BIS may consider making gold a Tier 1 asset for commercial banks with 100% weighting rather than Tier 3 asset with just 50% risk weighting as it does today.

Dennis Gartman noted today the following:


Despite the one day, onerous and expensive bearish shift... which has been replaced by the bullish reversal yesterday... we note the following comments made earlier this week by Mr. Ross Norman, the CEO of Sharps Pixley in London, entitled: The Next Big Thing in Gold: Possible Purchase of 1700 Tonnes:


Banking capital adequacy ratios, once the domain of banking specialists are set to become centre stage for the gold market as well as the wider economy. In response to the global banking crisis the rules are to be tightened in terms of the assets that banks must hold and this is potentially going to very much favour gold. The Basel Committee for Bank Supervision (or BCBS) as part of the BIS are arguably the highest authority in banking supervision and it is their role to define capital requirements through the forthcoming Basel III rules.


In short, they are meeting to consider making gold a Tier 1 asset for commercial banks with 100% weighting rather than a Tier 3 asset with just a 50% risk weighting as it does today. At the same time they are set to increase the amount of capital banks must set aside as well. A double win potentially.


Hitherto banks have been much dis- incentivised to hold gold while being encouraged to hold arguably riskier assets such as equity capital, currencies and debt instruments, none of which have fared too well in the crisis. With this potential change in capital adequacy requirements. Bank purchases of gold would drive up its value relative to other high quality qualifying assets, increasing its desirability for regulatory purposes further. This should result in gold being re-priced to bring it on a par with all other high quality assets.

Currently banks have to have core Tier 1 capital ratio of 4% of which will rise to 6% from the beginning of next year. In addition to its store of value merits, central to the argument in favour of gold as a bank reserve is its countercyclical nature to most other assets in that it tends to be inversely correlated. Gold is ideal as it bears no credit risk. It involves no other counterparty and it is no one's liability. It is a reserve asset diversifier if you like.

This is a treble win for gold - it would be a major endorsement of its role in preserving wealth and as a store of value from the highest financial authority, it would lead to significant purchases of gold by major financial institutions and it would lead to a reappraisal of its value with respect to other Tier 1 capital such as quality sovereign debt. Under the new rules gold could become a very significantly larger proportion of a reserve pool which is about to grow very much larger.

This is very bullish news for gold... very bullish; but at the moment it matters really very little, although it shall in the not-too-distant future. At the moment, the only thing that matters is Europe and that means deflation, liquidation and cash. All else is of little interest until further notice. 

One of the finest opportunities to buy gold in the whole bull market - Embry - #GOLD ANALYSIS - Mineweb.com

One of the finest opportunities to buy gold in the whole bull market - Embry

For Sprott's John Embry the current level represents a strong buying opportunity because nothing in recent months has really been gold unfriendly.

Author: Geoff Candy
Posted:  Wednesday , 30 May 2012
GRONINGEN (Mineweb) - 

While gold has fallen significantly since hitting a peak in September last year, according to Sprott asset management's chief investment strategist, John Embry, nothing in this period has been "gold unfriendly".

Indeed, Embry believes that there has been a great deal of interference within the market with a lot of people trying to make the global economic picture look better than it actually is. And, as a result, at current levels, gold represents " one of the finest opportunities if not the finest in the entire bull market which is now in its 12th year."

Embry is nothing if not bullish about the price of gold. Speaking on Mineweb.com's Gold Weekly podcast, he said, "I think gold is going to $10,000 at some point and it's going to have nothing to do with the cost to dig it out of the ground, it's going to have everything to do with the fact that people just don't think their money is going to be worth anything."

To back up his claim he says one just needs to look at the state of global budget deficits.

"They're out of control and they [politicians] are not going to get them back in control because austerity just makes budget deficits bigger. So, I think you're waiting for that moment of recognition when people realise 'Oh my God this paper currency that I've just clung to for the last 40 years isn't going to buy me a loaf of bread in two years.'"

He adds, "Gold is the mortal enemy of the fiat paper currency system that we are operating and have been operating for 40 years. People are beginning to realise that this money is going to be turned into confetti and the authorities are scared to death that they are going to make the connection that gold is a good idea...People aren't making the correct connection that gold is what you should be holding in this environment - that will change."

For Embry, one of the major problems is that while, understandably, a great deal of attention is being currently focused on Europe, the situation in the US is equally as dire.

"I spent a lot of time studying the real US economic statistics and I don't think there's any recovery of any substance whatsoever ... I think the most shocking statistic that has come out in the last nine months is the fact that last year the US monetised 61% of its budget deficit. That's staggering. I can't even conceive of that, yet they did it and no one seems to care."

But, he does agree with other commentators, such as Ian McAvity, that if Europe were to implode or if the banking system got into a great deal of difficulty, it would go viral around the whole world almost immediately and no-one would be immune.

"The majority view, which is propounded by the US and a lot of the European countries, will prevail and austerity will go by the boards and essentially we will refinance the European banks and it will be wildly inflationary," he says.

Read the article online here: One of the finest opportunities to buy gold in the whole bull market - Embry - GOLD ANALYSIS - Mineweb.com | The world's premier mining and mining investment website Mineweb

Gold -#China now #1 in demand- Turkey re-emerging as key market- World #Gold Council

World Gold Council numbers for Q1 and Aril 2012

We note that Turkey has continued to buy more gold, purchasing another 29 Tonnes in April 2012 ( reported this morning by the IMF).

 

CONCLUSION: Q1 global demand reached 1097.6 tonnes (worth $59.7B), down from last year and from previous quarter, due to declining demand from jewellery and technology sectors in reaction to higher prices. Increased demand for ETFs was not enough to offset the decline. Central Banks remained significant net buyers of gold.

 

1- Q1 demand 1097.6 tonnes, -5% yoy, but up in value (+16%) due to higher prices. The average gold prices was 22% above Q1/11.

2- China demand reached record level to 255.2 tonnes (+10% yoy), becoming the largest consumer market during the quarter. China dominated the jewellery market with demand of 156.6 tonnes (+8%).

3- Central banks net purchases reached 80.8 tonnes but lower than Q1/11 level (which saw an exceptional level as a results of Mexico 93 tonnes purchase). Buyers include: Russia, Mexico, Kazakhstan, Philippines,…

4- Turkey is re-emerging as an important gold market, for both exports and demand (page 4 to 11).

5- Investment demand was the only segment to be up yoy, reaching 389.3 tonnes (+13% yoy). In dollar terms, demand was up 38% yoy but down 13% from previous quarter. ETFs demand reached 51.4 tonnes, vs 62.1 tonnes net outflows in Q1/11.

6- Jewellery demand was down 6% yoy to 519.8 tonnes, however in dollar terms, demand was up 14% to a record $28.3B. India jewellery demand was down 19% yoy, but was up in value (in Ruppee). Although small, Russia's demand was up 28% to 20.4 tonnes.

7- Technology/other industrial demand was down 7%.

8- Total Gold supply was up 5% yoy to 1070.3 tonnes. Q1 mine production was up 3% yoy to 673.8 tonnes. Net hedging activity was almost halved yoy, from already a very low level.

 

 

Defriended gold still has room to run - Holmes

Defriended gold still has room to run - Holmes

Frank Holmes maintains gold may not go up vertically from here, June and July are traditionally weak months for the metal, longer term the metal will rise.

Author: Frank Holmes (US Global Investors)
Posted: Tuesday , 22 May 2012
SAN ANTONIO (U.S. Global Investors) -

Facebook's highly anticipated initial public offering Friday helped the company raise $16 billion, a record for tech IPOs. It's refreshing to see investor excitement rally around the stock, as the U.S. needs innovative businesses to thrive and attract capital. However, as behavioral finance warns, be cautious of a herd mentality.

Last November, the IPO deal of the day was Groupon. On the first day of trading, shares rose to a high of $31 from an initial offering price of $20.

By Thanksgiving, the stock had fallen below the IPO price, and only a few months later, uncertainty popped up around the company's accounting methods and financial controls. The stock fell further, with the market devaluing Groupon by about 50 percent in only six months. How's that for a group buy?

It's interesting to note that the value of Groupon's stock has lost more than $13 billion since the peak on the first trading day through April 30. For comparison, if you look at the total net assets in Lipper's precious metals mutual fund peer category, assets fell $8.3 billion over the same timeframe. Investors lost more than $5 billion more in one tech stock alone than in all of the precious metals funds combined.

Gold-A Reality Check
Investors have "defriended" gold recently in favor of the dollar, as Greek and French voters rejected austerity measures. Greeks have been responding to their escalating debt issues for a while by steadily pulling money from overnight deposits. I often say, money goes where it is best treated, and these deposits will need to find a safe haven.



It's not only Greece the market is worried about, says BCA Research. In a special report aptly named, "In Case of Emergency Grexit," the firm says there's extra pressure on Spain and Italy, "which imminently needs a large bailout of its banking system." The 10-year yields for each country have reached 6 percent today, and while there are funds to sufficiently cover Spain, there aren't enough funds for Italy, too, says BCA.

So if the European Union (EU) stops the flow of bailout funds, Greece, unable to pay wages, would invoke social unrest, according to BCA.

More importantly, without funds from the EU, Greece would default on its bonds. Looking at what the country owes this year alone, $1 to $7.6 billion is due each month, says BCA. The European Central Bank would then most likely stop providing funds to Greek banks, causing more individuals to pull money. "With deposit flight, and no injections from the ECB, the banks would be bust and Greece would be hemorrhaging money," says BCA.

It's also important to look at the investors of Greek debt. According to the London Evening Standard earlier this year, French banks are the largest holders of Greek government bonds and private-sector debt in the eurozone, with $47.9 billion exposure to Greece.

In the end, I believe governments in Europe lack the courage to be fiscally disciplined. Earlier this week, I told Aaron Task and Henry Blodget on The Daily Ticker that when push comes to shove, Europe will likely continue to print money. This should be positive for gold.

At the Hard Assets Conference earlier this week, Greg Weldon compared the money printing situation to a sink. In an interview he gave with The Gold Report, Greg said:

"It's going to be very difficult to see how economies in Europe, the U.S. and Japan can stand on their own two feet without the assistance of central banks debasing currency through debt monetization. I liken it to filling the sink halfway up with water and pulling the plug out of the drain. Of course, the water level will recede unless you turn the faucet on and start more water pouring into the sink. The level of water represents asset prices, the water flowing out of the faucet represents liquidity provided by global central banks and the drain represents the real macro economy, which has not been fixed.

"At the end of the second round of qualitative easing, when the Fed shut off the faucet, the water level (asset prices) started to go down. But now the water is running again-particularly with some of the measures instituted by the European Central Bank, with its three-year loan program, the federal liquidity swaps and the back-ended way that it's managed to involve the International Monetary Fund.

"The problem with all of this is it does nothing to fix the underlying problem, which is too much debt. This is not sustainable. Central banks turning on the water faucet is good for asset prices. The real solutions of fiscal austerity, which are probably not palatable to most politicians in Europe, are the real struggle as we go forward. This problem is not going to go away."

So, during times like we've had recently, when the dollar is chosen over gold, I apply math. The chart below shows the 60-day percentage change of the gold price and the U.S. dollar. Gold's recent weakness has triggered a -2.2 sigma event in standard deviation terms. Over the past 10 years, this has happened less than 2 percent of the time. Historically, each time gold has touched the -2 sigma mark, the precious metal has rallied.

This bounce is exactly what we saw on Thursday and Friday this week.

See more slides from my Hard Assets Investment Conference.

While gold may not go up vertically from here-as frequent readers know, the yellow metal historically has fallen in June and July-with the extraordinary events occurring in Europe, I believe investors will soon "friend" gold once more. As we wait for the central banks around the world to act, I encourage investors to consider dollar-cost averaging. It's a way to stay invested, and more importantly, to avoid making emotional investment decisions.

Frank Holmes is CEO/CIO of US Global Investors.

Read the article online here: Defriended gold still has room to run - Holmes

Gold bushwhacks bears - Peter Brimelow - MarketWatch

Gold bushwhacks bears - Peter Brimelow - MarketWatch

By Peter Brimelow, MarketWatch

NEW YORK (MarketWatch) — Gold bushwhacked the bears last week. It’s even got gold bugs talking about gold stocks … again.

After breaking gold bugs’ hearts by plunging to a new low for the year on Thursday, gold violently reversed. Measured by the CME floor close, the benchmark gold contract GCM2 +0.08%  gained $38.30 on the day. It followed up on Friday by adding another $17, for a two-day gain of 3.31%.

The NYSE Arca Gold Bugs Index XX:HUI +1.88%  jumped 5.29% in these two days.

Gold stocks’ outperforming the metal is significant, because they have been atrocious this year. As of Friday’s close, HUI was down 20.5% on the year, while gold was actually up 1.4% on the year. Just a restoration of late 2011’s multiples could produce serious gains.

If gold’s reversal sticks, it will be a triumph for the contrary opinion sentiment indicators. Nothing else had been offering any comfort.

The Hulbert Gold Newsletter Sentiment Index has been negative for a record 29 days. ( See Mark Hulbert’s May 4 column. ) The previous record, which ended in early 2005, was followed by a 72% rise in gold over the next 15 months.

When MarketVane’s Bullish Consensus for gold hit 51% on Wednesday, it was at the lowest except for one day — 49% on Nov. 13, 2008 — for many years.

The far-sighted Australian bullion commentary The Privateer thinks something really significant has happened.

This weekend it observed: “What is interesting about the snap-back this week — in both the physical and paper forms of gold, including gold stocks — is that gold has once again started to rise, while other asset markets (especially stock markets) are still falling.”

Another positive voice, from an unusual source, is veteran gold analyst Frank Veneroso.

As I noted during last Christmas’ gold gap-down, Veneroso earned an important place in gold-market history for conceptualizing, in the 1990s, the importance of Eastern physical demand to the gold price, then a new factor. But for several years he had dismayed gold bugs by ignoring the metal. ( See Jan. 2 column. )

After the Christmas gap-down, I reported that Veneroso had surfaced expressing a “hunch” that efforts by “a bunch of traders” to cause a technical breakdown would be defeated by central-bank buying. And, indeed, by Feb. 23, gold had risen 14%.

Now Veneroso has circulated another essay entitled “At The Threshold Of The End Of Central Bank Independence, Gold Is Compelling.”

He writes: “It may finally become clear to market participants that the body politics around the world will demand that central banks implement debt-eroding inflations.”

“With the death of the myth of independent central banking, gold should assume a unique position as a monetary asset. I think we are very close to this point.”

This represents a tremendous shift for Veneroso, formerly a dogged skeptic about the influence of monetary matters on gold.

Gold bugs are also excited about some strange technical news about Thursday’s rally. With bearishness previously so intense, it would have been normal for Thursday’s big jump to involve considerable short covering, which would have slashed the number of outstanding contracts on the CME — the “open interest”.

But precisely the reverse happened.

As Bill Murphy, proprietor of the LeMetropoleCafe website, put it on Friday evening: “The gold open interest rose a whopping 16,891 contracts yesterday to 433,847, which is new recent high, by a substantial degree. Almost everyone thought yesterday was about short covering. … It was new buying. The sort of major-league buying brought to your attention for weeks now in this space.”

A correspondent at Le Metropole Café remarks: “If indeed gold is underpinned by some enormous strategic buyer — probably a central bank — which is what the data implies, a number of market participants will have to do some serious rethinking.”

Rethinking the value of gold shares will be top of that list.

Read the article online here:Gold bushwhacks bears - Peter Brimelow - MarketWatch

Forget Greece, #China Biggest Risk to Global Economy: Faber CNBC.com

Forget Greece, China Biggest Risk to Global Economy: Faber

Forget Greece, which is an "insignificant" economy, it is China that's posing the biggest risk to the global economy, Marc Faber the editor and publisher of the Gloom, Boom and Doom report told CNBC on Friday.

Read the Full Story here:
http://www.cnbc.com/id/47472497

Silver supply to pass the billion ounce mark this year--CPM - #SILVER NEWS - Mineweb.com

Silver supply to pass the billion ounce mark this year--CPM

Silver price increases have had a positive impact on primary silver producers as global silver mine production may hit 729 million ounces this year, and total supply over 1 billion ounces, says New York-based CPM Group.

Author: Dorothy Kosich
Posted:  Thursday , 17 May 2012 


RENO (MINEWEB) -



Newly refined market economy silver supply is set to surpass one billion ounces for the first time in 2012, according to CPM Group's Silver Yearbook 2012.


Market economy silver mine supply was entirely responsible for the increase in total silver supply in 2011, with secondary silver declining during the year. Total refined market economy silver supply rose 22.6 million ounces to 995.1 million ounces in 2011.


After rising for nine consecutive years, total silver supply is forecast to reach 1.01 billion ounces in 2012 with nearly all of the projected increase expected to come from higher mine production.


Silver mine production in market economies was 713.6 million ounces in 2011, surpassing the 700-million ounce mark for the first time on record. Mine supply increased most strongly in China and Mexico, the two largest silver producers. Silver mine supply is forecast to reach 729 million ounces this year, up 15.4 million ounces from 2010.


"The increase in prices has had a positive impact on primary silver mine production," said the report. Silver mine supply from primary producers was 179.8 million ounces in 2011, up 7.2 million ounces from 2010.


The net increase in primary silver output came primarily from relatively few mines: Primarily San Jose in Mexico, Twin Hills in Australia and Cerro Bayo in Chile. Average silver cash costs at primary mines were $8.28 per ounce in 2011.


The top ten largest market economy silver producing countries in the world are Mexico, China, Peru, Australia, Chile, Poland, Bolivia, the United States, Argentina, and Canada.


Secondary silver supply is expected to increase to 279.8 million ounces this year, up 2.7 million ounces from 2011.


FABRICATION DEMAND


Silver fabrication demand rose 2.2% to 861.9 million ounces in 2011. The largest increase in global silver fabrication demand, in terms of ounces, came from the photovoltaic or solar panel industry, which consumed 59.8 million ounces in 2011.


However, demand for silver from the photovoltaic industry is expected to decline to 57.5 million ounces this year, "driven by a reduction in demand for new solar panels from Europe and a large supply overhang due to excess production by China," said the report.


The electronics sector is the second largest user of silver after the jewelry industry. "Silver is used to some degree in virtually every electronic item because of its excellent ability to conduct electricity," said CPM. Demand for silver from the electronics sector reached 221.8 million ounces in 2011, up 9.1 million ounces from 2010.


Silver jewelry demand is forecast to increase 1.8% to 296.1 million ounces this year. Much of the growth will come from Chinese jewelry demand, which could increase 8%.


Silver is used in biocide applications contained in medical, hygiene, cosmetic and textile producers. Demand from this sector rose to 6 million ounces of silver in 2011, up 7.1% from the previous year. Demand could rise 6.8% this year to 6.4 million ounces, CPM advised.


Silver fabrication demand is forecast to reach 879.1 million ounces this year, up 17.2 million ounces from 2011. "The main drive of growth during 2012 is expected to be the electronics sector," said the report.


INVESTMENT DEMAND


Silver investment demand remained strong last year as investors were estimated to have added 133.2 million ounces of silver to their holdings during the year, up 3.3% from 2010.


"Investors are expected to continue buying large volumes of silver during 2012," CPM forecast. "Net investment demand in silver by investors is expected to reach 131.7 million ounces during 2012, down 1.1% from 2011."


The report noted that 565.4 million ounces of silver backed exchange traded products at the end of last year, a decline of 26.5 million ounces from levels at the end of 2010.


However, CPM observed that "investors have turned net buyers of the metal in early 2012, having added 14.5 million ounces of the metal to holders at the end of the first quarter.


Total silver backing these products reached 579.9 million ounces on March 31, 2012.


Silver coin sales are estimated to have reached 88.2 million ounces in 2011, a 7% increase. "The rate of growth in total coin demand is forecast to slow in 2012 relative to sales levels in recent years, as investors become less pessimistic about the global economy, compared to recent years, and become more price sensitive," the report observed.


In India, silver demand is expected to be flat from levels seen in 2011, while Chinese investment demand has been rising sharply "helped by increased availability of silver physical and financial products and rising household income levels." However, CPM cautioned, "Expected moderation of inflation compared to 2011 coupled with relatively tight money supply could keep Chinese investment demand for silver capped."


To obtain a copy of CPM's Silver Yearbook 2012, please go to www.cpmgroup.com

Silver supply to pass the billion ounce mark this year--CPM - SILVER NEWS - Mineweb.com | The world's premier mining and mining investment website Mineweb

The MasterMetals Blog

Jim Rogers Blog: Gold: Short Term Bearish Outlook

Jim Rogers still bearish on gold.  What did he make of today's jump.

I think its a buy- all gold and silver stocks, and the metal itself.


Jim Rogers Blog: Gold: Short Term Bearish Outlook: Jim Rogers gives his short term bearish outlook for gold (with Maria Bartiromo on CNBC)


The MasterMetals Blog

Global #gold demand in Q1 2012 was 1,097.6 tonnes (t), down 5% - China, central banks and ETFs underpin demand for gold World Gold Council

Global gold demand in Q1 2012 was 1,097.6 tonnes (t), down 5% from the high demand levels seen in Q1 2011 (1,150.7t) 

World Gold Council

China, central banks and ETFs underpin demand for gold

17 May, 2012

Global gold demand in Q1 2012 was 1,097.6 tonnes (t), down 5% from the high demand levels seen in Q1 2011 (1,150.7t), according to the World Gold Council’s Gold Demand Trends report. This decrease was largely to be expected given the introduction of import taxes in India and high gold prices. Gold demand value however, showed a 16% increase year on year to an estimated US$59.7 billion. The average price of gold for the quarter was US$1,690.57, 22% higher than the average for Q1 2011. Demand for the quarter was underpinned by increased demand in China, continued central bank purchasing and inflows into exchange-traded funds (ETFs).


The main highlights from the report are as follows:
China’s investment and jewellery demand reached 255.2t up 10% on the previous year’s levels. Investment demand recorded strong growth with a quarterly record of 98.6t, up 13% from Q1 2011, demonstrating investors’ continued need to preserve wealth amidst ongoing concerns over inflation. Jewellery demand in China also increased significantly to 156.6t, accounting for 30% of global jewellery demand making China the largest jewellery market for the third consecutive quarter.
Gold demand in India was affected in Q1 2012 by a number of factors; a new tax on gold jewellery, two increases in the import duty for gold and weakness and volatility in the rupee. Jewellery demand fell 19% to 152.0t from Q1 2011. Investment demand was down 46% from the previous year at 55.6t. In May, the government withdrew the new tax on jewellery and the market is already responding positively.
Central banks across the globe continued the now established trend of net purchasing with demand in Q1 2012 reaching 80.8t. Demand was driven by Eastern Europe with Russia and Kazakhstan adding to their holdings and accounting for a substantial amount of the purchasing. Mexico’s central bank made the largest single purchase of 16.8t. The main driver for this demand by emerging market central banks is the need to diversify their holdings.
First quarter demand for ETFs and similar products totalled 51.4t, equivalent to a value of US$2.8bn; in stark contrast to the first quarter of 2011, when the sector witnessed net outflows.


Marcus Grubb, Managing Director, Investment at the World Gold Council said,


“China and India have seen continuing economic growth and whilst China’s economy is expected to slow, it will nonetheless surpass the rates of growth in the West. As we previously forecast it is likely China will become the largest source of demand for gold in 2012.


This growth story also extends to other emerging market economies and is reinforced by central banks’ continued buying of gold, as a diversifier and a preserver of national wealth. The current picture of the gold market is diverse and not withstanding a flight into US dollars and treasuries near term, we believe the fundamental reasons for investing in gold today remain very strong and compelling.”
Gold demand and supply statistics for Q1 2012:
First quarter gold demand of 1,097.6t was down 5% in comparison to Q1 2011 though in line with the average of the preceding eight quarters.
The value measure of gold demand was 16% higher year-on-year at US$59.7bn.
Demand in the jewellery sector of 519.8t was down 6% year-on-year, which when considered against a rise in prices of 22% shows resilience in jewellery demand. Increasing prices are leading to a re-premiumisation of gold, as it becomes even more exclusive. In US$ terms, the value of jewellery demand grew by 14% to a record US$28.3 billion.
The average gold price of US$1,690.57 was 22% higher than the average of Q1 2011. As a result, in value terms, virtually all sectors of gold demand posted year-on-year increases, with the exception of physical bar demand, which was broadly flat, and the official sector, where purchasing activity was below Q1 2011’s exceptional levels.
First quarter gold investment demand (including gold bars, coins, ETFs and similar products) grew by 13% year-on-year to 389.3t. In US$ terms, this equated to a demand value of US$21.2bn, 38% higher year-on-year. Increases in demand for ETFs and medals/imitation coins meant that demand reached 389.3t, 45.8t above Q1 2011 despite declines in demand for physical bars and coins.
At 107.7t, demand for gold used in the technology and industrial sectors was down by 7% compared with year-earlier levels.


The Q1 2012 Gold Demand Trends report, which includes comprehensive data provided by Thomson Reuters GFMS, can be viewed here.

17 May, 2012, China, central banks and ETFs underpin demand for gold Media World Gold Council

Gold investors forgetting the lessons of 2008 - INDEPENDENT VIEWPOINT - Mineweb.com

INDEPENDENT VIEWPOINT


Gold investors forgetting the lessons of 2008

Gold is currently trading at levels last seen before its big move up last summer and, Adrian Ash asks how much worse do things need to get before the lessons of 2007-2009 are revived.

Author: By Adrian Ash
Posted:  Thursday , 17 May 2012
BullionVault - 

Gold just gave back the last of its big surge from summer 2011's big crisis...

SO THE PRICE of gold keeps falling, and it keeps falling despite the imminent failure of Greece's Euro membership, the looming collapse of Europe's banking system, and the fast-looming debt-ceiling repeat and fiscal cliff in the US.

Hey-ho. Some €700m per day is being pulled from Greek banks. Global stock markets have fallen over 7% already this month, the broad commodity markets have fallen for 10 out of 11 days, and crude oil is trading at a 6-month low, down 15% from February.

Yet the distinct attributes of gold - un-inflatable, economically useless (relatively speaking) incorruptible gold, with its zero credit risk and 5,000 years of monetary use - count for nothing. In Dollar and Sterling terms, it's now back where it started last summer's big move.

It's like summer 2011 never happened...



That's precisely what happened in late 2008, when the collapse of Lehman Bros. - and the missed opportunity to let every other over-leveraged investment fraud go bust as well - drove equities, commodities and gold sharply lower.

By mid-October 2008, gold had re-traced the entire surge that started with Bear Stearns' hedge-fund failures of mid-2007, running to the peak above $1000 per ounce when Bear Stearns itself failed into the loving embrace of J.P.Morgan the following March.

Here again in 2011-2012, the crisis proved good for gold at first, but the whole move has been unwound as global credit deflation sucked the air out of gold futures and options, and wipe-out losses in other assets forced even true believers to quit their positions.



Gold prices have the potential to recover, reckons a UBS analyst on Bloomberg TV. No doubt he's right. But how strong is gold's immediate potential given the overwhelming bullishness of every other tomfool able to voice his opinion in public.

"Last time we talked, last September or October, you asked what I thought, and I was bullish at $1800," said one MBA with the certainty of a 12-year old to Business Insider a week ago.

"Now it's $1660, and I'm still bullish. I'm more bullish than ever."

Good grief. Just think how bullish he must be now gold has sunk another $120.

"When all the experts and forecasts agree, something else is going to happen," says David Rosenberg, previously chief economist at Merrill Lynch, now chief economist and investment strategist at Gluskin Sheff and - ummm - an expert by any measure. But what happens when all the fools agree with the experts? It most likely ain't pretty.

Put another way, gold has been getting "a thorough, undeserved smacking," as our friend Ross Norman at Sharps Pixley wrote last week. But what's so undeserved about it?

Gold has risen for 11 years straight, gaining through boom and bust and boom and bust again, beating all other tradable assets (now including silver) hands down and even being recognized by 1-in-4 Americans as the best place to keep your money (formerly 1-in-3, but who's counting besides us?).

The best place up until now, that is. Survey monkeys really don't know the best place from here. No one does. Hence the fun we're all having meantime.

Longer-term, of course, gold's low of Oct. 2008 proved a stand-out buying opportunity. Difference was that physical gold demand - at the lows of the 33% price drop top-to-bottom in 2008 - was massive. Lines formed outside coin shops, gold ETF holdings surged, BullionVault users couldn't pile the stuff into Swiss storage fast enough at just $4 per month, and financial journalists worldwide realized why people buy gold in crisis.

Today, in contrast, demand is fair but unspectacular. Hell, the financial press in Spain is telling people "gold is a risky asset" that has "lost its luster"! Maybe the crisis isn't clear enough. Maybe those people who would buy gold in a crisis already did, four years ago if not last summer, when the Eurozone crisis ran into the US debt downgrade ran into the torching of England's towns and city centers.

Or maybe things have to get very much worse again to revive the lesson of 2007-2009. The lesson that banks do go bankrupt. Debt investments do evaporate. Central banks will stop at nothing to stem a credit deflation.

Adrian Ash is head of research at BullionVault

Read the article online here:Gold investors forgetting the lessons of 2008 - INDEPENDENT VIEWPOINT - Mineweb.com | The world's premier mining and mining investment website Mineweb

Paulson keeps gold ETF exposure in Q1 - #GOLD NEWS - Mineweb.com

Paulson keeps gold ETF exposure in Q1

Hedge fund manager John Paulson held on to his ETF bullion holdings in the first quarter of this year, gaining from an early surge in gold prices before the market tanked.

Author: By Barani Krishnan
Posted:  Wednesday , 16 May 2012
NEW YORK (Reuters)  - 

Prominent hedge fund manager John Paulson held on to his ETF bullion holdings in the first quarter of this year, profiting from an early surge in gold prices before the market tanked, a regulatory filing by his company showed on Tuesday.
It was the first time Paulson had retained his position in the SPDR Gold Trust since the second quarter of 2011. He slashed his holdings in the world's largest gold ETF in two earlier quarters due to what analysts suspected were client redemptions.
Other major fund managers with positions in SPDR Gold, including billionaire financier George Soros, also turned positive on the ETF during the first quarter, some raising their holdings sharply.
Paulson & Co owned 17.3 million shares in SPDR Gold at the end of March 31, virtually unchanged from Dec. 31, a regulatory filing to the U.S. Securities & Exchange Commission showed.
The gamble resulted in a paper gain of nearly $180 million for the company as the value of its ETF holdings rose to $2.81 billion from $2.63 billion amid rising bullion prices.
The spot price of gold, which tracks trades in bullion, jumped 11 percent in January as the market appeared on course to test September's record highs above $1,920 an ounce.
The rally, however, lost steam abruptly, with gold falling a cumulative 4 percent in February and March before finishing the quarter up nearly 7 percent. The sell-off has deepened since, taking gold to below $1,545 an ounce by Friday's close, down more than 1 percent for the year.
Analysts read the first quarter filing by Paulson as a sign that the hedge fund manager, a well-known gold bull, has not lost his faith in the precious metal as a long hedge against inflation.
Paulson has to date been the biggest holder of SPDR shares, using them to hedge currency exposure, while other managers such as David Einhorn and Daniel Loeb have favored more-discrete investments in physical bullion.
Still some expected him to join the herd and cut some of his holdings in gold before the second quarter was through.
"There's absolutely no question in my mind that large institutions have been net sellers in gold over the past two weeks," said Adam Sarhan at New York's Sarhan Capital. "The fact that Paulson has been coming under a lot of pressure on his other holdings may force him to liquidate as well."
During the first quarter, Paulson was also bullish in outlook in his outlook for gold-miners such as Barrick Gold Corp and IAMGold Corp, accumulating more shares in the companies.
SOROS, OTHERS, ADD TO GOLD ETFs
Billionaire financier George Soros increased his position in SPDR Gold to nearly $52 million in the first quarter from $13 million previously.
Last year, Soros, who had called gold "the ultimate bubble", had largely dumped his stake in the ETF before the metal ran up to a record peak of $1,920.30 per ounce in September.
Other major institutional investors, including PIMCO and the Teacher Retirement System of Texas, also boosted their GLD holdings during the quarter. Eric Mindich's Eton Park Capital, which held only SPDR gold options during the fourth quarter, was back to holding to common shares as well.
Overall holdings in the SPDR Trust rose just over 8 percent in the first quarter, after a 2 percent gain in the fourth, according to data obtained from SPDR's website. Gold ETF holdings increased as the price of bullion rose more than 6 percent in the first quarter.

© Thomson Reuters 2012 All rights reserved

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Bob Moriarty: A Contrarian's Guide to Volatile Markets - The Gold Report

Bob Moriarty: A Contrarian's Guide to Volatile Markets

 [ABS, ABZUF, ATX, AGXMF, LODE, CGW, EVG, EVOGF, EV7, GV, GDVXF, MAG, MVG, TEM]

The Gold Report

Trotting the globe in his unrelenting quest for investing opportunities, Bob Moriarty had just completed a 21,000-mile travel-a-thon when he picked up the phone for this exclusive interview with The Gold Report.He liked a lot of what he saw, found plenty of bargains along the way and is willing to name names. Ever the contrarian, he is picking up stocks when everyone else is dumping them; he plans to cash in when the mass of sellers morphs into a mass of buyers and drives prices up.

The Gold Report: We're hearing many people these days warning that it's not a good time for investing in junior mining stocks. The TSX Venture Exchange has been experiencing some of its lowest volumes in six to nine months. What do you believe investors should do this summer?

Bob Moriarty: Anybody following my website for years will be familiar with me saying this: You can ignore technical analysis. You can ignore seasonality. You can ignore fundamentals. The only thing you can ever absolutely make money in is being a contrarian. Some very big names in the mining industry, including Rick Rule and Eric Sprott, have said, yes we're in the bottom but it'll be several months before you should invest. Where were they April 25 last year, when I said we'd reached the top in silver? For months afterward, the very best place to be was in cash. You have to look at what people say and when they say it. Very few people got it last year, but I clearly was one of them.

We are at a major bottom in gold and gold shares. The fact that some of the biggest names in the business are telling investors to bail out or keep their hands on their wallets if they're tempted to buy is a buy signal. If you have a hundred people in a room and every single one of them was a bear, the next trade would be up because you would have run out of sellers. The fact that the volume is so low speaks volumes all by itself. There are no buyers—only sellers, and we're about to run out of those. When that happens, the very next trade will be up.

It's a chicken-and-egg situation. Which came first? In this situation, was it the bottom or the news? Everybody hears, "The Dow went up 200 points today because of xyz." They try to connect news with action and it's exactly the opposite. When gold and gold shares go up, they'll say it's because of Iran, or Israel, or Osama bin Laden or Ron Paul. It's nonsense. It will go up because we're running out of sellers. When you have no sellers, you only have buyers. It's that simple. Too simple for most people to understand. But those who do will make a lot of money. Dawn follows the darkest hours.

TGR: But suppose the government announces quantitative easing (QE) 3, for instance, or some new European debt problems crop up. Wouldn't such news prompt investors to buy junior gold and silver shares?

BM: Absolutely not. What you hear on the radio, read in newspapers and most of what you see on the web is not news. It's propaganda. We have the equivalent of QE3 in Europe, something like $6.7 trillion, and gold, silver and equities have been going down. There's no connection between news and action. We have been spring-loaded to believe that the news is important and it's not. It's meaningless. Six people control 95% of the news media and you're being told what they want you to believe. That doesn't mean it's news.

TGR: So you have to divorce yourself from the news if you really want to be a contrarian in investing in mining stocks?

BM: Absolutely. Every time I call a silver or gold top and I'm perfectly correct, a hundred people immediately write to tell me how stupid I am in calling a top when in fact they're always dead wrong. They never tell me a month later; they always tell me as soon as I say it. Well, I've called tops and bottoms correctly for 10 or 11 years now. To be able to do that, either I have to know something other people don't or I have to be the guy doing the manipulation. And believe me, I'm not the guy doing the manipulation. All markets are manipulated and that makes manipulation as close to meaningless as you can get.

The mere fact that shares are hard to sell and there's very low volume is a buy signal all by itself. If you want to make a fortune in the junior mining segment, buy when nobody wants to buy and sell when everybody wants to buy. If that were all you did, you'd make 100% a year. Juniors have a 200–400% range every year. Buy when things hit a new low, sell when they hit a new high and ignore all the "gurus."

TGR: You talked about calling silver's high last April, and you've again been looking at silver and gold assets around the world. Do you consider yourself more of a silver bull or a gold bull? Or neither?

BM: I'm an agnostic. As for what I look for, I don't look for silver or gold or boron or natural gas. I look for opportunities. The Argentex Mining Corp. (ATX:TSX.V; AGXM:OTCBB) silver property we visited two weeks ago is a hell of an opportunity, and I said so.

TGR: That's in the Santa Cruz Province in Argentina, which has been a hotbed of exploration activity over the last several years.

BM: Yes, I was actually down there visiting four years ago. I liked the stock when it was $1.34/share. It's trading at about $0.38/share now, but two weeks ago it was trading at $0.25/share. If you're buying shares in silver at $0.25, you're effectively buying silver equivalent at $0.11/oz. If silver goes down to $15/oz, you're still going to make money.

Argentex will release a new NI 43-101 any day now, and they've doubled the amount of drilling, so it wouldn't surprise me to see the resource almost double. But in any case, when silver was selling for $5/oz, there were silver company shares selling for $1/oz in the ground. So, $0.08, $0.11 or $0.20—that's pretty cheap for an ounce of silver.

TGR: Do you look at certain jurisdictions or provinces that are particularly good for mining activity and then bet on some of those areas? Or is it always company specific in your view?

BM: It's actually management-specific. You need to look at a lot of factors, of course, but the most important is management. The country or province is absolutely important. I'm going to write an article shortly and will call it "The Miners' Lament." It's about having a gold or silver or boron project and the price of the commodity goes up. As soon as the price goes up, governments get greedy. That's happened in Peru, Bolivia, Ecuador and Australia. To a certain degree it's happening in Argentina, because the government has started getting greedy and claiming a bigger piece of the miners' pie.

TGR: On May 4, Argentina's Congress passed a bill to nationalize Repsol YPF SA (REP:BMAD), the biggest oil company there, expropriating 51% of Repsol's shares. Although not entirely unexpected because President Cristina Kirchner had announced her decision to nationalize YPF a couple of weeks earlier, the action—pretty much effective immediately—sent shockwaves through the resource investing community. Do you think this news makes investing in Argentinian juniors more risky?

BM: There are a couple of different issues to address here. One is the stupidity of government in Argentina. In 1914, Argentina had the third-highest GDP in the world. Based on agriculture and metal wealth and the educational level of its people, Argentina still should be one of the wealthiest countries in the world. It's not, and hasn't been for 100 years now. The reason is 100 years of incredible stupidity in government.

The resources are there. The people are there. The climate's wonderful. The wine's good. Buenos Aires is a lovely city to live in. Yet Argentineans suffer economically. For the government to seize YPF is especially stupid. The excuse was it was not making enough money out of it—in much the same way that the power company in South Africa wasn't making a profit because the government imposed limits on what the power company could charge for the power it sold.

Governments believe they're smarter than the economy and they can repeal or modify the laws of supply and demand. They can't. The last 6,293 times governments have tried to show they're smarter than the economy, they've screwed it up. Governments just get in the way of people making money. If you go to Switzerland, you don't even see government. In Sweden, government's in the background and that's a welfare state. But, government doesn't figure into every newspaper article and everything you hear on the radio. In China, I don't have a clue how the government works; I just know it's an exciting place to make money.

So let's go back to whether it's safe to invest in Argentine juniors. I think it is because the juniors are in the exploration stage and they're bringing money into the country. It would be especially stupid for the government to get involved at this point. I don't think it will fool around with the production companies yet, either, but there's no limit to the stupidity of governments.

Argentina’s ‘Chavez’ risks shale-fuelled economic miracle

Lessons in how to screw up your future...

Read the article online here: Argentina’s ‘Chavez’ risks shale-fuelled economic miracle: Argentina may rank third in terms of global shale gas resources, but it also ranks alongside the world’s economic basket cases and increasingly Chavez-esque international pariahs

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Investors losing faith in #commodity hedge #funds: Reuters

Investors losing faith in #commodity hedge #funds: Reuters

MINUTES ON THE CLOCK...!!??? Investors losing faith in commodity hedge funds Investors in some of the best-known commodity hedge funds are getting increasingly frustrated by their performance, with some heading for the exit as managers rack up a second year of losses. Some major funds focused on energy, metals and agricultural products have fallen this year after traders - still cautious about big bets following last year's losses - sought to protect themselves against rising volatility just as it fell. Clive Capital, the $3.4 billion London-based fund run by Chris Levett, and Armajaro, one of the largest players in the coffee and cocoa markets, are among those in the red. Meanwhile, Fortress Investment Group's commodities fund, run by William Callanan, this week became the year's third big-name commodity fund to close after it racked up double-digit losses and lost half its assets. "The multi-billion funds have really been nothing but disappointing over the last couple of years," said one investor, asking not to be named. "For people that only came in when the noise about commodities started a couple of years ago, they (the funds) have basically done nothing." Commodity managers who forged reputations for eye-catching returns as they rode the long commodity bull run that started some 10 years ago are now struggling with shorter, more uncertain trends. Aside from Fortress, two of the sector's biggest names also decided to liquidate their funds earlier this year, underlining how tough commodity markets have become for even veteran traders. Legendary natural gas trader John Arnold is closing down his flagship Centaurus fund after two years of struggling to maintain outsized returns, while oil fund BlueGold - famed for its 200 percent gain in 2008 - is shutting after racking up 35 percent losses last year. STRUGGLING WITH VOLATILITY For a sector renowned for managers' ability to navigate volatility, many struggled to get to grips with falls this year. Some funds came into the year predicting rising volatility in oil prices on the back of escalating tensions around Iran and its nuclear ambitions. Brent crude oil gained about 15 percent early in 2012 but has given up most of its rise. "The fall in commodity volatility has cost managers over the year. A lot of people bought call options on oil but implied volatility has fallen substantially over the past few months," Jaspal Phull, a portfolio manager at Stenham Asset Management and responsible for investing in commodity funds, said. "There is definitely a sense that ... managers need to produce returns this year after what was a disappointing 2011." Metal prices have also hurt funds. Key industrial metal copper, for example, has remained range-bound after gaining around 15 percent early in the year. "I think people have been trading a lot of options, not only in metals, expecting volatility to increase, but it just hasn't, it's been very flat ... People have lost a lot of money trying to trade volatility, it's not pretty," said a market source, asking not to be named. Big-name losers include Callanan at Fortress. His fund, which is now returning money to investors, lost 12.6 percent this year to the end of April after falling 8 percent last year. The $860 million Krom River Commodity Fund has given up 3.6 percent after a 4 percent drop in 2011, while Clive Capital, a big player in oil markets, is down 4.4 percent, compounding last year's 9.9 percent slide, figures seen by Reuters show. Meanwhile, commodities giant Armajaro, co-founded by cocoa trader Anthony Ward, saw its flagship fund fall 1.6 percent in the first quarter and its computer-driven fund shed 10 percent, according to figures seen by Reuters. The average commodity fund has fared only slightly better. Funds focused on energy or basic materials are up 2.15 percent to early May, but this is less than half the 4.42 percent rise of the average fund, according to Hedge Fund Research. Not all funds are in their second year of losses, however. Mike Coleman's Merchant Commodity Fund has rebounded after a slide in 2011. The portfolio has gained 11 percent up to the end of April after falling 30.1 percent last year. HEADING FOR THE EXIT Poor performance is encouraging some investors to sell. Many who poured into commodity funds after the financial crisis, wanting to diversify away from stock and bond markets ravaged by volatility, will have missed out on the boom years - epitomised by BlueGold's 200 percent gain in 2008. Assets in Callanan's fund slid 46 percent to $473 million during the first quarter, a company filing showed. The fund, which ceases trading around May 23, ran $1.2 billion last June. One investor in Clive and Armajaro, asking not to be named, said it was considering cutting its holdings as it now preferred to invest in smaller, nimbler managers. Clive and Armajaro declined to comment. "Everyone's had quite a lot of investors pulling money out and that causes a lot of rebalancing issues. They're pulling out for a number of reasons, not just outright performance, maybe a different strategy is being employed," the market source said. The worry now is that commodity markets are set to suffer renewed volatility, driven by geopolitical concerns in energy markets and weaker growth in China, the world's biggest consumer of raw materials, making it even tougher for managers to trade. Gabriel Garcin, portfolio manager at Paris-based Europanel Research & Alternative Asset Management, has shied away from investing in pure commodity hedge funds partly due to the relatively small markets in which they invest. "The Chinese slowdown is also adding to the asymmetry of returns in commodities. You have these two parameters that could create a lot of volatility and a very tough environment for traders," he said.     --- Tommy Wilkes and Eric Onstad, Reuters

#Gold plunges to 4-month lows on rising #dollar

Gold plunges to 4-month lows on rising dollar
With gold buyers remaining largely absent, the gold price has fallen nearly 4% so far this week, its worst weekly performance this year, prompting investors to seek refuge in the dollar.
Author: By Jan Harvey
Posted:  Friday , 11 May 2012


LONDON (REUTERS)  - 
Gold prices fell more than 1 percent to a four-month low on Friday as worries over the financial health of Greece and Spain and huge trading losses for JPMorgan hurt stock markets and the euro, prompting investors to seek refuge in the dollar.
Investors liquidated gold holdings to cover losses on other markets, analysts said, as a rise in risk aversion sparked selling across assets seen as higher risk, while lifting the U.S. currency and safe-haven German Bunds.
Spot gold slid to $1,573.29 an ounce, its weakest since Jan. 3, after support gave way at $1,579, and was down 1 percent at $1,578.56 an ounce at 0917 GMT. U.S. gold futures for June delivery were down $16.60 an ounce at $1,578.90.
Spot prices have fallen nearly 4 percent so far this week, their worst weekly performance this year.
"May is turning into a trouble month for investors in most asset classes once again. Gold, offering high liquidity, is being hurt by the need to realise cash and move to the sidelines," Saxo Bank vice president Ole Hansen said.
"We saw another sweep lower this morning assisted by another upside attempt on the dollar," he said. Nonetheless, he added, the downward move could soon run out of steam.
"We are moving into an area of support with many talking about 1,550 as the line in the sand. The dollar should by now have been a lot stronger considering the strong buy signal given this week in the EUR/USD. This has so far not materialized."
European shares fell on Friday as uncertainty over Greece's political outlook, a huge loss from JPMorgan and mounting concerns over Spain's banking sector led to a sharp deterioration in market confidence.
German Bund futures pushed higher, while peripheral euro zone government bonds were set to remain under pressure as Greece made a last-gasp attempt to cobble together a government. The euro hit a 3-1/2 month low against the dollar
Although last year gold tended to benefit from worries over the health of the euro zone, it has reverted to trading more in line with assets seen as higher risk as the dollar has taken over as the haven of choice.
"Safe-haven gold buyers remain largely absent while bullion continues to trade in the same direction as riskier assets," VTB Capital said in a note. "Risk appetite for gold is simply not there, with players preferring the greenback at the moment."
INDIAN GOLD DEMAND SOFT
Buying of physical gold has been lacklustre in recent weeks in major consumer India, where appetite has been dampened by rupee weakness, further eroding confidence in the metal.
Some buying was seen in the United States, where sales of American Eagle gold coins hit 31,500 ounces so far this month, already 50 percent more than was sold in the whole of April.
On the demand side of the market, the world's biggest gold miner, China, produced 29.8 tonnes of gold in March, bringing total gold output in the first quarter to 80.8 tonnes, the Ministry of Industry and Information Technology said on Friday.
Among other precious metals, silver was down 1.4 percent at $28.58 an ounce, tracking losses in gold.
The gold/silver ratio, which measures the number of silver ounces needed to buy an ounce of gold, broke through 55 on Friday for the first time since mid-January as the white metal underperformed.
The world's biggest silver-backed exchange-traded fund, the iShares Silver Trust, has seen outflows of just over 87 tonnes of metal so far this month.
Spot platinum was down 1.3 percent at $1,461.44 an ounce, while spot palladium was down 1.4 percent at $601.70 an ounce, having earlier touched its lowest since mid-December at $596.33.
Platinum Week, at which traders, miners, refiners, recyclers and buyers will meet, takes place in London next week. Recent price declines in both metals is likely to be discussed.
"After some sizeable price declines, we can't help thinking that both platinum and palladium look like good value here," UBS said in a note on Friday. "From the year's high of $1,737, platinum has already given back $245, while palladium has shed 15 percent from its high of $726."
"While some residual liquidation is possible if markets suffer another extreme risk-averse event, we tend to think that the bulk of the price declines are in the past and that PGMs have entered a value zone."
(Reporting by Jan Harvey; Editing by Alison Birrane)
 
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The Canadian #Oil Boom: #Infographic | Visual Capitalist

The Canadian Oil Boom: 
Introduction to the Alberta oil sands








The Canadian Oil Boom: Infographic | Visual Capitalist

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Fear Miners Set to Fall Off 'Supercycle' - Business News - CNBC

Fear Miners Set to Fall Off 'Supercycle'

Published: Thursday, 10 May 2012 | 4:30 AM ET

By: Jack Farchy and Helen Thoma

For a decade, life has been kind to miners. Perhaps more than any other, the mining industry has ridden the Chinese boom – or “supercycle” – in commodity prices.

But now investors are asking whether the sector’s best days are behind it. After the boom, they say, surely must come a bust. With metals prices down more than 20 percent from last year’s highs, could the supercycle be over?

The answer has profound implications for investors of all stripes, and particularly in the UK.

Following a surge in share prices and a string of listings, the mining sector now accounts for about an eighth of the market value of the FTSE 100[.FTSE  5495.99    -34.06  (-0.62%)   ], and so a large chunk of many British pensioners’ savings.

“We believe that the tail wind of ever-higher commodity prices, which has been the principal driver of share prices, is now over,” says Heath Jansen, head of metals and mining research at Citigroup, in a note entitled “Super-Cycle Sunset”.

The bears’ argument is two-pronged. First, Chinese growth is slowing, and becoming less commodity-intensive.

China is the main driver of demand for commodities such as iron ore, coal and copper [HGCV1  3.6545    -0.005  (-0.14%)   ], accounting for as much as three-quarters of forecast consumption growth.

But Beijing has lowered its growth target to 7.5 percent, the lowest since 2004. Put that together with the prospect of rising supplies as miners’ investments begin to kick in and, some investors argue, metals pricesare unlikely to rally much from current levels.

“We are looking at an inflection point in terms of China’s growth rate, which should slow gradually over the next decade after the pulsating growth of the last decade,” says Robert Lind, chief economist at Anglo American. “That has triggered a debate about whether commodity prices can return to their previous cyclical peaks.”

At the same time, the costs of running and building mines is rising rapidly.Kazakhmys [KAZ-LN  768.00    9.00  (+1.19%)], the London-listed copper miner, reported inflation of 18 percent in its production costs last year. Analysts at Deutsche Bank estimate that cost inflation across the industry was 10-15 percent in 2011 and predict it will slow only slightly in 2012.

The obvious conclusion is that margins will fall—and, with them, share prices. Indeed, the FTSE All-World mining index has already dropped 31.8 percent from its peak in April 2011. “This is usually the point at which the demand cycle finally matures and the supply response kicks in,” says Andrew Keen at HSBC, noting that stock valuations are already starting to discount a shift.

“If this is the case, it won’t be a repeat of the 2008/09 downturn, which turned out to be a brief intermission, but the start of a long, unwinding and normalisation of margins.”

Not everyone believes the supercycle is dead. Commodities prices could stay robust should China’s slowing growth be counterbalanced by difficulties bringing new supply to the market, as companies brave ever more tricky geological challenges and difficult jurisdictions in search of promising deposits.

“Exchange inventories are relatively low still despite this trough in demand currently affecting China and Europe,” says Simon Collins, head of bulk commodities at Trafigura, the second-largest metals trader. ”There’s not that much available material.”

Nonetheless, the idea of a shift in momentum for the mining sector is gaining greater credence among investors and executives alike.

BHP Billiton, the world’s largest miner by market value and a bellwether for the industry, acknowledged that growing caution among investors last week, when it said it would slow development of its big projects to match expectations for earnings.

Other miners are likely to follow suit, executives say, turning their focus from reinvesting profits to returning them to shareholders.

The result is likely to be a fundamental shift in mining as an investment prospect: putting money into the sector will no longer be a one-way bet.

“In the last 10 years as long as you got ‘long’ the right thing it didn’t matter,” says George Cheveley, natural resources portfolio manager at Investec Asset Management.

“That has not been the case since the middle of last year—we have seen much more differentiation in performance between companies and between commodities.”

Moreover, rising costs may not be entirely negative for mining equities.

In markets from iron ore to copper, the highest cost producers are seeing the most dramatic inflation in costs, meaning that even if prices fall, they are unlikely to return to pre-boom levels. That may help cushion margins for other producers—those at the lower end of the industry “cost curve”—even if their costs are rising too.

Those companies that are able to differentiate themselves – either by controlling costs and delivering projects on time, or by returning larger chunks of their profits to shareholders through buybacks and dividends – are likely to outperform, analysts and investors say.

“In an environment where metal prices remain elevated but range-bound, investors would have to pick winners and losers based on who can execute and manage cost pressures, as well as their policies on shareholder returns,” says Jeff Largey, analyst at Macquarie. “It could become a stockpickers’ industry again.”

Copyright 2011 The Financial Times Limited

Fear Miners Set to Fall Off 'Supercycle' - Business News - CNBC

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