EDITOR: | June 24th, 2013

Don’t write off gold just yet — you are fighting 3,500 years of faith.

| June 24, 2013 | No Comments

ProEdgeWire-Gold-As-Money1-300x231Here’s a conundrum: the gold price is plummeting, some gold miners face difficulties — yet these very factors are setting the gold market up for what the Chinese might call “interesting times”.

The amount of gold in the world (above ground and refined) grows by something between 1% and 2% a year. What if that production falls further as gold mines close?

Well, then you have the aforementioned interesting situation. With a shortage of gold, what happens next? Will the price then have to rebound, and rebound substantially, just to encourage miners to go back into production?

As with much of what is happening economically around the world, so with gold we are in uncharted waters.

I don’t know whether gold is going to tank further (I see someone predicting $900/oz) or stabilise here and rise again. Anyone who makes a firm prediction must have a high level of confidence.

Marc Faber, the noted contrarian who edit’s the Gloom, Boom and Doom Report, made this point on television over the weekend: “Whereas gold is close to $1,300 compared to say $700 in 2008, conditions in the mining industry are horrible. The exploration companies are running out of money and industry conditions are worse than they were in 2008. So I think that a lot of supply that potentially comes to the market through new exploration will simply not be there. In emerging economies sovereign funds, central banks and individuals will continue to accumulate physical gold.”

Yes, that is a very important point. What if the Chinese, Indians and central banks (along with gold bugs in the West) simply keep on buying physical gold? What happens to the price? Can those forces suspected of forcing down gold’s price have enough firepower to prevail?

That seems to be one of the most fascinating (and so far unanswerable) questions of 2013.

There is little doubt that the yellow metal is facing a crisis of confidence — but there are ongoing suspicions that this is due mainly to concerted action being taken against gold. However, the bottom line is that many gold mining companies are going to be facing a very, very tough time. And there is more to come in terms of new reporting rules over production costs.

This is being written as Monday’s trade in Asia sees gold retreat again to around the $1,290/oz mark and Toronto-based Barrick Gold is looking at job cuts and even mine closures at its Australian operations.

First, though, here is a summary of what some believe is really happening behind the scenes.

When New York gold trading opened on April 12, 3.4 million ounces (or 110 tonnes) of June futures contracts were dumped on the market, sending the gold price plummeting. Two hours later, another 10 million ounces (300 tonnes) hit the trading screens.

One of Australia’s most astute analysts, Warwick Grigor of Canaccord Genuity, commented at the time: “This had all the hallmarks of a concerted short sale designed to break the back of the gold market. When a party dumps 15 per cent of annual world mine supply it can only be for one purpose.”

Grigor’s latest client note, out last Friday, goes on to make this point: The Fed’s quantitative easing debased the value of the US dollar. This made gold the stabilising currency. But this was not what the Federal Reserve wanted. So bullion has been attacked with full force by U.S. monetary authorities working with the investment banks. And it has achieved its aim.

“The credibility of gold as a safe haven has been blown apart and it is now behaving like a commodity, open to manipulation in futures markets notwithstanding a strong physical market,’ writes Grigor. “Confidence in the objectivity of markets has been a major casualty. Trust has been shattered.”

And the effects are now being seen.

London’s The Sunday Times reports that “global gold miners face a wave of big losses, mine closures and chief executive dismissals”.

And Monday’s edition of The Financial Times notes that gold miners will be under pressure to write down assets now the Ben Bernanke has flagged a tapering of QE. It was QE that supported global equity and with it the price of gold, the newspaper added.

If all this was not bad enough, within the next two months the World Gold Council (WGC) is to release a new standard for reporting mining costs in producing the yellow metal.

Until now, the industry has used the cash-cost method — which has not included capital spending, administrative costs, royalties, exploration costs and site rehabilitation costs (among others).

The WGC’s new all-in cost standard will make it clear that many gold miners have in reality far higher costs per ounce that they have hitherto let on. This will make investment in gold stocks even less attractive.

Yet, as one Australian commentator notes, 10 years ago the industry was operating with prices at only about $400/ounce and not too many gold miners went out of business.

Interesting times, certainly. But we are likely to see the gold industry remake itself — and may be the better and stronger for it.

After all, does anyone think that a few government officials and investment bankers can just destroy a faith in gold that has lasted a long, long time. In fact, gold may have been mined for about 7,000 years and gold coinage became commonplace more than 2,000 years ago — and England’s first gold sovereign was minted in 1489.


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