3.03%
Canadian gold price = $900
Friday, October 31, 2008
Thursday, October 30, 2008
Tuesday, October 28, 2008
(some) macro indicators
1) The 3 month libor rate is now down to 3.465% - it doesn't mean that lending is back to normal levels, but it is a indication that there are some baby steps with interbank lending (the recent crisis had spiked it to 4.8% from 2.8%)
2) TED Spread - this is the difference between the 3 mth libor and the 3 mth T-bill. We want the rate difference to be as narrow as possible. The lower the 3 mth libor rate then the more banks are lending to one another. The higher the 3 mth T-bill rate then less cash flowing into T-bills. What happens is the more demand for T-bills then attractive the government need to make the interest rate. The demand was so strong recently that the rates were actually negative temporarily - basically people were paying the US government for holding on to their money during this crisis period (I guess the thinking might have been that people were assuming that the US government could never go under, or would be the last in the world to go under).
Anyway, as we know, foreign money managers have been piling into the US T-bills during this crisis. However, they have to buy US dollar first (before buying T-bills), hence the gigantic spike in the US dollar and the subsequent kill off of everything else in the world (including gold and all other currencies except the Japanese Yen - more about the Japanese Yen carry trade in a second). This is why a high T-bill rate is important to us. It is currently still well below 1%, hence we are still seeing that strong US dollar.
Prior to the recent crisis, the TED Spread was around 1%. Currently, it is 2.62%. At the peak of the recent crisis the TED Spread was around 4.5%. As such, it has come down quite a bit, but that's primarily due to the improvements in the 3 mth libor rate. The T-bill rate has naturally improved also, but not nearly at the same rate. We need to see the global money managers slow down quite a bit more in moving their money into T-bills.
The Asian and European markets were relatively calm overnight. Hopefully that's a step in the right direction. The US dollar seems to have slowed down just a tiny bit this morning. Right now, it's all about stopping the bleeding being done by the US dollar (even if the US dollar doesn't pull back immediately).
3) Yen carry trade - it may have become obvious that the hedge funds and other players used the weak Japanese Yen over the past few years to fund their massive commodities purchases. With the recent market crash, and the massive commodities price decreases, it appears as if these players have had to sell equities, gold and everything else (including the kitchen sink) to cover Yen positions.
Every currency in the world have gotten slaughtered recently by the strength of the US dollar, with the exception of the Japanese Yen (which actually has killed the US dollar in terms of performance). On the surface, it makes absolutely no sense that the US and Japanese currencies are so strong, especially given that these have been the 2 lead countries in monetary injections into their respective economies (the Japanese economy and investment markets have been completely slaughtered recently). However, we already know what's driving the US dollar strength. Now it is obvious what has drive the Yen strength - carry trade.
There seems to be a bit of easing over night. Prior to the recent crisis, the Yen (per US dollar) was around 106. Remember, the lower the ratio then the stronger the Yen. It went fell all the way down to about 92 recently. Right now it is 95.265. We need to see this continue to increase. The more it increases then it likely means the less hedge funds and other players will be selling gold.
2) TED Spread - this is the difference between the 3 mth libor and the 3 mth T-bill. We want the rate difference to be as narrow as possible. The lower the 3 mth libor rate then the more banks are lending to one another. The higher the 3 mth T-bill rate then less cash flowing into T-bills. What happens is the more demand for T-bills then attractive the government need to make the interest rate. The demand was so strong recently that the rates were actually negative temporarily - basically people were paying the US government for holding on to their money during this crisis period (I guess the thinking might have been that people were assuming that the US government could never go under, or would be the last in the world to go under).
Anyway, as we know, foreign money managers have been piling into the US T-bills during this crisis. However, they have to buy US dollar first (before buying T-bills), hence the gigantic spike in the US dollar and the subsequent kill off of everything else in the world (including gold and all other currencies except the Japanese Yen - more about the Japanese Yen carry trade in a second). This is why a high T-bill rate is important to us. It is currently still well below 1%, hence we are still seeing that strong US dollar.
Prior to the recent crisis, the TED Spread was around 1%. Currently, it is 2.62%. At the peak of the recent crisis the TED Spread was around 4.5%. As such, it has come down quite a bit, but that's primarily due to the improvements in the 3 mth libor rate. The T-bill rate has naturally improved also, but not nearly at the same rate. We need to see the global money managers slow down quite a bit more in moving their money into T-bills.
The Asian and European markets were relatively calm overnight. Hopefully that's a step in the right direction. The US dollar seems to have slowed down just a tiny bit this morning. Right now, it's all about stopping the bleeding being done by the US dollar (even if the US dollar doesn't pull back immediately).
3) Yen carry trade - it may have become obvious that the hedge funds and other players used the weak Japanese Yen over the past few years to fund their massive commodities purchases. With the recent market crash, and the massive commodities price decreases, it appears as if these players have had to sell equities, gold and everything else (including the kitchen sink) to cover Yen positions.
Every currency in the world have gotten slaughtered recently by the strength of the US dollar, with the exception of the Japanese Yen (which actually has killed the US dollar in terms of performance). On the surface, it makes absolutely no sense that the US and Japanese currencies are so strong, especially given that these have been the 2 lead countries in monetary injections into their respective economies (the Japanese economy and investment markets have been completely slaughtered recently). However, we already know what's driving the US dollar strength. Now it is obvious what has drive the Yen strength - carry trade.
There seems to be a bit of easing over night. Prior to the recent crisis, the Yen (per US dollar) was around 106. Remember, the lower the ratio then the stronger the Yen. It went fell all the way down to about 92 recently. Right now it is 95.265. We need to see this continue to increase. The more it increases then it likely means the less hedge funds and other players will be selling gold.
Saturday, October 25, 2008
The U.S. dollar spike (essential reading)
In my view, there have been a number of factors behind the severe gold price correction. I believe one of those factors has to do with the problems of the Indian economy, thus resulting in the fall off of jewelry demand over the past month (or so). However, the demand appears to have picked back up over the past couple of days, due to the low gold price. Nevertheless, I think the single largest impact on the gold price during this sharp correction has been the US dollar spike.
I think the writer did a good job of explaining the situation in this article. I think it's just a matter of time before money managers move their large sums of money back away from U.S. treasury bills, thus resulting in huge sell off of the U.S. dollar - longer term, money managers are paid to make money for their clients, and a 1% (or lower) return from T-bills is not going to cut it longer term. I personally think that Europe is the key. I believe that things have to calm down in Europe first though - severe instability with European banking system, coupled with the inability of the European governments to act more co-ordinated, made the flight into the U.S. even more massive over the past couple of weeks, IMO.
I wasn't able to print the graphs so I have posted the link to the article. Perhaps Carib can enable the link.
http://www.marketoracle.co.uk/Article6961.html
U.S. Dollar Driven Gold Price Crash
During this unprecedented month where the flagship S&P 500 has plummeted 23.0%, it isn't surprising this brutal stock-market selloff is monopolizing investors' attention. Thus gold's poor performance is largely flying under the radars. Month to date, this metal is down a massive 15.6%! This combined with the intense stock fears have led to an unthinkable 46.4% October decline in the HUI gold-stock index.
Shell-shocked gold and gold-stock investors are morosely trying to comprehend this incredible carnage. Traditionally a financial crisis of this magnitude would have led to a frenzy of gold buying, and we are indeed seeing this in the physical-gold world where bullion coin shortages remain acute. But despite the soaring physical demand, futures traders have sold gold aggressively driving down its price.
Many gold investors want to blame the usual gold villains, the central banks. I have no doubt they were selling, but this is nothing new. Since the Washington Agreement (now called CBGA) was signed in 1999, European CBs alone agreed to sell up to 400 tonnes of gold annually until 2004 and up to 500 tonnes a year since. Big CB gold sales are a constant, always there, and certainly weren't unique to October 2008.
After riding gold from the $250s to over $1000 between April 2001 and March 2008 despite heavy sustained CB selling over this period, it is very clear that CBs aren't running the gold market. They are a persistent headwind, but not a primary driver. Investors and speculators run this show. Though investment and speculation demand can fluctuate wildly, it is what has driven this secular gold bull. Just as gold couldn't have quadrupled without investors and speculators buying, it can't lose nearly a sixth of its value in three weeks without them selling.
So why were traders selling gold so aggressively in the face of the worst financial panic in decades? Forced selling is certainly a major factor. If you own gold and get a totally unrelated margin call from your broker or redemption request from your investors, you still have to sell whatever you can. And gold remains one of the most liquid assets in the world. Individuals and hedge funds getting into margin and leverage trouble were forced to unwind gold long positions (futures and ETFs) to raise cash fast.
But traders not in trouble were selling gold too, especially futures. This largely speculative selling is probably the single biggest reason for gold's extreme weakness of the past month. I suspect this selling was largely driven by the extraordinary surge in the US dollar. To most mainstream traders today, gold is still viewed as the anti-dollar rather than a unique asset with its own strong fundamental merits .
So when the dollar surges, especially if its move is a big, fast, high-profile one, gold futures are sold aggressively. I don't think this is rational anymore in Stage Two of this gold bull, but this Stage-One thinking is still pretty popular among futures traders. Regardless of futures traders' motivations to sell, logical or not, their sales still add supply which drives down prices over the near term.
And boy, if you think gold's whole story is merely that of a dollar-inverse proxy, there was no better time to sell it than the last few months. The US dollar, as measured by the venerable US Dollar Index (USDX), rocketed higher in one of its biggest bear-market rallies in history. The sheer ferocity of the dollar's run since mid-July defies belief. The USDX is rendered in blue on these charts with gold drawn in red.
If you are a student of the currency markets or a currency trader, you know that major currencies usually move with all the sound and fury of a glacier. The currency markets are the world's largest, they are hugely important and affect everything else, but they just don't move very rapidly most of the time. So the massive and fast spike in the USDX seen here is extraordinarily rare, maybe even totally unprecedented.
While I suspect it is unprecedented, I haven't carefully looked at every 3-month period in the USDX's long history since its early-1970s origin. But as the next chart will show, this massive USDX surge was easily the biggest and fastest of this entire dollar secular bear that stealthily began in the summer of 2001 . To see this world reserve currency rocket 19.2% higher between July 15th and today is mind-boggling!
Not only does this massive USDX bear rally look impressive on this chart, a nearly vertical surge, but it is impressive mathematically too. If you divide the dollar's huge total-rally gains by this rally's short duration, the USDX has been climbing 0.274% per day on average since mid-July. Such a sustained rate of ascent defies belief, it is unheard of in the major currencies. Only an extreme crisis could drive such intense dollar demand.
As late as July 15th, the USDX was grinding along near all-time lows. It bottomed in mid-April about 7 months after sliding decisively below 80 for the first time in its entire 37-year history. The last chart in US Dollar Bear 5 shows this entire history if you want some valuable long-term perspective. By mid-July the dollar was still bottom feeding just 0.5% above its all-time closing low. Global demand for dollars was weak as foreign investors continued to diversify out of their dollar-heavy holdings.
During normal times, the USDX probably would have continued grinding sideways or maybe rallied modestly to its 200-day moving average (black above) simply due to being technically oversold. But around this mid-July time frame as the GSEs' (Fannie and Freddie) stocks plummeted, fears for the whole global mortgage-backed bond trade really intensified. Flight capital began to pour into the very highest-quality bonds.
Globally, short-term US Treasury bonds are considered the safest debt investment. The US has long had the largest, strongest economy in the world. And because Washington can use the Fed to create endless US dollars out of thin air, the US Treasury can never default (unless Washington is overthrown in rebellion or conquered in an invasion, neither likely). Sure, bondholders will get paid back in dollars worth less, but over the short term (a few months) this inflationary impact to investors is trivial.
Since the US is a single sovereign nation, as opposed to the often-fragile federation of competing sovereignties that is the European Union, foreign investors still have more confidence in US Treasuries than other government bonds. So as toxic US mortgage debt started to bludgeon European banks and markets, European bond investors rushed to exit this hazardous realm. They parked their capital in short-term US Treasury bills.
This surge in T-bill demand was so immense it forced T-bill yields to unprecedented lows. The higher a bond's price is bid up, the lower its effective yield for a new purchaser becomes since its coupon payment is fixed on issuance. At one point a month ago, T-bill prices were driven so high that yields actually briefly went negative! Investors were effectively paying the US Treasury for the privilege of lending to it!
The more intense the financial panic grew, the greater the deluge of flight capital desperately seeking the safety of short-term US Treasuries. For American investors, this was easy. But foreign investors selling their local bonds for local currencies couldn't buy T-bills directly. After selling their bonds, they first had to convert the proceeds into US dollars to enter the Treasury market. This drove the unbelievable US dollar demand responsible for its huge spike.
The US Dollar Index is traders' favorite proxy for the US dollar's relative price among major world currencies. And it is dominated by Europe. The euro alone accounts for 57.6% of this index's total weight, and the UK, Sweden, and Switzerland add another 19.7% on top of this. So a whopping 77.3% of the dollar's behavior, as reckoned by the USDX, is driven by Europe.
European financial stocks, and hence stock markets, were hit hard in recent months by the growing problems with mortgage-backed debt. Many analysts believe that European banks' exposure to bad mortgage debt (both US and European) is much worse systemically than US banks' exposure, which is rather ironic since the sub-prime mess originated in the States. So European investors aggressively liquidated European bonds and stocks and sought a temporary safe haven to weather this storm.
That safe haven was US Treasury bills. Before buying them, most European investors converted their local currencies into US dollars. Thus this financial panic drove incredible levels of euro selling, so the euro-heavy USDX soared. This giant flight-capital trade out of euros (and pounds, kronor, and francs) led to incredibly intense dollar demand. And the result of this unprecedented event is evident in this chart.
On July 15th just before this dollar rally ignited, gold was trading at $976 an ounce, not far from its bull high of $1005 from mid-March. And gold in euros was running near €614. While disappointing to contrarians expecting some flight capital to seek gold's unparalleled safety, perhaps we shouldn't be surprised that such a violently fast 19.2% USDX rally would drive futures traders to sell gold aggressively.
Over this same span of time, gold was down 25.4% in US dollar terms. Such a fast gold decline, coupled with indiscriminate panic selling across all stock-market sectors , drove the horrific losses in gold stocks. Like many prices we've seen in recent weeks, I certainly believe gold and gold stocks were driven to absolutely unsustainable levels and will quickly surge once rationality starts returning to the markets.
While this gold plunge feels terrible, American gold investors need to understand that our perception of what happened in gold in recent months was really distorted by the panic flight into dollars to buy US Treasuries. Over this same span of time where USD gold fell 25.4%, euro gold only fell 7.8%. In fact, in early October euro gold carved new all-time highs near €673 that were actually 3.9% above its previous March highs!
So independent of the crazy dollar surge, gold actually did pretty well around the world. Some of the flight capital out of international stocks and bonds indeed fled into gold, as expected. And if gold was easier to trade, I suspect many times more capital than entered gold would have joined in. Even you or me, in a similar dire situation as these big money managers, would probably also have chosen US Treasuries over gold in the heat of the moment. Here's why.
Imagine you are running billions of dollars of Other People's Money in your fund, and you are taking a big hit like everyone else on the planet. You love gold personally, but you have to get your clients' capital out of harm's way fast . You can sell your stocks and bonds and get cash as fast as you want, so liquidating is easy. But how do you put billions of dollars into gold fast?
Physical gold would be best, but it would take weeks to arrange such a big buy, not even considering taking delivery and securing your gold bullion. And the coin market is far too small for big funds to enter without a radical price impact. And if you aren't a futures trading house, you can't buy futures since you have no infrastructure in place to do it. And even if you think ETFs are fine in normal times, they are ultimately just paper gold so you are probably wondering what will happen to gold ETFs if their issuing entities succumb to the growing financial panic.
So sadly, even if you want to buy gold in a financial panic, it isn't easy for a big fund manager. But in the time it takes for you to read this sentence, you could deploy billions into US Treasuries. They sure aren't gold, but they aren't going to lose value like everything else and there is a near-zero chance that Washington will fall before these 3-month instruments are redeemed. So despite loving gold myself, I don't fault big fund managers for choosing the ease of T-bills over gold during such a time-sensitive panic.
Now realize I am not arguing that Treasury debt is better than gold, far from it. Gold has preserved wealth for millennia before Washington and will keep preserving wealth long after Washington fades. But I can still understand why fund managers can't easily move billions into gold as fast as they can into effectively safe short-term Treasuries. I don't like it either, but the flight out of the world stock and bond markets and into US dollars and T-bills in the face of unprecedented levels of fear and uncertainty is definitely logical.
The resulting hyper-fast and massive rally in the USDX was amazing, and I wanted to understand it within the context of the US dollar's secular bear. This next chart shows all the major bear rallies witnessed in the USDX since its bear began in July 2001. Our current is actually the 10th, and technically it started in mid-April 2008 at the USDX all-time low although the dollar was still effectively flat until mid-July.
For each USDX bear rally, the top blue number describing it is its absolute percentage gain. The next white number is its duration in months. The second blue number below that is its average gain per day, a measure of velocity and intensity. Finally the red number is what happened to the US dollar price of gold over an identical span of time. As you can see, today's dollar rally has been unbelievably big and fast.
At 19.9% in 6.3 months, nothing else even comes close to our current massive USDX bear rally. The next biggest dollar bear rally is the 6th above, ending in November 2005. Yet it was only 14.6% absolute and it occurred over a much longer 10.6 months. This translates into a velocity of just 0.066% per day compared to our current specimen's crazy 0.151% per day. And if you reckon our current rally starting 0.5% higher at July 15th instead, its velocity was an amazing 0.274% per day. This is mind-blowing for a major currency!
There are a few other dollar bear rallies with higher velocities above, but they were all extremely short-lived and only lasted a matter of weeks. To see the USDX power higher so aggressively for a matter of months is absolutely unprecedented in this bear. And considering how extreme this USDX rally was, gold really did do a decent job of holding its own. The gold carnage certainly could have been worse.
Over this 10th rally's total span since mid-April, gold fell 23.0% while the USDX rallied 19.9%. As a ratio this 1.16x inverse relationship isn't bad compared to bear precedent. For example in the dollar's 3rd major bear rally the gold price fell 8.1% on a 4.3% dollar rally, a 1.88x inverse. During the 7th dollar bear rally in mid-2006, gold plunged 19.4% while the USDX only rallied 3.8%. Of course that particular episode, like today, was after a very sharp gold upleg so gold had technical reasons of its own to correct.
Gold's absolute levels compared to the dollar's in this rally's aftermath are also interesting. The USDX rocketed up to November 2006 levels, gaining back two years' worth of losses. Meanwhile gold only retreated to September 2007 levels, temporarily erasing one year's worth of gains. This might not be much consolation when considering the impact of today's irrational gold price on your portfolio, but gold really did weather this extreme dollar rally fairly well.
Since panic drove this sharp dollar surge, what happens when this panic abates? I bet the dollar collapses almost as fast as it rose. Of course gold would probably soar in such a scenario. This case can be made in both sentiment and fundamental terms, and both are very compelling. Market anomalies driven by extreme emotions typically unwind once the driving emotions finally peter out.
All over the world, money managers are hunkered down in short-term Treasuries. Yet T-bill yields are now running around 1%. This is pathetic. How many money managers are going to be comfortable reporting to their clients that they are only earning 1% before fees? So the moment the markets turn in the inevitable V-bounce , money managers are going to want out of Treasuries and back into assets that are either rallying or actually yielding something.
These money managers will sell Treasuries, sell dollars (if they are foreign), buy their local currencies, and start aggressively redeploying capital. 2008 has been a bad year in the markets for everyone, yet professionals still fear nothing more than underperforming their peers. So if they perceive rallies anywhere in stocks or bonds, they are going to dump Treasuries fast and rush to participate to mitigate some of their 2008 losses before year-end results are reported to their clients.
There are also fundamental reasons to unwind this anomalous dollar-long surge. Over the long term, relative yields drive currencies. While target rates are running 1.5% in the States, over in Europe the ECB's benchmark rate is still 3.75%. Why would European bond investors want to hang out one day longer than necessary in terribly-yielding US Treasuries when they could buy high-quality bonds in their own countries yielding 2x to 3x as much? European yields are very favorable for euro currency buying.
In addition, real rates of return (inflation-adjusted bond returns) are now massively negative in the US. The low-balled CPI has surged by an absolute 4.9% in the past year yet 1-year Treasuries are now only yielding 1.7%. Thus investors in short-term Treasuries are effectively guaranteed a 3.2% loss in real purchasing power annually by owning them thanks to the Fed. So while short-term Treasuries are attractive in a panic, the moment fear fades they return to being terrible investments.
For these reasons among many, I maintain the contrarian stance that this sharp dollar surge will rapidly unwind as soon as the intense systemic fear passes and money managers get comfortable enough to return to their usual stock and bond markets. The USDX spike is not the beginning of a new bull, as new bulls are driven by positive fundamentals that definitely don't exist for the dollar. Instead this was just an emotional anomaly that drove a spectacular bear rally that simply isn't sustainable.
And when this dollar panic buying reverses itself, so will the gold panic selling. The metal is just way too cheap today relative to its bullish fundamentals and the incessant fiat-currency growth all over the world. This anomaly is a heck of an opportunity for new long-side capital to deploy into gold and gold stocks. Virtually everything gold-related is available at such a discount today that it may be the best buying-op of this bull.
I am going to discuss all this, including specific trading strategies and trades, in our upcoming Zeal Intelligence monthly newsletter. October 2008 was very frightening and painful, but it has led to some of the most amazing prices we will ever see in awesome investments and speculations. Buying into this fear is tough, but fortunes will be made when the recovery arrives. Join us today and don't squander this once-in-a-generation opportunity!
The bottom line is extreme circumstances, a rare global financial panic, drove the sharp rally in the US dollar. And this massive and fast dollar rally hammered gold. But once the panic abates and money managers all over the world start chasing good returns again, the dollar-long T-bill buying frenzy will reverse hard. And as the USDX sinks again to reflect its dismal fundamentals, gold will really shine.
By Adam Hamilton, CPA
I think the writer did a good job of explaining the situation in this article. I think it's just a matter of time before money managers move their large sums of money back away from U.S. treasury bills, thus resulting in huge sell off of the U.S. dollar - longer term, money managers are paid to make money for their clients, and a 1% (or lower) return from T-bills is not going to cut it longer term. I personally think that Europe is the key. I believe that things have to calm down in Europe first though - severe instability with European banking system, coupled with the inability of the European governments to act more co-ordinated, made the flight into the U.S. even more massive over the past couple of weeks, IMO.
I wasn't able to print the graphs so I have posted the link to the article. Perhaps Carib can enable the link.
http://www.marketoracle.co.uk/Article6961.html
U.S. Dollar Driven Gold Price Crash
During this unprecedented month where the flagship S&P 500 has plummeted 23.0%, it isn't surprising this brutal stock-market selloff is monopolizing investors' attention. Thus gold's poor performance is largely flying under the radars. Month to date, this metal is down a massive 15.6%! This combined with the intense stock fears have led to an unthinkable 46.4% October decline in the HUI gold-stock index.
Shell-shocked gold and gold-stock investors are morosely trying to comprehend this incredible carnage. Traditionally a financial crisis of this magnitude would have led to a frenzy of gold buying, and we are indeed seeing this in the physical-gold world where bullion coin shortages remain acute. But despite the soaring physical demand, futures traders have sold gold aggressively driving down its price.
Many gold investors want to blame the usual gold villains, the central banks. I have no doubt they were selling, but this is nothing new. Since the Washington Agreement (now called CBGA) was signed in 1999, European CBs alone agreed to sell up to 400 tonnes of gold annually until 2004 and up to 500 tonnes a year since. Big CB gold sales are a constant, always there, and certainly weren't unique to October 2008.
After riding gold from the $250s to over $1000 between April 2001 and March 2008 despite heavy sustained CB selling over this period, it is very clear that CBs aren't running the gold market. They are a persistent headwind, but not a primary driver. Investors and speculators run this show. Though investment and speculation demand can fluctuate wildly, it is what has driven this secular gold bull. Just as gold couldn't have quadrupled without investors and speculators buying, it can't lose nearly a sixth of its value in three weeks without them selling.
So why were traders selling gold so aggressively in the face of the worst financial panic in decades? Forced selling is certainly a major factor. If you own gold and get a totally unrelated margin call from your broker or redemption request from your investors, you still have to sell whatever you can. And gold remains one of the most liquid assets in the world. Individuals and hedge funds getting into margin and leverage trouble were forced to unwind gold long positions (futures and ETFs) to raise cash fast.
But traders not in trouble were selling gold too, especially futures. This largely speculative selling is probably the single biggest reason for gold's extreme weakness of the past month. I suspect this selling was largely driven by the extraordinary surge in the US dollar. To most mainstream traders today, gold is still viewed as the anti-dollar rather than a unique asset with its own strong fundamental merits .
So when the dollar surges, especially if its move is a big, fast, high-profile one, gold futures are sold aggressively. I don't think this is rational anymore in Stage Two of this gold bull, but this Stage-One thinking is still pretty popular among futures traders. Regardless of futures traders' motivations to sell, logical or not, their sales still add supply which drives down prices over the near term.
And boy, if you think gold's whole story is merely that of a dollar-inverse proxy, there was no better time to sell it than the last few months. The US dollar, as measured by the venerable US Dollar Index (USDX), rocketed higher in one of its biggest bear-market rallies in history. The sheer ferocity of the dollar's run since mid-July defies belief. The USDX is rendered in blue on these charts with gold drawn in red.
If you are a student of the currency markets or a currency trader, you know that major currencies usually move with all the sound and fury of a glacier. The currency markets are the world's largest, they are hugely important and affect everything else, but they just don't move very rapidly most of the time. So the massive and fast spike in the USDX seen here is extraordinarily rare, maybe even totally unprecedented.
While I suspect it is unprecedented, I haven't carefully looked at every 3-month period in the USDX's long history since its early-1970s origin. But as the next chart will show, this massive USDX surge was easily the biggest and fastest of this entire dollar secular bear that stealthily began in the summer of 2001 . To see this world reserve currency rocket 19.2% higher between July 15th and today is mind-boggling!
Not only does this massive USDX bear rally look impressive on this chart, a nearly vertical surge, but it is impressive mathematically too. If you divide the dollar's huge total-rally gains by this rally's short duration, the USDX has been climbing 0.274% per day on average since mid-July. Such a sustained rate of ascent defies belief, it is unheard of in the major currencies. Only an extreme crisis could drive such intense dollar demand.
As late as July 15th, the USDX was grinding along near all-time lows. It bottomed in mid-April about 7 months after sliding decisively below 80 for the first time in its entire 37-year history. The last chart in US Dollar Bear 5 shows this entire history if you want some valuable long-term perspective. By mid-July the dollar was still bottom feeding just 0.5% above its all-time closing low. Global demand for dollars was weak as foreign investors continued to diversify out of their dollar-heavy holdings.
During normal times, the USDX probably would have continued grinding sideways or maybe rallied modestly to its 200-day moving average (black above) simply due to being technically oversold. But around this mid-July time frame as the GSEs' (Fannie and Freddie) stocks plummeted, fears for the whole global mortgage-backed bond trade really intensified. Flight capital began to pour into the very highest-quality bonds.
Globally, short-term US Treasury bonds are considered the safest debt investment. The US has long had the largest, strongest economy in the world. And because Washington can use the Fed to create endless US dollars out of thin air, the US Treasury can never default (unless Washington is overthrown in rebellion or conquered in an invasion, neither likely). Sure, bondholders will get paid back in dollars worth less, but over the short term (a few months) this inflationary impact to investors is trivial.
Since the US is a single sovereign nation, as opposed to the often-fragile federation of competing sovereignties that is the European Union, foreign investors still have more confidence in US Treasuries than other government bonds. So as toxic US mortgage debt started to bludgeon European banks and markets, European bond investors rushed to exit this hazardous realm. They parked their capital in short-term US Treasury bills.
This surge in T-bill demand was so immense it forced T-bill yields to unprecedented lows. The higher a bond's price is bid up, the lower its effective yield for a new purchaser becomes since its coupon payment is fixed on issuance. At one point a month ago, T-bill prices were driven so high that yields actually briefly went negative! Investors were effectively paying the US Treasury for the privilege of lending to it!
The more intense the financial panic grew, the greater the deluge of flight capital desperately seeking the safety of short-term US Treasuries. For American investors, this was easy. But foreign investors selling their local bonds for local currencies couldn't buy T-bills directly. After selling their bonds, they first had to convert the proceeds into US dollars to enter the Treasury market. This drove the unbelievable US dollar demand responsible for its huge spike.
The US Dollar Index is traders' favorite proxy for the US dollar's relative price among major world currencies. And it is dominated by Europe. The euro alone accounts for 57.6% of this index's total weight, and the UK, Sweden, and Switzerland add another 19.7% on top of this. So a whopping 77.3% of the dollar's behavior, as reckoned by the USDX, is driven by Europe.
European financial stocks, and hence stock markets, were hit hard in recent months by the growing problems with mortgage-backed debt. Many analysts believe that European banks' exposure to bad mortgage debt (both US and European) is much worse systemically than US banks' exposure, which is rather ironic since the sub-prime mess originated in the States. So European investors aggressively liquidated European bonds and stocks and sought a temporary safe haven to weather this storm.
That safe haven was US Treasury bills. Before buying them, most European investors converted their local currencies into US dollars. Thus this financial panic drove incredible levels of euro selling, so the euro-heavy USDX soared. This giant flight-capital trade out of euros (and pounds, kronor, and francs) led to incredibly intense dollar demand. And the result of this unprecedented event is evident in this chart.
On July 15th just before this dollar rally ignited, gold was trading at $976 an ounce, not far from its bull high of $1005 from mid-March. And gold in euros was running near €614. While disappointing to contrarians expecting some flight capital to seek gold's unparalleled safety, perhaps we shouldn't be surprised that such a violently fast 19.2% USDX rally would drive futures traders to sell gold aggressively.
Over this same span of time, gold was down 25.4% in US dollar terms. Such a fast gold decline, coupled with indiscriminate panic selling across all stock-market sectors , drove the horrific losses in gold stocks. Like many prices we've seen in recent weeks, I certainly believe gold and gold stocks were driven to absolutely unsustainable levels and will quickly surge once rationality starts returning to the markets.
While this gold plunge feels terrible, American gold investors need to understand that our perception of what happened in gold in recent months was really distorted by the panic flight into dollars to buy US Treasuries. Over this same span of time where USD gold fell 25.4%, euro gold only fell 7.8%. In fact, in early October euro gold carved new all-time highs near €673 that were actually 3.9% above its previous March highs!
So independent of the crazy dollar surge, gold actually did pretty well around the world. Some of the flight capital out of international stocks and bonds indeed fled into gold, as expected. And if gold was easier to trade, I suspect many times more capital than entered gold would have joined in. Even you or me, in a similar dire situation as these big money managers, would probably also have chosen US Treasuries over gold in the heat of the moment. Here's why.
Imagine you are running billions of dollars of Other People's Money in your fund, and you are taking a big hit like everyone else on the planet. You love gold personally, but you have to get your clients' capital out of harm's way fast . You can sell your stocks and bonds and get cash as fast as you want, so liquidating is easy. But how do you put billions of dollars into gold fast?
Physical gold would be best, but it would take weeks to arrange such a big buy, not even considering taking delivery and securing your gold bullion. And the coin market is far too small for big funds to enter without a radical price impact. And if you aren't a futures trading house, you can't buy futures since you have no infrastructure in place to do it. And even if you think ETFs are fine in normal times, they are ultimately just paper gold so you are probably wondering what will happen to gold ETFs if their issuing entities succumb to the growing financial panic.
So sadly, even if you want to buy gold in a financial panic, it isn't easy for a big fund manager. But in the time it takes for you to read this sentence, you could deploy billions into US Treasuries. They sure aren't gold, but they aren't going to lose value like everything else and there is a near-zero chance that Washington will fall before these 3-month instruments are redeemed. So despite loving gold myself, I don't fault big fund managers for choosing the ease of T-bills over gold during such a time-sensitive panic.
Now realize I am not arguing that Treasury debt is better than gold, far from it. Gold has preserved wealth for millennia before Washington and will keep preserving wealth long after Washington fades. But I can still understand why fund managers can't easily move billions into gold as fast as they can into effectively safe short-term Treasuries. I don't like it either, but the flight out of the world stock and bond markets and into US dollars and T-bills in the face of unprecedented levels of fear and uncertainty is definitely logical.
The resulting hyper-fast and massive rally in the USDX was amazing, and I wanted to understand it within the context of the US dollar's secular bear. This next chart shows all the major bear rallies witnessed in the USDX since its bear began in July 2001. Our current is actually the 10th, and technically it started in mid-April 2008 at the USDX all-time low although the dollar was still effectively flat until mid-July.
For each USDX bear rally, the top blue number describing it is its absolute percentage gain. The next white number is its duration in months. The second blue number below that is its average gain per day, a measure of velocity and intensity. Finally the red number is what happened to the US dollar price of gold over an identical span of time. As you can see, today's dollar rally has been unbelievably big and fast.
At 19.9% in 6.3 months, nothing else even comes close to our current massive USDX bear rally. The next biggest dollar bear rally is the 6th above, ending in November 2005. Yet it was only 14.6% absolute and it occurred over a much longer 10.6 months. This translates into a velocity of just 0.066% per day compared to our current specimen's crazy 0.151% per day. And if you reckon our current rally starting 0.5% higher at July 15th instead, its velocity was an amazing 0.274% per day. This is mind-blowing for a major currency!
There are a few other dollar bear rallies with higher velocities above, but they were all extremely short-lived and only lasted a matter of weeks. To see the USDX power higher so aggressively for a matter of months is absolutely unprecedented in this bear. And considering how extreme this USDX rally was, gold really did do a decent job of holding its own. The gold carnage certainly could have been worse.
Over this 10th rally's total span since mid-April, gold fell 23.0% while the USDX rallied 19.9%. As a ratio this 1.16x inverse relationship isn't bad compared to bear precedent. For example in the dollar's 3rd major bear rally the gold price fell 8.1% on a 4.3% dollar rally, a 1.88x inverse. During the 7th dollar bear rally in mid-2006, gold plunged 19.4% while the USDX only rallied 3.8%. Of course that particular episode, like today, was after a very sharp gold upleg so gold had technical reasons of its own to correct.
Gold's absolute levels compared to the dollar's in this rally's aftermath are also interesting. The USDX rocketed up to November 2006 levels, gaining back two years' worth of losses. Meanwhile gold only retreated to September 2007 levels, temporarily erasing one year's worth of gains. This might not be much consolation when considering the impact of today's irrational gold price on your portfolio, but gold really did weather this extreme dollar rally fairly well.
Since panic drove this sharp dollar surge, what happens when this panic abates? I bet the dollar collapses almost as fast as it rose. Of course gold would probably soar in such a scenario. This case can be made in both sentiment and fundamental terms, and both are very compelling. Market anomalies driven by extreme emotions typically unwind once the driving emotions finally peter out.
All over the world, money managers are hunkered down in short-term Treasuries. Yet T-bill yields are now running around 1%. This is pathetic. How many money managers are going to be comfortable reporting to their clients that they are only earning 1% before fees? So the moment the markets turn in the inevitable V-bounce , money managers are going to want out of Treasuries and back into assets that are either rallying or actually yielding something.
These money managers will sell Treasuries, sell dollars (if they are foreign), buy their local currencies, and start aggressively redeploying capital. 2008 has been a bad year in the markets for everyone, yet professionals still fear nothing more than underperforming their peers. So if they perceive rallies anywhere in stocks or bonds, they are going to dump Treasuries fast and rush to participate to mitigate some of their 2008 losses before year-end results are reported to their clients.
There are also fundamental reasons to unwind this anomalous dollar-long surge. Over the long term, relative yields drive currencies. While target rates are running 1.5% in the States, over in Europe the ECB's benchmark rate is still 3.75%. Why would European bond investors want to hang out one day longer than necessary in terribly-yielding US Treasuries when they could buy high-quality bonds in their own countries yielding 2x to 3x as much? European yields are very favorable for euro currency buying.
In addition, real rates of return (inflation-adjusted bond returns) are now massively negative in the US. The low-balled CPI has surged by an absolute 4.9% in the past year yet 1-year Treasuries are now only yielding 1.7%. Thus investors in short-term Treasuries are effectively guaranteed a 3.2% loss in real purchasing power annually by owning them thanks to the Fed. So while short-term Treasuries are attractive in a panic, the moment fear fades they return to being terrible investments.
For these reasons among many, I maintain the contrarian stance that this sharp dollar surge will rapidly unwind as soon as the intense systemic fear passes and money managers get comfortable enough to return to their usual stock and bond markets. The USDX spike is not the beginning of a new bull, as new bulls are driven by positive fundamentals that definitely don't exist for the dollar. Instead this was just an emotional anomaly that drove a spectacular bear rally that simply isn't sustainable.
And when this dollar panic buying reverses itself, so will the gold panic selling. The metal is just way too cheap today relative to its bullish fundamentals and the incessant fiat-currency growth all over the world. This anomaly is a heck of an opportunity for new long-side capital to deploy into gold and gold stocks. Virtually everything gold-related is available at such a discount today that it may be the best buying-op of this bull.
I am going to discuss all this, including specific trading strategies and trades, in our upcoming Zeal Intelligence monthly newsletter. October 2008 was very frightening and painful, but it has led to some of the most amazing prices we will ever see in awesome investments and speculations. Buying into this fear is tough, but fortunes will be made when the recovery arrives. Join us today and don't squander this once-in-a-generation opportunity!
The bottom line is extreme circumstances, a rare global financial panic, drove the sharp rally in the US dollar. And this massive and fast dollar rally hammered gold. But once the panic abates and money managers all over the world start chasing good returns again, the dollar-long T-bill buying frenzy will reverse hard. And as the USDX sinks again to reflect its dismal fundamentals, gold will really shine.
By Adam Hamilton, CPA
Thursday, October 23, 2008
Canadian gold price unchanged
With the exchange rate no longer at par, this has become relevant.
Earlier in the year a $900 US gold price would only give us $900 Cdn, at par. Although the US gold price has fallen to $718 US, we still have the same Cdn gold price. With the exchange rate now at .79, it means that the $718 US gold price gives us $909 Cdn per oz, which is actually slightly better (believe it or not).
Granted, it's a bit tricky with the cash cost. Yes, the cash cost per oz would have to be adjusted for the difference in US vs Cdn $, however much of that adustment should be offset by the deflationary environment (lower costs of consumables, explosives, fuel, as well as the 8% weaker Peruvian currency vs the US dollar).
Also, some of our Corporate costs are paid in US dollars, due to the head office being in the US. However, a good portion should still be in Canadian dollars.
Earlier in the year a $900 US gold price would only give us $900 Cdn, at par. Although the US gold price has fallen to $718 US, we still have the same Cdn gold price. With the exchange rate now at .79, it means that the $718 US gold price gives us $909 Cdn per oz, which is actually slightly better (believe it or not).
Granted, it's a bit tricky with the cash cost. Yes, the cash cost per oz would have to be adjusted for the difference in US vs Cdn $, however much of that adustment should be offset by the deflationary environment (lower costs of consumables, explosives, fuel, as well as the 8% weaker Peruvian currency vs the US dollar).
Also, some of our Corporate costs are paid in US dollars, due to the head office being in the US. However, a good portion should still be in Canadian dollars.
current 3m libor rate, and some thoughts
It looks like it stayed pretty much the same, perhaps a slight decrease to 3.535%.
With the recent dramatic fall in gold price, we are fortunate to have a semi-low cost producer in San Juan. With the previous (and current) fall in prices related to consumables, fuel, etc., coupled with the 8% (or so) decrease in value (vs US dollar) of the Peruvian currency vs Q2 timeframe, we might have a shot at seeing a cash cost per oz within the $350 - 425 US range effective Q4 and going forward (if the deflation environment remains). If Century moves to producing 25,000 - 35,000 ounces from San Juan down the road (instead of current production of around 16,000) then the possibility of a cash cost per ounce of $300 - 350 US may be possible within a deflationary environment. As you can see, production of 25,000 - 35,000 ounces with cash cost per oz of $300 - 350 US and any gold price between $500 US and $1,000 US can still be very favourable for a small cap company, especially one with currently a $.025 share price.
It is my belief that Century's management should start working on this plan (if they haven't already) in case the current (low) gold price discourages their potential lenders (Trafalgar and BNP Paribas/Fortis) from closing the current deals. Century can then put Lamaque on hold until the gold price and the credit environment picks up again. The key to this plan though is that management needs to aggressively reach out to the cashed up base metals and uranium companies out there that are looking to partner up with a company with a gold junior company with a producing asset and/or a very near producing asset. Century has both, plus semi-low production cost per oz at San Juan. There are uranium and base metal companies out there with $10 - 20M Cdn net cash in the bank. There are also junior (pure) gold exploration companies out there with $5 - 7M in net cash, and many many years away from producing anything.
Here are the 2 options Century should aggressively look into (even while simultaneously trying to close the deal for the loan and LT Debt):
1) Try to merge with 1 junior company with $10 - 20M in cash. If it's with a base metal or uranium company then the base metal or uranium properties can always be spun out to shareholders in a year or two once those prices have recovered - no one misses out on anything.
2) Try to merge with at least 2 of the juniors with $5 - 7M cash each.
The merged company can then renegotiate down (substantially) the $18M accounts payable amount within the balance sheet (this shouldn't be a problem as everyone is looking for immediate cash right now, and are willing to be creative) and then pay off the newly renegotiated balance. The merged company should then inject a few million of the remaining cash into bringing San Juan up to 25,000 to 35,000 ounces of production.
The new company should then eliminate almost 80% of the Corporate overhead until both the gold price and credit market picks up again.
These moves will allow Century Mining to become free trading again, as there would be no other roadblocks. They can still carry and service IQ's debt, as the principle payment is only $1M per year plus interest payments - 15 year payment plan is excellent. Also, the gold price would not be an issue, as the business would be solid on solid ground at any gold price over say $500 US. A $1,000 US gold price would just be a big fat bonus for shareholders, if these actions were taken.
I just hope that management is aggressively exploring this possibility. I think these simple moves can quickly turn this company around, and I think the economic conditions have created situations where companies with a bit of cash are desperate to hook up with undervalued (semi-low) cost gold companies with an already established revenue stream. We are fortunate to not only have that, but a company maker mine (Lamaque) that can go into production shortly after sufficient funding is gained down the raod (perhaps once the credit markets pick up again, if the BNP Paribas/Fortis situation doesn't work out short term).
With the recent dramatic fall in gold price, we are fortunate to have a semi-low cost producer in San Juan. With the previous (and current) fall in prices related to consumables, fuel, etc., coupled with the 8% (or so) decrease in value (vs US dollar) of the Peruvian currency vs Q2 timeframe, we might have a shot at seeing a cash cost per oz within the $350 - 425 US range effective Q4 and going forward (if the deflation environment remains). If Century moves to producing 25,000 - 35,000 ounces from San Juan down the road (instead of current production of around 16,000) then the possibility of a cash cost per ounce of $300 - 350 US may be possible within a deflationary environment. As you can see, production of 25,000 - 35,000 ounces with cash cost per oz of $300 - 350 US and any gold price between $500 US and $1,000 US can still be very favourable for a small cap company, especially one with currently a $.025 share price.
It is my belief that Century's management should start working on this plan (if they haven't already) in case the current (low) gold price discourages their potential lenders (Trafalgar and BNP Paribas/Fortis) from closing the current deals. Century can then put Lamaque on hold until the gold price and the credit environment picks up again. The key to this plan though is that management needs to aggressively reach out to the cashed up base metals and uranium companies out there that are looking to partner up with a company with a gold junior company with a producing asset and/or a very near producing asset. Century has both, plus semi-low production cost per oz at San Juan. There are uranium and base metal companies out there with $10 - 20M Cdn net cash in the bank. There are also junior (pure) gold exploration companies out there with $5 - 7M in net cash, and many many years away from producing anything.
Here are the 2 options Century should aggressively look into (even while simultaneously trying to close the deal for the loan and LT Debt):
1) Try to merge with 1 junior company with $10 - 20M in cash. If it's with a base metal or uranium company then the base metal or uranium properties can always be spun out to shareholders in a year or two once those prices have recovered - no one misses out on anything.
2) Try to merge with at least 2 of the juniors with $5 - 7M cash each.
The merged company can then renegotiate down (substantially) the $18M accounts payable amount within the balance sheet (this shouldn't be a problem as everyone is looking for immediate cash right now, and are willing to be creative) and then pay off the newly renegotiated balance. The merged company should then inject a few million of the remaining cash into bringing San Juan up to 25,000 to 35,000 ounces of production.
The new company should then eliminate almost 80% of the Corporate overhead until both the gold price and credit market picks up again.
These moves will allow Century Mining to become free trading again, as there would be no other roadblocks. They can still carry and service IQ's debt, as the principle payment is only $1M per year plus interest payments - 15 year payment plan is excellent. Also, the gold price would not be an issue, as the business would be solid on solid ground at any gold price over say $500 US. A $1,000 US gold price would just be a big fat bonus for shareholders, if these actions were taken.
I just hope that management is aggressively exploring this possibility. I think these simple moves can quickly turn this company around, and I think the economic conditions have created situations where companies with a bit of cash are desperate to hook up with undervalued (semi-low) cost gold companies with an already established revenue stream. We are fortunate to not only have that, but a company maker mine (Lamaque) that can go into production shortly after sufficient funding is gained down the raod (perhaps once the credit markets pick up again, if the BNP Paribas/Fortis situation doesn't work out short term).
Wednesday, October 22, 2008
Tuesday, October 21, 2008
3 month libor rate
The 3 month libor rate has now come back down to 3.83%. This is quite significant. It was previously around 2.8%, but it skyrocketed to around 4.8% during the past month (during the peak of the credit crisis). The 3 month rate is used as the benchmark for interbank lending. A 4.8% rate essentially stated that banks had completely stopped lending money to other banks - confidence issue. In a nutshell, global credit had completely frozen up. As everyone is aware, governments around the world (over the past couple of weeks) collectively injected trillions of dollars into the global banking system (and provided numerous banking loan guarantees, coupled with taking equity stakes in banks and guarantee of bank deposits) in order to unfreeze the credit system. At first there was hardly any improvements. However, there has been solid improvements over the past couple of days.
Of course, it will still take quite a while before the thawing makes it to the lower levels of the system, but nonetheless this is good for junior companies across the globe, and especially (capital intensive) junior resource companies. It might be more beneficial to junior gold companies (in the nearer term) than junior base metal companies, due to the fall off in demand for base metals.
Hopefully it is even more beneficial for junior companies like Century, with a bridge loan and LT Debt agreement already in place, that are working through the process to gain closure and subsequent drawdown. It is impossible to know if or how quickly the lower libor trend will work for junior companies, and specifically Century, but it's positive nonetheless. If the libor rate had stayed at 4.8% (even after the massive injection of funds by the governments) then it would have made everything even more challenging.
The other major challenge gold companies have right now is the lower drifting of the gold price. It's difficult to know how much of the gold price sell off is due to regular funds and hedge funds being in emergency mode in order to meet redemptions. There is probably some of that, but is probably also a tug of war between gold bulls and gold bears. A lot of people are expecting an asset deflation evironment for all assets. However, a lot of people also eventually expect monetary inflation to exist due to the massive injection of cash into the system. The US dollar is a superstar right now (due partly to being treated with "safe haven" appeal - people around the world have been piling into US treasury bills, but they have had to buy the US dollar first before buying the treasury bills), but the massive injection of liquidity most likely means that the dollar will come under pressure again at some point down the road.
The key problem long-term gold investors face right now though is that it might take a least few months or much longer before the massive cash injection works its way through the global system, and monetary inflation rises to the surface, along with US dollar devaluation. It's unclear how the gold price will hold up in the interim. Gold price confidence is one of the keys. A lot of investors (especially new mainstream gold investors) are very disappointed with the COMEX gold price. I think everyone expected gold to be stronger over the past month, during the crisis. Investment demand is essential right now so let's hope that the fringe gold investors understand the longer term potential of the gold price.
In the near-term, the gold price will need to navigate around a few other key factors also. Some people are predicting a $50 oil price, but it's really impossible for anyone to know. OPEC is meeting in a few days, and will be reducing production in order to give the price some support. I think there is a massive tug of war even within OPEC. Countries like Iran and Venezuela desparately need the cash from high oil prices. As a result, they need to see the price in the $80-90 range. Other countries, like Saudi Arabia, can live with $50-60 oil. The other problem with low oil prices is that a number of oil fields (both existing and planned for development) cannot make it (in this environment) with prices so low. As such, the short-term destruction from a low oil price could end up having a sling shot affect on the oil price longer term (in the opposite direction). I think some people recognizes this, and will push for a more stable price, but the oil price might end up being too forceful for anyone or anything to influence (other than hedge funds moving their massive dollars in and out of course, which is artificial, as we know). Anyway, it looks like OPEC might cut between 1 to 2 million (barrels per day) once they meet. However, there is talk that it could be as low as .5 million and as high as 3 million - I guess it depends who wins the tug of war within OPEC.
Gold might get a bit of support once the US Fed meets near the end of the month. The Fed is expected to lower the Fed rate by 50 basis points. Unfortunately, other key US trade partners around the world will likely cuts rates also, which will mostly negate the weakness that we would normally get from the US dollar index.
Globally, there still seems to be a number of money managers that understand the monetary inflation expectations. As such, they are planning to keep a portion of their portfolio in gold. Hopefully it will be enough to support the gold price in the short-term, but it remains to be seen. It would be good if the gold price stayed above $700 US. It would be good if the gold price stayed traded say in the range of $700 to $850, until it is ready to move higher. That would be a very healthy gold price range (although $600 US could still work also), especially since cash cost for most gold mining companies would come down quite a bit in that environment. It would be really nice to get back to $900 US and above again, once everything aligns again - it could happen at anytime or it take a few months (a lot of it depends on investor sentiments).
Of course, it will still take quite a while before the thawing makes it to the lower levels of the system, but nonetheless this is good for junior companies across the globe, and especially (capital intensive) junior resource companies. It might be more beneficial to junior gold companies (in the nearer term) than junior base metal companies, due to the fall off in demand for base metals.
Hopefully it is even more beneficial for junior companies like Century, with a bridge loan and LT Debt agreement already in place, that are working through the process to gain closure and subsequent drawdown. It is impossible to know if or how quickly the lower libor trend will work for junior companies, and specifically Century, but it's positive nonetheless. If the libor rate had stayed at 4.8% (even after the massive injection of funds by the governments) then it would have made everything even more challenging.
The other major challenge gold companies have right now is the lower drifting of the gold price. It's difficult to know how much of the gold price sell off is due to regular funds and hedge funds being in emergency mode in order to meet redemptions. There is probably some of that, but is probably also a tug of war between gold bulls and gold bears. A lot of people are expecting an asset deflation evironment for all assets. However, a lot of people also eventually expect monetary inflation to exist due to the massive injection of cash into the system. The US dollar is a superstar right now (due partly to being treated with "safe haven" appeal - people around the world have been piling into US treasury bills, but they have had to buy the US dollar first before buying the treasury bills), but the massive injection of liquidity most likely means that the dollar will come under pressure again at some point down the road.
The key problem long-term gold investors face right now though is that it might take a least few months or much longer before the massive cash injection works its way through the global system, and monetary inflation rises to the surface, along with US dollar devaluation. It's unclear how the gold price will hold up in the interim. Gold price confidence is one of the keys. A lot of investors (especially new mainstream gold investors) are very disappointed with the COMEX gold price. I think everyone expected gold to be stronger over the past month, during the crisis. Investment demand is essential right now so let's hope that the fringe gold investors understand the longer term potential of the gold price.
In the near-term, the gold price will need to navigate around a few other key factors also. Some people are predicting a $50 oil price, but it's really impossible for anyone to know. OPEC is meeting in a few days, and will be reducing production in order to give the price some support. I think there is a massive tug of war even within OPEC. Countries like Iran and Venezuela desparately need the cash from high oil prices. As a result, they need to see the price in the $80-90 range. Other countries, like Saudi Arabia, can live with $50-60 oil. The other problem with low oil prices is that a number of oil fields (both existing and planned for development) cannot make it (in this environment) with prices so low. As such, the short-term destruction from a low oil price could end up having a sling shot affect on the oil price longer term (in the opposite direction). I think some people recognizes this, and will push for a more stable price, but the oil price might end up being too forceful for anyone or anything to influence (other than hedge funds moving their massive dollars in and out of course, which is artificial, as we know). Anyway, it looks like OPEC might cut between 1 to 2 million (barrels per day) once they meet. However, there is talk that it could be as low as .5 million and as high as 3 million - I guess it depends who wins the tug of war within OPEC.
Gold might get a bit of support once the US Fed meets near the end of the month. The Fed is expected to lower the Fed rate by 50 basis points. Unfortunately, other key US trade partners around the world will likely cuts rates also, which will mostly negate the weakness that we would normally get from the US dollar index.
Globally, there still seems to be a number of money managers that understand the monetary inflation expectations. As such, they are planning to keep a portion of their portfolio in gold. Hopefully it will be enough to support the gold price in the short-term, but it remains to be seen. It would be good if the gold price stayed above $700 US. It would be good if the gold price stayed traded say in the range of $700 to $850, until it is ready to move higher. That would be a very healthy gold price range (although $600 US could still work also), especially since cash cost for most gold mining companies would come down quite a bit in that environment. It would be really nice to get back to $900 US and above again, once everything aligns again - it could happen at anytime or it take a few months (a lot of it depends on investor sentiments).
Sunday, October 12, 2008
The Got Gold Report from Resource Investor
This is an excerpt from this week's Got Gold Report:
There are no better hard assets than the two most popular precious metals, gold and silver. Both have been relied upon as a store of value for at least four millennia. Neither can be printed by fiat.
Unfortunately, at present there is not enough of the real metal to spread among all the individuals that want to own it. How do we know that? Because of all the “out of stock” notices on even the largest bullion outlets in the U.S., the U.K. and in Europe. We know it because of the historic, extremely high premiums over the current spot pricing which all bullion items command right now whenever a bullion dealer does manage to obtain some inventory.
While the margin masters, liquidating yesterday’s major traders in the paper-futures markets and opportunistic short sellers have temporarily managed to skew the benchmark spot prices for both gold and silver to unreasonably low levels (relative to the actual intense demand in physical bullion markets), large and small holders of precious metals apparently sense that the spot prices are artificially low. They aren’t selling. At least they aren’t selling in large enough volume to lower the currently sky-high premiums for gold and silver or to put real metal into the inventories of bullion dealers.
What spectacular irony. At the very time when investors want to buy physical gold and silver the most, the paper-contract markets (which affect the spot or cash market benchmarks) are being sold down to such ridiculously low levels that few want to sell any real physical metal unless they just have to or are forced to. Meanwhile, the divergence in pricing between the physical bullion markets and what is still called “spot” that this report mentioned last time grows even wider.
http://www.resourceinvestor.com/pebble.asp?relid=46957
Physical gold is in great demand and the price to acquire it is surely going higher - a lot higher. Century is not some junior exploration company looking for gold, they already have proven deposits - 1.3 million ounces in reserves and almost 5 million ounces in total. It's a given that with higher prices and the ongoing modelling work that the 3 million ounces of inferred ounces will be converted into M&I resources and P&P reserves.
Selling shares for 2 cents will prove to be irrational IMO whether CMM acquires financing or not. There will be demand for those ounces.
There are no better hard assets than the two most popular precious metals, gold and silver. Both have been relied upon as a store of value for at least four millennia. Neither can be printed by fiat.
Unfortunately, at present there is not enough of the real metal to spread among all the individuals that want to own it. How do we know that? Because of all the “out of stock” notices on even the largest bullion outlets in the U.S., the U.K. and in Europe. We know it because of the historic, extremely high premiums over the current spot pricing which all bullion items command right now whenever a bullion dealer does manage to obtain some inventory.
While the margin masters, liquidating yesterday’s major traders in the paper-futures markets and opportunistic short sellers have temporarily managed to skew the benchmark spot prices for both gold and silver to unreasonably low levels (relative to the actual intense demand in physical bullion markets), large and small holders of precious metals apparently sense that the spot prices are artificially low. They aren’t selling. At least they aren’t selling in large enough volume to lower the currently sky-high premiums for gold and silver or to put real metal into the inventories of bullion dealers.
What spectacular irony. At the very time when investors want to buy physical gold and silver the most, the paper-contract markets (which affect the spot or cash market benchmarks) are being sold down to such ridiculously low levels that few want to sell any real physical metal unless they just have to or are forced to. Meanwhile, the divergence in pricing between the physical bullion markets and what is still called “spot” that this report mentioned last time grows even wider.
http://www.resourceinvestor.com/pebble.asp?relid=46957
Physical gold is in great demand and the price to acquire it is surely going higher - a lot higher. Century is not some junior exploration company looking for gold, they already have proven deposits - 1.3 million ounces in reserves and almost 5 million ounces in total. It's a given that with higher prices and the ongoing modelling work that the 3 million ounces of inferred ounces will be converted into M&I resources and P&P reserves.
Selling shares for 2 cents will prove to be irrational IMO whether CMM acquires financing or not. There will be demand for those ounces.
Euro nations to guarantee bank refinancing
By GREG KELLER and JAMEY KEATEN, Associated Press Writers
PARIS - Nations in Europe's single-currency zone agreed Sunday to temporarily guarantee bank refinancing and pledged to prevent banks failing as part of a raft of emergency measures designed to get credit flowing again.
It was Europe's most unified response so far to the global financial crisis and addresses a key part of the problem: banks' reluctance to lend to each other. That has helped fuel the crisis that has pulled down some of Wall Street's most storied names and is threatening the core of the U.S. and European economies.
After the Dow Jones industrial average ended its worst week in history, plummeting more than 18 percent last week, world leaders scrambled all weekend for a way to unblock money markets before they open Monday.
At an emergency summit of leaders of the 15 euro-zone countries in Paris on Sunday, European governments agreed to guarantee new bank debt until the end of 2009, allowed governments to help banks by buying preferred shares, and vowed to rescue important failing banks through emergency recapitalizion.
But it stopped short of a one-size-fits-all solution: It's up to individual governments to announce how they will implement the measures.
"I want to tell our compatriots in all the countries of Europe that they can and should have confidence," summit host French President Nicolas Sarkozy said.
Sarkozy hoped the momentum from Sunday's meeting wouldn't stop at Europe's borders, and renewed his call for a summit of major world economies to help rebuild an international financial system "to make European ideas triumph."
European Central Bank Chief Jean-Claude Trichet welcomed the unity of Europe's leaders — but warned there is more work to do.
"The force of unity that we showed today is a fundamental element of confidence," said European Central Bank Chief Jean-Claude Trichet.
But "there are still many things to do," both by governments and central bankers, Trichet added.
European Commission President Jose Manuel Barroso said: "Our analysis isn't of an immediate miracle."
The plan follows Britain's 50 billion-pound ($88 billion) plan to partly nationalize major banks and promised to guarantee a further 250 billion pounds ($438 billion) of loans to shore up the banking sector.
But there was no sum given on how much the EU measures would cost, and Sarkozy said each country would decide how much it would spend.
British Prime Minister Gordon Brown, who met with Sarkozy earlier Sunday, said: "I believe that there is common ground now about what needs to be done, that it has to be comprehensive, and it has to be all countries working together to get to the bottom and solve what is a global financial problem."
Sarkozy said the measures — which also include new accounting rules for banks — will be enacted "without delay" in the 15 countries using the euro.
On Monday, the governments of Italy, Germany, France and others will present their individual ways of implementing the measures. The rest of the 27-member EU will have a chance to sign up to the measures when the countries meet Wednesday.
The statement by EU leaders said they agreed to "avoid the failure of relevant financial institutions, through appropriate means including recapitalization."
Governments would guarantee "for an interim period and on appropriate commercial terms" new debt issued by banks for up to five years.
"This scheme would be limited in amount, temporary and will be applied under close scrutiny of financial authorities until Dec. 31, 2009," it said.
Sarkozy said the measure taken by the leaders is "not a gift to banks."
"Banks need to be loaned money," he said. "So that this confidence is restored, states will have the possibility to guarantee the loans that banks take out, guarantee them under different forms."
German Chancellor Angela Merkel said the measures "will allow markets to start functioning again, that was our aim. It is a strong message to the markets."
As the financial crisis drags down the global economy, world leaders are scrabbling for a way to stop the panic. But efforts to agree on a coordinated global response have stumbled as leaders seek to address the unique challenges of their own countries.
"It's not easy," said Sarkozy. "We have different traditions. For some of us we don't have the same currency. We have different regulators."
But, he said, "In a situation of urgency we had to take responsibility."
Even within the 27-nation EU, some countries are facing the collapse of a housing market, some have had to step in to save banks, while others have faced different problems.
Finance ministers from the Group of 20, which includes rich countries and major developing nations such as China, Brazil and India, meeting in Washington this weekend, pledged to intensify their efforts to unblock a frozen financial system before it does more damage to an increasingly shaky global economy — but made no concrete offers of new moves.
PARIS - Nations in Europe's single-currency zone agreed Sunday to temporarily guarantee bank refinancing and pledged to prevent banks failing as part of a raft of emergency measures designed to get credit flowing again.
It was Europe's most unified response so far to the global financial crisis and addresses a key part of the problem: banks' reluctance to lend to each other. That has helped fuel the crisis that has pulled down some of Wall Street's most storied names and is threatening the core of the U.S. and European economies.
After the Dow Jones industrial average ended its worst week in history, plummeting more than 18 percent last week, world leaders scrambled all weekend for a way to unblock money markets before they open Monday.
At an emergency summit of leaders of the 15 euro-zone countries in Paris on Sunday, European governments agreed to guarantee new bank debt until the end of 2009, allowed governments to help banks by buying preferred shares, and vowed to rescue important failing banks through emergency recapitalizion.
But it stopped short of a one-size-fits-all solution: It's up to individual governments to announce how they will implement the measures.
"I want to tell our compatriots in all the countries of Europe that they can and should have confidence," summit host French President Nicolas Sarkozy said.
Sarkozy hoped the momentum from Sunday's meeting wouldn't stop at Europe's borders, and renewed his call for a summit of major world economies to help rebuild an international financial system "to make European ideas triumph."
European Central Bank Chief Jean-Claude Trichet welcomed the unity of Europe's leaders — but warned there is more work to do.
"The force of unity that we showed today is a fundamental element of confidence," said European Central Bank Chief Jean-Claude Trichet.
But "there are still many things to do," both by governments and central bankers, Trichet added.
European Commission President Jose Manuel Barroso said: "Our analysis isn't of an immediate miracle."
The plan follows Britain's 50 billion-pound ($88 billion) plan to partly nationalize major banks and promised to guarantee a further 250 billion pounds ($438 billion) of loans to shore up the banking sector.
But there was no sum given on how much the EU measures would cost, and Sarkozy said each country would decide how much it would spend.
British Prime Minister Gordon Brown, who met with Sarkozy earlier Sunday, said: "I believe that there is common ground now about what needs to be done, that it has to be comprehensive, and it has to be all countries working together to get to the bottom and solve what is a global financial problem."
Sarkozy said the measures — which also include new accounting rules for banks — will be enacted "without delay" in the 15 countries using the euro.
On Monday, the governments of Italy, Germany, France and others will present their individual ways of implementing the measures. The rest of the 27-member EU will have a chance to sign up to the measures when the countries meet Wednesday.
The statement by EU leaders said they agreed to "avoid the failure of relevant financial institutions, through appropriate means including recapitalization."
Governments would guarantee "for an interim period and on appropriate commercial terms" new debt issued by banks for up to five years.
"This scheme would be limited in amount, temporary and will be applied under close scrutiny of financial authorities until Dec. 31, 2009," it said.
Sarkozy said the measure taken by the leaders is "not a gift to banks."
"Banks need to be loaned money," he said. "So that this confidence is restored, states will have the possibility to guarantee the loans that banks take out, guarantee them under different forms."
German Chancellor Angela Merkel said the measures "will allow markets to start functioning again, that was our aim. It is a strong message to the markets."
As the financial crisis drags down the global economy, world leaders are scrabbling for a way to stop the panic. But efforts to agree on a coordinated global response have stumbled as leaders seek to address the unique challenges of their own countries.
"It's not easy," said Sarkozy. "We have different traditions. For some of us we don't have the same currency. We have different regulators."
But, he said, "In a situation of urgency we had to take responsibility."
Even within the 27-nation EU, some countries are facing the collapse of a housing market, some have had to step in to save banks, while others have faced different problems.
Finance ministers from the Group of 20, which includes rich countries and major developing nations such as China, Brazil and India, meeting in Washington this weekend, pledged to intensify their efforts to unblock a frozen financial system before it does more damage to an increasingly shaky global economy — but made no concrete offers of new moves.
Thursday, October 9, 2008
The Lamaque ounces in inventory
Assuming they haven't sold those ounces as yet, the increased gold price is presenting some choices.
Century had 3,200 ounces in inventory at Lamaque at the end of Q2. The $2.156M US hedge buyout settlement is planned for Q4, which would suggest that Century has most likely been waiting for a dramatic gold price increase in Q4 (which most of the gold experts had anticipated all along) prior to selling these ounces.
The spot gold price is now $926 US. The Cdn/US exchange rate is now .86. If Century sells those 3,200 ounces now then it should generate $2.963M US in cash. After paying Gerald Metals their $2.156 US, it should leave $807K US for Century, which converts over to $939K Cdn.
Will Century wait for a $1,000 US gold price? That price would create $1.214M Cdn for Century.
Is a $1,100 US gold price possible in Q4? If so, will Century wait for it before selling these ounces? I guess that decision might be determined on how quickly it spikes (if it does). It might be best to just take $1,000 (or $950) if it arrives in Q4. Anyway, if they wait for $1,100 then Century's share of the sale would be $1,586 Cdn (using the same assumptions).
Again, it is unclear what the current status is with those ounces, chances are probably good that Century is waiting to maximize the price in Q4.
The rise in gold doesn't hurt ounces being sold at San Juan either ($926 US gold price at this particular moment and potentially still $459 US cash cost or better).
Potential of Trafalgar loan to close shortly.
Fortis now with BNP Paribas, an extremely strong European bank, and one which is apparently gold mining friendly. There has been nothing to suggest that the Fortis arrangement has been stopped and/or that the recent technical evaluation was not positive. It is impossible to know what the outcome will be with Century's situation, but I would suggest that fear (and lack of official communication by the company) is a big driver for the share price reaching 1.5 cents. I guess only time will tell.
No long-term debt with San Juan.
Having a supportive secured debt partner (IQ - which has continually demonstrated their support in the efforts to make Lamaque a success) has been pivotal during this global crisis situation. Century does not have to make any payments to IQ in 2008, and Century's debt is due in equal payments over a 15 yr period (about $1M per year).
Century had 3,200 ounces in inventory at Lamaque at the end of Q2. The $2.156M US hedge buyout settlement is planned for Q4, which would suggest that Century has most likely been waiting for a dramatic gold price increase in Q4 (which most of the gold experts had anticipated all along) prior to selling these ounces.
The spot gold price is now $926 US. The Cdn/US exchange rate is now .86. If Century sells those 3,200 ounces now then it should generate $2.963M US in cash. After paying Gerald Metals their $2.156 US, it should leave $807K US for Century, which converts over to $939K Cdn.
Will Century wait for a $1,000 US gold price? That price would create $1.214M Cdn for Century.
Is a $1,100 US gold price possible in Q4? If so, will Century wait for it before selling these ounces? I guess that decision might be determined on how quickly it spikes (if it does). It might be best to just take $1,000 (or $950) if it arrives in Q4. Anyway, if they wait for $1,100 then Century's share of the sale would be $1,586 Cdn (using the same assumptions).
Again, it is unclear what the current status is with those ounces, chances are probably good that Century is waiting to maximize the price in Q4.
The rise in gold doesn't hurt ounces being sold at San Juan either ($926 US gold price at this particular moment and potentially still $459 US cash cost or better).
Potential of Trafalgar loan to close shortly.
Fortis now with BNP Paribas, an extremely strong European bank, and one which is apparently gold mining friendly. There has been nothing to suggest that the Fortis arrangement has been stopped and/or that the recent technical evaluation was not positive. It is impossible to know what the outcome will be with Century's situation, but I would suggest that fear (and lack of official communication by the company) is a big driver for the share price reaching 1.5 cents. I guess only time will tell.
No long-term debt with San Juan.
Having a supportive secured debt partner (IQ - which has continually demonstrated their support in the efforts to make Lamaque a success) has been pivotal during this global crisis situation. Century does not have to make any payments to IQ in 2008, and Century's debt is due in equal payments over a 15 yr period (about $1M per year).
Sunday, October 5, 2008
BNP Paribas to take control of Fortis in Belgium, Luxembourg: source
My understanding is that the Precious Medals division has been the most successful arm for Fortis. Hopefully the new owners decide to keep it intact, in one form or another. There is a lot of incentive to maintain a Precious Medals arm, as the gold price is expected to stay strong for several years into the future.
Here is the latest on the Fortis sale:
"LUXEMBOURG, (AFP) - French bank BNP Paribas will take control of ailing finance group Fortis's operations in Belgium and Luxembourg, a source close to the Luxembourg government said Sunday.
An agreement was reached after a weekend of talks between the parties under which France's biggest bank will take up 75 percent of Fortis' Belgian operation leaving the other 25 percent, a blocking minority, in the hands of the Belgian government.
On the Luxembourg side, BNP Paribas will take 66 percent of the shares leaving the Grand Duchy with 33 percent, the source said.
Fortis ran into liquidity problems which originated with the US-born financial crisis.
On Friday the Dutch government totally renationalised the group's Dutch arm."
Here is the latest on the Fortis sale:
"LUXEMBOURG, (AFP) - French bank BNP Paribas will take control of ailing finance group Fortis's operations in Belgium and Luxembourg, a source close to the Luxembourg government said Sunday.
An agreement was reached after a weekend of talks between the parties under which France's biggest bank will take up 75 percent of Fortis' Belgian operation leaving the other 25 percent, a blocking minority, in the hands of the Belgian government.
On the Luxembourg side, BNP Paribas will take 66 percent of the shares leaving the Grand Duchy with 33 percent, the source said.
Fortis ran into liquidity problems which originated with the US-born financial crisis.
On Friday the Dutch government totally renationalised the group's Dutch arm."
Friday, October 3, 2008
Very short article on the Atacocha majority ownership sale situation
I don't have a subscription to the "www.corporatefinancingweek.com" site, therefore I do not have access to the full article. Nevertheless, it looks like potential new majority ownership of Atacocha is still progressing forward (again, new majority ownership of Atacocha MAY eventually increase Century's chances of a more reasonable out of court settlement on the Poderosa legal case).
"Atacocha Sale Progresses"
"Peruvian miner, Atacocha, which said in August that a block of its shareholders were looking to sell a majority stake in the company, announced on October 3 that it would allow PAF Securities to conduct due diligence. Shares in the zinc and lead producer have climbed more than 40% since August on the back of speculation that a foreign mining company may be interested."
"Atacocha Sale Progresses"
"Peruvian miner, Atacocha, which said in August that a block of its shareholders were looking to sell a majority stake in the company, announced on October 3 that it would allow PAF Securities to conduct due diligence. Shares in the zinc and lead producer have climbed more than 40% since August on the back of speculation that a foreign mining company may be interested."
Subscribe to:
Posts (Atom)