In The Lead – Oh, Canada!

by Jon Nadler, Kitco Metals Inc. on July 20, 2012 · 0 comments

Precious Metals CommentaryThe final trading session of this once again indecisive week in gold commenced with a price drop. The yellow metal erased Thursday’s gains and retreated to under $1,575 in slow pre-market action as the US dollar picked up some steam following its visit to near two-week lows on the trade-weighted index yesterday.

Also contributing to the decline in bullion prices were the softer euro (falling to under $1.22 against the dollar once again) and the losses in crude oil (it fell 1.4% to $91.35 per barrel). As of this writing, gold appeared set to close out the week with a half-percent loss in value but the final tally remains to be ascertained later on in the day.

The euro suffered in the wake of once again rising Spanish borrowing costs and declining demand for that country’s bonds. Major Spanish unions have called for a nationwide protest against the government’s drastic austerity measures. The post EU meeting euphoria that was in the air just a few weeks ago appears to have dissipated with the summer thermals over in the Old World.

Silver spot prices dropped by almost 40 cents to trade at $26.92 per ounce on the bid-side in New York this morning. Analysts at Standard Bank (SA) note that silver stockpiles remain high (especially in China) and that demand from the industrial sector for the white metal is tepid at best. China has only imported 779 tonnes of silver in the year-to-date as against the 1,153 tonnes that it took in last year in the same timeframe. Silver is still almost completely dependent on investment demand to not only absorb the manifest surplus in the market but to be the driver of rallies towards higher price ground (but not much beyond $30 –if that -at this juncture).

Meanwhile, platinum lost $8 to ease to $1,406 the ounce and palladium slid $6 the $576 mark per ounce. In platinum-group metals news it was reported by Reuters News agency that Anglo American Platinum (the #1 miner of the metal) tallied almost no gains in its output for the noble metal on a year-on-year basis. Moreover, Amplats also warned that its headline earnings might experience a sizeable decline owing to lower sales and lower metals prices in H1 2012.

The week that is about to conclude has once again been defined by the ebb and flow (more the former rather than the latter) of Fedspectations and by the absence of decent physical gold demand from key markets. The situation in India continued to remain unfavorable for gold demand as the monsoon season appears to be on track to be the worst one since 2009. The folks most affected by a potentially dry summer rainy season constitute 66% of the country’s typical gold buyers in a given year. Locals have actually been selling gold on approaches towards $1,580 in the yellow metal.

Spot gold prices were confined to a trading range that was the tightest in circa 100 days as the summer doldrums and the tug-o-war actions between the bulls and the bears made their presence felt in the trading patterns for the precious metal. A heavy one-day outflow of gold took place in the gold ETF (GLD) which lost nearly 290,000 ounces of metal and is now tallying its lowest balances on the books in half a year.

In mining sector news it was reported that the International Health Tribunal rendered a "guilty" verdict against mining giant Goldcorp and the Canadian government for what it calls "irresponsible mining investments in Mesoamerica."

The IHT said that "[we] find Goldcorp guilty for its activities in Honduras, Guatemala and Mexico, which we find to be seriously damaging to the health and the quality of life, the quality of environment, and the right to self-determination of the affected Indigenous and campesino communities."

Meanwhile, the fortunes of the miners as a group are still in large part tied to the direction into which China might be headed. Reuters reports that the slowdown in Chinese demand for metals (copper and iron ore among the headliners) is hurting the mining industry’s giants.

As Reuters relays it, "China is the world’s second biggest economy, using the most copper, aluminium, iron ore, steel and coal and the second-largest consumer of oil.

Further, "Chinese demand has fuelled commodity market rallies for a decade and created a bonanza for many of the countries and companies that supply it. But after almost a decade of growing at about 10 percent a year, the economy is slowing, reined in by softening domestic demand and the financial and economic woes of its top two trading partners, the European Union and the United States."

More importantly, the producers of metals will need to do some intense math going forward even if they still realize a profit on shipments to China at the moment. It is said that with every single percentage point that China’s economic growth rate slows, the value of its industrial commodity demand falls by about $10 billion, according to Reuters calculations based on GDP and consumption growth over the last six years. A one percent Chinese GDP decline translates into 80,000 fewer barrels of daily black gold demand, for example.

Be that as it may, it now appears that there is one metal that has fared better than gold and silver thus far this year; the orange one. Marketwatch’s Myra Saefong reports that copper futures have climbed about 2.7% since the start of 2012 while gold has recorded a sub 1% gain in value and silver has lost 2.5% in same on the period. One market analyst remarked that "this is a good signal that economic conditions around the globe may not be as dire as has been reported." That said, the article underscores once again that China remains very much in the driver’s seat when it comes to copper demand as it siphons off some 40% of the entire world’s production.

And now, for some weekend reading. As a teaser, ponder this little fact: for the first time pretty much ever, the average Canadian is richer than his or her American neighbor. Our Globe and Mail tallied the average household net worth up here to be $363,202 while across the border that figure amounted to $319,970 per household. There is another metric by which Canada might also be the envy of the US at this time; our unemployment rate. It comes in at a full percentage point lower, at 7.2%.

Of course, there is a "shocker" (for some) in these developments that point to the fact that the Canadian model is working, while the American one is not; the fact that such success is owed to… socialism and its various applications in Canadian fiscal and economic life. If you can bear it, read on:

"Since the 1990s, Canada has pursued a hardheaded (even ruthless), fiscally conservative form of socialism. Its originator was Paul Martin, who was finance minister for most of the ’90s, and served a stint as prime minister from 2003 to 2006.

Alone among finance ministers in the Group of Eight nations, he "resisted the siren call of deregulation," in his words, and insisted that the banks tighten their loan-loss and reserve requirements. He also made a courageous decision not to allow Canadian banks to merge, even though their chief executives claimed they would never be globally competitive unless they did. The stability of Canadian banks and the concomitant stability in the housing market provide the clearest explanation for why Canadians are richer than Americans today. Martin also slashed funding to social programs.

He foresaw that crippling deficits imperiled Canada’s education and health-care systems, which even his Conservative predecessor, Brian Mulroney, described as a "sacred trust." He cut corporate taxes, too. Growth is required to pay for social programs, and social programs that increase opportunity and social integration are the best way to ensure growth over the long term. Social programs and robust capitalism are not, as so many would have you believe, inherently opposed propositions. Both are required for meaningful national prosperity."

Of course, it is unknown how Canada might have turned out were it not for the tar sands in Alberta and the vast treasures of other commodities it sits upon. However, credit needs to be given where credit is due.

Have a pleasant weekend.

Jon Nadler

Senior Metals Analyst — Kitco Metals

Jon Nadler
Senior Metal Analyst

Kitco Metals Inc.
North America

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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