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The gold bears got tossed a bone last week, when the World Gold Council reported that total gold demand dropped 34% in the third quarter from a year earlier. To be sure, total identifiable gold demand was up 15% from the abysmal second quarter, but the bears seized on the news as a sign that gold has one foot on the Slip ‘n’ Slide of Doom.
Yeah, sure. That’s why gold prices just hit a new high.
Let me tell you about six things that gold bears aren’t considering. Some is just new information on basics you already know. But some of this news could rattle your cage.
Fact #1: We’re at Peak Gold! Global gold production is in decline and has been for years. Aaron Regent, President of Barrick Gold, the world’s top producer of the yellow metal, recently told the press that global output has been falling by roughly 1 million ounces a year since the start of the decade. “Production peaked around 2000 and it has been in decline ever since, and we forecast that decline to continue. It is increasingly difficult to find ore,” Regent said.
Making matters worse, ore quality is declining — as I told you last week, ore grades have fallen from around 12 grams per tonne in 1950 to nearer 3 grams in the U.S., Canada, and Australia. So even if miners mine more ore, they’ll get less gold.
Barrick is putting its money where its mouth is — the company bought back 1 million troy ounces of its remaining gold hedge book in October and has 1.9 million ounces of its hedge book left which it expects to close by September 2010.
And AngloGold Ashanti — which has a 4 million-ounce hedge book — said it plans to end its hedge book by 2015, but could accelerate that.
Fact #2: South Africa’s Gold Reserves Downgraded by 90%! Gold output fell again last year in South Africa — by 14% — as companies were forced to dig ever deeper — at greater cost — to replace depleted reserves. Now, a paper published in the South African Journal of Science by Chris Hartnady, research and technical director of Cape Town earth sciences consultancy Umvoto Africa, reveals that South Africa’s Witwatersrand goldfields are around 95% exhausted, and anticipates that production rates should fall permanently below 100 tonnes a year within the coming decade.
In its day, the Witwatersrand was the biggest known gold field in the world. Production peaked at around 1,000 tonnes in 1970 and has declined ever since.
Hartnady reports that the South African "residual gold reserve" is only 2,948 tonnes, a little less than three times the amount of gold that was produced in 1970. This means South Africa’s gold reserves are less than half of the 6,000 tonnes currently estimated by the United States Geological Survey.
According to Hartnaday: “The glory days of South African gold mining appear to have arrived finally at an ignominious end.”
That’s bad news for South African miners, but good news for gold bulls. A lot of potential future supply has been removed from the market.
Fact #3: Central Bank Purchases of Gold Are Increasing. In 2009, we saw central banks become net purchasers of gold. And India bought 200 tonnes of gold from the International Monetary Fund in a deal that is looking very smart. Other central banks have also been bellying up to the golden bar. The purchase will lift India’s share of gold holdings as a percentage of its foreign reserves from near 4% to about 6%.
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| Central banks are increasing their gold reserves. |
You know who must be thinking about that? China — gold is just 1.9% of its $2.3 trillion worth of foreign reserves. If China were to follow India’s example, it would need to buy more than 2,000 tonnes of gold! That’s about as much gold as is produced by the world’s mines in a year.
And this week, Russia’s central bank released data showing its gold stocks increased by 500,000 ounces (15.6 tonnes). This comes on the heels of the announcement by Russia’s central bank last week that it plans to buy a total of 965,000 ounces (30 tonnes) by the end of the year. Other central banks are itching to convert those depreciating dollars into gold, the store of eternal value. And that’s bullish for the price of the yellow metal.
Fact #4: By Historical Standards, Gold Is Cheap. I’ve explained this a number of ways in previous issues, so here’s another example. In the 1970s, the gold held by the U.S. was enough to back the U.S. dollar. The United States owns nearly 263 million troy ounces of gold while the Fed’s monetary base is $1.7 trillion. According to Dylan Grice, an analyst with Societe Generale, if we took all the dollars in circulation and had them backed by gold today, gold would have to cost $6,300 an ounce.
This ratio is only going to get worse. The Fed can and does print new dollar bills like wallpaper. The Fed has bought $300 billion of Treasuries and is on pace to buy $1.45 trillion of government-backed mortgage debt. This adds to Uncle Sam’s financial problems … and other countries are also in bad shape financially.
Fact #5: Government Debt Is Exploding. Thanks to the bank bailouts and $787 billion stimulus package, the U.S. government debt could approach 100% of gross domestic product (GDP) in the next 12 months. The budget deficit hit $1.4 trillion in 2009. It looks to go higher in 2010, and we could see budget deficits of well over a trillion dollars for years to come.
But it’s not just the U.S. government that is bailing out America’s financial sector. Around the world, governments have bailed out banks and flagging economies. As a result, rescue packages over the past year have merely transferred private liabilities onto government shoulders, creating a fresh set of problems. Debt levels, public or private, are too high as a share of GDP. In Europe as well, public debt could exceed 100% of GDP in a few years. This chart from Societe Generale gives a graphic illustration of the problem.
Meanwhile, in emerging markets, we have seen more than $93 billion in sovereign debt issuance so far this year — a new record.
And don’t expect governments to back off on the spending throttle anytime soon. That would just send the weak economies of the world skidding into recession, lowering revenues and causing debts to rise anyway. It’s a Catch-22 situation that doesn’t have a resolution — at least not yet anyway.
Fact #6: All Major Currencies Are Falling Against Gold. The explosion of debt around the world is hacking away at faith in all paper currencies. It’s not just the U.S. dollar that is going lower against gold — all major currencies are going lower versus gold. Here’s a chart from U.S. Global Funds that illustrates that …
How can all currencies be going down against gold? Because gold is finally coming into its own as the world’s true reserve currency. It’s where investors, central banks and speculators alike rush when they start to lose faith in paper currencies. And that’s happening … right about now.
Ways to Play This Move
I can’t emphasize enough the importance of owning at least some physical gold and silver for worst-case scenarios. Beyond that, the miners in the Market Vectors Gold Miners ETF (GDX) are nicely leveraged to the underlying price of the yellow metal, and as gold goes high, they should go higher. I recommend you wait for a dip and then buy. And do your own due diligence before you pull the trigger.
Yours for trading profits,
Sean
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{ 2 comments… read them below or add one }
Love the physical gold recommendation… GLD doesn’t have the gold.
I agree with Andrew. Have it in your hand. Gold will never fail you long term!