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.
During the month of April, gold prices were range bound between $1180 and ounce and $1215 an ounce with much of the transactions being set at around the $1200 an ounce level.
Gold prices bounced off the previous session’s six-week low on Monday, but remained under pressure as the U.S dollar firmed while buyers remained cautious on the timing of a US interest rate hike. June gold closed up $12.60 an ounce at $1,187.10 an ounce and spot gold ended the day at $1187.80 per ounce.
Gold hit its’ highest since early April at $1,215 earlier this week but failed to hold that level after the latest Federal Reserve meeting.
Last Wednesday, the Federal Reserve downgraded its view of the U.S. labour market and economy in a policy statement that suggested the central bank may have to wait until at least the third quarter to begin raising interest rates.
While the Federal Reserve remains optimistic on growth this year, the latest disappointing GDP report has put a coffin nail in any talk of an interest-rate increase before the fall — or maybe even into 2016. That’s positive news for safe havens like gold.
The sad truth is that despite six years of the Fed’s zero interest rates, first-quarter GDP avoided negative territory only because of a huge build-up of business inventories. Blaming the snow and bad weather, the Fed says it sees light at the end of the tunnel and that its targets are just around the corner. But it’s been consistently wrong in its forecasts. So, I doubt they are going to be correct now. Don’t believe them.
As far as I am concerned too many traders are fixated on when the Federal Reserve might launch an interest-rate hike. For now it seems that they want to put a cap on the gold price at around $1,215 an ounce. Furthermore, I have no idea how analysts have come up with the theory that higher interest rates are bearish for gold. This certainly wasn’t the case in the eighties when interest rates soared.
Meanwhile, the financial noose is tightening on Greece, which is due to pay about 200 million euros to the International Monetary Fund on May 6 and another 770 million euros on May 12. According to financial officials, Greece intends to meet debt payments this month and reach a deal with its international lenders to unlock remaining bailout aid, but the International Monetary Fund insists on tough labour reforms.
The European Central Bank is set to meet on May 06, to discuss whether to increase discounts on the collateral it accepts from Greek banks in return for emergency funding, a move that could further restrict access to liquidity.
Of more importance is the insidious action taken by many banks in several countries around the world that most people are not even aware of. Suddenly, having cash is becoming a problem.
Governments and banks around the world are making it more difficult to save and transact with cash in their latest attempt to financially suppress their citizens. Their goal is to force you to deposit cash and charge you interest as well as having total control over the money on deposit.
Not surprisingly, the reason given was to “fight terrorism!”
The war on cash is proliferating globally. Recently, the Swiss National Bank implemented negative interest rates without first solving the “problem” of how to prevent cash from fleeing the banks. And as to be expected, prudent depositors started doing some calculations.
In one example, a Swiss pension fund, calculated it would save 25,000 francs for every 10 million it held in the bank by simply withdrawing those millions and storing them in a vault. The vault storage fees are less expensive than the negative interest rate.
What happened next is truly unbelievable. When the pension fund informed the bank that they wanted to withdraw their funds, the Swiss bank responded to the fund’s withdrawal request with a letter stating: “We are sorry, that within the time period specified, no solution corresponding to your expectations could be found.”
Although we all know that fractionally reserved banks literally don’t have the money their customers hold in demand deposits, the contract states clearly that customers may withdraw their funds at any time on demand.
This occurred in a country that is highly regarded for their banking. And, Switzerland regularly makes it to the top three on the list of countries with the highest degree of economic freedom.
Since the national bank has introduced negative interest rates, pension funds in the country are in trouble. Banks are passing the negative rates on to them. This results in the saved pension money shrinking, instead of producing a return. A number of pension funds are therefore thinking about keeping their money in an external vault instead of leaving it in bank accounts.
Meanwhile, the Swiss National Bank is berating the likes of the pension fund for trying to circumvent negative interest rates and it is encouraging retail banks to be “restrictive” with regards to cash withdrawals. And apparently no one should be questioning the wisdom behind the policy!
It now appears that the same thing is happening in the USA. Recently, JPMorgan Chase sent a letter to some of its large depositors informing them that the bank will no longer accept cash from customers who want to use it to make mortgage payments, pay credit card balances or to cover their automobile loan.
Chase also rolled out new restrictions on what can be put into safe deposit boxes. The “Updated Safe Deposit Box Lease Agreement” customers must sign states, “You agree not to store any cash or coins other than those found to have a collectible value.”
The bank coined a euphemism. It stated that from May 1, it will charge certain customers a “balance sheet utilization fee” of 1 percent a year on deposits in excess of the money they need for their operations. That amounts to a negative interest rate on deposits.
It is obvious, that the U.S. Federal Reserve bank and its owners, the largest banks on Wall Street, want to be able to charge you interest for the privilege of depositing your funds.
Depositors are already unhappy about zero percent returns on checking and savings accounts. If they must start actually paying the bank to hold funds on deposit, many will opt to simply withdraw the cash and store their notes elsewhere.
Financial repression has long been a driver of demand for physical precious metals. This demand will accelerate as measures become more draconian. Some bank customers, perhaps even the Swiss pension fund mentioned above, will decide that bullion is a better option than sitting on piles of depreciating paper currency or paying banks to hold deposits.
In France, individuals will not be allowed to make cash payments exceeding €1,000 (down from €3,000). Additionally, cash deposits and withdrawals totalling more than €10,000 per month will be reported to Tracfin—an anti-fraud and money laundering agency.
Currency exchange will also be further restricted. Anyone changing over €1,000 to another currency (down from €8,000) will be required to show an identity card.
Spain has prohibited cash transactions over €2,500. The justification? “To crack down on the black market and tax evaders.”
In Sweden and Denmark the use of cash is being steadily eliminated. In Israel, individuals and businesses are still allowed to make small cash transactions, but eventually, all transactions will be converted to electronic forms of payment. The justification being used in Israel is that “cash is bad,” because it encourages an underground economy and enables tax evasion.
In 2012 a law in Mexico was introduced banning large cash transactions, with a maximum penalty of five years in prison.
In August 2014, Uruguay passed the Financial Inclusion Law, which limits cash transactions to US$5,000. In future, all transactions over that amount will be required to be performed electronically.
Historically, only gold and silver have been trusted private stores of value as well as a hedge against political, financial and economic turmoil.
In such an insane environment, gold and silver will become the only real trusted alternative to fiat currencies. And, as more new capital flows into physical bullion, its price will soar.
TECHNICAL ANALYSIS
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.
