Gold

Gold bulls are predicting the yellow metal will break $2,000/oz by the end of this year, yet gold’s much-vaunted status as a safe haven has not been in evidence during recent market turmoil. You would have thought the threat of a global banking meltdown if Italy fails would be enough to promote a flight to safety by buying gold. After all, the bond markets have reacted to worries in Europe by not just pushing up Italian premiums to unsustainable levels over 7 percent, but also French and even German bonds have risen.

Yet gold has done little more than rise 4 percent this month, with the only visible support coming from Asian buyers stepping in on the dips. Buyers have come from both the Asian investment community and from the physical market, particularly Indian buyers ahead of the upcoming wedding season. Support is evident at $1,750 according to Standard Bank, placing something of a floor under the metal in spite of limited appetite to push prices higher.

Although gold has risen by nearly a third this year, a Reuters article rightly identifies the driving force as rising liquidity as the developed world’s central banks, including the US Fed, Bank of England, the ECB, Bank of Japan and Swiss National Bank, have sought to lower interest rates and/or exchange rates.

Rather than safe haven, the most likely primer for a push higher will be if the ECB has to print money to support bond purchases of Italian and Greek debt. Germany’s unwillingness to fund a bailout for Greece, let alone Italy, a reluctance extended to blocking the ECB from turning on the printing presses, is probably all that’s keeping the euro firm. Any sign of a relaxation in their position will be taken as a positive sign for gold.

Of course, the Germans are well aware of the perils of funding a bailout, pumping money, or allowing the ECB to pump money, into the European economy by buying up bonds, which will weaken the euro and lay the foundations for inflation in the medium term. Interest rates will have to stay low to fund the mountains of debt and yet rising inflation will mean we have, in practice, negative interest rates a recipe for gold price increases.

Inflation is already uncomfortably high in the UK, but the UK is outside the single currency; only German fiscal discipline (some would say stubbornness) has kept it under control in Europe, but the Bundesbank may, against all previous assertions, decide they have no choice other than to allow the ECB to print money and step in as a lender of last resort. A Greek default or exit from the euro would be problematic but containable — the same for Italy would not. French banks alone are said to be holding over 300 billion euro of Italian debt. For Italy to default or leave the euro would leave French banks with unsustainable losses hence Nicholas Sarkozy’s desperate attempts to coerce the Germans into some form of bailout.

The next week or two could be crucial. We are not by nature gold bulls at MetalMiner, but even we would admit the European debt crisis has just about the only conditions capable of giving gold a sustained push higher.

–Stuart Burns

Gold slipped below $1,800 per ounce last week as equities rallied in a burst of risk on investor enthusiasm. Does this spell the end of the bull run? The gold price has seen a lot of volatility of late and questions are being asked — not least by those holding long positions — as to what the future for gold prices holds in store.

GFMS, the precious metals consultancy, is understandably still bullish. In their recent quarterly Gold Survey, they are quoted by the Telegraph as saying, “Given strong demand for bullion from the public and private sectors ¦ the relatively constrained increase in scrap supply and the ‘stickiness’ of jewellery demand in the fact of higher gold prices, we can easily envisage gold breaking through the $2,000 market before year-end.” Pointing to strong purchasing by central banks in the first half of this year, GFMS predicts full-year bank demand could reach 336 metric tons, the highest level since the collapse of Bretton Woods 40 years ago. The firm is not alone; even normally conservative HSBC raised its 2012 average price to $2,015 from $1,625, with analyst James Steel citing “the euro-zone debt crisis, currency wars, and deep uncertainty among investors” among factors driving higher prices.

Which Way? Make Up Your Minds

But analysts do not seem to be able to agree even on the direction, never mind the degree. Back in late August, a summary of their views showed UBS’ fourth-quarter price at $2,100 and Societe Generale’s at $1,950 and $2,275 for 2012, with $2,500 for the last quarter of next year. Bank of America-Merrill Lynch agreed, seeing $2,000 as a 12-month target, while JPMorgan went along with SocGen, predicting $2,500 in a year’s time. Citi, on the other hand, revised its figure for 2012 up to just $1,650 for 2012 before falling in 2013; likewise National Bank of Australia has it back to $1,600 by the end of this year and the closely followed Goldman Sachs predicting $1,645 an ounce, $1,730 an ounce, and $1,860 an ounce on a three, six, and 12-month horizon respectively.

Nick Moore of RBS makes the point that gold is in a fundamental supply surplus and its rise is therefore a reflection of investor demand rather than physical supply and demand factors. High prices alone bring on an element of physical demand destruction — total global investment in gold dropped 24 percent in volume terms to 624 metric tons in the first half of this year. Clearly, net speculative length in gold has been falling, as the graph below shows:

Source: Standard Bank

Speculative longs — those holding gold in the expectation of a rise — have been falling, as speculative shorts have now risen above last year’s average of 90.7 tons.

Los Preciosos Otros

Silver and palladium have been in the news of late, more because of their performance relative to gold than because of major fundamental changes in their respective markets. Although ETF buying for silver remains strong, some are questioning how much further it can go. It has risen 885 percent over the last decade against gold’s 569 percent, and yet industrial demand could be shaky in the short term as recessionary fears spread beyond the euro-zone to slowing Asian and North American markets.

Platinum, on the other hand, is looking cheap relative to gold, having fallen to a discount. Nick Moore said that over the last ten years, platinum has averaged $420 per ounce higher than gold. According to Johnson Matthey’s Platinum 2011 published earlier this year, the market fundamentals for platinum are tight. The market showed a very small surplus of 20,000 ounces in 2010 as global supplies rose 35,000 ounces to 6.06 million ounces while gross demand in auto catalysts rose by 43 percent to 3.13 million ounces and industrial demand increased 48 percent to 1.69 million ounces. Slowing Chinese growth in automotive construction is probably the cause for the recent falls, but industrial use has remained robust. Platinum’s position seems more solid than Palladium’s which is increasingly looking bearish with short positions mounting suggesting prices will be lower in the fourth quarter.

Support for gold looks largely reliant on euro-zone debt worries. Recent positive sound bites on possible solutions to those worries have caused the price to pull back; an exit for Greece or downgrade of a major state’s credit rating will see it pick up again. Gold at over $2,000 is assuming some form of breakup to the euro-zone (probably Greece’s exit). That’s not looking likely in the short term, but with European politicians more focused on their domestic political fortunes, continued dithering — and hence risk of ultimate failure and support for gold — remains a strong possibility.

–Stuart Burns

Guest commentator TC Malhotra contributes from New Delhi.

India’s gold industry, the world’s biggest market for the metal, is likely to see a further rise in imports this year — even as the country experienced a 34.9 percent increase in imports in the first half of 2011.

According to the World Gold Council (WGC), gold imports in the first half of 2011 stood at 553 metric tons, whereas the total gold imports in 2010 was 959 metric tons, as stated in a Reuters report. The WGC had earlier reported that total Indian gold imports could touch a record 1,000 metric tons in 2011.

At the Multi-Commodity Exchange of India (MCX), gold had hit an all-time high of Rs 27,989 ($621.90) per 10 grams on Aug. 20.

India currently has only one operational gold mine. As such, India is heavily dependent on imports mainly from Australia, South Africa and Russia. Market analysts say that currently India and China are by far the biggest markets for gold in the world. However, gold plays a different role for the Indians than for the Chinese.

It is believed that India has been the biggest gold market for centuries because Indians buy gold for its role in their social, religious and cultural life. For the Chinese, however, attraction to gold is a recent phenomenon because they buy gold primarily for financial purposes.

India consumes about 800 metric tons of gold per year, which accounts for about 20 percent consumption of gold globally. More than 50 percent of this is used for making gold jewelry. However, the per-capita gold jewelry demand in India is low. The per-capita demand in India was 0.61 grams last year, although this level is below the peak levels of 0.65 grams recorded in 1998.

Pretty Jewelry, Attractive Investment

Moreover, gold is the most popular investment in the country. Indian investors generally buy gold as a hedge or safe harbor against economic, political, or social fiat currency crises (including investment market declines, burgeoning national debt, currency failure, inflation, war and social unrest). Some estimate that around 30 percent of per-capita income is saved and of this 30 percent, 10 percent is already invested in gold.

The gold market in India was freed up only in 1997, when the federal Indian government allowed banks and other government-owned trading firms to import the metal directly.

On Jan. 3, 2011, the Reserve Bank of India (RBI), the country’s central bank, allowed seven more banks to import gold and silver. With this, a total of 31 Indian banks (government-owned and private-sector banks) are now allowed to ship precious metals into the country.

Karur Vysya Bank, Punjab and Sind Bank, and State Bank of Hyderabad are some of the new banks that got permission.

Dr. Y.V. Reddy, the former governor of the Reserve Bank of India (RBI), has written in a previously published article that the RBI is neither a speaking purchaser nor a seller of gold reserves, unlike many other countries (including some developing economies, especially in Asia). RBI had used a part of gold (in parallel with government gold) for raising foreign currency resources during the balance-of-payments crisis in the early nineties. These overseas gold holdings are being used as part of reserve management to yield a return.

In November 2010, the WGC announced that India has over 18,000 metric tons of gold stocks, amounting to around $800 billion. India also represents at least 11 percent of global gold stocks.

A WGC research paper  titled “India: Heart Of Gold found that the amount of gold India has is equivalent to nearly half an ounce per person, a figure which is considerably below Western market consumption, and representing the scope for future growth.

–TC Malhotra

Source: 14kgoldteeth.com

Strangely, gold is the hottest commodity quickly and pervasively filtering not only into investment portfolios and central bank coffers, but also into peoples’ mouths and onto their teeth.

To wit, one of our posts about gold grillz — the technical name for gold-based jewelry custom made for the oral cavity — is the most-read post of the summer. Go figure.

The important thing is that we sometimes like to have fun with satire and silliness amidst our commentary on metals markets, sourcing strategies and macroeconomic issues and policies, and this next installment of MetalMiner’s Best Of Summer Series showcases just that. Enjoy!

1. Gold Grillz A Hedge Against Dental Monotony

2. A Thief’s Sourcing Guide to Stealing Scrap Part One

3. A Thief’s Sourcing Guide to Stealing Scrap — Part Two

4. Do War Dogs Have Titanium Teeth? No But They Have Some Sweet Metal Gear

–The Editors

Source: http://www.boston.com/bigpicture/2009/03/robots.html

I came across a press release the other day for a mining automation conference in South Africa.

Now, now — I know what you’re thinking. Yawn. Snore. Boring.

Well, I thought that too, but as I drilled down and did a bit of follow-up reading, some major issues presented themselves and led to big questions. This is the sentence in the release (especially the final phrase) that got me thinking:

“The lack of skilled mining professionals is likely to be the one of the key drivers in next generation mining with mine workers trading in their steel-toed boots for a headset and computer mouse as leading mining companies embrace mine automation to help solve their labour shortages and ramp up output.

Here’s one question that we can explore in a For/Against format (like the one seen in the Economist’s digital pages):

Should investments in automated mining technology especially in Africa come at the expense of teaching and employing more workers? (i.e will automated technology “solve labor shortages as the quote above claims?)

Some arguments for:

  • Increased efficiency resulting in greater volumes of higher-quality ore and metal. Some gold mining companies, for example, are hoping to stop blasting entirely, “create people-less stopes, and mine around the clock.”
  • Fewer employees onsite, which improves overall safety. Since there’s a large push to further take advantage of mineral ore reserves in Africa, and so many countries on the continent are plagued with social and political strife that it would be unsafe to pursue mining projects otherwise.
  • We’ve automated the auto industry so why not?

Some arguments against:

  • It may not build up African mining infrastructure as sustainably as possible. In other words, will local workers have an opportunity to get jobs?
  • It may improve a mining company’s bottom-line exponentially more than creating a sustainable employment infrastructure. As in the auto-industry corollary, the efficiencies provided by nonhuman technology make vast percentages of human workers obsolete. For context, the FT recently reported that in the six months up to June, Freeport McMoRan sold its copper at prices that were on average 4.5 times more than its production cost per pound.”
  • If global growth especially in the emerging economies — tapers off for unprecedentedly long periods (long shot), the investment may be for naught.

Of course, this is a rather cursory and perhaps naive argument and one that will receive deeper investigation as these technologies become more common but what do you think?

Where do you stand on mining automation? For or against? Is it a good thing or bad?

Let us know!

–Taras Berezowsky

A review of the gold price written by Robin Bew, chief economist at HSBC Bank, proposes that the gold price is in danger of entering bubble territory and predicts a sharp correction by year-end. Determinedly, Robin examines the main drivers behind the price over recent months while acknowledging by use of this graph that the price has been on the rise for much of the last decade:

Source: The Economist

Courting controversy from a few sides, the bank states there is nothing special about the nature of gold that makes it an ideal safe-haven asset. Were it not for its widely perceived role as just that, gold would behave like most commodities”rising in value during good economic times, when demand for its industrial uses increases. Of course, gold has limited industrial uses and if that were the only source of demand, the price would behave exactly as he suggests.

The problem is this quasi-financial role that gold has — not quite a currency, but treated as if it were. This imparts it with a special status like all currencies, though, it can rise or fall depending on circumstances. Upon accepting that the world has somewhat arbitrarily assigned gold this role, we must review a number of factors that support gold’s price prior to predicting how these may develop in the year ahead.

First, its safe-haven status, as he points out; since Lehman Brothers collapsed on Sept. 15, 2008, the price of gold has more than doubled. Demand from investors rose from 692 tons in 2007 to 1,200 tons in 2009 and 1,487 tons in 2010, along with demand for other safe-haven assets like US treasuries and the Swiss franc. The yield on all such government debt US, German, Japanese — has been historically low for much of the last three years with the exception of early 2011, when the community went risk-on and moved out of safe havens and into commodities and other riskier assets.

Recently though, sovereign debt has been very much back in the news and gold has benefited from its safe haven status as the Euro has seemed on the point of collapse and the US government seems unable to reach agreement on budget cuts.

The other major support for gold, which almost runs counter to fears about sovereign debt and another financial crisis, is the fear of inflation. Indeed in 2009/10 many were attracted to gold as a hedge against the potential for rising inflation as the global economies bounced back in an extremely low-interest and loose monetary environment.

HSBC’s opinion is the US will reach a deal that avoids default before Aug. 2 and that European leaders’ decisions this week will paper over the cracks, if not actually solve the indebted positions of Greece, Portugal, Spain and Italy such that they can continue to function within the Euro. The bank does not see any significant risk of a rise in inflation in the early stages of what will be a weak and prolonged recovery phase. They are expecting a gradual US recovery starting later this year and observe that Japan is already returning to some sense of normality after the natural disasters early this year. As interest rates do rise, the attractions of financing investments in gold will be reduced compared to other asset classes. As a result, the bank expects the price of gold to average $1,390/troy ounce in the fourth quarter of 2011 and to fall to $1,000/troy ounce by mid-2013.

Naturally the bank adds caveats that this is based on the recovery occurring as expected and inflation remaining subdued, but on the balance of probabilities — that is how the bank sees the next two years working out. As such, some may question if gold at $1600/oz really represents such great value, or if they would be better off taking profits while they can.

–Stuart Burns

As soon as we begin thinking that the Chinese government and industry couldn’t get any wackier, they surprise us once again.

The Wall Street Journal reported that Chinese oceanic administrations are undertaking a major push to explore deep-sea trenches for minerals. This exciting “treasure hunt began on July 1, when explorers shuttled a submersible named after a sea dragon out to the northeastern Pacific to begin some record-setting dives.

According to the article, Xinhua, the Chinese state-run news agency, quoted the director of the State Oceanic Administration as saying that “a Ëœmarvel’ of Chinese manned submergence would occur in the next 15 days.

Well, we’ll see about that.

Eastern Promises

There have been some pretty heavy indications that the Chinese are skilled at overstating their claims. Another Chinese “marvel, so to speak, is going on in the Western hemisphere right now and by that, of course, we mean the delays in the building completion of the San Francisco Bay Bridge.

While technically an American project (funded with taxpayer dollars), the metal and fabrications for the bridge were almost entirely sourced from China, which evidently made promises during the bidding process that it couldn’t keep, and now the endeavor is behind schedule and over-budget.

[Whether there’s a case to be made for sourcing from US producers to gain greater accountability at the cost of longer lead times remains to be seen¦that’s for a follow-up post on another day.]

Now China continues with more activity in its Bold Claims Department, and seeks to supplement its voracious demand for copper, gold, silver and zinc with tapping the ocean to give up its rich resources. To boot, the US blazed the deep-sea trail with Alvin in 1960, and it turns out the Chinese benefited from Alvin training dives through the US Navy.

The Deep-Sea Mineral Race

We’ve seen the same deep-sea rush with oil why not with minerals?

Maybe because, frankly: it’s kind of a pain.

Take the US, for example. They fell behind in deep-sea commodity exploration after leading the world in the 1960s and 70s, when commodity prices weren’t quite high enough in the 80s and 90s to merit the laborious process of exploration and extraction.

Notwithstanding the miles upon miles of water that a deep-sea mining operation would have to hurdle, there’s the sticking point of where the metal ores are located. According to the WSJ article, polymetallic sulphide deposits, each of which could contain 110 million tons of metal ore, are what explorers are after but these generally lie on oceanic ridges, only 5 percent of which have been explored so far.

Finding it is one thing, and creating the infrastructure necessary to suck it up to the surface and refine it is another altogether. That is not deterring China and Russia from applying for permits to explore these mineral-rich ridges all over the world’s oceans.

However, the US is not a member of the International Seabed Authority, the UN-based organization that grants oceanic exploration rights, and some are saying that the country could fall further behind in the race to get their hands on these raw materials.

Even though it may take China a while to gain any worthwhile ground, with metal prices reaching historical highs, now may be the time for the US to get in on the game.

–Taras Berezowsky

The rise and fall of the silver price this year had much more to do with speculative exuberance than any fundamental change in supply or demand. With a foot in both the industrial and investment markets, silver has always lived a dual life. Either pulled up or depressed by a rising or falling gold price and likewise supported by improving global macro economic trends suggesting industrial demand improvement. Sometimes this pushes silver counter cyclically to gold. Occasionally both factors coincide to encourage a high level of speculative interest in the metal.

Source: ETF Securities

This scenario occurred in the run up to silver’s $50 peak in late April. In 2009, investment demand soared but industrial demand plummeted. Last year both industrial and investment demand coincided. Speculators thought a bonanza at hand what with silver supply from mines and scrap sales growing only slowly, on average 2% and 4% respectively. And that bonanza existed for a while, but reality kicked in as the gold-silver ratio pushed 31.   Would a correction ensue?

Source: ETF Securities

The current ratio around 40-45 seems reasonable with industrial demand gradually recovering and with elevated gold prices making silver a more attractive metal for the small investor to hold. Bloomberg reports Australian Mint sales hit a record with the rising silver price. The FT reports the UK’s Royal Mint has seen the same surge in sales, as have other mints around the world. And India’s state trading company, MMTC announced in Reuters it will almost double its silver purchases this fiscal year to 1,500 tons. On average, India buys some 4,000 tons of silver per year. If MMTC double their purchases the more ‘fleet of foot’ private importers will do so likewise. A portion of this will go into jewelry which along with photographic use has trending lower over the last ten years. But in India demand remains strong particularly as the price increased. Silver became a more desirable store of value.

In addition, Exchange Traded Funds have sucked up considerable quantities of physical silver this year. Following the Comex silver restriction based sell off in May, many sold their ETF position but since that time, have made a comeback in late June-July.

Going forward much will depend on some key issues. First, perceptions of industrial growth both in China and the west. China, currently undergoing progressively tighter credit conditions in an effort to stifle inflation but has just posted some impressive export numbers suggesting the economy remains far from constrained by steps taken so far. In the west, recent PMI numbers suggest European manufacturing demand may slow. Naturally enough the Silver Institute appears very optimistic. They predict industrial demand for silver will increase to 666 million ounces by 2015, a 36% increase from 487 million ounces in 2010. In addition, much will depend on Asia and global growth generally. Second, the strength of the US dollar, which as the European debt crisis has worsened over recent days has strengthened considerably. Gold has reached record highs in Euros and Pounds but remains off peaks in dollars because of the currency’s relative strength. We see that unlikely to continue unless the European situation deteriorates further. Finally inflation which has remained benign in most mature markets has become a problem in many developing ones. If inflation fears surface in developed markets, expect gold and silver to move higher again.

We have never considered ourselves bullish on precious metals, as we tend to prefer markets that move based on more solid supply demand fundamentals and less on speculative pressures such as inflation or currency hedges. But short term volatility aside, we would leave readers with the view that for silver to reach the heady heights it scaled in April it swung to an unprecedented gold-silver ratio of 31. At a more comfortable ratio around 40 gold would have to hit over $2000/oz for silver to see $50 again.

–Stuart Burns

Last week we caught up with our friends at Elm Consulting Group International (you may recall a series of posts published on MetalMiner written by Lawrence Heim of Elm Consulting relating to the conflict minerals provision recently enacted under the Frank-Dodd banking reform bill) to hear about the progress made by SEC in terms of publishing the final rules (and hence requirements) for companies sourcing tin, tantalum, gold and tungsten. Lawrence Heim attended the EICC Extractives Supply Chain Workshop VI (EICC “promotes an industry code of conduct for global electronics supply chains to improve working and environmental conditions.) The organization has also developed an audit program for companies that need to comply with the legislation.

Heim suggests via his blog that a rift exists between policy-makers that include governmental and quasi-governmental organizations and the companies that need to implement the legislation. Not surprisingly, industry has raised concerns around several issues that policy-makers do not appear to have considered. The primary issues involve industry not accepting the recommendations of the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict Affected and High-Risk Areas and the Supplement on Tin, Tantalum and Tungsten specifically for its lack of “actionable, specific implementation steps/detail and the uncertainty about how the Guidance will comply with SEC requirements, and from a sourcing perspective, companies remain concerned about the confidentiality of supplier information as well as the fact that the supply chain for gold appears quite distinct from the other metals. Industry has raised concerns that compliance with Frank-Dodd will require a customized solution for that supply chain.

It should come as no surprise that the early interpretations of the legislation have lacked specificity. In fairness to the policymakers, the final rules have yet to be released by the SEC. Regardless, consulting firms and software providers will need to ensure the right balance of cost-to-comply, risk mitigation and actionable solutions.

We will continue to provide updates on this legislation, particularly when the SEC announces the final rules later this summer.

–Lisa Reisman

 

 

As the resident fashion blog reader here at MetalMiner, I’ve noticed a shiny trend: metallic is back, and not just in makeup, fabric, or statement jewelry. Designers are ditching the jewelry for statement … shoes! According to The Moment, the NYT fashion blog:

“Copper, silver and gold have taken a recent hiatus from the wrist and settled near the sole. Silver ankle cuffs are the newest way to dress up a pair of sandals, but they’re hardly the only golden opportunity. Many of the season’s best sandals look like they’ve been dipped in 24-karat gold dust ” a glimmer, not to mention a shimmer, of what’s ahead for fall. From Altuzarra’s silk sheath dresses dripping in metal  fringe to Balenciaga’s asymmetrical tunics with silver panels and Givenchy’s gold patent pumps, designers are smitten. Meanwhile, take a step in a right direction.

My favorites are from Lanvin and Giambattista Valli:

On the more functional (and, ahem, less expensive) side of the equation, Boing Boing featured something I need pretty badly. You see, I have a collecting problem. This is (just one) of my many bookshelves:

So imagine my delight when I saw these:

Designers Xin-Hung Lin, Pei-Yi Chiu, Chia-Rung Shu, & Wung-Bing Lin of Yanko Design came up with this “curled, tensioned metal shelf overlaid with plastic to hold the books in place. Plus, the ends have secret compartments to hold pens, trinkets, or whatever you want. Now any surface in my house can become a bookshelf!

Stay trendy, and stay organized this summer. And happy weekend.

–Sheena Moore

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