The Great Debate UK
from Breakingviews:
Gold miners no longer leveraged play on the metal
By Martin Hutchinson
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Gold miners' shares are a damped rather than leveraged play on gold -- at least from evidence this year. The yellow metal's price is up more than a quarter since December 31, but mining shares are roughly flat. Australia and Peru recently showed how governments grab more when commodity prices rise, while operating costs go up with prices, too. Moreover, mining investors tend to discount spikes in the price of gold as merely temporary, offering little uplift to the miners' value.
Royalties or equivalent charges paid to governments can severely crimp a miner's upside. Australia, for instance, is mulling a tax that would take 30 percent of operating profit exceeding a return equal to the government bond yield plus 7 percentage points. That will not deter investment in high-cost mines, where profitability is modest, but it caps the leverage of mining profit to 70 percent of the change in the gold price once profits are high. In Peru, miners feared that new president Ollanta Humala might expropriate assets; in comparison, the royalty he has proposed seems a fair deal. Nevertheless, the government's levy will be linked to operating profit, again limiting miners' upside.
There is slippage on the cost side also. Oil prices often rise along with other commodities and precious metals, and fuel typically represents 25 percent of mining operating costs. Naturally miners' wages, especially for skilled labor, also tend to increase when prices are high and activity intense. The same applies to the cost of mining equipment.
from Felix Salmon:
How to get $12 billion of gold to Venezuela
Ever since the news broke last week that Hugo Chávez wanted to transport 211 tons of physical gold from Europe to Caracas, I've been wondering how on earth he possibly intends to do such a thing.
There are 99 tons already being held at the Bank of England; according to the FT, the plan is to transfer other gold to the Bank of England from custodians such as Barclays, HSBC, and Standard Chartered; then, once it's all in one place, um, well, nobody has a clue what might happen. Here's the best guess from the FT:
Is there such a thing as a real safe haven?
By Kathleen Brooks. The opinions expressed are her own.
There are traditional relationships that the financial markets respect. For example, when the markets are tanking the world wants to own safe havens like the yen, the Swiss franc, U.S. debt and gold. If volatility spikes investors go into auto-mode and are almost pre-programmed to purchase these asset classes.
But just how safe are the safe havens? Both the Japanese and Swiss authorities intervened to limit the appreciation of their currencies in recent days. The Swiss National Bank (SNB) did so first by slashing interest rates and announcing a new QE program to flood the economy with money to try and put downward pressure on the franc. The Bank of Japan (BOJ) embarked on something similar, but they directly intervened and sold yen in the markets.
from Breakingviews:
Hoarding gold makes sense only for the hopeless
By Robert Cole
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
LONDON -- Compared to U.S. equities, gold is expensive. You have to go back to the stagflation of the 1970s -- or the depression of the 1930s -- to find a time when the yellow metal was more valuable. Today's worries could push it higher. But only the gloomiest can think gold will maintain its glittering trajectory.
from Breakingviews:
Gold as an each-way bet is fantasy
By Ian Campbell
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
LONDON -- Worried about the euro zone? Buy gold. Worried about the U.S. deficit? Buy gold. Fancy a quick speculative punt? Well, you can't lose with gold...or silver, which has almost trebled in price in just over six months. But precious metals can't be both safe havens and speculative plays. And with equity markets rightly signalling global recovery and higher interest rates, these speculative bubbles are set to be pricked before long.
from Breakingviews:
Private sector should lead gold standard adoption
A proposal from the president of the World Bank, Robert Zoellick, to use gold as a reference point could prove destabilizing. Like the Bretton Woods system, such a government-run peg would break under stress. A better approach would flip the monetary order and use gold as a private means of global exchange.
Zoellick suggests using the yellow metal as an "international reference point of market expectations about inflation, deflation and future currency values." In its weakest form, this would simply use the gold price as one indicator of the health of the global monetary system, something many central bankers already do. In a stronger form, it would mean fixing a peg for currencies in terms of gold, in a similar manner to the Bretton Woods monetary system in force from 1944 to 1971, and in vestigial form until 1973.
from MacroScope:
Did France cause The Great Depression?
Economist Douglas Irwin of Dartmouth College has stirred up a bit of a fuss by concluding in some academic research that it was France, not the United States, that was most to blame for The Great Depression.
Irwin's theory, in a paper posted here by the National Bureau of Economic Research, is that France created an artificial shortage of gold reserves when it increased its share from 7 percent to 27 percent between 1927 and 1932. Because major currencies at the time were backed by gold under the Gold Standard, this put other countries under enormous deflationary pressure.
from MacroScope:
Should central banks now sell gold?
Central banks in debt-strapped countries have a golden opportunity ahead of them, if you will excuse the pun, to help their countries' finances by selling their yellow metal holdings.
At least, that is the message that Royal Bank of Scotland's commodities chief Nick Moore has been giving in recent presentations -- and he thinks it might happen. The gist is that gold is now at a record price but banks have not come close to meeting their sales allowance for the year.
from Global Investing:
What fund managers think
Bank of America-Merrill Lynch's monthly poll of around 200 fund managers had a few nuggets in the June version, aside from the usual mood-taking.
Gold is too expensive. A net 27 percent of respondent thought it overvalued, up from 13 percent in May. Then again, the respondents to this poll have reckoned gold is too pricey since September 2009.
Gold rally could start to tire
Spot gold prices are up over 40 percent year on year. Yet, according to the World Gold Council, demand for gold in the third quarter of 2009, dropped by 34 percent year on year. Of course, demand in the third quarter of 2008 was exceptionally high due to the financial crisis. As well, relative to the third quarter average of the five years to 2007, demand for gold in Q3 2009 was down 4 percent.
When confronted with the ferocity of the rally in gold, the fact that the third quarter demand for gold was below the seasonal average is surprising. The dynamic between price and demand suggests some fall in supply perhaps led by increased hoarding.
