Merger Mania and Free Money

After a week of consolidation, gold showed some strength this week moving up from the USD$1,280s and trading above the “13” handle briefly before encountering resistance right on the 20 day moving average, pulling back to USD$1,297 at time of writing. Silver followed suit and dropped 1% overnight to USD$15.18 per ounce.

In local currency terms, the AUD/USD managed to survive an assault on the US 0.70c floor for now, so we are largely unchanged from last week at AUD$1,836 for gold and $21.65 per ounce for silver.

 
 
With the CFTC Commitment of Traders report out as of 5th March, gold’s holding of the $1,280 level was very encouraging considering that “money managers reduced their speculative gross long position in Comex gold futures by 28,314 contracts” and “short bets rose by 18,998 contracts”. Precious metals consultancy Metals Focus expects “gold and silver prices to strengthen before end-2019 … delivering single-digit percentage gains for both metals”.

The gold:silver ratio moved back below 85 this week. The ratio is still quite high historically, with the 80s seen by many as an indicator to shift (or at least be overweight) money into silver versus gold. However, the ratio has been in the 80s for more than six months and not showing any clear trend downwards.

Analyst Lobo Tiggre at The Independent Speculator says that the fear trade and greed trade are lining up for the precious metals in 2019 and while he thinks that “the gold-silver ratio has zero predictive power in terms of price direction” he is nevertheless uber-bullish on silver as “when the precious metals break out, gold leads and then silver goes off”.

 

Free Money? Buy Gold!

With an election coming up in India, politicians there are doing what politicians do everywhere: bribe the electorate with free stuff. In India’s case, the World Gold Council sees demand as set to recover there as cash handouts and higher spending in an election year boost disposable incomes.



Euphemistically referred to as “rural-friendly schemes”, the cash plus higher crop support prices have helped gold demand in a country that traditionally saves via precious metals.

It is not just individuals as the Indian reserve bank (RBI) has also buying gold, having added 42.3 tonnes to its reserves in 2018 and continuing with 6.5t in 2019 (China has also recently returned to buying gold after a two year break).

It is a significant change in attitudes from a few years ago, when the Indian government was putting in place rules to restrict gold buying and imports. The RBI is not alone as other central banks have been accumulating gold in an attempt to diversify their reserves as a better hedge against the US dollar.

 

Hedging Tail Risk

US money management firm Bernstein said in a CNBC interview, “gold is the most defensive commodity” as a tail hedge in previous market draw-downs.


Investor may need to watch their “tails” with OECD slashing their forecasts for 2019 growth, saying that the “global economy is suffering more than expected from trade tensions and political uncertainty which are clouding prospects particularly in Europe”.


 
Finance site Speculators Anonymous confirms this assessment, saying that global equity earnings will fall over the next year based on their South Korean Export Growth Indicator, which has been historically accurate over the last 25 years.
 

In Australia, the bad news continues with the total value of mortgages continuing their decline, now 25% down from the peak, a result of “the value of new loans to those intending to live in the home they purchase has fallen by 19% which, along with a 45% drop in the value of investor loans”.
 
 

No surprise that the ANZ-Roy Morgan consumer confidence index plunged 4.8% due to “soft GDP report and, perhaps more importantly, the focus on a ‘per capita recession’” (which we discussed last week).

 

Miner Merger Mania

Following Barrick’s acquisition of Randgold a few months ago and Newmont’s plans to acquire Goldcorp, Barrick launched a hostile bid for Newmont a few weeks ago. Calling it “hostile” may be an understatement, considering the quotes below from recent media.
 

Barrick on Newmont	Newmont on Barrick
“I [CEO] can do a better job than Newmont”	takeover is “nonsensical”
Newmont’s plans to acquire Goldcorp “ill conceived”	“unfavorable jurisdictional risk”
Newmont’s decision to pay a premium for Goldcorp “desperate and bizarre”	“comparatively ineffective operating model”
Doesn’t want “a bunch of less-attractive assets coming in from Goldcorp”	“poor track record on delivering shareholder returns”
The day Newmont announced the Goldcorp deal “your market capitalization dropped by more than the estimated present value of the synergies you announced”	“never collectively managed to the global portfolio of our scale, complexity or quality”
	“egocentric proposal is designed to transfer value from Newmont shareholders to Barrick”

Given those comments one Bloomberg commentator equated it to squabbling children yelling “Mine!” at each other and said that “the way to end this sort of squabble: Take away the toys”, by which he was suggesting that the Nevada mines should be put into a new company and listed separately.

There was plenty to squabble about as the reserves of a combined Newmont-Barrick would have been “about 128 million troy ounces, more than the central bank gold holdings of Germany”.

While heated, the takeover bid did get the two parties to the table to look at a joint venture of the two companies’ assets in Nevada, which had been discussed before and which many analysts thought was “a lot simpler than mashing these two huge companies together”.

The result was an agreement to form a JV with Barrick controlling 61.5% and having full operational control, at which point Barrick then pulled its hostile bid.

For those dabbling in gold equities, Mining.com was quoting “dealmakers” as saying that “a fresh wave of buyouts is imminent” with Northern Star Resources and Evolution Mining as being potential buyers given their strong cash flows on the back of a rising Aussie gold price and disciplined management. Gold mining consultants Surbiton Associates said last week that “Australian gold production hit 317 tonnes in 2018, surpassing the previous record of 314.50 tonnes set in 1997”.

Apart from the entertainment value, this merger activity is good news for investors in physical gold, as “consolidation at this level has historically been a sign that we’re nearing a bottom” in gold prices, according to Frank Homes of U.S. Global Investors. Corvus Gold’s CEO said that mergers “are validation of the precious metals entering an uptrend”.

One factor in the merger activity is the need to “buy” deposits, with analysts at BMO Capital Markets noting that “over the next five years, there are very few large scale new gold projects earmarked to come on-stream” as a result of weak exploration expenditures following gold’s peak.
 

They see these supply issues combined with continued demand growth from immediate geopolitical concerns and eventual return of jewellery demand as providing “tailwinds to higher gold prices”.

BMO also saw the mega mergers as being driven by the need for miners “to make themselves more relevant” to the institutional investors who are now starting to allocate to gold. We found this an interesting observation as it is an indicator that the “smart money” is now looking at gold. At ABC Bullion have seen a pick up in individual investor interest, unfortunately these savvy buyers are the exception to the rule, with the majority of retail investors only coming in much later in the cycle once a bull market trend is more obvious.
 


Until next time, 
ABC Bullion

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