GoldNerds in the Media

Have Gold Investors Forgotten the Home Advantage?

The Mining Chronicle , Vol 13, No. 6 

Joanne Nova and Troy Schwensen 

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     By resource size, the 20 largest gold companies working within Australia are valued on average at $60/oz, while the companies working overseas are valued at $86/oz, a heady 40% premium for NOT being in Australia. It's not explained by the size of the resources, which are roughly comparable (averaging, 6.2 vs 5.3Moz, respectively).
    The difference is most stark among the explorers. Far from being averse to third world conditions, investors appear to find exotic locations appealing. Explorers working in places like China, Argentina and Chile are valued at almost twice the price per resource ounce as Australian deposits.  
     Part of the reason gold resources in Australia have a lower valuation on the ASX is because many of the prize deposits here were bought up by foreigners around 2001, leaving less appealing resources behind for Australian investors.
     Plus with virgin territory overseas, and lower labour costs there are strong incentives for Australian explorers to hunt for ‘easy’ deposits overseas. Not surprisingly about 35% of the gold companies on the ASX have headed to foreign shores.
 Resources held by local gold producers are valued on average, 20% below their overseas counterparts. Although there are some good reasons; cash costs at Australian mines are about 25% higher than overseas, and apart from Newcrest, the average size of Australian resources and their gold production is about half the size of overseas operations.

      There are still anomalies though. Companies like Citigold at Charters Towers have similar cash costs and larger resources than the average offshore operation and no debt, yet the gold is valued at just $20 per ounce. It's true, Citigold has very small production figures-it's still digging declines and processing developmental ore, but in Egypt, Centamin is not even in production, and yet its resource commands $140/oz.  
     As another example, Newcrest’s resources are slightly cheaper than Sino’s, yet it has 9 times the resource size, produces 17 times as much gold and does it with a lower cash cost. Any premium for being ‘made in Australia’ is outweighed by other factors.
     As a gold investor, one of the main reasons to be in gold is as a hedge against financial catastrophe, yet it is in exactly these times of crisis when governments, even first world ones, bend the rules.
     So gold, more than any other commodity ought to attract a premium for lower sovereign risk.
     Sovereign risk is deceptive. It was after all, one of the world's greatest bastions of individual rights, the USA, which made private gold ownership a criminal offence for 40 years. Odd reminders pop up that even today ‘foreigners' don't have the same rights.

    In Canada, Sprott Asset management offers the locals a minimum investment of $5000, but expects $250,000 from everyone else. When asked, the company declined to give any reasons why foreign investors are treated differently.
     Even the ‘big fish' can't beat a foreign government on their own soil. Venezuela is the fourth or fifth largest oil producer, but Hugo Chavez had little trouble nationalising assets of entities as powerful as Chevron, Exxon Mobil and BP. He proclaimed to cheering workers that foreign oil companies had damaged Venezuela's national interests and that reclaiming them was a historic victory. He paid off the large oil firms at ‘book value' which was much less than the ‘current net worth' assessment. Venezuelan soldiers moved in and the Venezuelan flag was raised over four oil fields in the Orinoco Basin on the first of May last year.
     The bottom line is that possession is nine tenths of the law.
     While it's great to see such an active Australian presence all over the globe, it would make sense if investors were prepared to pay more for local explorers and producers.

 Gold is Money: 200 Tons Sold Before Morning Tea

The Mining Chronicle , Vol 13, No. 4 

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     Even four hundred tons of gold sounds influential, but it's barely enough to cover the average trades in London before lunch.
     The London Bullion Market Association (LBMA) reports that in March 2008 the daily average gold cleared was 25.7 million ounces, about 800 tons. (That was each day, every day, in March).
     Each week, a whole years' gold production from mines worldwide is sold by afternoon-tea on Wednesday. 
     The LBMA takes the term ‘wholesale' seriously. Clients trade a minimum of 1000oz per deal. At a million dollars a throw, it's not the place for sissies.
     Admittedly the gold market is not usually as active as it was in March, when it set new records for both price (US$1030/oz) and daily value ($25 billion per day).
     Usually things are much more sedate; the yearly average was ‘just' 500 tons a day.
     The LBMA is the biggest, but by no means the only place where gold is traded. These statistics don't include gold sales at any mints, nor direct sales from mines or other private transactions.

     These numbers do not even include sales by members of the LBMA itself if the transfer occurs outside London.
     And these are the end of day cleared values, so if a trader buys and sells 10 times a day, only the final net total is counted. Turnover is higher again. Those are busy bars.
     So gold churns through the LBMA and therefore, trades in the same style as dollars, yen and euro's rather than trading like most other rocks and metals. Clearly jewellers and dentists are not buying and selling 4000 tons of gold each week. Not my dentist anyway.
     Silver and platinum hover in their own schizophrenic zone, part-currency-part-commodity. They flick between the two styles.
     But gold is like no other commodity, since it's not ‘consumed'. It's shiny but essentially useless for most mass produced goods, and even when it is consumed, it's usually recovered.
     Mines produce about 2,100 tons each year, but most of the historic ancient gold is still lurking out there in Dowry purses, jewellery boxes, safes and teeth.

     Theoretically, 150,000 tons of old gold stock could ‘supply' the market if the price were right. Since most of it isn't on the market, presumably the price is not right, and is not even close.
     So most supply and demand arguments with gold miss the point. Yearly ‘supply' could be anything from 2,000 to 100,000 tons. And yearly demand is a magnitude more than the World Gold Councils' ‘3,692 tons'.
     A large part of that could be bought before breakfast, and sold before you get to your desk. 
     Having called Indian jewellery sales a sideshow, it does matter in the long run, because in India, jewellery is an investment. Since women can't own land, it's usually the only financial security they have.
     And 400 million natural shoppers can't be scoffed at, especially when they import 800 tons a year, and don't send it back.

 

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"The reason you would want to invest in gold is because it is an anti-cheating device," says David Evans, founding member of GoldNerds, a service that provides information on the fundamentals of Australian gold stocks. Evans has his own theories on gold, and like most of those interested in gold, has associated theories about currency.

"At the moment we have a worldwide bubble that's been caused by creating too much money since about 1995 and these things usually end in tears." He says once the world figures out what happened and why, they may turn back to some sort of commodity based currency system.

"And if they do that, the obvious candidate is gold, so you will probably find over the next decade or so that the demand for gold will go up a lot."

Given the current inflation scenario and the amount of money that has been created, Evans says, he expects the price of gold "will get somewhere between $US3000 and $US5000 an ounce within about five years". In terms of bullion versus shares as an investment option, Evans says that historically shares tend to go up more than bullion in the early parts of the gold run. "Then when the public gets involved and it becomes very exciting and you get into an exponential blow-off, as they say, the bullion itself goes up more."

Shares have more leverage to a rising price than gold or silver, he says, because the company's costs are fixed. If you double the price of gold you will often triple or quadruple their profits. Evans warns, however, of the effects of company-associated risks, such as bad management.

Bullion on the other hand, "is a real pain in the neck to own because you have to store it safely somewhere". According to Evans banks technically don't allow gold or silver in their safe deposit boxes. The reason, he says "is professional jealousy" as banks create fiat currency and want to discourage owning gold or silver. 

Gold's poor relation is now the belle of the ball

Australian Financial Review, Special Report, Alternative Investments.  May 15, 2008, p16

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" In terms of the gold-silver ratio, Troy Schwensen, who runs the investment advisory site, The Global Speculator, says we're at the midway mark of a ratio that has fluctuated between 100:1 and 15:1, "I would expect that ratio to gravitate towards a ratio of 15:1, as this precious metals bull market matures," he says. "

Troy is the Editor of The Global Speculator and also heads up the GoldNerds research team.