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Aug 2009 - DnD - NGF, SLR

Spec Buy NGF ; Buy SLR

  • There were a number of available mine site visits before, during and after this years’ Diggers (which was apparently the highest attended so far). Many people remarked that they were surprised by the number of local & large international fund managers at this years’ Diggers, possibly because the performance by the major gold stocks (apart from Anglogold) has been so poor. The mood was certainly more upbeat, possibly due to the higher share and commodity prices compared to last years’ approaching cliff edge.
  • We were part of groups that visited Norton Goldfields’ Paddington before the conference, Silver Lake’s Daisy Milano during the conference (during most of Tuesday – the 2nd day) and Catalpa’s Edna May afterwards. Catalpa is our next report and is hence not included in this review. You do wonder though whether the group members on the visits do realise what they are seeing on a visit, especially in the case of Silver Lake’s further new additional mineralisation underground at Daisy Milano.
  • We did not attend all the sessions, and there were many rumours and comments, and some of the perceptions have already affected share prices as in the case of Magma Metals (MMB) and Troy (TRY). The following is based on general comments that we encountered and perceptions that we made :
  • Who appears to be doing well : Silver Lake (SLR) stands out, followed by Avoca (AVO). Most of the nickel plays seemed upbeat as in Panoramic (PAN), Mincor (MCR) restarting Miitel and Western Areas (WSA), with Independence (IGO)’s lower guidance of 8kt to 8,4ktNi for 09/10 possibly recovering back towards 9ktNi as Moran was currently expected to be developed from JQ2010, and of course IGO has its 30% of Tropicana.
  • Pan Aust (PNA) referred to a possible new drill-ready discovery called Ban Phonxai about 20km from Phu Kham (PK’s grades were expected to increase due to the infill drilling) and the 33% expansion of PK was to be made at the end of 2010 for commissioning in JH2012, with the feasibility study on its ~A$130m >100kozpaAu/>700kozpaAg Ban Houayxai gold project due in MQ2010, ideally producing in DH2011. Terry at OZ Minerals (OZL) thought that a deficiency gap was approaching in copper and most projects needed US$2.50/lb to justify approval. Terry rated OZL’s current strategy as probably 1 copper, 2 gold, were recommencing underground studies at Prominent Hill, were keen on junior JVs and was undertaking a 100-day strategic review, with more details to come.

Aug 2009 - DnD - NGF

Spec Buy Norton Goldfields (NGF)

  • There were a number of available mine site visits before, during and after this years’ Diggers (which was apparently the highest attended so far). Many people remarked that they were surprised by the number of local and large international fund managers at this years’ Diggers. The mood was certainly more upbeat, possibly due to the higher share and commodity prices compared to last years’ approaching cliff edge to fall from.
  • We were part of a group that visited Norton Goldfields’ operations at Paddington on the Sunday afternoon (2 August 2009) before the conference. This review is based on that visit and NGF’s presentation at Diggers.
  • Norton Goldfields (NGF) - Spec Buy at A$0.19
  • NGF appears to currently be a high cost operation producing ~35,000oz per qtr at a total cash cost of A$955/oz in JQ09, that is only expected to materially improve in early 2010 as the new Homestead underground comes into production. We notice that the individual mining companies are beginning to diverge again when it comes to including what costs in the total cash costs, especially as regards the woolly areas of royalties and capex. NGF’s operating cash cost method is possibly on the conservative side as they were A$720/oz including royalties in JQ09.
  • NGF were applying a number of measures aimed at reducing their cash costs such as the 3 methods of reducing overburden removal costs shown in Figure 1a. Norton estimate that the use of these techniques has reduced their usual costs of up to $9/bcm down to $2.50/bcm to $6/bcm, and have a target of reducing their costs to $5/bcm (divide the bcm by the SG to get tonnes).

Jan 2010 - Year End & China

  • I must admit that even after all this time, the recent falls (mid/late January 2010) in share prices and commodities on the basis of a China slowdown still comes as a surprise – as if China could suddenly grind to a halt. The market has yet to accept that China has a planned vision of where it wants to be and how it is going to get there for the next 20 years. The main beneficiary should be Australia because of its proximity and relatively high grade orebodies. We re-iterate what we have said before, if anyone gives a China view, ask them when was the last time they were there?
  • The market’s behaviour implies that the share prices are going down because China is slowing, but commodity prices appear to be ignoring LME stockpiles & the major producers are struggling to expand as fast as possible to meet demand that has pushed spot prices of iron ore and coal well above their benchmarks. In September 2009, the brokers were forecasting gold to fall and drop to ~US$900/oz in 2010, whereas instead it rose to ~US$1300/oz on physical (an increasingly wealthy growing middle class in China, plus India and the central banks), and currency demand.
  • As it turns out, the 9.5% expected increase in China’s GDP for 2009 (at the time of the China Mining Conference in Tianjin TEDA in October 2009) was in fact ~10.7% (according to the latest statistics [21 Jan 2010]). In fact the last quarter of 2009 may have been at the blisteringly unsustainable pace of 13%pa (the official figure for the first half of 2009 was 7.1%). So it is no surprise that credit is being reined back, to an expected 7.5trnRMB (US$1.1trn at 6.8RMB to 1US$) compared to 2009’s 9.6trnRMB (US$1.4trn). Has the market already forgotten that in early April 2009 it looked like China was heading for a growth rate of < 6% compared to the long-term target rate of 7%pa to 8%pa?
  • April 2009 was actually the turn, when a number of construction sites in a number of cities in China moved to double-shifting and almost overnight, there was an immediate shortage of copper wire and copper piping. [Note : as per our comment last year, China only produces ~15% to 20% of its annual copper requirements, or 0.9mt with 4.5mt imported in 2008]. ERA business wise, we restarted marketing at the Paydirt Gold Conference at the beginning of April and by the end of April 2009, our forward book was back to normal (ie booked about 1 year ahead, [it had been booked up to 2.5years’ ahead], when the crunch hit we lost everything from Sept08 to Dec08 & other spots).
  • We (ERA) did in fact state on ABC TV [7.30 Report on 12 Dec 2008] that we expected the turn to be about Mar/Apr 2009 (while some thought 2nd half 2009 was a possibility, most appeared to be expecting 2010 or 2011). Our estimate was made on the basis of China slowing down ~6 months ahead of the August 2008 Beijing Olympics and then at least 6 months to recover afterwards, allowing for Chinese New Year and China’s new regulations on emissions), whereas timing wise, kick-starting China’s economy appears to have been the main reason for the recovery.

Oct 2010 - DnD - CAH, SLR, MPR

Buy CAH ; Buy SLR ; Spec Buy MPR

  • Our DnD Review is somewhat belated this year, as we completed our report on Focus (FML) first, (which slumped to ~3.8c post Dnd as the market focused on its ~200,000oz in reserves compared to the ~2moz resources), and quite a few of the gold stocks have run / increased significantly since then, spurred on by the Andean takeover.
  • Around Diggers we attended Catalpa’s Edna May mine opening, revisited Silver Lake’s : Daisy East progress underground at Daisy Milano, saw further intersections at Magic and walked over the new Wombola (North Monger) acquisition. We also visited the planned MacPhersons Reward Gold Ltd IPO (which is currently waiting for its ASX code which may perhaps be MPR or MRG) property, and spent 6 days with Focus (FML).
  • Focus Minerals is the subject of a separately released report (16 September 2010) that expected FML’s share price to double from ~5.4c per share, especially when the sensitivity to grade is considered (increase grades by 5%, add 1.4c to FML’s value),
  • Aside from the visits, the standouts at DnD were Silver Lake’s 1000oz (solid) Gold Miner in their booth as shown in Figure 1a, and Sandfire’s copper mineralised drill cores as shown in Figure 1b (showing how realistic their discovery is).

Nov 2010 - Sth American Review

Buy Extorre (XG) & Exeter (XRC)

  • In the two weeks after we emailed our Post DnD Review on 8 October 2010 we visited Argentina and Chile, spending almost a week visiting Mariana (MARL.L, an AIM listed company that expects to list on the TSX in Dec 2010/Jan 2011, & the subject of a separate report), and the following week participating in an ~40 strong analysts visit for what we thought were only the epithermal operations of Extorre (XG.TO) and Exeter (XRA, XRC.TO), which we attended to enhance our knowledge of epithermals. Mariana’s operations are in Argentina’s Patagonia and Chile, as were Exeter’s before it split under a plan of arrangement earlier this year (Mar 2010) into Extorre in Argentina (mostly Patagonia) and Exeter in Chile. The codes in brackets are Reuters codes (we use yahoo finance to freely access such prices, eg : http://finance.yahoo.com/q/cq?d=v1&s=marl.l+xg.to+xra+xrc.to).
  • WELL WHAT A SURPRISE !!. Both Extorre and Exeter appear capable of at least doubling their ~$6 share prices (Extorre based on potentially higher grades [– they are the highest we have ever seen in an epithermal], greater life, and possibly later greater throughput; and Exeter based mostly on market cap comparison, but also the possibility of occasionally better grades, and possibly better recoveries – especially in the oxide).
  • However, they are TSX or AIM listed companies and not listed on the ASX. So how do you buy them if you reside in Australia?. Well you should contact your own brokers. However, if you trade through Taylor Collison (TCL, the broker we are associated with and are a qualified Corporate Authorised Representative of) then : you place the order with your advisor, who can forward the order to the broker TCL are associated with in Canada.
  • That broker then (say) buys the stock and it is placed in a holding account, which is settled between TCL’s bank in Australia and the associate’s bank in Canada. TCL will raise a trade confirmation on your account which you will receive in the usual way (ie via email or post). For example: An order placed for ~$10,000 XG on 26 Oct, was transacted in Canada overnight, with the contract note received on 28 Oct, for settlement by 29 Oct (basically for TCL clients, the order is executed in Canada, and Canadian brokerage incurred, the whole converted into A$, and then Australian brokerage incurred on the converted A$ total, plus the usual GST on the Australian brokerage).
  • All the information in this comment is public. The visit included a number of broker analysts, fund managers, & media/investor groups like Mineweb and the Midas Newsletter (using video recordings and skype links to Reuters), (and a separate London broker led fund manager group, that appeared to try and avoid our group, arriving on mine sites at times like 3pm and 5pm – so they obviously missed the spectacular Andes flyover of Exeter’s Caspiche mine, east of Copiapo in Northern Chile)
  • It was the first time we have visited Argentina and Chile (well we have passed through Santiago on the way to Brazil and back from Peru when visiting Mundo’s operations). Both countries appeared to be relatively well developed (compared to what we have seen of Brazil and Peru) with Santiago apparently little affected by the earthquake earlier this year (as in its spaghetti junctions of freeways appeared to be intact including the ~11km long freeway tunnel that passes under the city).

Jan 2011 - China Stopping?

China is Not Going to Stop...

We have said it before and are repeating it here again, namely China is not going to stop. We made our annual visit to the China Mining Conference that was held last year (in November 2010) in Tainjin. We have visited the conference every year since 2004, and seen them gradually evolve to hosting over 3000 delegates.

Feb 2011 - Year End & China

  • Reading our introduction to last years’ comment dated 29 January 2010, little appears to have changed one year later, apart from the fall in share prices occurring earlier in January 2011, viz :
  • “I must admit that even after all this time, the recent falls (mid/late January 2010) in share prices and commodities on the basis of a China slowdown still comes as a surprise – as if China could suddenly grind to a halt. The market has yet to accept that China has a planned vision of where it wants to be and how it is going to get there for the next 20 years. The main beneficiary should be Australia because of its proximity and relatively high grade orebodies. We re-iterate what we have said before, if anyone gives a China view, ask them when was the last time they were there?”
  • In November 2010, after visiting Gryphon’s prospects in Mauritania and Burkina Faso we flew to the China Mining conference in Tianjin, and then saw some friends in Kunming (to get a greater feel for what is going on in China). After all, China is still the engine of growth for the commodity sector.
  • At China Mining, sessions are held covering the different commodities. Originally rare earths were planned to be covered, but then dropped and coal was excluded too. Perhaps China thinks it has or thought it had enough under control (which in the case of coking coal, it may have done as this was well before the QLD floods of January 2011).
  • Although China is trying to find ways of reducing the costs of various ores (possibly it will acquire its own shipping fleet), it felt that due to supply/demand gaps and hence shortages, the pricing pressures remained as scrap quantities reduce and India possibly reduces its exports (for its own domestic consumption) especially for copper (due to the emerging ETFs), and iron ore/steel due to the 3 majors (BHP, RIO & CVRD).
  • What was noticeable this year was the size of the booths at the conference and even Jinchuan manufacturing its own mining equipment as shown in Figure 1a. There is now a significant choice of mining equipment manufactured in China. China is also building self sufficient Circular Economic Parks centred on producing mines such as either coal or oil (there were nodding donkeys on the hills of the model) as shown schematically in Figure 1b. Datong (coal) has already built an operating one.
  • It was stated that China invested $301bn (2trn Yuan) during the 11th 5-year plan (2006 to 2010) to save energy and reduce emissions (hence the sudden slowdown at the end of 2010 in order for companies to try and meet their expected targets). In the 11th plan, more than 70% of coal-fired power stations installed the flue gas desulphurization (FGD) system. Greater reductions and energy savings targets are planned to occur in the current 12th 5-year plan from 2011 to 2015.

Sept 2011 - Denver Gold Show

  • The market cap size of the companies covered typically ranges from ~$25m to ~$2.5bn, are mostly gold, and depend on our perceptions of the management, project and country as to whether they are written.
  • This presentation is based on our observation and analysis of Gold and Gold Shares for about 35 years, (or since 1977).
  • We have used the GLD (SPDR) chart as a proxy for our comparisons as it does understandably have a close visual correlation to the Gold Price (in Slide 3).
  • It is no secret that over the past year most Gold Shares have underperformed the Gold Price as shown in the greater than US$20bn market cap Megas (in Slide 4). And in the greater than US$10bn market cap Majors (in Slide 5).
  • However in Australia, it has not been that simple with Regis and Alacer outperforming the Gold Price in the greater than >$1bn market cap category. And it should be borne in mind that the performances shown are in A$, which would have to be increased by at least 5% for US$.
  • And apart from Ramelius, most of the >$0.5bn Australian golds shown tried to recover in the recent rally, with a number of the movements explained by fundamentals such as Silver Lake's fall around May 2011 (shown by the purple line in the chart) in Slide 6, due to a fund redemption.
  • Measuring any form of recovery depends on the base, since as shown in the relationship with the Philadelphia Gold and Silver Index, XAU, - it hasn't recovered from the GFC setback.
  • The comparison with the XAU looks better on a 2-year base, or it did up to December 2010, after which it went sideways. We have seen this behaviour pattern before where the gold shares appear to ignore the gold price, and then suddenly recover by a multiple (as in Slide 10),
  • Examining the chart more closely, the gold shares rose to a point and then drifted sideways in late 1979, waiting for the gold price to drop back.
  • And then soared, with the gold price rising, coinciding possibly with the leverage aspect that would have become more noticeable from the reporting of profitability, and again even more so in 1982, (in Slide 11).
  • What leverage - well the impact that a rising gold price has on profitability and the NPV of the share as shown by the numbers in the table for the Australian gold producers that we cover.
  • In which their after tax profits double for a 33% increase in the gold price from US$1500/oz to US$2000/oz, as in the case of Alacer, Silver Lake & Focus (in Slide 12).
  • Or to put it another way, what gold price does the market appear to be basing the share prices on as in Silver Lake at US$1380/oz and Focus Minerals at US$1350/oz (in Slide 13).
  • So on that historic gold price chart, where are we now ?. Do the shares reflecting a gold price about $1300/oz, correlate to when the market was at US$300/oz in 1979, and hence infer that the equilibrium level after the "spike" is $2000/oz, or are we further along in a different scenario?.
  • The reality is that the Gold Producers are making money. As Focus Minerals remarked at the Australian Diggers and Dealers Conference in early August 2011, "we sold 1000oz gold and received more than $1.7m !!" (as in Slide 15).
  • Hence despite the recent rally, Gold Shares or Gold Equities appear to be overdue for an upward correction that may be partly driven by profitability from analysts estimates and/or reporting by companies.

Mar 2012 - Year End & China

  • As the Wall Street Journal commented on 6 March 2011, "Canadian stocks posted a sharp loss on Tuesday as concerns over the global economic outlook weighed down markets, and worries about resources demand from China pushed down prices of commodities producers....index slumped 4% (-4.3%)...copper producers fell amid concerns about demand from China after it lowered its growth projection to 7.5% from 8% on Monday 5 March 2011" (China's Premier Wen Jiabao stated that a level of 7.5% was more sustainable and efficient). And again on the morning of 21 March 2012,"....stocks decline on China growth concerns...".
  • The economists must be cheering "at last !, China is (appears to be) showing signs of slowing down". After they first predicted it to occur in April 2004, following China's reduced target of 7%pa in mid-March 2004, resulting in commodity prices falling - whereas the growth rate has often been ~10%pa since then.
  • So it should be recognised that 7.5% is still a target, and hence may not be achieved. The reality is that China is being rebuilt, and a vast number of its citizens are becoming increasingly wealthy. At the China Mining Conference in November 2011, it was very clear that China appears likely to continue to fuel the commodities boom for at least the next 10 years, but does not want to pay high commodity prices, and will try and pay lower prices any way it can. We (ERA) thought that it may take ~2 years before the market begins to gloss over possible "sabre-rattling" by China trying to reduce commodity prices (it took ~2 years for the market to realise that there were no significant Russian gold or platinum stockpiles).
  • In the Equatorial Resources presentation that was made to the Sydney Mining Club on 1 March 2012, an ambitious quote was given by Wu Xichun of the China Iron & Steel Association that "By 2015, China wants to import 50% of its iron ore from Chinese owned mines elsewhere in the world".

Nov 2012 - China Visit

  • Key Points
  • China expects to have ~8%pa GDP growth for at least the next 10 years.
  • From what we saw and where we went, China appeared to be booming in construction. However, it also appears that China does not want to pay high commodity prices to achieve its growth and may hence dampen expectations.
  • Main Statements by Chinese Presenters at the 2012 China Mining Conference :
  • The commodity prices are high due to our (China's) demand, why should we (China) have to pay high commodity prices for our own demand?
  • We (China) have so far been given two gifts to acquire resources cheaply, namely the GFC in 2008, and the current Euro crisis.
  • No additional big infrastructure capex/stimulus injection is required, because it is not as dramatic as the 2008 & 2009 situation, annual infrastructure development is already occurring and the cpi (inflation rate) has been declining.
  • The growth rate of ~7.5%pa to ~8%pa is expected to be achieved by the movement of 400mn to 500mn people from rural to urban areas in the next 10 years, with income per capita rising from the current 7,000Rmbpa per rural person & 21,000Rmbpa per urban person (expected to at least double in the next 7 years), and them then increasing consumption (both urban and rural in for example electrical and home appliances, medical, social, education),  USA is ~75% consumption / 12% investment vs China ~38% consumption / ~ >55% investment - and is slowly changing .
  • Iron ore prices were expected to be weak in 2013 due to weak European demand an'd the US fiscal cliff (CRU disagreed with this view, because they thought Europe was gradually turning upwards, and the US had bottomed in the 3rd Qtr 2012).
  • Iron ore demand was expected to continue increasing to possibly 1.5bt in 2015, with imports peaking at ~700mt except that China expected to be supplying ~60% of its iron ore from its mines (~400mt in China) & overseas, with China's own mine component rising (as its African mines are commissioned) during 2015 to 2020, sourcing less from Australia and Brazil.
  • For commodities : prices were seen to be flat in 2013 with steady demand for copper, nickel, aluminium, zinc, gold at $1700/oz and silver, due to a flat to weak Europe, and slowing India. However, steel demand was somehow seen to increase with no commodity price impact and uranium prices were expected to one day recover to the long-term contract price of $65/lb.
  • Main Observations :
  • China's GDP growth rate appears to be a case of "pick a figure" as it is an average across the country, with some parts of China significantly higher than others, e.g. the highest in 2011 appears to have been Chongqing 16.5% [collective pop: 33mn],  Tianjin @ 16%; Sichuan (includes Chengdu [pop:15mn]), Guizhou and Yunnan @ 15%; and then Shandong & Zhejiang @ 14%.
  • China's GDP increased from $1.45trn in 2002, to $7.32trn in 2011 (with a target of 28% of world GDP in 2030), while the world's GDP apparently incrd from $43trn to $69trn, Tianjin incrd from $26bn to $175bn in 2011, with Shandong's GDP at ~$650bn & Zhejiang's GDP ~$500bn.
  • Tianjin, Chengdu and Chongqing were a case of construction, construction, construction with crane farms, metros and bullet trains. The older apartments are gradually being replaced with 20 to 28 storey blocks with a study showing that it is more environmentally efficient to have 20 to 28 storey blocks (although there are also some areas of blocks of 2 storey houses).
  • Chengdu has 4 metro lines under construction / extension, as does Beijing, Chongqing, & Tianjin.
  • Bullet train lines are criss-crossing the country, and duplicate ring roads have started construction such as the tier above the second ring road in Chengdu.
  • Chongqing also has at least 5 (that we saw) bridges under construction over its rivers and valleys.
  • The market appears to be overlooking Brazil (which has an FDI of half of China's at ~$60bnpa).

Apr 2013 - Gold Saga

  • What happened in April 2013 ?
  • In what is best described as the "Gold Saga" over a period of almost exactly 2 weeks from 9 April to 23 April (with the market impact from 10 April to 24 April), the gold price fell by more than $200/oz within a week. Goldman Sachs (Goldmans) went from bullish/buy gold up to 9 April at ~$1570/oz through "short" gold on 10 April, only to "change horses" back again on 23 April at ~$1408/oz stating close the gold "short" positions, as the gold price could rise. (It is currently [28 May] finding resistance at ~$1400/oz).
  • The gold price coincidentally fell from ~$1565/1575 on 9/11 April to $1380 on 16 April (based on London pm fixes) with a trading low of $1321 and had recovered to $1408 on 23 April amidst unprecedented world-wide demand for delivery and purchase of physical gold, and then increased to resistance about $1470/oz (and sold back down on Friday 10 May to ~$1420/oz & closing ~$1445 [Merrills 9 May forecast: $1200 by June]).
  • November 2012: gold futures margins dropped from 15% to 5% by a Nth Am trader, followed by other Nth Am traders & then the Asian traders.
  • 10 April 2013: Goldmans switch from bullish gold up to 9Apr, to bearish, reduce y/e gold forecast to $1450/oz, recommend "shorting" gold. Gold price drops from ~1580 to ~$1560 as shown in Figure 1a
  • 11 April 2013 (Thursday) : 24-hour Gold trading holds $1550 long-term support (shown in Figure 2a), trading ~$1560 to $1565.
  • 12 Apr 2013 (Fri): After Asian market & as London closes (for weekend) $6bn short futures trade (costing $300m [due to 5%margin]) rep 4moz/124t of gold executed on Comex, London screens "freeze" blocking buy orders, & Comex  follows with 35mins of $15bn (cost ~$750m) short trades rep 10moz/300t of gold.
  • 12 April 2013: Critical $1550 Gold support level broken, computerised stops begin to occur selling gold positions automatically taking gold to $1500.
  • 14 April 2013 (Sunday) : Hong Kong opens Mon 15th, gold drops down to ~$1450/oz.
  • 15 April 2013 (Mon) : London opens, gold falls to pm fix at $1380,
  • 15 April 2013 : Goldmans re-iterates "short" gold, reduces y/e forecast to $1400. Comex down to 1350, HKong opens, down to 1321, & recovers to 1340.
  • World-wide stampede to buy physical gold starts.
  • 16 April 2013 : Goldmans states "Gold no longer a safe haven, switch to natural gas" (their author appears to not understand the allure of gold).
  • 17 April 2013 : Gold finds resistance at $1400.
  • 16/17 April : Asian traders raise futures margins back up from 5% to 15%.
  • 17 April 2013: Gold holds around $1380, falls with HK briefly to $1340 before recovering to ~$1360.
  • ~17 April 2013 : North American traders raise futures margins back up again to 15%.
  • 18/19 April 2013 : Gold encounters resistance at $1400; then $1420 and support at $1400.
  • 21 Apr 2013: Rises back through $1420 with Hong Kong opening.
  • 22 April 2013 (Monday) : Gold recovers in London to $1440.
  • Falls with Comex opening, as Goldmans state that Gold ETF's are a "bubble", ie still negative gold & gold ETF holdings were continuing to fall dramatically (but the gold price held $1420).
  • 23 Apr 2013: Goldmans "changes horses" back again, calls off "short" recommendation as gold could now rise.
  • (Despite no change in the rationale that Goldmans applied : Cyprus, on-off reduction of $85bn per month injection, Gold ETF's actually falling faster than expected, & leave their y/e $1400 target unchanged).
  • 25 April 2013 (Thursday) : Gold recovered to resistance at ~$1470/oz.
  • Conclusions / Results :
  • Goldmans "calls" may have simply been pure coincidence with what happened. The "short" call was made based on falling ETF holdings, and "comments" such as some IMF notes that suggested Cyprus could sell part of its gold for ~$0.5bn to reduce the ~$40bn debt package being sought; and the Fed in its FOMC minutes were considering slowing the $85bn per month injection down to $50bn, which could strengthen the US$ (less money being printed - even though the monthly printing does not appear to have materially weakened the US$).
  • Or Goldmans may have had exposed "short" positions that were at risk of the gold price rising from its $1550 support level shown in Figure 2a, and/or they had a large buy order at lower levels and switched back again when the order had been completed. Apparently it's not the first time Goldmans have been possibly involved in a gold price fall, the prev time (not proven) was ~2008.
  • Whatever was the reason, the reality is that the gold price has fallen through its $1550/oz support level, with only the 10-year trend still intact as shown in Figure 2a, and has severely damaged share market confidence in gold and gold shares.
  • Pandora's box has been opened, hedge funds found the classic unregulated play, where they could "short" $21bn worth of a "stock", in this case "gold", for an outlay of ~$1bn, and score a "multiple whammy" by shorting the other precious metals (they all followed gold down - regardless of individual fundamentals), & could also short the major gold stocks ahead of the "hit".
  • There is no other "stock" that we know of that you can naked "short" $21bn worth at its opening (ie without holding any). Comparatively, it would be like selling ~20% or ~600m BHP on its opening.
  • Shorting the major gold stocks has the benefit of extra downside leverage, if you know that your actions should result in the gold price falling and hence gold share prices falling too - and you can't face prosecution for it because gold trading is not regulated.
  • The Libor ruling at the end of March 2013 was when a landmark class-action civil lawsuit against some banks for Libor-related offenses was dismissed. In that case, a federal judge accepted the banker-defendants' argument: "If cities and towns and other investors lost money because of Libor manipulation, that was their own fault for ever thinking the banks were competing in the first place" (Source:rollingstone). So if instead "a group" colludes in "shorting" then they may not be liable either (it will be interesting to see if the same excuse holds for BP & Shell over UK fuel prices since ~2001).

Jul 2013 - Commodity Prices

  • Commodity prices - China , blah, blah - BUT !?
  • I just have 3 devil's advocate (/observation) questions or is it a question in 3 parts.
  • At the China Mining Conference in Tianjin in November 2012, there were two very clear messages, namely : "why should we (China) pay for our own demand (commodity prices)" ? and according to the Chinese presenters "commodity prices are going to be weak in 2013" (in defiance of western presenters who were overall more bullish, based on the US recovery etc) [for more detail see pages 8 and 9 of the Goode News column in the April 2013 issue of Paydirt, or the "Nov 2012 - China Visit" Comment on www.eagleres.com.au]
  • The Chinese presenters were right, so :
  • 1. Did the Chinese presenters know that despite the official view of 8%pa GDP growth, that a policy change was coming and China's GDP from 2013 was likely to be re-stated as 7% to 7.5%, and that perception could cause commodity prices to weaken ? - which they have.
  • 2. BUT, that there was underlying demand as has been illustrated by MMG's JQ 2013 release on 23 July (available from its website - it has a Hong Kong Listing) stating that China's demand for copper cons has been firm with imports in the first 5 months up by 30% (yoy) and copper cathode falling in bonded warehouses by 50% to ~400kt at the end of June 2013, such that premiums have risen to $200/t (levels last seen in 2009). Also that China's zinc con imports for 2013 so far have been the same as 2012, and the global demand for zinc has been firm.
  • How or why ? - quite simply from 2 sources, namely :
  • Firstly that GDP numbers are a broad guideline (as stated by a China-based presenter at the Sydney RIU conference in May 2013 "why are you focused on the GDP numbers, everyone in China knows that they are just a broad average of the provinces and areas with an error of ~10%, so 7.5% can mean between 7% and 8%").
  • Secondly the market has completely overlooked / missed the fact that in order for China to achieve its 20 to 50 year growth targets it initially needs to develop access to the rest of the world through joint venture construction projects with all countries (ideally using Chinese materials and expertise). [for more detail see the Goode News column of the August 2013 issue of Paydirt]. China basically needs the rest of the world to be developed too.
  • 3. Or in other words, commodity prices should not be weak. So how to get them to weaken or appear to be weak, and pay less for the required underlying demand ?. Is it simply one of the 36 Chinese strategies of the "Art of War" - one recalls John Hewson's comment at the recent Symposium Broken Hill Conference in May 2013, Paul Keating phoned John afterwards and said "I didn't mean those things I said, you must understand that politics is a 'game' and I'll say or do anything I can to win it". So does China perceive commodity markets and prices as a 'game' to be won by any means possible ?

Aug 2013 - A$ Going to Fall

  • In the post Diggers weekend AFR, page 40 had an article titled "Currency - Spike in Aussie will be short-lived"..............in our/ERA experience "will" is a dangerous word, as it gives no "lee-way" - "expected to be" may have been safer.
  • The AFR article focuses on the realisation that China is slowing down (a different opinion to our Purple Patch July Resource Roundup emailed on 26 July 2013, and also in complete conflict with page 12 of the same 10/11 August edition of the AFR that China's growth was on-track to meet its 7.5% target, especially after China's industrial production jumped from 8.9% in June 2013 to 9.7% in July). The article also expected that (on the basis of a China slowdown) the RBA would have to consider rate cuts.
  • The IP jump should not really have been a surprise, iron ore prices have remained strong, and the iron ore producers at Diggers ([in no particular order]: Fortescue, BCI, Mt Gibson & Atlas) all made comments along the lines of being unable to meet demand for their iron ore products/deliveries, and consequently still expanding where possible.
  • In the AFR article, CBA were quoted as stating that they envisioned the A$ as heading for their forecast of 85c by the end of 2014, and sub-80c over the longer term. The recent strength to 91c was due to the Fed to-ing and fro-ing about when the QE taper is going to start (as in Sept or Dec) and hence resulting in minor weakness in the A$. The A$ was expected to be depressed because rate cuts by the RBA and closing bond yields between Australia and the recovering world would have to depress it.
  • But let's face it, most A$ forecasts for a weak A$ were wrong last year, because they did not factor in a weak US$ and a weak Euro. As the keynote (ex-IMF) speaker in the Diggers 2012 Q & A session after his speech stated last year, the A$ could be relatively strong because it was a safer alternative to the US$ and the Euro, and offered a higher interest rate. The "hot money" was hence probably temporarily parked in the A$, and has weakened with a stronger US$. Last years' Diggers' speaker made no mention of China in regards to the strength of the A$.
  • The post Diggers keynote speech Q & A sessions are usually when the "gems" come out over what may have an impact in the world and hence affect Australia, and sometimes the speaker links the "gems" to their speech. This year (2013) was no exception.
  • This years' 2013 Diggers' keynote speaker was Austan Goolsbee (a former Obama economic adviser), who stated in the Q & A that he thought that QE would historically be viewed as an essential event. The fact is that QE is a combination of monetary x volatility/velocity of money. But the volatility is down, so hence there is no inflation. QE is printing money to avoid deflation, and create growth and hence he thought that it has to continue until the US turns around and its growth exceeds 3%, ideally back to its previous levels of 3.5%pa. (Note : it would appear that the rising debt is not an issue, because the US has to print money in order to grow).
  • However, the US is currently mired with 2% growth and 2% inflation, the growth for the 2nd Qtr of 2013 was 1.7%. In the US, if growth stays ~2%, then that is regarded as "the steady state", and no one really needs to be hired. The US has not had its usual "V" shaped recovery, so far, it has an "L" shaped one.  It could become a "U" shape if the US has a "housing bubble" because the US turns on housing, but that seems unlikely, so that means probably little change for the next 6 months as the growth rate is expected to remain below 3% for the remainder of 2013.
  • At least 70% of the US agree that Govt spending is out of control, but no lobby group wants to have a cutback, as in reduction of its benefits. So the US is grid-locked and can't agree on a solution. Austan drew an analogy of unblocking an apartment's kitchen sink drain full of lasagne with a shotgun and due to a u-bend the lasagne ends up splattered in another apartments kitchen. Clearing the lasagne was resulting in dumping the problem onto someone else - and apparently that is what Washington DC is currently doing.
  • Austan thought that although the new Fed governor (replacing Bernanke) may or may not have differing views, it probably mattered little, because they would be "locked in" to the existing processes.
  • Fortunately for the US, the EC appears to be in a worse state, with its banking system currently perceived as not solvable and its govt bonds similar to the US mortgage backed securities debacle. Ideally the Euro needs to devalue, but Germany having bailed out East Germany appears unlikely to accept bailing out the rest of Europe too. W Germany solved its crisis through labour mobility from E Germany to W Germany and a US$1.3trn subsidy to E Germany - that solution is not available for the EC. Austan envisaged a probable financial crisis in Europe every 6 months or so until they solve it.
  • The US has so far been the only country to print money and avoid inflation and a weaker currency, because it is printing a recognised reserve currency, namely US$. Other countries have printed currencies that have been based relative to the US$. As the President of Argentina commented a month or so ago, what she needed was a printing press that could churn out US$, not Argentinian currency or a substitute currency.
  • A drifting US, may result in a drifting to lower US$. As far as Austan was concerned, the key to a US recovery without housing construction was when the 25-year olds have to move out and buy poor quality pots and pans, and pay rent. However, Austan also thought that the Shale gas revolution would reduce US energy costs with a resulting impact on manufacturing, combined with selective growth city areas in the US (such as Seattle, San Francisco and Silicon Valley) also gradually resulting in a US recovery. 
  • Austan thought that Australia would feed off the growth of others, such as Asia/China and the US, while the EC faced greater issues.
  • So yes, it's great to have a weak A$, gold at A$1450/oz and 91c looks a lot better than gold at US$1320/oz and a 1:1 exchange rate. It may be on a wish list for a number of companies and industries for the A$ to fall to 85c or lower, but as they say "don't count your chickens before they have hatched".

Oct 2014 - East West Struggle

  • What happened in September 2014 ?
  • The gold price tumbled down about US$100/oz from ~US$1320/oz as shown in Figure 1a , with Goldmans re-iterating their forecast (in early Sept 2014) of $1050/oz by y/e December 2014, and stating "short" gold, based on a stronger US economy and strengthening US$.
  • As a delegate commented at China's (Govt participated, first) Gold Congress in Beijing from 10 to 12 Sept 2014, "Everyone knows that Goldmans talk their own book. If they have the financial power to cause (manipulate?) that to happen & make money for their clients,what's wrong with that?"
  • At the Congress, China was clearly frustrated with the gold price. More than one presenter stated "in 2013 : we (China) produced the most physical gold (~428t in 2013), consumed the most gold (~1100t), and traded the most gold in Asia (>40kt in 2013), but yet we have little control over the gold price, especially outside of our normal trading hours (ie Comex)".
  • China believes one of the main issues affecting the gold price is the strength of the US$,with gold showing a classic inverse correlation to it. The US$ index has continued to strengthen because there is no alternative reserve currency, with the € (Euro), £ (GBP) and ¥ (JPY) all in trouble.
  • ICBC (and China) appears to firmly believe that in the long term, gold has to rise, simply from its direct correlation with the combined world central bank's balance sheets as shown in an ICBC presentation, with the current movements in the gold price shown in Figure 1b, described as "a short-term fluctuation in a long-term rising chart". It has to be recognised that China does not think of gold from a < 1-year viewpoint, it takes more of a 5, 10 or 20-year outlook and beyond.
  • Aside from the significant rising jewellery and investment demand for gold and silver in China and its manufacture into everyday objects such as plates, cups, goblets and tea-pots with a further 200m people expected to join the middle class to form 500m by 2020; current gold holdings in China are apparently ~5g/capita, compared to the world average of ~23g/capita.
  • Against this background, on 29 September 2014 (being the one-year anniversary of the official launch of Shanghai's FTZ [free trade zone]) the International Board was to be formed by China in Shanghai's FTZ. The two initial aims of the International Board are the establishment of a recognised daily world gold benchmark in RMB/g (with physical trading backed by a 1000t gold vault) and the internationalisation of the RMB as a reserve currency.
  • However, on 18 September, China's Premier Li Keqiang launched its international gold bourse 11 days earlier than planned (due to the weak gold price ?). All gold transacted within the FTZ has to be physically backed and held in the currently 1000t FTZ vault. Known as "Shanghai Gold" contracts they are denominated in RMB/g. The main contract was expected to be the 25kg bars. Gold control was targeted to be first, then silver, then platinum and then spot.
  • China has planned for this internationalisation, and the rest of the western world is scrambling to catch up. Singapore announced it was having trading difficulties with its 25kg US$/oz launch now delayed from September to "sometime in October". At the Congress, the CME (Comex) stated in a presentation that they would be launching a new 1kg US$/oz physical contract in Hong Kong later this year (date not specified) - which all infers that the western world were not fully prepared for it.

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