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Before diving into the Weekly Recap, we present an abbreviated version of
our Comparative Analysis Table for your reference and ours. It compares
the operations of 12 of the top gold producers as measured by market cap.
It is a sampling of our in-house analysis, customized to capture key metrics
of the gold mining business. The complete table, available to
subscribers, encompasses a long list of producers and a mountain of
painstaking data gathering that we keep updated on a monthly, quarterly, and
annual basis as the information is released.
(Click the image to enlarge)
$217 Gold Premium in Vietnam? I can beat that!
I received a real world education on inflation and the benefits of owning
physical gold while living in Argentina for 9 months back in 2011.
This disheartening inflation experience came as a result of my habit of
frequently dining-out at a particular small steak house, called Don
Abel’s. I would go to Don’s at least once a week, always
dragging someone with me because my favorite order was a dish for two.
The Lomo Maria consisted of 4 medium sized beef tenderloins
smothered in a chive cream sauce, a side salad, and a plate of fries. With a
bottle of good Malbec, the bill for this meal was 110 pesos, which officially
at that time, was about US$24. That’s roughly 4.6 pesos to the dollar.
During my stay, inflation, as it has so many times in the past, reared its
wealth devouring head in the Argentine economy. In a vain attempt to prevent
its citizens from abandoning the peso, and draining the central banks dollars
reserves in the process, the President of Argentina, Cristina Kirchner,
suspended the trade of pesos for dollars.
This affected many Argentines I know personally because their wages were
paid in dollars.
Coincidently, soon after the dollar trade suspension, the price for my Lomo
Maria increased 20 pesos and continued to rise steadily for the duration
of my stay. The last price I paid for this feast was 165 pesos (US$37), an
increase in price of 50% over 9 months.
Being familiar with and interested in the monetary history of Argentina, I
was cognizant of the loss in wealth headed our way. As such, I educated my
friends about the benefits of gold and urged them to buy some to protect
their purchasing power.
Behind a closed door in the owner’s back office of an Argentinian currency
exchange house was where one could buy gold. The reason for such secrecy was
because Argentinians were not allowed to exchange pesos for US dollars and of
course, you need dollars to buy gold.
For an Argentine to buy gold, they first have to exchange pesos for
dollars at the black market rate. At that time, it was approximately 6-to-1,
pesos to the dollar. Then, after exchanging pesos for dollars, one still had
to pay the premium to buy gold, which was an extra US$100 per ounce.
At the time my friend decided to buy gold, the price was about US$1,700.
If we include the premium, it cost him US$1,800 at the 6-to-1 exchange
rate. In black market terms, this fiasco cost him 10,800 pesos per
ounce. If he was allowed to purchase gold legally, it would have only cost
8,100 pesos. That’s a premium of 25% or US$600!
Thus, although I am sympathetic to the Vietnamese having to pay a US$217
premium recently, I really feel for my Argentinian friends who face worsening
currency controls, price inflation, and expensive options to protect their
purchasing power!
Let’s Pull an Argentina on Iran
I highlighted a news story this week in the Gold Miners News Corner
titled New Sanctions Imposed on Iran to Halt Gold Trading. Let’s
steer clear of the political aspect of the story and just focus on the
monetary part.
Earlier, the US sanctioned Iran by not allowing them to use the
conventional banking system as a payment method for trade, mainly for the
sale of oil and gas, priced in US dollars. This sanction is effectively a
currency control. To get around it, Iran turned to gold, trading its oil and
gas for gold with Turkey.
Then, this past Monday, the US, a little perturbed about the gold trade
work-a-round, imposed further sanctions and prohibited anyone to sell or
transfer gold to Iran. Foreign bullion dealers who don’t adhere to the
restriction, risk expulsion from the US precious metal market, among other
penalties.
Although the Argentinian currency control has different dynamics than the
US imposed sanctions on Iran, my point is that when paper fails, people and
governments turn to gold.
Russia and Asia are Turning to Gold
To further highlight this theme, over the past couple of weeks Russia has
announced plans to establish a physical gold exchange by the end of this year
and Singapore is offering the world’s first peer-to-peer bullion trading
system, in a bid to become a regional gold trading hub.
In addition, UBS, Switzerland’s biggest bank, has leased vault space in
Singapore to accommodate the surging storage demands coming from its wealthy
Asian clients. UBS joins fellow big banks, Deutsche Bank and JP Morgan, in
offering gold storage services.
This storage boom emphasizes the rapidly diminishing gold inventories held
at the COMEX. As an example, US based ETF gold holdings are down an astonishing
28% year to date and large speculators on the exchange are holding one of the
largest short positions ever. The speculation is that this gold is flooding
into Asian hands and vaults.
Apparently, a weak gold price continues to fuel and not discourage
physical demand.
Considering this week’s gold storage developments along with previous
weeks comments about Russian, Chinese, Turkish and Kazakh central banks all
increasing their gold purchases, the feeling that gold is starting to become
the focus over its paper counterpart should be evident.
Geopolitically significant countries, like Russia and China, continue to
take proactive steps to increase their gold holdings and influence in gold
markets, reducing their historical subjection to the west in this important
monetary arena.
So With All the Gold Bull Talk, Here is This Week’s Gold Price
Recap
Gold opened at US$1,245 in New York Monday, after rallying dramatically in
last Friday’s afternoon trading from $1,200 to $1,232. The price
currently sits at US$1,215.60 as I submit this week’s recap, after taking an
approximate 3% drop in response to the non-farm payroll report.
It may be of importance to mention here that for the first time since the
2008 gold correction, the largest holders of COMEX gold inventory, bullion
banks JP Morgan, HSBC, and Scotia bank, are now net long gold. Of further
note, these banks have had a remarkable track record of positioning
themselves to profit just ahead of major gold price reversals.
This week’s gold price suffers once again from its familiar trend and is
down for the week. The graph is below.
The Gold Miners
Of importance this week in regards to the gold miners, was more write-down
news. Several analysts anticipate that Barrick Gold will take a $4.5-$10
billion dollar write-down in Q2 stemming significantly from major cost
overruns and project complications at their Pascua-Lama project which
straddles the border between Argentina and Chile.
The HUI, as you can see in the chart below, was crushed. Starting at
231.12 on July 1st, it is currently at 213.12 as I submit, an 8% smash.
Gold Creates a Currency Whipsaw for Some Miners
My final comment has to do with recent news stories coming from Australia
depicting the dire state of their mining sector. As an example, I commented
on the US$6 billion write-down by gold major Newcrest Mining a couple of
weeks back.
Now, in contrast to this theme, I want to draw your attention to the chart
below that shows the Australian dollar (AUD) versus the US dollar (USD).
You will notice that since May, the AUD has plummeted in relation to the
USD. As a reminder, mined gold is primarily bought and sold in USD.
Therefore, Australian gold miners receive USD for their gold production.
However, they pay a significant amount of their costs in the local, and
now much cheaper, AUD. Thus, for Australian gold miners, a weaker AUD
should translate into higher profitability for as long as the lower exchange
rate persists.
It will also encourage US dollars to flow into the shares of Australian
gold miners because they are now relatively cheaper than their counterparts
in other countries.
Just something to keep in mind.
That’s it for now. Hope you enjoyed this week’s recap. If you want, check
out our homepage: www.goldminersreport.com and sign-up for a free copy of our
June newsletter.
Best Regards,
By RJ Wilcox
www.goldminersreport.com
jeremy@goldminersreport.com
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