Precious Metals Market Update

Precious Metals Market Update

As we have continually reported, in any free market, high demand in the face of low supply normally drive prices higher. The higher the demand and the lower the supply, the higher the prices go (this is what we have seen in the crude oil market within the last 18 months). Both gold and silver face massive supply deficits, where demand far exceeds new supply. As we have also reported, this situation is made far more acute in the case of silver, as world wide inventories are running at record (and dangerously) low levels.

Many analysts continue to claim that the gold and silver markets are no longer free markets

Many analysts continue to claim that the gold and silver markets are no longer “free markets”, no longer reacting to normal supply and demand dynamics, but are instead being held artificially low, for a host of different reasons. Chances of massive price spikes (rapid increases in prices) continue as long as supply and demand don’t match – as long as we continue to consume the metals faster than we produce them from the ground.

High demand for physical gold demand continues in Middle East and Asia.

Oct 27 New York (Reuters):
But, despite higher overseas bullion prices, dealers said physical demand, notoriously price elastic, has picked up dramatically for dollar-priced spot gold since it broke under $270 an ounce last week.

“It’s been fantastic, very strong in India, the Middle East and so on. Even South East Asia has been reasonably good, ” said Ian MacDonald, precious metals trading manager at Commerzbank in New York.

What Ian MacDonald is saying here is, as gold has broken under $270 an ounce, demand has picked up, quote “fantastic, very strong”.

Oct. 27 Beijing:
China’s gold consumption may triple within three years of market deregulation as cheaper jewelry spurs demand, a World Gold Council official said.

China’s gold consumption could rise to as much as 600 metric tons within three years of deregulation, from about 200 tons, said Kerr Cruikshanks, director of international marketing at the producer-funded World Gold Council.

“A liberated market in China will ultimately lead to increased gold consumption,” he said at the China Gold Economic Forum.

China’s gold consumption of 102.5 metric tons in the first half of this year ranked it fourth in the world after India and Saudi Arabia, according to council estimates.

Why is the rest of the world continuing to buy gold while the west continues to sell?

We have been reporting that higher oil prices from here could spark much higher prices in the precious metals. With tight supply of crude coming from the Middle East and low inventories in the west, any disruption in crude oil supply WILL trigger much higher oil prices, in turn leading to higher metals prices.

Iraq may suspend oil exports in early November. Baghdad is warning its partners that contracts must be converted into euros or they will simply switch off the taps. The result of Baghdad’s decision could lead too much higher gold price and a tanking in the US dollar, which has been trading at 5-year highs.

October 26, 2000, 01:
8 PM NICOSIA (AFP English) – There is a “serious possibility” that Iraqi oil exports could be halted next week over Baghdad’s demand that buyers pay in euros from November 1, the Middle East Economic Survey (MEES) reported Thursday.

“The move into the euro has a high priority on the Iraqi political agenda and it is unclear how Baghdad might react to the delay,” MEES said, adding that the market was uncertain whether Iraq would dig in and “refuse to export oil unless euro-denominated letters of credit are opened by November 1.” Iraq informed the UN Secretary General Koffi Annan two weeks ago that invoices for its crude oil sales will be denominated in euros from November 1 and that payments into the Iraqi escrow account in New York should be made in euros.

(The United Nations has since 1996 controlled Iraq’s oil exports under the oil-for-food program, designed to alleviate humanitarian hardship under sanctions, allowing Baghdad to buy essentials in return for crude exports).

First Iraq and now Jordan to dump dollar.

Jordan to switch from dollar in trade with Iraq – a move is in response to an earlier Iraqi decision to stop trading with the US currency – October 25, 2000, 02:25 PM BAGHDAD (Reuters) – Jordan has decided to stop using the US dollar in trade dealings with Iraq and replace it with the euro or another European currency, the state news agency INA reported on Wednesday.

The move is in response to Iraq’s decision, announced in September, to stop trading with the US currency, head of the Jordan’s Trade Centre in Baghdad Ma’an Al-Azizi told INA.

“Jordanian companies which have dealings with Iraq started to make offers to Iraq with the euro or European currencies,” Al-Azizi said.

Baghdad remains Jordan`s main energy supplier as it delivers annually over $600 million worth of crude and products to the kingdom under undisclosed concessionary terms that ease the burden on the kingdom`s deficit-ridden budget. Iraq’s oil supplies to Jordan are exempted from United Nations sanctions.

We have said before that the euro will one day challenge the US dollar as the reserve currency of the world. Due to US dollar displacement, if (or when) Iraq is successful in its demands to be paid for its crude oil in euros, rather than dollars, it will cause the over valued dollar (and probably Wall St) to finally go into a major correction. At the same time this will positively impacting the euro and gold. Talk continues to circulate that the Arab oil producing nations might ask to be paid in gold, instead of dollars, at some point in the near future.

While we believe that physical gold and silver have massive upside potential, many gold mining companies don’t share the same rosy outlook for the future, due of their often undisclosed hedging (froward selling) practices in recent years. In the past when gold has increased in price, gold mining stocks have shown a handsome leveraged return, however, this is not the case in today’s environment. Due to their hedging and forward sales, a dramatic increase in the price of gold will send many larger mining companies to the wall.

Australian gold mining comapnies have the largest exposure to hedging in the world. With the recent lows in the Aussie dollar taking gold in Australian dollars to five year highs, many Australian gold producers are in serious trouble.

Bloomberg Oct 31 Sydney:
“Centaur Mining and Exploration (of Australia) warned the financial market on its hedging costs on 31 October 2000. Centaur said it was not generating sufficient revenue to meet negative monthly outflow linked to its metal and currency hedge position.”

“Newcrest Mining Ltd. led the market down, failing 16.5 cents, or 4.2 percent, A$3.80. The stock posted its biggest intra-day decline in six months, falling as much as 6.7 percent to A$.3.70 after analysts said Australia’s No. 2 gold miner’s currency and copper hedging positions will hurt earnings.”

It remains a great irony of our age that a higher commodity price would see many producers of that commodity put out of business. Buyer Beware!! When considering gold mining stocks be sure to thoroughly check out the company’s forward selling or hedge book. Consider smaller junior producers.

Due to the complexity of producer hedging, and the potential for downside exposure, many believe the safest way to be positioned in the precious metals markets is through physical bullion holdings, gold certificate and gold bond programs from reputable issuers.

“get gold, humanely if possible, but at all hazards, get gold” King Ferdinand of Spain – AD1511

by Philip Judge