There is a lot of negative sentiment around about gold. In fairness, this news is not entirely fair. The reality however is that markets only strike fairness when the majority of convinced of its imminence. Markets are ‘democratic’ institutions when the great wealth of private and public sectors is in the hands of unthinking custodians. So what are the pertinent factors:
1. Technical picture – Gold is bearish in the sense that it’s on a downtrend; but the fact is that, whilst it broken the $1520/oz support, it’s found new support at $1480-1490/oz, albeit maybe only temporarily. If this support fails, then gold might well fall to $1000/oz. Of course, the longer gold stays above $1480, the stronger the support.
2. Strong equity markets – The argument is that strong global stock markets are a source of weakness for gold. The fact however is that ‘adverse equity markets’ are often a source of weakness for gold. The reality is that many people simply hate gold. They don’t believe in it, and yet it defies them at every turn. It is silly to argue that equities are strong because they are strong until they are weak. A correction in equities could result in a temporary sell off in gold to cover weaker equity exposures, but gold will eventually prevail because its price is not paper-based.
3. Low inflation: The argument is that we are in a “low-inflation environment in the major world economies, with even some talk of deflationary price pressures building. Deflation is the archenemy of all raw commodity markets, including the precious metals”. This is actually not true. Whilst gold does correlate with inflation; it also correlates with deflation. Ultimately it depends on the reason for the deflation. If the deflation is caused by real wealth creation, gold does indeed fall, because people trust currencies. When deflation is because people are unemployed and there is an excess of capacity, high asset prices, low interest rates, then this is simply a single that ‘inflation’ as measured by governments is not representative of the facts. Ask yourself why property and equities are not measured by inflation? The reason is because inflation is designed to avoid these measures; and yet these are the largest class of traded possessions. Inflation is not correctly measured. If you want a sense of whether inflation is evident, look at real global output (stalled) and currency creation (i.e. Japan has recently announced its intent to expand its monetary base by 50%).
4. Slack demand: There is news that physical demand is weak in Asia. This is a silly argument for several reasons. Asia is a source of jewellery demand, but ultimately it is speculative demand which will drive the market. News that the “new India government regulations to thwart gold speculation have worked to decrease consumer demand in that gold-hungry nation” is of no substantive relevance to gold prices. If we were to worry about this source of supply, we should worry more about the dumping of gold by central banks.
5. Speculative demand: There is the argument that “legendary investor George Soros and the BlackRock fund have cut their holdings in gold exchange traded funds”. This is without question interesting in the short term, but in a month, I dare say he will be a net buyer again, because he’s a speculator and a trader. He enters positions, and he opens them. He is a substantial trader using the current liquidity and rumours about his positions to give momentum to his positions. One has to distinguish between short and long-term trading action.
6. Money printing: “Federal Reserve Bank of Philadelphia president Charles Plosser said in Italy Thursday that the central banks of the world cannot create wealth and said central banks do not have the tools to fix the present economic and financial problems in the major industrialized countries. He said the U.S. should wind down its quantitative easing program”. That argument does not make sense because the only action left to governments is to stimulate the market. More important is the fact that the world faces a threat of war in North Korea and Iran, as both countries develop nuclear weapons.
Federal Reserve Bank of Dallas president Richard Fisher: “Major central banks of the world continuing to run their money-printing presses is at best a short-term bandaid which will eventually create major long-term problems. The inflationary implications of the extremely easy central bank monetary policies of the past few years is very likely to become at some point down the road a long-term bullish factor for gold and other raw commodity markets”.The implication is that gold and silver is a great store of wealth, and emerging gold producers who are 1-2 years away from production make particular sense. This is particularly the case for companies sitting on short term cash, since they will not be diluted by the current low gold price. This of course will change when the gold market turns, and the ‘cash poor’ emerging gold producers are better placed. This will also mean investors will get a 2nd bite at the market. So, at present, I like cashed-up emerging gold producers like Gryphon Minerals (GRY.ASX). The paradox is that investors in these strongly discounted gold stocks cannot go wrong, as long as they pick stocks which:
1. Have large gold resources - Gryphon has 4Moz - so they have the capacity to ramp up peoduction to fully benefit.
2. Have low-cost resources - Gryphon is in Africa, it has some high grade resources, near-surface, so they will not suffer unless gold falls below $800/oz. I can't see it falling below $1000/oz given the context of currency debasement.
3. Have low sovereign risk - Anywhere is fine as long as not on under a town, in Iran, Venezuela or Central Asia.
4. Have sufficient cash - so they won't be raising substantial amounts of money in the next 6-12 months
These companies are trading at less than 5% of their gold value 'extracted', that's after they have mined and processed it. Aside from those dilution risks above, where is the downside. Remember that there is a lot of money squashing around the market looking for a speculative position.
Quotes: “P.M. Kitco Metals Roundup: Gold Ends Lower, But Up from Daily Low; Bears In Control”, Kitco News, website, May 16, 2013.
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