Gold

In supporting that last argument in Part One, it is observed that China is reducing its holdings of US-dollar treasuries — it has been a net seller for the last two months. According to the U.S. Treasury department’s Web site, in November 2010, the country lent the U.S. $895.6 billion, which was down 3.6 percent from the same period a year earlier. “China has shortened all their maturities to less than 5 years and now they are not as strong in the auctions,” argues Chuck Butler, president of EverBank. Speculation is bubbling that the country is shying away from the dollar to make more room for another asset; could that be gold?

But others have poured scorn on the idea. Jon Nadler, senior analyst at Kitco.com, argues that China loves growth too much to switch to a gold standard, and “forget about 8% growth.” If China supports its currency with gold then it will be forced to limit the amount of money in circulation, which could hurt the economy. “This is a far-fetched dream by the gold bugs,” he has said.

Putting the yuan onto a gold standard may not be the intended outcome, though; we would suggest an alternative objective might be to soak up excess liquidity in the economy and hence reduce inflationary pressures. Encouraging citizens to buy cars, white goods and electronics is good for industry, but the rate of growth has been so rapid aided and abetted, one should add, by the stimulus measures introduced by Beijing in the aftermath of the financial crisis and has since largely wound down that it has brought price inflation with it. Raising interest rates and bank reserve requirements has the desired effect of slowing demand, but at the additional cost of raising costs for industry. Giving the population something else to speculate on apart from property prices could be the intent. Nor can we see how encouraging the public to buy gold furthers the aims of a currency reserve standard — India has been the largest importer of gold for many years, most of it bought by the general public, yet the rupee is a long way from the front runners as the next reserve currency.

Whatever Beijing’s intent, it has undoubtedly supported the gold price over the last year and that policy is, like so many other metals, likely to impact gold prices this year and next to an even greater extent.

–Stuart Burns

MetalMiner and its sister site, Spend Matters, along with Nucor, will host a live simulcast, International Trade Breaking Point on March 1, 2011. If your company sources products from overseas, you will not want to miss this half-day event:

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Just why are the authorities in Beijing so actively supporting widespread purchases of gold and financial gold instruments? China has also been telling its citizens to buy gold, promoting different gold funds, giving investors access to overseas products and launching a global gold contract based in yuan by the Chinese Gold & Silver Exchange. On the face of it, this seems like a strange position to take; at the very least we have come to expect governments to be neutral on their citizens’ investment choices, sometimes downright negative such as raising interest rates to dampen property or stock market bubbles, but rarely so overtly supportive towards investing in speculative and volatile commodities. One has to ask: what would the social fallout be to a collapse in the gold price, and would there not be some resentment in being so aggressively encouraged to buy?

China’s desire for gold is not solely reserved for the man and woman on the street. According to a Reuters article, gold imports into China soared in 2010, turning the country, already the largest bullion miner, into a major overseas buyer for the first time. The same article said China imported 209 tons of gold in the first 10 months of last year, versus 333 tons by India for the whole year, making China second to India the largest gold market and accelerating fast enough to take top slot this within a year or two. The US by comparison bought 233.3 tons.

Theories abound as to why China is buying gold both for its central reserve (which now stands at 1054 tons, or about 1.8 percent of it central bank reserves), and encouraging its citizens to hoard gold as well. The front-runner is that China is on a drive to have the yuan accepted as the world’s reserve currency and amassing gold will improve investor confidence, if you like a return to a gold standard. If that were really the plan, China would have a profound impact on the gold market. As TheStreet.com points out, China holds $2.85 trillion in foreign reserves, which means the country would need to buy roughly 66,000 tons of gold to fully back its currency. Even if the country raised its holdings to just 3 percent, the country would need to buy 1,000 tons. The article goes on to point out that technically, a full gold standard isn’t an option. Under the IMF’s first amendment to Article IV of Agreement, ratified in 1978, participating countries are not allowed to peg their currency to gold, but that doesn’t undermine the attraction of carrying large gold reserves as an expression of solidity.

(Continued in Part 2.)

–Stuart Burns

MetalMiner and its sister site, Spend Matters, along with Nucor, will host a live simulcast, International Trade Breaking Point on March 1, 2011. If your company sources products from overseas, you will not want to miss this half-day event:

Register for the live simulcast today!

While there’s considerable focus on silver regarding what returns it can gain as an investment asset and as a hedging tool both valid applications, amidst sovereign debt risks and currency devaluations it’s helpful to zero in on the fundamentals of silver and how it plays next to gold, its precious cousin, and the more industrial-focused platinum and palladium. In light of China urging its citizens to buy gold (more on that key topic in a two-part series from Stuart on Monday), where does silver stand in all of this?

If there’s anything to say of silver’s performance in the ETF market, it’s all good. According to Bloomberg data compiled up to Feb. 11 and presented by ETF Securities in a recent presentation, silver has outperformed most of the other precious metals, key commodities such as Brent oil and equity benchmarks like the S&P. In terms of spot returns, the one-week return for silver stood the highest at 3.1 percent, compared to gold (0.7%), platinum (-1.7%) and palladium (-0.4%). The 12-week returns for silver stood at 91.9 percent, second only to palladium (94.5%).

Back to the fundamentals, however: investment and industrial demand, although playing off each other in different directions through the years (as the graph below shows), may be at odds with supply of the metal the rest of the year and beyond. (Just today in London, the silver spot price broke $32 per ounce, a 30-year high.)

Source: GFMS, compiled by ETFS

Although Will Rhinds, head of ETFS’ US operations, recently told MetalMiner in an interview that he sees no noticeable shortage of silver. “If people believe the mine supply of silver will fall this year, then some people can extrapolate that into something more extreme, he said. “But from our vantage point, we don’t see any signs of a visible shortage.

At first blush, that could seem to be at odds with the most recent outlook, presented by ETFS senior analyst Daniel Wills, who pointed out the relatively steady 2 percent growth of silver mine production from 2000 to 2009 may not be enough to offset the 86 percent decrease in above-ground stocks in 2009. Granted, Wills spoke based on data trends through 2009, while Rhinds may have more recent insight.

Source: GFMS, compiled by ETFS

Whatever the supply situation at the current moment, it’s inevitable that we’ll be seeing unprecedented broadening of the silver demand spectrum beginning this year, if the above graph of demand sources is any indication, going by Wills’ conclusions. With high inflation concerns across the globe and sovereign debt risk in Europe (but let’s not count out Japan and the US as well), and with miners increasingly looking to hedge their metal buys, this period may make for an interesting silver environment. (The gold-silver ratio dipped below its 50-year average at the end of 2010 the last time it was that low, Reagan was in office.)

–Taras Berezowsky

*For a much broader picture of the silver and gold investment environment, you can attend a free conference: Phoenix Investment Conference & Silver Summit on February 18-19, 2011.

Details contained in the referenced link.

Source: CITIZEN:Citizen

Silver and gold — so sang the dapperly dressed snowman (was that a snowman? Burl Ives, right?) in “Rudolph the Red-Nosed Reindeer. The precious metals aren’t really MetalMiner’s main focus, but here are some diamonds in the rough nonetheless!

1. “Silver The Price is as Volatile as the Predictions

Looks like silver’s not the only thing that’s volatile just check out David Carter’s eye-opening comment below the post!

2. “Is a Return to a Gold Standard the Answer?

Posts such as these have been especially important in the wake of the Fed’s implementation of quantitative easing, Chinese devaluation of the renminbi, and debt woes across Europe most recently Ireland.

3. “Silver Coins Could Top List for Santa’s Presents This Year

As coin sales attest, silver still remains popular with smaller investors and the general public. (I used to collect coins as a kid maybe I should get started again.)

–Taras Berezowsky

In these days of uncertainty, with investors diving into the gold market to hedge against the fluctuations of the currency market and especially the recent devaluations of the dollar how about taking it just one step further?

Instead of simply buying and holding a physical amount of gold (if you’re lucky), how about swallowing it in pill form yes, you read that right so that you can “turn your innermost parts into chambers of wealth”?

Source: CITIZEN:Citizen

This hilarious contrivance comes to our attention via The Consumerist (thanks, Consumerist!), with the quote in the previous paragraph concocted by the wordsmiths at CITIZEN:citizen, an art production and distribution house based in San Francisco. Evidently, these artists and champions of the avant-garde have set out to break the rules by changing “the landscape of design in North America.

Well, they’ve surely changed something.

Source: CITIZEN:Citizen

The artist, Tomas Wong, collaborated with Ju$t another Rich kid (Ken Courtney) to create “Gold Pills, 24-karat gold leaf capsules that are 20 mm L in size.  They retail for $425 each, and since the pills inhabit the art sphere more than the consumable one, they’ve been bought by the likes of San Francisco’s Museum of Modern Art. (Maybe that’s why they’re listed as “Temporarily unavailable on CITIZEN:citizen’s web page¦or perhaps it’s because some idiots actually did ingest some of these deliciously expensive looking treats and they ended up, ahem, not tasting so good.)

I guess CITIZEN:Citizen are just betting on selling to those who think their poop doesn’t stink or at least who think their poop is more valuable than anyone else’s. “Through its attention to craft, ideas and exquisite execution, CITIZEN:Citizen has defined itself by creating a new market, their site reads. Wong has been quoted as saying, “[I am] uncomfortable with uniqueness and preciousness as well as ownership. The design line the pills were part of, INDULGENCES, professes to address “the creation of and demand for the unnecessary, directly commenting on the ever-expanding market of luxury items in our culture. It always amazes me that artists commenting on excess and indulgence spawn things like $425 gold pills that only those who are being made fun of or “commented upon, to use their parlance can afford. Doesn’t this just perpetuate the circumstances of absurdity?

If the gold pill strike your fancy, you may also like Cokespoon #1, a solid bronze cast of a copper- and gold-plated Bic pen cap; Cokespoon #2 a solid bronze cast of the copper- and then gold-plated 1980’s McDonald’s coffee stirrer; or Swizzlestick, a solid bronze casting of a Playboy drinks stirrer.

Finally: a gold-and-copper-plated commentary on luxurious excess and 20^th century sexual imagery and branding. Awesome!

–Taras Berezowsky

An intriguing if slightly scary article appeared on Mineweb last week, summarizing a number of earlier interviews and comments by gold market commentators and investment gurus concerning the degree to which gold on deposit in bank vaults actually exists. Or, as the article explains, doesn’t. Confusing? Yes, well, the situation is more than a little confusing, but I will try to explain.

Unlike paper money, which we have always accepted, does not physically sit in bank vaults — following your deposit, it’s instantly recycled into loans and payments by your bank. We have always understood that for those of us fortunate enough to hold physical gold (this author not included), when we deposit our precious bars in a bank’s vault for safekeeping, and the bank starts billing us for storage charges, that gold is sitting safe in their vaults for our eventual return. Secure and instantly available when we want it? Well, maybe not. Anecdotal evidence quoted by Jim Ricards, Snr. MD of Market Intelligence, and James Turk, founder of Gold Money, relayed stories of clients with physical gold and silver in Swiss banks who had to fight for one and two months, respectively, to secure the physical return of their gold and silver holdings. The conclusion in both cases: the banks were no longer holding the physical metal, even though they were continuing to charge the owner for storage.

The article also quotes GATA in saying it has long been known that the amount of gold and silver traded every day on the markets far exceeds the amount actually in existence, and that if everyone demanded simultaneous delivery it would be impossible. That should not come as any surprise; the same ounce can be bought and sold many times in a day representing dozens of ounces when in fact it is the same ounce going around. In addition, many trades are swaps, hedges and other transactions requiring financial delivery, not physical. Nevertheless, the point is probably a fair one that we trade gold and silver as if ever trade was physically backed, with no risk on non-delivery priced in and yet in most cases there is a counter-party risk which like a sub-prime mortgage gets passed around, until one day it doesn’t. As the volume of physical gold taken up by sovereign states like China and by physically backed funds like ETFs has rapidly risen in recent years, it raises doubts about how much metal is actually available for prompt delivery in the market place.

If these stories of bank non-delivery were isolated cases, they could be dismissed as exceptions. But Resourceinvestor ran an article by James Turk   providing empirical evidence supporting the view that we have already entered a period of severe and growing physical tightness in gold supply — and he points to the forward price curve to prove it. The London Bullion Market Association (LBMA) forward price curve is normally in contango, meaning the forward gold price is higher than the spot price. The difference is a reflection of the cost of finance and storage of gold for the intervening months. If the spot price is higher than the forward price, the market is said to be in backwardation and is usually the case if spot demand exceeds supply, creating pressure for buyers to pay excessive premiums to secure prompt delivery.

Source: Resource Investor

As these graphs show, both the gold and silver markets have been in backwardation. This degree of backwardation has not been seen since the LBMA databases started in 1989. The fact that 12-month gold is also trending towards backwardation shows the situation is intensifying, says James Turk.

The situation is even worse for silver, where six-month silver has been in backwardation since June 2.

Source: Resource Investor

The likely result, says the committed gold bull Mr. Turk, is rising prices and although we cannot see any justification for a further bull run on gold, we have to agree. One likely solution to a short-term shortage is higher prices forcing more recycling and demand destruction as jewelry and industrial use is hit. Whether that will be enough to counteract rising fund buying, though, remains to be seen. One thing is for sure: it looks like an unpleasant set of opposing forces playing out in the gold market and could be the harbinger of further volatility.

–Stuart Burns

We wrote over a year ago about China actively urging its citizens to buy gold and silver and of course we hear constantly about how China’s insatiable demand for base metals and ores is driving up the price of all metals, but an intriguing article on a Wall Street Journal blog by Carolyn Cui explains how the two have been playing out quietly behind the scenes. Not that China’s demand for gold is some kind of secret. We have written in MetalMiner about increased state reserves of gold, partly from increased mining activity and partly from purification of lower purity reserves held but not previously recognized as part of China’s reserve. But what is curious is how widespread in demand and how substantial in character the phenomenon has been.

As the government has loosened restrictions on ownership of gold, the metal has been purchased both by financial institutions and individuals. In August, import and export of gold by banks was relaxed, opening up the market. In the first 10 months of this year, China imported 209.7 metric tons of gold, a fivefold increase with the same period last year. As Ms. Cui notes, trading volume increased 43 percent to 5,014.5 tons on the Shanghai Gold Exchange in the first 10 months of 2010. At a speech at the China Gold and Precious Metals Summit in Shanghai, Mr. Shen, chairman of the exchange, detailed the size of China’s imports this year — purchases were big enough to absorb all the gold that the International Monetary Fund had shed during that time period, which stood at 148.6 tons. The gold market often looks to the major ETFs as drivers of gold demand, but China’s purchases also exceeded the SPDR Gold Shares, the world’s largest gold-backed ETF, which added 159.48 tons of gold into its holdings in the same period. China’s Ministry of Industry and Information Technology said the nation’s gold production reached 277.017 metric tons in the January-to-October period, up 8.8 percent from the same period last year.

China’s 2010 gold production is expected at about 350 metric tons this year and according to the World Gold Council, could double in ten years. More than fears of inflation, sovereign debt crises, the squabbling Koreas, or a weakening US dollar may be the driver of the gold price being good old-fashioned demand from the world’s biggest buyer. Now wouldn’t that be a novelty?

–Stuart Burns

Source: National Geographic magazine; Photo by Michael Melford

As I unwrapped the plastic mailer from my December issue of National Geographic magazine, the second-from-last headline on the cover caught my eye. It read: “Alaska’s Choice: Gold or Salmon?

The words “Alaska, “gold and “salmon intrigued me. Alaska, because I consider myself a camping/hiking/all-around outdoors enthusiast and would cherish the chance to explore the state someday. Gold, because we cover it for MetalMiner. Salmon, because, well, it’s delicious. I love to eat it. But it wasn’t until I read the story that I understood the relationship between the three.

Pebble Partnership, a team effort between British Columbia-based Northern Dynasty Minerals and Anglo American, is evaluating the potential for constructing a two-mile-wide open pit mine and a 1,700-foot-deep underground mine just 120 miles north of Bristol Bay in southwest Alaska. The ore body that lies underneath their exploration grounds, just north of Iliamna Lake, “could hold the world’s largest deposit of gold and one of the largest of copper.

Source: aifma.org

The problem: The massive watershed, made up of countless rivers and tributaries that funnel into Bristol Bay, is home to the largest spawning run of sockeye salmon in the world, not to mention one of the biggest king salmon runs. (Incidentally, the west end of the bay is home to Sarah and Todd Palin’s family fishing operation, and the namesake of their eldest daughter; Ina Bouker, one of the Palins’ “family members, according to a recent episode of “Sarah Palin’s Alaska, is pictured kissing a salmon in the NatGeo article.)

So, what we have in the NatGeo story is a classic iteration of the “environment vs. industry narrative. Locals don’t want one of the richest salmon fisheries to be tainted with acid mine drainage, among other potential threats; Pebble’s prospectors want to assure them this won’t happen, while making sure such a rich deposit doesn’t go uncovered. But, for MetalMiner purposes (I’ll save my personal treehugger response for another time and place!), let’s focus on exactly what Pebble Partnership is sitting on.

According to data available on Pebble’s Web site, the prospected mine is home to 80.6 billion pounds of copper and 107.4  million ounces of gold. There are also 5.6 billion pounds of molybdenum. In addition, the company detected significant amounts of silver, rhenium and palladium. These deposits lie underneath 180 or so square miles of land, on which Pebble holds the leases.

The company estimated the mines’ total value, at today’s prices, to be between $100-500 billion. By comparison, the estimated annual value of the Bristol Bay salmon fishery is $120 million, according to the article. If the mine were to produce metals for 25 years, and assuming the annual value of the fisheries remained the same, salmon fishing would rake in only $3 billion in the same time span.

That’s not to say Pebble discounts the economic and environmental impact of the salmon fisheries. John Shively, Pebble’s CEO, arrived in Alaska 40 years ago as a VISTA volunteer and used to be commissioner of Alaska’s Department of Natural Resources. He says the mine would provide 2,000 construction jobs and 800 to 1,000 operating jobs, and wants more than half of the operating positions to be filled by locals, according to the article. Shively also says that Pebble is taking steps in its proposals to ensure no net loss, and create a permanent power source for the residents of the Bristol Bay region.

The partnership has already thrust itself into community involvement and infrastructure building. They created the $5 million Pebble Fund to create “a sustainable future for the Bristol Bay fisheries and the native Alaskans who live and work in the area.

Pebble doesn’t expect to finalize a preliminary development plan and application for permits until 2011; construction likely wouldn’t even happen until 2017. But when it does, Pebble’s find should help US gold and copper production grow considerably.

–Taras Berezowsky

In a typically frank interview, with Kamal Ahmed of the Telegraph this weekend, Jim O’Neill, the new chairman of Goldman Sachs Asset Management (GSAM), mapped out his view of currencies and the US economy.

Turning his attention first to the euro and European debt worries, O’Neill’s opinion was ‘we probably haven’t seen anything yet.’ He feels the euro should carry a risk premium of at least 10% and said the only reason the currency was not weaker was because of problems being masked by events in America and worries about weakness in the US economy. In Goldman’s view, these are overdone and O’Neill feels there are several encouraging signs that the US economy is showing more strength than it is being given credit for. Unemployment should start coming down slowly early next year and growth will pick up in 2011. As a result, the USD/Yen exchange rate in particular will come under pressure, but also the USD against other major currencies as the dollar strengthens in the face of further uncertainty in Europe and stagnation in Japan. In O’Neill’s opinion, the only problem the US had before the crisis was it had no domestic savings rate; two years on, savings have gone from 0.6% to 6.2% (which has resulted in the weakness in growth these last two years).

Encouraging views for US listeners, supported by recent developments both in macro economic trends and currencies following the Irish bailout last week, but what impact would that have on metals? First, gold would fall. The current strength of gold is predicated on fear of US inflation and prolonged financial instability — a stronger resurgent US with a rising US dollar would negate the safe-haven attraction of gold and likely result in the price coming off.

What applies to gold could apply to some of the base metals too. Aluminum has already come off on the back of a stronger dollar dropping from close to $2400/ton to $2250/ton in just the last two weeks.

Source: Kitco.com

This GFMS Index chart of all metals illustrates the falls well, following as it does the movements of the dollar over this period in the chart below it. Metals prices courtesy of Kitco, exchange rates of Exchange-Rates.org.

Source: exchange-rates.org

Further dollar strength will likely push the price lower still, as it will for lead and some of the other lesser metals with well-supported fundamentals.

If O’Neill’s analysis is correct (and he hasn’t been at the top of his game at Goldman for over 15 years without being right more often than he is wrong), then this provides a cautionary counterargument to the more bullish views on base metal prices for next year. Those base metals with strong fundamentals like copper have fared better over the last two weeks of dollar strength and would likely continue to do so if the dollar rose further, but those like aluminum may find themselves under pressure next year, other developments (such as capacity closures) notwithstanding.

–Stuart Burns

Earlier this year, a friend of mine mentioned that platinum, palladium and titanium are all the rage because of their strength-to-weight ratio and, well, that’s just what’s “in right now. If I was to go the more traditional route gold she told me to wait until the gold price dipped under $1,000 an ounce. (As most of us can see, that doesn’t look like it’s happening in the near term.)

However, my friend is not a trader or adviser. She’s a metalsmith and jewelry designer. I’m not a metals producer, buyer or speculator. No, folks, I am in a different market altogether.

I’m in the market for a wedding band.

You see, I’m getting married next summer. Having already made the proposal-and-engagement-ring leap, I am now beginning to think about what type of wedding band I should be buying. And although I know what I can afford (and will likely end up purchasing), the occasion gives rise to ponder: What are some metals other than gold that could really perform well in the future? Any “sleepers that would make a great investment?

With the Financial Times reporting this morning that jittery speculators have pushed the price of gold above $1,420 an ounce, now seems a good time to think outside the box when it comes to wedding bands.

Over a series of posts, I will lay out a look into particular metals that may perform well in the longer term. I do not intend on, nor do I foresee, having the need to cash in on my investment; but it could pay out to consider the classic go-to mantra, “Buy Low, Sell High. A more pertinent question: what if I lose the damn thing? If that were to happen, a simple cost analysis of the current precious metals market now could surely pay dividends later.

Stay tuned, as they used to say.

–Taras Berezowsky