Editorial: All eyes on gold

Volatility returned with a vengeance to the gold markets as February drew to a close. The spot gold price tumbled US$92.10, or 5%, in a matter of hours to US$1,691.80 per oz. at presstime, resulting in the biggest one-day loss since mid-December.

Gold prices were hit by U.S. Federal Reserve chairman Ben Bernanke suggesting in prepared remarks to the U.S. Congress that there would be no further quantitative easing for now on the part of the Fed — which pushed up the U.S. dollar — and by the release of relatively upbeat U.S. economic data.

Gold prices were also dampened by news that the European Central Bank had offered larger-than-expected, three-year loans totalling US$700 billion to the region’s 800 banks, which drove up buying of the euro in sharp contrast to the record shorting of the euro seen as recently as the end of December. Other factors in the gold sell-off were gloomy technical indicators, and end-of-the-month profit taking.

Some market watchers speculate that gold prices will come under further pressure in the very near term as margin calls are made, which could lead to a short-term bottoming in prices and a renewed round of buying opportunities.

The Feb. 29 fall reversed a major rally that had been ongoing since Dec. 29, when spot gold had a short-term bottom at US$1,534.80 per oz.

It’s worth remembering that gold prices were in the US$1,400-per-oz. range just a year ago, before the exciting July and August surge that pushed prices into record territory that peaked at US$1,900.10 per oz. on Sept. 5 before a US$300-per-oz. collapse in the ensuing weeks. In the bigger picture, gold has been trading sideways since July 2011.

And damaging to the perennial argument about buying gold as a form of insurance and portfolio diversification, gold prices have been moving in tandem with risky assets since mid-2011, with traders using price rallies as opportunities to trim their positions.

Oil and gold have shown some similar trading patterns in the new year, too, with West Texas Intermediate oil prices up 9% just in February. As the new year began, many commodity analysts had stayed bullish on only two commodities — gold and oil — as it looked like the year ahead would be marked by the global economy continuing to limp along, and by increasing political conflict over oil-exporter Iran’s nuclear program.

Silver again followed gold’s lead on the downside, with spot silver prices tumbling US$2.29 per oz., or 6.6%, to US$34.64 per oz. over the same few hours on Feb. 29, wiping out previous gains, but still maintaining silver’s overall rally from US$27.79 on Dec. 30.

• Montreal-based SNC-Lavalin is under siege. Canada’s largest engineering company says it will probe the accounting of its expenses, and revealed it would take a $80-million haircut, or 18%, compared to its previous profit guidance for 2011.

One component of the revision is a $23-million loss related to its involvement in Libya, where it had close ties to the now-overthrown Khadafy regime. Earlier in February, SNC-Lavalin dismissed two executives linked to former Libyan leader Moammar Khadafy’s son, Saadi.

In past years, SNC-Lavalin had been able to secure hundreds of millions of dollars of contracts relating to building an airport, water pipeline and a prison — representing 10% to 15% of the firm’s profits — from the regime before it was ousted last year. It’s unclear how many of these contracts will be maintained going forward.

But most of the revision relates to $35 million in “payments” made in the fourth quarter of 2011 that, in SNC’s words, “were documented to construction projects to which they did not relate and, consequently, had to be recorded as expenses in the quarter.”

On the news, the stock plummeted as much as 24% before closing down 20% at $38.43. The company has postponed the release of its fourth-quarter results for a month or so.

• The new, eleventh edition of Mining Explained is back from the printer and ready for purchase. You can pick up a copy in the “Investing” area of our website, or at our booth #810 at the Prospectors and Developers Association of Canada convention, or our booth at mining conventions we attend in North America. We’ve added new photos from our editorial staff’s exotic travels to mineral projects around the world, and brought the text up to date to reflect the current state of global mining.