A few up days hardly constitutes a trend but gold seems to be recovering some of its luster which I’m sure is a welcome relief to everyone. While the next phase of gold’s bull market may not play out this week or next, it will almost certainly do so in the coming months.
For those of us that haven’t been flushed out of the gold market by margin calls and other factors, the light at the end of the tunnel is beginning to look more like a navigation beacon than a freight train.
For investors in gold equities - and to a lesser extent physical gold - these past few months have been disconcerting to say the least. Perhaps it’s a sign of the times but the only solace I’ve been able to offer shell-shocked investors is that my losses are on a par with their own - and I’ve been in the business for most of my working life and presumably have some idea what I’m doing.
Throughout all this turmoil, however, I’ve tried to keep my eye on the big picture and I’m more convinced than ever that we are heading into the eye of a perfect storm for gold and gold equities.
Morgan Stanley is even getting on the gold bandwagon, predicting gold will climb above $1,000 per ounce in 2011 largely due to rising demand, coupled with higher mining costs and decreased mine output. In the past, I have told people that if I’m dead wrong about the positive impact of the current financial crisis on the gold market, consumer demand in the face of declining supplies will carry the day. At this stage, I’m convinced I’ll be right on both counts.
Donald Coxe, a Global Portfolio Strategist at BMO Financial Group, defines gold as “the new global currency” and believes its day in the sun is just around the corner.
"Looking ahead, we expect the dollar bull market to end soon and the equity bear market also to end soon. By that time, students of monetarism will be worrying about the Fed’s drastic rescue policies—and there should be renewed interest in gold.
Unless Milton Friedman is as obsolete as J.K. Galbraith and Samuelson, when the economic recovery arrives, gold will be in a major bull market. It will be the time the victims of the Midnight Massacre still left standing can say, with a grin—and a metaphorical gun, ‘Make my day!’"
From my standpoint it’s pretty well a given that the gap between mine supply and physical demand will drop given the current difficulties in credit markets (i.e. not much money available for capital projects), the high cost of developing new production, and the growing lead time from exploration through to discovery (sometimes up to 10 years). Funding for exploration companies in particular has virtually dried up and even firms with quality projects are finding it hard to finance their activities.
A significant shakeout of underfunded projects is taking place as I write this piece which will serve to constrain new production coming into the marketplace, not just for gold but for other metals as well.
One time high flyer, Nova Gold, saw its stock plummet by over 67% today when the company announced it was having difficulty meeting cash calls for its two principal gold projects, Galore Creek and Donlin Creek. In addition, the company is having problems repaying a bridge loan following a $US20 million cost overrun for its Rock Creek gold mine in Alaska which has suspended operations.
It would appear that Nova Gold has little chance of raising additional equity, securing debt financing or selling assets, prompting the company to concede that if it can’t raise additional cash by December "it will not have sufficient cash to meet its obligations." With Nova Gold’s stock trading at $0.58 per share on the Amex, one can’t help but wonder if its shareholders wouldn’t be willing to revisit Barrick Gold’s 2007 takeover offer of $US16 per share.
Some interesting news on the demand side might well be contributing to gold’s recent strength. In last week’s “Gold Demand Trends Report” put out by the World Gold Council, it was reported that consumers spent more than $6.5 billion buying 232 tonnes of gold coins and bars in the third quarter of 2008. That works out to an increase of 121% in volume over the same period last year, the reported noted.
Germany and Switzerland reported a huge surge in demand as did Exchange Traded Funds which had inflows of 150 tonnes in the third quarter, 8% higher than last year. Lower prices prompted price sensitive Indian buyers to purchase 178.5 tonnes of gold ahead of the Diwali festival in October, up 29% from the previous year.
The Perth (Australia) mint recently suspended orders for gold bullion in all forms, citing unprecedented demand from Europe, with Russia, Ukraine, Middle East and the US accounting for 89% of its sales. Some clients were buying up to $1million worth of gold, paying a premium above the spot price, said spokesperson from the Perth Mint.
On another note, while the election of Barack Obama is truly a historic event for the U.S. and arguably the world, it’s highly unlikely that his administration will be able to produce some magic elixir that will quickly resolve the country’s deep-seated and systemic financial problems. In fact, it would appear that in some policy areas his administration could well make matters worse.
One news item that caught my eye was the election of Representative Henry Waxman, a 69-year old Californian whose district includes upscale precincts of Beverly Hills, as Chairman of Energy and Commerce by the Democratic Caucus. According to the Wall Street Journal, Waxman wants to "phase out coal and cars that use gasoline" which would probably grind the world’s eighth largest economy to a halt - if the projected decline in peak oil related energy-production doesn’t do it before hand. Worth noting perhaps is that his biggest lifetime donors have been unions and trial lawyers.
As the ancient Chinese proverb (and curse) says, "May you live in interesting times."
www.MineSeek.net
