MAC: Mines and Communities

Market "meltdown" and the gold factor

Published by MAC on 2008-09-29

Investment in commodities had been regarded by many investors as the safest haven, even before last week's unprecedented meltdown in banking finance. The market price of gold reached US$900 last week - not its all-time high, but sufficient to prompt some market-watchers towards optimism - some even foreshadowing a return to gold as a form of alternative currency.

And not only gold - the market for phosphates has rallied to such a degree that some traders are calling it the best bet in commodities as a whole.

But, whereas major new funding is being earmarked for new phosphate mines (not least by BHP Billiton and Rio Tinto), it seems that gold miners themselves are in the doldrums.

According to Ian Henderson, head of J.P.Morgan's $5bn Natural Resources Fund, "a sustained price level of over $1,200 an ounce [is required] before we see any significant new mine build."

And the CEO of world No.4 gold miner, Gold Fields, says his company would require a market-price of $2,000 and above to justify investment in new mining - more than twice its recent high.

Gold the "safest vehicle"

With a lack of trust in the global banking system, gold is reckoned to be the safest asset in these turbulent times by some analysts and specialists.

BullionVault Press Release, London

25th September 2008

The price of gold bounced from its third drop to $880 in three days early Thursday, recording a London Fix of $889 per ounce as Asian stock markets closed lower for the 11th time in 17 sessions.

Crude oil slid 2% to $103 per barrel, while US Treasury bonds rose, pushing the annualized yield offered by 3-month notes down to 0.45%.

"Gold is the safest vehicle," said Afshin Nabavi, vice president of the MKS Finance division of the Swiss refining group, to Bloomberg this morning.

"People don't have much trust right now in the banking system...There's a lack of confidence in stocks."

Hong Kong cash-savers lined up Wednesday to withdraw their money from Bank of East Asia after what the authorities agreed were "malicious rumors" the $51-billion institution has been infected by the US banking crisis.

Japan today reported a 21% drop in exports to the US, driving the country's merchandise trade balance for August to only its second negative monthly reading since 1982.

Here in London, the ailing Bradford & Bingley mortgage lender - down 90% on the stock market since Sept. '07 - said it's written off or sold all "toxic" assets at zero, sparking a £133 million ($246m) charge against profits.

In an article to be published in Friday's "Spectator" magazine, the Archbishop of Canterbury Rowan Williams - head of the Anglican church - says Karl Marx was "right" about the evils of unfettered capitalism, "what the Jewish and Christian scriptures call idolatry."

Over in the debt markets on Thursday, the price of insuring bonds issued by Wall Street's last two independent investment banks - Goldman Sachs and Morgan Stanley - jumped sharply on concerns the US Treasury's $700bn banking bail-out package may be delayed or even rejected by Congressional wrangling.

The spread between prices to buy and prices to sell widened to more than $20 on Morgan's Oct. 2016 bonds, with the bid price demanding a yield of 14.5%.

"Gold is having some trouble with the 900 mark," notes the latest short-term technical analysis from Scotia Mocatta, the London-based bullion bank.

"Able to pierce it on four of the past five days, moves above this level have proved fleeting. We've now fallen through 892, the 61.8% Fibonacci retracement of the 988 to 737 down move, but have remained supported by the 100-day moving average at 878.63.

"Given the relatively calm price action of the past two days, we still like buys around 882 and sells at 920 - if resistance around 910 can be broken."

Longer-term, says Roland Duss - co-chief investment officer at Gonet & Cie, the Swiss private bank based in Geneva - the price of Gold Bullion could reach $2,000 or more per ounce over the next decade.

"We are still in a commodities bull market," Duss told London's CityWire news service on Wednesday.

"The growth in demand from emerging economies is such that it will exceed supply, so we are bound to have price hikes for another five to 10 years."

Duss says 95% of additional demand for energy, metals and other raw materials is coming from emerging economies. Developed OECD countries simply don't have an impact.

"On the supply side [in contrast] there is a lot of destruction. For metals, there are too many cost increases, which means that some mines are not going to be there."

World gold mining output peaked in 2003. Ian Henderson, head of J.P.Morgan's $5bn Natural Resources Fund, believes we need "a sustained price level of over $1,200 an ounce before we see any significant new mine build."

The CEO of world No.4 gold miner Gold Fields, Nick Holland, says his company's assets would require a market-price of $2,000 and above "if you tried to build these mines today" to justify the investment.

"Already at cost levels between $600-700 an ounce," notes the latest Precious Metals Weekly from Wolfgang Wrzesniok-Rossbach at Heraeus - the German refining group - "many mines will find it difficult to continue production.

"This should put a check on fresh supply. At lower prices, the feasibility of processing 'scrap gold' [meaning old jewelry and electronic bonding wire] will also be severely tested - and at the same time it should significantly encourage jewelry demand.

"As such, in the next 15 months, we do not see the gold price falling for any extended period of time below these levels

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