The Long-Term Price Trend and Investment Perspective of Gold

Instead of trying to interpret each move, it would seem prudent to see Gold prices from the prism of long-term trends. 

Gold prices etched a new milestone this week.  

After bottoming in January 2016, gold’s uptrend began to trek upwards in August 2018. This upside momentum picked up speed in the middle of 2019 when the issues on the US financial system’s repo holdings surfaced.  

The US government’s response to COVID-19 further accelerated this upside, which has turned almost vertical last week to break past September 2011 acme. 

While the eyes of the public have fixated on the USD quotes, the record run in gold prices has signified a global phenomenon.

Or, surging gold prices have reached milestone highs against ALL fiat currencies, including the Philippine Peso, for the FIRST time since the end of the gold exchange standards, otherwise known as the Bretton Woods standards through the Nixon shock on August 15, 1971.  

This unprecedented moment also suggests that while the actions of the US Federal Reserve and the Federal Government plays a significant role in the recent uptrend, global factors have likewise contributed materially.   

 

Like all assets, gold prices operate in long-term cycles.  

The last two gold bull-market had a 9- to 10-year cycle.  

Since August 1971, gold’s run-up from $35 to $760 occurred in about 9-years. Of course, nothing goes in a straight line; there were countercyclical moves within the general trend.  

After two decades of inertia, Gold prices bottomed in 2001-2002, which set the stage for the next ten-year uptrend, rising from about $260 to $1,794. 

If history rhymes, gold’s recent breakout in USD, peso and other currencies will translate to a multi-year upside. 

Or, if this uptrend of gold prices (in USD and peso) will at least resonate with the past, we should expect gold mining issues (here and abroad) to echo the ascent of its product.  

 

The gold indices of the US HUI (NYSE Gold Bugs), XAU (Philadelphia Gold and Silver), and Barron’s Gold Mining recently surged to reflect the breakout of gold prices.  

 

The chart of Philex shows how its prices behaved during the previous 10-year gold market. PX rose from about Php .15 per share to Php 26.55.  

And for the first time, in recent years, prices of domestic gold mines appear to have diverged or decoupled from the mainstream issues to the upside.   

So regardless of whether gold prices are about resurgent inflation or systemic credit deflation or escalating collateral issues of the offshore dollar system, a resumption of the gold’s uptrend will provide a safe-haven to your portfolio and or generate promising returns, without requiring substantial risk exposure.  

And political obstacles have also diminished.  Back in 2016, I predicted that the war on mines will end*. 

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! 

Why the War on Mining Will Fail!  June 26, 2016 

From GMA (July 23, 2020): Allowing some mining companies earlier suspended or closed by the late former Environment Secretary Regina Lopez could help generate much-needed revenues for the government to respond to the COVID-19 crisis, a top official of the Department of Environment and Natural Resources (DENR) said….Environment Secretary Roy Cimatu, on Thursday, confirmed that some mining firms closed or suspended by Lopez in her controversial industry-wide environment audit would be allowed to resume operations after onsite inspections and reviews found that the miners have rectified their violations and complied with corrective measures.  

Gold prices are presently overbought. Since no trend goes in a straight line, then profit-taking should be expected.  

And this pause would present a timely window for entry points.  

Newton’s Law Aborts the Formative Nickel Mining Mania

Newton’s Law Aborts the Formative Nickel Mining Mania

The stock market’s breadth has so deteriorated such that even individual stock manias, expressed via price spikes and backed by tall tales, have become incredibly short-lived.

The upside spiral of nickel mining issues in September, mainly due to the ban on Nickel exports by the Indonesian government led to this conclusion.

To be clear, I am positive on the long term prospects of nickel mines, but current developments reveal the penchant of domestic markets to exaggerate pricing.

Most Local Mines Fail to Benefit from Soaring Global Nickel Prices as a Result of Supply Constraints Mostly From Domestic Politics September 8, 2019

Newton’s Third Law of Motion, “For every action, there is an equal and opposite reaction”, has aborted a developing mania in nickel mining favorites.

Aside from plunging global nickel prices, the tumbling marketplace liquidity or lackluster volume has weighed on domestic miners.

 

Aside from the partial reversal by the Indonesian government on the ban on exports last November, which allowed for select miners, the crucial issue may have been the perceived bottoming of nickel inventories that have spurred a plunge in global nickel prices.

 

Nickel prices have dropped even before inventories may have hit the floor.

Neither has the huge gain in global nickel prices in the 3Q have filtered into Nickel Asia Corporation or NIKL’s revenues nor margins.

While Global Ferronickel Holdings or FNI’s margins posted significant improvements in the 3Q, surging nickel prices haven’t inspired a boom in output.

As Warren Buffett aptly stated, only when the tide goes out, do you discover who’s been swimming naked.

Most Local Mines Fail to Benefit from Soaring Global Nickel Prices as a Result of Supply Constraints Mostly From Domestic Politics

Most Local Mines Fail to Benefit from Soaring Global Nickel Prices as a Result of Supply Constraints Mostly From Domestic Politics

Following a stunning 12.35% surge, the 6-company Philippine mining index was this week’s best performing sector.

Nickel Asia’s thundering 57.7% returns combined with Global Ferro Nickel’s sizzling 10.9% gain contributed most to the sector’s advance. On the other hand, other sector components had mixed results: Semirara up .65%, Apex Mining down .81%, Century Peak Metals increased .4%, Philex Mining 3.66% while PXP Energy plummeted 9.83%.

The Indonesian government’s declaration of a nickel ore export ban from January 1, 2020, stoked speculations that such actions would benefit local nickel mines.

This article from the PNA rationalizes by reasoning from price changes booming price shares of domestic nickel mines: “The Philippines’ decision to implement stricter environmental policies and regulations is projected to hamper the nickel mining sector’s growth, but Fitch Solutions Macro Research believes the sector can get a relief from Indonesia’s nickel ore export ban”.

To be clear, I am positive on the long term prospects of nickel mines, but current developments reveal the penchant of domestic markets to exaggerate pricing.

According to Investing.com, the Philippines is the second major world producer of nickel after Indonesia. New Caledonia (France), Russia, Australia, and Canada ranked third, fourth, fifth and sixth, respectively.

According to the Nickel Institute, the primary use of Nickel is as stainless steel 70%, as Non–Ferrous alloys 9%, as alloy steel and castings 9%, as plating 8%, batteries 3% and on other uses 1%.

Engineering has the largest 37% share of Nickel use per industry. Metal goods ranked second with 20% share, building and construction 15%, transport 14%, electronics 11%, and others 4%.

Global prices of Nickel (in USD) has been rocketing since it bottomed in 2016 on the back of plunging inventories (KITCO). As of last Friday (September 6th), USD prices of Nickel (KITCO) have raced to a 66.41% return for the year as Indonesia’s export ban should add to the reduction of global nickel supplies.

Supply of Nickel has been instrumental in shaping the industrial metal’s global market prices since the 1980s (ChartrUS).

There has been so much hype surrounding the Nickel’s role in the battery of Electric Vehicles (EV). Sad to say that even prices of lithium, a light metal widely used for the manufacture of batteries, have been in a waterfall since Q3 2018, almost in conjunction with the decline of the Global PMI. Notably, a slowing global economy has also been hampering the sales of global Plug-in Electric Vehicles. Not to mention that only 3% of nickel usage goes to battery manufacturing.

Even in the context of stainless steel, which accounts for Nickel’s largest usage, has barely been vibrant. Global prices of stainless steel have barely budged since it found a trough in 2017 (AGMETALMINER).

Rather than demand, supply constraints, mainly from domestic or even local policies, have played the primary role in contributing to the dwindling global supply of nickel, and consequently, the metal’s price dynamics. For instance, 2019's export ban marks the second imposed by the Indonesian government. In 2014, the same government imposed an export ban that it lifted in 2017.

How has the nickel price boom affected the performance of domestic mines?

USD prices of Nickel zoomed by 19.05% in the 1H of 2019. Since the peso was up 2.6% during the same peso, nickel’s net gain in peso was about 21.65%.

Nickel Asia’s sales grew 4.41% in the 2Q and contracted by .36% in the 1H of 2019. The profit margin for ore sales has been shrinking. It was 49.38% in the 1H of 2019, compared to 53.01% in 2018 and 58.81% in 2017. In short, surging global prices of Nickel barely distilled into the company’s sales and or margins.

If surging global prices of nickel failed to percolate into NIKL’s fundamentals that had not been true for Global Ferro Nickel (FNI).

FNI’s sales zoomed 19.63% in 2Q and 24.06% in the 1H.

FNI’s profit margins widened as well. In the 1H 2019, FNI’s margins expanded to 46.9% from 45.8% in 2018.

Yet, FNI’s share prices had been bid lower than of NIKL.

Perhaps, aside from the national level, the local political environment had influences on operations of Philippine Nickel mines, which are estimated to be in the 30s.

And unless the national government gives sufficient breathing regulatory and tax space to these mines, only a speck of soaring global nickel prices will filter into earnings and profits of listed mining firms.

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Bullseye! NG-BSP Admits that the War on Mining Has Failed, the BSP’s Gold Bill is Now a Law!

Those entrapped by the herd instinct are drowned in the deluges of history. But there are always the few who observe, reason, and take precautions, and thus escape the flood. For these few, gold has been the asset of last resort.—Anthony C. Sutton

Bullseye! NG-BSP Admits that the War on Mining Has Failed, the BSP’s Gold Bill is Now a Law!

Back in 2016, I cited the Bangko Sentral ng Pilipinas (BSP) as one of the principal reasons why the war on mining will fail. [Why the War on Mining Will Fail! June 26, 2016]

“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.

Last week, the political leadership enacted the BSP’s Gold Bill!

From the BSP: (bold added)

The BSP today announced that Republic Act (RA) No. 11256, An Act to Strengthen the Country’s Gross International Reserves (GIR), was approved by Congress and signed by President Rodrigo R. Duterte last 29 March 2019.

The new law exempts from excise and income tax the sale to the BSP of gold sourced from small-scale mining activities. The measure also covers the sale of gold by small-scale miners to accredited traders for the eventual disposal to the central bank.

R.A. No. 11256 seeks to remedy the 99% drop in BSP’s domestic gold purchases from more than 900 thousand fine troy ounces (FTO) in 2010 to around 10 thousand FTO in 2019 as a result of the taxation of the sale of gold to the BSP beginning July 2011. 

The tax regime under R.A. No. 11256 would allow the BSP to increase its purchases of domestic gold to further build up the level of the Philippines’ GIR, which serves as the country’s primary buffer against external economic shocks. An increase in BSP’s gold purchases using pesos leads to a net increase in the GIR, thereby improving the country’s economic standing and lowering the cost of both funding for the Republic as well as doing business for the private sector. It also prevents the smuggling of Philippine gold through the black market to other countries and allows small-scale miners and traders to sell gold at international market prices.

So the BSP (and the leadership) admitted to the following:

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.” 

Back in August 2012, I wrote… [Philippine Informal Gold Mining Industry Booms, August 24, 2012]

The amount of gold sold by small-scale miners and traders to the Philippine central bank in the second quarter plunged 98 percent from a year earlier, according to the latest government data. By law, all gold produced by miners such as Mulato in the Philippines should be sold to the central bank at around world market prices.

It has been an accelerating trend over the past year. The data shows central bank gold purchases dropped an annual 4 percent, 76 percent and 88 percent in the second, third, and fourth quarters of 2011, respectively. It fell 92 percent in the first quarter.

Small-scale gold mining output, is the main source of the central bank's gold reserves, which hit a record high of $10.4 billion early this year.

For authorities, it would be better to “police” than to waive taxes. This assumes that smuggling or the informal sector will be curtailed by mere regulatory enforcement, yet the above already demonstrates their helplessness: note the phrase “become so overwhelming it can do little about the smuggling”

Doing the same things over and over but expecting different results has been the entrenched characteristic of politics. The essence of politics is symbolism. The impression to “do something” are actually meant to generate votes.

In reality, the purported political path to “police” gives political authorities a share in the the profits. Possibly to finance coming elections?

(bold italics added)

It took the BSP eight long years to realize the might or power of the law of demand on the economy, “if you tax something, you get less of it”!

Such is an example of the complete failure of “statistics is economics”!

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!

Again in 2012, I wrote: [Philippine Mining Index: Will The Divergences Last?  August 13, 2012] (bold italics added)

In reality, environmental preservation and optimizing revenues from the mining industry are strongly associated with theresource curse dilemma, that which is the politicization of the resource industry.

Informal economy, corruption, rent seeking and a general deterioration in the quality of governance are symptoms or are products of asphyxiating regulations, bureaucracy, high burdens from taxes and the cost of compliance, insecure property rights and involuntary exchanges or the intense politicization of the industry.

So the BSP and the political leadership has VALIDATED my predictions!

Well, for the BSP, it may not be all about GIRs or “improving the country’s economic standing and lowering the cost of funding”.

Figure 1, World Gold Council

Global Central Banks buying of gold hit a record high in 1Q 2019.

From the Financial Times (May 2): [bold added]

The central banks of Russia and China helped drive a 7 per cent increase in global gold demand in the first quarter from a year earlier, according to the World Gold Council, as they continued efforts to trim their exposure to US dollars.

Central banks purchased a total of 145.5 tonnes of gold worth about $6bn, an increase of 68 per cent compared with last year and the strongest first quarter since 2013, the industry-led body said.

Russia was the biggest buyer during the period, adding 55.3 tonnes of the yellow metal to tilt the composition of its reserves away from the US dollar, amid rising tensions with Washington and the prospect of further sanctions. China added 33 tonnes to its holdings and Ecuador bought gold for the first time since 2014, said the WGC.

There’s been lots of purchases by emerging market central banks looking to diversify their US dollar exposure, or in the case of Russia there are potential implications for FX reserve management if they become subject to sanction risk,” said Alistair Hewitt, a director at the WGC.

Last year central banks bought more gold than at any time since the end of the gold standard in 1971, led by Russia and Kazakhstan.

Still, the WGC data show that purchases have started to slow from last year. In the third quarter of 2018 central banks bought a total of 253 tonnes of gold, and 165.6 tonnes in the fourth quarter.

Overall gold demand also fell 17 per cent from the fourth quarter of 2018, said the WGC.

The BSP may have been influenced by emerging market central bank trend of partly diversifying its reserves assets.

It could also be about hedging reserves against the risks of a financial calamity.

Figure 2, World Gold Council

It may also be in response to the snowballing geopolitics of de-globalization as evidenced by the increased usage of economic sanctions and trade wars where gold may serve as safe-haven assets for central banks.

It may even be about emerging markets veering away from the US dollar standard to elude the hegemonic grip of US financial institutions and geopolitical intrusions.

It could even be related to financial asset collaterals used in the offshore US dollar (Eurodollar) markets.

Figure 3

In reality, based on the WGC’s data, the BSP’s gold reserves have been stagnant since 2011.

So the BSP’s Gold Bill must be about preparations to accumulate gold reserves and or designed to CENTRALIZE domestic gold trade for either tax purposes (formal gold enterprises) or to manage gold flows.

Figure 4 (Gold Price)

Because of the market mayhem late last year, gold prices surged to record highs against 72 currencies in January 2019.

Gold prices continue to soar against the Indonesian rupiah and Indian rupee, as examples.

Well, gold prices in Philippine pesos, reveals a similar dynamic as it approaches its 2011 apex.

So has the BSP been anticipating the record gold prices in pesos too for it to push the Gold Bill?

With the BSP’s Gold Bill highlighting the culmination of the absurd war on mining, expect that the next political move on the industry to be about liberalization.

Tax issues will impel the National Government to liberalize the industry.

The alcohol prohibition was repealed by US President Franklin Delano Roosevelt in 1933, hardly because of its social side effects but because the government wanted to generate financing in the face of the great depression.

As Professor Donald J. Boudreaux wrote,

And a House leader of Congress' successful attempt to propose the Prohibition-ending 21st Amendment said in 1934 that "if (anti-prohibitionists) had not had the opportunity of using that argument, that repeal meant needed revenue for our government, we would not have had repeal for at least 10 years."

There's no doubt that widespread understanding of Prohibition's futility and of its ugly, unintended side-effects made it easier for Congress to repeal the 18th Amendment. But these public sentiments were insufficient, by themselves, to end the war on alcohol.

Ending it required a gargantuan revenue shock -- to the U.S. Treasury.

From this premise, I shall make a prediction.

When the real economy falters, the government will liberalize the mining sector!

(bold original)

The Era of Easy Money is OVER! President Duterte Confirmed This With “The Economy Is In Doldrums”  June 24, 2018

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