Metals futures pare gains after GDP falls

In the Lead

It was not a very good day however in the mining niche on Thursday. Again. Goldcorp Inc. reported a tumble in QII earnings in the wake of operational difficulties and soaring cash costs in its Mexico and Canada-based Penasquito and Red Lake mines. The firm reported doubled gold cash costs of $370 an ounce and sales of only 532,000 ounces. Profits fell to $268 million on the quarter. Top global gold miner Barrick advised of a 35% drop in quarterly profit and a similar batch of bad news on rising costs pertaining to its Pascua-Lama mine in South America. Barrick reported cash costs of $613 per ounce of gold.

Meanwhile, gold is trading at roughly 2.5 times higher than the above-mentioned cash costs and investors in mining shares are licking some deep financial wounds at a time when they should be laughing all the way to the bank. Some specialists have warned that unless miners get their cost-control pencils nice and sharp the blood-letting will continue unmitigated. It might just be a good idea for some of these firms’ CEOs to cease making public forecasts for multi-thousand dollar gold prices and commence focusing on making their own shares shine irrespective of where gold is, or will be.

Trouble of another type is plaguing another large gold and copper miner. Newmont’s near-$5 billion Minas Congas project (the biggest foreign investment in Peru’s history if we discount Senor Pizarro’s long ago mission) has run into such strong opposition that the Humala government has itself run into trouble. One third of Peru’s denizens do not want their nation’s underground treasures to be owned by overseas firms. Minas Congas is estimated to be eventually able to produce nearly 200 tonnes of gold worth almost ten billion dollars. The press anticipates that President Humala might have to touch on the sticky issue in his address to the nation on Saturday (ironically, Peruvian Independence Day).

When it comes to gold and gold mining investments going sour, one could query John Paulson how he currently feels about the large hoard of such assets that he has amassed in anticipation of stellar profits to come. Mr. Paulson has been hard at work trying to repair the damage in his Advantage and Gold funds this year. The latest hit to performance has come from the 33% slump that the shares of NovaGold (13% owned by Mr. Paulson’s hedge fund) experienced on Thursday. Prior to that estimated $64 million loss related to Nova, Mr. Paulson’s investments in AngloGold Ashanti had recorded a 22% decline this year on top of a 14% whack in 2011. He may have also have posted a paper loss of $2.56 million on shares of Barrick on Thursday.

Finally, for some more weekend reading, here is one of the most cogent observations and best conclusive statements in recent times about so-called gold manipulation. It was posted on SeekingAlpha this week by regular contributor Vince Martin. While Mr. Martin’s supply of invective-laden e-mails might well surge after he has written such ‘heretical’ sentences, we can only say “Kudos!” and applaud his keen (and valid) take on the thorny topic:

“The belief in a coordinated manipulation of gold -- which is destined to fail as its predecessor the London Gold Pool did, and result in massive short-covering and an exponential increase in gold prices -- is erroneous, and dangerous. It creates expectations which most likely cannot be met, resulting in an over-attachment to gold (and gold miner equities) and, potentially, dangerously ill-conceived portfolio allocation.”

This, we have (sadly) seen in ample supply over the past decade.

Mr. Martin’s advice? “Whether investing in physical gold, or through ETFs such as the SPDR Gold Trust (GLD) -- another target of manipulation theories -- or in mining stocks through the Market Vectors Gold Miners (GDX) or Junior Gold Miners (GDXJ), or individual purchases, investors must understand that gold is a historically volatile, emotionally driven, and complex market. There is a bull case for gold, and a bear case for gold; but neither involves greedy bankers and evil government officials in a worldwide cabal to fleece the common man.”

Have yourselves a very pleasant weekend and get some Dramamine for next week – it promises to be a choppy one in the markets, summer doldrums notwithstanding.

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About the Author
Jon Nadler Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America
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