India, the economy of the world's largest consumer market for gold, appears to be hurting badly. Inflation in India seems to be rising, while industrial production there is falling.
India's rate of inflation increased to 7.2% in April from 6.9%, the Associated Press reported. This rate was actually higher than what the Indian government had earlier predicted. The biggest price increases were food, which now costs 10.5% more than it did in April 2011. Prices for manufactured goods were rising at a slightly lower rate of 5.1%.
This could be both good news and bad news for gold miners. The bad news is that Indians who traditionally spend big money on jewelry made from precious metals will have less to spend. The good news is that Indians with money may start buying more gold as a hedge against inflation, which could increase demand and prices.
The situation in industrial was made worse by a fall in industrial production there. India's industrial output fell by 3.5%, March Britain's Daily Telegraph noted. That means fewer Indians could be working and making enough money to buy more gold money. It also means lower demand for metals from India's industry.
This will obviously make the price of gold even more volatile, which will hurt the stock of gold producers like GoldCorp (GG) and Barrick Gold (ABX). Particularly hard hit will be the major producers that have invested heavily in new mines and production. The increased demand for gold that they were relying upon may not be there.
Chinese Economic Contraction Beginning
China's economy seems to have moved from falling growth to contraction. That is obviously very bad news for copper producers such as Freeport McMoRan (FCX), BHP Billiton (BHP), and Vale (VALE), all of which have been betting that a continued Chinese demand for the metal would sustain growth.
Some of China's economic indicators look very bad, the Telegraph's international business editor Ambrose Evans-Pritchard noted. State investment in railways has fallen by 44% in the last year, and housing sales in China slumped by 25% in the first quarter. Obviously, fewer railroads and houses under construction is going to mean lower demand for metals in China. The amount of new bank loans made in China fell from $160 billion in March to $108 billion in April, which would indicate less business activity.
That means China's fall in growth could be turning into a major economic slump. One analyst contacted by the Telegraph even used the word "deflation" to describe the economic situation there.
It goes without saying that this will be very bad news for Freeport McMoRan, which needs high levels of Chinese copper imports to keep its Grasberg mine feasible. It could be even worse news for Billiton, which has invested heavily in new projects in Australia designed to tap the Chinese market. If news stories of a Chinese economic slump keep circulating, expect both Billiton and Freeport's stock to start dropping.
To make mattes worse, the fall in Chinese demand could only be the beginning of the bad news for the major copper producers. With falling demand in their nation, Chinese copper producers could start dumping the metal on the world market and further drive down prices. Obviously, falling copper prices means falling copper stock values.
Major Freeport McMoRan Molybdenum Back in Business
Freeport McMoRan seems to be taking a major risk that could hurt its stock value. The company has reopened one of its major molybdenum mines at a time when industrial production and demand for steel seems to be falling.
The Climax Mine, on top of Freemont Pass near Leadville, Colorado, shipped its first batch of molybdenum concentrate in 17 years on May 10. The problem is that there could be no market for that concentrate.
The recent fall in India's industrial production and the decline in railroad investment in China would seem to indicate that there's going to be a lot less demand for steel. The decline is not just going on in China. The Daily Telegraph reported that car sales in Brazil fell by 15% in March. The situation is even bleaker in Europe, where demand for midsized cars has plummeted and car companies are cutting production.
The only good news for Freeport is that the U.S. auto industry appears to have recovered from the recession. It is unclear, though, if increased U.S. demand for molybdenum would offset losses in the Chinese markets. So there may not be enough demand to justify the expense of reopening the Climax. This means it is hard to see how Freeport's stock prices will stay up in the long-term.
Billiton Facing Further Losses over Shale Gas Investments
BHP Billiton's stock could be in for a fall. The head of Billiton's petroleum division actually told Australian journalists that a writedown of the value of the company's $17 billion dollar investment in the U.S. natural gas industry could be in the works. J. Michael Yeager made the admission Monday, according to Reuters.
This is the first time that Billiton has admitted that it has lost money in the natural gas business in the U.S. Last month, Britain's Sunday Times newspaper reported that the company had lost $5 billion buying U.S. gas company Petrohawk Energy and shale gas acreage from Chesapeake Energy last year. The investment has lost value because U.S. natural gas prices collapsed.
Yeager tried to defend his company's shale gas investments and claimed that the gas fields will make money in the long run. The most likely outcome of this will be a fall in Billiton's stock value. This, and news of falling Chinese industrial demand, could lead to a serious stock price decline for the British-Australian mining giant.
AngloGold Ashanti Plans Big Expansion
AngloGold Ashanti (AU) unveiled some big expansion plans last week. The plans include two new mines in the Congo and expansion of the Cripple Creek & Victor Mine in Colorado. This is supposed to add 500,000 ounces of output to Anglo's annual production, which would boost it to 5.6 million ounces.
The cost estimate for these projects is supposed to be $1.9 billion. It should be noted that recent mine expansions by other companies have gone grossly over budget, so it is impossible to know if this figure is accurate or not.
If the plans unveiled by CEO Mark Cutifani at a speech in Johannesburg, South Africa, last week work out, they could boost Anglo's stock value. They could also make up for recent losses at some of the gold producer's mines. Anglo's first-quarter production was about 20,000 ounces under target because of safety problems in South Africa and stoppages at the Obuasi mine in Ghana.
Cutifani told reporters that he thinks gold prices could go up to $1,800 an ounce in the second quarter of 2012 and even approach $2,000 an ounce. Cutifani did not say what he was basing his prediction on. Since gold was trading at $1,595.31 an ounce in London on May 10, this seems overly optimistic.
Even though Cutifani seems optimistic, his company does seem poised to grow. He told Bloomberg Business Week that production at Anglo's La Colosa mine in Colombia nearly doubled to 24.2 million ounces. He expects an overall growth rate of 29% if everything works out as planned.
I anticipate that Anglo's stock price will keep going up for the foreseeable future. It could start falling again if expansion costs rise and the new growth figures don't pan out. Something else that could sink Anglo's stock price quickly would be more failures to meet its production targets.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.