How Surging Gold Prices Could Impact the Philippine Mining Industry (3rd of 3 Series)

 

With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people—Friedrich August von Hayek 

In this issue 

How Surging Gold Prices Could Impact the Philippine Mining Industry (3rd of 3 Series)

I. The Absence of Commodity Markets Limits Investment Alternatives and Risk Management

II. Rising Operating Leverage: A Profit Margin Accelerator for Philippine Mines

III. Record-Breaking Gold Prices Spark a Reawakening of Philippine Gold Mining Shares (Exclusive for Substack Readers)

A. Belated Run-Up: Delayed Market Response to Gold’s Rally

B. Market Internals Reveal Vast Underweighting: Low Trading Volume and Limited Institutional Interest

C. Threading Uncharted Waters

D. Philippine Mining Industry: Entering a Bull Market Cycle? Potential for a Multi-Year Uptrend Amid Structural Challenges 

How Surging Gold Prices Could Impact the Philippine Mining Industry (3rd of 3 Series) 

This is the third and final article of our series on gold. How will record gold prices affect the Philippine Mining industry and share prices in the face of many challenges. 

I. The Absence of Commodity Markets Limits Investment Alternatives and Risk Management 

The absence of a robust commodity market in the Philippines limits investment alternatives for both producers and investors, particularly in a resource-rich nation where gold plays a significant economic role. 

Back in 2008, the Bangko Sentral ng Pilipinas (BSP) acknowledged this reality, noting that one reason for holding gold reserves was because "the Philippines is a significant producer of gold." 

This admission reveals a critical gap: instead of fostering investment alternatives for the public, the gold market remains underdeveloped, heavily reliant on physical sales—such as jewelry and ornaments—and the BSP as a major buyer of gold from local producers. 

Unlike other major ASEAN countries, including Indonesia, Thailand, Malaysia, and Vietnam, which have established commodity futures and derivatives exchanges, the Philippines lacks such a market infrastructure. 

These exchanges, accessible via platforms like the Indonesia Commodity and Derivatives Exchange, the Thailand Futures Exchange, the Bursa Malaysia Derivatives, and the Vietnam Commodity Exchange, provide critical benefits for resource-rich nations. 

Commodity markets enhance pricing efficiency by establishing transparent benchmarks, improve the allocation of commodity investments, and reduce the role of intermediaries or middle men, thereby lowering transaction and search costs. 

They enable producers and farmers to hedge against price volatility, access insurance, and secure better prices through competitive bidding, while also matching buyers and sellers more effectively. 

For savers and investors, commodity markets expand the investment universe, offering opportunities to diversify portfolios and achieve better returns by directly tapping into the price movements of commodities like gold, copper, and agricultural products. 

In the Philippines, the absence of such markets not only stifles these benefits but also limits the growth potential of the gold mining sector, leaving investors with few options beyond speculative investments in mining stocks. 

The lack of a commodity market means producers have fewer opportunities to hedge against price volatility, leaving them partially exposed to the risks of a potential global downturn, as discussed in the first article, where gold’s predictive power suggests an impending crisis.

While some Philippine gold producers mitigate this risk by hedging through international markets—such as the London Metal Exchange (LME) or the Chicago Mercantile Exchange (CME)—this approach is costly and less accessible for smaller firms, often requiring sophisticated financial expertise and exposure to foreign exchange risks. 

A local commodity market would provide a more direct and cost-effective hedging mechanism, enabling producers to lock in prices and protect against sudden drops in global demand. 

A crisis, as potentially signaled by gold’s historic highs, could expose gold miners to heightened credit risk, as lenders may tighten financing amid economic uncertainty, leading to critical dislocations in funding for operations and expansion. 

Additionally, such a downturn could reduce export revenues, particularly for the Philippines, where Switzerland and Hong Kong rank as the largest gold export markets (July 2024), accounting for a significant share of the country’s mineral exports.

For other commodity producers, such as those in agriculture or base metals like nickel, a global downturn could similarly dampen demand, disrupt supply chains, and lower export revenues, exacerbating economic vulnerabilities in a nation heavily reliant on commodity exports. 

The absence of a commodity market also limits the broader economic benefits for the Philippines. A well-functioning commodity exchange could channel investment into the mining sector, support infrastructure development—such as roads and processing facilities in mining regions—and create jobs in mining communities, fostering economic growth and reducing poverty in rural areas. 

For investors, it would provide a less speculative avenue to gain exposure to gold, copper and other commodity price movements, reducing reliance on volatile mining stocks and enabling more stable portfolio diversification. 

For listed Philippine gold mining companies, the current surge in gold and copper prices could drive share prices higher as investors seek to capitalize on rising profit margins driven by operating leverage. 

However, the lack of accessible hedging mechanisms increases their vulnerability to price swings, leaving them exposed to the downside risks of a potential crisis, such as a sudden drop in commodity prices or a contraction in global demand. 

II. Rising Operating Leverage: A Profit Margin Accelerator for Philippine Mines 

The current environment of rising commodity prices amplifies the financial dynamics for Philippine mining companies, particularly through operating leverage.

Gold has reached historic highs, as discussed in the first and second series of this article, driven by geopolitical tensions, deglobalization, and central bank buying, while copper prices have also broken into all-time highs, partly influenced by Trump’s tariffs, which have increased demand for domestically sourced metals and disrupted global supply chains.

Figure 1 

The chart of gold and copper prices illustrates this tandem rise, with gold climbing steadily since 2023 and copper following suit, reflecting heightened industrial demand and inflationary pressures. 

For Philippine gold mining companies, which often extract copper as a byproduct due to the geological association of these metals in porphyry deposits, this dual price surge presents a unique opportunity to capitalize on rising revenues, but, again, also underscores the need for accessible commodity markets to manage price volatility and attract broader investment.

Investment in mining companies hinges primarily on their reserves, which represent future earnings potential and determine a mine’s long-term viability.  

Rising commodity prices—particularly gold and copper—amplify the financial benefits for these companies through operating leverage.

Operating leverage measures how sensitive a company’s profit is to changes in revenue, driven by its mix of fixed and variable costs.

In the mining industry, high fixed costs—such as equipment, infrastructure, permits, licensing, labor, and energy—create significant operating leverage. 

This means that small increases in revenue, whether from rising commodity prices or higher output, can lead to disproportionately large boosts in profit margins, as the additional revenue is not offset by proportional cost increases. 

Conversely, if revenues decline due to falling prices or reduced production, profit margins can shrink rapidly since fixed costs remain unchanged, exposing companies to heightened financial risk during downturns.

To illustrate this dynamic, consider the following table of a hypothetical gold mining company, showing the impact of rising gold prices on its operating leverage: 

Figure/Table 2

In this example, as the gold price rises from $1,800 to $2,200 per ounce—a 22.2% increase—revenue grows from $18 million to $22 million. However, because fixed costs remain at $10 million, the operating profit surges from $6 million to $9.6 million, a 60% increase, and the profit margin expands from 33.3% to 43.6%. (Figure 2, upper table)

This demonstrates how operating leverage acts as a profit margin accelerator, making mining companies highly profitable during commodity price upswings.

Another table from Canada highlights B2Gold, a Canadian company listed in Canada, with a mining project in the Philippines provides insights into the country's gold production costs, particularly in terms of cash operating costs and All-in Sustaining Costs (AISC). (Figure 2, lower table)

The same principle applies to copper, where price increases further enhance revenues for Philippine mines that produce both metals, amplifying the financial upside.

However, this high operating leverage is a double-edged sword.

Ceteris paribus, while rising prices boost margins, a downturn in commodity prices can lead to significant losses, as fixed costs remain constant, squeezing profitability. 

Moreover, operating margins also depend on cost discipline—mines that fail to control variable costs, such as energy or labor, may see diminished gains even during price surges. 

For Philippine gold mining companies, the current environment of historic highs in both gold and copper prices offers a window of opportunity to leverage these gains, improve financial stability, and attract investment. 

Yet again, the lack of a local commodity market exacerbates their exposure to global market risks, as they cannot easily hedge against price volatility. 

As global uncertainties mount—driven by geopolitical tensions, deglobalization, and central bank policies—the development of a commodity market in the Philippines becomes increasingly urgent to unlock the full potential of its gold mining sector, mitigate the risks of an impending crisis, and ensure sustainable economic benefits for the nation. 

III. Record-Breaking Gold Prices Spark a Reawakening of Philippine Gold Mining Shares 

A. Belated Run-Up: Delayed Market Response to Gold’s Rally

Despite gold prices achieving a successive winning streak since at least 2022, as highlighted in the first segment, the Philippine Stock Exchange (PSE) largely overlooked these developments until the start of 2025. 

This delayed reaction underscores significant shortcomings in the PSE’s pricing mechanism, reflecting deeper structural issues in the market. 

Please continue reading at substack, press link below:

https://open.substack.com/pub/theseenandunseenbybjte/p/how-surging-gold-prices-could-impact?

Investing Gamechanger: Commodities and the Philippine Mining Index as Major Beneficiaries of the Shifting Geopolitical Winds!

 

Governments lie; bankers lie; even auditors sometimes lie: gold tells the truth— William Rees-Mogg 

 

Investing Gamechanger: Commodities and the Philippine Mining Index as Major Beneficiaries of the Shifting Geopolitical Winds!  

 

Geopolitics is now a primary driver of the transitioning global economic structures.  Since commodities are one of its beneficiaries, the Philippine mining index should reflect this dynamic. 

 

Geopolitics is the Name of the Game: Philippine Enters the Geopolitical Hegemonic Contest via the Reinforcement of the VFA-EDCA Agreement with the US 

 

Unless one lives under a rock, geopolitics is the name of the game! 

 

And commodities are one of the primary elements of geopolitics. 

 

Signed in 2014, the Enhanced Defence Cooperation Agreement (EDCA) represents an agreement between the US and the Philippine governments to expand their defense alliance by allowing the United States government "to build and operate facilities on Philippine bases for both American and Philippine forces." (Wikipedia) 

 

From the original five (non-permanent) bases (Palawan, Cebu, Pampanga, Nueva Ecija, and Cagayan de Oro), the incumbent administration has added four more facilities for US military access (Palawan, Isabela, Lal-lo Cagayan, and Santa Ana Cagayan) early April. 

 

And it is no coincidence that the expanded "pivot" by the Philippine government towards the US occurred as the Chinese military's partial intrusions on Taiwan's border to test Taiwan's defense capability has grown with frequency and scale.   

 

China's military has also been aggressively encroaching on the maritime boundaries of different neighbors as the Philippines in the South China Sea. 

 

The Xi regime has accused the Philippine government of interfering with the China-Taiwan conflict. 

 

The broader picture is that these territorial disputes are an extension of the hegemonic contest between the reigning superpower, the US, and her (NATO) allies against her emerging challengers (the Global South/BRICs).  The Russo-Ukraine War is a ripe example of the manifestations of the unfurling power struggle via kinetic warfare.  

 

But this increasingly confrontational hegemonic conflict has stretched to cover many other areas, including but not limited to trade, investments, financing, money, commodities, social mobility, space, deep-sea, technology and information, and more.  

 

And this expanded friction will unlikely diminish even if contending parties miraculously find a settlement to the Russo-Ukraine War—the other areas of dispute will persist. 

 

That said, commodities will be a principal element in a fragmented world. 

 

And NO economic analysis will be complete WITHOUT the role of geopolitics. 

 

Why Commodities Will Play a Principal Role in the Era of Fragmentation/Inflation 

 

One crucial evidence of malinvestments from the easy money policies of central banks is the severe underinvestment in the commodity sector that has led to a shortfall in supplies. 

 

The liquidity bailouts of global central banks during the pandemic exposed this accrued imbalance. 

 

Figure 1 

 

For instance, the stockpiles of industrial metals, like copper, are at their lowest in history. (Figure 1, top and middle charts)  

 

Yet it requires massive amounts of capital and time to increase exploration activities to generate expanded output.  And this isn't happening anytime soon. 

 

Further, with the world standing on the precipice of an expanded kinetic war, global public spending on defense will likely take a lead role, reshaping subtlely the global economic backdrop to a quasi-war economy. (Figure 1, lowest window) 

 

In nominal terms, global defence spending has been on a strong upward trajectory over the last five years, increasing from a nominal USD1.7 trillion in 2017 to USD2.0tr in 2022. Until recently, the same could be said of defence spending in real terms, but this upward trend stalled in 2021 and 2022 owing to escalating inflation, leading to a widening delta between nominal and real spending. Using 2015 as the base year for real terms calculations, the difference came to USD101bn in 2020. This more than doubled to USD222bn in 2021 and increased again to USD312bn in 2022. (McGerty, 2023)  

 

More public spending to develop an end-to-end military system diverts resources and finances from the private sector, which leads to production inefficiencies and relative shortages of consumer goods—which means structural supply-side imbalances, ergo contributor to inflation. 

 

In this case, the build-up of armaments requires massive amounts of different commodities/metals, like copper, nickel, silver, and more.   

 

The increasingly fragmented world should aggravate such supply constraints through the various restrictive and protectionist policies anchored on nationalism and geopolitical alliances. 

 

Again, the multi-faceted aspects of this power struggle won't be limited to military and trade but will involve the currency and financial system.  

 

Ergo, a potential challenger to the de facto USD standard--should emerge with this transition to a multipolar world. 

 

As evidence, several countries have been realigning their geopolitical relationships in favor of the Global South/BRIC. 

 

In the past few weeks, earth-shaking announcements from several countries with the intent to join the bandwagon of the establishment of an emerging rival currency system. 

 

Here are some events as compiled by the Kobeissi Letter (Twitter) 

 

-Iran said they are reducing their dependence on the US Dollar for regional and international trade.  

-France said Europe should reduce dependence on the US.  

-Meanwhile, Russia, Saudi Arabia and China are now trading with Chinese Yuan. 

 

Figure 2 

 

In any event, in conjunction with the drawing of the financial and monetary divide, global central banks amassed a record amount of gold in 2022. (Figure 2, topmost window) 

 

And instead of mimicking the current USD system, structured on a Triffin dilemma of debt and inflation-financed twin deficits, the competing currency standard will likely be backed by a basket of commodities.  A Bretton Woods 3 template as proposed by Credit Suisse's Zoltan Pozsar, perhaps? 

 

Commodity reserves will be an essential part of Bretton Woods III, and historically wars are won by those who have more food and energy supplies – food to fuel horses and soldiers back in the day, and food to fuel soldiers and fuel to fuel tanks and planes today.  

 

… 

 

This is serious: Bretton Woods II served up a deflationary impulse (globalization, open trade, just-in-time supply chains, and only one supply chain [Foxconn], not many), and Bretton Woods III will serve up an inflationary impulse (de-globalization, autarky, just-in-case hoarding of commodities and duplication of supply chains, and more military spending to be able to protect whatever seaborne trade is left). (Pozsar, 2023) 

 

Central banks will also play a significant role in financing public spending.  And in the backdrop of supply tightness, such monetary expansion should extrapolate to higher inflation, which also implies rising rates. 

 

And though the demand for metals in the electric vehicle industry may also be a part of the narrative, the focal point of the economics of commodities is the increasing fragmentation of the global economy. 

 

So decades of underinvestments that led to shortfalls in supply, the fracturing of the international division of labor and its geopolitical realignment, the quasi-militarization of the global economy, principally through central bank finance and partly via private sector participation, and finally, the emergence of competition to the US standard, heralds to higher demand and increased prices of commodities.  

 

The era of globalization, financed by easy money, will likely usher in the eon of fragmentation, marked by a milieu of high inflation and elevated rates. 

 

The Philippines will not be exempt from this seismic global transformation.   

 

The complementary bases under the VFA-EDCA, the Balikatan exercises, and other related participations constitute crucial economic and geopolitical drifts, which along with their corresponding risks, will likely come with consequences—as history has shown. 

 

The Philippine Mining Index in the Era of Fragmentation/Inflation 

To an observant eye, the subtle shifts have already been happening.  The unspoken changes in the performance of the share prices of listed commodity producers illustrate such developments. 

 

While USD coal prices rocketed from 2020 through September 2022, it had given up most of its gains.  But it is still above the highest level since at least 2010. (Figure 2, middle chart) 

 

As in the case of Europe, Japan, and elsewhere, the ESG thrust to replace coal with renewables as baseload supply will likely backfire.  Natural gas and nuclear power could be the future of Philippine energy.  The Philippines saw its first LNG import this month. 

 

Despite the short-term oscillations, USD prices of copper and nickel are in a long-term uptrend but below their recent highs. (Figure 2, copper-lowest diagram) (Figure 3, nickel topmost chart) 

Figure 3 

 

On the other hand, while USD gold prices have also been on a structural uptrend, it has yet to show a convincing breakout. (Figure 3, middle pane) 

 

But it did so against 5 ASEAN currencies (Philippine peso, Thai baht, Malaysian ringgit, Indonesian rupiah, and Vietnam dong) last April 6th. 

 

In any case, coal (Semirara SCC), Nickel (Nickel Asia NIKL, Global Ferronickel FNI, and Marcventures MARC), and Gold-Copper (Atlas AT, Philex PX, and Lepanto LC and LCB) comprise 96.32% of the Philippine Mining index as of April 14th.  Oil exploration firm PXP completes the 9-member roster.  (Figure 3, pie chart) 

 

The Philippine mining index is the most unpopular and possibly the "least owned" sector.   The institutional punters have likely ignored the industry.  

 

Figure 4 

 

As proof, the industry has had the smallest share of the monthly trading volume since 2013. (Figure 4, upper window) 

 

Local participants perceived this as highly speculative (higher beta), thus subject to intense ebbs and flows.   

 

Nota bene: Though several other mining and oil issues have not been part of the index—a rising tide usually lifts all—if not—most boats. 

 

More, its lack of correlation with the PSEi 30 should make it a worthy diversifier.  

 

But with the current climate of overindebtedness and rising rates seen with most mainstream issues, the market may likely have second thoughts about this disfavored sector. Soon. 

 

In the 70s, mines constituted many members of the Philippine Phisix, presently PSEi 30.   

 

That 70s show, marked by the age of inflation, may yet stage a comeback. (Figure 4, lowest pane)  

Figure 5 

Despite the low volume and a depressed sentiment in the general market, a divergence has emerged between the Mining index and the headline index. (Figure 5, upper chart) 

 

In fact, as a ratio of the PSEi 30, the mines have been reservedly outperforming since March 2020. (Figure 5, lowest diagram) 

 

If the advent of the era of fragmentation or the age of inflation materializes, could the consensus eventually be chasing a new bubble? 

 

Disclosure: This author holds exposure to some of the mining & oil issues. 

 

____ 

References 

 

McGerty Fenella Global defence spending – strategic vs economic drivers; Military Balance Blog, February 15, 2013, International Institute for Strategic Studies 

 

Pozsar, Zoltan: Money, Commodities, and Bretton Woods III; March 31, Credit Suisse Economics 

 

Nota Bene: The newsletter intends to apprise readers of the market conditions based on the information available at the time of the items’ writing, whose accuracy and timeliness of the issues concerned are subject to change without prior notice.   Solicitation to trade is neither intended by the contents. In the meantime, the discussion of occasional positioning on particular issues are opinions of this author.