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Blanchard Economic Research Note



-- Posted Wednesday, 23 May 2007 | Digg This ArticleDigg It!

The precious metals complex began turning around this morning as a sell off began in the dollar in Asia and has continued in the US and European markets today.

The market should move around a fair bit today as US energy inventory numbers hit the tape at 10:30 AM EST, potentially roiling what has already been a volatile energy market in the last week.

There are no other economic reports due out today, but key to gaining insight into the state of the US economy will be the release of the April New Home and Existing Home Sales on Thursday and Friday of this week. 

Central Banks

The Bank of France has remained a steady seller over the past year, but in the last three months, the Bank of Spain has appeared on the scene hemorrhaging nearly 3 million ounces of their reserves and potentially even more if they're behind the selling taking place in May.  If the banking system in Spain is heading for a total meltdown as some economists now believe, they're running out of gold to plug the gap, having disposed of 20% of their reserves in the March-April time frame (the largest set of gold sales in the market by any ECB member bank during the life the CBGA) and we will have an update soon if they have continued that selling into May.  It is our belief that Spain is creating a mini-Brown's Bottom in the market right now via their increased sales, but as has been the case following all major central bank sales into the market, the investors who took positions during that temporary flood of supply into the market are the end benefactors of price increases moving forward as that supply dries up.

"Central banks may have been selling through the London market, Innecco said. The European Central Bank said yesterday three unidentified member banks last week sold gold worth 280 million euros ($376 million), the most since the week ended April 20.

'We would not be surprised if the recent large sales by the Bank of Spain are continuing,'' UBS AG's London-based analyst John Reade said in an e-mailed report today." -  Bloomberg article, May 23rd.

Mine Supply

So what's really happening in the mining sector?  Seems to be a lot of conjecture about how much production should be expected.

All we can do is parrot what the miners are saying, production will continue to decline without higher prices.  Looking at declining production figures coming out of major mining countries, sounds like they're right.  Mining companies are throwing money into base metal mining, not precious metal mining.

The figures tend to run together after a while because there are just so many, but step back and look at the reports in their totality.  The only positive increases we've seen are coming out of China with production rising 16% in the last quarter compared to a year ago.  The rest of the production profile in the industry doesn't look that rosy.  So what if $10 or $20 or $30 billion has been earmarked for new exploration programs and developments?  No new mines of any size have gone online in the last few years and until substantial production begins at these precious few new mega-projects, nothing should be counted on as a given.

-  South Africa's production has been reported as 8% lower in the first quarter of 2007 compared to the same period last year.

-  Peru's gold figures have been reported as averaging 16% lower production in the first three months of 2007 vs. 2006.

-  At a mining conference this week, Chief Executives of Barrick and Gold Fields (#1 & #4 global gold producers) stated that no major finds have taken place in the industry and that production should continue to fall without materially higher prices.

"Greg Wilkins, CEO of Barrick, the world's No. 1 gold producer, said he expected the gold mining industry would be challenged to maintain the current production level, and miners would need higher metal prices to justify their capital investments." - Reuters Mining Summit

-  Harmony, (#5 global gold producer) confirmed at the same conference that their production this year would be flat in a best case scenario.

-  Zimbabwe, which produces only about 20 tonnes of gold a year, has had nearly it's entire gold mining community go offline in the last months as the country struggles to deal with out of control inflation.

-  Hecla mining has a mine in Venezuela sent offline in the last week while protests blocked the roads to facilities.  Impact to production, assuming the strike ends this week, is expected to only be 12,000 ounces total.

-  Mine production at Grasberg is estimated to be 1.6 million ounces in the first half of the year…it's then expected to fall to 300,000 ounces the second half of the year as very low grade material is moved out of the mine.

-  Kyrgyzstan mine production was reported today as 15% lower in the first four months of the year compared to 2006.  While not a top 20 producing country, lower production than what was expected is still important as it aggregates across more and more producing countries.

-  Rumblings continue of a strike at Peru's largest mine, Yanacocha, in the next week.

-  South African mining companies and labor unions have entered their first volleys of wage increase expectations this week as the two head for a showdown in the next three weeks.

-  Goldcorp, AngloGold and Newmont all revised 2007 production downward in the first few months of the year.

-  Alaskan courts have rejected a dumping plan for the Kensington Mine in the state.  With a number of large mining projects expected to come online in Alaska in the 2009-2011 period, this decision potentially put some of these new project timelines in jeopardy.

 

Blanchard and Company, Inc. is the largest and most respected retailer of American rare coins and precious metals in the United States, serving more than 450,000 people with expert consultation and assistance in the acquisition of American numismatic rarities and gold, silver and platinum bullion. The Blanchard Economic Research Unit is a key source of precious metals market analysis and continues to be an important resource for financial and consumer media throughout the United States. Blanchard and its predecessor companies have called the New Orleans area home for more than 30 years. For more information about the company, visit www.BlanchardGold.com or call the company toll free at 1-800-880-4653.


-- Posted Wednesday, 23 May 2007 | Digg This Article




 



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