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Jon Nadler

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You May Now Kiss the Bride. Careful!

By Jon Nadler       Printer Friendly Version Bookmark and Share
Aug 20 2009 4:12PM

Good Afternoon,

Following their serious hammering thus far in August, Chinese stocks finally had a good day. A very, very good day, indeed. The Shanghai Composite Index rose by 4.5% - the largest amount since March. This, one day after the index reached into clear bear market territory and its prospects looked rather poor.

Along with Chinese equities, the usual suspects joined the party; base metals advanced on growth expectations that appeared iffy just 24 hours ago. Such is speculative emotion. Today, it was a difficult task to find a pundit who still sees the contraction in lending or the bubble-like nature of the pre- August Chinese stock market as something to worry about. Two days ago, there was an abundance of cautionary punditry.

The dollar and the yen lost some ground following the party in Shanghai, but oil prices did not pick up where they left off on Wednesday, which, was lofty enough, indeed. Black gold still found itself at $72.25 this morning, notwithstanding a loss of a few pennies here and there.

The greenback actually climbed a small notch on the trade weighted index ahead of the NY metals markets' opening. It was quoted at 78.55 early this morning. This afternoon, the greenback was at 78.38 on the index, while oil advanced to $72.70 per barrel.

Bullion trading started with a small, $1.60 per ounce gain for gold this morning. The yellow metal was quoted at $943.10 an ounce and the trade was still seen as trying to make sense of yesterday's statistical picture in the market. As our good friend Nell Sloane over at NS Futures writes:

"It is possible that the headline news of a 9% decline in overall global gold demand will be the figure that the gold trade embraces. In short, the bear camp is likely to trumpet the headlines of falling demand and rising supply, while the bull camp will be left with only the old standby claim of sturdy investment demand."

Silver bullion opened with a 16-cent gain this morning, quoted at $13.97. Along with it, we tracked a $4 rise in platinum and a $1 gain in palladium. White metals were once again looking to the Chinese White Knight this morning - that much was clear. Not much in the way of serious trading was done prior to the release of the US labor statistics this morning, however. The US dollar held up to the news, at least initially

The US jobs figures indicate that initial claims rose by 15,000 to a weekly total of 576,000. Continuing claims fell to 6.26 million. It was the 15,000 figure that was unexpected in this morning's roundup of numbers from the labor front. Gold turned negative shortly after the release at 8:30 NY time. Support is now seen nearer $932 but odds of a sub-$925 trade in Oct. gold are still there. The size of the longs would say so, opined another trader.

The rest of the trading day turned out to be rather lackluster and gold remained confined between $936 and $946 while neither crude, the Dow, or the dollar offered any sense of which direction to steer into. In some respects, the markets were reflecting the truly mixed bag of news of the day. Following the aforementioned labor statistics, we learned that AIG said it expects to pay back the bailout money it received. Good.

Then, it was revealed that nearly 9.25% of all US home loans are delinquent, and that such a percentage sets a new record. Not so good, at all. Following that, the Conference Board opined that recession has indeed hit bottom, following a fourth straight month of rising leading economic indicators. Better than good. Finally, NYC’s unemployment rate surged to 9.6%, surpassing the national average. Bad, in one simple word.

The 3PM hour in New York saw gold trading at $940.30, down by $1.20 an ounce. Silver clung to a 10-cent gain, quoted at $13.91 per ounce. Platinum lost $1 to $1236.00 and palladium picked up the same amount, rising to $272.00 an ounce. Like we said, the action lacked…luster. 

Looking ahead (and most of these markets already are), we have the big Jackson Hole meeting over the weekend. Punditry is scrutinizing the alleged disunity among central bankers, and is expecting currency volatility to arise, should the elite of the official sector not come to a common vision in the manner they did just one year ago. But, hey, things looked very spooky one year ago. The sky had fallen, in fact. Whereas, today, talk of rebuilding the sky is all the rage.

Anyway, we will await announcements from wonderful Wyoming without inhaling. No, we are not awaiting the announcement about the putative 'fix-it all banking holiday' of August 24. You know, the one that is floating around on urban myth Internet sites. The same one that is supposed to finally give you the chance to barter your stash of silver Eagles for some Wonder bread down at the 24/7 mini-mart. C'mon Harry Schultz followers, turn down the noise. It sounds too much like Y2K minus 1. Dollar devaluation, chaos, Mad Max, and all.

Well, at least one traumatized country is doing the ‘proper’ thing as regards is ‘currency.’  The hyper-inflated and now embalmed Zimbabwe dollar could find all kinds of new fans if the country’s central bank governor Gideon Gono has his way. Think a Zimbabwe dollar backed by (gasp!) gold. And platinum. And diamonds. We know a few eager takers. The line starts to the left. It’s just that it will be a very, very long wait.

Meanwhile, one dollar mortician is not exactly putting his money where his mouth is: PIMCO's Bill Gross is "trading up" to an 11,000 sq. foot $23 million 'tear-down (!)’ home in Newport Beach, CA. California?! Wait a minute; shouldn't that house be on Sentosa Island, somewhere next to Jim Rogers? What kind of an anti-US /anti-dollar purchase is that? Good thing it is a gated, heavily-guarded enclave, this. The dollar-ravaged masses cannot get in. Someone can see some irony, no?

Pssst! Want to still make money in gold? You still can. In gold mining shares, that is. They -according to Bloomberg's Commodity Roundup this morning, "should beat bullion as declining costs bolster margins and higher dividends signal confidence." So says Evy Hambro, who helps manage about $17 billion in natural resource stocks at BlackRock Inc.

Gold has gained 38 percent from a 13-month low of $682.41 an ounce on Oct. 24, compared with a doubling of the 21-member FTSE Gold Mines index. Could this be the return of the legendary leverage that shares offer vis-a-vis gold itself?

"The index fell 20 percent last year while gold rose 5.8 percent. ``Moderation in operating costs across the resource sector combined with a good gold price should be beneficial to profit margins,'' Evy said by phone from London. Gold mining shares should outpace bullion ``until they recoup all of the lost relative return during the last few years.'' Holdings in the SPDR Gold Trust, the biggest exchange-traded fund backed by the metal, dropped 6 percent from a record 1,134.03 metric tons on June 1."reported Bloomberg this morning.

Of course, the story (as most do) has a flip-side as well. The National Post reports on the reasons why prior to this nice performance by mining shares, the picture looked more like a horror show. Surprisingly, among the causes of the previous bloodletting in shares is one that many thought was a good thing. The more you live…

Good or bad, the trend is (still) with us. Take it away, NP’s Peter Koven:

“The gold mining industry has been in a steady state of consolidation for the past couple of decades. But according to HSBC Securities analysts Victor Flores and Lucia Marquez, this is not necessarily a good thing.

In a long report titled "Welcome to the Machine," they argued that all the M&A activity in the sector over the last decade has created "only minimal value." In fact, they found a "strong inverse correlation" between deal activity and share price returns. Put another way, the companies that did less M&A have generally performed better.

"The potential value creation from most acquisitions has been eaten up by the purchase premium, leaving the acquirer to count on a rising gold price or the conversion of resources to reserves to achieve a return," they wrote. The all-in cost of takeovers (including operating and capital costs) has, on average, exceeded the gold price. That breaks a common rule of thumb that the cost of an acquisition (per recoverable ounce) should be less than 75% of the gold price in order to generate a double-digit return. It also implies minimal return on a deal.

As investors know, there is strong pressure on companies to pay up for good gold assets. When they refused to do so and proposed transactions fell apart, Mr. Flores and Ms. Marquez found that the premium was inevitably lower and the deal could have created good value for the buyer. They cited Glamis Gold Ltd.'s failed takeover of Goldcorp Inc. and Iamgold Corp.'s failed merger with Wheaton River Minerals Ltd. as examples.

Gold equities have badly underperformed the gold price over the last decade, disappointing investors. Mr. Flores and Ms. Marquez think that overpriced acquisitions "largely explain" this phenomenon.

Shotgun Wedding courtesy of Hyper Goldfish

All of this, after we learned just yesterday that gold mine production rose 6% in Q2 of this year. Perhaps happy times are indeed coming to the miners. Now, all they have to do is to find ready, willing, and able purchasers for their product. And not just spec funds.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.