Tuesday, February 8, 2011

$1,000 gold in a recession?

In my last post, I noted that Jessica Cross, CEO of Virtual Metals, had forecasted $900 gold in 2008. Now, Citigroup (Citibank) sees the possibility of $1,000 gold if the US economy goes recessionary. If we do see a recession, Citigroup ranks gold as the best likely performer, followed by copper, aluminum and zinc, with steel being the worst.
Citigroup observed that “. . . gold is oscillating around $800/oz as speculators have locked in profits. We view the outlook favorable for a test of $1,000.”
The Citigroup analysts see precious metals “as well-positioned” because the Fed and other central banks have made it clear that re-inflation is the operative for the times. Concerns about subprime debt have created what the money men call a “liquidity crisis.” Central bankers always attack liquidity crises by printing more money, which adds to inflationary pressures and makes precious metals more attractive to investors.
Meanwhile, Citigroup analysts warn that “. . . the IMF is taking measures (e.g., job cuts) aimed at convincing the U.S. and Europe to allow 400 tons of gold sales.” If the IMF, which has made rumblings about selling gold for some time, is successful in getting the US to approve gold sales we can expect years of turmoil in the gold market.
However, new comers to the gold market need to know that the IMF and the US were big sellers of gold in the early 1970s when gold had not topped even $200 and silver traded below $2.00. Sales of gold by “official” agencies do not necessarily result in lower gold prices over the long run. However, the short run can be hectic.
What we have to keep in mind is that we are living in highly inflationary times, and that gold and silver have proven to be smart investments during inflationary times.

Reduced scrap gold sales suggest higher gold prices

Gold Fields Minerals Services (GFMS), the London-based metals consultancy, says that the sale of scrap gold in India and the Middle East this year is down compared with prior years. India and the Middle East are “price-sensitive” regions where gold sales usually increase with gold price increases.
However, this year the average quarterly volume of gold sold in India is running less than 20 tons. In 2003 when the price of gold averaged $364, scrap sales ran at about 30 tons a quarter.
GFMS analysts explain the aberration this way: “The most simple explanation appears to be that, as expectations of higher (and ever higher) prices have taken hold, consumers have reduced the amount of old jewellery they are willing to sell back.”
In the industrialized countries this year, scrap gold sales increased with higher prices; however, sales have not kept pace with prior years’ sales. GFMS says that is because of “less of a clear-out from the trade than there was last year,” which means that commercial end users are holding on to their scrap gold.
Supposedly, the jewelry industry, the major consumer of gold, is the best prognosticator of gold prices. So, reduced sales scrap gold sales may suggest higher gold prices.

Ron Paul II

In my December 12, 2007 article Only Ron Paul, I asserted that of the presidential candidates only Ron Paul had the economic understanding to deal with the subprime mess. Now, I present more evidence that Ron Paul is the man to deal with the impending recession. The medicine, however, would be bitter, but the results would be long-lasting. Ron Paul would call for a return to the gold standard.
In 1985, Ron Paul presented a paper to the Mises’ Institute conference on the gold standard: The Political and Economic Agenda for a Real Gold Standard. Nearly 23 years ago, Ron Paul exhibited his grasp of the Austrian Theory of Money and the need for a return to the gold standard. Since 1985, we have seen the devastating results of not being on the gold standard: inflation and the destruction of the dollar as the world’s sole reserve currency.
Because returning to the gold standard seems anachronistic to most Americans (because they do not understand the gold standard and the concept of money), implementing the ideas of Ludwig von Mises, which Paul discusses in his 1985 paper, would be next to impossible. However, Ron Paul discusses another tactic to return to the gold standard, a tactic which should be of interest to gold and silver investors.
Paul asserts that the popularity of gold coins “have shown us that it is possible to adopt another tactic, that of getting gold coins into circulation prior to setting a new par value for the dollar.” (Par value for the dollar meaning the dollar’s conversion rate into gold [and maybe silver.])
In other words, the people would lead the “leaders” in returning to the gold standard. As more and more people turn to gold as protection against inflation and its inevitable result, a declining dollar, they adopt gold as their standard investment. Eventually, our “leaders” will see the handwriting on the wall and return to gold. Returning to the gold standard would be much less painful for the nation if Ron Paul were president. The other candidates, steeped in statist economic theories, would fight returning to the gold standard.
Paul’s piece is an educating read. If you do not grasp all of it, don’t worry. Just by reading Paul’s paper you will inherently know that now is the time to invest in gold and silver.

SA power shortages pressure price of gold

Worldwide concern about the dollar is the primary reason gold has surged to new highs this year. However, the dollar is not the only factor driving the price of gold. A shortage of electric power in South Africa, the world’s largest producer of newly mined gold, is putting downward pressure on the supply.
In South Africa, 95% of the electricity is generated by Eskom, a public utility that now cannot supply enough to meet the country’s needs. The gold mines (and the platinum mines), although South Africa’s economic lifelines because they generate the country’s export revenues, are suffering along with the South African people. Last week Eskom cut power to the mines, which resulted in an industry-wide shut down.
Eskom is between the devil and the deep blue sea.
If Eskom allocates enough electricity to the mines so that they can operate, other consumers will do without, those consumers being not only South African homes but also small businesses. That is a political nightmare for a public utility and the politicians running the country.
However, if Eskom denies the mines the needed power, jobs and export revenues will be lost, further compounding South Africa’s social problems. South Africa has one of the highest crime rates in the world.
If the mines get 50% of the power they need, they can keep the mines open but with no production. The other 50% is needed to mine. If the mines get 90% of what they need, production can be cut not 10% but 20%.
In the last few days, after much lobbying by the mining industry and its supporters, Eskom has been supplying 90% of the power the mines need, which has enabled Anglo Platinum to assert that they will be able to operate at “sustained levels” within two weeks if they continue to get the promised 90%.
Gold Fields has been in constant dialogue with Eskom since having its power needs cut to 80% and has been promised, according to a mineweb.com article, that they will receive the minimum 90% needed to produce.
But a major concern for the mines is the reliability. Can Eskom continue to supply the 90% that the mines say is the minimum needed to operate?
Further, the miners—the guys doing the work—are at great risk if the power is cut unannounced. So far, that has not happened, but it remains a possibility. The power utility previously committed to give the mines at least four hours warning before power supply was shut down or reduced.
Mining in South Africa has always been a great challenge because of the depths of the mines. An unreliable power source makes mining in South African even more challenging.
I visited South Africa in 1979 and made a two-mile vertical drop in a cage attached to a cable (Technically, it was an elevator, but not the type most Americans are used.) into the bowels of the earth where the miners worked. The temperature at the bottom would have been something like 140°F had it not been for the massive—and I mean massive—air conditioning units.
Additionally, there were the electric trains that hauled ore from miles of horizontal shafts. The use of electricity was enormous. Plain and simple: South African mines cannot operate without electricity.
The root of the problems in South Africa lies in the country’s shift toward socialism, but that is a topic for another blog post.
Meanwhile, a one would expect, South African gold shares have not done well since the problem arose. Some analysts say South Africa’s power problems cannot be solved for years. I suspect they will not be solved at all and that in time South Africa will resemble Zimbabwe, which can only be described as a cesspool.
The circumstances in South African are positive for the price of gold, but sad on a human scale. South Africa is a beautiful country with vast resources, but the country is now in the grips of socialism, which, in the ends, spreads misery among the people.

Analysis of proposed IMF gold sales

Resourceinvestor.com has posted an excellent report on the proposed gold sales by the IMF.
Before anyone panics at the idea of the IMF selling gold, I would like to point out that in the 1970s both the IMF and the US Treasury sold gold while it marched to $850. Further, European central banks have been selling gold for years, and gold prices are at record highs.
Additionally, the recommendation for the sales calls for limited sales, maybe up to 400 tons and “sold in a way that didn’t disrupt the market, much like gold sold consistent with the European Central Bank Gold Agreement (EGA), which limits sales to 500 tonnes per year.”
ResourceInvestor notes that past proposals have been blocked by the US Congress, which has, because of weighted voting power, a virtual veto on any IMF gold sales. However, come January 2009, I suspect Congress will have a much more liberal makeup than it now has, and it may not block IMF gold sales, especially with promises of limited sales that are done in a nondisruptive manner.
We may have to put up with IMF gold sales in future years, but the possibility does not dampen my enthusiasm for gold (and sliver). None of the likely presidential winners has any plans to address the massive bleeding of dollars by the US Treasury.
McCain is a war candidate and has said he will continue the occupation of Iraq. McCain has never addressed the financial cost of doing so. Clinton and Obama, while saying they will end the war in Iraq, offer such potpourris of social programs that the dollar will strain under them.
With the likelihood of one of these three becoming president and major shift to the left in Congress (already 21 Republican members of the House have said they will not run for reelection.), I cannot find anything positive for the dollar on the political scene. Although IMF gold sales may turn into reality sometime in the future, I don’t worry about them at all. Investing in gold and silver makes a lot of sense for these times.

Gold in the news

The last few posts were about silver because that’s the way the news fell. Now, we have a plethora of articles about gold, some worth reading and one worth listening to if you prefer not to read.
ANZ Australian Economics Weekly says gold prices may “firm this week.” With gold having hit $930 Wednesday morning, I bet ANZ now wishes they had predicted rising gold prices this week. Analysts love to be right about predicting short-term price moves. Accurate predictions sell subscriptions.
Although ANZ advised that gold could firm this week because of surging oil prices, the analysis warned that concerns about oil prices were “re-setting” global inflation concerns, “which should trigger a catch-up rally in gold (compared to oil).” I guess that’s what we’re seeing with gold up $65 from this time last week.
Nevertheless, ANZ cautioned, “We expect gold prices to drift lower over the coming months, with increasing signs that the fall in the USD is near the trough.” Seasonally, the summer is the low period for gold and silver prices, so there remains the possibility that “gold prices may drift lower over the coming months.” Still, past summers have not had the dollar in so much trouble and real fears that the Bush administration may bomb Iran’s nuclear research facilities.

Mineweb.com reviewed ANZ’s analysis, for those who want to read it
Meanwhile, Kevin McArthur, President and CEO of Goldcorp, a major gold mining company, said Tuesday that he is certain that investors will again see four-digit gold prices this year with the potential to “go well into the four digits.” Four-digit means above $1,000, and I guess that “well into the four digits” means something like $3,000 or $4,000 gold. McArthur didn’t give a time frame, but I don’t think he was predicting $3,000 or $4,000 gold this year.
I think that $3,000 – $4,000 gold is a real possibility, out there four to five years. A widened war in the Middle East, and it may not take four or five years.
Mineweb.com ran an article on McArthur’s comments, but the article is mostly about “greens” dominating the conference where McArthur made his predictions.
The third article, which you can listen to instead of read if you prefer, is titled Is the dollar doomed? and is more about the dollar than about gold. Because you can’t talk about a sinking dollar without talking about gold (if you’re giving an honest appraisal of the situation), the article really is quite good. Except where the speaker says, “Well, we don’t actually need a government run gold standard anymore.” Here, he covers himself by saying that there are places where individuals interested in investing in gold can go.
When a government is not on the gold standard, the door is wide open for inflation, exactly what we’ve had in the United States since 1971 when President Richard Nixon closed the gold window.
Meanwhile, resourceinvestor.com slapped gold around a little with an article titled Gold Demand Drops to Five-Year Low in Q1. The article, based on a GFMS study for the World Gold Council, noted reduced demand for gold, with the blame laid at the feet of higher gold prices. In India, for decades the biggest buyer of gold, demand shrank.
Here’ how resourceinvestor.com summed it up:
Gold demand in India, the world’s largest physical bullion consumer, was most severely affected by the movement in the gold price, falling 50% to 102.1 tonnes in Q1. Jewellery and investment demand, at 71.1 tonnes and 31.0 tonnes respectively, were half the levels of the correspondent quarter last year.
In almost an after thought, the resourceinvestor.com article noted:
In marked contrast to India, demand in China grew by 15% to 101.7 tonnes, with both jewellery and investment demand increasing during the first quarter as continued economic strength allowed consumers to increase their purchases regardless of the rising price. Jewellery demand rose 9% to 86.6 tonnes and investment demand surged 63% to 15.1 tonnes.
Somewhere a news outlet should broadcast that China is about to replace India as the biggest buyer of gold. Further, with China’s increasing prosperity and its people freer to buy gold, China’s impact on the gold market should be huge in the years ahead. Wonder why only the perpetual bulls seem to know what’s going on in China when it comes to gold?

Zimbabwean miners get paper for gold

Perhaps the fundamental fear behind every gold investment is that the paper money being gotten rid of could become worthless. In theory (probably in actuality), that fear rests with any currency not redeemable in gold or silver, which means all the world’s currencies. No world currency, not even the fabled Swiss franc can be redeemed for gold or silver at the Swiss National Bank, which is Switzerland’s central bank, the equivalent of the U.S. Federal Reserve Bank.
The destruction of paper money usually comes about after the abandonment of the gold standard and the institution of fiat money, which is money by governmental decree. The dollar is money by decree, “all debts, public and private.” However, in many cases, one fiat currency is introduced to replace another fiat currency. Brazil is famous for doing that.
Before moving on to the problems faced by the Zimbabwean gold miners, I should note that since the Bretton Woods Agreement of 1944, no country has been on the gold standard. The Bretton Woods Agreement established a gold exchange standard, under which the world’s currencies were redeemable in dollars, which were redeemable in gold. Although under the Agreement, currencies’ values were fixed relative to gold, central banks that were presented their nations’ currencies for redemption actually gave the redeemer dollars.
Zimbabwe is an economic cesspool, with government regulations of nearly every facet of economic activity. One control in Zimbabwe is that all mined gold is to be sold to the Zimbabwean central bank, the Reserve Bank of Zimbabwe (RBZ).
According to one source, gold miners are meant to be paid 35% of their production at the highly overvalued local currency and the remainder in US dollars. The RBZ pays partially in U.S. dollars because the gold mining companies need to buy equipment in foreign markets to keep operating. There is no market for Zimbabwean dollars outside Zimbabwe. Outside Zimbabwe, Zim dollars are paper.
While the official policy is for the RBZ to pay partially in U.S. dollars, the RBZ now has no U.S. dollars, or any other foreign currencies, and the gold mining companies are receiving only Zim dollars. Because Zim dollars cannot be spent outside Zimbabwe, the mining companies are unable to replace worn out equipment.
As a result, “Zimbabwe’s once proud and big gold sector could be set for a further decline,” says Tawanda Karombo, posting an article from Harare, the capital of Zimbabwe. Zimbabwe produced seven tons of gold last year compared to 11 tons in 2006, their lowest level in 90 years.
Although Zimbabwe’s gold production has never rivaled that of neighbor South Africa, for nearly a hundred years it has been a solid gold producer. Now, Zimbabwe’s gold production looks set to grind to a halt, which will be positive for gold investing.