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.
Before I get to the meat of this short article I’d like to say that the correction in Gold is very welcome by myself.
I was a bit early calling for it, but it was inevitable, and the chopping action would have just teared a trading position to shreds the past two weeks. I am glad we got out when we did.
Now we wait…maybe a few days, maybe a few weeks. There will be an exhaustion low though before it resumes it’s move higher and that low is what I’ll be aiming for.
But enough of that, I will be getting into that and so much more over the weekend in the free weekly letter.
Junaid Anwar Khan wrote an article recently titled “Soaring gold prices explained“.
He did an admirable job, but I thought I’d throw in my comments/thoughts on his views. My commentary is in italics.
GOLD prices have risen about 25 percent this year, reaching a record high of $1,387.35 an ounce on October 14.
The precious metal had touched all-time highs in eight out of the last 10 trading sessions leading up to last Thursday, fueled by a decline in value of the U.S. dollar.
The recent rally is the icing on a meteoric rise in the value of gold, viewed as a hedge against inflation and dollar depreciation, over the past 10 years.
Here are some of the factors behind the metal’s price rise and why the rally is likely to continue.
1. Financial crisis
Gold prices scaled new highs after the financial crisis of 2008-09 as investors shaken by the global economic turmoil found refuge in the safe haven metal. The story continues till today as we see gold prices setting successive records above $1,300.
True. Some investors began investing in Gold during and after the financial crisis, which is still underway…by the way.
But by 2008 Gold had traded at over $1,000. It then dropped to $700 briefly and the Gold bull market was apparently over.
What about investors who’d seen the crisis coming (a fairly easy thing to see coming in reality) and had been in Gold since the housing bubble peak in 2005 when Gold was at between $400 and $500 dollars.
And the real prophets who began investing in Gold since 2001 while Gold was under $300 and the internet bubble was fresh off it’s popping.
2. Big investors
Institutional investors and hedge funds have been increasingly putting money in gold through physical purchases on the spot or in the futures exchange market.
Yes. Absolutely correct….however the amount we are talking about today is very, very small as evidenced by the graph directly to your right.
Let’s even say that so far in 2010 Institutions and Hedge funds have really accelerated their buying of Gold and Gold mining shares and this figure is 5%….even if it were 10% we’d still only be halfway there.
There is NO BUBBLE!
3. Shaken confidence
Low interest rates and quantitative easing in major recession-hit developed economies such as the U.S., euro zone and Britain have also shaken the confidence of investors in major currencies – inevitably, gold’s allure has grown.
Bingo! But these Johnny come lately’s are reacting to economic conditions, not being proactive and trying to see what’s next.
4. Central bank gold reserves
Major central banks with sizable gold reserves have also halted sales and made known the shift in policy, with some in the emerging markets converting their currency holdings into gold reserves.
Absolutely. The Washington Agreement, as it’s known, is all but dead.
The only Central Bank selling anymore anything worth mentioning is the Central Bank of Central banks, the IMF which is selling 400 tonnes of Gold through the agreement and has sold over half of the 400 tonne total they have vowed to sell.
Soon, there won’t be ANY SELLERS!
5. Mining firms
With the rising gold price, producers have also stopped selling their anticipated production forward.
En masse, absolutely and it’s about time they got bullish on the product they are mining and selling.
The buyers of the hedges got the best deal since sliced bread and were the true prophets who saw Gold’s ascent coming.
They bought copious amounts of Gold around $300 for future delivery!
Smart cookies they are.
6. Exchange-traded funds
Perhaps the most significant player to enter the gold craze has been the ETFs or exchange-traded funds. These funds allow investors the opportunity to own the commodity through the purchase of ETF shares or certificates without hoarding gold in its physical form.
There is no doubt the ETF market has helping increase demand for Gold, but just how much is the question. It’s impossible to know, no matter what anyone tells you.
The most recent reasons to mistrust these types of structured product is the Foreclosure Gate fiasco.
No doubt ETF’s are increasing demand, but to 100% ensure increasing demand you have to physically own it in your possession or stored securely by yourself or someone you trust.
And heaven forbid you ever actually NEED the Gold for transactions or bartering purposes one day. There would be a 0% chance of retrieving your Gold from these structured products in that case.
7. Sovereign debt default fears
Fears of sovereign debt defaults have added to the worries of investors, already rattled by stock market volatility. Add to this existing geopolitical tensions, continuing economic uncertainty and declining gold production in key mining nations and you get an idea of gold’s unshakable safe haven status.
As long as these factors persist, gold is likely to find favor among institutional investors. However, if history is any guide, one can be sure that volatility in the price of gold will be the order of the day.
As I said above. Those who took the hedges on Gold are the powers behind the political facade of government. They knew a currency crisis was coming and sovereign debt default was a real possibility.
I may even suggest they structured it this way…but I’ll leave that to wear their tin-foil hats out in the open. Mine’s still in the closet!
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Until next week take care and thank you for reading.
Warren Bevan
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