The bear market of the past six years has been a lonely time for gold bugs, so it has to be gratifying for John Ing, one of gold’s steadfast defenders, to see signs that the market is turning.
In a May 1 analysis titled Gold: Is it for Real this Time? Ing, who is president of investment house Maison Placements Canada, suggests that events have put gold in its best position in a long time.
“Bull markets climb walls of worry,” Ing writes, “so we are not surprised about the cautiousness of the marketplace.” But he goes on to state his view that “several factors have converged, with the planets finally lining up to make precious metals more attractive than they have been in nearly 20 years.”
The main factors Ing identifies are sharp increases in retail bullion buying in Japan, a crisis of confidence in the stock markets, a new sense of weakness in the U.S. dollar, the potential for an oil price increase, concerns about inflation, and the gold producers’ move away from hedging. And his boldness hasn’t left him: he predicts a price of US$510 per oz. for gold by 2003.
Japanese retail investors, fearing that their banks — for many years the model of Eastern financial probity and conservatism — have overextended themselves with bad loans. Retail gold purchases went up threefold in the first quarter of 2002, and most observers agreed that a large part of the purchases were meant to offset scheduled reductions in deposit-insurance coverage for ordinary Japanese savers. But the heavy buying — 20 tonnes in February and 10 tonnes in January — covered less than 1% of the 11 trillion personal savings pool. Buying in 2002 is expected to be about 200 tonnes.
Japan has been in the grip of deflation for about three years now, and along with the Bank of Japan’s low interest rate policy, the yen has fallen sharply against the U.S. dollar. One effect of that was a 20% increase in the yen-denominated price of gold in 2001, rewarding those Japanese gold bugs that were quick off the start line. In the present atmosphere of low interest rates and high government debt, says Ing, “gold is a good thing to have as an insurance policy.”
Ing also suggests that capital markets are swamped by mistrust. (“Greed is no longer good,” he quips. “What a concept.”) Ing suggests the market may place a premium on the most transparent investments, including gold.
He also sees the end of a 7-year period when, for foreign investors, the U.S. dollar could do no wrong. The most significant factor is a massive current-account deficit, which was US$417 billion, or 4% of gross domestic product, in 2001. Projections for 2002 indicate a US$435-billion trade deficit this year; economists are predicting that the deficit is unsustainable and highly likely to reverse.
A weaker dollar, lower yields on U.S. investments as interest rates are pared back, and the poor climate for equities, all cut the capital inflows that up to now have funded the trade deficit. Longer-term bond yields have been driven up in the expectation that the obligations will be paid back in dollars whose purchasing power has been eroded by inflation. Ing points to the years 1985 to 1987, when the U.S.-dollar price of gold doubled, as a model of events to come.
The analyst enumerates three “oil shocks” that have left recession in their wake. The first was in 1973, when the Organization of Petroleum Exporting Countries placed its first embargo on oil, following the Yom Kippur war in the Suez. A second, in 1978, followed the Iranian revolution, and a third, in 1989, followed the Gulf War. Each time, there was a burst of inflation and an increase in the gold price, followed by a recession.
Should inflation return, Ing points out, the U.S. Federal Reserve “cannot respond with another round of interest rate cuts [from 1.75%]. . . . there is little ammunition left.” Ing points to “stealth bull markets” in many commodities, with producer prices edging upward. An increase in broad money supply in the U.S. — which ran at a 12% annualized clip last year but has “slowed” to 6% — also brings fears of inflation.
Ing also observes that “hedging is socially incorrect” these days. “The reduction of total producer hedges for the second year in a row has bolstered prices. Investors want 100% of the upside, and not what some bank will pay, for reserves in the ground.”
He rattles off the list: AngloGold bringing its hedges below 10 million oz.; Newmont, “the flag-bearer of the non-hedgers,” liquidating Normandy’s hedge book; Barrick Gold delivering half of its annual production at spot prices this year. Placer Dome’s decision to maintain hedges on 40% of its production over the next five years is, for Ing, a “dysfunctional step. . . . “At US$324 per oz. its hedge book will become negative, wiping out US$500 million of book profits.”
Ing sees only central bank gold sales as possibly souring the atmosphere for gold. The Washington Agreement, limiting gold sales by 14 European central banks, has reassured investors, but central bankers still reflexively talk gold down. In response to the observation, by Christian Noyer of the European Central Bank, that “the importance of gold is slowly declining,” Ing replies that gold has been becoming steadily less important to reserves ever since the Bretton Woods currency structures broke down in the early 1970s. “Like the bogeyman, investors are afraid of what they can’t see — that is, more sales.” He asks: “If central banks don’t like gold, why is gold still the central banks’ second-largest holding after the U.S. dollar?”
Ing concludes that the banks are unlikely to be vigorous sellers in a rising gold market and that “the threat of more central bank sales is just that, a threat.”
Strong fundamentals
Ing regards gold’s supply-and-demand fundamentals as strong, with supply tight and production at a plateau. Few new projects are coming on-stream, and there is renewed investment demand, especially from Japan. Equally, the worldwide economic situation, especially a falling U.S. dollar, makes gold a good side bet.
Ing predicts an average of US$325 per oz. for the year, with possible spikes to US$375. The longer term should see a 2-to-3-year bull market, topping at US$510 per oz. in 2003. “Despite German jawboning,” he says, “we expect the Washington Agreement to be extended beyond September 2004.”
Among larger gold producers, Ing recommends
Barrick’s new discovery at Alto Chicama in Peru is “a welcome sign, since exploration is the lifeblood of the mining industry.” Ing applauds Barrick’s fourfold increase in its exploration budgets.
Placer: a sell
He rates
At Campbell Red Lake in northwestern Ontario, a ground failure has sterilized about 300,000 oz. of gold that were in reserves. Campbell remains a rich high-grade gold mine, but Ing suggests a joint venture with the adjoining
Ing is unimpressed by two other Placer acquisitions: the South Deeps mine in South Africa (which “increased its geographic risk profile”) and the Getchell mine in Nevada, whose remaining stockpiles are to be processed by
Of Newmont, Ing says the merger with Franco-Nevada and Normandy Mining came at an opportune time, cleaning up Newmont’s balance sheet and allowing it to reduce geographic risk. He expects to see Newmont sell interests in
Ing sees the possibility of Kinross making similar deals with Echo Bay and TVX.
Agnico and Meridian
Two other mid-tier producers on Ing’s list are
Meridian’s acquisition of British-based Brancote Holdings brings it the high-grade Esquel gold property in Argentina, which promises production of 700,000 oz. annually by 2004 if feasibility studies are positive. The new production would offset decreases at the El Peon and Jerritt Canyon mines, in Chile and Nevada respectively.
Ing has dropped a recommendation on
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