Commodity Bull Market

Gold continued its downward trend in the third quarter, reaching a low of US$560 per ounce in early October. A great many self-appointed experts declared that the bull market in commodities had ended and applied this assessment to gold as well although there is very little evidence to support the notion that gold is a commodity like any other. Despair mounted, marking the bottom of a needed correction from the May high near $730. The gold price has since recovered strongly.

As we have often noted, gold is an alternative asset class to financial assets (equities and bonds). Over time, these two asset classes trade inversely to each other. Furthermore, the biggest moves in the gold price historically have also marked a significant outperformance of gold against commodities. In the third quarter, financial assets experienced a resurgence. Investor consensus was that we were going to experience a tiny, perfect slowdown and soft landing for the economy, one that would take the edge off inflation without depressing corporate earnings. Stock and bond markets responded positively. Interest rates fell and even the housing market was thought to be ready to rebound as pundits proclaimed that the worst had been seen and discounted. Commodities also performed relatively well as fears of a more pronounced slowdown subsided. All of these developments were antagonistic to gold. In our view, gold performed surprisingly well given investor sentiment.

There are other less obvious developments which currently point to better days ahead for the gold price. Gold has rebounded from its lows while the US dollar has strengthened and the oil price has fallen, contrary to prevalent expectations. In our view, major fundamental imbalances have yet to be unwound including bubbles in credit markets and real estate as well as the growing US trade deficit. Historically high financial asset values will revert to the mean, as they always do, and we expect confidence in these assets to wane and system liquidity to falter in the months ahead. The inevitable central bank response will be swift and relentless attempts to reliquify which we believe will drive investors to gold as a monetary asset. It was anticipation of this development that led us to establish Seabridge, and we are increasingly confident that such a shift in investor sentiment will occur. In the interim, it is gratifying to know that the evolution of our asset base through exploration during this period of gold price underperformance has provided excellent returns to our shareholders. We remain confident that the best is yet to come.