-- Posted Sunday, 12 December 2004 | Digg This Article
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That was the week that was
It’s been so long, it seems that we had volatility like we saw this week. But there it was and what volatility. Like a roller coaster that hits the top of a climb, having lost nearly all momentum, it accelerated on the fall, dropping a full $20+ in just over one day. It was too good an opportunity to miss it seems. With so many still focussed on the lower 4400 still, few thought the $450 level was here to stay, so few bought at the higher levels. So like the waves of the sea, it had to retreat to give these higher price levels credibility. No doubt about it at the $430 level the market is a lot more comfortable. Yes, it could fall further, but it may not. The fundamentals will dictate that and soon. It is certainly a healthy move for the gold market, giving it a more solid foundation for the next move higher. And look at the last week, has anything fundamental changed? No, the instability factor is higher if anything. The adjustments in currencies, in commodity prices is the function of a healthy market, but of themselves, insufficient to change any fundamentals. Clearly, sitting on support now, the gold price will now prove itself.
An important point to note is that the gold price has been led for the last few weeks, and even more so this week, by the price established at the London gold fix. It was there that we saw the dramatic drops in the prices with New York setting the direction but London establishing the levels. We see more in this than a simple market mood. It looks as though the presence of the Exchange Traded Fund is a far more significant factor than was expected at first.
It is vital that one does not get too close to the gold price in $ in isolation. In Euros, the gold price fell back to support at Euros 330, showing that this was indeed a fall in the gold price, not just a recovery in the U.S.$. But a look around other markets, showed that the devastation to prices hit Silver more, it hit the broad range of commodities. All of it appeared to be fund selling inspired, with them hitting the market on a broad front with their sales. It is close enough to the year end to be triggered to the end year presentation of financials to their companies. Nothing like taking good profits right now. This had to favour the selling side. The question is has it finished? Also we must ask, was this a simple Technical sell-off of short term speculative positions, or did long term holders join in the fray. Again the prices from now on will tell us that.
Global market prices:
Euro: (Euro 1 : $1.32245) With the Euro price of gold having struggled last week so badly, it is no surprise that there was a sudden loss of energy in the price and a retreat to support at Euros 328, where it has held, by the skin of its teeth. This retreat was engineered as part of the action in gold fund action, now reaching into physical gold through the new E.T.F.’s, maybe with the help of a few additional speculators.
U.S. $: A veritable bloodbath? The fall from $456 to the present $432 took our breath away. But markets do not just collapse like this, without a good bounce back to just short of where they dropped from, even if they are going to fall further? It is always time to temper the Technical picture with the fundamental one, so as to have a balanced professional view of the market. That’s why we publish both the Technical picture and the fundamental one [see below]
Rupees: ($1: Rupees 44.54) Patience pays! What can one say about our Indian friends? They suffered a blow in mid summer with the government removing the $+8 advantage on the L/C then the Rupee weakened to see them paying above international prices, having been paying quite a bit less before. Now the Rupee has strengthened and the gold price has dropped in $, so the prices are attractive again, looking more like $400 to them than the present price to us. Have no doubt that they will be buying again, once the prices stabilise. The authorities there are behind the gold industry as you can see below.
South African Rand.($1 : R5.815) Can you believe it? No interest rate cut! The Rand initially weakened to the R5.92 level, before re-assessing itself. Under the illusion that the growth South Africa is enjoying now is long term, the Central Bank, continues to ignore the level of the Rand. These are mistakes which cannot be rectified as can inflation, or interest rates levels. These industries take years to establish as do ordinary exports, so once destroyed will take more than years to repair.
If Rand costs were to retreat the same as the Rand the picture would be different, but they won’t. The Gold Producers continue to suffer the erosion of their margins, which will continue to result in job losses as the lower quantities of higher ore are turned to, to save what can be saved of the margins. The gold production falls tell the story, as do the job loss figures. As to the future of the industry, that is the first casualty of the Rand.
[Two weeks ago the gold price per ounce was R2,628.22, today it is R2,528.29 ]
Latest
At the time of writing, gold stood at $434.75 or $15.40 higher then this time last week and in Euros 328.82 around Euro 9 lower than last week. The Euro is worth $1.32215.
The streetTRACKS Gold Trust – far more than simply an Exchange Traded Fund bringing new people to the market!
The selling of 15 tonnes of gold from the streetTRACKS – Gold Trust, appeared apparently, before the price of gold dropped so dramatically, on Tuesday/Wednesday. The importance to this action does not lie in the present arguments being aired so fully on the web, but in the very nature of the Trust and how it fits into the market place. We have to say that this week has shown the present and future nature of the animal and we are impressed by the power it is attracting. The World Gold Council is gagged from marketing these features by New York Stock Exchange bureaucrats in their endless wisdom.
Because of this week’s behaviour by the Exchange Traded Fund, we now subscribe to the view that it is set to become far more than a home for a new type of Gold Investor [so widening the market in gold], we expect it to become a key gold market vehicle. This is a view expressed slightly differently by Mr Pierre Lassonde of late, but with the same conclusion. Why?
· It is not just that it is a definite bridge between paper shares and physical gold [and a very short one at that]. It does that as none has done before.
· It is not simply a vehicle to attract the small man, the Pension fund, or those who want to remove themselves form the business risks attendant on gold mining companies, which it does superbly.
· Its real additional value lies in the speed of dealing and the cost of dealing.
Essentially it is acting as a “Jobber”, the wonderful [wholesaler] fellow who on the old London Stock Exchange would stand in the middle of the floor, dealing only with the Stockbroker’s dealers, whose “Blue” buttons would then run to the phone to phone the completed execution of orders to their office. They in turn reported to the Institutions or individual Investors who had placed orders with them. The beauty of this system is that there has been no such concept in the Gold market before. It represents the near immediate conversion of the piece of paper representing a small portion of gold into an actual transaction in physical gold! The difference between the Jobber and H.S.B.C. ’s role is that the Jobber held a position in the Stock he wholesaled, protecting himself through the “Spread” he offered on the price. The Trust using H.S.B.C. cannot afford to hold positions in gold, it has to run as close to a ‘zero position’ as possible.
The H.S.B.C. bank is the largest member of the gold fixing, so the most competent to fill this role. They are in a position to provide such a speed of dealing, so that not only the Trust, but they are not caught holding a “position” in physical gold. Their share ‘book’ would have to match their physical gold ‘book’ at all times, so as not to be caught in a ‘risk’ position, that would make them and the Trust vulnerable to losses. That would be the quick way to a disaster. The H.S.B.C. bank is again, in the best position to keep that book ‘square’, by being constantly on top of the ‘buy’ & ‘sell’ orders and making sure that they were selling / buying physical gold in an instant, to match these orders. By virtue of their market making role in the gold market, they can do this with ease.
[By the way, the fact that the name H.S.B.C. stands for Hong Kong and Shanghai Banking Corporation , so I am informed on fairly reliable information, does not mean the Chinese government has a hand on the Till there.]
What the E.T.F. does for the gold market is to expand the scope of the gold market and to bring the efficiency of the bullion market to this “gold” note market. What this will mean, in contrast to the Futures market, is that the paper market has almost become ‘physical’. So it is no wonder that the gold price reacted to the sale of streetTRACKS – Gold Trust 15 tonnes of gold, it is the ideal quick dealing medium and the seller will get his price just before the gold is dropped onto the market. Will H.S.B.C. bring in a ruling that the price only applies to maximum size deal of ‘x’ amount of gold to protect themselves?, I doubt it, they will just have to deal fast enough themselves. It is 15 tonnes deals that tested the quality of this instrument and it passed this test with flying colours. No doubt it will be tested in the future on larger amounts. But the fact it passed this test, will bring professional into this instrument in far larger quantities than at present.
The small, medium and large dealer in gold now has an efficient way of dealing on the gold price. In extremis, when the very gold dealing and banking systems are suspect, then in any event, irrespective of what any piece of paper says, Investors should have moved into holding their gold at home.
We will see, in time, as the different participants get used to such instruments and the way they work that the different market players will operate with them. These instruments will have a home alongside gold shares, and futures and options. Indeed it may well find they themselves have derivatives drawn from them which will then be traded freely.
We would suggest that the Bureaucrats at the New York Stock Exchange did actually do their job and made this share just what it purports to be. We expect it to have a long, large and steady growth in the future, to become a fundamental gold market investment. We believe it has just passed an “acid” test more critical than any other!
Please note that a similar E.T.F. is soon to be listed in Hong Kong, no doubt accessible to the Chinese market?
Russia to change the shape of its reserves?
Taiwan said it last week, China expressed concern, now Russia is giving voice to its worries, again. We were informed that “Changes in the structure of gold and foreign exchange reserves are possible, Central Bank Chairman Sergei Ignatyev said in the State Duma. To have made any public statement to this government body takes the expression from one of possibility to one of either probability or certainty. He said, "We really consider changing the structure of the gold and foreign- exchange reserves to be possible. The dollar's sharp devaluation against the major currencies is worrying the Central Bank, but there would be no sharp changes”, Ignatev said. Have no illusions out there that this is going to bring down the $. Only fools would act in such a way as to lower the value of the balance of their holdings. Further, understand that these moves on the $ and those of the States are preparations for the ‘storm’ to follow the present calm!
India very serious about becoming a gold hub.
The Union Ministry of Commerce in India is demonstrating government support for the promotion of India as a gold trading hub for gold. Already taking 23.5% of the world’s new gold production, India is aiming at doing more. This government Ministry is about to examine the regulatory structure of Gold Industry with a view to improving India’s position in the global gold industry. This is significant in view of the fact that the gold Jewellery from India is rarely less than 18carats, or 75% pure gold, against the cheaper jewellery found in the West down to 37.5% pure gold. The price of this jewellery contains a far lower level of “design” cost. How many Western couples would be happy to know that their jewellery did have an intrinsic investment value, whilst adorning their wearers?
The Ministry’s brief also covers, recommendations for measures to facilitate the investment by Mutual Funds in gold, and to improve the ability of banks to implement a Gold Linked Savings Scheme. The committee will also suggest appropriate customs and foreign trade measures to enhance the gold manufacturing and trading whilst guarding quality of goods to be so traded.
We have no doubt that, if successful, the quantity of gold ‘consumed’ via both investment and jewellery manufacture would continue to increase in India.
The South African Royalty tax prospect – crushing new ventures.
While the Rand moved on and upwards and South Africans prayed for a cut in interest rates, international eyes turned again to the prospect of a revenue based Royalty tax on precious metal mining companies.
This week it was Anglo Platinum that joined A.B.S.A. ’s attack on the concept of Royalties on revenue, nor on profits. With this uncertainty, let alone the reality hanging in the air over South African investments, the investing public have to factor in the worst case. This is a 4% Royalty on revenue. This would kill the Junior mining sectors, not only in Platinum, but gold and diamonds. The intransigence in government appears to be politically driven by an unwavering belief that mining is robbing the citizens of South Africa of its wealth. As such, such heavy and uncompromising taxation, once established can be hiked up whenever it suits the government. Such an impasse will deter new mining projects and place a permanent question mark over the wisdom of investing in South African mining shares.
But it should be understood that this is a more fundamental issue than simple taxation. The very principles of capitalism demand that investment should not only produce a return of the investment, but on the investment. Such a revenue based tax, not only takes tax off the return on the investment but off the investment. Until this principle is recognised by the government of South Africa, mining will continue its inexorable road to its twilight.
Silver $6.68[Euros5.0535]
Silver showed itself to be far more volatile than gold this week. It tumbled again from its $8.15 high and is sitting well below $7.00 now. We went short again! It was looking as though it had gone too far. It seemed that it had gone too far, too fast, so we kept moving our protective stops up with support, until it looked just too much, so we added the short recommendation to the picture. But just look at the long term picture on silver. What an amazing based it has formed over all these years. When will it have reached its take-off point? We will have to wait and see. It seems that despite the change from silver based photography to digital photography, the prospects for silver are good. One of the main price depressants has been the persistent unloading by the Chinese from Official stocks. In addition the supply to the market is dropping from newly mined sources. As to the Silver price, as we have commented many times, the funds have had their way with the price all the way. It will continue, we feel to copy the path of gold in a more exaggerated fashion.
Maybe the future of Silver is about to re-invent itself. The London-based Argentium Silver Co. today announced the launch of a new sterling silver that keeps its shine indefinitely without the need for polishing. Argentium(TM) Sterling Silver is the first highly tarnish-resistant sterling available in all the traditional forms needed for wide scale manufacture. This new silver is set to replace up to 50% of the total worldwide silver market (*30 billion dollars) share from traditional sterling silver and be worth a total of 15 billion dollars as early as the year 2010. Already, Tiffany and Gucci have latched onto this product and are producing beautiful pieces of jewellery. With the persistent shine and no black marks on the skin, we have no doubt that this will make massive inroads to the markets occupied by other precious metals, excluding gold, methinks!
We will be publishing two new services covering the Technical picture – Short term, covering the big picture, as it pertains to precious metals and the best SENIOR and JUNIOR Gold, Silver and Platinum shares. We will be announcing these very, very soon!
Platinum $833.5 [Euros 630.55] - China shopping for resources
Zimbabwe, which is the target of sanctions by the E.U. and the U.S. because of its record on human rights and democracy, has turned to China as investment from the U.K. and U.S. dries up. Chinese companies have formed power, coal and telecommunications ventures in the country.
Now the Zimbabwe government has asked Impala Platinum Holdings (Implats), which owns the rights to most of Zimbabwe's platinum deposits, as well as the country's two platinum mines - Ngezi and Mimosa - through its Zimbabwe Platinum Mines unit and a venture with Aquarius Platinum, to consider talks with Chinese investors. The request comes from the Central Bank of Zimbabwe, which has control of the proceeds of the sale of the company’s platinum. The government of Zimbabwe is not shy when it comes to interfering in the company’s business, having already proposed that companies sell 30% of their mines to unnamed, black Investors, within 10 years for an unnamed price, one presumes in the relatively worthless local currency?
Implats said last month that it might start a $750 million (R4.3 billion) plan by March to boost output by six fold in 10 years. Zimbabwe's output by 2014 would reach 610 000 ounces, or 22% of the company's total, up from 7% at the end of next year, Impala has forecast.
Said the company’s Finance Director, "A speedy development of the resource would be in the interests of everyone”. Such a move could well be attractive to Implats, whose Shareholders must be extremely worried by the political/currency risks of the development. Such financing, being made available from the Chinese, would remove such a worry and guarantee a market for its products for the life of the mine. Expect more of such stories in such countries world wide.
Seen as part of China’s programme for securing resources, finance in such high risk countries is extremely difficult to secure.
