Tuesday, November 3, 2009

India, American Barrick, Anglogold Ashanti: Gold Is Going Much, Much Higher

As the saying goes, "follow the money."  Three major players in the global gold market have engaged in highly scrutinized and very visible bullion transactions, sending the loud and clear message to the market that the price of gold is going to go significantly higher in price.  A more subtle message, and more significant, is the signal to the world that the supply of gold available to purchase in large quantities is quickly dwindling.

India is the world's largest consumer of gold (China will soon surpass), American Barrick (ABX) is the largest gold mining company in the world, Anglogold Ashanti (AU) is the world's 3rd largest gold mining company.  They are all buying as much gold as they can - India because that's what India does;  ABX and AU because, otherwise, those two companies will go bankrupt from their massive gold hedges.

As most of you know by now, India's Central Bank announced yesterday that it bought 200 of the 403 tons of gold that the IMF is selling.  They paid $1045/ounce.  An IMF official said the transaction would be paid for by India in hard currency, not IMF Special Drawing Rights, which means India is most likely using U.S. dollar reserves to pay for the purchase.  This is a massive move out of dollars for India ($6.7 billion U.S. dollars).  India would not be engaging in this high profile transaction if it thought that it could easily purchase an eqivalent amount at an equivalent price quietly and privately. India is, to be sure, quite cognizant of the fact that this purchase sends a bullish signal to the market.  One can only conclude that this move signals to the world that the physical supply of gold in large quantities is getting tight, a view that has been presented on this blog and by other informed sources.

American Barrick announced yesterday that it bought back 1 million ounces of gold in October, that it might complete its hedge buyback program before the 12 month window it set in September and that global mine production will continue to decline.  After the 1 million ounces purchased in October, ABX estimates that the value of the remaining hedge that needs to be closed-out is $2.1 billion. The calculation assumes $1050/ounce gold.  Ever since ABX announced its plan to close out its hedge book, the Company has aggressively worked on buying back gold to cover its hedges as the price of gold moves higher. Since September, ABX has issued $4 billion in stock and $1.25 billion in debt for this purpose. It is patently clear to anyone analyzing ABX's activity that managment is becoming increasingly concerned with the manageability of their gold short and the risk of facing the liability of much higher prices in the near future.

Anglogold Ashanti announced yesterday (11/2) that it may accelerate the closing of its hedgebook.  The Company announced that the hedge was down to 4.3 million ounces.  The original timetable for closing the hedge was 2014, a date the Company set just recently in July.  Since that time, the price of gold has gone up around $160/oz.   This means that AU has dropped another $688 million (roughly) on its gold hedge.  To put the size AU's hedge in perspective, 4.3 million ounces translates into about 122 tons.  More than half the amount India purchased from the IMF.  Unless the IMF agrees to sell AU some of the remaining 203 tons that it is selling, AU has a big problemIt should be clear to everyone that AU faces a huge challenge to buy back its gold hedge without significantly driving up the price of gold and incurring huge financial damage. 

As signalled by India, ABX, AU and some big funds in the U.S., the long-anticipated scramble by Central Banks and large investors to accumulate gold is now underway.  When I first began researching the gold market back in late 2001, I examined some ideas offered by Jim Dines in his subscription newsletter (The Dines Letter).  One of the themes was that Central Banks globally would shift from being net sellers of gold to being net buyers and that the race to buy gold by these enitities would get quite competitive, as the available supply persistently declined and the price inexorably rose.  Please keep in mind that these same Central Banks had been key suppliers to the market over the past 10+ years.  To back up this thesis with an example, the European Central Bank System had been selling 500 tons per year since 1999, up until last year.  This year, as the price of gold has continued its ascent, the ECB selling has slowed to a trickle and a few of the member banks (Germany, for one) have announced that they are done selling gold. Some ECB banks have actually purchased gold recently.

I suggested last week that it wouldn't be a good idea to wait much past Halloween if you were thinking about buying gold.  The actions announced by China, Barrick and Anglogold have added considerable urgency to that suggestion.  Gold is going to go MUCH higher in price.  Period.


  1. Thanks! Still tinkering with edits. I hope it's not too long for people to read.

  2. Agree with anon, and it's not too long at all.

  3. Appreciate the feedback. It will be interesting to see the COT report Friday, as it will capture the commercial short position thru today. We'll get to see if the bullion banks covered some of their massive short on this run gold over the past couple days or if they continue to fight it by adding to their record net short.

  4. Dave,
    I left this question on the CNBC thread:
    Any ideas why silver is not running with the golden bulls?

  5. That's an excellent question. There were a few comments about that in tonight's Midas, so you can check those out too.

    I can toss out a few observations, and it could be tied to any or all of these factors:

    1) silver may be consolidating gains vs. gold right now. thru 9/30 YTD, gold was up 14% and silver was up 45%. so, to say silver is lagging over the past couple weeks doesn't take into account a wider data sample.

    2) another way of looking at #1 is using the gold/silver ratio. it got as high as around 80 in the summer of 2008. Right now it's 63, and i think it was a bit below 60 when silver was testing 18 a couple weeks ago. i don't watch this ratio as closely as i could, because i think we'll see a ratio below 30 before the precious metals bull is over.

    3) I don't know if you look at lease rates, but here's the link:


    These rates are the rates charged by Central Banks to lease gold/silver out to "bullion" banks. Occassionally, when the rates are negative, it means the CB's will actually pay a bank to borrow gold/silver. If you look at the charts for gold and silver, you'll see the lease rates for silver have been negative across the shorter terms since like July. This typically indicates that Central Banks are trying to force metal into the market to alleviate a shortage. Usually when leasing rates go negative, it indicates a price smack is coming. It's been negative long enough for silver that when it pops back to positive, I bet silver really spikes.

    4) premiums on silver bullion coins are still very low relative to the past couple years. indicates there's a lot silver coin inventory at dealers. i think this overhang will soon clear and silver will spike up.

    Like a lot of people, I think silver will substantially outperform gold over the long term (next couple years).

    Hope that helps. Would love to hear anyone else's thoughts on this.

  6. Thanks for the great reading, we buyGold in a recession. I will pass this on to our ira clients to read

  7. So, paper money is only worth the value that is assigned to it, because it is a fiat currency...but gold is valuable and holds it's value because, I guess, it looks pretty.

    Gold is the ultimate fiat currency...because there is almost a religious following, assigning value to a piece of metal that has very few uses other than flashy four-finger rings and false teeth.

    At the end of the day, gold is only worth what the next fool is willing to pay for it, just like any other made up currency.

    I agree with holding hard assets because of their value as a commodity including, copper, zinc, alumminum, etc. but gold...give me break, silver is far more valuable as a usefull commodity.

    By the way, I've never seen anybody discuss the Tax implication of buying and selling gold coins or do we just ignore that it is taxed a twice the amount as any other investment.

  8. "Gold is the ultimate fiat currency..."

    Actually, the only country I know where gold is routinely accepted as money for purchases (i.e. "currency") is Zimbabwe.

    This is because the government-issued currency there is now worthless. The end product of political corruption and monetary recklessness.

    But that would never happen here, right?

  9. I am truly agree with the fact that the prices of gold are increasing day by day and a time comes when the value of art remains because its become very difficult for every body to purchase gold coins in higher rates.http://www.gold101.com/bullion-commentary/