21 August 2008

The Global Speculator View

I’ve just had an interesting chat with Troy of www.globalspeculator.com.au who I have a lot of time for. His response to my hedging chart is illuminating:

“It is worth considering that many gold producers are still struggling to turn a reasonable profit. Their costs have risen astronomically and some companies have actually folded (especially the ones attempting to bring old mines back into production). The ones that locked in a gold price have been the most vulnerable to collapse (massive balance sheet problems – hedge liability related), so I do not think that a mining CEO would be all that keen on taking on hedging again anytime soon. On the other hand if the gold price has a prolonged collapse hedging may be the difference between surviving and not. What we are seeing around the gold industry both here and internationally is not consistent with a peak in the gold price in my opinion. Gold supply is flat if not falling.

Your point about where the gold demand is going to come from once dehedging has run its inevitable course is a pertinent one and I think Central Banks hold the key. Central Bank selling of gold is trending lower with the Washington Agreement Quota of 500 tons p/a not being filled for the last two years (including this year although we have another month or so left). Many non-western central banks have actually begun buying (Russia, Middle East and Asia etc). I agree that it is probably not your average mum and dad retail investor which holds the key for the gold price moving forward. Once fiat currencies start coming into question and people get a better appreciation that the US dollar is not the only questionable currency, things will start to get interesting and somewhat clearer. At the moment there is just shifting from one currency to the next and gold is still very much linked to the US dollar’s fortunes.”


  1. Bron, I read the discussion at Seeking Alpha, and was interested by your comments.

    I wouldn't automatically dismiss the reports of shortages, though I similarly accept your report that Perth has a satisfactory supply. I'm also interested by the hypothesis raised by the author of the SeekingAlpha article. While the major bullion banks have pretty stringent controls, such as you describe operating at Perth, it wouldn't be surprising if some of the less-regulated dealers don't sell some on the sly, expecting to buy it back.

    As far as the movements of precious metals, they seem to correlate closely to the dollar. But the movement of the dollar makes little sense. Despite slight deterioration of the global economy, the US is facing, at a minimum, the failure of a major investment bank, deficits hitting $500B or more, and a second leg to the mortgage crisis. I have a guess as to what is causing the movement of precious metals and the dollar, but it's pure guess at this point.

    Anyway, thanks for your constructive comments at Seeking Alpha. Don't mind the gold bugs. They're excitable.

    --Charles of MercuryRising

  2. Interesting blog of yours, I will have to pass it on to our bullion dealer, Deniece, a fellow cat lover.

    Shortages at the retail level only matter if they are sustained, it is too early yet to read too much into it. The manufacturing lead time given the US Mint buys coin blanks from outside suppliers is not short so lets see where we are in a couple of months.

    I do not doubt that there are some bullion banks or institutions that are going short gold. I also agree that central banks also "manage" gold - they currently manage exchange rates and if gold is (or should be) money, then it is logical that they see no problem "intervening" in the gold market.

    I suppose all I am saying is that this does not mean that every event is part of this manipulation in some grand scheme.

  3. Bron,

    Very interesting blog you have here. The so-called shortage is really a fabrication problem. The US mint confined its suspension of production to 1oz eagles only. There seems to be no problems with the other fractions of oz. eagles. As to why there should be sufficient supply of fractional oz blanks versus one oz, I can only guess that demand for one oz. is extreme at the moment. One oz. seems to be the head line product of choice for many US coin dealers, so I guess is more susceptible to higher demand. The US mint has just announced that one oz production is recommencing :

    As usual there have been no apparent fabrication problems in the goldbug commentator industry - they continue to fabricate their little hearts out. Once this beat up subsides, we can look to further pricing weakness, unless Chindia jumps in.

    I've not detected any delays in obtaining gold or silver here in Australia, so unless that changes, I don't see a problem - after all if the US is so short of product, I'm sure they wouldn't hesitate in giving Australian refiners a call....

    One question if I may, that you might know the answer to : Does the agent network for Perth Mint products buy inventory on a consignment basis, or on a fixed price ex-factory basis ?

    I look forward to further informative posts.

  4. The distributors of the Mint's bullion coins use a variety of methods depending on their size/financial strength etc. These include (and would be offered by anyone selling precious metal products):

    1) The golden rule is bullion is never sold on credit! The margins just don't allow 30 day terms. Anyway, would you give up gold for a fiat claim?

    2) Consignment. Only offered two ways - either you have a credit rating or you put up collateral/bank guarantee/letter of credit. Usually those with a credit rating are big enough to lease metal directly so wouldn't be bothered with consignment (see 3 below).

    3) Metal credit. Bigger dealers with the capacity to lease gold will just deposit metal into the sellers London metal account and pay for the fabrication premium in cash.

    4) Cash. In a lot of cases, the buyer has pre-sold the purchase, usually done on the London fix (one of the key reasons it exists). Some smaller dealers may buy on the hope they can sell it before the price rises, but this is a bit risky, particularly these days.

  5. ::chuckle:: I never thought MercRising would get typecast as a cat blog. My interest is the connection between geopolitics and finance. But to each, his/her fancy. If Deniece likes cats, she might look at icanhascheezburger.com. Lots of humor and great photos.

    I agree with you that the precious metals market is awash with rumors, few of which are based in fact.