Resource World Magazine

70 www.resourceworld.com F E B R U A R Y / M A R C H 2 0 1 9 Epilogue by David Duval M ining companies are still struggling to regain investor confidence following a string of badly reasoned takeovers and expensive development projects that buried them in debt and in many cases actually served to increase production costs rather than lower them. Given the cyclical nature of commod - ity prices, investors still appear concerned about a repeat of the previous cycle when companies failed to return cash to share- holders and made poor capital allocation decisions which they have yet to recover from. With gold prices closing sharply higher into the close of 2018, some investors are dip - ping back into mining equities – especially gold producers – although it could hardly be described as a "stampede" because mar- ket liquidity in most cases remains low and price volatility remains high. Whether the recent price uptick is the beginning of another bull market for gold or not is open for debate and there's always plenty of that on business networks and social media. However, the recent weak - ness in the US dollar and the drivers behind it, including the trade war with China and the burgeoning US national debt, appear to be supportive for gold in years to come. Alarmingly, at the end of 2018 that debt stood at a record $21.974 trillion, more than $2 trillion higher than when President Donald Trump first took office. When a fiscal deficit arises and federal debt accumulates, it undermines confi - dence in the economy and typically spurs safe-haven demand for gold. One good example of the impact of fed- eral debt on the gold market happened in the 2000s when President Bush created a twin deficit that significantly deteriorated the fiscal position of the country. What this did was erase investors' faith in the greenback thereby triggering a rally in gold, confirming its historic use as a hedge against irresponsible fiscal policies. The global debt situation appears des - tined to get even worse given China's aggressive military stridency along with that of the traditional US arch rival, Russia. Just recently, a Chinese admiral warned that Beijing could sink two US aircraft carriers, killing 10,000 sailors, to win the battle for the South China Sea over which China has been asserting control. Such provocations point to a renewal of the global arms race including increasing levels of debt and currency debasement on the part of all participants. The last arms race helped bankrupt the Soviet Union, leaving the US (albeit by default) the clear winner. (Some would argue it won because of easier access to debt markets.) In addition to global indebtedness lay - ing the foundation for higher gold prices, the gold mining industry – perhaps in anticipation of a price uptrend – is looking at strategic alliances that will make them more attractive in the marketplace. Barrick Gold recently concluded its previously announced merger plan with Randgold Resources, creating a sector-leading gold company which owns five of the industry's Top 10 Tier One gold assets. According to Barrick, it now has the lowest total cash cost position among its senior gold peers, along with a diversi - fied asset portfolio positioned for growth in many of the world's most prolific gold districts. The US$ 6 billion no premium merger solidifies Barrick's position as the world's largest gold mining company with proven and probable reserves of 78 million ounces of gold and dominant land posi - tions in many of the world's major gold producing regions. In a joint letter to stakeholders, Executive Chairman, John Thornton and President and CEO, Mark Bristow, pre - dicted that with the best asset base and the strongest management team in the sector, Barrick was well placed to be the world's most valued gold mining business. "We will do so by optimizing our existing operations, pursuing new oppor - tunities that meet strict investment criteria, and developing them with disciplined efficiency. In all that we do we will be guided by a long-term strategy and clear implementation plans designed to deliver sustainable returns to our owners, and real benefits to our partners, host countries, and communities," they said. It is clear that the Barrick-Randgold merger represents a bullish signal for gold which analysts have noted began to first strengthen in 2016 when the US Federal Reserve started its latest fiscal tightening program. Tightening is expected to con - tinue throughput 2019 although Federal Reserve Chairman, Jerome Powell, has hinted there may be fewer rate hikes than originally anticipated. Russ Koesterich, portfolio manager at the $60 billion BlackRock Global Allocation Fund, told Bloomberg recently that the partial government shutdown in the US is "occurring in the context of a lot of politi - cal uncertainty and trade frictions." "The relationship between uncertainty, volatility and gold's relative performance, is something that's worth watching. It has been a store of value for a very long time, and again, it has had a very consis - tent record of helping mitigate equity risk when volatility is rising," he added. n Gold shows momentum – More consolidation possible

• Cover