Gold Smugglers Aren’t Meeting The Demand…

So in the end the US government debt debate gets resolved for another few months. Except nothing has really been resolved, mostly just delayed. Put an entry in your calendar for the same cycle to repeat around about January next year. 

The other thing you should pencil in is the Port Phillip Publishing2014 conference, World War D: Money, War and Survival in the Digital Age. Put your email on the hotlist  if you’re interested. You’ll be eligible for an early bird offer but with no obligation. There’s going to be a cracking line up of speakers. We’re not at liberty to say who just yet.  

Speaking of money, it was interesting to hear currency expert Jim Rickards this week.  Rickards, a gold bull, has long said the path of the US dollar is unsustainable. Therefor it will not be sustained. Nothing about the recent ‘resolution’ of the debt situation changes that at all… 

Two Countries Still Feeling the Squeeze

As Rickards noted this week, the US debt, deficit and debt to GDP ratio are still going up. The debate was never about cutting US government spending, it was about the rate of increase. It was never a real government shutdown, either, just a temporary stop in the US ability to go deeper into debt. 

One takeaway from the US political gridlock is that the future of the US dollar looks a bit dimmer in the eyes of the world.  You’d think then that the future for gold would look brighter. But you wouldn’t know it by looking at the price. Editor Den Denning made his way north late this week to the 2013 Gold Symposium in Sydney.

He might’ve faced a more sceptical crowd than in previous years. Gold has a date with its first down year in 13 years since the beginning of the bull run that saw it go from US$250 to over US$1900. It’s currently trading around $US1300 but showing little sign of life.

Over at Markets and Money last week, your editor pointed out the physical gold market is under some pressure. That’s because the largest market for gold is in India, and the government is trying to restrict gold sales to reduce the country’s trade deficit.

The Wall Street Journal reported that imports of the metal fell 90% in August and ‘the import curbs had ramifications beyond India’s borders and helped muzzle a large part of the global gold trade.’ According to the article, refiners and traders in Switzerland and Dubai are feeling the slowdown. In September the value of Indian gold imports dropped 82%.

Of course, these figures are based on official data. What nobody can really know is how much gold is smuggled in. The WSJ also noted that demand is starting to fire up as India moves into its festival season, usually a time for gold buying. But premiums are high and gold supply is short. That suggests the smugglers aren’t meeting the demand!

That’s the physical market. But there’s some odd trades going on in the paper market as well.

Robin Bromby in the Australian reported this week that last Friday a huge two million ounce sell order hit the exchange at the open. It was ‘an order so big it triggered an automatic 10-second trading interruption (and a $US30 an ounce fall in the metal’s price)…There was a huge order unloaded on October 1, too, and then we had that episode in April when, within two hours, 13.4 million ounces was unloaded through Comex. Someone is determined to knock the stuffing out of gold.

Whether any attempt to jerk the price around is just big money boys trying to work an edge or something larger, we don’t know. Mr Brumby suggests the Chinese won’t mind, because they’ll be able to buy up more.

Bullion Versus Miners

Bullion buyers have the option to sit out the downside. That’s not a luxury afforded to mining companies. They need money coming in. Greg Canavan, editor of Sound Money Sound Investments, has been running the ruler over the gold miners. With gold at these prices, many gold miners will not only be not making money, they may not even have positive cash flow. Greg highlighted this research from UK company Hinde Capital this week: 
 ‘From an investor’s perspective it is a treacherous minefield… While the big caps that make up the GDX index are unlikely to go out of business in the short term and may offer some trading opportunities for a bounce here, the very nature of this desperate business remains. Huge capital is required a long time before there is even the sniff of future cash flow. All companies can go to zero but mining companies get there much faster than most.

Hinde’s research shows 109 global mining companies have suffered falls of 90% or more from the peak, with another 58 not far behind, down 80-90%. That’s shows you how savage this bear market has been. Their take is that gold bullion is an attractive proposition at the current price, but forget the miners for now. That sounds like something Jim Rickards would agree with. Stay tuned.

Callum Newman+
Editor, Money Weekend

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