Gold shines as euro crumbles

Mid-May saw a cooling off of the overheated gold markets, with the spot gold price pulling back from its nominal all-time record highs above US$1,240 per oz. and consolidating for the short-term above US$1,220 per oz. That, of course, brought with it heavy selling pressure on gold mining stocks big and small.

• However, the reasons behind gold’s historic May ascendancy — the Greek sovereign debt crisis and the cracks appearing in the euro — were very much front and centre over the week, as the euro hit new 4-year lows against the U.S. dollar and 8-year lows against the yen.

The structural impossibility of the euro succeeding long-term as a currency has long been a pillar of the gold-bull argument, chiefly because the euro has no treasury agency backing it to provide assistance with solvency problems, even if the European Central Bank is there to provide liquidity.

While talk of the euro’s demise may have once been limited mainly to gold bugs and conspiracy theorists, this year we’re seeing the euro’s future openly questioned again and again in the mainstream media, including George Soros opining in the Financial Times that the euro is “patently flawed” and elsewhere saying the current disintegration of the global financial system is comparable to the collapse of the Soviet Union.

There was even a report from Madrid’s El Pais newspaper, quoting Spanish Prime Minister Jos Luis Rodriguez Zapatero, that at a meeting of European leaders, French President Nicolas Sarkozy banged his fist on the table and threatened to pull France out of the euro system unless German Chancellor Angela Merkel supported the French-backed plan — which was ultimately adopted — to create a US$1-trillion bailout package for Greece and other European Union states in danger of defaulting on the sovereign debt.

More selling pressure came on the euro in mid-May as Germany’s financial regulators banned some forms of naked short-selling in euro-zone debt and selected financial stocks.

• More worrying for miners and their investors in the short-term has been the broad-based decline in base metals prices, particularly for copper, which has now dipped below US$3 per lb. and is typically considered a leading indicator of slowing global economic growth.

Of particular concern to copper-market watchers is the current bear market in Chinese stock markets and the apparent bursting of the Chinese real estate bubble.

One positive new development in the base metals market, however, is a report by Deutsche Bank that there is a “strong likelihood that physically backed base metal exchange-traded funds (ETFs) will become a reality” in the second half of 2010, including one that would include nickel. Nickel inventories are currently high, making it easy for a bank to quickly get physical backing for nickel in an ETF.

The creation of ETFs for gold, silver and platinum group metals definitely helped support precious metals prices, and there’s little reason to doubt new base metals ETFs would have a similar effect on base metals prices.

• There’s been quite a bit of shifting in the ownership of base metals assets lately.

In early May, Norsk Hydro agreed to buy Vale’s bauxite and aluminum businesses, which are mainly in Brazil, for US$1.1 billion in cash and US$3.8 billion in shares. When the deal closes, Vale would own 22% of Norsk and the Norwegian government would see its stake reduced from 43.8% to 34.5%.

And in mid-May, Anglo American announced it was selling its zinc business to India’s Vedanta Resources for US$1.34 billion. The assets include the Skorpion zinc mine in Namibia, the Lisheen zinc mine in Ireland and a 74% interest in South Africa’s zinc-focused Black Mountain Mining. The move will make Vedanta the world’s largest zinc and lead producer — yet another example of mining power shifting these days from the West to Asia.

• The exploration success story of the week was Gold Fields’ and Minas Buenaventura’s announcement of a 5.6-million gold-equivalent- oz. gold-copper-silver discovery at their joint-ventured Chucapaca project, situated 120 km northeast of Moquegua in southern Peru’s Altiplano area.

The announcement is also a stark reminder for investors of what it takes in terms of size for a discovery to become a material event for companies as large as Gold Fields and Buenaventura.

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