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A Yellow Brick Wall
by Professor von Braun
June 26th, 2000
In case you hadn't noticed, the gold market seems to have gone very quiet over the last few weeks. Volume is light, the price range is small and apart from the gold mining industry continuing its disappearing act, not much is happening.
What has happened in the oil industry over the past year and a half may contain some clues as to how gold's twenty-year bear market will end. During the Asian crisis of 1997 there was an over supply of oil due to falling demand. This over supply resulted in falling prices that bottomed in early 1999. Supply was reduced and then Asia began to recover, demand picked up and $10 per barrel became $30. This coupled with the fact that US refineries are at full capacity, along with some new environmental constraints for a clean burning fuel, has seen gas prices in the US rise to $3.00 per gallon at some locations. Lets not forget the impact of record sales of large V8 powered SUV's either.
A threefold increase in a short period of time for a commodity is not unusual, providing of course that one has a memory and can recall the period from 1971 through to 1980 when the commodities index rose rather rapidly. 1942 through to early 1951 was another period when commodities increased rather quickly.
Falling gold prices, especially
since February 1996, have taken place during a period when demand
has exceeded supply year after year by a large amount. Depending
of course upon who's figures one uses, but 1300 tonnes is a reasonable
assessment. This shortfall has been made up by
a) outright central bank selling,
b) covert central bank selling, and
c) gold leased and sold into the market by short sellers, including mining companies.
Reported mine supply has lessened. New mining projects are on hold, production is slowing down and the supply of leased gold is lessening, although according to last year's Washington Agreement, it should have stopped completely.
At some stage the supply/demand principle will reassert itself and the "paper" gold market will end. Even the supply numbers published by the World Gold Council are themselves suspicious. How can mine supply numbers be deemed to be correct when a lot of gold produced at present is already spoken for. Producers that have borrowed gold and sold forward still have to deliver back the gold they borrowed. So why include it in supply numbers?
The consolidation going on in the gold mining industry seems more like acts of desperation rather than an industry positioning itself for increased profits. It is difficult to see how Placer Domes acquisition of Getchell could be described as beneficial to shareholders, especially since they closed the mine down. Newmont's acquisition of Battle Mountain Gold seems more like a lifeline being thrown than an act of consolidation.
I have heard of mining companies having to respond to shareholder pressure as the cause of some of these "consolidations". While many shareholders are obviously frustrated by their investments, buying more uneconomical producing mines won't increase shareholder value. On the contrary!
While we may be witnessing the beginnings of a bull market for commodities, the bear market for metals has not ended yet. The activity that has depressed the gold price over the last few years has to end and it will not end until the supply that has fueled it dries up. The market makers in this market have had it their own way for some time and they will not give up without a fight. How they will explain to the European Central Bank that a large percentage of their leased gold is not coming back will be interesting.
This is more of a time to be looking ahead and steering clear of hedged producers. The upside potential is in companies that are unhedged (along with being able to survive at these price levels) and in companies that have projects on hold, but able to be started when the gold price starts to move. Location is also important. Some countries won't be able to resist the temptation to nationalize foreign owned mining projects should the gold price start to move. Alternatively buying physical metal at these price levels and taking delivery is still a good strategy. After all somebody has been buying the metal at these levels.
Meanwhile back in the world of virtual reality, it seems that virtual profits are not enough to support Amazon.com as its share price continues to decline. Now if Amazon.com had been buying oil wells in 1998 perhaps it would have faired slightly better.
Currencies need to be watched closely over the next few weeks as the Euro looks very sick, which won't help the Swiss. The Swiss still have about 120 tonnes of gold to sell, if they stick to their announced disposal program of 160 tonnes by September. A falling Euro may see this "disposal" speeded up.
The Prof can be contacted by email at email@example.com
Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.
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