Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
The latest economic data released this morning showed slightly better than expected GDP data from France and Germany. French GDP growth came in flat which was better than expectations of a contraction of 0.1% quarter-on-quarter. And, Germany, Europe’s biggest economy grew by 0.3% between April and July, compared to analysts’ forecasts of 0.1% mainly due to its strong exports. However, overall Eurozone GDP data for the second quarter shrank by 0.2%.
Meanwhile the latest GDP figures from Japan were weaker-than-expected. Japan Q2 GDP increased by only 0.3% quarter-on-quarter which was below expectations of an increase of 0.6%. And, the Greek economy, struggling in a fifth year of recession, shrank by 6.2% in the second quarter compared with a year earlier, official data showed on Monday.
The latest official data, made public last week, showed unemployment in Greece at a record 23.1% for May, with almost 1.15 million people registered as unemployed.
Although the 17-nation avoided a technical recession after a flat GDP reading in the previous quarter, several peripheral countries have slipped into recession and the situation in these countries looks set to get even be worse as the governments implement additional austerity measures.
In the US central bank’s most recent Federal Open Market Committee statement, it noted the elevated unemployment levels and decelerated economic activity, but simply said it “will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labour market conditions in a context of price stability.” And, of course we all know that in spite of the bold statement made by ECB president Mario Draghi, in which he declared that the central bank is “ready to do whatever it takes to preserve the euro, and believe me, it will be enough,” no action has been taken. However, many market participants have interpreted these statements to signal that some kind of coordinated action by central banks is looming and that these central banks are likely to resume large money printing programs sooner, rather than later.
Contrary to the rhetoric we have heard from global central bankers and other financial leaders, there is enough empirical evidence to show that the economies of these two regions are contracting and the unemployment rate remains high which means their monetary policies have been a dismal failure in stimulating economic growth. It is also amazing that they don’t seem to understand that good GDP growth comes from a vibrant economy in which productivity increases due to good demand, and not from falsely inflated asset prices or cheap money that banks can borrow to buy additional sovereign debt. Nor does it come from a myriad of austerity plans. Nevertheless, I have no doubt these banks are currently cooking up their next move which will no doubt be another round of some form of quantitative easing. But, as long as the current world order and corrupt, plutocratic, debt laden fiat monetary system continues along this path, we are going to see an increasing loss of confidence in paper money. This will lead to an increase in interest in gold.
Gold is a monetary metal whose price is determined by a myriad of factors that include inflation, fluctuations in the dollar, currency-related crises, interest rate volatility, international tensions, global equities, investor sentiment and increases or decreases in the prices of other commodities. The price of gold also reacts to supply and demand changes.
Gold is different from other precious metals such as platinum, palladium and silver because the demand for these precious metals arises principally from their industrial applications. Gold’s value does not arise from its usefulness in industrial or consumable applications. It arises from its use and worldwide acceptance as a store of value. Gold is money.
In contrast to other commodities, gold does not perish, tarnish or corrode. Gold mined thousands of years ago is no different from gold mined today. Therefore, gold existing in the aboveground gold stock is interchangeable with newly mined gold.
Today, many factors are conspiring to create the perfect scenario for gold prices to rise: a faltering global monetary system, a currency war, expansionary monetary policies, a long term decline in the major fiat currencies in particular the US dollar, low interest rates, a spike in food and oil prices, unsustainable sovereign debt, geo-political tensions, domestic unrest, a mammoth US trade deficit, and America’s status as the world’s largest debtor nation. But in addition, we are seeing an increase in the demand for physical gold especially by central banks as well as China.
In the last two years we have seen a complete reversal of attitude towards gold from many central bankers. For most of these central banks traditionally the dollar has been approximately 60% plus of their foreign reserve assets. And, the euro has probably constituted for another 20%. But now as these countries around the world see what the Europeans and the U.S. Fed are doing, many of these central banks have shown a keen interest in gold.
Last year, central banks purchased more than 400 tons of gold, the most in nearly five decades, according to the World Gold Council. IMF data shows that central banks were again net buyers in April with Turkey and Philippines being the largest buyers of gold.
The Philippines increased their gold holdings significantly by 32.13 tons to 194.241 tons in March – a 17% increase in their gold reserves in the month.
It was the single largest addition Philippines has made since September 2008. They have been pretty consistent buyers of gold over the last few years, but the 17% increase in April was another big rise.
Turkey expanded its gold reserves by 29.7 metric tons in April, putting their bullion reserves at 239.3 tons meaning that Turkey increased their gold reserves by 14% in April. The central bank also doubled the share of lira reserves banks can hold in gold to 20%.
Mexico increased gold holdings by 2.92 tons to 125.5 tons in April.
Kazakhstan raised gold holdings by 2.02 tons to 98.19 tons in April.
Ukraine upped gold reserves by 1.4 tons to 30.607 tons in April.
Sri Lanka raised gold reserves by 2.177 tons to 7.807 tons in January.
In July, South Korea, the world’s seventh largest forex reserves holder, reportedly bought 16 tons of gold. And, Russia has consistently added god to their holdings almost every month.
While the gold tonnage demand from central banks in recent months has been significant, gold remains a tiny fraction of their foreign exchange reserves and therefore the trend is sustainable and indeed may accelerate.
Central banks are buying gold because they see it as sound money. Price is not a determining factor in central bank buying. They are more likely being guided to allocating a percentage of their overall foreign exchange reserves into gold bullion.
In the meantime, as central banks continue to increase their holdings of gold, China remains very secretive, so we don’t know really if they’re buying or not. However, I am positive the Chinese government is accumulating as much gold as they can. And, we are also seeing more Chinese invest in gold bullion bars and coins.
It was only two weeks ago, that the price of gold struggled to breach the key resistance of $1600 an ounce. Now it has remained above this level for enough time to consider it to be the new support level. Thus any dips to this level should be bought while we await a break above the $1625 an ounce level which I believe will occur shortly.
TECHNICAL ANALYSIS
Towards the end of July gold broke above its 50 day MA which has turned positive. It is now attempting to breach the $1625/oz. level. I believe we will see a break of this resistance followed by a move to $1650/oz.
About the author
David Levenstein is a leading expert on investing in precious metals . Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.
His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. The largest gold refinery in the world use his daily and weekly commentaries on gold.
David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.
For more information go to: www.lakeshoretrading.co.za
Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.
