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Archive for June, 2010



   Posted by: Mr. Gold    in Uncategorized

Late last week, a friend from a hedge fund asked me what I thought about the rumor that Swiss National Bank was buying gold. Suddenly, twin images of May 1998 loomed in my memory. This was the time when two conflicting pieces of news hit the gold market. Pakistan’s and India’s nuclear tests and a Swiss research paper echoing an earlier recommendation of the Economic Committee of the National Council, advocating the sale of Swiss gold reserves.

The latter proved to be a watershed event for the struggling gold market. As recently as late 1980s, the alpine rock solid Swiss Franc was backed by foreign exchange reserves 40% of which were held in gold. For a country whose exports represent over 50% of its GDP, this was always a remarkable vote of confidence in the metal. After all, your current account surplus does not automatically vest you with gold receipts. Switzerland’s gold endowment was considered a testimony to the lasting defensive properties of such a significant gold stock.

What followed the May 1998 announcement was a triple waterfall. Gold market reacted very negatively to the announcement. Yet, amid political debate in the country, the then President of the Swiss National Bank confirmed the intention of the proceeding with the gold sales. The market reacted again, sending gold south. Finally, SNB actually began the sales process in May 2000 and continued its regular sales at around 20t per month. The market froze. In South Africa, AngloGold’s CEO and the National Union of Mineworkers marched together to hand protest notes to the Swiss diplomatic mission. Initially, it all looked like a sad example of a mismanaged sales process, one that was mimicked broadly by other European central banks. Until the Central Banking Gold Agreement (CBGA) was signed in the 1999 and a new era dawned on the beleaguered gold market. Switzerland was among the signatories to the Agreement.

Fast forward ten years and the rumors surrounding Swiss National Bank are again emerging. As in the 1990s, the rumors tend to reinforce the prevailing sentiment. “Only” the direction has changed.

In the intervening period, Swiss gold reserves bottomed out, in value terms, in 2003. In the last three years, the bank sold 160t of bullion and announced that no further sales were necessary. Yet something quite extraordinary has now happened to Switzerland’s official reserves. The reserves, which for many years hovered around the $70bn mark and then doubled since the onset of the global financial crisis in 2007, suddenly jumped a further 50% between April and May this year. Unexpectedly, Switzerland has overnight become 7th largest foreign reserve holder after the Asian and oil producing economies. This occurred due to the proactive stance of the bank’s new leadership to dampen speculative inflows into CHF. Indeed, Swiss National Bank bought more European government bonds since Brussels’ shock’n’awe strategy announcement than the European Central Bank itself. Much of this hyperactivity was apparently caused not so much to protect Swiss exports, but rather to shield Eastern European economies whose debt is largely denominated in Swiss Francs. It has been reported that as much as 60% of Hungarian mortgages are CHF-denominated. But in the process, the gold component of SNB’s expanded reserve, if left unadjusted, has now shrunken from 24% to 15% of the total.

Appearing as a key supporter of the Euro, the Swiss National Bank has made an announcement that it would now cease the CHF-weakening activity. It is unclear if this pledge will last. Since this announcement, the Swiss Franc has already hit an all time high against Euro.

What does it mean for SNB’s future gold strategy? The Swiss National Bank differs from many other central banks by having a mandate to actively manage its assets and since the outset of its gold sales program it hired personnel to trade bullion. Importantly, the Constitution of Swiss Confederation obliges SNB to hold part of its reserves in gold. Until the late 1990s, this “part” was defined as 40%. Since then, a 25% ceiling has been introduced. If the ratio has to be observed in future, the question of my hedge fund friend is well timed.

The gold market has experienced some unexpected jumps this month. On two occasions over the last two weeks, the market saw unusually large orders coming through. The typical rumor mill points fingers at central banks, whose buying decisions are only belatedly clarified. The most recent example thereof is this month’s disclosure of Saudi Arabia’s “accounting issue”, whereby the country’s gold reserves were boosted by a whopping 180t.

The first year of the 3rd CBGA runs out in September. So far, only 10% of the 400t quota has been filled. Would this mean that European central banks will now scramble to liquidate the remaining 360t over the softer summer months? I strongly doubt this. But should they do so, it is not impossible that some of the bullion will head back to the familiar safety of the Swiss vaults.

What a difference 10 years make.

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   Posted by: Mr. Gold    in Uncategorized

It could be pointless to focus too much on the intricacies of the gold market when most traders, investors and gold huggers spend more time looking at young men running in shorts after a small white ball. In order to marry the festive soccer/Fussball/calcio season with gold obsession, we have decided to look at the World Cup history from the viewpoint of a gold investor.

This is the 19th edition of the World Cup. For all the moaning and groaning about the relatively low entertainment quality of the current tournament (and Champions League’s allegedly superior art), there is no denying that this tournament’s history has, for 80 years now, punctuated the narrative of the beautiful game like no other.

From the gold investment perspective, this is an interesting timeline, as it includes the deflationary 1930s, the boom of the 1950s and 1960s, the inflation spikes of the 1970s, the expansion of the 1990s and the most recent, “golden” decade.

We have looked at the World Champions since 1930, assuming that each winning team would have been entitled to an ounce of gold (some actually were). Then we compared the prevailing prices during each of the preceding 18 tournaments, in USD, adjusted for inflation (2009). Finally, we took the timeline into account to see what the best annual return would have been from the gold “awarded” during the historic championship.

When Andrade and Cea’s Uruguay side triumphed in 1930, gold prices were at around $250 (in today’s dollars). An ounce invested there would have returned to this day, on average, an annual 4.9%. But nothing beats the Brazil of Gerson, Tostao and Pele, whose 1970 final against Italy would have vested them with gold at $200 dollars and a return of over 500% since (a creditable 13% per annum).

The Italian squad, despite winning the World Cup four times, would have had a somewhat poor timing in terms of the market entry. Captained by Meazza, the legendary Squadra Azzura of the 1930s’ would have picked gold at $540 and $520 per ounce in today’s dollars, yielding meager annual returns since. When Paolo Rossi’s team knocked out Canarinhos and eventually clinched the title in 1982, gold was at $930/oz, and woe to anyone spending the next 20 years paying for the vault and insurance. Yet whoever thinks that the Azzuri are a good contrarian indicator for the subsequent performance of the gold market, should think again. When Cannavaro’s side beat the head-butting France four years ago, gold hovered around $640 in real terms, giving the Italians a handsome 23% return annually since then.

But it is the Brazilians who somehow outperform any competition in terms of the timing of their investment. Ronaldo and Rivaldo’s 2002 team would have made a shocking 31.5% annual return from gold received at the Japan/Korea Championship. Three-time champions Germany are less lucky. Their last gold (1990, starring Matthaeus and Voeller) would have brought them only 3.8% annual return since, and the hirsute Beckenbauer-Breitner-Mueller legends from 1974 would have not even scored half of the returns generated by the Brazilian gold four years earlier.

Argentina’s entry into the gold market would have been even more unimpressive. Both the Kempes-Passarella champions of 1978 and the Maradona-Valdano teams of 1986 won when the inflation-adjusted gold prices were relatively high, at $560/oz and 640/oz, respectively. As a result, the English team’s investment form their unique title during the Bretton Woods’ era 1966 Championship would have outplayed the Argentines by a cumulative 200%. Even Zidane’s 1998 France comes close to the Argentine result, in terms of cumulative gains from Championship-timed entry into the gold market.

In terms of cumulative investment performance per achieved World Cup win, England appears as the undisputed champion, followed by Brazil and Uruguay. It is Argentina that closes this highly unscientific ranking. The numerous fans of Lionel Messi’s uebermenschlich footwork may think again what they are wishing for. Argentina’s win, despite the country’s name, may not be a good thing for precious metals’ future.

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   Posted by: Mr. Gold    in Uncategorized

While the Gold Bug-o-land is waving again the flag of global market Schadenfreude and celebrating yet another record set by the gold prices in just about any currency except the Yen, a more discerning investor in gold securities must be scratching his head.

For most of us, the new-new world began at the beginning of this year, when 10-year yields in Germany, US and UK commenced to succumb to gravity. By March, real yields began to fall as well. And as the Mediterranean drama continued to cleave the sovereign bond universe into a distinctly two-tier market, the unthinkable happened. On April 12, Chinese authorities announced draconian measures to cool the giddy property market. Since then, the global mining index has collapsed by 18.5%.

The reaction of the gold stocks depended on the market. As the Japanese investors, spooked by the perspective of a Chinese slowdown, pulled out their capital from their favorite carry-lands – Australia and New Zealand, the currencies of these countries collapsed and by mid-May the Aussie began to even trail the embattled Euro. With deflation firmly set in Japan and gold struggling to outperform the Yen, East Asians turned away from bullion. The round-the-clock merry go round saw Europeans plough their savings into coins and small bars, then Americans slowly pushing up ETF holdings and then Asians selling gold into another intra-day rally. None of this helped the Australian gold stocks. Adding insult to injury, foreign investors were doubly punished on the translation from the the Australian dollar – the first real casualty of Beijing’s measures. As a result and despite gold’s stellar performance in AUD since April 12 (up 18%), Australian gold indices barely budged. Although much of this could be attributed to Mr Rudd’s mismanaged profit tax threats, the Hong Kong-listed gold miners fared even worse than Sydney’s. Caught up in the regional sell-off compounded by the unwinding of the short Euro/long Asia trades, the HK gold stocks, posted a measly return of negative 3.5%. Obviously, going forward, the value opportunities among Australian gold stocks are unprecedented – with the Aussie dollar prospectively flattering the margins of these companies in the near term.

Things looked better in the European time zone. Naturally, the panic surrounding the currency crisis pushed investors into London and Johannesburg-listed gold stocks. Especially the latter appeared attractive after the disastrous 1Q results. South African golds have returned nearly 9% since April 12. The Africa and Russia – focused London gold stocks have gained almost that much, despite higher valuations at the beginning of the period. And that was quite an achievement on the oil spill-infested FTSE.

This brings us to the Americas. Here, the obsession with the domestic themes has deepened further over the past two months. Not surprisingly, the ever higher prices of gold, as denominated in Euro, were of little relevance for the US and Canadian equity investors. And so, gold stocks have yet again underperformed physical gold. Gold has returned over 6% during this period, with the main gold equity indexes trailing by around 2-3%. Remarkably, GDXJ – the index including smaller miners and explorers is yet to recover from the dramatic 20% drop in mid-May and turn positive over the period.

Indeed, many explorers have suffered considerably during this period. We have compared several sub-indexes, categorized by themes which are easily comprehensible to non-specialist investors and general public. One such group of exploration companies is exclusively composed of companies with over 5moz resources (measured and indicated only). Another index is composed of companies focusing on high grade properties (at least 1.8 g/t). Finally, a separate index has been created to distinguish between companies audacious enough to plunge into countries of high perceived risk (e.g. Central African Republic, Ecuador or Romania) and those preferring to focus on geologically prospective terrain in low risk jurisdictions (North America, Mexico, Chile).

The period under consideration shows that the companies with big resources and low sovereign risk were the preferred picks despite the volatility which affected all exploration companies across the board. But companies with smaller resource base did not seem to be overly penalized by comparison. Instead, it is the “high grade” group of explorers which seems to have fallen out of fashion, underperforming even the “high country risk” group. It is often the case that companies in high risk areas pursue only attention-grabbing high grade (and low tonnage) projects which could be brought to production at a fairly speedy pace. The exoticism of the destinations does not help and the jumpy and largely directionless equity market seems to fear nothing less than another Bre-X, twelve years after that sad event.

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   Posted by: Mr. Gold    in Uncategorized

If you ever have a chance to travel to Colombia’s cosmopolitan capital, you will find it hard to miss the local gold museum. The collection, similar but superior to similar permanent exhibitions in Lima, Quito or Capetown, brings together exquisite artifacts from the pre-Colombian cultures of Calima, Quimbaya and Tolima. Nothing beats the gamelan-like jingle of the grand finale, offered to visitors in the hall emblazoned with countless golden disks.

Yet, for years, the history of gold mining in Colombia was just that, a history. In the country known for its flagship coal (Cerrejon) and base metals (Cerro Matoso) operations, the gold production was long limited to informal sector staffed by barraqueros active in the province of Antioquia. The deterioration of the security situation in the country pushed down the national production to barely 20 tonnes per annum in the 1990s. As President Pastrana had his eyes on the Nobel Peace Prize, the country slid into chaos.

Two things have changed since then: the gold price and the Presidency. Last weekend, Colombians cast their votes in the first election since 2002 which did not feature Alvaro Uribe as a candidate. In just 8 years, Uribe’s security policy has completely transformed the country. In my frequent visits to Colombia, I could sense tangible improvements with more and more regions of the country open to astute gold explorer and nature-loving hiker alike.

And in they moved. High geological prospectivity and immaturity of the existing exploration programs run by local firms, such as Frontino and Mineras de Antioquia, enticed foreign companies to bank on further improvements in the security situation. In 2004, AngloGold Ashanti set up its first exploration office in Colombia, focusing on porphyry/epithermal systems, sedimentary-hosted gold and mesothermal vein systems. Meanwhile, Canadian junior Greystar entered Santander province, developing a high-sulphidation system in Angostura.

Thanks to the international confusion surrounding the situation in Colombia (some left-wing NGOs in Europe still consider FARC a freedom-fighting force, rather than drug-financed terrorist organization), these pioneers confronted less competition for prospective ground than in more mature areas of the Andes. A threefold strategy was necessary to turn an exploration prospect into a project and a project into a mine. First, geological work had to advance apace in often isolated, mountainous regions. Secondly, personal, access and zone security had to be assured. And finally, highly professional community development work had to engage the local population while constantly managing the expectations of prospective economic and social gains from the future mine.

But this is mining, and mining never comes without hiccups. Last April, the Colombian government asked Greystar to provide a new Environmental Impact Assessment for all operations above 3200m level, increasing the risks of delays to the Feasibility Study. The new legislation, aimed at protecting the vital paramo highlands was introduced after the filing of the original EIA by the company. Not surprisingly, Greystar’s share price lost half of its market value in one day. Earlier this week, the decision has been revoked (and the share price partly recovered), yet the grandfathering of the old EIA is not yet 100% certain.

Despite such travails, the industry remains optimistic about Colombia’s gold prospects. This week, the CEO of AngloGold Ashanti lashed out against Canberra’s efforts to socialize earnings from mining operations in Australia, and mentioned Colombia among the company’s favorite destinations. Indeed, AngloGold Ashanti’s discovery of 12moz resource at La Colosa sent shockwaves around the mining industry, long hungry for elephant-size finds in the Andes. At Toronto’s PDAC two years ago, wishful thinking abounded about a possible link-up between Aurelian’s Fruta del Norte asset in Ecuador and La Colosa. Aurelian was eventually acquired by the ever merger-happy Kinross and the border tensions between the two countries would in any case have made any such tie-up unworkable. But rumors surrounding possible M&A activity in Colombia have not entirely disappeared. Some analysts continue to believe that Gold Fields, which has operations in neighboring Peru, could be tempted by Greystar – a large, low-grade heap leach open pit mine with refractory ore that may require BIOX further down the line.

None of this effervescence would be possible without Alvaro Uribe’s dedicated commitment to rid the country of the plethora of armed thugs – from right-wing paramilitaries to EPL, ELN and FARC. There was a danger that Uribe’s continuously high approval ratings would lead to de-institutionalization of the Presidency in what is historically the most democratic country in Latin America. This danger has now been averted. Last Sunday, the former defense minister Juan Manuel Santos received nearly 47% of the vote. He has since secured the Conservative Party’s support for the runoff, making it virtually impossible for Antanas Mockus of the Green Party to win the election. Whatever could be the future of ‘Uribismo’, stability and continuity now appear guaranteed in Colombia. And that is good news for gold miners with a Colombian strategy.

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