Mexico’s proposed higher mining royalties could block nearly $7bn in investments
The Mexican government proposed raising mining royalties under the argument that metal prices have risen in recent years.
During the last decade, gold has emerged, once again, as a global currency and as an alternative to paper assets and paper currencies. While bond dealers and stock brokers continue to persuade clients to invest in equities and financials, the benefits of owning gold are totally ignored. And, when it comes to gold ownership, and in particular in South Africa, most of the commentators continue with their disparaging remarks regarding gold investing, especially as the price corrects. These so called “experts” have been totally wrong about the gold market for almost as long as the gold market has been in a bull market. It is obvious that they are clueless about the gold market and should therefore restrict their comments to their area of their expertise which is equities. It is for this reason why I would like to take this opportunity to explain what I believe are some of the main factors influencing the higher gold prices.
One major factor driving the price of gold higher is the high level of national debt in the US as well as the Eurozone. Essentially, these regions are either bankrupt or about to become bankrupt. And, as the levels of debt, in particular that of the US is so high, there is no other way to finance this debt apart from issuing new debt. But, this is nothing more than a Ponzi scheme and the eventual outcome could be a total collapse in the US dollar. However, central bankers are hoping for a miracle which will suddenly return these economic giants to a new period of prosperity that will create massive economic growth and low levels of unemployment. The gamble is whether or not these economies will recover before their currencies collapse?
Judging by the recent bond auctions in Europe, perhaps some of the worst skeptics may be convinced that this might be possible, However, just because the recent bond auctions in Portugal, Spain and Italy were successful, it does not mean the sovereign debt crisis in the Eurozone has been resolved. This is merely a temporary reprieve for the euro and these countries, and during the course of this year, I am convinced that we are going to see a further deterioration of the debt crisis which will cause the euro to drop further. And, while this is happening, despite the current exuberance on Wall Street, the US dollar is also headed for further losses this year.
The countries Portugal, Greece, Italy and Spain all have bond payments due this year. The amount of bonds coming due in 2011 from Portugal, Greece, Italy and Spain is almost 500 billion euros – Portugal 26.156, Greece 38.872, Italy 264.601, and Spain 128.312. Although the recent bond sales were successful, I found it interesting that the one of the major buyers included China. It seems that they are now being forced to prop up the value of their investments by supporting prices.
Investors in European bonds should prepare for losses, says Pimco co-CEO Mohammed El-Erian. Nonetheless, it’s an exciting time to be an investor, especially for those who keep a sharp eye for well-placed bond offerings.
“The main issue right now is the integrity of the Eurozone is getting weaker and weaker as we delay the problem,” El-Erian tells CNBC. “They are simply kicking the can down the road.”
“Ultimately there will be a haircut to bonds issued by certain governments in the Eurozone, and the longer we delay that recognition the bigger the problem and the more disorderly the process will be.”
The next factor influencing the gold price is the size of the US national debt. Although it is difficult to know how large the national debt of the US really is, most government figures tend to indicate that it currently is around $14 trillion. While the US economy was thriving, and unemployment was low, US Treasuries represented a great and safe investment. But, those times are over and now as the US economy is fragile and the US dollar looks precarious, US Treasuries with their low yields are not such an attractive bet for investors. And, during last year we saw the largest holder of US debt – the Chinese – reduce their exposure to US Treasuries. Now the US Federal Reserve has become the biggest holder of US government debt! Then, probably the second largest holder of US debt consists of a diverse group of government sponsored enterprises, brokers, savings bonds, corporate and personal trusts and estates. The Chinese are now the third largest holders of US debt with Japan taking the fourth slot. According to the Federal Reserve, mutual funds hold the fifth largest amount of US debt, followed by US state and local governments that have more than half a trillion invested in US debt. US Pension funds also hold around $500 billion in US debt.
With the very real possibility of a serious melt down in the US dollar and the euro, investors need to find a safe haven in order to protect their wealth that could be totally wiped out in the event that these currencies should collapse. And, historically, gold has been proven to be one of the best ways to preserve wealth. So, it is no wonder why the demand for gold from individual investors is increasing.
Another factor influencing the price of gold is physical demand. China is the worlds’ largest gold producer. Recently, the Chinese Ministry of Industry and Information Technology said that they expect China’s gold production for last year to be above 340 tons. Actual output for the first 11 months of the year, according to official figures, was 308.39 tons, up 9.2% on the same period in 2009. In 2009, China’s gold output was 319. 98 tons. This is now the 6th successive year in which the country has raised its gold output.
China also imported 209.7 tons of gold in the first 10 months of 2010 – up a massive 500% on the previous year’s imports over the same period. The demand for gold last year in China is set to reach approximately 600 tons or more – equivalent to around a quarter of global mine production. This makes China a major player in the global market place.
It also seems inevitable, that China will surpass India as the world’s biggest importer of gold. But, in the meantime demand for gold from India is likely to reach a record last year driven by investment demand, according to the World Gold Council.
Purchases were about 800 metric tons, compared with 557 tons in 2009, Ajay Mitra, managing director for India and the Middle East at the producer-funded group, said today in a phone interview from Dubai. Imports at that level “would be the highest for India in its history,” he said. The group hasn’t released final data for last year. Purchases in 2010 may exceed 750 tons, Mitra said Nov. 17. The Bombay Bullion Association said Jan. 3 imports probably totaled 700 tons in 2010. “Our assessment is demand will continue to be strong,” he said. “Price is no longer a factor.”
Investment demand for gold in India grew faster than the 62 percent gain in jewelry demand in the same period, according to the WGC. “It’s been demand driven with investment in mind,” Mitra said. “While jewelry is a form in which a lot of consumers do buy in India, the core proposition really is security for the future, which is the investment angle for buying into gold.”
And, of course central bank buying has an influence on the gold market. It is important to note that central banks have now become net buyers of gold instead of net sellers. During 2010 the central bank of Russia purchased between 500,000 to 700,000 ounces of gold each month bringing the total of gold now held in reserves to around 750 tons. And, no doubt we will see this action continue throughout 2011. And, it is believed that China intends to increase its gold holdings from the current level of around 1054 tons. Even if they doubled this amount, the percent of their reserves held in gold holdings would still be a fraction of their total reserves, now estimated at around 2.85 trillion, and still below the percentage levels currently held by most Western central banks.
While there are other factors such as high inflation and geopolitical instability, with the high levels of debt in the US as well as the Eurozone combined with very robust demand for physical gold from China and India, there is no doubt in my mind that the price of gold is headed higher, and what we are experiencing at the moment will turn out to be another correction in this huge bull market.
TECHNICAL ANALYSIS
Gold prices have been under some pressure since the beginning of this year and are currently trading around $1360 an ounce which also represents a Fibonacci retracement of 23.6% (F1). A breach of the 50 day MA could indicate a short-term move to the downside to the support of $1325 (S1) which also coincides with a Fibonacci retracement level of 38.2% (F2).
