Gold council CEO helps The Economist put investors to sleep

Aram Shishmanian, the CEO of the World Gold Council speaks to Economist on gold's purpose, market volatility and the dynamics of demand in China and India. He remarked that Indian women hold twice as much gold as the tonnage reported held by the U.S. Treasury Department. Shishmanian added that Indian women don't sell their gold, though maybe the WGC will contrive a scheme through which they can lease it to the exchange-traded fund GLD. 

The Economist's interview with Shishmanian may be most remarkable for avoiding discussion of currency market issues even as the currency markets are cracking under the strains of national insolvency and market intervention. With industry leadership like this, gold's triumph over the crookedness of the central banking system is assured in about a thousand yearzzzzz....

Why high gold prices haven't led to more production

By Fabrice Taylor
The Globe and Mail, Toronto
Wednesday, April 16, 2008


Ask an economist what happens to the supply of a commodity as its price rises and he'll tell you it eventually goes up as producers try to take advantage of good times.

History shows that it isn't necessarily so with gold, though, and that history makes a pretty good case for the metal.

In the 1970s, bullion prices rose from $35 (U.S.) an ounce to $700, yet gold production fell sharply. Why? In 1970, the gold mining industry was in terrible shape. The majority of production - 80 per cent - came from underground mines, and most of that from South Africa. Underground mining is very expensive.

Until 1968, the price of gold was fixed by central banks at $35/ounce. (It was called the Gold Pool). The cost of mining wasn't fixed at all, of course, so the profitability of gold mines was crushed. So producers started high-grading their ore bodies, stripping out the richest ore rather than taking a little good rock and mixing it with a little lower-grade rock.

Production rose because the mills kept running at capacity, by and large, but were processing higher-grade ore, and were thus putting more ounces of gold into the market.

At the same time, producers cut back on exploration and development to conserve cash.

This explains why by the time the Gold Pool, and the broader Bretton Woods accord, were fully unwound as the decade turned over, production was peaking, and why, in the seventies, as the price soared, production fell. Mine operators -- the ones that survived that is -- had to start putting lower-grade ore through their mills because the good stuff was gone.

They hadn't spent enough on exploration, so they hadn't replaced their reserves either. They didn't have the money to expand after so many lean years. Plus, although the price rose for much of the seventies, costs also rose rapidly because of inflation.

Sound familiar? The situation today isn't much different. Gold prices are way up, but producers aren't making much money. And despite a rise in bullion prices -- a big and drastic rise -- there's not a lot of new capacity coming on stream.

According to the U.S. Geological Survey, world gold production peaked in 2000 at 2,600 tonnes. Gold prices pretty much bottomed, with respect to the current cycle, around that time. In six years, production fell to 2,460 tonnes. There will likely be a small decline when the 2007 numbers are published. Production in 1970 hit 1,480 tonnes before falling to 1,200 in 1975, where it stayed for several years before climbing sharply in the eighties.

But there's a difference between today and the 1970s, says gold maven and stockbroker (and my former business partner) Murray Pollitt, who provided me with the above information.

In the eighties, when gold prices stabilized around $350-$400/ounce, production moved in earnest from underground mining, which is expensive and generally smaller scale but higher grade, to big open-pit mines, which are relatively cheaper but low grade. A lot of tired underground mines, stripped of their juiciest ore, became open pits, thanks to advances in technology and cheap fuel (open pits use a lot of diesel). That allowed ore that was previously uneconomical to see the light of day, literally and financially. But the industry's fortunes didn't improve much, and they really started to turn south in the following decade.

The upshot is that today, while we have rising prices (especially in U.S. dollar terms), we also have soaring costs, dropping production and a dearth of inventory in terms of untapped reserves. Imagine what oil at $112 (U.S.) a barrel will do to open-pit mines.

Look at some of the big projects that are touted as a big deal: Barrick's Pascua Lama, which is way up in the mountains of Chile and has a huge royalty on it, not to mention the billions in investment required to get it going. Galore Creek, in British Columbia, which was mothballed when the cost of getting it producing skyrocketed. Hope Bay? Dubious also.

In a nutshell, supply today is falling, perhaps irrevocably so. Demand? Rising, in fits and starts. There's inflation in the air, there are ETFs that make it easy for retail investors to buy gold directly and there are sovereign funds with tens of billions of dollars looking for a home and probably not looking for more U.S. Treasuries.

The demand side would be even more bullish if gold was still viewed as money. How likely is that ever to happen again?

Well, maybe more likely than you think.

For the past few decades, governments, led by the United States, have done their best to strip gold of its role as currency in favour of paper money. But history is long, and in its fullness, gold has spent far more time playing the role of money than not.

As Mr. Pollitt points out, not that long ago the United States preferred gold to fiat money. As owner of both a creaky financial system and the single biggest depository of bullion, it might be tempted to return to that preference one day.

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Fabrice Taylor is a chartered financial analyst.

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Mineweb: Volatile gold tracking backwards through $800

The recent gold price surge has been shortlived again as a dollar rise has led to a fall back to below the $800 level and may move lower. The gold price thus continues to be very volatile moving up and down on dollar strength perceptions.

Author: Lawrence Williams
Posted: Wednesday , 28 Nov 2007
LONDON -

If you want to take a view on gold and where the price is going you have to first take a view on the US dollar. Gold moved sharply upwards on a falling dollar last week, but this week, as some strength has been seen in the US currency, the gold price has rapidly tracked back downwards through the $800 mark - and if the dollar stays where it is, or shows even the smallest sign of strength - however temporary - we could see a return to the mid to high $700s over the next few days.

But, if the dollar starts to move lower again against the major currencies, gold will almost certainly bounce back upwards, and whether it achieves the $850 all time high in the near future will depend almost entirely on the weakness, or perceived weakness in the greenback in the next few months.

If US interest rates move down another quarter point, as many feel likely, then the dollar value against the basket of currencies will probably move down again too and gold will likely move up. If the Fed decides against cutting the rate, then this could be seen as a positive sign for the dollar and gold could slip back as a result to the mid $750s.

The dollar weakness is also being curtailed as non-US economies may also consider cutting their own interest rates to try to ward off any business downturn as a result of a static or contracting US economy, and their own industries becoming less competitive internationally against US output as the dollar declines.

But, gold production worldwide is, at best, flat and probably falling, and with the cancellation of major projects like Galore Creek, coupled with a credit crunch which could see more marginal or risky projects struggle to raise development funding, the decline may be greater over the next few years than analysts have been estimating.

There is also an impression that the rate of Central Bank gold sales may be declining in the face of higher prices and there are indications that some banks may even be buyers in the market to increase the size of their foreign reserves.

The pattern makes for increasing gold price volatility, such as we have been seeing over the past few weeks with recent short term peaks and troughs in the gold price being up and down as much as $70 an ounce - perfect for smart traders to move in and out of the metal and make good profits if they judge the market right - which in turn increases the volatility quotient.

Overall, though, not withstanding worldwide currency manipulation and the impact of various Central Bank policies, the trend in the dollar value remains downwards for the moment, and the gold supply situation is not likely to improve. There is additional offtake from the market through ETFs, although of course this can be divested more easily too. So, gold price fundamentals remain good, dollar fundamentals remain weak and thus the medium term gold price outlook should be very much a positive one.

If there are any serious shocks ahead for the US economy - which is certainly a possibility - and the dollar moves back down again, the gold price will rise and re-test recent peaks. It will be the strength or otherwise of such a dollar decline which will determine whether gold will at last breach the $850 level, but the general consensus of market followers is that this will happen sooner or later, but exactly when few are prepared to define.

Analysts also cite the oil price as being a driver for gold, but it seems more likely that dollar strength or weakness is both the driver of the oil price and the gold price, as both are traded in US dollars. Oil, though, is more open to market manipulation by the producing nations which can increase or reduce supplies at very short notice - an option not really open to gold miners.

A perfect storm for gold as mines left empty...

By Ambrose Evans-Pritchard
The Telegraph, London
Thursday, November 15, 2007

The era of "peak gold" has arrived.

Try as they might, miners cannot find enough ore at viable costs to replace their fast-depleting reserves, even if they dig miles into the centre of the earth.

"There's not much gold out there," said Gregory Wilkins, chief executive of top producer Barrick Gold.

"Global mine supply is going to decrease at a much faster rate than people generally believe. Many of the new mines that people are anticipating will never come into production," he told the RBC Capital Markets gold conference in London.

"There is a great disparity between the money spent on exploration and success. It's hard to say where the price of gold is going because we're in uncharted waters. I would say it could easily move to $900, $1,000, or beyond. It could happen very quickly," he said.

We know from the US Academy of Sciences that some 26 percent of all the copper and 19 percent of all the zinc that ever existed in the earth's crust has already been lost to mankind, mostly wasted in milling or smelting or buried in landfills.

Data has never been collected for gold, and the 5 billion ounces of gold mined over history is still around. Roughly 1 billion are in central bank vaults. But the same patterns of exhaustion are emerging.

South Africa's output is down to the lowest since 1932. Much of what remains elsewhere is locked up in no-go countries run by demagogues or serial expropriators.

"You don't put yourself in harm's way. It's a non-starter to invest in a country that takes your mine away from you," said Mr Wilkins.

"The list of countries where we won't go is getting longer. There's Venezuela, and all the countries in Latin America that are influenced by (Hugo) Chavez.

"In Ecuador they withdraw licences after they have been issued. You can't tolerate that kind of instability. Russia is another country where things are deteriorating," he said.

Kevin McArthur, chief executive of Goldcorp, said his group was not setting foot outside North America.

"We won't build a mine where we won't go on holiday. We're even tending to stay out of the US because that has some of the highest political risk in terms of mining investment," he said.

The gripe is that revisions to the 1872 Mine Act in the United States will add royalty costs and allow regulators to shut down projects on a whim.

Mr McArthur said global output was on a relentless slide. "We'll see four-digit gold. It will have to reach $2,500 an ounce to equal the 1980 record in today's terms, so we have a long way to go," he said

Gold reached a 27-year high of $846 an ounce in early November following rate cuts by the US Federal Reserve, though it has fallen back on profit taking.

Investors seem to be betting on a "Bernanke reflation," suspecting that the Fed will turn the liquidity tap back on to cushion the US property slump.

Tony Fell, chairman of RBC Capital Markets, said the world money supply has been growing by 5-10 percent while the stock of mined gold has been rising at 1.6 percent, creating a mismatch that must be covered.

Mr Fell says the total debt burden in the US has exploded to 340 percent of GDP, in stark contrast to the steady levels of around 150 percent of the postwar era.

It almost insures further dollar debasement. "We're in the very early phases of a prolonged bull market," he said.

RBC argues that the global dollar system known as Bretton Woods II is "coming apart at the seams" as Asian, Mideast, and Latin American states start to break their dollar links to avoid importing US inflation.

The result is to resurrect gold, which is fast regaining its role as the world's benchmark currency.

It was the last currency bust-up -- caused by America's attempt to the fight the Vietnam War and fund the Great Society without adequate taxes -- that lay behind the 1970s bull market in gold.

"The fact that monetary policy in the core was too loose for the periphery triggered the demise of Bretton Woods 1. The late 1960s saw first France and then Germany and Britain all start to swap their dollar reserves for gold. We may well be witnessing a similar situation today as price pressures build in the emerging world," RBC said in a new report.

However, the bank warned that gold was looking toppy after the blistering autumn rally and faced a likely selloff in coming weeks, perhaps to $725-$750.

India's gold-buying season is coming to an end with the Diwali Festival. The country accounts for 22 percent of world gold demand.

The level of speculative "long" positions on New York's Comex futures market has remained above 20 million ounces for five weeks in a row. This sort of pattern is typically followed by a sharp slide, although the global credit crunch and bank scares may change the game this time.

RBC says any correction is likely to be short, with gold probing record highs of $900 an ounce early next year.

Whether the gold mining shares will at last join the party is far from clear. Many have languished through the bull market, and some are trading well below levels reached when gold was half the price.

Costs are rising at $60 an ounce annually. They will average of $460 by next year. From tires to diesel fuel and the geologists' salaries, mine inflation is running at 15 percent.

Ian Cockerill, head of Gold Fields, said the industry had "shot itself in the foot" by touting production cash costs that were not even close to the real figure.

Hence the fury of shareholders left trying to understand how so many mines could have gone bust when alleged costs per ounce were half the spot price of gold.

"We've deluded ourselves and we've deluded investors by failing telling them about all the other bills we have to pay. Until we tell them the total cost per ounce, we'll never have credibility," he said.

RBC is betting that the gold mining shares will soon start to shine again, enjoying their famed leverage to the spot price.

At $1000 an ounce, it forecasts a share feast: Barrick up 65 percent, Newmont 80 percent, IAMGOLD 90 percent, NovaGold 90 percent, and Centerra 100 percent.

Purists will always prefer ingots of glistening metal.

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