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QE Lessons: Fiat Grows On Trees - Gold Does Not

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Published : September 18th, 2012
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Today’s AM fix was USD 1,756.75, EUR 1,344.31 and GBP 1,081.81 per ounce.
Yesterday’s AM fix was USD 1,767.25, EUR 1,349.36 and GBP 1,089.42 per ounce.

Silver is trading at $34.16/oz, €26.24/oz and £21.10/oz. Platinum is trading at $1,662.00/oz, palladium at $673.60/oz and rhodium at $1,350/oz.

Gold fell $14.00 or 0.79% in New York yesterday and closed at $1,757.60. Silver dropped to as low as $33.806 before it rebounded back higher, and finished trading with a loss of 1.76%.

Cross Currency Table – (Bloomberg)

Gold inched lower in quiet volatile trade on Tuesday after equity and commodity markets pulled back overnight and investors booked profits from the recent rally created by the US Fed’s QE3 launch.

However the current monetary climate of central bank money printing will cause inflation and this is increasing the appeal of gold for investors.

Platinum also fell, as news announced about Japanese closures of car plants in China due to the escalating territorial dispute between the two nations.

The China Japanese tensions have been simmering for some time and this largely unacknowledged geopolitical risk is a real risk to markets.

The tensions have led to protests and attacks on Japanese companies such as car makers Toyota Motor Corp and Honda Motor, forcing them to cease operations and there have been hints of trade sanctions.

Platinum is used as an auto catalyst and is necessary part for production in the automotive industry.

Central banks are pursuing quantitative easing, in effect, printing and electronically creating money which is extremely easy for central bankers to do.

Conversely, gold is called a ‘precious metal’ for a reason. Gold remains very precious, finite and very rare. All the gold in the world if made into one large gold bar (0.9999 pure) would be 21 metres cubed and would fit on the centre court of Wimbledon.

Gold needs to be extracted from the bowels of the earth in a gold mine. It needs to be found and it needs much capital and technology and specialist labour to get small amounts of gold out of the ground.

Lessons of QE: Printing Money Is Easy, Mining Gold Is Not

The process of development can take a very long time and many gold mining companies become insolvent and are not successful in producing even one ounce of gold. When companies are successful, it is often only many years later that one ounce of gold is produced.

This difficult task means that while U.S. money supply in the form of M2 has risen by 30% since June 2008, gold production has fallen by 1.7%, despite rising gold prices.

While the concept of “peak oil” has been widely debated in markets, that of “peak gold” is less well known. This will change in the coming years.

Cash Costs Are Rising for Gold Miners as Grades Are Declining

Rising cash costs have been fuelled by declining ore grades and higher raw material costs – especially with regard to higher oil and energy costs. Mining remains a very energy intensive business.

Ore grades have declined 8% annually, while cash costs have had a 14.1% CAGR since 2005 for senior producers.

Cost inflation has been driven by fuel, labour and key consumables, which have only been partially mitigated by the rising gold price.

Gold Production Stable Amid Decade-Long Price Surge

Global gold production remains at its level of the late '90s, even though prices have risen to over $1,700 per ounce from $252 per ounce in 1999 or roughly 16% per annum in dollar terms.

Only Rio Tinto and Ivanhoe's Oyu Tolgoi mine in Mongolia stand out as a major new gold mines expected to begin production in the near future.

Bulls note that global production has remained impervious to the price of gold. This may continue to be the case due to the increasingly obvious geological constraints being seen in the gold mining sector.

Resource nationalism is beginning to become an important factor again. This will also almost certainly affect supply at a time when demand is increasing from people throughout the world and many hedge funds, pension funds and central banks’ due to geopolitical, systemic and monetary risks.

The lesson of QE is that fiat currencies increasingly grow on trees. Gold does not.

This is the primary reason that gold will continue to protect investors in the coming months.

Charts and data courtesy of Bloomberg Industries Kenneth Hoffman and the Precious Metal Mining Team

(Bloomberg) -- Gold ETP Holdings Climb to Record for 10th Straight Session
Gold holdings in exchange-traded products backed by the metal rose to a record for the 10th straight session.

The amount increased 2.69 metric tons, or 0.1 percent, to 2,506.29 tons, data tracked by Bloomberg showed.

(Bloomberg) -- South Africa’s ANC, Unions Blame Mine Owners for Violence
South Africa’s ruling party and biggest labor group blamed mining companies for labor unrest that has crippled the world’s biggest platinum industry, saying they failed to pay their employees enough.

Workers at shafts owned by Lonmin Plc, Anglo American Platinum Ltd. and Gold Fields Ltd. have embarked on a series of illegal strikes over the past month. At least 45 people have died at Lonmin’s Marikana mine, 34 of them killed by police on Aug. 16 when they opened fire on protesters.

“The socio-economic conditions of the mine workers at Marikana and other areas are part of what led to the human tragedy that continues to haunt our nation,” the African National Congress’ National Executive Committee, the party’s top leadership structure, said in an e-mailed statement today. “Mining remains the bedrock of the South African economy and yet the abject poverty and squalor surrounding mining areas remains a matter of deep concern.”

The ANC has ruled South Africa since all-race elections in 1994 in alliance with the Congress of South African Trade Unions and the South African Communist Party. While the striking workers have accused the Cosatu-affiliated National Union of Mineworkers of failing to represent their interests, the rival Association of Mineworkers and Construction Union has gained recruits.

Lonmin has blamed union rivalry for igniting tension at Marikana.

Lost Revenue
The strikes at gold and platinum mines this year have cost the economy 4.5 billion rand ($547 million), President Jacob Zuma, who is also leader of the ANC, told unionists in Johannesburg today. The government has lost 3.1 billion rand in revenue as a result of the labor unrest, he said.

South Africa is the world’s biggest producer of platinum , chrome and manganese and mines gold and coal. Anglo American Platinum Ltd., AngloGold Ashanti Ltd. and Xstrata Plc operate in the country.

“Workers in the mines are rising against their continued exploitation by employers,” Cosatu President S’Dumo Dlamini said in an e-mailed copy of a speech he was to deliver today at the federation’s annual congress in Johannesburg. “The problem in Marikana is not rivalry between unions nor can it simply be put as being a widening gap between leaders and members.”

Dlamini accused a “right-wing clique” of seeking to destroy the alliance and undermine its efforts to redistribute wealth and create jobs.

Julius Malema
“We need a response that will draw everybody’s attention and energy on the total restructuring of our economy, so that it can be placed on a labor-absorbing trajectory,” he said. “We need a response that will focus the country on the distribution of wealth and nationalization of the commanding heights of the economy, and as well as for effective land redistribution.”

Cosatu has blamed Julius Malema, the youth leader who was expelled from the ANC this year, for inciting some of the illegal strikes. Police today prevented Malema, 31, from entering a stadium near Marikana where striking workers had gathered. That comes two days after the government deployed army personnel to assist police in seizing weapons from striking miners in Marikana.

(Bloomberg) -- Roads Barricaded by Protesters Near Lonmin
Trenches were dug and large rocks were laid down on the dirt roads leading into the shantytown bordering Lonmin Plc’s Marikana mine after South African police raided the area and confiscated spears and knives.

The barriers were put up less than a kilometer (0.6 miles) from Wonderkop hill, where 34 people were shot and killed by South African police on Aug. 16.

(Bloomberg) -- Rhodium Climbs to Highest Since May on Mine Production Concern
Rhodium climbed to the highest price in 16 weeks on concern unrest in South Africa’s mining industry will cut production and as the Federal Reserve said it will expand monetary stimulus.

Strikes over pay and working conditions in South Africa, the biggest rhodium producer, shut down operations at Anglo American Platinum Ltd., Impala Platinum Holdings Ltd., Lonmin Plc and Gold Fields Ltd. Other precious metals jumped to the highest levels since at least March last week after the Fed said it will buy more debt to bolster the labor market.

Rhodium, usually found alongside platinum and palladium, and mainly used in catalytic converters, fell 87 percent since reaching a record $10,100 an ounce in 2008 as carmakers cut the amount used in each autocatalyst and increased recycling to reduce costs. The surplus will drop 62 percent to 52,900 ounces this year, the least since 2008, Morgan Stanley estimates.

“The riots in South Africa led to an increase,” Hanau, Germany-based trader Heraeus Metallhandelsgesellschaft mbH said in a report e-mailed today.

Rhodium gained a third day, climbing 4 percent to $1,300 by 11:12 a.m. in London. That’s the highest since May 28, according to London-based Johnson Matthey Plc, the maker of one in three autocatalysts. Prices fell to $1,100 last month, the lowest since January 2009, and are down 7.1 percent this year.

South Africa deployed about 150 army personnel to help police quell violent protests at Lonmin’s Marikana mine as the government pledged to crack down on illegal strikes. The month- long standoff between police and thousands of strikers at the Lonmin mine has left at least 45 people dead, including 34 miners shot by police on Aug. 16.

The Fed said Sept. 13 it will buy $40 billion a month of mortgage debt to bolster the labor market and probably hold the federal funds rate near zero until at least the middle of 2015.

Rhodium is used in canisters with honeycomb-like surfaces that transform car emissions. Global sales of cars and light commercial vehicles will rise 5.5 percent to a record 81.1 million units this year, according to LMC Automotive Ltd., a research company in Oxford, England.

(Bloomberg) -- Gold-Borrowing Costs Decline to Lowest in Six Months in London
The cost of borrowing gold fell to a six-month low in London at a time when prices neared the highest since February and holdings in bullion-backed exchange- traded products climbed to a record.

The three-month lease rate fell to minus 0.0559 percent yesterday, the lowest level since March 14, from minus 0.0547 percent on Sept. 14, according to data compiled by Bloomberg. The rate is derived by subtracting the gold forward offered rate from the London Interbank Offered Rate. A negative reading means banks have to pay to have their gold deposits lent.

“Plentiful availability of metal for leasing usually implies low lease rates,” according to the London Bullion Market Association’s guide to precious metals markets on its website. “A sudden increase in the supply of gold liquidity to the market will push lease rates down.”

The six-month lease rate for the metal increased to 0.1669 percent yesterday from 0.1662 percent on Sept. 14, when it fell to the lowest level since March 15.

“Lease rates are an indication only of bank-to-bank borrowing charges,” analysts at Hyderabad, India-based Karvy Comtrade Ltd. wrote yesterday in a report. “The degree to which lease rates may be displayed as negative, would suggest the degree to which there is a lack of demand to borrow the metal.”

For breaking news and commentary on financial markets and gold, follow us on Twitter.


Why Gold May Hit $2000 by Christmas - Bloomberg

Gold slips after commodities sell-off, off seven-month high - Reuters

South Africa: $563 Million lost in gold, platinum production – Business Week

Ghost warehouse stocks haunt China's steel sector - Reuters


Global Crisis and Long Slump Catching Up With China – The Telegraph

All Signs Pointing to Gold - GoldSeek

Silver Bull SeasonalsSilverSeek

Mark O’Byrne




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Mark O'Byrne is executive and research director of which he founded in 2003. GoldCore have become one of the leading gold brokers in the world and have over 4,000 clients in over 40 countries and with over $200 million in assets under management and storage.We offer mass affluent, HNW, UHNW and institutional investors including family offices, gold, silver, platinum and palladium bullion in London, Zurich, Singapore, Hong Kong, Dubai and Perth.
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