News that Canada’s Barrick Gold, the world’s largest gold producer, has finally wound up its infamous hedge book will come as a relief to its investors and no great surprise to the rest of the industry even though it has cost the firm some $5.7bn. Barrick sold forward part of its production at fixed prices years ago and in the falling market of the 1990’s served the company well but as the gold price took off during this decade, Barrick was forced to continue to deliver gold at below the market price. A salient example that hedges are no guarantee to constant profits.
Following news of the liquidation of the hedge, Barrick’s fortunes are now aligned with the other gold majors and so it is no surprise to hear Aaron Regent, President of the company start talking the gold price up. In a report in the Telegraph newspaper, Regent is quoted as saying that global output has been falling by roughly 1m ounces a year since the start of the decade. Total mine supply has dropped by 10% as ore quality erodes, implying that the roaring bull market of the last eight years may have further to run. Ore grades have fallen from around 12 grams per metric ton in 1950 to nearer 3 grams in the US, Canada, and Australia. South Africa’s output has halved since peaking in 1970. In addition, the above ground mines of central banks have moved from being net sellers to net buyers as Asia’s central banks have gradually increased gold holdings at the expense of dollars.
All is true but is the logical conclusion that prices will continue to rise? In a separate article various opinions were detailed with mixed results. Barclays Capital was fairly neutral saying only the price would average US$1140 per ounce in the first half of 2010. Jim Rogers of Rogers Holdings in Singapore pointed to the last peak in 1980 adjusted for inflation, would be over US$2,000 and so concluded gold had a long way to run unhelpfully he went on to say this could be sometime in the next decade. 370 delegates at the London Bullion Market Association’s annual conference were polled and predicted gold would be at US$1181 in 12 months time marginally up from current prices. Standard Chartered London are being much more bullish suggesting US$1200 is possible before the end of this year on the back of continued dollar weakness. Nouriel Roubini, Professor of Economics at New York University’s Stern School of Business is less enthusiastic saying he could see the price going a little higher “But those people who delude themselves that gold can go to $1,500 or $2,000 are just talking nonsense. The fundamentals are not justified, and those people are just talking their books.
Confused? Join the rest of us. In the short term, gold does appear to be in a dollar play. The dollar weakens and gold rises but the wall of noise pushing it up is almost deafening. In the absence of a real risk of inflation, one has to wonder how much further the metal can go. Declining ore grades or not when most of the demand is investment rather than real consumption the available store of metal is actually increasing not decreasing. In the short term that doesn’t stop the price rising but it stacks the fundamentals against it staying high indefinitely. As interest rates rise the attractions of a possible capital appreciation may not look quiet as attractive as an equity market that is able to pay dividends.