By Chris Sorensen - Tuesday, April 30, 2013 - 0 Comments
Resource prices have driven the Canadian economy for over a decade. Are the good times coming to an end?
For investors and producers alike, gold’s recent rout was as devastating as it was unexpected. The price plummeted by $200 an ounce over a two-day period last week, suffering its biggest single-day drop in 30 years. Though it eventually stabilized at around $1,400 an ounce, stocks of gold mines—many of them Canadian—continued to be hammered by investors for days afterward, with some reports suggesting that as many as 15 per cent of the world’s gold mining companies are now wallowing in red ink.
There are many theories as to what caused gold to fall so far, so fast. They range from rumours that Cyprus planned to sell off some of its reserves to pay for its bailout, to the easing of fears that central bankers are destroying currencies with their unprecedented stimulus measures. “People thought loose monetary policies lead to rampant inflation,” says Keith Head, a professor at the University of British Columbia’s Sauder School of Business. “But gold prices stayed high, even when the underlying theory was repudiated by actual evidence, and that’s a vulnerable situation to be in.”
The big question now is whether other commodity prices will follow suit. Though gold, which traded as high as $1,888 an ounce in 2011, is unique in many respects—it is valued mostly as a way to store wealth, as opposed to as an industrial input—prices of everything from aluminum to zinc have slumped over the past several years after hitting historic highs, creating fears of a broader crash. Edward Morse, the head of commodities research at Citigroup, recently wrote that “the questions over gold and some overly securitized commodities like copper relate to whether their recent robustness is bubble-like and about to burst.” He claims that 2013 could be the year the decade-long boom in raw-material prices driven by China’s rapid growth finally hears its “death bells ring.”
How it all plays out will be crucial in determining Canada’s future prosperity. Nearly one-fifth of the country’s GDP can be attributed to resource industries and their spin-offs, not to mention half of all exports. “It’s been well-recognized, including by Mark Carney [the governor of the Bank of Canada], that commodities pretty much saved our bacon over the past few years,” says Pierre Gratton, the president of the Mining Association of Canada. But now global forces appear to be working against us, with resource prices falling, just as a once-hot housing market falters and consumers are awash in debt. “Higher prices bring on more supply, which brings down prices,” Gratton says. “That’s the cycle and we’re in a bit of that now.”
The latest shoe to drop came earlier this month when China revealed its growth was slowing more than expected. It said GDP came in at 7.7 per cent in the first quarter, down from 7.9 per cent in the fourth quarter of 2012. That threatens to translate into less demand for everything from lumber needed to frame buildings to the nickel used to make stainless steel.
The news helped suck the air out of Canada’s already lagging stock markets, home to roughly 60 per cent of the world’s mining firms. The S&P/TSX Composite Index has fallen 10 per cent since early 2011 and was one of the world’s worst-performing major indexes in 2012, while the S&P/TSX Venture Composite Index, which tracks mostly junior mining companies, is down by nearly 60 per cent as investors shelve their appetite for risky, early-stage projects. Meanwhile, the Dow Jones Industrial Average, which tracks some of America’s best-known companies, is up 25 per cent over the same period.
It’s a much different environment than just a few years ago, when theories of “peak oil” and even “peak copper” were prevalent. The prices of energy and minerals, when adjusted for inflation, more than doubled between 2003 to 2008, while the price of food increased 75 per cent, according to a 2012 report by the UN department of economic and social affairs. The report called the run-up in prices “unprecedented in its magnitude and duration” and suggested the world is witnessing the early phases of a decades-long “super-cycle expansion” in commodities driven by “the rapid pace of industrial development and urbanization in China, India and other emerging economies.” It seemed like a historic shift in the world’s economic balance of power (previous super-cycles resulted from the industrialization of the United States in the late-19th and early-20th centuries, and the rebuilding of Europe and Japan in the postwar years). Some estimates suggested that the world’s developing economies will represent nearly 80 per cent of global GDP by 2050, compared to about 50 per cent today.
Demand is only part of the equation, though, as every economist knows. Rising prices cause producers to boost production and seek out new reserves of key resources. That, in turn, boosts supply and eventually causes prices to drop—which is why commodity markets have historically been prone to major swings. Copper, for example, hit a high of $4.66 a pound in 2011 amid talk of a looming global shortage. (Copper is used in a variety of industrial applications, including wiring and plumbing.) There were reports of thieves trying to steal church roofs in Britain, and even power lines, with some electrocuting themselves in the process. Just two years later, the price has fallen back to about $3.20 a pound as new mines begin to come online.
With similar price declines under way for other key materials, producers are suddenly being forced to rethink multi-billion-dollar projects. Australia’s BHP Billiton said last year it was postponing several projects worth an estimated $50 billion. Brazilian miner Vale SA has suspended a potash project in Argentina, while Rio Tinto Group, the world’s second-biggest miner of iron ore, is in the midst of a major cost-cutting effort.
How bad this will be for Canada depends on whether this is a mere blip, or the beginning of the end of the Chinese-powered commodities super-cycle. The federal government estimates that the energy, mining and forestry industries contribute more than $30 billion annually to public coffers and employ up to 1.6 million people when related industries are taken into account. Ottawa is counting on revenue from the country’s natural-resource industries to help it meet its goal of balancing the budget by 2015, noting in its “action plan” that there are “more than 600 major resource projects, worth over $650 billion” planned over the next decade.
Citigroup, however, argues that the next 10 years will be defined mainly by a series of commodity-speciﬁc booms and busts, as opposed to broadly based increases. “The first quarter provided a clear precursor of what’s to come—the majority of commodities saw prices fall across the board, and those that rose did so for commodity-specific reasons,” Morse’s team wrote. Examples of the latter included natural gas prices that rose because of a temporary stall in production, and cotton prices that spiked because of uncertainty about Chinese buying following reduced plantings.
Others maintain that global raw-material prices will be only temporarily moderated as producers catch up with demand. “I don’t think it’s the end of the bull run in commodities, but I think we will go through a number of years of industrial metal prices being somewhat lower than they have been,” says Patricia Mohr, the vice-president of economics and head of commodities-market research at the Bank of Nova Scotia. “China’s demand will continue to grow, although at a slower pace. But the level of demand is already huge.”
British investment guru Jeremy Grantham is particularly bullish. He argued in a recent U.S. television interview that the combination of China’s rapidly urbanizing population combined with dwindling amounts of cheap, easy-to-access resources points to a future where prices of key commodities continue to soar. He says a sustained rise in the price of oil is helping to further magnify those increases, since it makes extracting and transporting other resources more expensive. Calum Turvey, a professor at Cornell University who is a past editor of the Canadian Journal of Agricultural Economics, says oil’s impact on the price of food is even more direct. “As oil prices rise, ethanol becomes more profitable, which increases the price of corn,” he says. That, in turn, causes farmers to plant more corn, decreasing the supply of other grains and oilseeds and driving up their prices.
In a sector where constructing a new mine can take up to 20 years, the industry is necessarily taking a long-term view. “You’ve also got India and a bunch of smaller economies in Africa that are growing at a very fast rate,” says Gratton. “So even as China’s growth abates, you’ve got other industrializing countries coming behind it that, we believe, will keep demand for materials robust.” He says the current slump is even being welcomed in some parts of Canada, where the recent boom was accompanied by skyrocketing equipment costs and a persistent shortage of labour. “I was in Saskatchewan recently, and they’ve got a lot of investments in uranium and potash and other things,” Gratton says. “You almost get this sense of relief that things have calmed down a little.” Investors, on the other hand, are almost certainly feeling their heart rates rise.
By Colin Campbell - Tuesday, February 5, 2013 at 11:55 AM - 0 Comments
Gold Rush fans may not want to change the channel just yet
Reality television’s latest obsession is gold. Jungle Gold, Gold Rush, Bering Sea Gold and Gold Fever are all shows documenting miners’ efforts to dig up flakes of the precious metal worth $1,700 an ounce. The last time TV was so caught up in a trend it was in the house-flipping genre (Flip This House, Flip That House), which seemed to hit its peak just before the U.S. housing market crashed. Is there a similar warning sign in the TV gold boom? Does all the mainstream fascination with gold suggest an overinflated interest and price?
Some analysts on Wall Street, at least, seem to think gold’s wild ride may be nearing its end. This week, Morgan Stanley lowered its gold-price forecast for the year by four per cent, to $1,773. Late last year, Goldman Sachs cut its target price for 2013 to $1,800 an ounce from $1,940, citing an improving U.S. economy. “The risk-reward of holding a long gold position is diminishing,” it said.
Gold is the ultimate safe-haven investment and has enjoyed an incredible rise in recent years. A decade ago, gold was worth little more than $300 an ounce. Since 2000, it has gone up every year for 12 years (a record) and in each of the three years after the 2008 crash, gold prices peaked to hit record highs. That gold might be finally losing some of its shine suggests fear of riskier investments may be ebbing. The S&P 500 index last week, for instance, cracked the 1,500 mark for the first time since 2007. Continue…
By Andrew Hepburn - Monday, July 23, 2012 at 4:59 PM - 0 Comments
I wrote about the private-sector side of the LIBOR scandal in my previous article for Maclean’s. Now let’s turn to the more intriguing part of the whole affair: How the Bank of England itself at one point supposedly started to encourage Barclays to fiddle with the numbers.
Even if the allegations proved to be true, you’d be excused for scratching your head in puzzlement. What’s the big deal with a central bank engaging in manipulation for the sake, supposedly, of the health of the financial system?
With governments trying to contain the effect of the financial crisis first and now the eurozone mess, we hear of central banks tampering with the markets almost every day. And, really, governments have always intervened in the economy to influence–manipulate if you will–outcomes. When a central bank adjusts short term interest rates, it is using its longstanding, legitimate power to artificially tip the market one way or the other. And, in a closer-to-home example, rent control is another form of market manipulation at the hands of the government.
We generally accept various forms of manipulations because we think the government can and ought try to influence certain markets in ways that produce beneficial outcomes for society. Take the case of monetary policy: The widespread consensus is that central banks can cushion recessions by lowering interest rates and help calm roaring inflation by raising them.
And because monetary policy is largely viewed as a reasonable area of government intrusion, interest rate changes are announced publicly. Market watchers and the general public may disagree about the need for rate cuts or hikes at any moment, but, for the most part, the government’s right to make the decision goes unquestioned.
Now, that’s not what happened with LIBOR. In this case, if the Bank of England did indeed instruct Barclays to submit artificially low rates, it had no choice but to convey such directions surreptitiously. According to the allegations, the very goal of Barclays providing false submissions during the financial crisis was to deceive the market into believing the bank was healthier than it truly was. Had the Bank of England publicly told Barclays to submit lower LIBOR figures, the charade would have been self-defeating. Everyone would know that LIBOR didn’t represent the true rate of borrowing.
By Tamsin McMahon - Tuesday, April 24, 2012 at 4:38 PM - 0 Comments
Canadian resource companies were among the worst performers of the year
It’s been a great year to be involved in Canada’s natural resource sector—unless you happen to own stock in some of the companies. Even with oil trading at more than $100 a barrel and gold hovering just below $1,700 an ounce, Canadian resource companies have been struggling to hit their earnings targets. Canadian mining companies were among the worst performers of the year, according to a recent report from National Bank Financial. They were dead last among commodity-producing countries, the report’s authors said.
Shares of Canadian energy companies have stagnated, while Canadian gold stocks have been on a steady downward spiral over the past 12 months. Energy companies can partly blame a buildup of crude oil reserves in the U.S. Midwest that has kept the price of Canadian oil low. Canadian gold producers, however, have been hit on all sides with soaring operating costs, massive writedowns at major projects, and the politics of operating mines in countries with unstable governments.
Shares of Kinross Gold Corp., the country’s third-largest gold company, fell 20 per cent in January. It was the largest drop in the company’s history and came after Kinross announced a $2.5-billion writedown on its mine in Mauritania along with expected delays at projects in Chile and Ecuador. Agnico-Eagle Mines Ltd. embarked on an ambitious plan to mine a stretch of Nunavut so remote that the company spent $50 million building a road to the nearest town. But after a blaze destroyed the mine’s kitchen in -60˚ C weather —and with operating costs soaring to $1,000 an ounce—the company announced a $644-million writedown last month. Vancouver’s Ivanhoe Mines stock also took a hit after the government of Mongolia said it wanted to renegotiate its agreement with the company over its $6-billion Oyu Tolgoi copper and gold mine, saying it planned to raise taxes and increase the government’s stake from 34 per cent to 50 per cent. The government later backed down, but the damage was done.
Investors, meanwhile, continue to flock to gold bullion as a surefire path to riches—even if they’ve proven they don’t have much faith in the Canadian companies that mine it.
By macleans.ca - Monday, September 26, 2011 at 11:56 AM - 2 Comments
Investors fleeing commodities amidst economic uncertainty
Gold is set to make its sharpest three-day fall in nearly 30 years as global investors shed off commodity stocks in favour of hoarding cash amidst the increasing probability of a Greek sovereign debt default and continuing economic uncertainty in the eurozone. Over the last three days of trading, the value of gold has dropped nearly 10 per cent, taking its largest hit over three days since February 1983. Other commodities, such as platinum and silver, have taken hits in recent trading as investors look to hoard cash—a sign of decreasing economic confidence. Over the weekend, European officials sought ways to restore order in the eurozone economy. Among the largest points of contention are whether member countries should put forward money to bail out European banks and countries struggling to curb public debt.
By Chris Sorensen - Tuesday, April 19, 2011 at 9:00 AM - 2 Comments
The gold rush in today’s economy doesn’t seem to be coming to an end any time soon
Identifying asset bubbles before they pop is a mug’s game. And gold is no different. As its price continues to set records, now closing in on US$1,500 an ounce, a long list of skeptics has emerged to warn that the gold party is on its last legs. “Naysayers started calling gold a bubble back when prices hit $250 an ounce, and though gold’s bull market has tossed and flung the bubble callers around for almost a decade now, their voices have only gotten increasingly louder as prices broke through $1,000, $1,200 and now $1,400 an ounce,” Frank Holmes, the CEO of San Antonio-based U.S. Global Investors, Inc., wrote in his blog recently.
Now Holmes and a few others are questioning whether current gold prices should really be viewed with gaping jaws. Gold has long been viewed as a “safe haven investment” during shaky economic times, and Holmes argues the recent gains in the price don’t seem as severe when compared against other asset bubbles, including Japanese equities in 1986 and tech stocks during the dot-com boom. Nor is there much evidence that average investors are piling into gold.
Canadian investment guru Eric Sprott is also in the no-bubble club. He argued in a March letter that new investment in gold over the last 10 years totalled a relatively meagre US$250 billion compared to the nearly US$100 trillion funnelled into other financial assets. Sprott noted that ownership of gold as a proportion of total financial assets has remained less than one per cent since the early 1990s, compared to as much as five per cent in 1968. “Investors can rest assured that they are not participating in any speculative bubble by owning gold,” Sprott concluded. “They are merely protecting their wealth.”
Indeed, there would appear to be abundant “fundamentals” to support continued price increases, what with the continued economic uncertainty in the U.S. and Europe, and political instability in the Middle East. Holmes, for one, predicts gold prices could double over the next five years. Of course, another frequently cited bubble warning sign is the emergence of those who would tell you that, with respect to the boom in question, this time it’s different.