It depended on who you listened to at yesterday’s excellent RBCCM gold meeting in London as to views on where gold is going in the short and medium terms. Just about everyone’s longer term view was positive but the next six to nine months generates a variety of opinions, most of which are now pretty firmly negative. While virtually no-one seems to be expecting any sharp falls in the gold price, they are not looking for major increases in the near future.
During lunch there were wo keynote speakers – one who is well known to gold enthusiasts was Pierre Lassonde of Franco Nevada, but even he was not his usual ultra bullish self as far as the gold price is concerned, although reading between the lines he is obviously still long term confident. He followed on from one of RBC’s economists – Russell Jones, Head of Fixed Income and Currencies Strategy Research – who was worried that price inflation is no longer what should be concerning our minds, but deflation and with interest rates trending towards zero around the world and inflation figures dropping like a stone, he has a point.
Jones commented that in 30 years he had never experienced anything remotely like the current ‘mess’ in terms of speed and ferocity of the downturn as three factors came into play. These included the downturn (collapse) in the housing markets of the US and Europe and which now seems to be spreading globally; the sharp tightening of credit which has intensified to excruciating levels, coupled with forced deleveraging by the investment sector; and that the rise in non-core inflation which has already been seen is already fading and will continue to fade rapidly. He said that an unnamed Bank of England official told him in mid-October that the world was then 24 hours away from total financial meltdown! Indeed he described the situation as a financial “near-death experience”.
Indeed he reckoned the short term looks to be near catastrophic and threatens to be the worst recession in 60 years with the U.S. economy likely to contract 4 percent in the current quarter and that “This year’s deflationary scare will become next year’s deflationary reality”. However on the less negative side he did feel that there would not be a global depression.
Deflation, he reckoned, was not conducive to a gold price moving forward, but when the situation stabilises gold will likely move back up again.
Meanwhile the banks’ appetites for risk will remain very low which does not bode well for those trying to develop projects in politically, environmentally or geologically risky environments. We are likely to see competitive devaluations of currencies and any healing process is likely to be very extended.
Pierre Lassonde pointed out that gold fundamentals on the supply/demand side remain strong in terms of being price supportive. Over 80 percent of current mined gold production is over 15 years old with some big mines nearing the ends of their days, ore grades are falling, underground mines are getting deeper, costs are rising and junior gold exploration has come to an abrupt halt. Production is likely to fall around 7 percent over the next few years, possibly more, but even so he expected the gold price to come down further before it recovers.
Over the next two years, he reckoned, the key for those in the sector is survival and producers will have to live with reality in a continuing period of financial stress. “Be prepared” was his warning.
Of the various luminaries from major mining companies speaking at the main event – these included Alex Davidson of Barrick, Kevin McArthur of Goldcorp, Tye Burt of Kinross, Mark Cutifani of Anglogold Ashanti, David Harquail of Franco Nevada, Graham Briggs of Harmony, Peter Marrone of Yamana , Sean Boyd of Agnico Eagle, Mark Bristow of Randgold Resources and Evgueni Ivanov of Polyus among others, an impressive lineup – there is obvious long term confidence in the gold price. No-one is talking of putting in new gold hedges at current levels, although most of those with base metals byproduction seem quite happy to enter hedge agreements for what they might term to be lesser metals – after all they are gold miners! They would also hedge currencies to protect themselves too – but not gold, although nowadays those with remaining gold hedge positions may not be so keen on aggressive reductions and may just let them fade away as their terms come to an end.
What is apparent, though, is that even the bigger companies are worried enough about the short term to be undertaking detailed reviews of capital spending, exploration and new project developments, which will undoubtedly lead to delays in the pipeline of new projects going ahead in the long term.
Gold’s performance recently has been something of a disappointment to most of the gold mining companies, but having seen far worse collapses in other metals they are perhaps thankful they are primarily in the precious metals sector. While base metals producers worldwide have been announcing major production cuts, no-one in the gold sector is doing this except in the extreme on some mostly small unprofitable operations. Most are producing on positive margins, albeit rather smaller ones than they would have been anticipating six months ago.