When the Global Financial Crisis started back in 2007, you could pick up an ounce of gold for just $670.

Wind the clock forward to today, and gold is now trading at $1690 – a rise of over $1000 per ounce.

The increase in price has led many market pundits to declare gold is ‘in a bubble’ and the price will soon crash.

In this article, we look at some of the myths about gold and debate the questions that regularly come up about this asset class.

Some of the questions commonly asked about gold include:

What is gold?

Is gold just another commodity?

Is the gold market an illiquid and obscure market?

Who owns the world’s gold?

Is gold really in ‘a bubble’?

Let’s look at each of these in turn.

What is Gold?

Gold is a monetary asset. There are two forms; gold (and silver) and paper money.

Over the long run gold is a far superior form of money than the paper dollars we are paid in and store in our bank accounts.

This is because gold, the supply of which is both finite and stable, is immune to the ravages of inflation that always end up reducing the value of paper money.

Is Gold just another commodity?

Gold is not a commodity, like wheat or oil, because it isn’t used up like other commodities are.

Wheat and oil are valuable because they are consumed (used either to eat or run an engine etc.).

Nearly all the gold that has ever been produced is still available (it’s either being worn as jewellery, sitting in a safe deposit box or being stored in a central bank vault).

Is the Gold Market illiquid and obscure?

The gold market is neither obscure nor illiquid. In fact it is huge. The value of all the above ground gold in the world is roughly US$9 Trillion dollars. That’s over six times the size of the entire Australian economy.

It’s also a highly liquid asset. Over $30 billion a day of gold is traded on the London Bullion Market, six times larger than the daily volume traded on the Australian Stock Exchange.

Who owns the World’s Gold?

Nearly 50 per cent of all gold holdings in the world are held in jewellery form.

The rest is predominantly held either by private individuals or by the central banks of the Western world.

These central banks and governments, including those of the United States, Germany, France and Italy hold three quarters of their foreign reserves in gold, highlighting the fact gold is an asset of strategic importance to their overall economic stability.

Governments in emerging markets (China/Russia etc.) are also busily acquiring gold to help diversify their asset base, with imports of gold into China from Hong Kong nearly quadrupling between 2010 and 2011.

Is Gold in a bubble?

And so to the last and most important question – is gold in ‘a bubble’?

To debate this point, it’s important to look at some relevant ratios to help come to a conclusion.

Whilst the gold price is no longer ‘cheap’ in nominal price terms, when you look at gold vs. the equity market, gold vs. inflation, or gold vs. the paper money supply (remember central banks are creating money out of thin air these days), gold remains much under-priced by historical standards.

To give just one example, if the ratio between gold and equities was to reach the same level it does in typical gold bull markets, the gold price will need to go over $10,000 (or the equity market will need to crash).

This is not a price prediction, but a useful number to keep in mind, and offers a strong rebuttal to anyone who suggests gold is ‘a bubble’ today.

Whilst there is good reason to think the gold price will continue rising, it is important that investors and potential investors in gold understand that the metal can be volatile in the short term (like the share market), and that the price will not go up in a straight line.

Significant corrections in price are a common trait of any major bull market, and gold is no exception in this regard.

Over the last decade (a period in which gold has gone from $255 to around $1690), there have been three major corrections.

The fall in the gold price during these corrections has been between 16 per cent and 29 per cent.

These numbers should help put the current pullback in price (from $1895 in September last year to $1531 in December) into context. That’s a fall of 19 per cent.

Whilst it’s never nice to see your assets fall in price, this is a perfectly healthy and normal correction in an ongoing bull market.

To give even more historical context, back in the 1970’s gold bull market, there was actually a period where the Gold Price fell just under 50 per cent at one point (from $193 in December 1974 to $104 in August 1976).

No doubt investors who bought in around $190 felt very nervous about their gold holdings after a fall like that.

Had they sold their gold though after that correction, they would have not only locked in a loss on their investment, but more importantly, missed out on one of the great bull markets of our time as over the next four years the gold price went on to trade at over $850 an ounce.

Finally, it’s important to remember what ended the last Gold Bull market back in 1980. Interest rates were over 15 per cent at the time. Obviously, the higher the rate of return you can get on paper money, the less attractive it is to hold gold, and vice versa.

This is exactly the economic environment we find ourselves in today, with interest rates in the majority of the developed world negative in real terms.

Considering the debt problems these countries face, interest rates may well remain negative in real terms for many years to come.

Until this issue is resolved, the gold price is likely to remain strong, as in this environment, it’s a more attractive asset to hold than paper money.

All Australians would benefit from getting some advice about investing in gold, the best way to own it and what it can do for your overall portfolio.

You can buy gold through retail superannuation (in ETF form only) if you are using the right super provider, or if you have a Self-Managed Super Fund (SMSF), you can actually buy and store physical gold (and silver) in your fund.

This process is no harder than buying shares on the stock exchange.

Times are tough out there. The Global debt crisis that we will struggle with for many years is in many ways more challenging than the problems which led to the Great Depression.

In times like these, saving and protecting your wealth should be of paramount importance.

Jordan Eliseo – Director of investments and advice

 

 

 

The families of mining industry workers are often overlooked when discussion arises regarding the pressures affecting their lifestyle and home life.

Pilbara families will be armed with practical strategies to overcome these pressures when Mining Family Matters presents two workshops in Port Hedland and Karratha.

The Mining Family Matters website www.miningfm.com.au was established in February 2010 to support Australian families linked to the mining and resources sector.

The free presentations, sponsored by Caltex, are aimed at celebrating families in mining, oil and gas, while also offering professional advice and simple tips for tackling fly-in/fly-out rosters and living in isolated mining communities.

 

The one-hour presentations on Mining: making it work for your family, will be presented by Mining Family Matters founder Alicia Ranford, on topics including:

Recognising that as a mining family, you do face pressures;

What partners find most challenging about life with a FIFO/DIDO miner;

How to communicate effectively to tackle relationship issues;

The importance of consistency in parenting and strong routines for children, whether parents are home or away; and

Strategies for raising healthy, resilient children in mining households.

Ranford is familiar with the lifestyle having spent five years as a FIFO mum and moving six times in the space of a decade with her mining husband.

She said her most important message is always to reassure mining couples that they’re not alone in doing it tough sometimes.

“Communication, spending precious time together and making sure the kids are OK – we’ve found these are some of the most common pressures raised by mining couples on the Mining Family Matters website,” Ranford said.

“The mining couples who cope well are those who tackle issues together as a team, instead of regularly banging heads about the same old issues.

“Many couples, for example, agree on a set number of social activities when the miner is home on days off. Some partners write lists of jobs that need doing around the house.”

Mining Family Matters has been planning for some time to visit key mining towns such as Port Hedland and Karratha to celebrate the role of families in mining, oil and gas, and also offer one-on-one support.

“We’re extremely grateful to the team at Caltex for their sponsorship of this Pilbara roadshow, and for their continued support of our website, which allows us to provide free professional support and advice to more than 11,000 families every month,” Randford explained.

Caltex business development manager – mining Amanda Keogh said the Pilbara roadshow is an important part of the company’s commitment to local mining communities.

“Caltex is committed to supporting communities in which we work and live,” Keogh said in support of the initiative.

Our sponsorship of the Mining Family Matters website and the Pilbara roadshow are key parts of that commitment.”
 
“We’re proud to lend our support to Mining Family Matters so that miners and their families can access information and support services when they need it.”

Details for the two presentations are:

Port Hedland: All Seasons Hotel, 10am Tuesday 11 September;

Karratha: Frank Butler Community Centre, 10am Thursday 13 September.

Morning tea will be provided after both presentations and all participants will receive a free copy of The Survival Guide for Mining Families, containing information and advice most commonly requested of the Mining Family Matters crew.

To register for the free presentations, please contact Lainie Anderson at lainie@miningfm.com.au

AFRICA DOWNUNDER: Perth – Australia has enjoyed its time as China’s resources mistress but the emergence of Africa has given our biggest commodities customer reason to stray.

China took over from Japan as Australia’s largest trading partner in 2009, right in the middle of the iron ore-led resources boom.

In 2005/06 the dollar figure placed on approvals for Chinese investment in Australia’s mining sector sat at $6.8 billion.

By 2009/10 that number had almost doubled, hitting $12.2 billion.

The future for the Australian / China relationship appears rosy enough, although there could be a few bumps in the road ahead.

Fear of growing Chinese investment in the resources and agricultural sectors will keep the Foreign Investment Review Board busy as they assess each deal on its merits.

It has been mooted that the cooling down of the Chinese economy may result in a weakening for the demand of Australian resource exports.

Any concerns on this front should be allayed once people understand that the Chinese economy may slow but it is not predicted to go backwards, which means it will still be at the levels that created much of the demands we are currently trying to meet.

If industry observers consider there may be a possible Sino-induced threat to the future health of the Australian industry their fears are not shared by former Prime Minister / Foreign Minister and Member for Griffith Kevin Rudd.

 

“Australian investors succeed in the international market place based on the quality of what they have to offer and the price they offer,” Rudd told journalists gathered to ambush him at the Paydirt Africa Downunder conference in Perth.

“We have done that against American miners, Canadian miners, European miners; they’re doing it against Latin American miners out of Brazil, out of Chile.

“And we succeed on the basis of the competitiveness of our bids.”

For the benefit of those who may not have heard of Africa, it is the second largest continent on the planet, consisting of, at last count, 55 different nations.

If you were to take a pair of scissors to your atlas you could arrange the countries of the United States, India, a good chunk of Europe, and China to fit within the continent’s coastline.

Economically, Africa has been on the move boasting six of the world’s ten fastest growing countries over the last ten years.

Eight of these past 10 years have seen Africa enjoy economic growth of a greater rate than that of East Asia.

China has been spending like a sailor on shore leave in Africa as it works to develop what is coming to be in global terms, one of the most important economic relationships of the century.

This is obvious by the amount of Chinese investment pouring into Africa since 2008 when around 800 Chinese companies were operating there.

That figure has exploded to over 2000 with an estimated one million Chinese people now calling Africa home.

The influx of people and resource and infrastructure investment has placed China as Africa’s largest trading partner.

According to The World Bank around two-thirds of Africa’s 55 nations have financial agreements in place covering the development of infrastructure.

Currently oil and gas receives the greatest amount of attention with 19 per cent of the total Chinese spend.

However, iron ore, copper, uranium, and gold are all travelling around the economic landscape under different umbrellas.

Once they are added up as one figure, along with all other Chinese backed mining activity the number hits an impressive 27.3 per cent.

As vast as the inroads China has made in Africa, Australia has also been busy.

The Department of Foreign Affairs and Trade (DFAT) tells us that the committed and planned investment by Australia companies in resources projects totals more than $20 billion.

DFAT figures also show Australia’s trade with Africa to have undergone steady growth over the last decade achieving an average rate of 6.1 per cent.

Australia’s total merchandise trade with Africa was valued at $5.8 billion for the year 2009/10.

Currently there are over 230 Australian companies working up some 650 mining projects across 42 countries in Africa.

Rudd told his fourth estate audience the good health of the industry was demonstrated by the fact there are more than 200 Australian mining companies participating in so many African projects.

“It’s because the good folks in Africa think we have something to offer,” he said.

“I believe in a competitive environment, always have believed; and I think the Australian industry has done well.

“And I believe that when it comes to working in the future there is a whole lot more that Australia and Africa can do together without creating any third country friction with anyone else, including China.”

AFRICA DOWNUNDER: Perth – An incentivised price range of between US$75 and US$90 a pound is needed to drive any new investment in greenfields uranium mines according to Perth-based uranium developer, Bannerman Resources.

Speaking in Perth at the 2012 Paydirt Africa Downunder conference, Bannerman chief executive officer Len Jubber said that while the industry had been through some turmoil following the Fukushima incident last year, there were significant signs of demand upturn and reactor development activity.

“Any examination of the price and supply trend of the past ten years shows a generally upward trend,” Jubber said.

“What we have come to recognise is that uranium will have its price spikes but it is the longer term trend that is the real sector indicator.

“In this mix is the increasing tiredness of a lot of uranium mines globally, historic inadequate pricing, the need for renewal for some existing operations such as Ranger mine in the Northern Territory going underground, project swaps, and sudden market impacts such as the deferral of the Olympic dam decision – an event that has ended much market speculation about potential future cheap volumes of uranium flooding the market.

“The market has to look seriously at those companies that have taken their projects to definitive feasibility stage because this is where the cost realities come in for future uranium projects.

“It gets rid of the blue sky numbers at the scoping study levels and sets the range at where new uranium mines can be viable.

“Our assessment of all current projects shows this price range will need to be in the US$75-90 a pound-range to see incentive decisions for new uranium mine developments.”

Jubber went on to say that any resurgence globally in the uranium space this year could be measured by better valuing the fact 433 reactors continued to operate worldwide, in 30 countries, 63 new plants were under construction and a significant 489 were planned and proposed.

“Add to that China’s stated intention to increase its nuclear output from 12 gigawatts to between 60 to 70 gigawatts by 2020 and you can see that demand will not be easing as that target only represents six to seven per cent of China’s total requirement to replace some of its fossil fuels – and course India is a sleeper at this stage,” he said.

Bannerman is developing the Etango uranium project in Namibia, with a Definitive Feasibility Study completed in April this year for the 119 million pound uranium reserve inventory.

The DFS outlined a 16 year mine life for Etango with a capital expenditure development cost of US$870 million.

 

 

AFRICA DOWNUNDER: Perth – Central and West Africa will be the world’s next major supplier of iron ore according to Africa-focused Australian iron ore developer, Equatorial Resources.

Speaking in Perth on the first day of the 2012 Paydirt Africa Downunder conference, Equatorial managing director John Welborn said China, by 2015, wanted to import 50 per cent of its iron ore from Chinese-owned mines elsewhere in the world – and this meant resolving the issue of alternative sources of supply.

“China remains by far the dominant buyer of seaborne iron ore, importing more than 650 million tonnes last calendar year or 63 per cent of total global seaborne iron ore demand,” Welborn said.

“Historically more than 75 per cent of China’s seaborne iron ore supply has come from Australia, Brazil and India where China has relied heavily on the big three producers.

“Chinese steels mills are suffering from high input costs and low profitability and need to find new sources of supply.

“Global demand is forecast to be more than 3.5 billion tonnes by 2030 and with current annual production figures showing approximately 500 million tonnes coming from Australia, 240 million tonnes from India, 390 million tonnes from South America, and 55 million tonnes from south Africa, it poses the question of where the extra supply will come from.

“Increased production from the traditional iron ore regions will not fill the gap and so it is a certainty that projects in central and western Africa will be developed to fill the demand gap.”

Welborn said this had generated a “race to production” along the western African coastline with companies from all over world racing to develop a range of iron projects in that province, both as stand-alone projects or as part of iron ore clusters.

“Central and west African iron ore offers the upside of massive scale, high quality resources, coarse grained ore bodies and low cost of production,” Welborn said.

“The challenge is the infrastructure reality, as the area needs the development of railways, ports, and mines amid many regional opportunities. New iron ore production is only coming on stream in Africa where two conditions exist –the presence of high grade, near surface iron ore bodies in close proximity to existing rail infrastructure.”

Welborn said the near term focus from the region would therefore continue to be growing output from mines close to infrastructure ports needed to get ore to market.

In the medium to longer term, new rail infrastructure development will drive large-scale production.

Equatorial is focused on developing two iron ore projects in the Republic of Congo including the Mayoko-Moussondji iron project (targeting maiden resource in 2H 2012) and the Badondo iron project.

The company is midway through a 70,000 metre drilling program at Mayoko-Moussondji targeting high grade direct shipping ore hematite over a 12 kilometre strike length.

It has also defined an exploration target of 1.3 billion to 2.2 billion tonnes at 30 to 65 per cent iron for the Badondo iron project.