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Colin Sutherland, a self-confessed“gold bug”and chief executive officer (CEO) of Nayarit Gold, a Canadian junior gold miner with a prospective mine in the Sierra Madre in Mexico, notes that while investment gold has dropped as funds take their profits, physical gold is at a premium. “Demand for physical gold is still high. If you were to try to buy a gold coin you would have to pay a higher price, since on the physical side of things, a lot of the mints just do not have the supply,” he says. Many small investors buy gold coins such as the South African Rand, the American Eagle or the Canadian Maple Leaf as the equivalent of managed fund gold holdings, and jitters about the dollar and indeed the whole financial system, have whetted their appetite, hence the shortage. Moreover, gold for jewellery is overwhelmingly sold to the Middle East and South Asia.“The Indian buying season, for example, starts in October ready for the wedding season, and the word is that fearful about where the commodity price is going, they have been a little reluctant to engage in buying [sic]. If there is a weakness in the price I expect them to come in buying aggressively.” If you think these issues are tangential, consider that in South Asia male chauvinism traditionally has a lock on land inheritance, therefore gold jewellery is regarded as a form of advance alimony and a widow’s pension for Indian brides. These days, of course, its socio-economic rationale is also subsumed in ostentatious consumption fuelled by rising living standards. So while the central banks around the world sit on 30,000 tonnes of gold, wedding buying and Diwali in India, the Lunar New Year in China and similar festivities are enough to cause an annual surge in price each winter and to consume up to 60% of the new gold that is mined and refined each year. While people anxiously wonder when peak oil will F T S E G L O B A L M A R K E T S • J A N U A R Y / F E B R U A R Y 2 0 0 9 The financial climate has led to credit constraints for the junior companies that have traditionally undertaken prospecting and resource identification. Colin Sutherland notes: “In the last few years the number of one million ounce deposits that has been found has declined considerably. If you cannot raise money then you cannot advance your project. The supply side is going to be impaired if the credit markets do not open up enough. The result is a supply constraint [and] increasing difficulty in finding major deposits. If the money does not start flowing for new projects senior producers are going to be out there with no pipeline of projects and with reserves starting to drop.” Photograph © Mirek Hejnicki/Dreamstime.com, supplied December 2008. arrive, peak gold arrived long ago, back in 2001 to be exact, and production has flattened out since then even as gold prices continued to rise, making new mines increasingly viable. However, gold in all its forms is an unusual commodity.The World Gold Council estimates that 158,000 tonnes of it have been refined since records began. Of this amount, 65% has been mined since 1950, and all but 10,000 tonnes has been mined since the California gold rush of 1848. Unlike oil though, no one burns gold. It sits in gold ingots, or is stored as jewellery and coins, and whenever possible, it is recycled. The World Gold Council estimates that 95% of all gold ever mined is still in use in one form or another. However, with an expanding world population and economy, and the esoteric demands on it as a store of value, its future value seems assured by a growing shortage. In addition, the financial climate has led to credit constraints for the junior companies that have traditionally undertaken prospecting and resource identification. As Sutherland notes:“In the last few years the number of one million ounce deposits that has been found has declined considerably. If you cannot raise money then you cannot advance your project.The supply side is going to be impaired if the credit markets do not open up enough. The result is a supply constraint [and] increasing difficulty in finding major deposits. If the money does not start flowing for new projects, senior producers are going to be out there with no pipeline of projects and with reserves starting to drop.”With his own project’s funding secured, he sees opportunity in others’ distress.“I’m a true fundamentalist. If you have gold increasing on the demand side and the supply side going down, it will play to our advantage,” says Sutherland, estimating the bottleneck to begin showing possibly in as little as two years. 69
GOLD: SET FOR A REBOUND? 70 One possible brake on such optimism is that the world’s central banks could dump their reserves on the markets. However, any concerted action in this direction would actually start to devalue central bank reserves. Currently central banks sell less than 400 tonnes a year, although their five-year agreement allows them to sell up to 500 tonnes. Indeed, if ever the Asian central banks decided to put even just one or two per cent of the reserves they currently hold in rapidly inflating dollars, and turn those into gold, Natalie Dempster of the World Gold Council points out“it would have a huge impact”. China for example, with its huge currency reserves, has only 600 tonnes of gold in its vaults, compared with the over 8,000 tonnes the US keeps. China has hinted at diversifying away from its US dollar reserves, leading to great expectations from the world’s gold community. Dempster says gold is a significant export for many emerging countries with important revenues for South Africa, China, Russia, Peru, Mexico and others. However, their physical reserves are already being mined, and newer reserves tend to be smaller, more expensive to work and thus more vulnerable to price volatility. They are also in remote areas where miners have to build infrastructure to get the ore out, and spend on infrastructure to buy acceptance from local, often poor, communities. Nayarit Gold’s experience in Mexico is typical. The company invests not only in physical infrastructure but also in social infrastructure, schools, churches and other facilities as a cost of doing business. Such cost margins make new mining investment heavily reactive to the vagaries of the market price.“Globally, any project that has costs in excess of $500 to $600 an ounce is likely to have some challenges over the short term. Worldwide, the average production cost is somewhere between $420 and $450 per ounce. With gold approaching $800 there is still some margin but fluctuations, with a $50/60 swing in any given week, pose an additional challenge for expenditure planning,”notes Sutherland.“If it were to swing back to $600/$650 you would see a massive correction with gold producers trying to reduce costs and move out some of the inflation in the system,”he adds. While gold bullion reserves are concentrated in the industrialised world, and many of the physical reserves are in the developing world, the lodestone for gold mining “Globally, any project that has costs in excess of $500 to $600 an ounce is likely to have some challenges over the short term. Worldwide, the average production cost is somewhere between $420 and $450 per ounce. With gold approaching $800 there is still some margin but fluctuations, with a $50/60 swing in any given week, pose an additional challenge for expenditure planning,” notes Sutherland. “If it were to swing back to $600/$650 you would see a massive correction with gold producers trying to reduce costs and move out some of the inflation in the system,” he adds. finance and the listing of gold mining companies is Toronto. Canada itself is a major gold producer, but Toronto is the home of major international gold miners such as Goldcorp, Barrick, Newmont and Iamgold. The Toronto Stock Exchange (TSX) claims 57% of the world’s mining listings, involving 1,200 companies, spread between the main board and its new venture arm, the TSXV. Junior miners are the explorers and developers, and if they hit a motherlode, they grow up to be seniors and graduate from the TSXV to TSX. “In Canada there is a commodity driven community in the local banks that knows what you are talking about, and on the exchanges, the regulators understand the industry,”says Sutherland. The country also has a high proportion of active individual investors who are attuned to gold and mining, while its proximity to the US also means that it attracts many investors from the US. Surprisingly though, there are few investors from the Middle East and Asia where most of the miners’ product is consumed. One would have thought that both institutions and sovereign wealth funds would be interested in investing back up the value chain, but Ellingham has seen no sign of it so far. Gold has often been lumped in with other mineral commodities for investment purposes, but the rueful expressions of those who went long on iron, oil and the like show that it is a separate case. Overall, the yellow metal becomes brighter when the economic skies are dark, and they have rarely been as dark as now. Like many other prospectors, Sutherland is betting his future Mexican mine on anticipated demand by China’s central bank and a slew of Indian weddings. He also looks to the US government as a driver for pushing up gold prices.“In this environment, the strengthening of the dollar is temporary, and as the Federal Reserve continues to finance bailouts, the excess of dollars will lead to inflation, which is a prime indicator for gold to take off. In addition, there is a lot of money being redeemed and there are people sitting on cash which they want to keep safe. With that economic environment, I’ve not heard anyone in the industry say that gold isn’t going back up to $1,000.” Of course they would say that, but the flood of dollars from the Fed is indeed highly convincing. J A N U A R Y / F E B R U A R Y 2 0 0 9 • F T S E G L O B A L M A R K E T S
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Page 45 and 46: CALENDAR 96 Index Reviews Jan - Apr
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