You’d have to forgive a miner for despairing at stock markets. Here is the rest of the world saluting gold’s historic ‘safe haven’ status by piling into the metal, taking it to the highest it has been for months. In the US it actually went through $730, challenging last year’s peak. As the world’s prime ’anxiety asset’ gold is being bought in every form, from jewellery to gold bars, funds to gold certificates. Yet what is happening to gold mining shares — merely some very, very picky buying.
Okay, the mines’ finance directors are much happier now gold sales will bring in more money to cover the rising costs. Those are currently running on average a profit-squeezing 20% up on a year ago. But the guys are much less happy to be so unloved by investors. For a start it makes raising money for exploration and production much more difficult.
Most mining shares around the world are stuck deep in the doldrums. Isabel says her South African friends are totally hacked off. Well, that’s putting it a lot less bluntly than they do. It’s a tight knit community there. Most people have friends in mining, many of their local investments are in the sector and the South African mining stocks have been among the worst hit.
World gold shares are down nearly 30%
Our stock broker tell us that world gold mining shares are on average down nearly 30% on last year’s highs. Not a single one of the bigger companies are worth what they were at the peak last year.
The brokers say that investors are only going for the top rock-solid stories even this week, which is apparently unusual when the gold price is rising. Normally that kind of market creates an appetite for risk on the grounds that this is where the most upside lies. They blame the fact that investors are probably feeling full up to the gills with risk. All that can be said about this is that it is totally understandable — especially when you see the queues outside UK bank Northern Rock.
Best performer is the largest gold producer of them all, Canada’s $32 billion Barrick. It is only a touch off its 2006 high, way ahead of the rest. Two Australians come next, both of whom have just announced serious profit enhancing moves. They are changing the way they sell their gold in order to get higher exposure to its price increases. These companies are the relatively unknown Lihir, which has also just ended a very damaging strike at its mammoth Papua New Guinea mine, and Australia’s top gold producer, Newcrest.
Behind the dismal stock market performance is the fact that a lot of equity investment funds have decided to treat the mining shares sector as a proxy for world economic growth and hence wealth. The problem is that post the credit crisis funds are pretty battered and aren’t sure what world growth prospects are. OK, China is growing at 11.2% this year, and India at 9.5% they are saying. But what about next year?
All the turmoil in financial markets has obscured the view of what could happen to world’s biggest importers especially the US. Will the emerging economies in Asia, the Middle East and South America be able to make up for a US recession?
The fun of chasing potential bid victims is suspended
Plus, the other investment angle on the mining shares is the fun of chasing potential bid victims. That has been suspended while markets decide what financing money, if any, can be got from the banks. So, investors have become cautious.
This, anyway, sleuthing through the market reports, is our view on what is happening. That very well-connected research consultancy, GFMS, for one, says there has been good news aplenty and “scant evidence of long-term investors losing confidence.” Looking at markets in the first half of the year it did notice, however, that short-term speculators were being forced out by the nasties happening in financial markets.
But it is pretty sure the speculators will be back. The gist of its views is that all the external determinants are turning positive for gold — rising crude prices, continued dollar weakness, concerns over macro-economy and geopolitical tensions. This is sure to attract speculative interest, it says.
While the World Gold Council put out a pretty good summary of the demand position on gold. It’s the Council’s job to persuade us all to buy more gold, and they seem to be succeeding. In dollar terms, it says, identifiable demand for gold in the first half of 2007 was more than double the level of just four years ago. It was up 124%.
Demand for gold jewellery doubled over the same period. In tonnage terms, total identifiable demand for gold in the second quarter was 19% higher than a year earlier and that for jewellery was 29% higher.
But gold has a cracking good tale
Right now Asia has plenty of money and is on a spree. Jewellery fabrication has grown by a robust 240 tonnes or 23% year-on-year. India accounted for more than 70% of the rise in jewellery demand while East Asia and West Asia also saw sizeable gains.
Other bullish points are on the last few months’ supply. Low central bank sales, although this could increase in the second half, thinks GFMS, and low scrap supplies being the most important.
No comfort for the miners, but what a cracking good tale gold is telling. No wonder the GFMS’s executive chairman Philip Klapwijk was prepared to risk putting his neck on the line as gold went through $700, “I don’t think it will be a problem sustaining these elevated levels.”
Keep chasing,
Erin and Isabel
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