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Australian Gold Miner Investing

Keeping an Eye on Gold Miners

Written by Brian Hicks
Posted August 7, 2013

According to the World Gold Council, Australia’s gold industry is actually in a strong position thanks to its geographical proximity to China.

It’s true that the Australian gold sector has been in a bit of a slump lately, but according to The Australian, Marcus Grubb of the WGC stated that global demand should exceed supply by 2014, meaning gold prices are going to go back up after their spiraling free-fall earlier this year. During that decline, gold prices dropped more than 30 percent.

GOLD OUTLOOKNumerous companies, including Silver Lake Resources (ASX: SLR), Alacer Gold (ASX: AQG), Evolution Mining (OTC: CAHPF), Kingsgate Consolidated (ASX: KCN), and others, have collectively written down nearly $2.3 billion, and companies have been pursuing cost-cutting methods all over the world. Nonetheless, here’s the key quote from Grubb:

"A number of things play in Australia's favour -- proximity to China, the wealth of resources and reserves here, and historically the industry has shown it is capable of adjusting to new economic circumstances perhaps better than in other regions of the world."

Clearly, Grubb is banking on the twin behemoths (at least, as far as gold markets are concerned) of India and China to help propel the nation’s gold sector back up to the top. At a time when gold is trading at $1,302/oz, down from the dizzy heights of $1,600/oz about a year ago, that’s a pretty bold bet. But it isn’t without reason.

Reuters reports that China could see its national demand for gold hit record levels this year, touching 1,000 tonnes. That is noteworthy because such a level would put China ahead of India as the world’s biggest gold consumer.

From Reuters:

"China will probably be the world's biggest gold consumer this year for the first time on an annual basis," [Marcus] Grubb said. "That will be driven by both jewellery and investment demand. Jewellery will be the biggest overall demand segment, but investment will grow fastest."

That may well come to pass. After all, the Shanghai Gold Exchange saw physical deliveries for gold shoot past the total level for 2012 in just the first half of 2013. Spot price premiums were up over $20/oz. Thus, it’s becoming probable that China could see its gold demand range between 950 to 1,000 tonnes over the year.

India, meanwhile, will likely come in at around 850 tonnes. This could partly be an effect of moves undertaken this year by the Indian government to try and restrict gold imports in order to deal with skyrocketing trade deficits. Meanwhile, the rest of the world’s central banks are likely to acquire about 400 tonnes of gold over the year.

Complicating the issue is persistent anticipation that the U.S. Federal Reserve is going to taper off its asset-buying stimulus program sometime toward the end of this year, which will surely rock the markets significantly. Indeed, anticipations regarding this tapering-off have already caused investors to sell heavily, leading to a 20 percent drop in gold prices over the year.

A Return to Form for Gold?

There are reasons to anticipate a return to form for gold (in a manner of speaking). First, companies around the world are reining in costs and projects and are improving efficiencies.

Take AngloGold Ashanti (NYSE: AU), for example. AngloGold is the world’s third-largest gold producer. Not only is the company about to bring its Tropicana mine into production earlier than anticipated, but it’s also seeking to reduce some $500 million in costs regarding its Australian operations over 2014.

Overall, AngloGold will see the Tropicana mine and the Kibali joint venture move into production—adding a total of about 600,000 ounces of gold. This is the same company that reported a drop in net profit to the tune of 47 percent just last year.

On the other hand, as the Wall Street Journal notes, Barrick Gold (NYSE: ABX) has stated it doesn’t have any current plans for new mining projects. This came after the company announced $8.7 billion in asset write-downs just last week.

Clearly, the gold mining sector is still quite unstable. For the moment, ETFs simply seem like the better deal, given all the uncertainty that’s plaguing the gold mining market. On the other hand, there are encouraging signs that you should keep an eye on. By all accounts, keep an eye on China and India.

 

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