 

We have already seen multiple increases from the large staple companies, such as Kimberly-Clark, from the retailers that sell those products, like Wal-Mart.  Next up: the fast food restaurants!

The continued rise in commodity costs, such as beef, has now forced their hand as well.  McDonald’s and Wendy’s have both announced price increases to their menus.

The following quote is from Wendy’s first quarter earnings report on May 10:

“Margins will be negatively impacted by increases in commodity costs primarily driven by unprecedented beef prices that are affecting the restaurant industry. We have reaffirmed our same-store sales outlook and expect to offset some of these commodity increases with prudent price increases, while protecting transactions and market share," said CEO Roland Smith.

Yet, the Federal Reserve still wants to preach that loose monetary policy is not an inflation catalyst and is not impacting the purchasing power of the American consumer.

Your STILL wishing the Fed would stop the printing press analyst,

Mitch Jaworski