Gold could suffer ‘collateral damage’ as global equities fragile

The New York gold price closed Monday at $1,076.90 down from $1,094.60. In Asia it was moved up to $1,083.00 and London held it just below that with the LBMA price set at $1081.1 down from $1,090.75 with the dollar index almost the same at 98.97  from 98.94 on Thursday. The euro was at $1.0897 up from $1.0883 against the dollar. The gold price in the euro was set at €992.29 down from €1,002.25. Ahead of New York’s opening, the gold price was trading at $1,081.15 and in the euro at €992.29.  

The silver price in New York closed at $13.85 down 30 cents.  Ahead of New York’s opening the silver price stood at $13.77.

Price Drivers

Wednesday saw no purchases into the SPDR gold ETF but a purchase of 0.99 of a tonne into the Gold Trust. The holdings of the SPDR gold ETF are now at 654.057 tonnes and at 161.16 tonnes in the Gold Trust.  And yet the gold price tumbled. With COMEX futures and Options dominating prices despite no physical transactions, the fall in the gold price stretches credibility too far. We could well see some heavy volatility either way today.

With the dollar still restrained below 100 on the dollar index and the euro stronger against the dollar the gold price moves were against all currencies and the supposed link to the euro irrelevant at the moment.

The overriding mood in global financial markets remains pointing to the downside. Chinese equity markets ‘officially’ entered a bear market today [down over 20%]. Today’s additional 3.5% fall in Shanghai’s composite confirmed this today. Global equities are struggling to hold current levels as the long term fundamental market forces take their toll. We expect further falls in equity markets.

With Iranian sanctions being lifted possibly this weekend the oil price looks as though it is entering the $20s next week.

We are witnessing a tidal change from 2015 in global financial markets and one that will extend through the year. The foundation for this change was laid in the last three years with government and central banks actions delaying what now appears to have been an inevitable course. The failure of government and central bank actions to stimulate global growth tells us that future global financial woes will be too much for both governments and central banks to combat. The new ‘normality’ the Fed referred to last year may well be ‘renewed’ once more. As in 2008 gold is collateral damage in the markets, but as then, this defied reason and the gold price then moved to record highs in the next few years.-  

The silver price behaved better than the gold price yesterday and may well be less volatile than gold today.

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

Daesh (Islamic State), climate change and what’s facing us in 2016

 Richard Poulden of Dubai-based Black Swan plc gives us his take on Daesh (Islamic State) and what this means for global stability in the year and years ahead.   He also has a word or two to say about climate change policy, the likely outcome of the U.S. Presidential election and the proposed Brexit referendum – all creating additional uncertainties in the year ahead.  There are also bound to be perhaps many ‘unknown unknowns’ (black swans) materialising in this most uncertain of years. As a safe haven investment gold would seem likely to be a beneficiary from all these and perhaps more if the predicted physical metal supply crunch comes about.

Uncertainty and Confusion

John C. Calhoun, the 19th century American politician and one time Vice President, once said: “The interval between the decay of the old and the formation and establishment of the new constitutes a period of transition which must always necessarily be one of uncertainty, confusion, error, and wild and fierce fanaticism.”

We are currently in just such an era as we transition from the American/Western dominated world to the next. Last year I described China’s various moves to seize control of the world economy and that process is continuing: exemplified during 2015 by the mad rush to join the Asian Infrastructure Investment Bank in defiance of the USA. We are also seeing massive and dangerous political instability in the Middle East, which seems to be completely misunderstood by Western governments.

There is no sign of real recovery in the world economy. Growth is anemic everywhere. In my view the “growth” in the USA is primarily the bringing forward of demand by effectively zero interest rates. Why wait two years for that new Corvette when it costs you nothing to buy it now? Sure, the US raised rates by 25 basis points but this is negligible in the overall economy. The world stock markets are being led lower by China so it finally looks as though the correction is happening.

Here in Dubai the close of 2015 and the opening of 2016 has been marked by the destruction of the Address Downtown Hotel and by the execution of 47 people in the Kingdom of Saudi Arabia. Many of those 47 will not be missed but the execution of Sheikh Nimr al-Nimr, a Shia religious leader, has led to the trashing of the Saudi embassy in Tehran and the cessation of diplomatic relations between the Kingdom and Iran. This further divides and destabilizes the region when, above all, we need unity to face Daesh.

The economic implications of the war with Daesh are global, this is not a short term or regional problem and this war is one of the critical factors for the world economy going forward. So I will start by trying to bring some clarity concerning the enemy we are facing.

The Regional and global threat of Daesh.

An Emirati friend of mine pointed me to a truly excellent article by Graeme Wood in Atlantic Monthly.  This should be required reading for every Western politician. Sadly they haven’t read it or they would not be behaving the way they are.

What is Daesh?

Firstly, let me get clear that this is not IS or ISIS or ISIL: Daesh, as my Egyptian driver was at pains to point out, is a derogatory term and so we should use it. It is a loose acronym of al-Dawla al-Islamiya al-Iraq al-Sham (Arabic for Islamic State of Iraq and the Levant) but sounds like the Arabic words Daes (“one who crushes something underfoot”) and Dahes (“one who sows discord”). Both of these latter phrases clearly describe Daesh.

But America and its allies do not get this. On September 10th, 2014 Barack Obama said: “Now let’s make two things clear: ISIL is not “Islamic.” No religion condones the killing of innocents, and the vast majority of ISIL’s victims have been Muslim. And ISIL is certainly not a state. It was formerly al Qaeda’s affiliate in Iraq”. Everything that Obama says is completely incorrect and demonstrates a total lack of comprehension of the enemy with which we are dealing. So let’s run through his view point by point.

Daesh is Islamic.

The fact that I, and my Muslim friends, disagree with Daesh’s interpretation of the Koran does not make it “wrong” and does not mean it is “not Islamic”. I do not believe that the Pope is infallible when he speaks ex-cathedra from the Chair of St Peter or, that when he does so, he is in direct touch with God. A lot of Catholics do believe this and it is part of the Catholic faith. So, despite the obvious craziness, this does not mean that this particular piece of insanity is “not Catholic”.

Daesh essentially wants to take the world back to a 7th Century interpretation of Islam with all that that implies: very like Pol Pot’s Year Zero in Cambodia in the late 1970’s. Now of course they are cynically picking and choosing their texts and also what they want to keep from the modern world: I very much doubt they will be giving up antibiotics or petroleum anytime soon.

Daesh’s interpretation of Islam does condone the killing of innocents.

Let me make this crystal clear: Daesh is a Sunni faction. In their extreme version of the interpretation of the Koran and its many associated texts, they are allowed to kill all “apostates”. Apostasy, for Islam, is defined as the conscious abandonment of Islam by a Muslim in word or through deed. It includes the act of converting to another religion, by a person who was born in a Muslim family or who had previously accepted Islam. In Daesh’s interpretation this includes all Shia Muslims because they do not subscribe to Daesh’s Sunni version of the world. So, very similar then to the burning of Protestants by Catholics and Catholics by Protestants that went on for a couple of hundred years.  So Obama is right that Daesh has killed a lot of Muslims: this is because they have been executing their definition of apostates, which means the Shia first.

It is also worth noting here that the Christian bible talks about apostasy and also talks about putting to death unbelievers. In particular there is the apostasy of one who has followed the Son of God but then returned to his pre-rescued ways. So the madness is there across the board, it is just a matter of interpretation and implementation.

Daesh is a Caliphate

What about his statement that “ISIL is certainly not a state”? This again is completely incorrect. Daesh controls an area of land larger than Great Britain and has declared a Caliphate. This latter point is immensely important as only certain people (according to Daesh’s interpretation of the Koran) can declare a Caliphate. They also have big plans for expansion: the map below is taken from their website.

caliphate

Now it is important to understand that the Caliphate has a clear structure as a state. It has set out its laws and how they will be applied. It has issued its own currency. It provides healthcare. It has a weapons development program and it also has a global reach.

There is also the problem that once a Caliphate is declared it is the duty of all (Sunni) Muslims to support that state and, if at all possible, to go and live under its rule. Daesh has a well-organized recruitment structure but it is this duty to support a Caliphate that helps explain the ease with which it can recruit a disaffected   youth from Birmingham or Berlin.

This also explains how seemingly random acts of terror can be undertaken in its name. Thus “believers” who wish to support the Caliphate can do this through an act of random killing(s) leaving a note to say it was all for Daesh. This is fundamentally different from the franchised, more secular operation which was/is al-Qaeda.

The Daesh Economy

It has been well reported that Daesh is pumping oil from captured wells and it has equally been reported that this is then transported by tanker. Less well reported, is that the purchasers of this oil are mainly Turkey and Israel. That’s right: a NATO member country and the USA’s favourite ally in the Middle East. This all makes the who-is-really-doing-what question a whole lot murkier. It was Russia that outed Turkey on this, not another NATO ally, although they must have known.

So is the oil enough to fund Daesh? Probably not. There have been allegations that Saudi Arabia is funding them and Vladimir Putin has stated via Russia Today that he has a list of 40 countries from which money is flowing to Daesh. We know that they were originally supported by the USA as opposition to Assad but I doubt that any mainstream state is foolish enough to be encouraging the growth of Daesh any longer, and I do not believe the allegations against the Kingdom.

However, given that it is the duty of Sunni Muslims to support a Caliphate, I am sure that Putin is correct that funds are flowing from around 40 countries. These will be coming from individuals rather than governments but I hope Putin will soon name the countries.

An end in sight?

Not really. It is pretty much impossible to protect a modern city against random acts of terror. One cannot screen everyone who boards a bus or subway, one cannot search everyone who enters a shopping mall or boards a train. The floods of refugees, as we know from Paris II, are a perfect cover for Daesh sympathizers to enter the west, however given the structure of supporting the Caliphate described above, a more important point is that they are probably already there.

Sure, the opportunity will be taken to remove more of your freedoms, increase the surveillance state at every turn and tell you that it is for your own protection but this is a kind of Cameronisation policy which will do little to reduce the chances of successful attacks. From the point of view of the world economy this will damage tourism and travel and areas, which rely on tourism, will suffer major unemployment and falls in property prices. If the rumours of new weapons technology (specifically the refurbishing of old missiles) are correct this will lead to a downward spiral of less travel and less business.

The whole nature of the religious war will also have an impact on world trade and this in turn will have a detrimental effect on the world economy pushing the non-existent recovery back into recession. This is very different from the issue the UK faced with the IRA where the City carried on with business as usual: Daesh can have a global impact and we ignore this at our peril.

A military solution?

There are several bombing campaigns underway at the moment. The Americans, as usual, have defined some groups as “Good terrorists” so try not to bomb them, the British squadron of Sopwith Camels will make no difference and the Russians are bombing everyone except Assad. All of this will do little except randomly kill civilians: no war has ever been won solely by dropping tons of ordinance on people.

Also this bombing is limited to Syria and Iraq whereas Daesh is not. Local jihadist bands in YemenSaudi Arabia, Sinai (who claimed the downing of the Russian civilian jet), Gaza, AfghanistanPakistanLibyaAlgeria, the Philippines (where there is also a training camp), the Caucasus and several Central Asian Republics have sworn allegiance to the Caliphate and many now are considered by the Islamic State as provinces. In Nigeria Boko Haram has expressed support for Baghdadi as Caliph and has been accepted by Daesh as part of the Islamic State.

Accordingly the first action required from the “Allies” is to remove the land directly ruled by the Caliphate as without territory the Caliphate ceases to exist. However this will not be easy or quick and the outposts will remain. This is a struggle akin to the Hundred Years War and could last just as long.

More Macro Economic Doom: Paris and OPEC disagree

COP21 in Paris was heralded as a huge success with 195 countries agreeing, “to keep the world temperature rise well below 2 degrees Celsius”. It is incredible at one level that nearly 200 countries could agree on anything but at another level it is profoundly disturbing as to what they have agreed.

In 2007 a hundred eminent international scientists wrote an open letter to the UN Secretary General warning, “It is not possible to stop climate change, a natural phenomenon that has affected humanity through the ages”.The thrust of theirs, and many others, arguments is that global warming and cooling are cyclical. We have for example the consistent cooling of the earth through the period 1940 to 1975.

However the arguments against climate change being solely man made do not mean that we should not switch to renewable energy and generally take better care of the planet, but what that 2007 letter argued was that we should not spend several trillion dollars solely on CO2 emissions because it will not actually have the expected effect. There is the further argument that since the Chinese and Indians have both on many occasions said they do not believe in the CO2th Fairy, they will simply falsify the data anyway.

But the hugely significant thing about COP21 is that, right or wrong, it is going to be implemented. Almost simultaneously with COP21, OPEC published their predictions for future energy consumption:  incredibly, they do not think anything is going to change (see graphic)! This is a major issue as this document actually sets out OPEC’s view of the future and is the set of assumptions on which they base their strategy. Assuming that they carry on regardless this will lead to an oil glut worldwide further depressing prices. This in turn will create major problems for the oil exporting economies, in particular Saudi Arabia. But even more significantly it will alter the whole strategic importance of the Middle East. As America moves towards self-sufficiency in oil they might well abandon the Middle East to its fate. Since they appear completely clueless about the politics of the region they might actually see this as a smart move. The outcome of the ensuing power vacuum, which will suck in Russia and China, is then anybody’s guess but it will not be pleasant for the region or the world.

For what it is worth, pretty much nobody else agrees with OPEC’s projections. Even the former Saudi oil minster, Sheikh Ahmed Zaki Yamani warned them “thirty years from now there will be a huge amount of oil and no buyers….the Stone Age came to an end, but not because we had a lack of stones”.

The Implications

If the last few years have seemed like an uncertain period what we are facing will make us wish to be back in the global financial crisis. All the world markets look very toppy at the moment and the 7% collapse in China on the first day of trading of 2016 does not bode well for the rest of the year.

Currencies are a hard call as, despite the massive QE printing, the dollar has performed well against the other major currencies. It will probably still be the currency of choice to hold next year. There seem to be no rays of light in the commodities markets overall so this will be a time to watch for those markets to be oversold and buy.

We have two major votes ahead of us this year: the US Presidential Elections and (almost certainly) Britain’s referendum on the EU. The Republicans may well nominate Trump but in the election he will sink, Barry Goldwater like, beneath the Democrat waves. Britain will vote to leave the EU. To everyone’s surprise it won’t make a lot of difference and actually to make the change could take many years.

 

Gold price pattern shows strong underlying strength

Julian Phillips sees strong underlying strength in the gold price as short positions are being unwound.

New York closed yesterday at $1,204.20 up $20.00 from the previous day’s NY close. Asia lifted it to $1,205.00, but London pulled it back to $1,202.60 ahead of the LBMA Gold price setting. The LBMA Gold price was set at $1,201.50 up $20.25. The euro equivalent stood at €1,097.92 up €12.99. Ahead of New York’s opening, gold was trading in London at $1,204.30 and in the euro at €1,112.21.

The silver price closed at $16.96 up 31 cents. Ahead of New York’s opening it was trading at $16.83.

There have been no sales or purchases gold from or to the SPDR gold ETF or the Gold Trust yesterday. The holdings of the SPDR gold ETF are at 737.237 tonnes and at 164.92 tonnes in the Gold Trust.

What we did see yesterday was strong short covering of gold positions. This is significant in that the consolidation pattern we are seeing in gold shows a very strong underlying strength. It does seem that despite developed world markets persistently trying to push gold prices down, the area around $1,200 is certainly one that gold demand feels is an acceptable entry point.  This is forcing speculators, despite their determination, to accept this level. Their marauding, shorting of the market is being defeated time and time again. When they decide that there are more profits to be made on the long side, like yesterday, they will change tack to long positions,

The dollar was weaker yesterday falling from $1.0745 to $1.0816 and the dollar index at 97.82 down from 98.34 yesterday.

It is almost certain now that an Iranian deal is about to be announced as the talks have been extended yet again. The points of difference are apparently not sufficient to abandon the talks. For gold investors, the impact on the oil price will be the focus. Yet it will take time before Iran can make a new heavy impact on the oil market. Currently, it is selling oil to China easily, but the global markets will see a discounting of the future by speculators. In further conversations with oil experts we are told that the impact on the oil price will not be so great. Consequently, we no longer see the oil price having a market downward or upward impact on the gold price.

It is a holiday in India today and tomorrow. Of more importance than this holiday for gold demand, is the coming Akshaya Tritiya holiday on the 21st April.  Indian demand overall remains very strong.

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

New style Mineweb precious metals competition – win cash

$2,000 up for grabs for Mineweb/Moneyweb readers for mid-year commodity price predictions

The last 12 months have proven to be a volatile period for commodity prices and there is much speculation about how different resources will perform in the new year.

Will geopolitical turmoil fuelled by a Greek exit from the European Union provide a catalyst for the gold price? Will the major investment banking groups be correct in their assessment that oil could drop as low at $30? Can a rebound in the automotive sector provide some support to the platinum price? Is the global supply glut finally to begin working its way out of the various sectors in the new year?

These are all questions which play on the minds of industry experts who try and predict commodity prices are going to go in the year.

Mineweb is giving our community members the opportunity to win $2,000 if they correctly guess the prices of various commodities by the opening of trade (9am South Africa time) on 1 June 2015.

We will be offering $250 for the nearest correct guess in gold, silver, platinum and the oil price and $1 000 to the person who correctly guesses the prices of the total basket.

Go to www.mineweb.com/predict-commodity-prices-win-cash/  to submit your entry form . Note don’t put $ signs in prices as form won’t accept them

Oil and copper crash – are we seeing start of next great depression?

Latest commentary on Mark O’Byrne’s Goldcore website – www.goldcore.com  looks at some disturbing possible scenarios.  Are we perhaps on the verge of a global depression?

Oil prices fell another 1 per cent this morning  and continue their collapse – down 57% in just over 6 months. Copper crashed 8% on the London Metal Exchange, plunging to 5 and a half year lows.

Oil fell to fresh six-year lows and has fallen almost 60 per cent since June 30, 2014 to levels last seen in early 2009 after the 2008 crash (see chart).

February Brent crude dropped another 79 cents to $45.80 a barrel and West Texas Intermediate crude for was at $45.34, down 55 cents. Copper for delivery in three months on the LME dropped as much as 8.7 percent to $5,353.25 a metric ton, the lowest intraday price since July 2009. Nickel slid 4.6 percent and lead fell 3.8 percent to the lowest in more than two years.

Commodities came under further pressure after the World Bank cut its forecasts for global growth, reinforcing worries of a gloomy economic outlook.

There has been much speculation in recent months as to the causes of oil’s dramatic crash in price. Some analysts have suggested that Saudi Arabia is attempting to put the U.S. shale oil industry out of business in order to keep the U.S. dependent on Saudi oil exports. Others suggest that prices were forced down by the Gulf states and the U.S. in order to damage Russia’s exports and its economy.

Copper Comex Spot HG Index - 1997 to January 14, 2015 (Thomson Reuters)

These may be factors but it is becoming increasingly clear that if they are, they are secondary factors to the major trend which is falling demand and a slowdown in the global economy – this is most pronounced in China, in Japan and in Europe.

We already have witnessed the customary New Year’s hype from many banks and governments that this year will finally be the year when economies come off the life-support of ultra low interest rates – even as they cheer-lead the ECB’s expected foray into QE and euro money printing.

However, the fact is that the omens for the economy this year are far from good. The most telling sign is not specifically that oil prices are collapsing but that it is happening in conjunction with the most widely used industrial metal – copper.

Copper fell over 8 per cent today, after a 1.3 per cent fall yesterday hitting its lowest level in nearly five years on the back of an 18% decline last year.

China has been the major user of the metal in recent years as its construction industry boomed. The Chinese housing and property market is now slowing down with the potential for a staggering collapse as dozens of “ghost cities” – brand new cities financed by reckless banks with nobody to occupy them – unwind.

The effects of such would be harsh on metal and commodity exporting countries, particularly those exposed to China like Australia and Brazil.

While copper has seen the most notable declines, other industrial metals are also faring poorly. According to Bloomberg, “A gauge of the six main industrial metals has declined 9.3 percent in the past 12 months to the lowest since June 7, 2010.”

Clearly global industrial production is slowing down.

When oil price declines are viewed against this backdrop a more worrying picture emerges. Oil prices are now at almost six-year lows and this despite record imports of oil by China.

The Financial Times report that trade data showed “China imported 30.37m tonnes of crude in December, up 19.5 per cent month-on-month.”

In only six months oil has lost 60% of it’s value. This may have been partly exacerbated by strategic maneuvering by various players but, by any standard, such a decline must be viewed with alarm.

The recent plunge in commodity prices and especially copper should also be viewed with alarm. It is said that copper should be known as Doctor Copper as the metal is said to have a PhD in Economics and the ability to predict future economic growth or a lack thereof.

Are we on the verge of a global depression?

Only, time will tell. The inability of central banks to stoke inflation and sustainable economic growth, statistics from Europe suggesting deflation, and stubborn and rising unemployment across the western world would suggest that it is a real possibility.

At the very least, the ‘great recession’ seems likely to continue. A serious recession or depression will likely collapse the already fragile banking system, especially in Europe, and the savings of ordinary people and companies will become exposed to bail-ins.

As ever, there are so many actors, factors and potential outcomes, it is unwise to predict exact outcomes. All we can be sure of is that the outlook is uncertain and unfortunately negative and we should prepare accordingly.

From a financial perspective, now is the time to be risk averse and diversify and favour safe haven assets such as safer forms of cash, bonds, hard assets and of course physical gold.

Click this link to read more commentary and data on the www.goldcore.com website

Strong dollar, weak oil a lifeline for struggling gold miners

A good number of gold miners are on the brink at $1200 gold or lower, but the weak dollar and the massive drop in the oil price will be providing many with a little more hope of surviving.  Article published on Mineweb.com.  Click here to read this article on Mineweb

With the quarterly reporting season for Q4 2014 now with us we should be seeing the beginnings of a serious uplift in margins for gold miners around the world, an uplift which will have been accelerating further since the year end.  While the gold price itself may have weakened during Q4, although not materially so, two factors will have been impacting very positively on the results of many marginal miners.

One important factor during Q4 will have been the ever increasing gains of the US dollar against most local currencies which, on its own will have led to an increase in revenue to operating costs margins in non-US dollar related parts of the world – in some cases, however,  rather more than others.  Australia, with its plethora of large, mid-sized and small gold miners will perhaps have benefited most in this respect with its currency falling around 14% against the US dollar over the period.  They sell their product in US dollars, but incur most of their costs in local currencies thus improving margins by the percentage fall in local currency parity against the greenback

The other major factor positively affecting the revenue/costs balance will be the oil price fall and this will have been particularly beneficial to virtually all the mining operations in remote areas without access to grid power, or without their own hydro-electric plants.  This will apply to most West African gold mining operations for example.  Further, open pit gold miners with oil guzzling truck fleets will also see some big benefits.  With the oil price falling throughout the quarter, and even more since the year end, the cost improvement as a result will be continuing to improve.  However it should perhaps be noted that these mines in remote areas do tend to carry large fuel  stocks on site against possible supply interruptions, and some will also have been hedging oil prices on the way down, which means the full impact of the dive in the oil price may only now be being felt as we move into Q1 2015, but many will already have been seeing the benefits in the earlier quarter although perhaps not yet to the full extent.

As we pointed out in an earlier article looking at all types of mining operations, the cost of power represents a very large proportion of overall operating costs, particularly for those having to rely on diesel generators, due to their locations.  Power for crushing and grinding alone, for example, may account for up to 40% of a mine’s energy costs, while total energy costs may account for a similar percentage of total operating costs for some mines relying on diesel generators and diesel powered loading and hauling equipment.

See: Expect some big mining cost falls in Q1

It is probably the gold mining sector which may well benefit most, and the smaller miners most of all.  Many gold mining operations are much smaller in tonnage terms than the big open pit iron ore or base metal mines so don’t have the wherewithal to invest in long power lines to connect them to the electrical grid system where this might be feasible for a bigger operation.  There are also probably more remotely located marginal gold mines out there than there are of mines in most other sectors.  The huge runup in the gold price up to 2012 prompted a good number of development decisions predicated on $1,000 gold and higher which have been coming on stream over the past year or so, and most of these have to be considered marginal operations at today’s gold price sitting at nearly 40% below its peak.

In the mad rush to develop these new mines to take advantage of rising gold prices, too often some costs ramifications were glossed over.  They would be more than countered by the seemingly inexorable rise in gold, but the reality has been different.  The rapid expansion of the sector also led to a shortage of qualified and experienced managers who might have been through ups and downs in the mining cycle before and might have been more price risk aware.

But what’s done is done, leaving a host of struggling gold miners, already battling to stay, or become, profitable and the latest dollar strength/oil price weakness scenario is probably offering a lifeline which may keep rather more of them afloat.  They will be hoping against hope that this double benefit to their costs structure will continue until the gold price picks up again – if it does.

Expect some big mining costs falls in Q1

By Lawrence Williams

The fall in the oil price will be having a very positive effect on operating costs at mines employing diesel-powered equipment and particularly those which have to rely on oil fuelled generators.  

This article has now been published on Mineweb.com.  Click on the link to view more articles on the world’s top mining and metals news and comment website.

The huge fall in oil prices may be having a devastating effect on major oil producers’ economies, but for the beleaguered global mining sector it will be proving, in many cases, a godsend.  Expect to see some big falls in mining costs in Q1 as a consequence.  Indeed Q4 costs are also going to be lower as a result of the reduced oil prices, but with the main price falls hitting late in the year we will only be seeing the principal impact this year.  With no signs of an oil price recovery in sight these cost falls could continue for some time to come.

Energy consumption can account for as much as 40% of some mines’ operating costs – particularly those in remote locations which have no access to grid power.  They mostly rely on diesel generators to provide mine power – and every part of the mining process utilises energy.  The percentage is probably highest for big open pit operations with long truck hauls.  A big 240 ton mining truck like a Cat 797 has a 1,000 gallon fuel tank which will require topping up every shift.  Costs will also be reduced for those operations employing long mine to port haulage distances for bulk minerals requiring diesel powered rail or truck hauls.

Underground mines also have high fuel consumption haul and load equipment and if long up-ramp truck hauls are required consumption rates are high, much as long up ramp hauls out of open pits, are also very fuel cost intensive.  Diesel powered underground loaders, which involve stop start activity while loading and tipping, are also high fuel users.  Virtually every activity, underground and surface, requires energy supply.

Mineral processing plants require large amounts of power too – indeed a recent Australian report reckoned that as much as 40% of a mine’s energy costs may be accounted for by comminution – crushing and grinding.  Even those on grid power may benefit as utilities relying on oil-fired power plants may be able to reduce their charges too.

Many of these miners, which incur costs in domestic currencies, but sell their product in US dollars will benefiting also, at least in the short term, from dollar strength, although since fuel is traded in US dollars this will reduce the benefits of the falling oil prices.  However the fall in oil prices will, in most cases, have been far greater than the rise in the dollar against the local currency.

As implied above, those that will see the biggest costs benefits are operations in remote locations relying almost entirely on diesel power.  For the most part they will already have been taking substantial steps to cut fuel usage – through elements on the mining side like improving mine design and haulage conditions and better scheduling of mine vehicles, while as to mineral processing the installation and utilisation of more efficient comminution equipment is also very important in cutting overall energy costs.  It is to be hoped though that the reduction in oil costs does not lead to ther cost cutting options being ignored.

Unstable global monetary environment favors gold and silver going forward

Julian Phillips’ latest commentary on yesterday’s gold and silver market action and where they may go from here.

By Julian Phillips

New York closed at $1,182.60 on the last day of 2014 and the first trading day of 2015 saw the gold price stand at $1187.40 ahead of London’s opening. The Fix saw the gold price set at $1,184.25 down $15.00 and in the euro, at €983.351 down €3.991 while the euro was 1.23 cents weaker at $1.2043. Ahead of New York’s opening gold was trading in London at $1,183.10 and in the euro at €981.87.

The silver price was at $15.69 down 58 cents. Ahead of New York’s opening it was trading at $15.79.

Price Drivers

There were sales of 1.792 tonnes from the SPDR gold ETF and sales of 0.55 of a tonne from the Gold Trust before the year’s end. In thin holiday trade, alongside the falling euro, traders knocked the gold price back to the $1,180 area as the euro began today a cent lower at $1.2051. While the holiday continues until next week, we expect the euro’s fall to dominate the gold prices, until real volumes return to the gold market. The holdings of the SPDR gold ETF are at 709.16 and at 161.18 tonnes in the Gold Trust.

We expect 2015 to be a year where currency dramas keep popping up as the dollar rises and the rest of the world’s currencies fall. The oil price collapse is benefitting all nations as well as the U.S. dollar as oil import costs fall to around half of last year’s levels. In most countries these costs make up a big proportion of imports. But because all non-oil producing countries are benefitting it is a common denominator so cancelling out the impact on most exchange rates. Attention therefore reverts back to interest rates, with the U.S. offering higher rates than the Eurozone, placing continual downward pressure on the euro and upward pressure on the dollar. This will continue to be the case throughout 2015.

In addition we do expect the Chinese Yuan ‘peg’ to the dollar to be lowered as the dollar rises. After all, China exports globally, not just to the U.S. More importantly we cannot see a case for the Yuan to see a higher exchange rate in the eyes of that government, no matter what other countries say.

The volatility we expect to see in exchange rates will create an unstable international monetary environment favoring gold going forward. Please bear in mind that the current monetary system is not the result of design but consequences. We do not believe it has the capacity to withstand the heavy pressures that lie ahead in 2015/16.

Silver– While the silver price is and will following gold it has become considerably more volatile as U.S. traders see more profit opportunities in silver than gold. This will continue until gold holds above $1,210, we feel.

Julian Phillips is founder and editor of www.goldforecaster.com and www.silverforecaster.com