To predict the gold price always involves a lot of factors, but the situation today is about as complicated as it gets.
How long can the US dollar continue to climb? Is the US equities run ending? Will the Fed raise rates? What do those jobs numbers really mean? How much downside is left for the Euro and the Yen? How long can gold keep gaining against other currencies but sliding against the greenback? Will gold repeat its reliable strong season from July to December? How will oil’s slide impact the US economy?
In the longer term, other questions arise. What impact will the Shanghai gold fix have on the gold market? If we are truly at Peak Gold, when will supply shortages become significant? Will generalist investors return to the gold market? Can the gold market somehow sidestep the outsize influence of paper trading and return to a basis in supply and demand? Why does the World Gold Council continue to drastically underreport Chinese gold demand? When and how will the fundamental shift of gold holding and trading from West to East really start to have an impact?
To answer them all would require (1) several hundred pages
…
All kinds of reports and newsletters file into my inbox. One that I read late last week got me thinking about how I view the investment landscape over the next year.
It was Jared Dillian’s The 10th Man newsletter. He mused about how we are all formed by our experiences – in particular, how the state of affairs during our first few years in the business determines our investing outlooks and biases.
Dillian started working in finance in late 1999, just before the top. For the first three years of his career stocks went down relentlessly. As a result, he is pervasively bearish.
He offered a couple other good examples.
“One of my bosses at Lehman was an options trader back in the ’90s. What he liked best was to just buy naked call options on stuff. Why not? It sure worked in the ’90s. Volatility was underpriced, and markets only went up. Not so much in the 2000s, when markets went sideways and vol was more challenging. But he kept buying naked upside calls—it was what he knew how to do…
“Guys who got rich trading tech stocks in 1996-1999 are still trading tech stocks. Never mind
…
Gold may have declined in the last two weeks but I remain as bullish as ever, for reasons old and new. I will explain all, but first an apology.
Sorry I disappeared for eleven days. For those of you who wait with baited breath for my next missive, I hope you survived the suspense! The reason was medical: I had to have my thyroid removed, along with a malignant little bugger growing off of it, and the surgery took more out of me than I expected. But all is now well (or getting there) and I have good reason to believe no more treatment will be needed.
It seemed a pity to remove my thyroid, a perfectly functioning organ, because of something attached but exterior to it – but that’s how things often go, isn’t it?
Take gold in 2012. After the price soared to overbought levels in August 2011 it had to correct and it did, falling 19% by mid-2012. Gold stocks fell multiples of that, with the Market Vectors Gold Miners ETF (NYSE: GDX) sliding more than 40%.
That might have been that. Gold staged a double bottom in May and started to rebound…until the Federal Reserve
…
“We are very close to peak gold, by which I mean this: our industry is never again going to mine as much gold as we did this year.”
So said the head of the largest gold company in the world by market cap – Chuck Jeannes, president and CEO of Goldcorp – in his keynote address at Roundup.
Granted, the guy is biased to believe in gold. But success doesn’t stem from acting based on wants, it stems from acting based information.
And the data behind peak gold make a lot of sense.
The fundamental reason is simple: the cost to discover an ounce of gold keeps climbing. Since 1975 discovery costs have increased 100-fold. Then, as discovery costs have climbed, exploration spending has declined.
Higher cost + less funding = fewer ounces discovered.
Making matters worse: of the shrunken pool of exploration dollars, majors are spending a larger portion than usual. That is not a good thing because, as Jeannes himself says, “Majors are not very good at grassroots exploration. We much prefer to let juniors do that and then come in and buy the assets.”
Those are the reasons. The results have been manifesting for years.
Gold
…
It’s a common stat in the sector: only 1 in 1,000 discoveries becomes a mine. But David Harquail, president and CEO of Franco-Nevada, takes that sobering fact one step farther.
Harquail started in the business as a child, following his father around as the elder Harquail assessed projects for famed mine-finder Thayer Lindsley. Harquail later took on a similar role with similarly famous resource titans Pierre Lassonde and Seymour Schulich.
That team became curious: how many mines actually produce economic returns? They assessed mines in western Canada and determined a full half were either disappointments (did not return the cost of capital) or failures (did not even return invested capital). Another 40% did not give a good rate of return.
That produced the sobering conclusion that only 1 in 20 mines generates a good rate of return – which means only one in 20,000 exploration projects becomes a good mine!
That’s bad, but not terrible from an investment perspective.
For one, those numbers were crunched in the 1980s. Hopefully mine developers have improved their success rate since.
Even if they have not, junior exploration investing is not always – or even often – about identifying projects
…
It’s easy to forget gold started 2015 under $1,200 per oz.
On January 2nd an ounce of gold was worth $1,172. This morning it is worth $100 more than that, after spending chunks of time last week above $1,300.
Gold companies and their bankers have clearly been awaiting this opportunity. Last week six companies announced bought deal financings, raising a total of $790 million (!).
Funds raised best a billion if you expand the time frame by a few days to include Yamana Gold’s $260-million deal and Lydian International’s $16.5-million raise.
The companies that announced deals last week were:
- Romarco Minerals: $300 million, shares only (no warrants)
- Detour Gold: $141 million, share only (no warrants)
- Osisko Gold Royalties: $200 million, shares and warrants
- Primero Mining: $75 million, convertible debentures
- Asanko Gold: $40 million, shares only (no warrants)
- Richmont Mines: $34 million, shares only (no warrants)
The flood of financings is a strong reminder of two things. First, seasonality is very real. Miners know about it and have likely been planning for months to wait until the January boost to raise money.
Second, while there are good reasons to think gold still has short-term legs,
…
What a week it has been.
Gold climbed above $1,300 per oz., a level it has not seen in five months. Today’s close above $1,300 marks a gain of almost 14% since gold’s early-November low of $1,142.
Gold was already on its way up, following Switzerland’s move late last week to abandon its currency’s peg to the Euro. Much can be said about the what and why of such a decision, but market reaction boils down to this: it gave investors a specific way to react to pervasive concerns about currency devaluation, quantitative easing, and economic stagnation, around the world but especially in Europe. And react they did, depressing the Euro, lifting the Swiss franc, and giving gold a shot of adrenaline.
Then gold got two more reasons to rise in the last few days.
The first came yesterday: the Bank of Canada’s surprise decision to lower interest rates by a quarter of a percent, to 0.75%. The rapid decline in oil prices clearly has economists worried that Canada’s economy will run out of fuel, hence the provision of interest rate stimulus.
The world did not much notice BoC’s move, but Canadians certainly did. Cheaper debt is
…
When prices for the red metal plummeted Wednesday morning the mainstream assumed Dr. Copper was simply waking up to the reality of slowing growth in China. Since China consumes 40% of the world’s copper, a slower China had put copper into oversupply.
Well, it seems China was to blame – but not for that reason.
Play detective for a moment.
Wednesday’s sell-off started at 1am UK time, late evening in North America – after almost all western metal traders had turned off for the night. In an hour, copper on the London Metal Exchange fell more than $400 to less than $5,389 per tonne.
When the price fell below the key support level of US$5,500 per tonne a wave of stop-loss sell orders were unleashed around the world, compounding the effect.
And this all happened in a global market made anxious by oil’s collapse and during the first quarter, when copper demand in China is weak because consumers and traders don’t want to hold big piles of copper over the looming two-week Chinese New Year holiday. Those factors made a copper decline ‘make sense’, further fueling the slide.
And who would have benefitted? Hedge
…
Copper cracked today, falling 5.5% to below US$2.50 per lb., its lowest level in five and a half years. It bounced some to close the day at US$2.56.
The PhD of metals fell after the World Bank downgraded its expectations for global growth, which prompted Goldman to lower its copper price forecast, which cause traders to panic, the price to fall, and stop-loss selling to snowball.
While a copper collapse hampers the seasonal lift we in the metals markets are all so desperate for, it is not the end of the world.
For one, few expected fantastic things from copper in the near term. Most of those looking for metal markets opportunities are focused on gold, zinc, uranium, and platinum group metals – metals where supply gaps, significant underpricing, or general financial anxiety (i.e. gold – read on for more) are creating clear price potential.
Second, most copper comes from large open pit mines – precisely the kind of operations where the falling price of oil has cut costs significantly. With their costs reduced, miners can handle lower copper prices.
Three, if you want an argument ask a group of analysts, miners, and refiners whether we are looking at
…
Two deals in two days reinforce the notion that tomorrow’s mining success stories are being bred today.
The first, which I’ll just mention quickly, was Newmont’s $820-million deal to buy the Cripple Creek & Victor mine in Colorado from AngloGoldAshanti. The deal is a value-add for Newmont, which adds a large, long-life mine with expansion potential in a safe jurisdiction. As important, though, is AngloGold’s reason to sell: it needs cash. The gold major has more than $3 billion in debt, representing 80% of its market cap and including $1.25-billion bond with an 8.5% coupon that has a call option next July. Talk had been mounting that the company would need to issue equity to cover the obligation, something it pointedly did not want to do.
Bottom line: Newmont’s focus on selling non-core assets and lowering production costs put it in a position to capitalize on AngloGold’s predicament. It’s a large-scale version of the little deals we are seeing across the sector.
Deals are being done in preparation for the upswing. And yesterday’s deal had to be mining’s biggest merger ever – not in terms of value but in terms of involved parties. Five juniors are joining forces,
…
