Russia

Some currencies which have dived along with key commodities

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In the following article, Frank Holmes looks specifically at the performances of five major global currencies which are very closely tied to (mostly) specific commodities which have been falling dramatically in US dollar terms.  There are obviously a number of others which have been similarly affected in the global commodities crash and, although not specifically mentioned in most cases, gold is also a significant contributor to the economies of all five and while the currencies noted may not track gold as closely as they do iron ore, oil and gas and copper, gold prices in all of these have performed hugely better than they have in the US dollar.

5 World Currencies That Are Closely Tied to Commodities

By Frank Holmes, CEO and ChiefInvestment Officer, US Global Investors

5 World Currencies That Are Closely Tied to Commodities

For more than a year now, commodity prices have been under pressure from the strong U.S. dollar and slowing global demand. This has made a huge dent in the balance sheet of many net exporters of resources, in turn weakening their currencies.

This should come as a shock to no one, but what most people don’t realize is just how closely some currencies track certain commodities. When I presented at the International Mining and Resources Conference in Melbourne, Australia, earlier this month, I shared several charts that show this correlation. Many attendees were astounded—and we’re talking professional economists, money managers and CEOs here.

With that said, I think it’s important that you see this correlation as well. Below are five world currencies that have been impacted by lower commodity prices.

1. Australian Dollar

Australia now accounts for around a third of global iron ore production, according to the country’s budgetary office. This means that its income is very sensitive to price changes. As demand from China, the world’s largest consumer of iron ore, has softened, so too has the Australian dollar.

Australian Dollar Tracks Iron Ore Prices
click to enlarge

2. Canadian Dollar

The sixth-largest oil producer in the world is Canada, about a quarter of whose exports is oil. The Conference Board of Canada, a not-for-profit economic research group, estimates that sales for the country’s energy sector will recede a sizable 22 percent this year. In Alberta, where revenue from oil sand exports had until recently helped the province become the fastest-growing in Canada, GDP is expected to contract 1 percent. And in September, the country’s economy shrank for the second straight quarter. As for the Canadian dollar, it’s fallen around 15 percent against the dollar for the one-year period.

Canadian Dollar Tracks Oil Prices
click to enlarge

3. Russian Ruble

Compared to Canada and Australia, Russia’s export mix isn’t nearly as diversified: About half of its exports in terms of value are a combination of oil and natural gas. (Russia sits atop the third-largest oil reserves in the world, the number one natural gas reserves.) It should come as no surprise, then, that its currency is highly influenced by Brent oil. Where oil went starting in July 2014, so went the ruble.

Russian Ruble Tracks Oil Prices
click to enlarge

4. Colombian Peso

The same story can be found in Colombia, where oil exports are responsible for about 20 percent of government revenue. Officials estimate, however, that oil sales will total $1.1 billion in 2016, compared to $6.7 billion in 2014. With prices lingering just above $41 per barrel, the Colombian peso has retreated 30 percent against the U.S. dollar for the one-year period.

Colombian Peso tracks Oil Prices
click to enlarge

5. Peruvian Sol

Besides gold, copper is Peru’s most important mineral export by value. With around 13 percent of the world’s copper reserves, it’s the third-largest producer after Chile and China. As such, the Peruvian sol has declined in tandem with the red metal.

The Peruvian Sol Tracks Copper Prices
click to enlarge

 

Russian central bank accumulates another 34.2 tonnes of gold

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Russia continues to amass more gold in its reserves with the purchase of another 34.2 tonnes in September, bringing its total to around 1,353 tonnes – or around 13% of its total foreign exchange reserve figure.  This is Russia’s second highest monthly total purchase in six years and represents yet another indicator of its continuing desire to downplay the significance of the U.S. dollar holding in its overall forex reserve make-up.

This is the seventh successive month that Russia has increased its gold reserve – it didn’t add to reserves in January or February.  It thus remains the world’s sixth largest national holder of gold, moving further ahead of Switzerland in seventh place which is sitting on 1,040 tonnes and closing the official gap with China which also reported increasing its gold reserve in September by 15 tonnes to 1,708 tonnes, although this only represents well under 2% of its massive forex reserves of around $3.5 trillion. Many reckon though that gold held in Chinese government accounts amounts to a far higher total than officially reported being amassed in accounts which it does not classify as part of its forex holdings and thus does not report to the IMF.

Top 10 World national holders of gold in forex reserves
Country Gold holdings
(in tonnes)*		 Gold’s share of
forex reserves
1 USA 8,133.5 72.6%
2 Germany 3,381.0 66.8%
3 Italy 2,451.8 64.9%
4 France 2,435.4 65.2%
5 China 1,677.4 1.6%
6 Russia 1,288.2 12.7%
7 Switzerland 1,040.0 6.1%
8 Japan 765.2 2.2%
9 Netherlands 612.5 56.3%
10 India 557.7 5.5%

Sources:  IMF, Wikipedia, Sharelynx, LawrieOnGold

However transparency in the reporting of global gold holdings can be obscure – even for those like China and Russia which are reporting month by month official changes.  Most of the gold holders in the table above as the central banks of the countries concerned do not allow audits of their gold holdings and many have reported zero change for a number of years.  In particular, as Wikipedia points out, gold leasing by central banks could place into doubt their reported gold holdings.

Spin on gold, China, Russia and everything else out of control

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Am I just getting cynical in my old age or is everything one reads in the media becoming more and more suspect as to its provenance?  Even this article will undoubtedly reflect some of my own prejudices, but at least they are my prejudices and not fed to me by some monolithic organisation trying to manipulate global thinking.

Americans in particular in the run up to the next Presidential election will be fed all kinds of propaganda for and against the various candidates.  Some will be true, some will be half truths, and some may well be downright lies, but it may be impossible for the general public on the receiving end to know which is which.  The frightening thing is that whoever’s team is most successful in spinning their candidates’ suitability will win the election.  Their sponsor will then be at the head of the most powerful nation on earth.  And the spin will continue at the same kind of level throughout the Presidency.  And the same will apply in leadership elections in virtually any country.

And of course the same factors are being applied in global economics and geopolitics.  The media is force-fed with often axe-to-grind data and opinion designed to move markets, vilify or beatify whole countries and institutions, politicians, business leaders etc. – no-one is immune.  Modern day spin is out of control.

Personally I have a specific interest in precious metals, and in gold in particular as a long term wealth protector.  I readily admit that my articles will probably favour a pro-gold conclusion, although I do try to be rather more balanced in my opinions than many of my peers and look at both upsides and downsides rather than just the one or the other.  I am ever increasingly dismayed therefore by the plethora of opinion and dubious ‘fact’ which appears in the mainstream media in particular.  This only seems designed to try to downplay gold and its role in global economics by attempting to make it ever less attractive to investors.  Thereby to reduce gold’s influence in the global economic picture and try to drive it out of peoples’ understanding as a potential brake on profligate government spending via the degradation of fiat currencies by unchecked money printing.

But of course the spin doctors are not just anti-gold.  They target just about anything and everything which the establishment doesn’t like.  In the West Russia, and its leader President Putin, for example, have come in for enormous vilification over policies on matters occurring on its borders.  The Russian point of view over the expansion of NATO ever eastwards is totally disregarded as irrelevant.  The U.S.A. is lucky in that it has not faced potentially hostile military forces close to its borders since the Cuban missile crisis and, to an extent Russia sees the NATO moves, or potential moves, to move ever closer to its borders as its equivalent of the Russian missiles in Cuba.

In Russia itself, of course the reverse is true.  Any economic difficulties are laid fair and square as being the result of dirty tricks by the Americans and their allies and President Putin is portrayed as a hero standing up to American-instigated aggression – and has domestic popularity ratings which any U.S. president would give their eye-teeth for.  True the Russian state  is rather less tolerant of opposition than Western ‘democracies’ and more controlling of its own media which makes this task easier.  But this is still spin.

China too is beginning to be seen as a threat to American global political and financial hegemony, so we can expect more and more media attacks on Chinese policies and institutions.  One wonders, for example if the very recent, hugely blatant, gold flash crash, being blamed by much of the Western media by insinuation as being instigated by Chinese hedge funds, despite it starting in New York, was designed both to be anti-gold, but also to cast doubts on the position of the rapidly growing Chinese financial and futures exchanges.  These are seen as a threat to Western control of key markets and anything which can set back their progress towards overtaking their American counterparts (which seems inevitable long term) would not upset the latter!  With the IMF considering inclusion of the Chinese yuan in its SDR currency basket, which the U.S. establishment may see as a threat to its position as the main global reserve currency, with the enormous trade and financial benefits that brings with it, anything that might cast aspersions on the integrity of the Chinese markets could be seen as beneficial!

As an example of double standards here and in political spin, one only has to look at Afghanistan, which geographically might be considered in the Former Soviet Union’s geographical sphere of influence.  When Russia put troops into the country in 1979, supposedly in support of the then Afghan government, this was hugely condemned by the West – to the extent of supplying the Afghan Mujahiddin with weapons to fight the Russian ‘invaders’.  Fast forward 22 years with the Russians having withdrawn in 1989, the U.S. and its allies went in to Afghanistan on much the same grounds as the FSU had earlier – but this was a just intervention as far as western political spin to the media was concerned.  Of course Western political spin came up with good reasons for the American ‘intervention’, just as it had with condemnation for the Russian ‘invasion’ although the two sequential super-power involvements look to have been almost identical in purpose – but one to prop up a Communist leaning government and the other to do the same for a Western leaning one.  Such is political spin.

So what point am I making here?  Primarily don’t necessarily believe anything you read in the mainstream media which could have been placed to suit some government or financial institution’s political or economic agenda.  Someone’s likely paying for it big time and it’s for their own benefit, not yours!

As I said at the beginning, I have a specific interest in gold as a long term store of wealth and my personal prejudices and feelings will show up in the above article.  But, despite my views on Afghanistan above,  I’m not what used to be described in the U.S. press as some pinko-liberal – indeed politically I probably fall on the right wing side of things in the European context (i.e. not as far right as the American right!).  This article has thus been prompted by the enormous volume of anti-gold propaganda in the mainstream media – described as reaching bubble proportions by one commentator yesterday.  Much of this negative spin is by insinuation rather than by condemnation, and in many respects that is the more dangerous as it makes readers think they are coming to the desired conclusion by themselves rather than being told what to do.

Modern day political and economic spin is dangerous, but in this day of global news and comment dissemination by internet we all have to live with it.  The important thing is to understand that it is an integral part of modern day propaganda and to consciously try and reason things out for oneself rather than just follow the mainstream media and the herd.

More SPDR gold ETF purchases show continuing institutional interest

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New York closed yesterday at $1,270.20 up $4.90. In Asia gold slipped slightly to $1,267.80 ahead of London’s. At the Fix gold was set at $1,264.00 up $0.24 and in the euro, at €1,103.641 down €3.067, while the euro was slightly stronger at $1.1453. Ahead of New York’s opening gold was trading in London at $1,265.00 and in the euro at €1,105.09.

The silver price closed at $17.30 down 6 cents. Ahead of New York’s opening it was trading at $17.27.

There were purchases of 5.376 tonnes of gold into the SPDR gold ETF but no change in the Gold Trust on Thursday. The holdings of the SPDR gold ETF are at 773.305 and at 167.75 tonnes in the Gold Trust.  The purchase yesterday was big enough to lift gold prices to current levels reflecting continued institutional interest in gold.

When we look at Europe, we see that specific political events don’t move precious metal prices by themselves. How those specific events impact the large monetary picture is what matters. Right now the euro is consolidating in the mid $1.14 area despite impending quantitative easing and the Greek debt negotiations, which should send the euro lower. That is, of course, provided the market is not discounting a Greek euro exit, which would strengthen the euro. As to Greece, the current chapter shows Germany in an avuncular manner putting the two Greek Ministers in their place, a big mistake, if they want the euro to remain intact. We do not believe the two leading Greek Ministers can take such a scolding quietly. In that scene, we now expect Greece, through these two politically committed men, to take that story up a notch.

With the Ukraine about to see its currency lose all credibility and the nation about to move to bankruptcy we are waiting to see if the U.S. and Eurozone are willing to take the Ukrainian civil war to an international one. Russia has made it clear it wants, at least, eastern Ukraine and will pay any price for it. This is well described by the exchange rate of the Ruble. The next week we see how far the West will go? It will affect the economic state of the Eurozone and may well eventually see a rupturing of gas supplies to Europe if the West takes the strife up to the next level. Only at that stage will it affect the gold price, we feel.

In China we are seeing the government increase liquidity in the system and aiding borrowers to lift growth. We cannot see China allowing deflation at this point in time, so will continue to follow the developed world by expanding their monetary base. We also expect to see them join the rest of the world by weakening the Yuan against the dollar. This continues to be gold positive.

Julian D.W. Phillips for the Gold & Silver Forecasters – www.goldforecaster.com and www.silverforecaster.com

EU threatens Russia with more sanctions as war in Ukraine intensifies, Greece pivots to Russia

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EU threatens Russia with more sanctions as war in Ukraine intensifies, Greece pivots to Russia

Latest commentary on Mark O’Byrne’s www.goldcore.com  website focuses particularly on worrying politico-economic developments in Europe which, if unchecked, could well lead to a banking and economic crisis which could spread globally.

EU foreign ministers are meeting in Brussels today to discuss imposing further sanctions on Russia following an upsurge in fighting in east Ukraine.

The EU and the US have already imposed sanctions on Russia and slapped asset freezes and travel bans on Russian individuals and businesses.

NATO says hundreds of Russian tanks and armoured vehicles are in east Ukraine. Moscow denies direct involvement but says some Russian volunteers are fighting alongside the rebels.

Greek’s new Prime Minister Alexis Tsipras and a leader of the country’s radical left-wing anti-austerity party, has indicated dissatisfaction with the sanctions posed on Russia. Russia and Greece have a history of good relations and shared culture. The opposition of EU sanctions by Tsipras may lead to the strengthening of the relationship between the two countries and spells trouble for further sanctions that are to be decided in the weeks ahead.

Tensions between Russia and the West are intensifying. President Obama’s suggestion that Russia would be cut out of the SWIFT banking transfer system was met with a degree of hostility and threatening words that has not been customary of the Russian government.

Prime Minister Medvedev warned that the “Russian response – economically and otherwise – will know no limits.”

The EU‘s push for further sanctions on Russia may be imprudent and only help ‘bait the bear’. Measures under discussion include asset freezes, travel restrictions on certain Russian individuals, and restricted access to capital markets.

The consequences of such a move could be dire. China have made it clear that it can provide liquidity to Russia if necessary, an offer the Russians have not felt the need to avail of as yet. Russia still sits on vast dollar reserves which it could dump on the market and buy Chinese yuan and other allied nations fiat currencies and indeed precious metals such as gold and palladium.

Or Russia could choose to cut off natural gas to Europe causing a crisis for homes and industry across Europe and paralysing industry and agriculture in already struggling periphery economies.

The war in Ukraine, in which 5000 people have already died, is growing in scope and intensity.

At some point Russia may directly enter the conflict – which it would justify given that the ethnically Russian people of Donetsk voted to secede from Ukraine following the overthrow of democratically elected, albeit corrupt, President Yanukovych.

Moscow’s intervention in Ukraine and its continued support for rebels in the east of the country is “not a wise course for Russia”, former UK foreign secretary and leading government politician William Hague has told CNBC.

“If Russia continues on this course of the last few days there will be a further grave deterioration in relations between the European Union and Russia,” Hague who is close to NATO told CNBC’s Worldwide Exchange.

The risks now fomenting in Greece as well the escalating tensions with Russia, along with the tacit admission that the EU is already in serious crisis by initiating emergency QE measures, mean that that the risk of banking contagion and collapse, economic collapse and currency collapse are real threats.

Gold and the Greek aftermath; and Ukraine too having an impact

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The Greek election result fallout has created significant waves in the gold market looking ahead – while there’s always the Ukraine to spice things up….  Update of article previously published 2 days ago on www.mineweb.com 

Lawrence Williams

Perhaps predictably, gold initially jumped up to the $1300 level in Asian trading as the Greek election results became apparent.  But as the news, which had been largely anticipated, began to be assessed the gold price fell back fairly sharply in London trading before subsequently recovering up to around the $1290 level whereabouts it has remained since give or take a few dollars.  Analysts at Commerzbank put this down to ‘buy the rumour and sell the fact’ profit taking, but with the aftermath of the election result still to really impact, one suspects that the likely forthcoming very difficult negotiations between the new Syriza government in Greece and the EU/ECB and the IMF over renegotiation of Greek debt will create some significant waves in the gold market ahead.  Syriza has promised to end most of the austerity measures imposed on it by its bailout lenders and there doesn’t seem to be any means of paying for this without defaulting on its billions of dollars of bailout loans unless the EU/IMF can be persuaded to cut and/or extend them.

Initial indications are that the IMF, and probably the Eurozone nations led by Germany will, however, strongly resist any Greek attempts to renegotiate and write-off much of its debt.  IMF Managing Director, Christine Lagarde for example seems to be taking a hardline approach.  “A debt is a debt” she is reported as saying.  But how much this is setting out an initial negotiating position ahead of the inevitable horse trading remains to be seen.  If all this results in deadlock then there is a strong likelihood that Greece will default on its debt as soon as next month, or at best by this summer with the possibility it will be ejected from the Eurozone by the other members who may have had enough of the already huge costs of trying, unsuccessfully, to support the Greek economy and bring it back on track.  The Greek Syriza point of view is that with the huge debt overhang it will be impossible for the Greek economy to recover for years, if not decades if it continues to have to repay them.

But Syriza itself may not even have an easy internal ride.  It appears to be agonisingly short, by 1 seat, of an overall majority in the Greek parliament and has had to enlist an unlikely coalition partner in Independent Greeks – a right wing party which has little in common with the radical left wing Syriza apart from the ending of the austerity measures which have so devastated the Middle and Lower classes’ incomes and generated huge unemployment – particularly among the under-24s (estimated at around 66%).

Syriza itself is also something of an unholy alliance of Marxist far left across to some with almost Centrist viewpoints, but again all opposed to the austerity measure imposed on  the nation as a condition for past bailouts and put in place by the now defeated New Democracy party which controlled the previous administration.  There is a substantial element which wants an immediate Greek exit from the Eurozone – something Syriza’s leadership has tried to play down ahead of the election, as this option is not seen as a popular one amongst the general population.  However, if Greece is forced out of the Eurozone, and this can be blamed on current bêtes noires Angela Merkel and Christine Lagarde, somewhat akin to Russia’s President Putin being able to blame his nation’s economic woes on the U.S. and its allies and carry the nation with him, then that might make an eventual Greek exit (Grexit) more palatable internally.

There is also the potential of the Syriza victory generating momentum for other European anti-austerity and anti-Eurozone groupings.  The attempted negotiations on loan mitigation between the new Greek government and the EU/ECB/IMF , coupled with ever more uncertainty as to whether the EU itself will survive amidst the economic difficulties which beset it is bound to create uncertainty in the weeks, months and possibly years which lie ahead – and geopolitical uncertainty is a strong driver of investment money into perceived safe havens like gold.  So don’t write off gold’s initial relatively samll downwards move as the end of the recent momentum upturn as it looks like volatility, both down and up,  could be back in play in the markets.

As Julian Phillips succinctly puts it in one of his recent daily newsletters to his www.goldforecaster.com and www.silverforecaster.com subscribers:

“The result Eurozone officials feared most in Greece happened over the weekend with the far left party coming into power with all but one of a clear majority in Parliament. It is clear to observers that unless the E.U. agrees to write down debt and allow a turnover of austerity measures, the new government will have to leave the euro. It’s one or the other. Certainly, Greece is a drag on the euro as is Spain, but without them the euro would be much stronger, something Germany and other member states don’t want, so they must weigh this against agreeing to Tsipras’ terms and keeping Greece in the euro. What is a certainty is a painful path from now on for the euro and E.U. itself ensuring ongoing uncertainty in Europe.  Today the euro tried to fall below $1.12 but suddenly the euro is rising. The next few days will see the news on Greece being digested. But we mustn’t forget that the E.C.B. is soon to start its QE program. Will the E.C.B. buy Greek bonds against this background? February will see a decision on this come as Greece must renew debt obligations or default then. We do expect to see a weaker euro, at least up until then.

The ripples out from where this particular stone hit the water, covering Europe and the rest of the world have yet to be seen. Whether Greece stays in the euro or leaves it, we believe the resulting scene will be positive for the gold price.”

But Greece and its travails are not the only geopolitical goings-on which could have a positive impact on safe haven demand for gold.  ISIL and other fundamentalist Muslim militarist factions are most certainly not going to go away without considerably more grief to come.  They have the prospect of generating ever more military and political mayhem, not only in the Middle East, but also in North and West Africa and Asia where there are very substantial Muslim populations.

Meanwhile media overload has largely relegated what’s going on in Ukraine to a place among the less important stories out there.  Arguably the latest action in south east Ukraine, with the Russian-supporting separatists apparently moving to try and take control of the strategic port of Mariopol on the Sea of Azov, could be an equally destabilising force in European geopolitics.  Russia denies involvement, but the apparent usage of high tech weaponry by the separatist rebels belies a totally neutral standpoint.  A Russia-friendly controlled land corridor along the coast to Crimea would be of considerable strategic importance.

Should, heaven forbid, NATO be dragged into any kind of military action in support of Ukraine forces then this could result in a very significant conflagration and one doubts NATO’s European members would want to see this.  It would be a very different proposition to the military action taken against Iraq or Serbia.  Russia has high-tech weaponry, and a well-trained army, which would be a match for what most of the West can assemble and would have a significant logistical advantage in fighting next to its own borders.  The USA being further away geographically may take a more belligerent tone, but even the extreme ‘nuke-em’ brigade would probably fall silent given the possibility of being ‘nuked’ back.

And as for increasing economic sanctions against Russia, an economically weak Europe would probably not be keen to go down this route either given Russia’s potential for retaliating in kind – particularly in terms of cutting off oil and gas supplies.  The West may well be miscalculating Russia’s ability to survive economic hardships also.  The Russian population’s been through all that before, and can no doubt do so again without generating, in any serious manner, anti-government protest.  President Putin has a very high popularity rating as being a strong leader who has put Russia back on the map as a major military and political powerhouse which has done wonders for Russian pride.

So lots of potential ahead for geopolitical elements that may work in favour of a retreat into gold as a safe haven investment – and these are just the ones we know about.  We’ve already had a few unpredictable Black Swan events in the first three weeks of the year (see: 2015 Black Swans abounding – Safe Haven gold to benefit).  On this pattern there could be a whole host more ahead in what is already turning out to be something of landmark year for geopolitical discord and change.

Gold and silver in a different world today

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Julian Phillips’ latest commentary on the gold and silver markets and geopolitical events in Europe.

The events in Greece are still being digested as the new party now has sufficient a majority to carry out its new role.  The I.M.F. has renewed its commitment to assist Greece, but with its usual terms, so the new government is likely to balk at such offers. With Greece’s debt now so large that country just cannot repay it, there seems little choice for creditors but to give this debt a major haircut. But Germany has renewed its intransigent position not to agree to such measures. The next week/month will be unstable as the political/financial battle rages.

With western democracy based on politics being separate from finances, such a battle goes to the heart of the Eurozone and not only that but to the structures operating in the western world. Which is more important, finance or politics? We will see which in the next few months.

A question that has also not yet been asked is, “Will China offer Greece financial assistance?”

With Russian debt no longer of a quality for central banks or others, after the credit downgrading to junk status by S&P, the insurgency in Ukraine, now a civil war, with Russia intervening, together with gas supplies being cut from Russia and the potential for major ruptures in the Eurozone, Russia is moving to a critical point, enhancing the growing divisions between Asia and the developed world.  The degrading of the situation in Russia can also ensure a recession in Europe, on top of its current difficulties. This is a very different world to 2014 already.

Market and ETF News

New York closed yesterday at $1,280.40 down $13.30. In Asia gold held that level. The Fix this mornin saw the gold price set at $1,279.00 down $3.75 and in the euro, at €1,132.961 down €8.58, while the euro was stronger at $1.1289. Ahead of New York’s opening gold was trading in London uncertainly, at $1,281.00 and in the euro at €1,135.69.

The silver price closed at $17.89 down 41 cents. Ahead of New York’s opening it was trading uncertainly at $17.90. It seems to want to fall quickly while the gold price is below $1,300.

There were purchases of 1.792 tonnes into the SPDR gold ETF as well as a purchase of 0.30 of a tonne into the Gold Trust on Monday. The holdings of the SPDR gold ETF are at 743.438 and at 167.84 tonnes in the Gold Trust. There was physical demand in the U.S. so the fall in the gold price is not on physical sales. Usually, when this happens, speculators and traders cannot hold the gold price down.

Julian D.W. Phillips for the Gold & Silver Forecasters www.goldforecaster.com and www.silverforecaster.com

 

The beginning of the end for gold and industrial metals price falls?

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Lawrence Williams

Or the end of the beginning? … Looking at mixed fortunes ahead for gold, iron ore and base metals – positive, flat to negative and slightly upbeat respectively.

Latest article by Lawrie published on Mineweb.com.  Go to Mineweb.com to read this and other articles on precious metals, base metals, industrial metals and minerals and mining of all types.

The title of this article could be taken two ways, but our meaning in using it – courtesy of London metals and mining commentator David Hargreaves’ Week in Mining newsletter, which used aspects of the famous Winston Churchill wartime quote in its title and conclusions this week – is that are we perhaps actually nearing the bottom of the prices downturn virtually across the board in resources?

As the newsletter points out –  the Brent crude oil price has fallen through $50/bbl, iron ore is staring down the abyss, copper has a look of testing $6,000 per tonne on the downside, while gold has picked up to $1,200 plus etc.

In currencies, the US dollar continues its rise against all, or at least most, others, with the Euro testing nine-year lows. The Eurozone has moved into deflation as the forthcoming Greek elections could put in power a political party which could well implement a default on the country’s debts and lead to Grexit – the possible Greek exit from the European Union.

Further on the geopolitical front, Islamic fundamentalist-inspired terrorism has hit the headlines again with the Paris shootings at the Charlie Hebdo offices, the totally unprovoked murder of a policewoman attending a traffic accident and subsequent hostage taking leading to more deaths.  Rhetoric from leaders of ISIL, which now dominates large swathes of Syria and Iraq, preaches extending Paris-type events to other Western nations and calls for new attacks on airlines.  All very disturbing for a mostly rather less volatile and less religiously committed Western World.

These French terror attacks are probably partly aimed at stirring up anti-Islamic feeling within the majority populations in Europe in particular as a way of polarising potential civil strife to the ultimate advantage of the extremist elements involved.   It is estimated that around 5% of the European population follows Islam, and in France, with its strong former colonial connections in mostly Muslim North and West Africa, the Islamic faith may account for as much as 10% of the population – a very sizeable minority indeed.  Political parties with an anti-foreigner agenda are springing up across Europe and this could escalate as the ‘faith’ polarisation becomes stronger and stronger.  Virtually all the Islamic faith followers in Europe abhor the French killings, but if these result in anti-Muslim retaliation (which they are beginning to) the prospect of alienating this very big minority of the European population, leading to ever more blood on the streets, is very real indeed.

While the Russia/Ukraine situation has stayed out of the headlines since the beginning of the year, recently completely overshadowed by the Paris events, it has not gone away.  There remains the prospect of new European sanctions against Russia, ostensibly over its annexation of Crimea, but as we pointed out in a recent article these sanctions are damaging to Europe too, and could become more so should Russia raise the retaliation stakes.  Also the Russia/Ukraine situation may be much more complex than most observers have been prepared to recognise.

See: 2015 Black Swans – or another BRIC in the wall

This plethora of problematical geopolitical events has the potential to further destabilise the European economy, which is already in recession and entering a prospective period of deflation.  The events represent an almost unprecedentedly disturbing start to the year and we have to hope against hope that they do not continue throughout 2015 or the consequences for global economic recovery could be dire.

To all this we have to add China.  While the forthcoming year of the sheep suggests a period of calm and prosperity in the Chinese Zodiac, the slowdown in the country’s economy suggests otherwise, although GDP is still said to be growing at a rate of around 7% per annum.  Because of its huge impact on global metals demand, the Chinese slowdown from double digit GDP growth, with the major mining companies gearing up to meet the kind of demand growth those figures suggested, has had a dramatic impact on demand for raw materials – particularly for iron ore and copper.  There is the suggestion that inventories have been run down and demand could pick up as the year progresses.  However there is no doubt that the Chinese building and construction sector is slowing which doesn’t hold out great hope for an iron and steel pickup, although for copper the expansion of the country’s high speed rail network could provide some much-needed stimulus.

But Chinese individual wealth has still been growing over the last several years.  This is showing up in terms of automobile imports which are continuing to rise.  China, for example, is nowadays Jaguar/Land Rover’s biggest market on the luxury car front.  While an economic slowdown – but probably not a recession – is on the cards, the economy is still growing at a rate which Western nations would love to see.  While the government is no longer looking for growth at almost any cost, it does seem to be prepared to help counter any prospective serious economic decline through lowering interest rates and other measures and perhaps the hard landing which some have predicted will thus be held off.

So where does all this leave us in terms of metals prices going forwards?  Stagnation in Europe and lower growth in China, perhaps slightly alleviated by a weak recovery in the U.S., may not be auspicious for iron ore, although we suspect it won’t fall much lower.  Copper, as the main element in the base metals picture is a slightly more complex situation to forecast.  Assuming China does need to rebuild stocks and continues to invest in electrically intense infrastructure development, and, with many analysts predicting a supply deficit in the current year, then the red metal could well be at or near its bottom and due for at least a weak recovery in price.

Gold is another matter altogether.  The price is still seemingly being controlled by activity on the futures markets, but the European travails could lead to rising safe haven demand as a wealth protector should the EU start to unravel, while Chinese demand looks as though it should remain strong throughout the year ahead.  Continuing strength in the US dollar against other currencies would normally mean a decline in the dollar gold price, but recently gold has been holding up remarkably well in dollar terms, which means it has been a very good buy in other currencies – notably the euro.

So what is the overall view in our opinion?  Oil – flat to weaker as long as Saudi Arabia continues to pump it at current rates; iron ore flat to weak also with the three biggest producers all having expanded capacity heavily over the past year, but with demand, particularly from China, at best stagnant for the time being; base metals perhaps slightly positive, but not significantly so; gold’s fundamentals continue to look good, but then they have for the past couple of years and the price has still tanked.  Overall though gold, and the other precious metals, on balance, should probably continue to see positive gains ahead with the possibility of a major kick upwards should additional geopolitical problems materialise, or current ones escalate.

Where will gold end 2015 – $1,000, $1,325 or maybe $2,500 or …?

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A look at the prospects for gold and silver prices in 2015 – and predictions of end year price levels for the two key precious metals.  (An updated version of this article has now been published on Mineweb.com)

By Lawrence Williams

Well there’s nothing like being optimistic at the start of a New Year and there are certainly many factors to be optimistic about if you are a gold bull. Gold demand remains strong – notably in China and India with those countries alone probably accounting for 100% or more of new mined gold at the moment.  At the end of this article we will make some not very scientific predictions on the final levels for the gold and silver prices at year end 2015 – perhaps to have these totally shot down in flames when the year end comes. It is always easy to be wise after the event.

China (in the form of the Shanghai Gold Exchange) is looking to perhaps see full year demand fall around the 2,100 tonne plus mark, only a fraction below last year’s record of 2,181 tonnes. So much for the almost incessant mainstream media reports throughout 2014 of a collapse in the Chinese gold market!

India too has seen a remarkable pick-up in demand in the second half of 2014 despite the maintained imposition of 10% import duty on gold and silver – so much so that some commentators have reported that it may have become the world’s No. 1 gold consumer again, retaking this position from China. It hasn’t! But even so, if one takes smuggled gold into account to avoid the import restrictions, it could well have imported close to 1,000 tonnes in 2014 – maybe more – and with world newly mined gold output estimated as likely to be at perhaps just over 3,000 tonnes in 2014 then it definitely looks as though the two Asian giants will indeed have accounted for virtually all of this.

But of course China and India are not the only consumers of gold. Virtually every Asian and Middle Eastern nation has a propensity to accumulate gold, while there are also signs that the jewellery sector – the main non-investment gold consumption market – has also been picking up healthily in the U.S. in particular as the populace is fed a seemingly unending positive spin on a return to economic growth.

Geopolitical events are also impacting positively on safe haven demand for gold. The crisis in Ukraine and Crimea is still playing out and is likely to cause ever more strife moving forwards. Russia’s President Putin in his New Year address made it quite clear that Crimea is now again wholly part of Mother Russia, while Ukraine’s economic plight is dire and one finds it hard to see how it can continue without defaulting on its financial commitments. This could have a major adverse impact on creditor banks and nations, which in turn could have a knock-on effect on financial institutions globally. One can foresee runs on banks and domino bank and fund collapses as a result with the global financial system being so closely interlinked.

But Russia too has seen economic sanctions and low oil prices bite severely and it is also in somewhat of a financial imbroglio. But still it has been buying gold for its reserves which it sees as a stabilising influence. Russian banks are in financial trouble too as access to Western funds is cut off. What should worry the West is that Russia has the capability of itself imposing substantial financial damage on western economies by restricting oil and gas supplies, and possibly by cutting off wheat exports as well as restricting imports from countries imposing sanctions, among others. True this would further damage the Russian economy but the nation’s rulers may feel that is a worthwhile sacrifice – and no-one should doubt the Russian peoples’ capacity for absorbing economic pain, particularly if the internal political spin puts the problems all down to the wicked Americans and their European allies which it is doing very successfully at the moment.

And this all has the propensity for escalation from the current uneasy stand-off, to a resumption of the Cold War and even escalation into a limited Hot War should NATO move into Ukraine – a move President Putin sees as totally unacceptable. But increasingly hostile rhetoric and action on both sides could well lead to this taking place. That is indeed a scary scenario for Europe in general and former Soviet Union satellites in particular. Continued escalation on this front could well lead to an ‘insurance’ move back into gold and if financial institutions start to falter, or collapse altogether as a result of Western bank difficulties, the flow could become a flood.

Meanwhile there is no resolution in sight in Syria and Iraq with fundamentalist Islamic forces still firmly in place despite total Western air superiority. How long before the West has to put troops on the ground to hold back, or defeat, the fundamentalist forces? When religion is involved, defeat is perhaps not an apt word – attempted control may be better. Look at Muslim Afghanistan as an example. The Taliban has supposedly been defeated but still is capable of some horrendous day to day impacts, while the spillover into Pakistan and the rise of similar fundamentalist groups in parts of North Africa has to be deeply worrying. ISIS (or whatever it calls itself now) is unlikely to be able to build its Caliphate covering much of the Middle East, North Africa and even parts of southern Europe to emulate the Moorish empire of the past. However its fanatical support, now with access to oil revenues to provide finance to buy ever more sophisticated weaponry, may provide a military headache for the Western/Christian/Moderate Muslim alliances for many years to come.

New mined gold supply is peaking as pipeline projects come on stream and build up (but leaving very little new in the pipeline now to replace depleting and uneconomic resources). The industry’s unprecedented cost cutting exercises will have put back new mine developments by many years and pushed back possible expansion plans.

The other major source of gold for the markets comes from scrap, but the lower prices have put something of a dent in supplies from this source. And much will have also been drawn out in 2009/10/11 when the gold price appeared to be rising inexorably and calls for individuals to sell unwanted gold jewellery were at their peak. Probably much less such metal is available to the markets nowadays.

On the negative side for gold, the metal price has shown weakness for three years now despite many of the above factors already being in play. Chinese demand hit a record in 2013, yet the gold price plunged. Sales out of the big gold ETFs will have been a factor that year. In 2014 too there were some significant sales out of ETFs as well but at perhaps only around 15% of those in 2013 and while there could be more to come from this source the amounts will likely diminish further. Nonetheless there are forces working against the gold price – and these may be even more prevalent in the much smaller silver market. The markets for both precious metals appear to being driven by the paper futures markets with relatively little physical metal changing hands.

There is a theory out there – not one believed by all – that the big money bullion banks are manipulating the gold price for their own ends – either to buy and make enormous profits when the market turns again, or at the behest of the U.S. Fed and other central banks. These may feel that a strong gold price would be seen as yet a further indicator of substantial weakness in the global fiat currency system and would act as a destabilising factor in efforts to portray national economies as being stronger than they actually are. With major bank analysts mostly still bearish on gold – some more so than others – one does not know if this represents collusion with those seeing lower prices as in their best interests, or strongly held beliefs – but regardless of which these do tend to take the form of self-fulfilling prophecies as the big bank analysts will have very strong followings amongst the financial institutions in particular.

So there are strong pressures out there both for and against gold and it is difficult at this stage to predict which will win out in 2015, although one has a strong feeling that the long term future for the gold price is very positive – but then long term is a somewhat indefinite time period. So where will the gold price be 12 months from now. Here I’ll take a leaf out of Martin Murennbeeld’s book and come out with three price scenarios, and apply a weighting to each to come up with a final median prediction.

  1. The high price scenario (probability weighting perhaps 15%) – Gold at $2,500, silver at $55.
  2. Low price scenario (probability weighting 20%) – Gold at $1,000, silver at $12.50
  3. Middle price scenario (probability weighting 65%) – Gold at $1325, silver at $24.

If we average these out we get a final median figure of: Gold $1396.50, Silver $26.35. Well it’s probably as good a guess as any at this time of year!

 

 

 

Russia bought yet more gold in November

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Latest figures from Russia’s central bank show that it purchased a further $720 million dollars worth of gold in November – which equates to around 18 tonnes at the prices prevailing that month.

As we noted in a previous article here – Is Russia really on the ropes: Could it sell its gold? – there has been speculation that Russia could liquidate some of its gold reserves – currently sitting at a little under 1,200 tonnes, worth approximately $45 billion at the current gold price.  However this is probably unlikely given President Putin’s strong positive feelings about the place of gold in any future currency realignment.  Indeed such a realignment may, perhaps through the ‘law’ of uninteneded consequences, be being brought ever nearer through what looks like a concerted effort by the West to destabilise Russia’s economy as punishment for its actions in Crimea and south eastern Ukraine.  What this has done is force Russia to set up bilateral trade deals with more friendly nations, notably China and former Soviet union satellites, bypassing the dollar, and also setting up its own version of the SWIFT international payments system in case the U.S. tries to freeze it out from using it.  Anything which reduces the use of the dollar in global trade will likely bring the day when a new reserve currency (or perhaps group of currencies) will come about.

Koos Jansen, now writing for http://www.bullionstar.com, has been great in picking up material from non English language statements by key figures which somehow seem to be completely missed by most mainstream Western media.  In his latest post on the bullionstar site he publishes an exchange of questions and answers between President Putin at his annual press conference only yesterday, and Russian journalist Vyacheslav Terekhov of Interfax, at which the Russian President stated categorically that the Russian Central Bank “should not hand out our gold and foreign currency reserves or burn them on the market, but provide lending resources”  For the full article click here.

Again as we pointed out in yesterday’s article on the Russian economic situation, 50 years of sanctions against Cuba have still not brought that country to its knees.  Yes its people may lack the wealth and ‘stuff’ that most Western countries’ citizens take for granted, but they are still happy to support their leader’s policies when they have the continuing perception that it is the wicked USA which causes the problems.  This has served to unite the people behind the government rather than rise up against it.  So it is with Russia, which has an enormously more self-contained economic system than Cuba had when U.S. sanctions were first imposed, and it also has a people who have lived through many years of economic deprivation before and come through them, perhaps not happily, but stoically.  Support for President Putin and his strong-man policies seems to be overwhelming as long as the American bete noire is out there to be blamed for any deprivations suffered.

Is Russia really on the ropes: Could it sell its gold?

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Is Russia really on the ropes: Could it sell its gold?

By Lawrence Williams

The problem with most of those delighting in Russia’s apparent comeuppance for what the West views as its expansionary destabilising tactics in Crimea and Donbass is that they aren’t Russian.  They assume Russians will act like Americans or western Europeans to a financial crisis and come rushing back, cap in hand, to beg forgiveness, return Crimea to its Ukrainian masters and withdraw any troops it may, or may not,  have in Donbass.  They should perhaps listen instead to Sergey Lavrov, the highly plausible and cultured Russian Foreign Minister who comments that Russia has survived such adversities in the past, and come out stronger as a result.

Yes, Lavrov is talking to his, and his masters’,  own political book but he also has a point.  Look at President Putin’s domestic popularity ratings.  They are riding at levels any western politician would give his or her eye teeth for.  Russians are a proud people who feel they were taken to the cleaners by the West pre-Putin during the break-up of the Soviet Union and now have a strong leader in charge who is putting Russia back on the map as a world power.

Russia is not a rich nation by any standards.  True there are some exorbitantly rich individuals and a growing middle class but the bulk of the population remains very poor by Western standards and feels it has nothing to lose anyway.  Those featuring in the Western media as suffering horrendously because their low interest dollar loans may now drive them into bankruptcy as the ruble dives against the dollar are but a minute fraction of the population.  The huge majority of Russians don’t have mortgages or dollar loans and while resultant inflation may eat into what little they do have, as Lavrov points out, they’ve been there before and come out stronger.

There is a strong feeling in Russia, no doubt promulgated by state controlled media, that the current financial crisis has been orchestrated by the U.S.-led West with sanctions and it views the rapid collapse of the oil price – the other major contributor to the nation’s economic problems – as also being politically driven by the U.S. and its ally Saudi Arabia.  Instead of dividing opinion against the Russian Government this looks so far to have only united opposition to the West, ans support for President Putin’s policies,  amongst the Russian general public.

And as for Russian gold.  The country has been building its gold reserves at a strong rate and there is little or no indication that it plans to sell any of this to relieve the strain on the ruble, but is far more likely to run down its foreign currency reserves before it even looks at selling gold as an option.  We are pretty sure that the Russian Central Bank has actually continued to buy gold in November and we should have the latest figures on this at the end of this week.  However the really sharp decline in the ruble against the dollar has only happened over the last week or so, so perhaps the November figures will not be a good guide to the very latest Russian Central Bank gold buying policy.

But the West should tread warily.  Russia is convinced of the view that the downfall of the Yanukovych Presidency in the Ukraine was totally orchestrated by the U.S. and its allies when it became apparent that he was leaning towards retaining economic ties to the Russian Federation rather than the EU.  Much of Russia’s subsequent response to ‘protect’ the ethnic Russians in Crimea and more recently in Donbass has been down to this, plus the perception in Moscow that the new Ukrainian government was anti-ethnic Russian and was to be dominated by ultra-right wing fascist leaning political groups (which is incorrect, although the right wing elements are still a powerful force and their militia involvements may well be largely responsible for the failure of the various ceasefire agreements in the southeast).  There was also the real fear, – there still is –  that the new Ukrainian government will push to join NATO and advance that alliance’s military presence right up to the south west Russian border.  Russia sees NATO encroachment as a major threat to it militarily, while the West regards the changes in the Ukraine and it joining the EU as integral part of the process of bringing true Western style democracy to Eastern Europe, while many within the western alliance would look upon expanding NATO as an important part of this.

Was it ever thus?  In the olden days the Crusades pitted Christian Western Europeans against Arab Muslims for the control of the Holy Land.  Nowadays it is not religious rivalries, but political dogma which drives such adventures and there is a real danger here that both the West and Russia will talk each other into military conflict as each side ups the ante to gain perceived political advantage.

Russia’s President Putin has a strong-man image to maintain, while the USA’s President Obama also feels the need to project his country’s strength of commitment to Europe, but this theatre is a long way from American soil so his fellow Americans don’t feel threatened.  But President Putin does feel threatened. NATO in the Ukraine is Putin’s Cuban missile crisis.  (Ironic given that the 50 year break in relations between the US and Cuba looks about to end.  It should also be noted that the 50 years of sanctions against Cuba never even brought that tiny nation to its knees!)  Putin thus sees NATO in Ukraine as a step too far by the West and it seems to this observer unlikely that a Western-initiated economic war against Russia will deter him from keeping at least a part of Ukraine on side – and if this requires an escalation of military involvement he would certainly have ground and supply advantage.

One strongly hopes it will not come to this.  The potential for escalation is enormous.  Maybe a Federal solution for the Ukraine is the answer, although the current government is strongly opposed to what it sees as fragmentation of its control – but even a Federation seems unlikely to get Crimea back.

The long and the short of it is that Western sanctions are unlikely to bring Russia to its knees.  Its economy was in a worse mess in 2008/9.  The declining ruble creates problems, but Russia has been building trade alliances with friendly states – notably China and its former satellites – and is taking other measures to avoid having to trade in U.S. dollars and the long term result here may well be yet another contributor to global reserve currency reform, perhaps over the next decade or so.  Russia sees having strong gold reserves as a key element in any future reserve currency realignment which it why this observer feels it unlikely it will dip into its gold reserves to any significant extent as a method of trying to arrest the ruble’s fall.  Indeed it has already stated it is willing to sell its currency reserves to do this.