(Confiscation of Gold through Currency Manipulations)
I have alluded to this in the past, and continue to harp on it to this day. The whole concept of confiscation of things 'real' through currency manipulations, especially the US$, appears more accurate as time moves on. The US$ has of course been involved in a controlled descent from nosebleed levels. The shores of many countries are awash in US$, trading of goods and services for fiat monetary paper instruments. The governments of the developed nations, trade self professed 'money' for items of real value, be it gold, oil, sugar cane, computers, what have you.
We have already discussed oil in a past essay, and how the manipulation of a currency directly affects the producers. Let's take this story to a couple of SA miners. At the beginning of this little bull market in gold, many of us would have thought that the rising price of gold would contribute mightily to the net revenue of the South African miners. But has that really been the case? Let's do a couple of elementary and quick calculations.
(for our purposes, these are approximates and not actual tops and bottoms)
While this is very simplistic, the value received in the home currency after the conversion, and after the effects of the dollar depreciation, is very evident. The miners are effectively receiving less for their gold produced, than prior to the advent of the bull market in gold. Or, pursuing this from a different view, the Rand has appreciated against the dollar much greater than the price of gold has risen in dollar terms.
Before we move on, let's take a look at a couple of charts showing the price of Gold in Rand, and in Euro's:
This first chart shows the price of Gold in US$ and in Euro's over the period of discussion. The price of Gold in US$ basis, is clearly in a solid uptrending bull market, while in Euro's, it is in a sideways formation. Effectively, there has been little gain for the holders of Gold in Euros throughout this nascent bull. Couple this with the Euro appreciation against the dollar, and there is a distinct disadvantage in holding gold in Euros. Buying at about 300 Euros, and selling at about 337 Euros per ounce, would have netted a gain of about 12.33%.
In dollar terms, the gold bull has produced a run of 256 US$ per ounce to 435 US$ per ounce, or an increase of 67%.
The Rand is a less stable, and much more malleable currency. What began as a very positive run in gold price on a Rand basis, quickly disintegrated into a modest gain of about 1930R per ounce to 2630R per ounce, or a gain of 36%. While this gain on the surface seems quite reasonable, the true gain, factoring in local inflation to produce each ounce, quietly wipes the slate clean of any bull market in Rand Gold. Note how the price in Rand gold went parabolic, and then was driven back down to a very modest gain. Of course, all of this was happening while the Rand continue to strengthen against the US$, eventually dropping back to the current levels of R6 per US$.
Let us reiterate that the inflation rate at the local level, must be added to this factor or discussion, resulting in an even more precarious position for the SA miners. Now the headlines all read 'another mine closed', 'another mine mothballed', 'costs for SA miners exploding', or the ever present, 'quarterly loss greater than anticipated'.
What choice do the miners have? Keep producing at a loss, close down excessively costly mines, close the doors completely, or maybe control input and throughput costs. The opportunity to control wage costs are non-existent as the unions are pushing the other button, or UP button. The input costs, including oil, have all been increasing worldwide. No real help there. Unless there are significant overhead costs to trim, which is highly unlikely for the survivors of the extended bear market in the gold arena, there really isn't a rational way to continue on in the way of the past. Marginal mines must be shut down in complete defiance of the gold opportunists. This metal must be removed from the market, it must not be given away as a loss leader, much like milk at a Walgreens.
What are they gaining by continuing to produce this metal at much below costs? Yes there are offsets, for instance when mothballed, water control must be maintained or the mine will be lost. But, let's face it, they are not in the business of water control. They are in the business of gold mining. Something drastic and severe must be done to show the currency manipulators that this excessive appreciation in the Rand, is unacceptable. While the dollar has declined from about 120 to 84 on the index, or about a 30% decrease, the Rand has gone from 10R to the dollar to 6R to the dollar, approximately a 40% strengthening against the dollar.
In addition, the governments of the area, will have to make some concerted efforts to help their most important producers/exporters. They will need to take a new look at the requirements to decommission a mine, or to mothball a mine temporarily, all with a look to the future and the longer term. I would venture a thought that they are under intense pressure to continue to supply the gold market, lest there be repercussions.
Let's remember too that the South African economy is but a very small economy when compared to the US. A 40% increase in relative currency value is very substantial. This will not go to a 1:1 ratio and beyond as the Euro has succeeded in accomplishing. South Africa is already beyond parity relative. I would argue much beyond.
We have watched Durban go from 70 cents a share to $6.00, and all the way back to the mid 70 cents a share again. They are in danger once again of being delisted from the US exchange as they have moved under $1 share price again. The drug that keeps them alive is the fact that they trade actively on a daily basis. The exchange cuts them some slack because of the large volume traded virtually each and every day. (read money made by the exchange). We have watched Harmony go from about $4 a share to $19, and back to the mid $6 range once again. Harmony actually looks destined to return from whence it came. Add to this the recent news of Newmont disappointing the market this earnings season, and it becomes a tidal wave of depressing news from the SA golds.
By the way, did you all notice who is smiling today? Barrick , of course. The one who was lambasted for excessively hedging production and so on. Interesting to say the least. I would hazard a guess that someone should review the bookkeeping. Their gold may be held in US$, allowing them to show the gain in US$ terms, while to pay their costs across the world, the US$ holdings must be converted to local currencies. Many of these local currencies have been increasing vs the US dollar. Hmmmm, oops, better get back on track.
Why keep producing at never ending losses? Why continue to give the currency manipulators what they want………..your gold on the cheap, or the opportunity to wipe out the mines? A few years back we watched many Asian country currencies get pounded by the seek and destroy currency crowd as they moved from one country to the next. We watched as they raised trouble in many South American countries, and now we stand by while they tear up the SA's. They of course are using a different tact this time, as the buck is declining with the Rand increasing. The results are the same, destruction of the local economy, for whatever reason or whim is present at the time. Because of the dollar decreasing, the SA's have something of value much coveted, that being the gold produced and on reserve there.
While gold is coveted as a hedge against dollar depreciation, let us not fool ourselves and think that the gold producers have the same leverage as the oil producers that we discussed earlier. The magic elixir of crude oil, and the must have nature of it, allow for more latitude in supplier pricing demands, than the gold miners. The producers of oil have greater leverage than the gold producers, allowing for easier pricing equality in the currency exchange game. Everyone understands the nature of crude, while very few understand the true ramifications of a concerted rise in gold prices. Everyone is a player in the crude market when the go to the local gas station and 'fill 'er up!'. This is not the case in gold. Many are unaware that gold even exists. Yes, gold prices have risen to levels not seen in quite some time, but they have failed to attain levels equivalent to the fiat monetary explosion worldwide.
Lost in all of this, so far are the shareholder rights. The shareholder has a right to expect a return on investment. If there is no return on investment, there will be no shareholders. Arguably, this is what is happening today. Many shareholders expected a fair return on investment, only to be quite disappointed. This is why we also argue against the buy and hold forever nature of some investors in this arena. That works for the physical side of this, but is almost suicidal in the paper markets. Miners are not known for consistent long periods of shareholder enhancement, either through share price increases, or dividend pay-outs. They are very adept at burning capital. Such is the nature of the beast. Mining has variables, consequences, and governmental interference that is much beyond a widget maker.
Some hard decisions must be made. Are some CB's actually trying to remove competition in gold supply, in order that they may dishorde their respective holdings in a more rapid fashion? Or, is it the reverse, where the current positioning is being used to confiscate and accumulate gold at rock bottom prices for the inevitable accelerating bull market? The fiat monetary system is with us, until the ultimate decline or implosion of the whole worldwide fiat experiment, whether we like it or not. There isn't enough gold existing to cover the level of fiat worldwide, except of course at much higher gold prices. Realistically, don't plan on a gold backed currency happening anytime soon, for that matter, not at all until it is forced upon a collapsed system.
In conclusion, the shareholders are hoping for a repeat of the 1970's period, in which the SA miners began a bull market by rising to decent heights, only to be hammered back to the stone ages. After that false start, the real bull market in these shares started, with eventual huge gains made all around as the SA gold stocks got rolling with a more forceful rising gold price. Eventually, showing extraordinary gains in share price in addition to throwing up sizeable dividends. We have seen a significant high in the Rand vs the Dollar. The SA miners have been hit with just about everything, except the kitchen sink, maybe that too. May they finally be at the buy point of all buy points?? Good question. Stay tuned.
Everyday is the right day to 'get physical'
Frank A Lechner
April 30, 2005
Frank A Lechner is a private investor, and makes no allowances for stupidity or insanity as each chooses his own investment battles. Past performance is no indication of future direction, nor do I even care about govt mandated disclosures. You make your choices and you live with them. He does in fact believe that we are indeed in a time of turmoil, a time of increasing prices, much as wrote about before, and that this period will resemble the 70's. Those that fail to learn from history are destined to repeat, or so I hear. Good investing to you.
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