(July 14, 1997)
The American press had given no notice to a comment made by Mr Nakayama, an important Japanese legislator and goldbug, when he said last month, "Japan's gold reserve levels are so small given our economic strength compared to other nations, I believe that Japan should boost those reserves. It's risky to depend heavily on the US dollar. Holding more gold should be considered." For several decades, we have on numerous occasions predicted that Japan would someday realize that their paper money was backed almost entirely by our paper money, and so would shift into gold. Of Japan's $220 billion in foreign-currency reserves, 76% is now in US dollars.
Thus, TDLrs were not surprised when, on Jun 23rd, Japan's Prime Minister Hashimoto, after a speech at New York's Columbia University, warned that Japan might soon switch its US Treasury Bills into gold, which triggered a mini-panic that sent the Dow-Jones Industrial Average plummeting 192 points in a matter of minutes, the second-largest one-day decline in history, trailing only the 508-point crash of 19 Oct 87. Hashimoto's comment sent bonds reeling, but officials smoothed over the flap the next day, brushing it off as an "error in translation." We do not think it was, but whether it was a trial balloon, or a counterweight to Clinton's pressure on Japan to balance its trade deficit, remains to be seen. The fact is, the United States is the world's largest debtor nation, so it is vulnerable to such pressure from a leading creditor, whose devastating bond selling would send our interest rates and gold prices higher.
| Currently holding less than 5% of its reserves in gold, we have long been convinced that Japan would eventually begin a surreptitious program of gold buying which, for all anybody knows, might have already begun. |
Aside from an Asian switch from paper dollars to gold, other reasons for a new bull market are the strong physical demand for gold jewelry at these low prices and, adjusted for inflation, gold is where it was at $73/oz in 1976, before it soared to $850 (unadjusted). Pessimism is at record levels, Central Bankers usually sell at bottoms, and there has been a huge amount of short selling and forward selling by gold producers, so the rush to cover on a rally might well produce a buying panic, believe it or not. Bre-X's crash has become imprinted on the mental rhodopsin of the Mass, whose panic selling at these ridiculously low prices thus provides a rare bargain-hunting opportunity.
Would lower gold-bullion prices help gold-mining companies? It is a self-evident truth that higher gold prices would help gold-mining companies, but we know of no other Analyst in the world who believes that lower gold prices would also benefit gold-mining companies. We would like to stake that lonely ground, and our reasoning is based on the fact that at five of this planet's twenty-two largest gold mines, cash costs to produce gold are above $346/oz, above current prices, so our guess is that an increasing number of mines will either have to close down, slash costs, or halt low-grade production. According to Gold Fields Mineral Services in London, the world's gold cash cost is $257/oz; however, including capital expenditures, the total cost comes to $315/oz, only around $25/oz lower than the current commodity price. At these interest rates, our guess is that at least half of the world's gold mines need $350 to $370 just to break even. There are ten mines in South Africa with working costs of at least $350/oz and four with costs of over $380/oz. Since South Africa is the world's largest gold producer, we can expect gold production to begin dropping fairly soon and, unless we're missing something, serious market students will agree that this is bullish rather than bearish for gold! Because of diminishing supply.
As evidence that golds are getting cheap, the beginning of an unprecedented wave of mergers in the industry has already begun. For example, Newmont Mining's acquisition of Santa Fe Pacific Gold will result in total cash costs next year of only $210/oz, making Newmont one of the world's most profitable gold producers. Newmont's annual production will be level with the current North-American leader Barrick Gold's approximate 3.2 million/oz, but still less than half of Anglo-American's, the world's largest. Newmont is looking to increase production to 4-million ounces next year, with its huge proven and probable reserves of 55-million oz.
If gold-bullion prices decline further, or even remain at these levels, we look for production to begin a serious decline, precisely at a time when these bargain prices are attracting increasing amounts of gold buying from Asia, and especially Japan. The most negative factor cited by Security Analysts these days is the fear of gold selling by European Central Banks, so let us look at that potential source of supply rationally: in fact, London clears around 30-million ounces of gold every working day, worth over $10 billion, which compares with average daily Comex turnover of 3-million ounces and 1-million ounces on Tocom. Because London's numbers do not include all transfers, instead of 30-million, the number is probably closer to 100-million ounces, but even at only 30, the daily turnover is almost twice the annual output of South-Africa's mines. Germany's entire gold reserves are 95.2 million/oz; France's 81.9; Italy's 66.7; Netherlands 34.8; United Kingdom's 18.4; Belgium's 15.4; Spain's 15.6; Austria's 10.8, all the way down to Ireland's 0.4. Our point is, even if European Central Banks sold all of their gold, it would be a drop in the bucket on the London bullion market! As evidence that European central bankers would not sell all their gold, the German government recently backed down from its "creative accounting" of marking its gold reserves up from its present $95/oz to its real value closer to $340/oz, because it was shouted down with ferocity.
Not only do we brush aside everybody's fear of Central-Bank selling, but we also point to an overlooked element of demand, because many Analysts focus on consumption of gold for jewelry without grasping that gold is the investment of choice during periods of Mass Fear. Perhaps something will be triggered by Japan, a stock market plunge or a spectacular terrorist incident. Perhaps there is a 100-year cycle stretching back to the 1898-gold discovery in Alaska's Klondike by prospectors George Washington Carmack, Tagish Charlie and Skookum Jim in Bonanza Creek near Dawson City in the Yukon Territory. With its one-hundredth anniversary next year, much will be made about that Gold Rush and 1998's headlines might well stimulate renewed interest in gold.
Amidst soaring pessimism, gold prices have levelled off this year, as shown in the "Precious Drop" chart below.
| Gold remains the ultimate liquid asset, spendable anywhere in the world, so it has a place in all balanced portfolios to provide downside protection against political upheavals, a currency crisis or even a Central-Bank shift out of paper dollars. |
Gold buying in the developing countries of Asia, the Middle East and Latin America rose 22% to a new record for any quarter, especially by Indonesia, Saudi Arabia and India. Because gold prices have been dropping while financial instruments have been roaring higher, investors are not much interested in gold right now but, sooner or later, relative values will trigger the usual bull market for the yellow metal. Meanwhile, 80% of total gold demand is for jewelry from the mature and price-insensitive markets of North America and Europe. Jewelry is rarely sold back or melted down.
The Dines Letter
June 7, 1997 June 14, 1997 June 20, 1997 June 28, 1997
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