Issue link: http://resourceworld.uberflip.com/i/198816
epilogue David D uva l Drivers of today's markets hardly reflect underlying fundamentals M ining companies – not to mention those of us who are active traders in the marketplace – are more often than not victims of misplaced sentiment. In the four decades I've been involved in the minerals industry I would run out of fingers counting the times mining companies have purchased assets at the top of the market, only to write the majority of them off over the next few years. I have also seen my share of mine openings (usually small ones) only to see them close a few months later. With the gold price failing to break above US $1,400/oz recently on a sustainable basis, it's understandable why the sentiment for the metal is so bad. But the overall disenchantment with mining equities is not entirely based on the price of the commodity they produce. The billions in write-offs – and equally as painful, the huge cost overruns associated with seemingly marginal new gold projects, has caused many investors to become skittish and search for better managed opportunities in other industry sectors. Frankly, you can't blame them. There is some hope, however, that the industry has finally come to its senses. Companies are beginning to manage production costs more effectively, putting off development of low-grade projects that can only be rendered economic by developing them on a large scale. With that, of course, comes considerable CAPEX risk which is best exemplified by projects such as Barrick's Pascua Lama on the Chile/Argentina border. Some companies are even beginning to relearn the fact that there's simply no substitute for grade in this business and managing 62 www.resourceworld.com projects close to home is much easier (culturally for one) than doing it in foreign jurisdictions. Unfortunately for mining companies, there's little they can do about commodity prices because they are set (fixed might actually be a better word) on world markets, a process that is often misaligned with underlying economic fundamentals. As I write this, I am seeing the US dollar catch a bid (at the expense of gold) despite the imminent threat of the United States failing to raise its debt ceiling which would put the country into technical default – an unprecedented situation for the nation that prints the world's so called "reserve currency." All of this is happening despite quasi threats from the biggest holders of US treasuries, China and Japan. Is it any wonder that Chinese demand for gold is a record levels and may in fact exceed 1,000 tonnes this year? You have to think the Chinese know something that all of us in the West don't. I expect the day of reckoning for the broader market will come soon enough and it will be brutal when it arrives. Just imagine the Chinese liquidating some of their vast US treasury holdings and replacing even a part of it with gold bullion. Reading online business publications including Bloomberg and the UK's Financial Times, you could easily get the impression that the market is the economy when in fact it's so far removed from mainstream economic realities that it's an abomination. I've worked in journalism long enough to realize that much of today's business media is nothing but a mouthpiece for the big investment firms that run Wall Street and arguably the US Congress and Senate. Whenever the gold price gets hit, you can almost guarantee it's shortly after a negative piece on Bloomberg.com, with quotes from the usual suspects at Goldman Sachs, Morgan Stanley and others. These are the same people who upgrade and downgrade their gold forecasts almost monthly which no doubt helps support their algorithm-based trading systems and short term technical traders whose idea of a long term investment is hours rather than weeks. Just recently Thompson Reuters was taken to task for providing sensitive market information to certain financial institutions before everyone else, allowing them to front run the markets. Deep down one suspects this is just the tip of the iceberg given the influence of various data points (US unemployment rate, Consumer Sentiment Index etc) on the DOW and other major market indices. Even worse is the recent LIBOR scandal, a series of fraudulent actions connected to the London Interbank Offered Rate. LIBOR is the average interest rate calculated through submissions of interest rates by major banks in London. The scandal arose when it was discovered that banks were falsely inflating or deflating their rates so as to profit from trades, or to give the impression that they were more creditworthy than they actually were. LIBOR underpins approximately $350 trillion in derivatives, many of which trade on largely unregulated Over-the-Counter markets. In the meantime, the gap in employment rates between America's highest and lowest-income families has stretched to its widest levels since officials began tracking the data a decade ago, according to an analysis of government data conducted for The Associated Press. Something's got to give and when it does things could get ugly! n november 2013