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Attention Gold Bears: - Fed to fall Short on Tapering QE-3Gary Dorsch The value of Gold has fluctuated wildly over the past few years. After rallying for 12-straight years, the yellow metal has tumbled as much as -38% from its all-time high of $1,923 /ounce reached in August ‘11. Gold officially fell into the quagmire of a Bear market on April 12th, and even central bankers were caught off guard. They were net buyers of 535-tons last year, - the most they’ve ever accumulated in any single year. Today, the central banks are among the biggest losers - holding 31,700-tons, or roughly 19% of all the gold mined. No one has more to lose from Gold’s slump than miners in South Africa, where the break-even costs are the highest in the world. Anything below $1,400 /oz is a red flag for South African gold miners. Costs are steeper than competitors abroad because of the extra labor that’s needed to dig deeper into its aging mines. Globally, gold-mining companies are moving to include capital expenditure in their per-ounce cost figures. Sibanye, South Africa’s second-largest gold miner by output, has total costs including production and capex of $1,334 /oz. Costs at Harmony, the country’s third-largest producer, are $1,487 /oz. AngloGold, the country’s largest gold miner, was the only South African bullion producer whose costs in the nation of $1,204 an ounce were below the current spot gold price.
Even the world’s biggest Gold miner – Barrick Gold (ABX.TO) is at risk of defaulting on its longer-term debt obligations, if the price of the yellow metal falls significantly lower. Shares of Barrick Gold (ABX.TO) have lost about $40-billion in market value since April ‘11. After the price of Gold fell below $1,400 /oz in April ’13, the yield to maturity on Barrick’s 6.35% note due in Oct 2036, soared to as high as 7.85%. The cost to insure $10-million of ABX’s debt in the credit default swap market jumped to as high as $344,000 on July 5th. Moody’s and S&P rate Barrick’s debt at Baa2 and BBB respectively, but its long-term debt trades at yields that’s more in-line with junk bonds. The problem plaguing ABX is that three acquisitions in the last five years for a total cost of $8.4-billion increased Barrick’s debt load to $16-billion today, the most among gold miners worldwide. In April, ABX said it expects “all-in sustaining costs” including output and capex costs to be between $950 and $1,050 /oz. But after ABX burned through $1.2-billion of cash in the 12-months through March, ABX could be forced to slash its $800-million annual dividend in order to preserve cash on hand, if Gold falls much further. Gold knows what no one knows, yet it is difficult to pin down the exact logic behind investors’ appetite for the yellow metal. Nathan Mayer Rothschild, - once the richest man in Britain and probably in the world, was appointed as the chief bullion broker to the Bank of England in 1840, and went on to operate the Royal Mint Refinery in 1852. N M Rothschild & Sons became a powerhouse in investment banking, lending, underwriting government bonds, discounting commercial bills, direct trading in commodities, foreign exchange trading and arbitrage, and dealing in Gold bullion. When asked what the value of the barbaric metal was worth, Nathan used to say, “I only know of two men who really understand the true value of Gold – an obscure clerk in the basement vault of the Banque de Paris and one of the directors of the Bank of England. Unfortunately, they disagree.”
Asked about the price of Gold, which is down about -23% this year, the chief of the Federal Reserve, Ben Bernanke also admitted on July 17th that he doesn’t understand the yellow metal. “No one really understands Gold prices,” Bernanke told the Senate Banking Committee, adding he doesn’t get it either. Calling it “an unusual asset,” the Fed chief said that investors hold Gold for “disaster insurance” and as an inflation hedge. He expressed surprise about the latter, noting “movements in Gold don’t predict inflation very well.” Bernanke took some solace in the recent sharp decline in Gold prices, though, suggesting they could reflect diminishing concerns over really bad outcomes. Gold has a multi-faceted personality, but nowadays, its behavior is mostly influenced by the direction of 10-year US Treasury notes. Spooked by the increasing likelihood that the Bernanke Fed will begin to “taper” down its $85-billion per month of liquidity injections into the money markets, the price of Gold has nosedived, alongside what appears to be the early stages of a bursting of the US T-Note Bubble. Lower T-Note prices, - and higher interest rates, are sending a clear signal to the marketplace, that the Fed is seriously entertaining the idea of winding down in radical “quantitative easing,’ QE, money printing scheme. Fed informs G-20 about downsizing QE-3, the top central bankers and finance chiefs from the Group-of-20 nations, huddled in Moscow on July 19th, where they heard behind closed doors that the Fed intends to down-size its purchases of bonds, - probably starting in September. “Unconventional monetary policies that were decided by the Federal Reserve, the Bank of England, the European Central Bank, and the Bank of Japan have consequences on capital flows. The unwinding of these policies needs to be phased out carefully,” said IMF Managing Director Christine Lagarde. “The current turbulence in global financial markets could continue and deepen,” the IMF warned at the July 20th meeting in Moscow. “Growth could be lower than projected due to a protracted period of stagnation in the Euro area, and risks of a longer slowdown in Emerging markets have increased. The eventual exit from low rates and unconventional monetary policy in advanced economies could pose challenges for emerging economies, especially if it proceeds too fast or is not well communicated,” the IMF warned. However, it was Bank of Japan chief Haruhiko Kuroda who let the cat out of the bag, with the most explicit signal yet of the Fed’s next move on QE, “An eventual tapering of monetary stimulus by the Federal Reserve would be natural and appropriate” he said on July 19th. To read the rest of this article, please click on the hyperlink located below: http://www.sirchartsalot.com/article.php?id=179 ### Jul 23, 2013 321gold Ltd |
