Editorial: Subprime woes good for gold

The week ended Jan. 12, the second trading week of 2008, was rife with jitters in the global financial system owing to growing losses in the U.S. subprime mortgage market, where rising interest rates have caused overextended borrowers to default on their home loans.

* On Jan. 11, Swiss investment bank UBS said that it still doesn’t know the extent of its losses from the subprime crisis, pegged at a minimum US$13.5 billion, and the company might record a loss for 2007.

At presstime, Citigroup — the largest bank in the U.S. — had written down US$18 billion in subprime losses and had recorded a US$9.8-billion fourth-quarter loss as revenues dropped 70%. In response, the Singapore government has pumped almost US$7 billion into Citigroup, adding to the US$7.5-billion cash infusion two months ago by the Abu Dhabi Investment Authority, when Citigroup’s deep problems first emerged and CEO and chairman Chuck Price was forced to resign.

Price’s departure occurred not long after the similar ouster of Merrill Lynch’s CEO and chairman, Stan O’Neal, following his company’s US$8-billion writedown due to the subprime crisis. Other big subprime losses include: Morgan Stanley, US$9.4 billion; HSBC, US$3.4 billion; Bear Stearns, US$3.2 billion; Deutsche Bank, US$3.2 billion; Bank of America, US$3 billion; and Barclays, US$2.6 billion.

All this turmoil has pounded the U.S. dollar, and been very, very good for those savvy enough to be invested in the precious metals sector. Spot gold ended the week by posting a US$891-per-oz. fix in London (up from 2007’s year-end US$836.50 per oz.), and started the new week by easily breeching the US$900-per-oz. barrier. Spot silver moved in tandem and has been trading above US$16 per oz. The new year has started with more analysts predicting that gold prices above US$1,000 per oz. are achievable in the near term.

* Cobalt is another metal getting within striking distance of its all-time, nominal high of US$50 per lb., a spike reached in 1978, when rebel armies took over the mining centre of Kolwezi in what is now the Democratic Republic of the Congo. With supplies constrained and stockpiles drawn down, the metal has been sold recently at upwards of US$47 per lb. in global trading, and above US$50 per lb. in the Chinese domestic market.

* China’s miners are continuing be more aggressive in securing overseas mineral deposits. This week, we saw the unusual sight of a Chinese company, nickel miner Jinchuan Group, entering the Mexican scene by tabling a friendly $214-million cash offer for Toronto-based Tyler Resources and its Bahuerachi polymetallic deposit in Chihuahua state.

* In Ottawa, Natural Resources Minister Gary Lunn (a friend of the mining industry who, in his younger days, worked as a certified journeyman carpenter and construction superintendent in mines in B.C. and the Northwest Territories) had a bureaucratic spat spill out into the open as the president and CEO of the Canadian Nuclear Safety Commission, Linda Keen, showed poor judgment by posting confidential correspondence between herself and Lunn on her commission’s website on Jan. 8 (available at www.nuclearsafety.gc.ca).

The dispute relates to Lunn’s and Health Minister Tony Clement’s earlier, seemingly ignored instructions to Keen and the CNSC to facilitate the resumption of operations at the closed NRU reactor at Chalk River, Ont., which is the provider of half the world’s supply of life-saving medical isotopes.

Parliament responded to the crisis by adopting Bill C-38 — supported by all parties — which allowed for the resumption of operations at the NRU reactor.

Far more disturbing, though, is the revelation that the Liberal Party — now out of power for two years — had never released a highly critical 2002 report by Auditor General Sheila Fraser on the Crown corporation Atomic Energy of Canada Ltd., which runs the NRU reactor, and that Lunn’s Liberal predecessor at that time, Herb Dhaliwal, refused to meet with Fraser to discuss her report.

Fraser’s newest review, made public by the Tory government, reiterates that there are “significant deficiencies” at AECL, especially at the antiquated Chalk River facility.