Resource World Magazine

70 www.resourceworld.com f e b r u a r y / m a r c h 2 0 1 6 e p i l o g u e D a v i d D u v a l P erhaps the most alarming feature of today's commodity price collapse is the unwillingness of producers to cur- tail output in the face of a global economic slowdown, most notably in China. At time of writing oil had fallen below $30 per bar- rel, copper was trading under $2 per pound, a six and one-half year low, and nickel, an important alloying agent in steel manufac- turing, was trading below $4. (Prices in US dollars) Even gloomier are prices for iron ore, coal and other commodities associated with steel manufacturing. If it wasn't for the weakness of the Canadian dollar our entire commodities sector would be under water to the greater detriment of our national economy. At least in Canadian dollar terms, gold has performed rea- sonably well and there are "qualified" expectations that it could move signifi- cantly higher in the year ahead – but more on that later. Most Canadians are arguably happier these days filling up at their local gas pump, with some even hoping for lower prices. But in this case it's probably best to be careful what you wish for! What they are saving at the gas pump is costing them elsewhere – and perhaps a great deal more. Alarmingly, the relationship between falling commodity prices and consumer necessities, namely food products, doesn't seem to have completely registered with mainstream Canadians if in fact it ever will. Today, Canadians complain about the rising cost of vegetables in their local supermarkets (which reflects the fact that the majority of our vegetables are imported from the US) yet they rarely consider the underlying reasons for it. What has hap- pened, I believe, is that Canadians have become ideologically complacent about what drives our economy. In most cases it seems they are opposed to almost every form of industrial development that will bring in export dollars and support our aptly named loonie. Oil in particular has a major impact on the value of the Canadian dollar versus its US counterpart because commodities are priced in US dollars. In actual fact, crude oil is the largest single contributor of for- eign exchange to Canada and its share has been increasing with the growth of oil sands production. In times of high oil prices, the amount of US dollars earned by Canada on each barrel of oil exported will be high, and therefore the supply of US dollars will be high relative to the supply of Canadian dollars, resulting in an increase in the value of the Canadian dollar. With oil prices almost 80% off their 2008 peak, the opposite effect comes into play. However, despite the recent economic downturn, the majority of Canadians oppose oil sands development and pipeline construction which can only serve to curtail output from Alberta's vast oil and gas resources. Low oil prices have contributed to the global deflationary environment we find ourselves in today which, in fact, should be gold negative. Although gold continues to trade well off its nearly $2,000 high, its support around the $1,200 level sug- gests other less obvious and potentially gold-positive economic forces are in play. One is demand from China which would appear to be a two-edged sword if you agree with finance commentators like Jim Rickards who contends that China is actu- ally suppressing gold prices to accumulate reserves. China's official gold reserves are esti- mated to be a bit less than 1% of GDP or about one-third that of the US and Russia. However, its unofficial reserves could be a lot higher given the questionable reli- ability of its gold consumption statistics. In any event, as the largest gold producer in the world, you can bet that little or none of its annual production of 450 tonnes (2014 estimate) is heading outside the country. Of all the commodities, gold seems to be the best positioned for a recovery, the scope of which will be determined by things such as US interest rates, the fall- out from slowing global economic activity, competitive currency devaluations and several other unquantifiable factors that have wreaked havoc in early 2016 with Asian and Western markets. All this uncertainty is positive for gold which, on a global output basis, has flat-lined and could remain that way for several years. Gold producers are cutting debt, focusing on reducing production costs, selling or shelving high cost produc- ers, and are positioned better than most people think to capitalize on higher prices. Historically depressed share prices for gold miners could be in for a hell of a ride with any sustainable recovery. Oil producers, on the other hand, face increased supplies coming into the market- place from Iran and an almost pathological unwillingness by competing producers to cut production. The same for base metals producers like BHP and Rio Tinto which are increasing iron ore output into an already saturated marketplace. n impact of commodity price collapse could be supportive of gold prices

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