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.
Gold bulls, ourselves included, have suffered another disappointing year. Rather than ending 2016 on a strong note, the biggest surprise to many was the failure of gold to surge higher in the wake of Donald Trump’s election as the next president of the United States.
For a moment, as the polls closed on Election Day, we thought Trump’s victory would create the sort of uncertainty upon which gold typically thrives. Instead, contrary to expectations, Wall Street has since zoomed to new all-time highs and gold has yet again disappointed fans of the yellow metal.
One thing is for sure: In the short run, financial markets – including gold – dance to their own tune and short-term forecasts, even when based on serious analysis, are often wrong.
As I’ve said many times, I don’t like making short-term predictions about the future price of gold. People who do are usually very lucky or very wrong.
That said, although a low probability, I think there is a real chance this year that the price of gold will recover much of the ground lost since hitting its all-time high near $1,924 an ounce in September 2011.
Over the long term, however, fundamentals do matter . . . and, over the long term, we feel increasingly comfortable with our long-term bullish forecast of gold prices rising to unimaginable heights. If not this year, the chances of gold soaring will rise from year to year.
Indeed, despite the yellow metal’s recently disappointing performance, the price of gold is likely to zoom much higher in the years ahead, perhaps doubling or even tripling from recent lows by the end of president-elect Trump’s four-year term.
Here are some of the reasons supporting my audacious long-term forecast:
Strong hands: In recent years we’ve seen a shift in gold ownership from weak hands to strong hands, from American and European hedge funds and other institutional investors to Asian hoarders – both private-sector buyers and central banks.
When sentiment in Western markets turns more favorable toward gold, those investors and speculators who were quick to sell or short the metal for a quick profit on the way down will find it difficult to restore their long positions except at increasingly higher prices.
In other words, a shrinking supply of readily available gold will be insufficient to satisfy rising demand for gold from many of those who not long ago were eager sellers.
Moreover, the contribution to new supply coming each year from global gold-mine production is now shrinking – and is set to continue declining for the next five-to-ten years. Gold mining is a high-risk endeavor with the time from exploration, development of new discoveries or expansion of existing mines, and eventual start of production, a multi-year endeavor.
Asian demand: China and India are, by far, the world’s biggest buyers of gold with each country’s annual demand near or above 500 tons. Despite year-to-year fluctuations, their voracious appetites for gold will continue to grow as their economies grow and their middle and wealthy classes expand.
China’s government is intentionally pursuing pro-gold policies, taking concrete steps to develop its domestic gold-market infrastructure by encouraging the development of domestic physical and futures markets. And, its central bank, the People’s Bank of China, has bought, on average, roughly 15 tons each month in the last dozen or so years.
India is a much different market for gold. The yellow metal is deeply embedded in Indian culture and religion – and serves as a vehicle for saving and accumulating wealth in lieu of distrusted Western-style financial institutions. Over the years, the government has tried to discourage gold demand by imposing onerous regulations and import taxes – but the more it tries the more people want to hoard the metal.
The Indian government’s recent effort to gain more control over its banking system by recalling 500 rupee and 1000 rupee banknotes will further damage confidence in the government and financial sector – and raise long-term interest in gold as a store of value.
Prospective Islamic gold demand: Another potentially significant source of demand for the metal – with possibly huge price consequences – is the recent relaxation of Islamic Sharia law with regard to gold and the associated regulatory changes that will make possible investment in physical gold and other related assets by millions of religious Muslims around the world who, until now, eschewed gold. Many have great wealth – but strict interpretation of Sharia law has heretofore limited or prevented their investment in the metal.
Author: Jeffrey Nichols, Senior Economic Advisor to Rosland Capital (www.roslandcapital.com)
