Attending the three days of the Mines and Money conference and exhibition in London earlier this week, I was pleasantly surprised by the overall ambiance. While not necessarily upbeat, it was not nearly as downbeat as the markets and metals prices might have suggested. Indeed, it appears as if London might, for the time being at least, be the place to go to to raise resource project money in the current environment, while other big mining resource centers such as Toronto and Sydney remain fixed in depression -- or that is the impression I received in talking to companies and fund managers in London.
This is particularly apposite to the junior sector, and for those with smaller but potentially profitable projects with rapid paybacks. Still, the appetite for multibillion-dollar project finance commitments remains, to say the least, limited. The big banks, which may handle syndication for mega project finance, just are not interested at the moment, while some of the smaller banks and private equity providers are prepared to step in for the right projects. Although those seeking finance from these sources may be subject to some pretty stringent terms, which need to be looked at carefully. In these markets, beggars can't be choosers, but it can be costly down the line.
As in any multi-resource conference, the gold market generates perhaps more coverage than most given that it has a disproportionate place in the mineral exploration and project finance sector. Arguably, investors should be more interested in, perhaps, iron ore, where pricing has held up remarkably well despite analysts preaching doom and gloom. China, which is buying most of this, certainly has a more resilient domestic economy than many have given it credit for.
But back to gold. Mining conferences tend to attract the more bullish element in the industry -- albeit in this case most of the speakers on the subject were from the more reasoned part of the sector. I don't think we heard even one prediction that gold was certain to rise to $10,000 in the near future, or above. However, there certainly did seem to be a consensus that at current levels, gold and gold stocks were heavily oversold in the light of fundamentals that would, perhaps at any other time, be wholly supportive of the metal price. The corollary is that a correction in the markets was well overdue.
Be that as it may, downward pressures on the gold price do seem to be prevailing. Few of the bullish gold presenters were prepared to say that there might not be more pain for the gold investor before things start to get better. But they were all confident that this day should not be too far away, and that the further gold falls the lower the remaining downside potential. In short, the feeling is that a turnaround is due in the relatively near future (but "relatively near" is not defined).
One of the most respected speakers at the conference was John Hathaway of the Tocqueville Gold Fund out of New York, who professed total puzzlement at the way the gold market has been reacting in the face of fundamentals, which he feels, should be truly price supportive. He feels the U.S. Fed's monetary easing policies are effectively pumping money into equity market investors while the bulk of the U.S. public is still not seeing any real recovery in their fortunes, and thus not pumping the money into the economy necessary to generate a real economic upturn. On Fed tapering, he was adamant that it will "never happen." He did mitigate this absolute statement in a panel discussion, though, when he said the Fed may implement a trial, limited taper but would be horrified at the results on capital markets and would thus be forced into returning to easing at the current levels or even higher ones. Hathaway said that he felt that the decline in gold and gold stocks looked something like the Nasdaq tech bubble, but in reverse and would correct upward in the way the Nasdaq corrected downward when that bubble burst.
Michael Belkin of "The Belkin Letter," which looks primarily at technical analysis of the markets, said much the same thing about the Fed's policies, reckoning they were "bamboozling" investors into risky assets (junk bonds and equities). And although not a true gold bug, he felt that with many, or most, gold stock levels now down 80%-90% there are some tremendous buying opportunities out there. We would add to this that if investing in a risky sector like gold stocks, one does need to do one's due diligence carefully and make sure one picks stocks that have the wherewithal financially to ride out the storm.
Our own view is that even some of the gold mining majors are vulnerable to predation in this kind of environment. If one takes the copper sector as an example of what can happen and one looks back to the big copper mining names of the 1960s and early 1970s, when the sector was in a heavy downturn -- Anaconda, Asarco, Amax, Kennecott, Phelps Dodge, etc. -- all succumbed to predators when they were crippled by their stock prices falling in the way those of the gold majors have over the past couple of years.
Chinese and Indian demand is the other principal part of the gold equation nowadays. If our analysis of Chinese consumption and imports is correct (see "1,000 Tons, 1,200 Tons Or 1,750 Tons?: How High Are China's Real Gold Imports?") -- and our estimates are conservative in comparison with some others -- then China and India between them will currently be soaking up on their own perhaps 80%-90% of global new mined gold output this year (up from around 46% only three or four years ago). This huge shift in physical gold from West to East, which is also soaking up the gold being released from the big gold ETFs, will have to alter the balance of the markets as the East starts to dominate gold trade, as it surely will.
At the rate things are going at the moment, the East -- along with other gold buying countries, notably Russia and the Middle East -- will tie up most of the world's physical gold, leaving the West with its paper gold with virtually no physical metal backing. One should perhaps not write this off entirely -- consider the growth in bitcoin valuations, which in our view has to be one of the biggest global Ponzi schemes ever perpetrated. But can bitcoin and paper gold be sustainable in the long term? We think not.