Gold Production Overview Feb 07 Part 2

The demand for gold has been outstripping annual production for a considerable time.

With realistic forecasts of a substantial and sustained growth in demand and little prospect of any worthwhile increase in production we investors would be forgiven for believing that gold is a raging bull market and jumping in with both feet.

It would be a given golden (no pun intended) scenario for almost every other investment class, from stocks and shares to soft commodities, to property or base metals and even to other precious metals.

The problem lies in the unique status that gold holds throughout our world.

It is indestructible and has throughout history been regarded as the ultimate store of value whatever may happen to the fiat currencies or any other tradable or exchangeable goods or items.

The expectation has always been that should all else fail gold can “get you out of trouble”.

If all else fails an individual expects to exchange his gold for food and shelter.

If the currency issued by a central bank comes under pressure then its holdings in physical gold will go some way to propping up the currency despite the major nations coming off the gold standard after World War II.

The gold held, hoarded may be a more appropriate description, by the central banks of countries throughout the world represents a very large proportion of all the gold ever mined.

If, for example, several major holders of physical gold, collude to manipulate the market it would distort the supply/demand ratio and change the whole outlook for the market in a very short time.

At present there is a school of thought, floated by a minority of market pundits who consider that the gold market is in fact being manipulated at this present time.

We do not have the insider knowledge to pass an opinion one way or another but will make two relevant observations.

In the first place this writer has not seen any hard or sustainable evidence produced to support the fact that the market is being manipulated at this time.

Secondly readers will have noted in Part 1 that the BBC World News program reported on Thursday 1^st February that the International Monetary Fund intended to sell 400 tonnes of gold and place the proceeds into interest earning assets.

We have emailed the IMF requesting a confirmation or otherwise of the report and to date have received no reply or acknowledgement of our enquiry.

Trying not to be conspiracy theorists, we note that the IMF holds 3,217 metric tons of gold valued on its balance sheet on the basis of its historical cost at circa US$ 8.8 billion compared to its value at the market price at end July 2006 of US$65.4 billion.

Not a bad profit and who could blame them if they cashed in 12% or so of their total holding.

400 tonnes would overhang the market for some time and it is hardly likely that IMF would make the same ignorant mistake as the misguided chancellor of the UK exchequer (Gordon Brown-likely to be Prime Minister this year!!) did in 1997 by announcing to the world that the UK was selling 400 tonnes of gold from its reserves and then wondering why the price went down.

Make of this what you will!

The obvious upward influences on the price of gold are the weakness of the US$ and soaring US deficits, rise in the price of oil, possibility of an imminent recession driving the smart money into gold, world wide inflation, political and military implications resulting in increasing tensions in the Middle East and N.Korea and continuing demand from the increasingly prosperous emerging nations.

The wise investor will make his own decisions based on these factors and if favorable will dig deeper.

Holding physical gold is one of the options to consider and many gold “old timers” reckon that a percentage of their holdings should be in physical gold.

physical_gold Gold Production Overview Feb 07 Part 2 The physical gold market is minute compared with the massive “paper” markets and some observers consider that just a 1% movement out of “paper” into gold would jump the price to over $1000 an oz.

It is possible that this kind of move is already underway as the West is recognizing that inflation is taking hold.

Physical gold pays no dividends and will carry costs to store and insure.

On the other hand transactions can now be carried out via authorized depositary receipts in physical gold between individuals or businesses across the world with relative ease and so discounting currency fluctuations and other imponderables.

On line trading in gold is now as easy as trading in stocks, options, currencies, etc.

Although trading in gold has not yet caught the investing publics´ attention in the same way as trading stocks there is a growing interest and activity in the gold market, particularly in China, that may also be an added factor in keeping up the momentum of the current bull market.

The mining sector, including gold, is divided into the major established players known as Seniors and the fringe players in exploration, holding mining leases with questionable prospects or just small producers with or without growth prospects known as Juniors.

It is a given that the Seniors give a leverage of circa 2-3 times to that of putting your money into physical gold and that picking the right Junior can give a leverage of 10-20 times more bucks for your dollar.

Our readers do not have to be told that leverage increases incrementally with risk.

Is it safe to assume that as the price of spot and futures gold rises so will the share prices of the seniors go up incrementally?

We have already noted that gold has tripled since 2001 and observed that mining production has fallen behind demand.

This scenario has led to the seniors and juniors making every effort to cash in on the good times but they are facing mounting problems.

Costs have risen dramatically, in the last five years one of the words largest gold mining companies tells us that their costs have gone up by an average of 2/3rds per oz. Another estimates that exploration costs have gone up by over 2.5 times per oz located.

As gold becomes more valuable so it attracts the attention of politicians. Profitable mining activities in politically volatile left leaning countries are likely assets to be seized by their governments.

This has already occurred in Fiji, Russia has revoked mining licences held by foreigners and there are reasons to believe that this is the tip of the iceberg – look what’s happened to oil in Venezuela.

Trade union activity has increased as work forces have become aware of the escalating price of gold and its effect on their employers profits.

It is to be expected that if the price continues to rise so will the demands of the work force.

Resistance by the employers is likely to result in strikes and that will lead to an even greater gap in supply and demand.

Mining activity in the stable economies is falling off. Exploration and development in these countries is not finding enough high-grade ores to offset the decline in production.

South African production is down by 50% in the last 6 years and Canadian and US production expected to be down by over 20 % from 4 years ago.

Similar problems are being experienced in other gold producing countries compounded by the activities of the environmentalist lobby.

Refer to our earlier item on this website discussing the Rosia Montana mine in Romania.

Believed to have the largest gold deposits in Europe the area has been mined since antiquity, now it is proposed to move the local inhabitants out of the vicinity, dig cyanide pits and make the whole area uninhabitable for many years to come, not to mention the pollution that is likely to spread into the water tables and rivers.

When it comes to developing gold mines I think that the environmentalists may have a point.

It is also important to consider the likelihood of the Seniors balance sheets diminishing in value as their asset base, the reserves of gold that can be economically mined, is extracted and whether the shortfall can be made up with new viable discoveries.

It is essential that would-be investors in Seniors carefully consider the implications, if any, of the locations of their mines and the environmental and political outlook of the region, as well as evaluating balance sheets.

It is also well worth the effort to thoroughly read the various chairman’s statements as the odd nugget (sorry!) of profitable information as to future intentions can be found in the detail.

As all investors know getting in on the ground floor of a take over or merger can make nice money.

In the last twelve months Western Silver was taken over by Glamis Gold and then a few months later merged with Goldcorp. All three were major players and there is good reason to believe that there is more to come.

Finally a look at the prospects of making big bucks by playing the Juniors.

Firstly all the considerations that apply to the Seniors are also relevant to evaluating the Juniors although perhaps to a lesser extent.

Bear in mind that Junior miners are a speculative play and so spreading the risk is that much more important.

As the potential profit in picking a winner is so good a sensible, but not fail safe, strategy is to look for a basket of say 4-6 companies that have potential and spread your speculative nest egg between them. In this way picking only one winner and the rest a total write off can still make you a very acceptable percentage profit.

It’s the picking that takes patience and care.

Good experienced management should be the cornerstone of any investment decision in a Junior mining company.

Sadly there are a number of Juniors out there whose prime consideration is obtaining investors money, by hook or by crook, to keep their directors fees rolling in.

What leases and exploration rights they conjure up are likely to have been acquired on the cheap, maybe the terrain is unsuitable for viable mining, possibly acceptable grade ore is inaccessible, a wing and a prayer comes to mind.

Trustworthy experienced management will most likely have been associated with other successful mining ventures in the past so this makes a good starting point when digging into their backgrounds.

With the fall off in supply, expense of exploration and time taken to bring a new mine into production the majors are looking to the Juniors to keep their profits up.

It is a good bet that if a Senior has taken a financial interest in a Junior then they will have faith in the management and prospects of a successful outcome so follow the smart money!

This is when the big profits kick in, the junior outfit strikes a rich seam and development starts to get underway probably with limited financial resources.

If a major has introduced some finance it will want, and pay for, a bigger, if not all of the action, if the junior has resourced all its operations without recourse to a major then it will also be an extremely attractive take over target.

Of course it would be nice icing on the cake if the individual investor had the expertise to evaluate ore samples and could travel to exploration sites to view the potential and interview the management but us lesser mortals have to be content with making our decisions on the resources we have at hand via our computers and financial press.

Nevertheless the gold arena is full of pitfalls so check out each and every fact that bears on your investment decision and that includes any thing you read on this website.

In conclusion the consensus of opinion reached by attendees at the Jan 2007 Vancouver Gold Show seems about right.

At that time the technical analysts were saying that gold had to break through resistance at $655 an oz to make progress. That has now been comfortably exceeded and looks for the present as being technically sustainable with the next level of resistance expected at the $685-695 level. Prospects for breaching the $1000 level by the end of the year look good.

The fundamental aspects at this moment in time supports the technical analysis but the news can make every historical chart pattern and projection meaningless.

For example if it became confirmed, and thus in the public domain, that 400 tonnes of gold was going to hit the market from the IMF then it would be difficult to interpret the subsequent drop in price as no more than a temporary technical consolidation.

Our reading of the runes helped by our own interpretation of the salient facts that we have been able to gather lead us to the opinion that the spot price of gold will hit US$ 1000.00 by the end of this year and that there are plentiful profits to be made from carefully selected majors. As in the past huge upside potential is in place if the right Juniors are picked.

This is an exciting market and if in play it is essential keep up to date with the news.

Do not be discouraged during a period of consolidation when the price falters or drops back by not too much unless a major news item is responsible.

Falling tensions in the Middle East and N. Vietnam might cause a setback; the China and the Indian stock markets might crash so be on your toes.

If in doubt look at our article on Uranium, it might give you more peace of mind.

As usual good luck with your investing.

Do not take anything at face value in the investing arena, do your own research and checking and follow your instincts.