Precious metals markets in good shape
August 31, 2006
Precious metals markets are looking in particularly good shape as we head into the Labor Day weekend and begin our peak demand season for investment demand for our markets.
A few things have been going on the last week that I'll just quickly gloss over before we head off to the long holiday weekend.
Mining company consolidation is continuing at a torrid pace. Goldcorp just announced a deal to buy Glamis Gold for $8.5 billion dollars. This is a good thing for supply because companies are continuing to take the route of "acquire rather than explore". Marginal projects will be pushed out the door in favor of large projects and eventually there will be less production on the market.
In four months of existence, the SLV ETF has just acquired it's 100 millionth ounce of silver to hold in vaults backing the shares. This quick pace of acquisition for silver to back the ETF has been surprising to say the least and is one of the main reasons we've seen silver outperform gold in the last month. Expect this to continue. The GLD ETF is still increasing it's overall holdings on a regular basis, although quite scaled back from the major increases we saw in 2005. The SLV ETF is just getting up and running and has already taken 100 million ounces off the market in less than 4 months. Even if the pace falls off, if the SLV ETF pulls another 100 million ounces off the market in the next YEAR it will significantly push up prices. Silver markets are getting particularly tight in supply and there is still a massive short position left out there on exchanges that would be forced to cover quickly when prices start rising in the next two months. This situation could be explosive for prices in the next 5 months.
Newmont's flagship mine and the largest producing gold mine in the world, Yanacocha, has been shut down due to protests for the last several days. Newmont has stated that the ruckus is over, but this just goes to highlight again the fragility of supply to the marketplace. Newmont has had a number of disturbances at the mine over the last few years and there is no sign that the tension has abated. Just think of what would happen if the largest gold mine went off line for a significant amount of time during peak demand season for gold....
Hold tight as we move into September. Things should start to get particularly interesting.
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