Editorial: Bernanke helps gold hit new highs

The eroding foundations of the global economic system dominated much of the world’s business news in the first week of July.

• Despite persistent happy talk from some quarters over the past few months of an economic recovery in the U.S., the stark reality of the financial mess the country’s elites have created struck home on July 8 with the release of a particularly dismal U.S. jobs report.

It showed unemployment statistics worsening across the board in response to a series of bad policy decisions by U.S. lawmakers, who seem incapable of dealing with the nation’s heavy and growing debt load, or encouraging a healthy climate for business. Global stock markets responded with waves of selling in the ensuing trading days.

Markets then stabilized, but U.S. Federal Reserve Chairman Ben Bernanke gave fresh impetus to the precious metals sector on July 13, by saying the U.S. central bank could ease monetary policy again if the U.S. economy continues to flounder.

On Bernanke’s words, the spot gold price jumped US$17 to new, all-time, nominal record highs above US$1,585 an oz. on the afternoon of July 13 in New York, while silver futures rose US$2.58 to US$38.23 per oz. Gold prices are now up an astounding US$383 per oz., or 32%, from a year ago, while silver prices have risen US$19.85 per oz., or 109%, in that time.

• In Europe, worries over chronic sovereign-debt problems have come back with a vengeance. Fallout from the Greek debt crisis has newly affected Portugal and Ireland, and is spreading to the larger economies of Italy and Spain.

The behaviour of Italian and Spanish bonds is starting to imitate those patterns seen earlier in Greek, Portuguese and Irish bonds, putting new strains on lenders in northern Europe. French banks alone have some US$650 billion in exposure to Italian and Spanish bonds, and mainstream commentators are now openly questioning the viability of the European Monetary Union, whose break-up will have varied political fallout.

And all these troubles are happening in a low interest-rate environment. Interest rate hikes of even 200 to 300 basis points would have devastating impacts on sovereign debt interest payments, and ratchet up the debt crisis to a whole new level economically and politically.

This continuing damage to the credibility of global financial instruments and the eagerness of central banks to debase their countries’ currencies translates into continued strength in precious metals prices, as the choice of financial safe havens keeps narrowing.

• As we go to press, Northgate Minerals has tabled a surprise, friendly all-share offer for Joe Conway’s Primero Mining that represents a 13.9% premium to Primero’s closing share price the day before the offer.

Northgate and Primero shareholders would own 69% and 31% of the resulting company, respectively, which would have a market capitalization of $1.2 billion and be sitting on some 13 million oz. gold in reserves and resources.

The deal would take Primero’s sole significant asset, the newly producing San Dimas gold-silver mine in Mexico’s Durango state, and fold it into Northgate’s stable of gold assets that includes the operating but struggling Fosterville and Stawell gold mines in Australia and the promising Young-Davidson gold mine, under construction in Ontario.

The combined company would produce a pro forma 320,000 oz. gold in 2011, but would ramp up to 550,000 oz. in 2013 as Young-Davidson comes on-stream and San Dimas is expanded. A wild card is Northgate’s large Kemess North copper-gold deposit in B.C., which appears technically economic but has been undeveloped owing to fierce opposition from local First Nations bands.

The deal looks to be a positive one in just about every way, with risks being spread over more assets, bigger and more-consistent cash flow, and a deepening of the management talent pool, who are all proven mine-builders. Downsides are the logistical challenges of a small company operating mines in three far-flung countries, and the unresolved tax issues on San Dimas’ silver production.

Goldcorp, which owns 35.5% of Primero as result of vending San Dimas, has already given its blessing to the deal, which is expected to close in a couple months barring any rival bid.