Gold price measuring the value of currencies – not vice versa

Gold Today –New York closed at $1,236.30 on the 21st February after closing at $1,239.00 on the 20th February. London opened at $1,235.00 today.

 Overall the dollar was stronger against global currencies early today. Before London’s opening:

         The $: € was stronger at $1.0505: €1 from $1.0558: €1 on yesterday.

         The Dollar index was stronger at 101.59 from 101.37 on yesterday. 

         The Yen was stronger at 113.32:$1 from yesterday’s 113.56 against the dollar. 

         The Yuan was stronger at 6.8818: $1, from 6.8866: $1, yesterday. 

         The Pound Sterling was stronger at $1.2491: £1 from yesterday’s $1.2423: £1.

Yuan Gold Fix
Trade Date Contract Benchmark Price AM 1 gm Benchmark Price PM 1 gm
      2017    2    22

     2017    2    21

      2017    2    20

SHAU

SHAU

SHAU

/

275.57

274.98

/

275.19

275.04

$ equivalent 1oz @  $1: 6.8818

      $1: 6.8866

$1: 6.8783

  /

$1,244.62

$1,243.45

/

$1,242.90

$1,243.72

Please note that the Shanghai Fixes are for 1 gm of gold. From the Middle East eastward metric measurements are used against 0.9999 quality gold. [Please note that the 0.5% difference in price can be accounted for by the higher quality of Shanghai’s gold on which their gold price is based over London’s ‘good delivery’ standard of 0.995.]

 At the close in Shanghai today, the gold price was trading at 275.8 Yuan, which directly translates into $1,246.53. But allowing for the difference of gold being traded this equates to a price of $1,241.53. This is $5 higher than New York and $1 higher than London. We watch to see if London and New York continue to follow Shanghai or not.

LBMA price setting:  The LBMA gold price was set today at $1,237.50 up from yesterday’s $1,228.70.  

The gold price in the euro was set higher at €1,177.79 after yesterday’s €1,166.30.

Ahead of the opening of New York the gold price was trading at $1,237.70 and in the euro at €1,177.51.  At the same time, the silver price was trading at $18.00. 

Silver Today –Silver closed at $17.98 at New York’s close yesterday against $18.03 on the 20th February.

Price Drivers

With the gold price still struggling to break through $1,240 – $1,250 we expect the price to keep pushing higher against the dollar. It is rising well in all other currencies.

We all watch the gold price in dollars to see whether it is rising or falling. This way of thinking is deeply embedded, going back to the time when the dollar was entrenched as the world’s most important currency.

This has extended to each of us, looking first at our expectations of which way the gold price is going in the dollar, then our view of the currency under which we live, against the dollar. Our objective is to see how gold will perform in our currency [if it is not the dollar]. The separation of our currency against the dollar and the dollar against gold is because the dollar, right now, is the global currency. But this is waning. Indeed, the gold price in the dollar is slowly becoming a measure of the dollar against gold, not the other way around.

Over time as we move into a multi-currency system and when the biggest physical gold market, China, dominates the gold price [which is happening right now], we will have to shift our thinking back to measuring supply and demand for gold.

How will we see this measure the gold price? We have reported the alignment of the world’s three gold markets, London, New York and Shanghai as Shanghai gains in prominence. We are seeing far smaller impacts of speculative action, that dominates New York. We are seeing London’s bullion banks ensure they are as prominent in the Chinese market as they are in London. China has made speculative trading much more expensive than New York, and since then we see more stability in the gold price. This tells us the effect of the Chinese gold market is becoming easily visible.

In turn we see the gold price more effectively measuring the value of currencies, as it has over several millenniums. Today’s action shows the gold price rising in all currencies, but more in the euro than in the dollar. In other ‘soft’ currencies the gold price is an excellent hedge against a weakening currency and more so over the long term. Over the very long term the gold price outperforms most other investments. For instance in the early ‘70’s a South African investor would have bought a Krugerrand for R300, it is now priced at around R16,200.

Gold ETFs – Yesterday saw no sales or purchases from or into the SPDR gold ETF or the Gold Trust.  Their respective holdings are now at 841.169 tonnes and 201.38 tonnes. 

 Julian D.W. Phillips 

 GoldForecaster.com | SilverForecaster.com | StockBridge Management Alliance 

Investors Shift Back into Gold as Trump’s Honeymoon Period Ends

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

Investors Shift Back into Gold as Trump’s Honeymoon Period Ends

That didn’t take long.

After little more than two weeks, President Donald Trump’s honeymoon with Wall Street appears to have been put on hold—for the moment, at least—with major indices making only tepid moves since his January 20 inauguration. That includes the small-cap Russell 2000 Index, which surged in the days following Election Day on hopes that Trump’s pledge to roll back regulations and lower corporate taxes would benefit domestic small businesses the most.

Is Trump's Honeymoon with Wall Street Over Already?
click to enlarge

And therein lies part of the problem. Although the President managed to sign an executive order last week requiring the elimination of two federal regulations for every new rule that’s adopted (and ordered a review of Dodd-Frank and former President Obama’s fiduciary rule), other campaign promises that initially excited investors—tax reform and an infrastructure spending deal among them—might have already hit a roadblock.

According to Reuters, a three-day meeting in Philadelphia between President Trump and congressional Republicans ended in a stalemate, with it looking less and less likely that tax reform will happen during Trump’s first 100 days in office—perhaps even the first 200 days. As for infrastructure, several Republicans were reportedly wary of committing to such an enormous spending package before more complete details become available.

Travis Kalanick, Uber CEO, dropped out of Trump's business advisory panel

Meanwhile, Trump’s seven-nation travel ban received a lukewarm—and, in some cases, hostile—reception from many in the business world who have traditionally depended on foreign talent. That’s especially the case in Silicon Valley, where close to 40 percent of all workers are foreign-born, according to the 2016 Silicon Valley Index. (Around the same percentage of Fortune 500 companies were founded by immigrants or children of immigrants, including Steve Jobs, whose biological father was Syrian.) One of the more dramatic responses toward the travel ban was Uber CEO Travis Kalanick’s dropping out of Trump’s business advisory panel, following an outcry from users of the popular ride-sharing app who saw his participation with the President as an endorsement of his immigration policies.

Notable Silicon Valley Immigrants

I’ve shared with you before that the media often take Trump literally but not seriously, whereas his supporters take him seriously but not literally. I think it’s evident that the market is finally coming to terms with the fact that Trump, unlike every other politician before him, actually meant everything he said on the campaign trail, including his more protectionist and nationalist ideas.

Although I don’t necessarily agree with Trump’s plans to raise tariffs, withdraw from free-trade agreements and restrict international travel, it might be easy to some to see why he feels American companies need protecting from foreign competition. Last week I attended the Harvard Business School CEO Presidents’ Seminar in Boston, and among the topics we discussed was China’s ascent as an economic and corporate juggernaut. Take a look at the chart below, using data from Fortune Magazine’s annual list of the world’s 500 largest companies by revenue. Whereas the U.S. has lost ground globally over the past 20 years, China’s share of large companies has exploded, from having only three on the list in 1995 to 103 in 2015. The number of Japanese firms, meanwhile, has more than halved in that time.

U.S. Has Lost Share of World's Largest Companies to China
click to enlarge

I will say, while I’m on this topic, that the uncertainty and unpredictablilty surrounding Trump has given active management a strong opportunity to demonstrate its value in the investment world. Assessing the risks and implications of his actions, policies and tweets, which change daily, really requires a human touch that fund managers and analysts can provide.

Dollar Down, Gold Up

One of those implications is the U.S. dollar’s decline. Following Trump’s comment that it was “too strong” and hurt American exporters’ competitiveness, currency traders shorted the greenback, causing it to have the worst start to a year since 1987.

U.S. Dollar Has Rockiest Beginning of the Year Since 1987, Boosting Gold
click to enlarge

This, coupled with a more dovish Federal Reserve, expectations of higher inflation and growing demand for a safe haven, has helped push gold prices back above $1,200 an ounce. January, in fact, was the best month for the yellow metal since June, when Brexit anxiety and negative government bond yields sent it to as high as $1,370.

Gold Posts Its Biggest Monthly Gain Since June 2016
click to enlarge

Demand for gold as an investment was up a whopping 70 percent year-over-year in 2016, according to the World Gold Council. Gold ETFs had their second-best year on record. But immediately following the November election, outflows from gold ETFs and other products accelerated, eventually shedding some 193 metric tons.

But now, just two weeks into Trump’s term as President, the gold bulls are banging the drum, with several large hedge fund managers taking a contrarian bet on the precious metal.

Inflationary pressures are indeed intensifying. U.S. consumer prices rose 2.1 percent in December year-over-year, their fastest pace since 2014, and inflation across the globe is beating market forecasts, with the Citi Global Inflation Surprise Index turning positive for the first time since 2012. Anything above zero indicates that actual inflation is stronger than expectations for the month.

Global Inflation Beats Expectations in December for the First Time Since 2012
click to enlarge

 

UPDATE: Same old, same old. Yellen speaks, gold falls

Here’s a lightly edited version of my latest article posted on the Sharps Pxley website yesterday – trying to make sense of gold’s latest price movements as President Trump’s inauguration approaches.  Yet again today gold is testing the $1,200 level on the downside and this time around the level may not be held, particularly if the Donald’s inauguration address seems to be conciliatry, as it probably will be – but with Trump who knows?

Gold investors are obviously holding back until they see which way the wind blows.  The world’s biggest gold ETF, GLD, has seen no purchases or sales since last Friday when 2.96 tonnes were added.  GLD sales or purchases do seem to provide something of a guide to the gold price direction – in the US dollar at least, which looks to be strengthening a little today – indeed today’s gold price weakness may well be down to a small recovery in the dollar index.

The EDITED VERSION OF THE Sharps Pixley article follows:

Gold has had a decent run, after a sharp fall immediately following last month’s US Fed interest rate rise.  If one looks back to last year, the gold price was volatile, particularly before and after the various Fed Open Market Committee (FOMC) meetings and it looks that this year the same may happen all over again, but this time around gold price movement up or down may be tempered by the perceptions of how the USA’s 45th President’s proposed policies may affect the economy.  While the Fed may be set on at least three interest rate rises this year – Yellen’s San Francisco statement yesterday did nothing to suggest this wouldn’t happen – we still think they may play wait-and-see before pulling the interest rate trigger, although others, like the well-respected, but nowadays slightly alarmist commentator, Jim Rickards, think the Fed will move quickly and implement another 25 basis point increase as early as March.

This year’s FOMC meetings, at which interest rate decisions are usually made, are due to be held right at the end of this month (Jan 31-Feb 1), which is almost certainly too close to the President Trump inauguration (tomorrow) for any such decision to be made.  The following meeting will be on March 14-15 – Rickards’ suggested date for the next rate rise – then May 2-3 and June 13-14 bring up the balance of FOMC meetings in H1 2017. We think the Fed may err on the side of caution and wait for one of these latter two meetings to raise rates for the first time in 2017 – if at all – in order to see which way the economic wind is blowing after the first few months of office of perhaps the most divisive U.S. President ever.  However an early rate rise could be seen as a Fed attempt to regain credibility given its failure to match its own economic predictions in previous years.

For the record, the H2 FOMC meetings will be on July 25-26, September 19-20, October 31-November 1 and December 12-13.  Expect gold price volatility around all these dates, as we saw in 2016.  If the Fed does raise rates early and the U.S. economy looks stable, unemployment doesn’t rise and equity markets don’t collapse then there could be a further two, or even three, rises in H2, but the uncertainty around the Trump Presidency makes this far from a sure thing.

Yellen’s statement yesterday did reiterate that in her, and presumably her colleagues’, viewpoint the U.S. economy remains on course to be able to support three small interest rate hikes this year, and more next, with a potential target of ‘normality’ of around 3% by the end of 2019.  But the Fed has been notoriously poor in its predictions for the strength or otherwise of the U.S. economy over the past five years or so.  Has its forecasting suddenly improved.  The Trump Presidency could well throw the Fed’s projections into disarray yetr again – but this could go either way if the new President’s policies are perceived to be generally stimulative for the U.S. economy.

Yet Rickards, despite his prediction that the Fed will raise interest rates at the March FOMC meeting disagrees: “They (The Fed) will raise (rates) in March and then something will hit the wall, either the economy or the stock market or both. Then the Fed will backpedal from there, starting with a forward guidance then perhaps a rate cut later in the year,” he says on his blog, and recommends holding gold and U.S. 10-year Treasurys.

If Rickards is correct in his predictions, the gold price could fly in the final three quarters of the year as the Fed misses its interest raising opportunities again.  But others do see the U.S. economy, inflation and unemployment levels ticking all the boxes for the Fed’s interest rate raising plans going forward.

But so much will depend on President Trump and whether Congress will allow him to proceed with his plans to cut taxes, spend heavily on infrastructure to boost the economy and implement other fiscal stimuli and cut legislative blockages given the country’s huge debt position.  The Trump proposals, if implemented, can only increase debt!  If the Trump boost to the economy is thwarted – there may be a Republican majority in both houses, but there are a number of anti-Trump GOP members in Congress and coupled with probably blanket opposition from the Democrats still sore over the Trump Presidential Election victory – the Donald’s legislative path may thus not be an easy one.

The last day of April will see the Trump Administration’s first 100 days in office – a time when the media tends to make its first judgments of likely success or otherwise of the new President’s proposed programmes – and we believe the Fed should not take any interest rate raising decisions before then at least, although what we believe is a sensible course will hardly influence the FOMC in its deliberations!

What will the first 100 days see?  We think some of the proposed policies will have to be rolled back altogether and a number of compromises will have to be made to satisfy Congress, while the Senate may block one or more of the Presidents’ proposed cabinet members from taking office which coluld make for an adverse perception of President Trump’s promises and his ability to deliver on them..

Gold is testing the $1,200 level on the downside today, but the enormous opposition to Trump as President, which will likely be highlighted by huge demonstrations in the nation’s capital, may sober the equity markets and boost gold again temporarily – but thereafter volatile markets are likely until a much clearer idea of where Trump policies are taking the nation become apparent.

Perhaps precious metals investors should take heart though from my colleague Ross Norman’s price predictions for the current year – See:  Sharps Pixley Forecasts Gold To Average $1310 With A High Of $1390 In 2017

Both Gold and Dollar boosted by Fed rate rise but Equities diving

While a month is a pretty short time in terms of global finance, the fallout from the U.S. Fed’s December rate rise has seen, as expected, a stronger U.S. dollar.  But what virtually all the major bank analysts had forecast – a consequent decline in the gold price in U.S. dollar terms – just has not come about.  In the event the reverse has been true and gold has been rising along with the dollar, contrary to generally accepted gold price theory.  This is pointed out beautifully in the latest chart from Nick Laird’s www.sharelynx.com charting site and is shown below.

As can be seen from the chart, ever since around the time of the Fed increase of 25 basis points, small though that was, the dollar index has been on an overall upwards trend. Before the Fed increase gold and the dollar had been exhibiting their normal relationship – dollar up and gold down.  But since the rate rise – almost to the day – gold has also been rising overall.  Indeed it has even been rising far faster than the dollar.  Can this continue?

What the forecasters had not been taking into account has been the post Fed rate increase dive in general equities virtually across the board, as markets took the rate rise, together with Fed projections of three or four more similar increases this year, as a sign of continuing money tightening.  Indeed the stock market declines – perhaps further stimulated by something of a rout in Chinese equity markets, which are even more of a casino than their Western counterparts – look as though they could be in danger of turning into a true rout……..

The above is the lead into my latest article published on sharpspixley.com.  To read the full article click on:  Fed Rate Rise has Boosted the Dollar AND Gold

‘Upside in gold is both larger and closer than the downside in gold’ – Rick Rule

Source: Karen Roche of The Gold Report 

Rick Rule Reveals a Unique Arbitrage Opportunity

One of the hardest things for a mining executive to do may be nothing. But in a market that is not rewarding companies for pulling resources out of the ground, Sprott US Holdings Inc. CEO Rick Rule would prefer to see what he calls “optionality” rather than dilution from companies looking to justify salaries. In this interview with The Gold Report, he praises innovative precious metals streams on base metal projects.

The Gold Report: In November, you called the bottom for precious metals. Do you still believe that we’re in the bottom?

Rick Rule: Yes, as long as you can define a bottom gently. I said in that same interview that the most important factor in gold pricing was the fact that it was priced in U.S. dollars, and we see a topping in the U.S. dollar. In fairness, Karen, if you had asked me that same question two years ago, I would have responded in the affirmative and been quite wrong. But I do think the upside in gold is both larger and closer than the downside in gold.

TGR: Now that the Federal Reserve has increased the key interest rate slightly, the expectation is that the value of the dollar will increase relative to other currencies. How could that be the sign of a bottom for gold?

RR: I cut my teeth in the gold business in the 1970s when the prime interest rate in the U.S. increased from 4% to 15%, and the gold price went from $35/ounce ($35/oz) to $850/oz. I also remember that the gold price increased in 2002 in a climate of increasing U.S. interest rates.

The question is more about the reason that interest rates get raised than it is about the simple fact that interest rates go up. If interest rates go up because there is an anticipation of the deterioration in the price of the dollar and, as a consequence, savers deserve more compensation for lending credit, that sort of ethos is supportive to the gold price. If, by contrast, Janet Yellen can make not just the first 25 basis point interest rate rise succeed but subsequent interest rates rise, too, in other words if she can get a positive real interest rate on the U.S. 10-year treasury that exceeds the depreciation in the purchasing power of the currency, then I think we’ll see renewed dollar strength. I don’t believe she’s going to be able to do that, but the market will determine that.

TGR: Back in the 1970s, the international currency situation was different. Today, the euro and the yuan are part of a currency basket competing with the dollar. If gold is priced in U.S. dollars but now we have competitive currencies, is the logic used in the 1970s relevant anymore?

RR: Although we are in a multicurrency world, the dollar hegemony relative to other currencies has stayed intact. If you owned gold in almost any currency in the world in the last 18 months, gold performed its role as a store of value relative to the depreciation in currencies. It was only the strength of the U.S. dollar relative to all other media of exchange, including gold, that caused gold to perform poorly in U.S. dollar terms. To the extent that the U.S. dollar hegemony in world trade begins to be compromised in favor of other currencies, that weakening would be beneficial to the gold price.

You see, any time the denominator declines, the numerator becomes less important. That means if the dollar buys less of everything, it buys less gold, ergo, the gold price goes up at least nominally. Probably more importantly, however, the response that we’ve seen in the last 10 years to financial uncertainty has been an attraction for international investors into U.S. Treasuries as a store of value. If the purchasing power obtained from the real interest rate on U.S. Treasuries comes to be seen globally as negative, the attractiveness of U.S. Treasuries generally, relative to gold, will decline.

What traditionally has happened in periods of uncertainty is that investors have chosen to store some portion of their wealth in gold. The U.S. Treasuries have replaced gold to some degree over the last 10 or 15 years. My suspicion is that gold will regain some of the market share it has lost to the U.S. Treasuries as a consequence of a reduction in confidence in the U.S. dollar and U.S. Treasuries. At current interest rates, with the ongoing deterioration in the purchasing power of the dollar, U.S. Treasuries are a very flawed instrument despite their popularity.

TGR: Why are they popular?

RR: I think they are popular because people have an intrinsic sense that losing 1 or 2% a year in purchasing power beats losing 30% a year in the equities markets. People are genuinely afraid of the direction in the economy. They’re afraid of a replay of 2008.

Super investor George Soros once said that you make large amounts of money by finding a popularly held public precept that’s wrong and betting against it. I just last night watched the movie The Big Short, and I was reminded that it’s not uncommon to have the financial services industry, the government and the populace believe something to be true that is categorically false. I’m not suggesting that the U.S. 10-year Treasuries are as stupidly overpriced as the U.S. housing market and mortgage-related securities were in the last part of the last decade, but I do suspect that we are in a bond bubble, in particular a sovereign bond bubble. I suspect that a 30-year bull market in bonds is fairly close to being over. Raising rates is very difficult for the principal value of bonds. I think we’re closer to the end of the bond bull market than we are to the beginning and that’s very good for gold.

TGR: In terms of resources, are there some widely held popular beliefs that you believe are not true?

RR: I do. Sadly, as an American, I think the hegemony of the U.S. economy relative to the rest of the world economy is a widely held precept that’s untrue. Remember in 2011, the pro-gold narrative revolved around on-balance sheet liabilities of the U.S. government—just the federal government, not the state and local governments—of $16 trillion ($16T). That was considered unserviceable in an economy that generated new private savings of $500 billion a year. If $16T was unserviceable in 2011, how can $19T be serviceable today? Was $55T in off-balance sheet liabilities—Medicare, Medicaid and Social Security—in 2011 less serviceable than $90T in off-balance sheet liabilities today?

My suspicion is that the change in the interpretation of the narrative has to do with the fact that in 2011, the lessons of 2008–2009 were much closer. My observation, having been in financial services for 40 years, is that people’s anticipation of the future is set by their experience in the immediate past. And the experience that we’ve had in the 2011–2015 time frame is that the big thinkers of the world—the Yellens, the Merkels, the Obamas—have somehow muddled through. But the liquidity they have added to the equation is not a substitute for solvency. That is the great, popularly held precept that’s wrong. What I don’t know is when the reckoning occurs.

TGR: Going back to Soros and a widely held popular belief and you bet against it, what’s the bet against this?

RR: Gold for one thing. I think you also need to have U.S. dollars because cash gives you the courage and the means to take advantage of circumstances like 2008. But I think that if you had a set of circumstances where faith in the U.S. dollar and U.S. dollar-denominated sovereign instruments began to falter, gold would be an enormous beneficiary. History tells us that if you’re using gold as an insurance policy that a very small premium—a fairly small amount of gold held in a portfolio—gives you an enormous amount of insurance. In other words, the upside volatility in the gold price is such that you can protect your portfolio against losses in other parts of your portfolio by having fairly moderate gold holdings.

TGR: Are you talking about physical gold?

RR: This would apply to physical gold or proxies like the Sprott Physical Gold Trust, the Sprott Physical Silver Trust and the Sprott Physical Platinum and Palladium Trust.

TGR: Soros has said that sometimes it takes two or three years before a bet actually comes in to the money. If we are expecting the gold price to increase as the faith in the dollar falters, what is the role of mining equities in betting against the status quo?

RR: I think it’s important to segregate between the gold bet and the gold equities bet. I would say if you think that gold is going to go up, buy gold. Don’t buy the gold stocks for that reason. This is particularly the case with the juniors. People ask me, “Rick, if the price of gold goes up, what will it do to the share price of my Canadian junior, Amalgamated Moose Pasture Mines?” The truth is that Amalgamated Moose Pasture doesn’t have any gold. It’s looking for gold.

If the price of something that you don’t have goes up, it doesn’t have much impact on the intrinsic value. I will say that the leverage that’s inherent in the best 10% of gold stocks is superb, but you need to buy those stocks because the management team is adding relative value. You can’t buy the shares hoping for a magnification of the gold price increase. That won’t compensate for the risks. There have to be other ways the company is advancing.

The truth is that the gold mining industry has been an enormously efficient destroyer of capital in the last 40 years despite real increases in the gold price. You need to be an excellent stock picker to overcome drag brought on by corporate inefficiency relative to the inherent leverage that you should theoretically enjoy in equities relative to the gold price. The equities have made me an enormous amount of money in the last 40 years. It’s just that as a consequence of understanding the equities for what they are, I’ve done a better job of picking them.

TGR: The Silver Summit was the first time I heard you explain the concept of “optionality.” What is your advice in this climate for mining investors?

RR: For the right class of reader who is speculative and willing to do the work, there is a class of junior company that offers extraordinary leverage to the changing perceptions in favor of gold and gold equities. It is inherently illogical to put a mine in production because you think the price of a commodity is going to go up in the future. Let’s say that there’s a five-year lag between the time that you put the mine in production and the time that the commodity price goes up. What happens is that you’ve mined the better half of your ore body and sold that gold during periods of low gold prices in anticipation of higher gold prices. So the gold price goes up, and you have a hole in the ground where your gold used to be. Fairly silly.

A much better strategy is to buy deposits cheaply when gold prices are low. Then hold them in the ground, spending almost no money on beneficiation. Spending money at that point only causes you to issue equity, which reduces your percentage ownership in the deposit.

TGR: How does someone who is not a geologist know what the relative cost of getting that gold is if the company hasn’t done some work like drilling and publishing a preliminary economic assessment to educate me?

RR: One thing investors can do is subscribe to publications like Brent Cook‘s newsletter or visit the free educational material at www.sprottglobal.com. The truth is that nobody, even the best investor in the world, is going to get it right all the time. All you have to do is get closer than your competition. Given the fact that most of your competition isn’t doing any work whatsoever, the bar isn’t very high.

TGR: Another investment strategy that you have been a fan of is streaming companies. How would you compare their optionality given where the gold price is now?

RR: I love the streaming business. It’s regarded as an extremely conservative strategy, and maybe that’s why I like it. In the streaming business, the contracting company buys the rights to a certain amount of gold or silver from a mine for a fixed price over a given period of time. The company receives the gold in return for a pre-negotiated payment irrespective of the gold price at the time that the gold is received. The company that contracts for the gold isn’t responsible for the capital cost required to build the mine, so any cost overrun associated with the mine is irrelevant to the streamer. Similarly, it is not responsible for the operating cost of the mine. It has already locked in its costs. Commonly, those are about $400/oz. The margin between $400/oz and $1,000/oz—$700/oz—is substantially greater than the margins enjoyed by the mining industry in general, which are, in fact, negative.

What I really like about the streamers right now is the arbitrage in cash flow valuation between the streaming companies and the base metals mining companies. Precious metals-derived revenues in a streaming company, because of the success of streamers in the last 20 years, have been capitalized at about 15 times cash flow. That same precious metals revenue as a byproduct revenue in a base metals mine is capitalized at about six times cash flow. That means that a streaming company could buy that cash flow from a base metals mining company at $10M, and it would be wildly accretive to the streaming company at the same time as it would materially decrease the cost of capital for the base metals mining companies.

Base metals mining companies are in truly dire circumstance right now, with the price that they’re being paid for their base metals commodities being substantially lower than their all-in sustaining capital costs for producing it. This means that the base metals mining companies need to do whatever they can do to lower their cost of capital. My suspicion is that you will see many billions of dollars of precious metals byproduct streams from base metals mines being sold from the major base metals mining companies around the world to the streaming companies. My suspicion is that these transactions will simultaneously save the base metals mining company billions of dollars in capital while being accretive to the precious metals streamers by billions, too. I think this is a transformative event for the streamers.

TGR: If a base metals company is essentially losing money for every pound pulled out of the ground, why wouldn’t the management leave the commodity in the ground until prices increase? Why don’t they practice optionality?

RR: One of the challenges with the optionality strategy is it is very tough to get a management team to do nothing. It’s tougher yet to get them to be paid appropriately for doing nothing. Not mining is an awful lot cheaper and an awful lot easier than mining, but the truth is that there’s a bias to produce, and there may be a need to produce. Your all-in cost to produce 1 pound of copper may be $2.75, but your cash cost to produce that pound may be $1.70, and if you sell it for $2/lb, you are generating $0.25 to service debt and cover the all-important CEO salary.

TGR: Frank Holmes agreed with you when he said that while the price of gold seems to have languished in the U.S. dollar terms, in other currencies it has been doing quite well. Particularly, he pointed to Australian mining companies as standing out. Do you agree?

RR: Australian gold stocks have performed incredibly well this year, so part of that thesis has been used up by the share price escalation of those companies. Given that Australian gold mining companies sell their product in U.S. dollars but pay their costs in Australian dollars, they had a de facto 40% decrease in their operating costs, which is extraordinary. In fact, the decrease was deeper than that because a major component of their variable costs is the price of energy, and the price of energy fell 50% in U.S. dollar terms at the same time that the Australian dollar fell further. That means that the operating performance of gold mining companies in Australia relative to gold mining companies whose costs are denominated in U.S. dollars with U.S. operations has been extraordinarily good.

We don’t see any near- or immediate-term strength in the Australian dollar so this cost competitiveness could continue. Additionally, the iron and the coal industry, which compete for workers and inputs directly with the gold industry, have experienced continued distress, which means that the cost push even in Australian dollar terms will diminish.

Plus, we see the Australian market as more honest than the Canadian or the London market in the sense that the mining industry in North America and Europe became increasingly securities-oriented where the value proposition became rocks to stocks and stocks to money. In Australia, the ethos is more a direct drive, more a sense that you want to make money mining and that the stock ought to take care of itself. We see that as a competitive advantage that will continue for five or six years while the North American and European industries reform their expectations.

TGR: The value of the Canadian stocks has been decimated over the last three years. If the management teams are not focusing now on making money now, what’s going to make them change?

RR: Hopefully, bankruptcy. There are 500 or 600 listings on the TSX Venture Exchange that are zombie companies with negative working capital. They’re in a capital-intensive business, but they have no capital, so they aren’t really in businesses. These companies need to be extinct. It’s an ugly thing to say to the people who own stock in these cockroaches and uglier still to the people who work for the cockroaches, but it has to happen.

TGR: You’ll be speaking at the Vancouver Resource Investment Conference at the end of January. What are you hoping that investors take away from that conference?

RR: This conference is in Vancouver, so it’s easy and cheap for companies to exhibit there. The first thing that I hope that people do is understand that if the narrative that existed with regard to resources and precious metals in 2011 was true then, it’s more true now. Only the price has changed. Investors need to recognize that a market that’s fallen by 88% in nominal terms and 90% in real terms is precisely 90% more attractive now than it was then. The mistakes that people made then were mistakes of overvaluation. The mistakes that people make now are mistakes of undervaluation.

It’s important, however, not to make the mistakes that we made in the past. The truth is that you need to temper your expectation of wonderful stories with hard core reality, with securities analysis, which people are unwilling to do. At that conference, you will have the ability to learn lessons in equity market valuations if you are willing to work and absorb them. And you have the ability, with 200 exhibitors present, to practice the lessons that you’ve learned in real time, 20 or 30 meters away from where you learned the lesson itself. So it’s a wonderful opportunity for people who come to work rather than people who come to be entertained.

TGR: Thank you, Rick, for your insights.

Rick Rule, CEO of Sprott US Holdings Inc., began his career in the securities business in 1974. He is a leading American retail broker specializing in mining, energy, water utilities, forest products and agriculture. His company has built a national reputation on taking advantage of global opportunities in the oil and gas, mining, alternative energy, agriculture, forestry and water industries. Rule writes a free, thrice-weekly e-letter, Sprott’s Thoughts.

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Frank Holmes on Resource Commodities and Currencies: Reaching an Inflection point?

Have Commodities Reached an Inflection Point?

By Frank Holmes – CEO and Chief investment Officer US Global Investors

Iceberg, Nominal Interest Rates and Real Interest Rates

Last week the Federal Reserve announced it would delay the interest rate liftoff yet again, but while everyone seems concerned about nominal rates—the federal funds rate, in this case—real rates have already risen about 5 percent since August 2011. This “invisible” rate hike is much more impactful to commodity prices and emerging markets than a nominal rate hike, which is simply the “tip of the iceberg.”

Since July 2014, the U.S. dollar has appreciated more than 20 percent. This has had huge implications for net commodity exporter countries, both developing and emerging, which typically see their currency rates fluctuate when prices turn volatile.

But why does this happen?

The main reason is that most commodities, including crude oil, metals and grains, are priced in U.S. dollars. They therefore share an inverse relationship. When the dollar weakens, prices tend to rise. And when it strengthens, prices fall, among other past ramifications, as you can see in the chart below courtesy of investment research firm Cornerstone Macro.

Dollar-Appreciation Spikes Almost Always Lead to International Currency Crises
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Indeed, commodities have collectively depreciated close to 40 percent since this time a year ago and are at their lowest point since March 2009. We might very well have reached an inflection point for commodities, which opens up investment opportunities.

Net Commodity Exporters under Pressure

The number of developing and emerging markets that are dependent on commodity exports has risen in recent years, from 88 five years ago to 94 today, according to the United Nations Conference on Trade and Development (UNCTAD). Many of these countries—located mostly in Latin America, Africa, the Middle East and Asia—have a dangerously high dependency on a small number of not only commodity exports but also trading partners.

For many suppliers, China is the leading buyer. But the Asian giant’s imports have been slowing as its economy transitions from manufacturing to services and housing, forcing many net commodity export countries to rethink their dependency on China.

China's Services Industry Surpasses 50 Percent GDP
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This is the position Indonesia finds itself in right now. As much as 50 percent of its total exports consists of crude oil, palm oil, copper, coal and rubber, for all of which China has historically been a vital importer. A stunning 95 percent of Mongolia’s exports flow into its southern neighbor, according to the World Factbook. And for Chile, commodities represent close to 90 percent of total exports, about 25 percent of which goes to China.

But countries needn’t have such a high dependency on commodities for their currencies to be affected. The Australian dollar, for instance, has a positive correlation with iron ore prices.

Australian Dollar Tracks Iron Ore Prices
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About 98 percent of the world’s iron ore supply is used to make steel. So important is the metal to the state of Western Australia, where most of the continent’s deposits can be found, that every $1 decline in prices results in an estimated $49 million budget loss.

The same relationship exists between the Peruvian sol and copper. Peru is the fourth-largest copper producer in the world, preceded by Chile, China and the U.S.

The Peruvian Sol Tracks Copper Prices
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The Russian ruble, Canadian dollar and Colombian peso all follow crude oil prices. (Russia is the third-largest oil producer in the world; Canada, the fifth-largest; Colombia, the 19th-largest.)

Russian Ruble Tracks Oil Prices
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Canadian Dollar Tracks Oil Prices
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Colombian Peso tracks Oil Prices
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It’s important that we see stability in emerging market currencies, which would help support resources demand. We’ve seen some stabilization in the Chinese renminbi after it was depreciated in August, but a few others are down pretty significantly.

Currency Depreciations Against the U.S. Dollar for the 12-Month Period
click to enlarge

Global Manufacturing Could Reverse Course Sooner Than You Think

I’ve shown a number of times that commodity demand depends on manufacturing strength, as measured by the J.P. Morgan Global Purchasing Manager’s Index (PMI). This indicator has steadily been trending lower. Although the reading is still above the neutral 50.0 line, commodity prices have reacted negatively.

Commodities are Highly Correlated to Global PMIs
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Cornerstone Macro believes both the Chinese and global PMI are “likely” to rise in October, leading to a full year of upside potential. If true, this is indeed welcome news, but it’s worth remembering that the PMI looks ahead six months, meaning it’ll take approximately that long for commodities to recover.

In any case, now might be a good time for investors to consider getting back into commodities and natural resources since we could be in the early innings of an upturn.

“You want to buy commodity stocks when they’re out of favor, because they are cyclical,” Brian Hicks, portfolio manager of our Global Resources Fund (PSPFX), told The Energy Report last week. “If you look out 12, 18, 24 months from now, those equity values should reflect equilibrium commodity prices and move significantly higher from here.”

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.

Gold breaks through Dollar and Euro resistance

Julian Phillips’ market commentary on gold and silver for Jan 6th.

New York closed yesterday at $1,205.50 up $18.00 as the gold price broke through key resistance in the dollar and in the euro. Gold continued to rise in Asia to $1,209.7 and in London to over $1,212 ahead of London’s Fix. The Fix saw the gold price set at $1,211 up $19.00 and in the euro, at €1,017.305 up €18.495 while the euro was another 0.3 of a cent weaker at $1.1904. Ahead of New York’s opening gold was trading in London at $1,211.80 and in the euro at €1,018.49.

The silver price closed at $16.20 in New York up 41 cents. Ahead of New York’s opening it was trading at $16.31.

There were purchases of 1.648 tonnes of gold into the SPDR gold ETF and sales of 0.03 tonnes from the Gold Trust yesterday. The holdings of the SPDR gold ETF are at 710.808 and at 161.15 tonnes in the Gold Trust.

Yesterday was an important day for gold as resistance was broken in the euro and strength is now indicated in the dollar price of gold. This makes today just as important as yesterday, as any price rises in either currency reflects the changing mood of markets globally and a positive indicator for gold.

With the year ending on a positive note for global financial markets, yesterday saw the mood turn down, as markets fell across the world alongside the oil price. The oil price is hitting new lows making the prospect of $35 a barrel of oil a distinct prospect, as oil producers raise production to compensate for lost revenue, exacerbating the situation in the oil market.

The euro is currently standing at $1.1904 and looks like falling lower. Emerging markets are showing the greatest signs of stress as prices fall there. While the oil price falls are direct stimuli to the global economy, these are part of the computations for economic growth measurement. In this case such statistics distort what is happening as they treat lower oil prices as deflationary, not as they really are, growth factors.

What is becoming clear to investors is the reality that central bank and government’s ability to promote true growth is very limited as we have seen in the last 8 years.  For precious metals what is important is the reality that any confidence in the future is tempered by the visibly high degree of uncertainty, volatility and a dash of prudence, that will prove positive for gold and silver.

The silver price is now back on track and moving up with gold. As on the fall it exaggerates the downside, so on the rise it will also exaggerate the upside.

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

 

 

Farewell free TTMYGH – Grant moves on

Farewell free TTMYGH – Grant moves on

By Lawrence Williams

One of the most interesting commentators on the geopolitical and precious metals scenes is Grant Williams, and his free newsletter, Things that make you go hmmm.. (TTMYGH) has always been mandatory reading .  It is a quirky piece, but always hugely insightful and entertaining too.  One may not agree with all his opinions, but everything is presented well – and if you’ve ever had the privilege of hearing Grant speak at a conference you’ll also be both enlightened and entertained at the same time.

So it is sad news for TTMYGH readers that Grant has, after 5 years, decided to cease publishing it as a free to view letter in favour of setting up a commercial version – much improved he says –  where subscribers will have to pay to access his views rather than receive them for free.  Fair enough, one needs to make a living.  Here’s a link to the final TTMYGH newsletter which makes particular comment on both gold and its long term prospects (spectacular) and the unfolding latest Greek financial crisis which could bring the whole European economic can of worms crashing down.  He brings us his views on the US dollar strength and the ongoing ‘currency wars’ (disturbing), Japan (toast) amongst other things all linked via references to the first UB40 music album, plus a number of key articles and charts written/prepared by other very astute commentators.

The new TTMYGH is due to launch this month and those interested in reading more about it are invited to register by clicking on this link – www.ttmygh.com