All that Glitters May Not for Long!

There was a huge gold sector pump into the weekend that put the oil manipulators to shame as very low volume pumping followed very high volume selling that exhausted itself by mid-day. The fact of the matter is that gold did close below the 50 dma of $619 for the second day in a row against virtually no dollar movement. The World Gold Council estimates there is currently a 52 ton surplus of gold, which makes sense since miners have now been ripping it out of the ground as fast as speculators would buy it for a full year now. This contrasts sharply with the Virtual Metals report which says there is only a 10 ton surplus. Virtual Metals is a research company employed by mining companies… The big Kahuna in the gold market will be September 26th when an agreement that limits the amount of gold that can be sold by Central Banks expires. Just like any savvy investor, it will be hard to find a Central Bank that has been sitting on $20Bn worth of gold for many years and now sees a $40Bn value not to take a little off the table before the price evaporates on them. If they do not come to a new agreement (this is an oil country vs. mineral country kind of thing) we may see literal tons of metal being dumped on the markets in short order. While you may hear figures that gold demand is up 12% from last year (more VM PR), the fact is that physical demand actually fell 24% by weight, it just cost a lot more per ounce! One big thing Virtual Metals ignores in its reports (because they only look at mined metal) is the supply of scrap gold, which rose 57% over last year as people melted down everything they could for $600 an ounce or more! It is looking like the opening of the gold ETF, GLD, soaked up 109 tons in Q1 as speculators rushed in (they take physical possession of the gold) but ordered just 39 tons in Q2. Should investors leave the ETF they will be forced to dump gold on the open market just as the price is going down! To see a train wreck in motion, take a look at these numbers from Canadian miner WDO, who just put out tepid earnings yesterday as 25% of the gold they produced went unsold for the quarter. Last year, demand was such that they had to draw 3,700 ounces out of reserves to cover sales of 15,800 ounces. This year, there was no trouble covering orders for just 8,700 ounces. http://www.newswire.ca/en/releases/archive/August2006/16/c6334.html Nonetheless, as dilligent subscribers to VM reports, they are going full steam ahead with additional production as “We are impressed with the strength in the gold market and believe it will continue to improve appreciably. It is certainly an opportune time to be bringing new production on stream.” As you can see from the financials, a doubling of operating costs is neatly masked by the $300 per ounce premium they have collected since last August and massive increases in the “value” of the reserves and mine assets make the company look like it is worth double last year’s price. As I am sure Prof can tell you, this is very similar to the logic the builders employed as they overpaid for land and overbuilt themselves into a crisis last year. We need to watch the small, inefficient miners as they tend to suffer first, quickly followed by big trouble in the majors.