Mining the Pharaoh's Gold

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Precious Metals

More than 2000 years after the Pharaohs mined the Sukari Hills in eastern Egypt, London-listed Centamin will this week start the first phase to mine some 200,000 ounces of gold annually from the region. The area has long been known to hold gold according to the Financial Times. After the Pharaohs, the Romans also surface mined the area but the depth of the deposits were never realized largely for political reasons. Nasser’s economic policies from 1956 to 1970 prevented the use of the advanced technology that was needed to quantify the deep deposits. Surveys now estimate the deposits at 13 million ounces, worth some $12 billion dollars at today’s prices.

Centamin will have to raise nearly $50m via a rights issue to continue the project, following delays and adverse currency movements, but should find willing investors in the current firm gold market. The gold price has remained at around $900/ounce for the last four weeks and the US Mint is reported to have sold 92,000 ounces of its most popular American Eagle coins in January, almost four times that sold in January last year and more than it shipped in the whole of the Jan-June period of 2007. The demand appears to be driven by investors wanting to spread their risk into some physical assets they perceive as a safe haven from the current turmoil. Investment demand is being driven by the very rich, said to be hoarding gold in vaults. Even though gold use in jewelry has collapsed, Goldman Sachs and UBS (plus about every gold miner on the planet of course) are predicting prices will go back above $1000/ounce. Though we can see the safe haven argument we don’t believe the market is supported by the fundamentals and wonder how far it has to go. There has been an unprecedented amount of bad news over the last six months and the gold price has failed to return to the near $1000 level last seen in early 2008. The only motor driving the gold price at the moment is the weight of money behind the ETF’s, as investors get back into the commodity ETF’s Gold will gain, not because it should but because the mix of investments in a typcial ETF pre-determines a proportion will be invested in Gold. The other dynamic that could hit the gold price is a dollar collapse, in that event we may re-assess our view but for the time being the dollar’s attractions as a safe haven appear to be matching those of the yellow metal.

–Stuart Burns

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