Mongolia, gold and a relaxed yuan - David Hargreaves, Mining Consultant: WH Ireland
A look at the difference between steel industry metals and LME metals, the impact of a relaxed yuan, a bit on precious metals and the outlook for Mongolia
GEOFF CANDY: Welcome to this weeks' edition of Mineweb.com's weekly Newswrap podcast and joining me on the line is mining consultant to WH Ireland, David Hargreaves. David it has been quite an interesting week for gold. It hit all time highs again last week and we've seen some relaxation of the Yuan in China and that's been having some impact not only on gold, but on base metal prices as well. If we start with gold though, what has been driving it up to these new highs?
DAVID HARGREAVES: We still have the world's economic worries and therefore gold is popular but we are now allowing or facilitating small people to buy small amounts of gold and we have six billion small people on the planet and they are buying gold at a ferocious rate in the form of small bars and coins such that whilst there is no shortage of physical metal, what we have is a shortage of minting capacity. So it's really quite serious.
GEOFF CANDY: How much of that is happening predominantly in Europe and how much are we seeing it in the likes of Brazil for example and markets like India?
DAVID HARGREAVES: India of course and China, they've always liked gold in any case and this if freeing them up to buy it. One ounce and less than one ounce in denominations, buy 20gr or 10gr worth even. So the major developing world is still doing it but there is quite a lot of it in Europe generally, particularly with the fears over the euro.
GEOFF CANDY: There was a great piece by Frank Holmes that is on the Mineweb website at the moment about the fact that gold is now legitimate and by that he means that the more popular price he is talking about gold investment where there was a big spread in the Sunday Times over the weekend on it and for a lot of investors that usually signals the time to get out of an investment class but that doesn't seem to be the case this time around for gold.
DAVID HARGREAVES: No I don't think so. I have been trying to find a reason why gold should crash. I can't find it right now. The euro crisis is going to take a long time. We still have concerns on the dollar, not just the oil slick, but the dollar generally and as long as we have those currency worries, then gold is going to stay where it is and in particular what is going to happen at the G-20 if the yuan floats against the dollar.
GEOFF CANDY: If we move from gold to base metals now and look briefly at copper, there have been some interesting moves around copper given the relaxation of the peg to the dollar for the Yuan. There is a lot of expectation that the Yuan would strengthen and this caused some obvious movement in the copper price. How is that likely to affect things going forward?
DAVID HARGREAVES: We are having a divergence between the steel industry metals, and the demand thereof, and LME-based metals where copper across the board, copper, lead, tin, wood, zinc, aluminium are extremely weak, very weak indeed in relative terms which tends to indicate that consumer demand is not too good whereas with the steel-industry metals - coking coal, iron ore, theyre going for their lives and my only interpretation is this, that there is nearby consumer weakness and we are seeing that in the car industry but there is tremendous strength in the steel industry looking long term for construction.
GEOFF CANDY: The car industry is something I want to come back to but if we look at aluminium briefly. In your latest update newsletter you talk about aluminium being in serious trouble and talk about the comments made by the President of Chalco, the aluminium corporation of China saying that domestic prices have dropped below the cost of production. What is happening in that aluminium market?
DAVID HARGREAVES: The production of aluminium is in major over supply. Of that there is no doubt. Poor old Rio Tinto must be shaking in its boots at what it did with its aluminium foray a few years ago. So we have a long term production surplus, huge LME stockpile, a massive overhang there which won't present any rise in the near future, but we then have some dangers attaching to the supply of bauxite - its raw material - particularly in Guinea and we are also seeing that Russia and China have an increasing role to play in that China's Chalco, probably the largest smelter in the world, if not the number two and is now crying of course that its selling prices are below its cost of production and this is almost certainly true. So unless it turns off the tap, which it won't want to, I see the surplus aluminium continuing.
GEOFF CANDY: You mentioned car prices earlier and that's clearly going to impact platinum prices because as we know one of the big uses of that metal is for auto catalytic converters in cars. There's been a substantial clear out of stocks or investments in the platinum sector in the ETF sector. What is going on in the platinum sector?
DAVID HARGREAVES: We have to look at automobile demand and the fact that when you store platinum physically as an ETF, there is much more of an opportunity for it to come out if either the price goes up or the price falls, rather than gold. People who like gold, like gold, so I don't see a run on that at all, but I do in platinum at the moment. The Bushveld complex is giving us more and more platinum by the day. Everybody is opening up a new mine, so we are not in danger of a supply fall, unless we are in danger from South Africa itself. So that's the reason why the ratio is closing in, platinum being physical and being an industrial metal, whereas gold, ever the store in value and platinum is not really seen as a store of value.
GEOFF CANDY: David just to close off with now, moving from the metals themselves to the political situations around them. Mongolia is a very resource rich country and there has been some talk in that country about listing their stake in the OYU Tolgoi project that is being developed by Rio Tinto and Ivanhoe and things like the coal deposits Tavan Tolgoi and there has been a flurry of activity from the various exchanges in the region as to who might get those IPOs. Are we likely to see an investment boom into Mongolia?
DAVID HARGREAVES: We might if they have the good sense to look at the models of other nations and put in a favourably economic investment for their performance. If they give a formula which will encourage the miners to come in there, then we will see a real investment rush because as you say it is a very metal-rich country.
GEOFF CANDY: Welcome to this weeks' edition of Mineweb.com's weekly Newswrap podcast and joining me on the line is mining consultant to WH Ireland, David Hargreaves. David it has been quite an interesting week for gold. It hit all time highs again last week and we've seen some relaxation of the Yuan in China and that's been having some impact not only on gold, but on base metal prices as well. If we start with gold though, what has been driving it up to these new highs?
DAVID HARGREAVES: We still have the world's economic worries and therefore gold is popular but we are now allowing or facilitating small people to buy small amounts of gold and we have six billion small people on the planet and they are buying gold at a ferocious rate in the form of small bars and coins such that whilst there is no shortage of physical metal, what we have is a shortage of minting capacity. So it's really quite serious.
GEOFF CANDY: How much of that is happening predominantly in Europe and how much are we seeing it in the likes of Brazil for example and markets like India?
DAVID HARGREAVES: India of course and China, they've always liked gold in any case and this if freeing them up to buy it. One ounce and less than one ounce in denominations, buy 20gr or 10gr worth even. So the major developing world is still doing it but there is quite a lot of it in Europe generally, particularly with the fears over the euro.
GEOFF CANDY: There was a great piece by Frank Holmes that is on the Mineweb website at the moment about the fact that gold is now legitimate and by that he means that the more popular price he is talking about gold investment where there was a big spread in the Sunday Times over the weekend on it and for a lot of investors that usually signals the time to get out of an investment class but that doesn't seem to be the case this time around for gold.
DAVID HARGREAVES: No I don't think so. I have been trying to find a reason why gold should crash. I can't find it right now. The euro crisis is going to take a long time. We still have concerns on the dollar, not just the oil slick, but the dollar generally and as long as we have those currency worries, then gold is going to stay where it is and in particular what is going to happen at the G-20 if the yuan floats against the dollar.
GEOFF CANDY: If we move from gold to base metals now and look briefly at copper, there have been some interesting moves around copper given the relaxation of the peg to the dollar for the Yuan. There is a lot of expectation that the Yuan would strengthen and this caused some obvious movement in the copper price. How is that likely to affect things going forward?
DAVID HARGREAVES: We are having a divergence between the steel industry metals, and the demand thereof, and LME-based metals where copper across the board, copper, lead, tin, wood, zinc, aluminium are extremely weak, very weak indeed in relative terms which tends to indicate that consumer demand is not too good whereas with the steel-industry metals - coking coal, iron ore, theyre going for their lives and my only interpretation is this, that there is nearby consumer weakness and we are seeing that in the car industry but there is tremendous strength in the steel industry looking long term for construction.
GEOFF CANDY: The car industry is something I want to come back to but if we look at aluminium briefly. In your latest update newsletter you talk about aluminium being in serious trouble and talk about the comments made by the President of Chalco, the aluminium corporation of China saying that domestic prices have dropped below the cost of production. What is happening in that aluminium market?
DAVID HARGREAVES: The production of aluminium is in major over supply. Of that there is no doubt. Poor old Rio Tinto must be shaking in its boots at what it did with its aluminium foray a few years ago. So we have a long term production surplus, huge LME stockpile, a massive overhang there which won't present any rise in the near future, but we then have some dangers attaching to the supply of bauxite - its raw material - particularly in Guinea and we are also seeing that Russia and China have an increasing role to play in that China's Chalco, probably the largest smelter in the world, if not the number two and is now crying of course that its selling prices are below its cost of production and this is almost certainly true. So unless it turns off the tap, which it won't want to, I see the surplus aluminium continuing.
GEOFF CANDY: You mentioned car prices earlier and that's clearly going to impact platinum prices because as we know one of the big uses of that metal is for auto catalytic converters in cars. There's been a substantial clear out of stocks or investments in the platinum sector in the ETF sector. What is going on in the platinum sector?
DAVID HARGREAVES: We have to look at automobile demand and the fact that when you store platinum physically as an ETF, there is much more of an opportunity for it to come out if either the price goes up or the price falls, rather than gold. People who like gold, like gold, so I don't see a run on that at all, but I do in platinum at the moment. The Bushveld complex is giving us more and more platinum by the day. Everybody is opening up a new mine, so we are not in danger of a supply fall, unless we are in danger from South Africa itself. So that's the reason why the ratio is closing in, platinum being physical and being an industrial metal, whereas gold, ever the store in value and platinum is not really seen as a store of value.
GEOFF CANDY: David just to close off with now, moving from the metals themselves to the political situations around them. Mongolia is a very resource rich country and there has been some talk in that country about listing their stake in the OYU Tolgoi project that is being developed by Rio Tinto and Ivanhoe and things like the coal deposits Tavan Tolgoi and there has been a flurry of activity from the various exchanges in the region as to who might get those IPOs. Are we likely to see an investment boom into Mongolia?
DAVID HARGREAVES: We might if they have the good sense to look at the models of other nations and put in a favourably economic investment for their performance. If they give a formula which will encourage the miners to come in there, then we will see a real investment rush because as you say it is a very metal-rich country.
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