Oct 30

Peak Oil? How About Peak Oil Storage?

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Here’s how cheap US energy promises an ‘epic’ turnaround in the US economy…
 

MATT BADIALI is editor of the S&A Resource Report, a monthly investment advisory focusing on natural resources from Stansberry & Associates.
 
A regular contributor to Growth Stock Wire, Badiali has experience as a hydrologist, geologist and consultant to the oil industry, and holds a master’s degree in geology from Florida Atlantic University.
 
Here he tells The Gold Report‘s sister title The Mining Report that cheap oil prices and the economic prosperity they bring can make politicians and investors look smarter than they are. Hence Badiali’s forecast that Hillary Clinton…if elected in 2016…could go become one of America’s most popular presidents. Yes, really.
 
The Mining Report: You have said that Hillary Clinton could go down in history as one of the best presidents ever. Why?
 
Matt Badiali: Before we get your readership in an uproar, let me clarify that the oddsmakers say that Hillary Clinton is probably going to take the White House in the next election. Even Berkshire Hathaway CEO Warren Buffet said she is a slam dunk. I’m not personally a huge fan of Hillary Clinton, but I believe whoever the next president is will ride a wave of economic benefits that will cast a rosy glow on the administration.
 
Her husband benefitted from the same lucky timing. In the 1980s, people had money and felt secure. It wasn’t because of anything Bill Clinton did. He just happened to step onto the train as the economy started humming. Hillary is going to do the same thing. In this case, an abundance of affordable energy will fuel that glow. The fact is things are about to get really good in the United States.
 
TMR: Are you saying shale oil and gas production can overcome all the other problems in the country?
 
Matt Badiali: Cheap natural gas is already impacting the economy. In 2008, we were paying $14 per thousand cubic feet. Then, in March 2012, the price bottomed below $2 because we had found so much of it. We quit drilling the shale that only produces dry gas because it wasn’t economic. You can’t really export natural gas without spending billions to reverse the natural gas importing infrastructure that was put in place before the resource became a domestic boom. The result is that natural gas is so cheap that European and Asian manufacturing companies are moving here. Cheap energy trumps cheap labor any day.
 
The same thing is happening in tight crude oil. We are producing more oil today than we have in decades. We are filling up every tank, reservoir and teacup because we need more pipelines. And it is just getting started. Companies are ramping up production and hiring lots of people. By 2016, the US will have manufacturing, jobs and a healthy export trade. It will be an economic resurgence of epic proportions.
 
TMR: The economist and The Prize author Daniel Yergin forecasted US oil production of 14 million barrels a day by 2035. What are the implications for that both in terms of infrastructure and price?
 
Matt Badiali: Let’s start with the infrastructure. The US produces over 8.5 million barrels a day right now; a jump to 14 would be a 65% increase. That would require an additional 5.5 million barrels a day.
 
To put this in perspective, the growth of oil production from 2005 to today is faster than at any other time in American history, including the oil boom of the 1920s and 1930s. And we’re adding it in bizarre places like North Dakota, places that have never produced large volumes of oil in the past.
 
North Dakota now produces over 1.1 million barrels a day, but doesn’t have the pipeline capacity to move the oil to the refineries and the people who use it. There also aren’t enough places to store it. The bottlenecks are knocking as much as $10 per barrel off the price to producers and resulting in lots of oil tankers on trains.
 
And it isn’t just happening in North Dakota. Oil and gas production in Colorado, Ohio, Pennsylvania and even parts of Texas is overwhelming our existing infrastructure. That is why major pipeline and transportation companies have exploded in value. They already have some infrastructure in place and they have the ability to invest in new pipelines.
 
The problem we are facing in refining is that a few decades ago we thought we were running out of the good stuff, the light sweet crude oil. So refiners invested $100 billion to retool for the heavier, sour crudes from Canada, Venezuela and Mexico. That leaves little capacity for the new sources of high-quality oil being discovered in our backyard. That limited capacity results in lower prices for what should be premium grades.
 
One solution would be to lift the restriction on crude oil exports that dates back to the 1970s, when we were feeling protectionist. It is illegal for us to export crude oil. And because all the new oil is light sweet crude, the refiners can only use so much. That means the crude oil is piling up.
 
Peak oil is no longer a problem, but peak storage is. If we could ship the excess overseas, producers would get a fair price for the quality of their products. That would lead them to invest in more discovery. However, if they continue to get less money for their products, investment will slow. 
 
TMR: Is everything on sale, as Rick Rule likes to say?
 
Matt Badiali: Everything is on sale. But the great thing about oil is it is not like metals. It is cyclical, but it’s critical. If you want your boats to cross oceans, your airplanes to fly, your cars to drive and your military to move, you have to have oil. You don’t have to buy a new ship today, which would take metals. But if you want that sucker to go from point A to point B, you have to have oil. That’s really important. There have been five cycles in oil prices in the last few years.
 
Oil prices rise and then fall. That’s what we call a cycle. Each cycle impacts both the oil price and the stock prices of oil companies. These cycles are like clockwork. Their periods vary, but it’s been an annual event since 2009. Shale, especially if we can export it, could change all of that.
 
The rest of the world’s economy stinks. Russia and Europe are flirting with recession. China is a black box, but it is not as robust as we thought it was. Extra supply in the US combined with less demand than expected is leading to temporary low oil prices. But strategically and economically, oil is too important for the price to get too low for too long.
 
I was recently at a conference in Washington DC where International Energy Agency Executive Director Maria van der Hoeven predicted that without significant investment in the oil fields in the Middle East, we can expect a $15 per barrel increase in the price of oil globally by 2025.
 
I don’t foresee a lot of people investing in those places right now. A shooting war is not the best place to be invested. I was in Iraq last year and met the Kurds, and they’re wonderful people. This is just a nightmare for them. And for the rest of the world it means a $15 increase in oil.
 
For investors, the prospect of oil back at $100 per barrel is not the end of the world. With oil prices down 20% from recent highs and the best companies down over 30% in value, it is a buying opportunity. It means the entire oil sector has just gone on sale, including the companies building the infrastructure.
 
As oil prices climb back to $100, companies will continue to invest in producing more oil. And that will turn Hillary Clinton’s eight-year presidency into an economic wonderland.
 
TMR: The last time you and I chatted, you explained that different shales have different geology with different implications for cracking it, drilling it and transporting it. Are there parts of the country where it’s cheaper to produce and companies will get higher prices?
 
Matt Badiali: The producers in the Bakken are paying about twice as much to ship their oil by rail as the ones in the Permian or in Texas are paying to put it in a pipeline. The Eagle Ford is still my favorite quality shale and it is close to existing pipelines and export infrastructure, if that becomes a viable option. There are farmers being transformed into millionaires in Ohio as we speak, thanks to the Utica Shale.
 
TMR: What about the sands providers? Is that another way to play the service companies?
 
Matt Badiali: Absolutely. The single most important factor in cracking the shale code is sand. If the pages of a book are the thin layers of rocks in the shale, pumping water is how the producers pop the rock layers apart and sand is the placeholder that props them open despite the enormous pressure from above. Today, for every vertical hole, drillers create long horizontals and divide them into 30+ sections with as much as 1,500 pounds of sand per section. A single pad in the Eagle Ford could anchor four vertical holes with four horizontal legs requiring the equivalent of 200 train car loads of sand.
 
Investors need to distinguish between companies that provide highly refined sand for oil services and companies that bag sand for school playgrounds. Fracking sand is filtered and graded for consistency to ensure the most oil is recovered. Investors have to be careful about the type of company they are buying.
 
TMR: Coal still fuels a big chunk of the electricity in the US Can a commodity be politically incorrect and a good investment?
 
Matt Badiali: Coal has a serious headwind, and it’s not just that it’s politically incorrect. It competes with natural gas as an electrical fuel so you would expect the two commodities would trade for roughly the same price for the amount of electricity they can generate, but they don’t. The Environmental Protection Agency is enacting emission standards that are effectively closing down coal-fired power plants. And because it is baseload power, you can’t easily shut it off and turn it back on; it has to be maintained. That means it doesn’t augment variable power like solar, as well as natural gas, which can be turned on and off like a jet engine turbine. So coal has two strikes against it. It is dirty and it isn’t flexible.
 
Some coal companies could survive this transition, however. Metallurgical coal (met coal) companies, which produce a clean coal for making steel, have better prospects than steam coal. Along with steam coal, met coal prices are at a six-year low. 
 
Generally, I want to own coal that can be exported to India or China, where they really need it. Japan has replaced a lot of its nuclear power with coal and Germany restarted all the coal-fired power plants it had closed because of carbon emissions goals. We are already seeing deindustrialization there due to high energy prices. Cheap energy sources, including coal, will be embraced. I just don’t know when.
 
TMR: Thank you for your time, Matt.
 
Matt Badiali: Thank you.
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Oct 03

Silver "a Screaming Buy", Crude Oil "Going to $60"

Gold Price Comments Off on Silver "a Screaming Buy", Crude Oil "Going to $60"
The beautiful thing about pessimism towards junior precious metal miners…
 

KAL KOTECHA is editor and founder of the Junior Gold Report, a publication about small-cap mining stocks.
 
Kotecha has previously held leadership positions with many junior mining companies, and after completing a Master of Business Administration in finance in 2007, he is now working on his PhD in business marketing, and also teaches economics at the University of Waterloo.
 
Here Kal Kotecha tells The Gold Report‘s sister title, The Mining Report, that to obtain superior results, you cannot do what everyone else is doing. He maintains that much of the risk associated with junior resource equities has been beaten out by the herd mentality and that selectively buying what’s left presents opportunity…
 
The Mining Report: You’re the editor of Junior Gold Report, but you also follow similar-sized companies in the energy sector. Please give our readers an overview of the energy space.
 
Kal Kotecha: I’ve been involved in the space since 2002 and I’ve never witnessed anything like what is currently happening. In the energy sector, I see the price of uranium increasing, but to see price appreciation across energy stocks, the price of oil must remain near $100 per barrel. That benchmark could prove challenging, given the growing supply of shale oil in the US Texas produces as much oil as Iraq or about 3 million barrels of oil per day. Most of it comes from two sources: the Eagle Ford Shale in southwest Texas and the Permian Basin in west Texas. Chris Guith, senior vice-president of policy for the US Chamber of Commerce’s Institute for 21st Century Energy, estimates that recoverable resources amount to 120 years of natural gas, 205 years of oil and 464 years of coal at current demand levels.
 
Fracking has lowered the price of natural gas by about 70% over the previous seven years or so. The price of oil, especially in the US, should decrease to $60-70 per barrel on average because of shale oil. US dependency on imported oil should lessen, too.
 
TMR: Is that a near- or medium-term forecast?
 
Kal Kotecha: That’s a medium- to longer-term forecast. I don’t believe in peak oil theory. The US’ savior in the oil industry is going to be shale oil, and there is a lot of it. Ultimately, that’s going enhance the US economy. Basically everything runs on oil. The US won’t have to import as much oil from Saudi Arabia or even Canada.
 
TMR: What’s your price forecast for natural gas?
 
Kal Kotecha: Natural should stay between $4-6 per thousand cubic feet (Mcf). It’s more expensive in Europe, but in North America the floor should remain around $4/Mcf. I don’t think it’s going to go back up to $12 or down to $3.
 
TMR: You mentioned earlier that you expect uranium prices to rise.
 
Kal Kotecha: Uranium is an interesting space. As oil prices slowly decrease, the demand for uranium seems to increase. Geopolitical tensions, especially in Russia and Ukraine, could lead to much higher prices. Russia is a large uranium producer and Western nations might stop importing uranium from Russia if political fires burn much hotter.
 
As of last month, China had 21 nuclear power reactors operating on 8 sites and another 20 under construction. China’s National Development and Reform Commission intends to raise the percentage of electricity produced by nuclear power to 6% by 2020 from the current 2% as part of an effort to reduce air pollution from coal-fired plants. Ultimately, uranium demand will triple inside six years.
 
In India, the government is expected to spend nearly $150 billion to develop nuclear power over the next 10-15 years. India now has nuclear energy agreements with about a dozen countries and imports primarily from France, Russia and Kazakhstan.
 
TMR: In a recent note on Junior Gold Report you wrote, “I smell smoke, but where’s the fire?” in relation to the current sentiment in the junior precious metals market. What’s your conclusion?
 
Kal Kotecha: The current pessimism surrounding the junior precious metal space has largely contributed to the fall in price of the commodities, but the beautiful thing about pessimism and hate towards a market sector is that there is plenty of room for error. Fantastic opportunities arise when great companies have been undervalued due to negative news that does not have a long-term impact on the company. So how do you determine which stocks, in a beaten up resource market, are great buys?
 
TMR: Do you have an answer?
 
Kal Kotecha: One must understand the essential principles of intrinsic value and the margin of safety. The principle of intrinsic value determines the worth of a stock through a combination of the price and the condition of the company. So no matter how great a company is, it may not always be a good investment. As Howard Marks wrote in The Most Important Thing: Uncommon Sense for the Thoughtful Investor, investment success doesn’t come from buying good things, but rather from buying things well.
 
The principle of the margin of safety involves minimizing risk and then, therefore, minimizing the potential loss of one’s money. Dealing with risk is a necessary part of investing, as stock price fluctuations occur and are often unpredictable. If the risk perceived by the herd – general investors who follow the majority – is less than the actual risk, then the returns will outweigh the risks. So when consensus thinks something is risky, the general unwillingness to buy it pushes the price down to where it is no longer risky at all, given it still has intrinsic value, because all optimism has been driven out of the price.
 
TMR: What are some metrics to help investors?
 
Kal Kotecha: A junior mining company’s ability to produce resources at a cost below its market price is essential for its sustainability. Junior mining companies should be judged by their ownership of mines, the quality of these mines and how management has executed similar projects in the past. Determining whether this data has been incorporated into the stock price is essential when seeking undervalued companies. I think this is where a lot of resource investors get duped.
 
Do you smell the smoke? I suggest investigating the source. I’d say that the herd is done shouting fire, and smart investors are filling up their baskets with goodies. But don’t forget to do your research, check the facts and invest in a contrarian fashion. To obtain superior results, you cannot do what everyone else is doing.
 
TMR: Many investors have heard the adage “buy when there’s blood in the streets.” When should investors reasonably expect to start making money again, given the current market conditions?
 
Kal Kotecha: That’s a billion-Dollar question. A lot of colleagues have predicted prices that have not come true yet. The big upswing in gold in the late 1970s was followed by a collapse and we had to wait 20 years for another upswing. It’s already been three years. I don’t think we have to wait another 5 or 10 years, but there is going to be a time very soon where investors will be rewarded. I think when the upswing happens it’s going to be very parabolic. I think it’s going to take wings on its own. Patience will be rewarded.
 
TMR: What gold price are you using in your analysis?
 
Kal Kotecha: $1200 an ounce. Many factors go into determining the price of commodities, especially gold and silver. Some of these factors include price manipulation, which cannot be foreseen; geopolitical strife; and import quotas, which are happening in India. However, I remain very bullish on precious metals in the long-term.
 
The best buy right now is silver. Silver is a screaming steal at $18 per ounce. I first started buying silver at around $7 per ounce in 2003 and I sold quite a bit in the $48 range a few years ago. I’m starting to accumulate silver quite heavily again. The ratio of gold to silver prices is currently around 68:1. I see that going to 50:1. If there’s another precious metals mania, perhaps 25:1. Silver demand is also very high. A record 6,000 tonnes silver was imported into India last year – roughly 20% of global production.
 
TMR: What’s your advice for investors in the current junior resource market?
 
Kal Kotecha: I think a combination of five or six stocks in a portfolio with a mix of junior energy and mining equities is probably a good start. That’s what I do. It’s difficult for the average investor to follow more than five companies. 
 
TMR: Thank you for your insights, Kal.
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Sep 26

End of the Central Bank Gold Agreement

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Well, end of one CBGA, start of another. Which says a lot about the Eurozone crisis…
 

THIS isn’t your father’s gold market, writes Adrian Ash at BullionVault. It isn’t even the same market as 10 years ago.
 
Because the buyers are different. So too are the sellers. 
 
During the 1970s, demand was led by investors…primarily in the rich West. Whereas today, the biggest buyers by far are Asian consumers, as the World Gold Council notes in its latest Gold Investor report.
 
Despite much lower incomes, India and China save a huge proportion of their earnings…and spend an ever greater share on gold the more income they earn. 
 
This makes it a “superior good” says Professor Avinash Persaud. Commissioned by the World Gold Council to study world gold buying demand, he says it increases faster than household income or GDP…something we’ve noted of Chinese gold demand before. 
 
On the supply side too, the gold world has changed. Besides a small rise to record mining output, the key source of the last 5 years was “scrap” sales from people needing to raise cash amid the financial crisis (a flow that’s now drying up. Fast). During the 1980s and 1990s, in contrast, central banks were the big source of existing above-ground metal, selling it down as prices fell…and worsening the drop by helping gold miners “hedge” their production by lending them metal to sell as well. 
 
Instead of the gold, Western central banks bought more “productive” assets. You know, like US Dollars, Euros, and government debt. 
 
Come the financial crisis however, central banks as a group worldwide turned into net buyers for the first time since the mid-1960s. First because emerging-market nations wanted to lose some of the Dollars piling up in their vaults (thanks to America’s perpetual trade deficit). Second because Western central banks…most notably in Europe…decided that selling gold during a crisis isn’t so clever. 
 
So, despite having an agreement in place to cap annual sales…aimed at avoiding the clumsy, price-damaging gold sales made by the UK in 1999…central banks in the West have stopped selling gold altogether. We think that’s likely to stay true all through the new 5-year agreement, signed in May and running from tomorrow until September 2019. 
 
The current CBGA (as we gold nerds know it) has seen European states sell barely 10% of their agreed limit. The new agreement doesn’t bother setting a cap at all. That might suggest they’re secretly planning big sales in future. But on the contrary, the lack of sales under the current CBGA made its 400 tonnes per year limit look stupid. 
 
Fewer than 18 tonnes were sold over the last 3 years in total…all of them from the German Bundesbank to mint commemorative coins. 
 
Just what would be the point of setting a sales limit from here? Fact is, central banks sell gold when times are good. They buy or hold when things are bad. They are not selling today.
 
We don’t think Eurozone central bank chiefs have any plans to sell until 2019 at the soonest. We do think there’s a message in there about the Eurozone crisis.
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Sep 26

Rising GDP "Boosts Consumer Demand" to Buy Gold

Gold Price Comments Off on Rising GDP "Boosts Consumer Demand" to Buy Gold
Consumers buy 5% more gold for every 1% rise in GDP, study shows…
 

GOLD BUYING is boosted more by rising GDP and stronger consumer incomes than by financial crisis, according to a new study from a world-renowned economics professor.
 
Defying the developed West’s common belief that gold is only for bad times, the report confirms what market-development organization the World Gold Council calls “gold’s positive duality: its ability to benefit from both the contraction and expansion phases of the business cycle.”
 
The econometric study comes from Avinash Persaud – emeritus professor at Gresham College, visiting fellow at CERF-Cambridge University, and governor of the London School of Economics – who was commissioned by the World Gold Council to study consumer versus investment gold buying both globally and in 11 key countries.
 
Over the last five years, world demand to buy gold jewelry has accounted for 48% of annual purchases, and a further 10% has gone to electronic products such as PCs and smartphones. With central banks buying 7% on average, and despite the global financial crisis, gold investing has accounted for less than consumer demand – some 35% per year since 2009.
 
“The new analysis,” says the Council, presenting Professor Persaud’s findings, “shows that a 1% increase in GDP lifted jewellery consumption by an average of 5%, all else equal.” Because “gold jewellery is what economists refer to as a ‘superior’ good,” says Persaud, “where demand increases proportionally more than income.”
 
The same 5:1 relationship applies to electronics demand compared to GDP growth, too.
 
Although gold investment demand is “much smaller” than jewelry buying, however, “shifts in investment demand can be large and play a critical swing role in the market,” Persaud cautions.
 
Gold investment, agrees the World Gold Council’s commentary, “can exert strong pressure on prices over the short (and potentially medium) term.
 
“However, the longer-term trend is more closely linked to global consumption, savings and, at the same time, by the availability of supply.”
 
China gold buying vs, income per capita (World Gold Council)
 
India and China lead world demand to buy gold, accounting for one ounce in every two sold worldwide last year. Asian households’ propensity to buy gold is far greater than Western consumers’, the report says, because they “typically devote more money to savings” with a real average saving rate around 30% of income.
 
India gold buying vs. income per capita (World Gold Council)
 
Even so, half of US gold buying “is [also] linked to consumers”. US jewelry fabrication will rise 6% this year from 2013, according to leading consultants Thomson Reuters GFMS in the latest Update to their Gold Survey 2014.
 
On the supply side, says GFMS, US scrap sales – which soared as prices rose during the financial crisis, enabled by companies like Cash4Gold – fell 17% in the first half of 2014 from a year ago.
 
Such recycling flows from consumer worldwide fell 9% “as the need to raise funds by cashing in gold assets dwindled,” the consultancy says, “due in large part to an improved US economy.”
 
“Given a strong price elasticity of demand in many countries,” says Professor Persaud – pointing to Asia’s huge move to buy gold on 2013’s thirty per cent price drop – “a trebling in the gold price [from 2009-2014] should have led to an even greater decline in gold jewellery consumption, and if prices were to stay high, a permanent decline in consumption.
 
“However, jewellery consumption is also highly sensitive (elastic) to rising income.”
 
In short, concludes the World Gold Council, “It seems reasonable to suggest that positive GDP growth will not necessarily be negative for the gold market.”
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Sep 24

India’s Changing Gold Culture

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India has been the world’s No.1 gold buyer for thousands of years. But traditions are changing…
 

TODAY marks the last day of Shradh, writes Adrian Ash at BullionVault, the period of “closed observance” on Hindu calendars when it’s deemed “inauspicious” to start new ventures or make new investments.
 
The end of Shradh has a political angle. Also known as Pitru Paksha, the early autumn shutdown has been used to delay nominations for upcoming elections, reports The Times of India.
 
Fighting such “superstitions” can be dangerous. Rationalist campaigner Narendra Dabholkar was murdered in summer 2013 when pushing anti-superstition laws. This summer’s delay to India’s electoral process has angered many who want to reduce what they see as the stifling (and corrupting) effect of India’s deep culture of religious observance.
 
Gold looms large in that culture of course (and also in India’s huge bribery and corruption culture). The peak demand season in the world’s heaviest consumer market starts now, running on until Diwali at the end of October. But long term, many analysts think the wider availability of luxury goods in India will dent India’s gold demand, overcoming superstition where rationalism cannot. Many financial services providers think the same of their products…from bank savings to stock-market funds.
 
India’s younger citizens are indeed breaking with tradition over gold, suggests this story on Mineweb. But not how Western observers might expect. Instead, some younger people have broken Shradh to buy gold at the recent low prices.
 
Forecasts of Asian households “substituting” out of gold into hi-tech consumer goods and packaged financial services are as old as the global bull market in gold, if not older. But they’ve proven very wrong to date. The only thing to dim India’s appetite for gold has in fact been government anti-import rules…imposed because 2013’s demand was so huge in response to the price slump.
 
India’s gold industry is finding ways around that…literally smuggling gold in “through the backdoor” (ahem) as one expert analyst joked to me last week. News today also says the old VAT round-tripping scam…where the same metal is imported and then re-exported in a loop to earn sales tax rebates illegally…has found a new use, helping get around India’s strict and stifling 80:20 rule.
 
Ancient Rome’s Pliny the Elder started the trend of European commentators calling India the “sink of the world for bullion” more than 2,000 years ago. Can that culture, and the flow of metal West to East it has demanded for so long, ever be changed by flat-screen TVs or iPhones?
 
Keep a close eye on how India’s demand…and the floor it’s clearly helped put beneath gold prices to date…develops as Diwali investing, gift-giving and temple offering draws near in 2014.
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Sep 18

Bad News for Gold from the Strong Dollar

Gold Price Comments Off on Bad News for Gold from the Strong Dollar
Expect a drop to $1200 near-term, says a man who called the bull market in 2001…
 

ERIC COFFIN is the editor of the HRA (Hard Rock Analyst) family of publications.
 
With a degree in corporate and investment finance, plus extensive experience in merger and acquisitions and small-company financing and promotion, Coffin has for many years tracked the financial performance and funding of all exchange-listed Canadian mining companies, and has helped with the formation of several successful exploration ventures.
 
One of the first analysts to point out the disastrous effects of gold hedging and gold loan-capital financing in 1997, he also predicted the start of the current secular bull market in commodities based on the movement of the US Dollar in 2001 and the acceleration of growth in Asia and India. 
 
Now Coffin tells The Gold Report how the continuing strength of the US Dollar is bad news for the price of gold, and believes that in the short term a price of $1200 per ounce is possible, though there is room now for an oversold bounce…
 
The Gold Report: You told us last year you were “neutral” on the state of the US economy. Since then, the headline unemployment number has improved. Even so, as David Stockman, former director of the Office of Management and Budget, says, there have been no net new jobs created since July 2000, and jobs paying over $50,000 per year have disappeared by 18,000 per month since 2000. What is your view of the health of the US economy?
 
Eric Coffin: I’m more positive than neutral these days, but I do agree somewhat with Stockman. As unemployment falls toward 6%, we would expect an increase in wage gains. But we’re just not seeing that. And five years into the latest expansion, we’re not seeing the economic growth spurts that tend to occur coming out of a really bad recession. I don’t see how the US economy keeps reproducing the 4% growth of Q2 2014 if we don’t see higher wage gains and higher paying jobs created.
 
TGR: You’ve used the term “smack down” with regard to the recent falls in the gold price. What do you mean by this?
 
Eric Coffin: It’s a wrestling term and means being thrown to the mat. This is what has happened to gold time after time, after every uptrend. The current smack down is due more to strength in the US Dollar than anything else. Gold does trade as a currency sometimes and for the past few weeks it has held a strong inverse correlation to the US Dollar. I think physical demand will ultimately determine the price level, but ultimately it can be a long time when you’re trading.
 
TGR: Why isn’t physical demand determining the price now?
 
Eric Coffin: It’s because of trading in the futures market. When somebody dumps 500 tons there, gold has to drop $200 per ounce. The futures market can overwhelm the physical market in terms of volume and often does. Most traders in the futures market (NYMEX or COMEX) are not buying gold and taking delivery. They are trading as a hedge, or just trading. The physical market, the place where people actually buy bullion, coins and bars, is not predominantly in London or New York but rather in China and India. And because of the smuggling that has arisen in India to circumvent increased tariffs, and imports moving to cities that do not release import statistics in China, it is difficult to know how much bullion Asia is buying right now.
 
TGR: Large short-term trades in paper gold could be used to manipulate the market, and an increasing number of people believe gold is being manipulated downward in this manner. Do you agree?
 
Eric Coffin: I’m not really a conspiracy guy. That said, when we see things like the sale in August of 400 tons in about 10 minutes, we have to wonder what’s going on. Again, when Germany requests its gold from the US and is told delivery will take seven years, it makes you wonder how much of that gold has been hedged or lent already.
 
TGR: Where do you see gold going for the rest of the year?
 
Eric Coffin: I think we are going to be trapped in this currency trade cycle for a little while. The European Central Bank (ECB) cut its rates. One of its deposit rates is now negative. Mario Draghi, the president of the ECB, is talking about starting up quantitative easing. If that happens, or if traders believe it will, the Euro, which has already fallen from $1.40 to about $1.28 to the Dollar, could fall to $1.20 or $1.10. And this strengthening of the Dollar is not good for gold.
 
The other factor of gold being traded on a currency basis is the possibility of Scottish independence, fear of which has already resulted in a significant decline in the British Pound.
 
TGR: Will $1250 per ounce gold lead to gold miners suspending production?
 
Eric Coffin: If gold stays at $1200-1250 per ounce for an extended period, there will be mine closures. Obviously, not all mines have the same costs, but the average all-in cost per ounce for gold miners is about $1200 per ounce. Already, some mines are high-grading to keep profit margins up.
 
Most of the large miners have already cut exploration budgets pretty significantly. We can assume that the pipeline is going to get smaller and smaller when it comes to new projects, even high-quality projects.
 
TGR: How badly will this gold price decline hurt the junior explorers?
 
Eric Coffin: It’s hurt a lot of them already. It’s much more difficult to raise money than it was two or three years ago, although it’s probably slightly better now than early this year. That could change on a dime, of course, if the gold price falls to $1200 per ounce or rises back through $1300 per ounce. Already, quite a few companies are keeping the lights on but not much else. We desperately need a few good discoveries – companies going from $0.20 to $5/share and getting taken out. 
 
TGR: You’ve been visiting mine sites in the Yukon. What do you like about this jurisdiction?
 
Eric Coffin: It’s a great area geologically, but it has some challenges. It can be an expensive place to work, so being close to infrastructure or designing an operation that doesn’t require a huge amount of nearby infrastructure is critical. Power costs are a big item. There’s no end of places in the Yukon where hydropower could be generated fairly cheaply, but that is not going to happen on a large scale unless the federal government steps up, and that would be nice to see.
 
TGR: How does Alaska compare to the Yukon as a mining jurisdiction?
 
Eric Coffin: They’re similar in many ways. Alaska, like the Yukon, is not low-cost, but it is mining friendly and even farther down the road when it comes to settling aboriginal issues. The key to success in Alaska is being close to the coast or major population centers or infrastructure.
 
TGR: How do you rate copper’s prospects?
 
Eric Coffin: There are several large producers that have either recently come onstream or will come onstream in the next few months. So copper is probably going to be in at least a small surplus for the next year or two. The price could fall back to $2.50-2.75/pound ($2.50-2.75/lb). I’m not terribly concerned about that. Copper should be fine in the long term and a good copper operation can make plenty of money at those prices.
 
TGR: The bear market in the juniors is now 3.5 years old. Should investors expect a general upturn any time soon?
 
Eric Coffin: I doubt it if you mean a broad market rise that lifts all boats. My expectation at the start of this year, which is looking fairly dodgy right now admittedly, was for a 30% TSX Venture Exchange gain for 2014. That is possible with only a small subset of companies doing very well, which is my expectation. Investors always want to look for the tenbaggers. It doesn’t matter what the market is like and, obviously, potential tenbaggers often turn into actual one and a half or two baggers, which is just fine. You want to find the projects with the highest potential for resource growth or new discovery and management teams that know how to explore them and finance them on the best possible terms. That is the combination that gives you the potential biggest wins.
 
TGR: Eric, thank you for your time and your insights.
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Sep 18

"Gradual" Gold Bull Market to Start 2015, "Next Floor at $1200" Says GFMS

Gold Price Comments Off on "Gradual" Gold Bull Market to Start 2015, "Next Floor at $1200" Says GFMS
Further gold price falls seen before flatter mine output meets new inflation concerns…
 

GOLD’s decade-long bull market is set to resume in 2015, albeit “gradually” from a new bottom according to a new forecast from the market’s leading data analysts, Thomson Reuters GFMS.
 
Thanks to gold’s rally over the first half of 2014 from $1200 to $1400, the consultancy says today in the first Update to its Gold Survey 2014, “Price sensitive [consumer] markets have seen sales slow.
 
“We believe it will take prices in a $1200-1250 range in order for physical buying from Middle Eastern, East and South East Asian markets to begin to increase.”
 
Low volatility and gold’s tightening price range form “the other defining feature” of the 2014 market to date, GFMS adds, noting that volatility on a 100-day basis has fallen to its second-lowest level since 2005, “undermin[ing] trade volumes.”
 
Launching the Update on Thursday, “The lack of a clear price direction,” said Rhona O’Connell, the London-based consultancy’s head of metals research and forecasts, “[plus] the expectation of lower prices have been key drivers in deterring purchases among private buyers and a similar mentality has prevailed in the professional sector.”
 
A recovery in European economic growth is “pivotal” to GFMS’s longer-term gold price forecast, because only then will investor attention focus on the “inflationary pressures” built up by what it calls “the massive injections of liquidity into the financial system” from central banks worldwide over the last 7 years of financial crisis.
 
China’s central bank reportedly injected $81 billion of cash into the country 5 largest banks this week. The European Central Bank is scheduled to begin a new round of cheap, open-ended bank lending today.
 
“There has been a whiff of professional investor interest [in gold] this year,” Thomson Reuters GFMS says, “but this is still very tentative” thanks to US tapering of the Federal Reserve’s quantitative easing program, plus the perceived risk of rising interest rates once tapering ends.
 
Noting the problems facing Middle Eastern gold demand thanks to political and military strife, “Any price fall towards $1200 is expected to see a strong resurgence in physical interest” from price-sensitive consumer markets, says O’Connell.
 
Demand from China in particular has been stifled so far in 2014 by consumers’ bargain-hunting on last year’s price crash, plus huge stockpiling by wholesalers.
 
Year on year, the first half of 2014 saw gold bar investment demand fall 50% globally, with a greater drop in both China and India – the world’s top 2 consumer nations.
 
Gold prices at $1200 now mark “the next big level to watch on the downside,” says GFMS – a level likely to be seen “in the coming months”.
 
But with central banks in emerging economies “continu[ing] a sustained strong buying policy,” GFMS also forecasts global gold mining output will peak and then plateau from 2014. Coupled with a likely return of inflation concerns, this should see “the fundamental position” of the gold market’s supply and demand balance “start to tighten during 2015 as underlying demand strengthens, taking the market into a deficit.
 
“The price is therefore expected to bottom out during 2015 before embarking on a gradual bull market.”
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Sep 17

Shanghai Gold Trading: The Real Challenge to London

Gold Price Comments Off on Shanghai Gold Trading: The Real Challenge to London
If China remains a one-way street for gold, it cannot become the world hub…
 

SHANGHAI this week launches a new international gold exchange inside the city’s free-trade zone, writes Adrian Ash at BullionVault.
 
Most everyone thinks this is important because “global gold traders [see] the zone as a gateway to China‘s huge gold demand.” But that’s the wrong way round. Because if it’s to have any real importance, the Shanghai FTZ gold bourse must mark a step towards China’s gold output and private holdings flowing out into the world, not the other way round.
 
Start with the situation today. China and the UK could hardly be more different when it comes to gold. China is the world’s No.1 gold-mining producer, the No.1 importer, and the No.1 consumer.
 
The UK in contrast…and despite spending its way to household debt worth 140% of income…has no gold jewellery demand to speak of. Private investment demand is also tiny compared to Asia’s big buyers
 
On the supply-side the UK hasn’t had any gold-mine output worth noting since 1938. Nor does it currently have any market-accredited refineries for producing large wholesale bars.
 
So you might think China plays a bigger role in the international gold market than does the UK. Yet nearly 300 years since it first seized the job, London remains the center of global gold flows, trading and thus pricing. For now at least.
Net UK gold imports, monthly data in tonnes, 2005-2014
 
Since 2004, and with no domestic mine output and next to no end demand, the UK has imported over 6,800 tonnes of gold, according to official trade statistics – more than China but behind India, the former No.1 buyer. It has also exported nearly 5,000 tonnes, more than any country except No.1 bar refiner, Switzerland.
 
That’s in a global market seeing some 4,500 tonnes of end-user demand per year. Because London is the heart of the world’s gold bullion market, and the central vaulting point for its wholesale trade. (Same applies to silver, by the way – the UK was the world’s No.1 importer and exporter in 2013.)
 
The relationship with prices is clear. When UK trade data (hat tip: Matthew Turner at Macquarie) show metal piling up in London’s vaults (which also offers the deepest, most liquid place for large investors to hold their gold in secure vaults, ready to sell or expand at the lowest costs) prices have tended to rise. But when the rate of accumulation in London is slowing, prices have tended to fall. Gold prices have sunk when London’s vaults have shed metal. 
 
On BullionVault‘s analysis, those months since end-2004 where Dollar gold prices rose saw net demand for London-vaulted gold average 38 tonnes. Falling prices, in contrast, saw London’s vaults lose 16 tonnes per month on average (imports minus exports). Exclude the gold-price crash of 2013 and we get the same pattern. Average net inflows when Dollar price fell were only 15 tonnes per month between 2005 and 2012. Rising prices, in contrast, saw London vaults add 48 tonnes net on average per month.
 
So what’s happening with London-vaulted gold really does matter to world prices. Far more, to date, than what’s happening to China’s flows.
 
Why? The Middle Kingdom’s modern gold boom has come in mining, importing and refining. But in exports it just doesn’t figure. Because bullion exports are banned, thanks to Beijing deeming gold to be a “strategic metal”.
 
Never mind that China now boasts 8 gold refineries accredited to produce London-grade wholesale bars. Out of a world total of 74, that’s more than any other country except Japan. But Chinese-made wholesale bars never reach London (or shouldn’t…) because they are dedicated by diktat to meeting its world-beating domestic demand alone.
 
China’s inability to export gold bullion puts a big block on it affecting world prices. Because while metal is drawn into China when domestic prices rise above London quotes (the so-called “Shanghai gold arbitrage” trade) it cannot flow the other way when Shanghai goes to a discount. Traders can only exploit the price-gap through in one direction.
 
Global investment flows are further locked out by Beijing’s block on foreign cash coming into China – another key difference between the UK and China in all financial trading, not just gold. Shanghai vaults have therefore been closed to international gold investment to date. So the impact of global flows on pricing has completely passed China by.
 
This may change this week however, when the Shanghai Gold Exchange launches its new international gold exchange inside the city’s huge free-trade zone on Thursday. Six major Chinese banks will provide clearing and settlement services. The first 40 approved members of the exchange include London market makers HSBC, UBS and Goldman Sachs. But whether global investors will choose to hold gold in Shanghai vaults remains to be seen. China remains a Communist dictatorship, after all. Whereas London, even in the dark days of 1970s exchange controls – which barred UK investors from buying gold, as well as moving cash overseas – still freely allowed foreign money to come and go as it pleased, not least through the City’s world-leading gold and silver markets.
 
Remember, China’s gold market has only answered Chinese supply and demand so far. Its mine-supply leads the world…but cannot reach it. China’s demand has meantime needed imports from abroad to supplement what Chinese mines produce. That demand leapt when world prices fell in 2013, doubling China’s net imports through Hong Kong from 2012 to well over 1,000 tonnes, and clearly showing that – for now – its gold market remains a price taker, not a price maker. The running is made instead by free-flowing investment cash choosing to buy or sell down gold holdings worldwide, and that decision shows up in London, center of the world’s bullion trade.
 
Yes, Shanghai’s new free-trade zone gold market marks one step towards changing that. Yes, the FTZ is very likely to replace Hong Kong as the stop-off point for gold imports entering the world’s No.1 consumer market. But only a truly liberalized gold trade, with foreign cash and gold flowing in…and out…right alongside China’s domesic flows will challenge London’s 300-year old dominance.
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Sep 13

Cash First, Then a Catalyst

Gold Price Comments Off on Cash First, Then a Catalyst
Better yields from better mining will lead investment cash back into gold stocks…
 

JEFF KILLEEN has been with the CIBC Mining Research team since early 2011, covering and providing technical assessment of junior and intermediate exploration and mining companies worldwide.
 
Prior to joining CIBC, Killeen worked as an exploration and mine geologist in several major mining camps, including the Sudbury basin and the Kirkland Lake region. Now he has spent much of 2014 on the road vetting junior mining projects, and says – speaking here to The Gold Report – that the cash-and-catalyst mindset should remain prevalent for investors looking at explorer and developer equities…
 
The Gold Report: Two years ago CIBC World Markets recommended taking a short position on a selection of gold stocks. What’s CIBC’s view on gold stocks today?
 
Jeff Killeen: We had put out a basket of names recommending some short positions, but at that time gold was trading at about $1600/ounce ($1600 per ounce) and there was little support for the price at that level. That dynamic doesn’t seem to be at play in today’s environment. We are maintaining our current recommendation: Investors should be at market weight with respect to their gold equity allocations.
 
Many mining stocks have performed well in 2014 and the move has largely been motivated by several factors. First, gold bullion itself has found a footing. The gold price has traded in a range of $1250-1,350 per ounce, which is fairly narrow compared to how gold prices have moved in the past three to five years. Investors are becoming comfortable with the idea that gold will remain range bound for the coming 12 months or more, and concerns that gold could drop significantly over a short period seems to be waning with gold seeing support around $1250 per ounce.
 
While some profit taking on strong first half share performance is certainly justifiable, I continue to recommend buying gold stocks with a focus on companies that are currently generating healthy margins and could enjoy higher trading multiples as they gravitate up toward longer-term averages. I also like gold stocks that have underperformed relative to their peers in 2014 that are projecting improving operations or have meaningful catalysts in the near term.
 
TGR: What do you expect the trading range for gold to be through the end of 2015?
 
Jeff Killeen: Our gold price estimate for 2015 is $1300 per ounce. Next year is likely to look a lot like 2014 with typical seasonal moves and maintaining that price range of roughly $1250-1,350 per ounce for the year.
 
TGR: Do you think the Market Vectors Junior Gold Miners ETF (GDXJ:NYSEArca) will be up another 30% through the first eight months of 2015?
 
Jeff Killeen: That would be difficult. There could be stocks that realize some strong performance in the back half of this year and into next year, but I don’t think it will be as broad based as we saw early in 2014.
 
TGR: In the near term do you expect gold buying to gain steam or have seasonal gold buying trends become something of the past?
 
Jeff Killeen: We’ve spent a lot of time tracking gold’s seasonal price patterns over 5-, 10- and 15-year trends. Plotting the relative performance of gold prices over those periods shows a fairly consistent seasonal pattern. A move in the gold price in early June on the back of geopolitical tensions was unexpected and may have taken some of the steam out of a fall rally, but we need to realize that the typical fall rally is largely spurred by physical demand from the East. I don’t see a reason why typical physical demand wouldn’t materialize in 2014 and we expect the gold price to do well over the next few months.
 
TGR: One division of CIBC World Markets uses quantitative models to identify predictive relationships and broad market trends. What are these models telling investors about small-cap gold stocks and the gold space?
 
Jeff Killeen: Our quantitative analyst, Jeff Evans, has been promoting the idea that gold stocks, especially the more volatile small- to mid-cap gold stocks, have high beta outperformance relative to the S&P 500 and the Toronto Stock Exchange given the current environment for stable or marginally upward moving interest rates over the long term. That’s from a technical standpoint.
 
With that in mind, we have to be cognizant of the fact that we’ve seen better downside support and some strong moves in the gold price in 2014 that weren’t necessarily expected and I’m sure that has helped move some gold stocks upward. But interest rates are having an effect on how people look at gold and gold equities, and using that as a trigger to buy or sell gold stocks makes sense to me.
 
TGR: In June 2013 positive news had largely stopped moving equity prices. You told us then that it would be temporary. What news is moving producer and developer equities in this market?
 
Jeff Killeen: On the producer side, improving operations has been the biggest motivator for share prices. Although I expect a lot of the cost improvements in the gold mining space have already been incorporated into operations, the market is thinking about how sustainable those cost improvements might be. Companies that maintain lower costs through 2014, relative to where they may have been in previous years, are likely to get attention as investors think about 2015 performance and if they should consider increasing their estimates for company earnings and cash flow. Such a scenario could generate further share support for good operators. Of course, companies that realize further cost improvements in the second half of 2014 are also likely to get investors’ attention.
 
TGR: What about developers?
 
Jeff Killeen: On the developer side, we’re starting to see share prices get rewarded for good drill results, resource growth and even new discoveries. When we spoke back in mid-2013 I recommended that investors stick to the cash-and-catalyst mentality, because an exploration stock needs to have a strong balance sheet and material near-term catalysts [ie, news likely to send the stock higher]. That approach was the right one and I’d stick with that concept today.
 
TGR: Would you make any modifications to the cash-and-catalyst thesis given what has transpired between then and now?
 
Jeff Killeen: Cash and catalysts are not the only components that a company must have. The main project has to have gold grades that are amenable to the type of process it is proposing, and the economics have to work at current gold prices to have a realistic chance of seeing a takeover offer. A company definitely has to have a solid management team to navigate today’s tricky financing waters or wisely allocate capital.
 
TGR: Which types of companies are seeing interest from institutional investors?
 
Jeff Killeen: My producer coverage is in the small to intermediate market cap in the gold space. The intermediate producers tend to have a higher beta to the bullion price so that segment of my coverage seems to have sustained greater institutional interest in 2014. Despite some merger and acquisition (M&A) activity in 2014, the general feeling among investors is that although M&A is likely to continue, it’s expected to come in the form of smaller consolidations or the sale of noncore assets by majors. In that context, exploration companies are struggling to attract attention from the institutional market.
 
TGR: One recent drill result at TV Tower was 130.9 meters grading 1.5 g/t Au and 0.48% Cu starting at surface. You model results like these all the time. What does that look like to you?
 
Jeff Killeen: No project is a single drill hole, but to have a single hole with those kinds of numbers is an excellent start. If you put several intercepts like that together you can quickly build pounds and ounces. Being able to validate a surface geological interpretation is big and a great starting point for any drill program.
 
TGR: What’s your sense of where we are in the recovery of precious metals equities?
 
Jeff Killeen: I get the feeling that we have hit the bottom and taken the first leg up – but the next leg up could take some time to materialize. There are individual stocks that should have good performance through the back half of 2014 and over the next 12 to 18 months.
 
From a broader perspective, a lot of the cost improvements have already materialized and I think there is little producers can do to significantly improve margins or cash flow. To accomplish those things we need to see a few things happen: more fundamental support from the gold price and an increase in physical demand in India and the rest of Asia. Better yields will catalyze the generalist investor back to investing in gold stocks.
 
TGR: Thank you, Jeff, for your insight.
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Sep 08

India’s Gold Deposit Scheme Targets "Easy" 200 Tonnes

Gold Price Comments Off on India’s Gold Deposit Scheme Targets "Easy" 200 Tonnes
Refiner MMTC-Pamp aims to mobilize household gold as CAD hits 1-year high…
 

INDIA’s much-awaited gold deposit schemes can “easily” unlock 200 tonnes per year from existing household stockpiles, according to state-backed refiner MMTC-Pamp, helping boost legal supplies and reduce smuggling in the world’s No.1 gold-buying nation.
 
“The annual [private-sector] requirement is around 900 tonnes,” said managing director Rajesh Khosla last week, “and the economy can afford to import around 700 tonnes.
 
“The balance will be easily bridged by effective schemes.”
 
With no domestic mine output, India’s world-beating gold demand has to date been met by imports from abroad. But surging demand on the gold price crash of spring 2013 helped take the country’s current account deficit (CAD) with the rest of the world to record levels near 5% of GDP.
 
Faced with a sharp drop in the Indian Rupee’s exchange rate, the government and central bank responded with a raft of anti-gold import rules, effectively shutting legal inflows in summer 2013. Since then, and with perhaps 25,000 tonnes of gold held by Indian households and temples – the world’s heaviest buyers until mid-2013’s strict rules – banks and government officials have repeatedly talked about “mobilizing” some of India’s existing stockpiles.
 
MMTC-Pamp – a joint venture between the state-owned refiner MMTC and Switzerland’s Pamp – says it is now working with commercial banks to launch a savings account with a 3-year term, into which consumers can deposit physical gold.
 
The depositor’s gold will be sold to help meet new consumer demand. Then, on maturity, says managing director Khosla, “the interest is [paid] not in Rupees but in gold and the investor has more gold in the account.”
 
Similar gold deposit schemes announced by the All India Gem & Jewellery Trade Federation last October as ‘Suvarna Nivesh Yojna’ still have yet to launch, because although “the previous regime was happy, [it] could not decide upon” details, according to the GJF.
 
Illegal gold smuggling into India since the anti-import rules were introduced last summer has been estimated at perhaps 200 tonnes by market-development organization the World Gold Council.
 
In the last 2 months alone, security agents at Delhi’s Indira Gandhi Airport have recovered nearly 6 kilograms of gold – worth a quarter of a million US Dollars – from toilets in Terminal 3.
 
“The toilets,” says India Today, “are being used by inbound smugglers as a place to leave the gold, where it is picked later by an accomplice, almost always an airport employee.”
 
A slight relaxation of India’s gold rules in June saw imports of the metal jump 65% from May, helping take India’s CAD to a 1-year high during the April-June quarter at 1.7% of GDP.
 
News of that surge comes as trade body the GJF says investment gold sales fell 70% over the last 5 months compared with the same period in 2013.
 
The rising import level, says precious metals analyst Jonathan Butler at Japanese conglomerate Mitsubishi, “adds to evidence that physical gold demand in India is improving.
 
“With the busy wedding and festival season now getting underway, this may indicate a degree of price support for gold from the physical side in the coming weeks.”
 
Despite failing to roll back the key anti-gold import rules as many jewelers and supporters expected, India’s new BJP government – led by Narendra Modi – is likely to be relaxed about the rising CAD, other analysts believe.
 
“The deficit is getting easily financed,” Bloomberg quotes Nomura bank’s chief economist in Mumbai, Sonal Varma.
 
“As the economy grows, imports will grow, so there will be some widening in the CAD. But we don’t expect it to be above sustainable levels.”
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