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Gold: Not Just Any Old Commodity - #5 - An Educational Series - Trey Reik

Gold: Not Just Any Old Commodity  - #5 - An Educational Series - Trey Reik
By Sprott Global Resource Investments Ltd. 3 years ago 1841 Views No comments

Trey Reik is a Senior Portfolio Manager and Precious Metals Strategist at Sprott Asset Management USA, a division of Sprott Inc., a Toronto-based alternative asset manager. He is also the author of The Sprott Precious Metals Watch, a monthly newsletter produced by Sprott Asset Management LP.

February 26, 2016

We’ve now seen how gold can behave in tandem, though certainly not in perfect correlation, with many currencies of the developed nations. [Click here if you missed that article]. But how is it behaving with other metals?

Gold is certainly an industrial commodity with many industrial applications. It does not tarnish, it conducts electricity, and it is malleable enough to be easily shaped into wire, sheets, or mixed with other metals. Silver, palladium, platinum and copper have similar properties. There are varying degrees of value to these metals, and certainly varying degrees of scarcity.

And the market has decided that gold plays by different rules than other metals and other commodities.

In his report, Trey notes that gold is positively diverging from the commodity pack. As other commodities continued to slump in the second half of 2015, gold started an upward movement. This is an important metric for the mining industry, which requires high capital expenditures to produce an ounce of gold. Fuel and building materials are meaningful components of a mine’s cost structure, and we’re currently reaching a point where costs are declining (more than they already have) and the price of gold is increasing.

Trey plots the ratio of gold prices to S&P Base Metals Index in his report, recreated below. Literally illustrating gold prices divided by the S&P Base Metals Index, this chart notes that gold is pulling away from other metals, implying that either gold is rising, or other base metals are falling (in December 2015, it was both). The result is a big spike in the chart.

But base metals are one thing (a very down thing). What about other commodities? Trey repeats the exercise, plotting gold against a broader basket of commodities and finds the relationship persists.

So we find that the market forces are treating gold, and other precious metals, differently from other commodities.

And this divergence may impact the mining industry in a meaningful way, forcing a sea change on the industry. The junior miners and exploration companies are entirely ignored by the market, in large part because of financing risks. In past years, a project could go to the public equities market for private placement capital to move a project forward. That project would then de-risk and either be brought into production or sold to a mid-tier or major mining house. Today, juniors hardly have the capital to stay listed on a public exchange, let alone de-risk a multi-million (sometimes billion) dollar project. Therefore, if a project is not near construction, the market is chucking it aside, recognizing that many of those small projects won’t get the financing they need to build the project to feasibility.

But what about the currently producing mines? As input costs dwindle, and gold prices stage a quiet recovery, currently producing mines may be in a sweet spot. While we won’t bet the farm on projects that need a higher gold price to survive, there may yet be some diamonds in the rough. . .if you know where to look.

The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.


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