2. Negative Real Interest rates
The FED made it clear that the current low interest rates are here for some time to come. That obviously means that the current negative real interest rates will be here for some time to come as well. History tells us that negative real interest rates are one of the strongest drivers for higher Gold prices.
3. Declining Gold supply
Exploration budgets have been cut by 67% over the past 5 years due to uneconomical prices of Gold. (Exploration pays off with Gold prices exceeding $350/ounce). The existing Gold reserves will be (at the current rate of production) depleted within 10 years. Many heavy weight insiders such as Bobby Godsell (CEO AngloGold), Pierre Lassonde (CEO Newmont), Alex Davidson (Vice president Exploration Barrick Gold) have raised the alarm bells last year regarding this issue.
Alex Davidsion, Barrick VP Exploration : (March 2003)
"Big mining companies need to spend more on exploration, or else, at current annual production rates, reserves will be depleted in 10 years, he said. It can take six to eight years between making a discovery and starting mine production, and "we're not currently funding exploration at a level required to replace reserves," Davidson said."
Pierre Lassonde, CEO Newmont : (August 31, 2003)
"The 20-year bear market in gold has weeded out marginal gold producers and significantly curbed exploration and production.
"If gold was $1,000 an ounce, it still takes four to seven years to open a mine," he said."
You don't have to be a rocket scientist to see what kind of fundamental impact a declining Gold supply has on the price of Gold.
For a detailed overview of declining Gold supply, see my Essay "Declining Gold reserves benefit Juniors" which can be found at : www.gold-eagle.com/editorials_03/hommelberg042303.html
Furthermore I was happy to receive some comments after this Essay from Professor Utter (Germany) in which he confirmed my thesis of declining Gold supply. He wrote :
Dear Mr. Hommelberg,
very good summary and compilation. In this context, I was quoted recently by the German monthly magazine "Smart Investor" that " the world's gold reserves (mining) last for about 6 to 7 years". See our web site www.zaruma.com and media "Die weltweiten Gold Reserven reichen noch fuer sechs bis sieben Jahre".
Keep up the good work.
Prof. Thomas Utter
Hon.Prof. (Geology) Technical University Darmstadt, Germany
Link to his interview : http://www.zaruma.com/data/en/documents/SmartInvestor0803.pdf
4. Increasing Gold demand
Demand for Gold will grow substantially (imo) due to the following :
All items mentioned above are described in detail in my Essay "Junior Launch time ?" which can be found at : http://www.gold-eagle.com/editorials_03/hommelberg090403.html
Just a small update of two items here :
ETF Gold Bullion Limited (Australian Stock Exchange : GOLD)
In March of this year Gold Bullion Limited started with approximately 1,000 ounces of Gold. In September this year their holdings increased to 131,073 ounces of Gold. Now two three month later their holdings exceeded the 200,000 ounces level. (237,632). The trend is obvious, see chart below !
Are there still any pessimists around regarding Chinese demand for Gold ? Well read on !
Chinese Gold demand
NEW YORK -- The Hong Kong edition of Friday's China Daily will be celebrated in gold bug circles after the Bank of China's bullion guru said local consumers could pour $36 billion into the metal, equivalent to around 2,950 tonnes, or more than one year of supply, at current prices.
Xi Jianhua, the Bank of China's gold business expert, is also quoted saying that it would be "safe and feasible" for China swap to some foreign exchange reserves for gold. The country has a little over 600 tonnes of gold in reserve now ($7.3-bn), and $360 billion in foreign exchange.
Pierre Lassonde, CEO Newmont Mining on Chinese Gold demand:
Chinese gold demand could only grow with deregulation. "Current consumption is 0.2 grams per person per year. In India it is over 0.7 grams and grew from a level similar to the Chinese 11 years ago. Indian gold market deregulation grew demand from 200 to 900 tonnes, although it has slipped to 600 tonnes now," he said. "Imagine if China grows from 0.2 to 0.7 grams of gold per person? It will be the largest gold market in the world. It will happen, I can see it."
So future Chinese demand for Gold will be huge, but I wonder who is going to supply the Gold ? " The Central Banks ? I don't think so, they already bombed the gold market with half of their reserves past decade (see next section - covering short positions), the Producers ? No way, even with Gold prices at $1000/ounce, it still takes 4 to 7 years to open a mine Pierre Lassonde of Newmont said, so forget about additional supply coming out of the mines coming years. So what's left ? I really don't know ! Investors will realize soon that Gold is precious and hard to find these days !
5. Covering Short positions
When the Gold Anti Trust Action Committee (GATA) presented their case regarding a manipulated Gold market four years ago, they were regarded as a bunch of nuts by most main stream analysts. Claims by GATA of short positions reaching 15.000 ton were categorized as being science fiction. But things are changing fast now. John Embry (President Sprott Asset Management) already praised GATA's work in an interview with ROB-TV in January this year. He said :
"The GATA group did some outstanding research in the field, they are not some lunatics like some people would like to paint them, they are some smart intelligent guys who have done some great great work. They would submit that there is most probably closer to 15.000 ton of CB Gold that has come into the market primarily through the leasing mechanism"
In his Essay "15 reasons to own Gold" (Sept 26,2003) John Embry mentions the large short positions again.
Large Short Positions
To fill the gap between mine supply and demand, central bank gold has been mobilized primarily through the leasing mechanism, which facilitated producer hedging and financial speculation. Strong evidence suggests that between 10,000 and 16,000 tonnes (30- 50% of all central bank gold) is currently in the market. This is owed to the central banks by the bullion banks, which are the counter party in the transactions.
Gold veteran Frank Veneroso confirms in an interview with Tom Calandra of CBS Marketwatch (September, 2003) that the amount of serious investment professionals who take GATA's position is growing rapidly. This is what Frank Veneroso said about GATA :
On the Gold Anti Trust Action Committee :
"Bill Murphy used to work with me. Bill was convinced this was a managed market. He went of to create LemetropoleCafe.com and GATA in 1999. As time passed and with the 1999 Washington Accord (limiting central banks' sales of Gold), it became clear the logic of his analysis had to be correct. The implications of all this were huge."
On the 'managed' Gold market :
"GATA has made a lot of publicity about management of the Gold market, and they are basically correct. Three years ago, this was regarded as crazy talk. Now when I am in Europe, I am shocked by the number of serious investment professionals who take this position, that the Gold market is manipulated"
So what will happen when the big picture unfolds in front of the main stream Investor ? What will happen if the main stream Investor recognizes that half of the CB Gold is gone ? Panic ?
Although a bit dated but the article published in February this year by Kelly Patricia O Meara from Insight Magazine "Panic Is Near if 'The Gold Is Gone'" is a must read for everyone interested in GATA's claims.
And last but not least, talking about gaining credence. What about a President candidate supporting GATA ? Well, hold on to your seat because here it is ! Bill Murphy had the pleasure of announcing his candidacy during the last New Orleans Investment conference. Here's what Bill Murphy said :
I'm going to introduce you to a man I've known for five years who is going to announce his candidacy for the President of the United States next week as an Independent.
A man who is not afraid to get the truth out there about gold and many other issues.
He ran for Governor in Nevada and got 30% of the vote in a 4 man race in 1998.
He is a staunch GATA supporter, fervent gold advocate, and while gold is only one of his points, he will be the ONLY Presidential candidate talking about gold in the coming Presidential election.
He has my support, along with that of James Turk and his longtime friend Richard Russell, along with many others in the Hollywood crowd. There will be much press coming out on this soon and he asked me to tell you he will bring up the gold issue in the Presidential debates. - MY FRIEND AARON RUSSO"
6. Recognition of Gold as Money
Despite the fact that even the Federal Reserve and ECB acknowledge the fact that Gold is money many investors are still in denial.
"Gold still represents the ultimate form of payment in the world." - Alan Greenspan, Testimony before US House Banking Committee, May 1999.
"Gold will remain an important element of global monetary reserves." - Statement by the European Central Bank, September 1999.
Gold is the ultimate form of payment because it is the only money that is not someone's liability. Because of this important attribute, gold is an essential monetary asset.
Why do these leading authorities on money make these statements about gold? Because gold is money, and it serves this role exceptionally well by providing a long-term store of value.
Furthermore Malysia is working on a currency backed by Gold (Gold Dinar).
John Embry (Sprott Asset Management) made the following remarks in his Essay "15 reasons to own Gold" http://goldmoney.com/en/commentary/2003-09-26.html
Gold as Money is Gaining Credence:
Islamic nations are investigating a currency backed by gold (the Gold Dinar), the new President of Argentina proposed, during his campaign, a gold backed peso as an antidote for the financial catastrophe which his country has experienced and Russia is talking about a fully convertible currency with gold backing.
Some believe that China will make its currency (Renminbi) convertible in time as well and that it will be backed by Gold.
Richard Russel on Gold , November 3
In due time the renminbi will be made convertible. I believe it will have gold backing, making the renminbi one of the strongest of all currencies and directly competing with the fiat US dollar.
So what we are witnessing here is a strong revival of Gold as being an important Monetary Asset. Malysia, Argentina, Russia, China all talking about convertible currency with Gold backing proves this point.
An interesting note from Paul van Eden in an interview with Tim Wood.
Paul van Eden (International Speculator) on Gold and currency
Paul van Eeden: I realized in 1997 that the gold price was insensitive to physical supply and demand paramaters such as those typically used to analyze commodities. Instead, believe it or not, gold was acting like a currency, and the gold price was responding to changes in money supply and exchange rates. This is, of course, what one would expect, since gold is money.
Steve Matthews, Commodities strategist for Tudor Investment Corporation
Matthews : There is an increasing tendency among funds to view gold as a foreign exchange instrument rather than a commodity. Whilst the macro factors count against fiat currencies and mainstream securities, bullion ETFs could be especially important to professional investors. This view was backed up by Ian McDonald, vice president and manager of precious metals at Commerz Bank, who says that gold has resumed its currency role after a two decade hiatus.
7. Flee from Equities to hard Assets
In uncertain times (fear of monetary chaos / dollar crash) Gold always performed its role of ultimate safe haven quite well. I think the following press release says it all.
Swiss bank puts wealthy clients in gold
Thu 18 September, 2003 10:06 BST
GENEVA (Reuters) - Swiss private bank Lombard Odier Darier Hentsch has said it is luring wealthy clients back to gold, plugging the diversification, protection and potential growth benefits of the asset.
"Against a background of geopolitical uncertainty and very turbulent equity and bond markets, investing in gold is a good way to protect and diversify assets while still aiming to achieve an absolute performance," the bank said.
Its multi-manager "World Gold Expertise Fund" which it launched on August 7, has already attracted over $150 million and LODH believes it could double by the end of this year.
"We've no specific target but we think we could double the size of the fund within a couple of months," Cyrille Urfer, head of fund research and multi-management at LODH told Reuters on the sidelines of an investor briefing.
The fund invests in four fund managers each with a slightly different perspective on the gold market but all with a focus on gold mines. It has two reference currencies -- the euro and the dollar, and carries an annual management fee of two percent.
Apart from diversification, which has regained importance in many portfolios decimated by an over-reliance on stocks when the bull run ended, gold also offers some protection against rising inflation in a negative environment for the U.S. dollar.
"Diversification has been rediscovered, but it's not only in alternative investments. Investors can also find it in traditional assets," Urfer said…
Well Ladies and Gentlemen, that's it ! Seven critical drivers for Gold all pointing towards higher prices for Gold and all firm in place. Plenty of facts are presented here supporting higher prices for Gold.
As mentioned before the Junior shares already appreciated into the 100 - 1000% range this year and Investment Capital is piling in right now.
Should you do the same ?
Well, of course that's up to you, but before making any investment decision at all I want you to take notice of the following disclaimer which is really very important !
The author maintains a big investment position in Junior Mining Companies and is not a professional investment advisor. The author has not been paid nor has been asked to write this analysis. This analysis is not a solicitation to buy or sell and no responsibility can be had for losses on the basis of this analysis. The reader should be aware that investing in Gold mining equities is a risky endeavor with a very real probability of substantial losses. Before making any investment decision, do your own research and consult a professional investment advisor.
The Junior Exploration Companies will be in the spotlight soon due to :
Declining Gold reserves :
Major producers will face a tremendous challenge in order to replace their dwindling Gold reserves. This is a direct result of the cut backs in Exploration budgets by 67% over the last 5 years. Even with a Gold price of $1000, it still takes 4 - 7 years to open up a mine Pierre Lassonde (CEO Newmont Mining) said. Eventually the major producers will turn to the better Juniors with promising Gold properties in order to replace their depleted Gold reserves.
John Ing of Maison Placements Canada recently raised this issue as well. He said :
Unfortunately there are fewer than ten world-class deposits that exceed five million ounces. Hence, we expect these companies to be among the next round of takeover candidates.
Increase of Gold price
I think it's sufficient to repeat just one single sentence of this Essay :
Can you give me just one single reason why the price of Gold should be trading below a 30 year average despite a declining dollar, despite a historical current account deficit, despite a declining Gold supply, despite a growing demand for Gold, despite the negative real interest rates, despite the fact that Gold as money is gaining credence, despite the fact that an increasing amount of private banks are putting their wealthy clients back in Gold, can you ?
Well folks, that's all, hope you enjoyed it and guess I gave you some homework to do !
Please feel free to send your comments at :
November 14, 2003