The Kiwi Gold Rush Is Over

Back in the days when Dunedin was a bustling mining town, gold flooded the streets as buyers and prospectors dealt their goods.

The gold rush began in Gabriel’s Gully, where a lucky Tasmanian gold prospector named Gabriel Read found a sea of gold along the banks of the Tuapeka River.

(Curiously, Read ended up returning to Tasmania, marrying his cousin and dying in an insane asylum in Hobart.)

His discovery drew in thousands of prospectors, many of whom had cut their teeth in the California and Victoria gold rushes a few years before.

Now, these veteran miners spent their days sifting through the stony soil throughout Otago, prospecting for the occasional flake or nugget that ended up in their pan. At the end of the day, they’d pop out of their crudely-dug coyote hole, trot on over to town and cash in with their favourite buyer.

When the yellow metal flowed, the town buzzed with excitement, warmth, and opportunity. It attracted young and old, all not wanting to miss out on claiming their bit of the wealth.

But when the veins had all been extracted, the lodes had all been picked and the river’s turbid waters stopped shining with that golden tint, the exuberance disappeared like a dying flame.

The streets emptied. The pubs went quiet. The banks shuttered their windows.

Like a thief in the night, the Otago gold rush came and went…and with it, the dreams of thousands of miners.

Today, many of those mining sites are overgrown with foliage, with the occasional relic of a shovel or tent peg exposed in the grass. And where the prospectors once extracted their precious gold, only quartz and pyrite remain.

If you’re not familiar, pyrite is a somewhat common sulphide mineral that’s made of iron. For the most part, it’s useless…but it does look pretty. It has a metallic lustre and a pale-yellow hue. It looks a lot like gold, in fact.

It’s no wonder that pyrite is well-known by another name — fool’s gold.

(To make it even more confusing, pyrite and gold often appear in the same environments…even sometimes entangled together.)

Imagine the look of disappointment on the novice prospector’s face when he proudly strolls up to a gold buyer just to hear that his massive nugget is as worthless as the stone he cut it from.

Just minutes before, he was picturing buying a brand-new farm, marrying the prettiest girl he could find, and living comfortably into old age.

Now he’s lamely sulking back to the mine.

The fool’s gold era

Today we are living in the tail end of what could be called the greatest gold rush of all time.

But instead of gold, our prosperity is riding on the backs of the technological and industrial innovation that’s shaped the past few decades. Our quality of life has shot through the roof. Many have become obscenely wealthy. The market overflows with excitement, warmth, and opportunity.

And much like the Otago gold strike, this period of plenty may also soon come to a close.

But there’s a big difference. With the Otago rush of the 1860s, wealth was determined by a real thing — gold. You could touch it, hold it, bite on it. If it was up to snuff, you’d make a pretty penny. If not (like pyrite), you’d be back where you started.

There was a real simplicity to it then.

In modern times, it’s not nearly as clear-cut. For example, with shares…the value of the company, the value of your share and the value of the dollars you trade it for are all erratically fluctuant. The value of your home works the same way…as many Kiwis are currently discovering.

And yet we feel rich. We feel like we’re on our way to buying that farm, marrying that girl, and living comfortably into old age…

But like that poor greenhorn, we may soon discover that we’re holding onto nothing but piles of fool’s gold.

Here’s why…

1. Corporate profits and therefore jobs, investment returns, and GDP are all propped up by record-low interest rates. Companies can basically borrow for free…‘expanding the business’ on debt. That’s what I call ‘easy money’.
2. As a result, the entire economy is weak. Few major market players will survive a credit contraction. Very few will be able to continue thriving at the pace they’ve been enjoying.
3. The painless solution, as you may have already figured out, is for mummy monetary policy and daddy fiscal policy to come bail us out. The government, through fiscal policy, will open the floodgates on spending…injecting a heavy dose of taxpayer and overseas lender dollars into the economy. At the surface, it may feel like the party’s still bumping…but behind the curtain, you’ll find policymakers pulling all the stops to keep the lights on.

Modern New Zealand

We’re already seeing these contingency plans being triggered here at home.

Saw the recent budget? It’s chock-full of billions of dollars of fiscal injections. And it’s hard to imagine they’ll be spent very well. Just look at the recent KiwiSaver and budget leak scandals. That’s who’s in charge of controlling the tap.

Keep up with the Reserve Bank of New Zealand? A recent bulletin outlined the RBNZ’s willingness to entertain desperate measures like negative interest rates (where you have to pay to put money in savings accounts) and buying up government bonds (bailing out the state and putting its debt on the RBNZ’s balance sheet).

House prices are continuing to roll downhill…

Corporate profits are being forecasted down…

And all of this is happening before interest rates get the inevitable hike. Imagine the turmoil when that day finally comes…

The moment we all realise we’re holding fool’s gold.

Best,

Taylor Kee
Editor, Money Morning New Zealand

PS: On a cheerier note, I’d like to ask your help on an idea I’ve been toying with. Most of the brokerages here in New Zealand lack simplicity and ease-of-use. It’s hard for new investors to get in and buy their first shares. It doesn’t have to be.

I’d like to work with or just talk with someone about the idea of building a brokerage platform designed for normal, non-technical investors. None of the complicated processes. None of the annoying jargon. Just the basics.

But I’m not talking about ETFs or indexes. I want people to be able to directly and easily invest in companies on the NZX.

If that’s something you’d be interested in or know someone who could be…let me know! I’d love to get a discussion going…reach me at [email protected]