Gold: Which Way From Here?

"Gold at over $2,000 is assuming some form of breakup to the eurozone (probably Greece's exit)"

Gold: Which Way From Here? - Seeking Alpha

Gold slipped below $1,800 per ounce last week as equities rallied in a burst of risk on investor enthusiasm. Does this spell the end of the bull run? The gold price has seen a lot of volatility of late, and questions are being asked — not least by those holding long positions — as to what the future holds in store for gold prices.

GFMS, the precious metals consultancy, is understandably still bullish. In its recent quarterly Gold Survey, it is quoted by the Telegraph as saying, "Given strong demand for bullion from the public and private sectors … the relatively constrained increase in scrap supply and the 'stickiness' of jewellery demand in the fact of higher gold prices, we can easily envisage gold breaking through the $2,000 market before year-end." Pointing to strong purchasing by central banks in the first half of this year, GFMS predicts full-year bank demand could reach 336 metric tons, the highest level since the collapse of Bretton Woods 40 years ago. The firm is not alone; even normally conservative HSBC raised its 2012 average price to $2,015 from $1,625, with analyst James Steel citing "the euro-zone debt crisis, currency wars, and deep uncertainty among investors" among factors driving higher prices.

Which Way? Make Up Your Minds

But analysts do not seem to be able to agree even on the direction, never mind the degree. Back in late August, a summary of their views showed UBS' fourth-quarter price at $2,100 and Societe Generale's at $1,950 and $2,275 for 2012, with $2,500 for the last quarter of next year. Bank of America-Merrill Lynch agreed, seeing $2,000 as a 12-month target, while JPMorgan went along with SocGen, predicting $2,500 in a year's time. Citi, on the other hand, revised its figure for 2012 up to just $1,650 for 2012 before falling in 2013; likewise National Bank of Australia has it back to $1,600 by the end of this year and the closely followed Goldman Sachs predicting $1,645 an ounce, $1,730 an ounce, and $1,860 an ounce on a three-, six-, and 12-month horizon, respectively.

Nick Moore of RBS makes the point that gold is in a fundamental supply surplus and its rise is therefore a reflection of investor demand rather than physical supply and demand factors. High prices alone bring on an element of physical demand destruction — total global investment in gold dropped 24 percent in volume terms to 624 metric tons in the first half of this year. Clearly, net speculative length in gold has been falling, as the graph below shows:

Source: Standard Bank

Speculative longs — those holding gold in the expectation of a rise — have been falling, as speculative shorts have now risen above last year's average of 90.7 tons.

Los Preciosos Otros

Silver and palladium have been in the news of late, more because of their performance relative to gold than because of major fundamental changes in their respective markets. Although ETF buying for silver remains strong, some are questioning how much further it can go. It has risen 885 percent over the last decade against gold's 569 percent, and yet industrial demand could be shaky in the short term as recessionary fears spread beyond the eurozone to slowing Asian and North American markets.

Platinum, on the other hand, is looking cheap relative to gold, having fallen to a discount. Nick Moore said that over the last ten years, platinum has averaged $420 per ounce higher than gold. According to Johnson Matthey's Platinum 2011, published earlier this year, the market fundamentals for platinum are tight. The market showed a very small surplus of 20,000 ounces in 2010 as global supplies rose 35,000 ounces to 6.06 million ounces while gross demand in auto catalysts rose by 43 percent to 3.13 million ounces and industrial demand increased 48 percent to 1.69 million ounces. Slowing Chinese growth in automotive construction is probably the cause for the recent falls, but industrial use has remained robust. Platinum's position seems more solid than Palladium's, which is increasingly looking bearish, with short positions mounting, suggesting prices will be lower in the fourth quarter.

Support for gold looks largely reliant on eurozone debt worries. Recent positive sound bites on possible solutions to those worries have caused the price to pull back; an exit for Greece or downgrade of a major state's credit rating will see it pick up again. Gold at over $2,000 is assuming some form of breakup to the eurozone (probably Greece's exit). That's not looking likely in the short term, but with European politicians more focused on their domestic political fortunes, continued dithering — and hence risk of ultimate failure and support for gold — remains a strong possibility.

http://seekingalpha.com/article/294789-gold-which-way-from-here?source=email_porfolio

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Peru govt. approves new mining royalty scheme - FAST NEWS | Mineweb

Peru govt. approves new mining royalty scheme

Peru's Finance Minister Luis Castilla reported on Tuesday that the government has approved three new mining royalty or tax schemes to fund anti-poverty initiatives and infrastructure projects, without specifying the new rates.

Posted:  Wednesday , 14 Sep 2011 

LIMA (REUTERS)  - 

Peru's government has approved three new mining royalty or tax schemes to fund anti-poverty initiatives and infrastructure projects, Finance Minister Luis Castilla said on Tuesday.

The new system based on operating profits would replace the current 1-3 percent royalty miners pay on sales, Castilla told reporters without specifying the new rates. Congress must approve the proposal.

"It brings together three main objectives of the government: to maximize income for the state, to preserve competitiveness in the mining sector ... and to preserve tax security," Castilla said after a cabinet meeting.

Securing more state resources from miners to fund social programs in a country where a third of the population is poor was a campaign promise made by leftist President Ollanta Humala, who was elected in July. For a factbox, see:

Castilla specified that the new royalty applied to mining firms that did not sign tax stability agreements with the government in the 1990s. Those firms would also pay a "special tax" directly to the central government, he said.

Firms with tax stability agreements will pay a "special contribution," also applied to profits, he said.

"The government will be empowered to sign accords with companies that have tax stability agreements, and this scheme will be applied to them," Castilla said.

The "special contribution" will also be calculated based on operating profits, he said.

Many large international firms operating in Peru including Xstrata, BHP Billiton and Barrick Gold are protected by tax stability agreements.

However, some of the agreements have already expired. Southern Copper, controlled by Grupo Mexico, no longer counts on a tax stability in Peru. The country's largest precious metals miner Buenaventura does not have a tax agreement with the government.

Prime Minister Salomon Lerner announced last month that Humala's government and mining firms had agreed on a new system that would yield around $1 billion per year in contributions from mining firms.

Miners consulted by Reuters said a sliding scale of royalty rates was being devised to take into account individual company profits.

Last year, the state collected $646 million in royalties applied to sales. Miners in Peru also pay a corporate income tax of 30 percent.

Peru is the world's No. 2 producer of copper and silver and the No. 6 gold producer. Minerals account for about 60 percent of its exports.

(Reporting by Marco Aquino and Teresa Cespedes; Writing by Luis Andres Henao and Caroline Stauffer, Editing by Himani Sarkar)

http://www.mineweb.com/mineweb/view/mineweb/en/page504?oid=135420&sn=Detail&pid=102055

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Resource Nationalism tops mining/metals risks for 2011-12—E&Y

Resource nationalism has imposed greater controls on foreign investment, mandated beneficiation, and resulted in use-it-lose-it demands and other risks to global mining, says Ernst & Young.

Author: Dorothy Kosich
Posted:  Wednesday , 14 Sep 2011 

RENO, NV - 

Ernst & Young's latest mining and metals report cites resource nationalism as miners' top risk for 2011 while skills shortage, capital allocation and infrastructure access continue to dominate the business agenda.

In the past 12-18 months, 25 nations have increased or announced their intention to mining taxes or royalties, as some have invoked "use it or lost it" clauses.

Governments worldwide are looking to increase local participation in mining projects "and we think this trend will only increase," said the E&Y report, "Business risks facing mining and metals 2011-2012."

Among the many forms of recent resource nationalism are imposition of a resource rents; amendments to royalty or other tax rates; imposition of greater controls on foreign participation; institution of new mining codes; mandatory government/local participation; and preference for state-owned minerals. Surprisingly, E&Y considers a nation's decision to encourage in-country beneficiation of raw commodities before export to be a business risk although economists often advocate such developments.

Steps can be taken to respond to resource nationalism risks, according to the E&Y report. These include investing in transparent relationships with host government; aligning with the host government's long-term economic and political incentives; focusing on generating direct and sustainable benefits for the host community through social and community development programs; aligning with multi-lateral agencies to achieve a prominent victim status in the face of mounting resource nationalism; partner with state-owned enterprises; and encourage direct government participation in the project at market prices.

Skills shortage ranked as the second highest threat to mining and metals businesses. "Indeed, we believe it may become a bigger risk in both developed and developing countries as we move into 2012," said the report.

"The long term impact could mean increased costs, a reduction in productivity and difficulty in meeting contractual obligations," said E&Y's Louise Rolland.

Significant risks associated with skill shortages include project delays, safety, higher operational costs, and reduce productivity, the report warns. To ease these risks, mining companies can invest in training; tap broader talent pools beyond traditional channels, groups or age brackets to fill positions; fast-track careers; initiate programs that encourage semi-skilled and retired workers to re-enter the workforce; and substituting capital for labor.

Infrastructure access climbed from its sixth ranking in 2010 mining business risk to third among the2011-2012 risks. "The lack of available infrastructure means that production cannot get to the markets where the demand is," said the report.

"A lack of sufficient rail networks appear to be the largest global bottleneck," said E&Y. "However, if the sector is meet the expected supply challenges for the expected growth in demand from the rapidly developing economies, greater innovation is required to bring together producers, customers, infrastructure, operators, financiers and governments."

Maintaining a social license to operate was ranked as the fourth top risk to miners, "and it has been a more significant risk in the 2011-2012 top ten list," said E&Y. Among the issues which can affect a social license to operate are environmental performance, risk to reputation caused by safety incidents, and land disputes.

Capital project execution, which was not a major risk a year ago, now sits in the middle of the top ten risks for miners. A large number of new mining projects, expansions and restarts have almost simultaneously been announced this year.

"Tight management of major capital plans in today's mining and metals landscape of a scarcity of inputs has become more imperative than ever," said E&Y. "Addressing risks surrounding the construction of mining projects is also critical and many miners have seen cost escalations that have forced them to defer, cancel or suffer the costs of project delays and/or overruns."

Among the other top 10 risks highlighted in the report are price and currency volatility, capital allocation, cost management, interruptions to supply, and fraud and corruption.

Under the radar risks or those that did not make it into E&Y's top 10 for 2011/12 are access to secure and cost effective energy, access to capital, climate change, consolidation, project pipeline shrinkage, scarcity of water, increased regulations, new communication vehicles for community activism, and new technologies.

To read the full reports, go to www.ey.com/ca