Now it's Peak Gold, oh dear!
7 December 2009
Sean Russo
I AM not sure how I missed this but scanning some old articles I noticed an interview with The Daily Telegraph in London where Barrick Gold president Aaron Regent said worldwide gold production has finally hit “terminal decline”. In fact he went so far as to argue that we have reached “Peak Gold”.
"Mr Regent said he expected the gold price to generally trend upward, supported by weakening currencies, rising investment demand, and tightening supply," according to the Times. "But he said the price could be highly volatile." Quite amusingly, to me anyway, one of his reasons for believing it would be volatile was that gold “after all was just another commodity”.
Mr Regent is not going to surprise anyone by being bullish he just spent an enormous amount of shareholders funds to buy a big lick of gold at record prices. Gold his predecessors sold 6-9 years ago because they feared they would all be ruined if they didn’t. Gold has been with man from the beginning here on Mother Earth. Find an ancient civilisation and you will find they found gold. I was as fascinated by the Ancient Egyptians as a child as they were seemingly fascinated with death and gold.
Against that kind of historical context it seems quite astounding to me that the world’s “largest gold miner” thought the gold price was destined to never rally and less than a decade later we are at Peak Gold. I would love Mr Regent to explain what happened at Barrick HQ that they could have got it so wrong, or are they wrong now?
In both cases, were they were probably simply responding to observed price action, outside pressure and the Job Preservation Pinch Point (“JPPP”). When I have spoken about the JPPP in the past it has been in the context of the downside price in the future where we can expect “big gold” to find religion and start hedging again. I would argue that Barrick like most of its peers hit JPPP around the turn of the century. I would also suggest quite perversely they just hit it again, very late by comparison to most peers and bought back to preserve their jobs because they feared if gold continues to run they would be lynched or abandoned by shareholders. For what it’s worth I believe the JPPP for many producers is now around 800 should prices stay below there for several quarters. How bad it gets is whether producers or “investors” blink first.
Given my last assertion I guess it’s not surprising I keep reading prognostications like Mr Regent’s that we are on an uptrend, albeit volatile or even better the calls that we will never trade below $US1000 again! If they are right the JPPP will not come into play. Regrettably I am reminded of the call by T Boone Pickens, the great oil man, when oil breached $US100/bbl who declared we would never again see $US50/bbl. It then traded to the $US140s on screams of Peak Oil and then collapsed to $US51 in weeks. He was right by a dollar, so far, but at Noah’s Rule such a call wouldn’t make the cut if we applied one our favourite adages: “better to be approximately right than precisely wrong”. An oil producer taking such a bold call shouldn’t get any comfort or sympathy when selling oil at $US51 or $US71 that they could have hedged at $US120-130-140/bbl. It needn’t have been much, 20 or 30% of the next year or two’s production to secure sensational margins or implied costs below zero on the unhedged barrels. Yes such a decision came with the risk of opportunity cost but it should have been done. Why? Because just like Mr Regent says about gold, oil is just another commodity, it cycles from overvaluation to undervaluation and back again.
As I said earlier it’s amusing to me Mr Regent is willing to say gold is just another commodity. If it is he should be selling more than he produces at these prices. Yes, he had to get rid of the legacy positions of his predecessors, essentially recapitalising his balance sheet because the JPPP hedges of old had essentially become debt. But then to claim Peak Gold and ever upward prices, please! If gold is just another commodity it is currently at, or on the last steps, to overvaluation. That high may well be last Friday, $US1650, or higher. I have no idea. What I know is the bigger the spike the bigger the bust and the longer the recovery.
Gold has been rallying strongly on two key drivers, massive gold producer buybacks that are all but finished and “investment demand”. That sounds so sophisticated doesn’t it - “investment demand”? I debated with a journalist this week that I didn’t think it was right to call the current EFT buying fundamental demand. To my mind fundamental demand takes stuff on the market and makes it less likely to come back, for example, engagement rings, fillings; or, impossible to return, for example, oil in our cars, coal in a power station.
I would suggest much of the EFT ounces bought in the past five years are the other half of currency short sales, bearish dollar strategies or outright momentum trades by cut throat traders on thin margins. Those ounces are only one click from coming back on the market and there are lots of them. It certainly isn’t fundamental demand it is fickle and it can move fast.
Peak Gold I don’t know. Nor do I care. At the right price we can probably extract gold from seawater.
If you are an independent minded individual the reason to hold some gold is because there may be times in your life where men will lose faith in politicians and fiat money and gold will be money of sorts for a while, or at least highly negotiable and highly prized. Fair enough too, they can price it faster than miners can dig it. If you hold this view accumulating regularly regardless of price makes sense. But every time you buy it, pray you lose money.
However, if you are a gold producer your first priority is to produce gold profitably so that you can be in business for the long run, not just for the shareholders that will sell and possibly short you into a price spike; a spike that you will only enjoy for weeks or months because you have abandoned the right to lock in favourable margins.
Planning for Peak Prices will reap more profits than predicting Peak Gold.