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 prices retreated on Monday after a strong rebound last week after the US Federal Reserve announced that it will not be raising interest rates.
In what has become the most highly anticipated meeting of the Federal Open Market Committee (FOMC), the Fed announced that it was going to maintain its current policies, and left the policy rate at 0.125%. Yet, the accompanying statement and the economic projections came in more dovish than expected. The Fed showed concerns over the negative impacts of the recent global financial market volatility, as well as rapid slowdown in China and other emerging markets, on growth and inflation outlook.
In her press conference, Fed Chairwoman Janet Yellen made it clear that the U.S labour market is close to full employment, and that she’s reasonably confident that the inflation rate will drift back up to around 2% eventually.
While gold prices were given a boost on Thursday and Friday, after the Fed announced that it will not be raising interest rates, the U.S dollar tumbled but later staged a strong recovery towards the weekly close. However the greenback still closed the week as the second weakest major currency, after Euro. The dollar index dipped to as low as 94.06 last week but recovered to close at 94.86.
Seven years ago on September 15, 2008, the US government’s total debt was $9.6 trillion. Today it’s over $18 trillion… and once they raise the debt ceiling (which is inevitable) the debt will rise overnight to over $19 trillion– twice as much in seven years.
In 2008 the entirety of the Fed’s balance sheet was just $924 billion. And the total of its reserves and capital amounted to $40 billion, roughly 4.3% of its total assets.
Today the Fed’s balance sheet has exploded to $4.5 trillion, nearly five times as large. Yet its total capital has collapsed to just 1.3% of total assets. And, its assets are things like US government bonds.
Over the last several years the Fed has essentially printed trillions of dollars and which it has used to buy US government bonds. This has all been done at almost zero interest rates. Currently the Fed is holding some $4.5 trillion worth of existing bonds, most of which they purchased when interest rates were basically zero.
So what happens if the Fed raises rates? The market value of their entire bond portfolio will fall.
And given the razor-thin capital the Fed has in reserve, they can only afford a tiny 1.3% loss on their bond portfolio before they too become insolvent.
Meanwhile, with inflation near zero, the yen plunging, the economy contracting and debt rising as the population ages, Japan’s debt crisis is deteriorating quickly.
According to the International Monetary Fund, public debt will increase to about 247% of gross domestic product next year.
Recently S&P cut Japan’s credit rating, announcing that Japanese debt is now rated lower than that of China and South Korea, two of its major trading partners. Japan’s bonds are barely worth the paper they’re written on.
A new development in the gold market has been India’s attempt to sell gold-backed bonds and allowing banks to tap idle jewellery and bars held by households and temples to cut reliance on imports.
Prime Minister Narendra Modi’s cabinet approved the gold monetization plan and sale of sovereign bonds by the Reserve Bank of India.
An estimated 20,000 metric tons or more of bullion — more than double holdings in the U.S. — is stashed in India’s homes and temples, according to the government. Modi is looking for a long-term solution to curb gold imports after the current-account deficit widened to a record in 2013 and the rupee slumped to an all-time low.
The monetization plan will allow Indians to deposit their jewellery or bars with banks and earn interest, while the banks will be free to sell the gold to jewellers, thereby boosting supply. The deposits can be for a period of one year to 15 years with the interest on short-term commitments to be decided by the banks and those on long-term deposits by the government in consultation with the central bank.
The plan may fail to draw people in large numbers because of Indians’ inherent love for holding physical gold and low interest rates likely to be offered by the banks. Inadequate banking facilities in rural India, which makes up for 60 percent of physical gold demand, may also scupper the plan, according to the All India Gems & Jewellery Trade Federation.
“The schemes will succeed only if the banks offer interest rates of about 2.5 percent and do not require customers to declare source of deposited gold below a certain limit,”Bachhraj Bamalwa, director of the federation, said by phone from Kolkata. “At the end of the day, Indians’ love for physical gold and investment sentiment in the rural areas, which do not believe in such investment products, will determine the success of the plans.”
It appears that South Africa’s gold mines, the deepest and among the oldest in the world, are in big trouble.
In an article published by Bloomberg, the four largest producers in the country are losing money on about 35 percent of production at current prices. At the same time, higher costs are cutting into profits as electricity bills climb to a record. Workers are also pushing for wage increases, with some threatening to strike if salaries aren’t doubled.
South African output slid at the fastest pace among the 10 biggest-producing countries in the past decade. Mine supply halved in the period to about 145 metric tons last year, according to the World Bureau of Metal Statistics.
The metal has slumped 40 percent from its 2011 record to about $1,122 an ounce. At that price, half of mines owned by the nation’s top producers are losing money, data compiled from second-quarter financial reports show.
Meanwhile on September 11, Reuters reported that gold coin sales in the United States and Europe have surged in the third quarter, with sales from the U.S. Mint reaching levels not seen since the price crash of 2013, as low prices and a series of market shocks fuel retail buying.
Sales of gold American Eagles have nearly trebled year on year in the third quarter with most of September still to go, reaching 322,000 ounces. That’s the highest of any quarter since the gold crash of 2013.
The surge in retail buying in 2013 came on the back of a dramatic reversal in a decade-long rally in gold prices, with buyers scrambling for bargains after a $200 plunge in gold prices in just three days.
The 6 percent drop in prices this year has been less dramatic, but has been accompanied by a highly turbulent period in stock markets, and fears over the stability of the euro zone.
Concerns over slowing Chinese growth flared after the central bank devalued the yuan, knocking Chinese stocks and helping put world shares on track for their biggest quarterly drop in four years. European assets also came under pressure in July from fears that Greece was set to crash out of the euro.
The Austrian Mint, which produces gold and silver Philharmonic coins, said sales of its gold coins more than trebled year on year in July and August to 321,500 ounces, citing lower prices, ultra-low interest rates, stock market volatility and fears of a ‘Grexit’.
The UK’s Royal Mint said it has seen significant increases in Sovereign and Britannia coin sales throughout the past three months, particularly in July. Sales are more than 50 percent higher than during the second quarter, it said.
Degussa, a leading German coin and bar dealer with sales of 700 million euros in the first half of 2015, said its gold sales this quarter have been 30 percent higher year on year.
“We had a fantastic month in July with large coin and bar sales,” Chief Executive Wolfgang Wrzesnioch-Rossbach said. “August was quieter, but still saw 20-30 percent higher demand compared to last year.”
Gold moving through the Exchange this August has totalled a phenomenal 301.96 tons bringing the year to date total to 1,718.2 tons, some 219 tons more at the same time of year than in 2013 when China consumed a record amount of gold.
If SGE withdrawals continue at the average rate recorded so far this year, full year deliveries though the Exchange could reach around 2,580 tons – and this is certainly not an impossibility given that demand during the final quarter of the year usually runs strong. This figure is equivalent on its own to around 80% of global annual new mined supply at present.
While Demand for physical gold and silver in August and September has been exceptionally strong as investors seek a safe-haven from market turmoil, the traditional months of strong demand from Asia are now ahead of us which will add even greater demand for gold in the coming weeks. In India, gold demand will reach its peak later than usual this year as Diwali falls in the second week of November.
However, this robust demand for physical gold has been obscured by the ongoing shenanigans of the bullion banks and their persistent selling of futures contracts on the Comex. For now, the paper or electronic market continues to set the price of the yellow metal creating a distorted perspective of the real situation. But rising premiums and delays for popular bullion products suggests that this continual price suppression will soon give way to a more realistic price discovery reflecting real world supply and demand.
Now, is the time to consider an allocation in physical gold and silver. These precious metals have been considered a reliable store of wealth and value for thousands of years.
TECHNICAL ANALYSIS
Gold prices rebounded strongly from the $1100/oz. level to break above the 50 day MA. I expect to see a period of consolidation and then prices should continue to trade with an upward bias in the medium term.
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.
