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Metal Doldrums?



Gold $385 Silver $5.70 Thursday 10th June, 2am Sydney.

G'day. Gold is lower and silver is steady at 10am NY. Not unexpected given the wild old day in the currencies. Lots of Euro/Yen going through and I have some inkling that it may be linked to the oil move. Just my speculation, so take it with a grain of whatever.

The currencies are again dominating the precious metals market. Gold is lower on a stronger dollar versus the Euro. A steep decline in the Euro for sure, and maybe there is more to come in the near term, although I see no particular driver for it in the longer term. I suspect we are at the mercy of the currency traders at present.

The physical market is alive and well in both gold and silver in their traditional markets. India is still importing gold, although premiums are tight. Turkey is importing silver at breakneck speed. I note that Japanese premiums are over a dollar, which is high for them. Dubai, we know, has had huge increases in imports of gold recently. Maybe Asia/Mid East is moving a little more cash into gold at these levels. Sensible action from where I sit. Physical is very different to paper gold.

The silver price has held the $5.70 level at this stage but is under pressure, no doubt. Risk is a new low, below $5.50, which could take us back to the $5.20 level. That would unwind the whole move to $8.50. I find that incredible, in the face of the issues facing the physical market. Still expect a retest of the $6.20 level in due course. When? I dunno. But I am keeping my timeframes very short. The summer doldrums could string this out longer than expected. Patience required.

The Amex Gold Bugs Index (HUI) again got clobbered yesterday and we continue on again today. It has been a reliable leading indicator over the past few years.

Oil is lower again today, which should take some pressure off many mining companies' costs. Many people won't recognize that one of the biggest floating costs in a gold/silver mining operation is energy. Many circuits are diesel driven, and big rises in price eat into cashflow/profitability margin. Think about those big bloody trucks in low-grade, high tonnage mines, and how much juice they slurp through. Most other costs are relatively fixed like personnel, management/head office, exploration is budgeted for, maintenance, contracts for cyanide/explosives etc, etc. Fuel hedging is the ONLY commodity hedging I want to see in a metals producer, as it reduces volatility in costs and limits the pain/losses should their energy costs explode.

I did some numbers a few years back, that illustrated the energy risk for a particular Australian gold company, but we will use today's numbers for realism. They produce about 400k ounces per annum at a rough cost of A$475 per ounce. Currently the Aussie gold price is A$560. Margin is $85 per ounce. They use about 40 million litres of diesel per annum on their truck fleet and mining operations. There is 159.11 litres of diesel in a barrel. A barrel of diesel costs about US$43 for Singapore Gasoil (diesel). Thus a litre costs about US 27cents per litre. The Aussie is 69cents versus the dollar, so a litre costs about Aud 40c. Their total fuel cost at this level is approximately A$16,000,000. A seemingly inconsequential rise of 1c per litre eats a dollar per ounce of their margin (or over 1% of profit, per each cent rise/fall). That hurts high cost producers who haven't fixed their energy costs. And when we get a disconnect with rising energy and falling gold like the last few months, there can be much pain. When I put this to the mining company in 2000, diesel was US$12C a litre and a 5 year fixed rate swap was about US15c. The Aussie was about 62c versus the US$. They could well have hedged this exposure at about 25c Aussie per litre. They weren't worried about the risk and did nothing. Ouch.

Midday NY and the two metals look decidedly dodgy on currency moves, although silver is hanging pretty tough at 5.70. This could be lotsa fun the next few hours. I am trading more in currencies at present, it's certainly a little more intense at present.

Gotta fly....

Enjoy the rest of the day


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Position in gold, silver, Euro

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