Tags: Gold | Industry | Investors | Metal

Gold's Slump Tarnishes Industry, Investors and High Hopes

Wednesday, 14 August 2013 09:11 AM

Akwesi Boahene’s gold dreams ended better than those of some people in Dunkwa-on-Offin, Ghana, whose riverbeds yield flecks of the precious metal to pickaxes. He still had his life.

Boahene, a satellite-television installer, and a partner pooled $10,000 two years ago to rent land and start a mining operation in a muddy West African town then booming with prospectors lured by what was gold’s longest bull market in at least nine decades.

In May, as prices sagged, his venture became another victim in a year of lost faith in the metal. Boahene shut down the no-longer-profitable business and told his 15 workers to stay home. When a former employee phoned one morning in June about returning to work, Boahene, 33, had no good news.

“I have asked you to give me some time, I am still trying to raise money before we can resume,” he said, lying in the shade outside his rented one-room house.

After enjoying a heyday from gold’s boom, the community faces a stark reversal of fortune that’s playing out in joblessness and an unusual crime spike. The news reverberating through the town of 33,000 that week: the deaths of two unemployed miners, shot during attempted thefts.

Gold’s swift fall, including two days in April when it plunged the most since 1980, has ravaged hopes and livelihoods around the world — from the 1 million miners in Ghana who scour in the dirt, to thousands of executives and geologists at mining exploration firms that are running out of cash in Vancouver. Gone too are jobs for auditors, bankers and analysts in the finance capitals of Toronto and London. Investors who bet big and lost are shifting assets elsewhere and scaling back retirement plans.

Sevenfold Gain

During a 12-year bull market, the metal was promoted as a hedge against inflation, a store of value and a spectacular investment in its own right, gaining more than sevenfold. Its rise resembled historic moves like the Internet stock bubble of 1999-2000.

The fall may end badly, too.

“The gigantic, decade-long rally I don’t think will be repeated, at least in my lifetime,” said Michael Aronstein, 60, president of Marketfield Asset Management LLC, which manages more than $13 billion in New York. Aronstein predicted the 2008 slump in commodities prices and the 2009 rebound.

$1,921.15 Peak

After peaking at $1,921.15 an ounce in September 2011, gold fell to as little as $1,180.50 in June, the lowest since 2010, before recovering Tuesday to $1,321.67. ABN Amro Group NV analysts consider it a respite, predicting the price will average $1,000 next year and $840 in 2015 because a stronger U.S. economy will limit gold’s appeal.

For many, a turning point came in May and June, when the yield on the 10-year U.S. Treasury note rose almost a percentage point to 2.61 percent from 1.63 percent, destroying the premise of a faltering U.S. “The foundation for gold has eroded,” said Edward Lashinski, the Chicago-based director of global strategy for futures trading at RBC Capital Markets LLC. “Capital can be deployed much more effectively in other enterprises that actually see a return.”

The drop frustrates ordinary and sophisticated investors alike. John Paulson, the New York hedge fund manager noted for making $15 billion with a bet against the U.S. housing market in 2007, told investors in February 2012 that gold would be his next triumph. His gold fund lost 59 percent through July this year, according to a person familiar with the results. The University of Texas Investment Management Co. — whose advisers include Dallas hedge fund manager Kyle Bass, also known for a winning housing gamble — has seen a gold hoard once valued at $1.5 billion decline by more than $400 million.

Bank Boomerang

Gold also boomeranged on central banks trying to diversify away from the U.S. dollar. After the late Venezuelan President Hugo Chavez added to a gold stockpile that’s now almost 70 percent of foreign reserves, the slump this year pushed the country’s reserves to the lowest since 2004 and compromised the government’s ability to repay foreign bondholders. A lack of dollars for imports has created shortages of such staples as toilet paper and rice.

At the September 2011 peak, the market value of the world’s gold mining companies reached $486 billion, more than the gross domestic product of the United Arab Emirates. Since then, they’ve lost $271 billion, including a 71 percent plunge in U.S. shares of AngloGold Ashanti Ltd., a Johannesburg-based producer held by Paulson.

Amid the rush for hard assets that followed the 2008 financial crisis, some investors overlooked some of gold’s drawbacks, among them the premiums to purchase and store it and the lack of a dividend.

‘Trash Bags’

“We’re holding trash bags,” said Philip Mann, 53, who with his wife put about $160,000, half their retirement savings, into gold and silver coins starting in 2009. They’re now worth at least 40 percent less, including sales mark-ups, he said. The drop forced him to cash out a 401(k) retirement plan, losing money to penalties. It also drained resources for two sons’ college bills and the planned purchase of a new home, said Mann, a retail supply-chain manager in Portland, Tennessee.

Gold advocates say there remains deep-rooted demand for the metal that has captivated humans since it was fashioned into decorative objects on the coast of the Black Sea 6,000 years ago. In countries like India, where weddings and other rites are steeped in gold-gifting, this year’s price drop caused long waits at jewelry stores and delighted Supriya Gupta, a teacher in Kolkata. She picked up a toe ring, anklets and a tiara for her soon-to-be married daughter and a pair of earrings for a younger one.

Gold-Gifting Frenzy

“If the price continues to fall, we can always buy more,” said Gupta.

Dubai is pressing ahead with plans to create a gold storage, trading and refining hub on a par with Switzerland, announcing in July it will build the world’s tallest office tower to house commodities traders.

“People own gold because they don’t trust the central banks,” said William Fleckenstein, author of “Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve,” a 2008 book arguing that the Fed caused repeated asset bubbles with artificially low interest rates. The price will be “much, much higher” within five years and stocks will crash again, he said.

Even seasoned forecasters say the metal’s future price is hard to predict, dictated more by sentiment than standard measures of supply and demand. Bulls point to the surge in jewelry buying and nine consecutive quarters of net buying from central banks, among them Russia and Kazakhstan. Bears contend the banks often buy at the wrong time — adding 203 tons this year as prices dropped, for example, leaving them with $284 billion of losses on gold holdings of 31,910 metric tons through May, according to data from central banks compiled by the International Monetary Fund.

Exchanging Gold

Jewelry, less than half of all gold purchases last year, is also a marginal factor compared with the wave of speculative investments, skeptics say. From 2008 to 2012, investors worldwide bought about 8,000 metric tons, the equivalent of more than three years of global mine production, according to the World Gold Council. In the seven months through July, about 25 percent of the gold in one type of investment, known as an exchange-traded product, has flowed out.

“Gold is still a bubble,” said Ronald Wildmann, managing director of Basinvest AG in Zurich, which manages 100 million Swiss francs ($107 million).

Going Mainstream

Bullion’s earlier run-up in the political and financial turmoil of the 1970s ended on Jan. 21, 1980, when the price hit $850 — equivalent to more than $2,400 today when adjusted for inflation. Gold didn’t top $850 again until 2008, as the crash of the U.S. housing market led to the worst financial calamity since the Great Depression.

Viewed as a fringe holding by some pension funds and advisers during the long bear market, gold suddenly went mainstream. In the U.S., “Cash for Gold” signs sprang up on street corners coast to coast. Radio personalities promoted gold coins, purchased by people like Mann, as protection against U.S. deficits. Exchange-traded products opened the market to everyday investors, allowing them to buy shares representing actual holdings of gold without the hassle of taking physical delivery.

Some 2,273 U.S.-based mutual funds — 32 percent of those tracked by Morningstar Inc. — have an exposure to gold bullion, mining or exploration, according to the Chicago research firm.

Amid the frenzy, gold advocates made dramatic predictions that the precious metal would be the only way to protect wealth.

Global Ripple

The boom rippled out to as many as 60 million people around the world — 10 million of them gold miners and 50 million others who sell them merchandise or services, said Kevin Telmer, executive director of the nonprofit Artisanal Gold Council in Victoria, Canada. People switching from farming could expand their earnings as much as fivefold, he said.

In Ghana, Africa’s second-biggest gold producer, farmer Francis Addai joined others thronging the industry around Dunkwa, where the typical daily wage for farmhands is $4 a day. Addai got a job in 2008 where he poured buckets of muddy water over a board to strain out gold. In 2011, he was hired as a security man at Josteh Mining, the operation Akwesi Boahene started with his partner that year. Addai said he earned $60 a week — three times the income he’d patched together from growing cocoa and weeding neighbors’ farms.

‘Quite Bearable’

“The weekly earnings made life quite bearable for me as a responsible father,” said Addai, 51, who supports five children and a niece, ages 2 to 23. Tuition is free in Dunkwa public schools, but books aren’t. Addai said he was able to buy more books and new school uniforms.

In July 2011, months before Addai started his new mine- security job, 125 people packed a patio outside the Four Seasons Hotel on West Georgia Street in Vancouver for a C$500-a-plate Hawaiian-themed luau that signaled the confidence of people at the companies that explore for new deposits. The charity and networking event, dubbed “Murdigras,” was the brainchild of Murray Seitz, 42, co-founder of Riverside Resources Inc., a Vancouver exploration company whose shares had surged to C$1.25 that year from as little as 18 Canadian cents.

Seitz started the parties in 2006, midway through gold’s rally, and they became something of a barometer for the industry. After collecting C$3,000 for local charities in a downtown bar that first year, he raised C$100,000 in 2010, when Murdigras featured a gold-painted Camaro and gold medal-winning athletes from that year’s Vancouver Olympics. Once Seitz added up the donations for 2011, he realized it was a warning sign: they slipped to C$60,000.

“It was already starting to happen,” he said. “It’s been a slow, continuous slide.”

Era’s End?

What’s been good for the economy has paradoxically been bad for gold. The U.S. jobless rate fell to 7.4 percent in July from a 2009 peak of 10 percent, helping push the Standard & Poor’s 500 Index to a record high. The Federal Reserve’s preferred measure of inflation has undershot its 2 percent target for 14 straight months, even as the central bank kept interest rates near zero.

In April, the French bank Societe Generale SA declared “the end of the gold era,” and Goldman Sachs Group Inc. forecast a price of $1,270 by the end of 2014, contributing to the price plunge. Goldman has since lowered its 2014 target to $1,050.

Seitz went to London in April to raise money for his newest venture, a developer of Kazakhstan gold assets called IRG Exploration & Mining Inc. He met with eight analysts and bankers. Six weeks later, four of them had lost their jobs, he said.

“In my professional career, it’s been the toughest couple years of my life,” Seitz said.

The 2011 Murdigras was the last.

Miners’ Woes

“I wasn’t going to ask people who were losing their jobs or put on partial salary to pay C$500 per ticket,” he said.

Vancouver is home to more than 700 mining companies scattered among high-rises framed against the stunning North Shore mountains. They’re often small, employing a handful of people who then hire auditors, engineers or helicopter pilots to reach remote sites. Many are struggling to survive. The median Vancouver mine exploration company has $325,000, enough to last less than five months, according to data compiled by Bloomberg.

Jeff Sundar, 38, cut his monthly salary by more than half, to C$5,000, last year to stretch the cash of his Vancouver explorer, Entourage Metals Ltd. Its stock has dropped 81 percent to 9.5 Canadian cents since it raised C$5.35 million in a February 2011 initial public offering. The firm had four full- time geologists at the time; now it has one.

Financing Challenge

“Entertainment, dinners, clothing, expensive trips — all that’s been shut down,” said Sundar, who has much of his own wealth tied up in a bet on a renewed rally. “It’s just challenging to raise money.”

In April, Toronto brokerage Fraser Mackenzie Ltd. shut, saying investor interest in early-stage mining had “considerably diminished” and shareholders voted to conserve capital “while we still have it.” The firm had employed as many as 80 people.

There were rows of empty seats at a Vancouver mining conference in May. Half as many exhibitors as a year before came, said conference organizer Joe Martin. “No Soliciting” signs were posted on tables to discourage salespeople who hadn’t paid from showing up anyway. In one hall, David Hodge, president of Zimtu Capital Corp., bellowed about an early-stage exploration company like a carnival barker.

“Yes, I am a stock promoter,” he said, his voice rising. “But that’s what you want in the beginning.”

ETF Panic

Stock in Zimtu, a Vancouver-based natural resources investment company, traded Aug. 12 at 37 Canadian cents, less than a fifth of the C$2.19 price in February 2011.

The ease of buying gold through exchange-traded funds backfired on some investors. One couple who put more than half of their assets into gold ETFs approached Rinehart Wealth Management in a panic in April, said Daniele Donahoe, president of the Charlotte, North Carolina-based firm, whose clients generally have more than $1 million. She said she sold many of the funds for the couple.

“With the advent of these ETFs people have been able to become somewhat of their own worst enemy,” Donahoe said.

Billionaire Paulson had so much conviction that he used a gold ETF to start share classes for his funds denominated in bullion, allowing investors to avoid the dollar. Most of his own $9.5 billion investment in his firm’s funds as of Jan. 1 was in the gold shares. The wager lost more than $1 billion this year, including a fund that holds shares of miners and other gold assets, according to data compiled by the Bloomberg Billionaires Index. Paulson & Co.’s four other main strategies gained this year.

Paulson’s firm has said the gold share class is still “up considerably” since beginning at an average cost of $950 an ounce in 2009. It remains committed to bullion.

Demand Intact

“The long-term trend of increasing demand for gold in lieu of paper is intact,” John Reade, Paulson’s gold strategist, said in an April statement.

The metal is also weighing on returns at Utimco, the $29.2 billion fund for the University of Texas and Texas A&M University systems. Utimco began buying gold as a hedge against dollar devaluation in 2009 and by 2011 held more than 20 metric tons — larger than Canada’s gold reserve — in a New York warehouse. The investment became a political weather vane in the state, where one legislator proposed a bill to move the gold to a newly created Texas Bullion Depository.

Assets Devalued

While gold helped the endowment gain more than 14 percent in fiscal 2011, it’s since been a drag. Returns were 9 percent in the fiscal year through May 31.

“What I missed was how emotional so many people tend to get on this topic,” said Bruce Zimmerman, the fund’s chief executive officer, a former Citigroup Inc. pension manager who had never owned gold before. “Gold represents less than 4 percent of our portfolio, probably encompasses about 5 to 6 percent of our thoughts and discussion but generates about 99 percent of our publicity.”

The fund isn’t selling the gold, which it holds at an average cost of $1,231 an ounce, Zimmerman said.

“Given easing monetary policy, there is a scenario where financial assets essentially become devalued,” he said.

At Texas Christian University, endowment managers considered buying gold for similar reasons three years ago — and rejected the idea, said chief investment officer Jim Hille. TCU instead holds oil and gas royalties, which produce income, he said. Gold typically must be sold to lock in gains.

Weathering Decline

“It just doesn’t do anything for your payout needs every year,” he said.

The Fort Worth, Texas, university’s $1.3 billion endowment gained 13 percent in the fiscal year through June 30.

The largest mining companies argue they can weather gold’s decline — so far, to a price still far higher than the $640 average over 20 years — by cutting overhead costs, paring exploration and writing down assets acquired during the boom.

Barrick Gold Corp., the world’s biggest gold producer, took $8.7 billion of writedowns and slashed its quarterly dividend 75 percent, lowering what it calls “all-in sustaining costs” to $900 to $975 an ounce for 2013. Gold miners have announced at least $23 billion in writedowns in the past month.

“Companies are pretty good at knuckling down and ultimately reducing costs,” Jamie Sokalsky, CEO of Toronto- based Barrick, said in an Aug. 1 interview. “I don’t think you are going to see massive types of closures.”

‘Not Sustainable’

Nick Holland, the CEO of Gold Fields Ltd., is less sanguine. The company’s South Deep mine is one of the few in South Africa that could survive prices near the year’s lows, in part because it’s largely mechanized and less reliant on labor, Holland said.

“The industry is not sustainable at $1,230 an ounce,” he said June 27. “We’re going to need at least $1,500 an ounce to sustain this industry in any reasonable form.”

Prices are already too low for Boahene in Ghana, who said he can’t afford to pay his workers $10 a day and rent an excavator for $750 a day. He said he’ll go back to installing satellite televisions if the price doesn’t recover.

The gold rush had a darker side for the town of Dunkwa. Resentments grew against Chinese immigrants who arrived to develop mines, using excavators and other heavy equipment few local people could afford. Miners dumped silt and chemicals into the river Pra, the region’s chief drinking source.

Dunkwa hasn’t benefited much visibly from its mineral wealth. On the unpaved, rutted road through town, a battered silver hatchback with a bumper sticker reading DESTINY inched past as a taxi, stuck in a six-foot-wide puddle, disgorged its shoeless passengers to walk through the muck.

Crime Spike

Thefts — of mobile phones, motorbikes and even Caterpillar Inc. excavators — are reported daily, said Love Mensah, crime officer of the Upper Denkyira East Municipal Assembly. The thieves use a master key to start the excavators and load them onto trucks, he said.

The two men shot recently were trying to loot homes and mine sites of Chinese nationals, Mensah said. Ghana’s government expelled dozens of Chinese miners this year, enforcing laws that restrict small-scale mining to citizens. Shutdowns of their mines compounded joblessness caused by gold’s falling price, said Lawrence Ansah-Brew, the area’s environmental health officer.

“The youth are just loitering about,” he said.

Nana Kofi, 22, quit school as a teenager, moved to Dunkwa and got jobs running excavators. Out of work for eight months, he said he’s down to $450 in savings.

“I know about 200 young men who are at home,” he said. “When we attack people with machetes, they should know we have to eat. I don’t mean I will do that, but it will happen.”

Regular Paycheck

Ghana’s economy shrank 3.1 percent in the first quarter from the previous three months as mining and construction output contracted, according to the central bank. Gold is the biggest foreign exchange earner for the West African country, accounting for $1.5 billion in the first quarter.

Former mine guard Addai said security is all he wants. With a regular paycheck, he can qualify for a larger government pension at 60. It’s harder to imagine clearing weeds with a machete and a hoe as before, he said.

“I am only praying that work on the mines resumes soon,” Addai said, “because I don’t have the energy and strength to do those very strenuous jobs again.”

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Gold’s swift fall, including two days in April when it plunged the most since 1980, has ravaged hopes and livelihoods around the world.
Wednesday, 14 August 2013 09:11 AM
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