Gold: getting back into the groove?

By Frank Holmes, CEO and Chief Investment Officer, US Global Investors

Gold begins 2016 with the right moves

Who says gold lost its appeal as a safe haven asset?

After five straight positive trading sessions last week, the yellow metal climbed above $1,100, its highest level in nine weeks, on a weaker U.S. dollar.. The rally proves that gold still retains its status as a safe haven among investors, who were motivated by a rocky Chinese stock market, North Korea’s announcement that it detonated a hydrogen bomb last Wednesday and rising tensions between Saudi Arabia and Iran.

Here in the U.S., gold finished 2015 down 10.42 percent, its third straight negative year. Until the new year, sentiment appeared poor, and many gold bulls were finding it hard to stay optimistic.

But after the price jump last week, large exchange-traded gold funds saw massive inflows, confirming a shift in investors’ attitude toward the precious metal.

It’s worth remembering that about 90 percent of physical demand comes from outside the U.S., mostly in emerging markets such as China and India. In many non-dollar economies, buyers are actually seeing either a steady or even rising gold price. The metal is up in Russia, Peru, South Africa, Canada, Mexico, Brazil and many more.

Note the differences in returns between gold priced in U.S. dollars and gold priced in the Brazilian real, Turkish lira, Canadian dollar, Russian ruble and Indonesian rupiah.

In 2015, Gold Performed Better in Non-Dollar Currencies
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Gold demand in China was very robust last year. A record 2,596.4 tonnes of the yellow metal, or a whopping 80 percent of total global output for 2015, were withdrawn from the Shanghai Gold Exchange. As for the Chinese central bank, it reported adding 19 more tonnes in December, bringing the total to over 1,762 tonnes. Precious metals commentator Lawrie Williams points out, though, that China’s total reserve figure is widely believed to be “hugely understated,” meaning the central bank might very well have much more than we’re being told.

Forget Interest Rates—Real Rates Are the Key Drivers of Gold

Despite all the talk of rising interest rates in connection to gold, they’re not a dominant driver of prices. Sure, rising nominal rates have tended to make the metal less attractive, since it doesn’t pay an income, but the larger driver by far are real interest rates. When real rates drop into negative territory, gold has historically done well.

As a reminder, real rates, important for the Fear Trade, are what you get when you subtract the consumer price index (CPI), or inflation, from the 10-year Treasury yield. As of January 6, the 10-year yield was 2.18 percent, while the 12-month CPI for November—December data will be released later this month—came in at a barely-there 0.50 percent. Real rates, therefore, are running at a positive 1.68 percent, which is a headwind for gold.

That’s why we need inflation to pick up, because then gold would be more likely to rally.

Regardless, the World Gold Council (WGC) writes in its 2016 outlook that gold’s role as a diversifier remains “particularly relevant”:

Research shows that, over the long run, holding 2 percent to 10 percent of an investor’s portfolio in gold can improve portfolio performance.

The reason for this is that gold has tended to have a low correlation to many other asset classes, making it a valuable diversifier. During economic contractions, for example, gold’s correlation to stocks actually decreased, according to data between 1987 and 2015.

Since 1987, Gold Has Had a Low Correlation to Other Assets
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For the last three years, gold has disappointed many because other investments, specifically equities, have seen such huge gains. But with global markets hitting turbulence, the yellow metal is looking more attractive as insurance against the currency wars.

I always recommend 10 percent in gold: 5 percent in gold stocks or an actively-managed gold fund, 5 percent in bullion and/or jewelry. It’s also important to rebalance every year.

This should be the case in both good times and bad, whether gold is rising or falling. As highly influential investment expert Ray Dalio said last year: “If you don’t own gold, you know neither history nor economics.”

USGI Among the First to Discuss the Significance of PMI as a Forward-Looking Indicator

Aside from real interest rates, gold prices are being challenged by weak manufacturing data around the world. China’s purchasing managers’ index (PMI) fell to 48.2 last month, down 0.4 points from the November reading. The Asian giant’s manufacturing sector spent a majority of 2015 in contraction mode, managing to rise above the key 50.0 level only once last year, in February.

China Manufacturing Still in Contraction Mode
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Although fears of a Chinese slowdown are real, they’re largely overdone. Consulting firm McKinsey & Company’s Gordon Orr calls these fears a distraction, writing that “the country’s economy is still massive—as are its potentional opportunities.”

Something to keep in mind is that China recently approved a new five-year plan, its 13th since 1953. Although we won’t know exactly what’s in it until March, we do know that these plans have been good for economic growth in the past. It’s likely that interest rates will be trimmed even more to stimulate business, with more funding diverted to infrastructure and “green” initiatives.

Manufacturing around the world showed signs of deterioration in December as well. The JP Morgan Global Manufacturing PMI declined to 50.9 from 51.2 in November. The sector is still in expansion mode, but just barely.

Global Manufacturing Cools in December
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The reading also fell below its three-month moving average in December, which, as I’ve shown many times before, can have a huge effect on materials and energy three to six months out.

We were one of the earliest investment firms to monitor this important economic indicator closely and bring it into public, everyday discourse. (From what I can find, the first time we wrote about it was inJanuary 2009, as it applied—wouldn’t you know?—to China.) Today, I hear and read about the PMI on the radio and in newspapers as often as I do more common economic indicators such as GDP and unemployment rates.

That’s a testament to the sort of cutting-edge analysis we do and pride ourselves on here at U.S. Global Investors.

Looking Ahead in the New Year

Until we see global synchronized growth with rising PMIs, we remain cautious going forward. A constant source of hope is the Trans-Pacific Partnership (TPP), which, when ratified sometime this year, will eliminate 18,000 tariffs for 25 percent of global trade.

We also anticipate more stimulus programs this year around the world. Lately we’ve experienced strong fiscal drag as more and more regulations and taxes impede progress that not even cheap money has been able to offset. A 2014 report by the National Association of Manufacturers (NAM) revealed that federal regulations in the U.S. alone cost businesses more than $2 trillion a year. To ignite growth, G20 nations should commit themselves to cutting red tape.

Burdensome regulations around the globe have led to massive fiscal drag

A good model for such a task is Canada’s “One-for-One Rule,” introduced in April 2012 during former Prime Minister Stephen Harper’s administration. The rule mandates that when a new or amended regulation is introduced, another must be removed.

However it’s accomplished, regulatory burdens placed on businesses must be reduced.

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Rob McEwen on gold, silver and investing in precious metals stocks

Rob McEwen, the Investor, Has Some Advice for Mining Executives Everywhere

Source: JT Long of The Gold Report n,

Rob McEwen is the chairman and chief owner of McEwen Mining Inc. He is the founder and former chairman and CEO of GoldCorp Inc.  McEwen was awarded the Order of Canada in 2007 and the Queen Elizabeth’s Diamond Jubilee Award in 2013.  He holds an Honorary Doctor of Laws and a Master of Business Administration from York University and a Bachelor of Arts from the University of Western Ontario. He received the 2001 PDAC Developer of the Year Award.

What does a veteran mining executive look for when investing his money in junior equities? In this interview with The Gold Report, Rob McEwen, who has been predicting $5,000/oz gold prices since 2011, explains why he still thinks that this is a possibility in the next four years and how companies can take advantage of technology to ensure that a price rise goes to the bottom line—and ultimately shareholders.

The Gold Report: For the last five years, you’ve been predicting $5,000/ounce ($5,000/oz) gold. Are you still predicting that and what would drive it there?

Rob McEwen: Yes, and the reasons are even more pressing and relevant. The industrialized world has never before increased the money supply as fast and as large as it is today and government debt is at unimaginable and unsustainable levels. The central bankers’ objective was to get the global economy back up and running, but so far it hasn’t worked. Interest rates are dragging along the floor and have forced investors and savers to desert their prudent ways and seek riskier investments in a frantic search for yield. Our governments want us to spend, to consume believing this will keep the economy afloat. But they are wrong and pushing the wrong levers. What we need urgently is capital investment that creates jobs and expands the tax base. Unfortunately, this is not happening.

On top of this setting, there appears to be a number of powerful countries that want to remove the U.S. dollar from its role as the reserve currency of the world. These players have been strategically moving to reduce the role of the dollar in their economies and lessen the need to buy dollars to buy oil, food and other essential commodities.

TGR: But if all that money printing hasn’t taken the price of gold up in the last five years, why would it do that at a later date?

RM: At some point soon, people are going to question the value of the dollar. Too many people believe the government can control interest rates and inflation. People are going to realize that the government is not telling us the truth about the economy, about inflation, about having the economy under control. When that happens investors will rush to diversify and put funds into gold and silver. Right now is an appropriate time to start buying gold. It is cheap and gold shares are even cheaper. What most investors don’t appreciate is the fact that gold has been going up significantly in the past year and a half in many currencies other than the dollar. Soon it will also climb in dollar terms.

How high will it go? Here’s some simple math to show what is possible. From 1970 to 1980 gold went from $40/oz to $800/oz, an increase of 20 times. The low in this cycle has been $250/oz. If you apply the same factor of 20, you’re at $5,000/oz.

TGR: What’s the time frame for your prediction?

RM: Four years out, in that time the dollar will have given up its premium position in the currency world and many more investors will be buying gold. The combination of crowd psychology and instantaneous communication are going to propel the price of gold to new heights that most people can’t imagine today.

TGR: If that’s the case for gold, what are the prospects for silver?

RM: Silver will follow gold’s upward climb and the gold/silver exchange ratio will compress in the future. It will go from the current high of 75:1 to potentially as low as 16:1.

TGR: As an investor, does it matter if gold goes to $5,000/oz if the operating costs and the capital expenditure (capex) costs continue to go up the way they have in previous cycles?

RM: Sure, but that scenario is not going to happen right away. I expect the gold price will increase far faster than the costs of producing it for several years. During that period, investors enjoy large gains due to the dramatically increased profit margins.

TGR: You’ve talked a lot about the role of technology. Could technology help to smooth out the ebb and flow?

RM: No, I do not believe that technology will alter the ebb and flow because mining is a cyclical industry, but technology could significantly improve the industry’s profitability. Unfortunately, the mining industry has a lot of inertia, so it tends to adopt new technology slowly. However, there are signs that its adoption rate is accelerating.

On the wish list are: faster discoveries, faster resource modeling, speedier permitting, faster construction, lower capex and operating expenditures (opex), higher recoveries, faster payback, higher returns on invested capital, smaller environmental footprint and, most importantly, superior returns to shareowners. While this is quite the laundry list, it highlights the significant opportunity for improvement.

TGR: Is demanding innovation and austerity the role of the board, the shareholders or management? Where does the mindset change start?

RM: Shareowners buy or sell depending on their assessment of management’s performance. The board should encourage and support management in embracing innovation and demand that management strive to always be efficient and productive with shareowners’ capital.

TGR: You’ve been a mining executive for decades, but you’re also an investor. What do you look for in a mining company when you’re thinking about making an investment?

RM: First, I listen to management’s pitch and if it sounds interesting; second, I ask about their share ownership and if I find they are talking a big story without having a large investment in their firm, then my interest starts to fade. But, third, I look at how the market is pricing the company. If its shares appear to be selling at a large discount my interest can return. I tend to take large positions in explorers and small producers that I feel have big upside potential.

TGR: What do you look for in the resource itself? Are you focused on country risk? Are there countries you won’t invest in, or do you have a short list of favorite countries?

RM: The location of a resource is very important. There are definitely countries that are unattractive to me, especially where there is no rule of law, high crime rates and greedy governments. Experience has narrowed my focus to the Americas and perhaps Europe. I have no interest in putting my staff’s lives at risk. In addition, I wish to avoid exposure to regions where corrupt practices are commonplace and the potential for us to get ensnared inadvertently in the new foreign corrupt practice laws that have been enacted here at home.

TGR: How do you protect yourself against those risks?

RM: It requires much more due diligence and vigilance than ever before. Governments worldwide seem to think the mining industry hasn’t been paying its share, despite the big investments made by the industry in infrastructure, employment and communities. They have a nasty habit of changing the rules, such as increasing taxes and taking larger interests in the mines without compensation, after companies have spent the capital and built the mines.

I’d like to see the mining industry unite and stand up to all governments. We need to tell the politicians that if they want us to invest our capital in their country, they have to give us iron-clad guarantees that they will honor the terms of the agreement. They should have to put in place financial instruments, financial guarantees that will return our invested capital, at a minimum, if they change the rules under which we invested. One such way to ensure that they keep their part of the agreement is to require them to put up a letter of credit, equal to our investment, in a major financial center outside their country. And should they violate the terms of our contract with them then we take away the funds we invested, without any recourse to their legal system.

TGR: What about physical risk? You recently had a significant breach in Mexico. How do you deal with that?

RM: There is a powerful crime element in Mexico. Some regions of the country are much worse than others. Until our recent robbery we had little to complain about. Since then, we consulted with Brinks and other security experts and we have fortified our refinery and mine property in addition to having a detachment of state police on the property.

TGR: What do you look for on a balance sheet?

RM: Debt, forward sales and property ownership issues such as joint ventures or options that could reduce the shareholders’ value.

TGR: Does that include hedging, royalties, streams, those sorts of things? Do you consider that debt?

RM: Absolutely, I consider those financial mechanisms a disaster. The sale of metal streams and the royalties have been one of the biggest sins committed by the industry. Many management teams view these financing vehicles as nondilutive and easy money. It’s 7-11 money, convenience store money, and management grossly overpays for this money and their shareowners end up paying a very big price in terms of lost cash flow and profits. The evidence is glaring; the share price performance of the metal streaming and royalty companies have far outperformed that of the producers.

The market has spoken loud and clear; investors don’t want to buy a producer that has sold a good part of its future revenue. The impact of streams and royalties has been particularly painful during this period of low metal prices, as these instruments have hammered operating margins. A number of mining CEOs say it’s the only reasonable source of financing they can secure now, but to my mind their actions appear to be a Faustian bargain. They are selling their shareowners’ future profit to the devil and he has come to collect it.

TGR: Why don’t you think most investors share the long horizon view?

RM: I believe the continuous and incessant nature of news media’s coverage of the market encourages and promotes a trading mentality. There is an unhealthy and unachievable focus on making quick, big profits. Long-term investments are viewed by many as old school and boring.

TGR: You’ve been through a number of these cycles. Is there anything we missed that investors can learn from your experience?

RM: When you observe an inordinate number of new issues or secondary issues coming out in a short period of time and the media is full of stories of ever higher prices, that is usually a good indication that you’re nearing a top.

TGR: So it’s easier to see a top than a bottom?

RM: Both are difficult to see but there are some market clues. The bottom is usually close when there is tiny trading volume, no one is doing any financings and the media is full of stories about ever lower prices. Today feels like we are very near the bottom.

TGR: Thank you for your time.


1) JT Long conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an employee.
2) Streetwise Reports does not accept stock in exchange for its services.
3) Rob McEwen: I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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Gold’s global top 10 by country and company

The past year has seen some changes in global gold production rankings, both by country and by company.  Edited, expanded  and updated version of article recently published on  To read original click here.

Lawrence Williams

It is interesting to see how the major producers of gold are faring in the grand scheme of things – both nationally and by company, given the continuing lowish gold prices pertaining over the past two to three years. Currently gold is wavering around the $1260 level and while this is perhaps better than its lows of last year, it is much lower than it was a couple of years ago and is now beginning to have an impact on global gold output.

While many assumed that the lower gold prices would lead to an immediate fall in world gold production as miners struggled to remain profitable, it has to be remembered that some major new mines were already under construction having been launched when prices were much higher.  Meanwhile marginal operations have been mining higher grades, at the expense of a reduction in longer term mine life, to maintain profitability.  Higher grades at a maintained mill throughput level means higher production so we have the anomaly that falling gold prices may actually lead to increased output.

But this all takes time to filter through and we are quite probably seeing peak gold being attained this year.  Global production growth has been falling so global gold output only rose by around 2% last year according to the latest analyses, and this year production is expected to remain flat.

While one may sometimes argue with the methodology, and findings, of GFMS’ global gold supply/demand statistics the consultancy’s latest report on gold includes its estimates of the world’s top gold producing nations and companies which are not so controversial and there are some changes in position and outputs which are certainly worth noting.

We last produced a similar listing based on 2012/2013 figures from rival precious metals consultancy, Metals Focus, last May (see: World top 10 gold producers – countries and companies on Mineweb) and while some of the GFMS statistics may vary a little from those of Metals Focus they broadly follow the same pattern and the overall figures are comparable – perhaps not too surprising given that Metals Focus was started by ex GFMS analysts and marketers.

Let’s take the top 10 country-by-country producers first, showing changes in position based on GFMS 2013 figures and 2014 estimates:

Table 1. Top 10 World Gold Producing Countries 2013/2014 (tonnes) 

Rank Country 2013 output 2014e output Change Y/Y
1 China 438.2 465.7 +6%
2 Russia 248.8 272.0 +9%
3 Australia 268.1 269.7 +1%
4 USA 228.2 200.4 -12%
5 Peru 187.7 169.3 -10%
6 South Africa 177.0 164.5 -7%
7 Canada 133.3 153.1 +15%
8 Mexico 119.8 115.7 -3%
9 Indonesia 109.2 109.9 +1%
10 Ghana 107.4 106.1 -1%
World 3049.5 3109.0 2%

Source: GFMS

Notably here, according to the GFMS estimates, China has continued to see increased gold output and remains comfortably the World No. 1. But the No.2 position is now occupied by Russia, which appears to have leapfrogged over Australia to attain this ranking with 9% output growth last year. Former World No. 1 for most of the last century, South Africa, is nowadays only in sixth place – and is evenin danger of being overtaken by Canada this year, which has seen particularly strong growth in the past couple of years while South African output continues to slip. Indeed Canada provided the strongest growth (15%) amongst the major producing nations.

Among the top producing companies, there have been some substantial gold output drops from the biggest miners, mainly due to divestments and closures – see table below.  While this may mean output has fallen for the two top gold miners, Barrick and Newmont, the divested operations are still producing, but for companies further down the food chain.

Table 2.World Top 10 Gold Miners 2013/2014 (tonnes)

Rank Company 2013 output 2014e output Change Y/Y
1 Barrick Gold 222.9 194.4 -13%
2 Newmont 157.5 151.2 -4%
3 AngloGold 127.7 136.9 +7%
4 Goldcorp 82.9 89.3 +8%
5 Kinross 77.7 80.4 +3%
6 Navoi (Uzbek) 70.5 73.0 +4%
7 Newcrest 73.5 72.0 -2%
8 Gold Fields 58.1 62.6 +8%
9 Polyus Gold 51.3 50.8 -1%
10 Sibanye Gold 44.5 50.1 +13%

Source GFMS

As can be seen, Barrick has recorded the biggest fall, while Newmont is in danger of being surpassed by AngloGold Ashanti as world No. 2 if 2014’s percentage increase and decrease figures are replicated again in the current year. Others which showed good production rises are Goldcorp, Gold Fields and the latter’s South African spinoff Sibanye Gold. Indeed if these two latter miners had remained combined they would together have been comfortably in the world No. 4 slot, well ahead of Goldcorp. The only change in ranking here is that GFMS reckons Uzbekistan’s state mining company, Navoi MMC, with a 4% increase in production, mostly from its massive Muruntau operation, has moved above Australia’s Newcrest, which is estimated to have recorded a small fall in output.

With GFMS now reckoning that the pent-up growth in global gold output may well have peaked last year with the various big, and small, new gold projects in the pipeline having mostly now reached full capacity, we could well see some further production downturns from some of the big miners this year, although their financial positions could be improving regardless given the recent concentration on cutting all-in costs – aided in many cases over the past year by the big fall in oil prices and the strength of the U.S. dollar for production from outside the U.S. itself.