In a world deluged with cheap credit, it is comforting to know that some things are still scarce, like common sense, good tastes, and gold.
The gold price has been a bit of a sluggard lately. But there’s always the big picture to consider. “A string of stalled gold projects, including the troubled revival of Victoria’s Bendigo and Ballarat fields, has resulted in Australia losing its ranking as the world’s second-largest gold producer,” reports yesterday’s Courier Mail from Queensland.
Australian gold mines cranked out just 249 million tones of gold last year, falling behind Team America, which produced 252 million tones. It was the worst production performance in 13 years according to Surbiton Associates here in Melbourne, and was a fiver percent decline from 2005’s production figures.
There is an…er…silver lining in this nugget. Mother nature, unlike the U.S. Federal reserve, is not in possession of a thing called a printing press. You can’t just print up gold on demand the way you can U.S. dollars. This is gold’s great virtue as a store of value. It is hard to find. It is expensive to mine. Its supply cannot be increased willy-nilly by politicians who have wars to pay for and electorates to bribe.
This is why modern politicians hate gold (those who understand it, that is.) It holds them fiscally accountable. It is also worth nothing that increased capital investment in the mining sector does not automatically lead to greater production of a given resource. The gold is where it is, not where you want it to be (or when you want it to be there.)
Going forward, look for the gold companies with proven reserves in the ground to begin commanding higher premiums in the stock market. The cost of production is rising for mining firms everywhere. But there is always a lowest-cost producer or a big firm with deep pockets that can find ways to produce gold cost-effectively-provided it knows where the gold is.
That makes small, non-producing gold companies, at least as we think about it this morning, more desirable than current producers. If you believe the price of gold will double or triple from here, the gold is worth more in the ground now than it is in the spot market. Proven reserves are essentially a call option on higher gold prices, a call option with no time decay or expiration.
Let us not forget uranium. “The South Australia government is expected to give crucial approvals for Australia’s fourth uranium mine in weeks,” again courtesy of the Courier Mail. “The Honeymoon mine, being developed by Canada’s SXR Uranium One, is 80km northwest of Broken Hill and on track to start production of yellowcake in March of next year.”
Idle question, if Labour wins the Federal elections in May, how many weeks will it take for it to reverse itself on its “no new uranium” mines position, and give cover to state Labour governments looking to ease the ban? Apply the band-aid test and you get about 30-days. With painful things, it is better to do them at once and quickly rather than drag them out. Rip off the ban like a band aid and get it out of the way quick.
Markets and Money