The Pulse: Why gold is not failing; Nod for Tanzania RE project; Egypt worries
How do you reconcile Japan’s move to effectively, over a short period of time, inject the yen equivalent of $75 billion a month into the financial system with a prediction that gold will collapse to $1375/oz, or even lower, by the end of 2013?
The short answer is: you cannot. Over just one year, the Bank of Japan’s plan together with the Federal Reserve’s monthly $85 billion will mean that the global system will receive a sugar hit of close to $2 trillion. In just 12 months!
Look, I’ve been following gold since 1988 and watched every move upwards from 2002. If only I had a nickel for every forecast since 2002 of a collapse in the gold price! So yet another such gloom and doom scenario is easily brushed away.
Oh, it’s not just Japan that will keep printing money. London’s The Daily Telegraph reports that Columbia University’s Michael Woodford — the paper describes him as “the world’s most closely followed monetary theorist” — believes that, worldwide, quantitative easing is here to stay. He makes the point that no one can stop; the last time they tried, when Japan decided to reverse the huge monetary injection that occurred between 2001 and 2006 by turning off the money spigot, it ended in tears; the retraction of stimulus pushed Japan into a deflationary nightmare, one that it is only now just trying to get out of.
Japan is now about to double its monetary base in one of the most dazzling manners. And the Federal Reserve, European Central Bank et al know that if they do stop the liquidity, the global economy will tumble. Hence inflation will eventually rear its head — and everyone will want gold again as a hedge.
The $1375/oz or worse scenario came out of Societe Generale last week, and caused the expected stir among the gold types.
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And a quick retort from Sprott Asset Management in Toronto. David Franklin and David Baker issued a hard-hitting response, arguing that the French analysts had made a common mistake: they viewed gold as a commodity rather than as a currency. “Gold doesn’t really work as a commodity because it doesn’t get consumed as one,” they write. “The vast majority of gold mined throughout history remains in existence today.” Yes, of course, but always worth repeating.
With all this money printing, gold will continue to be the one sure store of value. The world cannot produce more than about 3,000 tonnes a year, and that goal is getting harder to maintain as mines become exhausted and grades drop, with new discoveries not replacing what is being mined. China alone is consuming around a third of world mine production.
Gold at $1375 would mean many high cost mines closing, making the gold availability even scarcer. It doesn’t make sense to argue that gold would stay down if in extreme short supply.
RARE EARTHS: The resource upgrade at the Ngualla rare earth deposit in Tanzania has drawn a reasonably positive comment from Roger Bade at London broker Whitman Howard. The increase by Peak Resources (ASX:PEK) from 8.2 million tonnes grading 4.35% REO to 21.6 million tonnes at 4.54% is significant because 86% of the resource is in the measured category. “This is important as the previous resource supported .. a $400 million, 25-year mine and mill producing 10,000 tonnes a year of REO using simple sulphuric acid leaching,’ said Bade. This resource upgrade, coupled with the recent encouraging metallurgical work, means that higher production rates can be modelled while at the same time offering lower cash costs and, hence, higher returns, he added.
EMERGING MARKETS/PHOSPHATE: MENA, otherwise known as Middle East-North Africa, is a critical region geopolitically. But it is also critical for security of phosphate supplies, with the arc from Morocco to Syria providing around a quarter of this fertilizer feedstock. So we keep an eye on any worrying developments.
Here’s one: According to Agence France Presse, there are fears in Egypt that the terms of the $4.8 billion loan from the International Monetary Fund that require the government in Cairo to rein in its gaping budget deficit, will cause further suffering among the people. Prices are already rising, and many blame the IMF as the government has been forced to reduce subsidies on vital elements such as fuel and bread. Cooking gas rose 60% last week. Flour and sugar are now 50% more expensive than last year.
Remember, it was rising fuel costs that sparked troubles in Tunisia which in turn set off the “Arab Spring”.
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