lemetropolecafe.com
MANY Austrialian Cafe members sent me the following article that was written in the Australian Financial Review this past Thursday.
ALL were fairly excited about it.
Ironically, it is exactly the information presented in this article that is the PROBLEM with the gold market and the gold industry.
The numbers cited by the gold industry executives are WAY TOO LOW and UNDERSTATED. They are flat out wrong,in our opinion.
The real gold demand numbers coming to the light of day are much greater than cited by GFMS.
I am working on this for our presentation to members of Congress and will include commentary in the next Midas, but note the following:
GFMS shows a supply/demand deficit today of 900 tonnes in this article for 1999. That includes a "one off" 200 tonne figure of short covering buying by the speculative crowd. That is important because their yearly numbers have been too low for a long time - so that this 900 number is overstated in a longer term sense concerning their year in/year out work.
That deficit they say has been met by central bank selling and leasing, but while they NOW state the gold loans might have risen to 4500 tonnes, THEIR YEAR TO YEAR WORK shows only a 3000+ tonne total. They now say 4500 tonnes, but do not tell us where the adjustments have been made over the years to come up with that number, according to Frank Veneroso of Veneroso Associates.
TWO YEARS AGO, Frank Veneroso alerted the gold world that the GFMS numbers were wrong. Few paid any attention. The bureaucrats in the industry just sit on their big fat fannies and accept the status quo from the bullion dealer apologists. As "Yoots," they must have had the line "Curiosity Killed the Cat" drilled into them. They are safe, that is for sure.
Frank Veneroso's diligently put together supply/demand numbers tell us that the deficit has risen to 1500/2000
tonnes at the moment - almost 2 to 3 times what the recent yearly numbers of GFMS number tell us it is.
That deficit is being met by central bank sales and loans. This is VERY SIGNIFICANT as you will come to understand when you read this story.
Our camp says that the deficit and gold loans are MUCH greater than commonly understood and what GFMS puts out.
We are certain we are correct; the real gold story is expotentially more bullish than reads in this positive gold article.
Now, one can say, well why should we think that the work of Frank Veneroso is correct? Fair question.
At the Australian Gold Conference, the chief bullion dealer for Chase Bank, Dinsa Mehta, told the attendees that the official sector gold loans have risen to 7000 tonnes. Throw in 200 tonnes for private sector loans and we are up to 7200 tonnes or TWICE, give or take,what the gold industry understands as fact from GFMS.
A WELL KNOWN BULLION DEALER SAYS GFMS IS WRONG AND SAID SO PUBLICLY. Yet, the gold industry yawns while the share prices of their companies continue to drift into oblivion.
Enough for now. The gold price could take off at any time because most of the gold industry is working off the WRONG numbers. They do no realize that the gold loans are TOO BIG to pay back in a short period of time. It CANNOT BE DONE. The Big Shorts are TRAPPED.
That is the message that the GATA delegation is taking to members of the U.S Congress. That is the message we are taking to the banking committees. The longer the situation goes on, the longer it takes to rectify the gold short problem, the more significant will be the economic consequences. This not a time for a "stick the head in the sand" politico policy.
Too much gold is being consumed at too cheap a price. The longer the gold price is HELD DOWN at these price levels, the worse the problem will be down the road.
We will ask Congress to talk to Dinsa Mehta and to very highly regarding U.S economist, David Hale, who has stated that the gold loans are probably 7600 tonnes to 10,400 tonnes - greater than Mehta suggests and closer to what Frank Veneroso thinks they are.
Keep this in mind as you read this well written article.
By Trevor Sykes
The good news for the Australian gold industry is that the long-term future looks highly promising. The bad news is that they don't know when the long-term is going to start - it may be six months but it may equally well be six years.
So the gold miners are in the position of a horse in a drought - they have to live until the grass grows again.
The reasons for long-term hope lie in the tables (below) presented to the Australian Gold Conference this year by
Ronald Cambre, chairman and chief executive officer of Newmont Mining Corporation.
The first table shows the supply and demand of gold in 1999, as measured by Gold Fields Mineral Resources,and Newmont's best guess at the figures in 20 years'time. The 1999 figures show total demand for gold last year outstripped supply by 900 tons. That differential was filled by sales of gold from central banks (notably the Bank of England's programmed (sell-down) and lending by central banks to cover producer hedging.
Gold supply & demand (All figures in metric tons)
Supply 1999 2020
Mine production 2,550 3,450
Scrap 625 1,100
Total supply 3,175 4,550
Demand
Jewellery 3,075 5,950
Other fabrication 600 900
Bar hoarding & Investment 400 400
Total demand 4,075 7,250
Deficit (900) (2,700)
Central bank sales
and lending 900 ??
This is not a new scenario. For most of the last decade the Gold Fields survey - generally respected as the best available for the gold industry - has shown gold demand as exceeding supply. Despite that imbalance the gold price steadily declined through those years and is now at historic lows. Depending on how the real price of gold is measured, adjusted for inflation, it is getting back to the equivalent of the $US35 an ounce levels that prevailed under the Bretton Woods agreement.
The supply-demand imbalance, therefore, has been absolutely irrelevant to the gold price for the past decade at least.
So why should we start taking notice of it now? The answer is because the imbalance is reaching serious proportions and appears likely to grow to the point where it will impact.The 900 ton shortfall last year is three times the annual production rate of Australia, which is one of the world's largest gold producers.
The two key drivers for the future will be fabrication demand and mine supply. Fabrication demand is mainly for
jewellery, with lesser amounts being used for dentistry and industrial applications, particularly computer chips. Fabrication demand grew at a compound rate of 11 per cent in the 1980s and slowed to 4 per cent in the 1990s. Cambre's
forecasts for growth to 2020 are based on a growth of 3 per cent, putting total demand by then at 7,250 tons a year - a 75 per cent increase on last year.
That growth rate could be achievable - at least in the short-term - as lower gold prices encourage consumption.
Cambre forecasts that the expansion of e-commerce will enhance jewellery sales in the developed world, while
growing populations and improved economies in the Far East, India and China should support continued growth in those
traditional markets.
Meanwhile, mine supply is drying because of several factors. Cambre has forecast it to grow at 1.4 per cent a year, but thinks that is an optimistic rate. At present the world's biggest producers are South Africa, the United States,
Australia and Canada - all of which have problems.
South Africa's mines have traditionally been high-cost because they ran fat on cheap labour. Now they are stripping
out many of the labour and management costs but they cannot escape the higher cost of having to drive ever deeper into the earth for economic gold.
South Africa's deepest mines are now looking at going down to 5,000 metres, or nearly three miles below the earth's surface. The temperatures are searing, which means they will need strong ventilation, refrigeration and probably remote control mining techniques. Even at lower levels, South African mines are often chasing narrow one-metre seams and high-grading their mines to survive.
The Australian and North American gold miners suffer handicaps which are strikingly similar. All the oxide ore near the surface, which can be excavated at low cost in open pits and treated easily in carbon-in-pulp plants, has been
won.
Increasingly pits are going deeper and mining is going underground, which is higher cost. Also, as the mining
descends further into the orebody, the oxides run out and gold has to be extracted by more complex treatment from sulphide ores.
The higher costs of both underground mining and more complex treatment are being defrayed by the application of cutting-edge technology. Nobody in the world is ahead of Australians in the application of high technology to gold
mining. One of the rewards has been to extend the economic life of relatively low-grade underground orebodies.
However, the easily found orebodies are also vanishing. Nearly all of the currently known gold deposits in Australia
were originally found by old-time prospectors from surface geological expressions. Future discoveries will be like
that of Bronzewing in Western Australia, an orebody invisible at the surface which was detected through sophisticated soil chemistry followed by a concentrated drilling program.
Companies today are in survival mode and few would have the stomach or funds to countenance the sort of exploration needed to find Bronzewing.
The falling gold price has shrivelled exploration expenditure. Tougher environmental, permitting and native title regulation in Australia and North America can also take some of the responsibility. J.B. Were, which has probably done more consistent research on the mining industry than any other broking firm in Australia over the past decade, reckons gold exploration last year in Australia amounted to $400 million, which would mean it has fallen by
half in the past three years.
Robert de Crespigny, executive chairman of Normandy Mining, points out that the exploration statistics are worse then they look because they do not differentiate between brownfields and greenfields exploration.
Exploration drilling seeking extensions to a known deposit (brownfields) is lower risk and higher reward than wildcat (greenfields) exploration in the bush. Greenfields exploration is generally agreed by mining companies to be at a very low ebb at present, partly because of the falling gold price but also because of native title.
Australia entered the third millennium with relatively high gold reserves of 80 million ounces. But they are also being
mined at a relatively high rate. Broadly, the lead time between exploration and production is around 10 years. The
high exploration rates of the middle 1990s should sustain the big low-cost mines through most of the present decade and brownfields exploration should keep them going a bit longer. But somewhere out there one of two things must happen: either the price of gold rises or production dries up because exploration is not bringing any fresh mines on stream.
Terry Burgess, managing director of Delta Gold, says the larger gold companies are spending less on exploration
than they were five years ago. He also points out that the number of pure resource exploration companies in Australia has fallen from 270 to 70 in the past 18 months.
Gold production rates in Australia are around 300 tons a year and have been falling slightly for the past three years. According to ABARE, they will reach 250 tons by 2010. Cambre says North American production has almost certainly peaked.
South America looks the most prospective continent for gold, with a pro-mining attitude, political stability in the main regions of Chile, Brazil and Argentina (a little more risk in Peru) and probable large deposits still to be found. However, South American production is unlikely to fill the gaps left by declining production in the other major regions over the next decade or so.
The other possible sources of gold supply are Africa, Russia, China, Indonesia and Papua New Guinea, all of which have question marks over their political stability.
This makes Newmont's forecasts (guesses) in Table One particularly interesting. If supply and demand keep following their present trends, the deficit by 2020 will be running at 2,700 metric tons a year.
The accumulated deficit over the 20 years between now and then will have mounted to 33,515 metric tons. As Table Two shows, that is almost exactly the amount of gold now held by central banks and other official institutions such as the International Monetary Fund and the Bank of International Settlements.
Official gold holdings 1999 (All figures in metric tons)
Covered by Washington agreement (15 European banks) 15,942 = 48% Abiding by Washington agreement
(USA, Japan, IMF, BIS 12, 344 = 37% Other countries 5,197 = 15% Total 33,483
Implied drawdown to meet supply deficit through 2019 33,515
One factor which has driven the gold price down in recent years has been central bank gold sales and - even more potently - the fear of them. Table Two shows that if the supply/ demand imbalance continues for another 20 years no central bank in the world will have an ounce of gold left. The only way that prediction could come true would be if gold were devalued to the point predicted by Lenin, who wanted to see it used as a building material for public lavatories.
It just ain't gonna happen. In the short-term a moratorium has been placed on gold sales by the Washington agreement under which 15 European central banks have agreed not to sell their gold holdings for five years.
Importantly, those banks have also agreed to cap their gold lending at levels prevailing in October last year. The US, Japan, the IMF and BIS have all undertaken to abide by the Washington agreement too.
That leaves a little over 5,000 tons of gold held by central banks who are free to sell - and a limit on the amount of
gold that will be provided to finance forward sales over the next four-and-a-half years.
Even if the Washington agreement doesn't hold, on the Newmont forecasts the central banks will have exhausted their gold reserves in 20 years' time and the simple laws of supply and demand should ensure that the price will have to be a lot higher than it is now. If the Washington agreement does hold, the price should start rising in a couple of years' time.
All we need is for the horses to stay alive until the grass grows again.
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