|
Gold – metal or not?
Closer analysis of the global metal market engenders doubts regarding the actual value of some traditional market pillar-conceptions. In the recent years we have been being actively rammed into believing that privatization, competition, free trade and pricing are real “nuts and bolts” of the market economy. We have been forced to think that these were the only guiding lines that would help translate the Russian economy into market one. “Demand calls for both supply and prices” appeared an axiom. Competition was given a role of a whip to spur up quality standards.
It looks like we have been taught the elementary economy, whereas highly developed countries are fully in line with advanced economic principles.
Thus, the present series of articles spotlights certain “over-market” mechanisms of development in the world metallurgy.
Drawing 1
By all means, stability of the precious gold has made it special. It has lost its consumer characteristics long ago. Like the first money, gold has started performing quite different functions – saving, trade servicing and others.
As the civilization was swiftly developing, its increasing boons (taken as their summarized prices) led to a deficit in gold. There were many money substitutes, and none of them survived. But paper banknotes, supervised by the vigilant state, within the past two centuries were able to eliminate the money deficit. The gold, initially a guarantee to banknotes, has turned into a “ghostly” half-visible commodity.
It is curious that at the earliest stage of paper banknotes’ existence their “gold price” was quite conventional to talk about. Things have changes to the contrary in the recent years: now we are used to talking of “paper price” for gold.
But gold is still a metal with an especially sophisticated mining technology.
Miners and metallurgists are good at their job. And despite geological conditions of mining becoming more and more complicated, actual volumes of gold production are growing.
Another obvious tendency in the recent decades has been the demand stably exceeding supply (mining) 20-25%. As soon as (in 1971) the States ceased supporting the dollar with gold reserves (thus putting an end to the Bretton Woods system) stable gold prices fell into oblivion. According to the Classic Economy, consequences were predictable – a huge hike of prices. The theory seemed to be proved in the early 80-s, when a troy ounce cost up to $850 (hand in hand with a surge in oil prices).
Drawing 2
Otherwise, the theory proved to be very distant from the reality. In the past two decades fluctuations in prices on gold have occurred almost independently from the real production and consumption.
The matter is that central banks have stocked gold amounts nearly equal to 12-year world production output. The gold reserved are mostly thought to serve as defensive weapon to shield the world currency markets from speculative attacks. At the same time the most influential players on the global market have become more enthusiastic in their market game. And today it is not supply/demand correlation, but financial giants coupled with leaderships of many countries, who are pricing gold.
The way it is being done
A survey by the Gold Anti-Trust Action Committee (GATA) of January 1999 found that a culprit of low gold prices is a cartel of international banks.
According to GATA’s experts, the cartel has been manipulating on the gold market since 1994 together with assistance of high officials from different countries. The cartel allegedly includes the Bank for International Settlements, J. P. Morgan, Chase Manhattan, Citibank, Goldman Sachs, Deutsche Bank, às well as the Secretary of the US Treasury L.Summers, the Chair of the Federal Reserve A.Grinspen and the President of the New-York Federal Reserve W. McDonough.
GATA reported that “these banks and their elite clients were in a habit taking a lease of gold from central banks at annual interest as low as 1%. Then they sold the gold on the market and allotted the profits to the Treasury Department of the US”.
On the expiry of leasing contracts they buy off the gold on the market and return it to the central bank. Profits gained from the operation were, understandably, kept to the wheller-dealers.
GATA makes a supposition that the “gold cartel” dumped a price on gold “several hundreds dollars beneath the natural balance level”. In the aftermath a gold price dropped from $388 in 1995 to $273 in 2000. Now the cartel is making its best to hold in the price, failing which its gold leasing is becoming too expensive. In its turn, the GATA considers bringing the world prices on gold up to $600/ounce a priority of its policies. These efforts have been enthusiastically backed up by many manufacturers, including 300,000 members of the South Africa’s Miners Trade Union. The National Union of South African Miners announced the time had arrived to unmask international cartels, which had gone to all lengths in the past years in their bean counter.
GATA is convinced that it was the “gold cartel” who sank the Australian dollar, in order to make Australia’s gold miners sell in advance as much production as possible at higher local prices.
The world gold mining could not help being influenced by financial dealers. Meanwhile, deposits are gradually running out. As has been estimated by World Gold Council, the 10 leading gold mining countries (except Russia) have in the depths just 15 td. tons of gold. The amount is actually next to nothing:
--- only 40% of the world banking reserves;
--- gold amounts enough for 6 years of mining with the present rates;
--- gold amounts enough for 4-5 years of consumption with the present rates.
In short, a dramatic decline of gold mining is soon to come.
So, the gold metal trade is tailing itself along. Gold influx to the world markets is relatively small, compared to its combined deposits. And it makes the gold market easier for the cartels to deal with.
According to "Forbes" (an article of April 5, 2001), “the state, for instance the USA, finds it logical enough to print as much money as needed to sustain the price on the desirable level”.
By now the state debt of the USA has exceeded 6 trillion dollars, i.e. over 500,000 tons of gold at the current prices, or 10 times as much as the total world reserves (meaning all gold saved in banks and thoroughly explored deposits).
Thus, in the final analysis the debt has been created by a money printing press of the Federal Reserve System of the States.
Now with the global economic slump and a credibility gap with respect to various securities many are pinning hopes on the gold, as a stability warranty. In 2001 a troy ounce cost $270,15, while by now the price has risen to $327 (of November 2002); the market is awaiting further hikes.
In a struggle between manufacturers and financial magnates positions of the latter are, surely, stronger.
Today the gold traded at a reduced price is the Klondike for investments. Central banks throughout the world are afraid of a strong jerk up in prices, because it would dramatically spoiled attractiveness of shares and bonds, which are the basis of the contemporary world economy.
As for the world gold mining, a soon relief is coming. Gold prices are expected to go up. The only question remains wide open – up to what extent?
Drawing 3
Barton Biggs, a broadly-known analyst from Morgan Stanley bank, has declared a change in his view upon the gold. He is now persuaded that the best investing strategy is a set of gold and shares of gold-mining companies, which is not only deprecation-proof, but capable of bringing the owner at least 15% of annual income. By the by, shares of the world gold-mining companies weighted in price over 60% in H102.
With account of inflation rates in the past 10-15 years a fair price for gold is today thought to be about $500-600/troy ounce, and there is, Ned Schmidt supposes, space for growth up to $1,250/troy ounce.
So what about the state of affairs in Russia? - Everything is placid to sluggish. So far we haven’t played on the world financial and stock exchanges, just “reacted” to them. The largest Russia’s holdings alone can afford some activity. Actually, there is just one big holding in the gold mining – “Norilsk Nickel” that has its own production of precious metals and is turning to the traditional Russian gold mining.
The Head of the Russian Government M.Kasyanov signed a decree ¹539 of July 18, 2002 authorizing Norilsk Nickel to do refining of precious metals.
On the 25th of October NorNickel told to the press that it had purchased 100% of shares of the Russian biggest gold manufacturer “Polyus”, which had been previously owned by Khazret Sovmen, the President of the Republic of Agygeya.
According to a report of November 4, the former Head of Gokhran of Russia (the state body in charge of formation of the State Fund of precious stones and metals), Valery Roudakov, has held the highest position in the BoD of “Polyus”.
At the moment the company is in talks on a purchase of a gold-mining company “Maiskoye” on the Choukotka peninsula.
It seams like NorNickel’s experts are awaiting a serious surge in prices for gold. | 
