With the exception only of the 200-year period of the gold standard, practically all governments of history have used their exclusive power to issue money in order to defraud and plunder the people. ... money is certainly too dangerous an instrument to leave to the fortuitous expediency of politicians – or, it seems, economists –Friedrich August von Hayek
In this issue
The War On Mining Has Utterly Failed! The Mining Industry’s 9-Year Moratorium Lifted! Will a Bull Market in Mining Emerge?
I. The War On Mining Has Utterly Failed! The Mining Industry’s 9-Year Moratorium Lifted!
II. Short-Term Political Risks, Longer Term Economic Divergence Favoring the Mines
III. As Global Central Banks Increase Balance Sheets, the Uptrend in Anti-Bubble Gold Remains Intact
IV. Copper and Nickel Uptrends as Potential Inflation Hedges
V. Price Changes of Gold (in Peso) Resonates with the BSP’s Assets
VI. With Gold Reserves Down, BSP’s GIR Increasingly Depends on ‘Borrowed Reserves’
VII. How Liberalization Should Affect the PSE’s Mining Index
VIII. Will a Secular Bull Market in the Mining Sector Emerge? Will the Mining Index Diverge with the PSYei 30?
The War On Mining Has Utterly Failed! The Mining Industry’s 9-Year Moratorium Lifted! Will a Bull Market in Mining Emerge?
I. The War On Mining Has Utterly Failed! The Mining Industry’s 9-Year Moratorium Lifted!
THE WAR ON MINING HAS FAILED ABSOLUTELY!
From the Inquirer (April 16): President Duterte lifted on Wednesday the nine-year moratorium on new mining agreements to boost government revenue, create more jobs and prop up the pandemic-battered economy.
When the war was declared to appease the environmental left, back in June 2016, I predicted: (bold original, underline added)
“Once the bubble economy begins to corrode and where prices of metals soar, such industry bullying will come to an end. Ban on mining will transform to welcome back mining!”
“Of course, another reason why mining won’t likely be totally banned is because the Bangko Sentral ng Pilipinas not only buys gold from the miners (even illegal miners), they get revenues from sales to them!
“So I expect the BSP to oppose a total ban.
Why the War on Mining Will Fail! June 26, 2016
And
“The critical moment here will be when the government revenues fizzle out, or will come under increased pressure to match expenditures. The exigency to finance the wanton growth in public spending will likely spur the government to close their eyes on environmental politics.”
War on Mining: Flip Flopping Exposes the Underbelly of Environmental Politics February 12, 2017
Got that?
To justify the liberalization or the welcoming of the mining investments, the National Government used our premises!
The late British Prime Minister Margaret Thatcher in a 1976 TV interview said that "The problem with socialism is that eventually, you run out of other people's money". She was on the spot.
Our validation also exhibits that the economy is a process. Even before the pandemic, the political economy flowed in this direction ever since the prohibition.
The passage of the BSP’s Gold Bill in May 2019 already provided this clue.
As I explained then…
First, the domestic mining industry IS the primary source of gold for the BSP, which it uses to manage its balance sheet.
Second, the massive backlash of excise taxes on the industry, and thus its UTTER failure!
This excerpt signifies an awesome confessional: “R.A. No. 11256 seeks to remedy the 99% drop in BSP’s domestic gold purchases…a result of the taxation of the sale of gold to the BSP beginning July 2011.”
…
Lastly, the political institutions (war on mining) have failed to control or suppress the black market, which has been the primary channel for small-scale mining activities, and subsequently, the conduit for smuggling!
Bullseye! NG-BSP Admits that the War on Mining Has Failed, the BSP’s Gold Bill is Now a Law! May 26, 2019
Finally, this validation.
The great Nobel Prize Austrian Economist, Friedrich von Hayek, presciently wrote,
The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.
To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralising decisions, and that a division of authority will actually extend the possibility of overall order.
Von Hayek, Friedrich August, The Fatal Conceit, p 76-77 Mises.at
All other aspects covered by central planning are due to follow.
Socialism. Utterly. Failed.
II. Short-Term Political Risks, Longer Term Economic Divergence Favoring the Mines
Given the emergence of the “Woke” (social justice warriors) political economy, popularly represented by the Environment, Social and Governance (ESG) standard, the triumph of free markets may be fleeting since the national election is around the corner. The BSP has even embarked on Green Financing!
Nonetheless, because there won’t be any meaningful and sustained recovery, instead the economy will transition from a recession to a crisis of insolvencies, dependence by the National Government on the mining sector for financing will only increase.
According to this 2017 Inquirer editorial (February 28, 2017): The Philippines is the fifth most mineral-rich country in the world for its combined deposits of gold, nickel, copper, aluminum and chromite resources with an estimated value of $1.4 trillion.
Any source of revenues will count.
Besides, global and domestic inflationary pressures are likely to drag the economy down, accentuating the role of the much belittled and besmirched sector as an inflationary hedge.
In sum, yes, the political risks from the coming elections may hamper or impede the mining sector’s liberalization.
But no, this free-market trend will likely continue in the face of surging prices of metals as the economy continues to keel over from the various embedded risks.
III. As Global Central Banks Increase Balance Sheets, the Uptrend in Anti-Bubble Gold Remains Intact
With central banks in a frenzied mode to expand their respective balance sheets, gold prices appear to represent the anti-bubble asset class.
Figure 1
As noted early last year, for the first time in history, gold prices soared to record highs against ALL Fiat currencies in early 2020. You read it, right…ALL.
The US financial media broadcasted the USD price of gold. But it did not cover the prices of the gold in OTHER currencies, where the action truly mattered.
What you are about to see is a defining monumental process in financial history!
Lo and Behold, Gold’s phenomenal rise against central banking’s Fiat Money standard!
See Oh, Gold!!!! February 23, 2020
When global central banks, accelerated their balance sheet expansion, gold prices refused to join the bandwagon of liquidity-fueled speculative mania that spread from stocks to real estate, to junk bonds, to cryptocurrencies, to commodities, to NFTs (non-fungible tokens), and other asset classes.
Signs of economic green shoots have stemmed from the tsunami of liquidity from global central banks. Since the GDP measures spending, the sheer degree of fiscal and monetary bailouts have likewise temporarily amplified demand, creating the illusions of growth. Nevertheless, such politically aided spending adds pressure on the supply shocks, which had been hobbled principally by mobility restrictions, giving rise to higher CPI.
In any case, gold prices pulled back from its milestone highs to exhibit its anti-bubble properties.
Nonetheless, the uptrends in the 44-year and 20-year charts of the USD prices of gold remain solidly intact.
At the moment, the 2-year trend line appears to be holding.
IV. Copper and Nickel Uptrends as Potential Inflation Hedges
Figure 2
Prices of copper have likewise benefited from the stagflation of the 70s, and currently from supply drought and the global central bank’s liquidity boom.
Like gold, the 60-year price trend of copper remains sturdy. Copper prices appear in the process of testing the support of the 20-year uptrend, which now functions as resistance. A breakout would translate to an epic high.
And while we are supposed to be dazzled by the impact of surging demand for electric vehicles on nickel prices, given the current scale of imbalances, this outlook is uncertain.
Nonetheless, somehow like copper, supply issues and the recent tidal wave of liquidity from global central banks have bolstered the surging prices of nickel.
Prices of nickel have been rangebound in the last 10-years that has been supported by two massive rounding bottoms, as shown by the 32-year chart. An upside breakout of both can translate to a test of the May 2007 all-time high.
From my perspective, like gold, reservation demand could support prices of metals behind the domestic mining industry. Or, these metals could benefit as inflation hedges than by unsustainable central bank “reflation”.
However, while gold is likely to climb, copper and nickel prices may fall, should deflationary forces prevail.
Gold should function as insurance against either credit deflation (wave of insolvencies) or money printing by central banks (runaway inflation).
V. Price Changes of Gold (in Peso) Resonates with the BSP’s Assets
Figure 3
Mimicking its global peers, the BSP has expanded its balance sheet by a record 39.09% to Php 1.988 trillion amounting to a historic 40.35% share of the 2020 real GDP!
The BSP's unprecedented scale of liquidity infusions spiked domestic money supply growth. In 2020, M3 to nominal GDP, as previously shown, accounted for a landmark high of 79.04%!
Rather than expanding the division of labor, the GDP is now a product of BSP monetary operations!
Further, gold prices in PHP appear to manifest the conditions of the BSP’s assets.
Gold prices soared to a fresh record ahead in February 2020 of the unparalleled growth of the BSP’s asset-to-GDP last year.
In 2011, both gold prices in PHP and BSP assets-to-GDP simultaneously set the previous records.
It appears that this time has not been different.
As of last week, from their ALL time highs, the recent pullback in gold prices in PHP translated to a mere 9% decline.
VI. With Gold Reserves Down, BSP’s GIR Increasingly Depends on ‘Borrowed Reserves’
Gold reserves of the BSP has declined partly due to liquidations.
From Philstar (April 16) Foreign reserves dropped for the third straight month in March after the government paid up foreign obligations using some of its dollars while gold values dropped, the central bank said on Friday. Gross international reserves totaled as $104.82 billion as of end-March, down 0.34% from the previous month’s level, preliminary data showed. Reserves stood at their lowest in 5 months or since accumulating to $103.8 billion in October 2020.
Figure 4
The BSP’s gold holdings in March dropped by .62% or USD 56.9 million, month-on-month, fundamentally reflecting price changes.
But following their announcement to sell last September, the BSP embarked on gold liquidations to finance their financial obligations.
The reduced gold exposure, based on IMF’s International Reserves and Foreign Currency Liquidity data, further reinforced the increasing share of other FX reserve assets (derivatives) and external borrowings of the BSP’s GIR (as of January). The latter two represents “borrowed reserves” or “USD shorts” that carry financing costs and require repayment in foreign currencies.
From the Businessworld (April 12, 2021), “FOREIGN LOANS availed of by the government to finance its pandemic containment rose to $15.493 billion as of April 8, mainly due to external debt taken on for the mass vaccination program, the Finance department said.”
The aggregate FX loans on the pretext of the pandemic signify 51% of the USD 30.11 billion of accrued gains from the BSP's GIR trough of USD 74.11 billion in October 2018.
To simplify, the growth of the BSP’s GIR increasingly dependent, not on economic sources of FX receipts (from merchandise trade, OFWs, and BPO remittances, tourism receipts, and foreign direct investments) but financial operations backed by derivatives and multilateral and bilateral borrowings.
Artificially low rates from global central bank policies have enabled and facilitated such a macroeconomic façade.
The reversal of the accommodations from the easy money environment is where the problem arises. Higher financing costs will either compel the BSP to draw down on its reserves and reduce exposure on leverage, thereby limiting its ability to defend the peso.
Have recent events been a partial squeeze to the BSP ‘borrowed reserves’?
On this note, the BSP's path dependency is to likely deepen its espousal of inflationary policies, by magnifying its asset base with more large-scale asset purchases (LSAP or QE), coming at the expense of the peso and benefiting gold priced in the PHP.
VII. How Liberalization Should Affect the PSE’s Mining Index
But here’s the good news.
The partial liberalization essentially clears the political obstacles on investments in the Philippine mining industry.
It should lead to improvements of the fundamentals of the industry, from small-scale miners to the listed mining firms, representing the largest in the country. Theoretically, the latter’s gain should also get reflected in their share prices.
The Philippine mining index currently consists of 8 firms, namely, Apex Mining, Century Peak Holdings, Lepanto Consolidated, Nickel Asia, Philex Mining, PXP Energy, and Semirara Mining.
The share-weight of the full market capitalization of the subsectors has been skewed towards Nickel (45%), then Coal (25%), Gold (22%), and Oil (8%) as of April 16.
Since non-institutional accounts or retail participants are likely to dominate trade in this sphere (I am guessing here), compared to issues of the main benchmark, the degree of market price distortions could be lower.
The stock market cycles also include the local mining index.
The mining index commenced on a boom from 2004, hit its top in 2012. The bull market lasted 8 years. Then the bears ruled from 2012 through 2020 for a total of another 8 years.
In all, the latest complete market cycle, from 2004-2020, covered 16 years.
With the first complete cycle from 1950 to 2003, this cycle could significantly be less than its prior.
Of course, international prices of metals determined the flows and ebbs of the mining cycle. And it will continue to lay the groundwork for the industry and its participants, as well as their share prices.
VIII. Will a Secular Bull Market in the Mining Sector Emerge? Will the Mining Index Diverge with the PSYei 30?
Figure 5
We now move to chart the “four-leaf clovers”.
The rally from the depths of 2020 lifted the Mining index to reclaim its 17-year trend line. It earlier moved out of the 8-year bear market by breaking out of the downtrend also last year.
For the index to reinforce the fledging mark-up/advance phase, it must stay within the context of the 17-year trend. Otherwise, a decline from here would mark the continued aging of the accumulation or bottom phase.
Importantly, should the index barge through the critical resistance levels of 2007, 2019, and January 2021 and climb from there, a nascent bull market may have begun.
Throughout history, accounts of divergences between the PSEi (PSYEi) and the mining index have been few and limited. But since 2012, while the PSEi traded partly up and mostly sideways, the mining index ground downhill, agonizingly.
Such divergence spotlighted the underinvestments in the mines (also in agriculture) and overinvestments in the bubble sectors (real estate, malls, tourism, construction and banks) showcasing malinvestments from monetary policies in action.
Will the mining index diverge anew with the managed headline index, this time in the opposite directions? If so, which of the metal sectors will lead it? Will a bullrun in the mining sector morph into a bubble as institutional accounts pile in?
And should deflationary forces from the banking system gain an upper hand, how does this affect the various sectors of the mining industry?
The lack of probabilities set limits on the charting predictive accuracy, although it provides a useful roadmap based on visual heuristics.
Ultimately, the business and credit cycle is what matters.
To be clear, this discussion of the industry is about cycles and barely about short-term momentum. Reacting to the news, this week the mining index surged 5.6%. Opportunities should emerge over time.
As a disclosure, this analyst holds some position on gold mining issues.
Yours in liberty,
The Prudent Investor
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