Editorial: Egad! Gold corrects

Like farmers on a sunny day who sense a heavy rainfall on the way, gold watchers spent much of August bracing themselves for a major correction in the gold price, even as spot prices kept breaking new, all-time nominal record highs since July. The parabolic price rise had most gold analysts calling in mid-August for a 10-20% correction to restore some calm to the market and shake out the triflers.

• Well, they didn’t have long to wait: After briefly topping another all-time nominal record of US$1,900 per oz. in Hong Kong on the morning of Aug. 23, spot gold prices were hit by a powerful selling wave that took prices down to the US$1,840-per-oz. range by day’s end. The next day gold plummeted US$70 in a couple of hours to settle at US$1,740 per oz.

Contributing to the selling pressure was talk of more tightening of the margin requirements for gold-futures trading on the Comex, which, some argue, similarly precipitated the harsh correction in silver prices seen earlier this year.

It was the worst one-day gold price drop since March 2008, but prices remain well above early July’s US$1,500-per-oz. level, and the gold price is still within striking distance of matching its inflation-adjusted high of around US$2,400 per oz. in 2011 dollars, a figure reached in 1980 at the tail end of U.S. President Jimmy Carter’s malaise-ridden term in office.

• Another bearish sign for gold is the sudden emergence of Texas Governor Rick Perry as the leading Republican candidate for president in the 2012 election, after his official campaign launch Aug. 13. With President Barack Obama’s approval ratings hitting new lows around 40%, Perry is now the leading contender to be sworn in as U.S. president in 2013.

These are big ifs, but if it looks like Perry would be a fiscal conservative in power, and the Senate and House are both on track to be taken over by true Republican deficit hawks who could restore sanity to the U.S. federal budget, there could be a strong swing out of gold and back to the U.S. dollar later next year as the U.S. national elections approach.

• We never tire of Hugo Chavez news, and all the novel schemes El Presidente comes up with to slowly wreck Venezuela. This week, he paused in his cancer treatment to pronounce that the Venezuelan government would nationalize all gold mining in the country.

Speaking on state television via telephone, Chavez blamed “mafia and smugglers'” control over the gold industry in Venezuela as a reason behind the move, and vowed to stamp out illegal mining while calling for the country’s military to secure control over the underdeveloped sector.

There were few details beyond that, leaving the only North American-listed gold miner active in Venezuela, Russian-controlled Rusoro Mining, in damage-control mode and crossing its fingers that Chavez only means nationalizing the small-time local gold miners. No big surprise: Rusoro’s shares have marched steadily downward from 40¢ in March to 13¢ at presstime, as its two small gold mines in the El Callao district – Choco 10 and Isadora – recorded first-quarter cash costs approaching US$1,300 per oz. and the company missed a US$30-million loan repayment scheduled for June.

The Chavez government had long ago chased out gold miners and developers such as Gold Fields, Hecla Mining, Gold Reserve and Crystallex International, and its previous ham-fisted nationalizations of other heavy industries (e.g. oil and cement) typically resulted in significantly lower production levels following the change in ownership.

More importantly to foreign gold investors, Chavez is looking to repatriate much of Venezuela’s foreign exchange reserves held in the United States and Europe, according to a recent report by The Wall Street Journal. The report alleges the Venezuelan government plans to transfer billions of dollars of reserves held abroad – including about 90% of its gold reserves – to banks in more “friendly” countries such as China, Russia and Brazil. Some estimates have placed the total value of Venezuela’s international reserves at around US$29 billion, of which about US$11 billion is held in gold, or about 211 tonnes of bullion.

Opposition congressman Julio Montoya has questioned whether the government was pressured into transferring its reserves because of growing financial ties with China and Russia. Last year, Venezuela received a US$20-billion credit line from the China Development Bank for a large-scale social housing program, while this year Chavez announced an additional US$8 billion of credit lines from Russia, a portion of which are earmarked for military hardware and small arms supplies.